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The Political Economy of the Undervalued Renminbi

Ingrid Rima

No 1012, DETU Working Papers from Department of Economics, Temple University

Abstract: A relatively new phase in China's reform since the Cultural Revolution is evidencing itself in the focus given to direct foreign and joint investment in large-scale manufacturing industries that yield increasing returns. The ongoing relative cheapness of the yuan at 6.78 to the dollar is assuredly enhancing the effectiveness of China's export program. The U. S. Congress maintains that a more expensive renminbi would ease the plight of the American manufacturing sector and laid-off workers. However, the argument of this paper is that the success of China's trade is not based on Ricardian comparative advantage. Its trade reforms are better explained in terms of increasing returns as set forth in Nicholas Kaldor's restatement of Verdoorn's Law and Adam Smith's "vent for surplus" principle. This analytical perspective seems particularly relevant, given contemporary political concern about the value of the yuan. Given the attractiveness of China for direct foreign investment (DFI), what is the likely ultimate effect on the distribution of the world's wealth? It seems possible that trade can alter the distribution of the world's negotiable wealth in the twenty-first century in much the same way as the programs of the World Bank and the IMF enabled the OECD countries and the United States to control some 85 percent of the world's wealth in the twentieth century.

Keywords: Cultural Revolution; direct foreign investment; export-led growth; trade reform; vent for surplus; Verdoorn's Law. (search for similar items in EconPapers)
JEL-codes: F12 F31 (search for similar items in EconPapers)
Date: 2010-10
New Economics Papers: this item is included in nep-his, nep-pke and nep-tra
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http://www.cla.temple.edu/RePEc/documents/detu_10_12.pdf First version, 2010 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:tem:wpaper:1012

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