After the jump are portions of a very long message from a doctoral researcher at Oxford, Charlie Pistorius, quoted with his permission. His particular interest, as will be obvious, is in Africa. The reason I think his questions are more generally significant is what they show about our old friend, "unintended consequences," when it comes to China's inevitable decision to let the value of its currency rise.
Americans often act as if they will enjoy a straightforward "win" if and when the Chinese government stops holding down the RMB. Yes, that will be a positive step for the world economy, in reducing the distortions imposed by China's cheap-RMB bias toward overproduction. But it won't just mean that. It will make America poorer and China richer around the world. The price of oil (in dollars) will go up, as the value of each dollar goes down. Other adjustments will ensue. It has to happen, because of America's over-consumption and China's over-production. But the decline of the dollar is not really something to celebrate.
We can't know everything that will happen as the dollar goes down and the RMB goes up. But Pistorius' note, which follows (and with emphasis in the original), suggests some of the surprises that could lie in store:
I would like to ponder on China's role in Africa. Specifically, how I see China retaining its manufacturing advantage through its unique relationship with Africa.
After laying out the emphasis of my argument below, my question is going to be - what influence will this new relationship have on the RMB revaluation argument, and on the global balance of trade?
Putting aside the huge resource investments China has made in Africa this past decade, it is now establishing special economic zones (SEZ) in Africa. Seven are currently planned, similar to those earlier ones in China from the 1980s. [JF: Like the one in Shenzhen described here.] These zones may indeed follow more along the lines of the larger special economic development regions like the Yangtze and Pearl River Delta's. China has the opportunity, and I would say vision, to act in the role of rich industrial foreigner that moves into the host country for export-processing relations (at first), and eventually capitalizing with small-and-medium private and wholly-owned ventures, servicing both their own needs and that of the respective African host economy.
Exactly like China's own experience between 1984 and 1994, the roles can reverse, with Africa as the industrial backwards and poverty-laden host country, ready and willing to transform. We see that China is today uniquely positioned and equipped to assist the Africans in building up their countries, not just through infrastructure projects, but with non-colonial proactive cooperation.
My question is then, what impact will this have on China's current account surplus, currency peg, and domestic industry?
I would postulate that if China moves its heavy polluting industries - tanneries and smelters for instance - abroad to Africa, as well as subsidizing heavy state-owned industries and other over-capacity manufacturers to move their businesses into these African SEZ, and if they adopt an export-processing relationship, whereby low wage local (African) workers are utilized in assembling the goods which are then in turn sent back to their Chinese parent companies, and gets re-exported as final goods, [then all this will form] part of China's external trade balance.
At a quick glance I'd say that this scenario benefits China greatly - locally they release pressure on their controversial environment costs... as well as reducing pressure on domestic industry by spurring manufacturing competition.... In all, this has positive effects in keeping China's domestic productivity and unit labour costs in check, and the knock on economic effects (which is a thesis in itself) is overall good for the Chinese economy.
The fact that China can extend its arm to Africa, transferring the skills, workers, technologies and capital from both the agricultural and industrial sector, should allow [the Communist Party of China] to stay put on its current growth path, and earn itself more mercantilist-time to gradually advance the education and consumption capabilities of their citizenry.
For Africa, the yields are immense; in short, Chinese producers working out of Africa will inject the benefits of agglomeration economies - knowledge and technical spillovers, technological and capital investments, opportunities for local firms to form joint-venture partnerships and build their capacity in capturing a regional African economy of scale; and as the firms increasingly locate within the development zones, local labour migration and massive employment opportunities will follow - raising the subsistence level or the poor and hopefully out of severe poverty is Africa's most tangible and immediate gain!...
If China takes a sustainable equity interest in the development of Africa via these SEZ, the corruption and mismanagement that African nations have been prone to, can be subverted. And what of the "green-tech" impetus? Could this relationship be a platform for China to assist Africa in undergoing industrialization and development at discounted environmental costs, and possibly via a eco-friendlier path....
For the rest of the world, the U.S. per se, well, they lose in this calculation as far as I can see.