The Chinese government yesterday announced it would move to devalue its currency, the yuan. The move is seen both as a necessary step in moving towards decentralizing China’s heavily-regulated economy and as a short-term effort to boost the nation’s economy. By devaluing its currency, China will make exports less expensive in foreign currency terms, while simultaneously making its imports more expensive in local terms. The move had immediate international repercussions, with the Dow Jones Industrial Average falling more than 200 points on the news. In the longer term, the move may also force the US Federal Reserve to push back its plan to increase interest rates in the United States.
Countries regularly attempt to manage currency values, usually within a relatively narrow band of values. By increasing the supply of currency in the market, or by reducing interest rates, governments can put negative pressure on the value of their national currencies. In doing so, they make exports from the country less expensive in global terms, thereby providing an economic stimulus. However, some observers fear that the move by China may spark similar moves by other countries, leading to a competitive devaluation and a currency war, thereby threatening global economic growth.
What do you think? What impact will the move have on China? What impact will it have on the global economy? Should China continue with its devaluation? Why?
This week, the BBC published a collection of diary entries from Esther (a pseudonym), a 28 year old professional living and working in Harare. The diary chronicles her daily struggles living in the capital of Zimbabwe as the country collapses around her. The diary makes for fascinating reading and provides a real (and particularly human) insight into the collapse of the country that was—at one point—the shining future of southern Africa, highlighting the problems of runaway inflation, the hope (and subsequent disappointment) surrounding the elections, and the recent slate of abductions. The story is definitely worth a read.
Staying with Zimbabwe, the BBC also carried a story on the increasing dollarization of the economy. After re-issuing its currency and stripping ten zeros from denominations in August—such that $10 trillion become $100 overnight— the government issued a new $500 million note on DATE. The bigger problem, however, is the fact that inflation continues to rage out of control. According to some estimates, annual inflation in Zimbabwe currently floats somewhere between the official estimate of 231 million percent and parallel market rates of up to 200 billion percent. Now, the economy of Zimbabwe has effectively been dollarized, as many purchases now have to be made in U.S. dollars or other hard currencies. For the estimated 20 percent of the population with access to U.S. dollars, this means that goods are once again available in supermarkets. But for the estimated 80 percent of the population without access to international currencies, life remains untenable.
This is a far cry from the Harare I remember. At the time of my last visit in 2001, the crisis was only beginning to break. Gasoline was in short supply, and petrol cues were part of daily life. But the supermarkets were still full, the water was still safe to drink, and people were able t go about daily life without significant difficulties. And most importantly, there was hope in the air.
Here’s hoping the new year brings a return to stability and prosperity in Zimbabwe.