ACCUMULATING PERIPHERALS

Dani Rodrik posted this over a week ago but I’ve just noticed it:

Can you resist financial globalization?

Yes you can, and Asia has been doing it.  I am in Bangkok for a Bank of Thailand conference, and among other interesting contributions (by Jose Antonio Ocampo, Raghu Rajan, and Arvind Subramanian) is a nice paper by the BIS’s Robert McCauley and Guonan Ma called “Resisting financial globalization in Asia.”  The paper documents how fours countries (China, India, South Korea, and Thailand) have thrown “sand in the wheels of finance” to varying extents. Interestingly, those countries that have done the most resisting are the ones that are the least affected by the crisis.

Early this year, as Vietnam’s inflation rose and confidence in its currency dropped, respectable people (the Wall Street Journal editorial pages et al) were still actually writing that the best way for a country to ensure a stable currency was a liberalized currency market. Even then, my impression was that most people didn’t believe that. Now my impression is that almost no one does. In late spring, as foreign analysts wrote that Vietnam might face a sudden collapse of the dong unless it allowed steady, rapid depreciation, others were explaining that because the dong is not freely exchangeable and is tightly managed by the State Bank, it would extremely hard to mount an attack on it. They were right, the dong didn’t collapse, and anyone who bet strongly against it in May has lost a lot of money.

As far as I understand it, this is an area in which developing countries that have been following China’s model in recent years have done well, and those that have followed the US’s advice have done poorly.