Is the global monetary order ready for another reboot? In the 1960s, Japan and Europe exported their way to post-World War II prosperity under the fixed exchange rates of the Bretton Woods agreement. The US went off the gold standard in 1971, but the established way of doing things didn’t collapse. Thirty years later, China essayed the role of being the world economy’s periphery and selling cheap widgets to a revamped core — the West and Japan — with the help of an undervalued exchange rate.
This, as economists Michael P Dooley, David Folkerts-Landau and Peter M Garber noted in an influential 2003 essay, was Bretton Woods revived. The “China phase,” they said, would play out over 10 to 20 years as the world economy absorbed 200 million surplus rural Chinese workers at the rate of 10 million to 20 million a year. To that end, Beijing would acquire vast quantities of foreign-exchange reserves regardless of cost. And when China was done, India would take its place. Will it?
One clue may lie in official reserves. By purchasing the public debt of a profligate centre, a hardworking fringe signals its reliability; any threat to Western business investments, and the periphery’s holdings of US Treasuries and other safe assets could get cancelled. (Far-fetched as it may sound, the idea did get discussed recently when President Donald Trump’s administration was contemplating punishing China for its handling of the coronavirus outbreak.)
By the time Dooley et al got down to writing, “The Revived Bretton Woods System’s First Decade” in 2014, China’s reserves were peaking, at about $4 trillion, from under $300 billion at the time of their original study. Just recently, India’s foreign-exchange stockpile crossed the $500 billion mark. In 1990, the country only had enough dollars to pay foreign suppliers for half a month. Now the reserves cover two years of imports.
Yet the domestic political discourse is harking back to a protectionist past. Prime Minister Narendra Modi wants self-reliance. Other officials are coaxing Indians to buy local even if means paying more. It doesn’t look like India sees itself as the world’s next factory, which requires openness. Emboldened by its recent free trade agreement with the European Union, Vietnam may be more suited to playing that role, even though the Southeast Asian nation of fewer than 100 million people lacks India’s labour power. Some of India’s retreat may be tactical and temporary. The US is still coping with China’s rise, and not in a mood to let another 200 million workers latch on to its customers. Industrialisation of the periphery requires a fundamental restructuring of the labour force in the core, as the authors of Bretton Woods 2.0 warned. “No country has found a workable way to compensate its own losers.”
The Western companies that chose China as a manufacturing location became vocal supporters of its developmental strategy and shielded it from politicians and labour unions in their home countries. This global businesses elite is no longer as powerful amid a rising anti-globalisation tide almost everywhere. The threat of being branded a “currency manipulator” by the US Treasury also limits the extent to which the Reserve Bank of India can intervene in the foreign-exchange market.
Then there’s Covid-19, and the worst global recession since the Great Depression. While a rapidly deteriorating relationship with Beijing impels Washington to draw the only other billion-plus-people country deeper into America’s embrace, massive unemployment in an election year makes it impossible to grant concessions. India understands the compulsions.