Exchange Rates and Foreign Direct Investment in Emerging Asia: Selected Issues and Policy Options

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Exchange Rates and Foreign Direct Investment in Emerging Asia: Selected Issues and Policy Options. By Ramkishen S. Rajan. London and New York: Routledge, 2012. Pp. 215.

The author is no stranger to both themes of exchange rates and foreign direct investment (FDI) and is eminently qualified as an Asian expert. Many chapters in this book are revised versions of co-authored articles with globally affiliated colleagues, noted in the Acknowledgements (p. xxiv). Forewarned is forearmed for readers as the author is as mathematical and quantitatively inclined as any econometrician.

This two-part ten-chapter book is well supported by research and empirical evidence in statistics and figures. It is as elucidating as it is timely with the global financial crisis (GFC), rising China, India and the rest of Asia, in emphasis. Six chapters in Part 1 cover exchange rate regimes and policies, the rest in Part 2 on FDI in emerging Asia. Each chapter title is posed as a question with the "answers" and concluding remarks as highlights.

Chapter 1 is on Singapore and Taiwan as small, open economies in contemporary globalization, managing exchange rates and build-up of foreign exchange reserves (Figure 1.2, p. 4, pre-GFC). Their de facto sterilization and capital mobility policies are seemingly justifiable versus no sterilization in most monetary models on exchange rates and balance of payments (BOP). In contrast, Singapore and Hong Kong remain the most open (ratio of trade to gross domestic product) small city-states, but diametrically opposite in monetary exchange rate policies. Competitive, rivalrous, successful development models, all three are exemplary, enjoying BOP and foreign reserve surpluses.

Chapter 2 is on exchange rate pass-through (ERPT) transmission, appropriately shedding more light into the currencies of developing and emerging economies via changes from trade prices. In particular, pricing-to-market (PTM) elasticities for India's top five export markets (the United States, China, United Arab Emirates, Singapore and Hong Kong (pp. 34-44) are estimated. Post-GFC, as more intra-Asian trade is needed, more research is urged as in "most of developing Asia, the literature supports incomplete ERPT" (p. 34), with ERPT highest for Thailand and Indonesia, but somewhat lower for Japan (p. 44).

Chapter 3 broadens the de facto exchange rate flexibility in strong evidence of heavy currency management in Bangladesh, India, Indonesia, Pakistan and Sri Lanka. With the rest in fixed U.S. dollar exchange rate regimes, India is a managed floater, joining other East Asian economies in building up reserves (Figure 3.1, p. 56) and leaning against the wind to manage global volatility. Decoupling or East-West as growth engines is controversial, East Asia's currency undervaluation has lessons for South Asia in resource reallocation, fiscal consolidation and productivity of non-tradeable sectors. They impinge on domestic reforms, notably for India with poorer infrastructure to also heed the political economy of the U.S. branding China as a currency manipulator, as a start as of now.

Chapter 4 shows the vulnerability of shocks versus emerging Asia's pre-GFC benefits as relatively open to global trade and FDI. Using the classic Swan framework (Figures 4.1-4.5, pp. 67-73), the author assesses policy responses with more questions posed for maintaining both internal and external balances. As post-GFC's "new normal" possibly includes a lower standard of living for the United States and the European Union, short-term policy responses for interest rates and exchange rates to shocks are as hard for Asia. Nuances and idiosyncrasies mean no template "one-size-fits-all". All suffer the socio-politics of jobs at risk. Consequently, domestic politics inevitably always prevail over any cooperative international political economy order for overall sustainability. The classical "trilemma" or "impossible trinity" of juggling a fixed exchange rate, free capital movement and an independent monetary policy remains. …