| For almost a decade, China has followed a mercantilist growth strategy, which has involved maintaining a deliberately cheap exchange rate to boost exports and growth. Crucial to this policy has been China's choice to keep the economy relatively closed to foreign financial flows. Had it not done so, foreign capital chasing the high returns in China would have put upward pressure on the Chinese exchange rate and undercut its ability to export.
India, on the other hand, is steadily if stealthily dismantling its capital controls, foregoing the ability to emulate the Chinese growth strategy. For reasons still unclear, the world, and hence Indian policymakers, are in thrall to the narrative of "imbalance" surrounding Chinese mercantilism. In this view, mercantilism has been a problem for China, creating distortions and reducing welfare, and a problem for the world.
Chinese mercantilism has not been costless, and these costs may well be rising. But this imbalance narrative has obscured the first-order and potentially paradigm-shifting lesson about Chinese mercantilism: It promoted unprecedented growth, raised consumption dramatically, reduced vulnerability to risk, and facilitated China's rise as an economic superpower. India should avoid egregious Chinese mercantilism. But there is no reason India should, by liberalizing capital flows, deprive itself of the tools to prevent currency overvaluation, lower growth, and greater susceptibility to macroeconomic crises. There is a middle path between repelling the capital inherent in Chinese mercantilism and recklessly embracing it as India has chosen.
>> Read full op-ed |