Direct Investment, Rising Real Wages, and the Absorption of Excess Labor in the Periphery

Abstract

This chapter concentrates on the connection between the currency regime and the development strategy of rapidly growing Asian countries, especially China. It specifically argues that the expansion of the volume of trade in goods and services and the volume of two-way trade in financial assets is the backbone of a successful industrialization and development strategy. Analysis of government behavior implies that there is a trade-off between objectives for intertemporal trade, objectives for net international investment positions, and objectives for growth in gross trade in goods and financial instruments. The optimal exchange rate and inflation policy are derived conceptually from the exhaustible resource problem. China has more than adequate controls on domestic and international financial transactions. Central banks have raised interest rates more slowly than in the United States, if at all, and bond yields have remained stable, while yields fell in the United States.

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