India can be the next China, but only if it is more open to foreign investment

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 U.S. 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 center, a hardworking fringe signals its reliability; any threat to Western business investments, and the periphery’s holdings of U.S. 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. Read More