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Interview: Cambridge Economist Ha-Joon Chang on the G20 Summit and Currency Wars

By Democracy Now · 14 Nov 2010

Before leaving Seoul in South Korea, America's President Barack Obama defended last week’s $600 billion move by the Federal Reserve to buy up government bonds. Obama rejected critics’ claims the U.S. is waging a currency war by devaluing the dollar. But Obama failed to win international backing for his effort to pressure China to raise its currency value. The U.S. has accused China of artificially manipulating the price of the yuan for economic gain.

To find out more about these issues, Juan Gonzalez of Democracy talks to Korean-born economist Ha-Joon Chang. He teaches economics at the University of Cambridge. Chang is the author of the forthcoming book "23 Things They Don’t Tell You About Capitalism." His previous book was titled "Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism."

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JUAN GONZALEZ: President Obama arrives in Japan today on the last stop of his ten-day Asia tour. Obama will attend the Asia-Pacific Economic Cooperation summit amidst a dispute with the Japanese government over relocating the U.S. military base in Okinawa. Obama comes to Japan after South Korea, where he failed to finalize a long-stalled free trade deal.

Before leaving Seoul, Obama defended last week’s $600 billion move by the Federal Reserve to buy up government bonds. The President rejected critics’ claims that the U.S. is waging a currency war by devaluing the dollar. But Obama failed to win international backing for his effort to pressure China to raise its currency value. The U.S. has accused China of artificially manipulating the price of the yuan for economic gain.

To talk more about these issues, we’re joined by the Korean-born economist Ha-Joon Chang, who teaches economics at the University of Cambridge. He’s the author of the forthcoming book 23 Things They Don’t Tell You About Capitalism. His previous book was titled Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism. Welcome to Democracy Now!

HA-JOON CHANG: Good morning.

JUAN GONZALEZ: Well, tell us first your assessment—the reports are, certainly in terms of what happened in Korea, that President Obama failed to achieve any of his goals, either in terms of a free trade agreement with South Korea or in terms of trying to get some international agreement on what to do about the continuing international crisis.

HA-JOON CHANG: Yes. On the issue of currency, I think it was unrealistic to expect any concrete agreement there, because in both our countries have such different views about what is the right way forward and they have all very different interests. So I think it was quite unrealistic to expect anything on that account.

Now, I think that there was probably more realistic expectation about the Korea-U.S.A. free trade agreement. But once again, the problem is that the deal was already agreed, and then the Americans are asking for more. And, I mean, the South Korean government is actually quite keen to sign this agreement, although I personally oppose it. But even they couldn’t quite stomach it, because they had made all the concessions—well, they thought they had, and then now the U.S.A. is coming back, "We want more."

JUAN GONZALEZ: Well, what were some of those concessions? Because the President portrayed it as an attempt to get more protections for American workers in a renegotiated part of the deal.

HA-JOON CHANG: Yes, I mean, that’s the fundamental problem with these bilateral free trade agreements, because when you open trade in this kind of way, a lot of people on both sides are going to get hurt. And none of the countries have come up with an adequate compensation mechanism. And it’s understandable that the Korean farmers or U.S. auto workers, people who are going to get hurt, want to protect themselves and oppose these agreements.

JUAN GONZALEZ: Well, in terms of the currency debate, clearly the United States now for—and other countries in the world, for more than a year, several years now, have been claiming that China is refusing to peg its currency at what it’s really worth now on the international scene. And now suddenly, though, the tide, especially after the Federal Reserve action in the past week to begin to buy up more bonds and in effect drive the currency value—

HA-JOON CHANG: That’s right, yeah.

JUAN GONZALEZ:—of the U.S. dollar down—now the charge is being leveled against the United States. Who’s right here? And what is the role not only of the emerging third world countries, but also of the European Union in this debate?

HA-JOON CHANG: Well, you know, it is quite understandable why Americans are kind of frustrated by the slowness in the adjustment of Chinese currency. I mean, let’s get the facts right. I mean, it has been adjusted, only very, very slowly, so it’s not like China is absolutely refusing to move. But, yes, I mean, given the imbalances that U.S.A. is facing, it looks painfully slow. But on the Chinese side, you have to understand this. I mean, first of all, they don’t want the kind of abrupt adjustment that Japan had to make to its own currency in the 1980s in the so-called Plaza Accord, which then created this huge financial bubble, destroyed the Japanese economy. So the Chinese want to do it slowly.

And secondly, you know, it’s not just China who "manipulates" currency value, as you just said. I mean, the Fed flooding the American economy with this money is also currency manipulation. So the Chinese are rightly upset.

But on the other hand, yes, I mean, the problem is that, since the '70s, we have lived under the kind of notion that only the deficit countries have to make adjustment. You know, surplus countries have to make adjustment, too, but in the last 30 years the reigning orthodoxy has been that, you know, anyone who's spending beyond his means has to be punished. I mean, this is exactly the logic behind the punishment of third world countries in the debt crisis, and later Asian economies and the Argentinean economy. So, in that sense, it’s that, actually, that the very thing that the U.S. have been trying to impose on the world are coming to haunt itself, you know, because the U.S. has been on the forefront of this logic that it’s only the deficit countries that have to make adjustment, and now other countries are legitimately saying, "Well, why don’t you then do the same?"

JUAN GONZALEZ: But in terms of the currency—in terms of this flood now of American capital that is heading overseas now because the government has driven interest rates down here so drastically, several of the emerging economies—certainly Brazil, India and others—are increasingly looking at how to prevent this entrance into their economies of basically speculative capital.

HA-JOON CHANG: Mm-hmm, mm-hmm.

JUAN GONZALEZ: What is your sense of how this will develop and, again, how Europe, which is this other huge power force on the world economic scene, how Europe will react to the debate between the emerging countries and the United States over currency controls?

HA-JOON CHANG: Yeah. Well, first of all, let’s put this into perspective. You know, the reason why the Fed has to engage in this massive quantitative easing is because of the inability of the American political system to agree on continued deficit spending. So all the burden of adjustment is put on monetary policy, and, you know, this is at the root of the problem. So, I mean, in a way, the monetary easing wouldn’t be as big if the American political scene is such that it can continue the stimulus package. But it’s not going to happen, so that we are stuck with this situation.

Now, given this low interest rate and huge amount of the liquidity released into the system, a lot of this money is flowing into the so-called emerging economies—that is, mid-level developing countries—and they are really desperate. I mean, some of these countries have seen huge appreciation of their currency value, which is making their export difficult. And now most of them are beginning to put capital control in place. I mean, this is actually quite amazing, because until recently capital control was a mortal sin. Now, in certain countries, even the IMF is saying, "Maybe we should put capital control in, so that this speculative capital wouldn’t destabilize your economy."

Now, when it comes to the eurozone—

JUAN GONZALEZ: And by "capital controls," you mean what precisely? The taxing of investments, financial investments, that are coming in from abroad?

HA-JOON CHANG: Yes. I mean, there are—

JUAN GONZALEZ: Or the restrictions on their leaving? What are the—

HA-JOON CHANG: No, there are a range of measures. So yeah, the most kind of draconian measures will be that you have to get government approval when you are bringing money, you have to get approval when you are bringing it out. That is still rare. But a lot of countries are putting, for example, these deposit requirements. So when you are bringing money in, you deposit, say, equivalent of, say, 30 to 50 percent of the money, which you will get back when and if you leave after, say, a year or two, but if you leave earlier, then you lose the money. So this is a—creates incentive—

JUAN GONZALEZ: That’s the current speculation, right?

HA-JOON CHANG: Exactly, yeah. And some other countries have started taxing capital gains from these speculative flows. So a range of measures are being used. But the direction is clear. I mean, these speculative inflows cannot be managed through market mechanism, because, you know, I mean, just to put it into perspective, even the biggest stock markets in the developing countries are less than like one or two percent of the U.S. stock market. So a tiny drop flowing out of the U.S. is a flood for these economies, so that they need these kind of protective mechanisms.

JUAN GONZALEZ: Well, ever since the financial collapse a couple of years ago, first all the governments tried to engage in some sort of stimulus of their economies, but now the clear debate is over—is the way forward to reduce deficits and to impose austerity on government spending, or is it to continue to stimulate economies and promote economic growth?

HA-JOON CHANG: Yeah, no, no.

JUAN GONZALEZ: And obviously you fall clearly on one side or another.

HA-JOON CHANG: That’s right. Yeah, no, I mean, I—

JUAN GONZALEZ: Explain why.

HA-JOON CHANG: You know, one thing that has to be made clear at the very beginning is that the main reason for these large deficits is not excessive government spending, but the fall in tax revenue due to the collapse in the private-sector demand. So, I mean, if we are in a full implement situation, cutting government spending might create room for the private sector to come in and create jobs and so on. But the very reason why we have this deficit is that the private sector is not investing. And cutting deficit is not going to make them invest, because the root cause of their unwillingness to invest is the problem with their balance sheets. You know, so, I mean, this cut is not going to solve the problem.

But more importantly, in the short run, you know, that this view that it is the best if you cut this deficit as much and as quickly as possible, I mean, that has no economic logic. I mean, for example, the British government says we have to cut this deficit down to basically zero in four years’ time, but, you know, four years is—makes sense in calendar terms, but in economic terms it doesn’t make any sense. I mean, if you want to cut this deficit, you have to cut it to the state of the economy. So maybe that, in some cases, you can cut it in two years; maybe it, in some cases, will have to be 12. Unfortunately, a lot of deficit folks have a hidden agenda. They basically want to roll back the welfare state. They are using it as an excuse to do it.

JUAN GONZALEZ: As Naomi Klein says, disaster capitalism is the opportunity to implement policies you’ve always wanted to do.

HA-JOON CHANG: Exactly, yeah. And then the kind of political sleight of hand that they have deployed is quite remarkable. You know, I mean, all these crises that have basically been generated by these bankers and other financiers, I mean, these people are still paying themselves billions of dollars of bonuses, while the poorest people are asked to make the adjustment. I mean, this is outrageous.

JUAN GONZALEZ: Yeah, but now you’re seeing one country after another—Greece, France, England, with its austerity measures—

HA-JOON CHANG: Even England, yeah.

JUAN GONZALEZ: And now, of course, the United States, their commission now recommending potential huge cuts in the Social Security and Medicare here in the United States. How do you see President Obama’s policies so far, in terms of the way he’s handling this crisis since he got into office?

HA-JOON CHANG: Well, luckily, the U.S. still hasn’t yet given in to the deficit hoax. But with the Republican victory in the midterm election and this debt commission, it’s coming. But, I mean, he has to resist it. He has to, first of all, buy time to restructure the economy without creating a recession by sustaining this deficit spending, because otherwise our other option is going back to the 1930s. Don’t forget that in the 1930s a lot of countries started cutting this deficit as soon as things looked slightly better, and many of them went back into recession. It’s already happening in Ireland. I mean, they started cutting deficit. They are now in bigger trouble.

JUAN GONZALEZ: Well, I’d like to ask you about Germany, which seems to be one of the countries that has survived the financial crisis the best in Europe, and yet still has—maintains a considerable sort of welfare state approach, in terms of what the government does for its workers and population. Why do you think that Germany has survived so well?

HA-JOON CHANG: Well, Germany hasn’t bought into this finance-driven free market capitalism as much as other countries have. You know, even France, despite its pretension to be the kind of counterpoint to Anglo-American capitalism, has actually seen a huge explosion of the financial sector. The proportion of banking assets in proportion to the GDP in France is almost as high as that in the U.S. and the U.K. So, you know, I mean, these are the countries that are going through trouble. Whereas Germany—I mean, there was some expansion of finance, but it has been mainly driven by solid manufacturing performance.

JUAN GONZALEZ: And it still runs a surplus, right?

HA-JOON CHANG: Oh, yeah, yeah.

JUAN GONZALEZ: And in terms of the role of China and the growing economies of Asia, in terms of the financial crisis, where do you see the Chinese role in the coming years?

HA-JOON CHANG: Well, China is a very peculiar case, in the sense that, you know, I mean, it’s now officially the second biggest economy in the world, but in terms of per capita income, it’s still about one-tenth that of the U.S. level. So, it’s an important economy, so it has to do certain things for global balance and so on, but internally it’s got a lot of poor people and a weak welfare state and a very fragile political system, that it cannot actually do things that require a lot of internal adjustment. I mean, that’s the trouble. I mean, whatever, when the U.S. was in a s

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