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Devaluation overtakes textbook-bound views

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Once again, an American think-tank has come up with the scenario of an export-based boom for those Asian countries that have let their currencies fall while Hong Kong and the mainland, which have kept their currencies stable, lose export competitiveness.

According to the Institute of International Finance, the current account surplus of the seven countries hardest hit by the downturn - Korea, Indonesia, Malaysia, the Philippines, Singapore, Taiwan and Thailand - will increase by US$100 billion to $150 billion as exports rise and imports fall.

Meanwhile, it says, Hong Kong and the mainland could lose up to $34 billion in trade as intra-regional trade declines and Western markets substitute products from Hong Kong and the mainland with those from cheaper regional economies.

And now to some facts.

As the first chart shows, export growth in the seven countries where the institute expects improvement is not doing so well. Latest figures show their combined exports were down 1.8 per cent from a year ago in US dollar terms.

The institute gives them two years to show improvement, but, if fallen currencies had given them such a price advantage in their goods, why were buyers not lining up outside their doors immediately? The answer is that fallen currencies have made matters worse, not better, for their exporters. Most of their costs are in US dollars, and devaluation has done little to help them here. Devaluation, however, has produced higher domestic interest rates and banks that are reluctant to lend to anyone, which has hurt them very badly.

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