February 28, 2005
Economist Dooley at center of debate over
Asian investment in U.S. economy
By Jennifer McNulty
Economist Michael Dooley is spending a lot of time explaining
himself lately. That's what happens when a leading international
economist becomes a vocal proponent of today's high levels of
Asian investment in the U.S. economy.
UCSC economist Michael Dooley argues that Asian investment
guards against the prospect of a U.S. downturn.
Photo: r.r. jones
Dooley, a professor of economics, and two associates with
Deutsche Bank, stand virtually alone in their analysis, but
their views have triggered widespread discussion and international
Conventional wisdom says that large U.S. fiscal and current
account deficits make the U.S. vulnerable to an economic downturn:
It's only a matter of time before foreign investors sour on
the deficit-riddled U.S. economy and sell off dollar assets,
causing interest rates to jump and the value of the dollar to
plunge. The bigger U.S. deficits are at the time, the bigger
the potential "shock" of a sell off.
But Dooley argues that conventional wisdom doesnt fit
todays scenario. The United States is in the midst of
a "quite vigorous economic expansion," and although
U.S. international borrowing is high (6 percent of gross domestic
product), Asian investment actually guards against the prospect
of a U.S. downturn. A constriction of credit to the United States
would increase long-term interest rates and generate a "major
shock," said Dooley, but a "large and meaningful block
of countries in Asia" won't allow their currencies to go
up, thereby assuring a steady flow of money to finance U.S.
debts, he said. China is willing to fund the U.S. deficit as
part of its development strategy, and that makes all the difference:
"It's okay to have deficits if somebody's willing to buy
your securities," he said.
Dooleys views have been covered by the Economist,
Financial Times, Financial Post, Business Week,
the San Francisco Chronicle, and others, and the San
Francisco Federal Reserve Bank recently invited more than 30
economists--including Dooley and his Deutsche Bank coauthors--to
a symposium focused on their work.
For all the international media coverage, however, little attention
has focused on what Dooley called the truly "revolutionary"
aspect of this almost symbiotic relationship between the United
States and Asia. Joined by Peter Garber and David Folkerts-Landau
of Deutsche Bank, Dooley likens the current situation to the
1950s and '60s, when the Bretton Woods system helped war-ravaged
Western European nations rebuild by pegging exchange rates to
Since the early 1980s, countries like Hong Kong, Taiwan, Malaysia,
and Korea have purchased U.S. dollars to keep their currency
undervalued, which has fueled the export-led growth that has
transformed their countries. Dooley calls it a de facto economic
development strategy that works.
An expert on Latin American debt and development, Dooley has
witnessed the failure of development strategies that rely on
rich nations lending money to the governments of poor countries.
History has shown that government protections get in the way,
employment and production never take off, and the debts are
never repaid, said Dooley, who sees a potential win-win scenario
in the interaction today between the United States and China.
Calling the scale of unemployment in China today "no less
a problem than the Great Depression," Dooley said that
as long as China remains locked into U.S. securities, the dollar
will remain strong and U.S. consumers will continue to gobble
up Chinese-manufactured goods. That consumption is financing
China's own rapid development--employing its enormous work force,
raising wages, and ultimately creating a nation of Chinese consumers
with an unparalleled appetite for goods and services. Unlike
the strategies that failed in Latin America, today's scenario
eliminates protectionist policies and "makes developing
countries compete from the start in international markets,"
A successful outcome depends on rapid development in China,
which Dooley projects will take a decade or so.
"Chinese currency will rise as wages rise, and they'll
be holding dollars," said Dooley. "They'll lose on
those. That's why this is a transitional policy. It can't last
forever. But as long as it's gradual, it doesn't have to end
in a bang."
Right now, Dooley emphasized, the priority for China's leaders
is to develop their capital stock, promote high levels of direct
investment, and build markets for their industrial output. "It's
in their self-interest," he said.
If, however, private speculators buy up undervalued Chinese
currency, it could force the Chinese to allow the yuan to appreciate,
and the impact on the U.S. economy would be "even worse
than what our critics are saying," he conceded. That scenario
underscores the high stakes involved, but Dooley shows no signs of unease about holding a minority viewpoint.
"People don't understand enough about the history of the
system they live in," he said.
Dooley acknowledged that rapid Chinese development will trigger
social and environmental problems. "But what's the alternative?
Do you want 200 million unemployed Asians?" he asked. "I'd
rather see them rich and prosperous, more like Japan than Argentina."
"China and other Asian countries won't allow their currency
to go up, and Argentina and Brazil are resisting the appreciation
of their currency," said Dooley. "Mexico and Latin
America are starting to follow the Asian model. I think it will
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