Monday, July 22, 2013

An article on the falling rupee

It was about three rupees a dollar when I was a kid and I always wondered about why rupee kept falling in the long run. Prabhat Patnaik explains in The Fall of the Rupee
 "It is important first to appreciate a fundamental structural fact. If the prospective rates of return were the same between India and the U.S. then wealth-holders would shift their wealth out of India to the U.S. because the latter is the home base of capitalism where they feel safer compared to India. And even if India offered a higher rate of return that prevented such a shift in normal times, even then occasions might arise when suddenly wealth-holders got sufficiently panic-stricken to take funds out from India, and other economies in the periphery, to the U.S. In other words, there is a basic asymmetry in the world economy, such that wealth-holders never get panic-stricken at the centre of the capitalist world to shift funds to the periphery, while they do feel occasionally panic-stricken at the periphery to shift funds to the centre, which after all is why the centre is the centre and the periphery only the periphery.
It is this incidentally which constitutes the fundamental argument against opening up the economies of the periphery to free capital flows: with such freedom, the movement over time, no doubt through fluctuations, will be for funds to flow out from the periphery. And this means that there is a secular tendency for the exchange rate of peripheral economies to decline in a world of free capital flows, which would ultimately mean that the wealth of the periphery will pass into the hands of wealth-holders from the Centre who hold the strong currency of the Centre. Not that this happens suddenly; there is however an undeniable tendency towards this, which manifests itself sporadically, but in a pronounced fashion, followed again by long periods when the peripheral currency does not depreciate, and everybody begins to think that no such asymmetry ever characterized the world economy."
I am reminded of Keynes quote reproduced in Shaxson's ook on tax havens "Let goods be homespun whenever it is reasonably and conveniently possible. Above all, let finance be primarily national'. 
The book is reviewd here

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