Chinese Mercantilism: Currency Wars and How the East was Lost

The world changed on July 2, 1997 when Thailand floated the baht. Explanations abound on the origins of the crisis - indeed it is a growth industry. This study is part of that explosion. It has several objectives. Identification of the causes of the crisis is the most important goal. Why did it happen ? Why did the contagion happen ? What went wrong ? Was the East Asian miracle a mirage ? If causes are correctly identified, the correct policy response is expected to follow. If not, then developing countries may embark on another lost decade. A large part of the analysis centers around the proposition that the regime of fixed, quasi-fixed, managed exchange rates was at the core of the problem. In addition to managed exchange rates, the paper offers an additional contributory cause of the crisis - China’s mercantilist policy. [Working Paper No. 45]