The Straits Times says

No winners in a race to the bottom

The world's 20 large economies have put their collective clout behind an effort to prevent China's currency devaluation from sparking a contagion. The Group of 20 declared in Turkey the importance of moving towards market-determined currency rates and resisting competitive devaluation. Since such devaluation is the financial equivalent of economic protectionism, the message from the G-20 clearly is that there must be no race to the bottom, especially at this difficult and dangerous moment in contemporary economic history.

The temptations of indulging in a currency war are there. The artificial lowering of the exchange rate for the national currency reduces the price of exports, thereby helping domestic industry and workers. However, the corresponding increase in the price of imports harms the purchasing power of citizens, invokes retaliatory action by competing nations and hurts international trade overall. Ultimately, the costs of competitive devaluation outweigh the benefits, which is why countries are hesitant to adopt the measure. Yet, the pressures of the moment, and the political compulsions that they generate, could encourage some nations to embark on a course bad for all. By making it clear that it will not join a downhill bandwagon, the G-20 has placed its material and political influence in the service of a larger good: to keep the global economy functioning despite the turmoil prompted by Beijing's actions.

Today's fears naturally reflect the experience of the Asian financial crisis of 1997-1998, which was replayed globally a decade later when a collapse on the epic scale of the Great Depression of the 1930s became conceivable. The centrality that the Chinese economy has achieved in Asian affairs since the latest two crises has provided the continent with a buffer against Western hegemony. But it is also a source of danger within Asia should the Sinic economic "miracle" falter. Given the repercussions of the Chinese crisis, rippling across the rest of Asia, it is absolutely important for other Asian countries to abjure a "beggar thy neighbour" policy in order to keep home fires burning temporarily.

Instead, this is a time for everyone to turn attention back to enduring economic fundamentals. Precisely because the financial domain is threatened by disarray, it is imperative for countries to focus on upgrading their work force through measures to reinforce productivity, exercise fiscal prudence even if this is politically unpalatable, and steer away from the short-term and ultimately illusory option of protectionism. Asian countries bounced back from the crisis of the closing years of the last century by embarking on painful but necessary structural reforms. Much as one hopes the current crisis can be contained without the need for more wrenching reforms, nations should be ready to press on with economic readjustment.

A version of this article appeared in the print edition of The Straits Times on September 10, 2015, with the headline 'No winners in a race to the bottom'. Print Edition | Subscribe