The equilibrium real exchange rate of China: a productivity approach

A large body of theoretical and empirical works asserts that exchange rates depend upon a country's productivity growth, and this effect is dubbed the Balassa-Samuelson effect. This paper examines the evidence for a Balassa-Samuelson based explanation for the real exchange rate movements of China vis-a-vis the U.S. dollar. Using disaggregated industry level data, we construct sectoral total factor productivities (TFPs) for the tradable and nontradable sectors from 1980-2003. Our main findings are: (a) the sectoral TFP differential is cointegrated with the relative price of nontradables with the unit cointegration vector; and (b) the real exchange rate is cointegrated with home and foreign sectoral TFP differentials. This productivity based real exchange rate model is then used to estimate the equilibrium exchange rates of the Renminbi (RMB). A comparison of the equilibrium exchange rate predicted by the productivity-based model and the actual rate indicates that the Renminbi is somewhat undervalued against the US dollar, though the undervaluation is not statistically significant. Our conclusions continue to hold even after we have controlled for the movements of net foreign assets.Nontraded Goods; Balassa-Samuelson Model; Cointegration

Cradle of Creativity: Strategies for in-situ Conservation of Agro Biodiversity

Given the inter-relationship of different agro ecological sub-systems in any country, success of the strategy of diffusion of varieties invariably adversely affects the conservation of agro biodiversity. At the same time, given the climate change and other fluctuations in the environment, in-situ conservation of agro biodiversity is most essential for future survival of the society. This study is a part of a long term investigation being pursued by the first author about the micro level changes at plot level in the farmers’ fields and their implications for micro policy at national and international level. Same villages were studied in 1988-89 and 2000-02 to look at the degree of erosion of agro biodiversity. In addition, a survey on preferred incentives for in-situ conservation was also conducted among the local communities. The implications of the study for monetary and non-monetary incentives for conservation have been drawn. Different models of incentives for possible action research have been described. There are not too many studies that provide micro level evidence over a decade on the subject. The findings were presented to the national policy makers though actual response in practice so far has been limited.