China's exchange rate continues to be blamed for global economic imbalances, with the economist Paul Krugman one of Beijing's staunchest critics. Even after China announced a change in its currency policy in June, Mr Krugman argued that it did not “address the real issue, which is that China has been promoting its exports at the rest of the world's expense”. Yet, arguably, it is the Nobel Prize-winning ideas that Mr Krugman developed three decades ago, not currency manipulation, that have led to China's unparalleled growth.
Deng Xiaoping, the architect of China's reforms, would almost certainly have disagreed with those who see appreciation of the renminbi as the solution to global trade imbalances. Instead, he would probably have noted that neither is China's exchange rate a noticeable drag on global growth, nor is it what helped China to develop. It was about the same time that Mr Deng began opening China to the world in 1979 that Mr Krugman began formulating his theories on the “new economic geography”. These showed how economies of scale and declining transport costs encourage concentration of production in certain places, and in turn lead to new trade patterns. It is this process that transformed China into the world's most efficient producer-cum-exporter of manufactured goods.
Mr Deng initiated a strategy based on the three “Ds” of this new economic theory. China increased the “density” of economic activity by concentrating production in a few coastal cities geared to exports. It cut the “distance” between markets through an expansion of transport services. It undertook to reduce barriers to the movement of goods, helping to eliminate “divisions”.