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Regional Papers on Asia Pacific

The Financial Crisis and Gender: Assessing Changes in Workforce Participation for Rural India
Siddhartha K. Rastogi & Pradyun Rame Mehrotra, World Economics, March 2018
Labour market data in India shows female participation declining as GDP has increased, a phenomenon found in other East Asian economies over past two decades. This contradicts empirical observations, which argue over the feminization of the work force due to participation in global export markets, primarily driven by wage efficiency of female labour. The impact of the global financial crisis on female participation rates in rural India in 2009-10 is studied with a cross-state analysis to test theories about female unemployment in a downturn. One of the major findings is that as the formal wage difference between men and women decreases, the female participation gap increases, but more data is needed to identify critical causal factors.
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Analysis of Revisions in Indian GDP Data
Amey Sapre & Rajeswari Sengupta, World Economics, December 2017
This paper studies constant price growth estimates of India’s annual GDP data in order to understand the revision policy adopted by the Central Statistics Office. The use of high-frequency indicators to prepare initial estimates overstates the growth of the economy, although at the aggregate level the difference between initial estimates and final revisions is low. At the sectoral level the extent of revision for almost all sectors is large and the magnitude and direction of the revision is unpredictable. The Central Statistical Office must address issues in data quality and revisions by (i) adopting a comprehensive revision policy, (ii) supplying information and data on high frequency indicators and (iii) adopting revision metrics to assess the quality of estimates.
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Using Indian Data to Measure the Impact of the Eurozone Debt Crisis Through the Financial Channel
Vighneswara Swamy, World Economics, December 2017
Economic data for the period 2000 to 2013 shows that the sovereign debt crisis in the Eurozone had a macroeconomic impact on India by transmission through financial channels. Capital flows into India slowed down significantly due to the crisis: net external loans availed by banks stood at US$2.7 billion in the third quarter (Q3) of 2012–13 as against outflows of US$87 billion in Q3 of 2011–12. The number and quantity of Euro issues by Indian firms declined from INR159.6 billion (with 18 issues) in 2009–10 to only INR10.3 billion (with 5 issues) in 2012–13 and portfolio investments into India fell significantly. One significant lesson from the Euro debt crises is that the Indian financial system is relatively more open than that of the Chinese.
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India and China: Tracking their WTO Journeys with Trade Data
Siddhartha K. Rastogi, World Economics, December 2017
Trade data are used to examine the roles played by India and China in the World Trade Organization (WTO) and the implications for their share of global trade. India was a founding members of the WTO whereas China joined in 2001 after much deliberation, negotiation and caution. India has been one of the Organization’s most active members, a key negotiator for the developing world during Uruguay and a main source of obstacles in the Doha rounds of trade liberalisation. India contributes about 2.3% to world trade and is a services trade powerhouse, while China controls 11% of world trade as the world’s factory and as an emergent technology giant.
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Why Maddison was Wrong: The Great Divergence Between Imperial China and the West
Kent Deng & Patrick O'Brien, World Economics, June 2017
Much academic debate in Western and Chinese universities has engaged in testing the hypothesis that standards of living in China did not fall behind those of the populations of the national economies of Western Europe until late in the eighteenth century Unfortunately, the data for China accessible in secondary sources do not provide historical runs of estimates either for GDP or for total population, let alone for any purchasing-power-parity rates of exchange estimates. Angus Maddison used short-cut methods to circumvent these difficulties, but a platoon of distinguished economists have found his methods and estimates to be conceptually and statistically unacceptable as historical evidence. The data currently available for China are and may well remain too fragmentary, ambiguous and insecure to sustain a Kuznetsian perception for investigation into the historical origins of the Great Divergence.
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Measuring the Success of Industrial Policy in Australia
Andrew Marks, World Economics, December 2016
Industry policy in the context of trade liberalization has played a critical reinforcing role in re-orienting production in the Australian manufacturing sector from the domestic to international market. In the textile, clothing, footwear and motor vehicle industries this has promoted sustainable output and employment growth. This policy has also been instrumental in improving the structure of manufacturing exports from simple to elaborately transformed manufacturing products. The niche capital and knowledge intensive nature of elaborately transformed manufacturing products is of particular importance because they exhibit a comparative advantage in international markets. This has helped to offset the competitive advantage provided by industry policy in stimulating manufacturing exports in the countries of the South East Asian region which constitute Australia’s major export markets. Pressure is also being applied on other countries to implement industrial policy in order to remain competitive on the international market and in particular in this rapidly growing region of the world.
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The Creation of the Asian Infrastructure and Investment Bank: America’s Loss and China’s Gain
Stuart P.M. Mackintosh, World Economics, September 2016
The Global Financial Crisis (GFC) pulled institutions together diplomatically and economically. It clarified options and failures of the past and hastened coordinated reforms. But the GFC also starkly illuminated another geopolitical dynamic: Deals struck in extremis must be adhered to after parties leave the negotiating table. Failure to do so can cause embarrassment, recriminations, and unintended consequences with long-term implications that run counter to the original aims and objectives of U.S. policymakers and reformers. This sequence of events played out with the long holdup of agreed International Monetary Fund voice and vote reforms, and the birth of the Asian Infrastructure and Investment Bank, which hastened the rise of China while weakening the role of the Bretton Woods institutions.
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Japan’s Monetary Policy Misadventure
Masanaga Kumakura, World Economics, June 2016
This paper argues that the Bank of Japan’s decision in April 2013 to formally adopt inflation targeting as the framework of its monetary policy and to embark on a programme of quantitative and qualitative monetary easing was misconceived. The aim of the policy to achieve consumer price inflation of two percent on a sustainable basis has not been achieved. It is ill conceived because Japan’s deflation during the past two decades has been quantitatively small with evidence that a substantial part of this deflation is a statistical artefact. Furthermore, much of the fall in growth rates can be explained by a combination of a shrinking labour force and falling working hours. A large part of Japan’s fiscal deficits is structural, reflecting ballooning social security expenditure for the elderly which policy makers are unlikely to be able to reform. Weakening fiscal discipline implies that monetary policy in Japan is a de facto open monetization of government debt. When a crisis comes, the Bank of Japan will have no option but to continue financing government deficits even if the inflation rate climbs beyond its official target in the future.
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China’s GDP Per Capita from the Han Dynasty to Communist Times
Kent Deng & Patrick O'Brien, World Economics, June 2016
This article is a critical survey of the concepts and data utilized by economists and economic historians that purport to measure relative levels and long term trends in GDP per capita from the Han Dynasty to Communist times. We favour attempts to extend macro-economic analysis and its associated quantification to China’s long imperial history, but have concluded that estimates calibrated in international dollars for 1990, or 2005 or 2011 are not fit for that purpose. Furthermore, and after surveying recent endeavours to reconstruct the published secondary and official statistical sources available for the measurement of primary production for Ming and Qing China (1368-1911), we reluctantly suggest that Kuznetsian paradigms for empirical economics are probably not viable, either for the measurement of the empire’s growth over time or for reciprocal comparisons with European economies. This is because on both conceptual and statistical grounds the concept and associated metric for GDP per capita does not travel easily and securely between the fiscal systems of China and the West (Yun-Casallila and O’Brien 2012).
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How Fast Will China Grow Towards 2030: And what about the US?
Jorgen Randers, World Economics, June 2016
Historical data for the last fifty years shows that there is a surprisingly strong correlation between the growth rate of a nation’s GDP per person and its income level. The growth rate declines linearly with income, and this relationship can be used to estimate the future growth rate of a nation’s economy. Using the same method it is also possible to forecast the share of GDP in agriculture, industry, and services – and to demonstrate the continuing decline of the share in industry as a nation get very rich. This article concludes with a discussion of the likely impact of robotisation and greening on GDP growth.
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Youth Employment Crisis in India
Swati Dutta, World Economics, March 2016
The global financial crisis and the subsequent uneven recovery have underscored the need for Africa’s resilience to output and other shocks originated in the rest of the world. A comparison of two regional economic communities – the East African Community (EAC) and the Southern Africa Customs Union (SACU) – suggests that deeper intra-regional, and in particular intra-industry, trade ties have contributed to the EAC’s resilience to external output shocks. More broadly, intra-regional and intra-African trade with fast-growing economies, together with geographically diversified trade links, can strengthen the capacity of African countries to absorb global output shocks. Besides helping shield countries from external shocks, intra-regional trade also supports economic diversification and participation in regional value chains.
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The Indian Economy: From Growth to Stagflation to Liberal Reform
Deepak Lal , World Economics, March 2016
This paper considers the optimistic scenario that India was on a high growth path and would follow China’s path with a lag (as its reforms started in 1991 compared with China’s in 1980) which would produce an economic miracle. This did not happen and since 2011 India’s growth seemed to be reverting to what has been termed “the Hindu Rate of growth”. This paper considers why this happened and the likely future path of the Indian economy following the victory of Narendra Modi’s Bhartiya Janta Party (BJP). The paper evaluates the change in India’s economic fortunes following the 1991 economic reforms in historical perspective. The sources of the growth acceleration are explained with an examination of why growth faltered. India’s highly disputed revision of the GDP series shows annual growth rising to 7.5% in 2015-16, but it is more likely that it is around 6%. The author concludes that given its economic fundamentals, with improved policies India would be able to grow at about 10% leading to a per capita income growth of about 8.5–9% for the next two decades.
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Dissecting China’s Property Market Data
Meiping (Aggie) Sun, World Economics, March 2016
This paper analyses Chinese property market data to evaluate recent trends in the market and to make prognoses for the future. It considers whether or not the existence of high prices and at the same time an enormous rise in residential supply in terms of floor space under construction means that there is a ``bubble'' in China's property market which may burst, similar to what happened in Japan in the early 1990s. Evidence that the price of new homes moves almost perfectly with sales of new residential floor space rather than with completed floor space suggests that the housing market is behaving normally and follows mini boom and bust cycles like other industries. The analysis finds that there are low maintenance costs for buyers after purchase due to the lack of annual property tax and negligible depreciation of bare-shelled housing units which limits the risk of default. Although recently developers are under pressure to raise more revenue mainly due to high interest-rate borrowing from shadow banks, the author considers that the probability of a systemic collapse of housing market is minimal given existing taxation systems, easing monetary policy and the continuing urbanization process.
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Data on Singapore’s Sovereign Wealth Fund is Flawed
Christopher Balding, World Economics, September 2015
This paper undertakes a critique of the quality of Singapore’s public economic data in the context of the claim that one of the island’s sovereign wealth funds, Temasek Holdings, reports that it has earned since inception in 1974 an average annualized rate of return of 16%. Over a similar time period the Singapore stock market earned 4.99% implying that Temasek on average outperformed the local stock market in which it was heavily invested, by a factor of more than three times every year. The paper replicates Temasek’s portfolio and analyses Singapore’s public finances and finds that irregularities may exist within Temasek financials. It concludes that if there are as of yet unknown financial weaknesses within Singaporean public finances that have yet to be realized then given the importance of the island in Asia’s financial markets, this should raise concerns over the quality of financial statements produced by government linked corporations and the public sector.
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Inflation Targeting in Developing Countries
Anthony Gathogo & Wook Sohn, World Economics, June 2015
This paper analyzes economic and institutional factors that affect the likelihood of adopting an inflation-targeting monetary policy regime in emerging markets and developing countries. We use a logit model for a sample that comprises both inflation-targeting and non-targeting countries for the period of 1990–2009. The results show that countries experiencing improved macroeconomic performance and stronger institutional stability have a high chance of switching to the inflation-targeting framework. In particular, central bank independence, as measured by governor turnover rate and legal independence, positively affects the decision to change regimes.
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Deflation? What Deflation? Statistical Origins of Japan’s Declining Price Levels
Masanaga Kumakura, World Economics, June 2015
Although Japan’s CPI is often criticized for potential upward bias, it deals with improvements in the quality of individual goods in ways that make the statistical inflation rate much lower than actual price changes. Moreover, the quantitative importance of this effect has risen progressively since the early 2000s due to increased weights of technology-intensive electronic products and changes in the method of adjusting their prices for quality improvement. Once this artificial effect is taken into account, it becomes questionable that Japan’s recent deflation has been so serious as to justify the adventurous monetary policy currently implemented by its central bank.
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How Wealthy are the Chinese?
Scott MacDonald, World Economics, December 2014
This paper looks at the available data about the number of high and ultra-high net worth individuals in China in order to assess the potential for Family Offices in the country. It also considers the possible investment preferences of the Chinese outside China as external capital controls become liberalized. The paper surveys the current state of knowledge published in Rich Lists and investment bank reports and finds that their predictions are contradictory. The paper concludes that there remains much uncertainty about the number, location and asset holdings of the wealthy individuals and families existing in China.
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The Greek Economic Crisis - is the Euro to Blame?
Andreas Hatzigeorgiou, World Economics, September 2014
The euro has been at the centre of reporting and discussion on Greece’s economic crisis. This article analyses the build-up, outbreak and development of the crisis in Greece, with the aim to answer whether the crisis can be traced to the country’s entrance into the Eurozone. By identifying a few of the underlying causes of the crisis, the article concludes that Greece’s crisis cannot be blamed on membership of the EMU. Nor is the financial meltdown and global recession of 2007–2008 to blame. Even without the euro, it is likely that Greece would have found itself in an economic crisis.
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Measuring the Asia-Pacific Region
Brian Sturgess, World Economics, September 2014
The Asia-Pacific region covers the countries around the Pacific Rim, South East Asia, the Indian Sub-Continent and Oceania. It contains three of the world’s largest economies outside the US: China, India and Japan. The quality of economic statistics varies widely across the region mainly because of differences in the resources available to national statistical offices in the large number of poorer countries. There are other data problems affecting inter-country comparisons: the use of old standards of national income accounting; the degree to which shadow and informal economies are under-recorded; and the use of outdated base years for the calculation of real GDP. On top of these issues is the continuing question about the extent to which China’s economic data is subject to political manipulation.
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Why India is Vulnerable to Portfolio Investment Movements: Analysis of capital flows between India and the United States
Mandira Sarma, World Economics, December 2013
This paper analyses the trend of capital flows between India and the US during 2000–2012. The US is a major source of foreign capital in India, through both direct and portfolio investment. During this period, portfolio investment from the US to India dominated over direct investment. A large part of India’s outward FDI is towards the US, although in terms of total FDI in the US, India’s share is not very large. Internationally active Indian banks have the largest foreign claims towards the US, however this amounts to less than 1% of the Indian banking sector.
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Human Resource Development (HRD) and Foreign Remittances: The case of South Asia
Muhammad Abdul Wahab, Vaqar Ahmed & Hamid Mahmood, World Economics, December 2013
This study tries to document linkages between HRD, migration and remittances in South Asia. We have explained in detail the various channels through which HRD promotes migration and remittances, and a case has been made not to consider this process as brain drain – rather it should be viewed by public policy practitioners as brain circulation which can in turn result not just in increased foreign exchange reserves but also increased prospects for transfer of technology and creative ideas. Econometric results suggest that infant mortality, gross primary school enrolment and real per capita GDP have a negative relationship with remittance inflows in South Asia, whereas gross tertiary school enrolment and access to financial instruments have a positive relationship with remittances in these countries. The result indicates that higher levels of education facilitate mobility of labour and allow better opportunities for working abroad.
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Asset Poverty in India
Swati Dutta, World Economics, September 2013
In order to formulate policy to target the correctly identified rural poor in India, focus on an income poverty measure alone is insufficient. The purpose of this research is to study a new area of poverty measurement based on data that detail a household’s access to basic assets. The study has used the secondary data source provided by the Demographic and Health Survey (DHS) for the time period of 1992, 1998 and 2005. In order to construct the asset index the technique of multiple correspondence analysis is used. A discussion of trends in asset poverty in various states in India follows, together with the policies they need to adopt depending on their state of poverty.
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From Stellar Growth to Underperformance: The Abiding Vulnerability of the Indian Economy
Dilip K. Das, World Economics, September 2013
The economic trajectory of the Indian economy has altered several times. After decades of severe underperformance, the Indian economy gradually picked up momentum in the 1980s and 1990s, and turned in a stellar performance during the 2000s. This paper examines the rationale behind the ups and downs in India’s economic performance. It provides a succinct account of various phases of growth, delayed initiation of reforms, tardy and incomplete implementation, and vitally important economic strategies that should have been adopted by Indian policymakers but were ignored. In addition, India failed to address several serious structural issues, allowed them to fester indefinitely and paid a high price in terms of GDP growth. Paradoxically the economy benefited from the incomplete reforms and Indian growth had a stellar growth period in the 2000s, before slumping in 2011. Deterioration continued in 2012. The paper delves into the causes behind the deceleration, and analyses how macroeconomic attrition came about. It concludes with proposals of a revival strategy warranted by the current economic predicament.
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Cross-Border Financial Integration in Asia and the Macro-Financial Policy Framework
Philip R. Lane, World Economics, June 2013
In relative terms, Asia came through the global financial crisis relatively well. In part, this can be attributed to its conservative approach to international financial integration. At the same time, financial globalisation means that Asia cannot be fully insulated from international financial shocks. Moreover, it is likely that the rest of the world will undergo a redesign of its international financial profile, such that Asia will also have to adapt. All in all, there is likely to be considerable convergence in the composition of international balance sheets across Asia and the rest of the world. In turn, this is likely to be associated with a higher degree of regional financial integration within Asia. These structural changes call for the careful design of a prudential macro-financial policy framework.
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How Safe is SAFE’s Management of China’s Official Foreign Exchange Reserves?
Friedrich Wu, Robbert-Jan Korthals & Ng Kuan Khai, World Economics, June 2013
This paper examines whether the State Administration of Foreign Exchange (SAFE) and its subsidiary SAFE Investment Company (SIC), the sole managers of China’s gargantuan official foreign exchange reserves (OFER) until 2007, have shifted their investment behaviour since the inception of China Investment Corporation (CIC). We find that external conditions such as overexposure to US dollar-denominated assets and declining value of the greenback, as well as internal conditions like the rise of CIC as a rival to manage China’s OFER, have prompted SAFE-SIC to depart somewhat from their pre-2007 conservative style of investing most of China’s OFER in low-yielding foreign government bonds, especially US Treasury bills. Since 2008, SAFE-SIC, in a seeming competition with CIC, have started to pursue higher-risk, higher-return investments. However, we observe that this bolder strategy of SAFE-SIC might not be sustainable for long, because: (a) it duplicates CIC’s explicit mission already set by the State Council to invest in higher-risk, higher-return assets; (b) it runs against SAFE’s core mission to preserve, rather than grow, China’s OFER; and (c) SAFE is tied down by other core responsibilities such as the regulation of China’s foreign exchange administration system, the stewardship towards full capital-account convertibility, and the gradual internationalisation of the renminbi (RMB). As such, engaging in higher-risk, higher-return investments would most likely remain a secondary priority within SAFE’s overall mandate.
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Poor Economic Statistics Fuel China’s Low Consumption Myth
Jun Zhang & Tian Zhu, World Economics, June 2013
The generally held belief that China’s consumption is too low is a myth based on inadequate theory, a misreading of official statistics and the use of market exchange rates for making international comparisons. Chinese official statistics underestimate consumption expenditure on housing, they omit consumption paid for as benefits by the corporate sector, and there are a number of problems with the household expenditure surveys employed. An adjustment for statistical issues suggests that the rate of consumption is 60–65% of GDP, not the 48% based on the widely quoted official statistics figures, and is quite similar to the level experienced by other East Asian economies.
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Industrial Rebalancing is Already Here, But Can it Continue?
Nate Taplin, World Economics, June 2013
In mid-2012, as China’s economy decelerated, growth in electricity production – traditionally a good proxy for the health of industry – diverged strongly on the downside from official measures of industrial value added. While many analysts interpreted this incongruence as a sign of official data manipulation, detailed output and electricity consumption data tell a different story. Variation in Chinese electricity production since 2008 has been close to an exact function of output growth in a handful of heavy industrial sectors including metals, cement and chemicals, rather than industry as a whole. The underperformance of these electricity-intensive, but relatively low value-added sectors in Q2 and Q3 2012 largely explains the divergence between electricity output and industrial growth that confounded analysts last year. Moreover, the declining profitability of electricity-intensive sectors relative to consumer goods is an initial indication of ‘rebalancing’ in the Chinese industrial economy, which may herald changing data patterns in the future.
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Averting a Global Food Crisis: Policy and data needs
Keith Boyfield, World Economics, March 2013
The World Bank’s Food Price Watch reached a new historic peak in August 2012. High and volatile food prices spell real hardship for the world’s poor, and supply problems due to volatile climatic conditions have exacerbated the surge in global food prices. Investment in agriculture is handicapped by the lack of reliable, accurate data. In many developing countries, the methods of collecting agricultural statistics have hardly advanced in 50 years. This article analyses these flaws and omissions and reviews initiatives to resolve current shortcomings. Plantation agriculture offers one of the most effective means of producing sufficient food to meet global demand. The scope for enhancing production is considerable, particularly in certain countries such as Nigeria which are faced with a substantial food import bill. This article reviews a dozen key staple commodities and explores the opportunities to expand output with a particular reference to Sub-Saharan Africa. Recent research reveals the opportunities to improve production through planting more appropriate seeds and the use of fertiliser. Any step change in production hinges on the adoption of larger scale commercial production, for which private capital will be required. In the case of palm oil, the last few years has seen significant investment in Africa by global agri-business groups keen to complement production from the two major exporting countries: Malaysia and Indonesia. The potential for large scale agriculture has never been so bright as it is today in Africa.
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Communist China’s Capitalism: The highest stage of capitalist imperialism
Kenneth Austin, World Economics, March 2011
This article explains the contemporary Chinese–American economic relationship as an ironic variant of the classical theory of capitalist imperialism. Communist China is the modern world’s great imperial power (exporter of surplus savings). China exports its savings by undervaluing its own currency and acquiring foreign exchange reserves. As the supplier of foreign exchange reserves, the United States is not merely the colony, but the crown jewel of China’s empire. It absorbs China’s savings and consumes the corresponding surplus Chinese goods. However, unlike the old imperialist system, this relationship can be ended without military rebellion. The US, by controlling access to its financial markets, owns the ‘off switch’ for the Chinese export machine.
Recent Developments on the Rare Earth Front: Evidence of a new technocratic mercantilism emerging in China?
Robert Looney, World Economics, March 2011
Chinese actions in the rare earths market have raised a number of concerns about the country’s motives in restricting exports. One theory is that the country simply wants to ensure that it has adequate supplies for its future expansion into a number of energyefficient, and high-tech sectors using large amounts of this resource. Another view is that the country is practising a new type of mercantilism – leveraging the country’s current near monopoly over the resource to coerce using firms to locate in China and transfer their technology to Chinese firms: technocratic mercantilism. An analysis of China’s recent actions, together with empirical work suggesting a severe technological readiness lag, lends some support to the mercantilist interpretation.
On Economic Growth and Domestic Saving in India
Tarlok Singh, World Economics, March 2011
This study examines the economic growth and domestic saving in India. The onset of gradual economic reforms since the 1980s provided some fillip to growth, and the momentum was carried forward through the adoption of a wide-ranging structural adjustment program since the beginning 1990s. The sustainability of an accelerated growth trajectory hinges heavily on the acceleration of saving and investment and the improvements in productivity. While foreign direct investment, liberalization of trade and the globalisation of goods and financial markets have well-documented gains, the accrual of these gains is contingent on the acceleration of productivity to a threshold level where the firms can effectively compete for market share in both domestic and international markets. Gobalization is unlikely to take developing economies out of low level equilibrium traps of underdevelopment, if it is not accompanied by the institutional reforms, development of adequate infrastructure, unleashing of productivities, development of efficient financial sector, and the improvements in the competitiveness of import-competing industries in the domestic and export-oriented industries in the international markets.
Why is the Chinese Saving Rate so High?
Guonan Ma & Wang Yi, World Economics, March 2011
China’s saving rate is high from many perspectives – historical experience, international standards and model predictions. Furthermore, the average saving rate has been rising over time, with much of the increase taking place in the 2000s. What sets China apart from the rest of the world is that its rising aggregate saving has reflected high savings rates in all three sectors: corporate, household and government. Our evidence casts doubt on the proposition that distortions and subsidies account for China’s high saving rate. Instead, we argue that tough corporate restructuring (including pension and home ownership reforms), a marked Lewismodel transformation process (where the average wage exceeds the marginal product of labour in the subsistence sector) and rapid ageing process have all played more important roles. Such structural factors suggest that the Chinese saving rate may peak over the coming years.
A Rising Consumer Class: A perspective on India
Manish Sonthalia, World Economics, December 2010
India has had two stages of growth, both related to consumption since 1947. The first was based on developing economic self sufficiency; the second on rising disposable income. It is now entering its third period of consumption growth which sees it entering the world stage as one of the largest consumers in the world. This paper explains the factors that are driving this dramatic shift from the emerging middle classes to the patterns of consumption and investment in India today.
Vietnam: From Transitional State to Asian Tiger?: Issues of the Vietnamese economic transformation experience
F. Gerard Adams & Anh Le Tran, World Economics, June 2010
Putting aside the legacy of its unique history, Vietnam has achieved an excellent growth record. But it is still far behind the leading East Asian economies. We consider the Vietnamese growth strategy in light of the controversies about ‘accumulation vs assimilation’ and ‘non-intervention vs governing the market’. We discuss the changes that are occurring as a result of the actions of the still large state-owned sector, and as a result of growing private domestic and FDI-led entrepreneurship. Policy options for directing economic development are today influenced by Vietnam’s participation in AFTA and WTO. Trade links with China, Japan and the US also influence the direction of Vietnamese development.
Maddison and Wu: ‘Measuring China’s Economic Performance’
Yuri Dikhanov & Eric V. Swanson, World Economics, March 2010
Angus Maddison and Harry Wu (2008) claim that, in 2003, China’s GDP was 73% of that of the United States on a purchasing power parity (PPP) basis. Rejecting the results of the 2005 International Comparison Program (ICP), they construct their own PPP using a 1986 GDP estimate for China (Ren & Chen 1995) which they adjust upwards, and then extrapolate to 2003 using their revised growth rates for China, which they adjust downwards. This note examines the validity of their adjustments and assumptions, and finds them to be inconsistent with recommendations both from the perspective of index number theory and recommended national accounting practices. The 2005 PPP estimates from the ICP, which Maddison and Wu reject, produce a more plausible estimate of the size of China’s economy relative to that of the US (43% in 2005).
The Chinese Renminbi (Yuan): A new global currency in the making?
Friedrich Wu, Pan Rongfang & Wang Di, World Economics, March 2010
This paper is a tentative endeavour to delineate the potential of the renminbi to become a global currency. It first analyses the critical economic, financial and policy attributes that are required to support a currency to gain an international role. It then examines whether China has the potential to acquire these attributes. The paper concludes by offering some provisional observations on the implications for Asia and the global economy should the renminbi evolve into a world currency in the coming decades.
Well-being and Public Attitudes in Afghanistan: Some insights from the economics of happiness
Carol Graham & Soumya Chattopadhyay, World Economics, September 2009
Afghanistan is a context where individuals have to cope with the most adverse of circumstances. Our study of happiness finds that Afghans conform to a remarkably consistent worldwide pattern in the determinants of happiness across individuals within countries of all different development levels. Average happiness scores in Afghanistan, meanwhile, are higher than the world average and on a par with those from Latin America. In contrast, scores on a ‘best possible life’ question are much lower. This suggests that Afghans may be naturally cheerful and/or have adapted their expectations downward in the face of adversity, yet are more realistic when thinking about their situation in relative terms. Also suggestive of adaptation is that Afghans in general do not report to be unhappy when victims of crime and corruption, most likely because these phenomena have become the norm. In contrast, respondents in some Taliban-influenced regions, where crime and corruption are less common, do report unhappiness with corruption victimisation. More generally, resilient preferences for political freedom coexist with tolerance of crime and corruption and low levels of trust in public institutions.
Are Economic Sanctions Useful in Discouraging the Proliferation of Weapons of Mass Destruction?
Robert Carbaugh, World Economics, December 2008
against countries that have been implicated in the development of weapons of mass destruction and the use of terrorism. These sanctions have included limitations on customary trade and/or financial relations with a target country. Are sanctions effective in discouraging the proliferation of weapons of mass destruction? This paper investigates the nature and effects of sanctions applied to North Korea, Iran and Iraq. The paper concludes that although sanctions may help slow down the development of weapons of mass destruction, it is unlikely that they will be able to prevent determined and well financed countries from becoming members of the nuclear club. In the absence of military conflict, policymakers should reinforce the effectiveness of sanctions by being ready to negotiate and offer positive incentives as a method of encouraging cooperation with target nations.
How can Korea Raise its Future Potential Growth Rate?
Elena Ianchovichina & Danny Leipziger, World Economics, December 2008
Korea has achieved tremendous economic progress over the last three and a half decades, but in recent years growth has slowed down, and looking forward, most forecasters expect potential growth to decline substantially. The authors’ analysis of the key factors determining potential growth in Korea suggests that only if Korea implements swift reforms to address the low productivity of its service sector and prevent the decline in its labour supply, can the Korean economy achieve a doubling of its per capita income level by 2020. Without a rapid response this goal will be unachievable and the expected growth slowdown will be unavoidable. Reforms intended to boost productivity in services and labour force participation could help Korea sustain growth at double its expected real growth rate in the business-as-usual scenario in the period 2020–40.
Trends and Challenges in Islamic Finance
Heiko Hesse, Andreas (Andy) Jobst & Juan Solé, World Economics, June 2008
The paper first discusses the current trends in Islamic finance, which has become mainstream with currently more than US$800 billion of assets worldwide and a buoyant market for sukuk bonds. However, this exorbitant growth raises many challenges, particularly in the areas of banking, capital markets and regulation. Thus, the paper then considers these challenges, notably the economic and legal bottlenecks of sukuk, banking-specific issues, such as liquidity risk management and business models, as well as disharmonized financial regulation. Despite the challenges, the paper concludes that the Islamic finance industry has a bright future.
The Rise of China Investment Corporation: A new member of the sovereign wealth club
Friedrich Wu & Arifin Seah, World Economics, June 2008
The sovereign wealth club acquired a new member with the official launch of the China Investment Corporation (CIC) on 29 September 2007. The arrival of CIC has further heated up the debate on sovereign wealth funds (SWFs) and their potential implications for global financial markets. This is because, in carrying out its investments, CIC can tap into China’s huge official foreign exchange reserves, which by April 2008 had surged to US$1.76 trillion. CIC’s initial working capital of US$200 billion makes it the fifth largest SWF in the world today. This article seeks to analyze the background of the emergence of CIC, its hitherto investment strategy as well as the potential economic and political implications of its offshore investments, and finally the challenges it is likely to face in the near term.
Measuring China’s Economic Performance
Andreas (Andy) Jobst & Harry X. Wu, World Economics, June 2008
China is the world’s fastest growing economy and is also the second largest. However, the official estimates of the Chinese National Bureau of Statistics exaggerate GDP growth and need adjustment to conform to international norms as set out in the 1993 System of National Accounts (SNA). This paper presents and discusses the necessary adjustments. The two major contributions are new volume indices for the industrial sector and for "non-material" services. Finally, in order to measure the level of Chinese GDP in internationally comparable terms, the authors use a measure of purchasing power parity (PPP) instead of the exchange rate.
Islamic Economics and Finance
Rodney Wilson, World Economics, March 2008
This article provides an introduction to key concepts and methods involved in an Islamic approach to business, investment, risk taking and insurance. The prohibition of riba (interest or usury) profoundly influences the way business transactions and investments are made and financial contracts must comply with Islamic law or shariah. Underlying all economic and financial transactions from an Islamic perspective is a moral dimension, with the authoritative source of guidance being the Holy Quran, the revealed word of Allah, and the Hadith, the sayings and practices of the Prophet Muhammad and his companions, referred to as the Sunnah. Notably there is a concern about the justice of outcomes for individuals. A valuable contribution of the Islamic finance industry-with over one trillion dollars’ worth of assets designated as shariah compliant-is the issues it raises about morality and social accountability in financial dealings and the challenge it poses to conventional assumptions.
Growth Strategies and Dynamics: Insights from country experiences
Mohamed A. El-Erian & A. Michael Spence, World Economics, March 2008
The paper examines the challenges that developing countries face in accelerating and sustaining growth. The cases of China and India are examined to illustrate a more general phenomenon which might be called model uncertainty. As a developing economy grows, its market and regulatory institutions change and their capabilities increase. As a result, growth strategies and policies and the role of government shift. Further, as the models of economies in these transitional states are incomplete and because models used to predict policy impacts in advanced economies may not provide accurate predictions in the developing economy case, growth strategies and policies need to be responsive and to evolve as the economy matures. This has led governments in countries that have sustained high growth to be somewhat pragmatic, to treat the policy directions that emerge from the advanced economy model with circumspection, to be somewhat experimental in seeking to accelerate export diversification, to be sensitive to risks and as a result to proceed gradually in areas such as the timing and sequencing of opening up on the current and capital account. The last is an area in which existing theory provides relatively little specific guidance, but in which there are relatively high risks that decline over time as the market matures.
The Future of North Korea is South Korea: (Or hope springs eternal)
Marcus Noland, World Economics, September 2007
North Korea's famine was in significant part a product of state failure, and unleashed an unintended grassroots process of marketization. Reforms undertaken in 2002 are more usefully interpreted as a response to this development than as a pro-active attempt to improve efficiency, and the government’s stance remains ambivalent. The economy is progressively more integrated with those of China and South Korea, but the modalities differ: involvement with China increasingly occurs on market-conforming terms, while interaction with South Korea has a growing official transfer or subsidy element. Recent floods will contribute to a political context for enhanced South Korean government support.
A Dynamic Theory of China–U.S. Trade: Making sense of the imbalances
Amar Bhidé & Edmund Phelps, World Economics, September 2007
China's trade surplus with the U.S. is now more than a quarter of the U.S. trade deficit and, with China growing faster than the U.S., raises questions about its future course. Some media commentators term the chronic trade surplus "mercantilist" but offer no persuasive motive for it. Academics taking the classical static view regard the trade surpluses as a policy error. The authors offer a rudimentary model in which trade surplus in the early years is central for an optimal growth trajectory. The novelty derives from two features of underdevelopment shaping trade between backward economies like China and advanced economies like the U.S. First, the initial comparative disadvantages in China are an artifact of the uneven technical advances made by the U.S., so China may be able to erase those disadvantages through technological transfers bought with surpluses of exports over imports in goods and services. Reserves may be accumulated to pay for large lumps of know-how. Second, the diffusion of new products requires learning, which takes time, so the initial dearth of familiarity in China with a range of U.S. consumer goods operates as a drag on import demand for them, which may tip trade balances into surplus.
Does China Still Need Hong Kong?
Friedrich Wu, World Economics, June 2007
As the Hong Kong Special Administrative Region reaches the 10th anniversary of the territory’s reunion with its sovereign in China this year, it faces several looming competitive challenges from its ambitious and aggressive “sister” cities on the mainland. Going forward, without a credible counter-measure strategy, Hong Kong’s economic role as the uncontested interface between China and the rest of the world will be usurped by some of the mainland’s first-tier cities.
Can China Learn from Sweden?
Arne Bigsten, World Economics, June 2007
China is undergoing a very rapid process of structural and institutional transformation, which has led to dramatic increases in income levels. During this process, the country is facing a series of development challenges that need to be dealt with in order to sustain growth. The question posed in this paper is whether China has anything to learn from the Swedish process of development, or the ‘Swedish Model’. The author first describes the emergence of the Swedish Model, and then summarises its main features and the various institutions, both economic and political, that have sustained it. He discusses governance issues, the welfare state, and policies towards the private sector. He contrasts the situation of China with that of Sweden, in order to try to ascertain whether an analysis of the Swedish Model gives insights that are of relevance to China.
The Emergence of a Regional Financial Architecture in Asia: Recent developments and prospects
Anthony Elson, World Economics, September 2006
This paper provides an assessment of monetary and financial cooperation in Asia since the regional financial crisis of 1997–98, with a view to determining whether the emerging Regional Financial Architecture in Asia is compatible with the global financial architecture and what are the prospects for possible economic and monetary union. Monetary and financial cooperation has focused on four architectural pillars (economic policy surveillance, crisis prevention, liquidity support, and bond market development), which can be consistent with the global architecture. However, progress toward full integration is likely to be gradual and experimental, given the lack of strong regional institutions, regional economic disparities, and the need to build political commitment to such a goal.
What Could Brake China’s Rapid Ascent in the World Economy?
Friedrich Wu, World Economics, September 2006
There has been much hype about China’s rapid ascent in the world economy. For instance, economists from Goldman Sachs and the OECD have predicted that the Chinese economy will overtake the Japanese and the US economies well before the mid–21st century. However, these optimistic, straight-line projections are based on extrapolations from past trends, without paying sufficient consideration to the many challenges that China must face going forward. This paper aims to balance this sanguine perspective by identifying a number of near-, medium-, and longer-term potential “growth-decelerators”—i.e., economic overheating, widening regional and rural–urban economic divides, banking sector fragility, environmental degradation, rampant corruption, an ageing population and military conflict with Taiwan—that could possibly brake China’s rapid ascent in the world economy. It also seeks to examine how these potential “growthdecelerators” would impact China’s future expansion trajectory.
Understanding China’s Economic Transformation: Are there lessons here for the developing world?
Daniel W. Bromley & Yang Yao, World Economics, June 2006
Economic change is a process of continual adjustment to new circumstances. Economies are always in the process of becoming. Good economic policy entails pragmatic adjustment so that economic dystrophy is avoided. The experience of economic (institutional) reform in China since 1978 is drawn on—and explained—to illustrate the extent to which Deng’s reforms represent the pragmatist’s focus on the practical effects of purposeful actions. Economies rest on an evolving institutional foundation. Deng understood this and used it to bring China to the forefront of the world’s economic stage. Here is an account of how he managed that transition.
Corporate China Goes Global
Friedrich Wu, World Economics, December 2005
Recent high-profile international acquisitions and take-over bids by Chinese companies have attracted much media limelight and raised intense interest in China’s rising outward foreign direct investment (FDI). This paper delineates the macro trends of China’s outward FDI based on the most currently available data. It analyzes the size, geographical distribution and motivations of China’s outward investment. It identifies an emerging trend-shift in the globalization strategy of Chinese firms, moving from organic growth to strategic alliance and outright acquisition. The paper weighs the balance between obstacles to, and supporting factors for, the internationalization of Chinese enterprises. Finally, it spells out the mutually-beneficial effects of China’s outward FDI on home and host countries.
Reserve Accumulation in Asia: Lessons for holistic reform of the international monetary system
Graham Bird & Alex Mandilaras, World Economics, March 2005
In the aftermath of the 1997/1998 crisis, Asian economies have built up large holdings of international reserves. Although initially encouraged to do so by the IMF, more recently they have been criticised for maintaining undervalued currencies, running large current account balance of payments surpluses and accumulating excessive reserves, policies that have been blamed in part for causing global economic imbalances. This paper examines two related issues. The first is the role of closer international macroeconomic policy co-ordination in rectifying the imbalances and the institutional mechanisms through which this may be achieved. The second is the alternative ways in which the liquidity needs of Asian economies may be met without them having to acquire large reserve holdings. There may be an inconsistency in opposing reserve accumulation in Asia and at the same time blocking reform that would provide additional security against subsequent economic and financial crises.
Trade in the Chinese 21st Century
Howard Davies, World Economics, March 2005
In this article Sir Howard Davies, Director of the London School of Economics and Political Science, offers some thoughts, first, on the political framework within which trade policy is determined, then about the way in which the globalization debate has developed, and finally some suggestions on the way in which the growing significance of China as a global trader will affect us in the future.
Governance Matters: The role of governance in Asian economic development
David E. Bloom, David Steven & Mark Weston, World Economics, December 2004
In recent years there has been a surge of interest in governance: good governance increasingly is seen as a vital adjunct to successful development efforts. This paper attempts to explain what governance is and why it is important, and assess which forms of governance are likely to best support and promote economic development. Although economies with very different governance arrangements have performed strongly in recent decades, a focus on governance is likely to bring out some commonalities that may be helpful for 21st century policy-makers.
Asian Drama: The pursuit of modernisation in India and Indonesia
Tim Lankester, World Economics, September 2004
The now largely forgotten book Asian Drama: An Inquiry into the Poverty of Nations by Swedish social scientist Gunnar Myrdal was published in 1968. Myrdal called his book “Asian Drama” because of the tensions he saw being played out in Asia between modern ideals and the traditional. But there was another drama too— the tension being played out, within the ‘modern project’, between the different economic strategies that were on offer. It is this particular drama that Tim Lankester focuses on in the context of India and Indonesia over the three decades from the mid–1960s. And for both these populous countries, there are dramas still to be played out. Both countries have new elected governments this year, and growth prospects of their economies largely will depend on to what extent remaining reform and governance issues are tackled.
Globalisation and the Asia–Pacific Revival
Arne Bigsten, World Economics, June 2004
This paper reviews evidence on the evolution of international economic integration of Asia–Pacific countries, and discusses the extent to which this explains their recent growth success. It starts with a review of some theoretical arguments in the growth and globalisation debate, which is followed by a presentation of facts about Asia–Pacific international economic integration and growth relative to other regions of the world. The causes of the growth acceleration in the Asia–Pacific region are then discussed, with reflections on the relationships between policy reforms, openness, and per capita income growth. Finally, some tentative conclusions are drawn about future growth in the region.
The Quest for Development: What role does history play?
Areendam Chanda & Louis Putterman, World Economics, June 2004
It may be no coincidence that those countries that grew most rapidly in the late twentieth century—including South Korea, China, and, of late, India—were relatively developed civilizations when Western Europe began its overseas expansion five centuries ago. In this article the authors explore the literature showing that institutions matter to growth, then examine new evidence that the ‘social capability’ to achieve growth is a function of capacities that go beyond the formal education system. Remarkably, a long history of nationhood at the time of Columbus means better odds of growth today.
China’s Capital Market: Better than a casino
Stephen Green, World Economics, December 2003
Throughout the 1990s, China’s stock market was developed as a tool of industrial policy. It was used to supply capital to state-owned enterprises (SOEs) that remained controlled by the state and whose performance usually declined after listing. Secondary market trading was poorly regulated, again partly for political reasons. As a result, the market has become infamous for extreme volatility, price manipulation and grossly unreliable accounting. This is a problem for the government since the stock market is ill-equipped to support the government’s other increasingly important economic priorities. The government now needs to improve the efficiency of industry in order to sustain employment creation, to raise capital to finance its own liabilities and to put into place a modern pension system. As a result, China’s stock market is being slowly reformed. Listed companies are quietly being allowed to privatise. The regulatory framework has been rationalised. The empowered China Securities Regulatory Commission is pushing forward with a range of policies aimed at improving corporate governance. Shareholders have been allowed to pursue civil compensation claims against firms in the courts. Financial intermediaries are being privatised, the fund sector is being rapidly expanded and foreign investors are gradually being allowed in. These changes, although deeply unpopular among some important groups, will mature the market over the next decade.
Exchange Rate Regimes: Is there a third way?
Vijay Joshi, World Economics, December 2003
This paper argues that (a) for many developing countries, the optimal external payments regime would be a combination of an intermediate exchange rate with capital controls and (b) the policy stance and advice of the IMF should reflect this judgement. The paper uses India as a case study to illustrate its argument.
Hydropower in Bhutan and Nepal: Why the difference?
Jeremy Berkoff, World Economics, September 2003
Bhutan and Nepal have followed differing hydropower development strategies. Bhutan has co-operated with India and power export earnings have helped fund a broadly successful economic, environmental and social programme. In contrast, Nepal turned to the World Bank and other donors to fund its power projects. When World Bank funding for Arun III was withdrawn in 1995, its programme was thrown into disarray and it remains to this day a net power importer. Nepal’s current economic, environmental and social malaise can in part be attributed to these past decisions in the power sector by the Government and World Bank.
A Decade of Trade Reforms in India: How it compares with East Asia
Ramkishen S. Rajan & Rahul Sen, World Economics, December 2002
This paper summarises recent trade reforms in India and documents the extent to which the country has integrated with the global trading system. The paper argues that India has made important strides since the initiation of reforms in 1991. Although it lags significantly behind most of East Asia in terms of manufacturing exports, as part of India’s newfound global orientation, trade in services has taken on a key role, constituting over a quarter of India’s total exports in the last few years. Within the services sector, the Information and Communications Technologies sector is of particular relevance.
Continuities and Discontinuities in Global Development: Lessons from new East/West comparisons
Kenneth Pomeranz , World Economics, December 2002
Much literature normalises a ‘North Atlantic’ pattern of development, and sees a regionally specific ‘East Asian’ path emerging relatively recently. However, development patterns in core regions of Europe and East Asia were surprisingly similar until almost 1800; Europe’s subsequent divergence was shaped by exceptional resource bonanzas. East Asian growth has been less resourceintensive, and more continuous with pre-1800 patterns. Since 1978, ‘East Asian’ patterns again characterise coastal China, but China’s interior poses greater challenges; current interest in more resource-intensive, state-driven development strategies for those regions is thus unsurprising, but environmentally and socially risky.
Japan’s Monetary and Economic Policy
Allan Meltzer, World Economics, September 2002
Japan has gone from very successful policies that promoted growth without inflation to a long period of slow growth, recessions and deflation. The Bank of Japan’s policies are a major reason for deflation. Although the Bank has purchased foreign exchange, it counteracts the inflationary effects of its purchases via sterilization. This forces deflation to continue. Currently, there is a ‘dialogue of the deaf’. The government wants faster growth but does not reform the banking system; the Bank makes bank reform a condition for ending deflationary policies.
The Economic Impact of the World Cup
Stefan Szymanski, World Economics, March 2002
The World Cup will be the biggest sporting event of 2002, but the Japanese and Korean governments are also hoping that it will be one of the biggest economic events of the year. Impact studies by respected economic research institutes predict a dramatic boost to GDP in both countries. This paper explains how these forecasts are generated and explains the tendency for such forecasts to be over-optimistic. The paper concludes with some policy recommendations for governments and sporting bodies considering hosting such events.
Capital Controls: The experience of Malaysia
Jomo K.S., World Economics, March 2002
Malaysia’s decision to adopt capital controls in September 1998 reminded the world that there are alternatives to capital account liberalisation. Unfortunately, there has been a tendency for both sides in the debate over the capital control measures to exaggerate their own cases, with little regard for what actually happened. After examining the cases made, and the actual events surrounding the imposition of capital controls, the author concludes that the contribution of the controls to Malaysia’s subsequent recovery cannot be conclusively established. At worst, the controls may have discouraged not only foreign portfolio investment, but also foreign direct investment—which may adversely impact Malaysia’s medium-term competitiveness vis-à-vis the new industrialising economies of Asia, including China and India.
The Emerging Northeast–Southeast Asia Divide and Policy Implications
Friedrich Wu, World Economics, March 2001
Since the outbreak of the Asian financial crisis in mid-1997, the gulf between the Northeast Asian economies and Southeast Asian economies has widened as measured by GDP growth rates and size, direct and portfolio investment flows, stock market capitalisation and trading turnover, as well as foreign exchange reserves. The growing divide between the two regions can be explained by four factors, namely: political-risk differentials; different paces in economic restructuring and financial reforms; China’s allure in post-WTO entry; and the technological gap between the two regions. To recapture competitiveness, the Southeast Asian economies need to pursue the following policy responses with some urgency: re-establish a more stable political environment; accelerate market-oriented reforms and liberalisation; and fine tune incentives to attract foreign investment.
Why Did the Protected Areas Fail the Giant Panda?: The economics of conserving endangered species in developing countries
Timothy M. Swanson & Andreas Kontoleon, World Economics, December 2000
Most biodiversity lies within the developing world, and much of it is under threat because of forces for change within these countries. In order to be effective, biodiversity conservation must be viewed as a development opportunity, rather than as a constraint on development. This implies management for the purpose of harnessing all of the values of biodiversity and the organization of national management to make this possible. This general proposition is illustrated in a case study demonstrating how one celebrated species, the Giant Panda, is able to generate substantial flows of revenues, thereby creating the incentives for the conservation of its own habitat. The study focuses on the Wolong Panda Reserve, one of the most important panda reserves, located in Sichuan Provinces China. The study demonstrates that the proper management of the Giant Panda Reserves in Sichuan province should be able to generate an estimated $100 million per annum for the Wolong Reserve. This stands in contrast to the $250 thousand currently being allocated to reserve management. If a small proportion of this value were appropriated and then channeled to the local peoples, this would dramatically alter the incomes of hee local communities and their perceptions of the value of the Giant Panda and its reserves. The “opportunity cost” of allowing the continuing demise of the species, by reason of the continuation of conflicting uses and activities within the Reserve, is the loss of these natural values.
Is there a Case for an Asian Monetary Fund?
Graham Bird & Ramkishen Rajan, World Economics, June 2000
The East Asian financial crisis has spawned a number of proposals for institutional reform. Some envisage reforming existing institutions, particularly the International Monetary Fund (IMF), while others suggest that new institutions are needed. Amongst them is the idea of establishing an Asian Monetary Fund (AMF). Evaluating this proposal raises a number of complex issues. Its appeal hinges on whether it would be able to undertake some functions better than the IMF. To the extent that crises are regionally contained, there may be a case for mobilising finance to help deal with them at the regional level. This could also take pressure off the constrained resources of the IMF. In as much as access to finance from an AMF would be conditional upon compliance with specified standards and policy guidelines, an AMF might also help to prevent a future financial crisis in the region.