The renminbi and poor-country growth
Helmut Reisen 05 December 2011
China’s currency has appreciated substantially in recent years. While many in the west still argue that this is not sufficient and focus on the effects on their domestic industry, this column asks what the effects have been for the world’s poor countries.
China’s current-account surplus over the past two decades can be explained in large part by its savings rate. Song et al (2010) have stressed the role of rising corporate savings due to reallocation within the manufacturing sector from low- to high-productivity companies. Wei (2010), meanwhile, explains China’s rising household savings with gender imbalances. Still, large appreciations do impact the current account and – in developing countries – do depress growth (Keppler et al 2011), as evidenced by data over the past 50 years.
Development International trade
China, exchange-rate policy, poor countries
The price of children and fertility responses: Evidence from the Israeli Kibbutz
Avraham Ebenstein, Moshe Hazan, Avi Simhon 02 December 2011
For years, policymakers trying to influence the decisions of would-be parents have tried to change the ‘price’ of having children. In France they have made it cheaper; in China more expensive. This column looks at whether such policies are likely to have their desired effect. It examines unique evidence of a shock to the cost of having a child in Israeli communities between 1990 and 2000.
To what extent does economics affect fertility decisions? Ever since Gary Becker’s seminal work on the economics of the family in the 1960s (Becker 1960), economists have argued that money weighs heavily on the minds of would-be parents, and policymakers throughout the world have been heavily influenced by such research.
Frontiers of economic research Health economics
France, China, fertility, demographics, Israel, population
How to agree emissions targets at Durban
Valentina Bosetti, Jeffrey Frankel 28 November 2011
The signatories of the UN Convention on Climate Change will meet again this week in Durban, South Africa. But time is running out if they are to come up with a successor to the Kyoto Protocol, especially with the US at loggerheads with China and India. This column proposes a novel yet pragmatic solution.
The parties to the UN Framework Convention on Climate Change will meet once again in Durban, South Africa, from 28 November to 9 December. The clock is running out on negotiations for a successor agreement to the Kyoto Protocol. Despite optimism from some (see Tol 2010), progress at Copenhagen two years ago and Cancun one year ago was slow. Negotiations have been blocked by a seemingly insurmountable obstacle.
Environment International trade
US, China, Kyoto Protocol, India, UN Convention on Climate Change
Market-economy status for China is not automatic
Bernard O’Connor 27 November 2011
Is China a market economy? This legal question matters as antidumping and anti-subsidies laws apply differently to market economies. This column deconstructs the myth that China will automatically get market-economy status at the WTO in 2016 and argues that if China wants the EU to recognise it as a market economy it should comply with the explicit criteria in EU law.
In EU trade-defence law (antidumping and anti-subsidies), there is provision for different treatment between those exporting countries which are considered to have the status of being a market economy and those which are not. If a country does not have market-economy status it is easier to construct the normal value of the exported goods. The constructed normal value will normally be based on costs and prices from outside the exporting country and thus are likely to be higher.
Global governance International trade
China, WTO, antidumping
Are Chinese individuals prone to money illusion?
Heleen Mees, Philip Hans Franses 20 November 2011
Are the Chinese prone to money illusion? This column uses a unique Chinese dataset and finds that, unlike their American counterparts, Chinese people are more likely to base decisions on the real value and not be fooled by inflation.
China’s monetary policy and its inflation have got people talking – particularly about the effect on other countries (see for example the eBook edited by Evenett 2010). But what about its effect on China’s people? Are they fooled by money illusion?
Frontiers of economic research Monetary policy
US, inflation, China, money illusion
Does openness generate growth? Reconciling the experiences of Mexico and China
Timothy Kehoe, Kim Ruhl 19 November 2011
In 1985, Mexico opened itself to trade and investment. In recent years, China has followed the same path with much more impressive results. But this column argues that the slow growth and crises that Mexico experienced after the initial boom should act as a warning to those optimistic about China.
Does opening to international trade and foreign investment generate economic growth? A large empirical literature employs regressions with a country’s growth rate as the dependent variable and some measure of openness among the independent variables. Although some researchers find that growth is positively correlated with the share of trade in GDP, Rodríguez and Rodrik (2001) point out that the trade share is not a direct measure of policy. When the dependent variable is a measure of policy, the results are ambiguous and highly sensitive to the exact specification of the regression.
International finance International trade
China, free trade, financial globalisation, openness, Mexico
The financial trilemma in China and a comparative analysis with India
Rajeswari Sengupta, Joshua Aizenman 15 November 2011
Emerging markets face what some economists are calling a trilemma. They cannot simultaneously target exchange-rate stability, conduct an independent monetary policy, and have full financial integration. So what to do? This column looks at how Asia’s giants are responding – and in different ways.
Policymakers dealing with the Great Recession of 2008–09 are confronted with what we call the ‘financial trilemma’. This hypothesis, based on pioneering work by Mundell and Fleming in the 1960s, asserts that a country may not simultaneously target exchange-rate stability, conduct an independent monetary policy, and have full financial integration – it is a potent paradigm of open-economy macroeconomics (see Fleming 1962 and Mundell 1963).
Development International finance International trade
China, India, emerging markets, exchange-rate policy, financial trilemma
China’s economic growth ‘miracle’ and its outlook by 2020
Yuhan Zhang 13 November 2011
China’s growth since the 1980s has been phenomenally high. This column argues that it has been driven not by exports, as widely believed, but by investment. It adds that this strategy makes China’s economy unsustainable as it creates significant overcapacity in a range of sectors and leads to increasing debt. China’s road towards more consumption-driven growth will be far from smooth.
China’s economy has taken off since Deng Xiaoping’s economic reforms in 1978. Contrary to the conventional wisdom that China’s economic growth has been driven by exports, it is investment that actually contributes the most. China’s fixed capital formation and inventories jumped from 30% of GDP in 1980 to around 47.5% in 2010. Fixed capital formation, which corresponds to infrastructure such as factories, roads, and housing, had risen to the unprecedented high of 18.2 trillion renminbi at the end of 2010. And it is still rising.
Should India join the sovereign-wealth-fund herd?
Kavaljit Singh 31 October 2011
In 2007 China set up its sovereign wealth fund, the China Investment Corporation, with an initial capital fund of $200 billion. Since then, Asia’s other emerging economic power – India – has been wondering if it should follow. This column argues that such a move is ill-advised and that India has more worthy investment opportunities at home.
New Delhi will soon take a final call on the issue of setting up of a sovereign wealth fund. The idea of setting up an Indian sovereign wealth fund has been going around since 2007 when China established its major sovereign wealth fund, China Investment Corporation (CIC), with an initial capital fund of $200 billion. However, this time the proposal has received strong support from India’s corporate leaders who recently suggested the establishment of a state-owned sovereign wealth fund primarily to secure access to natural resources and pursue strategic investment opportunities overseas.
International finance International trade
China, India, sovereign wealth funds
The rise of the renminbi as international currency: Historical precedents
Jeffrey Frankel 10 October 2011
Over the last few years, use of China’s currency for international trade has been growing steadily. Some argue this is the start of a journey that will see the renminbi displace the dollar and become the international reserve currency within a decade. This column asks whether such prophecies are realistic by looking at how other international currencies established themselves.
All of a sudden, the renminbi is being touted as the next big international currency. Just in the last year or two, the Chinese currency has begun to internationalise along a number of dimensions. A renminbi bond market has grown rapidly in Hong Kong, and one in renminbi bank deposits. Some of China’s international trade is now invoiced in the currency. Foreign central banks have been able to hold renminbi since August 2010, with Malaysia going first.
reserve currency, China, renminbi, dollar