Jessica Moeller
INST 310 – Spring 2009
February 25th, 2009
The World Bank article discusses the two different waves of trade increases that followed the decrease in transportation costs. The first wave led to more trade between countries that were separated by long distances. This is because these countries are more likely to have different resources. The second wave was followed by an increase in trade between countries that were closer together. This trade was not trade between different industries (inter-industry trade) but rather between the same industries (intra-industry trade). “In other words, in the old trade theory and with high transport costs, countries trade only what they need to. In the new trade theory and with scale economies, a love of variety, and low transport costs, countries trade because they want to” (World Bank, 182).
Ricardo’s theory of comparative advantage was part of the basis of standard trade theory. It argued that, “goods are mobile across international boundaries than are resources (land, labor, and capital)” (Ruffin, 2). The Heckscher-Ohlin model stresses the importance of factor endowments in trade (Ruffin, 3). The differences in resources that countries have are often catalysts to trade between these countries. These theories both explain the relative frequency of inter-industry trade. They do not, however, explain the relative frequency of intra-industry trade.
Intra-industry trade is when two countries trade products that come from the same industry – like different brands of cars, for example. As Ruffin explains, “The significance of intra-industry arises from its basic character: it need not be based on comparative advantage. To a large extent intra-industry trade arises from the facts that products are differentiated and the production of any particular product requires some fixed costs” (Ruffin, 6). By trading products within one industry, countries and companies are able to specialize and then mass-produce these products. Large-scale production in turn reduces the over-all cost of the products. “Intra-industry trade enhances the gains from trade through better exploitation of economies of scale – rather than through comparative advantage – as trade leads countries to concentrate on a limited number of products within any particular industry. This leads to an expansion of world output because of the saving of fixed costs” (Ruffin, 7). Allowing for specialization also provides more opportunities for innovation. These effects all benefit the over-all economy.
Another benefit of intra-industry trade is that it provides a more stable form of trade. “Productive factors do not switch from one industry to another, but only within industries, intra-industry trade is less disruptive than inter-industry trade” (Ruffin, 8).
The frequency of intra-industry trade decreases as the distance between two countries increases. This has often been believed to be caused by the increased transportation costs associated with further distances. After analyzing the trends of intra-industry trade, Rice, Stewart, and Venables came to the conclusion that while the costs associated with distance do play some part in explaining why distance decreases its frequency, it is not the most important factor. They argue that, instead, countries that are close together have more similar economies and are therefore better able to trade within industry. “Closer countries tend to have more similar structures of underlying export supply and import demand” (Rice, 17). These countries produce and have markets for similar products, and therefore have reason to trade with each other.
The World Bank article argued that while inter-industry trade increased when transport costs first decrease, intra-industry costs increased when transport costs further decreased. Ruffin states that intra-industry trade “is more beneficial than inter-industry trade because it stimulates innovation and exploits economies of scale” (Ruffin, 8). The benefits of intra-industry trade are most often shared by countries in close proximity because they frequently have similar economies.
Sources:
Rice, Patricia, Martin Stewart, and Anthony J. Venables. The geography of intra-industry trade: empirics. Revised, Nov 19, 2002. http://www.econ.ox.ac.uk/members/tony.venables/prtv18.pdf
Ruffin, Roy J. The Nature and Significance of Intra-industry Trade. Economic and Financial Review. Federal Reserve Bank of Dallas. Forth Quarter 1999. http://www.dallasfed.org/research/efr/1999/efr9904a.pdf
World Bank. World Development Report 2009 “Reshaping Economic Geography”. 2009. Chapter 6: Transportation Costs and Specialization. http://siteresources.worldbank.org/INTWDR2009/Resources/4231006-1225840759068/WDR09_12_Ch06web.pdf
A new view on mobility
Annotated Bibliography: Factor Mobility (Labor and Capital)
In searching for literature that discussed factor mobility, I found a collection of authors who argued along the same lines as those published in the World Development Report. In fact Dilip Ratha appears in several reports published by the World Bank in 2005 and 2007, all of which argue for the encouragement and formalization of external capital flows (specifically remittances) and labor market stabilization through ease in restrictions to internal and international migration. This appears to be a trend in economics that stems from work done by Robert E. Lucas (as mentioned in the World Development Report). This new trend views labor clustering (especially high-skilled labor) as a positive factor in creating economic spillovers. Low-skilled labor can also contribute to the development process by helping settle the labor market equilibrium and funneling capital through remittances. In addition, new insights on how the capital and labor affects both sending and receiving countries have prompted IGOs to make different policy recommendations regarding the restrictions to migration.
Remittances: Development Impact and Future Prospects
Edited by Samuel Munzele Maimbo, Dilip Ratha World Bank Publications, 2005, 378 pages
This book explores policy options for alleviating poverty in the developing world though use of what now constitutes the largest source of financial flows to developing countries: remittances. Ratha outlines trends and determinates of remittance flows as a component of external capital flows and suggests ways in which receiving countries can increase these flows as well as maximize their development impact. In the first part, Ratha discusses the increase in remittance flows over the past few years and points out remittances are often invested in countries with particularly sound economic situations. This means receiving countries who work to improve economic stability and encourage domestic entrepreneurship can potentially increase remittance flows. Ratha also advocates a strengthening of the financial sector infrastructure so that both source and receiving countries can bring more of the remittances into formal sectors. He suggests that lowering the transaction costs will attract even larger capital flows because of increases in secure transfer of capital with reductions in the cost to transfer. Part two examines the socioeconomic aspects of migration and remittances as many of the remittances are used to invest in health care, education, or savings to fund the future migration of relatives. The economic effect of remittances can also be large because of the effect large amounts of foreign currency can have on domestic inflation rates and international currency exchanges. The book also makes a series of policy recommendations to both countries hosting emigrants and those sending them that aims to ease the restrictions on labor and capital flows as a way to alleviate poverty in the developing countries.
The New Economics of Labor Migration
Oded Stark and David E. Bloom, The American Economic review, Vol. 75, No. 2
Oded Stark and David Brooks analyze changes in theoretical and empirical research regarding the economics of labor migration. They found that migration behavior in individuals differs in accordance with perceived relative deprivation and skill level. Higher perception of depravity and higher skill levels tend to increase the probability of migration; however, the decision to migrate is rarely an individual decision. Migrants often make this calculated strategy “jointly with some group of non-migrants”, with shared costs and benefits. Although remittances serve as the primary reimbursement to non-migrants, better economic scales for the home labor market can also occur due to the migration out thereby benefiting both the migrant (through higher wages at the new destination) and non-migrant (through more stable wage markets). The authors also suggest some areas in which further study should be considered. In terms of labor market adjustment, more research should be done in the substitutability of international and internal labor migration.
In searching for literature that discussed factor mobility, I found a collection of authors who argued along the same lines as those published in the World Development Report. In fact Dilip Ratha appears in several reports published by the World Bank in 2005 and 2007, all of which argue for the encouragement and formalization of external capital flows (specifically remittances) and labor market stabilization through ease in restrictions to internal and international migration. This appears to be a trend in economics that stems from work done by Robert E. Lucas (as mentioned in the World Development Report). This new trend views labor clustering (especially high-skilled labor) as a positive factor in creating economic spillovers. Low-skilled labor can also contribute to the development process by helping settle the labor market equilibrium and funneling capital through remittances. In addition, new insights on how the capital and labor affects both sending and receiving countries have prompted IGOs to make different policy recommendations regarding the restrictions to migration.
Remittances: Development Impact and Future Prospects
Edited by Samuel Munzele Maimbo, Dilip Ratha World Bank Publications, 2005, 378 pages
This book explores policy options for alleviating poverty in the developing world though use of what now constitutes the largest source of financial flows to developing countries: remittances. Ratha outlines trends and determinates of remittance flows as a component of external capital flows and suggests ways in which receiving countries can increase these flows as well as maximize their development impact. In the first part, Ratha discusses the increase in remittance flows over the past few years and points out remittances are often invested in countries with particularly sound economic situations. This means receiving countries who work to improve economic stability and encourage domestic entrepreneurship can potentially increase remittance flows. Ratha also advocates a strengthening of the financial sector infrastructure so that both source and receiving countries can bring more of the remittances into formal sectors. He suggests that lowering the transaction costs will attract even larger capital flows because of increases in secure transfer of capital with reductions in the cost to transfer. Part two examines the socioeconomic aspects of migration and remittances as many of the remittances are used to invest in health care, education, or savings to fund the future migration of relatives. The economic effect of remittances can also be large because of the effect large amounts of foreign currency can have on domestic inflation rates and international currency exchanges. The book also makes a series of policy recommendations to both countries hosting emigrants and those sending them that aims to ease the restrictions on labor and capital flows as a way to alleviate poverty in the developing countries.
The New Economics of Labor Migration
Oded Stark and David E. Bloom, The American Economic review, Vol. 75, No. 2
Oded Stark and David Brooks analyze changes in theoretical and empirical research regarding the economics of labor migration. They found that migration behavior in individuals differs in accordance with perceived relative deprivation and skill level. Higher perception of depravity and higher skill levels tend to increase the probability of migration; however, the decision to migrate is rarely an individual decision. Migrants often make this calculated strategy “jointly with some group of non-migrants”, with shared costs and benefits. Although remittances serve as the primary reimbursement to non-migrants, better economic scales for the home labor market can also occur due to the migration out thereby benefiting both the migrant (through higher wages at the new destination) and non-migrant (through more stable wage markets). The authors also suggest some areas in which further study should be considered. In terms of labor market adjustment, more research should be done in the substitutability of international and internal labor migration.
The World Bank Advocates State-guided Economies
The World Bank, in advocating the necessity for cities to understand the concept and theory behind economies and diseconomies of scale and of agglomeration, has also, perhaps unknowingly, become an advocate for a slight version of the state-run, Asian economic model. Although the World Bank has recently expanded its acceptance of various economic theories, the World Bank has seemed to be a strong proponent of the liberalized, capitalistic model of the West, namely the United States, in the past. By supporting an economic model such as the United States’s model, the World Bank would assumedly be in favor of a liberalized approach to economic development. Encouraging the state to step in a take the helm goes against such an advocacy for liberalism. Hidden in the World Bank’s Scale Economies and Agglomeration is a strong case for state-led and state-planned economies.
One of the main purposes of the chapter was to “assess whether policy makers in the developing world have been learning from (scale economies) experience and analysis.” (Scale, 126) And indeed, the closing statement of the assigned reading likewise emphasized the importance of the involvement of municipalities and their governments in their area’s economic development. “…cities and towns should be seen as market agents that, just like firms and farms, serve market needs.” (Scale, 126) Although the content of the chapter could easily pass for an analysis of the natural consequences of a free market and its expansion, the deeper message is one that the Asian tigers, along with China would be proud of.
Throughout the chapter, the World Bank does seem to emphasize that the development of a city and its specific industries can be attributed to natural causes. Small cities naturally specialize in the manufacturing of standard goods, while large cities somehow naturally cater to the service-oriented industries. (Scale, 137) The World Bank also mentions that a city’s history also has a role to play in what type of industry the city and its citizens will work in. (Scale, 138) Yet the government of a city or a country possesses several tools to guide and foster growth in cities and regions.
In fact, the chapter sets out three basic guidelines for policy-makers to follow in regards to cities, trade and ideas. By encouraging or funding certain research or activities, a government can direct the development of certain industry sectors. (Scale, 137) Even through enacting policies to make a city more “business-friendly and livable” may help direct and guide an area’s economic growth. (Scale, 137)
The chapter also talks about how a state’s mismanagement can inhibit economic growth. According to World Bank, economies of scale rely on large pools of human labor, aka high densities of population. When countries try to discourage a population from moving to larger cities, they inhibit the natural growth that comes from a higher density population. The chapter also talks about how the mismanagement of land and its uses could inhibit the economic growth of a region. The chapter states, “The ability and ease of a city to adapt its land to different uses according to changing market needs will enable its sustainable growth.” (Scale, 142) Later, the chapter discusses how investment in the transportation infrastructure of a city is likewise vital to the city’s economic success. (Scale, 144)
Through all of its recommendations on how a city government should handle its growth and development, there is a degree of credence given to a liberal philosophy on economics. For example, when discussing how city governments can handle the management of its land, the chapter says, “Successful cities have relaxed zoning laws to allow higher-value users to bid for valuable land…” (Scale, 142) Yet beneath the overtones of liberalization and market freedom lies the deeper strain of state-guided growth. The final advice of the chapter to cities that they should see themselves as “market forces,” echoes strongly the principles the East Asian development model has.
One of the main purposes of the chapter was to “assess whether policy makers in the developing world have been learning from (scale economies) experience and analysis.” (Scale, 126) And indeed, the closing statement of the assigned reading likewise emphasized the importance of the involvement of municipalities and their governments in their area’s economic development. “…cities and towns should be seen as market agents that, just like firms and farms, serve market needs.” (Scale, 126) Although the content of the chapter could easily pass for an analysis of the natural consequences of a free market and its expansion, the deeper message is one that the Asian tigers, along with China would be proud of.
Throughout the chapter, the World Bank does seem to emphasize that the development of a city and its specific industries can be attributed to natural causes. Small cities naturally specialize in the manufacturing of standard goods, while large cities somehow naturally cater to the service-oriented industries. (Scale, 137) The World Bank also mentions that a city’s history also has a role to play in what type of industry the city and its citizens will work in. (Scale, 138) Yet the government of a city or a country possesses several tools to guide and foster growth in cities and regions.
In fact, the chapter sets out three basic guidelines for policy-makers to follow in regards to cities, trade and ideas. By encouraging or funding certain research or activities, a government can direct the development of certain industry sectors. (Scale, 137) Even through enacting policies to make a city more “business-friendly and livable” may help direct and guide an area’s economic growth. (Scale, 137)
The chapter also talks about how a state’s mismanagement can inhibit economic growth. According to World Bank, economies of scale rely on large pools of human labor, aka high densities of population. When countries try to discourage a population from moving to larger cities, they inhibit the natural growth that comes from a higher density population. The chapter also talks about how the mismanagement of land and its uses could inhibit the economic growth of a region. The chapter states, “The ability and ease of a city to adapt its land to different uses according to changing market needs will enable its sustainable growth.” (Scale, 142) Later, the chapter discusses how investment in the transportation infrastructure of a city is likewise vital to the city’s economic success. (Scale, 144)
Through all of its recommendations on how a city government should handle its growth and development, there is a degree of credence given to a liberal philosophy on economics. For example, when discussing how city governments can handle the management of its land, the chapter says, “Successful cities have relaxed zoning laws to allow higher-value users to bid for valuable land…” (Scale, 142) Yet beneath the overtones of liberalization and market freedom lies the deeper strain of state-guided growth. The final advice of the chapter to cities that they should see themselves as “market forces,” echoes strongly the principles the East Asian development model has.
National Borders and National Identity
While many people might think that globalization would eliminate national borders as the world becomes more of a global society, in fact many national borders are actually becoming more important. They provide a means of breaking the world into manageable parts and they provide the basis for the identity of these parts.
While in theory, globalization would create a world where distance would not be an issue in trade, the fact is that we live in a physical world that makes this impossible. Transportation will always cost something, meaning that distance will also matter to some extent (Wolf, 178-180). Nation-states provide divisions in the world that break communities up into manageable parts. It would be nearly impossible for the world to be governed by one centralized government. By having national borders, the globe is divided into smaller sections that can be more easily governed and managed. But by having many separate components, competition is unavoidable.
One result of globalization has been international polarization. As some economies open up and develop quickly, others lag behind. As the differences between economies and societies become greater, people are more likely to try to more towards the societies and nations with higher standards of living. In order to try to limit the number of immigrants into a country, nations often strengthen their borders. The strengthening of borders does not deter all people from trying to travel from nation to nation, though. Because of this, as national borders are strengthened the amount of illegal border crossing and crime also tends to increase. This tends to be a concern for nations that are trying to form a united front with which to compete in the global market. The strengthening of borders is a means of establishing a set national identity.
“In some sense the identity has been stipulated by a real border of this or that space. But this space is no more only physical in the epoch of globalization. The identity is impossible without borders, because a border, as it was noted by Martin Heidegger, is not the place where something ends, but it is the place where something starts to exist” (Liahchylin, 108). Borders do not tell where something ends, but rather where it begins. Borders are a necessary means of establishing identity, in this case national identity. They provide a means of separating “us” from “them”.
As globalization makes trade more competitive, nations feel additionally pressure to succeed. This pressure usually causes a nation to become more united in trying to rise to the challenge. Nationalism and national identity become more important. “Although many anticipated that globalization foreshadowed a ‘virtual’ world in which national borders would be largely irrelevant, instead it appears that many Western nations are reconstituting and reinforcing geographic and social divisions through border reconstruction projects, reaffirming the importance of ‘place’-based privileges and rights, as well as ‘insider’ verses ‘outsider’ identities” (Wonders, 1).
The rise in nationalism that can stem from globalization can lead to international conflict as nations vie for power and influence globally. As the globe becomes more interconnected, it actually can become more divided. As nations try to protect and preserve their own interests from their increasing global competition, they can become more closed and strengthen their borders. “Despite widespread claims about the porosity of borders and the diminished power of nation-states under globalization, borders remain critically important and nation-states are key players in the construction of the global economy” (Wonders, 1). Nation-state can look to borders as providing the basis for a national identity to gather around.
“As the source of order and basis of governance, the state will remain in the future as effective, and will be as essential, as it has ever been” (Wolf, 190). Borders break the globe into manageable parts that compete in the global economy. They provide a stable basis of identity for nation-states that allow them to unite to be able to compete. “National identity is one of a few remained sources of sense in the modern world” (Liahchylin, 111).
Liahchylin, Anatol and Tatsiana Astrouskaya. The Specificity of the National Identity in the Epoch of Globalization. Limes, 2008, Vol. 1, No. 2. pg 108-112. http://www.limes.vgtu.lt/upload/limes_zurn/2_liahchylin_108-112.pdf
Wolf, Martin. Will the Nation-State Survive Globalization?. Foreign Affairs: Volume 80, No. 1, January / February 2001. pg 178-190. http://www.fpvmv.umb.sk/fpvmv_www/phprs/storage/File/ksp/GLUN/S_Wolf_FA.pdf
Wonder, Nancy A. Globalization, Border Reconstruction Projects, and Transnational Crime. Social Justice, Summer 2007. http://findarticles.com/p/articles/mi_hb3427/is_2_34/ai_n29429010/pg_1?tag=content;col1
While in theory, globalization would create a world where distance would not be an issue in trade, the fact is that we live in a physical world that makes this impossible. Transportation will always cost something, meaning that distance will also matter to some extent (Wolf, 178-180). Nation-states provide divisions in the world that break communities up into manageable parts. It would be nearly impossible for the world to be governed by one centralized government. By having national borders, the globe is divided into smaller sections that can be more easily governed and managed. But by having many separate components, competition is unavoidable.
One result of globalization has been international polarization. As some economies open up and develop quickly, others lag behind. As the differences between economies and societies become greater, people are more likely to try to more towards the societies and nations with higher standards of living. In order to try to limit the number of immigrants into a country, nations often strengthen their borders. The strengthening of borders does not deter all people from trying to travel from nation to nation, though. Because of this, as national borders are strengthened the amount of illegal border crossing and crime also tends to increase. This tends to be a concern for nations that are trying to form a united front with which to compete in the global market. The strengthening of borders is a means of establishing a set national identity.
“In some sense the identity has been stipulated by a real border of this or that space. But this space is no more only physical in the epoch of globalization. The identity is impossible without borders, because a border, as it was noted by Martin Heidegger, is not the place where something ends, but it is the place where something starts to exist” (Liahchylin, 108). Borders do not tell where something ends, but rather where it begins. Borders are a necessary means of establishing identity, in this case national identity. They provide a means of separating “us” from “them”.
As globalization makes trade more competitive, nations feel additionally pressure to succeed. This pressure usually causes a nation to become more united in trying to rise to the challenge. Nationalism and national identity become more important. “Although many anticipated that globalization foreshadowed a ‘virtual’ world in which national borders would be largely irrelevant, instead it appears that many Western nations are reconstituting and reinforcing geographic and social divisions through border reconstruction projects, reaffirming the importance of ‘place’-based privileges and rights, as well as ‘insider’ verses ‘outsider’ identities” (Wonders, 1).
The rise in nationalism that can stem from globalization can lead to international conflict as nations vie for power and influence globally. As the globe becomes more interconnected, it actually can become more divided. As nations try to protect and preserve their own interests from their increasing global competition, they can become more closed and strengthen their borders. “Despite widespread claims about the porosity of borders and the diminished power of nation-states under globalization, borders remain critically important and nation-states are key players in the construction of the global economy” (Wonders, 1). Nation-state can look to borders as providing the basis for a national identity to gather around.
“As the source of order and basis of governance, the state will remain in the future as effective, and will be as essential, as it has ever been” (Wolf, 190). Borders break the globe into manageable parts that compete in the global economy. They provide a stable basis of identity for nation-states that allow them to unite to be able to compete. “National identity is one of a few remained sources of sense in the modern world” (Liahchylin, 111).
Liahchylin, Anatol and Tatsiana Astrouskaya. The Specificity of the National Identity in the Epoch of Globalization. Limes, 2008, Vol. 1, No. 2. pg 108-112. http://www.limes.vgtu.lt/upload/limes_zurn/2_liahchylin_108-112.pdf
Wolf, Martin. Will the Nation-State Survive Globalization?. Foreign Affairs: Volume 80, No. 1, January / February 2001. pg 178-190. http://www.fpvmv.umb.sk/fpvmv_www/phprs/storage/File/ksp/GLUN/S_Wolf_FA.pdf
Wonder, Nancy A. Globalization, Border Reconstruction Projects, and Transnational Crime. Social Justice, Summer 2007. http://findarticles.com/p/articles/mi_hb3427/is_2_34/ai_n29429010/pg_1?tag=content;col1
The Missing Puzzle Piece
Fred Robins’ Asia’s 1997 Crash: its Character, Causes and Consequences added further explanation to some of the possible underlying factors of the Asian financial crisis. Although his purposes in the article went further than just an explanation of the crash to its modern day consequences, he did spend a deal of time discussing the causes of the financial crisis. Yet instead of adding clarity to my understanding, though, as might be expected when further explanation is given through a paper, the further explanations and reasons for the 1997 Asian market collapse only exacerbated and confused me. I could not determine the point of my exacerbation until the end of the paper when I realized that, despite adding pieces of explanation to the puzzle of the Asian financial crisis, there still remained one glaring gap of explanation, and the gap is the role of culture, of tradition, of history – of humanity.
The articles our class has read so far have lightly touched on the role of tradition, culture, history, humanity, whichever you would like to call it. In Revisiting the Japanese Economic Model, T.J. Pempel mentions that analyses of the culture and value systems of Asia exist. However, he deals with their possibility in one fell sentence and promptly moves on to more economist-friendly factors. (Pempel, 32) In the reading for today’s class, Asia’s 1997 Crash, Fred Robins devotes his time to a brief analysis of the causes of the crisis and then to a more lengthy speculation to the crisis’s consequences. In his discussion on the Asian model, he wanders for a moment into the realm of humanity, but quickly returns to the path of numbers and data. Robins mentions the possible influence of Confucian or Asian values, but states, “The chapter avoids such contentious issues.” (Robins, 45)
In all fairness, a discussion on the impact of culture or history on the financial structure of a country does allow room for an infinitely broad topic of analysis and debate. Without the guidance of concrete numbers in the form of GDP or FDI or any other economic fact or even policy, the analysis honestly can become depressingly long and complicated and as Robins said “contentious.” (Robins, 45) However, just because none of the authors we have read thus far seem willing to enter that debate, does not mean other analysts have not dared to enter. The mere fact that both Pempel and Robins allude to the existence of the analysis of such factors hints that some experts in the field believe culture is important.
Indeed, a simple google search on the social and cultural factors of the Asian financial crisis can bring up a myriad of academic papers and sources. One such source takes an exhaustive look at the cultural factors involved in the development of the East Asian economic model. In Cultural Factors and Economic Performance in East Asia and Latin America, Jiang Shixue qualifies his intense interest of the influence of culture on economy and goes further by separating the analysis of culture. He says,
“In pinpointing the causes of underdevelopment, some people would put more emphasis on external factors, such as: a long history of colonial dominance and exploitation, unequal exchanges and the absence of a just international economic order. However, it is also necessary to pay enough attention to internal factors. As a matter of fact, development is the result of both external and internal factors, and in many cases, internal factors should always play a more important or even decisive role.” (Jiang, 8)
Jiang goes on to cite other scholars, such as Max Weber and Joseph Schumpeter, who have paid special attention to the element of culture in an economic development model. Jiang concludes his article by stating that culture cannot fully and independently explain the reasons behind the rise and fall of East Asian markets. However, he does offer culture as a valuable part of the equation. This final, even if complicated, piece of the financial crisis may be the block that has been missing in my understanding of the Asian financial crisis. Although I understand how difficult such abstract analyses can become, a brief discussion or reading – something more than a simple sentence or paragraph – might provide a better framework and foundation upon which to understand the colossus of a crisis I have been attempting to understand.
Sources:
Pempel, T.J., Revisiting the Japanese Economic Model
Robins, Fred, Asia's 1997 Crash: its Character, Causes and Consequences
Jiang, Shixue, Cultural Factors and Economic Performance in East Asia and Latin America, http://orpheus.ucsd.edu/las/studies/pdfs/jiang.pdf
The articles our class has read so far have lightly touched on the role of tradition, culture, history, humanity, whichever you would like to call it. In Revisiting the Japanese Economic Model, T.J. Pempel mentions that analyses of the culture and value systems of Asia exist. However, he deals with their possibility in one fell sentence and promptly moves on to more economist-friendly factors. (Pempel, 32) In the reading for today’s class, Asia’s 1997 Crash, Fred Robins devotes his time to a brief analysis of the causes of the crisis and then to a more lengthy speculation to the crisis’s consequences. In his discussion on the Asian model, he wanders for a moment into the realm of humanity, but quickly returns to the path of numbers and data. Robins mentions the possible influence of Confucian or Asian values, but states, “The chapter avoids such contentious issues.” (Robins, 45)
In all fairness, a discussion on the impact of culture or history on the financial structure of a country does allow room for an infinitely broad topic of analysis and debate. Without the guidance of concrete numbers in the form of GDP or FDI or any other economic fact or even policy, the analysis honestly can become depressingly long and complicated and as Robins said “contentious.” (Robins, 45) However, just because none of the authors we have read thus far seem willing to enter that debate, does not mean other analysts have not dared to enter. The mere fact that both Pempel and Robins allude to the existence of the analysis of such factors hints that some experts in the field believe culture is important.
Indeed, a simple google search on the social and cultural factors of the Asian financial crisis can bring up a myriad of academic papers and sources. One such source takes an exhaustive look at the cultural factors involved in the development of the East Asian economic model. In Cultural Factors and Economic Performance in East Asia and Latin America, Jiang Shixue qualifies his intense interest of the influence of culture on economy and goes further by separating the analysis of culture. He says,
“In pinpointing the causes of underdevelopment, some people would put more emphasis on external factors, such as: a long history of colonial dominance and exploitation, unequal exchanges and the absence of a just international economic order. However, it is also necessary to pay enough attention to internal factors. As a matter of fact, development is the result of both external and internal factors, and in many cases, internal factors should always play a more important or even decisive role.” (Jiang, 8)
Jiang goes on to cite other scholars, such as Max Weber and Joseph Schumpeter, who have paid special attention to the element of culture in an economic development model. Jiang concludes his article by stating that culture cannot fully and independently explain the reasons behind the rise and fall of East Asian markets. However, he does offer culture as a valuable part of the equation. This final, even if complicated, piece of the financial crisis may be the block that has been missing in my understanding of the Asian financial crisis. Although I understand how difficult such abstract analyses can become, a brief discussion or reading – something more than a simple sentence or paragraph – might provide a better framework and foundation upon which to understand the colossus of a crisis I have been attempting to understand.
Sources:
Pempel, T.J., Revisiting the Japanese Economic Model
Robins, Fred, Asia's 1997 Crash: its Character, Causes and Consequences
Jiang, Shixue, Cultural Factors and Economic Performance in East Asia and Latin America, http://orpheus.ucsd.edu/las/studies/pdfs/jiang.pdf
China's "Foreign" Direct Investments?
Jessica Moeller
INST310 – Globalization and China
Foreign Direct Investment (FDI) has played a large role in China’s recent economic development. A large part of the capital that China has used to grow its economy has come in the form of FDI. As such, understanding the nature of FDI coming into China is important to understanding how China has been able to develop economically. One major distinguishing factor of FDI in China is where it has come from.
“China is unique in the sense that a substantial proportion of total FDI is from the Chinese Diaspora” (Wei & Balasubramanyam, 31). The large part of FDI coming into China comes from Chinese living abroad. There is a large number of Chinese living outside of China. These individuals therefore have to potential to be a significant economic force, and often are. Chinese living abroad tend to be comparatively willing to invest in their native country. “China has had a large and wealthy diaspora that has long been eager to help the motherland, and its money has been warmly received” (Huang & Khanna, 75).
Additionally, China’s definition of “foreign” sources is rather vague: “a company is ‘foreign’ as long as its place of registration is outside Mainland China” (Li, 23). As such, a large portion of FDI coming into China comes Hong Kong, Macao, and Taiwan. “During the 1990s, more than half of China’s FDI came from overseas Chinese sources” (Huang & Khanna, 80). In 1992, it comprised around 80%, though it decreased to 45% in 2000 (Wei & Balasubramanyam, 11).
Another source of China’s FDI comes from round tripping of funds. Round tripping is “when a company exports to set up a subsidiary and then imports the money back into China as FDI” (Huang & Pei). This is often done in order “to increase their property rights and political status” (Huang & Pei). In the case of China, up until the beginning of 2008, foreign investments were not taxed, while domestic ones were. In order to get around these taxes, Chinese companies often used round-tripping methods to invest funds. Additionally, round tripping provided property rights protection, could be positively affected by exchange rates, and allowed for competitiveness in overseas financial services (Xiao, 11). Because of the disproportionate benefit that round-tripped funds provided as compared with regular domestic funds, many Chinese companies engaged in these practices. Because of “the intrinsic secrecy nature of round-tripping capital, it is almost impossible to obtain a direct and accurate measure on the scale of the round-tripping FDI” (Xiao, 2). Most estimates are high, though; one estimate states that, “PRC’s round tripping ratio is likely to be around 40% or within the rage of 30% to 50%” (Xiao, 23). Realizing that such a large proportion of Chinese FDI is actually round-tripped funds is essential to accurately understand the impact that FDI will have on China. One researcher argues that, “since the capital is originated from China, the positive externalities of genuine FDI could not occur” (Li, 23). China’s economic growth does not, therefore, owe as much to actual foreign entities as it might at first seem.
By not knowing the source of FDI and the extent of round tripping, the way that FDI are viewed and managed may not be as ideal as would like to be thought. “Round tripping also distorts data on FDI in China, which may not only influence the effectiveness and official management of China’s FDI utilization, but also brings risks to China’s financial system” (Li, 24).
In January of 2008, Chinese law changed so that domestic and foreign investments will be treated equally in regard to taxes (Li, 10). This change is likely to decrease the amount of round tripping that occurs, which would in turn decrease the amount of FDI coming into China. The impact that this will have on the Chinese economy over time is unknown. The disuse of round tripping would not necessarily decrease the amount of funds in China, but just where they come from – from secondary foreign sources to original domestic ones. At this point it is just speculation, though.
As can be seen, much of China’s FDI is from Chinese sources – be they Chinese individuals living abroad or Chinese companies engaging in round tripping practices. While the international factors influencing China’s economic development must not be forgotten, the type and amount of impact that they actually have should be clearly distinguished. Domestic factors should not be overlooked and should be understood in the larger context. The success of China’s FDI-driven approach relies on this accurate understanding.
Sources:
Huang, Yasheng and Tarun Khanna. Can India Overtake China? Foreign Policy: 2003. http://www.foreignpolicy.com/Ning/archive/archive/137/13.PDF
Huang, Yasheng and Minxin Pei. Foreign Direct Investments in China: Why Surging Levels May Indicate Serious Economic Problems. Carnegie Endowment for International Peace: Jan 16, 2003. http://www.carnegieendowment.org/events/?fa=eventDetail&id=566
Li, Jinyan. The Rise and Fall of Chinese Tax Incentives and Implications for International Tax Debates. Florida Tax Review, Forthcoming, CLPE Research Paper No. 5/2008. Available at SSRN: http://ssrn.com/abstract=1087382
Wei, Yingqi and Balasubramanyam, V. N. Diaspora and Development. The World Economy, Vol. 29, No. 11, pp. 1599-1609, November 2006. Available at SSRN: http://ssrn.com/abstract=943848
Xiao, Geng. People’s Republic of China’s Round-Tripping FDI: Scale, Causes, and Implications. Hong Kong Institute of Economics and Business Strategy, Working Papers: July 2004. http://www.hiebs.hku.hk/working_paper_updates/pdf/wp1137.pdf
INST310 – Globalization and China
Foreign Direct Investment (FDI) has played a large role in China’s recent economic development. A large part of the capital that China has used to grow its economy has come in the form of FDI. As such, understanding the nature of FDI coming into China is important to understanding how China has been able to develop economically. One major distinguishing factor of FDI in China is where it has come from.
“China is unique in the sense that a substantial proportion of total FDI is from the Chinese Diaspora” (Wei & Balasubramanyam, 31). The large part of FDI coming into China comes from Chinese living abroad. There is a large number of Chinese living outside of China. These individuals therefore have to potential to be a significant economic force, and often are. Chinese living abroad tend to be comparatively willing to invest in their native country. “China has had a large and wealthy diaspora that has long been eager to help the motherland, and its money has been warmly received” (Huang & Khanna, 75).
Additionally, China’s definition of “foreign” sources is rather vague: “a company is ‘foreign’ as long as its place of registration is outside Mainland China” (Li, 23). As such, a large portion of FDI coming into China comes Hong Kong, Macao, and Taiwan. “During the 1990s, more than half of China’s FDI came from overseas Chinese sources” (Huang & Khanna, 80). In 1992, it comprised around 80%, though it decreased to 45% in 2000 (Wei & Balasubramanyam, 11).
Another source of China’s FDI comes from round tripping of funds. Round tripping is “when a company exports to set up a subsidiary and then imports the money back into China as FDI” (Huang & Pei). This is often done in order “to increase their property rights and political status” (Huang & Pei). In the case of China, up until the beginning of 2008, foreign investments were not taxed, while domestic ones were. In order to get around these taxes, Chinese companies often used round-tripping methods to invest funds. Additionally, round tripping provided property rights protection, could be positively affected by exchange rates, and allowed for competitiveness in overseas financial services (Xiao, 11). Because of the disproportionate benefit that round-tripped funds provided as compared with regular domestic funds, many Chinese companies engaged in these practices. Because of “the intrinsic secrecy nature of round-tripping capital, it is almost impossible to obtain a direct and accurate measure on the scale of the round-tripping FDI” (Xiao, 2). Most estimates are high, though; one estimate states that, “PRC’s round tripping ratio is likely to be around 40% or within the rage of 30% to 50%” (Xiao, 23). Realizing that such a large proportion of Chinese FDI is actually round-tripped funds is essential to accurately understand the impact that FDI will have on China. One researcher argues that, “since the capital is originated from China, the positive externalities of genuine FDI could not occur” (Li, 23). China’s economic growth does not, therefore, owe as much to actual foreign entities as it might at first seem.
By not knowing the source of FDI and the extent of round tripping, the way that FDI are viewed and managed may not be as ideal as would like to be thought. “Round tripping also distorts data on FDI in China, which may not only influence the effectiveness and official management of China’s FDI utilization, but also brings risks to China’s financial system” (Li, 24).
In January of 2008, Chinese law changed so that domestic and foreign investments will be treated equally in regard to taxes (Li, 10). This change is likely to decrease the amount of round tripping that occurs, which would in turn decrease the amount of FDI coming into China. The impact that this will have on the Chinese economy over time is unknown. The disuse of round tripping would not necessarily decrease the amount of funds in China, but just where they come from – from secondary foreign sources to original domestic ones. At this point it is just speculation, though.
As can be seen, much of China’s FDI is from Chinese sources – be they Chinese individuals living abroad or Chinese companies engaging in round tripping practices. While the international factors influencing China’s economic development must not be forgotten, the type and amount of impact that they actually have should be clearly distinguished. Domestic factors should not be overlooked and should be understood in the larger context. The success of China’s FDI-driven approach relies on this accurate understanding.
Sources:
Huang, Yasheng and Tarun Khanna. Can India Overtake China? Foreign Policy: 2003. http://www.foreignpolicy.com/Ning/archive/archive/137/13.PDF
Huang, Yasheng and Minxin Pei. Foreign Direct Investments in China: Why Surging Levels May Indicate Serious Economic Problems. Carnegie Endowment for International Peace: Jan 16, 2003. http://www.carnegieendowment.org/events/?fa=eventDetail&id=566
Li, Jinyan. The Rise and Fall of Chinese Tax Incentives and Implications for International Tax Debates. Florida Tax Review, Forthcoming, CLPE Research Paper No. 5/2008. Available at SSRN: http://ssrn.com/abstract=1087382
Wei, Yingqi and Balasubramanyam, V. N. Diaspora and Development. The World Economy, Vol. 29, No. 11, pp. 1599-1609, November 2006. Available at SSRN: http://ssrn.com/abstract=943848
Xiao, Geng. People’s Republic of China’s Round-Tripping FDI: Scale, Causes, and Implications. Hong Kong Institute of Economics and Business Strategy, Working Papers: July 2004. http://www.hiebs.hku.hk/working_paper_updates/pdf/wp1137.pdf
2008: Asian Financial Crisis Part II
Kevin Dodez
INST310: Guo – Asian Tigers & Globalization (Park)
In Park’s comparative analysis of South Korea and Taiwan, I saw a striking similarity between the current credit crisis and the one that occurred during the Asian Financial Crisis. In my mind, it is American domestic policy that encouraged cheap lending through the ubiquity of foreign credit, discouraged domestic savings because of low interest rates, and eventually experienced a meltdown in foreign direct investment and credit availability, mainly foreign loans. In contrast, China’s financial system strongly encouraged domestic savings, discouraged financing development through foreign loans, and prevented firms from becoming highly leveraged.
South Korea and Taiwan experienced two different types of challenges during the Asian Financial Crisis because of the different areas each government placed emphasis during development. It is the relationship that each developmental government chose to have with international financial system that decided its fate.
Much like Latin American countries using Import-Substitution-Industrialization techniques, South Korea depended on foreign loans rather than foreign direct investment to retain control of domestic industries and continue pursuing policies of rapid growth, investing in capital-intensive export-oriented industries. Like Latin American countries, South Korea was left vulnerable to external flux in global finance. When prices in global commodities, like oil, rise and fall, there are direct effects on the availability of global credit.
Taiwan’s emphasis on domestic financial stability through controlling inflation enhanced competitiveness by fostering a domestic credit market, basically a more controllable alternative to international finance. Although no country is immune to changes from global shifts in political policy, this move left Taiwan less vulnerable to changes in international financial markets. In the past year, China has risen as the least impacted by the current credit crisis for much of the same reasons.
When looking at Park’s analysis in light of recent events, two lessons be drawn from the comparison of South Korea and Taiwan: domestic financial stability and high savings rates will cushion the impact of dramatic changes in international financial markets; review of our current global financial system is still needed. One can only wonder how the 1997 Asian Financial Crisis was allowed to replay itself in magnified form this past year. The analysis of South Korea shows that overdependence on foreign capital markets, through accumulation of foreign loans, causes an economic interdependence that is highly vulnerable to external shock. Fast-forward to the present and one can see the United States also accumulated large amounts of foreign loans to continue funding “development” (in this case the real estate “boom”) and eventually pulled every major economy on the globe into its financial troubles.
This unchecked economic interdependence suggests that a World Financial Organization (WFO), similar to the international organization now monitoring trade and commerce, may be needed to regulate the use of different financial instruments including loans and investments so as to avoid one country or region’s debtor dominance—making each country at least partially responsible to foster a domestic credit market through savings. As Park states, “stability should not be sacrificed to growth” (163).
INST310: Guo – Asian Tigers & Globalization (Park)
In Park’s comparative analysis of South Korea and Taiwan, I saw a striking similarity between the current credit crisis and the one that occurred during the Asian Financial Crisis. In my mind, it is American domestic policy that encouraged cheap lending through the ubiquity of foreign credit, discouraged domestic savings because of low interest rates, and eventually experienced a meltdown in foreign direct investment and credit availability, mainly foreign loans. In contrast, China’s financial system strongly encouraged domestic savings, discouraged financing development through foreign loans, and prevented firms from becoming highly leveraged.
South Korea and Taiwan experienced two different types of challenges during the Asian Financial Crisis because of the different areas each government placed emphasis during development. It is the relationship that each developmental government chose to have with international financial system that decided its fate.
Much like Latin American countries using Import-Substitution-Industrialization techniques, South Korea depended on foreign loans rather than foreign direct investment to retain control of domestic industries and continue pursuing policies of rapid growth, investing in capital-intensive export-oriented industries. Like Latin American countries, South Korea was left vulnerable to external flux in global finance. When prices in global commodities, like oil, rise and fall, there are direct effects on the availability of global credit.
Taiwan’s emphasis on domestic financial stability through controlling inflation enhanced competitiveness by fostering a domestic credit market, basically a more controllable alternative to international finance. Although no country is immune to changes from global shifts in political policy, this move left Taiwan less vulnerable to changes in international financial markets. In the past year, China has risen as the least impacted by the current credit crisis for much of the same reasons.
When looking at Park’s analysis in light of recent events, two lessons be drawn from the comparison of South Korea and Taiwan: domestic financial stability and high savings rates will cushion the impact of dramatic changes in international financial markets; review of our current global financial system is still needed. One can only wonder how the 1997 Asian Financial Crisis was allowed to replay itself in magnified form this past year. The analysis of South Korea shows that overdependence on foreign capital markets, through accumulation of foreign loans, causes an economic interdependence that is highly vulnerable to external shock. Fast-forward to the present and one can see the United States also accumulated large amounts of foreign loans to continue funding “development” (in this case the real estate “boom”) and eventually pulled every major economy on the globe into its financial troubles.
This unchecked economic interdependence suggests that a World Financial Organization (WFO), similar to the international organization now monitoring trade and commerce, may be needed to regulate the use of different financial instruments including loans and investments so as to avoid one country or region’s debtor dominance—making each country at least partially responsible to foster a domestic credit market through savings. As Park states, “stability should not be sacrificed to growth” (163).
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