The Soviets matched the US only by spending up to 20% of GDP on the military during the Cold War. This column argues that, in stark contrast to this example, China has the potential to match the US in certain military spheres with similar burden on its economy. Using exchange rates comparisons significantly understates the Chinese military spending. A much more realistic assessment is obtained using PPP terms. If both countries spent the same fraction of their GDP on the military, the relative size of China’s military machine would be more than 90% of the US one.
Peter Robertson, 30 March 2015
John Whalley, Daqing Yao, 23 February 2015
Since September 2013 China has been operating a new form of free trade zone based in a small area of Shanghai. This column describes the implied new trade and investment policies in detail and concludes that the new special zone is likely to be a first step towards a floating exchange rate, free capital account and independent monetary policy.
Carlo Carraro, 07 February 2015
China and the US have recently agreed to reduce their greenhouse gas emissions. This column asks what quantifiable impact the new targets will have, whether they are any better than previous approaches, and if so, whether they are enough to avoid dangerous climate change. While insufficient for keeping temperature increase below the 2°C limit, the US and China’s bilateral commitments are a step in the right direction, and form the basis for a stronger international agreement in Paris later this year.
Alex Cukierman, 07 January 2015
The Global Crisis has increased the importance of the renminbi as an international currency. This column describes how the status of the renminbi has changed relative to that of the dollar and the euro. It also discusses what their future as future currencies would be. The author suggests that within 10 years, the renminbi would be at least at par with the dollar as a regional trade settlement currency in East Asia. It is also likely to become a close second to the euro as a world reserve currency.
James Wang, 30 December 2014
Many lenders hire loan officers to screen soft information that may otherwise be ignored by credit scoring. However, in addition to their compensation costs, loan officers may have characteristics, such as being overly cautious, that could distort their decisions. This column documents the performance of loan officers using data from a Chinese lender. Despite the distortions, the loan officers contribute three times their pay in annual profits above what the lender could have earned by itself, even with the benefit of hindsight.
Samuel Marden, 28 December 2014
It is often argued that for poor countries, increases in agricultural productivity result in higher non-agricultural output, but the theory is ambiguous and the empirical evidence is limited. This column presents evidence from a natural experiment provided by China’s early 1980s agricultural reforms. Higher agricultural output induced by the reforms led to quantitatively important growth in non-agricultural output. This growth appears to be primarily due to rural savings increasing the supply of capital to the non-agricultural sector.
Corrado Giulietti, Jackline Wahba, Yves Zenou, 21 December 2014
Migration is heavily influenced by social networks. Nonetheless, little is known about the underlying mechanisms. This column uses a new dataset from China to disentangle the effects of strong and weak ties on the migration decision. The findings indicate that strong and weak ties act as complements. Having many weak ties with an urban area amplifies the positive impact of having a strong tie in the same area.
Willem Thorbecke, 06 November 2014
Foreign reserve accumulation by China and other east Asian countries has been a controversial way to boost exports. This column argues that it is not even in their own national interests. The policy has been ineffective in maintaining China’s ordinary trade surplus, while its processing trade surplus continues to rely on devaluation in countries further up the supply chain. Foreign reserve divestment would increase purchasing power in east Asian countries, free up government revenue, and be innocuous to export competition if properly coordinated.
Zheng Song, Kjetil Storesletten, Fabrizio Zilibotti, Yikai Wang, 19 October 2014
The design of the pension system is a hot policy issue in China, given its fast-ageing population. This column discusses how different pension systems could allow different generations to share the benefits of high growth. The authors argue that a reform of the current system is necessary to achieve financial sustainability. However, delaying its implementation is advisable on the grounds of its effect on income inequality.
Florian Mayneris, Sandra Poncet, 13 October 2014
Minimum wage laws are often shown to have little impact on employment as the labour price rise can be offset by lower turnover, lower markups, and heightened efficiency, or ‘cleansing’ effects. This column shows that in a fast-growing economy like China, there is a ‘cleansing’ effect of labour market standards. Minimum wage growth allows more productive firms to replace the least productive ones and forces incumbent firms to become more competitive. Both mechanisms boost the aggregate efficiency of the economy.
Daron Acemoglu, David Autor, David Dorn, Gordon Hanson, Brendan Price, 28 September 2014
Manufacturing in the US has rebounded after the Great Recession, but employment levels have not recovered from their steep decline in the decade before the recession. This column examines to what extent the sector’s fall is a result of the rise of China. The authors estimate direct effects of import competition from China, as well as labour market and buyer-seller indirect effects that operate at the local level. China’s impact has been strong, and employment in US manufacturing is unlikely to recover.
Heiwai Tang, Wenjie Chen, 22 September 2014
Using a new, unique, and comprehensive data set that covers close to 19,000 Chinese ODI deals from 1998 to 2011, we find that in contrast to the common perception, over half of the ODI deals are in service sectors, with many of them appearing to be related to export promotion. Ex ante larger, more productive, and more export-intensive firms are more likely to start investing abroad. Ex post, ODI appears to enhance firm performance (i.e., total factor productivity, employment, export intensity, and product innovation). Empirical analysis based on firms’ trade transaction data shows a significantly positive effect of ODI on firms’ trade performance, but little technology transfer.
Haichao Fan, Yao Amber Li , Stephen Yeaple, 06 September 2014
Trade liberalisation has transformed the economies of many developing countries. This column presents evidence from China’s accession to the WTO. The authors find that high tariffs on imported inputs prevented Chinese firms from producing high-quality goods. When these tariffs were reduced, firms upgraded the quality of their products, entering more competitive foreign markets.
Abhijit Banerjee, Xin Meng, Tommaso Porzio, Nancy Qian, 04 September 2014
The loosening of the one-child policy will transform China’s demographic development in coming years, but it also runs the risk of lowering China’s high rate of personal savings. This column argues that high estimates of the magnitude of this response may be overstated. There are multiple channels at play, and predictions of a large response in savings do not account for general equilibrium effects.
Pradumna Rana, 05 August 2014
China’s frustration with the slow progress of IMF governance reform has contributed to the evolution of a China-led architecture that locks out the West – the latest examples being the New Development Bank and the Credit Reserve Arrangement established by the BRICS. This column argues that these institutions are not a threat to the IMF and the World Bank, but they complicate global economic governance. It is unlikely that Europe’s ‘troika’ model – where the IMF works jointly with regional financing facilities – will be possible in Asia. We perhaps need a New Bretton Woods.
Hongyong Zhang, 21 July 2014
The Chinese government has been actively promoting innovation via policies such as R&D subsidies, tax relief, and location policies. Since 1995, central and local governments have established more than 100 clusters in over 60 cities. This column presents new evidence on the effect of the concentration of firms on product innovation (new products) in the manufacturing industries.
Liu Yang, 19 July 2014
In China, both unemployment and a labour shortage have emerged as problems in recent years. This column explains their co-existence by a decrease in the matching efficiency in the labour market. One way to improve the matching efficiency, though difficult to implement in the short-run, is through the creation of more employment agencies. Companies can benefit if they invest more in recruiting activities.
Alex Bryson, John Forth, Minghai Zhou, 24 June 2014
Publicly traded companies are the engine behind China’s growth, which raises the question of how CEO compensation works under an interventionist state. This column presents an analysis of executive compensation in China and a comparison to the West. Chinese listed firms have incentive structures similar to those of the US; in this case, effective compensation policies seem to transcend political boundaries.
Paolo Giordani, Michele Ruta, Hans Weisfeld, Ling Zhu, 23 June 2014
Capital controls may help countries limit large and volatile capital inflows, but they may also have spillover effects on other countries. This column discusses recent research showing that inflow restrictions have significant spillover effects as they deflect capital flows to countries with similar economic characteristics.
Davide Cantoni, Yuyu Chen, David Yang, Noam Yuchtman, Jane Zhang, 29 May 2014
Schooling changes are associated with ideological ones but it is difficult to claim a causal relationship. This column attempts to analyse the causal effect of curriculum changes in China on shaping preferences of students. The new curriculum moves one’s belief about democracy by about 25% of a standard deviation in the direction desired by the government. The findings suggest the state can use education to promote socially-useful beliefs and cultivate good citizenship.