Posts Tagged ‘China’

Around the World with Joseph Stiglitz

1 December, 2008

BWPI Chair and Nobel Laureate Joe Stiglitz has a new documentary just out. ‘Around the World with Joseph Stiglitz’ is a hard-hitting look at globalization. Joe takes two journeys. His own journey began in Gary, Indiana. The documentary returns to his hometown to see what shaped his thinking. It then heads across the world, taking in Botswana, Ecuador, India and China. It weaves together the social and economic effects of globalization, recommending ways to manage it for the good of all.

If you are in New York you can catch it at the Lincoln center this Wednesday (3 December).

In the meantime, check out Joe’s interview with Alex Jones on YouTube on his book The Three Trillion Dollar War: the True Cost of the Iraq War, with Linda Bilmes. And Joe on the sub prime crisis on CNBC.

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Should Aid be Capped?

16 September, 2008

Aid is in the news at the moment. The Accra Aid forum took place last week in advance of the UN’s Financing for Development meeting in Doha later this year (on Accra see Simon Maxwell on ‘High Drama at the High Level Forum’ over on the ODI blog).

Meanwhile, in Martin Wolf’s Economists’ Forum at the FT Adrian Wood argues for capping aid. He writes:

“… one can have too much of a good thing. Some developing countries, most of them in Africa, have had high levels of aid dependence – in excess of 10 per cent of gross domestic product, or half of government spending – for decades. It is questionable whether this has been helpful”.

“I therefore propose that donors collectively set an upper limit on the amount of aid they give to any developing country. This limit should be 50 per cent of the amount of tax revenue that the aid-receiving government raises from its own citizens, by non-coercive means and excluding revenue from oil and minerals”.

This proposal has mileage. Countries certainly don’t benefit from excessive dependence on aid. But Adrian’s idea needs refinement to make it work, as I point out in a response posted on the FT blog. In particular, I worry that it increases the pro-cyclical nature of aid. That is, donors reward governments in good times (when they need aid least) and reduce aid in bad times (when they need it most). (On the evidence that aid is pro-cyclical see: John Thornton in the Journal of African Economies and the IMF on the macroeconomics of managing aid).

Capping aid at 50% of the country’s tax revenue, as Adrian suggests, could exacerbate the budgetary impact of negative shocks, either external (such as energy costs) or internal (such as drought). How? Shocks reduce GDP and therefore tax revenue. This is especially so for indirect taxes as market sales fall, and tariff revenues as import volumes decline (on which many low-income countries are still very dependent). As revenue falls, aid will be automatically reduced under Adrian’s proposal. The proposal would punish governments hit by shocks that are not of their making. In sum, this exacerbates an existing and undesirable bias in the timing of aid.

Here is my solution: governments and donors will need to agree a time frame (say 5 years) over which to monitor the aid/tax ratio (i.e. a period matching the country’s business cycle: different economies might need different time frames). Then agree a level of aid over the next five years, based on the outcome for the first five. And make sure that most of this extra tax revenue is spent wisely, for example on the “seekers” that Bill Easterly has written about (NGOs working to find better solutions to chronic poverty).

So, Adrian has an interesting idea, but it needs refinement.

But a bigger question is: how do you get donors to co-ordinate, so all their aid adds up to less than 50% of tax revenue? Getting donors to act together is like herding the proverbial cats: this is despite the 2005 Paris Declaration (as this FT report discusses). And that’s the OECD-DAC donors, who are supposed to coordinate. What about the aid donors who don’t participate in the DAC, most importantly China and India – the so-scalled ‘new donors’ (although China was giving substantial aid to Africa back in the 1970s). Can you design incentives to encourage their co-operation? (on the non-DAC donors see Peter Kragelund’s paper in the DPR here).

Adrian’s proposal has received a lot of comment (go to the CGD blog for a collection of these).

China in Angola

11 December, 2007

This week’s Crossing Continents on BBC Radio 4 is an interesting examination of China’s much discussed relationship with Africa using China’s investment in and aid to Angola as a casestudy. It will be available online here until only Thursday the 13th for download or podcast, so if you’re interested get in there soon.

EU pressuring China to strengthen its currency

28 November, 2007

The EU is expected to put pressure on China in a bilateral summit this week to allow its currency to strengthen more quickly, says the BBC here. Luxembourg’s prime minister, Mr Juncker, has claimed that the yuan is undervalued by 20-25%, leading to a soaring trade deficit between China and the EU which rose by 25% in the first eight months of the year to £50.23bn.

China has also come under considerable pressure from the US over recent years to strengthen the yuan due to the large bilateral trade imbalance between the two. Official US government figures showed a bilateral trade deficit with China in 2005 of $202 billion, although these figures are somewhat exaggerated by certain quirks of the US method of measuring trade flows with China. The US has criticised China’s tight control of its exchange rate and pushed them to float the yuan.

Ironically , floating the yuan is likely to worsen the problem (if it is a problem) rather than improve it. As UNCTAD’s 2007 Trade and Development Report argues (pages 13-29), floating its currency would open up opportunities for ‘carry trade’ – that is, the practice increasingly employed by investment funds to borrow money in local currency from a country with low interest rates, and then convert it into another currency (often US dollars) that earn a higher yield. That is, borrow money at low interest rates (China’s current real interest rate is negative) and lend the money in a different currency where it earns high interest rates. As UNCTAD say (page 28), ‘if China were to give in to the pressure from the United States and float its exchange rate, [the yuan] might risk following the examples of the yen and the Swiss franc and be carried to high interest rate locations. If that were to happen, it would depreciate and cause a further increase in China’s competitiveness instead of reducing it. Such an outcome would clearly worsen the global imbalances’.

China, as we all know, is currently growing at around 10% a year by steadfastly ignoring the advice it receives from what Ha Joon Chang has termed the Bad Samaritans (i.e. Western governments) and has lifted millions of people out of poverty by doing so. It would be a shame if that process were halted by increased instability resulting from China giving in to badly thought out recommendations for floating their currency from countries that not long ago managed to precipitate a financial meltdown across Asia with their advice for capital account liberalisation.