Book review: The evolving role of China in the global economy

blo gs.lse .ac.uk http://blo gs.lse.ac.uk/lsereviewo fbo o ks/2013/04/15/bo o k-review-the-evo lving-ro le-o f-china-in-the-glo bal-eco no my/ provided by LSE Research Online View metadata, citation and similar papers at core.ac.uk brought to you by CORE Book Review: The Evolving Role of China in the Global Economy Blo g Admin The Evolving Role of China in the Global Economy is a serious scholarly effort to understand the economic dynamics of the world’s second largest economy, writes Ross Harvey. With sections on exchange rate policy, savings and investment, monetary policy and capital controls, and foreign direct investment, this book seeks to offer a systematic analysis of the factors in China’s rapid economic growth. T he Evolving Role of China in the Global Economy. Yin-Wong Cheung & Jakob De Haan. MIT Press. October 2012. Find this book: The Evolving Role of China in the Global Economy is the latest contribution to understanding one of the most remarkable growth stories of the last f our decades. Edited by Yin-Wong Cheung and Jakob de Haan, the book provides an orthodox economic analysis of China’s growth, using econometric models to explain China’s exchange rate policy, savings and investment, monetary policy and capital controls, and f oreign direct investment (FDI). For those interested in mathematicallyinf ormed analyses of the “Asian miracle”, this book is a worthy read; but f or those seeking a more political economic perspective which grapples with the “hidden hand” of the Chinese Communist Party (CCP) during this period, the book may disappoint. Opening with China’s exchange rate policy, the contributors provide some welcome insights on the renminbi debate and whether it really is predatorily overvalued. T he second part of the book examines Chinese savings and investment, in which Juann Hung and Rong Qian controversially suggest that savings rates are actually not that much higher in China than across the rest of the world. T hirdly, the contributors address China’s monetary policy and capital controls, f inding that China has largely been able to insulate its monetary policy f rom international monetary movements. Contributors in this section also f ind that Chinese authorities can still maintain a signif icant degree of capital account control while promoting of f shore use of its currency. T he f inal section examines the determinants of China’s f oreign direct investment (FDI) strategy and its quest f or resources. In a world that is increasingly asking questions about the impact of China’s hunger f or natural resources, these two chapters are really important and are the primary subject f or this review. Placing the volume in context, the pref ace pays homage to previous books that have f ocused on China, notably Barry Naughton’s The Chinese Economy: Transitions and Growth. But it f ails to mention Yasheng Huang’s work, Capitalism with Chinese Characteristics, which skilf ully critiques Naughton’s view and provides a better explanation f or the f oundations of Chinese growth. T he book would also have benef ited f rom explicitly f raming the questions it addresses in the context of China’s 12th f ive-year economic plan, currently underway. T his plan envisages a move away f rom investment-led export growth toward higher levels of domestic consumption and services (which are more labour-absorptive on the margins than manuf acturing). But the prerequisite f or this move is to complete the industrialisation phase (by 2020), which requires the importation of large quantities of raw materials and signif icant energy capacity. Xingwang Qian does a thorough job in chapter 12 of tracing China’s quest f or external oil supply. T he centrepiece of analysis here is the ‘going global’ policy, under which China’s national oil companies began an aggressive global expansion af ter 2002 (p. 375-376). It was not without controversy and China has been accused of colluding with rogue states such as Sudan, in addition to jeopardising global energy security by shipping oil straight to China. Qian rightly points out, however, that these accusations are largely anecdotal “and lack f ormal econometric analysis on [the] determinants” of China’s oil investments (p. 377). T his is a signif icant problem in the literature that deals with China generally, and China in Af rica in particular. But Qian himself begins by asserting that China is diversif ying its oil supply away f rom the Middle East “due to the prolonged instability in the area” (p. 377) and toward Af rica f or that reason. But stability is hardly a staple of Af rican states. Qian’s econometric models suggest that corruption is a key attractor of Chinese oil investment, but this weakens his argument f or why it is diversif ying away f rom the Middle East. Aside f rom the dubious f indings pertaining to the centrality of corruption in determining where China will invest to secure oil, there are problems with the econometrics. For instance, Qian uses real Gross Domestic Product (GDP) per capita as a “typical measure f or the level of inf rastructure” (p. 384). However, a country’s inf rastructure levels should be an explicit control variable in the model as its relation to GDP is not perf ectly linear. T his is important because the model produces f indings that “China’s ODI tends to go to an oil nation with poor inf rastructure” (p. 392), and this is apparently explained by China’s proclivity to of f er “oil-f or-inf rastructure deals”. But this conclusion does not f ollow even if the f inding itself was accurate. T here could be a number of alternative explanations such as the simple need to secure oil supply regardless of local conditions. Qian also f inds that once China has decided to invest in a country, corruption again plays an inf luential role in determining how much FDI will f ind its way there. Here at least the explanation is plausible, that China invests in corrupt countries not because it is inherently attracted to corrupt states but because it is a relative latecomer to the global oil game and will invest wherever it can secure supply in the context of f ierce competition. And yes, corruption is perhaps less of a concern f or Chinese oil companies than it may be f or some other international oil companies, but this argument is signif icantly weakened in light of Shell’s history in the Niger delta, f or instance. T he regressions also reveal that “a selected oil-producing country with a stable political system and less social tensions attracts China’s ODI” but that “China invests more ODI [in] countries loaded with corruption and poor in law and order” (p. 393). T he author then concludes that “China’s ODI is generally averse to political risks” (p. 410). T his is f rankly conf using, as there is no argument of f ered as to why corruption and low levels of law and order are not considered synonymous with political risk and instability. ‘China’s Investments in Af rica’, the f inal chapter, warrants a review in itself , this reviewer f eels. It examines the extent to which political considerations and host-country characteristics determine China’s FDI in Af rica. T he authors use two datasets – one f rom 1991 to 2005 and another f rom 2003 to 2007 – and f ind that f or the f irst one, political variables are signif icant in attracting Chinese FDI, but not f or the second. Economic ties and the drive f or natural resources best explain Chinese FDI in the latter. T hese are very dif f erent f indings and f orce the reviewer to question their validity on those grounds alone. While the chapter is a welcome addition to the China-in-Af rica literature, the econometric models suf f er f rom similar def ects to the ones in the previous chapter (the same strategy is f ollowed), and the f indings again lead the authors to conclude that China is averse to instability but attracted to corruption. T his conclusion is potentially spurious, however, given that resource-security and geopolitical strategy are probably the primary motivators f or investing in Af rica. Corruption and instability are theref ore likely incidental rather than instrumental determinants. Overall, The Evolving Role of China in the Global Economy is a serious scholarly ef f ort to understand the economic dynamics of the world’s second largest economy. Even if some of the conclusions inadvertently raise more questions than answers, the book will hopef ully steer the debates about China in a more usef ul and rigorous analytical direction now. ——————————————————————————Ross Harvey is a Ph.D student at the University of Cape Town’s School of Economics. His research f ocuses on the impact of Chinese economic involvement on economic wellbeing in selected Af rican countries. He is particularly interested in whether natural resource wealth extraction in these investment deals will turn out to be positive f or these countries’ economic perf ormance in the long run, or whether it will simply entrench rent-seeking political elites at the expense of local economic wellbeing. He works as a f reelance researcher and was previously a research and communications staf f er f or the of f icial opposition party in South Af rica. He tweets @harvross and can be f ound on Academia.edu. Read more reviews by Ross.