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Moderator:  Calla Wiemer (calla.wiemer@acaes.us)

The Exchange Rate in East Asia's Macro Stabilization Policy: Contrast with Latin America

Co-Author: Roberto Meurer

The conclusion of the previous post in this series is that East Asia has worked out a policy routine for managing exchange rates in service to macroeconomic stabilization. For Latin America, by contrast, such a routine is not in evidence.

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The Exchange Rate in East Asia's Macro Stabilization Policy: It's Not Just China

China has long gotten a bad rap on currency manipulation. The fact is, however, that China is not so different from other East Asian economies when it comes to exchange rate management.

The essence of the East Asian model is to steer the exchange rate along a steady long-run course, erring toward undervaluation in the face of uncertainties about the future. Any perception of overvaluation runs

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The 'New Fiscal Consensus' As Per Blanchard & Subramanian Interpreted for Southeast Asia

The 'new fiscal consensus' holds that major advanced economies have the fiscal space to go big on stimulus and should do so in response to the pandemic. In a recent webinar sponsored by the Ashoka Centre for Economic Policy in Haryana, India, Olivier Blanchard made the case for the new fiscal consensus and Arvind Subramanian then responded on the relevance for emerging market economies such as India. This post extends elements of their analysis to the major emerging economies of Southeast Asia: Indonesia; Malaysia; the Philippines; Thailand; and Vietnam.

Blanchard explained that to preserve a stable debt/GDP ratio, the following condition must hold:

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Review of Keun Lee, The Art of Economic Catch-Up

Cambridge University Press, 2019.

The received image of catch-up growth has developing countries following steadfastly along a path trodden by their predecessors. Keun Lee, professor of economics at Seoul National University and 2014 winner of the Schumpeter Prize, upends that image arguing that if latecomers aim merely to follow in the footsteps of countries that have gone before, they will never catch up. Rather, each country must find its own way to advance based on cutting-edge innovation along ever shifting frontiers.

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On China As a Model for the Philippines (Fabella Review Addendum)

In the book Capitalism and Inclusion under Weak Institutions, reviewed in a previous post, author Raul Fabella points to a lack of social coherence in the Philippines as undermining economic progress and contrasts this with the Chinese case where "a strong sense of identity and mission" has propelled phenomenal economic growth. Judging by differences in receptivity to the statement "most people can be trusted", Fabella may be onto something. Survey results presented in Figure 1 show 62.7% of Chinese agreeing with this statement versus just 2.8% of Filipinos. Personally, I am mystified by these results having spent many years in both countries and not finding Filipinos any less trustworthy than Chinese. Yet the results do lend credence to Fabella's thesis.

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Review of Raul Fabella, Capitalism and Inclusion under Weak Institutions

published by the University of the Philippines, Center for Integrative and Development Studies, 2018. pdf download

The lackluster development performance of the Philippines over the span of many decades is routinely blamed on "weak institutions" by Filipinos. In this thought-provoking book, University of the Philippines economics professor and Philippine National Scientist Raul Fabella advises on how to overcome the curse of weak institutions to achieve robust growth with poverty reduction.

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East Asia's Fiscal Response to Crisis, Then & Now

When the last global crisis hit in 2008-09, the major economies of East Asia, but for one, had ample fiscal space to respond, and took advantage of that. This time around, the positioning is more mixed and the threat potentially much greater.

In Asia, the shock of the Great Financial Crisis (GFC) was inflicted mainly through export loss and capital flight. Domestic financial systems remained sound and productive capacity intact. A quick shot of fiscal stimulus was just the remedy to tide an economy over until global trade rebounded and financial capital returned. Use of such a strategy shows up in Figure 1 as a sharp increase in the debt-to-GDP ratio in 2009 for Malaysia, China, Vietnam, Thailand, Korea, and Taiwan, with the ratio then declining or stable in 2010. Two countries – the Philippines and Indonesia – saw no increase in their debt ratios in 2009, riding out the crisis without recourse to fiscal stimulus.

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The State of Journal Publishing: Elsevier on Gender

 

The dominant publisher of economics journals suffers from a dearth of women among its top tier editors. The underlying problem is that academics are not making the selections; rather, the choices are made by Elsevier staff who do not read the journals they manage or appreciate how those journals distinguish themselves. They thus rely on superficial criteria and succumb to subjective biases on gender in picking editors. 

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The Real Reason for China's Unbalanced Growth (Orlik Review Addendum)

This post follows up on my review of Tom Orlik's wonderful book "China: The Bubble that Never Pops". The book explains why constant predictions of China's economic collapse due to mounting debt and financial risk have not been borne out, and the explanation is altogether compelling. My one quibble with the book regards Orlik's view of the underlying driver of the saving/consumption imbalances that motivated debt driven stimulus. Orlik emphasizes China's one-child policy as the source of the imbalances, going so far as to call it China's original sin in an interview. The argument is that with China's weak social welfare system, having only one child makes for insecurity about old age that induces parents to save more during their working years. I'm not convinced that this holds up as a reason for China's imbalances. Let me hasten to add that, regardless, the book's original contribution in explaining why no crash has occurred holds up very well. The source of the imbalances is a separate issue, but one worth pursuing in its own right.

There is a sense in which I agree that the one-child policy has been a factor in China's high saving. The exceptionally sharp decline in the birth rate in China's case accentuated the demographic transition that is common among countries during economic development. A couple of decades on, the drop in the birth rate brings a bulging labor force relative to a shrinking share of old and young age dependents in the population. Per the life cycle hypothesis of Modigliani (1970), saving is done by those in their working years who generate income whereas the young and old consume without producing any income from which to save. The decline in China's dependent share was particularly steep in the 2000-aughts and relatedly, so was the rise in the saving rate, as shown by Bonham and Wiemer (2013). So while the one-child policy mattered, it did not matter until two decades after it was introduced and not because it prompted precautionary saving to provide security in old age but because of the long-run demographic forces it intensified.

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Review of Thomas Orlik, China: The Bubble that Never Pops

Oxford University Press, May 2020.

As much as China's crash has been predicted, someone needed to explain why it hasn't happened. And no one could be more credible in doing so than Tom Orlik who has reported insightfully on China since 2011, first with the Wall Street Journal, then with Bloomberg where he is now Chief Economist. 

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