Puzzles, Paradoxes, Controversies, and the Global Economy

Puzzles, Paradoxes, Controversies, and the Global Economy

by Charles Wolf Jr.
Puzzles, Paradoxes, Controversies, and the Global Economy

Puzzles, Paradoxes, Controversies, and the Global Economy

by Charles Wolf Jr.

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Overview

In this wide-ranging collection of essays first published between 2007 and 2014, Charles Wolf Jr. shares his insights on the world’s economies, including those of China, the United States, Japan, Korea, India, and others. First appearing in such periodicals as in Forbes, the Wall Street Journal, and the Weekly Standard, among others, these chapters take on a range of questions about the global economy. Wolf discusses the paradoxes and puzzles within China’s political economy and in its interactions with the United States. He analyzes the shortcomings of Keynesian economics as a response to the 2008 recession, as well as the weaknesses of policies and actions inferred from the theory, and compares those weaknesses with those of austerity policies intended to limit government spending and indebtedness. He also offers his views on economic inequality and where its principal sources may truly lay, China’s currency and the continuing controversy about whether and when it may become a major international reserve currency, and many more insights on key economic issues affecting the global economy. Bringing these essays together for the first time in a single volume, including two essays not yet published elsewhere, this book enables the reader to absorb the author’s expert perspective during the years in a collection in which the whole is truly greater than the sum of its parts. Each chapter includes a brief “postaudit” in which the author attempts to grade how well or ill the essay seems in retrospect.

Product Details

ISBN-13: 9780817918552
Publisher: Hoover Institution Press
Publication date: 05/01/2015
Edition description: None
Pages: 272
Product dimensions: 6.00(w) x 8.90(h) x 0.90(d)

About the Author

Charles Wolf Jr. is a senior research fellow at the Hoover Institution. He holds the dinstiguished chair in international economics at the RAND Corporation and is a professor of policy analysis in the Pardee RAND Graduate School. He is the author of Looking Backward and Forward: Policy Issues in the Twenty-First Century.

Read an Excerpt

Puzzles, Paradoxes, Controversies, and the Global Economy


By Charles Wolf Jr.

Hoover Institution Press

Copyright © 2015 Board of Trustees of the Leland Stanford Junior University
All rights reserved.
ISBN: 978-0-8179-1858-3



CHAPTER 1

The Paradoxes of China


China, on the cusp of a major leadership transition, has cropped up only sporadically in our presidential campaign. The candidates, in their occasional comments on our largest lender and trading partner, seem to vie with one another only in how tough each will be. But toughness is not a policy.

China is rife with paradoxes. They include paradoxes of class, foreign aid, military spending, and corruption. Whether and how they are resolved will seriously affect the evolution of policies within China, as well as its future relations with the United States.


The Class Paradox

In principle and doctrine (Mao, Marx), communism in China aspires to a classless society. In practice, it is formally stratified into a multitiered hierarchy of specified classes. The twenty-seven tiers encompass not only government officialdom but the Communist Party of China's eighty-three million members as well: at the middle and higher levels, most government officials are also CPC members. The defined classes extend to state-owned enterprises (SOEs), the military's upper reaches, and such public services and nongovernmental organizations as hospitals, schools, and research institutes. Because Jiang Zemin called for eligibility for CPC membership to be extended to businessmen and businesswomen, the stratification encompasses some from the private sector as well.

The steps on the stratification ladder are differentiated in several ways. Compensation levels vary widely, consisting of an explicit "visible" component and a substantially larger "invisible" component, including different allowances, benefits, and other perquisites. For the visible component, the spread between top and bottom is a modest tenfold; for the invisible component, it is probably several orders of magnitude — that is, a thousand or more times — larger.

The classes are also sharply differentiated by the honorific conferrals that accompany them. The rarefied top reach of Class 1 is thinly populated by the party general secretary (who also is China's president and chairman of its Central Military Commission) and several of the other eight members of the Politburo Standing Committee, including the premier and the chairman of the National People's Congress. Class 2 includes the vice president and deputy premier, other members of the Politburo, and the first vice-chairman of the People's Congress. Classes 3 and 4 include members of the Central Committee and the State Council, and governors of major provinces and of megacities like Beijing, Shanghai, and Chongqing. As a rough approximation, these top four classes correspond to what was referred to in the bygone Soviet Union as its nomenklatura; in China, they have some of the trappings of royalty.

China's remaining classes are filled in descending order by government leaders of smaller provinces and cities and by the lower-level officials and CPC cadres who occupy the remaining tiers of the class pyramid.

The system provides for meritocratic mobility among the classes, although an element of legacy intrudes in this process. For example, the so-called princelings — children and relatives of previous top-tier leaders — often inherit upscale status quite apart from their merit. The recent Bo Xilai–Gu Kailai–Wang Lijun scandal in Chongqing was replete with evidence of the legacy phenomenon.

How the paradox of a sharply stratified class structure juxtaposed with a principled doctrine of classlessness will resonate in an extensively networked and increasingly informed population of 1.3 billion people is a high-stakes "riddle wrapped in a mystery inside an enigma," as Winston Churchill once said about Russia.


The Foreign Aid Paradox

In recent years, China's annual worldwide foreign aid has been very large (more than China's officially reported defense budgets), concentrated on development of natural resources (fossil fuels, ferrous and nonferrous metals), and extended to ninety-three countries with exacting, quid pro quo conditions attached to the loans that require repayment in kind and thus accord with the direct economic interests of the donor. Hence, China's aid has a distinctly "capitalist" character, in contrast to the more "philanthropic" aid extended by the "capitalist" West.

Development of natural resources made up nearly 40 percent of the pledged totals, infrastructure development amounted to 45 percent, and the remaining 15 percent consisted of technical assistance, humanitarian aid, education aid, and recipients' sovereign debt acquired or forgiven by China.

Most of this aid is financed by subsidized loans from the China Development Bank, its Export-Import Bank, and the China-Africa Development Fund. These sources are supplemented by technical and financial support from major SOEs that have natural resource development interests. Formal management responsibility for China's foreign aid resides in the Ministry of Commerce.

Loan agreements accompanying foreign aid projects typically stipulate that commodities produced by the natural resource projects will be exported to China, that the lending institutions establish escrow accounts into which the revenues from these exports will be deposited, and that the lending institutions withdraw interest and principal for debt servicing and for fees and other payments due to contractors from these escrow accounts.

The paradox of China's foreign aid is that, unlike traditional, philanthropic aid provided by the capitalistic United States, European Union, and Japan, the quid pro quo transactional conditions attached to China's foreign aid projects are distinctly capitalistic.


The Military Spending Paradox

To frame the military spending paradox, two points are crucial: the first is the special meanings that "liberal" and "conservative" have in China; the second is the pace of military spending growth in China.

"Liberals" in China are those who favor economic reform with a dominant role for market-based pricing and market-based resource allocation and who seek to reduce central planning and government control. "Conservatives," on the other hand, favor increased reliance on state enterprise, central planning, and protectionism and diminished reliance on markets.

During the first decade of the twenty-first century, China's real gross domestic product increased at an average annual rate of 10.2 percent, while real military spending increased at an average annual rate of 12.1 percent; both rates were the highest among all the world's major economies, and the substantially higher rate of military spending growth was unique to China.

China's liberals endorse the growth of military spending no less enthusiastically than do China's conservatives. Indeed, China's liberals view rapid increases in peacetime military spending as an essential part of economic reform, distinguishing them from the liberals of the Western world, who press for lower levels of military spending and for lower rates of growth in peacetime military spending.


The Corruption Paradox

Members and adherents of the CPC confront two sharply divergent views of corruption — defined as officialdom's use of public authority to extract personal profit at the expense of the public good.

Mao Zedong viewed the practice permissively, if not dismissively. He analogized strict efforts at curtailing corruption to trying to "squeeze out all the toothpaste" from the tube: not likely to succeed and not worth the effort. At moderate levels, he viewed it as a peccadillo and perhaps a lubricant for the smooth functioning of the system. According to Mao, "Among those whose labor is good, no (corrupt) label should be given," and rehabilitation should be quick and easy.

A sharply different view is advanced by others, including some in the upper levels of the hierarchy referred to in the above discussion of the class paradox. They see the conspicuous rise in corruption as a threat to the party's "legitimacy" and its continued monopoly on political power. Furthermore, some of those holding this view worry that as long as the state plays a major role in the economy, corruption will grow. Consequently, they favor greater reliance on the private sector, freer markets, and sharp reductions in the state's economic power.

The paradoxes that pervade the China scene are deep, abiding, and in some cases, counterintuitive to Western thinking. Still, when it comes to assessing the complexities of US-China relations, the paradoxes should be an important part of the calculus — indeed, more important than reiterated "toughness."

CHAPTER 2

China's Expanding Role in Global Merger-and-Acquisition Markets

Summary

CHARLES WOLF JR., BRIAN G. CHOW, GREGORY S. JONES, AND SCOTT HAROLD


Background and Scope

One of the few propositions on which virtually all China experts agree is that foreign investment in China has been a major contributor to the Chinese economy's remarkable growth over the past three decades. In addition to the direct benefits realized from the invested capital itself — which increased more than sixfold between 1992 and 2007 — significant additional benefits accrued indirectly from the technology, management, and marketing skills that were associated with foreign investment.

From China's perspective, these large capital inflows were sometimes viewed as entailing risks that were mitigated by imposing restrictions on foreign investment. These measures included limiting foreign equity investment to nonvoting Class B shares, constraining the proportion of ownership that foreign investors could acquire in Chinese companies, and limiting the number and size of foreign firms' financial platforms in China's capital markets.

In the coming decade, foreign investments by China may become an important contributor to growth in the rest of the world and a major factor in global merger-and-acquisition markets. Besides the direct effects of prospective investments from China, there also will be indirect benefits realized through improved know-how, learning, and market access relating to local procedures and regulations within China's thirty-seven diverse provinces and administrative regions. From the perspectives of recipients of China's foreign investments, there may also be concerns and risks. These risks may entail the broad national interests, sensitive technologies, and natural resources of countries receiving China's investments. Recipient countries may thus seek to mitigate these risks through various measures discussed in this chapter.

In this chapter, we seek to improve understanding of China's foreign investment patterns and strategy. We explicitly consider whether and how US national interests might be compromised by some of China's investments and how these interests can be safeguarded without interfering with, indeed by encouraging, opportunities for investments that advance the economic interests of the United States, other countries, and China.

Our research focused on China's investments in US companies and, more particularly, investments in US companies whose acquisition by China might affect US national security. This focus entailed paying special attention to prior investments by China that led to reviews by the United States and to potential investments that might warrant such assessments in the future. The research also sought to compare China's investments in the United States with those of several top-rated private equity (PE) companies to provide a benchmark for evaluating their respective similarities and differences, as well as their patterns and inferred priorities. A fuller understanding of China's investment strategy also required looking more broadly at China's investments in countries other than the United States and considering how China's investments in the United States fit into this broader pattern. Consequently, the research described in this chapter also provides an initial examination of the pattern of China's investments in Europe, Asia, and the rest of the world and inferences that may be drawn from this wider view of China's foreign investment strategy.


China, the United States, and the Global Economy

In the evolving global economy, China's large and growing financial resources will strengthen its bargaining power when it looks for companies and resources abroad. The resulting challenge for both target investment countries and China is how to nurture the opportunities for and potential benefits from efficient allocation of Chinese investments while avoiding or sharply limiting possible risks to national security in the countries of proposed investments. The implied goal of this research is to develop policies and procedures that will promote win-win outcomes while minimizing outcomes that might involve losses for the countries involved.

The drivers of China's remarkable economic growth during the past three decades have included both direct investment from abroad and massive domestic investment constituting more than 35 percent of China's gross domestic product (GDP), an unprecedentedly high domestic savings rate of 45 percent of GDP, continued growth of labor productivity and total factor productivity, and open and expanding markets for China's exports, especially to the United States until mid-2008. These drivers have also included important institutional changes in China: privatization of state-owned enterprises, vigorously competitive domestic product markets, volatile and sometimes highly speculative securities markets, emergent attention to corporate governance, and serious if imperfectly effective efforts to control corruption.

As a consequence of these multiple drivers, China has become the world's second-largest economy. As its economy has grown, China has accumulated the world's largest holdings of foreign exchange reserves — over $2.1 trillion at the start of 2010, one-third larger than those of Japan. These huge holdings enable China to expand its foreign investments and to seek and acquire companies and other assets abroad.

China's increased prominence in the evolving global economy also stems from its bilateral economic relations with the United States; the effects of the global financial crisis on these relations, including the respective fiscal stimulus programs in China and the United States; and the consequences of these matters for China's recent and prospective investments in US companies and in countries and companies in other parts of the world. China's increasing prominence in the world economy has led to some discussion of possible reforms to the international financial system in which the yuan would become a generally accepted international reserve currency. Such reforms are unlikely in the short to medium term because the yuan's prospects as a reserve currency are remote as long as it remains incompletely convertible. China's policy makers have repeatedly stipulated that capital transactions are unlikely to be fully convertible for the indefinite future. In the longer run, the prospects are brighter.


China's Recent and Prospective Foreign Investments

China's broad foreign investment strategy appears to be distinctive, selective, and flexible.

It is distinctive in that it reflects both the central government and ruling party's broad national priorities that prominently include the salient need of the Chinese economy to sustain high rates of economic growth. This distinctive role of the central government results from the fact that China's major foreign capital transactions require approval of the State Assets Board (SAB) and the State Administration for Foreign Exchange (SAFE), which are accountable to the State Council. When competing claims arise for using China's foreign investments to help meet the demands of the economy, the military, or the economy's technological advancement, these claims are resolved by the institutions at the top of the institutional pyramid. The distinctiveness of China's investment strategy is also reflected in the contrast between Chinese investments in recent years and investments made in the same period by several prominent global PE firms: Blackstone, Kohlberg-Kravis-Roberts, Carlyle, Cerberus, and Berkshire Hathaway.


(Continues...)

Excerpted from Puzzles, Paradoxes, Controversies, and the Global Economy by Charles Wolf Jr.. Copyright © 2015 Board of Trustees of the Leland Stanford Junior University. Excerpted by permission of Hoover Institution Press.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

Table of Contents

Foreword Newton N. Minow xi

Preface xiii

Acknowledgments xvii

Part I China's Economy

1 The Paradoxes of China 3

2 China's Expanding Role in Global Merger-and-Acquisition Markets: Summary Brian G. Chow Gregory S. Jones Scott Harold 9

3 China's Next Buying Spree: Foreign Companies 21

4 China's Foreign Aid and Government-Sponsored Investment Activities: Scale, Content, Destinadons, and Implications: Summary Xiao Wang Eric Warner 25

5 The Strategy behind China's Aid Expansion 33

6 A Truly Great Leap Forward 37

7 A Smarter Approach to the Yuan 41

8 Our Misplaced Yuan Worries 57

9 Chinese Fire Drill 61

10 A Liberated Yuan Is Likely to Fall 65

11 Developmental Corruption in China: Charles Wolf Jr. on Double Paradox: Rapid Growth and Fating Corruption in China Andrew Wedeman 69

Part II Us Economy and Other Issues

12 Where Keynes Went Wrong: What If Government Spending Depresses instead of Stimulates? 81

13 Pro-growth Austerity: Tightening the Government's Belt Doesn't Have to Squeeze the Economy 87

14 Explaining the Recovery's Puzzles 91

15 The Fed and Inequality: Zero Interest Rates Have Side Effects 95

16 Income Inequality: Farsighted Leadership in a Shortsighted World John Godges 101

17 One Policy Change, Please 105

18 Tax the Nonprofits: A Modest Proposal 107

19 The Facts about American "Decline" 113

20 An American Lost Decade? 117

21 What Are the Chances tire United States Becomes Energy Independent? 119

22 The Geopolitics of US Energy Independence 121

Part III US-China Interactions

23 All Inequality Is Not Equal Arthur C. Brooks 127

24 The Inequality Debate: The United States versus China 133

25 A Few Low Notes Won't Spoil China-US Harmony 139

26 Bipartisanship Doesn't Help Fix Exchange Rates 143

Part IV Japan, Korea, India

27 The Asian Century: Reality or Hype? 151

28 Japan's Sun May Be Rising: A Different Cure for Economic Stagnation 155

29 China and India, 2025: A Macroeconomic Assessment Alisher Akhmedjonov 161

30 Modernizing the North Korean System: Objectives, Method, and Application: Summary Norman D. Levin 191

31 The Cost of Reuniting Korea 201

Part V Other Regions and Issues

32 Austerity and Stimulus-Two Misfires 207

33 How Might bin Laden's Demise Affect Business? 211

34 Enhancement by Enlargement: The Proliferation Security Initiative: Summary Brian G. Chow Gregory S. Jones 215

35 Asia's Nonproliferation Laggards: China, India, Pakistan, Indonesia, and Malaysia 225

36 Natural Disasters 229

37 The Economist's Pantheon: Charles Wolf Jr. on Grand Pursuit: The Story of Economic Genius Sylvia Nasar 231

About the Author 241

Index 243

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