Friday, April 18, 2008

The Fallows article got our readers' attention, and some good questions were sent in. Here, I address them briefly in a new post.

Anantha: Is there a possibility that authoritatrian/semi-authoritarian prefer FDI/Export-led growth to domestically led growth because it could eventually grow into a threat to their political authority? Is there thereoetical or empirical literature on this? Could this also be a factor in the CCP's economic policy choices?

Me: Well, you could be right in the case of encouraging so much FDI. The regime knows that foreign investors are only interested in making money and that they would move if the conditions weren't right. In contrast, domestic businesses engaged in both the domestic and export markets may have a larger stake in trying to change the system in order to improve profits. China's foreign exchange limits also make domestic investment abroad difficult, especially for smaller firms. I don't think this is a deliberate strategy, but the outcome certainly certainly encourages FDI. The best treatment of this issue is Huang Yasheng's Selling China (Cambridge University Press), which systematically lays out Chinese policy biases in favor of FDI.

Anonymous: I don't know if the food reserve is so irrational in today's world. Both Clinton and Obama are so anti free trade, at least in rhetoric. and they're from the economically most powerful market in the world. Think about it. 21st century doesn't necessarily mean a free market century, especially when so many ppl in the west are so wary about China.

Me: True, food security is never completely irrational policy, and China still worries about the threat of famine. Nonetheless, unless you believe in the collapse of the global commodities market, one can hedge against price threat by buying futures contracts which guarantee food delivery at a certain price. True, I think China should maintain control over major food conglomerates (like China Grain) so that they can go out to the world market to buy future deliverables. Granted, with export limitation that some countries are now imposing on their own farmers, food prices will be driven up some more. However, I think this situation will right itself in a couple of years as US and Canadian farmers catch up with the high profit that can be made from increased production.

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