Harold Meyerson on an increasingly important puzzle – international capital flows controlled by governments:

China just bought itself a $3 billion share in Blackstone, the U.S. private equity firm.

To be sure, the Committee on Foreign Investment in the United States has the power to nix such purchases if they compromise national security. But what is the proper response of laissez-faire advocates to this sudden wave of foreign government investment in non-security-related companies? It’s okay if the Chinese government owns a slice of our economy but not okay if our own government does? We trust every other government more than we trust our own?

I posed this question to William Niskanen, chairman of the libertarian Cato Institute and among the most principled ideologues on our political landscape. Foreign government ownership, he argued, shouldn’t pose a problem unless that government obtains a controlling interest. When I then asked whether it would be a problem for the U.S. government to buy into such a company, he answered immediately, “I don’t think I would want to be a shareholder in a company in which the U.S. government owned a good bit of the shares,” and then, pausing, continued, “I haven’t thought about this” — “this” being the distinction between U.S. ownership and, say, Chinese.

Niskanen is hardly alone. None of us have thought sufficiently about how the belief in untrammeled capitalism could lead to foreign governments, whatever their agendas, controlling more and more of the American economy.

Via Thoma.

A fascinating CSM story on Chinese investment in Africa:

Brad Phillips, director of Persecution International, an aid group working in South Sudan, has seen the destruction firsthand. “The Chinese are equal partners with Khartoum when it comes to exploiting resources and locals here,” he says. “Their only interest here is their own.” He would love to see the Chinese sponsor a school here, he says, or a clinic, or an agricultural program, or “anything for the people.” But there is nothing like that in sight. Just miles of desolate land.

“The Chinese simply do not care about us,” says Martin Buywomo, Paloich’s mayor. “They have no contact. They never even came to my tent to pay respects. They think we are lesser people.” A member of the Shilluk tribe who attended British mission schools, Mr. Buywomo puts down the worn copy of George Eliot’s 19th-century classic “Silas Marner” he is reading and continues sadly. “We see them in their trucks but they overlook us. If they saw us dying on the road, they would overlook us.”

Buywomo rearranges the Chinese-made plastic pink flowers on his desk. “This is colonialism all over again.”

I doubt that US investors like Chevron built many schools or clinics, but accusations of “scorched-earth clearances of the indigenous population” don’t sound good for China’s National Petroleum Corporation. Read the full story.

[HT: Drezner]

A fascinating CSM story on Chinese investment in Africa:

Brad Phillips, director of Persecution International, an aid group working in South Sudan, has seen the destruction firsthand. “The Chinese are equal partners with Khartoum when it comes to exploiting resources and locals here,” he says. “Their only interest here is their own.” He would love to see the Chinese sponsor a school here, he says, or a clinic, or an agricultural program, or “anything for the people.” But there is nothing like that in sight. Just miles of desolate land.

“The Chinese simply do not care about us,” says Martin Buywomo, Paloich’s mayor. “They have no contact. They never even came to my tent to pay respects. They think we are lesser people.” A member of the Shilluk tribe who attended British mission schools, Mr. Buywomo puts down the worn copy of George Eliot’s 19th-century classic “Silas Marner” he is reading and continues sadly. “We see them in their trucks but they overlook us. If they saw us dying on the road, they would overlook us.”

Buywomo rearranges the Chinese-made plastic pink flowers on his desk. “This is colonialism all over again.”

I doubt that US investors like Chevron built many schools or clinics, but accusations of “scorched-earth clearances of the indigenous population” don’t sound good for China’s National Petroleum Corporation. Read the full story.

[HT: Drezner]

CGD’s Michael Clemens is unhappy – see why.

CGD’s Michael Clemens is unhappy – see why.

Raymond Baker & Jennifer Nordin on dirty money:

This enormous disappearance of capital from poor countries—perhaps a cumulative $5 trillion in recent years—should be of keen interest to economists. Billions of dollars in foreign aid have flowed into developing countries over the last several decades—on average $50 to $70 billion a year. These countries, home to 80 percent of the world’s population, often have weak le- gal and administrative structures, large gangs of drug dealers and racketeers, and wealthy elites who want their money elsewhere. The estimated $500 billion in illicit outflows eviscerates foreign aid and contributes to deeper poverty for billions of people. Despite the impact of trillions of dollars of dirty money flowing out of poorer countries, we are still at step one: measuring it.

International flows of dirty money also have implications for the (mis)measurement of trade volumes and balances.

Great article in the Economist:

In the calculus of costs, risks, customers and logistics that goes into building global operations, an increasing number of firms are coming to the conclusion that China is not necessarily the best place to make things…

China is the emerging giant, but the investments that are being diverted away from the Middle Kingdom present the rest of Asia with a huge opportunity to become manufacturing hubs in their own right…

So far, most industrial development in China has taken place in the country’s eastern coastal regions, particularly around Shanghai and the Pearl River Delta near Hong Kong. But costs in these centres are now rising sharply. Office rents are soaring, industrial land is in short supply and utility costs are climbing. Most significant of all are rocketing wages. In spite of the mass migration of workers from China’s vast interior to the coast, pay for factory workers has been rising at double-digit rates for several years. For managers, the situation is worse still…

Equally important are concerns about growing protectionism. The United States and the European Union are becoming more assertive in holding China to account over its World Trade Organisation obligations. Companies worry that this could lead to sudden interruptions to trade…

South-East Asia has been the chief beneficiary of companies’ decisions to diversify out of China. The problem is that the ten ASEAN nations have yet to form a single market. Although the region offers plenty of opportunity for export-based manufacturing, as a single market it remains highly fragmented. Companies want to be able to set up one factory to serve the whole region, but numerous barriers prevent them from doing so.

Read the full piece.

Shang-Jin Wei has his hand in a pair of recent papers that sound interesting.

Raymond Fisman, Peter Moustakerski, Shang-Jin Wei – “Outsourcing Tariff Evasion: A New Explanation for Entrepot Trade”

Traditional explanations for indirect trade through an entrepot have focused on savings in transport costs and on the role of specialized agents in processing and distribution.  We provide an alternative perspective based on the possibility that entrepots may facilitate tariff evasion.  Using data on direct exports to mainland China and indirect exports via Hong Kong SAR, we find that the indirect export rate rises with the Chinese tariff rate, even though there is no legal tax advantage to sending goods via Hong Kong SAR.  We undertake a number of extensions to rule out plausible alternative hypotheses based on existing explanations for entrepot trade.

Shang-Jin Wei & Zhiwei Zhang – “Collateral Damage: Exchange Controls and International Trade”

While new conventional wisdom warns that developing countries should be aware of the risks of premature capital account liberalization, the costs of not removing exchange controls have received much less attention. This paper investigates the negative effects of exchange controls on trade. To minimize evasion of controls, countries often intensify inspections at the border and increase documentation requirements. Thus, the cost of conducting trade rises. The paper finds that a one standard-deviation increase in the controls on trade payment has the same negative effect on trade as an increase in tariff by about 14 percentage points. A one standard-deviation increase in the controls on FX transactions reduces trade by the same amount as a rise in tariff by 11 percentage points. Therefore, the collateral damage in terms of foregone trade is sizable.

The slide towards 2:1 continues.

Dollars per pound sterling:

Interesting argument about the current account deficit:

The early 1980s marked the onset of two striking features of the current world macro-economy: the fall in US business cycle volatility (the “great moderation”) and the large and persistent US external imbalance.  In this paper we argue that an external imbalance is a natural consequence of the great moderation.  If a country experiences a fall in volatility greater than that of its partners, its relative incentives to accumulate precautionary savings fall and this results in an equilibrium permanent deterioration of its external balance.  To assess how much of the current US imbalance can be explained by this channel, we consider a standard two country business cycle model in which households are subject to country specific shocks they cannot perfectly insure against.  The model suggests that a fall in business cycle volatility like the one observed for the US relatively to other major economies can account for about 20% of the current total US external imbalance.

[HT: MR]