David Dollar

Shang-Jin Wei

Based on a survey that we designed and that covers a stratified random sample of 12,400 firms in 120 cities in China with firm-level accounting information for 2002-2004, this paper examines the presence of systematic distortions in capital allocation that result in uneven marginal returns to capital across firm ownership, regions, and sectors. It provides a systematic comparison of investment efficiency among wholly and partially state-owned, wholly and partially foreignowned, and domestic privately owned firms, conditioning on their sector, location, and size characteristics. It finds that even after a quarter-of-century of reforms, state-owned firms still have significantly lower returns to capital, on average, than domestic private or foreign-owned firms. Similarly, certain regions and sectors have consistently lower returns to capital than other regions and sectors. By our calculation, if China succeeds in allocating its capital more efficiently, it could reduce its investment intensity by 5 percent of GDP without sacrificing its economic growth (and hence deliver a greater improvement to its citizens' living standard).

Firm Ownership and Investment Efficiency in China

Das (Wasted) Kapital

Beata K. Smarzynska Javorcik

The "pollution haven" hypothesis states that multinational firms, particularly those in highly polluting industries, relocate to countries with weak environmental standards. Despite the plausibility and popularity of this hypothesis, Smarzynska and Wei find only weak evidence in its favor.

Dirty Secret Or Popular Myth?

Pollution Havens and Foreign Direct Investment

Mr.Arvind Subramanian

This paper furnishes robust evidence that the GATT/WTO has had a powerful and positive impact on trade. The impact has, however, been uneven. GATT/WTO membership for industrial countries has been associated with a large increase in imports estimated at about 40 percent of world trade. The same has not been true for developing country members, although those that joined after the Uruguay Round have benefited from increased imports. Similarly, there have been asymmetric effects among sectors, with WTO membership associated with substantially greater imports in sectors where barriers are low. These results are consistent with the history and design of the institution, which presided over significant trade liberalization by the industrial countries except in sectors such as food and clothing; largely exempted developing countries from the obligations to liberalize under the principle of special and differential treatment; but attempted to redress the latter by imposing greater obligations on developing country members that joined after the Uruguay Round.

The WTO Promotes Trade, Strongly But Unevenly

Mr.Zhiwei Zhang

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.

Exchange Controls and International Trade

Collateral Damage

Cyn-Young Park

Michael Devereux

Research Fellow at the Institute for Fiscal Studies London Professor of Finance Department of Economics Michael Devereux

Philip R Lane

The book assesses financial integration in emerging East Asia at both regional and global levels. The publication studies the factors driving the progress of regional financial integration in relation to financial globalization and identifies the relevant policy challenges facing emerging market economies in the region.

Facts and Analytics

The Dynamics of Asian Financial Integration

Chong-En Bai

The Quality of Bureaucracy and Capital Account Policies

Bureaucratic quality in terms of the level of corruption varies widely across countries, and is in general slow to evolve relative to the speed with which many economic polices can be implemented such as the imposition of capital controls. In this paper, we study the possibility that quality of bureaucracy may be an important structural determinant of open-economy macro-policies, in particular, the imposition/removal of capital controls, and financial repression. We first derive a model that delivers such a result. Bureaucratic corruption translates into reduced ability by the government to collect tax revenue. Even if capital control/financial repression is otherwise inefficient, as long as the government needs the revenue for public goods provision, it would have to rely more on capital control/financial repression. For all countries for which we can obtain relevant data, we find that more corrupt countries are indeed more likely to impose capital controls, a pattern consistent with the model's prediction. The result of this paper suggests that a premature removal of capital controls mandated by outside institutions could reduce rather than enhance economic efficiency.

Quality of Bureaucracy and Open-economy Macro Policies

Shenggen Fan

Xiaobo Zhang

S. M. Ravi Kanbur

This Oxford Companion to the Economics of China presents a new collection of perspectives on the Chinese economy's past, present and future. The contributors of these entries include: the best of young Chinese researchers based in China and outside; renowned academics from the top universities in China, Europe and North America; present and past senior officials of international agencies like the World Bank and the International Monetary Fund; seniorChinese government officials from the Centre and the Provinces; and four recipients of the Nobel Prize in Economics. The Editors are four global leaders in Chinese economic analysis and policy who between them have held or hold the following positions: Director General, International Food Policy ResearchInstitute; Co-Editor, China Economic Review; President Chinese Economists Society; Assistant Director of Research at the IMF; Principal Adviser to the Chief Economist of the World Bank; and Professors of Economics at Ivy League Universities.

The Oxford Companion to the Economics of China

Based on a survey that we designed and that covers a stratified random sample of 12,400 firms in 120 cities in China with firm-level accounting information for 2002-2004, this paper examines the presence of systematic distortions in capital allocation that result in uneven marginal returns to capital across firm ownership, regions, and sectors. It provides a systematic comparison of investment efficiency among wholly and partially state-owned, wholly and partially foreignowned, and domestic privately owned firms, conditioning on their sector, location, and size characteristics. It finds that even after a quarter-of-century of reforms, state-owned firms still have significantly lower returns to capital, on average, than domestic private or foreign-owned firms. Similarly, certain regions and sectors have consistently lower returns to capital than other regions and sectors. By our calculation, if China succeeds in allocating its capital more efficiently, it could reduce its investment intensity by 5 percent of GDP without sacrificing its economic growth (and hence deliver a greater improvement to its citizens'' living standard).

Shang-Jin Wei

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