The FDI-Income Growth Nexus: a review of the Chinese experience

Amongst many economists, China serves as the foremost example of the benefits that developing countries can derive from being open to foreign direct investment (FDI). Since the early 1990s, China has, by a large margin, received more FDI than any other developing country. It has also experienced the world�s fastest rates of income growth. Moreover, those provinces within China that have hosted the bulk of FDI have grown at relatively faster rates. However, a literature has now emerged that makes it possible to better assess the relationship between FDI and income growth beyond these stylised facts. A review of this literature leads to the conclusion that China�s FDI-income growth nexus is in need of considerable qualification. The paper then attempts to reconcile the perception that FDI has been an important driver of income growth on the one hand with the limited evidence to that effect on the other. By way of conclusion, policy implications consequent to the review of literature are drawn.

China's capital account convertibility and financial stability

Capital account convertibility in China is on the rise. Some see the process as a means of circumventing domestic financial sector inefficiency while others view it as potentially exposing China to financial crises. In considering these different viewpoints, this paper attempts to quantify the impact that opening the capital account will have on the volume of China�s international capital flows. It is found that were China to fully open its capital account, gross non-FDI capital flows are predicted to rise by around 4.6 percent of GDP. While an increase of this magnitude would present a prudential challenge for China�s monetary authorities, it does not appear to be large enough to seriously call into question financial sector stability, either in China or abroad.

Measuring long-run equilibrium exchange rates using standardized products with different specifications

Purchasing Power Parity (PPP) is an appealing theory of the determination of longrun equilibrium exchange rates as it is founded on the intuitive proposition that opportunities for arbitrage will not go unexploited. However, in practice, measuring PPP exchange rates is hindered by difficulties in isolating the cost of tradeable inputs in the price of a reference product basket. This paper proposes a method that can extract this component using price information embodied in slightly different specifications of otherwise identical, standardized products. The method is illustrated using two well-known information and telecommunication (ICT) products, and could readily be applied to a broader, more representative product basket.

Estimating China�s de-facto capital account convertibility

China�s capital account convertibility is presently not well understood. A relatively closed de jure regime sits in contrast with a de facto regime that exhibits distinct signs of being quite open. This paper seeks to shed light on this issue by using an econometric model to predict the level of capital flows that would be expected if China had a fully open capital account. The results show that over 2001-2003, observed capital flows were around 85 percent of the predicted value, suggesting that China�s capital account over a one year time horizon is already quite open. Short run convertibility would expectedly be less than this figure. Thus, the results carry the connotation that the cost of capital controls in terms of allocative inefficiency over the medium and long run is likely to have been modest while some unwarranted short run volatility has been avoided. Nonetheless, the results do not leave room for policy complacency. As China continues to implement its WTO commitments in addition to other arrangements such as the Common Economic Partnership Agreement with Hong Kong, short run convertibility is presently on the rise. This makes implementing policies that are prerequisites for full convertibility a matter of urgency.

Posterior propriety and admissibility of hyperpriors in normal hierarchical models

Hierarchical modeling is wonderful and here to stay, but hyperparameter priors are often chosen in a casual fashion. Unfortunately, as the number of hyperparameters grows, the effects of casual choices can multiply, leading to considerably inferior performance. As an extreme, but not uncommon, example use of the wrong hyperparameter priors can even lead to impropriety of the posterior. For exchangeable hierarchical multivariate normal models, we first determine when a standard class of hierarchical priors results in proper or improper posteriors. We next determine which elements of this class lead to admissible estimators of the mean under quadratic loss; such considerations provide one useful guideline for choice among hierarchical priors. Finally, computational issues with the resulting posterior distributions are addressed.Comment: Published at http://dx.doi.org/10.1214/009053605000000075 in the Annals of Statistics (http://www.imstat.org/aos/) by the Institute of Mathematical Statistics (http://www.imstat.org