Macro Economy

Macro Economy Proceedings, Issue No.3, March 2008 (PDF: 744kb)

Contents:

OUTSOURCING: Is the Third Industrial Revolution Around the Corner?

Arvind Panagariya

By creating vast potential for rich countries to import "skilled" services from poor countries, recent innovations in telecommunications have triggered a sometimes-heated controversy over the effect of service outsourcing for the importing country. Columbia University's Arvind Panagariya argues for clear thinking regarding the scope and magnitude of the threat from service outsourcing and the appropriateness of policy responses. To clarify the issue, he considers how terms such as outsourcing and offshoring correspond to the phenomenon of arm's length trade in services made possible by new technologies. The number of such jobs outsourced by the United States to India so far is quite small compared to the total number of jobs the U.S. economy creates and destroys every year. Panagariya then considers how outsourcing of service jobs may affect the gains from trade before taking on Blinder's contention that it portends a third Industrial Revolution for the U.S. economy. For good measure, he enumerates the significant limitations on India's potential supply of skilled service jobs.

ASIAN SWFS IN EUROPE: Much Ado about Nothing?

Paola Subacchi

Sovereign Wealth Funds (SWFs) gained renewed prominence as emerging economies with large account surpluses or oil revenues began to seek high returns in global capital markets. Some recent investments by SWFs aroused concern in recipient countries, in part because little is known about their governance or objectives. Paola Subacchi of Chatham House combines published data and original analysis to develop a picture of the size, growth prospects, and objectives of SWFs. Focusing on Asian SWFs it assesses their likely investment strategies and identifies the possible targets for acquisitions in Europe. The tentative conclusions are that China Investment Corporation will largely aim for portfolio investments, with directed investments making up a smaller portion of its assets; that acquisition targets in Europe will be companies that offer access to financial expertise or resources; and that the UK's relatively open policy stance makes it the preferred European destination for Asian SWFs.

INFLATION, APPRECIATION, OR REFORM? A Structural and Institutional Perspective on the Renminbi and China's External Imbalance

Geng Xiao

Geng Xiao, a Beijing-based Fellow of Brookings Institution, believes that Washington's focus on revaluation of the renminbi is too narrow an approach to China's external imbalance because China's economy today is far from the neoclassical world of fully employed labor and capital where prices and exchange rates adjust to correct temporary market disequilibrium. He discusses many structural conditions such as hidden transactions costs, the pool of unskilled rural and migrant workers, the lack of social, infrastructure that underlie China's economy and contribute to the imbalance between its imports and its exports. Xiao sees a long run restoration of balance through loose monetary policy to accommodate steady structural inflation accompanied by an orderly currency appreciation. He advocates a Marshall-type Plan by which the United States and the international community help China put in place a modern, robust economic infrastructure. By addressing the fundamental constraints on domestic consumption, this could prove a win-win strategy for both China and its partners.