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PIIE Update Newsletter
April 4, 2012

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Why the Euro Area Crisis Will Impact Little on Europe's Relations with China

Jacob Funk Kirkegaard
  Jacob Funk Kirkegaard Since December 2011 it has been abundantly clear that it is the European Central Bank (ECB) and not the Chinese State Administration of Foreign Exchange that will provide the cash the euro area needs to stabilize its financial system and its sovereign debt markets. The Chinese government prudently refrained from directly investing official funds in the European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) when European leaders suggested that the fund could be "leveraged." China will instead only contribute through the much safer option of the International Monetary Fund (IMF). Because China risked very little to assist the euro in its hour of need, the euro area countries are not in a rush to arrange a quid pro quo. The only likely way China will benefit from the European crisis is by securing voting power at the IMF commensurate with the size of China's pledge to that organization. As a result, it is not expected the crisis will lead to a sudden deepening of Euro-Sino relations. Certainly, the euro area will not be compelled to do China any particular favors in other policy areas, as reflected by ongoing disputes over airline emissions, the arms embargo, and various trade-related issues. So while strong economic and political relations between Europe and China are in the best interest of both parties, it is unlikely the euro area crisis will play any significant role in bringing about this outcome.

>> Read full op-ed

  Working Paper 12-6
Transportation and Communication Infrastructure in Latin America: Lessons from Asia

Barbara Kotschwar
  Barbara Kotschwar In Latin America, inadequate transportation infrastructure is an important impediment to the region's further integration in global trade and a significant factor preventing countries from taking advantage of a multitude of trade agreements signed in the past decade and a half. This paper examines transport and communications infrastructure initiatives in Latin American and Asian regional trade arrangements and finds several lessons Asia can teach Latin America.

One lesson is to follow the money: Investors, both public and private, are more likely to invest in infrastructure when it will benefit already present or emerging production patterns. Second is the important role of government: While private participation is important, public involvement and national commitment is essential to the success of regional cross-border initiatives. Third is that private investment needs a platform: The provision of regional public goods and cooperation involve political difficulties—who should be in charge and who should pay? A sound outside guarantor is necessary for attracting private investment.

>> Read full working paper [pdf]

Why BRICS Is No Good for Russia

Anders Åslund
  Anders Åslund Since the Soviet collapse, Russia has tried to join all major international groups such as the G-8, the BRICS (Brazil, Russia, India, China, and since 2011, South Africa), and the G-20. But it has not been very successful and needs to rethink its priorities. A closer relationship with the European Union would make the most sense. For one thing, Russia trades primarily with Europe. Additionally, Russia's key need is the institutional development of good governance and rule of law, something the European Union knows how to do and has built in the 10 newest eastern EU members through a technique of twinning the state agencies of old and new EU members. The European Union is open to a free trade agreement with Russia with substantial institutional contents. As a highly developed country, Russia needs to aim higher than the BRICS, which are actually far less developed in most regards. It should focus on the European Union as a more ambitious peer group.

>> Read full op-ed

Katherine Boo, India, and China

Arvind Subramanian
  Arvind Subramanian Katherine Boo's new book Behind the Beautiful Forevers—which explores the generalized economic dynamism of life in a Mumbai slum—can be interpreted as a warning against a serious misreading of China's phenomenal growth experience. Growth-addled India is in danger of overlooking the colossal costs to the poor of deteriorating Indian governance. A collective action trap condemns the poor to coping with, rather than having any chance of reforming, India's institutions. "Instead of uniting, poor people competed ferociously with one another for gains as slender as they were provisional," Boo writes. Within China, all the preoccupation is with the need for reform and the rollback of the state. That is entirely appropriate because China's state continues to be an economic drag and a political yoke. What distinguishes China is that in the Communist Party, it has had a resoundingly effective state/public institution, better than in any other part of the developing world, with regard to delivering certain essentials for development: social stability; rule of law; basic services such as health, education, and sanitation; and enviable physical infrastructure. And these essentials have protected those citizens who are most in need while facilitating transformational possibilities for them. What the poor of India need is basics from the state, as in China. Provision of these basics would make life at the bottom of the scrapheap less nasty, brutish, and short.

>> Read full op-ed

Peterson Perspectives Interviews

audio  China's Declining Current Account Surplus, Part II
Nicholas R. Lardy explains the policy implications for the United States of China's currency appreciation and lower current account surplus.

audio  China's Declining Current Account Surplus, Part I
Nicholas R. Lardy assesses the factors that have caused China's currency to appreciate and its current account surplus to decline significantly.

audio  Have the BRICS Outlived Their Usefulness?
Arvind Subramanian says that Brazil, Russia, India, China, and South Africa (BRICS) seem to be struggling to find a common purpose at their latest meeting.

audio  Can the World Bank Adjust to a Changed World?
Arvind Subramanian assesses the prospects for Jim Yong Kim, President Obama's choice to head the bank, and the other aspirants to the job.

Recent Blog Posts

RealTime Economic Issues Watch   China Economic Watch    North Korea:  Witness to Transformation
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How the Iran Sanctions Could Also Hurt North Korea

Should President Obama's Choice Become President of the World Bank?

Ireland Has No IMF Option If It Rejects the Fiscal Treaty

The Challenges of Renminbi Internationalization

Is the Risk Free Status of Euro Area Sovereign Debt in Tatters?
  Are Chinese Banks Too Profitable?

China's Economic Outlook in 2020 and Beyond

The Challenges of Renminbi Internationalization

Can Microcredit Lenders Fill the Gap?

Household Wealth and the Housing Market
  Grand Strategy in Asia I: The Defense Strategic Guidance

More Sanctions Technology: Elliott on Odious Obligations

"Forever Freedom" The Art of Song Byeok

Slave to the Blog: Skrillex, Suzanne Scholte, and LMFAO—the Celebrity Edition!

Neelsen and Stratmann on Early Life Famine Exposure

PIIE Noted in the News and on the Web

The Diane Rehm Show
Apple and Working Conditions in Overseas Factories
NPR's Tom Gjelten hosts a discussion on international labor standards in light of reports of labor issues at Foxconn, a major manufacturer of Apple products in China. C. Fred Bergsten, coauthor of China's Rise and director at PIIE, joins Auret van Heerdon, Fair Labor Association; Robert Scott, Economic Policy Institute; and Judy Gearhart, International Labor Rights Forum, in the radio show.

China May Ramp Up Restructuring, Lardy Says
With demand from Europe falling, Nicholas R. Lardy predicts that China's leadership change later this year will lead to a restructuring of its economy in order to encourage greater private consumption and keep growth up. Lardy is author of Sustaining China's Economic Growth after the Global Financial Crisis.
In This Issue

Featured Book
Flexible Exchange Rates for a Stable World Economy Flexible Exchange Rates for a Stable World Economy

Joseph E. Gagnon
Marc Hinterschweiger

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