Financial Economics

How has the Chinese economy managed to grow at such a remarkable rate — no less than ten per cent per annum — for over three decades? This book combines economic theory, empirical estimation, and institutional analysis to address one of the most important questions facing contemporary economists. A common thread that runs throughout the book is the underlying political economy: why China became a ‘developmental state’, and how it has maintained itself as a ‘developmental state’. The book examines the causal processes at work in the evolution of China's institutions and policies. It estimates cross-country and cross-province growth equations to shed light on the proximate, and some of the underlying, determinants of the growth rate. It explores important consequences of China's growth, posing a series of key questions, such as: Is the economy running out of unskilled labour? Why and how has inequality risen; has economic growth raised happiness? What are the social costs of the overriding priority accorded to growth objectives? Can China continue to grow rapidly, or will the maturing economy, or the macroeconomic imbalances, or financial crisis, or social instability, bring it to an end?

This book aims to analyse the impact of the global financial crisis of 2007–09 on Asian economies, to assess the policy responses to the crisis in terms of their effectiveness and sustainability, and to draw lessons about how best to avoid and/or mitigate future crises and to identify structural policy recommendations that can help guide Asian policymakers to expand the growth potential of domestic and regional demand in future, and thereby create a basis for sustainable and inclusive growth. The book is organized into four parts. Part 1 discusses the motivation of the book, provides an overview of the major issues, and presents some policy recommendations. Part 2 includes two chapters that review the crisis in the US and its transmission to Europe. Part 3 focuses on the impacts of the global financial crisis on Asian economies, policy responses and growth strategies. And finally, Part 4 deals with lessons of the crisis for emerging markets. The main inference of the book is that Asian economies have recovered strongly from the global financial crisis, reflecting their aggressive moves to ease monetary and fiscal policy as well as the underlying fundamental strength of their economies. However, Asia as a whole needs to transform itself into a large consumer market while maintaining its competitiveness, by rebalancing sources of growth away from excessive dependence on extra-regional to domestic and regional demand. This growth rebalancing effort requires closer policy coordination in Asia in order to pursue structural adjustment, integration of regional markets, and socially inclusive and environmentally sustainable growth.

East Asia's recent economic integration is in many ways similar to that undergone by Western Europe following the Second World War. The book analyses the Asian experience from both Asian and European perspectives. The two regional evolutions share a number features but the political, historical, and economical differences are significant enough to warrant caution in drawing lessons. Even though the quest for exchange rate policy stability has been a longstanding common concern, the European experience — and its monetary union — does not always transfer successfully to Asia. Successes and failures in both regions are highlighted, and suggestions are made for future policy and practice in monetary and financial integration. Particular areas of focus are: Asia's response to the 1997–8 crisis; the euro area's framework for monetary policy implementation, introduced in 1999; initiatives for financial cooperation and macroeconomic surveillance; and the East Asian reliance on markets in a globalized world that makes it difficult for the region to achieve the deep integration seen in Europe. The implications of the recent global financial crisis are also examined although the book has been completed before the public debt crisis hit Europe and forced important policy measures.