Political Institutions and Economic Culture of China: a Transdisciplinary Perspective Yi Feng for Sh

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Political Institutions and Economic Culture of
China a Transdisciplinary Perspective Yi
Fengfor Shanghai Rising

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Regional Patterns of FDI in China

• FDI tends to concentrate on the East coast of
  China.
• This phenomenon is determined by factors
  including population, scale economies, labor
  availability, infrastructure, consumption, access
  to other parts of the world
• The next few slides provide preliminary
  information on the determinants of the pattern

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FDI Flows in 1993
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From 1993 to 2003

• Since the late 1990s, FDI has increasingly
  flown to the Yangtze River Delta and the Bohai
  coast, rather than heavily concentrated in the
  Pearl River Delta, a phenomenon of the 1980s and
  the early 1990s.

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FDI flows in 2003
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FDI Firms in 1993
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FDI Firms in 2003
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Yi Feng, 2000Financial Market Reform in
ChinaProgress, Problems and Prospects

• The following determinants of FDI have been
  identified
• Real GDP per capita
• Real expenditure on fixed capital
• Average wages
• Unemployment rates
• Exports and Imports
• Roads, telephones
• Employees in environmental agencies

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Where is politics?

• The earlier works on FDI in China have ignored
  political conditions.
• It is argued here that government extractive
  capacity affects investment negatively in China.
• Provinces where government extracts more attract
  FDI less.

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Measure of Relative Political Extraction
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Relative Political Extraction in China
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Political Extraction in China

• High Political Extraction Periods
• 1962 (war with India) 1966-1971 (peak of
  cultural revolution)1973-1984 (continued
  revolution and post-mao power consolidation)
  1979 (war with Vietnam) 1989-1992 (Tiananmen
  Square demonstrations and aftermath)
• Low Political Extraction Periods
• 1971 (attempted return to normalcy) 1985-1988
  (economic reform deepening) 1992 (Dengs visit
  to South China)

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Estimate of Provincial RPC in China

• Parameter Standard
• Variable Estimate Error t Value Pr gt
  t
• Intercept 14.518 3.873 3.75
  0.0009
• primary -15.592 7.867 -1.98
  0.0581
• secondary -11.718 6.337 -1.85
  0.0758
• tertiary -0.0005997 0.000383 -1.57
  0.1296
• trade 0.00389 0.00137 2.84
  0.0086
• R-squared 60.

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Puzzle

• Why do the central provinces tend to be
  politically strong?
• Historical background is consistent with the
  political capacity argument.
• China A Macro History by Ray Huang. M.E. Sharpe,
  1997.
• Geography and meteorology have been responsible
  for political centralization in some central
  parts of China

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From Chinas Macro-history

• The 15-inch isohyet divides China into two
  meteorological regions. On the west of the
  isohyetal line, little rainfall occurs to the
  east of the line, an average of 14 inch rainfall
  is expected. Historically, the people who lived
  east of the line were farmers and the people who
  lived west of the line were hunters and herdsmen.
  The latter would cross the border during famines.
  

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From Chinas Macro-history

• The loess plateau contains rich soil that runs
  from 50 to 700 feet deep, making it suitable for
  agriculture.
• The middle segment of the Yellow River runs
  through the plateau, carrying a lot of sands and
  silts in its water and leading to flooding.
• Strong central government was needed to provide
  public goods such as irrigation projects, dyke
  building and water conservancy.

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From Chinas Macro-history

• When the hot air from the Philippines Sea meets
  the low pressure from the west, rainfall occurs.
• When they meet too often and too long, a lot of
  precipitation will ensue.
• When they do not meet or meet infrequently,
  drought will take place.
• The area on average has 1.4 natural disasters per
  year.
• A strong civic leadership was desired to allocate
  resources in preparing against natural disasters.

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Data Analysis

• Stable government is needed for investment.
• Political extraction varies among local
  governments.
• Political extraction is negatively associated
  with FDI in China.
• Some previous results (state investment, labor
  wages, unemployment, trade and environment
  protection) tend to hold.

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Regression Result 2004Dependent Variable
FDIFLOW

• Intercept 104972
  (133566)
• RPE -1522
  (764)
• Wages -2.84
  (7.58)
• Unemployment Rate 31617 (17325)
• SOE Investment 522
  (116)
• Environment Protection -44458 (31740)
• Trade 296
  (77)
• White-corrected standard errors in the
  parentheses

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Future work

• Improve measures of political capacity
• Analyze general economic performance and social
  welfare
• Economic growth
• Private investment
• Education
• Demographic transitions
• Social security and equity

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Tianjin

• Fastest growth among Chinas provinces
• GDP per capita (exchange rate) USD 2666.
• Foreign invested enterprises 47
• High-Tech
• Electronics and communications
• Transportation equipment
• Petroleum and natural gas
• Human capital

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Fujian

• Primary
• Rice, poultry, and aquatic product
• Secondary
• Electronics, machinery, and chemicals
• Tertiary
• Finance, insurance, transportation and storage

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Hubei

• Construction and engineering
• Heavy industry vs. light industry 21
• New products generators, roads and freeways,
  tourism
• Higher education
• Over 40,000 graduate students at 75 universities

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Hunan

• Agricultural province (19 of GDP)
• The secondary (auto, steel, paper, engine)
• Water conservancy projects and forestation
• Privatization.
• Property ownership reforms through stocks
• Flexibility of land use in the countryside

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Hubei Projects promoted by the government, 2004

• Forestation and protection of rainforests
• Irrigation and water conservancy
• Ramie textiles
• Herb and animal medicines
• Quartz
• Laser products
• Photoelectric products
• Digital machinery
• Auto parts
• Construction and management of water and gas
  supply (Chinese control)
• Tourism development and infrastructure, site
  preservation and transportation

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Hunan Projects promoted by the government, 2004

• Forestation and protection of rainforests
• Irrigation and water conservancy
• Ramie textiles
• Tungsten and molybdenum processing
• Bismuth chemical compounds
• Barium salt (Chinese control)
• Hormone medicine
• Rubber machinery and equipment
• Construction and management of water and gas
  supply (Chinese control)
• Tourism development and infrastructure, site
  preservation and transportation