Monday, 8 June 2009

Research Paper: "Economics in the Backyard"

This paper by Hughes Hallet and Richter looks at a series of interesting questions related to the Chinese integration of Hong Kong (and indirectly Taiwan).

These results reinforce some of my own previous results. The results are as expected. It is always useful to have ones intuition verified.

Economics in the Backyard: How Much Convergence is there between China and her Special Regions?

Andrew Hughes Hallett 1 and Christian Richter 2
1 George Mason University, University of St Andrews and CEPR; School of Public Policy, Fairfax, USA , and 2 School of Economics, Kingston University, UK


This paper tests the hypothesis that the links and dependency relationships between China and her special regions have changed over the past 20 years with the industrialisation of China, and the emergence of Taiwan as a source of investment and sophisticated manufactures, and Hong Kong as financial centre and supplier of services. Has this changed the size and direction of spillovers in the region, and has it curtailed or eliminated American economic leadership? We use time-varying spectral methods to decompose the links between six advanced Asian economies and the US. We find: (a) the links with the US have been weakening, while those within a bloc based on China have strengthened; (b) that this is not new – it has been happening since the 1980s, but has now been reversed by the surge in trade; (c) that Taiwan is more integrated with, and dependent on, the Chinese economy, while Hong Kong continues her separate development based on specialisation and comparative advantage; (d) that the links with the US are rather complex, with the US able to shape the cycles elsewhere through her control of monetary conditions, but the China zone able to control the size of their cycles; and (e) there appears to be no real evidence that pegged exchange rates encourage convergence; in fact the reverse may be true.


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