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A Sketch of an Economics Research Idea: Does Chinese FDI Cause Improvements in African Institutions?

Thursday, March 9, 2017 14:23
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(Before It's News)

I continue to work on topics related to China's economic growth. My co-authored 2017 JEP paper and my 2016 Princeton Press book capture many of my past ideas. In this blog post, I'm going to sketch a new idea that I'm working on.

In Why Nations Fail, Acemoglu and Robinson argue that China features extractive institutions. They argue that nations with such institutions under perform in terms of long run economic growth.

We all know that China seeks to extract resources from Africa.  To extract resources requires investing in transport infrastructure.  China is funding billions of dollars of such investment and these investments help to create cities and urban sub-centers.   The Chinese cannot invest in African extraction without upgrading Africa's capital stock.

Now let's step this up a notch.   China has many different possible trading partners in Africa.  Competition is a good thing. African nations that seek to attract Chinese investment have an incentive to reduce their violence and other governance challenges.  Why?  Such local governance challenges creates uncertainty and represents a type of tax on Chinese capital.  The Chinese government will be less likely to invest in unstable African nations. This creates an incentive for African nations to get their “affairs in order” in order to attract Chinese FDI.   The competition to be an extraction colony actually creates incentives for African nations to improve their governance. Such nations will receive the influx of Chinese funds and now have better institutions and this should together raise per-capita income levels in Africa.

A critic might say;  ”Matt, this is interesting but how will you develop this into a “top 5″ worthy causal analysis?”   We will see.  

But note how I differ with Acemoglu and Robinson. In my thinking , institutions are not immutable.  A nation can change its “rules of the game”.  China's great wealth creates quite a carrot for nations that can overcome ethnic division and years of war.  


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