Principles of Economics- Mankiw (5th) 675

Principles of Economics- Mankiw (5th) 675 - CHAPTER 30 A...

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CHAPTER 30 A MACROECONOMIC THEORY OF THE OPEN ECONOMY 697 be used productively at home. Often, such money was fleeing instability, as it was in Latin America in the 1980s, Russia in the 1990s, and Africa in both decades. Usually, however, developing coun- tries invest their capital in their own growing economies. And some Chinese officials believe that’s what China should be doing, too. One former Chinese cen- tral bank official calls it “scandalous” that a country of poor peasants is financ- ing investment of an industrialized power such as the United States. Others complain that China isn’t even getting good returns on its invest- ments. It pays an average of 7 to 8 per- cent on its $130 billion foreign debt but earns only about 5 percent on the $140 billion of its reserves invested abroad. That’s partly because yields on U.S. debt—widely considered the safest se- curities in the world—are relatively low. But China has good reasons to send some of its capital overseas. Its in- vestment in fixed assets as a percentage of its gross domestic product was an ex- traordinarily high 34 percent in 1996, the
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