The issue starts with a three-paper symposium on the issue of "contingent valuation," which is whether it makes sense to use survey techniques to estimate the costs of events like the Exxon Valdez oil spill in 1989 or the BP oil spill in 2010. The symposium has an overview paper laying out the issues, followed by pro and con viewpoints. Next comes a five-paper symposium on various aspects of China's economy: labor markets, macroeconomic imbalances, and perspectives on patterns of long-term growth. The final three papers are about the Clark medal awarded to Amy Finkelstein, about Irving Fisher's famous 1896 paper, and a "Recommendations for Further Reading" that I contribute to each issue.
Symposium on Contingent Valuation
"From Exxon to BP: Has Some Number Become Better Than No Number?" by Catherine L. Kling, Daniel J. Phaneuf and Jinhua Zhao
On March 23, 1989, the Exxon Valdez ran aground in Alaska's Prince William Sound and released over 250,000 barrels of crude oil, resulting in 1300 miles of oiled shoreline. The Exxon spill ignited a debate about the appropriate compensation for damages suffered, and among economists, a debate concerning the adequacy of methods to value public goods, particularly when the good in question has limited direct use, such as the pristine natural environment of the spill region. The efficacy of stated preference methods generally, and contingent valuation in particular, is no mere academic debate. Billions of dollars are at stake. An influential symposium appearing in this journal in 1994 provided arguments for and against the credibility of these methods, and an extensive research program published in academic journals has continued to this day. This paper assesses what occurred in this academic literature between the Exxon spill and the BP disaster. We will rely on theoretical developments, neoclassical and behavioral paradigms, empirical and experimental evidence, and a clearer elucidation of validity criteria to provide a framework for readers to ponder the question of the validity of contingent valuation and, more generally, stated preference methods.
"Contingent Valuation: A Practical Alternative When
Prices Aren't Available," by Richard T. Carson
A person may be willing to make an economic tradeoff to
assure that a wilderness area or scenic resource is protected even if neither
that person nor (perhaps) anyone else will actually visit this area. This
tradeoff is commonly labeled "passive use value." Contingent
valuation studies ask questions that help to reveal the monetary tradeoff each
person would make concerning the value of goods or services. Such surveys are a
practical alternative approach for eliciting the value of public goods,
including those with passive use considerations. First I discuss the Exxon
Valdez oil spill of March 1989, focusing on why it is important to measure
monetary tradeoffs for goods where passive use considerations loom large.
Although discussions of contingent valuation often focus on whether the method
is sufficiently reliable for use in assessing natural resource damages in
lawsuits, it is important to remember that most estimates from contingent
valuation studies are used in benefit–cost assessments, not natural resource
damage assessments. Those working on benefit–cost analysis have long recognized
that goods and impacts that cannot be quantified are valued, implicitly, by
giving them a limitless value when government regulations preclude certain
activities, or giving them a value of zero by leaving certain consequences out
of the analysis. Contingent valuation offers a practical alternative for
reducing the use of either of these extreme choices. I put forward an
affirmative case for contingent valuation and address a number of the concerns
that have arisen.
"Contingent Valuation: From Dubious to Hopeless," by Jerry Hausman
Approximately 20 years ago, Peter Diamond and I wrote an
article for this journal analyzing contingent valuation methods. At that time
Peter's view was that contingent valuation was hopeless, while I was dubious
but somewhat more optimistic. But 20 years later, after millions of dollars of
largely government-funded research, I have concluded that Peter's earlier
position was correct and that contingent valuation is hopeless. In this paper,
I selectively review the contingent valuation literature, focusing on empirical
results. I find that three long-standing problems continue to exist: 1)
hypothetical response bias that leads contingent valuation to overstatements of
value; 2) large differences between willingness to pay and willingness to
accept; and 3) the embedding problem which encompasses scope problems. The problems
of embedding and scope are likely to be the most intractable. Indeed, I believe
that respondents to contingent valuation surveys are often not responding out
of stable or well-defined preferences, but are essentially inventing their
answers on the fly, in a way which makes the resulting data useless for serious
analysis. Finally, I offer a case study of a prominent contingent valuation
study done by recognized experts in this approach, a study that should be only
minimally affected by these concerns but in which the answers of respondents to
the survey are implausible and inconsistent.
Symposium on China's Economy
"The End of Cheap Chinese Labor," by Hongbin Li, Lei Li, Binzhen Wu and Yanyan Xiong
In recent decades, cheap labor has played a central role in
the Chinese model, which has relied on expanded participation in world trade as
a main driver of growth. At the beginning of China's economic reforms in 1978,
the annual wage of a Chinese urban worker was only $1,004 in U.S. dollars. The
Chinese wage was only 3 percent of the average U.S. wage at that time, and it
was also significantly lower than the wages in neighboring Asian countries such
as the Philippines and Thailand. The Chinese wage was also low relative to productivity.
However, wages are now rising in China. In 2010, the annual wage of a Chinese
urban worker reached $5,487 in U.S. dollars, which is similar to wages earned
by workers in the Philippines and Thailand and significantly higher than those
earned by workers in India and Indonesia. China's wages also increased faster
than productivity since the late 1990s, suggesting that Chinese labor is
becoming more expensive in this sense as well. The increase in China's wages is
not confined to any sector, as wages have increased for both skilled and
unskilled workers, for both coastal and inland areas, and for both exporting
and nonexporting firms. We benchmark wage growth to productivity growth using
both national- and industry-level data, showing that Chinese labor was kept
cheap until the late 1990s but the relative cost of labor has increased since
then. Finally, we discuss the main forces that are pushing wages up.
"Labor Market Outcomes and Reforms in China," by Xin Meng
Over the past few decades of economic reform, China's labor
markets have been transformed to an increasingly market-driven system. China
has two segregated economies: the rural and urban. Understanding the shifting
nature of this divide is probably the key to understanding the most important
labor market reform issues of the last decades and the decades ahead. From
1949, the Chinese economy allowed virtually no labor mobility between the rural
and urban sectors. Rural-urban segregation was enforced by a household
registration system called "hukou." Individuals born in rural areas
receive "agriculture hukou" while those born in cities are designated
as "nonagricultural hukou." In the countryside, employment and income
were linked to the commune-based production system. Collectively owned communes
provided very basic coverage for health, education, and pensions. In cities,
state-assigned life-time employment, centrally determined wages, and a
cradle-to-grave social welfare system were implemented. In the late 1970s,
China's economic reforms began, but the timing and pattern of the changes were
quite different across rural and urban labor markets. This paper focuses on
employment and wages in the urban labor markets, the interaction between the
urban and rural labor markets through migration, and future labor market
challenges. Despite the remarkable changes that have occurred, inherited
institutional impediments still play an important role in the allocation of
labor; the hukou system remains in place, and 72 percent of China's population
is still identified as rural hukou holders. China must continue to ease its
restrictions on rural–urban migration, and must adopt policies to close the
widening rural-urban gap in education, or it risks suffering both a shortage of
workers in the growing urban areas and a deepening urban-rural economic divide.
"Understanding China's Growth: Past, Present, and Future," by Xiaodong Zhu
The pace and scale of China's economic transformation have
no historical precedent. In 1978, China was one of the poorest countries in the
world. The real per capita GDP in China was only one-fortieth of the U.S. level
and one-tenth the Brazilian level. Since then, China's real per capita GDP has
grown at an average rate exceeding 8 percent per year. As a result, China's
real per capita GDP is now almost one-fifth the U.S. level and at the same
level as Brazil. This rapid and sustained improvement in average living
standard has occurred in a country with more than 20 percent of the world’s
population so that China is now the second-largest economy in the world. I will
begin by discussing briefly China's historical growth performance from 1800 to
1950. I then present growth accounting results for the period from 1952 to 1978
and the period since 1978, decomposing the sources of growth into capital
deepening, labor deepening, and productivity growth. But the main focus of this
paper will be to examine the sources of growth since 1978, the year when China
started economic reform. Perhaps surprisingly, given China's well-documented
sky-high rates of saving and investment, I will argue that China’s rapid growth
over the last three decades has been driven by productivity growth rather than
by capital investment. I also examine the contributions of sector-level
productivity growth, and of resource reallocation across sectors and across
firms within a sector, to aggregate productivity growth. Overall, gradual and
persistent institutional change and policy reforms that have reduced
distortions and improved economic incentives are the main reasons for the
productivity growth.
"Aggregate Savings and External Imbalances in China," by Dennis Tao Yang
Over the last decade, the internal and external macroeconomic imbalances in China have risen to unprecedented levels. In 2008, China's national savings rate soared to over 53 percent of its GDP, whereas its current account surplus exceeded 9 percent of GDP. This paper presents a unified framework for understanding the structural causes of these imbalances. I argue that the imbalances are attributable to a set of policies and institutions embedded in the economy. I propose a unified framework for understanding the joint causes of the high savings rate and external imbalances in China. My explanations first focus on an array of factors that encouraged saving across the corporate, government, and household sectors, such as policies that affected sectoral income distribution, along with factors like incomplete social welfare reforms, and population control policies. I then turn to policies that limited investment in China, thus preventing the high savings from being used domestically. Finally, I will examine how trade policies, such as export tax rebates, special economic zones, and exchange rate policies, strongly promote exports. Moreover, the accession of China to the World Trade Organization has dramatically amplified the effects of these structural distortions. In conclusion, I recommend some policy reforms for rebalancing the Chinese economy.
"How Did China Take Off?" by Yasheng Huang
There are two prevailing perspectives on how China took off. One emphasizes the role of globalization—foreign trade and investments and special economic zones; the other emphasizes the role of internal reforms, especially rural reforms. Detailed documentary and quantitative evidence provides strong support for the second hypothesis. To understand how China's economy took off requires an accurate and detailed understanding of its rural development, especially rural industry spearheaded by the rise of township and village enterprises. Many China scholars believe that township and village enterprises have a distinct ownership structure—that they are owned and operated by local governments rather than by private entrepreneurs. I will show that township and village enterprises from the inception have been private and that China undertook significant and meaningful financial liberalization at the very start of reforms. Rural private entrepreneurship and financial reforms correlate strongly with some of China's best-known achievements—poverty reduction, fast GDP growth driven by personal consumption (rather than by corporate investments and government spending), and an initial decline of income inequality. The conventional view of China scholars is right about one point—that today's Chinese financial sector is completely state-controlled. This is because China reversed almost all of its financial liberalization sometime around the early to mid 1990s. This financial reversal, despite its monumental effect on the welfare of hundreds of millions of rural Chinese, is almost completely unknown in the West.
Other Articles
"Amy Finkelstein: 2012 John Bates Clark Medalist," by Jonathan Levin and James Poterba
Amy Finkelstein is the 2012 recipient of the John Bates Clark Medal from the American Economic Association. The core concerns of Amy's research program have been insurance markets and health care. She has addressed whether asymmetric information leads to inefficiencies in insurance markets, how large social insurance programs affect healthcare markets, and the determinants of innovation incentives in health care. We describe a number of Amy's key research contributions, with particular emphasis on those identified by the Honors and Awards Committee of the American Economic Association in her Clark Medal citation, as well as her broader contributions to the field of economics.
"Retrospectives: Irving Fisher's Appreciation and Interest (1896) and the Fisher Relation," by Robert W. Dimand and Rebeca Gomez Betancourt
Irving Fisher's monograph Appreciation and Interest (1896)
proposed his famous equation showing expected inflation as the difference
between nominal interest and real interest rates. In addition, he drew attention
to insightful remarks and numerical examples scattered through the earlier
literature, and he derived results ranging from the uncovered interest
arbitrage parity condition between currencies to the expectations theory of the
term structure of interest rates. As J. Bradford DeLong wrote in this journal
(Winter 2000), "The story of 20th century macroeconomics begins with
Irving Fisher" and specifically with Appreciation and Interest because
"the transformation of the quantity theory of money into a tool for making
quantitative analyses and predictions of the price level, inflation, and
interest rates was the creation of Irving Fisher." I discuss the message
of Appreciation and Interest, and assess how original he was.
"Recommendations for Further Reading," by Timothy Taylor