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7) lavish Thanks to the obsession with monthly figures, one change in 8) divert , China's financial flows over the past couple of years has gone little no9) surreptitiously ticed. In 1996 China had a capital-account surplus of $40 billion. By 10) slash . , last year, that had swung to a deficit of $6,3 billion, with near-$11) crony , billion decline taking place in 1998 alone. Although some $45.6 billion 12) guerrilla of capital flowed in, $52 billion, officially noted, passed it on the way 13) roam , out.

Some of that was foreign money. Last year, foreign banks pulled 2. Statements for discussion.

in their horns. Having lent $8,7 billion in China in 1997 they withdrew 1) Vladimiro Montesinos is known to have been a master of the $8.6 billion last year. Portfolio investment shrank by $3,7 billion.

dark arts.

After allowing for small sums of money lent or invested by 2) The appointment of the new intelligence chief Daniel Mora China abroad, the best part of $35 billion of Chinese money seems to has been approved unanimously in Peru.

have left the country last year. Does this matter China ran a current3) Donated by Americas Central Intelligence Agency sophistiaccount surplus in 1998 of $29,3 billion, offsetting its capital-account cated equipment to fight drugs was used perversely.

deficit by $23 billion. Yet foreign-exchange reserves increased by a 4) Public safety in Peru is reported to be far from normal state.

paltry $5 billion, to $145 billion. Some $18 billion seems to have dis5) Each country should have spy web to provide security for its appeared, mostly into a black hole labelled errors and omissions". Has citizens.

China got a problem with capital flight Economists tend to be more sanguine about China's capital flight 3. Give a summary of the text.

than, say, Russia's. If Chinese companies are worried about devaluation, it makes sense for them to stash foreign exchange offshore. They can do this by falsifying import orders or keeping export earnings out of China. The government may not like this indeed it has cracked down on it but at least much of the money remains as Chinese com 51 panies' working capital. The Chinese, unlike the Russians, are not en- Science and the Nazis riching money launderers and tax havens. A large if unquantifiable Bullying by numbers amount of capital returns to China, as foreign investment eligible for Hitler's Scientists: Science, War, and the Devil's Pact (By John Cornwall) tax breaks.

Mathematicians Under the Nazis Nicholas Lardy of the Brookings Institution notes another reason for the outflows: a huge increase in trade credit extended to foreign John Cornwells account of the dilemmas faced by scientists and (mainly South-East Asian) buyers of Chinese goods. Chinese firms mathematicians after the rise of Hitler begins before the first world have not traditionally got involved in export finance. That changed war, when German science was at its peak. German speakers had won when Asian turmoil threatened a collapse in Chinese exports. In the more than half of the Nobel prizes in science, while extensive collaboend, exports reportedly grew by 0,5 % in 1998. That good performance ration with industry led to profitable development of soaps, fertilisers, is explained, says Mr Lardy, by the extension of trade credits and by pharmaceuticals, dyes and other products. The war had opened a period cooking of the books by government statisticians.

of difficulty for the scientific community, but in the late 1925 German It will be months before statistics are published for this year's science began to recover its prestige. This was destroyed by the rise of capital account, just possibly, outflows may be lessening. Trade credits National Socialism.

might be being paid back; the government's anti-smuggling campaign After Hitler came to power in 1933, Jewish scientists were dismay succeed. Fewer smuggled imports means less hard currency missed en masse from their jobs. Hitler cared little for the damage this stashed offshore.

would cause German science. "If science cannot do without Jews, then But Mr Lardy argues against ending the capital-outflow scare.

we will have to do without science for a few years," he told Max Trade credit may continue to be extended; and the level of eventual Planck, a physicist. Indeed, half of Germany's theoretical physicists lost defaults remains unclear. Capital outflows could thus remain high. The their jobs, to the immense benefit of Britain and America, which future for capital inflows, particularly FDI, is also uncertain. FDI may gained a generation of talented minds.

not yet have dropped sharply, but this is mostly money committed beSome scientists supported the Nazis or used the dismissals for fore foreigners took a grimmer view of China's economic future.

personal advantage. Empty positions were filled by junior colleagues, Meanwhile, huge current-account surpluses cannot be expected usually without protest or delay. But could scientists opposed to Nazi to offset capital outflows for ever. The export recovery taking place policies retain their integrity and continue to work in Germany Many this year is weaker than September's 20 % year-on-year growth sugscientists chose to stay, and hoped to preserve German science for betgests. That growth came on a very low base last year. The statisticians ter times. Among them was Max von Laue, another physicist, who had may not have to fiddle this year, but exports are unlikely to grow by spoken bravely on Einstein's behalf in the early 1935 (and who is said more than 5 % in 1999 as a whole: hardly stellar, given the recovery in to have developed a habit of carrying large parcels under each arm, to the rest of the region. With imports surging, the current-account surplus avoid having to give the Nazi salute).

could tumble by nearly half. An export sector in difficulties and declinOther cases are more debatable. Mr Cornwell devotes several ing foreign investment: it is no longer unthinkable that China's perennichapters to Werner Heisenberg, whose wartime conversations with ally growing foreign reserves, currently $152 billion, might shrink.

Niels Bohr have been famously dramatised in Michael Frayn's recent And that concern about the yuan could rise.

play, "Copenhagen". Despite ample opportunity to leave, Heisenberg chose to remain in Germany and ran the German atomic-bomb programme. He made a poor director, and some have suggested that he in effect sabotaged the programme. Mr Cornwell sees no evidence for 53 this, arguing that Heisenberg was neither a hero nor a villain, but was Economics Focus instead "morally and politically obtuse".

Soft science no more Sanford Segal's book looks in depth at the fate of German mathematics under Hitler. Mathematicians, of course, were also faced Once a beautiful turn of phrase would take you a long way in with the wave of expulsions of Jews from the profession. For those economics. From Adam Smith to John Maynard Keynes, economists who remained, Nazism quickly impinged on their lives. Mathematiwere content to put their theories and ideas into (mostly) English prose, cians were subject to repeated political evaluations. University emand leave it at that. Their big, breezy thoughts made great, but impreployees had to swear oaths of loyalty to Hitler and greet their colcise reading. Contradictions were glossed over. So prolix was Keynes, leagues with the Nazi salute. Foreign contacts and travel were strictly for example, that he is thought to have said everything at least once.

limited, and research stagnated.

This will no longer do. Since 1945 or so, practitioners of what Some mathematicians, such as Hermann Weyl, chose to leave, was once called "political economy" have become more demanding.

while many remained and kept a low profile. However, a few collaboThey sought to test their grand thoughts against the hard facts of the rated with enthusiasm. A particularly egregious example was Ludwig real world. Incomes, interest rates, and prices of all sorts could be Bieberbach, a senior professor in Berlin and a leading mathematician measured. Did they behave as theory supposed National accounts, the of the period. Bieberbach was an enthusiastic proponent of Nazi ideoldetailed measures of GDP, were just being created, at Keynes's behest.

ogy, publicly advancing a theory of racial and national differences in But economic data were, and still are, messy; analysing them even mathematical style. His theory divided mathematicians into two types:

more so. It took decades to develop the tools to detect and measure Jewish or French mathematicians (the "S-type") were pure theorists economic relationships with much certainty.

who imposed their ideas upon the world, while true German mathemaThis year's (2003) Nobel prize has gone to two economists who ticians (the "I-type") supposedly understood the world as it really was.

epitomise the rise of statistical techniques: Robert Engle, an American Mr Segal's account of this episode is one of the most interesting economist at New York University, and Clive Granger, a Briton at the parts of the book. While the maths may at times prove too technical for University of California at San Diego. They have crafted some of the the lay reader, the strength of the book lies in its many individual stomost sophisticated tools to analyse economic data. Their contributions, ries and case histories. Mr Cornwell's work is more wide-ranging and developed during the 1980s, deal especially with "time-series" data:

accessible, and evokes the moral dilemmas of the period very effecshare prices, household consumption, inflation-anything, in fact, that tively. Both books offer disturbing and important accounts of the life of changes over time, and thus poses difficulties for older forms of statisscience and scientists under the Nazis.

tical analysis.

Poets and Plumbers The Nobel committee seems to be highlighting the wide range of ideas and skills that comprise modern economics: a healthy equilibrium, you might say, between poets and plumbers. Last year one of the two winners was a psychologist whose findings contradict many of the assumptions of economic theory. This year the plumbers were back.

Only three years have passed since James Heckman and Daniel 55 McFadden were also honoured for sharpening econometrics, the statis- these tools might conclude that a casual relationship existed where tical methods with which economic data are analysed. none really does, and thus be fooled by a statistical mirage.

Mr Engle and Mr Granger have crafted techniques that demand Mr Granger devised a clever solution to this, called co-integraeven greater virtuosity at maths, but which are nevertheless crucial in tion. He made use of the notion of economic equilibrium- the idea that separating wheat from chaff. Mr Engle's work has helped build the variables tend to move towards particular values, and thus in a predictfoundations for measuring and avoiding myriad types of risks in the able direction. He found that when two sets of economic data are commodern economy. He has studied the volatility the severity of swings pared, for example inflation and exchange rates, they can often be of time series ranging from inflation to the prices of securities. Any- treated with standard techniques. In collaboration with Mr Engle, he one who watches the stockmarkets knows that they undergo periods of worked to create tests for economists to ensure that they were getting wild adolescent swings as well as times of geriatric languor. Until Mr reliable results when making such comparisons.

Engle came along, people interested in such things-financial types, Despite these sophisticated techniques, which economists now mostly, but also regulators-used crude measures of historical volatility, apply as a matter of course, the analysis of economic data remains looking back over a year, say, to see what the average of the swings messy. "Driving a Mercedes down a cow-track" is how Thomas Mayer, was. They would then use this as a gauge of likely future volatility. an American academic economist, once described the application of Mr Engle's approach, ARCH (for autoregressive conditional het- fancy tools to real-world phenomena that are not easy to model, much eroscedasticity, should you insist on knowing) gave researchers the less to measure.

power to test whether and how volatility in one period is related to Even so, the place of econometricians at the centre of economics volatility in earlier times. There often is a link, as casual observation is now confirmed. Indeed, there now seems to be a dearth of the grand suggests. After several days of stockmarket upheaval, there may be theorists of days past. Specialisation to use an economists' term is several days of calm. A 3 % rise or fall in shares is often heralded by the order of the day. But then a good plumber is in greater demand than increasing volatility, much as an earthquake is preceded by tremors. Mr any poet.

Engle's high-powered maths has made market risk easier to forecast.

Thus banks and investors who use "value at risk" techniques to analyse their portfolios owe much to Mr Engle. So does the Basel committee which is drawing up new rules for banks' capital requirements.

Mr Granger's research was aimed more at coming to grips with longer-term swings in economic growth, inflation and currencies than with shorter bouts of risk and volatility. Macroeconomic data often share some common features. GDP per head, for example, has tended to grow over time (at least for as long as it has been reliably measured).

But the "trend" rate of growth discussed by forecasters and, yes, by journalists is never as fixed as they make it seem: it can be influenced by shocks like rising oil prices or wars.

This may obscure deeper relationships hidden in the data, posing tricky problems for statisticians. Using standard statistical tools derived from things that do not change much over time, such as the distribution of people's heights can be misleading. An economist using 57 Western Promise ing with life in Britain often involves hanging out with other Chinese students meaning that one big hoped-for benefit, exposure to an EngChinese students are flooding in to British universities lish-language environment, is muted. Yvonne Turner, an academic specialising in the Sino-British cultural gulf, says some Chinese stuSeen from close to, Britain's universities are in a sorry state:

dents tell her that their English-language skills decline while in Britain.

overcrowded, cash-strapped and demoralised. But from far away they This fits in with a second problem. Chinese university teaching is can look very attractive. Their marketing to foreign students is exceldifferent to that in British higher education. Class discussion and queslent, especially in China, where educating children abroad is increastioning the teacher are rare and often discouraged. Exams are very imingly fashionable. The latest firm figures, from 2001, show around portant; group-based activities and course-work hardly feature. Memori18,000 Chinese students in British higher education. That makes them zing and regurgitating texts matter a lot; use of other source material and the largest group out of a total of 143,000 foreigners. And it is a 71% critical thinking skills, especially at undergraduate level, are minimal.

increase on 2000. Preliminary figures for 2002 show a further increase Coupled with the often-hesitant spoken English of many Chinese of 67 %, taking the likely total over 25,000. By far the most popular students, that can create irritation in the classroom. British students ofsubjects are business studies and accountancy (35 %) followed by comten feel frustrated by their Chinese colleagues' silence. Academics find puting (14 %) and engineering (11 %).

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