Archive for the ‘Economics’ Category

The long-running debate as to whether China will dethrone the U.S. as the world’s top superpower or buckle like Japan or the Soviet Union is heating up again. Slowing growth and a slew of ominous data has people talking about just how serious this crunch will turn out. You can check out two great discussions about this at ChinaFile and New York Times (or to simplify, just read the opposing viewpoints of Michael Pettis and Justin Lin).

Whether there will be a crash and what that says about China’s economic model is certainly very significant, but I think when looking at the big picture of China’s future, it’s hardly THE most significant issue. I don’t fear a Chinese hard landing nearly as much as I fear the hard long slog unfolding much more quietly.

Right now China is barrelling down the economic rapids trying to avoid crashing, but there’s already a hole in the bottom of the raft. Even if it avoids a crash, there are much worse things in store. And China doesn’t have just one big hole in its raft, it has (at least) four.

1.  The Aging Population
In 2010, about 13 percent of China’s population was over 60-years-old. Or in other words, there were five working age people for every retiree, and even that’s already causing problems. With China’s enormous “floating population” of migrant workers, about half of all elderly live by themselves or with just an elderly spouse. This leaves many migrants the choice of essentially straddling their hometown and work-destination in order to care for ailing parents, or paying to put them up in the city. Both options can cause huge financial strains, which is made worse by the fact that the one-child policy has left plenty of couples to solely support four parents. But as tough as it is now, we ain’t seen nothing yet:

population aging chart

That 5-to-1 ratio of workers-to-retirees will fall to 3-to-1 just by 2020 and continue to get worse from there until the over 60 crowd goes above and beyond a third of China’s population. Some may point out that this is very similar to what Japan and several other countries are going through, but there’s one very important thing to keep in mind:

 japan china gdp2

Thanks to the one child policy wreaking havoc on demographics, China is facing a first world problem while it still only has third world resources to cope with it. Japan may be able to afford it, but in all likelihood, China won’t. The facilities and the trained personnel to care for these elderly just aren’t there, and putting them there will be incredibly difficult with the meager means China has at its disposal. It will put unmanageable strains on families, pensions and China’s healthcare system…not to mention the economic dividends China’s large population of workers have been supplying over the past two decades.

2.  The Pollution
I don’t even know where to begin on China’s pollution problems. For starters, an estimated 750,000 Chinese die prematurely each year from air pollution-related respiratory diseases. Hundreds of “cancer villages” dot the countryside. And the country’s carbon emissions, which are already the highest in the world, aren’t expected to peak for at least another two decades.

But the most frightening implication of China’s pollution is what it’s doing to the food and water supply. Wall Street Journal reported last week that “anywhere between 8% and 20% of China’s arable land, some 25 to 60 million acres, may now be contaminated with heavy metals. A loss of even 5% could be disastrous, taking China below the ‘red line’ of 296 million acres of arable land that are currently needed, according to the government, to feed the country’s 1.35 billion people.”

Many farmers that used to produce healthy food are now growing food they know can’t be sold just so they can qualify for compensation from the government or polluting factories. Or worse, they’re growing food they know isn’t safe to sell, but they’re sellling it anyways. On top of this, desertification resulting from global warming and deforestation is claiming arable land the size of Rhode Island every year.

After decades of growth policies that used the “grow GDP first and clean up later” principle, China is realizing that it all may be too expensive to clean up. A researcher from the Chinese Academy of Social Sciences has estimated that if you factor in environmental costs, China’s real annual GDP growth would be nearly halved. However, no matter how much money is thrown at the problem, there are some resources that may never be recovered…which leads to the next big problem.

3.  The Water Shortage
Demand for water in China is skyrocketing, while at the same time supply is dwindling and being contaminated.  The Tibetan glaciers, which supply the water for all three of China’s major rivers – The Yangtze, Mekong and Yellow – are disappearing by as much as 7% per year. About half of the rivers that existed in China in 1990 have already dried up, and of those rivers and lakes that remain, about 75% are severely polluted. 28% are so polluted that their water can’t even be used for agriculture.

The water shortage will also have severe effects on industry. As much as 17 percent of China’s water is now used by the coal industry and other power stations. And as you can see, China’s coal use has been shooting upward for the past decade with no promise of slowing any time soon.

 coal chart
Chart via U.S. Energy Information Administration

Over the next two decades, this water crisis is poised to come to a head with demand far outstripping supply by nearly 200 billion cubic meters. What this will mean for China’s economy and the everyday lives of its citizens is scary to think about, to put it mildly.

 waterrisk
Chart via Business Insider and China Water Risk

4. The Gender Imbalance
The one-child policy, a patriarchal culture and sex selective abortions and have come together in what will eventually create a population of surplus men that rivals the overall populations of many large countries. According to a Chinese population researcher from Xi’an Jiaotong University, the number of these “bare branches” aged 20 to 49 in China will reach 20 million by 2015 and continue to grow to around 44 million by 2040. At current birthrates, eventually one in five Chinese men will be hopelessly single. These numbers are unprecedented in human history, and experts are expecting very little good to come from it.

Times and places in history with large male surpluses – from the American Wild West to mid-19th century Northern China – have been marked by lawlessness and exploitation of women. Rises in violent crime rates have been attributed to the imbalance that already exists in contemporary China. And since those left without wives tend to be the very poorest men – who are increasingly finding themselves clustered in “bachelor villages” – other grievances could easily consolidate them into a violent force. This is exactly what scholars Valerie Hudson and Andrea Den Boer have argued preceded historical Chinese conflicts like the Nien Rebellion, the Black Flag Army, the Boxers and the Eight Trigrams Rebellion.

Furthermore, if the Chinese government gets worried about the social upheaval bare branches could cause, they may try to channel that angst into the Chinese army. In that case, it could result in ultra-nationalism and a foreign policy that’s “swaggering, belligerent, provocative,” as Hudson and Den Boer put it.

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I try to be an optimist. I have confidence that new technologies and targeted policies can mitigate some of these problems before they become catastrophic. But the fact that these four things are happening in concert is downright terrifying and presents the probable scenario that they’ll exacerbate one-another. The worsening health effects from pollution could make it more expensive to care for the elderly. The water shortage and soil degradation could cause food and utility prices to rise, making it harder to eke out a living and keep the bare branches content. You get the idea.

So by all means keep an eye on the present economic hurdle. It will certainly have enormous implications on the quality of life in China and the extent to which the country is able to address other issues. But don’t forget that even if China gets over this hurdle, there are much bigger ones on the road ahead. Keep a very close eye on these hurdles, because they won’t become apparent in any abrupt crash. But they have the potential to be much more crippling to the country’s sustained growth.

Over last few weeks the Apple supplier Foxconn has been in the news yet again for the usual reasons: fights, strikes, riots, underage workers, etc. Every few months the same sweatshop narrative comes up about Foxconn (because apparently it’s the only manufacturer in China), and every time unverified and wildly exaggerated media reports hastily come out (and that doesn’t even include super-fraud Mike Daisy).

I’m always disappointed when this happens; not only because of the eagerness to jump on a largely bogus narrative, but also because it overshadows what I think are the much more interesting nuances of factory life in China. Yes, the hours are long, life is hard and conditions aren’t enviable, but there are deeper issues than that.

Last week I recorded a podcast (listen here) with Liu Zhiyi, a former intern from Southern Weekend, who got a job at Foxconn’s Longhua factory for 28 days in 2010 in order to do undercover reports.

One of the big misconceptions resulting from the sweatshop narrative is that workers are routinely forced to work ungodly hours. In fact, the workers themselves usually demand as much overtime as they can get. While at Foxconn, Liu described this saying, “For the workers desperate for making money, overtime is like ‘a pain that can breathe.’ Without it, the days without money make them ‘suffocate.’”

They’ve travelled so far from their hometowns to work that any idle time not spent making money is seen as a waste.

The conditions are another misconception. At Foxconn, they’re pretty good – especially compared to other factories. (James Fallows recently posted some photos from the same factory Liu worked at – here, here, here and here).

Liu said about the factory, “I have entered a system, and the system can provide everything that I need for my body. We have gymnastics, swimming pool, exercise room… The only thing they don’t provide is time.”

Because of the long hours (which remember, the workers desperately want and will seek elsewhere if they don’t get), it’s easy to lose touch with some simple human needs. Liu explained how roommates are always turning over or working different shifts, so it’s hard to make friends (or even learn people’s names). And because different departments are usually skewed one way or the other toward a single gender, it’s even harder to find a lover. He said the resulting emotional imbalance and conflicts over girls are often what spark fights in the factory.

The thing that surprised Liu most though, and what he sees as the biggest problem, is how workers seem completely puzzled about their futures. Earlier he wrote: “They often dream, but also repeatedly tear apart their dreams, like a miserable painter who keeps tearing up his drafts. ‘If we keep working like this, we might as well quit dreaming for the rest of our lives.’”

He says they’re almost all focused foremost on making a lot of money, but they don’t know how much is enough or what the next step is after making the money. They hope to move up in the world through their hard work, but they often don’t know where the path is, or if there even is a path. This, he says, could be a major problem in the future if society and the government can’t address it.

Anyways, Liu was very insightful about his time in the factory. I hope you’ll listen to the full podcast.

Since Reform & Opening up (and to an even greater extent after the Tiananmen uprising) the Communist Party has used China’s torrid economic growth to justify its absolute unchecked power. By pointing to slower growth in emerging economies like India and the recessions of developed democracies, the CCP can proudly tout the superiority of its system.

But things are changing. Just about every economic indicator for China is headed downward. Mass factory layoffs/closures, sharply declining steel production, a pile up of unsold cars…you name it. Serious questions are being raised over the “superiority” of China’s command and control economy, which pushed down interest rates, forced excessive loans (MANY of which are starting to go bad) and created what could be the biggest real estate bubble in history.

Over the next few months we should start to see an answer to the “hard vs. soft landing” question. Since talk of a possible hard landing began, I’ve often wondered how China’s propaganda apparatus would respond if and when China’s economy takes a sharp turn south.  The party can’t exactly just say, “Oops. I guess our system is deeply flawed and not as superior as we led you to believe.” Its legitimacy lies almost completely in the idea that efficient economic growth is a result of its authoritarian model.

A few weeks ago People’s Daily gave a little clue as to how the party might be planning to address this issue. Unsurprisingly, it looks like it will go with the standard approach of “It’s not that bad; and anyways, it’s the West’s fault.”  The piece said:

The Chinese economy is slowing down due to both international and domestic factors.

Internationally speaking, the weak growth in developed countries caused by the global financial crisis has had a marked negative impact on the Chinese economy. China’s trade surplus rebounded greatly in the second quarter, but not due to the acceleration of export growth or slowing down of imports. In fact, the growth of China’s exports to the United States, Japan, and Europe has slowed down markedly, becoming a major constraint on economic development in the eastern regions.

Domestically speaking, China’s economic slowdown is a legacy of the global financial crisis. In order to resist the crisis, China introduced a large-scale economic stimulus package, which created objective conditions for subsequent inflation and soaring housing prices. The country then adopted a series of macro control measures to curb the inflation and cool the overheated property market, when the contribution of consumption to its GDP growth failed to increase markedly. This countercyclical action has inevitably caused a slowdown in domestic demand.

So whether it’s domestic or international problems, no fault lies with China itself. The rest of the piece downplayed the idea that China’s economy is in serious trouble anyways, with a touch of “look on the bright side” (inflation is falling). It seems a likely double-pronged approach: Pretend that a hard landing isn’t happening and blame foreign countries for the minor economic hiccup that has to be acknowledged.

Many of the points the piece raises are valid. If it wasn’t for the US-created 2008 financial crisis, China wouldn’t have injected its $586 billion stimulus (which has largely gone into fruitless projects) or required banks to give out a ludicrous $2.7 trillion in loans (ditto). So in that sense, a fair amount of blame does belong to the US for setting the stage for China’s potential hard landing. Europe certainly hasn’t done anything to help matters either.

But the mismanagement of the economy by the Chinese government is where the lion’s share of the blame rests for China’s economic woes. When faced with an economic crisis and potential unrest, the government opted (as always) to secure short-term stability at the cost of long-term sustainability by throwing cheap money at the problem and trying to guide the invisible hand of the market too forcefully.  “The debt-ridden western countries are to blame” argument can only stretch so far.

But accepting blame and owning up to deep systematic flaws with its economic model aren’t in the CCP playbook. So it’s likely we’ll see that argument stretched to its very limit.  The question is, will people buy it?

As worries of a banking crisis have started to weigh on China in recent months, economists’ eyes have been fixated on Wenzhou. Entrepreneurs in the Zhejiang business hub tend to forgo the banks and simply lend money to each other. This has traditionally served the city well, as it allowed small enterprise to thrive. But now trouble is brewing.

Overinvestment and a slowing economy are starting to see many defaults on loans in Wenzhou. Scores of business owners have already fled the city or committed suicide to escape their debts to shadow lenders. In one case, the daughter of a businessman was taken hostage by a creditor to insure repayment of debt. Because of the growing network of shadow lenders across the country, as well as over-lending by official banks, Tsinghua economist Patrick Chovanec has said Wenzhou is the “canary in the goldmine” for China.

Those interested in the implications of Wenzhou’s economy may do well to look at the city’s other claim to fame: Its Christians. The city has around a 20-30% Christian population – abnormally high for China. Cao Nanlai, Hong Kong University professor and author of Constructing China’s Jerusalem: Christians, Power, and Place in Contemporary Wenzhou, recently told me how religion and economics relate in the city.

He said that Wenzhou Christian entrepreneurs tend to take loans from one another because of the trust and shared values they’ve cultivated together in church. When the city’s debt crisis began, preachers started giving sermons about God’s punishment for greed and telling congregants to keep this in mind in their business dealings. “Wenzhou Christians tend not to put on pressure to repay loans, while their secular counterparts may have resorted to extreme measures that caused an exodus from the city,” Cao said. “In this sense, Christian values and networks do have a very positive impact on Wenzhou’s regional economy.”

In 1905 German economist Max Weber introduced the idea of a “Protestant work ethic.” It said the religion was instrumental in the development of many western countries because of the Calvinist emphasis on honest hard work that would lead to worldly success – a sign that one was heaven-bound.

Recent research has suggested even further economic benefits to religion. A study last year found that people who believe in a vengeful god (ie- one that might send you to hell) cheat less often. And another study that looked at economic data in 59 countries over 20 years found that rises in a belief in hell, and to a lesser extent heaven, correlated with spikes in economic growth.

In 2002, Hong Kong University Professor Wang Xiaoying wrote on China’s “post-Communist personality” and how the country is suffering the excesses of capitalism. Becoming rich is the focus and any attempt at moral guidance is scorned. “Nothing better represents such problems as the sheer scale of corruption and the ineffectiveness of all measures to keep it in check,” Wang writes. “Whatever the intrinsic flaws of capitalism as a social system, China’s social problems seem to come as much from the failure to establish a viable capitalist social order.”

Wang fears China doesn’t have the established social order that the west did during its development to reign in the capitalist excesses. Religion might be one effective way to establish this order and perhaps even turn a few corrupt officials honest. “Christianity may play a very important and positive role in the public sphere at the local and grassroots level,” said Cao Nanlai. “An informal local network of churchgoing relatives and friends can embed local officials within a shared emotional structure, shaping their moral values. This is certainly the case in Wenzhou.”

But religion’s potential in helping China develop might not just be about stopping the strong from exploiting the weak. It could be just as much about keeping the exploited quiet and working through the excesses of development. We’ll dig deeper into that tomorrow.

 

Christianity series Part 1: Can Lei Feng compete with Jesus?

Christianity series Part 2: The new Christians

Christianity series Part 4: What Marx may have gotten right

Christianity series Part 5: Communist Christianity

How economic growth happens

Posted: January 31, 2012 in Economics
Tags: , ,

For years now the debate has been going on about the superiority of China’s economic model. China has averaged around 10% annual GDP growth for the past 30 years while, on a very good year, western capitalist countries might see something like 3% – and that’s on a very good year. Yesterday Global Times ran an interview with Ding Chun, a member of the Global Agenda Council on Europe of the WEF, and asked, “Do you think the West should learn from developing countries like China?”

He replied, “I believe so. The West used to praise highly the Washington Consensus. Then they promoted the so-called conscientious market economy. Now the economic situations of developing countries are better than those of Western countries.”

The Chinese government loves to tout the idea that, since Western countries are suffering and China’s economy is soaring, it means capitalism is bunk and Socialism with Chinese Characteristics (AKA authoritarian capitalism) is superior. China is lucky to have the Communist Party ruling it.

I’m not an economist, but I have taken one entry-level economics class – which is one more than anyone who would make a claim like that has taken. China’s meteoric rise would be completely predictable to any economist worth giving himself that title. Let’s dumb down growth for developing countries to its most basic form. Essentially, it’s turning this:

into this:

A poor developing country isn’t very productive, so after people save up enough money from picking wheat, they buy a machine to improve productivity and income. Eventually they can buy the most productive machine there is and learn how to use it most efficiently. Then with all the new money, industries that never existed before (ie-tourism) can also bloom. Voila! Growth.

China is massive and there are still a lot of people doing things the old-fashioned way. So it’s completely normal that, as long as the government doesn’t get in the way, there will be large growth for a long time. But China’s government did get in the way from 1949 to 1979. Then Deng Xiaoping had the wild notion that if you let people reap the direct benefits of their work rather than force them to slave for the good of the motherland, they’ll be more productive. So I suppose you can credit China’s government for the huge economic growth of the past 30 years. Just like if I won a marathon I could credit the guy who was bear-hugging me at the beginning of the race for finally letting go.

To be sure, China’s development under authoritarian capitalism has been much faster than, say India’s democratic capitalism during this stage (although not necessarily better). But what happens when everyone finally has the biggest, most productive machines? Then they have to innovate and make an even better machine or method if they want to keep growing. This is what western capitalist countries are doing now – and it’s much slower.

In fact, this is what they’ve been doing for more than a hundred years because they were the first to build these big machines. Late-comers like China only needed to buy (or pilfer) this technology and learn these methods that already exist – a big 2nd mover advantage. So naturally, its development has been much faster than the West’s was.

Now that developing countries like China, which are more numerous and have much larger populations, are getting these machines, their workers with lower wages and less stringent labor/pollution laws are making it cheaper to produce basic goods while developed countries struggle with ways to make them more efficiently.

During this struggle, developed countries are losing production they’ve traditionally had, yet their people have still clung to the quality of life they’ve grown accustomed to. Hence, many are going into debt. They’re trying to make up for this with even more innovation at the frontier, but again, it’s slow-going. So given China’s huge population, it will indeed continue to grow until its GDP is well past any western capitalist country. However, China’s growth is already slowing because of it’s diminishing returns in increasing productivity. So what happens when China eventually gets everyone the newest, most efficient machines?

Then even less developed countries will take away many manufacturing jobs and China will go head-to-head with developed capitalist countries in innovation. It will come down to who has a better education system and more intellectual freedom.  Given the current atmosphere, who would you put your money on as more sustainable in the long run?

The other night in Beijing I had somewhere to be at 7:00 that should take about 15 minutes to get to by bus on empty roads. But given that it’s Beijing, I left at 5:30…and I was still 20 minutes late. In related story, the next day I opened my pollution mask to change the filter. The one on the right in that picture is a new one. The one on the left is what it looks like after a month of casual (maybe an hour per week) use in Beijing.

Some problems in China are so complex and ingrained into habit that solving them will take decades; if they can even be solved at all. This is not one of those problems.

There was recently a hilarious report that claimed Beijing commutes have been slashed from an average of 145 minutes to 60 minutes since this time last year. This incredible 170% drop supposedly happened thanks to the odd-even license plate system that’s been in effect for three years – and it happened while over 240,000 new cars hit the road. I can’t imagine a single Beijinger (who hasn’t been bed-ridden for the past year) who believes this.

The 240,000 new cars are actually down from over 900,000 new ones last year, thanks to a new annual quota on licenses. But after doing extensive calculations of all the traffic reduction measures [looking at them], I found a common fatal flaw: they still allow the number of cars to go up.

If they actually wanted to solve the problem once and for all, it would be as simple as charging a toll to drive in the city. Singapore has a brilliantly simple system where drivers have a pre-paid card on their dashboard that overhead cameras scan, deducting money automatically as they drive around town. Prices are higher during weekdays and during rush hour. If traffic starts getting a little too congested, the price goes up and, magically, less people are on the roads.

The Singapore minister of national development said, “It’s not rocket science to know that if you charge people to use certain commodities, that use is managed and controlled.”

No, it’s not rocket science. It’s freshman economics 101. Use incentives and disincentives properly to achieve the desired result. Yet this is a concept that continues to elude many governments around the world.

While the number of cars has surged parking prices have naturally followed. The average cost of buying a parking space in the Beijing is now around 140,000 yuan ($21,726) while some spaces are fetching upwards of 800,000 yuan ($124,316). So what is the government doing? Accommodating the upset drivers by building 200,000 new spaces. If they had attended said economics 101, they would realize that when this measure makes parking more abundant, more people will have incentive to buy cars. Ditto if more roads are built. The problem will be solved very briefly, and then become worse. This is why several major cities have put caps on the number of new spaces that can be built.

The current measures being taken to alleviate traffic are all essentially gimmicks to pacify the greater public while avoiding too much agitation of car manufacturers and drivers. China doesn’t want to miss out on the boon that an auto industry gives the economy and the government doesn’t want to upset drivers – who are quickly becoming as whiny as Americans in defending their “need” and “right” to having a car.

Then there’s the social stability concern. Several drivers have beaten, and even killed, parking attendants over high fees.  But, to put that in perspective, the average life-expectancy of a Chinese traffic cop is 43. And how many others are having their lives shortened with blackening lungs each day and dying in traffic on the way to the hospital?

A Singapore-type measure wouldn’t solve Beijing’s horrific pollution completely, but it would help immensely. And it would, without a doubt, solve the traffic problem. In fact, it would work in any city that has a decent public transportation infrastructure. It would dent China’s auto industry, but if the government thinks it can develop the car culture the same way America did, we may as well all start digging our graves now.

Drivers would be upset, but frankly they can cry me a river. Why shouldn’t they pay for their negative externalities? It would be an egalitarian measure all around that does good for the maximum amount of people. Is there something I’m missing here?

At the risk of sounding alarmist, China is in trouble. China watchers from all kinds of backgrounds would probably agree with this statement to some extent. It’s “trouble” in the abstract sense, since we don’t know exactly how it will play out. But it’s hard to look at political, social, economic and environmental trends without getting the feeling that a perfect storm of sorts is brewing. I’ve put together this infographic to try and bring together some ominous signals from several different fields. What it all means, I can’t say for sure, but it’s apparent that in the very near future China will meet challenges unprecedented in the history of mankind. For the sake of China, and realistically, the rest of the world, let’s hope the 5th generation of leaders knows what they’re doing.

Feel free to use this image, please just link back to this site.