Quotulatiousness

January 1, 2012

Gordon Chang still bearish on China

Filed under: China, Economics, Politics — Tags: , , , — Nicholas @ 10:54

He predicted the fall of the Communist China within a decade — back in 2001 — but he isn’t worried that his prediction hasn’t come true yet:

Why has China as we know it survived? First and foremost, the Chinese central government has managed to avoid adhering to many of its obligations made when it joined the WTO in 2001 to open its economy and play by the rules, and the international community maintained a generally tolerant attitude toward this noncompliant behavior. As a result, Beijing has been able to protect much of its home market from foreign competitors while ramping up exports.

[. . .]

Don’t believe any of this. China outperformed other countries because it was in a three-decade upward supercycle, principally for three reasons. First, there were Deng Xiaoping’s transformational “reform and opening up” policies, first implemented in the late 1970s. Second, Deng’s era of change coincided with the end of the Cold War, which brought about the elimination of political barriers to international commerce. Third, all of this took place while China was benefiting from its “demographic dividend,” an extraordinary bulge in the workforce.

Yet China’s “sweet spot” is over because, in recent years, the conditions that created it either disappeared or will soon. First, the Communist Party has turned its back on Deng’s progressive policies. Hu Jintao, the current leader, is presiding over an era marked by, on balance, the reversal of reform. There has been, especially since 2008, a partial renationalization of the economy and a marked narrowing of opportunities for foreign business. For example, Beijing blocked acquisitions by foreigners, erected new barriers like the “indigenous innovation” rules, and harassed market-leading companies like Google. Strengthening “national champion” state enterprises at the expense of others, Hu has abandoned the economic paradigm that made his country successful.

Second, the global boom of the last two decades ended in 2008 when markets around the world crashed. The tumultuous events of that year brought to a close an unusually benign period during which countries attempted to integrate China into the international system and therefore tolerated its mercantilist policies. Now, however, every nation wants to export more and, in an era of protectionism or of managed trade, China will not be able to export its way to prosperity like it did during the Asian financial crisis in the late 1990s. China is more dependent on international commerce than almost any other nation, so trade friction — or even declining global demand — will hurt it more than others. The country, for instance, could be the biggest victim of the eurozone crisis.

Third, China, which during its reform era had one of the best demographic profiles of any nation, will soon have one of the worst. The Chinese workforce will level off in about 2013, perhaps 2014, according to both Chinese and foreign demographers, but the effect is already being felt as wages rise, a trend that will eventually make the country’s factories uncompetitive. China, strangely enough, is running out of people to move to cities, work in factories, and power its economy. Demography may not be destiny, but it will now create high barriers for growth.

H/T to Chris Myrick for the link.

December 8, 2011

“Pure socialism” in the Soviet Union

Filed under: Economics, History — Tags: , , , — Nicholas @ 08:53

Nicholas Snow summarizes the only serious attempt to implement “pure socialism” in the first years after the Russian revolution:

The closest the Soviet Union came to actual pure socialism was the period known as War Communism, 1918 to 1921. This period is unanimously seen as a disaster, even among socialists. Production fell in most if not all industries, and millions starved to death. From then on the Communist Party struggled to keep hold of both their Marxist ideology and their power. Naturally the latter took precedence, and as a result the price system, which they originally wanted to abolish, took on a larger and larger role. [. . .]

The Soviets certainly liked to keep up appearances. At a glance the Soviet economy looked centrally planned. The planning board for each industry set output levels, and the State owned de jure all means of production. A closer look, however, revealed a different story. As Boettke and Anderson pointed out, the Soviet economy was closer to that of a mercantilist economy, a heavily regulated market economy effectively run by rent-seeking government officials and factory managers. De facto, the factory managers were the owners and residual claimants. They paid the State for the right to run the factory, and in return the State created a monopoly for them, just as in the mercantilist system of old.

Middlemen, known as the Tolkachi, worked on behalf of the State enterprises to sell surplus commodities on the one hand and purchase needed products on the other. They essentially created a market that allowed for economic calculation not possible under a pure socialist system.

July 31, 2011

Another book to add to the “to be read” pile

Filed under: Books, Economics, History, Media — Tags: , — Nicholas @ 18:00

From the current issue of Reason, a review of a pair of new books on the concept of “empire”:

The Rule of Empires, by the Washington University historian Timothy Parsons, explores the fundamental contradictions of imperial rule, making the case that empires have become increasingly difficult to maintain as potential subjects’ identities have become less fluid and more nationalistic. In Merchant Kings: When Companies Ruled the World, 1600–1900, the independent historian Stephen Bown takes a less systematic approach to the study of imperial power, but his book supplements Parsons’ by filling in the biographical details of the men who built Europe’s modern commercial empires. Both books demonstrate that while empire may seem a quick route to power and wealth, in the long run the idea is a military and financial loser.

[. . .]

Empires throughout history have claimed “to rule for the good of their subjects,” Parsons maintains, but this “was and always will be a cynical and hypocritical canard. Empire has never been more than naked self-interest masquerading as virtue.” To keep resources flowing from subjects to rulers, empires must walk a tightrope between subjugation and assimilation. If the state imposes draconian laws and taxes, it will face rebellion, so the rulers must seek out collaborators among their subjects who will assist in the domination of their fellow citizens. In return, collaborators are frequently brought into the imperial fold and given a portion of the spoils. But this leaves the empire vulnerable to conquering from the inside out, with many masters and few servants.

[. . .]

Empire building typically falls under the purview of governments, but in the 17th through 19th centuries, European states outsourced imperial conquest to quasi-private joint-stock companies. Governments granted these companies monopoly trading rights in distant regions and frequently offered their military might to ward off potential rivals. States rarely intended for the companies to become independent imperial powers, but the potential spoils of conquest proved hard for company officials to resist. After all, they had been freed from the discipline of competition, they were thousands of miles from political oversight, and their military risks were socialized by their state sponsors. As Bown points out in Merchant Kings, the EIC and similar corporations “were less the product of free-market capitalism than the commercial extension of European national wars and struggles for cultural and economic supremacy. They occupied the muddy grey zone that exists between government and enterprise.”

I’ve been looking for a good (recent) history of the East India Company for the last several months, so Merchant Kings sounds like it’d be of interest.

March 7, 2011

QotD: Mercantilism

Filed under: Economics, History, Humour, Quotations — Tags: , , — Nicholas @ 09:56

You actually had a short, but interesting chapter in your book explaining why you think our trade balance with China is mostly irrelevant. Could you give people a short, but sweet synopsis of that argument?

Adam Smith was the first to point this out in the Wealth of Nations. The common wisdom at the time, mercantilism was the name it went by, was that the way a nation got rich was by exporting things. In return for the exports they’d get gold. And Smith’s going, I’m paraphrasing broadly here, “You can’t eat gold, you can’t kiss gold, and gold won’t keep you warm at night. Gold is just gold.”

He said the exports, that’s real stuff, and you’re giving it away in favor of gold. He said imports are the good thing. Imports are when you’re getting something you like. You’re getting French wine. You’re getting American tobacco. You’re getting furs from Russia, getting whatever they were getting back in those days. He said exports are the way you pay for those imports. So imports are Christmas morning. Exports are January’s Visa bill.

People getting so upset because everything seems to be made in China — I understand it on the level of the jobs have moved overseas. I think it’s probably an important thing to remember that if the jobs hadn’t moved overseas, they probably would have just gone away. So, it’s not like the Japanese have all of our car making jobs.

John Hawkins, “The P.J. O’Rourke Interview”, Grendel Report, 2010-10-11

February 17, 2011

Victor Shih interview on China’s economy

Filed under: China, Economics, Military, Politics — Tags: , , , , — Nicholas @ 07:35

The Browser interviews Victor Shih:

What do people get most wrong when they think of the Chinese economy?

The biggest misperception about China is that it’s a dynamic market economy — it isn’t. It’s a fast-growing, state-dominated economy with some dynamic, private-market aspects. If you look at investment, a main driver of growth, much of it is going to state-owned enterprises (SOEs) or shareholding companies dominated by state entities. Or it’s going directly to government investments carried out at a central or local level. The misperception has abated recently following Richard McGregor’s book on the Chinese Communist Party. People are realising that the party is still behind much of what happens in China.

[. . .]

Your first choice is Yasheng Huang’s Capitalism with Chinese Characteristics. I believe this book successfully demolishes the idea that China is developing a new economic model called ‘market authoritarianism’.

I think Yasheng goes a little too far with some of his claims. But the broad outline is correct. There was a period of healthy organic growth in the 80s, driven by the de facto private sector. Many township and village enterprises were collectives or owned by the local government. But in reality they were private enterprises. This changed in the mid-90s, especially with the adoption of the ‘grasping the large and letting the small go’ policy that circumvented the special interests in the state sector. When Deng Xiaoping was alive, his executive vice premier, Zhu Rongji, wanted to bankrupt or merge many of the smaller state-owned enterprises into larger ones. It was a political tactic to further reform. And it worked.

The problem was that it created these giant, state-owned enterprises. Recent statistics reveal the state sector made a profit of 2 trillion renminbi last year, of which the 122 largest SOEs made 1.35 trillion. They have combined assets of over 10 trillion dollars and have become an enormously resourceful and powerful interest group. Their CEOs have numerous ties with top political leaders and sit on the party’s central committee. Most bank loans, issued bonds and stock-listing proceeds in the system go to these conglomerates. There’s still a private sector but it has been squeezed tremendously, especially in the last two years.

[. . .]

Most investment bankers like to talk things up, but that’s not something we can accuse Carl of doing.

By the late 90s, China’s banks were technically insolvent because the non-performing loans ratio was 40 to 50 per cent. Carl’s still a big fan of Zhu Rongji, the former prime minister. One of Zhu’s greatest achievements was to ‘solve’ the problems in the banking sector by setting up asset-management companies and recapitalising the banks. Today, of course, the banks are still lending very recklessly despite a lot of reform — the formation of credit and risk-management committees, for example. The banks continue to require bailouts and recapitalisation from the Chinese government, which props them up so that they can sell these bank shares to the public in Hong Kong or Shanghai. Carl sees this process as a kind of Ponzi scheme.

December 2, 2009

Defining Obamanomics

Filed under: Economics, Liberty, Politics, USA — Tags: , , — Nicholas @ 08:57

Timothy P. Carney gathers up the tea leaves and provides a useful definition of Obama’s economic philosophy, Obamanomics:

Although robust corporate-government collusion was hardly invented by the current administration, the U.S. has not seen such a consistent practitioner of corporatism in more than half a century. It’s fitting then to name this Big Business-Big Government practice Obamanomics.

Make no mistake — President Bush’s Wall Street bailout was probably America’s biggest dose of corporate socialism since World War II. But President Obama has seen Bush’s $700 billion and raised him another couple trillion — and counting.

The Laws of Obamanomics

Underlying Obamanomics are some basic economic facts and political realities. These are the Four Laws of Obamanomics, paired below with some of the lobbying strategies that exploit these laws.

1) During a legislative debate, whichever business has the best lobbyists is most likely to win the most favorable small print. Similarly, once a bill has passed, the business with the best lawyers and lobbyists will best be able to craft the regulations and learn how to game them. A big business, counting on this fact while lobbying for more government spending or control, is employing The Inside Game.

2) Regulation adds to overhead, and higher overhead crowds out smaller competitors and prevents startups from entering the industry. When corporations, knowing this, lobby for more regulation of their industry, I call this the Overhead Smash.

3) Bigger companies are often saddled by inertia, meaning robust competition is a threat. Adopting regulations that stultify the economy is the equivalent of raising the basketball hoop to twenty feet at half-time: it protects the lead of whichever team is ahead. When Big Business seeks to stultify the economy to hold back smaller competitors, I call it Gumming the Works.

4) Government regulation grants an air of legitimacy to businesses, boosting consumer confidence, often beyond what is warranted. This is The Confidence Game.

The Bush administration was one of the least libertarian in US history, but Barack Obama’s track record so far almost makes me nostalgic for Bush. Almost.

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