Twofish's Blog

July 29, 2007

Minxin Pei’s Reflex

Filed under: china — twofish @ 5:05 pm

Minxin Pei has written the same article over and over again over the last 15 years.

1) Problem X is due to China’s bad Leninist party-state (i.e. BAD) government structure

2) To solve problem X,  China has to move to a perfect *GOOD* government.

3) Without solving problem X, China is doomed.

There are problems with this reflex

1) Something that Minxin Pei never seems to reflect on is that problem X eventually appears to get solved without dismantling the Chinese state.  Problem X in the past has been economic growth, the bad banks, rural land-sales.  Pei seems to think that the problem with bad food is *unsolvable* within the current Chinese system, but he has said that about all sorts of other problems, that turn out to be solvable.

2) The other thing that is missing is that Pei seems to lack details.  All you have to do is to snap your fingers, China becomes democratic, and the problems are solved.  There isn’t any thought about the real trade offs and difficulties involved.

3) Everything is black and white.  Either the press is free or it isn’t.  There isn’t any notion that you have intermediate states between total freedom and total repression, and hence no notion of how much you have to loosen up the system.

4) Finally, what happens if you *can’t* change everything overnight?  Pei seems to think if we can’t institute democracy in China tomorrow, we are doomed and we should just give up.  Everything we can do that doesn’t involve overthrowing the government and changing everything is a half-measure, which isn’t worth trying.

Personally, I tend to distrust people with magic formulas to solve all the problems of the world.  The trouble with people who believe in magic formulas is that they tend to be comparing cars which run on diesel with those that run on magic.  When I hear Pei talk, it’s like hearing someone say that the solution to fixing a car is to wait for the magic car to come around the corner, and not to worry about trying to fix things under the current system.

What I think will happen is that the Communist Party will solve the problem with food safety.  Food safety is the type of thing that is easy to do within a bureaucracy.  But no problem, I’m sure that two years from now, there will be a new problem (water pollution, old age pensions) and Pei will take whatever that problem is, and write another essay which looks exactly the same as the essay he has written for the last 15 years.

Comments on Brad DeLong’s capsule history of Chinese reform

Filed under: china, economics — twofish @ 4:19 am

Brad DeLong wrote a capsule history of Chinese economic reform, with some points that I disagree with, although whether those disagreements affect the main conclusions, I’m not sure.   The first paragraph talks about corruption between 1955 and 1978 as the main reason that China was poor, and I disagree with that.  China today is far more corrupt today than in 1960.  That’s not to say that anyone wants to go back to 1960, since it is better to have a functional corrupt economy run by more or less sane people than a non-corrupt economic disaster run by a homicidal maniac, but it does make the point that in making policy decisions, you have to make tradeoffs.  It also means that China’s economic problems in the 1960’s were not due to corruption, but rather I think due to lack of political stability, and a command economy that was incapable of making basic economic calculations.

In a market economy, you make money or you lose money.  If you lose enough money you go out of business.  In a command economy, the government tells you to accept X tons of steel to make Y toasters.  The workers get benefits (i.e. housing, health care, etc.) from the factory.  The concept of “making money” or “losing money” doesn’t enter into any of this.  The other interesting thing about the system is how corruption happens.  Since there is no money involved here, corruption doesn’t take the form of cash bribes.  Instead, you trade goods and information and favors.  I can know the people that can get you a nice apartment if you do something nice for me.  One thing about market economies is that they make corruption a lot easier (here is cash) because they make *all* economic transactions simpler.

Hence Deng Xiaoping kept China closed in the early years, and used tax revenue from the productive countryside to keep the Soviet-style industrial sector running–value-subtracting as it was–while another, alternative industrial base was gradually built up, a market-oriented sector in which local party bosses had an important and very profitable stake.

This isn’t quite accurate.  The way that Chinese economic reform worked in the early years was that there were to parallel economies.  The state command economy and the market economy.  The command economy continued to function much as it had before, and basically the state was able to keep it functioning using price controls on inputs and quotas on outputs.  One part of the system was that the market economy *wasn’t* used to fund the command economy, and certainly not through taxes. Even though the industries were “value-destroying” the system of command economies hid this fact.

Starting in the early 1980’s, industries no longer received direct state subsidies.  During the 1980’s, the system gradually broke down as more and more inputs were market determined.  The basic problem with a system of “dual prices” is that there is tremendous and illegal profits to be made by getting things at the state price and selling at the market price.  Over time, more and more prices became market prices, the unprofitable nature of the state owned enterprises became more obvious.  Since they couldn’t get government subsidies, they got loans from banks, which went bad, and which lead to the bad loan situation which has only recently been fixed.  The other thing is that most of these loans *didn’t* go to corrupt communist party bosses.  Remember all of those workers that worked in the factories that got social benefits from working at the factory?

A lot of human resources and infrastructural capital was wasted becuase Deng Xiaoping did not dare risk the political consequences of the economic process of shifting resources out of the old Soviet-style industrial sector.

Two points.  One problem is talking about the “Soviet-style” command economy.  The Chinese command economy was different from the Soviet in many ways.  Soviet state-owned enterprises were largely organized along industrial lines from Moscow, whereas Chinese state-owned enterprises were more often controlled by local governments.  Soviet SOE’s were much larger, whereas most Chinese SOE’s were tiny.  Chinese SOE’s were responsible for a lot of social welfare and government control functions that I don’t think Soviet SOE’s were.  I have no idea whether these differences were relevant or not, but that makes it even more important to realize that there are differences.

Immediately opening up the industrial sector to international trade, however, would have led to (a) a rapid rise in imports of foreign-manufactured industrial goods, (b) a rapid rise in exports of agricultural products to pay for those imports, (c) mass urban unemployment as the value-subtracting Soviet-style heavy industries found that they could not compete and closed, and (d) riots and revolution as the now-unemployed urban manufacturing workers overthrew the government.

Actually it seems to me that China *did* open up the industrial sector to international trade and there *was* a rapid rise in imports of foreign-manufactured goods.  What kept (b) and (c) from happening was that China kept a very tight control over foreign exchange, and the fact that command economy was living in its own economic world.  The other thing was that the SOE’s were not really in competion with foreign manufactured goods, and foreign trade allowed for people to use their bits of otherwise useless color paper (i.e. money) to satisfy consumer demands.

Xiaoping’s power and status as paramount leader, and the wisdom exercised by him and his team, and their goal of making the Chinese rich. Dani Rodrik’s praise of policies that “protected employment while industrial capabilities were being built up” strikes an echo of Juan Peron’s development strategy in Argentina in 1950–keep the descamisados employed and the price of beef low. It was a strategy that sounded good to many at the time (including Raul Prebisch). It was was justified in economic terms by assertions about market failures and the second best. And it turned into a complete and total disaster.

Something that is important is that social systems are complex and there are consequences that people don’t forsee.  I doubt that anyone in 1978 really intended for China to transition completely to a market economy.  The market economy was seen by many as a “supplement” to the command economy, and it was only over time that it overtook it.  I doubt that Deng Xiaoping intended the market to take over, but the good thing was that once it started to happen and it seemed to work, he didn’t try to stop it.

One thing that is important to distinguish here are the two elements of capitalism.  Private ownership and market allocation of resources.  In the case of China, the market has become the dominant economic system while large amounts of the economy are still state owned.

One final note, DeLong is the second person I talked to recently who has had this idea that China has been in constant economic decline since the Song dynasty.  I added this note to DeLong’s blog about some “historical speculation” that I’d like to talk about more later…..

Something that is now becoming a consensus among Chinese economic historians is that China’s economic problems really didn’t start until the late-18th century. Kenneth Pommeranz has written an entire book describing China in 1750 and coming to the conclusion that Europe didn’t really take off until the early 19th century.

My assessment is that China’s problems through most of the 19th and 20th centuries was due to the Yongzheng Emperor’s failure to develop a centralized taxation system in contrast with England’s successful efforts to do so. No central taxes, no central armies. No central armies -> Warlords and civil war.

My theory as to *why* people talk about a decline of China after the Song Dynasty is because the Song Dynasty Buddhism was the “bad guy” among lots of mid-Qing intellectuals, and this eventually got transmitted to Western theories of economic growth in the 1920’s. It wasn’t until the 1970’s that people really started looking at the data, and the idea of a Chinese economic decline starting in the Song dynasty isn’t supported at all.

Notes on the Obama/Clinton and China

Filed under: china, economics — twofish @ 2:50 am / In depth – Clinton and Obama back China crackdown

Actually if you look at the bills that Clinton and Obama are actually supporting, they really won’t have a huge effect on China trade.  The anti-dumping measures that the bill talks about are hard to invoke, and China’s actions are clearly within WTO rules so bring a trade case seems to be political theater more than anything else.

Baucus and Grassley are generally pro-China trade because they come from agricultural areas with a lot of Chinese exports.  Graham and Schumer care mainly about textile exports  None of them are too interested in bring Chinese trade to a halt.  What they all want to do is to be able to apply some pressure to the Chinese government to benefit their districts, and the problem with the trade measures on the books right now is that they are basically nuclear bombs, which can’t be credibly exercised.  The main thing that the Baucus/Grassley bills do is to give light pressure tools.

There are a number of reasons why I don’t think Chinese trade is not going to be a huge issue in 2008:

1) There are a lot of beneficiaries of Chinese trade in both parties.  The financial district is centered in New York which is a solid blue state.  In the labor union movement, one of the strongest unions is the longshoreman’s union which is booming because of Chinese trade.

2) With some exceptions, most of the trade issues are not China specific.  If you decrease Chinese production of auto parts, the factories are going to move to Mexico.  This means that for the purpose of keeping people employed, bashing China is useless except in specific industries where China has a major advantage (textiles).

3) Most people don’t care about the value of the RMB or the overall trade surplus.  They care about their jobs.  If you put things that help their jobs, the all of the concern about the RMB or the overall trade surplus disappears.

July 15, 2007

So what is a rising superpower supposed to look like?

Filed under: china, economics — twofish @ 3:01 pm

Question I asked at “China Law Blog”

Let me ask the question “What is a rising superpower *supposed* to look like?” If China is “strange” what is the “norm”?  Since there is one superpower in the world, we can look at the history of the United States, and looking at US history, China looks much less “strange.”

The reason I tend to be optimistic about China is that if you take every single problem that China has, it sounds a lot like the United States in 1890.  Environmental degradation.  Poor food.  Social class divisions.  Sweatshops.  Etc. Etc.  Even the corrupt, authoritarian governments were typical of the United States in the 1890’s (at the national level you had a two party system, but most state and local governments were one-party states in the hands of a corrupt political machines.  Try being a Republican in Mississippi in 1890, and heaven help you if your skin had a high melanlin content.)

The other reason I’m optimistic is that China has IMHO already done the hard part which was to convert a completely dysfunctional centrally planned economy and turn it into a partially functional market driven one.

July 14, 2007

A Trillion Dollars really isn’t that much money

Filed under: china, economics, finance — twofish @ 5:36 pm

One big of data that suggests to me that the US-China trade deficits and foreign exchange acculmlation isn’t unsustainable.  The foreign exchange reserves for the PRC is about $1.2 trillion and the trade deficit is about $200 billion/year.  This is about the size and revenue of one of the major banks in the United States.  The State Financial Investment Corporation that the People’s Bank of China will create next year isn’t a particularly large financial institution by global standards.

July 9, 2007

Working for Trans-United Global MegaCorp

Filed under: new york city — twofish @ 1:24 am

I’m working in New York, with my new job for Trans-United Global MegaCorp, a huge multi-national corporation.  One of the things that I’ve found missing from the internet are voices like mine that go to work for a big multi-national corporation, and actually like it.  Part of the problem is that big corporations really don’t like it if you talk too much about them, which leaves the field of internet-discourse to people who think multi-nationals are the scourge of the earth.  This is unfortunately, because there really are a lot of good things that happen in multi-national corporations, and that point of view needs to be stated somewhere.

The main reason I’m working for Trans-United is that I actually believe that what I’m doing is the most useful thing that I can to for the world.  Trans-United sees China as a major opportunity, and that is one reason I’m interested in them, and they are interested in me.  I’m working with smart, ethical people, and looking on the corporate intranet, I can actually see the world changing.  The one thing that large bureaucracies don’t like is if you talk too much, even if what you have to say is largely positive.  For very good legal reasons, the company saves all e-mail going out, and there is a corporate firewall that filters out some websites.  I can’t mention the real name of Trans-United, and I’m a little stand off-ish about mentioning my real name.
The nice thing about Trans-United is that they are profit focused.  They see me and judge me based on how much money they think I can make for them.  That’s fine with me.  Looking around, you see people from all over the world.  They really don’t care what you look like, what language you speak, what citizenship you are, or who you sleep with.  It’s all about the money.  The money is nice, but I wouldn’t be working there if I didn’t think that there wasn’t something else besides the money.  There is the challenge, and the idea that I’m really doing some good in the world.

Henry French

Filed under: china — twofish @ 1:04 am

Interesting article, but I have suspicions about the “frame”

One of the questions whenever you read the article is what is the article implying but not stating.  I get the sense that French is implying that there was a evil government conspiracy to direct anger at foreign countries but thanks to the fearless small challengers to the the government, this conspiracy failed.  I somehow think that was is going on is more complex and interesting.  Too bad we won’t read it anywhere.

Chen’s interview in the Washington Post

Filed under: china, taiwan — twofish @ 12:48 am

A pretty good interview which illustrates what Chen Shui-Bian thinks

Personally, I think it is very illustrative of how out of touch he is with the various trends that are going on in the world.  He seems to have an intense desire to make Taiwan a “normal nation” which ignores that fact that the world is becoming one in which there are no “normal nations” and that places that do the best are those with contradictory, confused inclusive identities.  He seems to define “Taiwanese” as “not being Chinese” which is hardly a way of creating an inclusive unified identity on Taiwan.  There is no doubt that Taiwan-centered has become more important in the 1990’s and in the last eight years, but it is far from clear that Taiwan-is-not-Chinese thinking has become more prevalent since 2001.

Also, his poll numbers confuse two different polls.  Questions on national identity are very sensitive to how you ask them, and the poll series that I referenced earlier show no major shifts since 2001.  There was a recent poll that showed a huge amount of Taiwanese-not-Chineseness, but I suspect that this was the result of asking “who would you support in a war” along with the question.

Also one thing that has come out in the polls is that people in Taiwan don’t consider national identity to be the most important issue, the economy tops that.

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