The Panic of 2007

Lots of interesting parallels with the Panic of 1907…..

http://www.npr.org/templates/story/story.php?storyId=14004846 

No smoke

On second thought, I take back the previous post.  Other than the picture, there haven’t been any other news annointing Li Yongchao, and there is a simple alternative explanation for the picture, (Hu is from Jiangsu).

White smoke – 17th Party Congress

The Catholic Church signals the selection of a new pope by white smoke, and I think the Communist Party of China has just burned the white smoke and chosen a successor to Hu.

All of the major news outlets in China are running as their headline story, Hu Jintao visiting the Jiangsu delegation, and more interestingly the are running the exact same picture of Hu shaking hands with the members of that delegation. Standing right behind him is governor Li Yuanchao. If you look at the picture, it’s pretty obvious what message is being sent. Hu Jintao shaking hands, and Li Yuanchao is standing right behind him……

Another note on the 17th Party Congress

Just one point that has been missed. Hu in his speech about Taiwan said that Beijing would negotiate with any party under the condition of that there is “one China.” Something about the DPP candidate Frank Hsieh is that he has in the past mentioned his theory of the “one constitutional China” which is that the ROC constitution states that there is one China and while the DPP doesn’t think that this is the way things should be, these are the way things are. That I think is enough for talks to begin if DPP gets elected.

The problem that DPP has right now is that there are two people trying to run the campaign who don’t seem to agree on what to do.

http://news.chinatimes.com/2007Cti/2007Cti-Focus/2007Cti-Focus-Content/0,4518,9610160141+96101609+0+174729+0,00.htm

Here you have Frank Hsieh explicitly not requiring Beijing to drop the insistance on “one China” whereas Chen Shui-Bian insisting that Beijing does.  (Again, you have the problems here of media lensing.  China Times leans toward the KMT so obviously they are going to highlight any discord in the DPP.  I tried to look for these statements in the pro-Green press and I couldn’t find them.  Pro-green has been really quiet, which I think is a good sign being pro-blue.)

As far as why the condition of “one China” is important to Beijing it has to do with the details of international law. Under international law, it is legitimate to use force to prevent internal secession but it is a war crime to use force against another state. One can get into deep arguments as to whether Taiwan is a state or not, but as long as Beijing or anyone else important doesn’t recognize Taiwan as a state, then one can argue that the situation is ambiguous. Once Taiwan does something that clearly indicates that it is a state and Beijing does not object, then Beijing loses any ability to try to argue under international law that the threat of force is state self-defense. As it is, it is some thing you can argue about, but if Beijing says Taiwan is independent then there is nothing to argue about anymore.

It also works the other way. If Taiwan were recognized as under the sovereignty of Beijing (as is Tibet), then arms sales to Taiwan by the United States would be a violation of international law.

This comes up with one difficulty of dealing with law. When you do something legal, you have to understand and respect a different legal theory while at the same time promoting your own. One problem in getting into nationalistic discussions involving international law, is that people tend to regard arguments that support their side as “obviously right” and those that support the other as “obviously wrong.” However, this is bad approach, if you are trying to use the law to get something done. In that case you have to respect and understand other people’s arguments, and in many situations actively work with people who you disagree with in order to come up with a solution to a problem. It’s this sort of thinking that I think does a lot to promote what I think of as “democracy.”

In this particular situation, since I think that talks between the Mainland and Taiwan are a good thing (since they promote economic interaction which I think will contribute in the long run to national unification), part of the challenge is to arrange the situation so that neither side has to compromise their legal theories to talk to each other. This actually is quite a bit more difficult than it sounds since even the act of being publicly seen talking to someone has legal and diplomatic ramifications.

Reply to Howard French

http://www.howardwfrench.com/archives/2007/10/13/letter_from_china_secrets_and_slogans_still_the_rule_in_china/

Howard French asks:

Beijing gives its own people an offer they can’t refuse, for now: trust us to make all the decisions that need making, behind closed doors. We’ll fill you in on an as-needed basis, no questions asked.

(….)

The outside world need show no such patience, however. China’s rising prominence and its growing importance to the rest of the world give rise to a natural sense of uneasiness about a closed system that remains a throwback to the first half of the last century, and the normal response to Beijing’s trust-us proposition is: “Why?”

Because for all it’s faults China has a more or less functional system of government, unlike the some places in the world like…..  I don’t know…… Iraq????

Notes on corruption

http://piaohaoreport.sampasite.com/blog/The-costs-of-corruption.htm

Corruption is a lot more complex than it appears. The tendency is to think that if you have moral upstanding officials that you can save the $86 billion, but corruption usually happens because someone is seriously underpaid. It isn’t even clear that corruption is even economically harmful in all cases. The classic example of “good corruption” is a black market in a centrally planned economy.

Focusing on the “money that you can save” by eliminating corruption is not a good idea, because you’ll usually find that fighting corruption will cost you more money (in the short term) than letting it stay. The negative aspects to corruption are less the direct costs, but rather the bad effect it has on institutions and public trust.

What does happen as an economy develops is things that used to take place under the table start taking place on the table. Instead of showing up with suitcases of cash, you hire lobbyists and make campaign contributions. It isn’t any cheaper, but it does allow one to keep track of which flows are socially productive and which one’s aren’t and to make sure things don’t get out of hand.

In the case of your ATM salesman, I doubt that ending the corruption would save anything in direct costs. For bribes to end, you’d have to have the bank dramatically increase the salary of the manager (and this is one reason Western banks pay a huge amount to managers), and you’d still have to spend a huge amount of time doing sales and marketing. The benefits wouldn’t be in the direct costs, but rather in the indirect costs. The manager is going to make decisions of which is the best ATM based on what is best for the bank rather than who gives him the most money. There is also the social benefit. If it is commonly believed that rich people got their money through honest means, it makes it less likely that people will wait to string them along the wall and shoot them.

It looks really bad….

It looks really bad for democracy promotion when Blackwater falls into a legal loophole and can’t be prosecuted while people seem to be stuck in Guantanamo.

http://www.nytimes.com/2007/10/11/world/middleeast/11legal.html

 http://www.nytimes.com/2007/10/14/us/14gitmo.html

Not short sighted at all….

http://www.rgemonitor.com/content/view/219003/86/
No one I know in business is being short-sighted at all here. Everyone is doing what they are doing with full knowledge of the consequences. If low end manufacturing is moving toward China and India then why lose money by fighting the flow rather than make money encouraging it? The only two reasons that come up are sentimental national loyalties and fears of a protectionist backlash.

The trouble with national loyalties is that while a Swede can reasonably be expected to site factories in Sweden over China, there’s no reason why a Swede would want to site a factory in the United States over China or any reason why an American would want to site a factory in Germany over China. Multi-national corporations are increasingly multi-national which makes arguing for political siting difficult. The Americans on the board of directors might want the company to do things that especially benefit the American economy or American national interest, but that’s not going to convince the Swedes, Italians or Brazilians in the room, and over time you are going to find more and more Chinese and Indians in the board rooms.

The trouble with protectionist backlash is that the fundamental driving forces behind globalization don’t have much to do with trade law. They have to do with the fact that I can instant message someone in Hong Kong at no cost. As long as you can have people talk between Hong Kong and New York City, people will find ways around the barriers.

People in finance and business have seen the writing on the wall, perhaps a bit earlier than people in politics or main street. If world economic and political power is moving from Western Europe and the United States to China and India, then you have lots of people who have seen the writing on the way, and figuring out how to get in good graces with the new people with power.

That’s being realistic and far-sighted, not blind and short sighted……..

Difficult decisions postponed — Good

http://piaohaoreport.sampasite.com/blog/Difficult-decisions-postponed.htm

First of all, I don’t think that who is or is not in the Politburo will make a huge amount of difference as far as economic policy goes. The driving factors for PRC decision making are mostly institutional rather than personal.

Second, when dealing with complex systems like economies, I think it is almost always a bad idea to implement decisive political changes without a lot of discussion and consensus. The reason for this is that arguing about an issue gives you some broader perspective and also makes more much more subtle and sophisticated policy. The need to preserve employment is a valid policy goal, and I’ve found that in arguing about an issue that you often end up with creative solutions. The thing that makes policy tricky is that you never will know what happened if you didn’t undertake a policy. Yes, maybe by boosting unemployment, you end up avoiding the disaster. Then again maybe not. it’s possible that one’s economic principles were wrong in the first place, and by boosting unemployment you just made the problem worse.

Something that is important is that Chinese decision making leaves under the shadow of the Great Leap Forward and the Cultural Revolution. Saying that some massive pain is necessary in order to avoid disaster insure a great future is something people heard before, and are really skeptical of now. Sure your theory says that we might do X to avoid disaster Y, but maybe your theory is wrong.

Finally, in a situation where you have real economic growth, it makes sense to delay difficult decisions until later, because the longer you delay the decision, the more economic growth you have, and the more economic growth you have, and the more options you have for fixing the problem. Also making a difficult decision generally leads to new problems and new difficult decisions.

The entire history of Chinese economic reform since 1978 has been the history of political compromises and delaying difficult decisions for as long as possible. In hindsight, I think that this has been a wise move since there are things we now know about the Chinese economy that we simply did not and could now have known in the past. For one to argue that this time “bold decisive action” is necessary, one has to explain how “this time is different.” And since 1978, there has been no shortage of people arguing that “this time things are different.” I don’t think they are, and the key thing that makes things the same is that we don’t know what is going on.

Reading back since 1978 there have been a whole slew of papers that have argued “China is doomed unless they give this incremental approach to reform, and take bold action now” and in hindsight these papers have been wrong and the course of action suggested by these papers would have been sub-optimal for reasons that were unknown at the time the papers were written. One thing that is humbling is to go back in time, and read papers that describe policy suggestions at a point in time pretending that you know only what people knew them. It’s amazing what people just got wrong, and there is no reason to think that we are going to be less incorrect with our own predictions of the future.

If you go and ask most people in the Chinese bureaucracy what the key to Chinese success has been, I think that the answer is not in particular decisions, but rather in a philosophy and a mode of decision making.

“Seek truth from fact” (which by the way was a phrase used first not by Deng Xiaoping but rather a 17th century Chinese philosopher) means “don’t seek truth from theory” whether the theory was written by Karl Marx, John Maynard Keynes, or Milton Friedman.

Notes on the 17th Party Congress – A 1.5 party system

http://www.nytimes.com/2007/10/05/world/asia/05china.html 

Title is China’s leaders deadlocked over succession.  There is one important aspect of the Chinese Communist Party politics that the article doesn’t mention and that is that the two major factions within the Communist Party have different power bases.  Here is a nice paper on the topic

http://www.carnegieendowment.org/files/Li.pdf

The papers argues that there are two factions within the party.  The “populist” faction which consists of people from the inner provinces, and the “elitist” faction which consists of people from the coastal provinces.  One point that the paper makes is that neither faction has the will or ability to gain absolute power over the other, and both have expertise that the other does not have.   The paper also makes the point that high offices are allocated to these factions with almost mathematical precision.

This puts the latest reports of “deadlock” in another light.  First of all, the infighting really isn’t between Hu and Jiang, its between two different factions with different regional bases of support.  Second, it was probably agreed early one that one of the next generation of leaders would be a “populist” and the other would be an “elitist” and what all of the screaming about is for each side to get some points.