Yglesias and Hessler on China

Matt Yglesias recently visited China and did a series of posts on his impressions of the country.  At one point he mentioned that his commenters where giving him a hard time for being naive about China, but I thought the posts were generally excellent.  Although Yglesias is much more liberal than I am, when Americans look at a very different country like China, their political differences can seem minor and they often have very similar opinions.   Even if you don’t agree with Yglesias, he is very smart and insightful.  This is from one of his posts:

For about half the trip the train runs roughly parallel to a new track construction for what I infer is the Shanghai-Hangzhou Maglev Project that, when completed, will be a damn impressive piece of technology (though arguably not one that meets a rigorous cost-benefit analysis). Relative to European train travel it seemed to me that the Chinese have equalled them in technical and engineering terms but are still a ways behind in terms of the relevant organizational capital to create a process that runs smoothly in terms of actually getting everyone on and off the train, and doing things like checking tickets and selling beverages in a reasonable manner. This seems like a pretty natural consequence of China’s rapid pace of development but it’s a reminder that there are limits to how rapidly an infrastructure buildup can really work given that human capital necessarily takes time to build.

I found the new train stations in Beijing and Tianjin to be far superior to what Yglesias describes in Shanghai (and the Beijing–Tianjin train is also much faster than the one he rode.)  But I do often notice the problems he describes.  When visiting China I am often confronted with situations where the growth of the country (in sheer physical terms) seems to have exceeded the growth in their ability to manage a modern economy.  The good news is that this was even more true in the 1990s.  You’d see grand new projects like hotels with marble lobbies where they made basic errors in installing the plumbing.  But when you think about it, how could it be otherwise?  If you suddenly thrust a billion people into a modern economy, you won’t suddenly have huge number of workers who have the specialized skills required to run that economy.  Physical capital can grow faster than human capital. 

On recent trips I’ve been surprised at how fast China is changing in terms of sophistication, not just scale.  The buildings are of dramatically higher quality than those built in the 1990s.  You still see flaws, but the rapid improvement in quality is a good example of how important on- the-job training is for human capital accumulation.  Of course formal education is also essential, and China is dramatically increasing the numbers that go to college, but it is also clear that the former peasants who do a lot of the construction are much more skilled than even 10 years ago.

BTW, I just read that China is building a 350kph train line from Chongqing to Chengdu.  That’s kind of mind-boggling when you consider the rough terrain.  The track will be 66% tunnels and bridges.  Does this make sense?  My heart says yes but my brain says no.  (I think that is what Matt Yglesias is hinting at above.  He seems to favor these projects on environmental grounds, but understands that some may be too fancy for a country like China.)  And it is a critique that has been forcefully made by Yasheng Huang.  I suppose if you wanted to defend these projects you’d make the following argument:

When China becomes rich these project will pass a cost/benefit analysis.  But they will be too expensive to build.  NYC now wishes it had built a better subway system.  But it is too late.  Construction costs are now too high.  China is building rail lines, subways and airports that are totally inappropriate for a country that is much poorer than Mexico.  But they are highly appropriate for a country twice as rich as Mexico, which is where China will be in 30 years.  I still lean toward the Huang perspective, because the argument I just made ignores the opportunity cost of capital invested in these projects, but I think the alternative view is also defensible.

A few months ago I read Peter Hessler’s book Country Driving.  I would highly recommend this book to anyone (like me) with some knowledge of China, who wants to get deeper into the subject.  It’s full of interesting insights about politics, economics, education, health care, etc.  Although I would guess Hessler’s politics are closer to Yglesias’ than mine, I don’t recall a single argument with which I disagreed.  There are some people who simply have unerringly good judgment, and Hessler is one of them.  (And I’m a very critical reader.)

The book is entertaining as travel writing, but the analysis of how China is being transformed is what really sets it apart.  Only the first third of the book meets one’s expectations (for a colorful travelogue), when Hessler rents a car in Beijing and drives out to western China.  It’s the most humorous but least interesting section of the book.  The rental car company seemed to not care that he violated the contract (which said don’t leave Beijing) or that the car was returned badly dented.  He also took a driver’s ed course in Beijing.  They don’t bother with things like seatbelts and turn signals.  And they take a break from driving lessons to have a few beers during lunch.  Once the class drank so much they had to cancel the afternoon class.

The second section looks at how a small village 30 miles from Beijing was transformed by the economic boom, which really shifted into overdrive around 2003.  There are memorable characters and gripping drama.  He mostly focused on one family; and how their life was utterly transformed (for both better and worse) by the boom.  You can understand why obesity is a bigger problem in China than Japan.  A country with many people who went through the Great Leap Forward is inclined to encourage their children to eat as much as they want (when they can finally afford fattening foods.)

The final section focused on a factory in entrepreneurial Zhejiang province.  One thing that struck me about this section is how different things seem from the ground level, as compared to when you read about “sweatshops” in the news.  It’s not that those stories are wrong; it’s that they miss the complex human interactions that take place between the workers and the bosses.  I remember one 15 year old girl in particular, who obviously had a lot of street smarts and spunk.  The boss didn’t want to hire her, as she was underage (you must be 16 to work in China).  But she talked her way into a job, then got one for her 17 year old sister, and brought their family to live nearby.  BTW, the girls won’t work in certain types of factories as there are rumors that the chemicals cause birth defects. 

What struck me most about the people Hessler met was how at a cultural level the bosses didn’t seem that different from the workers.  The bosses were often former peasants themselves, who had only a rudimentary knowledge of how to run a factory.  They would try to steal workers away from other firms who had learned how to operate a sophisticated German machine for making some simple item (bra rings in this case.)  One uneducated peasant was discovered to have a virtual photographic memory for machines, and was hired away to help recreate the machines for other companies.

When I finished the book I said to myself that in 20 years the 15 year-old girl working in the bra ring factory would probably be more successful than the factory owner.  She seemed much more competent and ambitious, qualities that will be increasingly important as China develops.  And the country is in a constant state of flux, with people rising from peasant to rich businessman almost overnight. 

I should add that China is very complex.  The factories discussed in the book are in a part of China that has a lot of small entrepreneurial businesses.  These are nothing like the huge Foxconn factory in the south of China, which has recently been in the news due to strikes and suicides. 

You can’t generalize across China, and you also can’t generalize over time.  A few years ago it was generally true that China would not allow strikes, that they would brutally suppress them.  If things get out of hand they could easily do the same in the future.  But for the moment the Chinese government has decided to allow workers to press for higher wages.  Of course wages have been rising rapidly for many years, but if China follows the pattern of South Korea and Taiwan, then you can expect especially rapid wage increases while China is a middle income country—i.e. over the next 2 or 3 decades.

When I read Suetonius’s Twelve Caesars, my first reaction was; “Those Romans were crazy.”  Then I recalled that life expectancies were really low back then, and I realized that Roman society wasn’t nuts, it’s exactly what you’d expect of a country where typical person is a teenager.  Sometimes when reading about China or visiting China you find yourself thinking; ”Those Chinese are crazy.”  No, they aren’t crazy; it’s what you’d expect if you thrust nearly a billion peasants from primitive farms into sophisticated cities almost overnight.  Think of things that way and many bizarre sights suddenly make more sense.

The world will age dramatically over the next few decades (one of the only predictions that we can make with much confidence.)  The world of 2040 will be a world dominated by old people.  Now we just have to figure out what that means.

Update:  Brett pointed out that my Roman teenager comment was misleading.  He’s right, this link implies the median age was about 26.  Scroll down to graph two (the black bars) to get a picture of the distribution of ages.  But it was a young society.


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9 Responses to “Yglesias and Hessler on China”

  1. Gravatar of spencer spencer
    11. June 2010 at 10:08

    They will have extremely rapid wage increases, but it is important to point out that given the unrealized potential for productivity growth such rapid wage increases probably will not be inflationary.

  2. Gravatar of Brett Brett
    11. June 2010 at 10:49

    Then I recalled that life expectancies were really low back then, and I realized that Roman society wasn’t nuts, it’s exactly what you’d expect of a country where typical person is a teenager.

    I think those life expectancies are more an artifact of high early childhood mortality rates, as well as much higher risk of death due to complications in childbirth for women. At least from what I’ve read, if you survived your first five years of life, you had a good chance of living into your fifties (and often sixties) as long as disease, injury, and war didn’t get you.

    The bosses were often former peasants themselves, who had only a rudimentary knowledge of how to run a factory.

    That’s one of the reasons why most of the private sector factories were partnerships with foreign firms. If you don’t have the expertise yourself, you have to import it, at least for a while.

  3. Gravatar of StatsGuy StatsGuy
    11. June 2010 at 12:46

    “When China becomes rich these project will pass a cost/benefit analysis. But they will be too expensive to build. NYC now wishes it had built a better subway system. But it is too late. Construction costs are now too high.”

    Such is the frailty of cost benefit analysis that uses 7-8% real discount rates (like the executive order mandated rates that OMB and OIRA used in the mid naughties). While I’m not arguing for maglev per se, extreme long term investments with slow payouts are the types of things that markets just don’t do that well, and often do not appear to make sense with artificially high real discount rates. Remember what China’s age profile will look like in 2040. Would they rather have big houses that are expensive to maintain like us, or small efficient houses and good transportation?

  4. Gravatar of scott sumner scott sumner
    12. June 2010 at 06:08

    spencer, Yes, that’s right. But only if China appreciates the yuan over time to reflect what is called the “Balassa-Samuelson effect.” (This means that productivity rises much faster in tradable manufactured goods than in services.) I think they will do that, and thus I think they will keep inflation at fairly low levels (averaging well under 5%)

    Brett. You’re right, the median age was nearly 26. I added an update at the end.

    The region of China covered in the book doesn’t have as many foreign partnerships. The firms he covered were purely domestic. But you are right that there is heavy foreign involvement in many areas, which helps China grow fast. Of course this also transfers massive amounts of knowledge from the foreigners to the locals– which is precisely the point.

    Ironically, Taiwan has greatly aided China’s development.

    Statsguy, Those are good points about the discount rate. But just to be fair to the other side, much of what Huang is objecting to is the inequality. The development strategy is keeping the rural population poorer than a more free market strategy (like what China had in the 1980s, when the rural areas grew fastest) and this means part of the cost of those trains is that the rural population moves out of poverty at a slower rates than a policy regime that gave them all the rights that urban residents have.

    In other posts some commenters have pointed out that Singapore relies heavily on cheap foreign labor who have no right to stay in Singapore if they get sick. You could say the same about rural labor in China that build the wonderful urban infrastructure.

    All this isn’t to disagree with you point about discount rates, which is a good one, but merely to indicate that the opportunity cost is much more than just a few less big houses.

    My hunch is that the optimal strategy would look “messier” to foreigners.

  5. Gravatar of Indy Indy
    12. June 2010 at 11:50

    I’ve read something in line with the “building trains, not for today, but for a future, wealthier China where the cost-benefit analysis will make sense” line of thought, but from a different perspective.

    As you may know, China is the world’s largest user of Primary Energy and second largest generator of electricity. Most of the energy comes from their geographically-concentrated domestic coal supply, the bulk of which (similarly to the US) must be transported by rail across the country to power plants and industrial centers.

    China’s massive coal use (half the world total) has doubled in under 7 years, but the freight-rail capacity has not and
    there is some concern about future delivery capability. (Platts is a good reference for this).

    Rail infrastructure is an inherently difficult kind of capital to expand – especially in imposing geography, and even a government like China’s doesn’t have an infinite capacity to move people and buildings around overnight and at will in order to make room for more rail in very-densely populated areas.

    Also, much of China’s rail is still multiple-use, where coal must currently compete with human travelers for rail space and time.

    So what China may be up to is essentially the Europeanization of their rail service – building two semi-independent networks, one for people (straighter, high-speed, with firm departure and arrival times) and one for freight (with railside warehousing, space-available opportunity loading, more flexible movement schedules, etc…)

    So, essentially, they may not really be “expanding” their rail capability so much as they are building an aircraft alternative, high-speed human rail network, from scratch – and using the space and time made available on the existing infrastructure to greatly expand their coal movement capability as the “free lunch”.

    Otherwise, they would have still have had to massively expanded their rail capacity, but people would be moving slower on tracks made for freight, and coal trucks would have to wait for people (who must travel on time) to get out of the way, even if loading is done and there’s some open track available.

  6. Gravatar of The Bellows » Speculative Building The Bellows » Speculative Building
    13. June 2010 at 05:16

    [...] thought this was a very interesting comment by Scott Sumner: I just read that China is building a 350kph train line from Chongqing to Chengdu.  That’s kind [...]

  7. Gravatar of j j
    13. June 2010 at 09:20

    As you observed, China is over-investing in infrastructure (relative to its current and foreseeable needs). I think that the reason is that they are generating too much savings, and there is nowhere to invest it.

  8. Gravatar of scott sumner scott sumner
    13. June 2010 at 10:05

    Those are really good points. In other words even if they didn’t build the high speed rail, they would have needed to build more rail lines for their freight trains. This frees up extra lines for freight trains. I suppose that one could argue “given they needed to build these new lines anyway. why not build state-of-the-art?”

  9. Gravatar of scott sumner scott sumner
    13. June 2010 at 10:08

    j, They should give some of that savings to the public, and let them invest (or consume) where they think the returns are highest.

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