Archive for the Category China


In the long run we’re all rich, free and peaceful

It’s intellectually fashionable to be pessimistic, so let me push back with one of my occasional contrarian posts.  I’ll try to defend Fukuyama’s “End of History” hypothesis one more time.  Let’s start with peaceful:

1. A new study shows that the Kellogg-Briand Pact (1928), which outlawed war, has been highly effective. If you took history in high school, you might recall your teacher make fun of the touching naiveté associated with this utopian treaty.  Well it looks like Kellogg and Briand might get the last laugh.  First a bit of background.  The act was intended to change the rules of war.  Previously, countries were allowed to keep territory they conquered.  It was wars of aggression that were outlawed, not civil wars, not wars to prevent proliferation of WMD, not wars aimed at preventing genocide.  And wars of conquest (which were common throughout almost all of human history), have almost stopped happening (with Russia’s recent acquisition of the Crimea a notable exception, and even that was not particularly violent.)

So the world is getting more peaceful.

2.  It’s fashionable to say that freedom is a western concept, and Fukuyama’s prediction doesn’t apply to the rest of the world.  People point to China’s one child policy, or Saudi Arabia’s unwillingness to let women drive.  I’m with Zhou En Lai; it’s too soon to say.  China recently abolished its one child policy, and today Saudi Arabia granted women the right to drive.  Maybe progress will stop and no more freedoms will be achieved in the non-Western world.  But my hunch is that modern technology will gradually make the world more liberal, by beaming images of successful western societies to everyone who has a smart phone.

So the world will get freer, even if the past decade has been a mixed bag.

3.  Here’s Tyler Cowen expressing pessimism about economic progress in poorer areas:

Increasingly, it seems that many parts of the Western world might never “catch up,” including Greece, southern Italy, much of the Balkans and much of Latin America, in addition to Puerto Rico. One of the pleasing features of the 1990s, in retrospect a delusion, was the notion that proper policy and good multilateral institutions would bring most of the world into consistent, steady-state growth at a higher rate than what the wealthier countries could manage.

I agree with most of what Tyler said about Puerto Rico, including his view that’s it’s future currently looks quite bleak.  But I find this paragraph to be far too pessimistic, and not even consistent with the data:

a.  Since 2000, the developing world has grown faster than the rich world.  Yes, that’s partly China, but it also includes lots of other populous Asian countries.  And Asia is perhaps 70% of the developing world.  Parts of Africa have also done pretty well since 2000.  But what makes this claim especially dubious is his reference to “proper policy”.  Most of the developing world rates far below the US in economic freedom (including freedom from corruption).  And those few countries that score high on the good policy scale (such as Chile and Estonia) have had a pretty good couple of decades.  If you want an African example, compare the growth rate of Botswana and Zimbabwe in recent decades.

b.  Yes, there are good reasons (including culture) to be pessimistic about the near term prospects of Greece and southern Italy.  But in 1970 there were good reasons (including culture) to be pessimistic about Ireland.  You might say that the Irish were always capable of much better, as evidenced by their success in America.  But Greeks and southern Italians have also been quite successful in America.  You might argue that corruption will keep Greece and southern Italy poor.  Yes, but for how long?  China is much more corrupt than Singapore, and much poorer.  But Singapore is also ethnically Chinese, and rooted out corruption through a determined effort of the government.  Corruption is not baked into the genes of the Chinese people.  Might the Chinese government be able to root out corruption? I don’t know, but the current leadership seems to be making an effort.

My point here is that “never” is a really long time.  If Tyler had said that Greece and southern Italy would remain relatively poor for another 80 years, I’d have no reason to disagree.  But another 80,000 years?  Who knows?

In the early 1940s the Kellogg-Briand Pact look like a pathetic failure.  Now it looks like a success.  Yesterday, it looked like Saudi women would remain oppressed.  Today there seems to be hope that they might start achieving more equality.  The arrow of history is still pointing toward more wealth, freedom and peace.  The real risk we face is not stagnation, but rather a sudden crisis that catches us unaware, like terrorists getting a WMD.

HT:  Scott Alexander, who also linked to this mind-boggling article:

The number one food exporter in the world is the United States. The number two food exporter in the world is the Netherlands, 1/270th the size and mostly urban.

Update:  Maybe not–check out comment section.

Poverty does not cause social problems (and the cream rises to the top)

Pity poor New Hampshire:

Manchester is at the heart of New Hampshire‘s opioid epidemic, which has first responders, lawmakers and health care administrators scrambling for solutions before the situation spirals further out of control.

Though other New England states such as Vermont and Maine have seen spikes in opioid-related deaths, the granite state ranks No. 2 in the nation, behind West Virginia, for the number of opioid-related deaths relative to its population. It ranks No. 1, though, for fentanyl-related deaths per capita.

So what makes New Hampshire so special?  Why so many deaths of despair? Perhaps because it has arguably the most successful economy in the entire world, with extremely high income, high education and extremely low rates of poverty:

Pop quiz:

Which U.S. state had the highest median income in 2016? . . .

New Hampshire.

The Granite State’s median household income last year was a whopping $76,260, nearly 30 percent higher than the national median of $59,039, according to the Census. . . .

One of the chief drivers of New Hampshire’s high median income is its poverty rate, which is the lowest in the nation. Only 6.9 percent of the state’s residents live below the poverty line, compared with a national average of 13.7 percent (in Mississippi nearly 21 percent of people live in poverty).

New Hampshire’s workforce is also among the best-educated in the country, according to previously released census data. Better-educated workers tend to make more money.

New Hampshire also has a very low level of inequality.

Of course it’s silly to argue that affluence causes addiction—correlation doesn’t prove causation.  But it’s equally silly to suggest that people in West Virginia become drug addicts because they are poor.  There are a billion poor people (by American standards) in China, and very few are heroin addicts.

Liu Qiangdong is one example of a Chinese poor person who did not become a heroin addict:

Liu Qiangdong is making up for lost time — and with vertiginous speed.

Again, like so many of China’s new titans, Liu’s family was so poor that until he went to university aged 18 he only tasted meat once or twice a year. His family, peasant farmers in arid coal country, 700km south of Beijing, had a few rice fields but they also had to hand over the crop to the government; these were the dire days after the Cultural Revolution. “From June until September we were able to eat corn — cornmeal porridge for breakfast, corn pancakes for lunch and dry cornbread for dinner; cornbread so tough it made your throat bleed,” he tells me. “The other eight months we ate boiled sweet potato for breakfast, sweet potato pancake for lunch and dried sweet potato for dinner.”

Now he is 43 and worth nearly $11bn.

Yes, that’s anecdotal, but consider this:

Virtually every Chinese millionaire or billionaire is self-made because capitalist reforms to the centrally planned communist economy only began in the early 1980s and did not really take off until the 1990s. But the modern super-wealthy often turn out to be descended from an earlier capitalist class. Richard [Liu] is no exception. Before the 1949 revolution his family were wealthy shipowners who transported goods along the Yangtze river and the ancient imperial canal from Beijing in the north to Hangzhou in the south. They lost everything when the communists took over and were forcibly resettled at least twice. One academic survey found more than 80 per cent of Chinese “elites” (those with income at least 12 times higher than the average in their area) are descended from the pre-1949 elite. Richard puts this down to “family culture”.

“My parents and grandparents taught us a lot — not Chinese or maths but a sense of values, of how you should be and how you should treat others,” he says. They also drilled into him the knowledge they had once been very rich but everything had been taken away — a lesson all too relevant even now.

You often hear a debate about what would happen if everyone suddenly lost everything, and the entire population was equally poor.  Liberals claim that people like Bill Gates become rich because they come from upper class families, with all sorts of advantages.  Conservatives claim that even if income were made 100% equal, within a few years the rich would regain their position and the poor would fall back.  Mao’s China provided a near perfect test of this theory, and we now know that the conservatives are right about this issue.  The cream does rise to the top.

Of course this is not true in every single case.  Sometimes highly talented people have bad luck and end up homeless.  Occasionally an idiot will win $100 million in a lottery, or maybe even get elected President.  But on average the more talented, more ambitious and harder working people will tend to succeed.  Being born white in America does give a person some advantages, but that doesn’t really explain very much.  Certainly not income gaps between American whites and Asians, or between Christians and Jews, or between immigrant blacks and American born blacks, or between Korean-Americans and Laotian-Americans, etc., etc.

PS.  RIP Cassini.  This is my all-time favorite NYT article, and it contains almost nothing but pictures and a video. In my view, Saturn (and her moons) is the most beautiful object in the Solar System.  This is also worth examining.

PPS.  RIP Harry Dean Stanton.

Is Trump a Chinese mole?

The WaPo is reporting that Vietnam is moving toward a pro-China position, out of desperation:

Vietnam’s fierce rivalry with China often exceeds any lingering resentment against the United States, which is now seen as a crucial counterweight to Beijing’s ambitions.

Yet the suspending of the Repsol drilling project has provided wary Vietnamese with a reason to believe their government is capitulating behind the scenes. Neither the Spanish company nor the Vietnamese government has offered an explanation for suspending offshore activities.

“There are so many rumors swirling around Repsol, as there always are when it comes to China and Vietnam. But there doesn’t appear to be any reason to do what they did other than pressure from Beijing,” said a prominent member of the international business community who frequently interacts with officials representing the three countries involved, who spoke on the condition of anonymity because he is not authorized to publicly speak about political matters.

If Vietnam did privately back down, he said, it has not been left with much choice since President Trump took office. “The U.S. really left Vietnam at the altar when it canceled TPP. What are they supposed to do?” he asked, referring to the Trans-Pacific Partnership, the trade deal that included Vietnam and explicitly excluded China. Trump had slammed the deal as a job-killer during the presidential campaign, and he withdrew from the pact just days after taking office.

At least we have a reliable ally in South Korea.  But for how much longer?  Here’s the Guardian:

Donald Trump has asked aides to prepare for US withdrawal from a free trade agreement with South Korea, it was reported on Saturday – a potentially stunning development at a time of tense confrontation with North Korea.

. . .

The decision is not final yet, and several leading members of the Trump administration are seeking to dissuade the president, according to the Washington Post, but the report added “the internal preparations for terminating the deal are far along and the formal withdrawal process could begin as soon as this coming week.”

Withdrawal from the 2007 trade deal (known as Korus) with one of Washington’s closest allies in Asia would be only the latest of a series of zig-zagging interventions by Trump amid the looming nuclear missile crisis that have caused bewilderment and alarm in the region.

.  .  .  withdrawal would be in line with campaign promises to tear up trade deals Trump has presented as disadvantageous to US workers. He has already ruled out joining the Trans-Pacific Partnership (TPP) . . .  as well as the Transatlantic Trade and Investment Partnership with Europe, and he is threatening to pull out of the North American Free Trade Agreement (Nafta).

Ian Bremmer, the president of the Eurasia Group, a political risk research and consulting firm, said that if Trump went ahead and withdrew from the agreement, “it would be a significant loss of US influence in Asia – nearly on par with withdrawal from the TPP”. . . .

“China would be the big winner, with [South] Korean president Moon [Jae-in] harder pressed to maintain present levels of security cooperation with the United States. If China is your key economic partner, there’s a lot less reason to listen to Washington.”

Putin’s gamble backfired.  Once it became clear that the Russians tried to influence the election, Congress turned against the Kremlin. The sanctions will stay in place.   China’s turned out to be the big winner from Trump’s stupidity.  Steve Bannon also looks like a fool, as the Trump/Bannon policy regime is delivering exactly the sort of Chinese hegemony that Bannon warned us about.

PS.  Perhaps Trump will put tariffs on Chinese steel, thereby assuring that Chinese manufacturers have a cost advantage over American companies that rely on our high priced steel.  Or maybe he’ll start a war with N. Korea.  The possibilities are endless when you are dealing with a mentally unstable president.

Why China will democratize

Tyler Cowen has a new Bloomberg article discussing why China may never democratize:

The argument that China will become democratic rested on observations of Japan, Taiwan and South Korea, all nearby countries that became democratic or sustained a democracy once they were sufficiently wealthy. The middle classes in these countries wanted accountable government, and ultimately the autocracies were willing to step aside and support democratic transitions, albeit with the Japanese path being more closely linked to the American postwar settlement and occupation. Much of Eastern Europe and Latin America became democratic too, and so it seemed plausible that China might be next in line.

Conversely, there are two powerful arguments that China will not become democratic. First, China never has been democratic in thousands of years of history, and perhaps that history simply will continue.

Second, the middle to upper middle class is still a minority in China, and will stay so for a long time. A smaller country can build up in percentage terms a larger middle class, by exporting, than can a very large and populous country. There’s just not enough demand in global markets to elevate all or even most of the Chinese people, and so Chinese inequality likely will stay high, to the detriment of democratic forces.

In essence, many of the wealthier Chinese trust the Communist Party to look after their interests more than they trust elections.

Both of these arguments are wrong, although the final sentence I quoted is entirely accurate.  Many affluent urban Chinese do not support democracy because they worry that it would turn the country over to the rural poor.  Today.

Nonetheless, both of Tyler’s arguments are wrong:

1.  The fact that China has thousands of years of non-democracy carries exactly zero weight, because all countries had thousands of years of non-democracy before becoming democratic. It’s simply not a “powerful argument”—it carries no weight. So the fact that East Asia is increasingly democratic is very relevant.  Those East Asian democracies also had thousands of years of non-democracy before first becoming democratic.

2.  And it’s true that the middle and upper middle class are still a minority in China, but it is not true that things will stay that way for a very long time. China will be mostly middle class by 2050. A big issue in China today is the fact that working class wages are rising faster than professional white collar wages, and indeed are often higher. College grads complain that factory workers and construction workers make more than they do.  And all wages are rising very fast.

In my view the relevant odds are as follows:

1.  Odds of China becoming democratic:  95%

2.  Odds of China never becoming democratic, and most of the rest of the democratic world reverting to authoritarianism:  4.99%

3.  Odds of China never becoming democratic, but most of the rest of the developed world staying democratic:  0.01%

So if China really never does become democratic, the real story is that democracy will fade away in the rest of the world.  It’s simply not plausible that we’d continue on for hundreds of thousands of years with China non-democratic and South Korea, Japan and Taiwan democratic.  That’s not how things work.  Something has to give.

You can’t be pessimistic about China and optimistic about the world, at least in the very long run.

PS.  Here’s China Daily, telling white collar workers to stop complaining that blue collar workers make more than they do:

Manual workers deserve the high wages they get

DATA ON AN employment exchange website show the average monthly income of construction workers in Chengdu, Sichuan province, was 8,300 yuan ($1,210) last year, with skilled bar benders, bricklayers, carpenters and painters earning more than 10,000 yuan. In contrast, the average monthly salary of clerks and secretaries was about 3,800 yuan. An article on comments:

The huge income gap between blue-collar and white-collar workers may be surprising for many people. But manual workers’ incomes have been rising over the past few years because of the supply-demand law.

Each year, 7 million college graduates enter the job market, while the number of skilled laborers joining the workforce is much lower, because it takes years for a worker to become an expert in his/her field while clerks can learn their job in months.

If blue collar workers really are making $15,000/year, in a country with a much lower cost of living than the US, then I may be excessively conservative in my 2050 date for a majority of China being middle class.  It’s coming faster than almost anyone imagined.

HT:  TravisV

Most shocks don’t matter

Over the past 18 months we’ve seen three major shocks, each of which were expected to have a significant impact on growth:

1.  The late 2015 Chinese yuan devaluation/capital outflow shock

2.  Brexit

3.  The Trump election

Many people expected the Chinese economy to slow sharply in 2016.  It didn’t.

Many people expected the UK economy to slow sharply after mid-2016.  It didn’t.

Many people expected growth and inflation to rise significantly after Trump was elected.

The third prediction still might come true, but this FT article suggests that investors are moving away from the “reflation” trade.

We are nearing the anniversary of a great market turning point. Like most such turning points, it was not obvious as such at the time, but in early July last year markets reached the lowest point of their fear of deflation — falling prices amid a stagnating economy — and started to position for reflation.

The shock of last summer’s Brexit referendum brought bond yields, the market’s most direct expression of its belief in deflation, to a historic low. The rebound started as the effects of China’s economic stimulus were felt, while it grew clear that Brexit had not sparked a financial crisis.

It gathered momentum after Donald Trump’s victory in the US presidential election. The theory was that the Trump administration would pick up the baton from China, which looks over-leveraged and will soon need to ease off its stimulus, and would bring in its own growth-friendly policies, including tax cuts and infrastructure spending. From “reflation off”, we moved emphatically to “reflation on”.

Stock markets have risen this year, but 2017 has seen a gradual shift back to “deflation-off”. Short-term inflation expectations have moved sharply in recent weeks. The bond market’s implicit forecast for US inflation over the next two years, once at 2.15 per cent, has dropped to 1.35 per cent.

In each case I expected some effect, but less than the consensus.  In the case of China and Brexit, even the very mild slowdowns I predicted proved too bearish. I’ve learned my lesson from Brexit, and in the future will pay no attention to “uncertainty shocks”.  Always a skeptic, I am now convinced that uncertainty has virtually no significant business cycle effects.  And never bet against Chinese growth. Someday it will falter, but no one can predict when.

[In macro, the forecast most likely to be true is, “Not much will change”.  However the way to build a reputation is to forecast dramatic changes.  You will usually be wrong, but the public will forget those mistakes and give you undeserved praise on the few occasions when you are correct.]

I’m sticking with my prediction that Trump’s policies might lead to a couple tenths of a percent faster NGDP growth.  Monetary offset will keep inflation close to 2%, and Trump’s supply-side reforms are likely to be modest (at best).  An extra couple of tenths of one percent NGDP growth is so small it will be almost impossible to tell if I am correct—especially given that growth is likely to slow as we approach full employment.  If there is a recession, however, or 5%-6% NGDP growth persisting for a few years, then I will clearly be wrong.

Maybe the French will give us another shock later today.

PS.  I still believe that Brexit itself will reduce UK growth.  This post discusses the effect of pre-Brexit uncertainty, not Brexit itself, which is still years away.

PPS.  I believe the US should withdraw from the IMF.  Not because the IMF is not good enough for the US, rather because America is not good enough for the IMF. If we don’t leave, I hope the other IMF members expel us:

Finance ministers and central bankers from around the world have dropped a pledge to resist protectionism, in a further sign that the new US administration’s stance on trade is shifting the global debate.

The group from International Monetary Fund member countries issued a statement on Saturday saying they would “promote a level playing field in international trade” but did not reiterate a previous commitment to “resist all forms of protectionism”.

The change of stance mirrors a similar move made by the finance ministers and central bank governors of the G20 countries after they met in Baden-Baden in March. On that occasion, the US was unwilling to endorse forthright language on protectionism.