One of the most long-established propositions in international economics is that a 10% across the board tariff on imports, when combined with a 10% across the board subsidy to exports, would have essentially no effect in the long run.  And this is true despite the fact that each policy, considered in isolation, would distort trade and reduce welfare.

The intuition here is simple.  Exports are the way we pay for imports.  So this combined tax and subsidy would be like the Federal Government simultaneously imposing a 10 cent tax on the purchase of gasoline, and a 10 cent subsidy on the sale of gasoline.  This is why I specified the long run; in the long run all imports must be paid for by exports.

The combined tariff/subsidy policies are also very similar to a 10% devaluation of a currency.  And it is well known that a 10% devaluation will not change the real exchange rate in the long run, as the domestic wage and price level would simply rise 10% in response.  But in the short run wages and prices are sticky, and thus either a 10% devaluation or a 10% tariff/subsidy scheme could lead to a real currency depreciation, and hence would affect trade.

I don’t doubt that author of Pop Internationalism is well aware of what I just wrote, but I think Paul Krugman’s readers may well have misunderstood his argument:

An export subsidy is WTO-illegal. An import tariff is WTO-illegal. A deliberately undervalued currency, maintained by massive foreign exchange intervention over a period of years, is in effect a combination of an export subsidy and an import tariff.

So how can China’s actions be legal, and a US response illegal? Well, the rules on currency manipulation are written in a confusing fashion, and seem to pass the buck or maybe the yuan “” back and forth between the WTO and the IMF.

But I basically can’t believe that the fine points here can override the clear merits of the case. If China’s currency policy were two separate policies, the US would have every right to respond; arguing that by combining the policies China somehow acquires immunity is just too tricky.

I can’t tell whether Krugman is referring to legal arguments or moral arguments.  There is no moral argument against a permanent tariff/subsidy combo, because it is neutral.  But “clear merits of the case” seems to imply a moral argument, not a legal argument.

It is important to distinguish between arguments that policy X will cause trade distortions, and those that claim policy X will lead to trade surpluses.  Trade surpluses are not caused by trade barriers; rather they occur because of high levels of private or government saving within a country.  Real exchange rates (on average) reflect economic fundamentals (including government saving as a fundamental.)  China is currently experiencing a higher inflation rate than the US, because that’s nature’s way of moving its real exchange rate to equilibrium when the Balassa-Samuelson effect is pushing the yuan higher but the government pegs the nominal rate.  Will this process eliminate China’s trade surplus?  No, because the surplus is caused by high levels of Chinese saving, not a nominal exchange rate that is out of line.  Again, I think Krugman may agree with this, as in earlier posts I recall that he suggested the deeper problem is the Chinese government’s massive accumulation of foreign exchange (i.e high saving) and the undervalued yuan merely reflects that policy.

But if the real problem is Chinese government purchases of foreign exchange, which permanently depresses the real exchange rate for the yuan, then it’s hard to draw an analogy to a tariff/subsidy combination, which doesn’t have any real effects once prices and wages adjust.

The intellectually respectable case for banning tariffs and subsidies is that, in isolation, they are trade distorting.  I.e., these policies should not be outlawed by the WTO because they affect trade balances, but rather because they distort trade.  On the other hand, a policy of massive foreign exchange accumulation can have a long run effect on trade balances, but is not trade-distorting in the usual sense of the term.

If the WTO wants to install a set of rules that ban countries like Germany, Japan, Switzerland and Singapore from pursuing high saving rates through government policies, then by all means do so.  But if they aren’t go to do so, then it is disingenuous to single out a country that is half communist and thus forced to pursue its high saving policies in a more obvious and unsubtle fashion.

What do I mean by “unsubtle?”   Policies that encourage private saving are more subtle than those that involve public savings.  And policies that achieve high public savings rates through budget surpluses are more subtle than policies that pursue public saving through foreign exchange accumulation.  China saves money in just about the most unsubtle way possible.

But make no mistake; there are many countries who are running trade surpluses that are vastly larger than China’s on a per capita basis, or even as a share of GDP, but are not being singled out because they are much smaller, and achieve the objectives using more subtle methods.

Krugman seems to want to deputize the WTO to enforce his theory of macroeconomics in a liquidity trap, which is that there is nothing that deficit countries like the US can do (or will do?) to offset the negative impact of Chinese trade surpluses on our domestic aggregate demand.

If we are going to have the WTO and IMF doing any investigations, I’d like to see them examine whether the Fed, ECB and BOJ are artificially raising the value of the dollar, euro and yen—where value is measured against goods and services, not other currencies.

PS.  Don’t respond with “in the long run we’re all dead.”  I get the fact that we need more economic stimulus RIGHT NOW.  I just think we’re more likely to get it from a robust price level target than a futile attempt to twist the arm of the Chinese.  US stocks soared early last week on strong Chinese exports numbers.  That doesn’t prove cause and effect; both items probably reflect a stronger world economy.  But there is very little evidence that growing Chinese exports are what’s keeping the US depressed while many other countries are recovering rapidly.  We need to look in the mirror.

Post-modernists claim that you have to treat “texts” like a puzzle, where the author is making one set of assertions, but the real meaning is hidden beneath the surface.  In that spirit, I’d like to deconstruct a recent article on inflation in The Economist:

The inflation of the 1970s had its origins in the 1960s, with economists who believed that a bit more inflation could buy lasting lower unemployment. The natural-rate-of-unemployment hypothesis of Milton Friedman and Edmund Phelps, the rational-expectations revolution and the dismal experience of the 1970s all put paid to that idea. Politicians, aware that high inflation often brought regime change, accepted the idea that central banks should be left to concentrate on inflation. The latest crisis has demonstrated that price stability is no guarantee of financial and economic stability””indeed, a narrow obsession with prices may have led central bankers to neglect asset bubbles and the condition of the banks. Yet in practice price stability has not been dislodged from the centre of central banks’ attention. If anything, some seem anxious to unwind their quantitative easing and normalise interest rates despite the prevalent deflationary pressure.

It seems to me that there are many ways of reading this paragraph.  Recall my argument that the Fed should try to generate more inflation in order to boost economic recovery.  Is my argument consistent with The Economist’s take on things, or inconsistent?  Am I arguing for “price stability” or am I peddling a discredited theory that inflation can reduce unemployment?   I think I am arguing for price stability, and simply applying the Friedman/Phelps hypothesis, but I’ll bet most readers of The Economist would reach a different conclusion.

Let’s start with what The Economist means by ‘price stability.’  Do they mean stable prices, or do they mean a steady 2% inflation rate?  You might say; “It’s obvious, price stability means price stability, i.e. zero inflation.”  But there are two problems with that interpretation.  First, when The Economist suggests that price stability didn’t insure economic stability, they are almost certainly referring to the Fed and ECB’s policies, which are better described by a 2% inflation target than a 0% percent inflation target.  And second, look at what The Economist has to say about the one developed country that actually did have (CPI) “price stability” in the 5 years leading up to the 2008 crisis:

If anything, the record of quantitative easing in Japan should heighten worries of deflation. As Adam Posen of the Peterson Institute for International Economics notes in our forum, it “did not have a predictable or even large short-term result…We need more humility about what we are capable of doing with monetary policy once deflation begins.”

Japan is treated as an example of failed monetary policy, a country that failed to produce “price stability.”  And yet in the 5 years preceding the crisis, the Japanese price level was far more stable than then US or Eurozone price levels.  OK, what if I am right that by ‘price stability’ The Economist really means 2% inflation?  That would cast an entirely differently light on the first paragraph I quoted.  If price stability is actually 2% inflation, then it is not true that price stability failed to produce “economic stability.”  Indeed, what happened is that the world economy plunged in late 2008 precisely when central banks diverged from a policy of “price stability.”  How do we know?  We need look no further than another article from the same issue of The Economist:

Judging by the discussion in a new online forum of more than 50 leading economists from around the world, which The Economist launched this week, deflation is the bigger short-term danger in big, rich economies, whereas inflation is an immediate worry in many emerging economies and, potentially, a longer-term danger in rich ones.

That seems a fair assessment. In America, the euro area and Japan, deflation is either uncomfortably close or a painful reality, despite near-zero interest rates and other efforts by central banks. In the year to April core consumer prices rose by a mere 0.9% in America, the slowest pace in four decades. In the euro area they rose by 0.7%. And in Japan, which has battled falling prices for more than a decade, they fell by 1.5%.

So inflation began falling sharply below the 2% “price stability” range precisely when the world economy went into free fall in late 2008.  How might people respond to my argument?  I suppose they might argue that I have reversed causation; that inflation fell sharply because of the recession, rather than the fall in inflation causing the recession.  As you know, I prefer to focus on NGDP.  The sharp fall in NGDP caused both the fall in inflation and the fall in RGDP.  This should be the standard view of almost all macroeconomists (excepting those who favor real theories of the cycle.)  But for some reason it isn’t.  The question is why.

I think The Economist would agree that if monetary policymakers had kept NGDP rising at trend, and inflation no lower than 2%, we would not have had a severe recession.  Except for the unusual case of 1974 (a severe supply shock) recessions are almost always associated with lower NGDP growth.  If we still had 2% inflation, the recession would almost certainly have been very mild.

So why does The Economist imply that a policy of “price stability” failed to ensure economic stability?  I think there are two reasons.  First, they think the financial crisis (not falling inflation) caused the recession.  And second, they don’t think monetary policy could have done much to prevent the fall in inflation.  I plan to do another post soon using data from the IMF, which I believe shows pretty conclusively that the financial crisis was almost entirely due to falling NGDP, and only a small part was due to foolish lending that would have gone bad even with briskly growing NGDP.  But for now let me focus on the second point, which I think is the sine qua non of The Economist’s assertion.  At the end of the first article I linked to, they made this claim:

With the exception of Japan, there have been few instances of governments pressing central banks for more expansionary policies. To be sure, there’s not much more they could do. But perhaps politicians, like central bankers, are not yet ready to discard orthodoxy.

Not much more they could do?  What in the world would make The Economist think that monetary stimulus could not easily boost inflation right now?  Here’s what.  Go back to the second quotation, when Adam Posen expresses skepticism about the ability of monetary policy to arrest inflation.  And why does he express skepticism?  Because of what The Economist calls “the record of quantitative easing in Japan.”  This is where I start to feel like Paul Krugman, wanting to grab the world by the shoulders and scream “wake-up people.”  For the 100th time, inflation targeting in Japan didn’t fail because IT WAS NEVER TRIED.  The evidence is absolutely overwhelming that the BOJ didn’t want even 2% inflation.  The BOJ behaved exactly like a central bank who wanted to keep CPI inflation at 0% or slightly below, and they have succeeded in that objective better than almost any other central bank in the world.  Here’s the evidence:

1.  They twice tightened monetary policy (in 2000 and 2006) when Japan did not have any inflation.  They did this by raising interest rates.  What does that tell you?

2.  The monetary injections of 2002-03 were temporary, and withdrawn in 2006, despite the fact that there was no inflation.  Temporary currency injections are not stimulative.

3.  They let the yen appreciate sharply from about 115 to 85 to the dollar, despite falling prices in Japan.

4.  They continually refuse to set a positive inflation target, as the Fed and ECB have either implicitly or explicitly done.

5.  They refuse to do level targeting, which is known to be very helpful during deflation.  This would force them to make up for past deflationary mistakes.

When will people stop talking about the BOJ as some sort of helpless victim of deflation who did all they could, and recognize that they are an extremely reactionary central bank, much more so that the Fed or ECB?

Why is this important?  Because if you recognize that a regime of level targeting can prevent deflation, even during a financial crisis, then you also recognize that it can prevent a severe demand-side recession in the wake of a financial crisis.  And you will also see the current fall in inflation to levels far below “price stability” as a failure of monetary policy, not some sort of inevitable side-effect of a recession that was caused by financial distress.

To summarize, The Economist should have written the following; “Price stability worked well up until 2008.  When central banks switched to a more deflationary policy we got the severe recession predicted by the Friedman/Phelps Natural Rate model.  Monetary policy can prevent this from occurring with level targeting of prices, or better yet, NGDP.  Oh, and the tight money also made the financial crisis much worse.”

While we are deconstructing The Economist, think about this.  The article focuses almost entirely on monetary policy, with almost no discussion of fiscal policy.  Now I don’t have a big problem with that, as I believe monetary policy drives inflation, and fiscal policy has only a minor effect.  But here is what I object to.  When mainstream publications like The Economist talk about ideas for stimulating the real economy to boost growth and lower unemployment, they almost always spend a lot of time on fiscal policy.  I don’t see any theoretical justification for this dichotomy in any of the mainstream macro models that journalists rely on.  Those models say that both fiscal and monetary stimulus boost both prices and output.  The tendency of journalists to talk about inflation in the context of monetary policy and real growth in the context of fiscal stimulus is very revealing.  They have some non-mainstream model in their minds, but for the life of me I can’t figure out what that model could possibly be.

To end on a more positive note, I really like the first paragraph of the first article I cited in The Economist:

IN THE short run inflation is an economic phenomenon. In the long run it is a political one. This week The Economist asked a group of leading economists whether they reckoned inflation or deflation was the greater threat; this was our inaugural question in “Economics by invitation“, an online forum of more than 50 eminent economists. The rough consensus was that in the near term, as Western economies struggle to recover, the bigger worry there is deflation. But as the time horizon lengthened, more experts cited inflation, because it seems the most plausible exit strategy for governments trying to deal with crushing debts.

I feel bad being so critical of a magazine that invited me to join 49 other much more esteemed economists.  Think of it this way.  I subscribe to the paper edition of The Economist because it is the best magazine/newspaper in the world.  That’s where I found the article.  Similar perspectives can be found in any other serious publication.  So don’t take it personally Mr. and Ms. Anonymous Journalists at The Economist—I still love your work.

Belgium is nice and compact, the iPod of countries.  When I visited in 1990 I noticed that most Belgian cities were about 30 minutes from Brussels by train.  When I need an example of a small country to use in my economics class, I often pick Belgium.  But today I’d like to argue that Belgium is just too big.

In earlier posts like this one I argued that there are severe diseconomies of scale in governance.  In olden times large countries benefited from having a big internal market and a large military to deter invaders.  The unfortunate Belgians was frequently overrun by the Germans or French.  But in the modern world this is no longer a problem.  Belgium is protected by NATO and can export freely throughout the EU.  I got to thinking about this issue when I read this article:

BRUSSELS (AP) – Belgium’s 6.5 million Dutch and 4 million French-speakers are locked in an unhappy, quarrelsome union, and voters in a general election Sunday might well favor the prospect of a political divorce down the road.

A mainstream Flemish party that is expected to do well is invoking the concept of irreconcilable differences to seek a separation and, in time, take the country’s Dutch-speaking Flanders region into the European Union as a separate country.

This is a nightmare scenario for the poorer Wallonia, Belgium’s Francophone south, which greatly depends on Flemish funds.

.   .   .

The divide goes beyond language.

Flanders tends to be conservative and free-trade minded. Wallonia’s long-dominant Socialists have a record of corruption and poor governance. Flanders has half the unemployment of Wallonia and a 25 percent higher per-capita income, and Dutch-speakers have long complained that they are subsidizing their Francophone neighbors.

But those in Wallonia don’t want to join France and France has never expressed any interest in absorbing the region because of its high unemployment and other costs. France also does not to encourage separatism so regions like the French island of Corsica don’t get their own separatist ideas.

If you are a right-winger this pushes all your buttons.  Wallonia is too socialist.  They rely on handouts from the more conservative and productive Flemish.  They speak French.  But they are so poor even France won’t take them.  You’re instincts tell you that the virtuous Flemish would be better off without those deadbeats.

But I am a utilitarian, and am thus supposed to be above all that petty bigotry.  So I’ll try to make a principled argument that both sides would be better off with an amicable divorce.  The advantages to Flanders are obvious.  A population of 6.5 million is a bit more than Denmark and and a bit less than Switzerland and Austria, all three of which are highly successful countries that also border Germany.  And all three are richer than Germany.  A small country can be nimble, and set public policies that are well-suited to attracting international business.  And in a small country it’s harder for rent-seeking special interest groups to rip-off the broader public, without attracting attention.  Win-win policy coordination is easier to get in Flanders than in a country like America, where the Democrats and Republicans are barely on speaking terms.

But how would the Walloons gain?  Here the argument is a bit tougher, but I’ll try to make it using the analogy of Czechoslovakia.  Before the split-up, the Slovaks represented the smaller and less prosperous part of Czechoslovakia.  Being further east, their instincts were probably more statist.  After the breakup they did flounder around for a few years, but then got their act together and instituted some important neoliberal reforms.  And I think it is fair to say that the reforms were successful.  Obviously Slovakia still has lots of problems, but their business-friendly tax regime did attract lots of investment from multinational car companies.  So tough love can work.

I am a pragmatist, so I don’t want to argue that separation is the answer to every problem.  The Swiss have shown that decentralization can work well, and up until 1929 it was highly successful in America as well.  I suppose there is the risk that a region that strikes it rich with oil could decide that it doesn’t want to share its undeserved riches with the rest of the country.  Or Beverly Hills might want to declare independence to avoid high income taxes.  (Indeed Monaco is essentially in this position vis-a-vis France.)  But where you have two regions that are relatively equal in natural resources, but have trouble getting along due to cultural/language differences, then why not split in two?  When it comes to governance, small is beautiful.

PS.  I suppose there is the tricky issue of what to do with Brussels.  How about making it an independent city-state?  Call it Brussels D.E., meaning Brussels, District of Europa.

PPS.  I tried to find a YouTube of the old Monty Python skit about Belgians, but (perhaps fortunately) could not locate that tasteless performance.

Ed Dolan recently sent me an interesting theory on difference between Chinese and Russian corruption.  I suggested he post it, but his blog specializes in other topics.  So we decided I could post it here.  This is Ed Dolan’s idea:

Dynamic China, Stagnant Russia: Can Corruption Explain the Difference?

As a long-time Russia watcher, I endorse the widespread notion that corruption is one major explanation for that country’s relative stagnation. Even Russian president Medvedev agrees, saying that corruption is “systemic in nature” and has “deep historic roots.” (The Guardian). But what about China? China is pretty corrupt, too. Transparency International’s corruption perceptions index ranks Russia at a dismal 146 out of 180 countries surveyed, but China, at 79, is not exactly squeaky clean. Other attempts to measure corruption specifically and institutional quality generally seem to reach similar rankings. Yet China is far from stagnant. Why?

Is it simply that China, although corrupt, is less corrupt that Russia? Only as corrupt as Burkina Faso, instead of as corrupt as Kenya? No doubt the degree of corruption plays a role, but I wonder if part of the explanation also lies in differences in kind among the corruption encountered in one place or another.

By analogy, consider a distinction that Russians make between “white envy” and “black envy.” If your neighbor buys a new BMW, and your reaction is to want to work harder so that you can buy one too, that is white envy. If your reaction is to want to sneak over during the night and slash his tires, that is black envy.

By the same token, it seems to me there is “white corruption” and “black corruption.” In the white variant, a corrupt official might say, “I’ll pull strings to help your business grow if you will cut me in on a share of your future profit.” In the black variant, the official would say, “pay me off, or I’ll shut your business down,” or alternatively, “pay me off, and I’ll shut your competitor’s business down.”

I don’t mean to say that “white corruption” is actually good. It introduces distortions and raises costs relative to government based on honesty, transparency, and the rule of law.  But it certainly seems possible that comparatively speaking, white corruption is more pro-growth and black corruption is more pro-stagnation. The reason is partly that black corruption involves negative sanctions rather than positive incentives, and partly because it suggests more of a long-term, trust-based relationship. To borrow a term from Mancur Olson, the official practicing white corruption would be more of a stationary bandit, and the one practicing black corruption would be more of a roving bandit. The stationary bandit encourages the local farmers to take good care of their cows; the roving bandit slaughters the cows (maybe the farmers, too) and moves on after the feast.

I know from my own experience in Russia that black corruption is pretty widespread, although the white variant also exists. I have heard anecdotes about China that suggest that the white variant of corruption might be more common there. Does anyone with more experience of China than I have think that is true, and if so, if it could play a role in explaining how China can be corrupt, but dynamic?

This isn’t my area  of expertise, but his argument makes sense.   I was reminded of Ed’s email when I recently ran across the paper “Spite and Development” by Fehr, Hoff, and Kshetramade:

Abstract:
In a wide variety of settings, spiteful preferences would constitute an obstacle to cooperation, trade, and thus economic development. This paper shows that spiteful preferences – the desire to reduce another’s material payoff for the mere purpose of increasing one’s relative payoff – are surprisingly widespread in experiments conducted in one of the least developed regions in India (Uttar Pradesh). In a one-shot trust game, the authors find that a large majority of subjects punish cooperative behavior although such punishment clearly increases inequality and decreases the payoffs of both subjects. In experiments to study coordination and to measure social preferences, the findings reveal empirical patterns suggesting that the willingness to reduce another’s material payoff – either for the sake of achieving more equality or for the sake of being ahead – is stronger among individuals belonging to high castes than among those belonging to low castes. Because extreme social hierarchies are typically accompanied by a culture that stresses status-seeking, it is plausible that the observed social preference patterns are at least partly shaped by this culture. Thus, an exciting question for future research is the extent to which different institutions and cultures produce preferences that are conducive or detrimental to economic development.

Alex Tabarrok recently linked to another item that is relevant to Dolan’s argument:

In Russia, the ‘Ask the Audience’ lifeline isn’t one that the contestant would often use because the audience often gives wrong answers intentionally to trick the contestants.

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.