Development Bank Research Bulletin

No regulations are unbeatable, not even China’s one-child policy

Economists have long told us that people respond to incentives! Given proper incentives, you will be amazed by the kind of genius solutions people can come up with. No regulations are unbeatable, because the people and businesses you are regulating are always more-motivated than employees in regulatory agencies, and they will always be able to find some ways to avoid the regulations. Sometimes, it takes the form of bribery, in the others genius and absolutely legal solutions.

China: Drug bid to beat child ban
SHANGHAI, China (AP) -- More Chinese women are exploiting easy access to fertility treatments to skirt China's one-child limit, leading to a boom in numbers of multiple births, an official newspaper reported Monday. The main pediatric hospital in the eastern city of Nanjing recorded 90 births of twins or triplets last year, up from an average of 20 in past years, the China Daily said.

Genius solution notwithstanding, Isn’t it better for people to spend their time and talent in more productive activities (well, certainly having more children is also a “productive” activities) than in avoiding regulations.

Wherever there is a regulation, there is always some way to circumvent it, and this is how tax codes in the United States accumulate to thousands of pages of long, and Americans wastes tens of billon of dollars just to avoid them. By some estimation, it is actually better off for the society if American tax officers are corrupted because you may spend less money bribing them than hiring tax advisors, and in both cases American government won't recieve your money anyway.

Have foreign MBA, will travel in Chinese business

“Have foreign MBA, will travel in Chinese business”. This is the title of an article in today’s International Herald Tribune. But we will certainly see this job requirement more often in recruitment section of newspapers in the next decade.

“The management consulting firm McKinsey estimates that Chinese companies, given the global aspirations that many nurture, will need 75,000 leaders who can work effectively in global environments over the next 10 to 15 years, compared with the 3,000 to 5,000 that they have now.”

According the article, foreign business schools are rushing into Chinese markets in order to exploit this huge profit opportunity.

“Such programs do not come cheap, particularly in Chinese earning terms. The Global CEO course at Ceibs costs $43,500, and executive MBA programs in China average upward of $40,000, a fortune by local standards.  The Insead-Tsinghua program could top $100,000. “

Certainly students expect to earn more after obtaining such degrees, and as a matter of fact, those who already attended such programs indeed are earning double the tuition fees within three years.

They also remind CEOs of big Chinese corporations that they will regret if they don’t pay to come to one of their executive training  programs.

”For chief executives who make multimillion-dollar decisions, if learning helps them to improve the performance of their companies by a mere 0.1 percent "that will be more than enough to pay their tuition," said Rolf Cremer, the dean and vice-president of Ceibs.”

That is why most CEOs of the largest Chinese state-owned companies have attended these expensive executive programs.

Equatorial Guinea: second richest country in the world!

Which country is the second richest in the world? Many of us know that Luxembourg is the richest one, but few of us would link Equatorial Guinea, an African country located between Cameron and Gabon,  to the title "second richest country in the world".

But it is! Thanks to discovery of a huge oil reserve,  Equatorial Guinea has become one of the world's richest countries, boasting a per capita income of USD 50,200, second to that of Luxembourg.

Endowed with huge wealth notwithstanding, according to CIA fact book:

"Despite the country's economic windfall from oil production resulting in a massive increase in government revenue in recent years, there have been few improvements in the population's living standards. Businesses, for the most part, are owned by government officials and their family members. "

In number, I guess it is not unlikely that they will overtake Luxembourg soon:

"Undeveloped natural resources include titanium, iron ore, manganese, uranium, and alluvial gold. "

For ordinary people, it will remain a very poor country, as oil revenues do not get into their pockets.

Latest World Bank newsletter on Chinese economy

The latest issue of the World Bank (Beijing office)'s quarterly newsletter on Chinese economy was released on last Thursday. You can go to their website to find it, or download the reprot in PDF file format directly from here.  The newsletter is called Quarterly Update. I wonder who came up with such an uninformative name.

The Quarterly Update provides a very comprehensive review of the recent development in Chinese economy. The quality of the newsletter is quite good, comparable to similar reports by major investment banks, and most importantly, it is free!

For those who are interested in Asian economies, another free quarterly newsletter I find useful is the Asian Economic Monitor published by Asian Development Bank. You can find it here.

For people interested in Indian economy, I recommend you read the monthly Summary of Economic News in India published by IMF's representative office in India.

Blame Wal-Mart, don't blame China (if you really want to blame someone)

One tenth of China’s exports to the United States are created by procurements by Wal-Mart in China. If Wal-Mart were an independent nation, it would become one of the top ten importer countries of Chinese products. If Wal-Mart were a nation, it would become one of the largest exporters to American market, and should be responsible for America’s huge trade deficits (if someone believes that creators of trade deficits must be blamed at all).

Stephen King (managing director of economics at HSBC) has some insights about this at The Independent newspaper:

“Sixty per cent of China's exports and imports are today accounted for by so-called foreign-invested companies. Ironically, then, America's unease about China is, indirectly, the result of actions by American companies in China. Should the protectionist faction in Congress ever manage to impose tariffs on China, they would be very much shooting themselves in the foot: tariffs on Chinese imports into the US would be tariffs on the profits and economic success of American companies operating in China.”

I wonder whether  some politicians will try to convince us that WalMart is owned and subsidized by Chinese government.

I also recommend you to read this book: The United States of Wal-Mart by John Dicker

The usefulness of corruptible elections in China

In China, frequent elections are hold at village level. They are believed to be rigged, and at least heavily influenced by the government. Two economics professors Loren Brandt and Matthew Turner at the University of Toronto however find that these elections, although corruptible, are still very effective in reducing rent-seeking activities.

In the fall of 2000, they conducted surveys in 60 villages in 30 counties in 6 provinces in China. Based on the detailed data they collect from villagers, they conclude that  even in most corruptible environment with the most rigged elections,  there is strong negative relationship between rent-seeking activities an re-election success, which suggests that villagers are able to punish those who don’t act in the interests of their constituents.

Most importantly, they find that restrictions on proxy voting improve the ability of rural Chinese electorates to oversee their leaders. This is consistent with reports that proxy voting is widely abused to rig elections. They also find that public nominating procedure also leads to better corporate governance, but mainly through the channel of recruiting the most capable leaders instead of providing incentive for incumbents to work harder in order to stave off more competent challengers.

Surprisingly, they find it does not help much to provide a public forum for candidates to debate and make speeches, or to fix the locations of ballot boxes. The explanations (I beleive) could be that (1) within a village everyone knows each other and public election campaign becomes less relevant; (2) it is easier and safer  to rig the elections through proxy voting procedure than to physically manipulate the ballot boxes.

The Usefulness of Corruptible Elections
ABSTRACT: Using a sample of rural Chinese villages which have recently been the subject of democratic reforms we look for relationships between marginal changes in the democratic process and marginal changes in economic outcomes. We find that even very poorly conducted elections can have large incentive effects. That is, even corruptible elections provide leaders with strong incentives to act in the interests of their constituents. Our findings also allow us to rank the importance of four possible election reforms which have attracted the attention of international observers and academic researchers.

China’s non-performing loan ratio down to 8.9 pct?

China's major commercial banks NPL ratio 8.9 pct at end-2005
SHANGHAI (AFX) - China's banking regulatory agency said the non-performing loan (NPL) ratio of major commercial banks fell to 8.9 pct as of the end of 2005, or 4.3 percentage points lower than at the beginning of the year.

I don’t believe in this number at all; there is no way that the non-performing loan ratio is so low. But I trust that the non-performing loan ratio is indeed going down, as a result of transfer of bad loans to asset management companies, huge cash injections by the government, large retained profits, and current economic boom.

China's new Greater Leap Forward

Yesterday I criticize about India’s lip-service great leap forward. Today I find that some Chinese are making the same mistake.

According to a “China Modernization Report 2006” drawn up by the country’s Chinese Academy of Sciences:

“If the country can maintain its current 9 per cent rate of economic growth, it predicts the average income in China will rise to $1300 a month, about 10 times the current level.”

What a naïve assumption! No such a large country can maintain growth rates of 9 per cent per year for five decades. At the early stage, you grow fast because you are catching up, but once you reach the income level of Brazil, you will slow down unless you can innovate, which is not guaranteed and no one can predict.

Nevertheless, unlike Indians, Chinese not only dream, but also know very well they are dreaming.

“The authors admit the targets will be hard to achieve. He Chuanqi, who headed the research team, said that China's economic situation is 100 years behind the US and there is only a 6 per cent chance of his forecasts being realized.”

China is a sweat shop, not a trade threat!

I find this article quite insightful about the true nature of Sino-American trade war.New York Times: “Some Assembly Needed: China as Asia Factory”.

“But often these days, "made in China" is mostly made elsewhere — by multinational companies in Japan, South Korea, Taiwan and the United States that are using China as the final assembly station in their vast global production networks. Analysts say this evolving global supply chain, which usually tags goods at their final assembly stop, is increasingly distorting global trade figures and has the effect of turning China into a bigger trade threat than it may actually be.”

See? China is making not much money; most of the profits are kept in the pockets of Westerners.

“It may look as if China is getting the big payoff from trade. But over all, some of the biggest winners are consumers in the United States and other advanced economies who have benefited greatly as a result of the shift in the final production of toys, clothing, electronics and other goods from elsewhere in Asia to a cheaper China.”

See? Ordinary Americans benefit from trade as well.

“Asian exports to the United States have actually slipped over the last 15 years. Factories in Taiwan used to assemble many of the world's computers; now China does. Hong Kong garment workers used to stitch tons of fabric into finished clothing; now Chinese workers do.”
"The biggest beneficiary of all this is the United States," said Dong Tao, an economist at UBS in Hong Kong. "A Barbie doll costs $20, but China only gets about 35 cents of that."

See? Americans actually lose nothing. It is other developing countries that are losing market share in face of competition from China.

I have to say

To Chinese:  start your own companies once you save enough money from your factory wage. You shouldn’t work as cheap labor for you whole life.

To some American politicians: Have you no sense of decency or shame? Shut up please!

How to engage China in a constructive way?

I want to show you this very impressive strategy paper by European Commission in how to engage China and help transform China into an open society.  It is not just talking. They actually put up a huge sum of money (250 million Euros) in implementing it, training Chinese judges, lawyers, NGO activities, etc. Europeans are experts in this, with experiences accumulated from transforming Eastern European countries.

Wonder when will the United States start to deal with China in such a constructive way?

China Country Strategy Paper 2002-2006
(PDF file)

The European Commission has today approved the Country Strategy Paper (CSP) for China, which sets out the framework for EU co-operation with China during the period 2002-2006. The co-operation strategy outlined in the CSP is designed to support the implementation of the EU's broad policy objectives regarding China. These include further integrating China into the world economy and world trading system; supporting China's transition to an open society based on the rule of law and respect for human rights; making better use of European resources by improving co-ordination between EU assistance and bilateral spending by Member States; and raising the EU's profile in China.