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According to an online test of politicial orientation, I am a libertarian!
(see the definition of libertarianism in Wikipedia)
The Political Compass test however used to define me as a centrist. I like the libertarian label better.
Go check out who you are!
| You are a (68% permissive) and an... (70% permissive) You are best described as a:
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Many people are tired of the India vs. China debate. After all, India and China are more likely to be complementary than substitute for each other. One is better in hardware while the other is better in software, there is more opportunities for cooperation.
There absolute loser from China’s rise in world production is actually Latin America. Latin America has much higher wage level than China, Thailand, or Malaysia. The region however is much backward in production technology. This is not going to be sustainable. In a “flattened world”, no importers are willing to pay higher price for lower quality products.
Jeffery Sachs used to say: the problem of Argentina is not fiscal policy, but how it is possible that a country like Argentina, with per capita income as high as 10,000 USD, is still engaging in low knowledge-intensive productions.
It is not sustainable. You need to overhaul your education system and upgrade your production technology, in order to catch up with the rising East Asia.
The Inter-American Development Bank has just published a book on this very topic, titled “The Emergence of China: Opportunities and Challenges for Latin America and the Caribbean”
The book is available for download (PDF file)
As food for thought, the book provides very detailed background information and insights. I am not happy with the answer of the book though, that the solution for Latin America is to serve China as a provider of energy, raw material, and commodities. You are turning Latin America into Africa (Nigeria, specifically)!
Brazil in the short term has reason to celebrate as it hits a jackpot as a result of China's hiking demand for iron ores, but don't forget that India is actually a bigger exporter of iron ores to China than Brazil currently is. If India can be an exporter of both raw material and high-tech services, why do you think Latin America should accept to be downgraded to a misery third-world exporters of commodity producer.
Hope this article can stimulate some discussions on how Latin America can cope with the rise of China and East Asia.
Richard Nixon used to advise then young Donald Rumsfeld : “Latin America does not matter.... no one gives one damn about Latin America!” Hope that’s not an accurate description of the reality.
China has been said to be the World’s factory and cheap labor is said to be the reason why China attracts most of the manufacturing activities away from developed countries as well as from other developing countries.
Africa’s wage level is much lower than China, but they are never on the radar screen as threat to China’s position though. Nevertheless, let’s make a more relevant comparison between China and India.
India has a hard time in attracting manufacturing firms to move there. Many Indians attribute the “failure” to “that’s because we don’t have cheap labor; we focus on service industry with higher value-added”
Let’s compared the minimum wage of China and India to get a idea of who really has cheap labor.
Take China’s Guangdong province as an example. This province is where manufacturing activities agglomerate and where most immigrant workers from inland provinces are employed.
The hourly minimum wage in Guangdong province of China (Effectively July 2006- July 2007) :
Shenzhen (Special Economic Zone) and Guangzhou (two core cities, where manufacturing activities are moving out):
4.66 Yuan/hour ( = 0.58 USD= 26.7 Rs.)
Shenzhen (outside SEZ), Foshan, Dongguan, Zhuhai, Huizhou, where most of the “sweat shops are actually located:
4.02 Yuan/Hour (=0.5 USD = 23.1 Rs.)
For India, I heard that the minimum wage is between 7.5 -12.5 Rs./Hour.
(Please correct me if I am wrong; and if anyone can provide me with the minimum wage level, the actual enforcement, and the coverage of workforce, in typical manufacturing-intensive regions in India, it would be most helpful for me to make a more representative comparison)
So, minimum wage in China's manufacturing sector is between two to three times that of India!
You may argue that laws are never actually enforced in China. Well, indeed, complicated laws usually get circumvented in China. That’s why the most common violations of labor laws in China are, among others, paying normal wage for overtime work, insufficient safety and health work conditions, insufficient compensation for work-related injuries, no compensation for lay-offs... These laws get circumvented because employers always managed to maneuver the vague language of the laws in favor of themselves.
Minimum wage requirement however is in general complied by employers particularly in foreign-owned factories, because it is so easy for regulators to monitor and verify, particularly considering that most factories in the area are in the formal sector and not small workshops.
The most power force however is the market: today if you pay lower than the amount required by the minimum wage, I doubt you are able to recruit any skilled workers to work in Guangdong province, and most employers find it not worthwhile to go down the skill ladders. Labor cost after all constitutes only small fraction of the cost in typical factories producing electronic equipments and employers do not want risk having lower quality of disgruntled workers. For details see my previous post in the Bulletin: “Unlimited labor supply in China? Not anymore! Wages are hiking!”
As a matter of fact, this is exactly why the minimum wage is set to the level where it is now, i.e. almost equal to market-clearing prices. The employers basically control the whole legislative process.
But still, the minimum wage level in Chinese “sweat shops” is much higher than in India where unions have bargaining power in the legislative process of labor laws.
Well, maybe the difference is not that high. First, living expenses in China is higher; second, Chinese workers in “sweat shops” typically have at least 9 years of education.
After all, it is the whole package: infrastructure, administrative efficiency, and education level of workers, flexibility of hiring and firing, etc. that are driving the location decisions of manufacturing firms
Update:
In a report by Deloitte and Touche "India and China: The Reality Beyond the Hype", it is cited that, according to IMF data, typical monthly wage for manufacturing workers in China is almost 4.7 times that in India. But I am not able to verify the number it from the original source. (Hat tip: PSD Blog)
As the Economist magazine features in “The battle for Latin America's soul”, Latin American countries one by one is falling into hands of populists who oppose to economic reforms. It thus becomes an urgent question how market economy and economic reform can win Latin America’s soul again?
Ugo Panizza and Monica Yanez from the Inter-American Development Bank recently published a paper titled “Why are Latin Americans so unhappy about reforms?” in which they looked into the Latinobarometro survey, which was conducted yearly in Latin American countries since 1996, for answers.
They use the opinion surveys to document discontent with the pro-market reforms. They explore four possible sets of explanations for this discontent: (i) a general drift of the populace’s political views to the left; (ii) an increase in political activism by those who oppose reforms; (iii) a decline in the people’s trust of political actors; and (iv) the economic crisis.
What they find is that the macroeconomic situation plays an important role in explaining the dissatisfaction with the reform process, while the other factors are not important.
Detailed research of the survey data show that even if in 1997 100% of people belong to the center right, while in 2002 100% of them convert to extremist left, the support for reform will only go down by 9%. This means that even such an extreme assumption of drift to the left can only explain one third of the actual drop in support for reforms.
The survey results also show that increasing political activism of the leftists or decline in the trust of political actors cannot explain the drop in support for reforms
The single most important factor is the economy. Drop of GDP growth by one percentage point can reduce support for reforms by 1.1%. In the case of Argentina, growth rate dropped by 21 percentage points between 1997 and 2002, which would predict a drop in support for privatization equivalent to 23 percentage point.
In Latin America, countries experiencing crisis usually fall into vicious cycle. When the economy performs badly or experiences a crisis, it becomes much easier for populists to get into power and halt economic reforms. Without reforms the country cannot gain real competiveness internationally, and the political situation becomes self-reinforcing as the economy deteriorate further (sometimes several years can be saved with high oil price, but then the pain will be felt harder when oil price drops).
Economic and employment growth is the only criteria voters use to evaluate reforms, and they usually don’t give you second chance. Reformists need to think more about the stability consequence of the reforms they propose, because “one strike, you are out”. Better do it slowly but safely.
Reference:
Which of the democratic checks and balances—opposition parties, the judiciary, a free press—is the most forceful? Professors John McMillan and Pablo Zoido find the answer from an unusual place: the secret dossier of Vladimiro Montesinos.
In the 1990s, the Peruvian secret-police chief Montesinos systematically undermined all of these democratic checks and balances with bribes. For record-keeping and to ensure future cooperation of the bribe-takers, he video-taped and kept detailed records of almost all of his dealings with more than 1,600 bribe-takers.
After the fall of President Fujimori and the arrest of Montesinos himself, these video-tapes and documents come under public scrutiny
Professors McMillan and Zoido obtained some copies from journalist friends in Perue, and creatively quantify the values of these democratic checks and balances using the bribe prices.
They find that, Montesinos paid a television-channel owner about 100 times what he paid a judge or a politician. One single television channel’s bribe was five times larger than
the total of the opposition politicians’ bribes. The cost of bribing the politicians to get a majority in Congress added up to less than US$300,000 per month. The total cost of bribing judges was US$250,000 per month. The total cost of bribing the television channels was more than US $ 3 million per month.
By revealed preference, the strongest check on the government’s power was the news media.
Montesinos is smart but everyone makes mistakes at some point. He bribed all television channels but one: Channel N. He thought Channel N was an expensive channel with limited viewership and was not worth bribing.
Just several months after Fujimori won 2000 election, one of Montesinos’s videotapes (which will come to be called the vladivideos) was broadcast on Channel N.
The government fell. Fujimori fled to Japan. Montesinos was arrested in Venezuela and sent back to Peru for trials.
Reference:
How to Subvert Democracy: Montesinos in Peru (PDF file)
A video showing Montesinos counting out US$1.5 million for Jose Francisco Crousillat, the VP of America Television, Channel 4
Bribe receipts. Left: a supreme court justice acknowledges being paid US$10,000. Right: a member of the National Electoral Board acknowledges being paid US$15,000
Every two months, World Bank’s finance research and policy staff publish an academic- oriented newsletter featuring latest research progress in finance and development-related topics. The newsletter is interestingly named as the Interest Bearing Notes (IBN). I always find IBN to be a must-read for keeping pace with the constantly-moving knowledge frontier in finance research. I can testify that IBN is a very focused knowledge “bank” that seldom diversifies into non-interest-bearing operations.
IBN's self description:
"Interesting Bearing Notes is a product of the Finance Team in the World Bank's Development Research Group, in association with the policy staff in the Financial Sector Operations Vice Presidency. We report on our own and other people’s research, dataset, conferences and miscellanea. Our working papers and descriptions of research projects in progress can be found, along with a list of forthcoming seminars and conferences, on our web page (http://econ.worldbank.org/programs/finance). The next issue of Interest Bearing Notes will appear in July, so please send comments, suggestions and requests to be added to our distribution list, to Agnes Yaptenco (ayaptenco@worldbank.org) by July 10."
Is economic prosperity of a nation partly determined by genes of its population?
Is this a question that is too politically incorrect? Well, scientific inquiry has no boundary. Economics professors Enrico Spolaore and Romain Wacziarg study genetic and economic data for a wide cross section of countries around the world, and discover that genetic distance, a measure associated with the amount of time elapsed since two populations' last common ancestors, bears a statistically and economically significant correlation with pairwise income differences.
They also find that genetic distance between two populations also determines differences in human capital and social institutions, which suggests that differences in human characteristics transmitted across generations - including culturally transmitted characteristics - can affect income differences by creating barriers to the diffusion of innovations.
The Diffusion of Development (PDF file)
Abstract: This paper studies the barriers to the diffusion of development across countries over the very long-run. We find that genetic distance, a measure associated with the amount of time elapsed since two populations' last common ancestors, bears a statistically and economically significant correlation with pairwise income differences, even when controlling for various measures of geographical isolation, and other cultural, climatic and historical difference measures. These results hold not only for contemporary income differences, but also for income differences measured since 1500 and for income differences within Europe. We uncover similar patterns of coefficients for the proximate determinants of income differences, particularly for differences in human capital and institutions. The paper discusses the economic mechanisms that are consistent with these facts. We present a framework in which differences in human characteristics transmitted across generations - including culturally transmitted characteristics - can affect income differences by creating barriers to the diffusion of innovations, even when they have no direct effect on productivity. The empirical evidence over time and space is consistent with this "barriers" interpretation.
Professor Enrico Spolaore and Romain Wacziarg published an interesting study on the economic effect of merging two countries on economic growth. They conduct simulations for large number of potential mergers of geographic neighboring countries. Some results are quite interesting.
In general, small countries benefit from merging with larger countries, and poorer countries benefit from merging with their richer neighbors.
According to the simulation, were Bangladesh to merge with India, she would grow faster by 1-2 % per year, and in the long run, she may double her income. The merger of Argentina (or Bolivia, or Peru, or Paraguay, or Uruguay) with Brazil, or Mexico (or Canada) with the U.S. would create economic benefits of similar magnitude for these smaller neighbors as they get full access to larger markets.
Pakistan’s economic growth rate will increase by 1.2-1.5 % per year, and long-run income level will be double, if she were to merge with India. India on the other hand will not gain much. Indian growth rate would be raised by 0.1%, and in the long run become 10% richer. (This may explains why Indians in general are less interested in signing free trade arrangement with smaller countries such as Thailand.)
Certainly the merger of these two countries with different culture and religion will create social problems that certainly will outweigh the economic benefit. But on the other hand this also sadly highlights the huge economic costs of two countries hating each other for half a century.
Borders and Growth (PDF file)
Abstract: This paper presents a framework to understand and measure the effects of political borders on economic growth and per capita income levels. We present a model that provides a theoretical foundation to estimate empirically the effects of political borders on growth. In our model, political integration between two countries results in a positive market size effect and a negative effect through reduced openness vis-à-vis the rest of the world. We estimate the growth effects that would result from the hypothetical removal of national borders between pairs of adjacent countries. We also identify zones of mutually beneficial political integration, and discuss the applicability of our framework to European political integration.
Princeton economics professors Gene Grossman and Alan Krueger discover that economic growth is ultimately good for environment. Once the per capita income of your country reaches $8,000, enviromental quality will start to improve because now you can better afford those enviromental luxuries!
Their study covers four types of indicators: urban air pollution, the state of the oxygen regime in river basins, fecal contamination of river basins, and contamination of river basins by heavy metals.
They find that economic growth brings an initial phase of deterioration followed by a subsequent phase of improvement.
The turning points for the different pollutants vary, but in most cases they come before a country reaches a per capita income of $8,000.
Reference:
Economic-growth and the environment (published in the Quarterly Journal of Economics)
China’s Pearl River smells, but mayor vows to swim (earlier in this Bulletin)
Saving the environment from the environmentalists (also in this Bulletin)
As reported by Reuters, World Bank country director for China, David Dollar, thinks that big change in Yuan exchange rate may not be advisable.
“For the exchange rate, I have a lot of sympathy for the Chinese government approaching that cautiously," he said. "I agree with the macro-economists who think that it's in China's interests to allow some appreciation of the currency but I respect the government wanting to make that move gradual."
"A big change in the exchange rate really could have unpredictable effects on economic growth," he said.
"In the developing world we often seen these financial crises together with an exchange rate, macro crisis," Dollar added. "I think it's fair to say that's almost impossible in China ... because it's got about $900 billion in reserve."
Indeed, revaluation of Yuan is in the interest of Chinese government, and I guess that they already realize that appreciation of the currency is key to China's goal of transformation into a domestic-demand-driven economy. It is understanable that they want to do it gradually, not least not to be seen as yielding to American pressures.
