Development Bank Research Bulletin

China bad loans may reach total of $900 billion; IMF urges China to restrain lending

(1) “China’s total liabilities for non-performing loans may be as high as $900bn, dwarfing official estimates and outstripping the country’s massive foreign exchange reserves, according to a study of Beijing’s bad debt problem. The study, part of Ernst & Young’s annual global survey of NPLs, says China’s big four state banks alone have bad loans worth $358bn, or more than twice official estimates.” – Financial Times

Update (05/15/06): Ernst & Young withdrew the report admiting that the report contains errors and did not go through normal internal approval procedure. But it is not clear whether they do it because of government pressure and/or concerns for losing lucrative clients among Chinese state-owned companies.

(2) “The International Monetary Fund urged China on Tuesday to tighten access to credit, saying that last week's modest interest rate increase was insufficient to stave off economic overheating. China's M2 measure of money supply, which includes all cash and bank deposits, rose 18.8 percent in March from a year earlier to 31.1 trillion yuan, or $3.88 trillion. The value of new lending in China rose more than 60 percent in the first three months from a year earlier.” --- International Herald Tribune

Easterly vs. Sachs: The big push Deja Vu

One of our Bulletin contributors,  Warbug,  already covers the “Easterly vs. Sachs” debate in a previous commentary. Warburg does not think Bill Easterly to be constructive in his new book "The White Men’s Burden". I however think that Professor Jeffrey Sachs is even worse.

Professor Jeffrey Sachs has a lot of big plans. He has a long  “Checklist for Development Economics” that coveres every technical details on how to lift a country out of poverty, but as Arkady Volsky (a  former Soviet official) rightly points out: “People say that Russia should become like Sweden. But the problem is that we don’t have enough Swedes.”

Professor Sachs tells us that a mere $3 per year would help save an African from Malaria, but as Bill Easterly points out: “Doesn't he have a little curiosity about why this easy problem wasn't solved with some of the $568 billion (in today's dollars) in foreign aid given to Africa over the last 43 years?” “What about the World Bank studies in Guinea, Cameroon, Uganda and Tanzania, which estimated that 30 to 70 percent of government drugs disappeared into the black market rather than reaching the patients?”

I absolutely applaud Professor Sachs’ efforts in helping poor people. His plan is absolutely beautiful. But what I can see is that the money he raises will never reach the poor in need. The huge amount of money will simply go into the personal pockets of local corrupted officials. I don't disagree that sometimes we should have beautiful dreams, but don't dream too much, particularly when you are in your day job.

References:
Bill Easterly: The Big Push Deja Vu (PDF file)
A modest proposal (Easterly's review on Sachs' book "The end of poverty"), Washington Post
Sachs' reply  ,  Washington Post

Vietnam kicks off political reforms? Competitive election for national party boss?

The 10th Congress of Vietnamese Community Party started on April 18th and will last for one week. Unprecedentedly, there are two candidates for the post of Communist Party secretary general (the big boss of Vietnam).

Nong Duc Manh, the incumbent, was expected to hold the post for another term. The large scale corruptions in the transport ministry (the PMU18 scandle) that was uncovered  recently however anger the whole nation. Both within and outside the party, the call for Nong Duc Manh’s resignation is gaining momentum. Recently, three famous retired generals that gained their reputations from Vietnam war publicly denounced the government and pushed for reforms.

The communist party eventually decided that another candidate would be nominated to compete for the position, and whether Nong Duc Manh or the other candidate Nguyen Minh Triet (63 years old, who is the party boss of the South Vietnamese boom town Ho Chi Mihn City, and currently ranks the 4th in the national leadership) will become leader of the nation will be decided by Party’s Congress. The results will  be out within one week, and it is clear that both candidates have substantial supports from various fractions within the Vietnamese Communist Party.

The news is being widely cited in Chinese mainstream newspapers, and some comment that: for the past twenty years, Vietnam has been following the footstep of China’s economic reforms, and maybe China can learn from Vietnam too. As coverd by the Bulletin last month, a heated public debate over soicalism vs capitalism, and better privision of public goods through government reforms has been ongoing for some time in China.

Update (4/25/2006): the incumbent Nong Duc Manh has been re-elected.

The two candidates (the new candidate Nguyen Minh Triet on the right)

Chinese GDP grows by 10.2% in first quarter, highest in ten years; Domestic politics and boom-bust cycle in China

New Chinese growth statistics has come out (still not offiical as of today, but it was leaked by the Chinese president himself). In the first quarter of 2006, Chinese economy grew at 10.2%, which is the fastest in the past ten years. Morgan Stanley’s Steve Roach was wrong again (In March he forecasted that there was going to be a slow down)

Anyone who is familiar with the political-business cycle in China, however, will be even more surprised by this new development.

In China, there has been a five-year business cycle coincident with the Communist Party’s national plenary meeting, in which new five-year plans will be discussed and ratified, and most importantly, major personnel decisions will be made.

According to a study done by Chinese economist Fan Gang: during 1977-2003 period, the average GDP growth rate in the Party national meeting year is 10.3%, compared to 11% in the second  year, 9.3%, 8.7%, and 8% in subsequent years. The reason for faster growth rates in first and second years is that local provincial bosses (newly appointed in the meeting) usually tried to impress the national leader by boosting up investment rates, and more than completing their assigned tasks. Such incentives usually fade away gradually over the five year cycle.

Year 2006, however, is the last year of the 2002-2006 political cycle, and based on past experience, should grow at the lowest speed. The economy however grew at the highest speed in ten years. Something must have changed. One speculation is that the incentive structure has changed. In the past, provincial heads worked hard in the first and second year of the cycle to impress their national boss. Now they work hard in the last year to pro-actively build up political capital for their future career which will be decided in the 2007 national meeting of the Communist Party, and the best political capital in China is GDP, GDP, GDP!  At national level, central government wants to slow down the investment boom, but provincial bosses have made up their own minds.

Year 2006 is going to be an exciting year!

Update: Minxin Pei from the Carnegi Endowment also has similar views in its WSJ article: "China is still far from being a free-market economy". A very nice article!

China’s conservative middle class blocks the way to democracy

Will the rise of middle class in China necessarily lead to relaxation of political control? In media discussions that I am aware of, this is at worse taken as a hope, and at best taken as granted, while for most of us the real question is simply “how long will it take?” 

China expert Professor Ken Lieberthal's view is very representative. When interviewd by New York Times, he said: "The spread of middle-class affluence and education across more of the Chinese population should eventually be a force for democratic liberalization, following the pattern of Taiwan and South Korea.'Am I a hundred percent sure I'm right? No, but that's the long-term bet I'd make' "

Jonathan Unger’s article “China’s conservative middle class” in the April issue of Far Eastern Economic Review, however, argues that Chinese middle class is actually a negative force in this process

“The educated middle class is elitist. Many of its members do not want democracy-that is, multiparty elections for the nation's top leaders. Nor did they want this at Tiananmen a decade and a half ago. They did not and do not want China's peasant majority to play a decisive hand in deciding who rules. Most of them hold the rural populace in disdain, and their fear is that the peasants would be swayed by demagogues and vote-buying. They believe that the rural populace is not yet ready to participate in elections. This is ironic, since villagers have been the only ones in China who have been allowed to cast secret ballots to elect their locality's leader.”

Jonathan Unger concludes that Chinese middle class is not the solution, but a barrier.

“The Chinese educated middle class has become a bulwark of the current regime. Summarizing a large survey of political attitudes in Beijing, a recent book by the political scientist Chen Jie concludes that, among all urban groups, "those who perceive themselves to belong to the middle class and who are government bureaucrats are more likely to support the incumbent authorities." Don't expect regime change or democratization any time soon. The rise of China's middle class blocks the way.”

Does the new labor law really harm French youth? Who actually take to Paris streets? The truth is...

French are  taking to streets protesting. Why? They say they are protesting against a newly passed law that gives employers the right to fire workers under the age of 26 during their first two years on the job. They are outraged as it sounds that it gives the right to employers to fire people at their will. For them, it is like “What? You passed a law giving capitalists the right to kill people.....”

What does the law really do?

If I am an employer, and I am (under the old law) not given the right to fire a worker once I hire him; What will I do when making hiring decisions?  First, I am very reluctant to hire any one, as I fear that I may be burdened by him in case the demand for my products turns out lower than expected. Second, I will prefer hire an elder and more experienced worker, as I can know his quality from his previous career. As a result, under previous French labor law that making firing very difficult, unemployment is high and in particular for young people without any working experiences.

The new law is addressing exactly this problem. They give the right to employers to fire young workers under the age of 26 during their first two years on the job. Now I am more comfortable in hiring new and young workers. First, I can hire him when sales are rising and fire him when demands are low. (Note that previous I won’t hire this person in the first place); Second, I am willing to try out a young worker, because compared to an elder worker, it is easier for me to fire him if he turns out to be of low quality.  Thus the law will give many people the change of a first job. This is why the law is known as First Job Contract (The Contrat Premiere Embauche, or CPE)

Many workers are outraged by the word “fire”. But think about it: you can only be fired if you are hired in the first place. If you are unemployed, a law that protects you from being fired is meaningless.  Let me ask you: would it be a great thing if we pass a law permitting people to get anything from grocery stores for free? Isn’t it great? But in that case grocery shops will be empty and shopkeepers will move away and you would starve and cry outside the shops, and the law is meaningless for you. I don’t think I need to elaborate on another example such as passing a law exempting everyone from paying back credit card debts. Does it mean that then you will get unlimited credits from banks?

Why do they take to streets and who are they?!

Now you understand that the law actually helps unemployed young people? But why do they take to streets? French are smart people and they should have already figured out what I say. Yes, they do! And that’s exactly why they don’t take to streets. Ironically, It is another group of people that are protesting, those who are over 26, educated , or unionized. Hey, the “victims” are staying home, why are you instead in such a  hurry?!

As rightly pointed out by a BusinessWeek article,

“The students involved in the most recent demonstrations against the CPE are the ones least likely to be affected by it. That's because university students in France are often nearly 26 by the time they complete their studies. Relatively few would thus fall under the law's purview. Similarly, many of the trade unionists and civil servants protesting the CPE are also unlikely to ever be affected by it because they already have extremely strong job protection. Indeed, the French youth who might benefit the most from the CPE, the immigrant and first-generation youth that burned the suburbs of Paris last year, are rarely seen or heard from in the fevered demonstrations about CPE. "To a certain extent," notes Six, "It's the wrong kids marching in the street."

Now their motive is clear:  it is not about protecting the relatively unskilled young people, it is about protecting their own turf. Under the new law, unskilled young people will be given more chances by employers in trying their first jobs, threatening the job positions of elite college students and trade unionists. When the old law made firing workers very difficult, employers usually prefer experienced workers (who are already unionized) or college graduaes who demonstate their quality by being admitted into colleges and having managed through graduation. Under the new law, everyone is equal, and employers can check out who are of higher quality. Elite college students and unionists do not like this. It's that simple.

It is perfectly understandable that people protest against legislative changes that negatively affect their own interest. But by cheating? By claiming that you are protesting on behalf of those who you actually want to get rid of? Give me a break.

Iraq: war vs. containment

Three Chicago economists (Davis, Murphy, and Topel) have produced a highly controversial paper, as mentioned by R-Squared in a previoius commentary "Chicago economists produce a paper on how war in Iraq helps save Iraqi lives". 

hey evaluate –from the standpoint of 2003—the expected costs of going to war in Iraq versus the costs of continuing the containment policy.  All in all, “going to war was the best decision”.

Policy decisions of such magnitude are usually made under considerable uncertainty, a tight timing, and substantial stress.  Economics can improve the decision making process: by seriously and consistently evaluating all alternatives under the table.  Maybe the best contribution of their paper is that it clearly establishes that the alternative of going to war was not doing nothing.  In fact, the alternative was continued containment or other options.  These had costs, and serious decision-making should consider them as well.

How do the authors arrive to these findings?  As for the benefits and costs of war, they evaluate:

· X number of Iraqi deaths now, versus Y later
· Upfront costs of war, versus prolonged costs of containment
· A big shock to Iraqis today versus a long period of continued economic misfortune
· The humanitarian costs of continued repression under Sadam

Do they do a good job of evaluating the alternatives?  Judge for yourself.

Chicago economists produce a paper on how war in Iraq helps save Iraqi lives

Steven J. Davis, Kevin M. Murphy, and Robert H. Topel, three famous economics professors in the University of Chicago, publish a working paper on how war in Iraq may help save Iraqi lives. It is part of their ongoing academic project studying how to deal with “tyrants, rogue states and terrorists who threaten not only their own people but also others.”

Their analysis indicates that war and forcible regime change will yield large improvements in the economic well-being of most Iraqis relative to their prospects under the containment policy, and that the Iraqi death toll would likely be greater under containment.

“This conclusion follows from some basic observations.
First, the Iraqi economy was in terrible condition before the war, and it would have remained in a sorry state under the policy of containment.
Second, the regime of Saddam Hussein was an economic failure of tremendous proportions. The available evidence suggests that real income per capita fell by roughly 75 percent as a consequence of Saddam’s misrule. In addition, much of Iraq’s greatly diminished output was diverted to an oversized military, an apparatus of terror and repression and the relentless glorification of Saddam.
Third, the removal of sanctions, the expansion of petroleum exports, large-scale reconstruction aid, and the reintegration of Iraq’s economy into the world economy provide a strong basis for economic gains – even in a society with serious institutional weaknesses. If, over the course of a generation, Iraqis recover even half of the economic losses they suffered under Saddam Hussein, then they will be significantly better off in material terms as a consequence of forcible regime change.”

They emphasize that:

“Had containment remained in effect, the historical record suggests that premature Iraqi deaths would have continued indefinitely at the rate of 10,000 to 30,000 per year.”

The working paper can be located at:
War in Iraq versus Containment (longer version)
War in Iraq versus Containment (Shorter version)

Note: Professor Joseph Stiglitz disagrees with them and argues that the costs of war in Iraq could well exceed two trillion US Dollars, if U.S. troops are maintained in Iraq through 2015. See: "The Economic Costs of the Iraq War: An Appraisal Three Years after the Beginning of the Conflict"

Socialism or capitalism? New turning point in China?

New York Times reports that a sharp debate has erupted in China over ideologies, between leftist old guards and reformists.

A Sharp Debate Erupts in China Over Ideologies
BEIJING, March 11 — For the first time in perhaps a decade, the National People's Congress, the Communist Party-run legislature now convened in its annual two-week session, is consumed with an ideological debate over socialism and capitalism that many assumed had been buried by China's long streak of fast economic growth.

NYTimes uses the word “erupt”, but this new development in China has been going on for almost a year. The leftist old guards are using China’s rising income gap and increasing social unrest to raise doubts about economic reforms. The reformists however argue that these problems are not caused by reforms, but the results of too few reforms. They ask for more economic freedom for the private sector and “better provision of public goods” (which is equal to cleaner government and more accountable officials), which they believe is a better solution than “going back to central-planning”.

About 25 and 15 years ago respectively, there were similar debates on directions of reforms, and in both cases the reformists managed to stave off the old guards, with the help of both public sentiments and strongman politics. In both cases, some sorts of public debates were involved. Single party rule notwithstanding, debates are always needed, because “Our government only moves forward when it feels there is a strong consensus," (according to Mao Shoulong, a public- policy specialist at Tsinghua University in Beijing). In the last two times, Chinese reached consensus that “inequality of prosperity  is better than equality of poverty”. And the reason for the newly ignited debate is that "Right now, the consensus is eroding and there is a debate over ideology, which we haven't seen for some time. (again according to Mao Shoulong)" 

What are different this time is that the era of strong-man politics has ended, and there is more tolerance for different opinions, both outside and within the government, so long as what you advocate is consistent with the basic principle that things have to done within the system under the leadership of current government. What is most important is that, people and media are now allowed to talk about it openly by framing it as a debate of “efficiency vs. fairness”, a topic that seems less politics-sensitive.

No matter which side wins this time, the question of “efficiency vs. fairness” will always be raised and debated every several years when the general pubic is not happy about some of the outcomes of the reforms , even in economically and democratically well-developed countries. Thus, the most important thing we should think about is how to institutionalize the consensus-reaching and decision-making rule and process, in order to efficiently and transparently resolve the differences between the reformists and the leftists.

A positive development in recent years is that the private sector is starting to organize some forms of lobby groups attempting to influence public opinions and policy agendas, while the leftists start to rely on Internet to gain supports (although in many cases they go too far in manipulating irrational populist sentiments). Professors also are joining the debate very actively.

Differences are being resolved in a more civilized way now.

India to beat China in 10 years? It takes more than belief to get things done!

What a joke! Decades ago Chinese believed that they would overtake UK and USA soon. It takes more than belief to get things done. Chinese learnt a hard lesson on that. Nowadays, very few Chinese are talking about overtaking any countries. You just keep working, and your life will be better off, and talks just won't get you anywhere. Nevertheless, it is always a good thing that people have hope.

India to beat China in 10 years: BBC survey
NEW DELHI, FEB 9:  A BBC World survey in association with AC Nielson on global indians reveals that India will overtake China in terms of economy growth in the next 10 years. While 57% respondents feel India will become the next Asian superpower in the next 10 years, 55% believe India can win a bid to host the Olympics during the same period and 60% believe that the poor in India will benefit from future economic growth.