Development Bank Research Bulletin

What US stocks China may want to buy with its foreign reserve?

China has decided to diversify away from US treasury bonds, and invest up to $200 billion of its huge foreign reserve in equities in order to boost the return on its foreign reserve holdings.

Making financial profits is certainly one of the major objectives of the foreign reserve managers, but it is also expected that Chinese government may want to create benefits for its own economy (and Chinese employment) as much as possible. In short, they don’t want too much net capital outflow. In any case, a poor country is certainly in greater need of capital. But how can Chinese achieve these goals?

One possible way is to link the portfolio allocation decision to US corporations investment decision in China. Chinese government may want to invest more in US multinationals that promise to invest more in China-based projects.

According to the Commerce Department’s “2007 Investment Climate Statement”, these large US corporations active in China include (ranking by their Chinese asset size):

Motorola, General Motors, Wal-Mart, General Electric, Kodak, DaimlerChrysler, Coca-Cola, Exxon Mobil, Ford, Intel, Anheuser-Busch, DuPont, Alcoa, United Technologies, IBM, Cummins,  and Microsoft.

In any case, these are large and liquid US stocks and are thus perfect candidates for foreign reserve investments.

Moreover, strategically speaking, some of them can be very valuable for Chinese if the Chinese can acquire significant block of shares and have a say in the management.

Wal-Mart for example can give Chinese a perfect retail distribution channel in the US for Chinese products. General Motors, which has run into financial troubles, may help Chinese build up its domestic car industry, in exchange for financial injection from the Chinese. Motorola, IBM, and Microsoft can help Chinese upgrade their information technology.

It is predictable that there will be a huge political backlash in the US when the Chinese acquire significant share block in any one of these corporations.  But who are you going to blame? If Americans save less than invest, and America has to let foreigners in to bring in the money.

The happy variety of Capitalism

The Deutsche Bank Research has just published a report titled “The Happy Variety of Capitalism.” (download PDF file)

Capitalism has many varieties; Even within Europe, the mode of capitalism differs across countries.

According to the report, Germany, Spain, France, Belgium and Austria has the less happy variety of capitalism, while Portugal, Italy and Greece, even worse, has the UNHAPPY variety of capitalism (well, Italian may be a little bit loud, but I am sure they are very happy everyday; it is just a different way of having fun)

Some funny facts:

Napping is an activity just a little bit happier than cooking. So when your feel drowsy, do some cooking instead; at least you will have something to eat as a result, and yes, lunch and dinner are happiness-improving activities.

Morning commute makes people very unhappy, even much unhappy than working; and evening commute is just a little bit happier than working.

Australia has the very happy variety of capitalism. Thousands of German still migrate to Australia every year.

After BRICs, Goldman Sachs names another eleven promising economies

In Global Economics Paper No.134 “How Solid are the BRICs?” (pdf file), Goldman Sachs names another eleven economies that may emerge as important players by 2050. They are (in alphabetic order): Bangladesh, Egypt, Indonesia, Iran, Korea, Mexico, Nigeria, Pakistan, Philippines, Turkey, Vietnam. Goldman Sachs names them N11 (i.e., the Next Eleven).

P.S. I would say GS forgets another important economy: the Hispanic population of the United States! According to another GS report "The Hispanization of the United States", by 2030, Hispanic/Latino population in the United States will reach 73 million, or 20% of US population. The Latino US is going to become an important emerging (or even industrialized) economy! Be prepared for it.

GS believes that following BRICs (Brazil, Russia, India and China), these eleven economies may become influential by 2050 because of the projected size of their economies.

Among them, Korea and Mexico are particularly important. Mexico will become the sixth-largest economy. By 2050, Korea will become richer (in income per capita) than any  of the current G7s (Canada, France, Germany, Italy, Japan, U.K., U.S.) except the U.S.  GDP per capita of Korea will reach 81,462 USD (in market exchange rate) in 2050, if everything goes smoothly, while Mexico’s will reach 52,990 USD. U.S.’s GDP per capita, standing at 89,663 USD in 2050,  will be still slightly richer than Korea’s.

Currently, US’s GDP per capita stands between 42,000 and 43,000 USD/year, and Korea’s GDP per capita will reach this level between year 2015 and 2020, which is not very far away from now.

In a previous post in the Bulletin, I also discussed why Korea has potentials to become an economic and geopolitical regional power.

Should journalist use lies to fight lies? The Apple “slave” labor case

Apple is running into trouble recently. A recent U.K. newspaper report claims that workers at a Chinese iPod factory were working long hours, for little pay, and in "slave conditions". They were said to have been earning $50 a month (or about $1.60 a day) while working 15-hour shifts. The reporters visited two plants in the crowded country, one close to Shanghai and the other near Hong Kong. One, described as iPod City, was said to have 200,000 workers who lived in dormitories on the site.

Labor compensation is really terrible in China, but I don’t think these journalist should use lies to fight lies.

First, in the two locations where the journalist claim they investigate (I guess one in Kunshan and the other in Shenzhen), it is impossible to hire assembly workers at $50 /month. It is just impossible, not because the employers are benevolent, but because factories next doors will recruit away all you workers at the prevailing market price if you offer only $ 50/month.

Reading the report  carefully (I guess most readers will only remember the headline numbers they throw out instead of finishing the whole report),  however, you will find that $50/month is not the wage, but the net saving after deducting expenses as calucauted by the journalists. Should we say that some American workers are paid zero dollars/month because they rarely save money?

Interestingly, the real monthly salary number (about $100 /month) obtained by the journalists (I guess the number should be real, as journalists do not have incentive to over-report the number) meets the minimum wage requirement, which many labor activists believe to be fair but don't think are actively enforced! The report unexpectedly provides evidence that minimum wage law in China does have teeth!

$100 /month is small sum for British, but it is a lot of money in China. Why don’t the journalist make some attempt to put the number into perspective. In inland provinces, government employees (dream position for most local residents ) are paid $100/month.  $300/month is also three times what Indian workers can get.

Why don’t the journalist tell readers what are the alternative income these workers could get if they don’t have a job in the  factory?  It is a poor country, and $100 /month is exactly the same as the country’s GDP per capita. The average monthly British GDP/per capita is over $2800, will you call a British worker who are paid $2800/month a slave!!

Second, in the past five years, Apple sold 42 million i-Pods. If 200,000 workers are employed to produce i-pods, then each worker produced only 210 i-pods so far.  Don’t you think such productivity is ridiculously low. A Washington Post article reveals that the factory is not owned by Apple, but by a contract manufactures Hon Hai precision Industry, also known as Foxconn electronics Inc.  Foxconn does employ 200,000 workers, but Apple is only a client, and only small fraction of the 200,000 workforce work on i-pods.

I really don’t know why the journalists want to throw out a sensational number of "200,000 workers", and the so-called “iPod city” name, just to exploit the popularity of iPod brand name?  And “the 200,000 workers in one site” description also tries to get readers to have an impression that all 200,000 workers are fit into one dorm room!

I want to say to the journalist of Mail on Sunday (the U.K. newspaper that reports the story): 
The best weapon of journalists is fact and truth, if you degrade yourself to the same level of a lying regime, you bring shame to the whole journalist community!

Interestingly, Mail on Sunday doesn't put the report online. Are you fearing of sunshine?

Reference:
Sweatshop conditions at iPod factory reported
Apple eyes labor conditions at iPod plant

Update:

found that Perry Wu in the ChinaTechNews.com has the same views as mine, in his article "Hyperbolic Apple iPod factory woes"

Sun Bin recommends a blog post "A Chinese view of iPod City", which provides a nice summary of the event and coverage. Thanks.

Outsourcing is good for American job growth! Two data-intensive evidence

As more manufacturing and service jobs are outsourced to developing countries, complaints arise domestically that it is responsible for the “jobless growth” in the U.S.

Two research papers recently produced however provide evidence that outsourcing is actually good for American job growth. 

The first study, authored by Mihir Desai, Fritz Foley, and James Hines Jr., investigates migration of manufacturing production to developing countries. They show  that 10% greater foreign capital investment is associated with 2.2% greater domestic investment, and that 10% greater foreign employee compensation is associated with 4.0% greater domestic employee compensation.

You may ask: “but the growth is not proportional – growth in the U.S. is smaller!”.  But this already is a serious blow to those who believe that the impact should have been negative!  Furthermore, 10% growth in compensation for foreign workers is much smaller than 4% growth in compensation for U.S. workers (who’s pay level starts at least 10 times that of their foreign counterparts.

The second study, authored by Mary Amiti and Shang-Jin Wei, looks into service outsourcing, which is feared by white-collar workers.

They show that,  in each of the past 10 years, the value of US insourcing (i.e. the value of business services expoerted by a country like the U.S., e.g., high-priced business consultants and lawyers in richer countries offering their services to the rest of the world) has been greater than that of US outsourcing! This is true even though the US has been running a trade deficit and an overall current account deficit.

Examining 100 sectors of the U.S. economy, they also show that there  is no evidence that the most outsourcing-intensive sectors have had systematically slower (or negative) job growth in the last decade. In fact, the millwork and plywood sector, the metal coating, engraving, and allied services sector, and the insurance industry have had some of the fastest increases in service outsourcing but at the same time also some of the fastest
rates of job creation.

Study 1: Foreign Direct Investment and Domestic Economic Activity   (pdf file)
Abstract:   How does rising foreign investment influence domestic economic activity? Firms whose foreign operations grow rapidly exhibit coincident rapid growth of domestic operations, but this pattern alone is inconclusive, as foreign and domestic business activities are jointly determined. This study uses foreign GDP growth rates, interacted with lagged firm-specific geographic distributions of foreign investment, to predict changes in foreign investment by a large panel of American firms. Estimates produced using this instrument for changes in foreign activity indicate that 10% greater foreign capital investment is associated with 2.2% greater domestic investment, and that 10% greater foreign employee compensation is associated with 4.0% greater domestic employee compensation. Changes in foreign and domestic sales, assets, and numbers of employees are likewise positively associated; the evidence also indicates that greater foreign investment is associated with additional domestic exports and R&D spending. The data do not support the popular notion that greater foreign activity crowds out domestic activity by the same firms, instead suggesting the reverse.

Study 2: Fear of Service Outsourcing: Is It Justified?   (pdf file)
Abstract:      The recent media and political attention on service outsourcing from developed to developing countries gives the impression that outsourcing is exploding. As a result, workers in industrial countries are anxious about job losses. This paper aims to establish what are the hypes and what are the facts. The results show that although service outsourcing has been steadily increasing it is still very low, and that in the United States and many other industrial countries "insourcing" is greater than outsourcing. Using the United Kingdom as a case study, we find that job growth at a sectoral level is not negatively related to service outsourcing.
(Also check out Raghuram Rajan and Shang-Jin Wei's op-ed "The non-threat that is outsourcing (pdf file))

Morris Goldstein and Nicholas Lardy’s solution to Chinese currency problem

Morris Goldstein and Nicholas Lardy’s solution to the Yuan problem:

“...we propose the following compromise. First, China should implement in the next few months a 10 to 15 percent appreciation of the renminbi relative to the current value of the basket. This could be done either by a revaluation or by allowing market forces to push up the currency’s value. Such a “downpayment” would help to persuade external critics that China is serious about controlling its growing external imbalance. Second, China should widen substantially either the band around the central rate or the daily fluctuation limit. That would provide increased independence for monetary policy, allow scope for further renminbi appreciation and give China experience in managing increased flexibility. Third, to offset some of the contractionary effect of the renminbi appreciation, China should simultaneously implement fiscal expansion. Fourth, China should maintain most capital controls until its banks are further strengthened.

This would still require sizeable real appreciation of the renminbi later, with all the problems that such a phased adjustment entails. If speculative inflows resurge, the authorities would need to choose between an acceleration of renminbi appreciation and a temporary recourse to tighter controls on capital inflows. In the final stage of currency reform—when China’s banking system is more stable—China would float the currency and remove the remaining capital controls. Admittedly, this is not an elegant plan. But if it would break the existing logjam in addressing global payments imbalances, it merits consideration.”

see Goldstein and Lardy's full article in the Finanicla Times

Asking China to revaluate currency? Now you see the inflation consequence

Central bankers in both U.S. and the U.K. are worrying about domestic inflation as manufacturing wage and prices in China hike recently.

Bloomberg: Rising costs in China could affect America

Financial Times: Chinese exports add to U.K. inflation fears

Let’s see what are driving them to worry: Costs of goods from countries in the Pacific Rim region, including China, rose 0.2 percent in May.

Well, if 0.2% worries them, how about revaluation of Yuan by 50%, WalMart shoppers!

How cheap is Chinese labor? U.S. Department of Labor has the answer for the first time

Contracted by the U.S. Department of Labor, Judith Banister, famous for her estimation of Chinese death number (30 million) in Great Leap Forward, has put out a number on average wage of Chinese manufacturing workers.

According to the report, in 2002, Chinese manufacturing employees are paid on average 57 cents/hour, and those in cities are paid twice that amount. In comparison, U.S. manufacturing workers are paid   $21.11/hour, and Mexican workers are paid $2.48/hour.

57 cents/hour however is not a bad deal for many Chinese workers. Because China’s living costs are low, it is equivalent to nearly $3 dollar/hour adjusted for purchasing power.

The numbers are based on 2002 though. In the past four year, particular after 2004, wage level hikes in Chinese manufacturing factories, so the latest number should be much higher than that.  According to London-based EIU (Economist Intelligence Unit), labor costs last year has reached $1.36/hour, 72% higher than in 2001, and in 2010 they will be double again.

"It is not just wage that is going up; companies are having to buy air conditioners for employee dorms, provide better food and make the enviroment better for workers"  according to Michael Kleist, author of Global Sources' China Supplier Survey.

Banister also points out that, Western companies shouldn’t expect to pay only 57 cents per hour (not even in 2002), because foreign-owned factories are usually located in cities, and hire skilled workers who earn more. 

Evidence seems to point to the direction that cheap labor is not the only reason why Chinese excel in manufacturing. Wage level in India is much lower.

The longer reports:
manufacturing employment and compensation in China (pdf file)
Two shorter reports:
Manufacturing employment in China  (pdf file)
Manufacturing earnings and compensation in China  (pdf file)

You may also want to read a previous post on this Bulletin,  on Chinese minimum wage

What’s so special about China’s exports? They are too sophisticated.

One special characteristic of Chinese exports is that they are too technologically sophisticated for a typical developing country at this stage of development. Certainly it is sometimes foreign parent companies that control the most value-adding stage of the production chain of these products, and Chinese may not contribute that much technologically, there are benefits associated with such an export pattern.

According to new study Harvard professors Ricardo Hausmann, Jason Hwang, and Dani, this export pattern is beneficial to China’s future growth, because knowledge can spillover from these sophisticated productions, while in countries specialize in commodity exporting, they may not have a chance to learn at all.

What You Export Matters (pdf file)
When local cost discovery generates knowledge spillovers, specialization patterns become partly indeterminate and the mix of goods that a country produces may have important implications for economic growth. We demonstrate this proposition formally and adduce some empirical support for it. We construct an index of the "income level of a country's exports," document its properties, and show that it predicts subsequent economic growth.

Also see their case study of China:
What’s so special about China’s exports? (pdf file)

Robert Mundell: don’t push China to revaluate currency!

Nobel economist Robert Mundell gave a lecture on the Chinese economy, in Simon Fraser University, BC.

Below quoted from the Calgary Sun:

"I don't think China will accept it," said Mundell. "It's moreover not a good policy for the United States or the IMF to push because it would do countless damage to the poorer parts of the Chinese economy."

While China is the most successful of the world's emerging economies, it still has 80 million people living on less than $1,000 US a year.

Boosting the yuan by the 40 to 50 per cent that some have demanded would make their products instantly uncompetitive, Mundell warned.

"Appreciation would be devastating to those people," he said.

Mundell noted the Japanese economy ground to a halt for most of the 1990s and its banking system collapsed after Japan agreed to boost the yen.

Removing exchange controls by allowing China's currency to float would be equally damaging as Chinese demand for dollars exploded and the yuan tanked, Mundell argued.

What are in the Chinese currency basket?

Officially Chinese Yuan is not pegging USD, but a basket of currencies that include mainly USD, Euro, Japanese Yen, Korean Won, and various other secondary currencies. The precise weight of each currency in the basket is however confidential. As a matter of fact, it is actually not clear whether the basket actually exists, or whether USD actually makes up 100% of the basket.

Many private sector analysts have been doing some reverse-engineering to back out the weights by regressing USD/Yuan rate on movement of other major currencies.

T-A-C Financial Research, for example, reports that USD’s weight in the basket is estimated to be 33%, while weights for other currencies are 11% for Euro, 30% for Japanese Yen, 16% for Korean Won. Morgan Stanley’s estimate of USD’s weight is much higher at 43%.

According to a report by T-A-C (pdf file), the predicted weights fit the actual movement of USD-Yuan rate very well in 2005, with a R-Squared of over 90%. Using this weighting scheme, Based on consensus forecast of USD exchange rates with other major trading partners, T-A-C forecasted in September 2005 that  USD/Yuan rate will on average reaches 7.99 in August 2006. In the most optimistic situation, Yuan may appreciate to 7.91.

Certainly, all of these forecasts of Yuan movement are conditional on China’s actually using a weighting scheme (as opposed to human discretion) to set the exchange rate  and the scheme will remain unchanged.

Yuan needs revaluation, not flexibility (volatility)

Should Chinese currency Yuan’s exchange rate be made flexible? Or should we be happy with just a large revaluation (and then fix it there)?  At least currently these two goals are consistent, as everyone expects Yuan to revaluate once flexibility is allowed. But in the longer term, Yuan can move in both directions, and we need to evaluate the pros and cons of it.

A new research (done by professors Philippe Aghion, Philippe Bacchetta, Romain Rancière and Kenneth Rogoff ) suggests that it may not be advisable to introduce flexibility (volatility) too early into Yuan when China is still a financially underdeveloped country. Their theory and empirical evidence shows that, for countries with relatively low levels of financial development, exchange rate volatility generally reduces growth.

Then I think an unidirectional revaluation of Yuan upward would suit the needs of both Chinese and Americans, since no one is actually demanding flexibility (I guess the Congress will explode if China were to devaluate Yuan, although it is also a “flexibility” intepreted literally)

Now that we establish that what everyone wants is just a revaluation, then one proposal could be: Using government (not market) force to gradually lower the Yuan-Dollar rate to 7 or even 6 (to appease some American politicians), and fix it there after 2008 U.S. election (after which I think the need to use China as a scapegoat will be gone),  until there is need in the Chinese’s side to further adjust the exchange rate.

Exchange Rate Volatility and Productivity Growth: The Role of Financial Development (PDF file)
Abstract: This paper offers empirical evidence that real exchange rate volatility can have a significant impact on long-term rate of productivity growth, but the effect depends critically on a country's level of financial development. For countries with relatively low levels of financial development, exchange rate volatility generally reduces growth, whereas for financially advanced countries, there is no significant effect. Our empirical analysis is based on an 83 country data set spanning the years 1960-2000; our results appear robust to time window, alternative measures of financial development and exchange rate volatility, and outliers. We also offer a simple monetary growth model in which real exchange rate uncertainty exacerbates the negative investment effects of domestic credit market constraints. Our approach delivers results that are in striking contrast to the vast existing empirical exchange rate literature, which largely finds the effects of exchange rate volatility on real activity to be relatively small and insignificant.

Why I think Peter Morici is wrong in Chinese currency revaluation issues?

Dr. Peter Morici (University of Maryland) is a dedicated China-basher on Yuan revaluation issues. His articles on Yuan revaluation issues appear in numerous national and international  newspapers. I agree that China should allow more flexibility in Yuan exchange rates and it is in China’s own interests to let Yuan appreciate. But the reasoning based on which Dr. Morici reach his conclusion is problematic.

Let me comment on them one by one. Let's start from: “It’s high time for John Snow to cite China for manipulating the Yuan” – in Finfacts, Ireland

“US Treasury Secretary John Snow will soon issue his semiannual report on the currency policies of major trading nations....Secretary John Snow should determine that China manipulates the yuan to obtain an unfair competitive advantage. Sadly, he will likely again deny sound economics and finesse the issue.”

“Should determine”? I shall “determine” that from now on the sun will rise from the west? Does the world work in such an egoistic way? And I feel particularly disturbed that he think whoever don’t think the same way as he does is not “sound economics”

“China to obtain an unfair competitive advantage”? Seems that most of China’s exporters are foreigner-owned. Is Dr. Morici saying that some hard-working American entrepreneurs are gaining an unfair advantage against some American vested interest (unions, etc)?

“International trade and investment flows best promote global prosperity and progress in developing countries when those reflect comparative advantages and national differences in market-determined rates of return for capital. Exchange rate adjustments are vital for ensuring that national trade and investment balances reflect these fundamentals and promote the efficient geographic dispersion of production.”

I think it is quite true. So why doesn’t Dr. Morici accept that fact that many manufacturing tasks are not American’s comparative advantage any more?

“For example, the 1997 Asian currency crisis was caused by overvalued currencies, such as the Korean won, engineered to allow manufacturers to buy western capital goods and technology on the cheap. These required borrowing dollars to support currency values and betting those loans could be repaid with future export earnings."

Doesn’t Dr Morici know that currency overvaluation is simply redistribution of profits from Korean net exporters to Korean net importers, and for those who import machines and then export final products, the effects are more likely to be canceled out?

Also, does this mean that Americans consumers are buying goods “on the cheap”. Then why the complaints? It’s redistribution of profits from some low-tech American manufacturers to American consumers. If you feel it is unfair, go legislate a law to tax American consumers and use the proceeds to compensate unemployed American workers. It is simply an American domestic issue.

“(In Korea....) When bad investment choices and corruption kept export enterprises from paying out as needed, dollar denominated loans could not be repaid and calamity followed. Speculators were tarred but it was the stupidity of finance ministers that precipitated the crisis.”

Who is to be blamed for the Great Depression then? Treasury secretary of the United States?

“In the 1980s and 1990s, Japan prosecuted a mercantilist assault on European and North American durable goods industries by purposely undervaluing the yen. When rising wages and other costs finally limited export-led development, Japan’s economy sputtered, and it has suffered a decade of stagnation.”

Don’t disseminate false information. Let me correct you. Japan fell into recessions because she yielded to the pressure of the United States and drastically appreciated Yen.

“Clearly, China’s currency practices create an unfair trade advantage and are one reason manufacturing is not enjoying the same scale of expansion as the rest of the U.S. economy.”

Why should manufacturing enjoy the same scale of expansion as the other sector at all? Manufacturing employment share has been declining for decades. (remind you: China was busy in Cultural Revolution at that time and wasn’t doing business with the U.S.  Who else do you want to blame then?) America prospers because she keeps moving away from low value-added manufacturing to higher valued-added services, research and development. It is an inevitable trend!

“Given China’s development status and trade surpluses, this pattern of official reserve purchases may be fairly characterized as currency manipulation. It may not be reasonably characterized as anything else.”

Remind me of: “Given that this person is Black or Hispanic, he may not be reasonably characterized as anything else other than a murder.”  What an interesting conclusion!

“Sooner or later, China will reach the limits of its ability to sell cheap goods in the United States. With its surplus of underemployed labor, rising wages won’t pose too much of a problem. However, Wal-Mart can only sell so many cheap gadgets, and if China steals too many U.S. jobs, stagnant wages will severely constrain U.S. demand for its products.”

Why do you think Chinese won’t move up the value chain? And based on what do you established that China “steals”?  Are theses jobs owned by the U.S., and not allowed to be occupied by poor people outside the U.S.? So whoever defeat you is stealing from you?

“China’s drain on oil and other global resources, and the inflation that creates, is about to preview that phenomenon”? Doesn’t the United States consume oil and global resources as well? So you don’t allow others to consumer too?

And an undervalued Yuan create inflation in the U.S. ? What kind of economics is this, Dr. Morici?

Skilled workers don’t fear losing jobs

In the new century, so long as you have skills that others don’t have, you will have a job, well-paid job. Skills don’t come to you randomly, people worked hard and sacrificed in leisure in the past in order to obtain skills, and certainly they should be treated differently from lazy people. No pain, no gains! Facing the same challenge, it is interesting why some people do not address it in a civilized way.

“A British consultancy and 150 former MG Rover engineers are aiming to start up production of Rover cars in China. Ricardo, the engineering group, is working on turning the intellectual rights into production and on creating a range of cars including a stretched version of the 75.” – Channel 4, U.K.

“In September 2004, for example, hundreds of Spaniards took to the streets to protest job losses to Chinese competition in the country's shoemaking industry. Demonstrators badly damaged two Chinese-owned warehouses and set fire to a truck owned by a Chinese businessman. Others unfurled banners that read Chinese Out.” – CNN Money

Latin America vs China: a more meaningful topic than India vs China

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.

Minimum wage, China vs India: is cheap labor the real answer for China’s success in manufacturing?

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)

How large is the economic benefit of merging Pakistan with India, Mexico with US....

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.

India loses out in free trade agreement with Thailand?

Ravi Krishnan in Indian newspaper Financial Express claims that India loses out in free trade agreement with Thailand.

His evidence is that:

During January-December 2005, Thailand's exports of items under the Early Harvest Scheme (EHS) of the Indo-Thai FTA stood at Rs 664.3 crore — an increase of 71% over calendar year 2004. In contrast, India's exports to Thailand actually declined 33.8% to Rs 195.6 crore.

His point is that: India receives less monetary revenue from trading with Thailand and thus loses out from the deal.

Ravi forgots that trade is exchange of goods for goods, goods for money, or money for goods. In any voluntary exchange/trade, when you give away goods or money, you will receive goods or money of equivalent value as compensation. 

Certainly in this deal Indians send more money to Thailand than Indians receive, but doesn’t it also indicate that Indians receive more goods from Thailand?

No one loses out from trade. As a matter of fact, both sides gain because with the same amount of money, you can get more stuff from Thailand than from inefficient domestic manufacturing sector back in India.

If you are a worker, do you think your boss always loses out when he hands you the paycheck. No, because he gets your labor of equivalent market value as exchange. Then why do you think India loses out from trade simply because Thailand exports more and receive more money from India?

Why Has There Been Less Financial Integration In Asia Than In Europe? Geography matters

Why Has There Been Less Financial Integration In Asia Than In Europe? Professor Barry Eichengreen has a geographic explanation.  His study shows that: distance between countries, whether they share a common language, and whether they share a land border, explain a good deal of the difference in financial integration between the two regions.

He also points out that recent surge of intra-regional trade in Asia is a good sign for further financial integration, because evidence that finance follows trade suggests that Asia is less financially integrated than Europe because it has done less to promote the growth of intra-regional trade.

You may also want to check out our previous commentary in the Bulletin: "A single Asian common currency?"

Why Has There Been Less Financial Integration In Asia Than In Europe? (PDF file)
Abstract: This paper asks why there is less financial integration in Asia than in Europe, taking as a case study the cross-border lending and investment activities of national banking systems. Our results suggest that different levels of economic development in Asia and Europe, along with other differences in regional circumstance that are largely predetermined from the point of view of policy (distance between countries, whether they share a common language, and whether they share a land border), explain a good deal of the difference in financial integration between the two regions. The rest of the gap is explained by policy variables. Evidence that finance follows trade suggests that Asia is less financially integrated than Europe because it has done less to promote the growth of intra-regional trade. Our results also suggest that controls on capital account transactions can have a lingering effect on the volume of cross-border claims and that their shadow is longest where those controls were maintained for the greatest number of years. The underdevelopment of financial markets and institutions in some potential lending countries also appears to be an impediment to financial integration in the region.

John Snow blames it on the rest of the world

Today John Snow, US Secretary of theTreasury, published an article in the Post that tries --again-- to blame the huge US twin deficits on the rest of the world.  The problem he implies, is not that the United States is the only economy in the history of the world to fight a war and reduce taxes at the same time; nor the unbeleivable fiscal profiglacy of this administration (remember the "bridge to nowhere"?).  Blame it on the Asians for their huge savings, low investment and government spending.  Yours truly saw him this morning walking on the street after a meeting part of the bi-annual IMF-WB spring meetings, where thousands of journalists, policymakers, and yes, bloggers, converge.  Being an innefectual secretary of the Treasury, with little understanding of economics, it was no surprise that he looked gloomy and weary.  What a difference with Rubin.

Is Poland the next Spain? Is China the next Spain?

In the 1970s and early 1980s, income level in southern European countries such as Spain rapidly converged to the rest of the Western Europe. As central and eastern European countries are joining the common market, it is natural to ask “is Poland the next Spain?” Will they catch up with their western neighbors? And how long will it take?

Professors Francesco Caselli and Silvana Tenreyro analyze the case and bring one piece of bad news and one piece of good news.

The bad news is: as the income gap between agriculture and industry is quite small in Eastern Europe, it is unlikely that they could raise income dramatically by massive reallocation of labor from agriculture to manufacturing and services (which was what happened in Spain in 1970s). The only option for Eastern European countries is to increase productivity in manufacturing as the productivity gaps in this sector compared to Western European countries are still enormous. This is more complicated a task and will take a long time.

The good news is: Eastern Europe already has levels of human capital similar to those of advanced Western Europe. Human capital gaps have proved very difficult to overcome in the experiences of Southern European countries such as Spain. Eastern European countries however start out without the handicap, and they may catch up even faster because higher human capital enables them to emulate their western neighbors’ frontier technologies and best practices without inventing the wheel.

New questions: Is China the next Spain? Is India the next Poland?

In China, increase of per capita income is evidently achieved through mass reallocation of labor from unproductive agriculture sector into urban manufacturing sector.This happend in Spain too. In India, the higher education system produces higher quality graduates as competitive as their Eastern European counterparts.........

What are missing for both China and India, however,  are geographic neighbors that are as rich and as responsible as Western European countries. I don't see Japan can play such a role in the near term. Rich EU countries have a well-designed package of programs to help their Eastern neighbors to harmonize their system and converge to Western standards.This isn't ready for Asia yet; the income and institutional gaps are too big in Asia!

References:
Is Poland the next Spain? (PDF file)
Professor Jeffrey A. Frankel wrote an interesting piece of  comment titled “Is Slovakia the next Portugal?” (PDF file)

Globalization and trade does help promote democracy: historic evidence

Does globalization and international trade helps promote democracy? On the one hand, Dovish school of foreign policy believes that trade can engage countries behind iron curtains and get them exposed to new ideas and new thoughts. Also, authoritarian regimes are likely to hold out when the economy open up and private sector develops. On the other hand, the hawkish believe are very pessimistic on this, pointing to China as an counterexample, claiming that it is wish-thinking to bet on trade to change a political regime.

Historic evidence however indeed suggests that international trade helps promote democracy. Christopher M. Meissner (Cambridge) and José Ernesto López-Córdova (IADB) study history from 1870 to now, and find that late nineteenth century trade globalization may have helped generate the "first wave" of democratization.

They show that: “Between 1920 and 1938 countries more exposed to international trade were less likely to become authoritarian.”; and “post-World War II results suggest that a one standard deviation increase in trade with other countries could bring countries like Indonesia, Russia or Venezuela to be as democratic as the US, Great Britain or France.”

A caveat does exist. They also notice that “commodity exporters and petroleum producers do not seem to become more democratic by exporting more of such items”. Venezuela, Russia, Nigeria, Saudi Arab..... you can say good bye to democracy.

The Globalization of Trade and Democracy, 1870-2000  (PDF file)
Abstract:  We study whether international trade fosters democracy. The likely endogeneity between democracy and trade is addressed via the gravity model of trade, allowing us to obtain a measure of natural openness. This serves as our instrumental variable for actual trade openness a la Frankel and Romer (1999). We use this powerful instrument to obtain estimates of the causal impact of openness on democratization. A positive impact of openness on democracy is apparent from about 1895 onwards. Late nineteenth century trade globalization may have helped generate the "first wave" of democratization. Between 1920 and 1938 countries more exposed to international trade were less likely to become authoritarian. Finally, our post-World War II results suggest that a one standard deviation increase in trade with other countries could bring countries like Indonesia, Russia or Venezuela to be as democratic as the US, Great Britain or France. We also see some variation in the impact of openness by region and note that commodity exporters and petroleum producers do not seem to become more democratic by exporting more of such items.

Globalization is helping the poor in China. Wages are rising!

Today’s New York Times’ Editorial is about the “World’s Factory” - China. I have to say that the Times does a very good job in defending free trade.

Wages are rising in China. It is not the result of union activism, nor is it the result of government intervention. It is simply the invisible hand that is working. As the economy grows, demand for skilled workers rises, and employers have to pay more.

“...the result looks like a union leader's dream come true: wages are going up, and workers are demanding — and getting — better working conditions and benefits. Minimum wages, which averaged $58 to $74 a month, excluding benefits, in 2004, have climbed about 25 percent over the last three years in Shenzhen, Beijing and Shanghai. Wages at larger factories operated by multinationals, which are typically $100 to $200 a month, are also rising.”

Many Western observers complain that multinationals are “exploiting” Chinese workers. But as the Times rightly points out, what the anti-globalization activists are doing is simply pushing female workers to prostitutions.

“But the alternative is far worse. In the developing world, there is too often little work to be found. In Cambodia, young men spend their days leaning against their rickety moped taxis, hoping for passengers. In Ghana, young girls run up to cars at Accra's few stoplights, selling oranges for nearly nothing. For all the toiling and monotony, factory jobs in these countries can mean survival for a family of six, supported by the monthly paycheck from one sister who sews shirts for the Gap.”

The Times concludes that trading with China is a win-win situation, for Chinese, for Americans, and for the developing world. Hard-working people, regardless of races,  deserve benefiting from competition. A certain segment of our population always tries to impose their disproportionate influences on us through rent-seeking activities, because they are going to lose out from globalization.

“All this speaks to how woefully misguided it is for members of Congress to respond to these pressures by trying to stop the flow of goods from China. The better off China is, the better off the rest of the world is — poor countries because they will get a shot at the jobs that leave China; rich countries because many more people over in China may finally be able to afford the expensive goods that are made in America.”

Saving 226 U.S. jobs with $221 million per year? Why don’t we send them to some Caribbean resorts instead?

According to a study by professors Gary Hufbauer and Kimberly Elliott, “ the annual consumer costs per American job "saved" by "special" protection range from $100,000 to over $1 million and average $170,000. Consumers thus pay over six times the average annual compensation of manufacturing workers to preserve each job.”

In 1990, the U.S. tariff on luggage was estimated to be protecting only 226 U.S. jobs, at an annual cost to consumers of $221 million, or $934,000 for each job protected.  Why don’t we just buy the workers all year long luxury holidays in some Caribbean Islands? No..... In that case who are to feed the union leaders and the lobbyists? The whole protectionism businesss is never about the welfare of hardworking workers!

They are not alone. In Europe, the Common Arigcultural Policy uses up almost half of the European Union's budget to protect an industry that employs only 5% of the labor force, and raise the price of food to consumers.

Measuring the Costs of Protection in the United States
(by Gary Hufbauer and Kimberly Elliott)
This comprehensive study finds that tariffs and quantitative import restrictions in place in 1990 cost American consumers about $70 billion, more than 1 percent of GDP. The net national welfare loss, after deducting tariff revenues and transfers to domestic producers, was $11 billion, of which perhaps 70 percent was captured by foreign producers as quota rents.
Nearly half of the consumer costs are accounted for by 21 highly protected sectors, and more than a third, $24 billion, are attributable to textiles and apparel alone. The cost to consumers of "special" protection aside from textiles and apparel dropped sharply in the 1980s, from $15 billion in 1984 to $6 billion in 1990. If it is ratified, the Uruguay Round will result in a further large reduction in these costs, particularly in textiles and apparel. Still, the annual consumer costs per American job "saved" by "special" protection range from $100,000 to over $1 million and average $170,000. Consumers thus pay over six times the average annual compensation of manufacturing workers to preserve each job. In terms of net national welfare, the cost per protected job is about $54,000.
This figure far exceeds the cost per worker of the most generous adjustment program entailing income support, retraining, and relocation. This study will be indispensable to public and private sector decision makers and analysts concerned about the very high costs and small benefits of US import barriers. Teachers will find this book an engrossing way to introduce students to the cost of protection calculations that government economists and trade negotiators frequently make.

Reference: David N. Weil, "Economic Growth", Chapter 11, Growth in the open economy

Unlimited labor supply in China? Not anymore! Wages are hiking!

According to Business Week report “How Rising Wages Are Changing The Game In China”, a labor shortage in China is having  pay soaring!

“Labor shortages are forcing the company to boost wages. Last year salaries surged 40%, to an average of $160 a month, and Yongjin still can't find enough workers ....... Guangdong Province says it has 2.5 million jobs that remain unfilled, while Jiangsu, Zhejiang, and Shandong provinces say they, too, face shortages of qualified workers......Reports of labor shortages first cropped up in late 2004, but companies thought the phenomenon was temporary. Now a surge in both turnover and wage costs is convincing multinationals and their suppliers that the China game is changing permanently.”

The good news  (for China) is that what China is selling is not only cheap labors, but the whole package (first-world infrastructure, business-friendly and efficient bureaucracy, skilled labors....), and thus there are no signs multinationals are moving their factories to even lower cost countries in Indonesia or Vietnam.

The bad news (again for China) is that research shows that only about one-fifth of cost hikes are passed through to American consumers because Chinese manufacturers have little bargaining and pricing power against Wal-Marts, etc. Higher labor costs are thus only eating into Chinese’s profit margin. At some point, they will have to realize that they cannot put up with this anymore, and have to develop their own global brands, move to higher end markets, instead of manufacturing undifferentiated commodity-type  products and making merely fifty cents for every pair of Nike trainers and even less for plastics Christmas trees.

The bad news for Americans is that we are going to see our grocery bills rising!

Globalization and taste convergence: The cases of wine and beer

We’ve heard too much discontents of globalization. Globalization however is unstoppably changing every aspects of our life. Take alcohol consumption as an example.  Joshua Aizenman and Eileen L. Brooks at the University of California (“wine country” campus?) examine historic data in 38 countries around the world and discover that there is clear convergence in the consumption of wine relative to beer between 1963 and 2000 . Relative consumption of wine can be explained well in 1963 by grape production and latitude, but these variables are much less significant in 2000. Now you don’t need to live in wine country to be able to enjoy great wines!

Tip for our readers: In another paper "Products and Prejudice: Measuring Country-of-Origin Bias in U.S. Wine Imports" , Professor Brooks discovers a secret that a “Product of Italy” label can raise the price of a bottle of wine by more than 50% without raising the quality, which means that:  if you see two bottles of wine with same price, one is “Product of Italy” and the other from Argentina, don’t buy the Italian one! Curious why folks beleive that Italian wine should sell at higher prices? because they are better economists?

Globalization and taste convergence: The cases of wine and beer
Abstract: This paper investigates changes in cultural consumption patterns for a low concentration industry: wine and beer. Using data on 38 countries from 1963-2000, there is clear convergence in the consumption of wine relative to beer between 1963 and 2000. Convergence occurs even more quickly within groups of countries that have a higher degree of integration. A key prediction of international trade is confirmed in the data: greater trade integration weakens the association between production and consumption patterns – although the relative consumption of wine can be explained well in 1963 by grape production and latitude, these variables are much less significant in 2000. Despite these “scientific” explanations for the consumption of wine, there is also a cultural angle to wine consumption. While the relative wine consumption of France and Germany is converging, several Latin American countries fail to converge. The patterns of convergence are consistent with dynamics of adjustment in an overlapping generation habit formation model.

+2000 years of Chinese trade surplus: a history lesson

“China, a vortex for the world's gold” is an intriguing article by Keith Bradsher (NY Times) on ancient history of Chinese trade surplus. Chinese reserves of foreign currency already exceed $800 billion, up from just under $4 billion in 1989. But it is nothing new if we travel back in time for 2000 years.

“Ancient Rome, for example, found that it had little except glass that China wanted to buy. Nearly 2,000 years ago, Pliny complained about the eastward flow of Roman gold along the Silk Road in exchange for Chinese silk.”

“...from A.D. 600 to 750, from 1000 to 1300 and from 1500 to 1800 - China again tended to run very large trade surpluses. By 1700, Europe was paying with silver for as much as four-fifths of its imports from China because China was interested in little that Europe manufactured.”

And history suggests that Chinese products will remain very cheap despite huge trade surplus and “appreciation” of money.

“A longstanding mystery for economic historians lies in how so much silver and gold flowed to China for centuries for the purchase of Chinese goods yet caused little inflation in China. Many of China's manufactured goods remained much cheaper than those from other countries until the early 1800s, despite the rapidly growing supply of silver in the Chinese economy. One theory is that Chinese output was expanding as fast as the supply of precious metal. Another is that the Chinese were saving the silver and gold, not spending it.”

British Empire worked out a way to maintaining a large long-term trade surplus with China by getting Chinese addicted to imported opium. In the twenty-first century, however, we have a better solution:  Chinese invest much of its foreign currency reserves in U.S. Treasury securities or mortgages on American homes.

On thing I am very sure: we should always try to learn from history. Let me tell you a story.

A famous historian, Niall Ferguson,  was talking to a mid-ranking official in the US Treasury about American plans for the post-war reconstruction of the Iraqi economy. She had just attended a meeting on precisely that subject. "So what kind of historical precedents have you been considering?" Prof. Ferguson asked. "The post-Communist economies of Eastern Europe," she replied. "We have quite a bit of experience we can draw on from the 1990s."

Well, she obvious is not aware that British used to invade Iraq more than 80 years ago.

"What happened in Iraq last week so closely resembles the events of 1920 that only a historical ignoramus could be surprised. It began in May, just after the announcement that Iraq would henceforth be a League of Nations "mandate" under British trusteeship. (Nota bene, if you think a handover to the UN would solve everything.) Anti-British demonstrations began in Baghdad mosques, spread to the Shi'ite holy centre of Karbala, swept on through Rumaytha and Samawa - where British forces were besieged - and reached as far as Kirkuk.Contrary to British expectations, Sunnis, Shi'ites and even Kurds acted together. "

Prof. Ferguson has to reach a conclusion in his op-ed "This Vietnam generation of Americans has not learnt the lessons of history" that:

"For many Americans - including the Democratic contender for the presidency, John Kerry - the only history relevant to American foreign policy is the history of the Vietnam War."

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

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!

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. 

The fake China threat

In today’s Washington Post,  Sebastian Mallaby  (in “The fake China threat”) explains to us why China is not a threat, but  actually a “generous” contributor to American economy, and why we should stop cold-war way of  thinking. I have to agree with him. The creation of knowledge and advancement of technology has never been a zero-sum game! And America stands to gain more in the pie.

“ Harvard's Richard Freeman, an economist who has studied the market for scientific talent, recounts a conversation with a physicist who'd collaborated with foreigners. "Ah, so you are helping them to catch up with us," Freeman commented. "No, they are helping us keep ahead of them," came back the answer: Because of the superior U.S. business environment, the research was being turned into a company in the United States.

Equally, in the competition to retain the best research scientists, the United States has a lead that tends to reinforce itself. Because nearly all the world's top universities are American, the world's top researchers flock here; provided enough visas are available, it's hard to see why this would change. The story of Gavriel Salvendy, which some might see as an omen of America's declining status, is in fact more subtle. Salvendy has long recruited star Chinese graduate students to Purdue, where he still does most of his research. Of the 18 Chinese who have completed PhDs under his supervision at the Indiana campus, 15 have stayed on in the United States.”

The link between racism and trade protectionism

I love reading Harvard professor Niall Ferguson’s books and articles. He is such a library of history that he can always inform current affairs with similar historical lessons. Many of us rarely realize that history always repeats it self and human beings are very forgetting, and this is why we keep making similar mistakes.

In a recent article “We may have no ghettoes – but Britain must beware the paradox of integration”, he tells us why integration and prosperity of minority groups may not bring peace but disasters to them. 

Through his analysis, I find the true root and reason of  rising trade protectionism and politician hawks’ hysterias in coining “China threat” (note: this is however my own extension of Prof.Ferguson's theory, and he didn't talk about trade protectionism in that article)

“Successful racial integration - whether in the housing or the labour markets - can in fact have precisely the opposite effect, paradoxical though that may seem. Here's how.

A century ago, hundreds of thousands of Jews migrated westwards from Russian-occupied Poland and Ukraine to escape from discrimination and pogroms. Many settled in Western Europe. There they thrived, quickly leaving behind the slums where they had first settled. By the early 20th century the sons and grandsons of immigrants were prosperous businessmen, professionals and academics.

Another indicator of integration: more and more Jews married non-Jews - by the early 1930s, for example, one in every two marriages in Hamburg involving a Jew was to a Gentile. So total was the assimilation of German Jewry that religious leaders feared their community was simply going to dissolve itself.

Yet within a decade, dissolution had given way to the "Final Solution", as first Germany and then all of Continental Europe was gripped by an extraordinary anti-Semitic backlash.

The Holocaust was, of course, a unique historical crime. Yet its underlying cause - a violent reaction against the apparently successful integration of an ethnic minority - was far from unique.

This is not to predict either Nazism or Balkanisation in Britain. But it is to point to the dangers of a comparable kind of backlash against integration. Because for every success story like the academically ambitious Anthony Walker, there are at least two - and probably more - white losers.

Ill-educated, unskilled and probably unemployed, Britain's white losers ought to blame themselves (or possibly their elected leaders and negligent parents) for their plight. But it is much more convenient for them to blame the hard-working offspring of immigrants, whose achievements contrast so starkly with their own. Their resentments are likely to be inflamed by the sight of a non-white man with a white woman, since sexual jealousy nearly always plays a malign role in crises of integration. It certainly did in Nazi Germany.”