Ferraris for all

The China Digital Times, an excellent portal source for information on contemporary Chinese society, has produced a useful series of guides to China in 2008. Topics include China and the developing world, the environmental crisis, the global financial crisis and China’s domestic market. Links to each review are provided in the latest topic guide: on the contentious subject of food and product safety.

Labels: china, development, economics, environment, food

The following comment by me appeared in the latest Fund Strategy (15 December).

As the days go by explanations for the economic crisis pile up. Initially the favoured explanation was a combination of greedy bankers and irresponsible borrowers. Others added to the list since include insufficient state intervention and timeless financial euphoria.

This column has argued instead that other factors are key. It can be seen as a crisis of green capitalism and of risk aversion.

Green capitalism is key because it means that the growth in productive capacity is being slowed by subjective limits. There is a widespread fear of growth and innovation. As a result a disparity arose between the scale of production and that of consumption. In that sense it can be called a crisis of underproduction.

Risk aversion also plays a role. As the financial sector has swollen it has been shaped by risk aversion. Many key financial instruments that have played a large role in the crisis - including credit derivatives and securitised mortgage products - are essentially mechanisms for transferring risk. Yet, contrary to what their creators intended, they have created the basis for "contagion" as financial problems have spread.

On reflection there is also another important factor to consider. It could indicate the decline in importance of a one-off boost to the global economy.

With the end of the Cold War a huge new labour force became more closely integrated to the global economy. China and India boomed and the world economy enjoyed a strong growth spurt as a result.

Clearly China, India and other emerging economies will still continue to exist and, hopefully, to grow. But it is hard to see any equivalent additional boost to the global economy of the scale of the addition of these countries.

In the past two decades the world has enjoyed an unprecedented period of extensive growth. The scale of involvement in the global economy has grown hugely and many millions of people have benefited as a result.

This boom is entirely different in character to that which followed the end of the second world war. That was much more characterised by intensive investment in technology and machinery.

Experience provides little guide to the character of the economic crisis. Its roots in green capitalism, risk aversion and extensive growth make it unlike any other.

Labels: china, economics, environment, finance, Fund Strategy, india

Worldwrite’s latest Worldbytes television programme includes an item with me talking about global inequality. Other stories include challenging China bashing, a scientist talks about waste and an alien’s take on carbon footprints.

Labels: china, development, environment, footprint, inequality, media appearances, Worldwrite

I have added to and updated the list of useful links on the left hand bar at the side of this site. New links include China Digital Daily, Climate Debate Daily, Culture Wars’ world development pages, the Future Cities Project and Indur Goklany’s papers. Any suggestions for further links or material for posts please email me HERE.

Labels: china, cities, climate, development, progress

John Engler, the president of America’s National Association of Manufacturers (NAM), has written a piece in the Financial Times disputing the newspaper's article last week arguing China is about to come the world’s largest manufacturing power (see 12 August post):

“China has a long way to go to catch up with the US. The NAM’s analysis shows that in terms of real manufacturing value-added (price-adjusted, to reflect the quantity of output) the US remains by far the world’s largest manufacturer, producing nearly one-fourth of the world’s industrial output. Based on the highly respected World Bank database, our analysis also shows that we will produce twice as much this year as the fourth placed economy, China (the European Union and Japan are in second and third position, respectively). Even in current measures of manufacturing denominated in dollars (which inflate China’s position because of the rising yuan and other factors), China will produce only about 60 per cent as much as the US in 2008.”

Labels: America, china, economics

Dick Meyer, a veteran American journalist, has written an interesting-sounding book on self-loathing in America with the brilliant title of Why We Hate Us (Crown 2008). To quote the blurb from his publisher:

“Meyer argues—with biting wit and observations that make you want to shout, “Yes! I hate that too!”—that when the social, spiritual, and political turmoil that followed the sixties collided with the technological and media revolution at the turn of the century, something inside us hit overload. American culture no longer reflects our own values. As a result, we are now morally and existentially tired, disoriented, anchorless, and defensive. We hate us and we wonder why.”

No doubt there is much that is wrong with Meyer’s analysis but he raises some important questions. There certainly is a strong element of self-loathing in America and Western culture more generally. This is apparent in many areas including environmentalism, identity politics and the hostility towards Chinese economic development. It is a topic that is worth examining in more detail.

An extract from the book and interview with the author are available here.

Labels: America, book, china, consumption, happiness

To many it will probably come as a surprise that China is not already the “workshop of the world”. But according to a piece in yesterday’s Financial Times (FT) it is likely that China will take over from America as the world’s largest manufacturer sometime next year. China will account for about 17% of manufacturing output value added ($6.1 trillion) compared with 16% for America. This will end over a 100 years of American dominance. The exact figure is not quoted in the report but India is expected to remain way behind in this respect, despite often being mentioned in the same breath as China.

Today’s FT included a follow-up comment which argued the main challenge from China’s rise is likely to be environmental.

Labels: America, china, economics, india

The following comment by me - written during the opening ceremony for the Olympic games - appeared in this week’s Fund Strategy.

The Beijing Olympics symbolises the most important and positive development in the world in decades: the rapid economic development of China. Those who whine so noisily about the Olympics and China reveal more about their own insecurities than about the Asian giant.

China’s rapid growth over the past 30 years has raised more people out of poverty than any other development in world history. Its population is benefiting enormously from rising prosperity in a country where the scourge of famine was until recently a frequent occurrence. It is true that inequalities within China are widening, but in absolute terms living standards are immensely higher than in the past. China’s rapid growth has also led to a welcome reduction in the inequality gap between the developed world and emerging economies.

Given that China’s population is 1.3 billion, a fifth of the world’s, its internal development is hugely important. But it has also brought immense benefits to the rest of us. The global economy would have grown far more slowly in recent years if it were not for China’s contribution. Its rapid growth has played a key role in keeping the world economy going in the midst of an economic slowdown in the West.

If China’s development is so positive, why does it elicit so many complaints? It is hard to escape the conclusion that the West feels threatened by China’s emergence. Although China’s growth strategy is pragmatic, the western countries are worried they could lose their privileged place in the world.

The nauseating double standards applied to China confirm the point that the criticism is driven by western anxieties. No doubt the Chinese regime is deeply autocratic, but many critics forget, or at least downplay, anti-democratic trends at home. Try drawing breath in any British city without being filmed by CCTV cameras. Or how about detaining suspects for 42 days without charge? Those who complain about Tibet seem to forget about British troops in Afghanistan and Iraq. Defenders of such measures might point to the threat of terrorism and crime, but Beijing could do the same.

Rather than carp about the Olympics and China, it is time to enjoy the spectacle of the greatest sporting event on Earth.

Labels: china, development, Fund Strategy, growth

An interesting international poll for the BBC Newsnight programme shows mixed views on China. For instance, the Chinese were widely seen as both modern and friendly but also oppressed. The poll was conducted in America, Brazil, Britain, India and South Korea. It is an interesting counterpoint to the recent Pew poll of the Chinese themselves (see 24 July 2008 post).

Labels: china

An interesting survey on Chinese public opinion from the Pew Global Attitudes Project. The Chinese are evidently extraordinary satisfied with their economy even compared with a similar survey in 2002. Levels of personal satisfaction (on questions such as family, income and jobs) are not particularly high by international standards.

Labels: china, economics

The recent BBC Radio 4 Analysis programme by Martin Wolf, the chief economics commentator at the Financial Times, was particularly interesting. He looked at the significance of the increasing importance of the developing world.

Justin Lin, a contributor to the programme and chief economist of the World Bank, has also recently had an interesting sounding chapter published on Chinese inequality. It is part of China's Dilemma, a collection of papers co-published by the Australian National University and the Asia Pacific Press.

Labels: china, development, economics, inequality

You can see me talking about China and the environment at the recent Battle for China conference by clicking the link.

Labels: china, development, environment, media appearances, television

Frank Furedi has a piece on spiked today looking at how perceptions of China are distorted by the West’s own anxiety about modernity. He argues that hostility to China is one of the few issues that binds the contemporary right and left. One is fearful of a sinister new enemy while another treats Chinese business as uniquely malign. Furedi goes on:

“China has become a kind of environmentalists’ vision of Sodom and Gomorrah. Its population growth, brash materialism and indifference to the dogma of sustainability go directly against the precautionary attitudes that dominate public life on both sides of the Atlantic. It appears that the cartoon Chinese villain Fu Manchu is alive and well in the Middle Kingdom – only this time he is using his fantastic powers to pursue a variety of eco-crimes. Of course China’s real ‘crime’ is that, unlike some its liberal critics, it is still unambiguously wedded to modernity. It has not yet adopted the risk-averse and precautionary culture that prevails in Europe and America.”

Labels: china, development, spiked

Some last minute preparation for my Battle for China session on China as a “green peril”. An article by Elizabeth Economy and Adam Segal in Foreign Affairs (July / August 2008) argues that China’s inability to provide safe food and clean air for the Beijing Olympics shows its political weakness. And a Newsweek cover story on measuring global environmental progress includes a piece arguing that China lags behind other countries with similar income levels.

Labels: china, development, environment, speeches

I will be speaking at a session on China and the environment at the Battle for China event on 12 July in London.

Labels: Asia, china, economics, environment, speeches

The following comment by me appeared in yesterday’s issue Fund Strategy.

If demography was key then Zimbabwe, with a median age of only 20.3 years, according to the Central Intelligence Agency, would be a haven of prosperity. Yet it is Africa's worst-performing economy by far. India, too, would have been more dynamic in the past yet it has gone through prolonged periods of sluggish growth.

Conversely, Britain's median age, at 39.9 years compared with 25.1 years for India, might be taken to suggest a relatively poor country. But Britain, although growing more slowly, is vastly more productive and wealthier than India.

The key to a nation's prosperity is its productivity. High levels of productive technology and good infrastructure allow countries to become rich and stay that way. They also tend to lead to older and healthier populations.

Those of working age can produce more, and even the elderly, should they so wish, are in a better position to work, too. The more technology is used, the less need there is for workers to have to draw on sheer physical strength and stamina to perform their tasks.

In contrast, India has a vast population, particularly in rural areas, that is chronically underemployed. Over 60% of the labour force - that is more than 300m people - works in agriculture despite it accounting for only 17.5% of GDP. In this sense it is more closely equivalent to being on the dole in Britain than an efficient form of production.

A key challenge facing India, therefore, is to develop much larger modern industrial and service sectors. Although there is much hype about India's leading-edge technology, particularly information technology, it only accounts for a tiny proportion of the labour market.

For India to continue its economic growth the proportion of employees in modern sectors will have to be increased enormously. A substantial improvement in infrastructure - airports, communications, roads and utilities - will greatly aid the process.

The continuation of India's rapid growth depends on broadening economic development rather than the age of its population.

Labels: Asia, china, Fund Strategy, india

Last year the New York Times ran a series of articles on pollution in China entitled “Choking on growth”. Today Nicholas Kristof, a regular Times columnist, has a comment headlined “Where breathing is deadly”. No prizes for guessing which country he was talking about.

Kristof refers to one of the earlier articles which estimates that between 300,000 and 400,000 Chinese die prematurely every year as a result of pollution. These estimates could well be accurate but, as is often the case with statistics, they can be misleading in isolation. No doubt a rugged statistical model could be constructed to show that many millions of Chinese die every year as a result of poverty. If China had living standards and infrastructure on the same level as the richest countries no doubt its people would live longer and healthier lives.

To be fair to Kristof he does add some balance to his article: “China has been better than most other countries in curbing pollution, paying attention to the environment at a much earlier stage of development than the United States, Europe or Japan. Most impressive, in 2004, China embraced tighter fuel economy standards than the Bush administration was willing to accept at the time.”

Labels: china, development, environment

This week’s Economist includes a discussion (subscription required) of the World Bank’s $1 a day poverty line – its official measure of absolute poverty. However, the World Bank is rethinking this measure, which first emerged in the 1990 World Development Report, as it does not take into account relative deprivation. Evidently two new working papers (Dollar a day revisited and China is poorer than we thought) from the World Bank suggest a new poverty line of $1.25. The Economist concludes:

“For practical purposes, policymakers will always care more about their own national poverty lines than the bank's global standard. The dollar-a-day line is more of a campaigning tool than a guide to policy. And as a slogan, $1.25 just doesn't have the same ring to it. A better option might be to reset the poverty line at $1 in 2005 PPP, which would line up reasonably well with at least ten countries in the authors' sample. In adding a quarter to the dollar-a-day poverty line, the researchers may cut its popular appeal by half.”

As it happens such measures are generally arbitrary. But, in the absence of better data, they give some indication of trends in poverty and inequality.

Labels: china, development, economics, inequality

Will Hutton, writing in his regular Observer column on Sunday, was quick to blame corruption for the devastation caused by the recent Chinese earthquake. He associated this in turn with rapid economic growth:

“Corruption is ubiquitous, which is why so many buildings were deathtraps. Another woman drew attention to the government and party buildings that remained standing, plainly built to the right specifications. The Politburo could anticipate what was going to be said; fast, open and effective action was its best riposte.

“The government has announced an investigation into why so many classrooms collapsed, but the answer is already known. People want the government to maintain the pace of development but increasingly do not accept that the price has to be corruption. The government agrees and launches unsuccessful anti-corruption drives.”

What Hutton fails to even acknowledge is that building earthquake resistant buildings is expensive. That is why rich countries generally suffer less damage in earthquakes then poorer ones. In that sense rapid economic growth is a precondition for China being able to afford them. Hutton is so hostile to growth and so suspicious of the Chinese he does not even appear to recognise this basic fact.

Labels: china, corruption, development

Moisés Naím has an ambivalent article in Foreign Policy (March / April 2008) entitled “Can the World Afford A Middle Class?”. His short answer is “yes, but it will be awfully expensive”. Naim makes the correct but obvious point that the economic development of the likes of China and India will involve the use of a huge amount of resources. However, Naím seems doubtful about the ability of humanity to find new sources of supply for natural resources. Although he does not openly embrace Malthus he expects the surge in demand for resources to have unexpected and painful side effects.

Labels: china, consumption, development, economics, inequality, Malthus

Last week’s (15 March) Economist seemed to confirm some of the points I made in my recent spiked article about China being viewed as a “green peril”. The front cover branded China as the “new colonialists” for its hunger for natural resources. The headline of one of the articles on its survey of China’s use of natural resources was “the perils of abundance” and declared that “China must learn to do more with less”. Fortunately the main body copy was not quite as unbalanced but it shows the limits of the Economist’s supposed free market critique of environmentalism.

Labels: china, environment

Spiked has published my essay on why China’s environmental problems do not make it a “green peril”. It is based my talk to the China Development Society of the London School of Economics Students Union and part of a spiked campaign against China-bashing.

Labels: china, environment, speeches, spiked

The newly opened airport in Beijing looks amazing. Its architects evidently describe it as “the biggest building on the world”.

A comparison with London’s Heathrow airport is instructive. According to an article on the BBC website :

“Beijing's terminal is twice the size and about half the cost of Heathrow's new Terminal Five, which is due to open next month.

“Beijing has got from start to finish in four years. Heathrow has taken nearly 20.”

The BBC tries to soften the comparison by pointing out that the Chinese authorities, unlike those in Britain, do not have to engage in a lengthy consultation exercises.

But there is nothing democratic about such exercises. The slowness is more a symptom of Britain’s lack of dynamism and culture of excessive caution.

It is also sad that the small band of reactionaries who are campaigning against Heathrow’s third runway after often viewed so sympathetically. They should have the right to protest but their cause is entirely backward-looking.

Labels: china, climate, development, progress

Time magazine’s cover story (in the Asia and Europe editions) on “China’s short march” gives a vivid description of China in the midst of transformation from a rural nation to an urban one. In addition to the move from countryside to cities many millions of the newly affluent are moving to suburbs that surround China’s urban centres.

Although Bill Powell refrains from much editorialising in the piece there is a hint of environmental dangers through the spread of car ownership. He also ends with a warning about the potential dangers of inequality:

“It's not the people living the Great Chinese Dream — with the new house and the car and the dog and maybe a second child on the way — that the government needs to worry about. It's the people who build that dream for others, and then move on, hoping to do it again somewhere else. They, too, are vested in the country's economic miracle. But should that miracle somehow turn sour, look out.”

While the dangers are no doubt real it is a pity that it generally seems to be the negative points that are emphasised. On balance the urbanisation of China is a tremendously positive development.

Labels: Asia, china, cities, environment, inequality

I have come across a useful list of blogs on contemporary China.

Labels: Asia, china

Kenneth Rogoff, a professor of economics at Harvard and former chief economist at the International Monetary Fund, expressed concern about inequality in an article in yesterday’s Financial Times. Although the article focused on the possibility of a Chinese economic slowdown its points on inequality were much broader. He argues that:

“Protectionism is another growing risk. With income and wealth inequality rising throughout the developed world, politicians may start lashing out at China with trade sanctions on automobile parts, steel, paper products and, of course, textiles. China’s explosive export growth has made it far more vulnerable to a fall in exports than it was during the 2001 global recession.

“Perhaps the greatest threat to China’s expansion, however, comes from pressures created by its own exploding inequality levels. According to World Bank statistics, income inequality in China has leapfrogged that of the US and Russia, which is no small feat. Rising inequality is placing enormous strains on the political system, as is evident from a recent sequence of ill-considered policies that have been aimed at mitigating the problem. The government’s recent attempt to fight food inflation by using price controls is a highly conspicuous example.”

Later on Rogoff argues for welfare reforms as the best way of dealing with inequality:

“Rather than try to deal with inequality by labour market fiat, the government would do better to improve the social safety net through provision of more and better healthcare and pensions.”

Soon I hope to write a critique of these limited views of inequality.

Labels: china, economics, inequality, trade

Pranab Bardhan, a professor of economics at the University of California, Berkeley, has an interesting article in the Boston Review (“What makes a miracle” January / February 2008) on myths of Chinese and Indian development. His concern is to show the misconceptions in the standard account of recent rapid growth in China and India. He describes the orthodoxy as follows:

“The answer that continues to dominate public discussion in the United States runs along the following lines: decades of socialist controls and regulations stifled enterprise in India and China and led them to a dead end. A mix of market reforms and global integration finally unleashed their entrepreneurial energies. As these giants shook off their “socialist slumber,” they entered the “flattened” playing field of global capitalism. The result has been high economic growth in both countries and correspondingly large declines in poverty.”

However, for Bardhan the facts do not fully correspond with the account. For example, “China has indeed made large strides in foreign trade and investment since the 1990s, but well before then, say between 1978 and 1993, the country had already achieved an average annual growth rate of about nine percent.” And in relation to poverty reduction in China he argues that: “World Bank estimates suggest that two-thirds of the decline in extremely poor people (those living below the admittedly crude poverty line of one dollar a day per capita at 1993 international parity prices) between 1981 and 2004 had taken place by the mid-1980s. Much of the extreme poverty was concentrated in rural areas, and its large decline in the first half of the 1980s may have been principally the result of domestic factors that have little if anything to do with global integration: a spurt in agricultural growth following de-collectivization, in which output increased at 7.1% per year on average between 1979 and 1984, almost triple the 1970-78 rate; a land reform program, involving a highly egalitarian distribution of land-cultivation rights subject only to differences in regional average and family size, which provided a floor for rural income; and increased farm procurement prices.”

He makes similar points in relation to India. For instance. “As for poverty, the latest Indian household survey data suggest that the rate of decline, if anything, slowed somewhat in 1993-2005—the period of global integration—compared with the ’70s and ’80s. Moreover, some non-income indicators of poverty such as those relating to child health, already rather dismal, have hardly improved in recent years.”

There are many other points in the article that are worth pondering.

Labels: Asia, china, development, economics, health, inequality

I will be giving a talk on China as the new “green peril” at the London School of Economics at 2pm on 5 March.

Labels: Asia, china, environment, speeches

Lester Brown, one of the doyens of environmentalism, excels himself in miserabilism in a missive entitled “Santa Claus is Chinese” (apparently first published in 2006 but emailed out today). After complaining about how many Christmas goods are made in China, and the fact Americans are willing to go into debt to pay for them, he goes on to argue:

“It’s not the fact that our Christmas is made in China, but rather the mindset that has led to it that is most disturbing. We want to consume no matter what. We want to spend now and let our children pay. It is this same mindset that introduces tax cuts while waging a costly war. Economic sacrifice is no longer part of our vocabulary. After the Japanese attack on Pearl Harbor, President Roosevelt banned the sale of private cars in order to mobilize the manufacturing capacity and engineering skills of the U.S. automobile industry to build tanks and planes. In contrast, after 9/11, President Bush urged us to go shopping.”

The more this passage is examined the more worrying it becomes. What does he mean when he says “We want to consume no matter what”? This is essentially an attack on the demand for high living standards. And why should be celebrate economic sacrifice? Like many environmentalists he goes on to celebrate war as it leads to curbs on consumption. But the fact that many millions of people died in the second world war – hardly an incidental fact – does not seem to strike him as relevant.

Labels: china, consumption, economics, environment

Today’s Fund Strategy includes a comment by me on the revision of statistics on the size of Chinese and Indian economies.

Last week's biggest economic news got hardly any attention. Both China and India are about 40% smaller than they were. Also global economic growth was half a percentage point less than previous assumed. Never mind the Bank of England possibly reducing interest rates by a little bit at some point in the future. This was shocking.

Of course, the Chinese and Indian economies have not literally shrunk. What has happened is that more accurate statistics are becoming available which give a better idea of the size of their economies.

Nowadays growth statistics are often quoted on a purchasing power parity (PPP) basis. This means that the figures are adjusted to take into account different price levels in different countries. So a dollar in America can buy a lot less than its equivalent in China.

The truth is that until now the PPP statistics have largely been based on guesswork. So it turns out that the size of the Chinese and Indian economies has been substantially over-estimated. And since these are large components of global growth it means the world GDP figures are exaggerated too.

Such statistical revisions do not change reality but they do make some comparisons starker. For example, they show that both China and India are considerably poorer than previously assumed. Not only is the average income level lower but the number of people below the standard $1 a day threshold is much higher.

It is a sobering thought that, according to the new data, China's average GDP per head is only 10% of the American level. China may be growing rapidly but its living standards remain well below America's.

Another lesson from this revision is that it is generally better to compare the relative sizes of economies by using GDP at market exchange rates rather than PPP. This may seem a small technical detail but it can make a huge difference to the numbers.

Since countries trade and invest with each other at market rates, these provide the most meaningful comparisons of the relative weights of national economies. Judging on a market exchange rate basis the Chinese economy is still only fourth largest in the world rather than second.

PPP statistics have their uses. But they are more appropriate for comparing living standards between different countries than comparing their relative economic weights in the world.

Labels: Asia, china, economics, Fund Strategy, india

Today’s Fund Strategy includes a review by me of a book on India and China.

The rise of China and India has, apart from anything else, produced a booming economy of books designed to introduce the countries to western readers. Robyn Meredith's The Elephant and the Dragon is one of the best of the genre.

Meredith's perspective is that of an American journalist who has covered recent developments in India and China at first hand. From her base in Hong Kong, where she is a correspondent for Forbes magazine, she has written widely on both countries. Her mission in the book is to help her predominantly American readership better understand the two emerging Asian powers.

Her approach is in contrast to that of David Smith, the economics editor of the Sunday Times, who recently wrote a book on the same subject called The Dragon and the Elephant (see 9 July post). His work, while worth reading, is more historical and based largely on secondary sources. But Meredith has spent much time watching Chinese workers produce goods for western markets, navigating India's awful roads and talking to people in the region. Both books are well written, but Meredith's is more vivid.

She, like Smith, tends to alternate chapters on the two countries. So after a general introduction on "tectonic economics" she has a chapter on China's rise since the 1970s, followed by one on India's ascent. She then moves on to China's manufacturing and India's surge in IT services.

Perhaps most interesting is her chapter on what she calls "the disassembly line". This describes how the world economy has moved from one where production is focused on assembly lines to one where supply chains are key. Under the old system, of which Ford was the emblematic example, each company was responsible for a series of processes that ended up with a final product.

Under the new system, different parts of a product can be made by an enormous array of producers all over the world. Chinese firms play a key role in such supply chains as important links in this new set of processes. Often the final goods end up in the West, under western brand names, even though a good part of their value is created in China.

Although Meredith is generally sympathetic to the rise of India and China, she does discuss problems associated with their emergence as economic powers. First, she says that the rise of the two nations puts strains on the availability of natural resources. Second, she warns that the modernisation of their military forces could create tensions with America. Finally, she discusses the environmental problems posed by the rise of the two Asian giants.

In her conclusion, Meredith looks at what the rise of China and India means for America. She argues that the solution to the challenge they pose is neither an unadulterated free market nor protectionism. Instead, America needs to create more jobs and educate its population better.

Unfortunately, The Elephant and the Dragon takes the mainstream view of the two countries too much at face value. Perhaps this is inevitable in what is essentially a primer. But, like Smith, she accepts what I call the "revelation theory" of economic development.

This essentially argues that China and India lived in the intellectual dark ages until their leaders realised that capitalism was best. If only they had latched on to this perspective sooner they could, so the argument goes, have enjoyed spectacular growth rates much earlier.

What this argument misses is that there was little incentive for third-world countries to open their economies in the decades following the second world war. During the post-war boom the West was generally uninterested in investing in or trading with the developing world. Therefore there was not much incentive for third-world leaders to encourage western investment or trade. This was particularly true of demographic giants such as China and India as their strategy of relying on their large domestic markets seemed reasonable at the time.

This is not to be in favour of autarky in principle. On the contrary, it has many disadvantages. But even if China and India had opened themselves up earlier, it is doubtful whether the West would have been particularly interested in doing business with them. It was only with the end of the post-war boom in the West that an externally orientated development strategy became feasible.

The Elephant and the Dragon is also too much influenced by western, and particularly American, preconceptions. Rather than ask what the rise of China and India means for the world, the "all of us" in the subtitle seems to refer only to Americans. Meredith's primary concern is how American policy-makers should react, rather than what is best for humanity.

Such one-sidedness is particularly apparent in her discussion of the environment. She describes, correctly, how China and India are heavily polluted. But she fails to recognise that focusing on economic development, rather than the environment, can be the correct approach for developing countries. Since human welfare is closely linked to poverty, a focus on development can benefit a country's citizens even if it increases pollution.

Meredith also fails to draw out the fact that economic development provides the resources to tackle pollution. American cities are cleaner than those of Asia precisely because America is so rich. It has the economic resources and technology to clean up its environment. As time goes on it is likely that India and China will make a clean environment a greater priority.

Despite these weaknesses, The Elephant and the Dragon is well worth reading for anyone who wants to get a quick overview of the Asian giants. Given their importance to the world economy, they are countries of which people can no longer afford to be ignorant. The rise of India and China is one of the key trends in the contemporary world.

Labels: book, china, Fund Strategy, india, review

A little noticed but key fact in the new World Economic Outlook from the International Monetary Fund (page 1 of chapter one). In the first half of 2007 China made the largest contribution to global growth for the first ever. This is true not only if measured at purchasing power parity but also at market exchange rates.

Labels: china, economics, growth

The Chinese bureaucracy seems to be taking on growth scepticism. According to a report in the Guardian the Chinese president, Hu Jintao, emphasised the dangers of environmental degradation and social inequality in his speech to the 17th congress of the Communist Party:

“President Hu Jintao admitted yesterday that China's Communist party had failed to live up to the expectations of the people and promised a more sustainable and accountable policy of development.

“In a speech that will set China's direction for the next five years, Mr Hu spoke of the need to address the problems of environmental degradation, political corruption and income inequality between the rich cities on the eastern seaboard and villages in the poor western interior.”

A full English language version of the speech does not appear to be available yet on the internet but there is a useful official summary.

Of course there is nothing inherently wrong with discussing inequality or environmental degradation. The problem comes when they are used as arguments against economic growth.

Sheila Lewis has also recently discussed the debates on environmental damage and inequality in China on the Battle of Ideas website.

Labels: Asia, china, environment, inequality

I will be speaking at a session on economic development at the Battle for Africa strand at the Battle of Ideas festival in London. My session will include Professor Paul Collier, Giles Bolton and Firoze Manji. Other sessions in the strand are on saving Africa and on the continent’s growing ties with China. The Battle of Ideas is on the weekend of 27-28 October.

Labels: Africa, china, development, speeches

The increasingly shrill attacks on China’s environmental record are staggering (see posts of 23 July, 24 July and 10 August). Elizabeth Economy, the author of a book on China’s environmental record, has written an essay for Foreign Affairs arguing argue bottom-up reforms are needed if China is to address its poor record. She sees the national bureaucracy as setting bold targets but attacks local officials for ignoring them.

Labels: china, environment

One of America’s most prominent economists has questioned China’s rapid growth rates. Lester Thurow, a professor at the Massachusetts Institute of Technology, argued in yesterday’s New York Times that China is growing at less than 4% a year rather than the 10% official figure.

He gives three reasons to support his argument:

* Official figures show that the countryside is not growing at all.

* Chinese statistics contradict those from Hong Kong.

* If China’s economy was growing as fast as claimed its electricity use would be growing even faster than it is.

Today Capital Economics, a respected consultancy based in London, put out a paper countering Thurow’s claims. Taking each in turn it argues that:

* Thurow is simply wrong on the rural growth figures.

* There may be some merit in Thurow’s second point.

* Thurow’s point on electricity ignores that fact that China has shifted from a centrally-planned industry to more efficient manufacturing and services.

Labels: china, development, economics

Brendan O’Neill has written a piece on Spiked about the extinction of the Yangtze dolphin in China. He makes the key point that, although the dolphin’s demise may be sad, it has to be set against the enormous advances to humanity from China’s economic development. From this perspective there is no contest: China’s increasing prosperity easily trumps the loss of biodiversity.

Labels: china, development, environment, spiked

James Woudhuysen has written a more extensive article for Spiked on bashing China (see yesterday's post).

Postscript (27 July) - some additional references:

* Brendan O’Neill’s article on the comment is free website on 25 July.

* Edward Burtynsky’s book of photographs on China.

Labels: china, development, environment, spiked

This week’s Fund Strategy included a comment by me on attacks on China for not being sufficiently green.

Last week seemed to be Bash China Week. Suddenly there was a widespread discussion of China's supposed failings.

Rather than caricature what is said, it is probably best to quote it verbatim. A cover story in Business Week, a prestigious global business magazine, started with the sentence: "Beijing can't clean up the environment, rein in stock speculation, or police its companies."

John Vidal, the environment editor of the Guardian, wrote on the newspaper's comment is free website: "What we are witnessing is the mass poisoning of a people and the ecological devastation of a nation."

Arguably the Guardian is prone to such hyperbole but Vidal's article was based on a report from the Organisation for Economic Development (OECD) on China's environmental performance. Naturally the OECD would not use such intemperate language as Vidal but its report was sharply critical.

No doubt there is some truth in many of these criticisms. They are also to some extent a counter to the hype about China taking over the world in the next 10 minutes. But they nevertheless exhibit a disturbing lack of perspective.

The starting point to examine this question should be the recognition that China is still a relatively poor country. As David Smith, the economics editor of the Sunday Times, pointed out in his recent book, it is 107th in the world in terms of income per head. China's income per head averages $6,000 compared with an average for the rich countries of the OECD of $25,000 (in 2000 purchasing power parity dollars).

This may surprise people who see the headlines about China's rapid growth. Indeed a striking news story last week was that China is likely soon to overtake Germany to become the world's third largest economy. But the apparent paradox is easily resolved. China's GDP has to be divided by 1.3 billion people to determine average living standards. So even though the economy is large in absolute terms the average citizen remains poor.

As a developing country, it cannot afford to be as concerned about the environment as a rich one. Environmental measures - whether reducing air pollution or cleaning up rivers - have a cost. That is one reason why economic development is positive: it gives countries the resources to clean up the environment for the benefit of their inhabitants. However, it also means that developing countries will often have other priorities, including escaping extreme poverty, which will outweigh improving the environment.

A continuation of China's rapid economic development will put it in the best position to deal with the other problems that it faces.

Labels: china, development, environment, Fund Strategy

This week’s Fund Strategy included a review by me of David Smith’s new book on China and India.

A few years ago David Smith, the economics editor of the Sunday Times, was giving a talk on the world economy to a group of businessmen in London. After someone asked a question about China and India it emerged that the audience had a downbeat attitude towards the rise of the Asian giants. It was in response to this pessimism among business types, in the West overall rather than just Britain, that Smith wrote The Dragon and the Elephant.

Smith succeeds admirably in his aim of providing an overall assessment of the rise of China and India. He concedes at the start that he cannot match the local knowledge of those who have spent many years specialising in the two countries. Instead he brings to bear the relatively detached perspective of a seasoned Western journalist with a strong overall grasp of the world economy.

Smith's approach is essentially chronological. After a brief introduction he starts by examining how China and India fell from their historical position of being leading economic and technological powers. From 1820 to 1914 the European powers were dominant in the world while the rest of the twentieth century belonged to America. In the subsequent chapters he examines how China and India finally set themselves on the path to development. He ends with a chapter comparing China with India and a conclusion on 10 ways the rise of the two countries will change the world.

The Dragon and the Elephant avoids many of the common pitfalls in writing on China or India. For example, he shows both the growing importance of the Chinese economy in absolute terms and its relative poverty. Although China is one of the world's largest economies it is only 107th in the world in terms of income per head. The explanation is that China's GDP has to be divided between 1.3 billion people. But many commentators find it hard to reconcile the two facts,

Where there is a well-publicised debate relating to a country's development the book tends to give both sides of the argument. In relation to India, for instance, many commentators argue that the economic reforms of 1991 were a watershed in the country's development. But other influential voices point out that India's growth rate first accelerated in the 1980s rather than the 1990s.

Smith is also good at bringing out the contrasts between the two countries. China's growth record is much more impressive than India's. China's development is primarily industrial while India depends heavily on services. India's population is, on average, substantially younger than China's. Nevertheless the two countries are still both, at least in population terms, largely rural.

If there is a problem with Smith's book it is a corollary of his project of summarising the received wisdom on the two countries. It is usually the case that the mainstream ideas on any subject are flawed. That is true of perceptions of China and India.

An important example is the exaggerated importance attached to demographics. Many commentators claim that, over the long term, India has an advantage over China because of its younger population. But a key lesson of economic development should be that the more productive an economy becomes the less demographics matter.

Comparisons between those of normal working age and those outside working age reveal little about the character of an economy. As an economy becomes more advanced it becomes possible for fewer people to support a larger number at a higher standard of living than previously. Dependents could be people outside the working age or alternatively they could be individuals who are unemployed or in education. As technology becomes more advanced and health improves it also becomes easier for the elderly to work too.

The problem India has with a huge pool of unskilled, agricultural workers is economic rather than demographic. It needs to promote a form of development that can bring these workers into the industrial and service sectors. The challenge is one of underdevelopment rather than of too many people.

Smith also wrongly takes it as given that economic development necessarily brings environmental problems. He says: "The nightmare, for the global environment and demand on the world's energy resources, would be a rise in Chinese car ownership towards American levels". That would certainly amount to several hundred million more cars on the road but it is not clear that it should necessarily be a problem. A lesson of economic history should be that economic development allows humanity to harness resources more efficiently. A richer society should have the necessary means to build a transport infrastructure able to handle so many cars. Technological development should also mean they are cleaner and more efficient than the present generation of vehicles.

The Dragon and the Elephant can also be faulted for its adherence to what could be called the "revelation" theory of economic development. Smith implicitly accepts the view that rapid development came to China and India because their leaders finally accepted free market principles. Until then, so the argument goes, they were enmeshed in socialism in China or Fabian dogma in India.

But the development process in the two countries was never as simple as that. In the decades following the second world war there was relatively little foreign investment or trade available for developing countries so correspondingly little incentive to liberalise. In any case the state still plays an enormous role in China's economy today and an important one in India.

Nevertheless, as an introduction to the rising economies of China and India The Dragon and the Elephant works well. It should provide a good starting point to anyone who wants a lucid primer on the subject. However, working out the real significance of developments in China and India is beyond the scope of the text.

Labels: Asia, book, china, Fund Strategy, india, review

The Independent is scared of economic development.

Yesterday the newspaper ran a classic Malthusian scare story on its front cover about how food prices were rising while supplies were falling. It said one of the main factors behind this trend towards “agflation” (agricultural inflation) is the “growing affluence of millions of people in China and India is creating a surge in demand for food - the rising populations are not content with their parents' diet and demand more meat.” The other factor it identified was the increasing use of agricultural crops as a source for biofuels rather than food.

The Independent did a poor job of putting recent food prices rises into context. Although food prices have risen recently the long-term trend is for them to fall. To be fair the article did conceded that: “Sixty years ago an average British family spent more than one-third of its income on food. Today, that figure has dropped to one-tenth.”

On Friday it ran an article on what it saw as the threat of relatively cheap cars becoming available in India. Apart from congestion the inevitable threat of climate change was raised.

It is a tiny step from expressing such fears about development to outright hostility. If the Independent’s perspective is accepted then it makes sense to try to limit development.

The alternative is to welcome economic development as it brings better lives to literally billions of people. It also brings with it a better chance of tackling such problems as insufficiently high agricultural productivity and climate change. After all, the experience of the two centuries since Malthus shows that his pessimistic outlook grossly underestimates human ingenuity.

Labels: china, climate, consumption, development, environment, food, india, Malthus

A flurry of new papers on China and India:

A paper by David Dollar, the World Bank country director for China, looks at the combination of rising affluence and increasing inequality in China. He argues that some rise in inequality was inevitable with the introduction of a market-based system in China. However, other factors, such as curbs on rural-urban migration, have probably exacerbated the problem. Dollar argues that the government’s recent attempts to rebalance the economy towards domestic consumption should help reduce these disparities.

Meanwhile, a piece by Sanjay Reddy, an assistant professor of economics at Columbia University, in New Left Review argues that China has performed relatively poorly in raising life expectancy over the past three decades. Unfortunately the whole paper is only available on the internet in exchange for payment.

Finally, a paper on India from the World Bank looks at the unusual combination of rapid economic growth and rising government indebtedness. The authors suggest the main factor in rising debt as a result of a reduction

Labels: Asia, china, development, india, inequality

This week’s Fund Strategy included the following comment by me on sovereign wealth funds.

Beijing's recent purchase of a $3bn (£1.5bn) stake in Blackstone, an American private equity group, raises fundamental questions about global finance.

For a start, it signals that China is starting to diversify the holdings in its $1,200bn of foreign exchange reserves. Rather than holding American treasury bonds, it is shifting its portfolio towards other types of assets. Private equity is only one of several asset classes the Chinese are moving into.

More generally, the Blackstone move signals the growing importance of sovereign wealth funds (SWFs). An increasing number of countries are developing substantial SWFs as an endowment for the future.

According to Morgan Stanley estimates quoted in the Financial Times, $2,500bn is invested in SWFs and the amount is growing fast. In comparison, about $1,500bn-$2,000bn in hedge funds and $55,000bn is invested in conventional assets worldwide.

It should be recognised that some amounts overlap. For example, SWFs no doubt invest in both hedge funds and conventional funds. But whatever the exact asset allocation of SWFs, the volume of assets they control is huge and their influence looks set to increase. The average unit trust investor will have their funds affected by the behaviour of SWFs as well, even if they are unaware of their influence.

The secrecy of SWFs means it is hard to work out exactly what effect they are having. It is likely that bond yields are being depressed by SWF purchases, but it is hard to prove. It is also probable that other asset classes, such as shares or private equity, will rise in price as more assets are allocated to them.

The rise of SWFs is another indication of how the rapidly growing developing countries, China in particular, are changing the world. Relatively few people in the West appreciate the scale of this change. But those who work in the financial markets have increasing evidence in front of them.

Labels: china, economics, finance, Fund Strategy, globalisation

The Wall Street Journal has a substantial feature today reviewing the discussion of globalisation and inequality. It argues the standard case that incomes are rising in absolute terms but relative inequalities are growing too. Such widening inequalities are helping populist presidential candidates in Latin America and are worrying Chinese officials. The article cites a piece by Pinelopi Koujianou Goldberg of Yale and Nina Pavcnik of Dartmouth in the March 2007 issue of the Journal of Economic Literature.

Labels: china, globalisation, inequality, Latin America

This week’s Fund Strategy included the following comment by me on Will Hutton’s views on China.

Given the widespread view that China is emerging as a great power it is important to examine the contrarian case. In Britain the leading "China pessimist" is probably Will Hutton, an Observer columnist and chief executive of the Work Foundation. His book on China, The Writing on the Wall (Little, Brown), was published in January. Although his argument is flawed it is gives some insight into Chinese development.

At a meeting last week at the Institute of Contemporary Art he said: "My story is that China is a bubble". His main evidence was China's rapidly rising stockmarket. Hutton draw parallels with house price bubbles in Britain and the technology bubble.

However, Hutton's argument was not entirely dependent on the stockmarket. He pointed to China's high savings rate while claiming that total economy productivity was lower than in Mao's time. He also argued that China is a "sub-contractor to the West". No Chinese companies are in the top 100 global brands. China also has a low level of patent applications and widening economic inequality.

Although most of Hutton's facts are probably correct they do not demonstrate what he claims. It may well be true that the stockmarket is in the middle of a gigantic bubble but it does not follow that its real economic growth has not been astonishing. The financial bubble is relatively recent while the rapid economic growth goes back almost three decades.

China's lack of global brands and its low level of patents do not indicate that it is not growing rapidly. The fact that many leading Western companies use Chinese components and manufacturers shows that China has already made enormous strides. Over time it will no doubt develop skills in branding and marketing.

Nor does the widening of inequality show what Hutton says it does. China has had tremendous success in reducing absolute poverty even though relative inequalities have widened. In addition, the widening of inequality does not show China is not undergoing a fundamental transformation. On the contrary, growing income disparities are a symptom of that transition.

Perhaps Hutton's strangest claim is that productivity is lower than in Mao's time. If that is the case it is hard to explain how cheap Chinese goods have proved so popular all over the world.

In addition, most academic studies show Chinese productivity rising sharply. How China Grows (Princeton University Press), a new book by James Riedel, Jing Jin and Jian Gao, quotes several authoritative studies showing rising productivity in China.

Hutton's thesis shows China still has a long way to go in its economic development. But it would be a mistake to underestimate what it has already achieved.

Labels: book, china, economics, Fund Strategy, growth