Ferraris for all

A great example of ambition from Chinese railways as shown in an article on the American ABC news website:

“China is negotiating to extend its own high-speed railway network to up to 17 countries in 10 to 15 years, eventually potentially connecting London with Beijing and then on to Singapore.”

Evidently at its maximum speed of 344 km (215 miles) per hour the train could get from Beijing to London in two days.

Labels: Asia, china, technology, transport

This is my comment from this week’s Fund Strategy.

It is easy to become so focused on someone else’s problems that you fail to grapple with your own. That is a lesson that the West’s leaders, fixated with China, would do well to learn.

No doubt China has its faults. It is arguably keeping its currency artificially low to help bolster its exports. But western leaders are too eager to scapegoat China for their own failings. America and Britain would have a weak export sector even if their trade with China was in balance. Both Anglo-Saxon economies have suffered a long period of deindustrialisation.

Nor are the spats restricted to economics. America has got into rows with China recently over the Copenhagen climate summit, the Dalai Lama, Google, Iran and Taiwan arms sales.

These disputes are happening against a backdrop of a western debate over how best to respond China’s rise. It is the cover story of this week’s Economist and the theme of a new book by Anatole Kaletsky, an economics commentator on The Times (London).

There are two key reasons why this obsession with China is unhealthy. First, there is a danger that the conflict between the West and China will spill out of control. Given the importance of China in the world economy this risk is particularly worrying. 

China is already retaliating against punitive measures by the West. Last week it announced anti-dumping duties on American chicken imports in a response to American tariffs on Chinese steel.

But, even more important, the verbal assault on China is a distraction from the West sorting out its domestic economic problems. If the western economies are restructured the main motivation should not be to compete more effectively against China. More likely, though, the West will do little restructuring at all rather than tackle the formidable challenge of its domestic weaknesses.

Western economic debate focuses on the relatively easy questions rather than the hard ones. It is obsessed with the correct monetary and fiscal policy to help offset the immediate impact of the economic downturn. But long-term structural weaknesses get scant attention.

Last week’s Green Budget from the Institute for Fiscal Studies and Barclays Wealth gave some idea of the scale of the problem. It estimated that Britain’s trend rate of growth was only 1.75% rather than the 2.75% the Treasury assumes. Although one percentage point might not sound a lot it makes a huge difference when compounded over several years.

Western leaders should stop fretting over China and tackle their domestic weaknesses.

Labels: America, china, economics, Fund Strategy, trade

This is my comment from this week’s Fund Strategy.

Arguably China came of age last week. After more than three decades of rapid economic growth it achieved the titles of the world’s largest exporter and the world’s biggest car producer.

This was an enormous achievement. Back in 1978, when its rapid growth began, China was dirt poor. Not much earlier, famine had been a frequent scourge of Chinese life. 



Today not only are the Chinese people much wealthier but China is the second most important economy after America. Decisions made in Beijing and Shanghai have an impact all over the world.



Such a high profile can be a mixed blessing. China has come under sustained attack for allegedly “dumping” its exports and, in particular, for keeping the renminbi unreasonably low. 



As a result, western experts frequently call on China to let its currency appreciate. Often this is presented as a demand which will help China counter the effects of overheating. For example, Barry Eichen­green, a professor of economics and politics at the University of California, Berkeley, argued last week that:



“It’s crunch time for China. If the authorities don’t let the renminbi appreciate substantially now, they risk a substantial depreciation later. Appreciating now will help cool off China’s overheated asset markets. Otherwise China risks a crash and economic slowdown with a weaker currency, since exports will be the only game in town.”

What such comments often downplay is that Western producers have a vested interest in a Chinese revaluation. It would help give their goods more of an export edge against Chinese ones.



Whatever the merits of the arguments on the renminbi, most commentators tend to overestimate China’s strength. They see figures such as China’s rapid growth rate or its export performance and erroneously conclude that it is a rich country.

But such conclusions omit a key factor: China’s massive population. Once its 1.3 billion people are taken into account it should be clear that China remains poor. Even at purchasing power parity—taking into account America’s higher price levels—America has about eight times the income per head of China. China is at about the same level as Angola and Egypt in relative income terms.

It is true that if China continues at its rapid growth rate it will probably overtake the developed countries at or before mid-century. But it is still far from having reached that stage and, if China’s growth rate slows substantially, it may be a long way off or even never achieved.

Over the past 30 years China has moved from being dirt poor to simply being poor. Although it has made huge strides forward it is still far from being a developed economy.

Labels: Asia, china

This is my comment from this week’s Fund Strategy.

No doubt the G20 summit of world leaders in Pittsburgh will come out with a pious declaration about the need for international cooperation. Most likely too it will blame the bankers for the economic crisis of the past year. But it will skirt over some of the key tensions that are emerging in the global economy.

On this side of the Atlantic last week we saw a spat between Britain and Germany over the fate of General Motors’ former subsidiaries in Europe. Lord Mandelson asked the European Union to ensure that German subsidies for Opel do not start a “subsidy war”. London fears that such subsidies might convince Magna, the new Canadian owner of the former GM businesses, to sacrifice Vauxhall for the sake of Opel.

Meanwhile, China reacted angrily to Barack Obama’s decision to impose a 35% tariff on the imports of vehicle tyres. Strangely, the president argued that such a tariff would somehow lead to more trade rather than less.

At the G20 summit itself America and Europe are evidently planning to lead a drive to reduce global imbalances. But China, with some justification, seems to be assuming it will come under pressure as a result of this initiative.

These spats point to two competing trends in the global economy. On the one hand, countries benefit from international cooperation. On the other, the economic downturn is intensifying competitive pressures between countries.

Cooperation is immensely beneficial because it strengthens the resilience of the global economy. If one country gets into trouble it can be bailed out by others. International organisations could also play a role in ensuring the global economy runs smoothly.

But the economic downturn puts such cooperation under threat. It increases the pressure on countries to take unilateral action to defend their narrow sectional interests. Such measures, including tariffs and subsidies, threaten retaliation by other parties.

Ultimately the result could be a total breakdown of international relations. In essence that is what happened in the build-up to the second world war. Economic tensions gradually morphed into political and military ones.

Mercifully, the world is a long way from a global war. International cooperation remains broadly intact despite growing tensions around the edges.

But the robustness of such cooperation remains one of the great unanswered questions of the economic downturn.

Despite the earnest statements at forums such as the G20, the world’s leaders are at the same time undermining global cooperation.

Violations of free trade or state subsidies for investment may not be large in themselves but they create a dangerous precedent. If international cooperation cannot be maintained the price will be high.

Labels: America, china, economics, Germany, trade

This is my comment from this week’s Fund Strategy.

Despite the changes in recent years the West has yet to fully grasp the importance of China in the world economy. Although it is seen as immensely more influential than it was a decade ago it is still not studied sufficiently closely.

The headline figures understate China’s importance. Taking GDP at current prices - the best way to compare the sizes of different economies - the American economy is almost three times the size of China. According to forecasts from the International Monetary Fund (IMF) America’s GDP will be about $14 trillion (£8 trillion) this year compared with $4.8 trillion for China.

In addition, the Chinese economy is still slightly smaller than that of Japan, with a GDP forecast to be about $5 trillion this year. Indeed it is true that the importance of Japan in the world economy is also underestimated.

However, there are at least two reasons why these figures understate China’s centrality to the global economy. First, China contributes an enormous proportion of the growth in the world economy. China looks set to grow by about 7.5% this year according to the IMF compared with 1.5% for the developing world as a whole. The output of the advanced economies is expected to fall by 3.8%.

Second, because of China’s role in the system of global economic imbalances (see last week’s Fund Strategy cover story). Contrary to the common prejudice it is Chinese production, rather than American consumption, that has been the engine of the world economy in recent years. Without China’s strong growth the global economy would have suffered an earlier and deeper economic slowdown.

China’s role has become even more important now that the world has entered recession. Chinese growth is playing an important role in the stabilisation and recovery of the world economy.

However, whether China can continue to drive forward its growth at such a rate is open to question. Many commentators argue it can but others insist that it cannot be sustained.

Whether China can maintain economic growth at a rapid rate over the coming years is a question of the utmost importance for the world economy. It is one to which Fund Strategy will return in the coming weeks.

Labels: china, economics, finance, Fund Strategy

Neil Davenport’s review on spiked of Leslie Chang’s Factory Girls: Voices from the Heart of Modern China brings out the human side of China’s rapid economic development. Critics tend to one-sidedly condemn China’s rapid industrialisation and the huge internal migration that has accompanied it. But Davenport show it is generally seen as far preferable to the isolated tedium of rural life. He concludes:

“By portraying how Chinese people are actually living their lives, as opposed to talking about how they should be living their lives, Chang provides a clear and dynamic portrait of Chinese society and the individuals undergoing transformation. The conclusion to be drawn from Factory Girls is not that development is dangerous but that its humanising reach cannot come quickly enough for millions of Chinese people. There is nothing misanthropic or childish or apologetic in advocating that.”

Labels: book, china, development, spiked

According to this article in the Sunday Times (London) the Chinese workers who produce energy efficient lightbulbs for the West are suffering from mercury poisoning:

“Doctors, regulators, lawyers and courts in China - which supplies two thirds of the compact fluorescent bulbs sold in Britain - are increasingly alert to the potential impacts on public health of an industry that promotes itself as a friend of the earth but depends on highly toxic mercury.

“Making the bulbs requires workers to handle mercury in either solid or liquid form because a small amount of the metal is put into each bulb to start the chemical reaction that creates light.”

Labels: china, environment, technology

Thomas Friedman, the New York Times foreign affairs columnist and doom-monger-in-chief, has written an op-ed piece claiming the economic growth model must come to an end:

“We have created a system for growth that depended on our building more and more stores to sell more and more stuff made in more and more factories in China, powered by more and more coal that would cause more and more climate change but earn China more and more dollars to buy more and more U.S. T-bills so America would have more and more money to build more and more stores and sell more and more stuff that would employ more and more Chinese ...

“We can’t do this anymore.”

This passage makes the elementary mistake of conflating two different things. It is true that the economic imbalance between American consumption and Chinese production looks unsustainable. Either the Americans will have to produce more than they are or consume less relative to the Chinese. America cannot simply continue borrowing huge amounts of Chinese money to finance its consumption. But this is a fundamentally different problem from the supposed natural limit to economic growth that Friedman is suggesting.

Labels: America, china, climate, economics, environment, growth

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

Two prominent American economists have written a justification for income inequality. Gary Becker, a Nobel laureate, and Kevin Murphy, winner of the John Bates Clark Medal of the American Economic Association, argue that widening inequality can be “beneficial and desirable”. In an article on American.com they point out that in China the rise in income inequality has accompanied a sharp decline in absolute poverty. In America it represents an increasing pay-off for education and other skills. Both African Americans and women have benefited from the latter trend.

The two authors are partly right. It is true that absolute rises in incomes and living standards should be welcomed. However, it would be preferable if those at the bottom of the income distribution gained even more than they do.

Labels: America, china, inequality

The latest World Development Indicators from the World Bank show the enormous benefits of economic growth in poverty reduction. The total number of people living in extreme poverty - defined as less than $1 a day - fell to 985 million in 2004 (the latest available figures) compared with 1.25 billion in 1990. It should also be remembered that the world population has grown substantially during that time so, in relative terms, the drop was even sharper.

The number of people living below the $2 a day threshold is also falling. However, at 2.6 billion people it still accounts for almost half the population of the developing world.

Two related factors seem to be behind the drop in extreme poverty. First, the rapid rate of growth in developing countries overall in recent years. On average the rate of GDP growth per head has average 3.9% a year since 2000. Second, the spectacular growth of East Asia and China in particular.

Interestingly the World Bank seems keen to emphasise that other factors besides economic growth also play a role in poverty reduction. However, part of this discussion seems to be on relative inequality - a different although related question - rather than absolute living standards.

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

If an article in today’s Wall Street Journal is to be believed the Chinese are finding it easier than expected to shift to more sophisticated production. To quote the start of a piece by Andrew Batson in Beijing:

“China is demonstrating a surprising ability to parlay its dominance in low-end manufacturing into a new strength in producing sophisticated high-tech goods.

“Already the place where many of the world's computers and mobile phones are put together, it is expected to become home to a multibillion-dollar integrated-circuit plant run by Intel Corp, the world's biggest maker of computer chips.

“The speed at which China is moving into more-complex manufacturing is a sign that its transition from a low-wage economy making cheap goods to a high-wage economy producing valuable ones may not be as difficult as once thought.”

Labels: china, development, economics, technology

Stephen Roach, the chief economist of Morgan Stanley, has written on the difficulties of China making the transition to being an environmentally cleaner economy. Given that the Chinese economy is heavily skewed towards manufacturing it is pollution and energy intensive. But Roach is optimistic it can find the right balance.

Labels: china, climate, economics

Yesterday Fund Strategy published a cover story by me on the euro-zone and a related comment. They were, strictly speaking, more about economics generally rather than growth scepticism but I thought they might be of interest. The cover story is too long to post here (and there is no direct link) but I have pasted the comment below:

Many large European companies seem to be pinning their hopes for the future on outsourcing production to Asia. While this might work as a short-term financial strategy, it will not alter the shifting power balance between the two continents.

As Daniel Ben-Ami discusses in this week's cover story many European firms are transforming themselves into "platform companies". This means they are retaining control of such functions as marketing and design, while outsourcing the production of their products. Ikea and H&M are prime examples of European platform companies.

The phenomenon has also been noticed by those discussing Asia. Will Hutton, one of Britain's best-known economic commentators, has written a book that makes much of the fact that hardly any leading global brands are Chinese. He argues that China's strength is frequently exaggerated because commentators fail to grasp that it often acts as a sub-contractor for Western firms.

It is true that Western companies can benefit from outsourcing their production to Asia. No doubt they are bolstered by the restructuring involved in shedding their own workforces and relocating elsewhere. It also means they have fewer assets tied up in fixed capital. Lower volatility and higher share prices can be a result of this process.

But if Western companies believe Asian firms will be content to just assemble products for others they are deluding themselves. Once Asian companies have honed their production skills, they are likely to start developing their design and marketing abilities. This may take time but it is hard to see how the process can be thwarted.

The process will in some ways be analogous to Britain's relative decline. In the Victorian era Britain was the world's leading power, but in the 20th century it was supplanted by America. This did not mean Britain disappeared but it is not the power it once was. In absolute terms, Britain is far wealthier than in the 19th century, but relative to other powers it has fallen behind.

In a similar way, the shift today is towards Asia. Firms from the East will no doubt become leaders in technology and marketing rather than assemblers of Western goods. European firms will continue to operate - many may thrive, but fewer of them will be the world leaders they are now. The continent of the future looks set to be Asia rather than Europe.

Labels: Asia, china, corporations, economics, Europe, Fund Strategy

There follows a comment by me on Chinese economic development from the 11 December issue of Fund Strategy.

One of the few interesting things in Gordon Brown's generally dull pre-Budget report speech was his reference to China. He started with some figures that will not be a surprise to anyone who follows the economic fortunes of the Asian giant: "China alone is manufacturing half the world's computers, half the world's clothes and more than half the world's digital electronics, and this Christmas, more than 75% of children's toys."

He went on to recognise that China is increasingly competing on quality as well as quantity. As an indicator, Brown used the massive number of engineers and computer scientists graduating from Chinese universities.

The existence of this trend is underlined by a report from the Organisation for Economic Cooperation and Development, published last week. It shows that in absolute terms, China looks set to become the second-largest spender on research and development in the world. America is set to spend $330bn (£168bn), China $136bn and Japan $130bn. The EU15 - which includes Britain - looks set to spend a combined $230bn.

On other measures too China's R&D effort is increasing. As a proportion of GDP it increased from 0.6% in 1995 to more than 1.2% in 2004. China has the second-highest number of researchers in the world, at 926,000, compared with more than 1.3 million in America.

Another indication of China's growing economic sophistication is its increasing concern with intellectual property rights. As Stephen Roach, chief economist at Morgan Stanley, wrote last week: "There is a key reason for this shift: Inasmuch as China's economic prowess has moved rapidly up the value chain in recent years - from low-value-added items such as toys and textiles to increasingly high-valued-added products - there is a growing consensus forming within the Chinese leadership that IPR protection is now in its best interest." (Morgan Stanley, Global Economic Forum, December 4, 2006).

When Hank Paulson, the US treasury secretary, leads a delegation to trade talks with China this week he will be aware of such shifts. America can no longer look down on China as a minor player in the world. For the rest of the world too it is necessary to grapple with the reality of a sophisticated, as well as large, China. Although China is still a developing nation, it is already playing a large role in shaping global economic and financial affairs.

Labels: china, development, economics, Fund Strategy

A despicable attack on China for providing cheap loans to Africa in today’s Financial Times (and I suspect elsewhere too). The FT article is based on comments by Philippe Maystadt, the president of the European Investment Bank (EIB):

“Philippe Maystadt, the EIB's president, said banks like his were operating in competition with Chinese lenders anxious to extend Beijing's influence across the world.

“ ‘The competition of the Chinese banks is clear,’ said Mr Maystadt, whose European Union-backed bank is the world's biggest multilateral lender. ‘They don't bother about social or human rights conditions.’ “

So not only is China providing cheap capital to Africa but it is not trying to impose its views on African governments. Sounds like China is providing a better deal to Africa all round. The last thing China needs is expensive Western capital with numerous strings attached.

Labels: Africa, china, Europe

There follows a comment by me on the third world development from the 27 November issue of Fund Strategy.

First we had Brics, now we have Chindia. The first term, coined by Jim O'Neill of Goldman Sachs in 2001, has become widely accepted as an acronym to cover Brazil, Russia, India and China. Chindia was coined by Jairam Ramesh, an Indian politician and economist, and now is the basis for several funds.

As a shorthand way of indicating the countries included have huge populations while remaining relatively poor, such terms are fine. But there are many important differences between them. Brazil, unlike the others, is not growing particularly fast. Russia, unlike the others, is heavily dependent on one commodity - oil - and related products. India, despite its rapid growth, has appalling infrastructure and a weak industrial base. China stands out as by far the largest and most rapidly growing economy.

In other ways, too, the discussion of these countries is often distorted. A typical fund manager presentation on any of these countries starts by noting their huge populations. It then raises the spectre of such relatively poor countries moving towards Western levels of consumption. "Just imagine if every family in China buys a food processor," runs the argument. "The share price of the Shanghai Acme Food Processor Company is bound to rocket."

Such discussions are back-to-front. The primary determinant of consumption is production. In other words, it is necessary to work out how the barriers to raising production can be overcome before considering how much consumption can rise. The only reason China can consume so much more than in the past is because its output has risen rapidly.

Admittedly the level of production does not put an absolute limit on consumption in the short term. Up to a point it is possible for countries to borrow overseas to help subsidise their current consumption. It is also possible, as in China today, for individuals to save heavily rather than go all out to consume.

Despite these modifications, the fundamental point remains that production determines the level of consumption over the long term. Therefore, a consideration of such factors as the level of investment and the ambition of the governing class are crucial in assessing development prospects. If the level of production rises, consumption levels are likely to follow. Stagnant output, in contrast, means that the consumption story will fail. The simplistic story of the Brics and Chindia told by many financial institutions misses out the key elements in the development process.

Labels: china, debt, Fund Strategy, india

China is increasingly being used to symbolise the supposed shortcomings of economic development. The advantages of greater development are being ignored, or at least downplayed, while the associated problems are being exaggerated.

The New York Times has a typical piece along these lines today with an article headlined “A Troubled River Mirrors China’s Path to Modernity”. The piece, accompanied by video images and a slide show on the website, argues that:

“For centuries, the Yellow River symbolized the greatness and sorrows of China’s ancient civilization, as emperors equated controlling the river and taming its catastrophic floods with controlling China. Now, the river is a very different symbol — of the dire state of China’s limited resources at a time when the country’s soaring economic growth needs more of everything.”

No doubt rapid economic development is causing problems such as pollution. But it should also provide the resources to solve such problems along with vastly improving the lives of its 1.3 billion citizens.

Labels: china, development

There follows a first attempt by me to discuss the economics of climate change. It is from the 2 October issue of Fund Strategy magazine. I intend to return to this topic in the near future.

The consensus that cutting carbon emissions is the only way to tackle climate change is almost universal. Even the few who were sceptical about the need for a low-carbon economy are dwindling in number.

Several fund management groups have already discussed the possibility of specialist firms benefiting from the development of new technology to mitigate climate change.

However, the costs of mitigation, which could affect huge swathes of the economy, have received little attention. To assess the overall economic and investment impact of curbing emissions of carbon dioxide it is necessary to balance these factors against each other. It should not be assumed automatically that mitigation is the only way of tackling climate change, let alone the best.

The consensus in favour of mitigation is certainly striking. Many have long favoured such a strategy, but now almost everybody does.

Under Arnold Schwarzenegger, its Republican governor, California has recently become the first American state to legislate curbs on greenhouse gas emissions. Shortly afterwards the state announced it was suing six of the world's largest carmakers for their responsibility for global warming.

Meanwhile, Rupert Murdoch, long known as a sceptic on climate change, has announced that News Corporation is to go carbon neutral. This outlook is already being reflected in his newspapers, including articles in the Sun such as "going green can be so, so sexy" and "we're on the erode to hell".

Richard Branson, long a target for environmentalists because of his involvement with airlines, has tried to clean up his image with the announcement of a $3bn (£1.6bn) investment in alternative energy over the next decade. He has also called on the global aviation industry to cooperate to help tackle climate change. Although some environmentalists are sceptical of these moves, they do raise the possibility of heavy investment in alternative energy.

In Britain the government is stepping up its pro-mitigation initiative still further. As David Miliband, the environment secretary, told last week's Labour Party conference: "Today I propose we adopt a new goal as a country: to aim to live as a nation within the limits that the environment can tolerate - One Planet Living."

Companies are coming under pressure to live to share Miliband's planet. The new company law, which should be enacted soon, will make it a statutory duty for directors of quoted companies to take into account environmental factors when making decisions. Businesses have countered that such a requirement will increase the regulatory burden they have to bear.

Margaret Hodge, the industry minister, reportedly signalled that the process could go even further at a Labour Party fringe meeting where she argued that private companies too should have such an environmental obligation. Although in a later statement Alistair Darling, the trade and industry secretary, denied this was the government's intention.

Even before the introduction of such legislation most large British companies seem to be moving towards mitigation. According to a survey of FTSE 350 companies by Investec published in July, more than three quarters of respondents claim to measure their emissions and two thirds report on them. More than half are trying to cut emissions.

Under such circumstances those funds that invest in environmental technology could benefit. Those that specialise in this area include the Impax Environmental Markets investment trust and Merrill Lynch New Energy Technology. There are also numerous specialist open-ended environmental funds.

However, despite the overwhelming consensus in favour of mitigation, and the opportunities that could flow from its implementation, it is important to remember it has costs. For many sceptics the costs could be exorbitant. For example, fossil fuels are still by far the cheapest and most efficient form of energy in many cases, and are likely to remain so for a long time. So forcing people to switch to other forms of energy could slow growth or even cause an economic reversal. If the litigation against carmakers is successful, the impact on global growth could be even greater.

Those who suffer most as a result of mitigation are likely to be the developing countries. At present even China, with its rapidly industrialising economy, is responsible for far less greenhouse gas emissions per person than America or the European Union (see bar chart).

If China reaches the level of emissions per head of the EU or Japan, let alone America, the total level of emissions would increase enormously. But that could be the price necessary to raise China out of poverty. The sceptics would argue it is not up to rich Westerners to deny the Chinese, or the rest of the global poor, the benefits of affluence.

The mainstream counter-argument to this stance takes several forms. Some contend that it would be relatively quick and easy to switch to low-carbon technologies. If that is true the economic costs would be lower. At the Labour Party conference Gordon Brown proposed a $20bn global fund to help the poorer countries develop alternative energy sources.

Despite this apparently optimistic talk of new technology many are, more or less explicitly, arguing that economic development needs to be curtailed. That was certainly the implication of Miliband's "One Planet Living" remark at the Labour Party conference. The idea is that Third World development should be limited - or made "sustainable" - and Westerners should curb their living standards too. Understandably, such talk is not popular with the general public.

It is hoped that the Treasury's Stern Review on the economics of climate change, due to report soon, will help answer these questions. But the discussion paper already published on its website . is decidedly skimpy on how much mitigation is likely to cost: "For all countries, understanding the costs of mitigation will be critical. Existing estimates vary considerably.

"One important factor in the variation of these estimates is the assumption made about the nature of technological progress, specifically whether innovation can be stimulated by policy. If policies to reduce emissions are assumed to accelerate the development of these technologies, then the costs of mitigation will look much lower than if technological development is assumed to happen exogenously."

Of course many environmentalists would argue that whatever the economic costs of mitigation it should be implemented. In their view the planet is facing such a serious threat that an immediate switch to a low-carbon economy is essential.

However, even if such environmentalists are right on the science - and there is debate about whether we are facing a catastrophic scenario as opposed to just a serious one - there are other ways to deal with climate change.

The most widely discussed alternative is adaptation, which involves such measures as constructing better flood defences, building at or above current sea levels and developing new crops. Indeed, the preliminary papers on the Stern Review point out that in any case adaptation will be necessary as the climate is set to warm whatever happens.

A more ambitious approach is what could be called geo-engineering or weather modification. For example, Paul Crutzen, a Nobel laureate in chemistry, has raised the possibility of injecting sulphur into the atmosphere to promote cooling. Others have suggested putting trillions of lenses into orbit to divert some of the sun's rays. Although such initiatives may appear like science fiction, it does not mean they cannot play an important role in the future.

The answers to these questions will have a substantial bearing on future economic and investment prospects. For the more optimistic proponents of mitigation there can be a smooth transition to a low-carbon economy without significant economics costs.

For the more pessimistic advocates of mitigation such a strategy is vital to save the planet, to the extent that the economic costs are unimportant. Such pessimists see austerity as a necessary part of the response to global warming.

For the sceptics a strategy based on mitigation is generally seen as bearing high economic costs. It could stunt development in the Third World and undermine economies in the West. They advocate alternative strategies such as adaptation and even geo-engineering as the best way to tackle the threat posed by climate change.

The outcome of this debate is likely to have enormous consequences. At present the proponents of mitigation are overwhelmingly in the ascendant, but it does not necessarily follow that they are right.

Labels: china, climate, economics, environment, Fund Strategy, sustainability

I am amused by the symbolism of environmentalists calling for darkness. Evidently environmental campaigners in Hong Kong tried to get individuals and businesses to dim their lights yesterday in a protest against air pollution in the city. However, according to a BBC report the campaign failed to get mass support.

No doubt economic growth can help China clean up its problems with pollution. But the drive to get China to adopt environmentalist principles is a pernicious one. China’s development approach should be geared towards improving the lives of its people rather than maintaining some kind of harmony with nature. The environmental debate in China is a particularly important one to watch.

Labels: china, environment