economics

March 12, 2011

Quake, Tsunami Slam Japan One of Largest Ever, Temblor Kills Hundreds, Raises Fears of Radiation Leaks at Nuclear Plant

Filed under: Uncategorized — ktetaichinh @ 2:18 am
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By MARIKO SANCHANTA and CHESTER DAWSON in Tokyo and DAISUKE WAKABAYASHI in Fukushima Prefecture, Japan

WSJ’s Daisuke Wakabayashi reports from Northern Japan, where the extent of the devastation from a 8.9-magnitude earthquake and subsequent Tsunami became even clearer with the arrival of daylight Saturday morning.

TOKYO—The most powerful earthquake ever to hit Japan triggered a 30-foot tsunami that washed away parts of the northern shore, leaving hundreds dead, forcing more than 100,000 people to evacuate their homes and raising fears of a radioactive release from some of the country’s many nuclear power plants.
Strong Quake Strikes Japan

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Kyodo/Reuters

The quake was one of the world’s five strongest in more than a century of record-keeping, with a magnitude of 8.9. It inflicted particularly severe damage in Japan’s northeast, where powerful waves swallowed warehouses and fishing boats and swept across neighborhoods and rice paddies. A train was reported derailed and missing. A quake-sparked blaze at an oil-storage site spread throughout a town of 75,000.

Japan’s National Police Agency said Saturday morning that 236 people had died, 725 were missing and 1028 injured. That toll is likely to rise as figures were compiled across the country: Police said 200 to 300 bodies had been found in the city of Sendai, the closest major city to the quake’s epicenter.

Worries mounted early Saturday over safety at two nuclear-power plants north of Tokyo, after power outages disabled the systems that cool fuel rods. Radiation levels in a control room of one reactor reached around 1,000 times the normal level early Saturday, Kyodo News reported the government’s nuclear agency as saying. Officials said they had asked people living within about six miles of that plant to evacuate. Some 20,000 people had left the area around that and another troubled plant by Saturday morning, Kyodo reported.
Japan Quake’s Effects

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See a map of post-earthquake events in Japan, Hawaii and the U.S. West Coast.

The impact of the quake’s first jolt, which hit at 2:46 p.m. on a clear Friday afternoon, was felt around the country, including in Tokyo. There, office buildings swayed. Trains, buses and phone service stopped. Millions of households lost power.

Japanese spent the rest of the day and night watching televised images of fires, collapsed buildings and deadly debris-filled waves, delivered by news anchors in hard hats. Dozens of powerful aftershocks emanated from off the eastern coast through Saturday morning, shaking the country and its people.

The quake’s footprint spread at about 3 a.m. local time, as new seismic activity rippled through the center to the country’s western coast, raising the specter of a series of quakes extending throughout the country, which sits atop crisscrossing fault lines on the so-called Pacific Rim of Fire.

“I really thought I was going to die,” Yuhei Sakaibara, a reporter for the local Sendai newspaper, said in a telephone interview Friday night. “Dishes went flying in every direction and huge cracks ripped up the walls. When I got outside, I saw that several houses in the neighborhood had collapsed.”

In a town of about 12,500 residents in neighboring Fukushima prefecture—at the outskirts of the worst-damaged areas—roads were cracked. Goro Okawara, a 68-year-old farmer who said he was in the fields when the first quake hit, said he thought the temblor would last 30 seconds but “it just kept going and kept getting worse and worse.”

The traditional kawara tiles on Mr. Okawara’s roof “came flying off,” he said, crumbling and spraying red clay blocks in all directions. A glass door shattered. A crater appeared in his driveway. Nearby, he said, the crematorium where his family was planning a funeral for a relative Saturday had collapsed. At the local cemetery, many headstones were snapped in half.

In all, about 100,000 residents of Fukushima province had evacuated by early Saturday, Kyodo reported.
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The quakes and waves slammed a nation that has had its prolonged share of miseries. An extended economic decline saw Japan recently slip behind China as the world’s second-largest economy. A series of scandals have not only discredited and paralyzed its political leadership, but also tarred institutions from elite universities to the ancient sumo sport.

Japan’s long-deadlocked parliament appeared initially to have set aside political bickering and rallied around calls for unity and new measures to keep the quake from further weakening the economy.

With damages estimates likely to mount quickly, news of the quake—which struck near the close of trading Friday on the Tokyo Stock Exchange—may pummel Japanese shares next week. Should the already debt-burdened government be forced to issues trillions of yen in reconstruction bonds, the move would affect the Japanese fixed-income market and weigh on Japan’s already-weakened credit rating from the world’s major rating agencies.

Yumiko Ono reports from Tokyo that more than 1000 people are dead or missing after a massive 8.9 magnitude earthquake and devastating tsunami struck Northern Japan Friday.
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Some economists have argued that a quake could actually lift the economy in the long run, by requiring a surge in rebuilding spending. But more immediately, the impact disrupted a spectrum of the nation’s industries, from auto and consumer-electronics makers to steel and beverage producers, forcing a number of them to shut factories.

Offers of sympathy were swift from around the world, with Japan’s foreign ministry saying it had recieved assistance offers from some 50 governments. These included China and Russia, which have recently had testy territorial disputes with Tokyo.

Premier Wen Jiabao expressed “deep sympathy and solicitude to the Japanese government and the people” and told Prime Minister Naoto Kan that China is willing to offer aid. An earthquake has been an occasion for China and Japan to set aside their differences before: After the 2008 Sichuan earthquake that killed at least 68,000 people, Japan’s Self Defense Forces were the first foreign aid and rescue team allowed into China.

“Today’s events remind us of just how fragile life can be,” U.S. President Barack Obama said at a news conference. “Our hearts go out to our friends in Japan and across the region and we’re going to stand with them as they recover and rebuild from this tragedy.”
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Quake Hits Japan

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* Shaky Science: Damage Estimates From Japan Tsunami
* Quake Warning System Alerted Tokyo
* Tokyo Grapples With Its Vulnerability
* Out of Ruin, Unity
* Quake-Hit Area Was Already Reeling
* Temblor Hits Already Weak Economy
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* Post-Kobe Measures May Have Limited Damage

Global Impact

* Waves Hit Hawaii, Force Evacuations
* Nations Brace for Tsunami Impact
* Airlines Cancel, Divert Flights
* Foreign Businesses Gauge Impact
* Telecom Operators Report Damage to Undersea Cables
* Reinsurer Stocks Take Hit, but Exposure May Be Limited

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Shaky Ground

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Colliding plates under earth’s surface make Asia Pacific one of the most tectonically active region on earth.
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Were you there when the earthquake hit Japan, or were you among those evacuated along Pacific coasts? Email us your photos of the damage, at yourphotos@wsj.com.

Mr. Obama said he spoke Friday morning with Mr. Kan and offered whatever assistance was needed, and said he expected U.S. aid to be focused on helping with the cleanup. He said the U.S. has an aircraft carrier in Japan now, with another is on the way. A third ship is en route to the Marianas Islands to assist as needed, he said. The U.S. has a large military presence in Japan, and there were signs troops were being mobilized quickly there to help out.

Friday’s quake was the largest ever to hit the earthquake-prone country in terms of strength, but didn’t appear, at least in the early hours, to be as devastating as two great quakes of the 20th century. More than 100,000 people died or went missing in the 7.9-magnitude Great Kanto Earthquake in 1923. The 1995 Kobe earthquake, which registered 7.3, killed more than 6,000 people in the region.
Disastrous Japan Earthquakes

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Associated Press

In September 1923, a 7.9-magnitude earthquake hit the Nihonbashi district of Tokyo.

See some of the most powerful earthquakes to have hit the island nation.
The World’s Biggest Earthquakes

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Associated Press

A photographer looked over wreckage as smoke rose in the background from burning oil storage tanks at Valdez, Alaska, March 29, 1964.

One reason for the lower death toll appeared to be a heightened readiness in Japan, raised particularly after the Kobe quake embarrassed the government and builders for weak preparedness.

“Japan has spent a huge effort preparing for a destructive earthquake off the east coast and is better prepared than most countries in the world,” said Kevin McCue, a director at Australian Seismological Centre.

Analysts say steps taken since the wake-up call of the Kobe quake include using improved construction methods for bridges to make them more responsive to the shock and giving the country’s self-defense forces authority to more immediately engage in relief efforts.

Citizens also got some advance warning from the world’s first early-warning system, developed by the country’s meteorological agency. The agency detected the initial quake’s shock wave near the seismic center and sent off the warning message, which appeared on national television and radio as well as on mobile-phone screens. Throughout the day, the tell-tale warning chime sounded regularly before new tremors hit.

After the quake hit, the government ordered the nation’s military, police and emergency rescue personnel to head for the affected areas to help with the rescue missions.

The central bank quickly announced that it has set up a disaster-management team, headed by Bank of Japan Governor Masaaki Shirakawa, and said it was standing ready to supply liquidity to ensure stability in financial markets.

The government will likely first use roughly 200 billion yen ($2.41 billion) in emergency funding left in the budget for the current fiscal year ending this month, several Finance Ministry officials said. They said the proposed budget for the new fiscal year contains another 350 billion yen for natural disasters and 810 billion yen in emergency funding.

Across Japan, ports, railways and airports shut down. Car-navigation systems indicated that almost every entry point in Tokyo to the nation’s highway system was closed.

In Tokyo, cellphone reception was down, causing long lines to snake around pay phones. Children walked home from school, some with protective head gear. People huddled around televisions, trying to grasp the extent of the damage.

Near Tokyo Station, people streamed onto the street, where the only option was to walk— buses and taxis weren’t available and all trains were halted.

Akira Nomiya, 74, in Tokyo from Sapporo to visit his grandchildren, said the quake hit right after he stepped out of a monorail. “It shook so badly that I couldn’t keep standing as I stepped out of the monorail. People were just hanging onto the wall or sitting down on the ground. Girls were screaming on the platform.”

“A screen fell off my desk,” said Varun Nayyar, an associate director at UBS Securities Japan, who hastily evacuated his building.

At 3:24 p.m., the first large aftershock could be felt by those standing outside of buildings in central Tokyo. Looking up at construction cranes shaking violently atop half-completed buildings, people gasped. As of early Saturday, at least 50 aftershocks were recorded.

The Japanese auto industry was also hit by the earthquake, with Nissan Motor Co., Toyota Motor Corp. and Honda Motor Co. among those shutting plants, but one automotive analyst called the expected impact on the industry “manageable.”

Toyota shut down two assembly plants. At Honda’s plant in Tochigi, north of Tokyo, a factory ceiling collapsed, crushing a worker to death and injuring 30 others. Nissan said five plants were shut down immediately after the quake struck, with small fires extinguished at two of them. It was assessing its operations and those of suppliers to see whether production could restart Monday.

Analysts from the main ratings agencies—which have recently downgraded Japan’s sovereign debt—said it was too early to say how the quake might affect the country’s credit ratings. Richard Jerram, a Singapore-based economist at Macquarie Securities with long experience in Japan, said that while the scale of damage was hard to predict, “the most obvious concern is the debt market. That’s going to be the thing to watch.”

Japan’s political logjam won’t likely be a problem, as “you’re obviously going to get a cooperative approach,” he said.
—Juro Osawa, Kana Inagaki, Yoshio Takahashi, Mari Iwata
and Kenneth Maxwell contributed to this article.
[JQUAKE]
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“ This is truly a horrible tragedy. I feel very sorry for those affected as well as their family members. I hope they can get back on their feet quickly.

June 10, 2010

As China’s Wages Rise, Export Prices Could Follow

Filed under: Uncategorized — ktetaichinh @ 3:51 pm
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Labor unrest in China reflects changing demographics, more awareness of rights

Shifting demographics, including years of effective population control through the government’s “one child” policy, have left China short of younger workers, particularly in the crucial 15-25 age group that many factories rely on most. These young workers don’t have to travel far from home like their parents did to find work. They are more aware of their rights. And having grown up in a more prosperous China, they are demanding a fairer share.

“The first generation of migrant workers made a lot of money compared with their poor life before,” said Cai He, dean of sociology at Sun Yat-sen University. “But right now the majority of migrant workers are in their 20s. They were born in the 1980s. Most of them have no farming experience” and “are more sensitive to the disparity between the wealth of the city and their own poverty.”

Cai added: “The younger people received a better education. They surf the Internet, use mobile phones and watch TV. Their awareness of their rights is much stronger than the older migrant workers.”

HANGHAI — The cost of doing business in China is going up.
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Foxconn Seeks Price Hikes (June 8, 2010)
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A woman receiving information from a recruiter at a job fair in Qingdao, China. Nearby is a poster displaying wages.

Coastal factories are increasing hourly payments to workers. Local governments are raising minimum wage standards. And if China allows its currency, the renminbi, to appreciate against the United States dollar later this year, as many economists are predicting, the relative cost of manufacturing in China will almost certainly rise.

The salaries of factory workers in China are still low compared to those in the United States and Europe: the hourly wage in southern China is only about 75 cents an hour. But economists say wage increases here will eventually ripple through the global economy, driving up the prices of goods as diverse as T-shirts, sneakers, computer servers and smartphones.

“For a long time, China has been the anchor of global disinflation,” said Dong Tao, an economist at Credit Suisse, referring to how the two-decade-long shift to manufacturing in China helped many global companies lower costs and prices. “But this may be the beginning of the end of an era.”

The shift was illustrated Sunday, when Foxconn Technology, one of the world’s largest contract electronics manufacturers and the maker of well-known products that include Apple iPhones and Dell computer parts, said that it was planning to double the salaries of many of its 800,000 workers in China, beginning in October. The new monthly average would be 2,000 renminbi — about $300, at current exchange rates.

The announcement follows a spate of suicides at two Foxconn campuses in southern China and criticism of the company’s labor practices.

Foxconn, based in Taiwan and employing more than 800,000 workers in China, said the salary increases were meant to improve the lives of its workers.

Last week the Japanese automaker Honda said it had agreed to give about 1,900 workers at one of its plants in southern China raises of 24 to 32 percent, in hopes of ending a two-week strike, according to people briefed on the agreement. The new monthly average would be about $300, not counting overtime.

And last Thursday, Beijing announced that it would raise the city’s minimum monthly wage by 20 percent, to 960 renminbi, or about $140. Many other cities are expected to follow suit.

Analysts say the changes result from the growing clout of workers in China’s economy, and are also a response to the soaring food and housing prices that have eroded the spending power of workers from rural provinces. These workers, without factoring in the recent wage increases by some employers, typically earn $200 a month, working six or seven days a week.

But there are other reasons. Analysts say Beijing is supporting wage increases as a way to stimulate domestic consumption and make the country less dependent on low-priced exports. The government hopes the move will force some export-oriented companies to invest in more innovative or higher-value goods.

But Chinese policy makers also favor higher wages because they could help ease a widening income gap between the rich and the poor.

Big manufacturers are moving to raise salaries because they are desperate to attract new workers at a time when many coastal factory cities are struggling with labor shortages.

A Foxconn executive said last week that the turnover rate at its two Shenzhen campuses — which employ over 400,000 people — was about 5 percent a month, meaning that as many as 20,000 workers were leaving every month and needed to be replaced.

Marshall W. Meyer, a China specialist at the Wharton School at the University of Pennsylvania, says that demographic changes in China are reducing the supply of young workers entering the labor force and that this is behind some of the wage pressure.

“Demography will do what the Strategic and Economic Dialogue hasn’t: raise the cost of Chinese goods,” he said, referring to United States-China talks on Chinese currency reform and other economic issues. “There is no way out.”

Economists say many of the same forces that were at work in 2007 and 2008, when China’s economy was overheating, have returned and even intensified this year.

Local governments have stepped up enforcement of labor and environmental regulations, driving up production costs.

And perhaps most troubling for companies here is the prospect of an appreciating Chinese currency, which would make their exports more expensive overseas.

Beijing has long promised to allow its currency to fluctuate more freely. But when the global financial crisis shuttered many Chinese factories, the government effectively repegged the renminbi to the dollar to protect exporters.

Pietra Rivoli, a professor of international business at Georgetown University and the author of “The Travels of a T-Shirt in the Global Economy,” says the effects of rising labor costs will vary by industry, perhaps with lower-valued goods like garments being forced to move to western China or even to Vietnam and Bangladesh.

But she says high-end electronics like smartphones are likely to remain, because they command high profit margins and because China has built a sophisticated infrastructure and quality-control system.

“Labor is such a small piece of the pie for them,” Professor Rivoli says of the electronics brands. “The money’s all in the design, the marketing and the complicated distribution system, including retail outlets. Like with Apple, they have those rents in the shopping malls, fancy stores and all those hip people working there. That costs a lot.”

Still, salary increases are expected to affect many stages of the supply chain and force some companies to raise prices. For many exporters who simply produce on contract for global brands, profit margins are already razor-thin, and raising prices could hurt business.

“They’re going to have to find a way to pass this on to the end user,” says Mr. Tao at Credit Suisse.

Economists say a necessary restructuring is under way, one that should allow the nation’s huge “floating population” of migrant workers to better share in the benefits of growth and stimulate domestic consumption.

United States and European Union officials have been pressing China to help improve the global economy by consuming more and reducing the country’s huge trade surpluses.

Rising labor costs here are not the end of cheap production in China, analysts say, but they are likely to help change the country’s manufacturing mix.

“China isn’t going to lose its manufacturing base because it’s got a huge domestic market,” said Mary Gallagher, director of the Center for Chinese Studies at the University of Michigan. “But it will move them toward higher-end goods. And that matches the Chinese government’s ambition. They don’t just want to be the workshop of the world. They want to produce high-tech goods.”

Chen Xiaoduan contributed research.

http://www.theage.com.au/business/beyond-the-sweatshop-20100607-xqt9.html
Gou said he would raise the base wage of his Shenzhen assembly workers to 2000 yuan ($A355) a month from October 1, which is 122 per cent higher than the current 900 yuan. The company’s 400,000 workers elsewhere in China will get hefty pay rises too.

Anecdotes of China’s rapidly tightening labour market conditions grew stronger from about the middle of last year and now they are everywhere. The Foxconn wage shock comes after a week in which a rare strike at a Honda factory in nearby Guangzhou led to a 24 per cent pay rise and the Beijing municipal government lifted the minimum wage by 20 per cent to 960 yuan.

Factory owners around China are complaining they cannot get enough workers. Cotton farm bosses from China’s far west are competing with each other in central China to attract workers by offering better dormitories, better food and higher wages.

May 27, 2010

Chinese Economy Treads Risky Path. (Ask Japan.)

Filed under: Uncategorized — ktetaichinh @ 4:22 pm
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China is different in two respects that may seem contradictory. On one hand, major industries like oil, telecommunications, banking and aviation are deemed strategic and are under tight state control. Of the 22 Chinese corporations listed on the Fortune Global 500, 21 are controlled by China’s central government or state-run banks. Just one, Shanghai Automobile, is run by a local government. None are privately owned.

These “national champions,” as the government deems them, are the vanguard of China’s push into global markets, and the evangelists of Chinese economic values.

On the other hand, light industry, retailing and the nation’s booming export sector are more free to play by Adam Smith’s rules. In contrast to Japan, in China Western retailers and consumer goods, from Wal-Mart to Snickers to Tesco, are ubiquitous and compete vigorously with homegrown competitors. And many of China’s leading exports, like iPods and Nike sneakers, are manufactured by or for foreign multinationals that retain most of the profits from their sale.

May 26, 2010

Beijing tries to push beyond ‘Made in China’ status to find name-brand innovation

Quick: Think of a Chinese brand name.
Last year, China overtook Germany to become the world’s largest exporter, and this year it could surpass Japan as the world’s No. 2 economy. But as China gains international heft, its lack of global brands threatens its dream of becoming a superpower.

No big marquee brands means China is stuck doing the global grunt work in factory cities while designers and engineers overseas reap the profits. Much of Apple’s iPhone, for example, is made in China. But if a high-end version costs $750, China is lucky to hold on to $25. For a pair of Nikes, it’s four pennies on the dollar.

“We’ve lost a bucketload of money to foreigners because they have brands and we don’t,” complained Fan Chunyong, the secretary general of the China Industrial Overseas Development and Planning Association. “Our clothes are Italian, French, German, so the profits are all leaving China. . . . We need to create brands, and fast.”

The problem is exacerbated by China’s lack of successful innovation and its reliance on stitching and welding together products that are imagined, invented and designed by others. A failure to innovate means China is trapped paying enormous amounts in patent royalties and licensing fees to foreigners who are.

China’s government has responded in typically lavish fashion, launching a multibillion-dollar effort to create brands, encourage innovation and protect its market from foreign domination.

Through tax breaks and subsidies, China has embraced what it calls “a going-out strategy,” backing firms seeking to buy foreign businesses, snap up natural resources or expand their footprint overseas.

Domestically, it has launched the “indigenous innovation” program to encourage its companies to manufacture high-tech goods by forcing foreign firms to hand over their trade secrets and patents if they want to sell their products there. Since 2007, thousands of Chinese businessmen have attended government-sponsored seminars on “going out,” learning everything from how to do battle with domineering Americans and Britons during conference calls to why a Chinese boss should think twice about publicly humiliating his wayward foreign workers — as he’d do to his staff at home.

In recent months, the Western media have hyperventilated with stories about China’s going-out strategy and about Chinese firms buying up the globe — Oil! Gas! Cars! — and even investing in the United States. In 2000, China had $28 billion in overseas investments; this year, it could break $200 billion.

But a little perspective: Even if China’s total foreign direct investment hits $200 billion, it still pales in comparison to smaller economies, such as Singapore’s, Russia’s and Brazil’s. And China has plunked down only about $17 billion in rich countries, equivalent to the overseas assets of a single medium-ranked Fortune 500 company.

The 34 Chinese companies on the Fortune 500 list basically operate in China only. The world’s three biggest banks are Chinese, but none is among the world’s top 50, ranked by the extent of their geographical spread. China’s attempts to fight what it sees as the stranglehold of foreign patents and intellectual property rights have also had hiccups.

China is estimated to have paid foreign firms more than $100 billion in royalties to use mobile telephone technology developed in the West, according to executives of Western communications companies.

So in the late 1990s, it decided to develop its own. But after more than $30 billion in development costs, its unique technology still has fewer than 20 million users in a market of more than 500 million.

Handset makers have told China’s government that they won’t produce phones equipped with the new technology unless they are given subsidies. And China has resorted to giving away the technology to Romania and South Korea to encourage broader use. “China is still stuck,” said Joerg Wuttke, former president of the European Union Chamber of Commerce in China and a 25-year veteran of doing business in China. “There is a huge disconnect between the money spent in universities and the lack of products.”

China also faces enormous challenges to creating globalized firms. Studies of Chinese executives show that they spend far more time with government officials — who in China are the key to their profits — than with customers, who are the key to international success. “Chinese executives like me need to spend a generation outside China to learn how business is done around the world,” said Hua Dongyi, who chairs a massive Chinese mining company in Australia but has also built roads in Algeria and infrastructure in Sudan.
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THE OTHER SUPERPOWER: China craves brand recognition
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Special report: The other superpower

That’s definitely true for Hua. In April, he was forced to apologize to his Australian workers after he told Chinese media that the workers were money-grubbing and lacked the “loyalty and sense of responsibility existing in many Chinese enterprises.”

Lenovo’s lessons

The Chinese computer maker Lenovo, which bought IBM’s ThinkPad in 2004, wasn’t the first Chinese company to acquire a big foreign brand, but it’s still considered the pioneer.

That’s probably because China’s other forays into buying foreign brands have ended in disaster. An attempt by the Chinese electronics firm TCL to become the world’s biggest TV manufacturer in 2003 fizzled when its French subsidiary lost $250 million.

A move by a private Chinese company to take over a once-dominant U.S. lawn mower company, Murray Outdoor Power Equipment, ended in bankruptcy because, among other mistakes, the Chinese firm didn’t realize that Americans tend to buy mowers mostly in the spring.

Lenovo purchased IBM’s laptop division for $1.25 billion — a gutsy move considering that IBM’s renowned ThinkPad brand lost $1 billion from 2000-2004, twice Lenovo’s total profit during that time.

Although Lenovo’s move was portrayed by many in the West as a sign of China’s rise, Lenovo acted out of desperation, said Yang Yuanqing, who has been a senior executive at Lenovo since it was founded in the 1980s with government funds.

Lenovo was losing market share in China. Its technology was middling. It had no access to foreign markets. With one swoop, Lenovo internationalized, purchased a famous brand and got a warehouse of technology as well.

But from the start, things were tough.

Lenovo’s American competitors fanned anti-Chinese flames in Congress, insinuating that Lenovo could insert spyware into the computers it was selling to the U.S. government. The firm also faced enormous challenges bridging cultural divides among U.S. workers at its Raleigh, N.C., headquarters, the Japanese who made ThinkPads and the Chinese who made Lenovos. William Amelio, the firm’s second chief executive who had been lured from a top job at Dell, remembers his first trip to Beijing as the new Lenovo boss in late 2005.

“I was greeted with rose petals and the red carpet treatment and company songs. In Raleigh, everyone’s armed were crossed. It was like, ‘Who died and left you the boss?’ ” he said. “You had the respect for power in the East and the disdain for authority in the West.” Meanwhile, Lenovo’s competitors were moving. In 2007, Acer, the computer powerhouse from Taiwan, snapped up the European computer maker Gateway, effectively cutting Lenovo off from European customers. Lenovo slipped to fourth place worldwide behind HP, Dell and Acer.

Lenovo might not have much of a brand overseas, but its association with a foreign firm has helped it in China. Lenovo’s computers routinely command twice the price in China that they do in the United States. Lenovo offers its top-of-the-line ThinkPad W700 to the Chinese government at $12,500; in the United States, it runs for $2,500
Chinese officials pushing the going-out strategy have looked at Lenovo as a model for Chinese firms seeking to become known multinational brands. But for China’s companies, going out might be the secret to staying alive at home.

This year, the Chinese car company Geely bought Volvo from Ford. Pundits figured it was to expand China’s economic heft — and its brands — overseas. But as Geely’s founder, Li Shufu, put it, “Volvo will find a new home market in China.”

May 17, 2010

Le Monde Diplomatique April 2010 Greater Hanoi swallows the countryside

Filed under: Uncategorized — ktetaichinh @ 5:45 am
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Hanoi is now ranked ahead of Shanghai, Beijing, Tokyo and Seoul as the place to shop in Asia. It has annexed vast areas of farmland on which to build suburbs served by motorways. But the lives and homes of ordinary Vietnamese, rural or urban, aren’t improving that fast

by Xavier Monthéard

The Vietnamese architect Hoang Huu Phe made a passionate case for a policy of all-out urban development in Hanoi: “Some people in government still see a city only as an administrative entity. Luckily this backward-looking attitude is on the decline. We need to build an attractive, hi-tech capital with an international outlook. After all, the Americans built Las Vegas in the middle of a desert.”

His opinions carry weight: he is the director of the research and development division of Vinaconex, Vietnam’s biggest state-owned construction firm, typical of the flourishing enterprises of the post-communist era. His sky-blue office is hung with futuristic blueprints alongside photographs of completed buildings and a hi-tech video screen. Phe claimed to have no concerns about property bubbles: “We must use property speculation as a driving force. Our determination will protect this city from the laissez-faire approach that has led to cosmopolitanism in Bangkok or Manila, which you could call westernisation. I am trying to use market mechanisms to make my dream come true.”

Last year, the online magazine Smart Travel Asia ranked Hanoi the continent’s sixth-best city for shopping, after Hong Kong and Singapore but ahead of Bali, Shanghai, Tokyo, Beijing and Seoul. Vietnam is in. In 2008 property projects there attracted more than $28bn, or almost half of all direct foreign investment in Vietnam (1). Property prices in its larger cities have shot up. Can this really be the battered post-communist Vietnam that Noam Chomsky believed would need a century to recover, if it ever did (2)?

In August 2008 Prime Minister Nguyen Tan Dung announced that, with immediate effect, Hanoi would absorb Ha Tay province and a number of adjoining towns. Overnight it tripled in size to more than 3,300km2. According to Laurent Pandolfi of the Hanoi Cooperation Centre for Urban Development, “Even though the decision was made very quickly and has strong political motives, it is not short on logic. It is consistent with a policy of urbanisation, and one hopes that it will supported by large infrastructure projects, such as the future subway.” The government also commissioned a US-Korean organisation to draw up a new urban plan within a short (some would say impossible) time frame.
Decollectivised land

Why the fuss over “Greater Hanoi”? To understand, go back some 20 years. Since 1986 Vietnam has had a policy of economic opening up, similar to China’s doi moi (renewal). In 1990 the political bureau of the Communist Party acknowledged the family as an autonomous economic entity of production and enterprise and proposed the allocation of land to family units. This was the beginning of decollectivisation. A new law in 1993 allowed private individuals to hold land-use rights on renewable long-term leases (initially of 15 years). These rights can be sub-leased, sold and inherited, although the Vietnamese state reserves pre-emption rights to prevent the theoretical possibility of land grabbing by the urban bourgeoisie. Important property reserves remain in the hands of the Communist Party, the army and communist mass organisations such as the Fatherland Front and the trade unions.

In 1993 the market value of land was low but exports have quadrupled in 15 years and some 10,000 foreign companies are now operating in Vietnam. As a result, the old rice paddies have become goldmines. Commercial ambitions are beginning to conflict with historical legacies, such as the allocation of colonial villas to families that distinguished themselves in the war against the US, or the reservation of vast estates for the military. The property developers want land that the city can no longer supply.

According to its advocates, the development of Greater Hanoi will require the construction of satellite towns. This will open up the mountainous areas to the west while reducing population density in the capital, and will connect Hanoi to the flow of international commerce while providing it with modern housing. One name sums up this: Splendora. This complex is under construction in North An Khanh, in the former province of Ha Tay. A motorway will pass close by, leading to the Hoa Lac High-tech Park, where Vietnam’s Silicon Valley is to be built. Vietnam National University, Hanoi, will be transferred to Hoa Lac and provided with a campus. The park is expected to attract a range of high value-added green technological industries.

At harvest time last year, farmers were using sickles to cut rice around where the motorway was still under construction. Children led buffalo and horses and goats roamed among the concrete blocks. Signboards advertised residential complexes in varying stages of completion, including Splendora and the Singapore-designed Tricon Towers, three 44-story buildings offering 732 condominiums with swimming pools, a medical centre and a kindergarten (3). So far nobody had dared touch the village cemeteries that lay scattered among the paddies, mournful reminders of the old Vietnam.

The promotional videos I saw showed big developments with green spaces and lakes, all in 3D. Fast roads would allow traffic to flow through a mix of skyscrapers, smaller buildings and detached houses. The videos depicted a serene shopping experience in superstores, far from the tumult of the city centre or the boorishness of the suburbs. “But do you see any nurseries or schools or sanitation equipment in these videos?” asked Pham Van Cu, a geographer at Vietnam National University, Hanoi. “Where are the ordinary people, where is the economic activity? Such projects put the investors’ interests first. The state will lose resources, services will be privatised and people of modest means will become dependent on the service companies… rich people pay other rich people: they’re the only winners.”

These medium- to high-end developments do target the well-off, the 10% who earn 30% of the national income and like to stroll around Hanoi’s West Lake on Sundays. Developers hope they will leave the city centre for more spacious accommodation and the calm of the suburbs, in the US sense of the word. There is one problem: the farmland between the residential developments, motorways and industrial zones will be cut off from its irrigation systems. The new developments are built on mounds, which heighten the risk of floods in the lower-lying villages of this densely populated alluvial plain. And as Vietnam is in a monsoon zone, it rains a lot. Regulations governing construction of such mounds in built-up areas require developers to install drainage systems. But when the state withdraws to the point of transferring control of urban and rural planning to investors, who is to keep watch? In return for building road infrastructure, the government rewards the developers with parcels of adjacent land. It even delegates the compulsory land purchases to them.

This was the case in Hoa Muc, a village closer to the centre of Hanoi affected by an earlier redrawing of administrative boundaries. When it was reclassified as an urban district in 1997, land prices rose. Three years later the authorities – that is, Vinaconex – began construction on the Nuong Chin-Trung Hoa residential development. “Hoa Muc was one of the many villages in Vietnam whose inhabitants pursued both agriculture and crafts. Here it was brick-making,” said the Canadian sociologist Danièle Labbé. “When the state decided to build Nuong Chin-Trung Hoa, it issued compulsory purchase orders for the villagers’ agricultural land, leaving them just their houses and a small patch of ground to cultivate. The state negotiated the level of compensation via the People’s Committee (the municipal authorities) and the mass organisations. The inhabitants knew that villagers in other newly urbanised districts who had resisted had been treated badly, so they gave in. Since 2003 the state has directly entrusted the developers with the task of making these compulsory purchases. There have been promises of new jobs and vocational training, which have not generally been kept. At Hoa Muc the financial compensation, though far below market rates, was decent. But in other places the conflicts have reached deadlock.”
Social transition

The Hanoi People’s Committee, whose members are urban, is trying to deal with problems of which it has little understanding – those of rural districts. The social risks are considerable. “It’s not easy to make the transition from country to town without preparation, especially when it happens quickly,” stressed Labbé. “It’s very hard to find a new job. And we’re talking about a village that’s only four kilometres from the city centre and has been linked to it for centuries. What will it be like for those living further out?”

The destabilisation of peri-urban areas also threatens the commercial city centre, whose development has relied, since at least the 17th century, on continual exchange with a peripheral belt rich in agriculture, crafts and industries. At the end of the 1980s, this traditional arrangement, which had been shattered by the Communist period and the war, was revived, and the city with it. The “36 streets and corporations” quarter is typical. Famous for its commercial vitality, it draws vital components from the countryside into the city. Ornate and brightly coloured residential buildings, surrounded by a maze of structures with many internal courtyards and hidden floors, overflow with merchandise. Each street has its speciality and often its own smell: coffee roasting, the odours of traditional pharmacopoeia (with spices such as cinnamon, aniseed and ginger beside medicinal ingredients). There are streets for office equipment, second-hand clothes and cut steel. Restaurants alternate with businesses, many of them the “dust restaurants” that offer a typically Southeast Asian sociability: Hanoi people like to eat outdoors, in spite of the noise, and crowded conditions. They sit on low stools to be as close as possible to the ground. The traffic roars and the division between the pavement and the roadway is notional. Cars (still few in number) jostle for space with thousands of motorcycles.
Number-one employer

The emergence of family micro-units working in services and retail has just about made up for the loss of jobs in the public sector and farming. A poll of several thousand households found that the informal sector is now the number-one employer in Hanoi (30%) and operates as an enclave economy, relatively cut off from formal business channels (4). I saw some of this informal sector. It included an old itinerant saleswoman trotting along so as not to bend under the weight of her wares; two stately women on bicycles, carrying star fruit and custard apples; and Man, a young moto-taxi (motorcycle taxi) driver, providing a vital service in a city where public transport is in its infancy. He spends 10 hours a day in heavy pollution – and danger, given Hanoi drivers’ idiosyncratic interpretation of traffic rules. During a break, he treated himself to a lungful of smoke from a beautifully decorated pipe. A pouch of low-quality tobacco only costs a few US cents. But, like everything else, it has become more expensive. “I can still manage two meals a day. But I have to be careful. My partner does manicures; she’s not rich either. I don’t have enough money to get married, so I smoke and drink less. But it’ll take years to scrape enough together.”

His worst problem, besides the inflation that keeps raising the cost of basic essentials, was accommodation. He was renting a cubbyhole of 10m2 for $52 a month, water and electricity included. Coming from the provinces, Man had little hope of finding anything better: everything had been taken by native Hanoians. A young woman about to complete a doctorate in sociology was in a similar predicament. She bowed her head in embarrassment, so acutely did her social circumstances contrast with her professional aspirations. She was still living in shared accommodation with a communal toilet and shower. “I’ve studied for 10 years, I do research for a prestigious institute, but nothing is coming onto the market. In fact it’s the opposite. For the past two years, it’s been impossible to find accommodation. The university’s halls of residence are jam-packed. It’s not right that the government should give students so little support.”

According to Nguyen Thi Thieng, of the population department at the National Economic University in Hanoi, “Studies show clearly that migrants now settle in the outlying districts whereas, until 2007, they gathered in the central districts of Ba Dinh and Hoan Kiem. They can no longer find housing in the areas where they work.” Dispossessed farmers sometimes turn makeshift landlords. As Danièle Labbé explained: “On the little patches of land they have been left with, the inhabitants of Hoa Muc have erected simple buildings to rent to students and workers who don’t have the means to live in the centre. It’s very big business.”

This is because demand is rising while developers’ projects make it ever harder to get access to property by causing prices to rise. According to the April 2009 census, the city now has 6.5 million inhabitants – as many as the whole of neighbouring Laos. Even though the basic family unit has stabilised at four people (5), demographers expect a national population increase of about one million a year over the next few years, most of the growth in cities.
Everyone for himself

At a conference in Hanoi in September 2009, Martin Rama, the World Bank’s chief economist for Vietnam, was enthusiastic about Vietnam’s progress in poverty reduction, which he pronounced to be even faster than China’s, claiming that the ratio of the population under the poverty threshold had fallen from 58% in 1993 to only 16% in 2006 and even lower since. Nguyen Nga, who was involved in humanitarian and economic development projects for 20 years, was less sanguine: “To understand Hanoi, you have to remember the misery of the 1980s. When I looked at children then, I used to tell myself they were learning to cope with inequality along with hunger and that they were making it part of themselves. And that’s what happened. Those children are 20 now, and know no other culture than ‘everyone for himself’. They want their share of material wealth, but their sensitivity is atrophied; their dreams are impoverished.”

When autumn comes to Hanoi, it’s wedding season, because the moon, a symbol of fertility, is at its purest and most brilliant. It’s customary at this time of year to give presents of little round biscuits representing the celestial body. The origins of the custom are lost in antiquity, but last year, the 4646th of the traditional calendar, the most highly prized biscuits were those bearing the logo of the Sheraton Hotel. Have the Americans finally conquered Vietnamese hearts and minds, 35 years after the war? The time of ideological divisions is long past. Nationalism, abandoning its Communist past, is going back to its roots. According to the historian Nguyen The Anh, “the country is returning to a time before French colonisation. Especially where the structure of government is concerned. The ruling caste, whatever you want to call it, can be compared to a self-proclaimed mandarinate, minus the Confucian virtues. As for the people, they are reviving the old cults.”

I noticed a group of workers from the provinces who had been restoring a 17th-century temple. Surrounded by the mud and the incessant noise of the capital, their makeshift camp was built around a statue of the local guardian spirit, a deified popular hero, which generations of squatters had left intact. Flowers, fruit, cooked food and joss sticks were heaped up at its feet.

Translated by Tom Genrich

Xavier Monthéard is a journalist

(1) See Hanoi Statistical Office, Hanoi Statistical Yearbook, Hanoi, 2009.

(2) See Noam Chomsky, Understanding Power: The Indispensable Chomsky, edited by Peter R Mitchell and John Schoeffel, New Press, New York, 2002.

(3) See Minh Ky, “Tricon Towers: A New Face for Hanoi”, Vietnam Economic News, 11 September 2009;

(4) See Jean-Pierre Cling, Le Van Dy, Nguyen Thi. Thu Huyen, Phan T Ngoc Tram, Mireille Razafindrakoto and François Roubaud, “Shedding Light on a Huge Black Hole: The Informal Sector in Hanoi” (PDF), GSO-ISS/IRD-DIAL Project, Hanoi, April 2009.

(5) With 2.08 children per woman nationwide and 1.83 in urban environments; see United Nations Population Fund, Viet Nam Population 2008, Hanoi, April 2009.

April 28, 2010

China vs America: fight of the century

Ian Bremmer

22nd March 2010  —  Issue 169 Free entry

The world’s two great powers are growing dangerously hostile to one another. Could this be worse than the cold war?

A flourishing downtown Shanghai in January 2010


At the World Economic Forum in Davos this January, Chinese vice premier, Li Keqiang, gave an entirely unremarkable speech. Steering clear of subjects that make headlines, he instead sung the praises of China’s stability and technological progress. Yet the moment was made extraordinary by Li’s entourage: a group of about 75 subordinates who laughed, cheered and applauded on cue—and all with apparently genuine gusto. This scene brought to my mind Deng Xiaoping’s famous dictum that his country must “keep a low profile and never take the lead.” There was plenty of Chinese exuberance in the room, and the rest of us were meant to notice. Has the need to lie low subsided, I wondered? Does China believe that its time has come?

That was the message many people took from the triumphalist pageantry of Beijing’s 2008 Olympics. But the real game-changer was economic. The financial crisis, global recession, and China’s remarkable recovery have produced a big shift in the world’s most important state-to-state relationship. Chinese officials argue that their country’s resilience in the face of America’s meltdown has vindicated a Chinese model of development, one that rejects US-style free markets in favour of a “state capitalist” system. A relationship until recently shaped mainly by shared interests must now adapt to accommodate the two sides’ increasingly divergent views of capitalism—and a large shift in the balance of confidence.

The list of irritants in US-Chinese relations is growing. Google threatens to quit China over censorship and cyber-attacks. Washington and Beijing are at cross purposes over Iran’s nuclear programme. US lawmakers have again criticised China’s unwillingness to allow the value of its currency to rise and its failure to protect the intellectual property of foreign companies. There are trade disputes over tyres and steel pipes. Yet these problems are merely symptoms of an illness that has progressed further than some observers realise.

Put bluntly, the Chinese leadership no longer believes that American power is as indispensable as it once was for either China’s economic expansion or the Communist party’s political survival. Nor does it accept that access to US capital or commercial know-how is quite so important for the next stage of China’s development—or that its growth depends on the spending habits of American consumers.

China has embarked on a process of economic “decoupling.” The western financial meltdown put millions of Chinese out of work in early 2009, as factories that produced goods for export closed their doors. Over the past 18 months, Beijing has seen how dependence on western markets can produce unacceptably high levels of risk at home. The solution is to shift its model to rely more on China’s growing consumer base. This plan, however, must be undertaken with great care to ensure minimum industrial disruption.

Meanwhile, China’s political decoupling from the west is also in full swing. We saw it at December’s climate change summit in Copenhagen, as China spearheaded resistance from developing states to western-proposed targets on carbon emissions. We saw it in the strong reaction to an announcement in February of US arms sales to Taiwan and to Barack Obama’s meeting with the Dalai Lama days later. We will see more public Chinese pushback against what Beijing considers “interference” from Washington in months to come.

There is still considerable mutual dependence between the US and China, grounded mainly in commercial ties. But the unfolding conflict is in many ways more dangerous than the cold war. Economic decision-making in Moscow had little impact on western power or standards of living. But globalisation means there is no equivalent to the Berlin wall, insulating China and America from turmoil inside the other.

The rivalry may take on a life of its own, growing beyond the governments’ ability to contain it. American policymakers must ensure that US power remains indispensable to China’s rise. This will not be a popular undertaking in Washington. Facing voters this November, US politicians will want to shift the blame for the country’s woes onto someone else. Cultural conservatives of the right and labour champions of the left will tell voters that their problems are made in China. Even more sober figures are beginning to raise the alarm, as when economist Paul Krugman warned in March 2010 that China’s economic policy “seriously damages the rest of the world.”

Soon, more Americans will be asking why a country with 10 per cent unemployment can’t persuade a country with 10 per cent growth to respect trade rules and play a responsible role on the global stage. And Beijing’s new assertiveness is feeding a growing insecurity in the US. In a survey conducted by the Pew Research Centre in 2009, 44 per cent of Americans named China as “the world’s leading economic power.” Just 27 per cent chose the US. Reasonable or not, this is a sea change in attitudes—2008 was the last presidential election in which average voters didn’t know or care where the candidates stood on China.

***

How did we get here? For the past 30 years, China’s rise and America’s power have been complementary. In the late 1970s, the Chinese leadership began to tinker with capitalism and to cautiously open the country to foreign trade and investment. Less hawkish officials in Washington and Beijing hoped that a relationship could be built, but fallout from the Tiananmen Square massacre in 1989 put their plans on hold. As the Warsaw pact governments fell later that year and the Soviet empire followed in 1991, China’s hardliners applied the brakes on capitalist experimentation. But in 1992, 88-year-old Deng Xiaoping breathed new life into market reform. Deng’s successor, Jiang Zemin, beat back old guard resistance to liberalisation, and stepped up the pace of reform in the early 1990s.

The collapse of European communism taught China’s leadership that to hold onto power, it must succeed where other socialist states had failed by offering people a rising standard of living. Building China’s economy meant establishing the country as an export powerhouse, a plan that required access to consumers in the US, EU and Japan—still China’s three largest trading partners. That meant opening the economy to ever-higher levels of foreign trade and investment—effectively“coupling” China’s growth to the west’s.

US companies were happy to oblige. Wal-Mart became the world’s largest retailer because its founder, Sam Walton, recognised the possibilities of low-cost Chinese labour. In the years since, a growing number of American companies have begun banking on huge profits based on sales to China’s potentially enormous middle class. In turn, Chinese companies looking to move up the value chain have benefited from exposure to the management, advanced technologies and marketing techniques of US, European and Japanese companies.

Beijing’s relationship with the US reached a crucial moment in January 1993, when Bill Clinton entered the White House. As a candidate Clinton had denounced China’s leaders as “butchers,” and promised to end the “most favoured nation” trade status that China had enjoyed since 1980. As president, Clinton proved more circumspect, pursuing a policy of “constructive engagement.” US consumers benefited as cheap Chinese products helped to keep inflation in check during the 1990s. Before leaving office, Clinton signed into law “permanent normal trade relations” between the two countries. The relationship had become too big to fail.

At the time, Beijing had good reason to value American power and Washington’s willingness to use it. Developing trade and investment relationships with potentially volatile emerging states in Africa, the middle east, southeast Asia and Latin America exposed China to risks it had little experience in managing. America’s willingness to play the global policeman helped open and maintain trade routes and sea lanes for Chinese companies. Expanded access to US consumers helped China’s economy create millions of jobs. Washington proved willing (for the most part) to respect Chinese sensitivities on Taiwan, Tibet and Tiananmen Square.

In 2001, China joined the World Trade Organisation: a landmark moment in its embrace of the global status quo. In the years since, the creative destruction that comes with decades of double-digit growth has created big problems inside China: the disparities of wealth between coastal cities and the rest of the country, serious environmental damage and social unrest. To ensure a more “harmonious” rise, a new generation of leaders led by President Hu Jintao and Premier Wen Jiabao has taken a direct hand in managing expansion. The government already relied heavily on state-owned companies to secure access to resources. It now began to use privately owned companies to dominate certain sectors: Yingli and Suntech have taken over the solar-power industry; BYD dominates batteries and cars. Beijing relies on both public and private sectors to manage the pace of growth and the distribution of its benefits. And sovereign wealth funds, created from the country’s enormous reserves of foreign currency—the People’s Bank of China valued the country’s holdings at $2.399 trillion (£1.580 trillion) in December 2009—are used to direct huge flows of investment.

In sum, the Communist party is using markets to create wealth that can be directed as officials see fit. The ultimate motive is not economic but political: to maximise the state’s control of development and the leadership’s chance of survival. It is a model that has so far been strikingly successful—to the extent that China no longer needs to keep a low profile and let the US take the lead. But it is not a system that offers a level-playing field to foreign companies and investors.

***

The signs of decoupling are all around us. In January, Google claimed that its proprietary source code and the Gmail accounts of human rights activists had been targeted in a sophisticated cyber-attack from inside China. In response, the company threatened to quit the Chinese market. It remains unclear whether the Chinese government played a direct role in the attacks, condones them, or is simply unable to stop them. The government promotes “indigenous innovation,” a vaguely articulated plan to encourage homegrown intellectual property and the companies that develop it. Some of that innovation has been stolen. Google’s charges placed the issue of Chinese cyber-espionage in the headlines, but the problem has been building for years. Following the Gulf war in 1991, the Chinese government saw the need to invest in the information warfare capabilities of the People’s Liberation Army. At first, cyber-espionage was mainly confined to the military realm, but in the past three years it seems to have expanded into the corporate world.

Beyond the espionage problem, China’s ambitions have provoked a sharp response from high-tech companies in the US and Europe. They charge that China’s policy of favouring products made with domestically created intellectual property proves that Beijing is no longer even pretending to observe international intellectual property rules. That’s why the Google story is not really about censorship or state persecution of dissidents. It is mainly about Baidu, Google’s main Chinese rival. Baidu already holds the dominant market share within China, and if Google leaves or is forced out, Baidu will benefit the most. Companies such as Baidu have growing influence within China’s state bureaucracy and have also become symbols of pride for the government and public.

In January, the US government announced a plan to sell $6.4bn in weaponry to Taiwan. This kind of deal was sure to provoke an angry response from the mainland, and it did. But this time Beijing added an extraordinary threat: the imposition of sanctions on US aircraft manufacturer Boeing, which dominates China’s airline market, worth $400bn over the next 20 years. Were Boeing to lose this business, some of it would surely fall to European aircraft-maker Airbus. But over time, more of it would move to emerging Chinese companies.

The predicaments of Boeing and Google illustrate how the US and Chinese brands of capitalism are pushing Washington and Beijing towards conflict. For the moment, the governments’ incentives for co-operation outweigh any advantage that either can find in direct confrontation. But the forces that divide them are too large for either side to fully control.

There is also trouble looming over the dollar. As China moves to shift from exports to greater domestic consumption, the need to purchase dollars will lessen and much of the extra cash will flow into the purchase of commodities. America will then have to look elsewhere to make up the difference in financing its debt. This larger shift in the balance of power in the relationship will also empower Chinese hawks to call for greater resistance to US pressure on places like Iran, Burma and Sudan. Chinese state-owned companies have established lucrative commercial relationships with these governments—ties that serve China’s interests. In exchange, China provides these governments with the resources and political cover they need to reject US and European demands for policy change.

***

Back at Davos, tensions were evident during an exchange between Zhu Min, the deputy governor of the People’s Bank of China, and the Democratic congressman Barney Frank of Massachusetts. Zhu was questioned on China’s currency. “It is very important to have a stable yuan… It is good for China and good for the world,” Zhu said. “Could it be stable but a little higher?” Frank asked. The audience laughed. Zhu smiled, unperturbed. No need to explain your strategy when you’re holding a winning hand. Nonetheless, the same dispute broke into the open again in March 2010, when Premier Wen Jiabao slapped down calls by another group of American lawmakers for China to allow its currency to appreciate.

Last autumn, Washington moved against Chinese exports of tyres and steel pipes to protect American companies and jobs in these industries. But the next conflict will extend well beyond trade. In December, Senate Majority Leader Harry Reid sent an open letter to President Hu Jintao in which he accused China of, among other things, pursuing “a policy to undermine American competitiveness… while simultaneously benefiting from open access to the US market” and “rampant intellectual property theft.” There is an abundance of bootleg Windows software in China, for example, something Microsoft has been unable to control; it’s estimated that up to 80 per cent of all software sold in the country is pirated. When congress debates energy policy later this year, Republicans will demand to know why the US should accept binding commitments on carbon emissions that undermine its competitiveness while China refuses to follow suit. In turn, China’s fast-growing blogosphere will ask why free market champions in the US are threatening them with protectionism.

China will not mount a military challenge to the US any time soon. Its economy and living standards have grown so quickly over the past two decades that it’s hard to imagine the kind of catastrophic event that could push its leadership to risk it all. Beijing knows that no US government will support Taiwanese independence, and China need not invade an island that it has largely co-opted already by offering Taiwan’s business elite privileged investment opportunities.

That said, China’s determination to defend its territorial integrity, its ambitions to extend its influence in Asia, and its plan to form new commercial partnerships in far-flung places have given momentum to military plans. With 2.3m soldiers under arms, the People’s Liberation Army is already the world’s largest. Its investments in cyberwarfare technology continue to cause anxiety in Washington. Its military budget is thought to have tripled between 2003 and 2009 to about $70bn. This is only 13 per cent of what the US spends each year, but significant enough to pose future challenges.

Any cold war-type conflict is much more likely to develop over issues of economic security than military confrontation. Charges of Chinese corporate espionage will complicate the efforts of Chinese companies to invest in the US. China will respond with investment restrictions of its own. And western companies will find themselves competing for natural resources across the developing world with Chinese state-owned companies, armed with subsidies and political backing. This is already happening openly in places like Nigeria and Ghana, and there is more subtle competition taking place from Angola to Venezuela to Iraq. China and other authoritarian governments that embrace state capitalism will increasingly direct trade flows toward one another, lowering the trajectory of economic growth in the west. Finally, though China’s military will not offer the US a global challenge, it can certainly take on American forces in Asia.

***

So how should America respond? The country’s cold war experience offers a useful strategy. The stalemate imposed by “mutually assured destruction” that prevented the US-Soviet conflict from igniting created a sense of stability. Today, the US and China are locked in a new form of “mutually assured economic destruction,” a dependence that can force some degree of co-operation even as political, economic and security disputes simmer. America still needs China to help finance its debt. For the moment, China needs access to US consumers to keep unemployment in check and for continuing foreign investment. Even if the Chinese economy becomes more driven by domestic demand, consumers will still want access to foreign-made products. The two sides will be doing business for decades to come.

US officials should do their best to ensure that this “mutually assured economic destruction” continues. But in Washington’s poisonous political climate, populist opportunists will cast engagement as appeasement. With criticism of China from both left and right, those who see the wisdom of deepening mutual dependence will need courage—particularly when China’s leaders criticise US policy to appease hardliners within the leadership, and a restive population.

American (and other foreign) companies doing business in China can take lessons from how multinational oil companies have adapted to a world in which state-owned energy companies control at least 80 per cent of the global oil reserves—by shifting their business models to exploit their remaining comparative advantages. To compete with state-owned energy operations, multinationals now invest in the project management and advanced technology that their rivals can’t yet match. Foreign companies in China should similarly invest more heavily in products with a blazing-fast product cycle, like advanced electronics and videogaming. By the time their Chinese rivals have broken the code on this intellectual property, they will already have a newer model. And given the greying of China’s population, foreign investment will remain welcome in healthcare innovations. There are many such examples.

It is also important for the US government and American companies to invest in those areas where their comparative advantage is most likely to endure. For Washington, that means maintaining US “hard power” advantages. Soft power helped America survive the cold war, and continues to play a crucial role in extending US influence. But over the next several years, hard power will ensure that the US remains indispensable for global political and economic stability. The US now spends more on its military capacity than all potential competitors combined. It outspends China by about eight to one. Even if defence spending were significantly reduced, the US will hold a dominant military position for the foreseeable future, because it will be decades before any rival will prove both willing and able to accept the burdens that come with global leadership. China will continue to expand its influence, particularly within Asia. But it makes little sense for a still developing nation to challenge US hard power outside its immediate neighbourhood—particularly when China’s state-owned oil companies will rely for several decades on oil and gas supplies from unstable parts of the world such as the middle east, the Caspian sea basin and west Africa. In addition, the presence of US troops in Japan and South Korea limits the risk of an Asian arms race. That saves China, Japan, South Korea and India a great deal of money.

Finally, America will have to get by with a little help from its friends. US relations with Japan have been tested over the past year as the Obama administration and the new Democratic party of Japan-led government re-establish the common interests that bind the two countries. The Clinton and George W Bush administrations built closer ties with India; that work should be broadened and deepened. The US should co-ordinate more closely with the EU—and its most influential member states—on ways to create a unified front in trade disputes with Beijing.

Post-cold war US hegemony didn’t last long. But there is no coherent alliance of rising powers to contain the American colossus. Instead, the speed with which ideas, information, people, money, goods and services now cross borders has enabled a host of nations to make a mark on the international stage—just at a moment when the US is overstretched militarily, and its responses to international terrorism have exacerbated global anti-Americanism. And no single relationship will play a larger role in shaping Washington’s response to the messy new order that is now emerging than its increasingly troubled relations with Beijing.

April 15, 2010

Poland Out of tragedy, normality Poland’s prospects look bright, despite the aeroplane crash that killed its president on April 10th. But Poles still have a lot to do to make the most of their chances

Filed under: Uncategorized — ktetaichinh @ 8:05 pm
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What does look questionable is the concentration of talent on the passenger list. The crash cost Poland’s armed forces six of their top seven commanders, and killed dozens of other notables. Countries and big companies usually have strict rules about how many of their most vital people can fly in the same plane. The crash shows the wisdom of such practices.

The investigation may reveal other misjudgments, too. Mr Kaczynski publicly berated for cowardice a pilot who refused to fly him and four other heads of state to Tbilisi during a mission to support the Georgian leadership during the war in August 2008. (The pilot later got a medal for refusing to obey the president’s reckless order.) The theory that on April 10th the pilot felt unduly pressured to get the president to the commemoration of the Katyn massacre, despite severe fog at Smolensk airport, deserves scrutiny. Some also wonder if it is overdoing things to give the late president, a divisive figure, the honour of burial in the crypt of the Wawel cathedral in Cracow, alongside Poland’s greatest leaders.

But whatever combination of incompetence, recklessness and sheer bad luck turns out to have caused the disaster, the bigger picture of Poland is a bright one. Foreigners used to stereotypes about Polish disorganisation, backwardness and prejudice find plenty to surprise them.

The clearest success is the economy. Poland is not only doing well in the “ex-communist” region (already a dated category). It is doing well by any standard. Its economy was the only one in Europe to boast growth last year, of 1.7%. Though the budget deficit is a whopping 7% of GDP, outsiders are unbothered. Poland’s banking system is solid, being largely unburdened by the rotten foreign-currency loans made in places such as Hungary and Latvia. Outside investors like Poland. It attracted more than $10 billion in foreign direct investment last year. Debt, at 53% of GDP, is manageable. Countries such as Britain might drool at that.

Poland’s success is partly a matter of luck. Its size (the biggest economy by far of the European Union’s newer members) means that domestic demand cushioned a fall in exports. EU taxpayers’ money for new roads, railways and other modernisation provided a fiscal stimulus at the right time. Growing interest by outside investors in Poland’s big gas reserves has raised the prospect of both a bonanza and greater energy independence—a big deal in a country fearful of over-dependence on Russian gas.

There was also good judgment. Poland has used monetary and fiscal policy well during the crisis. It has made a stab at reforming the pension system—a weak point in all ex-communist countries. It is using EU money more effectively than in the past. One of the biggest successes of Donald Tusk, the prime minister, has been to push squabbling local politicians to agree quickly on road-building programmes. Transport bottlenecks were an infuriating and growth-stifling feature of Polish life.

The government now exudes confidence. Mr Tusk heads a stable coalition with a solid parliamentary majority (unknown in modern Polish history). Business likes that. Among its prominent members are the finance minister, Jacek Rostowski, an economics professor from Britain; and Radek Sikorski, the foreign minister. A teenage refugee from communism, Mr Sikorski boasts a degree from Oxford and a high-profile American wife (who was a former Economist journalist). Both men have the connections and language skills to get Poland’s message across in a way that stirs envy among other politicians, working in laboured English or through interpreters.

Under the previous government, led by the late president’s twin brother Jaroslaw, Poland was turning into a laughing-stock. The Kaczynskis’ policy seemed to be to pick noisy fights with Germany, Russia and the rest of the EU, over, for example, support of the beleaguered Georgians. Some of the criticism was no doubt grossly unfair but the twins’ woeful tactics left Poland marginalised.

Since Mr Tusk’s government took office in 2007, however, that has begun to change. The country has offered loans to stricken economies such as Iceland, Latvia and Moldova. Some wonder if it might help Greece, undermining the notion that Europe has a rich, well-run western half, and a poor, backward east.

Polish leaders have also made friends with Germany, seeing in Angela Merkel’s leadership an opportunity for a powerful friendship. Many noticed when Guido Westerwelle, the German foreign minister, paid his first visit not (like his predecessors) to Paris, but to Warsaw.

Poland has always been a military heavyweight by European standards, able to deploy its 100,000-strong armed forces in Iraq and Afghanistan. America likes that, seeing a sharp contrast with the feeble efforts of some other NATO allies. In return, Poland has gained the main role in America’s anti-missile plans. The Obama administration clumsily ditched a scheme promised by the Bush administration but says the new programme will be bigger and better. American energy companies’ interest in Polish gas reserves may make the connection even stronger. Poland has also earned NATO attention on what was once the neglected home front. The alliance developed contingency plans to defend Poland, and is extending them (using mainly Polish troops) to protect the vulnerable Baltic states.

But Mr Tusk’s biggest diplomatic achievement since taking office has been to steer Poland towards a rapprochement with Russia. The biggest sign of that was the participation of the Russian prime minister, Vladimir Putin, at a ceremony on April 7th to mark the anniversary of the Katyn massacre. The Russian government’s reaction to the deaths of Mr Kaczynski and his entourage seems designed to take the process further (see article).

This is a big change. Poland used to be the most forthright critic of Mr Putin’s regime. The Russian leader said that Poland would be a nuclear target in wartime.

The countries’ reconciliation still has a long way to go. Mr Putin has expressed sympathy for the victims of Katyn. But he has not publicly condemned their executioners. And in a response to a lawsuit at the European Court of Human Rights brought by relatives of Katyn victims, Russia still claims that it is not clear who perpetrated the massacre. Many Poles find that outrageous: it is as if, they say, modern Germany were to admit the Holocaust was not a myth yet still hesitated to condemn Hitler outright.

Such feelings brought Mr Kaczynski, along with almost the entire foreign-policy leadership of his party, the commanders of the armed forces, senior intelligence veterans and top historians, to board the plane that crashed on April 10th. They were paying their own unofficial visit, an alternative to the (in their eyes, phoney) reconciliation of the earlier event attended by Messrs Tusk and Putin.

In many countries, the destruction of so great a part of the top echelon would have precipitated a crisis, domestically and on foreign-exchange markets. It is hugely to Poland’s credit that this has not happened: the country’s institutions and constitution have passed the test almost serenely.

But it has taken a great tragedy to remind Poles of this achievement because, for many of them, too little has changed in daily life. A million or more have gone to work in other EU countries, chiefly Britain and Ireland. Despite the downturn there and Poland’s economic success, they are so far mostly not coming back.

The reasons are complex. Poland has little tradition of internal labour mobility, so shortages in Warsaw and the country’s booming western crescent can coexist with deep joblessness in the east. It can be easier, with a budget airline, to commute weekly to Britain than to drive to a job 100km away. Petty corruption in health care and education is endemic. Perhaps most worrying, social mobility is stagnating. After the collapse of communism, a bright young person could aim high. Now many feel that without good connections, it is best to head abroad.

The suspicion lingers that the country’s old communist elite and their children have morphed into a new nomenklatura. Poles call this idea the Uklad, an all-but-untranslatable word meaning “deal”, “arrangement” or “system”. The price of the communist surrender in 1989 was that the old elite was able to turn its power into wealth, using connections, slush funds and privileges to gain a head start in the country’s shift to capitalism.

The Kaczynskis found that idea repellent. They wanted a fresh start and called it a “Fourth Republic”. But during their ill-starred government of 2005-07, the atmosphere was more reminiscent of Robespierre than Benjamin Franklin. Prosecutors conducted trial by press conference, denouncing victims live on television on what often seemed the flimsiest of grounds. Overzealous sleaze-busting was matched by an apparently obsessive focus on reforming the over-mighty military-intelligence service.

Disquiet about the brothers’ vengeful, chaotic and weird reputation led to their downfall in 2007 and the election of Mr Tusk’s Civic Platform party. The big criticism of his government is that presentation outweighs substance. Poland’s prosperity rests on a surprisingly narrow base. It needs structural reforms to deal with, for example, a rapidly ageing workforce, only just over half of whom are economically active.

The deaths of Mr Kaczynski and many of his closest allies leave a big political hole but also create an opportunity. The late president was already facing a tough challenge from Mr Tusk’s party in the presidential race that was due in October. That election will now be in June. Bronislaw Komorowski, who is acting president by virtue of his position as speaker of the lower house of parliament, the Sejm, is also the Civic Platform candidate. A victory for him would make Mr Tusk’s efforts to consolidate the centre-right of the Polish political spectrum start to look unstoppable.

The most powerful candidate for Law and Justice would be Mr Kaczynski’s twin, Jaroslaw. His intentions are unclear. If he stands, he could gain a big sympathy vote. But he might also remind Poles why they voted him out of office as prime minister. Some Poles believe that a cross-party candidate would be the right step.

One of Mr Tusk’s biggest excuses for his government’s cautious approach to reform is that anything radical might be met with a presidential veto. That was not a complete excuse. But if Mr Komorowski or a non-partisan figure is elected, it will be no excuse at all. Poland has done a tremendous amount to make up for five decades of sometimes bestial misrule after 1939. But it has more to do if it is to establish a position as one of the powers of Europe.

March 23, 2010

Kingdom Kim’s Culinary Outposts

Filed under: Uncategorized — ktetaichinh @ 7:26 pm
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Inside the bizarre world of Asia’s North Korean restaurant chain.

By Sebastian StrangioPosted Monday, March 22, 2010, at 12:09 PM ET

North Korean waitresses perform for patrons. Click image to expand.North Korean waitresses perform for patronsPacked for dinner each night, the Pyongyang restaurant in the heart of Cambodia’s capital, Phnom Penh, is as famous for its kimchi as for its troupe of talented Korean waitresses, who perform an elaborate floor show for patrons. But Pyongyang is no ordinary Korean mess hall. The operation is run by the North Korean government, part of a chain of dozens of eateries—stretching from northern China to Thailand—that funnels much-needed foreign exchange into the state coffers in Pyongyang. While a visit to the reclusive Democratic People’s Republic of Korea is next to impossible for most, Pyongyang offers casual diners a window into Kingdom Kim, an elaborate combination of food and culture from north of the 38th parallel.

Visitors to the restaurant are ushered into an air-conditioned, flood-lit hall filled with dozens of glass-topped tables. Unlike North Korea proper, which is wracked by economic sanctions and constant famines, the food here is fresh and abundant. The menu features specialties such as Pyongyang “cold noodle” (served encrusted with ice), barbecued cuttlefish, stringy dangogi (dog meat) soup, and countless variations on the kimchi theme, all served with glutinous white rice. Also available for sale are a series of North Korean products, including ginseng wine and some nameless bear “product” promised to increase sexual virility. All carry hefty price tags in U.S. dollars, since the Cambodian riel is not convertible outside the country.

In addition to the food, the main attraction is the group of pretty North Korean-born waitresses, who perform music and dance routines complete with tightly synchronized choreography reminiscent of North Korea’s annual Mass Games. Donning traditional chima jogoiri dresses and pasted-on smiles, the pretty young women serenade diners with violins, guitars, synthesized karaoke, and Korean pansori music. The predominantly South Korean clientele claps and cheers, requesting reverb-drenched renditions of Korean pop classics.

Aside from small North Korean flags pinned to the waitresses’ blouses, the restaurant is surprisingly free from overt propagandizing. Instead of paeans to the Great Leader and his revolutionary juche ideology, the walls are adorned with a series of monumental landscape paintings. One crashing seascape, rendered in an apocalyptic palette of blues, greens, and reds, recalls the painting used as a backdrop to the official photo of Kim Jong-il and Bill Clinton that was taken during Clinton’s visit to Pyongyang in August. The cold flood-lighting and no-camera policy (often violated on the sly by curious Western expats) also lend an Orwellian tinge to an evening at Pyongyang, though the authoritarian mood is often broken by the sound of drunken South Korean businessmen warbling their way through the restaurant’s thick karaoke catalog.

North Korean government-run restaurants have existed for years in the regions of China adjacent to the DPRK’s northern border, but the 21st century has seen an expansion of the business into other parts of Asia. In 2002, the first Southeast Asian branch of Pyongyang opened in the Cambodian tourist hub of Siem Reap, and it became an immediate hit with South Korean tour groups visiting the nearby temples of Angkor. The success of the restaurant, reportedly opened by Ho Dae-sik, the local representative of the DPRK-aligned International Taekwondo Federation, led to the opening of the Phnom Penh branch in 2003. This was followed by more elaborate establishments in Bangkok and the popular Thai beach resort of Pattaya, as well as a small branch in the Laotian capital, Vientiane.

Little is known of how the restaurants operate, but experts say they are closely linked with other overseas operations run by the reclusive regime in Pyongyang. Bertil Lintner, author of Great Leader, Dear Leader: Demystifying North Korean Under the Kim Clan, says that in the early 1990s, North Korea was hit by a severe economic crisis caused by the disruption in trading ties with its former Communist allies. At that time, both the Soviet Union and China began to demand that Pyongyang pay for imports in hard currency rather than barter goods, forcing it to open “capitalist” foreign ventures to make up funding shortfalls. He says the restaurants are part of this chain of trading companies controlled by Bureau 39, the “money making” (and money-laundering) arm of the Korean Workers’ Party.

“The restaurants are used to earn additional money for the government in Pyongyang—at the same time as they were suspected of laundering proceeds from North Korea’s more unsavory commercial activities,” he says. “Restaurants and other cash-intensive enterprises are commonly used as conduits for wads of bills, which banks otherwise would not accept as deposits.”

According to reports from defectors, the eateries are operated through a network of local middlemen who are required to remit a certain amount every year to the coffers in Pyongyang. Kim Myung Ho, a North Korean defector who ran a restaurant in northern China, reported in 2007 that each establishment, affiliated with “trading companies” operated by the government, was forced to make annual fixed payments of between $10,000 and $30,000 back to the North Korean capital. “Every year, the sum total is counted at the business headquarters in Pyongyang, but if there’s even a small default or lack of results, then the threat of evacuation is given,” Kim told reporters from the Daily NK, a North Korean news service run by exiles and human rights activists.

A North Korean waitress working at the Pyongyang restaurant in Phnom Penh. Click image to expand.A North Korean waitress working at the Pyongyang restaurant in Phnom PenhMeanwhile, the DPRK provides the bevy of pale-faced—and politically sanitized—beauties who live and work on the restaurant premises. Marcus Noland, a senior fellow at the Petersen Institute of International Economics, says that all North Koreans dispatched to work in restaurants abroad are forced to undergo stringent screening for political loyalty. “It is considered a desirable achievement to be selected and have the opportunity to go abroad,” he says.

A year ago, the Pyongyang restaurants in Cambodia and Thailand suddenly closed their doors, only to reopen again after a six-month hiatus. Lintner cited an Asian diplomat in Bangkok saying the restaurants, like all “capitalist” enterprises, were hit hard by the global economic crisis, but locals familiar with the establishment in Phnom Penh offered another explanation. One worker at a nearby business said Pyongyang closed after a dispute with a Cambodian customer who tried to take one of its North Korean waitresses out for “drinks” after dinner.

If true, it would not be the first time. In 2006 and 2007, Daily NK reported several incidents in which waitresses from North Korean restaurants in China’s Shandong and Jilin provinces tried to defect, forcing the closure of the operations. Kim Myung Ho added that two or three DPRK security agents live onsite at each restaurant to “regulate” the workers and that any attempts at flight result in the immediate repatriation of the entire staff.

Visitors to Pyongyang can come and go as they please, eating their fill and pondering the prospect of a freer, more prosperous North Korea. But for all their smiles, the young women staffing these far-flung outposts of the reclusive state are soldiers of juche, performing their nightly ritual under constant surveillance.

March 22, 2010

China’s Miracle Demystified

Filed under: Uncategorized — ktetaichinh @ 8:03 pm
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The average annual growth rate of GDP reached 9.8 percent, far exceeding the expectations of most people in the 1980s or even early 1990s, including Deng Xiaoping who initiated the reforms. Deng’s goal was to quadruple China’s economy in twenty years, implying an average annual growth rate of 7.2 percent per year.

In 1979, China was inward-looking and its trade as a percentage GDP was only 9.5 percent. Now China is the world’s largest exporter and the third largest importer, with trade contributing around 70 percent of GDP. Over 30 years, more than 600 million people got out of poverty.

China’s miracle raises the following five questions.

  1. What was behind China’s extraordinary performance?
  2. Why Did China Fail before the Transition in 1979?
  3. Why Didn’t Other Transition Economies Perform Equally Well?
  4. What Costs Did China Pay for Its Success?
  5. Can Other Developing Countries Replicate the Miracle?


Here are my answers to these questions:

1. What was behind China’s extraordinary performance?
After the industrial revolution, sustained growth in any economy depended on continuous technological innovation as well as industrial diversification and upgrading.

As Angus Maddison shows, before the 18th century, the average annual growth rate of per capita income in the West was only 0.05 percent for years. That means it took 1,400 years for Europe’s per capita income to double prior to the 18th century. In the 19th century, it took about 70 years; and in the 20th century, 35 years.

The industrial revolution sped the move away from an agrarian society where 85 to 90 percent of the labor force worked in traditional agriculture. The move from agriculture to nonagricultural and manufacturing sectors was gradual but inexorable. In the manufacturing sector, it was at first very labor-intensive, and then became more capital-intensive as technology advanced. Ultimately, the service sector dominated. Overall, the process was one of continuous structural change.

As a late-comer to this modernization process in 1949, China had the advantage of backwardness. To innovate, China did not have to invent the technology or industry by doing R&D. It could borrow technology, industries and institutions from the advanced countries with low risk and costs. East Asian economies, including Japan and the four small dragons as well as China after the transition in 1979, all tapped into this advantage.

2. Why Did China Fail before the Transition in 1979?
China didn’t tap into that potential until 1979 because it adopted a misguided modernization strategy.

Revolutionary leaders such as Mao Zedong and Zhou Enlai hoped to make China an advanced country immediately after the founding of the People’s Republic of China in 1949. They adopted a strategy to build up advanced capital- and technology-intensive industries even though China was an agrarian economy.

The government’s priority industries went against China’s comparative advantage. The government needed to protect them by giving them monopoly positions and subsidizing them through various price distortions, including suppressed interest rates, over-valued exchange rates and so on. The price distortions created shortages and the government was obliged to use administrative measures to mobilize and allocate resources directly to the non-viable firms in the priority industries.

Through those interventions the government was able to set up modern advanced industries, but the resources were misallocated and the incentives repressed. Economic performance was very poor. Haste made waste.

3. Why Didn’t Other Transition Economies Perform Equally Well?
Not only China but also all the socialist countries and most developing countries after WWII adopted a similar development strategy. In the 1980s and 1990s, they all engaged in reforms to transit to a market economy. However, their governments did not realize that the existing distortions were endogenous in a sense that they were instituted to protect the non-viable firms in the priority sectors.

Some of them eliminated the distortions immediately. The priority sectors collapsed, causing a contraction of GDP, surge of unemployment, and acute social disorder.  Others, to avoid this, continued to subsidize those non-viable firms through disguised subsidies and protection, and efficiency suffered.
China adopted a pragmatic, gradual, dual-track approach. On the one hand, the government continued to provide transitory protection to the non-viable firms in the priority sectors, and on the other hand, it liberalized private enterprises and allowed joint-ventures’ entry to labor-intensive sectors–areas in which China had comparative advantage, but were repressed before. In this way, China achieved stability and dynamic growth simultaneously.

4. What Costs Did China Pay for Its Success?
One of the main drawbacks of China’s gradual, dual-track approach to transition is the widening of income disparities. From a relatively egalitarian society in 1979, the Gini coefficient reached .47 in 2007.

The reason was the continuation of distortions in various sectors, including the overconcentration of financial services by the four large state-owned banks, the almost zero royalty on mining, and the monopoly of major service industries, including telecommunication, power, and finance.

Those distortions are used to subsidize or protect the non-viable firms in the old priority sectors. They also favor big corporations and rich people. For example, the interest rates that big banks charged are kept artificially low, allowing big companies and rich people to benefit at the expense of middle class depositors who have limited access to credit services.

The result is a widening of income disparities.
The large corporations and rich people have a higher saving propensity than low-income households. The widening of income disparities also contributes to the saving-consumption imbalance and China’s large trade surplus, which reflects the disparity in saving and consumption in recent years. Therefore, it is imperative for China to remove the remaining distortions and complete the transition to a market economy.

5. Can Other Developing Countries Replicate the Miracle?
Other developing countries can replicate China’s performance. Every developing country has a similar opportunity if they know how to tap into the advantage of backwardness, learn to borrow technology from advanced countries and upgrade their industries step by step.

Most developing countries also have all kinds of distortions and non-viable firms due to their governments’ past development strategies and inappropriate interventions. In this respect, China’s experience in the past 30 years provides useful lessons.

In the transition process, it may be desirable to adopt a dual-track approach, providing some transitory protection to those non-viable firms to maintain stability, but liberalizing entry to sectors in which the country has comparative advantage.

Ultimately, however, sustained and inclusive growth requires eliminating all distortions and completing the transition to a well- functioning market economy.

Comments

Dynamic Comparative Advantage

Submitted by Joe on Sat, 2010-03-20 06:38.

“In the transition process, it may be desirable to adopt a dual-track approach, providing some transitory protection to those non-viable firms to maintain stability, but liberalizing entry to sectors in which the country has comparative advantage.”

Yes, but what about non-viable firms that may become viable in the future – the idea of dynamic comparative advantage and the work of Ha Joon Chang suggesting that early protection of firms such as Toyota and Samsung allowed them to become industrial powerhouses further on in their development?

Friday, March 19, 2010 Quantitative Easing at the Fed and the Bank of Japan

Filed under: Uncategorized — ktetaichinh @ 6:28 pm
Tags: , , , , ,

Next Thursday March 25 the House Financial Services Committee will hold a hearing on how the Fed should exit from its quantitative easing. This past week I was in Japan discussing the Japanese experience with QE with traders and experts in the financial sector and in the Bank of Japan. A simple graphical comparison between QE at the Fed and at the BOJ puts the exit strategy in a useful perspective.

The two graphs show the monetary base—currency plus bank reserves—in the United States and Japan as reported by the Fed and the Bank of Japan. (The BOJ reports units of 100 million yen; thus the monetary base in Japan is now slightly below 1,000,000 units of 100 million yen or 100 trillion yen).

The big bulges in the monetary base are measures of quantitative easing because the monetary base would have continued to grow at relatively steady pace without QE. Japan’s experience with QE was from 2001 to 2006; during those years the monetary base increased from about 65 trillion yen to 110 trillion yen, or by about 70 percent. While QE lasted for a long time it ended very quickly, and the quick exit seemed to go smoothly without volatility in the markets. Note that the post 2008 quantitative easing in Japan is very small compared to 2001-2006; thus Japan does not have an exit problem right now though it is still struggling with a deflation problem and will likely continue with its QE. Unlike the Fed, the BOJ did not think a big quantitative easing was appropriate in the recent crisis.

Moreover, the Fed’s recent QE is quite different from the BOJ’s QE in 2001-2006:

First, the monetary base in the United States increased by twice as much in percentage terms (140 percent) compared with Japan.

Second, QE came on much quicker in the United States, with most of the increase in the base concentrated in the last few months of 2008, though increases have continued since then.

Third, the Fed entered into QE when the interest rate target was 2 percent, while the BOJ started QE when the interest rate was already essentially zero at 0.1 percent.

Fourth, the Fed’s quantitative easing has largely been caused by the need to finance its purchase of mortgage backed securities, bailouts of AIG and Bear Stearns and other loans and securities purchases.

Fifth, and most important for the exit strategy issue: the BOJ exited from QE much more quickly than the Fed is now signaling its exit will be. Japan’s experience suggests that a quicker exit for the Fed might be considered.

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