China? A Planet within our Planet

National emblem of the People's Republic of ChinaImage via Wikipedia
Lately there's been an avalanche of news about China, ranging from the best to the worst. Fantastic skyscrapers and olympic shows to floods, strikes and police massacres of Tibetans and Uyghurs. Not to mention tussles with neighbours, in particular Taiwan (the "special relations") and Vietnam (over the Paracels islands).
But China is also a trade giant, credited by some with saving the world from the Great Recession. 

A Gentle Giant.


I'ts becoming increasingly evident that China doesn't need the rest of the world. It grows fast - exponentially fast with little help from outside. And whatever technology it needs, it can buy. Chinese used to go abroad to get it - no more. Now they import from the West whatever brainpower they need. And unlike the Western Capitalist Model, the key agent for change is not business but the government.

It's in the process of becoming a planet within our planet.

Just one example among many: in 2009, sales of digital content in China reached $1bn and they are growing at an estimated 40% annually. Predictably, the Chinese authorities are paying attention: in 2010, the largest state-sponsored publishing conglomerate, China Publishing Group, launched Digital Media Co. Ltd., a new digital media subsidiary. To understand just how amazing this is, imagine the US Federal Government moving into the new roaring e-book market and setting out to compete with Amazon.com!

Where does that leave us? Are we going to be overrun by the Chinese? Their goods flood our markets and in some areas, like solar energy, they are holding (literally) the winning chips, because the needed material is mined almost exclusively in China. By end 2010, China is expected to produce two-third's of the world's solar panels. And, although not as good, they're half the price of the Germans. It's a price war - not a technical one, and the Chinese tend to win every time, here and elsewhere. The world is awash with shoddy Chinese stuff...

Should we worry? There is a sense of déjà vu - when Japan surged forward after World War II, they flooded us with cheap goods and kept their own market closed. Just like China today. But, remember, nothing disastrous resulted from the Japanese Tsunami. We got used to it, they improved quality, and a new equilibrium was reached.

China however is a HUGE market and every businessman worth his salt is salivating to get in. Some do, but it's difficult. Google famously clashed with the authorites and  has learned its lesson. Today it's way behind the Chinese-owned search engine Baidu. And eBay has been driven out by Dangdang and Zhuoyue. It would seem that Western businesses who wish to enter the Chinese market need a Chinese partner. And must learn to toe the political line. That's how GM has managed to sell more cars in China than in the US. It has a dormant partner, Shanghai Automotive Industry. Unfortunately, dormant partners have a way of waking up as soon as they learn the ropes. They become rivals, and Shanghai Automotive plans to enter the Indian market alone...

The upshot? The Chinese are big and getting bigger. Are they going to be tempted to control the world? I know a lot of people worry. My mother who's 96 is convinced the the 21st Century will be Chinese. She has this old-fashioned vision of yellow hordes galloping across Europe, Genghis Khan-style.

Not quite. The Chinese are busy at home growing and don't need anybody. Again, one example among many, going back to the one reported in Publishing Perspectives (July 22, 2010). The consensus in the industry is that few if any Chinese publishers would ever think of going abroad because of the immense opportunities at home. Essentially because there's no need to venture outside to become a success.

It's like saying China is so big it doesn't need anybody. We can all agree it's not like Queen Victoria's England that needed Trade (and War) to build the British Empire, giving us the unique spectacle of a tiny island that "ruled the waves". China is not a bit like that. It's a continent and has no interest in ruling the waves. And never had. This is the country that invented the compass in the 4th century BC but never used it to sail any further than the China South Seas. 

Mmmmm...maybe. Do you agree? I have to admit I'm only half-convinced myself. Actually, I'm constantly on the look-out for signs of Chinese...imperialism. By that I mean a political desire to impose their own ideology on the rest of the world. For the time being, the Chinese Brand of communism sounds pretty bland. I just hope it stays that way...

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The World Cup 2010 - Political fallouts

So the suspense is over, SPAIN won, the NETHERLANDS lost and it all happened at the very tail end of the game - the 116th minute to be precise. Spain won with just one goal. Big deal! I'm no expert in soccer, but it seems to me that a game that has to drag fully 16 minutes beyond the "normal" 90 minutes had to be pretty close to a draw. I bet people who watched wondered whether anybody would ever score!

But what really drew my attention was not the game in itself - and I'll readily admit soccer watching is a lot of fun, it's a spectacular game - no, what drew my attention were the comments made by everybody, CNN, BBC, France 24, the big papers like the New York Times and Herald Tribune etc. You'd think this was all about sport and nothing else, but no, it's serious stuff, it's about POLITICS and NATION-BUILDING!

There is an enduring notion that Sport can bring Good to the world. Mandela 15 years ago, during the African Nations Cup soccer event, said "sport has the power to change the world...It speaks to youth in a language they understand. Sport can create hope where once there was only despair." That of course echoes the philosophy of Pierre de Coubertin, founder of the Olympic Games.

Bringing The World Cup to South Africa was seen by FIFA's president, Sepp Blatter as a special mission. "Football for hope", he called it and the South African President, Jacob Zuma, called business leaders for "billions of dollars to these shores for investment". At the opening, "we are all Africans!" screamed Tutu. While the South African team lost right away, Ghana saved the honour of African soccer and sowed the promise of future victories for Africans. But above all, South Africa came out as the political winner: now always invited to G8 meetings, it belongs to the restricted club of BIG Emergers ( the original BRICs plus a dozen others). South Africa is the Next Big Country and the hope is that sport will help heal the rift between the poor and the rich.

I have my doubts but then who's got a crystal ball? I don't and I'd be more than willing to hope that such an event - terribly expensive for the home country who has to foot the bill - does go towards something more useful than just kicking a ball around. The last Olympic Games certainly didn't help Greece and indeed, contributed to making its debt crisis well-nigh intractable...But let's keep our fingers crossed and hope that South Africa will not run into the same kind of problems.

But the hype doesn't stop there. Yesterday we were awash on all TV channels with the spectacle of hundreds of thousands Spaniards chanting in the streets of Madrid all night long, waving the red and yellow Spanish flag like a trophy. Their happiness was a Tsunami. While the Dutch sadly walked home in silence - it was nothing less than a national funeral.

Doesn't that strike you as extraordinary in this day and age? We are all Europeans, aren't we? Spain and the Netherlands both belong to the European Union - yet, when one scores a victory against the other in a GAME, for goodness'sake, people in the street turn it into a national victory as if a war had been won.

Can you imagine the same spectacle in America? Suppose a Florida team (that's a little like Spain, the Sunshine State) beats Rhode Island (a little like the Netherlands with its maritime past) , what do you think would happen?

Nothing? Yes, nothing.

Ah, poor Europeans - when will they ever grow up?


The Great Recession: How Long Will It Last?

Time to move away from fiction to a little bit of non-fiction.

Have you noticed that the on-going economic crisis has lately acquired a name? It's no longer a financial collapse, a credit crunch, a real estate bubble gone bust, it's the Great Recession. Sounds good, a little depressing but definitely impressive. You can count on economists to come up with nice names even if they can't predict anything about the next turn, whether up or down. They can't tell us after two years of Great Recession and tons of analyses, how long it will last..Even weather predictions are better!

And don't expect me to come up with an answer because I won't! I studied Economics at Columbia University a long time ago and I was lucky to have courses with the likes of Milton Friedman and Baghwati. But at the time I came away with a strong sense that economists are great as long as they confine themselves to their theories and models, and they're very poor when it comes to grappling with reality. The long and short of it is that I didn't learn much that was useful in real life.

It's become increasingly clear to everyone (and not just me) that the direction economics has taken over the past fifty years - towards more and more modelling and mathematics - hasn't delivered the expected goods, i.e. improved predictions, the way it has done for, say, the weather science. Why?

Well...because, bottomline, economics isn't really a science. Economists would like us to believe they're better than historians because they go beyond specific facts to the fundamentals. In their opinion, historians get lost in the trees, and they are the ones who see the whole forest...Well, it isn't so. I'm afraid the truth is that they are quite myopic, stuck on their pet theories, and generally fail to see reality for what it is. With a few notable exceptions of course, like Roubini or Rogoff and Reinhart - the latter two have come up with a remarkable historical reconstruction of crises in 66 countries over 800 years, title: "This Time Is Different". I haven't read it yet, but I've put it into (my ever-growing) must-read list.

Lately, one of the more amusing things to watch is the incredible number of theories economists have come up with to try and explain why the British economy seems to be headed towards a dangerous slow down in economic growth coupled with a rise in inflation. It's too early to use the terrible word "stagflation", but the British economy definitely seems to be going in the opposite direction from most others in the developed world. Why this is happening, no one knows.

Less amusing is the spectacle of the political class in Europe - and now in America too - embarking on a supposedly "virtuous" campaign of cutting fiscal deficits, balancing government budgets and engaging in austerity programmes at precisely the wrong time. I've blogged about this before, and this type of reaction in the political class is probably explained by (1) fear (politicians are always afraid to lose votes) (2) ignorance (economics is difficult to understand and economists can't agree between themselves); and (3) a need to follow the pack. The herding instinct is very strong in Man and explains most social behaviour, from fashions to wars.

Perhaps what is most surprising is the unconditional support of central bankers. They are supposed to be professionals and should know better. In particular, Trichet, the head of the European Central Bank. A few days ago, he once again reiterated the need for austerity, that it was all about "restoring confidence". Confidence? It's not a magic potion, and it won't work when governments, because their austerity programmes have throttled their economy, find they are no longer getting the needed revenues to service their debt. We still haven't come out of the Great Recession - some countries are barely climbing out - but everybody will fall back in the hole if governments everywhere pull up their oars (if I may be allowed to mix my metaphors).

In this mess, the French Finance Minister Ms. Lagarde, who is undoubtedly a very clever lady, is the exception. She has followed the rest of the pack up to a point - agreeing to launch an austerity programme (financial "rigueur", she calls it). At the same time, and that's the interesting point, government policies should also aim at accelerating economic growth ("relance"). Combining the two words, rigueur and relance, she has even coined a term for her programme: "rilance". But she hasn't unveiled her programme yet.

In short, we're into an absolute mess when it comes to predicting where the economy is going and what should be done about it. So far, some interesting analysis has been done on the onset of the crisis. and I don't think there's much to add to what for instance Stiglitz says about it in his thoughtful and well-written book, "Freefall" - a great title with a telling subtitle: "America, Free Markets and the Sinking of the World Economy" (Norton&Co, New York, 2010). One of the lessons of this crisis, as he puts it, is the "need for collective action - there is a role for government...But there are others: we allowed markets to blindly shape our economy, and in doing so, they also helped shape ourselves and our society." (p.276)

Markets have shaped our society? Indeed, they've caused a highly worrying change in our cultural ethics. As Stiglitz explains it (see p.278 & ff.), financial markets have not only misallocated capital but have also led to the misallocation of one of our scarcest resources: human talent. "I saw too many of our best students going into finance", he writes, "they couldn't resist the megabucks." How true! Markets have altered our values, and the Great Recession is also a Great Moral Crisis. Other telling phrases of his: " The crisis has exposed fissures in our society, between Wall Street and Main Street, between America's rich and the rest of society...The country as a whole has been living beyond its means. There will have to be some adjustment. And someone will have to pick up the tab for the bank bailouts...The failures in our financial system are emblematic of broader failures in our economic system, and the failures of our economic system reflect deeper problems in our society" (p. 295).

Deeper problems in our society? Yes, and a pity that Stiglitz ends his book there. One would have liked to see an analysis of the "failures of our economic system" and which comes first, a failure in finance or a failure in the real economy, or both together? The latter probably.

I have a feeling that so far we've been paying too much attention to strictly financial issues and not enough attention to the woes of "main street". Recently released unemployment data in the United States is extremely worrisome: it points to long-term problems and maladjustment in the labour market.

It is clear that the American manufacturing sector is going through a massive restructuring under the pressure of technological innovation. Let me explain that.
Two years ago, American manufacturers, with the onset of the crisis, laid off their least skilled personnel and started to replace them with advanced technology solutions. Now, as we (may be) coming out of the crisis, many businesses are ready to hire again, but their needs have changed. They have become more technologically advanced, hence two things: (1) they need fewer hands to do the same work; (2) they need better skilled personnel (who can read and have some maths) to run the machines. The trouble is that kind of person is hard to find among the currently unemployed.

In practice, what's happened is this: we have, as Schumpeter (a famous Austrian economist) would have it, a case of innovation driving the business cycle. Now if markets were functioning perfectly as argued by Hayek, another famous economist, they would clear and everything would work itself out - no imbalance left. But markets are not perfect, so things don't wortk out as they should. And it's not just a matter of lack of information that renders them imperfect. In particular, there's no assurance that jobs lost to innovation will be compensated elsewhere. Ok, those who can read and write will end up in the services sector, but that's not a solution for everybody. Furthermore, as a result of this rush to the services sector, it has become bloated: jobs may have multiplied to accomodate new entrants but they tend to be badly-paid, next-to-useless, highly volatile jobs.

The upshot? Unemployment persists and becomes a long-term structural problem. What governments ought to do on both sides of the Atlantic - because that structural weakness in the labour market also exists in Europe - is to invest into massive retraining programmes. Recycle, refresh, teach new skills - anything that will give people a job. Forget about academia and old-style universities, none of that fancy education has ever guaranteed anyone a job. Indeed,the unemployment rate among young people, and that includes lots of recent graduates, is always and everywhere higher than in the rest of the labour force. It says something about our education system, doesn't it? True, governments have tried to do something and some practical training programmes do exist, but not enough, by a long shot...

But wait a minute. Wasn't this kind of structural imbalance in the labour market - I mean a mismatch between skills and jobs - a long standing problem predating the Great Recession? You bet it was - in America and in Europe and possibly in Japan too.

So we've had a number of long-standing social problems brewing in the background, while bankers and financiers gaily romped in Wall Street. Yes, gambling with more and more sophisticated financial instruments that are little more than gambling chips. The trouble is that all this gambling diverts savings away from the real economy - the investment function is sterilized and banks don't do the work they're supposed to do (ie lend to entrepreneurs and sustain economic growth).

OK, I admit this is a very broad - perhaps even superficial - view of relations between Wall Street and Main Street. It would be worth a whole book - not by me but someone like Stiglitz (I'm just a blogger...albeit an informed one).

But there are several things I can see already.

We're probably heading towards a double dip recession - or, if not, a prolonged recession, very flat, hard-to-come out of. Because what we're facing is really a double whammy: there's an imbalance in the financial sector that everyone is focussed on and there's an imbalance in the real economy as it struggles to go "post-modern" into the IT age. Actually there are many persisting, long-term and difficult to control global imbalances: in international trade with the Chinese Renmimbi that continues to be undervalued (not to mention other BRIC currencies); the problem of outsourcing work to cheap labour markets in developing countries; the problem of corruption and misallocation of government revenues; the looming sovereign debts and risk of default; skewed income distribution with a growing class of ultra-rich that prefers the gambling games of Wall Street to productive investment in Main Street etc etc Not a pretty picture, nor a comforting one.

All this is bound to make recovery far more difficult and of course far more time consuming. And the middle classes are the ones that are going to suffer.

What is your opinion? Will China and India save the situation? Is a boom in trade the answer?

In my reading, the imbalance in the fundamentals goes beyond whatever good a recovery in trade could achieve. We need to address those fundamentals, and that's where Ms. Lagarde may be right with her idea of "rilance". A very clever term, but I wonder how she'll manage it. It'll be worth watching...