Archive for the ‘economics’ Category

Tunisia and Egypt got through their protests with relatively few casualties. The army wasn’t sent in to crack down or anything like that. Maybe they military weren’t willing to go in and shoot people or maybe those dictators weren’t willing to have that blood on their hands. Whatever the reason, widespread massacre of civilians didn’t take place (or at least wasn’t reported).

Now in Libya and Bahrain, it seems like things are different, especially in Libya. Check out this BBC article about Libya: http://www.bbc.co.uk/news/world-africa-12512536

Now China is currently in a pretty different situation so it is extremely unlikely that unrest would spread over to the People’s Republic. But the protests in the Arab countries today do share some similarities with the Tiananmen protests.

First of all, there is the underlying economic issues that tend to be the main cause of most protests. High unemployment for educated youth and inequality between those in the government and the ordinary citizens are two main similarities. Then there’s that talk about political reform and what-not, but those are usually over-hyped because it sounds better that people are protesting for freedom rather than a TV. People of the less developed world are generally brought to protests for material reasons rather than ideological ones.

Anyway. The mindset of the Chinese government and military back in ’89 had more in common with that of Libya than Egypt. The willingness to go to extreme violence and the united will of the government with the military usually means civil disobedience turns into a lot of dead people. In those situations, peaceful protests don’t really have much of a role.

But today, it is difficult to see how the Chinese government would respond to similar types of protests. Sure, the military and paramilitary forces in China would most likely be willing to crack down on their own people, but is the Chinese government willing to send them in? Some would say yes and provide examples of how the Chinese government dealt with the Xinjiang and Tibet unrest. However, those protests were made by minority groups. Violence used against a minority group is easier than violence against the majority because there aren’t that many of them. But if Han Chinese were to rise up again in large numbers rather than Manchurian or the Yue, would the Chinese government be willing to pull another 6.4?

Who knows.

EDIT: Bah… The Economist said the same thing I did except better and a day earlier… http://www.economist.com/node/18178177

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Mr. Hu’s Claims

Sure, this is late, but I read a couple of articles on the Economist that seemed interesting:

Hu’s counting – Hu claims that China saved Americans money.

Hu’s counting II – Hu claims that China created jobs for the world.

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Google declared that they’re going to try and negotiate with the CCP to uncensor their google.cn site. As most people are saying, the CCP will most likely not agree to this, which makes a lot of sense. If the CCP softens their hard line stance against Google, Bing is sure to follow, and then Yahoo! will jump on board, and close behind them Baidu will shout for equal treatment. Before long, the People’s Daily will be posting articles about how they should be uncensored as well. It’s not gonna happen.

But I’m actually very impressed with Google’s decision. I mean they are a corporation that is responsible to their shareholders. Doing business in China is profitable, whether or not censorship is taking place. Once Google announced this, their share price dropped like 1.5%. This isn’t so much Google going up against the CCP, but Google going up against their shareholders or, in broader terms, the ideology of their shareholders v. their profit.

I’m sure there are some pretty liberal folk who hold Google stock and sold it when they heard of the decision. I mean they might have cheered in their hearts, but they’re not willing to support human rights at the risk of their investment. Very few people would do this. Ideology is something abstract while money is something substantial. You can’t buy tacos with a belief, but you can with $1.10 at Taqueria Guadalajara in San Leandro.

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It’s pretty difficult to tell whether or not such protests would be successful or not. For example, back in 1989, there were a lot of successful non-violent and violent revolutions that took place. The Fall of the Berlin War, the Velvet Revolution, and Solidarity were all pretty successful in creating democratic governments in Eastern Europe. Then, there was the Tiananmen Massacre which has led to… well… what we have right now in the PRC. A little later, there were the Color Revolutions that led to the creation of mostly democratic states in Georgia (the country, not the state) and a few others. Of course, there was also that massive failure in Myanmar where the monks didn’t really force that much change.

Protests are sometimes useful, but most of the time, they’re just around long enough for the media to exploit for ratings. If the majority of the people in a country, not just the urban or educated elite, support the revolution, it’ll probably have a higher chance of success. Like in East Germany, I would guess that there was a decent amount of support and knowledge about plans for reunification. In China back in ’89 on the other hand, the peasants in Ningxia had no idea what democracy was, let alone what the students were doing in Beijing.

I don’t know too much about Iran, but it really doesn’t seem like the faction that is supporting reform is large enough yet. At least I haven’t heard much about the peasants and the poor joining in on the protests. Marx was right when he was talking about the prerequisites for communist revolutions, except it can be expanded to revolutions in general. Development increases the chance that a political revolution would be successful. If the people are poor and starving, they can be easily riled up to protest, but at the same time it is easy to buy them off with some food or redistribution of some land. Those who have satisfied their basic needs can be riled up to protest as well, but if they are given economic mobility and consumer goods are available for purchase, they can be distracted from the revolution as they seem to fulfill their consumption needs.

Now once you got that TV and motorbike, the marginal benefit of consuming more decreases. Getting that first TV gives you much more benefit in comparison to having to trek over to a Best Buy to watch on one of those display TVs. On the other hand, a bigger TV might make you happier, but less and less as your TV gets bigger and bigger. The people can no longer be as easily bought off with economic reforms. They’re going to want a cleaner environment, a safer place for their kids, and other public goods. They’re going to demand this from the government. Kaboom. We got a civil society forming. The civil society expands from demanding services from the government and goes into immaterial things. Human rights, democracy, freedom, liberty, and so on and so on.

I’m not saying that the poor won’t want ideas like freedom and equality, but they usually have more important things on their minds. They want freedom so that they can sell their goods on the market at a fair price. They want human rights to protect their land from wealthy men and armed thugs. They want democracy so they can choose a leader that they have connections with so that they can get help. They want these ‘ideas’ to achieve material gains, not just for the sake of having these rights’. That’s why most communists are students or comfortable intellectuals. The poor inner city youth would prefer a sweet ride and a couple hos in the back.

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So I was listening to NPR as usual and they were interviewing this guy, I think he was some kind of Democrat politician, who was talking about the bailout plan. He said that government spending is more effective in stimulating the economy than tax cuts since parts of those tax cuts would be saved.

The biggest problem that I have with Democrat politicians (and actually most politicians in general) is that they ignore the basic fact that savings is what drives the economy. If you looked at the savings rate for countries, there is a direct parallel between the savings rate and the growth rate. People in Thailand, Singapore, South Korea, and post-reform PRC had really high savings rate  of around 30-40% and they experienced very high growth rates. Then you looked over at sub-Saharan Africa and their savings rate was somewhere around 15% and they all had very low growth rates.

The argument that was made by Keynes is that when people save money, they’re not spending. When people are not spending, revenue for firms go down. When revenue goes down, firms hire less people, which leads to less jobs, and less income for the people. As a result, when people save money, they  actually hurt themselves because their income decreases. Thus the term ‘Paradox of Thrift’ was coined.

Note: This is not just a liberal term. Bush, right after 9/11, told people to go shopping based on the idea that savings is bad. Even when Republican politicians propose tax cuts, they do so not to promote savings, but to promote higher consumption.

So what happens when people save money? Do they just stick it under their mattress and forget about it? Probably not, except in the case of Japan in the 90s when people were ‘hoarding’ (not saving) money due to poor confidence in t he banking system.

Instead, savings goes into financial institutions, bonds, financial assets, and stuff like that, but for simplicity sake, lets just look at banks. People put money in the banks. What happens to that money? Do banks really just sit on all that cash and not lend it out as a bunch of people were saying before? Well, during the time when people were saying there was a ‘credit crunch’, interest rates were actually decreasing, which means that banks were trying to loan money out. If a bunch of people were demanding credit and were unable to get it, the interest rate should have increased. Which it didn’t (and just to dispose of another myth, while the Federal Reserve can influence the interest rate by printing or destroying money, it doesn’t exert control over it).

So people put money into banks. The banks do not just sit on it since the way that banks make money is by loaning it out. If people are pulling out of the stock market (which is why it tanked so much in the past few months), then they have to put it somewhere. Lets assume that they’re putting it into their savings account just for continuity sake. Now the banks are overflowing with money and they want to loan it out. Who do they loan it out to? Well obviously to people that they think would be able to pay it back. Now this is not always the case, which is what led to a few bank collapses, but the majority of the banks in America are still solvent, which means that most of the loans made were good.

So who borrows money? Well, sometimes its by people who want to buy a new yacht, but usually, its businesses that want to invest so that they can increase production and efficiency in the future. Higher investments means higher productivity. On the micro level, this can be seen as an outward shift in supply, which leads to lower prices and higher quantity. Multiply that supply-demand chart by 300 million and you got increased production due to higher capital to labor level and as a result are able to reach a higher income level (Solow growth model). Everybody is richer, everyone has more, and everyone is materially better off. Now those people who are seeking spiritual enlightenment are left wanting, but everyone else should be happier.

At least this is what the people who say that the Paradox of Thrift is all screwed up. Next time, I’ll counter the argument that the Paradox of Thrift is totally wrong and that spending AND saving can both lead to growth.

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…well, a lot of good can be done in preserving the CCP’s hold on power (as well as making the lives of its people better). I mean they’re using around $500bn right now, but where would we get the most ‘bang for the buck’? I’ll write a few of my own thoughts in a series of blog posts… so in no particular order…

1. Infrastructure Projects

The water system can definitely use some investment.

President Hu Jintao and Premier Wen Jiabao ordered all-out efforts to fight the drought, allocating 400m yuan ($58m, £40m) in relief assistance.

So there’s a pretty awful drought right now and China is spending $58m to fight it. Imagine they had $580m to spend. There could be improved irrigation systems, deep wells, water purification plants, pumps, improved piping in rural areas, and the spread of running water to some of the poorer areas in the west. This would definitely help China’s economy, increase legitimacy of the CCP, and make millions of lives better.

Improving internal transportation would also be a good thing.

Police had seized more than 40,000 scalped tickets, with a total face value of about 5 million yuan (730,000 U.S. dollars) since Jan. 14 when the Ministry of Public Security launched a nationwide campaign to curb illegal ticket deals.

Compared to many other developing countries, China actually has a pretty good internal transportation network. They have airports in most medium sized and up cities, many roads even in countryside towns are paved, and serviceable bridges cross over the major waterways. However, China has a lot of people (duh) so there’s a much higher need. Better and more fuel efficient buses in the cities, more and faster trains on the tracks, subways systems in the major metropolises, and all these other ‘people moving’ systems would enable a freer flow of labor (oh, and Hukou reform would be good too).

Freight transportation networks into the west would also be nice. Improving canals in places where river transportation is key, building more tracks and roads that reach townships previously neglected, and decreasing tolls for roads would do nicely in encouraging development in the west where labor might be even cheaper. This will also have the effect of lowering pressure on coastal urban areas.

Power generation would also need to be improved and expanded.

Wang forecast that China’s power use will grow about 5 percent this year although the contraction in consumption seen late last year will extend into the first half.

China’s currently using a lot of coal because they have a lot of it, but environmentalism is a rising trend in China and ‘green’ is the new ‘red’. The CCP also has been open to green energy so I think that using a stimulus plan to invest in renewable power generation would be a great thing. Solar panels in the western deserts would create much needed investment, wind turbines in the mountains would make Free Tibet folk and tourists angry about the ruined scenery, but as long as they keep them off the beaten track, it’ll benefit the local communities greatly. I would stay away from hydroelectric since most rivers have been damned (haha) to hell and water pollution is already high.

But most importantly, China should focus on flying cars.

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Crisis has hit China’s economy

People say that China needs to have GDP growth of over 6% a year to ensure enough job creation to prevent social and political unrest. I mean the high economic growth in China can legitimize almost everything that the CCP has done since reforms in 1978. Ending the Democracy Wall movement? Well, they countered that by opening up rural agriculture markets. Crushing the Tiananmen protests? The number of people lifted out of poverty since the reforms have saved and improved the lives of millions. The suppression of political and religious freedoms? China’s open economy has put a McDonalds on every block and brought the Olympics to Beijing.

Ok, so of course economic growth doesn’t legitimize everything, but all those people who hate on China usually avoid criticizing the CCP’s handling of the economy (except in the cases of high inequality and damage to the environment). So if ‘crisis’ really is hitting China’s economy, then something must be done.

As the demand for China’s exports shrinks, he said that as part of relaunching the economy, the country had to focus now on expanding domestic consumer demand.

Ah yes, increasing domestic consumer demand to make up for the huge drop in exports. But then again…

Mr Wen said that among the reasons behind the current global downturn were “inappropriate macro economic policies in some economies, characterised by [a] low savings rate and high consumption”.

So China is going to change the structure of their economy so that it can become the reason for the next global economic downturn instead of a victim of someone else problems? Ok, I’m kidding, but does China really need to increase their domestic consumption?

Increasing domestic consumption would mean all those goods waiting in warehouses would be sold and firms would receive higher revenue. This means that they would be able to hire more people and thus save the economy.

However, if savings are really high in China, firms can borrow money at a really low interest rate.  Since there is currently lower consumption demand, firms should just focus on investing for the future so that they can produce better and more goods at a lower cost. Or at least that’s what all those classically trained economists would say.

If we were talking about America’s economy, I would say that we should encourage Americans to save more so that banks with bulging vaults would be forced to loan that money out to reputable and innovative companies. However, since China doesn’t have the best financial system in the world, a lot of those savings might be wasted on poor investment choices, like propping up a failing SOE. So yeah, I think Mr. Wen is right that increased domestic spending, may it be through coupons to buy a new fridge or discounted bicycles for rural folk, would do a lot of good in getting China through the current economic downturn.

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