As regular readers know I have often argued that the Chinese development model is an old one, and can trace its roots at least as far back as the “American System” of the 1820s and 1830s. This “system” was itself based primarily on the works of the brilliant first US Secretary of the Treasury Alexander Hamilton (see especially his report to the Congress on manufacturing and his two reports on public credit and banks).
This development model was also implicitly part of the debate in France that led to one of the most important financial innovations of the 19th Century, the creation of the Crédit Mobilier in France in 1852. The debate concerned one of the great economic questions in France, especially after the defeat of Napoleon: why had England, a country that one hundred years earlier had been poorer than France, managed to surpass France and all other countries economically and technologically, even though in the pure sciences and engineering the French were at least the equal to the British and perhaps superior?
One obvious reason had to do with the financing of the commercial application of new technology. The French banking system, dominated by rentiers and the landed aristocracy, seemed to specialize in protecting savers, in part by mobilizing capital and investing in gold or in government obligations. The English banking system did this too, but it also seemed much more willing to finance infrastructure and manufacturing capacity.
In fact more generally I have argued that the main reason “industrial revolutions” have occurred largely in England and the United States is because industrial revolutions are not driven by scientific developments but rather by the commercial application of scientific developments. For this to happen it seems that a robust financing system is key. England, and the US later, benefitted from a financial system that seemed to do better than others in financing new infrastructure and technological ventures.
A well-functioning financial system, one that allocates capital to new ventures, in other words, may have been the key difference between England and France at the end of the 18th Century, and for this some historians blame the brilliant but erratic John Law and his Mississippi Bubble. This concern about the inefficient French banking system led to the creation of Crédit Mobilier, whose role was to break the constraints of the existing Rothschild-dominated financial system, mobilize the savings of the middle classes, and allocate these savings towards financial projects, such as infrastructure development, that would, over the longer term lead to more rapid economic development.
I will come back to this issue of the financial system, but the point here is that there have been many versions of this development model, and at least two major economic theoreticians – the German Friedrich List in the 19thCentury and the Ukrainian-American Alexander Gershenkron in the 20th – have formally described variations on the investment-driven growth model. Michael Hudson, one of my favorite economic thinkers, wrote twenty years ago a brilliant and provocative book (Trade, Development and Foreign Debt), which traces many aspects of this model to debates in England at the end of the 18th Century.
Aside from Alexander Hamilton, its intellectual and political godfather, the main proponents of the American System were figures like Henry Clay, Henry and Matthew Cary, John Calhoun, and even Abraham Lincoln himself. Their vision of economic policymaking was looked down upon as naïve and even foolish by most American academic economists – schooled as they were in the laissez faire doctrines then fashionable in England – but I think it is hard for any economic historian not to feel relieved that neither the academics nor the Jeffersonian and Jacksonian factions had the clout to force “good” economic policy onto US development. America got rich in part by doing the wrong things.
Many countries in which the academics had real influence at the time – Chile in the 1860s under the tutelage of the famous French economist Jean Gustave Courcelle-Seneuil, for example, or Mexico at the turn of the century under the expert guidance of José Y. Limantour, finance minister under President Porfirio Díaz – never achieved the kind of growth that the less capable student-countries experienced. I write about some of these cases in my 1996 article for Foreign Affairs, for anyone who might be interested.
To get back to the main story, in another, also brilliant and provocative, book (America’s Protectionist Take-off, 1815-1914) Michael Hudson refers to a leading member of the second generation of proponents of the American System, a Columbia University graduate by the name of E. Pechine Smith. What is especially interesting about Smith in the context of China is that in 1872 he was invited to Japan to serve as advisor to the Mikado, becoming the first of a stream of economists and lawyers – most of them proponents of the American System – to advise and help shape Japanese development after the Meiji restoration.
Smith thus creates a direct link between the American System and the Chinese development model. It was of course the post-War Japanese development model, itself based on Japan’s experience of economic development during and after the Meiji restoration, that became the standard for policymakers throughout East Asia and China. I think of China’s growth model as merely a more muscular version of the Japanese or East Asian growth model, which is itself partly based on the American experience.
There were three key elements of the American System. Historian Michael Lind, in one of his economic histories of the United States, described them as:
· infant industry tariffs
· internal improvements, and
· a sound system of national finance
These three elements are at the heart, explicitly or implicitly, of every variation of the investment-led development model adopted by number of countries in the last century – including Germany in the 1930s, the USSR in the early Cold War period, Brazil during the Brazilian miracle, South Korea after the Korean War, Japan before 1990, and China today, to name just the most important and obvious cases. For this reason I think it makes sense to discuss each of them in a little more detail.
Infant industry tariffs
The “infant industry” argument is fairly well known. I believe Alexander Hamilton was the first person to use the phrase, and the reasoning behind his thinking was straightforward. American manufacturing could not compete with the far superior British, and according to the then- (and now) fashionable economic theories based on Adam Smith and David Ricardo, the implications for trade policy were obvious. Americans should specialize in areas where they were economically superior to the British – agriculture, for the most part – and economic policy should consist of converting US agriculture to the production of cash crops – tobacco, rice, sugar, wheat and, most importantly, cotton – maximizing that production and exchanging them for cheaper and superior British manufactured items.
In this way, as Ricardo brilliantly proved, and assuming a static distribution of comparative advantages, with each country specializing in its comparative advantage, global production would be maximized and through trade both the British and the Americans would be better off. While most academic US economists and the commodity-producing South embraced free trade, Alexander Hamilton and his followers, mainly in the northeast, did not (in fact differing views over free trade as well as over slavery and state rights were at the heart of the North-South conflict that led eventually to the Civil War).
Hamilton was convinced that it was important for the US to develop its own manufacturing base because, as he explained in his Congressional report in 1791, he believed that productivity growth was likely to be much higher in manufacturing than in agriculture or mineral extraction. Contrary to David Ricardo, in other words, Hamilton believed that comparative advantage was not static and could be forced to change in ways that benefitted less productive countries. What is more, he thought manufacturing could employ a greater variety of people and was not subject to seasonal fluctuations or fluctuations in access to minerals.
Given much higher British efficiency and productivity, which translated into much lower prices even with higher transportation costs, how could Americans compete? They could do it the same way the British did to compete with the superior Dutch a century earlier. The US had to impose tariffs and other measures to raise the cost of foreign manufacturers sufficiently to allow their American counterparts to undersell them in the US market. In addition Americans had to acquire as much British technological expertise and capacity as possible (which usually happened, I should add, in the form of intellectual property theft).
This the US did, and in fact I believe every country that has managed the transition from underdeveloped to developed country status (with, perhaps, the exception of one or two trading entrepôts like Singapore and Hong Kong, although even this is debatable), including Germany, Japan, and Korea, has done it behind high explicit or implicit trade tariffs and stolen intellectual property. The idea that countries get rich under conditions of free trade has very little historical support, and it is far more likely that rich countries discover the benefits of free trade only after they get rich, while poor countries that embrace free trade too eagerly (think of Colombia and Chile in the late 19th century, who were stellar students of economic orthodoxy) almost never get rich unless, like Haiti in the 18th Century or Kuwait today, they are massive exporters of a very valuable commodity (sugar, in the case of Haiti, which was the richest country in the world per capita during a good part of the late 18th Century).
But rather than just embrace protection I would add that there is one very important caveat. Many countries have protected their infant industries, and often for many decades, and yet very few have made the transition to developed country status. Understanding why protection “works” in some cases and not in others might have very important implications for China. I won’t pretend to have answered this question fully but I suspect the difference between the countries that saw such rapid productivity growth behind infant industry protection that they were eventually able to compete on their own, and those that didn’t, may have had to do with the structure of domestic competition.
Specifically, it is not enough to protect industry from foreign competition. There must be a spur to domestic innovation, and this spur is probably competition that leads to advances in productivity and management organization. I would argue, for example, that countries that protected domestic industry but allowed their domestic markets to be captured and dominated by national champions were never likely to develop in the way the United States in the 19th Century.
I would also argue that companies that receive substantial subsidies from the state also fail to develop in the necessary way because rather than force management to improve economic efficiency as a way of overcoming their domestic rivals, these countries encourage managers to compete by trying to gain greater access to those subsidies. Why innovate when it is far more profitable to demand greater subsidies, especially when subsidized companies can easily put innovative companies out of business? Last April, for example, I wrote about plans by Wuhan Iron & Steel, China’s fourth-largest steel producer, to invest $4.7 billion in the pork production industry.
The company’s management argued that they could compete with traditional agro-businesses not because steel makers were somehow more efficient than farmers, but rather because their size and clout made it easier for them to get cheap capital and to get government approvals. They were able to invest in an industry they knew little about, in other words, because they knew they could extract economic rent. This clearly is not a good use of protection.
The lessons for China, if I am right, are that China should forego the idea of nurturing national champions and should instead encourage brutal domestic competition. Beijing should also eliminate subsidies to production, the most important being cheap and unlimited credit, because senior managers of Chinese companies rationally spend more time on increasing access to these subsidies than on innovation, a subject on which, in spite of the almost absurd hype of recent years, China fares very, very poorly.
There is nothing wrong with protecting domestic industry, but the point is to create an incentive structure that forces increasing efficiency behind barriers of protection. The difficulty, of course, is that trade barriers and other forms of subsidy and protection can become highly addictive, and the beneficiaries, especially if they are national champions, can become politically very powerful. In that case they are likely to work actively both to maintain protection and to limit efficiency-enhancing domestic competition. It was Friedrich Engels, not often seen as a champion of capitalist competition, writing to Edward Bernstein in 1881, who said that “the worst of protection is that when you once have got it you cannot easily get rid of it.”
Internal improvements
The second element of the American System was internal improvement, which today we would probably call infrastructure spending. Proponents of the American System demanded that the national and state governments design, finance and construct canals, bridges, ports, railroads, toll roads, and a wide variety of communication and transportation facilities that would allow businesses to operate more efficiently and profitably. In some cases these projects were paid for directly (tolls, for example) and in other cases they were paid for tax revenues generated by higher levels of economic activity.
It is easy to make a case for state involvement in infrastructure investment. The costs of infrastructure can be very high, while even if the benefits are much higher they are likely to be diffused throughout the economy, making it hard for any individual company to justify absorbing the costs of investment. In this case the state should fund infrastructure investment and pay for it through the higher taxes generated by greater economic activity.
For me the interesting question, especially in the Chinese context, is not whether the state should build infrastructure but rather how much it should build. In fact this is one of the greatest sources of confusion in the whole China debate. Most China bulls implicitly assume that infrastructure spending is always good and the optimal amount of infrastructure is more or less the same for every country, which is what allows them to compare China’s per capita capital stock with that of the US and Japan and conclude that China still has a huge amount of investing to do because its capital stock per capita is so much lower.
But this is completely wrong, and even nonsensical. Infrastructure investment is like any other investment in that it is only economically justified if the total economic value created by the investment exceeds the total economic cost associated with that investment If a country spends more on infrastructure than the resulting increase in productivity, more infrastructure makes it poorer, not richer.
In China we have problems with both sides of the equation. First, we don’t know what the true economic cost of investment in China might be. In order to calculate the true cost we need to add not just the direct costs but also all the implicit and explicit subsidies, most of which are hidden or hard to calculate.
The most important of these subsidies tends to be the interest rate subsidy, and this can be substantial. If interest rates in China are set artificially low by 5 percentage points, for example, which is a reasonable estimate, an investment of $100 million receives an additional subsidy of $5 million for every year that the loan funding the investment is outstanding – and loans are almost never repaid in China. Over ten to twenty years of outstanding debt this can add 30-40% to the initial cost of the investment. This means that the recognized cost of an infrastructure project is much lower than the true economic cost, with the difference being buried in explicit and implicit subsidies.
But the bigger problem is in the value created by the investment. We can think of the value of infrastructure primarily as a function of the value of labor saved. In countries with very low levels of productivity, each hour of labor saved is less valuable than each hour saved in countries with high levels of productivity. For this reason less productive countries should have much lower capital stock per capita than more productive countries.
This should be obvious, but it seems that often it isn’t. When analysts point to high quality infrastructure in China whose quality exceeds comparable infrastructure in rich countries, this is not necessarily a good thing. It might just be an example of the amount of waste you can achieve when spending is heavily subsidized, when there are strong political (or pecuniary) incentives for expanding investment, and when there is limited transparency and accountability.
Other things matter too. If a country has low levels of social capital – if it is hard to set up a business, if less efficient businesses with government connections can successfully compete with more efficient businesses without government connections, if the legal and political structure creates problems in corporate governance (the “agency” problem, especially), if the legal framework is weak, if property rights are not respected, if intellectual property can easily be lost – then much infrastructure spending is likely to be wasted.
In fact it turns that it may be far more efficient to focus on improving, say, the legal framework than to build more airports, even though (and perhaps because) building airports generates more growth (and wealth for the politically connected) today. Weak social capital becomes a constraint on the ability to extract value from infrastructure, and this constraint is very high in poor countries with weak institutional frameworks,
Journey to the West
This issue of how much investment is enough is a very important topic that deserves much more discussion, but I think there is a very good example of why we need to be worried about how useful additional infrastructure investment in China might be. This shows up most clearly in China’s push to create development in the western part of the country.
Often when I question the economic value of China’s push to the western, poorer parts of the country (by the way economic value is not the same as social or political value, the latter of which may nonetheless justify projects that are not economically viable) I am almost always treated with the story of the American West. In the 19th Century, as everyone knows, the US went west, and most economists agree that this made economic sense for the country and was an important part of the process that led it to becoming the wealthiest and most productive country in history.
But we must be very careful about drawing lessons from the American experience. The US is not the only country in history that “went West”. Several other countries did so too, but for some reason we ignore their experiences altogether when we discuss China. Brazil, for example, went west and north in the 1950s and 1960s as it expanded from the rich southern coastal areas into the Amazon and the Caribbean. The Soviet Union did something similar after the Second World War as it went east into Siberia.
Most economists today agree that the Brazilian and Soviet experiences were economically unsuccessful and left those countries burdened with such enormous debts that they were at least partly to blame for Brazil’s debt crisis in the 1980s and the collapse of the Soviet economy in the 1970s. It turns out, in other words, that there are both successful and unsuccessful precedents for China’s going west.
What are the differences and how do they apply to China? Again, I can’t say that I can fully understand or explain them, but one major difference leaps out. In the US it was private individuals, seeking profitable opportunities, that led the move into the American West, and government investment followed. In Brazil and the Soviet Union, however, there was little incentive for private individuals to lead the process. It was the government that led, and private businesses followed only because government spending created great opportunities for profit. Once government spending stopped, so did business.
My very preliminary conclusion is that large-scale government ambitions allied to strong political motivation and funded by cheap and easy access to credit can lead very easily to the wrong kinds of investment programs. The US experiences of government investment in the 19th Century, in other words, may be a very poor precedent for understanding China’s current policy of increasing investment spending, especially in the poor western part of the country.
Brazil and the Soviet Union may be much better precedents. At the very least these gloomier experiences should not be ignored when we think of China’s policies. “Going West” isn’t always a great idea from an economic point of view and has led to at least as many, and probably more, bad outcomes as good outcomes. It is not clear why these lessons cannot possibly be applied to China.
A sound system of national finance
The third pillar of the American System was the creation of an appropriate financial system. But what does that mean? It is hard to describe the American financial system in the 19th Century as stable and well-functioning. In fact the American banking system was chaotic, prone to crises, mismanaged, and often fraudulent, and yet the US grew very rapidly during that time.
China’s banking system, on the other hand, is far more stable – in fact the favorite cliché of Chinese bankers is that while the system may not be efficient, it is very stable. What makes the Chinese banking system stable, of course, is that it is widely believed that the government stands fully behind the banks. It makes no difference, in other words, how weak the credit allocation decision is, because by controlling credit and the deposit rate, and by limiting alternatives for Chinese savers, the government guarantees both the liquidity and solvency of the banking system. As long as government credibility is intact, the banking system is unlikely to fail.
In that sense you can easily make the case the Chinese banks today are sounder than American banks in the 19th century. This might bode well for the future of the financial system in the short term, but in the long term it is not clear to me that monetary soundness and financial stability are necessarily correlated with more rapid growth.
I say this because I have seen no evidence that countries with sound and conservative financial systems grow faster than countries with looser and riskier financial systems (although they do seem to have fewer financial crises). In fact I have more than once made reference to Belgian bank historian Raymond de Roover’s provocative and profound comment that “perhaps one could say that reckless banking, while causing many losses to creditors, speeded up the economic development of the United States, while sound banking may have retarded the economic development of Canada.” Canada was blessed (or cursed, according to de Roover) in the 19thCentury with being part of the Britain, and so inheriting England’s much better managed financial system.
“Reckless” banking is hard to define, and certainly it is easy to make the case the Chinese banking has been reckless, especially in recent years, but it is a very different type of recklessness. Once again I cannot say with complete confidence how China’s version of its development model differs meaningfully with the American System on the subject of banking, but I would suggest there are at least two very important differences.
First, the American financial system then (and now) has been very good at providing money to risky new ventures. It provides capital on the basis not only of asset value but, more importantly, on future growth expectations, and risk-taking has been actively rewarded In China it isn’t clear that this is the case at all. Chinese banks favor large, well-connected, and often inefficient giants at the expense of risk-takers.
Second, although both systems were prone to bad lending, the American banking system tended to correct very quickly – in the form of a crisis – and bad loans were written down and liquidated almost immediately. This was certainly painful in the sort term – especially if you were a depositor in the affected bank – but by writing down loans and liquidating assets three important objectives were achieved. Financial distress costs were quickly eliminated (writing down debt does that in ways I won’t get into because they are well-known and much discussed in corporate finance theory), capital allocation was driven by profitability, not by implicit guarantees, and assets were returned to economic usefulness quickly.
A classic example of the last of these objectives may be the response to the railway bubble of the 1860s. During and after the 1873 crisis, a number of railroads went bankrupt, including major lines like the Union Pacific and the Northern Pacific, the latter of which even brought down Jay Cooke & Company, the leading financier of the US government during the Civil War. After the crisis some major railway bonds traded as low as 15-20% of their original face value, and so they were purchased and reorganized at huge discounts. The new buyers were consequently able to cut freight and passenger costs dramatically, in some cases by over 50%, while still earning more than enough to cover the costs of buying the railroads, and this led to a collapse in transportation costs in the US.
Liquidation, in other words, provides an important economic value to the economy. It allows assets to be re-priced, which creates a boost to the economy and prevents those assets from acting as a deadweight loss. If the railroads hadn’t been liquidated, in other words, any reduction in costs was likely to be minimal and the railroads would have been far less useful to the development of the US economy.
Comparing development models
This issue of the newsletter is long, and I plan to write about this a lot more in the future, but for now I think it makes sense to summarize some of the important points about the American System and other similar growth models, like the Chinese version.
1. Infant industry protection has worked to promote long-term development under certain conditions and has not worked under other conditions. I would argue that the key difference is that in the former case there were powerful forces that drove managerial and technological innovation and rapid growth in efficiency.
In the US case this seems to have been brutal domestic competition. If China wants to benefit from its own protection of infant industry, it is important that there be similar domestic drivers of innovation and efficiency. Note that access to cheap capital cannot be such a driver, even though it is one of the main sources of Chinese competitiveness. Access to cheap capital is just another way to protect infant industries from foreign competition.
2. Every country that has become sustainably rich has had significant government investment in infrastructure, but not every country that has had significant government investment in infrastructure has become sustainably rich.On the contrary there are many cases of countries with extraordinarily high levels of infrastructure investment that have grown for a period and then faltered.
I would argue that the difference is almost certainly the extent of capital misallocation. In some countries it has been much easier for policymakers to drive capital expenditures, and in those countries it seems to have been relatively easy to waste investment. If this is the case in China, as I believe it is, the key issue for China is to rein in its spending and develop an alternative and better way to allocate capital.
The point is that there is a natural limit to infrastructure spending, and this limit is often imposed by institutional distortions in the market economy. When this natural limit is reached, more investment in infrastructure can be wealth destroying, not wealth enhancing, in which case it is far better to cut back on investment and to focus on reducing the institutional constraints to more productive use of capital, such as weak corporate governance and a weak legal framework. The pace of infrastructure investment cannot exceed the pace of institutional reform for very long without itself becoming a problem.
3. Any economy looking to achieve sustainable long-term growth must have a “good” financial system that allocates capital efficiently and rewards the correct level of risk-taking. It is hard to determine what the characteristics of a “good” financial system are, but we shouldn’t be too quick to assume that this has to do with stability.
What’s more, while obviously the capital allocation process is vitally important, I would also suggest that the liquidation of bad loans is just as important. Bad loans, as Japan showed us in the past two decades, can become a serious impediment to growth in part because financial distress distorts management incentives in the way widely understood and described in corporate finance theory and in part because they retard the process by which bad investment is absorbed by the economy.
4. One thing I have not discussed above is the role of wages. The American System was developed in opposition to the then-dominant economic theories of Adam Smith and David Ricardo, in part because classic British economic theory seemed to imply that reductions in wages were positive for economic growth by making manufacturing more competitive in the international markets. A main focus of the American System, however, was to explain what policies the United States, with its much higher wages than in Europe at the time, had to engineer to generate rapid growth Sustaining high wages, in fact, became one of the key aspects of the American System.
The Japanese version of this development model, as well as many of the various versions implemented in other countries throughout the 20th Century, shared its view of wages not with the American System but rather with classic British economic theory. Rather than take steps to force up wages and keep them high – thereby both driving productivity growth and creating a large domestic consumption market for American producers – many of the later versions of the American System sought to repress growth in household income relative to total production as a way of improving international competitiveness. This is perhaps the main reason why the United Sates, unlike many other countries that have implemented similar development strategies in the 20th Century, tended to run large current account deficits for much of the 19th Century
This different focus on whether high wages are to be encouraged or discouraged is, I believe – although very little discussed in the theoretical literature as far as I know – nonetheless perhaps the most important difference between the American development model and its many descendants in the 20th and 21st centuries. I would even argue, although I cannot prove it, that one consequence of this difference is that growth in demand tends to be more sustainable when it is balanced between growth in both consumption and investment.
In analyzing China’s growth in the past three decades we seem to forget that there have been many growth “miracles” in the past two hundred years. Some have been sustainable and have led to developed country status but many, if not most, were ultimately unsustainable. Nearly all of the various versions have had some similar characteristics – most obviously infant industry protection, state-led investment in infrastructure, and a financial system that disproportionately favored producers at the expense of savers – but the way these characteristics played out were very different, in large part because the institutional structure of the economy and the financial sector created a very different set of incentives.
I would argue that in understanding China’s growth and its sustainability we need to have a clear understanding of why these characteristics worked in some cases and not in others. Most economists who focus on China seem to know little about economic history, and when they do, their knowledge tends to be limited to a very superficial understanding of US economic history. But there are many precedents for what is happening in China and not all suggest that further Chinese growth is inevitable.
On the contrary, the historical precedents should worry us. In most cases they suggest that China has a very difficult adjustment ahead of it and the closest parallels to its decades of miracle growth suggest unfavorable outcomes. Understanding why the growth model has succeeded in some few cases and failed in most will help us enormously in understanding China’s prospects.
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This primarily consisted of individual merchants and landowners, plus workers themselves using their own saved capital to purchase machines. Banks and more organized centers of finance in Britain largely did not lend to industrial concerns until the next wave of industrialization in the 1820s and 1830s.
The latter was far, far more important than the former, since tariff rates tended to be erratic and never high enough to really shut out British goods (many of which were so cheap that they could be competitive even with tariffs). What made American industry succeed was that they took the British technology they stole, then modified it and combined it with local innovations centering around mass production, which they then proceeded to do better than the British. It’s sort of like how the post-war Japanese pioneered “Just In Time” manufacturing and business, plus utilization of new technologies.
Yes, but don’t confuse financing mechanisms with the existing of joint stock banks. As for your second point, the importance of tariffs is much debated and tends to follow ideological lines. It seems to me, however, especially after the Civil War they tended to be very high and very effective.
Brett, not simply ‘a well functioning financial system….’ but also a greater extension of commodity relations, to include the commodification of labor-power.
Differently, the British working class was more developed than on the continent.
What about the creation of zaibatsus in Meiji-Japan, would that not be considered an instance of where national champions were able to successfully lead the nation’s industrialization?
Zaibatsus and their Korean equivalents were very important, but they were also competitive domestically. I don’t remember the numbers, but I think there were over five auto manufacturers in Japan in the 1960s and 1970s, all competing ferociously for the domestic market.
I lived in Japan in the early nineties, and memory tells me there were nine. I must say that I have not followed what has happened since. But I know that it’s not pretty. I have read recently about terrible losses by Toyota, essentially because of their commitment to build cars in Japan. But then North Americans cannot say anything, look at how zombie airlines are kept alive. And car companies too…
This is a long and thought provoking article, so I will reply as I digest each chunk of the article.
One huge difference between the USA and China is that the USA’s resources were ingenuity and nearly unlimited natural resources. Whereas, China’s main resource is massive quantity of cheap labor. This I argue is the primary reason that China’s development model is more focused on mining its people, than developing them.
I want to draw attention to your prior article on globalization and my disagreement there with the fundamental driver of globalization.
When new technology renders old jobs noncompetitive, there is only one choice for society and that is to take on massive debt and try to find a pathway to adopt the new technology. Depending on the inertia of the installed mass of people who can’t adjust quickly, determines how severe will be the misallocation from a cycle of the “globalization” cycle.
P.S. I bought a 30A switching 220-12v charger and a 300W 12-220v inverter made in China for roughly $80. They both failed after less than a day of burn in. My lost time is money, except in China I guess (where exporting is just a shell game played by the rich for extract capital from the exploitable masses). The manufacturer obviously doesn’t even burn in these units.
Rephrase for clarity, “with the fundamental driver” to “as to the fundamental driver”
And “Depending on the inertia” to “The inertia”.
One comma doesn’t work; it’s two or none:
The inertia of the installed mass of people, who can’t adjust quickly, determines how severe will be the misallocation from a cycle of the “globalization” cycle.
or
The inertia of the installed mass of people who can’t adjust quickly determines how severe will be the misallocation from a cycle of the “globalization” cycle.
Whether you meant to indicate that either the majority of “slow adapters” (a subset of all people) or the majority of all people (in this case described as slow adjusters) would determine the presence of the pair of commas.
Commas are used to construct sentences. They don’t indicate a caesura.
Thanks for the correction Stephen. Obviously it took me several hours to construct these detailed comments, and that was already eating too much of my time. So I was rushing. One comma after “quickly” is what I would normally use in that case. I remember what I did in haste was removed a parenthetical and replaced with comma-delimited without reading again the construction.
More importantly, sentences should be not this unintelligble.
Should we obfuscate the discussion with more off-topic pedantic jousting over grammar?
Not necessarily more debt, but definitely more capital. That can come from local sources (such as high savings rates or export earnings) or outside ones (like FDI and remittances).
Technological shift, national capital base, and the globalization cycle
Whether from savings or debt, it is capital misallocation to the extent that the pathway of dealing with technological shift is one of maladjustment.
Indeed my point is the largest resource of capital in China is the people (and their savings in form of currency and knowledge, ability attained since birth), and thus this is where the capital is coming from in China, either in the form of low wages (i.e. sustained by suppressing consumer share of GDP) or creation of debt from thin air in fractional reserve fiat system.
My fundamental point is I believe that technological shift drives competition which drives finance, not the other way around. Finance can not change any of the fundamental realities, it just reacts to them, as water flows downhill.
For the USA example, the technological shift of the industrial revolution began in the early 1800s and was causing unemployment with the Luddites. This stimulated migration to the USA seeking better opportunities. The USA’s main capital was the wide open frontier of freedom, the untapped natural resources, and the ingenuity and motivation of those willing to seek that land of opportunity. Thus we see a very different result of the way finance flowed when comparing the USA and China. (this is the concept of increased degree-of-freedom and thermodynamics that I keep incorporating in all my theories)
The technological shift now is the computer and that the programmer generates orders-of-magnitude more production than a non-programmer. This made it uneconomic to keep uncreative labor jobs in the high tech countries, and it also meant China was falling exponentially behind the curve in the 1970s when the personal computer was born and by the 1980s when the PC was blasting off. So it was a natural fit of capital, that China would eat the uncreative jobs, but the problem is this did not move China close enough to catching up with the technological shift. It was handing the failure to China. China’s limitation was that its capital is not sufficient for it to catch up. The capital of China encourages a top-down system run by 200 families to mine that capital.
There is only one solution for mankind going forward. There is no way for these developing countries to adapt monolithically to the computer age shift, because their capital is too much of an incentive for top-down control. Thus the people individually must escape from their nation-state jails. You can see this with the 1.3 million filipinos leaving to work abroad every year. But the more efficient way is for the people to learn online and then work online too.
Thus the nation-states have been disrupted and will become increasingly economically irrelevant.
With my prior points in mind, I continue my analysis of this article.
The industrial revolution was fixed capital intensive because of the hardware. The software revolution is not fixed capital intensive.
So we needed much financial (savings) capital to direct human resources (via symbiotic balance between fixed capital and consumer spending) into the industrial revolution in the 1800s, but monetary savings is much less useful in the software revolution, where we need knowledge development. Consumer spending can’t motivate humans into learning software and actually demotivates it! This is fundamentally why we have ZIRP and competitive currency devaluation. It is not a liquidity problem, it is a technological shift adjustment problem.
China missed the industrial revolution, and is now missing the software revolution, by mining its own capital to build out the antiquated industry.
The contraction of globalization from 1910 to 1944 was caused by the inability of global population to adjust to the mass production age, which resulted from the second stage of the industrial revolution due to network effects stimulated during the primary stage. The contraction from 2000 to probably 2030 or 2040, is being caused by the inability of global population to adjust to the software production age.
I will continue my analysis in a future comment.
Just how is the country run by engineers and boasting software like the fastest supercomputer backplane and the most innovative online social aoftware” missing the software revolution”?
If they are innovating in software as well as the west, they are darn good at keeping it locked up inside their borders. They are not at all involved with the innovation of the global internet. No one outside of China is using their software.
I strongly suspect there is negligible grassroots programming in China, because the citizens and the government disrespect copyright. I was told by a Chinese man that the citizens don’t pay for software. So how can there exist much grassroots entrepreneurial software development if there is no revenue source?
If I remember my US History correctly from 32 years ago in high school, the US developed in the 1800s under a laissez faire doctrine that allowed the big capitalists (such as for the construction of the Erie Canal) to do as they wished without government regulatory interference and even with government facilitation.
Note w.r.t. to my prior comment, the construction labor was provided by immigration, another evidence that unlike China, the USA’s capital was not human labor.
It wasn’t government non-inference (i.e. laissez faire) that caused Chile’s problem, but rather either government interference or Seneuil’s influence (see the footnotes on page 1) in moving Chile from commodity money with no central bank to the fractional reserve system with a central bank. While the USA had a “free private banking” (i.e. laissez faire) system without a central bank until 1913.
I think what you are really wanting to argue against is liberalism, i.e. socialism and interference of the government in domestic affairs when the government becomes a huge component of the domestic economy as in China.
Wasn’t it Douglas MacArthur who taught the Japanese how to improve their manufacturing?
I.e. the laissez faire doctrine, which means small government cooperating with big capitalists by not interfering internally and supporting their needs externally.
USA had no central bank, was on a gold or bimetallic standard, and had a free private banking defacto fractional reserve system.
Yeah but that is for fixed capital development which is irrelevant in the new economy, and China can’t have the laissez faire doctrine, because it is dominated by socialism with a huge population that is massively deficient in high tech software knowledge where the new economy is.
Shelby wrote:
I mean China can’t have laissez faire doctrine w.r.t. to the software economy, because it threatens the ability of the 200 controlling families to mine their 1.2 billion units of flesh capital. China mines the dexterity of opposing thumbs, because it has not the capital to invest in developing the 1.2 minds (instead prefers short-term, myopic strategy, i.e. debt based thinking). It actively suppresses domestically the internet, information, thought, and even the citizens hate copyright. (note software patents are absurd)
Shelby wrote:
One evidence is Japan which has much faster internet infrastructure than the USA, but is nothing in software.
The USA was trading with nearly every country, and the government wasn’t restricting it.
Whether the momentum would have been obtained without tariffs is irrelevant to analyzing China, because China needs to leapfrog the industrial revolution and head directly to the software economy. But of course it can’t do that monolithically, only individually, but the monolithic system can’t allow individual thought and expression.
So China should charge a tax on using the internet sites created outside the country?
Of course not, and because the price of software is not its main advantage, but rather the quality.
But luckily lot of infrastructure is not required to develop a software economy, so it doesn’t need to be coddled by government. Software economy needs a hacker culture (which is often confused with cracker, and not anti-property rights) and a government which does not interfere, because the Mythical Man Month points out why software is very individually developed phenomenon.
Agreed, i.e. very small laissez faire government.
Problem is that due to the Iron Law of Political Economy and the impossibility of a meritocracy in the collective, very large population relative to other capital, makes it very difficult for the government to remain small. The only hope is for some disruptive technology that bypasses the normal way that societies organize politics, i.e. the internet. So it is not surprising to me that the taipans of China are blocking it
Are you sure this is entirely correct? I thought it was the private capitalists (e.g. John D. Rockefeller and his brutal competitiveness in railroads) that were putting up most of the financing and they were paid back through various revenue schemes, some of which were revenue partnerships with the government. There is no doubt they socialized their business methods (e.g. Rockefeller had the politicians in his back pocket), as you point out this is the only way to make such long-term payout NAV calculations viable.
On the topic of the appropriate level of infrastructure in China, I would argue it should be closer to zero. Because in the coming software economy, you don’t need it. Hey I am programming from near the tip tallest mountain in the wild south of the Philippines right now with a $25 3G wireless USB internet connection device and a $600 computer. I only need my $200 battery backup system and a simple hut. In fact, I created Coolpage.com arguably the world’s first social network in 1998 from a Nipa Hut and had 1 million users with me as the only employee.
And those all this infrastructure China is building is just inertia for the rest of the population to resist moving into the software economy. In other words, in a NAV calculation looking forward, nearly all the infrastructure is uneconomic.
Well even programmers need basic sanitation, roads, electricity. But we don’t need high rises, bullet trains, museums, etc..
Thus I expect China to crash back to this level of basic services infrastructure.
Agreed on all your points.
USA was private banks and a multitude of private debtors doing fractional reserves behind a bimetallic constitutional gold+silver standard, thus the system was constantly crashing (bank runs) and correcting. This multitude of decisions makers based on a profit motive, means very tight and self-correcting (rapid liquidation for failures) fitness to truly economic opportunities.
China is government (200 taipans) making the decisions on financing with 200 taipan debtors, which means extreme detachment from economic reality and very low fitness.
I think your first 3 points basically miss the key factor. You get closer to the key factor with point 4 about higher wages.
The key factor in attaining high development is rewarding knowledge creation. You have to value the human mind.
China is so far off course, but that is to be expected from a totalitarian culture.
Dogfree, are you going to continue spouting that nonsense about China’s model being different in some superior way?
Insults and unsupported generalizations do not an argument make. You need to understand national accounts and relinquish conventional China-bashing.
Godfree (apology for prior typo on your username),
Could you please explain how you think my theory does not factor in macroeconomic national accounts?
My theory is not conventional and it is not bashing. It is an attempt to understand reality. If you disagree, please present your reasons.
You make the unsupported claim that China is somehow different in some magically superior way and can escape the realities I am pointing out.
Your unsupported claim that China can continue to overinvest in infrastructure until 2046, was so far detached from the reality I see, that I characterize it as “nonsense”.
My theory is not a generalization. It is distilling the essence of the driver of high sustained growth– development of the human mind.
start here:
http://inpraiseofchina.blogspot.com/2011/01/chinas-productivity-miracle.html
I already provided a rebuttal and it is linked in the comments of your article. I will add some points.
1. Who trusts Chinese data on GDP to be properly adjusted with an accurate inflation deflator, nor to be reported correctly?
2. The GDP is padded by debt spending both domestically and abroad (as demand for exports). This is not real productivity, because the activity is targeted to demand that is not real. One indicator is the massive imbalance between fixed capital and consumer % share of GDP. The Chinese system is allocating the human capital (savings and abilities) with mechanisms such as debt andYuan peg, to activities that can maximize GDP, without the necessary feedback loops that exist in a free market. Refer to Michael’s section about how frequent liquidations (feedback loops) under the private banking system in the USA in the 1800s sustained the growth model.
Fundamentally you don’t understand that degrees-of-freedom are necessary for fitness.
Also you cherry pick some macro statistics that support a particular argument, while ignoring other statistics that refute it.
You want to believe they are transitioning to a balance on consumer share, but there are statistics which refute it. The reason China can not balance, is because there are not enough degrees-of-freedom in their top-down growth model that is based on using debt to direct the savings of their people into uneconomic activities. While the debt bubble is expanding, it is difficult to prove these activities are uneconomic merely from some cherry picked statistics. But if you look deeper, you do find proof as Michael has shown.
You want to believe that the Chinese are achieving great milestones in engineering, and even I saw a video where they can build a very tall hotel in less than a day, using well engineered prefab. But this misses the point that being the best a picking my nose, does not make me wealthy. China’s problem is the decisions about what the people are learning and being trained in, are coming from the top via debt, and not from the grass-roots up via a free enterprise system with frequently correcting liquidation (to weed out the failures).
This is why we don’t see any grass-roots hacker activity coming out of China and contributing to the new Internet economy. Zilch (as far as a I know).
Are there supposed to be charts below “But the figures tell quite a different story” and “But take a look at the growth in US exports to China!”? I only see large areas of white-space and I checked the HTML source and there is only white-space in the code.
2004 example but a few interesting articles/papers -
http://www.rieti.go.jp/en/china/04011601.html
That was great. It makes me wonder if the US housing markets that suffered the most liquidation now have the most opportunity; and if a higher minimum wage pushes capitalists to increase technology to reduce labor, which makes labor more productive. Thought provoking throughout. Thank you.
Good article. One comment, although finance is an important component to any economy. It’s just one component. One must be careful not to attribute too much to any one component. Especially with a topic so big and complex as world economic development. Indeed, people working in finance get much to much air time, you can feel the sun getting envious as the press treats finance folk as the centre from which things revolve.
You may be right, cjared, but I tend to think the role of finance is actually understated in development history. Of course I am a former Wall Street guy….
Appeals to historical models are weak when confronting the Chinese model, which is uniquely Chinese and requires all elements of the economy to be equally malleable so that compensatory mechanisms can be smoothly implemented. It also requires a cooperative populace and, with an 80% approval and trust rating from the Chinese people, the counry has that. (Pew, Edelman).
It’s a dirigiste approach, like France’s or Singapores, but executed by smarter people. Infrastructure will presumably become less profitable (to China as a whole – which is how its planners view it – when it reaches par with Germany’s. At China’s present rate of infrastructure investment I would expect that transition point some time in 2046.
Nice!
The Chinese model post-1979 is unique to China or do you mean the Chinese model from the very beginning of Chinese history time (5009 years to be exact)? Or from 1949? 80% approval rating is nothing, I hear that in North Korea the approval rating is even higher!
I have worked in many countries and have had a hard time finding a single one whose analysts did not make the same claim — history explains other countries well but not the rather unique one I happen to know well. I think this is almost always wrong. Certainly China seems to be following the path that the historical precedents suggested it would and which few China ana;lysts predicted as recently as three years ago..
Excellent. One of your best posts and of high importance.
Until the growth is also measured with investments in infrastructure (that means empty cities, highways, … ) … kinda artificial growth, don’t you think? Or am I wrong?
Some scattered observations on this enormously important post.
It points up, for one thing, the trivial and indeed dangerous nature of much contemporary Western economic theorising. A great deal of this is obsessively concerned with modelling the interactions of supposedly rationally self-interested individuals in highly abstract terms. This ignores two problems: that the exclusive emphasis on rational self-interest does not mesh either with common sense or with empirical evidence about how human beings actually behave, and that how a rationally self-interested actor can be expected to behave is a matter of context.
A central message of this article is, contrary to what is assumed by contemporary American economists who know nothing about the relevant history, successful ‘catch-up’ development, in the U.S. as elsewhere, has required state action to ensure that rational self-interest operated in contexts where it can produce benign rather than perverse outcomes.
Among other things, it is crucial that ‘infant industry protectionism’ be accompanied by ‘brutal domestic competition’ – and that one does not end up with a situation where rationally self-interested actors, in essence, suck at the teat of the state.
It would seem to follow that a necessary – but of course not sufficient – precondition for successful development would be elites whose views are shaped by good economic historians, and who ignore the conventional wisdoms of the economics profession. Also however necessary, however, it would seem, would be for those elites to identify, for whatever reason, with the objective of development – and not to be distracted from it by imperatives of rational self-interest that militate against it. Moreover, these elites need to in control of a state structure which is capable of effective action, without strangling private initiative.
An object lesson of how to do almost everything wrong would seem to be the ‘shock therapy’ adopted by the so-called Russian ‘reformers’ egged on by Western economists, notably from Harvard, in the 1990s. In fact the work of a developing school of research on mafias suggests that ‘shock therapy’, as applied to the former Soviet Union, was a strategy peculiarly well-adapted to ensure that rational self-interest manifested itself in the form of criminality.
As Professor Federico Varese of Oxford put it in his 2011 study ‘Mafias on the Move’:
“A relatively recent body of research has shown that mafias emerge in societies are undergoing a sudden and late transition to a market economy, lack a legal structure that reliably protects property rights or settles business disputes, and have a supply of people trained in violence who become unemployed at this specific juncture.”
A further complexifying factor which the Russian comparison brings into sharp focus is the role of military vulnerability. Particularly as claims about military threats can easily – although they are not necessarily – means by which rationally self-interested actors justify sucking at the teat of the state, a question arises as to how far the patent absence of such threats facilitated the success of industrialisation in the United States.
(The problem of demilitarising a hyper-militarised economy was, of course, central to the dilemmas faced by post-Soviet Russia. A fascinating paper back in 2006 by the late Vitaly Shlykov, incidentally, argued that Russian ‘reform’ would have been far more successful if, rather than attempting demilitarisation by market methods, the Russian government had followed the example of what the United States actually did following the end of the Second World War.
In fact, the reaction against the combination of protectionism and acute lack of competition in the Soviet command economy led to an uncritical acceptance of precisely the same conventional wisdoms about the virtues of free-trade of which Alexander Hamilton had been rightly sceptical.
[See http://eng.globalaffairs.ru/number/n_6571 ])
A clear implication of Professor Pettis’s analysis, more generally, would seem to be questions about the nature of their elites, and their ability both to understand the requirements of development and to develop and push through an effective strategy to generate them, should be central to ‘development economics’. Talk about ‘good governance’ seems to have marked limits as a way of approaching the issues involved.
A final observation is that it would be interesting to hear the views of Professor Pettis and others about how the kind of social model which has been developing in the United States, and elsewhere in the West, over the past decades looks in the context of his arguments about the requirements for successful development. It would seem an interesting question how far the requirements of maintaining the success of a ‘developed’ modern economy are distinct from, or similar to, those of creating such an economy.
@David Habakkuk
I wrote in a comment above, “the nation-states have been disrupted and will become increasingly economically irrelevant”.
I think the model for development and sustainability is the same. The government has to maintain a laissez faire doctrine w.r.t. to the high-valued knowledge economy. And even with the social model in the USA, you can see enormous resistance to SOPA and PIPA regulation of the internet. Canada’s government recently reject such similar bills.
It seems there are enough people (i.e. hackers in the most general definition) involved in knowledge creation (i.e. software) in the developed countries to counter-act the political power of those sucking the tit of statism. And if ever the statists do try to regulate us and limit our ability to code knowledge, we hackers hold all the power. The modern economy would collapse if we stopped working. We always find a clever way to disrupt top-down power that attempts to limit our coding freedom.
I know it is difficult for people to believe that software is invading everything and is so critically important. It isn’t just robotics, software is in every creative profession, and increasingly so. Because the computer is the bicycle of the mind.
Those people who don’t get with the software age, will fall into relative poverty. And the social systems will be bankrupted and fail and perhaps lead us into a World War 3 result by 2030 or 2040.
why had England, a country that one hundred years earlier had been poorer than France, managed to surpass France and all other countries economically and technologically, even though in the pure sciences and engineering the French were at least the equal to the British and perhaps superior?
I can give you answer to this. Their loot form india the tremendous resournces they got by pushing millions of Indian into poverty, hunger and deprivation helped them to live life of luxury.
There is something to be said for the Empire financing some of Britain’s early economic development. However Bharat, I don’t think Britain deserves all the blame for India’s problems.
I am not sure, Bharat, that looking at the experience of other countries — some who “looted” and yet did not develop English levels of industrialization, and others who did without colonies they were able to “loot” — supports this claim. Even in the case of India I suspect that british repression of the Indian textile industry was far more important to British growth than any looting might have been. At any rate countries that live the life of luxury are not necessarily countries that spawn industrial revolutions. As Marx pointed out, capitalist society differed from all its predecessors in the way wealth was accumulated. In the former it was created, whereas in the latter it was expropriated.
Wow, great blog article. Fantastic.
More excellent comment. But don’t leave out of the American pantheon the great Hezekiah Niles, whose register was soaked up by Carey and List.
Thnaks Jonathan. I know he was one of the most influential journalists in the early history of the American republic, but I have never thought of him as being a writer on economic issues. Do you have any specific references?
> “industrial revolutions are not driven by scientific developments but rather by the commercial application of scientific developments.”
“Scientific” is misspelled. The correct spelling is “engineering.”
Brilliant article. Buying your book as I type.
Your observations about higher wages in the American model is a good one. The left has often co-opted that as “higher wages; higher spending; higher profit”. But, the comparison with China, lends a more credible rationale: higher wages is an outgrowth of allowing the private sector/individuals to have the freedom to allocate their own consumption spending and to make a choice to increase their own wages through higher productivity. All the failed models you mentioned, including Great Britain & France, have a large amount of state control or a large vested interest (i.e. aristocratic classes). We should also be conscious of that in the US, with vested interest dulling competition (telecom, patent trolls, defence, public unions).
I don’t know about creating software but I think the written Chinese language of ideograms is conducive to the using of software. This is why I think the present Chinese have been as successful as they have been at adopting many Western technological innovations since computers have become widespread.
I agree with the main thrust of the article. it doesn’t look good for China. It doesn’t look good for the US. Hardly any of the reasons we were able to become developed are still working. There is still a good emphasis on promoting individual innovation but other than that – efficient capital allocation ho ho ho quickly moving away from unproductive investments ho ho ho major industries not sucking on the government teat ho ho ho not to mention crony capitalism and rule of law applying to everybody ho ho ho None of the elites in any country seem to care about the general welfare and making wise investments in infrastructure (did they ever?). I believe there is a sewer in Rome built a couple of thousand of years ago that is still used today. Contrast that to how the stimulus money of Obama has been used.
The USA is #1 in software. I don’t see a problem. The rest of the system is dying because it is antiquated.
My students tell me otherwise, gepay. They say Chinese characters make if more difficult, although I am not a software writer so I have no real knowledge one way or the other.
Unlike human language, programming languages use a small unambiguous vocabulary. Also, AFAIK all the significant programming language words use English letters and symbols.
The genius of Chinese character writing (vs. a phonetic alphabet) was that no matter what dialect you spoke in the vast Middle Kingdom every literate person could read the same official documents, postings and other writings. Even today someone from Hong Kong with limited knowledge of Mandarin can communicate with someone in Shanghai by email and the written word.
I don’t know the limitations of Chinese characters when writing software. However, the People’s Republic of China introduction of a simplified form of Chinese characters to expand literacy in the 1950s would seem to imply there is a level of complexity inherent in this form of writing.
Gepay
When someone points to Obama, and such, or the widely discredited Trickle Down theories still in play in the modern media, one sideline the issue, point of fact, the actual stimulus funds are and will be spent into the middle of the next presidency as is the case in budgeting at the federal level, as spending commitments in the Obama period were arranged in the Bush presidency, to speak nothing of tax policy which created the current spending situation.
So, to be correct, automatic entitlements, evolution since great society, not Obama, Fed actions, their actions, and frankly, thank God, deficits, a matter of tax policy (2001, 2003 cuts), vast spending, legacy of 911, and unfunded pandering to baby-boomers and their elderly parents (donut hole). So spending mess.
But the bigger mess, is that unless, and globally, there is much greater maturity, in these matters, there will be a devolution in the system, this was forseen, remember the debate on increasing trad ties between a “leaugue of democracies”, early 2000′s. The fact is the system has been tremendously successful, but much falsity exists in how, why, when where models, false models, and fallacious economic history, and misinterpretations of wrong-minded economic policy dominate the debate and globally.
Can they pull it together. who knows.
But, having lived in EA, SEA, EU, CE, MENA, etc… I see much universal blindness.
Where national stories, regional stories, vary, they almost universally overlook the important stuff. One thing about Michaels blog, that is telling, is, despite muc delusional pandering otherwise, national economies are not like your bank account, and are not the same as a private business. Moreover, at the Global level, the steadfast corners in which people treat debating the wrong arguments, and finding strength in their rightnesses, are most likely leading to lose lose situations. While wrong-headed, and incorrect histories, and interpretations of economics, and so many other areas of the modern era continue, even accelerate, people gain more reason to hold their wrong-headed positions (and this globally).
For you, it is elites. Were it only so easy. It is not only elites, and elites globally, but it is also the Malwain women having 7 children, and the baby boomer that must accept, encourage and participate in reformation of entitlement programs, as much as the Goldman Sachs trader who quits his job because he was only making 500,000 USD a year, and the grade school student (and their parents) who needs to study earnestly.
I wrote up-thread the following.
I explained with charts, that the current downturn is due to the maturing of the computer revolution and that the downturn will last for decades. I explained in that linked article how the prior downturn from 1920s to 1940s was caused by mass production from the maturing of the Second Industrial Revolution (which ostensibly began in 1860 with Bessemer Steel).
Martin Armstrong has identified this 78 year cycle in real-estate downturns. The prior case was the downturn from 1850s as the First Industrial Revolution peaked with the peaking of railroad bubbles. Remember real estate value was driven much higher in value when a railroad was built to access it.
The prior two 78 year real estate cycles were caused by two waves of increased agricultural productivity, one peaked at the end of 1600s, and the other peaked 2/3 of the way through the 1700s.
Note how a war resulted from each of these downturns. The US war of independence in the 1770s, the US civil war in the 1860s, World War 3 in the 1940s, and now surely another war to come within a decade or two.
I hope everyone now understands why I am sure my theory is proven by history, and knows what to expect going forward.
The real estate 78 year cycle peaked in 2007, and the Economic Confidence Model (ECM) also turned down 2007, but the ECM turned back up 2011 and real estate model gets a bounce from 2012 to 2015, then both turn down again. The real estate model will not bounce again nor bottom until 2033, which is also when the ECM peaks and crashes. After 2033, we will be a in public wave for the ECM, which is because robotics will have unemployed billions of people. 2033 is also the turning of the 310 year empires cycle!
http://armstrongeconomics.com/the-princeton-models-and-methodologies-a-users-guide/business-economic-confidence/
http://armstrongeconomics.com/models/7219-2/
http://armstrongeconomics.com/2013/01/29/8797/
http://armstrongeconomics.files.wordpress.com/2012/03/a-forecast-for-real-estate-111509.pdf
Originally Armstrong was expecting gold to rise through 2016 after a pullback 2012 – 2013:
http://armstrongeconomics.files.wordpress.com/2012/03/gold-5000-11-7-09.pdf#page=14
Now he is thinking gold will not rise until after the next peak in Real Estate and ECM models in 2015.75:
http://armstrongeconomics.com/2013/02/25/gold-what-now-2/
His reasoning may be due to his expectations for the sovereign debt crisis:
http://armstrongeconomics.files.wordpress.com/2012/01/armstrongeconomics-sovereign-debt-crisis-when-013012.pdf
It appears that all the money the central banks printed from 2008, has been enough to lift the ECM until 2015.75, so now all they have to do is jawbone (move their mouths but not actually print) until the next big crisis comes. Well that crisis is Japan. Japan’s real estate model will bottom on 2015, so it is going into its big tailspin, and then it will have to print like mad from 2015 which will finally put a bottom on its real estate market. Note the USA’s real estate market won’t bottom until 2033. Remember Japan’s real estate crash started in 1989 and the real estate crashes in his 78 year model have a 26 year duration.
However, note that the ECM bottomed in 2002.95 (Dec 2002) and gold did not rise from 2004 to nearly the end of 2005. Yet during that period to 2005, gold/silver ratio dropped from 80 to 50, and then by 2007 to 45. In other words, silver could outperform gold to 2015. Remember that gold was rising from LTCM scare in 1998, Y2K scares, and 9/11 terrorist attack, there was a fear of finance crash. But by 2004, the focus had shifted to the real estate bubble, then silver blasted off. So we have similar situation now, as the scares about Europe, China, and USA have subsided for the time being and now the focus in on bubbles in the developing world.
So while the debt crisis may not erupt again until 2015, the inflation may be increasing in the developing world as capital flows are shifting there.
http://armstrongeconomics.com/2013/02/14/unemployment/comment-page-1/#comment-1617
Shelby commented:
Let’s put it in chart form, so it is visually easier for readers to see the model.
78 Year Real Estate Market Cycle
Boom Collapse War Unemployment Cause Tech Revolution
2033-2085 2085-2111 ? ? Quantum Computer
1955-2007 2007-2033 ? Robotics, automation Digital Computer
1877-1929 1929-1955 WW2 mass production 2nd Industrial
1799-1851 1851-1877 Civil railroad bubble 1st Industrial
1721-1773 1773-1799 Indep. farm yield increase 2nd Soil
1643-1695 1695-1721 Queen Anne farm yield increase 1st Soil
The blog software ignored the whitespace, let’s try again with periods instead of every other spaces.
Let’s put it in chart form, so it is visually easier for readers to see the model.
78 Year Real Estate Market Cycle
Boom . . . .Collapse . . . War . .Unemployment Cause . . .Tech Revolution
2033-2085 . 2085-2111 . . .? . . .? . . . . . . . . . . . Quantum Computer
1955-2007 . 2007-2033 . . .? . . .Robotics, automation . .Digital Computer
1877-1929 . 1929-1955 . . .WW2 . .mass production . . . . 2nd Industrial
1799-1851 . 1851-1877 . . .Civil .railroad bubble . . . . 1st Industrial
1721-1773 . 1773-1799 . . .Indep. farm yield increase . . 2nd Soil
1643-1695 . 1695-1721 . . .Queen Anne .farm yield increase .1st Soil
Someone who is an economist with a physics background expressed rational and reasonable skepticism or implicit bias against whether fixed periodizations are realistic in a world of butterfly effects and chaotic causes and effects, i.e. seemingly random data (non-emergent phenomena).
I replied:
—————————————-
I replied to two people who questioned my claim that “programmers will rule the roost” going forward.
@First reply:
@Second reply:
I wish you were advicing Mr. Rajoy. His head is filled with incredibly naïve ideas about how the economic development proceeds.
Thanks a lot for this excellent lesson in the history of economic development. I am storing this entry in my computer. Second, I will buy your The Great Rebalancing as soon as I can.
Thanks, Ignacio. If I end up advising anyone in Spain, and of course I would love to be able to help in any way I can, I suspect it would be members that are not currently in the economic policymaking center. My guess is that over the next few years we will see the rise of third parties or “mavericks” within the major parties who are less committed to some of the ideological constraints of both PP and PSOE. By the way most people saw the Italian election as a terrible thing. If you believe, however, that the current path is unsustainable and we need radical solutions, and the longer we wait the worse it will be, then anything that hastens the demise of the current system of thinking is a positive thing. The sooner politics become chaotic the sooner we might emerge from this mess — although of course the greater the risks of a political disaster along the way. Democracies can seem chaotic, but never underestimate their ability to adjust their thinking radically, something with which authoritarian governments have great difficulty.
Thank you. An excellent article.
Prof. Pettis,
Is it true that demand precedes growth? In order to create demand households spend(consumption), Government spends, Companies upgrade their facilities, when exports exceed imports (import demand), Government invests, and of course one must have rule of law and infrastructure to support the demand. Is there any other way to create the demand?
Demand drives growth and growth drives demand. It is a self-reinforcing relationship, which is why when there is a significant interruption on one side it will often adjust brutally.
Economic history has always made for interesting debate and expanded macroeconomic understanding. I was struck by some points Mr. Pettis made.
Why did the “Go West” policy further U.S. economic development whereas this result was not achieved by the USSR and Brazil in Siberia and the Amazon respectively? I do think the American West offered inherent agriculture advantages over those two regions that helped feed a rapidly growing population in the industrial East. The California gold rush comes to mind. Coastal development also seems historically intertwined with human advancement. I think the Siberian coast has obvious geographic disadvantages to the U.S. Pacific coast. All this confirms I believe what others have noted above, national economic development is very complex and depends on many variables.
Mr. Pettis mentioned the swift restructuring of the U.S. railroads in the 19th century and the resulting reduction in transportation costs that helped spur economic development. Some have noted obvious parallels to today’s U.S. broadband industry where many providers failed around the last milennium. The restructuring of the broadband industry and excess capacity has spurred innovation and new technologies.
On the note of domestic competition, it seems like the U.S. encourages chaos and cannibalism in certain industries (not all). I do recall the U.S. is typically reluctant to declare technology standards and let the market decide. Europe is allegedly much quicker to choose a standard and encourage its dominance. The EU and the U.S. have differing views on antitrust law. As an economic laymen, simply stated I believe the U.S. looks at immediate consumer benefits and Europe looks at overall economic/market power. I prefer the European approach as I think economic power leads to consumer disadvantage in the long run. I think this has led to some of the “dulling” of competition mentioned by JT in the U.S. telecom and defense sectors. I do believe the consensus is that larger enterprises distort the political process in every national economy. So again, economic systems are complex mechanisms and have many moving parts including the impact of culture.
I would suppose that going west didn’t work out for the USSR and Brazil in no small part because their governments were too much involved in their economies.
Illumined, I very much agree, but I do think the American West particularly the Coastal States and the fertile Great Plains differed greatly with Siberia and the Amazon jungle. It was “easy pickins” for the U.S. economy to use an American colloquilism.
If you include the Mississippi Basin then the American West contains the “Heartland” due to the enormous agricultural area overlaying the largest interconnected navigable waterway of the planet. Therefore it is more comparable to the Eurasian Steppe in Russia/Ukraine or the Yellow River Region in China, except for the crucial “navigation” part.
So it would be useful to look at the area between western Texas, Nevada, Idaho and North Dakota which lacks a natural connection to any waterway and contains some rugged und difficult terrain.
Nevertheless, in comparable difficult terrain the US achieved to develop the region (in terms of GDP per capita), without crippling the rest of the economy.
I would argue that the USSR tried something akin to squaring the circle in Siberia: Transforming a region which is suited for low-density, commodity focused development into a highly populated economic powerhouse.
How come the US didn`t make such a grave mistake? Probably, it had to do with the centralization of decision making, or rather lack thereof.
In the USSR, all resources could be thrown a one goal, thereby giving every “pet project” a nearly unlimited margin of error. This led to a positive feedback loop of wasteful investments, since bad decisions were actually rewarded (by measuring production increases, e.g. output, without reference to output/input ratio e.g. profitability).
It is much like inertial navigation: Small errors lead to calculation using incorrect data creating a positive feedback loop.
The US model provided something like a GPS, giving regular corrections thereby limiting the error and maximizing profitability.
Decentralization is exactly the key. China is the antithesis.
http://esr.ibiblio.org/?p=4824&cpage=1#comment-396054
JustSaying (Shelby) wrote:
http://esr.ibiblio.org/?p=4824&cpage=1#comment-396080
JustSaying (Shelby) wrote:
Good points, I think you mean “economic power leads to consumer advantage”, right? Since you just referenced Europe going for the “economic power” model and your preference for that. Just a bit confused.
I would also suggest that barriers to entry are larger in the US than in Europe for telecom. US is much less densly populated and much larger, so telecoms need that many more towers to be competitive. I think defense is pretty uncompetitive in countries around the world, and hence overly expensive. How do you start a weapons company without secret gov information? And you don’t get secret information unless you’re a trusted weapons supplier.
Andao, I apologize for the lack of clarity. My understanding is that European Union antitrust regulators fear economic consolidation, size and power more than it favors the U.S. model of looking at consumer benefits. My statement above (and opinion) is that economic size and power can lead to consumer disadvantage in the long run even if a merger creates stronger competition/consumer benefits in the short run. It’s a balancing act for antitrust regulators. To the credit of U.S. antitrust policies and the U.S. economy, many times competitors have surfaced unexpectedly with new, different and flanking approaches to markets that exhibit oligopolistic behavior. It’s a dynamism and openness that are characteristics of the U.S. economy (and several others).
Your point on Telecom is correct. Interestingly, the Obama Administration’s Antitrust Division challenged AT&T’s acquisition of T-Mobile in late 2011. (The Antittrust Division tends to be slightly more aggressive challenging mergers under Democratic administrations.) The result now appears T-Mobile (#4 in the market) is raising capital, merging with smaller players and is gearing up to be more competitive. Softbank is investing in Sprint (#3). This is a good thing for U.S. consumers.
I also lump cable TV and internet access into Telecom. This is a market where I think U.S. consumers have long been taken advantage. The structure of these markets including television entertainment have definitely been over-influenced by government policies and regulators for many years to the detriment of consumers. Large cable operators have exercised influence with Washington, the States and last but not least municipalities. Thankfully, new technologies and investment are creating new competition and choices for consumers. However, Antitrust permitting the recent acquisition of NBC Universal by Comcast does not make any sense to me. I don’t think we want cable TV operators controlling content.
Lastly, I forgot to include Banking in with Telecom and Defense. I am sure the list of industries could be longer. Any industries that require large amounts of capital by definition will certainly have some degree of power and influence with government.
Phil, I agree with you here. Ironically (though probably not unpredictably), the overpriced, monopolistic cable operators are pricing themselves out of existence, thanks to the YouTube/Netflix revolution.
Obviously I don’t support the collusion with politicians and price gouging that cable operators participate in, but on the other hand I guess we should be grateful that they do this. The biggest “new media” movements seem to be coming more from the US than Europe, which I believe has more choice in cable, broadband, and cell phone providers.
I am glad you mentioned the broadband industry, Phil. It has become, like the railroads in the 19th Century, a classic example of bubble-induced investment that was value-destroying for its investors but, once bankruptcy occurred and the assets were repriced, value-enhancing for society.
Ditto cellular infrastructure.
Your writings explain this as the expansion of demand and finance creates these bubbles of globalization. I think rather that technological shift causes capital to have no available investment able to compete because by definition the technological shift is more efficient (drives everything else bankrupt) and is owned and controlled by the technologists (technology can’t be bought), thus passive capital tries to concentrate in order to gain political leverage. The is what Rockefeller did in the USA.
Differentiate between the passive capitalists building out implementations of technology (a repetitious and low knowledge business) with actually creating and continually improving the new technology (creative ingenuity), which is what the technologists do.
Capital chases negative returns because it has no place else to go. This is why we have negative real interest rates. This is why we have concentration of power in China, because there is no way for China to compete otherwise. The technologists in the developed countries are driving all these radical changes we see in the world now, and in every phase of globalization.
This is why capital retreats from the developing countries after the global bubble pops in every phase of globalization, because they are not intellectually competitive with the structure of the developed countries. It is not only an issue of how much science and math is known in the population, but also a culture of open exchange and free markets that is crucial. Software is especially like that. We can not improve in isolation.
Ambrose Evans-Pritchard’s mention of your book, and the arguments it makes, might propel you to celebrity status. While it has always been my intention to buy your new book, it was Pritchard’s summation that compelled me to no longer wait.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/9891082/Trade-protectionism-looms-next-as-central-banks-exhaust-QE.html
Ambrose Evans-Pritchard’s article affirms the 2015 – 2017 timing on the detonation of the sovereign debt inflationary spiral that I mentioned in my prior two comments above. It is all fitting together in a lucid picture for me now. Thanks.
Thnaks Glenn. I have bee very fortunate in the reviews I have gotten so far.
How else one can get an economic Professor’s education, knowledge, and lifetime of learning?
All found in a simple book “The Great Rebalancing..” for less than $20.
Very well written blog. I enjoyed reading your insights.
Congratulations Mr. Pettis on another positive review of your book in yesterday’s Wall St. Journal. Besides the author declaring you are a “brilliant economic thinker”, he recognized your status as a “nightclub owner”. I wonder which one pleases you more to see in print.
Although I don’t care for the WSJ’s style of lumping two books with similar themes in the same review column, the reviewer was nonetheless very complimentary of your book.
Thanks Phil. I was flattered by that comment, but now some of the students in my seminar refer to me, a little sarcastically I am afraid, by that phrase..
Hi Michael,
Must take this opportunity to convey my deepest acknowledgements of you and your works and thank you for all the great and invaluable insights you have been giving us all.
I would like to ask you a few things
1)Over the past two years there have been increases in China’s consumption to GDP ratio. So do you think the Chinese rebalancing process has started already?
2)I have read you claiming that there would not ever be a financial meltdown in China. Does it mean that Chinese could borrow as much as possible without any negative consequence on their future growth rates and development?
I am a novice when it comes to economics and would appreciate your enlightening views.
Thanks,
Sarkar
^^ Here are some links to show that consumption is slowly becoming the driver of economic growth in China. Whats your take on this?
http://www.economist.com/blogs/freeexchange/2012/10/rebalancing-china
Thank you, Abhradyuti. I actually discussed this in June I think. To summarize, in 2010 and 2011 we saw a surge in Chinese wages, but because real interest rates dropped sharply during this time (because of rising inflation), the net impact on transfers from the household sector was small or even negative. However by the end of 2011 and the beginning of 2012 the sharp drop in inflation forced up real interest rates.
At the time this left me very optimistic that we were likely to see the beginning of a rebalancing, and the very slow growth in the first half of 2012 (officially above 6% but probably below 4%) confirmed this. In June I wrote for the FT that China had finally started to rebalance, but I was worried that the drop in growth might be more than the government could take, especially coming as it did just before the October CPC meetings.
In fact, and as many of us expected, in the second half of 2012 Beijing got nervous about the growth slowdown and stepped again on the credit accelerator. This cause the rebalancing process to slow and even reverse.
This year credit growth has exploded, so GDP growth is still high, but the relationship between credit growth and GDP growth has gotten so ugly that it is hard to find anyone who isn’t worried. My guess is that in the next few months we may see credit growth slow again and the rebalancing process reignited, but I am not sure Beijing understands or is willing to accept the growth implications. Expect to see over the next two years many more cases of stopping and starting.
As you’ve also written, the longer they push credit growth and the current model, the more likely it crashes chaotically and they lose their options for managing it.
We see also this starting and stopping with the expansion of the central bank balance sheets globally. The Fed, ECB, and BoJ learned recently that they can buy some time simply by threatening to expand balance sheets.
What I see is the politics is appeasing the status quo for as long as possible, which means a very horrific and chaotic finale.
And I assert the reason is because there are simply too many people that are not employable if we allow the free market to proceed and this next phase of technological unemployable to go at full speed. So the politics has no choice but to choose “the live until we die” course.
I wonder how many fingers these central planners have to keep the holes in the dike plugged?
Warming patiently,
Giant Portobello 8)
Very Many Thanks Michael.
So its like taking one step forward and 2 steps backward. The reason I say two steps backward is because the longer China stays this way the more troubles it is likely to witness.
Recently I was reading an IFPRI paper on how rural China had reached the “Lewis Point” in 2010 already. While an IMF paper thinks there is still 15 years time. There was another paper (I forget the name of the researchers) who suggested that with better Worker Force Participation enforcement to levels closer to Japan, China would be able to substantially negate its workforce reduction.
You have always dwelled on debt and investments, could you throw some light on China’s labour/workforce reduction and the effects of that on its growth. Recognizing this, I think the Chinese authorities are pushing for getting the industries to push up the value chain.
Regards,
Abhradyuti Sarkar
Prof.,
Is your book available in China? Considering you are in China, would it be possible to receive a signed copy?
This interview with the smiling, smug Zhang Xin: China’s real estate mogul says so much from a personal perspective about the history of China since the cultural revolution. She thinks growth rate won’t drop below 7%, she fled cut throat capitalism in London to return to the idealism of communism in 1992. As I see it, China is in one big bubble disguised subconsciously as idealism. And we know how those mass delusions end up.
Just like in the US
http://www.cnbc.com/id/100542594
Prof. Pettis,
You mentioned in your earlier posts that China would need to raise interest rate to
Transfer the wealth on to household to begin the rebalancing process. But does China have room to increase interest rate?
China has 3 trillion of reserves and an equivalent RMB liability (assuming that everything was sterlized). If China increases interest rate there would be huge appreciation pressure on RMB and if they let RMB appreciate, they will have to take a nominal loss on the balance sheet and the due to low US Interest rate, it will also increase the cost of their RMB liability.
If they don’t let it appreciate they will keep accumulating reserves and increases the size of their balance sheet.
How can China get out of this situation? Do they have to wait for US interest rate to increase before they can do anything ? Is printing money the only option to get out of this situation?
Would be interesting to hear you thoughts on this ?
Dr. Pettis,
A thought provoking post.
Do you believe that a country can become rich by having multi-national companies? Does a country require national players to become successful?
In the quest for technology and capital, India (and probably China) is queuing up for investments from MNC’s. I know that MNC’s in the consumable sectors (CPG / FMCG) took a huge loss for several years with lower pricing, thereby eliminating local players. Subsequently, they increased prices to gouge consumers. For example, the only two drinks available in India today are from Coke and Pepsi. What effect does FDI have in economic growth? This has been a rather contentious debate in India
When US was adopting its protective policy in the 1800′s, did they allow flow of foreign capital to own companies in the US?
China has Wahaha
NR, this is an interesting question. The British were big investors in the U.S. all through the 1800′s. I am sure some of this was due to similar legal and property rights. I am sure sharing a common language didn’t hurt either at this time. I believe most of this was portfolio investment not direct investment. Portfolio investment still gives the investor ownership rights and influence over management, but not control of day-to-day operations.
Given the distance and lack of modern communication systems, it would seem almost impossible for the British and others to manage day-to-day operations across the Atlantic. In this manner along with protective tariffs (as Mr. Pettis has noted in the U.S.), I think national champions developed in the U.S. and Western Europe. MNCs were a limited concept pre-World War II. I think it is well-established that developments in telecommunications and business technology have contributed to higher levels of foreign direct investment (and competition) across the globe. I would also not underestimate the power of intellectual property to drive the growth and influence of MNCs. One just has to look at the many technology and pharmaceutical giants with global empires.
Your Coke and Pepsi example also raises the issue of cultural imperialism which is a far bigger debate beyond protecting local industries. I am sure the enticement and cache of purchasing global brands is also a contributing factor. If Coke and Pepsi achieved dominance in India solely on predatory pricing, the antitrust regulators need to have more teeth.
Phil,
I understand that trade used to occupy a higher portion of world GDP in the early 1900′s than today. However, cross-border ownership and portfolio investments were probably small then.
My problem with the pure-play financial and competitive arguments put forward by Dr. Pettis is in the lack of consideration of human factors and quality. Philippines, Malaysia and Thailand have been open economies doing a variety of things that Dr. Pettis advocates. However, their markets are dominated by MNC’s competing domestically. Their citizenry have marginally benefited. They have been unable to create national champions. Taiwan, meanwhile powered ahead. Is there something to it beyond financial openness, support for infant industry and protectionism?
The other question that I have is whether a country citizenry can extract enough rent from foreign investment so that its citizens are benefited? Singapore and Dubai are classic in these cases. Can large countries simply benefit by opening up their economies? Else, do they require national champions? What should government policy be? Protect domestic industries or allow FDI investments and get MNC’s to invest?
On predatory pricing, it is really hard to do if an MNC takes a long term view of ten years. It would be impossible to prove that the prices are predatory. They could simply resort to an argument of higher efficiency. In the case of Coke and Pepsi in India, they actually bought out some of the best selling soft-drinks and killed the brand. They were actually willing to do that.
Does a lack of national champions hurt employment? Does it hurt the quality of life of the people? Thailand in particular has grown, and continues to grow, very rapidly despite having no real international brands. China has grown dramatically with no national champions.
I guess except for bragging rights, I don’t see the definitive advantage of having a national champion. Sooner or later, more Toyotas are going to be made outside of Japan than inside (it might already be that way). Chinese workers at Toyota factories in China gain by having a job, and Chinese consumers get cheaper Toyota cars. Who wins on the Japanese side? Generally only Toyota stockholders, right? Interested to hear your thoughts.
I don’t think MNC’s are fundamentally a bad phenomenon. However, they have a bad track record in terms of the rent that they provide to labor and their upholding of laws around competition, environment, child labor, working hours, safety and local laws. I find MNC’s that come to developing countries on account of their market to be a tad better than MNC’s that come for labor arbitrage and mineral extraction. They latter are the most egregious. National champions seem to do better on these counts. This is my gut feeling.
Countries need to enact better laws and ensure that all companies follow these set of laws. Instead they seem to dilute laws and allow foreign companies to act with impunity in the name of FDI’s. This will have consequences in the long run.
Validation is required.
Philippines has at least one national champion, that now has international branches, e.g. Jollibee. Also I think San Miguel beer is I think distributed internationally.
The Philippines would not an efficient location to try to develop an integrated manufacturing base, because of the 7100 islands and mountainous terrain. And with the tropical climate, you simply don’t have the culture for the science’s education. Filipinos love to dance and sing, and the schools spend most of their time doing such activities. Filipinos are really good with their hands, thus you see wiring harnesses, laser printers, Timex watches, etc.. being manufactured here. But with robotics coming, there is no long-term reason to locate manufacturing in the Philippines. I suppose the Philippines will try to become the tourism capital of Asia, but I doubt they can, because again it is difficult to gain economies-of-scale when the attractions are spread over 7100 far flung islands. It is tiring to travel too much on a short vacation.
The Philippines thus found its best economic sweet spot with exporting labor and importing English call centers. This has worked for as long as the world needed maids, nurses, cooks, seamen, and human call center agents. Again the robots are coming with voice recognition, so in my estimation, the Philippines is going to have to find new markets. I see trouble ahead for the Philippines and another boom & bust cycle after this current irrational infrastructure buildout peaks.
And the $trillions of global debt is masking the fact that global labor is in oversupply, because people in developed countries are using debt to avoid taking a cut in standard-of-living and thus can afford to pay filipinos to do work that they would consider marginal salary.
In my dreams, the filipinos need to leapfrog (their tropical culture and rural third world) into high sciences education, but this is impossible given all educational institutions need to be registered with DECS which mandates time-wasters and de-focusing tangents such as for example “values education”. I personally went to the deans of the some of the top computer science programs in Mindanao (Ateneo, Univ of Southern Phils, and MSU at Illigan) to try to start some initiatives to get students exposed to cutting edge concepts, but this is met with requests for conformance.
Also the parents are very much opposed to their children being subjected to solitude and intense study. They believe in “holistic and social development”. When I suggested to a high school english teacher at a private school that he have the kids read entire novels, he looked at me as if I had them to climb Mt. Everest. When I suggested an honors math course, so the fast learners wouldn’t have to slow down for the slow learners, this was met with the typical Asian concept of “the group is more important than the individual”.
I gave up. No one can change this.
There are so much financial bubble in China.
It’s interesting you mention wages in your analysis, as one of the best accounts I read on Industrial Revolution was that it was in fact driven by high English wages. High and sticky wages were forcing continuous innovation and capital expenditure (why expand capital in France when it was cheaper to hire ten more peasants?), but at the same time high wages were driving demand (marginal effect of ten extra peasants paid peanuts is still not much).
The more I think about it, the more I believe that the “classical” economists had tunnel vision – in similar sense as early greek philosophers had really bad effect on development of proper science for centuries. In similar way we still suffer from our economic foundations looking up to the classics, building on the tunnel vision.
Thnaks. I just bought the book
I’d mention I don’t know the author and have no financial interest in the book’s sales
.
That said, I’d be really interested in looking deeper into this – i.e. why Ricardian “each to his own, forever” has patchy results and how and why it breaks down, and whether we’d not really just ignore it anyways.
Prof. Pettis,
I think you comment goes well beyond chinese model and some further elaboration on principles of “developmental economics” is definetely needed for many policy makers around the world. Your comment goes perfectly in line with what Acemoglu says on institutions on the one hand and developmental economists like Ha-Joon Chang say on productivity and protectionism on the other.
On a separate note what do you think are the preconditions for the “right” development policies? Was it democracy, meritocracy or nationalism that promoted and sustained succesful export led industrializations of 20th century? How was the political balance between the interests of incumbent elites and development reached?
Maybe there is hope for this model returning to fashion. Harvard’s MBA program now includes a case study by Zeynep Ton on Quick Trip ………
“It’s a much believed assumption in the retail world: If you’re going to compete on the basis of low cost, then you can’t afford to invest in your employees.
Extensive training—who has the time to give? Regularly scheduled hours?—way too inflexible. Benefits?—forget it! Better to trim schedules and leave vacant positions unfilled for immediate, measurable savings. That’s the retail way. Moreover, the costs of understaffing aren’t easily quantifiable; who can say how many customers are lost to long lines or stock-outs?
But now a growing group of retailers is challenging this notion of an industry built on the backs of crummy jobs, very prosperous companies that include Costco, Mercadona, Trader Joe’s, and QuikTrip. What do they know that their competitors don’t?”
http://hbswk.hbs.edu/item/6708.html
Is China closer to 1980s Japan or 1837 United States?
China is closer to Japan in the 60s and 70s
If you had to compare China and Japan, I would concur 60s and 70s, but that is if forced to compare. However, I think the differences for China today are not at all minor.
- China has an enormous amount of low-skilled labor relative to 60s/70s Japan.
- China is pushing up against a World that is awash in debt and not at all hungry or able to absorb trade imbalances.
How China brings up the skills and wages of the low-skilled population will be interesting and challenging in a manner very much different than Japan 40-50 years ago.