by Andrew

Why targets make sense for healthcare liberalization

In working on my Paulson Institute paper on service-sector liberalization, I ended up putting a lot of emphasis on one seemingly minor component of the 12th five-year plan on healthcare. Among its many goals, the plan includes a target for raising the share of hospital beds in private hospitals to 20% by 2015; while the 2015 figures aren’t available yet, that share did in fact rise from 11% in 2010 to 17% in 2014 (see chart below). This seemed to me a useful example of how to use China’s planning system to drive liberalization rather than just increased output. And reading the excellent recent CSIS report on China’s 13th five-year plan, by Scott Kennedy and Chris Johnson, I find that I am not alone. The section on healthcare includes this comment from an anonymous interviewee:

One Chinese health care expert suggested that perhaps the best benchmark of whether the various reform proposals would actually transform the system would be to focus on the proportion of hospital beds that are in private hospitals. In order for that figure to rise dramatically, for example, to 60 percent, it would likely require changes in other areas of the system, including the development and marketing of drugs, the professional status of doctors, and the availability of private insurance.

So the reason to set a target for the private sector’s market share is to push people in the system to figure out all the different things that need to change in order for the target to be achieved. Rather than get bogged down in precisely specifying the means, the authorities can just specify the ends. The CSIS report puts it rather better than I originally did in my paper. This logic I think further supports the idea that these kind of targets should be more widely adopted if the Chinese government wants to ensure that its rhetoric about greater opportunities for the private sector is actually matched by reality.

The expert’s proposal for a very high and aggressive target for the private sector’s share of healthcare would certainly be controversial. As Kennedy and Johnson write, the complexity of healthcare markets makes it hard to simply argue that a much greater private-sector role would be uncomplicatedly good for everybody:

There is no consensus that a fully market-oriented health care system would yield better health care outcomes for Chinese society. Some worry that if things were made easier for foreign pharma[ceutical companies], private hospitals, doctors, and private insurers, the cost of health care would rise, and many who now are well treated would be priced out of the market. …

Would more thoroughgoing marketization serve China much better? It is hard to know for sure, given that there are both successful and failed examples of privately-based, market-oriented health care system.

On the other hand, they do note the ways in which the corruption and inequality in the Chinese healthcare system is linked to the high levels of state dominance:

China’s almost 3 million doctors have been prisoners in this state-controlled system. They are not classified as regular workers, and they are tied to their hospitals just the way SOE and government employees used to be fixed to their official work units. As a result, hospitals have gotten away with providing meager wages to their doctors of only a few thousand yuan per month. Not surprisingly, it is hard to attract promising minds to consider medicine as a profession. …Because of their terrible pay, some of those who do become doctors have been driven into corruption, taking bribes (masked as commissions or event fees) from drug companies and distributors in the hopes they press their hospitals to acquire certain drugs and encourage their patients to use them. Several sources reported that doctors also earn a large portion of their actual take-home pay from bribes from patients hoping to receive their care.

The 13th five-year plan for healthcare has not yet been published, so it will be interesting to see what happens to that private-sector target.

Public vs private hospital beds

by Andrew

What is socialist about “socialism with Chinese characteristics”?

Deng Xiaoping’s classic slogan is wonderful because of its strategic ambiguity: just what are those Chinese characteristics anyway? And this slipperiness has led to a tendency to think of “socialism with Chinese characteristics” as a kind of dodge, a way of saying, yeah, China is really capitalist but we just don’t want to admit it, wink wink nudge nudge. I’m not sure that was ever correct, and no one less than Xi Jinping himself seems to be urging us not to think that way. In his now-famous speech on Deng’s legacy, Xi had a pretty good one-liner: “Socialism with Chinese characteristics is socialism, and not some other -ism.” And Xi repeated that line again in his speech on Friday for the 95th anniversary of the founding of the Communist Party.

Yet for a speech that was billed as heavily ideological, and whose theme was supposedly the eternal verities of Marxism, there is not a huge amount of ideological content to be found. To me the speech feels not so much ideological as highly nationalist. Xi says the Communist Party’s main achievement is not realizing socialism in one country, or some other Marxist shibboleth, but “the march of the Chinese nation with its more than 5,000 years of civilization toward comprehensive modernization.” There is plenty of Deng-style pragmatism (“Whether socialism with Chinese characteristics is good depends on the facts, on the judgment of the Chinese people”) and focus on economic growth (“Development is the Party’s top priority in governing and reviving the nation, and is the key to solving all of China’s problems”).

So it would be easy to interpret “socialism with Chinese characteristics” as just meaning whatever makes China rich and strong. And such an interpretation would be pretty consistent with Deng’s own fundamentally nationalist perspective. Yet I’m not sure we can really view the Communist Party as pure maximizing pragmatists completely unconstrained by history or ideology–surely it does make a difference that the Party comes out of the socialist tradition? Of course, the most obvious consequence of the Party’s historical trajectory is its commitment to authoritarian rule. The political meaning of “socialism with Chinese characteristics” is so obvious that it hardly needs stating: the continued rule of the Chinese Communist Party. Or, as Xi put it on Friday, that the “choice of the Chinese Communist Party to lead China’s great revival is correct.”

But I’ve also been wondering whether there are other, more purely economic consequences: what do Chinese leaders think are the fundamentals of socialism that they cannot abandon and still call themselves socialist? So far, I’ve come up with two answers. And as so often, one of Deng’s own pithy comments provides the best summary. In a 1985 interview with American journalists, Deng said: “In the course of reform we shall make sure of two things: one is that the public sector of the economy is always predominant; the other is that in developing the economy we seek common prosperity, always trying to avoid polarization.” I think that’s exactly right.

I would propose, then, that in practical terms the “socialism” part of “socialism with Chinese characteristics” means 1) a continued large role for state-owned enterprises, and 2) generous regional development policies aimed at offsetting the inequalities produced by market forces.

That the Communist Party is committed to SOEs will probably not surprise many people. Still, it’s worth recalling just how deep the historical roots are. The economic model that China’s post-1978 leaders have been working with owes a lot to Lenin’s New Economic Policy of the early 1920s in Russia. To recover from the excesses and economic disasters of the early Bolshevik period, Lenin proposed a mixed-economy model, in which market mechanisms and private firms play a major role but SOEs occupy a strategic position (the famous phrase “the commanding heights” is often attributed to Lenin at this time, but it appears only in fragmentary form in his collected works; Nikolai Bukharin, the theorist of the NEP, should probably get the credit). This mixed model did not last long in Russia, but it has persisted for some decades now in China. Given that Chinese Communist Party documents still refer to “the basic economic system with public ownership playing a dominant role,” I am probably on pretty safe ground in saying that the Party feels that it cannot give up SOEs.

The regional development angle may be a bit less obvious. But I think it also has deep roots in a different strand of socialist thought: Maoist egalitarianism. Here a good guide is John G. Gurley’s 1970 essay “Capitalist and Maoist Economic Development,” a treatment of Maoism that is unusually sympathetic. Gurley introduced a distinction between capitalist “building on the best” (investing in the places and people with the greatest comparative advantage) and Maoist “building on the worst” (deliberately investing in the places and people that are disadvantaged). Here’s how he summarizes the difference:

Capitalist development, even when most successful, is always a trickle-down development. …. In many ways, then, Maoist ideology rejects the capitalist principle of building on the best, even though the principle cannot help but be followed to some extent in any effort at economic development. However, the Maoist departures from the principle are the important thing. While capitalism, in their view, strives one-sidedly for efficiency in producing goods, Maoism, while also seeking some high degree of efficiency, at the same time, in numerous ways, builds on “the worst.” … Maoists build on the worst not, of course, because they take great delight in lowering economic efficiency, but rather to involve everyone in the development process, to pursue development without leaving a single person behind, to achieve a balanced growth rather than a lopsided one.

Mao and Deng

Mao and Deng

Deng was very explicit that his reforms rejected Maoist egalitarianism in its pure form; what he derided as “everyone eating from the same big pot” was a recipe for poverty and backwardness. But he also made clear that his acceptance of some economic inequality was purely instrumental; as he told Mike Wallace: “We permit some people and some regions to become prosperous first, for the purpose of achieving common prosperity faster. That is why our policy will not lead to polarization, to a situation where the rich get richer while the poor get poorer.”

So at the level of principles egalitarianism was not totally abandoned. And one of the most consistent ways in which this principle has been expressed is in repeated efforts to boost China’s less developed regions: from the inland development projects of the 1960s and 1970s, to the “Great Western Development” project launched by Jiang Zemin in 1999, to the “Revitalize the Northeast” campaign under Hu Jintao after 2003. All of those plans were very clearly in the spirit of “building on the worst.” In the latest egalitarian gesture, the State Council announced, just before the Party’s July 1 anniversary, an aid program for the isolated mountainous areas where Communist revolutionaries sheltered during the civil war.

So a large role for state-owned enterprises and regional development plans are features, not bugs, in the China economic model. Unfortunately a lot of the obvious waste, inefficiency and misallocation in the Chinese economy in recent years are also attributable to these features. If I’m right about the political importance of these two policies, then fixing those problems could be quite challenging.

by Andrew

Explaining catch-up growth with China and commodities

The World Bank’s latest Global Economic Prospects report may be a 194-page document, but most of the attention it got was for one little infographic. The Financial Times focused its coverage on the chart, and the Economist also made it one of their charts of the day. As the bank helpfully made the underlying data available, it is easy to reproduce, so here is the original:

World-Bank-EM-catchup

That’s indeed a very nice chart, showing that catch-up growth is not a constant phenomenon, but one that has risen and fallen over the last couple of decades. I like the chart too, but when I first looked at it, I thought: I’ve seen that curve somewhere before. Because I’m interested in regional growth patterns, I have been looking at catch-up growth within China: how quickly have poorer provinces been closing the income gap with the wealthier provinces? (I chose Shanghai as the reference point, since it has been the most developed part of China for many decades.) And when I took my provincial catch-up data and overlaid it with the World Bank’s global data, this is what I got:

catch-up-comparison

I would say those trends are pretty much the same: fewer places experiencing catch-up growth in 1997-2001, a widening of catch-up growth to more places from 2002-2012, and more recently a sharp fall off. So that’s pretty interesting: catch-up growth within China, and catch-up growth across lots of other developing countries, seems to follow the same pattern.

One possibility is that catch-up growth is just a function of growth, and so when global/China GDP growth is slow, catch-up growth is less widespread. But this doesn’t explain why catch-up growth has faded so sharply in the last couple of years: while both global growth and trade volumes are not doing that great, they also have not gotten suddenly worse. What has declined very sharply are commodity prices, thanks to an oversupply generated by producers who thought China’s housing construction boom would go on longer than it actually did. So I think commodities may be more important for the pattern of emerging-market catch-up growth than the World Bank acknowledges.

This does not mean that I’m arguing commodity exports are actually a great thing and that it’s really too bad that commodity prices have fallen. I firmly agree with the conventional wisdom that commodity exports are not an effective or sustainable way for developing countries to become rich. But remember what is being measured in these lovely charts: not the number of people whose incomes are converging with developed-country standards, but the number of countries (basically a diffusion index). And my intuition would be that more developing countries are, if only by default, commodity exporters, simply because the alternative development model–exporting manufactured goods–is in fact quite hard to do.

The data support this intuition. If I split developing countries into two baskets, manufactures exporters and commodity exporters, on the simple criterion of having more or less than half their exports in manufactured goods (a concept I borrowed from Jon Anderson), the majority of developing countries are in fact commodity exporters. For the low and middle-income countries in the World Bank’s World Development Indicators database, only 33 of 96 countries had more than 50% of their exports in manufactured goods in 2011. The same pattern holds internally within China: while most of China’s population is concentrated along the coast, most of its provinces are not. Of China’s 31 provinces, only 10 are officially classified as “Eastern.” The diffusion index for catch-up growth within China will therefore be dominated by the central and western provinces, and these provinces have more commodity-driven economies. To be precise, I estimate that the mining and metals share of GDP is higher than the national average in all but four of the 21 central and western provinces.

This pattern of catch-up growth is not just a statistical artifact, but gets at a real phenomenon. The same economic role has been played by a group of provinces within China’s borders, and a large group of countries outside China’s borders. Both prospered by supplying materials for China’s housing boom (the underlying cause of the commodity boom), and both are seeing that prosperity erode now that the housing boom is fading. I keep discovering that housing is the answer to many economic questions about China; it seems that Chinese housing also explains a lot about the patterns of global growth.

by Andrew

What is nationalism anyway, and why is it so powerful?

I’ve had nationalism on the brain lately–thinking about the history of Chinese nationalism, reading about Russian nationalism–so I was predisposed to interpret the UK’s vote to leave the EU as being driven by nationalism. I found Fintan O’Toole’s essay arguing that the Brexit movement was an undeclared English (not British) nationalist movement very convincing, and it looks quite prescient in light of the actual results. Yet a number of my British colleagues and friends did not agree that the term nationalist applied.

I realized that I was not operating with a clear definition of nationalism, without which I was not going to win that particular argument. So my task is to come up with one–an objective definition of nationalism as a social phenomenon, that does not use the term as a rhetorical synonym for patriotism, or racism, or right-wing politics, or what have you.

Ernest Gellner

Ernest Gellner

The classic definition comes from Ernest Gellner, the great anthropologist and philosopher, who argued that nationalism is about political legitimacy: legitimate government requires that the boundaries of the state and the boundaries of the nation/people/ethnos coincide. One state per nation, one nation per state:

Nationalism is primarily a political principle, which holds that the political and the national unit should be congruent.

This principle is now so widely accepted–“self-determination of peoples” is right there in the UN Charter–that it is easy to take for granted. But it was and is a revolutionary argument, and Gellner used it to explain the breakup of the 19th-century European empires (and later the Soviet Union) into smaller, more ethnically homogeneous states.

Secession from an entity that is too large or foreign to be legitimate is the quintessential nationalist political movement. The most principled arguments for Brexit–self-government and the supremacy of Parliament–are thus in fact the most nationalist (again, I am not using nationalism as a pejorative term but as a descriptive one). If starting point is that the nation-state is the proper form of government then it is indeed hard to see the EU–a state without a nation–as a fully legitimate government.

John A. Hall, in his biography of Gellner, notes a few issues with Gellner’s original formulation. First, the focus on how European empires split into smaller countries means it may not be as helpful in understanding nationalism in large countries whose borders are not particularly contested. A theory of nationalism that does not explain Chinese, Indian, Russian or Japanese nationalism is probably not a very useful theory. Second, it doesn’t perfectly jibe even with the history of classical nineteenth-century nationalist movements such as the Czech, who originally agitated for better treatment within Austria-Hungary rather than outright independence. Hall concludes that a different definition of nationalism is required:

Not every nation seeks its own state. Nationalism is better defined in the simplest terms as the desire for the national group to prosper.

There is clearly something to this, but Hall’s proposal feels a little too baggy and capacious: who doesn’t want their government to do good things? I would try to tighten up the definition a bit, and propose that nationalism is the argument that a legitimate government is one that works to raise the status and prosperity of the nation/people. This formulation builds on rather than replaces Gellner’s original one, since it still presupposes that government is the representative of a definite group, however it may be defined (an “imagined community” in Benedict Anderson’s phrase).

The ingroup-outgroup dynamics that are inherent to nationalism clearly resonate with a lot of people, though they can manifest in different ways. Nation-states that arise out of polyglot empires (e.g. China and Indonesia) seem to have a strong attachment to the details of maps and national boundaries, while those that are more monoglot in their self-imagination may focus more on ethnic differences (much of Europe). But that’s not all that nationalism is about. Chinese nationalism from the 20th century days was consistently focused on national “wealth and power” (fuqiang), and this has also been the unvarying theme of its post-Mao politics. The most recent versions of Russian nationalism have in fact meant an increase rather than a decrease in the nation’s foreign entanglements–which are popular because they are perceived as raising the status and power of the Russian people, however much they complicate the one state per nation idea.

This definition of nationalism should be a neutral one: nationalism seems to be neither inherently left wing or right wing, good or bad (it’s good to recall Benedict Anderson’s comment that “nations inspire love, and often profoundly self-sacrificing love”). Rather, nationalism offers powerful arguments about political legitimacy that can appeal across the political spectrum, which resonate because they do in fact reflect important aspects of people’s real lives (rather than being purely theoretical or based on economic self-interest). That flexibility and emotional force may be some of the reasons why nationalism, born in the late 18th or early 19th centuries, continues to be so potent well into the 21st century.

I can’t resist closing with a fantastic, acerbic quote from Gellner, on how nationalism has proved to be so much more powerful than other ideological movements:

Just as extreme Shi’ite Muslims hold that Archangel Gabriel made a mistake, delivering the Message to Mohamed when it was intended for Ali, so Marxists basically like to think that the spirit of history or human consciousness made a terrible boob. The awakening message was intended for classes, but by some terrible postal error was delivered to nations. It is now necessary for revolutionary activists to persuade the wrongful recipient to hand over the message, and the zeal it engenders, to the rightful and intended recipient. The unwillingness of both the rightful and the usurping recipient to fall in with this requirement causes the activist great irritation.

From our current perspective, the spirit of history’s mistake looks like delivering the message of Marxism in the first place. The long, painful experimentation with this highly ideological form of government seems to have put down surprisingly shallow roots. Stalin fairly early on abandoned pure Marxism for a version heavily flavored with Russian nationalism, and China’s Communist leadership did something very similar once the ideologue Mao Zedong was out of the way. The Marxist component has only gotten more diluted in the ensuing decades. Eric Hobsbawm’s comment that “Marxists as such are not nationalists” is absolutely right as a matter of principle–it’s just that there were never so many true Marxists to begin with.

by Andrew

Freeing up China’s service sector: the why and the how

I have a new paper out at the Paulson Institute, on China’s service sector. Obviously I would like people to read the whole thing, but here’s the short version:

The first part of the paper is a rather fun (for me anyway) piece of data work, comparing the development of China’s service sector over time with the patterns of Japan, South Korea, and Taiwan. The conclusion is that China’s “modern” service sector looks over-developed, while its household service sector looks under-developed. The over-development of modern services seems to caused mainly by a huge increase in the size of the financial sector, and therefore is not actually a cause for celebration. The under-development of household services suggests (though admittedly does not prove) that these sectors are being held back by high levels of state ownership and/or regulation. Therefore I argue that instead of doubling down on finance-driven growth, China would be better off liberalizing household and other service sectors.

In the second part I offer some suggestions on how to do this. My main idea is that China should make use of its well-developed planning institutions to drive liberalization. In simple terms, I propose that the Chinese government set quantitative targets for the market share of private companies in various sectors. This would make clear what the end goal of liberalization is, and impose accountability on officials for achieving that end goal–but it would also allow for flexibility in how the goal is reached. There is some precedent for this approach: in the twelfth five-year plan for the healthcare sector, the government set a target that private hospitals should account for 20% of hospital beds and service volume by 2015, and their market share did rise. Similar targets could work in other sectors. It’s worth a try, I think.

My thanks to Evan Feigenbaum and particularly Song Houze of the Paulson Institute for their help and comments on this paper, and I am also very pleased that the Institute’s resources allow the paper to be translated into Chinese.

Paulson-Services-Cover

by Andrew

Of ice cream and industrial restructuring

The home of “Iron Man” Wang, the original Chinese hero of heavy industry, is, it turns out, also in the ice cream business. Rooting around in a freezer on a recent, very hot summer weekend, I came up with a bar of ice cream bearing the “Daqing” brand. This surprised me since Daqing is better known as the site of China’s largest oil field, and the inspiration for innumerable 1960s propaganda posters about the exploits of its model workers, particularly the aforementioned Wang Jinxi. But here was its name proudly displayed on the wrapper of what turned out to be a pretty tasty ice cream bar:

DaqingIceCream

The ice cream bar was indeed actually made in Daqing, but rather than disguise the fact that they’re making food near a lot of toxic chemicals, the manufacturers are going all out to highlight their roots. Why? I can at least speculate. Daqing itself is indelibly associated with the Cultural Revolution, when Mao held it up as the national example of how revolutionary fervor could work economic miracles. While personally I find Cultural Revolution nostalgia creepy, it’s still a real phenomenon: some people imagine the 1960s as a less materialist, less complex, more virtuous time. The logo with its echo of socialist-realist woodcuts, the plain one-color wrapper, the proud “product of the Northeast” declaration–all these combine to evoke simpler times and convey a kind of straightforward authenticity.

Some people like to say that the Northeast was the first to adopt the planned economy and the last to abandon it, and that economic legacy is not usually thought to be a positive one. But it is still part of the region’s distinctive identity, so you might as well use it to sell stuff (the maker of the Daqing ice cream bars also sells ice cream under other brands without the socialist trappings). Of course there is something odd about using nostalgia for the high-Maoist era to sell mass-market consumer goods today, since the 1950s and 1960s in China were definitely not a time of consumer abundance. Ice cream was such an exotic luxury that it might be sampled only once a year–a far cry from the ubiquitous and cheap delights of today.

Is making ice cream in Daqing a sign of something else–perhaps the long-awaited emergence of a “consumer-driven” Chinese economy? It is true that Heilongjiang province, where Daqing is located, and the other northeastern provinces are under lots of pressure to diversify away from dying industries. The latest in a series of government plans to “revitalize” the northeast declares, correctly, that the region’s industrial structure is tilted toward traditional heavy industry and state-owned enterprises. Vice-minister of industry Feng Fei, returning from a recent inspection tour of the northeast, noted approvingly that some local governments were “promoting investment in sectors like car parts and food processing, fostering new economic growth drivers.” Ice cream has been made in Daqing since at least 2002 (when Baixing, the maker of the Daqing bars, was founded), but perhaps it is one of the industries of the future.

Yet there is a long way to go to shift the northeast’s industrial structure–you need to sell a lot of ice cream to match the economic impact of a giant oil field. Around two-thirds of Daqing’s GDP comes from oil and petrochemicals; food processing contributes just 2.5% (still higher than I would have guessed). And the city of Daqing itself accounts for a quarter of Heilongjiang’s GDP, which means that the Daqing oil industry alone generates about 18% of Heilongjiang’s GDP (on 2014 statistics). That’s huge, making it easier to understand why nominal GDP growth collapsed along with oil prices last year.

And in case it’s not obvious–yes, this whole post was basically just an excuse to write something else about Chinese ice cream.

by Andrew

What I’ve been listening to lately

A bit more on the mainstream tip of late:

  • Dexter Gordon – A Swingin’ Affair. An entry in his classic run of mid-60s Blue Note albums, but one which had previously escaped my notice. As usual with Dex, the ballads are a highlight. But like his other recordings from this period (such as Our Man In Paris), it is just a sterling example of this style of jazz, difficult to better.
  • David Murray & Mal Waldron – Silence. Waldron is one of the great masters of the jazz duo (his series of recordings with Steve Lacy are high on my all-time favorite list), and this rather unusual pairing does not disappoint. Waldron the original minimalist keeps Murray the great maximalist on his toes and in top form.
  • Sonny Stitt – Tune-Up! My brother gave this to me years ago, saying a friend of his recommended it as a quintessential jazz recording. I didn’t really get it at first, not being that into straight-ahead jazz at the time, but it has only grown on me over time. Stitt is powerful, inventive and exciting throughout, demonstrating just how much life remained in the bebop idiom in 1972.
  • Magic Sam – West Side Soul. Like many influential recordings, much better than most of what it influenced. Electric Chicago blues is one of the more over-played styles of music, but there’s a reason for that. It’s a treat to hear his original version of “Sweet Home Chicago,” even if some of the impact is inevitably lessened by having heard so many bar bands play it before.
  • Grant Green – The Complete Quartets with Sonny Clark. Lots of good stuff here, but the version of “It Ain’t Necessarily So” stands out and is one of my favorite jazz guitar tracks; the backbeat from Art Blakey drives Green to an almost unbearable intensity.
by Andrew

Deng Xiaoping was an outstanding Chinese nationalist

That is an interesting and important statement from Peking University’s Niu Jun, from a roundtable commenting on the recent Pantsov and Levine biography of Deng (for what it’s worth, I agree with the consensus of the reviewers that the bio is vividly written and has interesting insights, but is marred by mean-spirited editorializing). Deng has variously been portrayed as a reformer, a revolutionary, and a dictator, but rarely first and foremost as a nationalist. Niu argues that this was one of the important things distinguishing him from other leaders of his generation, particularly Mao:

I think that Deng Xiaoping: A Revolutionary Life pays insufficient attention to another prominent facet of Deng’s identity. Vogel’s book does likewise. If one is assessing Deng’s life, one should state that he was an outstanding Chinese nationalist. There were not many such among his generation of Chinese communist comrades-in-arms. This year, “The Nine-Day Whirlwind” [aka Mr. Deng Went to Washington], a documentary film screened in China, included an interview with former U.S. National Security Adviser [Zbigniew] Brzezinski. Facing the camera, he recalled one of Deng’s talks during his January 1979 visit to the United States. Deng remembered his sojourn in France as a young man on the ‘Diligent Work Frugal Study’ program. Deng said that when he arrived in Paris, what impressed him most deeply was how backward China was in comparison. So he resolved to save his motherland and help it become a powerful country. This was the key to his becoming a Communist, because he saw this as the only way forward. …

Deng’s nationalism was manifest above all in his dealing with Sino-Soviet relations. … Deng’s method of dealing with the normalization of Sino-Soviet relations after Mao demonstrates, on the one hand, that in the Sino-Soviet theoretical debates, he was a firm supporter and executor of Mao’s policies. On the other hand, he also had important differences with Mao. In comparison with him, Deng was more of a nationalist. Put simply, Mao’s opposition to Soviet ‘revisionism’ was rooted in a more utopian way of thinking. He thought that Khrushchev’s reforms were to take the capitalist road. Of course, Mao loathed so-called Soviet chauvinism that was displayed toward the “fraternal countries,” but replacing the Soviet Union as the leader of the international Communist movement and continuing to promote the world revolution were obviously more important to him. Deng’s subsequent words and actions show that he was more inclined to oppose the Soviets for having humiliated China and for posing a threat to China’s security. His ‘anti-revisionism’ was more a matter of following and implementing Mao’s thought while his ‘anti-Sovietism’ accorded more with his own nationalist inclinations and was a distinctive feature of his foreign policy once he was in power.

In his talks with Soviet President Mikhail Gorbachev in May 1989, Deng stated that both sides were at fault with regard to the theoretical dispute, but more important was that the Soviet Union had not accorded China equal treatment. This had been a problem through several periods from Tsarist times to the Soviet era. Deng stated that the humiliation inflicted on China from Russia and the Soviet Union was almost as serious as Japan’s aggression from the same era and was extremely detestable. This talk marked the normalization of relations between the two countries thirty years after they had fallen out with each other. Deng’s lengthy speech was the result of very long deliberation on his part. For Deng the theoretical dispute was not significant; it was the Soviet attitude and the harm and threat it posed to China that were the real sources of the deterioration of relations between the two countries.

Deng and Khrushchev in 1960

Deng and Khrushchev in 1960

Deng’s much-praised pragmatism was rooted in his nationalism: whatever made China stronger was good. In 1980, Deng’s nationalism meant recognizing that China was weak and underdeveloped, and doing what was necessary to strengthen its global position and drive economic growth, including borrowing ideas and capital from Japan. By 1990, nationalism increasingly meant taking pride in China’s accomplishments and standing up to real or perceived slights. Vogel’s biography of Deng recounts how an anti-foreign, and specifically anti-Japanese, tone was adopted in government propaganda to shore up its popular support after the chaos of 1989:

After 1989, when Western countries were imposing sanctions, there was a widespread patriotic reaction against foreign sanctions. To many Westerners, sanctions on China were a way of attacking Chinese leaders who used force on June 4, but to Chinese people the sanctions hurt all Chinese. Patriotic “education” linked nationalism to the Communist Party, as the Communists in World War II appealed to patriotism and nationalism to rally support against the Japanese. Conversely, criticism of the Communist Party was ipso facto unpatriotic. … Within weeks after the Tiananmen tragedy, Deng began emphasizing his patriotic message. The Propaganda Department skillfully publicized anti-Chinese statements by foreigners that caused many Chinese, even students who advocated democracy, to feel outraged.

There’s little question that nationalism has become the dominant political theme in China since Xi Jinping took over the top positions in 2012. While a lot of commentary has emphasized how Xi is breaking with recent precedents, the continuities with previous leaders, particularly Deng, are still quite strong. Xi’s nationalism may be another, underappreciated way in which he is building on Deng’s legacy.

by Andrew

Inertia is not helping China’s inland provinces

There is an interesting new Federal Reserve paper by Ryan Monarch that looks at some very detailed data on the relationships between US companies and their Chinese suppliers. The main finding is what he calls the inertia in these relationships: US importers tend to be reluctant to change Chinese suppliers, even to get a lower price. And when they do change suppliers, they often go to one that is located not very far from the old one. Here’s the key graphic and the author’s summary:

monarch-importers-fig1

Two facts are clear from Figure 1. First, there is a significant share of U.S. importers who maintain the same supplier over time. Even though the number of potential exporting choices is increasing over this time period, the share of importers using the same supplier year-to-year is 45.9%. As a benchmark, given that there are an average of 30 Chinese exporters to the U.S. per HS10 product in the data, if importers were choosing their partners randomly each year, the probability of staying would be 1/30, or 3%. Thus path dependence is far higher than would be expected if importers were choosing their supplier randomly. Secondly, among those firms who do choose to switch, approximately one-third of all importers remain in the same city as their original supplier. Using a similar benchmark as above, random exporter selection would imply a 12-13% chance of staying in the same city. Thus there is strong inertia keeping firms in their original city, even if they choose not to use the same supplier as before.

Much of the rest of the paper is about how making it easier for US companies to find trusted new suppliers could lower import prices. I’m more interested in a different angle: what this importer inertia means for the Chinese suppliers and for regional development within China.

Chinese exporters are clustered in the coastal provinces, and for years people have been talking about how rising labor costs in those provinces will push manufacturing inland. The government has embraced this putative trend as a development strategy, building up infrastructure in the inland provinces to lower transport costs and actively encouraging relocation (see for instance this good Reuters piece on the drive to develop textile manufacturing in Xinjiang). Yet despite conventional wisdom and government policy, the inland provinces’ share of Chinese exports is only marginally higher than it was a decade ago.

coast-vs-inland-export-share

Inertia helps explain why: existing trade relationships, concentrated in the coastal provinces, change only slowly, and when they do change the geographic shift is likely to be close. The need to maintain customer relationships is thus likely another reason for why manufacturers in the coastal provinces are not in fact so terribly eager to relocate inland. Here is a good observation from a recent Bloomberg article on Guangdong:

By moving elsewhere in China, factories may be able to trim wage bills or gain access to cheaper land, but they lose the concentration of suppliers, logistics and services that Guangdong has built up over 30 years. Gao Dapeng, CEO of Desay SV Automotive Co., which makes car navigation systems in Huizhou, said the overall cost saving of moving to an inland province like Chongqing is only about 10 percent, and it would mean the plant would be hundreds of miles from its suppliers. He said the company is not sure if the relocation is worth that.

It seems like the network effects and economies of scale and scope that China’s coastal provinces have developed are fairly powerful advantages, against which the cheaper labor and cheaper land in inland provinces are not proving as attractive as expected. Or to put it a different way, the cost of switching suppliers remains high, despite policies aimed at reducing it. The same issue could be affecting the lower-wage Asian economies who have been trying to grab export market share from China–which they have, but not as much as some economists expected, as Mark Magnier reports in the WSJ.

by Andrew

Saving labor isn’t everything: charts on capital in China

The excellent Scholar’s Stage blog reminded me to go through the Asian Productivity Organization’s latest  APO Productivity Databook, a feast of growth accounting data that has been sitting in my to-read pile for a while now. While I also like the consumption chart that Greer chose, my own favorite chart from the report is below; it’s pretty striking.

APO-labor-capital-price

While it’s possible there are some data problems in their estimation (that’s a pretty steep hockey stick), the direction of the trend is quite plausible. There is plenty of anecdotal evidence that the incentive to substitute capital for labor in China has been quite strong recently. And the government is not shy about using subsidies and other industrial policy to push things even further in that direction. Here is a recent piece from the FT:

Across the manufacturing belt that hugs China’s southern coastline, thousands of factories like Chen’s are turning to automation in a government-backed, robot-driven industrial revolution the likes of which the world has never seen. Since 2013, China has bought more industrial robots each year than any other country, including high-tech manufacturing giants such as Germany, Japan and South Korea. By the end of this year, China will overtake Japan to be the world’s biggest operator of industrial robots, according to the International Federation of Robotics (IFR), an industry lobby group. The pace of disruption in China is “unique in the history of robots,” says Gudrun Litzenberger, general secretary of the IFR.

Yet over the exact period during which it became much more compelling for companies to invest in capital rather than labor, overall investment spending in China nonetheless slowed substantially. The chart below is my estimate of real growth in capital formation in the national accounts (a better if less timely indicator than the monthly fixed-asset investment numbers). Gross investment growth was about 5% in 2015, against an average of 15% over the previous decade.

capex-slowdown

What’s going on here? How can investment growth be so weak when the incentive to substitute capital for labor is so strong? As for almost all macro questions about China, housing is a big part of the answer (a theme I have hammered on before; see this rant and this more sober post). Residential construction drove a big chunk of that 15% annual growth in the past, but housing now looks like it has moved off the steep part of the S-curve and on to the flatter part. With residential construction stalling out, it’s hard for aggregate investment to grow very fast. It will take a while for robots to compensate for that.