by Andrew

A new variation on the hex grid tile map of China

Many things, blogging and otherwise, to catch up on after a good holiday. First off, I’m overdue in acknowledging a nice use of my proposed hex grid tile map of Chinese provinces by Claire Chang Liu, posted in the comments on the original post. The below is an excerpt from her data visualization project on Chinese migration, with the tile map illustrating the percentage change in each province’s floating population between 2000 and 2010.

Claire-hex-grid

Claire also moves Xinjiang, Qinghai and Tibet down one row compared with my original proposal. Personally I have to say I still like having Xinjiang stick up a bit, it helps maintain the classic chicken-shaped outline of China. But mainly I’m glad the hex tile map is getting a bit of use.

hex-map-simple

by Andrew

Benedict Anderson on the classical heritage and nationalism in Europe vs Asia

I enjoyed reading Benedict Anderson’s short memoir A Life Beyond Boundaries. I did a lot of Southeast Asia at university and so read many things by Anderson and his colleagues at Cornell, so it was a treat to learn some of the history and personalities behind those classic works. It’s mostly an academic rather than personal memoir, but the theme of learning different languages and understanding different cultures runs throughout, starting from his classical British public-school education.

In the conclusion Anderson uses an elder scholar’s privilege to speculate about grand historical themes, and suggests some ways in which Europe’s classical heritage differs dramatically from the cultures he has studied in Asia. He thinks that these differences make Europe somewhat less susceptible to narrow nationalism than Asia–which may not be what recent news headlines from Europe immediately bring to mind, but is still an interesting idea. Here’s the passage:

The Roman Empire was the only state ever to rule a large part of today’s Europe for a long period – even if this era is extremely remote in time. But it was not a ‘European’ state, since it controlled the entire Mediterranean littoral, a large part of today’s Egypt and Sudan, and much of the Middle East, and it did not rule Ireland, Scandinavia or much of northeastern Europe. Furthermore, over time, it drew its emperors from many parts of the Mediterranean world. No European state or nation has had any chance of claiming exclusive inheritance from this extraordinary polity, nor has any of Christianity’s multiple sects. The Empire is not available for nationalist appropriation, not even by Italy. Here there is a huge contrast with China and Japan, and probably also India, where antiquity is easily nationalized. …

Even better, a substantial part of the extraordinary philosophical and literary production of Graeco-Roman Antiquity survived into early modern times, thanks to monkish copyists in the West, but also to Greek-speaking Christian Arab scribes under the rule of Byzantium. As time passed, their translations into Arabic allowed Muslim thinkers in the ‘Maghreb’ and Iberia to absorb Aristotelian thought and pass it on to ‘Europe’. This inheritance offered ‘Europe’ intellectual access to worlds (Greek and Roman) which in profound ways were alien to Christian Europe: polytheistic religious beliefs, slavery, philosophical scepticism, sexual moralities contrary to Christian teachings, ideas about the formation of personhood from the bases of law and so on. Direct access to these worlds depended on a mastery of two languages which for different reasons were both difficult and alien. … Better still, [they] gradually became ‘dead’. That is, neither ancient Greek nor ancient Latin belonged to any of the countries in Europe.

For all these reasons (and others I have not mentioned), Graeco-Roman antiquity brought Difference and Strangeness to European intellectual and literary life right through till the middle of the twentieth century. Just as in fieldwork, this awareness of Difference and Strangeness cultivated intellectual curiosity and enabled self-relativization. There were city-states and democracy in ancient Greece. The Roman Empire was much larger than any other state in European history, and as its ruins were spread almost all over Europe, one could recognize its greatness no matter where one might be. The literature, medicine, architecture, mathematics and geography of Graeco-Roman antiquity were clearly more sophisticated than those of medieval Europe. And all of them were products of pre-Christian civilizations, products which had pre-dated the appearance of ‘messianic time’. While China and Japan tried to bar Difference and Strangeness with their ‘closed-door’ policies, Europe came to hold antiquity in high regard and adopted it self-consciously as its intellectual heritage. …

Before the late seventeenth century, when some French intellectuals began to claim the superiority of their civilization, none of the European countries denied that the civilization of antiquity was superior to its own, and they competed against each other to learn more about it in order to be civilized. Whether in wartime or peacetime, no country could boast that it was the centre of civilization, a European version of ‘sinocentrism’ as it were, and throw its head back declaring it was no. 1. Innovation, invention, imitation and borrowing took place incessantly between different countries in the fields of culture (including the knowledge of antiquity), politics, global geography, economics, technology, war strategy and tactics, and so on.

Nothing like this existed in East Asia, nor even South Asia. In East Asia, China and Japan both set up their geographical and cultural boundaries and often attempted to shut out the ‘barbaric’ outside world with drastic closed-door policies. The necessity of competition with other countries over politics, economics, technology and culture was only scarcely felt. Southeast Asia was probably the closest parallel to Europe. It was diverse in terms of culture, language, ethnicity and religion. Its diversity was further magnified by the historical lack of a region-wide empire (which was associated with frequent political turmoil), and later by the colonial rule of various Western powers. It also resembled Europe in its openness to the outside world through trade.

Probably the best single part of the short memoir is the chapter on comparison and translation; you can read much of that in a long excerpt over at the London Review of Books.

by Andrew

The salt monopoly and the purpose of state-owned enterprises

For those interested in the intersection of obscure Chinese industries, regulatory politics and ancient history (you know who you are), the top story of the week is without question the long-awaited announcement of some reforms to liberalize China’s salt monopoly (here’s a news story and the original Chinese document).

China’s salt monopoly is one of the best examples of a more general principle: state-owned enterprises are often used as a substitute for regulation. Where institutions are weak and compliance difficult to enforce, as they are in most developing countries, state-owned enterprises can be a reasonably effective way to accomplish policy goals. Rather than create a whole complex of rules and try to convince people to follow them, the government can just tell an SOE what to do. The policy goal the salt monopoly accomplished for China was ensuring that salt was iodized, an important public health measure. Although news stories love to emphasize the salt monopoly’s ancient roots, in fact its latest iteration is only a couple of decades old, and was the result of a conscious decision to revive the monopoly to achieve this specific goal.

china-national-salt

My favorite account of this history is a classic WSJ piece by Leslie Chang from June 2001. I’m quoting from the piece at length because I cannot find it on the WSJ website, probably because it is so old. As she makes clear, the monopoly was able to achieve the public health goal, though this did not come without costs and distortions. And making the transition away from the SOE model to a more sustainable system is quite tricky, as the long debate over reforming the salt industry shows.

LIZI, China — Pei Nuwa touches her neck where she has a swelling the size of a small melon. She remembers a time when almost every extended family in this farming village had someone with a goiter like hers.

“The ones who had it have all died, and now the young people and the children don’t have this,” says Ms. Pei, a 67-year-old who has tiny eyes and skin wrinkled like parchment.

Ms. Pei doesn’t know why goiters became rare, but the answer is sitting in a clear plastic bag on a grimy counter in her single-room house. It is iodized salt. Minute amounts of iodine consumed regularly — the equivalent of just a teaspoonful over a lifetime — can prevent goiter and other thyroid-related disorders.

How this bag of salt arrived in this farming hamlet in the northwestern province of Gansu represents a triumph of public health. Five years ago [i.e., 1996], only a third of the Chinese population, then 1.2 billion, consumed iodized salt. The lack of iodine in the diet caused a range of health problems, from goiters to the severe mental retardation known as cretinism to lower IQs, among a generation living in rural areas. Today [i.e., 2001], more than 90% of Chinese eat iodized salt.

But this success also underscores the halfway nature of economic reform and decentralization in China. While Beijing has quietly shifted the responsibility and funding for key social services such as education and health care to provincial governments, there are no self-regulating mechanisms or built-in incentives that force officials to carry out their duties. …

To ensure that millions got iodized salt, Beijing officials reinstated a national salt monopoly that had existed in some form for more than 2,000 years, until private operators emerged about a decade ago. The state fixed salt prices to restore the industry to profitability and wrote laws that criminalized the sale of private salt. Hundreds of private salt producers were closed, and the remaining operators were consolidated into giants that formed the monopoly. The state also put together a 400,000-person bureaucracy to run the operation, including a 25,000-strong “Salt Police” with officers in gold-braided uniforms.

The original salt monopoly was set up in 117 B.C. during the Han dynasty. For nearly two millennia, the imperial family controlled the lucrative monopoly, one of the empire’s biggest sources of revenue. Salt financed campaigns of expansion, built the fabulous villas of the merchants of Yangzhou and inspired one of the most famous policy debates of the imperial era. In 81 B.C., supporters of a monopoly in iron and salt argued that it would serve the public good, while opponents said it would stifle individual enterprise.

The monopoly’s current revival stemmed from public-health concerns. By the 1980s, Chinese officials had made headway in fighting iodine deficiency by providing iodine injections in villages with a high incidence of goiter. But the same years brought economic liberalization and an explosion of private enterprise, including manufacturers flooding the market with usually cheaper noniodized salt. By the early 1990s, this unregulated salt trade, combined with little official oversight, was erasing the public-health gains of the command-economy days. In Gansu, consumption of iodized salt dropped to just over 60% in 1991 from 90% two years earlier. …

The network of control and the costs have a downside: They heighten the appeal of smuggling illegally produced salt, which can be sold more cheaply and without paying taxes. In a case two years ago, a group of salt smugglers from neighboring Ningxia beat up five salt policemen who caught them trying to ship three tons of rock salt into the province. The ringleader is still at large. Another case involved a high-speed car chase, the confiscation of six tons of unlicensed salt, fines and jail time for the perpetrators. In faraway Hebei, several officials were recently brought in for round-the-clock questioning in connection with widespread sales of private salt. …

Health experts say that system’s functioning depends on whether official attention — and the monopoly — can be sustained. Some are troubled by recent state media reports linking monopoly-affiliated companies with smuggling, which could feed arguments that the monopoly should be dismantled. Its supporters say the market should be opened to competition, but only after good production methods and habits are ingrained. “China needs to maintain this monopoly for at least 10 more years,” says Ray Yip, a Unicef adviser in Beijing. “After that, it will be safe.”

A bit more than 10 years, it turns out. This seems like good news at the margin, though it certainly does not look like China is now ready to let a regulatory apparatus replace the policy functions of its SOEs across the rest of the economy. In many strategic areas, like energy and telecommunications, regulation-by-SOE seems to be as strong as ever.

by Andrew

The next book I want to read about the Chinese internet

Like most people I’ve talked to, I enjoyed reading Duncan Clark’s Alibaba: The House That Jack Ma Built. The book starts off with a bit too much entrepreneur hero worship, but quickly finds its rhythm and ends up being a very engaging tale of the Chinese internet’s early days. I lived through some of the events Duncan relates (as a technology reporter for Dow Jones in 2001-2003), and enjoyed being reminded of some now-forgotten figures of those bubbly times. The book is easy to recommend for those who don’t know the story of Alibaba’s rise (i.e. most people outside China), and for getting a sense of the wacky world of the Chinese internet.

Still, most of the action of the book takes place before 2012, and I think another book will be needed to properly tell the story of the more recent development of the Chinese internet. Alibaba’s story has gotten more complicated since 2012, and it is becoming less easy to fit into easily digestible archetypes about heroic entrepreneurs. Duncan acknowledges this in his closing paragraphs:

Jack’s fame stems from the story of how a Chinese company somehow got the better of Silicon Valley, an East beats West tale worthy of a Jin Yong novel. His continued success, though, is becoming a story of South versus North— of a company with roots in the entrepreneurial heartland of southern China testing the limits imposed by the country’s political masters in Beijing.

Since Xi Jinping became president of China in 2012, high-profile entrepreneurs have found themselves increasingly subject to scrutiny and sanction from the Chinese government. One high-profile real estate entrepreneur, Vantone Holdings’s Feng Lun, even blogged— then later deleted— the following message: “A private tycoon once said, ‘In the eyes of a government official, we are nothing but cockroaches. If he wants to kill you, he kills you. If he wants to let you live, he lets you live.’” …

Jack is already the standard-bearer for China’s consumer and entrepreneurial revolution. Now he is advancing on new fronts, such as finance and the media, that have long been dominated by the state.

Forged in the entrepreneurial crucible of Zhejiang and fueled by his faith in the transformative power of the Internet, Jack is the ultimate pragmatist. By demonstrating the power of technology to assist a government confronted with the rising expectations of its people for a better life— from the environment, education, and health care to continued access to economic opportunity— Jack aims to create the space for him to fulfill even greater ambitions.

So what should the next book about the Chinese internet cover? In part it must necessarily be less about the startup phase and more about strategic positioning of the three giants of the Chinese internet–Baidu, Alibaba, Tencent–in the same way that writing about the English-language internet has to be about the strategic positioning of Google, Amazon, Apple, Facebook, etc (out of the Chinese trio, Alibaba has the more charismatic leader, but Tencent is just as interesting a company, and deserves a book of its own).

And in part it has to tell the story of the complicated relationship between the government and the internet companies, which, it seems safe to say, is not like what we see anywhere else. Alibaba’s Alipay online payment service (run by a separate company called Ant Financial) is on its way to becoming a de-facto state-owned enterprise, as major state institutions have put lots of money in its last two rounds of venture capital fundraising. Part of Alibaba is in turn investing in state-owned enterprises as it tries to show how its technology can be of service to the state. Jack Ma and the heads of the other are now regularly called to appear at government meetings on internet policy, which tend to emphasize security issues and state control. The story behind all these events will certainly not be easy to dig out, since no one involved has much incentive to be forthcoming. But that’s the story that needs to be told.

by Andrew

What I’ve been listening to lately, International Jazz Day edition

I’m pleased that there is such a thing as International Jazz Day, though I’m not sure exactly how to observe it, other than by putting on some jazz, which I would probably do anyway. On to the tunes:

  • Duke Ellington – The Complete 1936-1940 Variety, Vocalion And Okeh Small Group Sessions. A massive Mosaic box set that I eyed for years before I finally picked it up, just before it went out of print. This is flat-out some of the most wonderful jazz ever recorded, at least for my taste. These small-group sessions have the unmistakable Ellington flair for arrangement and color, but often feel looser and more laid-back than the full orchestra. The first-ever recording of “Caravan” is here, but a few “hits” do not really cover the impact of the whole thing. Truly a near-endless supply of casually tossed-off genius, charming and delightful.
  • Paul Motian – Garden of Eden. The obituaries for Motian, who passed in 2011, invariably start with his role as the drummer in Bill Evans’ classic piano trio. But I think he was one of the great bandleaders of recent decades, and this 2004 recording is one of his peaks: a gorgeous wash of sound, featuring no fewer than three guitarists, along with two saxophonists. The two Mingus covers (strangely rare for some reason) are particularly great.
  • Chris Lightcap’s Bigmouth – Epicenter. This group’s 2010 recording Deluxe was one of my favorite jazz albums of recent years, thanks to its combination of smart compositions and groove. The 2015 follow-up is just as good and even more varied. Craig Taborn mostly plays electric piano, giving the group a nicely spacy backdrop to the interplay between tenor saxophonists Tony Malaby and Chris Cheek (in what is probably not a coincidence, the same saxophonists as on Garden of Eden). But the writing by bassist-leader Lightcap is what really sets it apart, with some West African riffs and even an arrangement of a Velvet Underground tune.
  • Hamiett Bluiett – The Calling. Perhaps one of the most diverse jazz recordings I’ve ever heard, despite a seemingly minimal lineup of Bluiett on winds, D.D. Jackson on keyboards, and Kahil El’Zabar on percussion. The three old masters change instruments and styles on virtually every track to create a mosaic portrait of modern jazz in all its variety, with plenty of rhythm and humor.
  • Curtis Fuller – Blues-ette. A near-perfect masterpiece of hard bop from 1959, featuring the great tenor saxophonist Benny Golson along with trombonist Fuller. Nearly as good is Imagination, recorded the same year and adding Thad Jones’ trumpet to the front line.
by Andrew

Why is China not a “transition economy”?

When I first started working on the Chinese economy, most of the research I read compared China to other Asian economies, particularly the “miracle” economies of Japan, South Korea and Taiwan. Grouping these economies together, despite their differences, is fairly easily justified by their exceptionally high growth performance over a long period of time.

But if we think back to the late 1970s and early 1980s, before China had that growth track record, it was not at all obvious that it belonged in the club. South Korea, Japan and the US were allied with the US, and China was, despite its feud with the Soviet Union, still very much part of the international socialist community. The term “transition economies” now conventionally refers only to Eastern Europe and former Soviet Union, and so leaves out by the far biggest example of an economy in transition away from central planning. So how exactly did China end up in the Asian growth miracle club, rather than the transition economy club? Some recent reading has helped me to understand this history better.

Yu Guangyuan

Yu Guangyuan

The examples of other socialist countries were in fact of great interest in China for a time. In the early years of the reform era, from roughly 1978 to 1985, there was a strong emphasis on establishing that economic reforms were ideologically consistent with socialism. One of the key figures in this effort was Yu Guangyuan, a Marxist theoretician/economist associated with Deng Xiaoping (he passed away in 2013). Yu presented China as one of several socialist countries in the world, all of whom had borrowed the Stalinist system from the USSR, all of whom had encountered problems in applying it to their own conditions, and all of whom were all trying to reform the socialist model. Hungary had had its “Goulash Communism” and Yugoslavia its “workers’ self-management” for years already. This rhetorical strategy emphasized how China was part of the global socialist movement, and how it risked falling behind even smaller socialist countries who were reforming.

Here is Yu on how the example of the Eastern European countries played an important role in early thinking about economic reform, from the preface to a recent anthology of his works:

After World War II, the Communist League of Yugoslavia seized power and proclaimed Yugoslavia a socialist country. Later, the League had differences with Joseph Stalin and was expelled from the socialist camp. Accordingly, the Communist Party of China also refused to recognize Yugoslavia as a socialist country and suspended its relations with the Communist League of Yugoslavia. In the 1950s and 1960s when the Chinese and Soviet parties were engaged in a polemic, we still regarded Yugoslavia as a negative example.

In 1978, a delegation of the Party Central Committee visited Yugoslavia. The delegation was headed by Li Yimang, with me and Qiao Shi being his deputies. Our mission was to conduct field inspections and contacts and then submit a report to the Party Central Committee on the basic conditions of that country and on whether interparty relations should be resumed. Before that, I had contacted some economists from the Soviet Union and Eastern European countries for their views on reform but never conducted any field inspection.

Yugoslavia’s practice left a deep impression on us. From this inspection, we drew a conclusion that socialist countries could have diverse economic models. The delegation submitted a report to the Party Central Committee after the visit. The report held that Stalin tried to impose the Soviet economic system and model on Yugoslavia but Joseph Tito rejected them, which led to a deterioration of the Soviet-Yugolsav relations, and that Yugoslavia was a socialist country and the Communist League of Yugoslavia was a party upholding socialism. Based on this report, the Party Central Committee decided to recognize Yugoslavia as a socialist country and to resume its relations with the Communist League of Yugoslavia. This meant that the Party Central Committee changed its views on the diversity of socialist models…[which] represented an ideological shake-off of the party from the shackles of the Soviet model. …Nevertheless, many people indicated they could not accept the Yugoslav ‘autonomy’ system. In fact, our reform later did not follow that road.

…At the end of 1979, the Party Central Committee dispatched me to head a delegation to visit Hungary for a reform inspection. This inspection deepened our understanding that socialism could have diverse models, and enabled us to have more understanding of many concrete issues in the course of reform.

Yu also sponsored much of the early wave of research into the ideas of Mikhail Bukharin, the theorist behind the mixed-economy model adopted in Russia in the 1920s under the label of the “New Economic Policy” (see this previous post for more). But it is nonetheless the case that once the reform drive got beyond broad political conceptions and into practicalities, China took relatively little from the examples of Hungary, Yugoslavia, Poland and the USSR itself. Rather than restricting itself to models drawn from the international socialist brotherhood, China started looking to countries that were politically more distant but geographically closer.

One of the turning points in this shift is generally held to be the Moganshan conference of August 1982, organized with assistance from the World Bank. Edwin Lim, an early World Bank official in China, recalled the result in a 2005 account (source here):

Other than Adrian Wood and myself, all the other international participants were East European practitioners in Soviet-type reforms, particularly price reforms. Two major conclusions came out of this conference. First was that price reforms of the type attempted in the Soviet Union and Eastern Europe—more price adjustments than fundamental reforms of price-setting mechanisms—were not seen as true reforms. China thus began to look beyond the Soviet Union and Eastern Europe for its reform strategy. By the end of the decade, China was far ahead of the Soviet Union in moving toward a market economy. Second was the consensus among both international and Chinese participants that China simply did not have the margin of error to consider rapid reforms or shock therapy.

Another famous meeting of economists in 1985 helped cement the shift. Again from Lim:

Three years later, following the publication of the second Bank economic report, the question the reformists faced was how to manage a market economy and, particularly, the transition to it from a command economy. To address that question, we organized what has become known in China as the Bashan Boat Conference. The premier attached a great deal of importance to this conference and wanted many of the senior economic policymakers to participate. To ensure their complete attention, the conference was held on a boat (the Bashan) that floated slowly down the Yangtze River through the Three Gorges for seven days. Spouses of the international participants were invited, and each day the boat would dock to allow them to go sightseeing while the conference continued.

The foreign participants to this conference, in addition to Adrian Wood and myself, included Jim Tobin, the Nobel Laureate from Yale, who explained the basic principles of macro-management in a market economy; Sir Alec Cairncross of Oxford, who talked about management of a market economy, particularly the postwar experience of the United Kingdom in dismantling the wartime price control and rationing systems; Otmar Eminger, former president of the Bundesbank, who talked about the role of an independent central bank in macro-management as well as the German experience in dismantling the wartime control economy; Michel Albert, former head of the French planning commission, who talked about indicative planning in a market economy; and Janos Kornai of Hungary, who talked about behavior of a planned economy that may persist in a reformed scenario.

The decisive intervention may have been that of Janos Kornai, judging from how Ezra Vogel summarizes the result:

By the end of the conference, Chinese participants, already doubtful about the appropriateness of Eastern European models for China, were thoroughly convinced that the structural problems in socialist economies—such as the “soft budget constraints” that permitted firms to survive even with low performance and cycles of overproduction—were systemic problems in planning systems. This marked the end of the use of Eastern European reform models and greater acceptance of the role of markets.

If the fellow travelers in Eastern Europe did not have the answers, who did? There were some strong contenders not far away. Here is Vogel again (both quotes are from his Deng Xiaoping and the Transformation of China):

In the early 1980s, while Chinese leaders were exploring the experiences of Eastern Europe and making use of World Bank advisers, they were also studying Japanese experiences. Although Japan was a member of World Bank, Japanese efforts to work with China were generally done bilaterally and were conducted on a larger scale than China’s relations with any other country. Although China was also interested in the Taiwan and South Korea experiences in modernization, mainland China did not have direct relations with them until the late 1980s so their experiences in the early 1980s did not play a major role in shaping Chinese views. …

In the 1980s, Japanese gave more aid and built more industrial plants in China than did citizens from any other country. The Japanese factories built in China set standards by which China measured its progress in achieving efficient industrial production. For the study of modern science, the Chinese looked overwhelmingly to the United States. But more new machinery to build assembly lines in Chinese factories came from Japan than from anywhere else. Prime Minister Ikeda’s income-doubling plan for the 1960s became the inspiration for Deng’s goal of quadrupling the gross value of industrial and agricultural output in the 1980s and 1990s. And from 1974 on, Deng met more delegations from Japan than from any other nation.

By 1985, the idea that China would join the ranks of fast-growing East Asian countries was no longer ludicrous, though not exactly widely accepted. The Harvard economist Dwight Perkins was one of the first to posit that China would follow the high-growth East Asian path and not the less exciting example of the European transition economies. The following passage is from his 1986 book China: Asia’s Next Economic Giant? (note the question mark! a sign of the times):

Reform in the Chinese case means moving closer to at least certain key features of the economic strategy and economic system found elsewhere in East Asia. In concrete terms that means retaining an emphasis on an expanding role for foreign trade, household-based agriculture operating in response to market forces, and a substantially enhanced role for the market in industry subject to continued state guidance but not direct control. … Hungary and Yugoslavia, for example, have achieved reforms in their economic systems that go well beyond those currently in force in China in many respects, but no one contemplates 6 to 8 percent growth rates in GNP in those countries over the next decade or two. … Japan, South Korea, Taiwan and other others have demonstrated that GNP growth rates of 8 percent a year and even higher are feasible in the post-World War II era. In terms of per capita income, level of capital formation, and degree of income inequality China has characteristics similar to those of its East Asian neighbors when they entered into sustained periods of rapid growth.

Ultimately, the reason why China favored Asian over East European models was most likely that those models were more relevant to its conditions on the ground. Despite the political affinity with other socialist states in Europe, China’s economic structure at the start of the reform era was quite different, and more similar to the other Asian economies at the beginning of their growth take-off processes. The classic statement of this argument is a 1994 article by Jeffrey Sachs and Wing Thye Woo, “Structural Factors in the Economic Reforms of China, Eastern Europe, and the Former Soviet Union,” (JSTOR link):

China began reform as a peasant agricultural society, EEFSU as urban and overindustrialized. China faced the classic problem of normal economic development, the transfer of workers from low-productivity agriculture to higher-productivity industry. In EEFSU, the problem is structural adjustment: cutting employment in inefficient and subsidized industry to allow new jobs in efficient industry and services. …Crucially, China’s agricultural workers had nothing to lose, indeed much to gain, from the dismantling of socialism, while much of the industrial and even agricultural work force in EEFSU has plausible fears that dismantling the old system could leave them worse off, at least in the short run.

These days, the differences between China and the other Asian “miracle” growth stories are becoming more apparent–the most important being the continued large role of state-owned enterprises in its economy (the best summary of those similarities and differences is the last chapter of Joe Studwell’s How Asia Works). I wonder if, in this context, comparisons of China to the European “transition economies” will soon start to seem more relevant.

by Andrew

A Singaporean perspective on American and Chinese nationalism

I enjoyed this talk from long-time Singaporean diplomat Bilahari Kausikan for its relatively objective view of the peculiarities of both the US and China, and how it roots the difficulties the two countries have in their respective sense of identity. I’ve pulled out some of the key passages below:

The essential source of American and Chinese nationalism is a sense of exceptionalism; the US and China both consider themselves exceptional countries. But the conclusions they draw are different.

America is an inclusive culture that wants everyone to become like it and believes that the world would be a better place if this were so. … China’s rise has been psychologically unsettling to many in the West because in China, capitalism flourishes without democracy. This is regarded as unnatural and illegitimate because it punctures the western myth of the universality of its political values and of the inevitability of the development of political forms similar to its own. Unlike the former Soviet Union, China cannot be dismissed as an economic failure and thus challenges in a very fundamental way the western sense of self which assumes its political and moral superiority as a key element. …

I think the US knows that preservation of CCP rule is the most vital of Chinese core interests and is reluctant to endorse this explicitly. The US deals with the CCP pragmatically; it has no choice. But to invest CCP rule with legitimacy requires a redefinition of American values, including a de facto abandonment of the idea of universality that is apparently too painful to bear. …

China has an exclusive culture that rejects the notion that anyone could become like China as impossibly pretentious. To China, the best others can do is humbly acknowledge China’s superiority and the sooner we do so the better for everyone.

This is a very ancient and deeply ingrained feature of China’s approach to international relations. Throughout its history, China took great pains to preserve the forms of its centrality, at least in its own mind, even when the facts were otherwise. It never lost its sense of superiority even when powerless before the West and Japan. Now that China has re-emerged as a major power, this sense of superiority has become the underlying cause of the difficulties in China’s relations with many countries. The attitude that China is entitled to have its superiority acknowledged and that failure to do so can only be due to recalcitrance or ill-intention, is why I think China will always suffer a deficit in ‘soft power’ and evoke resentment. …

One of the basic functions of diplomacy is to see the world through your competitors’ eyes in order to understand the frame of reference he is operating within, and thereafter one of the basic purposes of statecraft to use what means are available and appropriate to manoeuvre him into your preferred frame of reference or if this is not possible, to operate within the same frame in order to achieve your purposes. A stable modus vivendi can only be reached if all parties are operating within the same frame of reference. Are the US and China operating within the same frame of reference? I think they do substantially but not entirely and therefrom arises the complexity and risks of the relationship. Can they be brought within a common framework? That is not yet clear. …

If a new modus vivendi requires the US to acknowledge that different political systems can have their own legitimacy, it requires China to resist the temptations of triumphalist nationalism.

There’s a lot more, but I had to condense more than usual to keep this post from getting too long; a transcript and video of the full talk is at the link.

bilahari-kausikan

by Andrew

Is steel excess capacity a symptom of China’s system, or of its size?

The wave of Chinese steel exports hitting world markets is one of the most visible ways in which the country’s domestic slowdown is affecting the rest of us. All too visible, as it is leading to the shutdown of steel plants across Europe and prompting many countries to push for anti-dumping tariffs on Chinese steel.

How should we understand this phenomenon? The usual tendency, among both Chinese and foreign observers, is to attribute Chinese problems to distinctively Chinese causes. China is always different, it stands alone culturally, politically, economically. So the tendency is to take China’s excess capacity in steel as a sign of something peculiar to its system.

This may not always be the right way to look at the question. Indeed there is a more parsimonious explanation for the excess capacity that gets less discussion. What if the main reason that the world cannot digest China’s steel exports is not that its steel industry is peculiarly distorted, but that China is peculiarly large? I have previously suggested that the effects of China’s enormous size are not well understood, and I think this may be one area where size is indeed a very important factor (I am not denying that the excesses of state-led investment are part of the story; my point is that it’s not all of the story).

A comparison with Japan I think makes this easier to see. The primary use of steel, as discussed previously, is as a construction material, so rapid increases in steel use are usually a result of urbanization. Japan’s domestic steel output and steel consumption surged throughout the 1960s, but its domestic steel consumption peaked in 1973 (it later hit a new high in the late 1990s, but let’s ignore that for now). Other indicators of construction activity also peaked around the same time, so that was apparently a turning point for Japan’s urbanization process. While domestic steel consumption continued at a decent level, it retreated from the peak and stopped growing. However the capacity that the steel industry had built up to serve domestic demand was still there. So Japan naturally started exporting more steel. In the early 1970s, Japan’s steel exports accounted for 20% or more of all global steel exports.

The trajectory of China’s steel exports is eerily similar. China’s domestic steel consumption appears to have peaked in 2013, and since then its steel exports have surged, hitting 112 million tons in 2015. China’s share of global steel exports also is now probably around 20%, matching Japan’s in the early 1970s. The chart below shows the parallel. Japan could not sustain a global steel export market share of over 20% for long, and given the political backlash that China is now experiencing, it will probably encounter a similar ceiling in market share.

Japan-China-steel-export-market-share

In relative terms Japan and China do look quite similar. China’s peak level of true domestic steel use in per capita terms was close to, but below, Japan’s, meaning it is actually a somewhat more efficient user of steel–as one would expect given three more decades of technological improvement. In absolute terms of course they are quite different: Japan had about 100 million people in the 1970s and China has 1.4 billion now. Japan’s crude steel production in the late 1970s was just over 100 million tons a year, but China’s is now over 800 million tons a year. China’s steel exports last year are larger than Japan’s annual steel output in the early 1970s.

That size is now a problem for China, because a 20% global market share in steel exports is, well, just not enough in domestic terms. China is now exporting close to 15% of its domestic steel output, the most it ever has. But in the early 1970s, Japan was exporting close to 30% of its domestic steel output. And once you factor in indirect steel exports–the steel contained in products like cars and ships–Japan was actually exporting 40-50% of its domestic steel output.

Japan-China-steel-export-output-share

Japan built up a steel industry to serve domestic urbanization, but then was able to successfully transition the industry to exports. China cannot plausibly transition its steel industry to exports. Why? Because China is too big (or, depending on your point of view, the world is not growing fast enough; if India’s steel demand was now beginning a Chinese-style urbanization boom, this whole discussion could be moot). If China was a small Communist country, it could just export enough steel to keep its domestic industry afloat, and no one would complain that much. Because it is a large Communist country, it can’t export enough steel to keep its domestic industry afloat. And therefore there is a lot of excess capacity. But most people tend to focus on the fact that it is a Communist country, not on the fact that it is a large country.

What’s the implication of all this? Well, as the Chinese industry official I quoted recently said, China probably cannot avoid reducing its steel output in coming years–unless it rather quickly becomes a much, much bigger exporter of cars and other steel-using goods.

 

Note on sources. Thanks to Wing Thye Woo of UC Davis for asking the question that prompted this little investigation. The historical data are from the yearbooks of the World Steel Association, a wonderful resource. Since the older historical data is somewhat patchy, I had to convert between different concepts (steel production and apparent steel use) and statistical bases (crude steel equivalent and finished steel equivalent) to get these longer time series, so the figures in the charts should be taken as approximations rather than precise records. Also though I had data for China’s steel exports for 2015, I did not have the world total, so the figure in the chart is a guesstimate.

by Andrew

Where is Chen Yun when we need him?

I’ve been dipping in and out of Ezra Vogel’s Deng Xiaoping and the Transformation of China, which is less a biography and more an authorized history of elite policymaking. The sections on the early reform era are particularly interesting, not least because they do not sound anything like what is going on in China today. In the very first years after the Third Plenum formalized the turn toward a market economy, there was a constant back-and-forth on the right direction for the economy.

Deng was gung-ho for growth, and viewed aggressive growth targets as a way of breaking free of the oppressive Maoist orthodoxy. But he shared power with Chen Yun, who was widely respected for correctly opposing Mao’s excesses in the Great Leap Forward, and who was consistently a voice for caution and realism. Deng of course ultimately won the argument, and Chen Yun today is often viewed, rather unfairly, as a planned economy stick-in-the-mud. But in fact he played a “necessary but annoying” role, as Vogel puts it, in keeping Deng’s ambitions tied to economic reality.

Reading the passages below, I could not help but wonder: who in China’s leadership is now playing Chen Yun’s role? Of course we know little of what is going on behind the scenes, but there are no obvious candidates. And wouldn’t China be better off if the overriding focus on highly politicized growth targets, which have become a form of orthodoxy themselves, was offset with some concern for enormous (if hidden) government deficits, rising strain in the financial system, and other economic imbalances? In short, couldn’t China today do with a bit more of the Chen Yun spirit?

Okay, editorializing over. Here is a history lesson from Vogel:

When Deng became preeminent leader in December 1978, Chen Yun, who had just rejoined the top leadership team, called attention to a potential crisis looming in the economy: visions of growth had gotten out of hand, the budget was out of balance, and commitments for purchasing technology from abroad had exceeded China’s foreign currency reserves, which were needed to pay for them. Among the leaders trying to provide direction for the economy in this new uncharted era, there were countless opinions about how to proceed. But as officials at the top began aggregating the various views, the different views tended to coalesce around two opposite poles. One group centered around the builders, who eagerly sought to introduce new factories and infrastructure projects; the other group, led by Chen Yun, the balancers, cautiously tried to ensure that resources were available for all the national priorities. …

Deng Xiaoping, like Hua Guofeng, was at heart a builder who wanted to see rapid progress. He admired project managers who under adverse circumstances had been able to complete important projects that provided visible signs of progress. Deng, who had little patience with detailed calculations, considered the cautious balancers necessary, but annoying. …

On December 10, 1978, during the meeting of the Northeast group at the Central Party Work Conference, Chen Yun voiced his concerns about the uncontrolled exuberance that had reached the highest level of party leaders. As if giving adult supervision to overly excited teenagers, Chen Yun laid out the problems in the ten-year economic vision. He spoke with authority, suggesting that he already knew he would be appointed to the Politburo. He said, “We should maintain steady progress and not get caught up in a headlong rush. . . . When materials are not available for a project, whether at the local or national level, it should not be launched.”

Before the Third Plenum, Deng Xiaoping had been fully supportive of the project managers, but after December 1978, when Chen Yun warned about the lack of careful planning, Deng threw his weight behind Chen. … Why did Deng shift course from supporting the builders to backing the balancers, led by Chen Yun? Deng recognized the importance of putting the economy on a solid base for the new era, and the summary economic data assembled in December for the past year reflected serious problems. At the time, there was only US$4 billion in foreign currency reserves and most of the foreign currency income from exports was already committed, although contracts had been signed to purchase over US$7 billion of foreign equipment. Even though the imbalances would seem infinitesimal when contrasted with the foreign trade figures a decade later, they loomed large enough to worry cautious officials who were accustomed to smaller amounts and who were frightened by the leverage that such debt might give the capitalist countries.

By March 1979, Chen Yun had collected more data, done more analysis, and was ready to systematically present his proposals for cutting back on the contracts to import foreign plants and for lowering the economic targets for the next several years. Some of his proposals, and even the terminology, were remarkably similar to the retrenchment policies that he had introduced to recover from the Great Leap Forward. Rather than use the term “retrenchment,” the term he used earlier, which would have sounded very negative, Chen Yun used the term “readjustment” (tiaozheng). …

The essence of Chen Yun’s approach to planning was balance: balance income and expenditures, loans and the ability to repay, and foreign currency income and expenditures. He also sought a balance between investment in consumer goods and producer goods, between heavy and light industry, and between industry and agriculture. In 1978, some 57 percent of China’s industrial output was from heavy industry and only 43 percent from light industry. Chen Yun, like many other officials, believed that China’s economy had been out of balance since 1958, with food and consumer goods sacrificed for more heavy industry than the people could bear. In 1980, under Chen Yun’s direction, heavy industry grew only 1.4 percent whereas light industry grew 18.4 percent; and in 1981 heavy industry declined by 4.7 percent whereas light industry grew 14.1 percent.

By the time Chen Yun returned to work in late 1980, the budget deficits had ballooned to become the largest since the Communists took over. The seriousness of the problem made Chen Yun more determined to clamp down and enabled him to gain support from other officials, including Deng. The deficit had grown not only due to the costs of the Vietnam War, but also because of the increase in procurement prices paid to the farmers for grain, the decline in agricultural taxes, and the costs of resettling people who had earlier been sent to the countryside and were now allowed to return to the cities. Moreover, the central government began allowing provinces and local enterprises to keep more of their own funds to stimulate local initiatives, a strategy that had reduced the total amount of taxes collected by the central government. The result was a great stimulus for many provinces, but Chen Yun considered the serious budget deficits alarming and potentially disastrous. …

In November 1980 China’s economic growth rate targets for 1981 were set at a much lower rate, 3.7 percent, and capital construction allocations were reduced from 55 billion yuan to 30 billion yuan. When there were complaints that such restraints would waste valuable time, Chen retorted, “How much time have we wasted since the Opium War? Over a hundred years. Why is it such a big thing to wait three years to move ahead?” What had most delayed China’s advances since 1949, he said, was leftist errors made while rashly pushing ahead. Chen Yun was allowed to take firm control over guiding the drafts for the Sixth Five-Year Plan (1981–1985) and over bringing the budget and deficit under control.

by Andrew

The raw material of urbanization: recommended readings on steel

Fresh from posting on the winter of the steel industry in China, I see that Richard Jones has written a nice top-level view of the role of steel in the world economy, explaining broad indicators like per-capita steel demand, and steel intensity, or steel use per unit of GDP:

The dominant uses for steel now are in construction and infrastructure. 42% of steel output goes into buildings, the biggest fraction of which (44%) is in the form of rebar, and 14% in other infrastructure (again, mostly as rebar, but including some 6% as train tracks).

Steel, then, is the fundamental raw material of urbanisation. We can now understand the two periods of fast growth of steel output, in broad terms, as corresponding to two great waves of urbanisation–the first, between 1950 and 1980, in the USA and Europe, and the second, from 2000 and still continuing, as the rapid urbanisation of China. …

Steel is more important than ever as the foundation of our industrialised, urban economies. But more than a century of remarkable (and widely unappreciated) technological progress means that it is relatively less important in terms of its contribution to GDP, because we’ve learnt to make it so much more cheaply and efficiently.

But why exactly is steel the “fundamental raw material of urbanization”? To understand this we have to understand something of the history and physical properties of steel. I also recently stumbled across this nice account of the invention of the modern process of steelmaking in the American Scientist which explains the basics well:

Broadly speaking, steel is just iron with a bit of carbon in it. But that definition doesn’t capture the stunning metamorphosis that occurs when the iron and carbon merge in the correct way. The secret behind steel is that it isn’t just one substance like most metals, but a mixture. On the microscopic scale, steel turns into two different substances that stack up like a layer cake. One of the layers is rich in carbon and strong. This layer is a chemical compound called cementite, and with the right amount of force, it snaps like brittle chalk. The other layer has little carbon (around 0.2 percent) and is malleable (flexible and easily bent). This chemical compound is called ferrite, and with enough force, it can be pulled like taffy. These layers complement each other with strength and malleability. Most metals, being monolithic, have only one property or the other. The characteristics of strength and malleability usually are more like two ends of a seesaw; as one goes up, the other goes down. But in steel, its layers allow both properties to exist, and that makes steel versatile and suitable to build many things, from trains to tools to cars to cans.

So steel is useful for many things, but why is it particularly useful for buildings? I did not fully grasp this until I read Mark Miodownik’s wonderful book Stuff Matters: Exploring the Marvelous Materials That Shape Our Man-Made World. A delightful introduction to materials science, it includes chapters on both steel and concrete. And it turns out that steel by itself is not the “fundamental raw material of urbanization”; that title should properly belong to steel-reinforced concrete. The unusual interaction between the physical properties of concrete and steel makes this an incredibly useful combination:

Concrete is essentially a simulacrum of stone: it is derived from it and is similar in appearance, composition, and properties. Concrete reinforced with steel is fundamentally different: there is no naturally occurring material like it. When concrete reinforced with steel comes under bending stresses, the inner skeleton of steel soaks up the stress and protects it from the formation of large cracks. It is two materials in one, and it transforms concrete from a specialist material to the most multipurpose building material of all time. …

Most materials expand when they get warmer and contract when they get cooler. Our buildings, roads, and bridges expand and contract like this, observing day and night temperature cycles, as if they are breathing. It is this expansion and contraction that causes a lot of the cracks in roads and buildings, and if it is not taken into account in their design, then the stresses that build up can destroy the structure. Any engineer…might have assumed that concrete and steel, being so different, would expand and contract at such different rates that they would tear each other apart… But, as luck would have it, steel and concrete have almost identical coefficients of expansion. In other words, they expand and contract at almost the same rate. This is a minor miracle.

There’s a lot more fun stuff in all three of these readings.