Topic: International Economics and Development

Should China’s Meltdown Be Surprising?

As stock markets decline around the world, apparently in response to stalled economic growth in China, one might ask whether China’s difficulties should come as a surprise.  After all, has not China “liberalized” its economy in recent decades, paving the way for the spectacular growth that capitalism can deliver?

Alas, China has liberalized in some dimensions, but its economy remains highly controlled in other dimensions; it  has state capitalism, not true capitalism. In a recent Cato Research Brief, Donghua Chen, Dequan Jiang, Alexander Ljungqvist, Haitian Lu, and Mingming Zhou provide evidence for this claim:

The key function of an economic system is to allocate scarce resources efficiently. Having proved superior to central planning, Western liberal capitalism, based on markets and private enterprise, was in the ascendant following the collapse of the Soviet Union. More recently, however, state capitalism has won adherents as an alternative to Western capitalism.State capitalism, as practiced in China, Russia, and elsewhere, combines the power of the state with capitalist tools: the state controls access to capital, picks winners, and influences investment decisions, while at the same time listing state firms on domestic or overseas stock markets.

In our research, we ask how efficiently state firms allocate capital. Our focus is on China, the country where state capitalism is perhaps most entrenched. Because China’s capital markets are relatively underdeveloped and firms cannot access them without political approval, we focus on firms’ internal allocations of capital, the internal capital markets operating inside business groups. As we show, Chinese firms rely more heavily on capital obtained from fellow group members than on external capital markets.

We investigate the efficiency of capital allocation by contrasting how state business groups and privately owned business groups in China allocate capital across member firms. An efficient internal capital market allocates more capital to units with relatively better investment opportunities. This is exactly how, according to our evidence, private groups in China allocate capital. State groups, in contrast, do the opposite.  …

Our results suggest that state capitalism does a poor job of allocating capital, at least in China’s state business groups. This likely reflects the fact that the objective of the Chinese Communist Party (CCP) is not just maximizing profits or shareholder value but also maintaining a “harmonious society.” Consistent with this, we document that the chairmen of state groups are rewarded with promotions to higher office not only for raising productivity but also for avoiding large-scale job losses. These aims can be in conflict and over time may be incompatible. State group chairmen appear to let their career incentives influence their internal capital allocation decisions. Not only do we find that internal capital allocations are used to prop up large and struggling employers with poor prospects, consistent with the policy aims of the CCP. We also find that capital allocations are particularly distorted when group chairmen are up for promotion and cease to be distorted once a group chairman becomes ineligible for promotion under the CCP’s rules on mandatory retirement.

The surprise, therefore, might be that China’s economy has done as well as it has until now.

The Great Job-Creating Machine

As the Guardian recently reported, technology has created more jobs than it has destroyed, and the new jobs it has created have been of higher quality. Technology eliminated many difficult, tedious, and dangerous jobs, but this has been more than offset by a rise in the caring professions and in creative and knowledge-intensive jobs, resulting in a net increase in jobs.  The sectors to lose the most jobs have been agriculture and manufacturing, which are both difficult and dangerous, while work opportunities in medicine, education, welfare, and professional services have become more abundant. (For example, there are more teachers per student, improving student-teacher ratios, and there are also more physicians per person than in the past).

In 1980, almost a quarter of the world’s employment was still in agriculture. Now, only around 15% of the world’s workers are engaged in agricultural labor. Yet we are feeding more people, undernourishment is at an all-time low, and food is becoming less expensive. Technological advances liberated humanity from toiling in fields by mechanizing many processes and boosting productivity, allowing more food to be produced per hectare of land, and freeing hundreds of millions of people to pursue less grueling work.

The elimination of so many unsafe jobs in manufacturing and agriculture means fewer worker deaths. According to data from the International Labor Organization, from 2003 to 2013, the number of work fatalities in the world decreased by 61% (i.e., over 20,500 fewer deaths). This occurred even as the world population grew by over 700 million over the same time period. If the most dangerous thing you have to face at work is the threat of a paper cut, you quite possibly have technological innovation to thank for that.

Even if in the future robots steal some jobs, advancing technology will likely make several higher-quality jobs available for every job lost. As the Guardian article cited earlier says, technology has proven to be a “great job-creating machine,” eliminating toilsome work but bringing into existence more—and better—opportunities than it takes away.

But note that behind every machine, there lurks human ingenuity. As Matt Ridley wrote in his book The Rational Optimist:

It is my proposition that the human race has become a collective problem-solving machine and it solves problems by changing its ways. It does so through innovation driven often by the market.

Learn more about what market-driven technological innovation has done to improve the state of humanity at HumanProgress.org.

China’s REAL ID Program

China is implementing its “toughest-ever” mobile phone real-name registration system, according to the Want China Times. The effort seeks to get all remaining unregistered mobile phones associated with the true identities of their owners in the records of telecommunications firms. Those who do not register their phones will soon see their telecommunications restricted.

This policy will have wonderful security benefits. It will make identity fraud, anonymous communication, and various conspiracies much easier to detect and punish—including conspiracies to dissent from government policy.

The United States is a very different place from China—on the same tracking-and-control continuum. We have no official policy of registering phones to their owners, but in practice phone companies collect our Social Security numbers when we initiate service, they know our home addresses, and they have our credit card numbers. All of these are functional unique identifiers, and there is some evidence that the government can readily access data held by our telecommunications firms.

We have no national ID that would be used for phone registration, of course. The Department of Homeland Security says it will begin denying travel rights to people from states that do not comply with the REAL ID Act beginning in 2016.

Extreme Poverty’s End in Sight

Ending extreme poverty may sound like a remote dream voiced by idealists and beauty pageant contestants, but that goal’s attainment is actually closer than you think. The share of people living in absolute poverty (i.e., living on less than $1 a day) has dwindled to around five percent of the world’s population. Much of this progress can be attributed to massive poverty reduction in China that elevated hundreds of millions of people out of destitution.

Not only has the share of the global population living on less than $1 a day fallen, but so has the total number of people living on less than $1 a day. This is incredible when one takes into account population growth.  Consider the graph below, showing the total number of absolute poor decrease by more than 700 million between 1981 and 2008, even as the world population rose by 48 percent (i.e., over 2 billion). Again, a large part of this improvement can be explained by China. Even if one excludes China, close to 200 million people escaped absolute poverty over this time period.

Overshoot Day Underestimates Human Ingenuity

Media outlets ranging from Newsweek and Time, to National Geographic and even the Weather Channel, all recently ran articles on the so-called “Overshoot Day,” which is defined by its official website as the day of the year

when humanity’s annual demand for the goods and services that our land and seas can provide—fruits and vegetables, meat, fish, wood, cotton for clothing, andcarbon dioxide absorption—exceeds what Earth’s ecosystems can renew in a year.

This year, the world allegedly reached the Overshoot Day on August 13th. Overshoot Day’s proponents claim that, having used up our ecological “budget” for the year and entered into “deficit spending,” all consumption after August 13th is unsustainable. Let’s look at the data concerning resources that, according to Overshoot Day’s definition, we are consuming unsustainably. (We’ll leave aside carbon dioxide absorption—as that issue is more complex—and focus on all the other resources).

New Human Freedom Index, U.S. Ranks 20th

Today we’ve released The Human Freedom Index, a new report that presents a broad measure of personal, civil, and economic freedom around the world. It is co-published by the Cato Institute, the Fraser Institute (Canada) and the Liberales Institut (Germany), and is the most comprehensive index on freedom yet created for a globally meaningful set of countries.

My co-author Tanja Porcnik and I look at 76 indicators in 152 countries to capture the degree to which people are free to engage in voluntary exchange and enjoy major liberties such as freedom of speech, religion, and association. We also include measures on freedom of movement, women’s freedoms, safety and security, and rule of law. We use data from 2008 to 2012, the most recent year for which sufficient data is available.

Hong Kong and Switzerland top the rankings, followed in order by Finland, Denmark, New Zealand, and Canada. The United States ranks in 20th place, below the United Kingdom (9) and Chile (18). Other countries rank as follows: Singapore (43), India (75), Russia (111), China (132), Venezuela (144), and Zimbabwe (149).

The United States fell from 17th place in 2008 to 20th place in 2012. The decline reflects a long-term drop in every category of economic freedom and in its rule of law indicators. The U.S. performance is worrisome and shows that the United States can no longer claim to be the leading bastion of liberty in the world. In addition to the expansion of the regulatory state and drop in economic freedom, the war on terror, the war on drugs, and the erosion of property rights due to greater use of eminent domain all likely have contributed to the U.S. decline.

We do not measure democracy in the index, though we consider it important. Indeed, we find a strong relationship between human freedom and democracy, a link that merits further study. As such, Hong Kong is an outlier in our index. Its high ranking is due to its traditionally strong rule of law, and high levels of both personal and economic freedom, something that all advocates of freedom, including democracy advocates, should seek to protect. The danger there is that China’s efforts to limit democracy will lead to increasing interference in the territory’s institutions—including on the independence of its legal system and the freedom of its press—which will reduce its overall freedom.

We believe that freedom is inherently valuable and plays a central role in human progress. As the graph above shows, belonging to the freest countries in the world greatly improves the average person’s income. Read the study here to see our other findings, the data, and other goals of the research.

Why China Is in Trouble

The course of an economy is determined by the course of that economy’s money supply (broadly determined). The relationship between money growth and nominal GDP growth is presented in the accompanying chart. It is persuasive. Indeed, money, not fiscal policy, dominates.

As I listen to all the ad hoc conjectures about the state of China’s economy and its near-term prospects, I am astounded to never hear anything said about the most important determinant of nominal economic growth: the money supply. The second chart tells the tale. The picture is not a pretty one. China’s money supply growth rate has been slowing down since early 2012. It now is growing at an annual rate of about 10%, which is well below the trend rate of money growth: 17.06%. China is in trouble. Slower money supply growth means that slower nominal GDP growth is already baked in the cake.

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