China and globalisation

David Lipton (IMF)’s tweet:

China’s leadership in support of globalization also means addressing its own restrictions on trade and investment, including protecting intellectual property rights. [Link]

Dani Rodrik’s tweet (in response):

As the leading beneficiary of globalization by far, perhaps China has a few things to teach the rest of us on how to do it, including the IMF? [Link]

Chris Balding’s (tongue-in-cheek) tweet:

He has a point. I propose everyone become mercantilists and run 5% of GDP surpluses to increase savings. [Link]

Dani Rodrik’s ‘clarificatory’ tweet:

And in case people misunderstand, my point is not that others should replicate specific Chinese policies (patents, CA surpluses). It’s that each country needs its own domestic policy space to leverage globalization. [Link]

In spite of this ‘clarification’, several others have pushed Dani Rodrik back and correctly so.

Globalisation had many dimensions. In the main, it was about free trade, free capital flows and a bit about immigration. Asian societies were never hot on immigration. They were mostly beneficiaries of the on-off immigration policies of the West. I do not blame them. Many historical wrongs, etc., are involved here. Just a matter of fact.

On financialisation, well, the record of China is mixed. It has relied on debt finance even if it did not take the Wall Street route on other matters. Further, its infamous and blatant interventions in 2015 summer to shore up the stock market are not worthy of emulation at all.

Specifically, with respect to globalisation, China was the biggest beneficiary and not a contributor. So, it is an entirely valid criticism of his remarks that, on globalisation, the IMF should look at China and recommend the template to other developing countries. That is utterly infeasible and incorrect too.

IMF policies on capital flows, financial sector liberalisation and on the effectiveness and transmission of monetary policies with a failure to recognise asymmetry, etc. are undesirable. Clearly, China with respect to globalisation is not to be held up as an example.

I am not even sure if China could be held up as an example for several things in economics. Their sheer size, brazen unilateralism, beggar-thy-neighbour exchange rate policy, debt addiction have played no mean part in their economic growth. Their emphasis on primary education, technological openness, execution efficiency, mindfulness on scale are worthy of emulation.

Last but not the least, the United States was China’s biggest benefactor. That is a fat and that made a huge difference. John Pomfret’s book is a MUST READ on this. Without the support of the USA, there may not have been much to emulate about China.


Gems from China

It is really hard to believe why an aspiring superpower would do this or is this an effective tactic that other countries can and should learn from? I doubt if is something worth emulating. I am referring to the video that China had allegedly put out, parodying Indians with reference to the Doklam standoff.

But, if you peruse the links below, this might not come as a surprise.

They have also been ordered to remove inscriptions of Islam’s holiest verse, “There is no god but God, and Muhammad is the messenger of God,” from mosque walls and replace them with large red banners that read “Love the [Communist] Party, Love the Country” in yellow writing. [Link]

The title of this article wonders if granting WTO accession to China was a mistake:

When China entered the WTO in 2001, it promised to sign the Government Procurement Agreement, which requires government purchases to be made on a nondiscriminatory and transparent basis, “as soon as possible.” Sixteen years later, this has not happened. [Link]

Apparently, WTO rules prohibit mandatory requirement of technology transfers. The article concludes on this ominous note:

If turning over our technological crown jewels to a foreign power is against the national interest, then our government should have the power to prevent it. But wielding this power without blowing up the international trade regime will not be easy.

Nor will the media and American elites would let President Trump do that.

James Kynge writes about the trust issue with China:

The concern for western business is not that its Chinese counterparts may have more money than sense, but that they have little idea who or what to trust. ….The key challenge for western companies is that Chinese bids emanate from a domestic context that is difficult to understand and impossible to predict. The invisible hand of the Communist party can permit market forces to flourish for a while, only to abruptly curb such freedoms when they no longer serve a higher purpose.

“The risks associated with Chinese investments overseas are usually of three types,” said Yu Jie, head of the China Foresight Project at the London School of Economics. “There are economic risks, political risks and ones associated with the omnipresence of the Chinese Communist party.” All three of these are “inevitably intertwined” given the nature of China’s political system, she adds. They “do not always follow economic rationality”.

The FT has a story based on the latest report by Charlene Chu at Autonomous Research:

In her latest report, Ms Chu estimates that bad debt in China’s financial system will reach as much as Rmb51tn ($7.6tn) by the end of this year, more than five times the value of bank loans officially classified as either non-performing or one notch above. That estimate implies a bad-debt ratio of 34 per cent, well above the official 5.3 per cent ratio for those two categories at the end of June….

…. Her estimate of Rmb51tn in bad debt is based on average credit losses across other 11 other economies that previously experienced rapid debt increases comparable to China, including Japan in 1985-97 and the US in 2000-07.

“What I’ve gotten a greater appreciation for is how everything is so orchestrated by the authorities,” she said. “The upside is that it creates stability. The downside is that it can create a problem of proportions that people would think is never possible. We’re moving into that territory.”

While we are at the subject of bad debts, some stuff from Caixin magazine:

A CBRC-led audit at the beginning of this year found that actual bad loans were higher than what the banks had on the record, a vice director of a provincial branch of the banking regulator told Caixin.

In a report last year, the central bank estimated that lenders might have understated the amount of nonperforming loans by at least 50%, which suggests that bad loans at commercial banks could be as high as 4 trillion yuan.

This could present a problem as the amount of funds set aside for bad loans, totaling 2.9 trillion yuan at the end of the second quarter, is only enough to cover reported levels of bad debt.

In addition to being underestimated, bad loans may be on the rise too.

“The banking industry’s risk control situation is still complex and difficult, and pressure for nonperforming loans to bounce back is very high,” according to an official transcript of the CBRC’s mid-2017 Work Forum held on July 29. [Link]



It can and should be stopped

There is an interview of Dr. Arvind Subramanian (AS for convenience), the Chief Economic Advisor to the Government of India in FT. The interviewer is James Crabtree (‘James’). I know James a little better than I know AS. I had met the latter once in 2010 when we both were invited to the preparatory meeting for the Indo-Chinese Strategic Dialogue, by Mr. Shivshankar Menon, the then National Security Advisor to the Government of India. Of course, he had given a nice blurb to my co-authored book, ‘The Economics of Derivatives’ with Dr. Somanathan. He knows Dr. Somanathan well and respects him.

James now lives in Singapore and I have interacted with him in person and exchange emails from time to time. He is an easy-going chap. He was nice enough to tweet my critical analysis of his analysis of the Uttar Pradesh election results in India in March.

When AS was being considered for the post of CEA, I had checked my own blog posts that referenced him. There were quite a few. I had been blogging for little over six years then. Almost all of the posts had only approving references to his works or views or both. So, I mentioned it to some people whom I thought were closer to the powers-that-be in the ruling dispensation in Delhi.

He has done a very decent job so far. He has made very useful contributions to the progress of the Goods & Services Tax legislation in the country. His annual Economic Surveys are thoughtful and useful for the most part, although I disagree with the consensus view on this year’s Economic Survey, especially with respect to the idea of Universal Basic Income for India. India does not need it. India cannot afford it. Even for the West, it is more a romantic than a useful idea and it is a salve for the consciences of the technology billionaires who are facilitating its destruction of life and society, as we know them. Work is much more than about salaries and handouts are poor substitutes for them. I have more to say on technology later because AS had chosen to mention it, in the interview. Indeed, that is the main and  a large portion of this post.

The only time I disagreed with him and sharply too was on the joint column he wrote for ‘Bloomberg Views’ with Dani Rodrik on the ‘whining’ of Emerging economies on the spillover from the Federal Reserve monetary policy. I thought they were completely on the wrong path. Subsequent research, even from sources like the International Monetary Fund, had confirmed that spillovers are a painful and inevitable reality even for well-run and well-managed emerging economies with sound fundamentals.

Now, back to this interview. It has nice pictures of his pad in New Moti Bagh in Delhi. His Pooja shelf features Shri. Ramana Maharishi. Nice. He has cassettes. So, do I. I do not know what to do with them these days. Even CDs have quickly been replaced by other means of listening.

For the most part, in his interview, he hits the right notes on his boss. That is to be expected. He hits the right notes on India too. The interview is a bit thin on substance though.

James refers to Modi as a leader who brooks no dissent. It would be rather useful to know if any political leader brooks or has brooked public dissent. The real issues are about how they dispose of the dissenter rather than if they allowed them to thrive and that too in public view. So, I am not sure as to the point of it. No politician who makes it to the top in competitive democratic politics will be a front-runner in the competition for the ‘Mr. Nice Guy’ award. That includes the former U.S. President Barack Obama.

For the most part, journalists are either naive or take their readers to be so or it is a bit of both. I am disappointed that James is doing that here.

As for AS’ remarks,

“’Hyper-globalisation is dead, long live globalisation,’ is how I like to put it,” he says. “If you look crudely at the post-war period, 80 per cent of globalisation is driven by technology, 20 per cent by policy. And that 80 per cent, you can’t stop.”

I take issues with that. Well, I winced. At a very philosophical level, many things in the world are processes over which humans have very little or no control. We are mere cogs in the wheel. But, modern societies and governments are organised on the principle that humans are in charge. They choose and decide. Blaming technology is a bit like blaming terrorism or saying that the West is at war with terrorism. That is seemingly clever but a bit daft and stupid.

The world cannot be at war with terrorism. It is at war with terrorists. Period. Nothing more. Nothing less. Narrowing it down further to geographical markers or specific religious markers is also necessary to focus efforts. Euphemism is part of denial and it helps to lull people into believing that something is being done while nothing worthwhile is being done. That is why my eyebrows went up when I read an article in Bloomberg that McMaster advised President Trump against using the phrase, ‘radical Islamic terrorism’ in his Presidential address to the Congress.

Back to technology from terrorism, even though both could be terrorising humans and societies. Technology is deployed and advanced by leaders – political, commercial and scientific – making choices. It does not advance by itself. Some technologies have been shelved and some have been abandoned because their negative externalities were judged to exceed vastly their private benefits or even public benefits.

Several examples would help. The decision by President Nixon to open up to China was a choice. The decision to admit China into WTO even before it became a ‘market economy’ was a choice. The decision to sign the NAFTA was a choice. The decision to repeal Glass-Steagall Act was a choice and so was the decision to legislate the Commodities Futures Modernisation Act in the United States. All of them had consequences. Financial and technological innovations amplified the consequences greatly. Some of the decisions were made without awareness of their fallout on communities, on families and on society. Only economic and commercial considerations, at the aggregate level, were the decisive actors.

That is why Bill Gates was right to propose taxing robots. Obviously, robots do not pay taxes but the companies that are behind them do. The tax may and could even be punitive enough to stop some of the research and advance in the technology. That is not being Luddite. That is being careful about consequences. That is about being honest and humble about forces that one is about to unleash, about which one has no ideas and over which one has no control. That is about recognition of human limitations.

“High-tech hubs were among the five metropolitan statistical areas where the gap between the highest- and lowest-income households expanded the most: two in California, San Francisco and San Jose, as well as Austin and Seattle.” [Link]. The article’s header is a tell-all tale: ‘America’s rich get richer while the poor get replaced by robots’.

Predictably, Larry Summers has objected to Bill Gates’ proposal. Mr. Summers is a very useful weathervane for the direction in which conventional wisdom is blowing. It is usually wrong. Summers’ views are useful for many of us to make up our minds – usually in the other direction. Here is another example. But, that is a different topic.

Political correctness prevents many from admitting to their inability to comprehend the present and the future, especially with respect to such obviously disruptive developments. There is more disruption than progress about them. Tyler Cowen’s article in Bloomberg in February is an example of this unfortunate political correctness. He concludes on that note despite advancing all useful and important arguments against precisely such a stance.

Perhaps, Tyler Cowen, AS and Summers should read an article that appeared in ‘Quartz’ last month. The article is headlined, ‘No one is prepared to stop the robot onslaught. So what will we do when it arrives?’.

The article notes, “In February, the European Union did consider rules that, while not stopping the robots, would have the force of discouraging automation by compelling companies to pay compensating taxes and social security payments for jobs that their robots wipe out. But, EU parliamentary members balked even at this, adopting much milder language that exacts no retribution on the robots or the companies that use them. A pivotal dynamic in the vote seemed to be a reluctance on the part of the deputies to expose themselves to possible ridicule as Luddites.”

That is the problem. Andrew Feenberg, who teaches the philosophy of technology at Simon Fraser University in Vancouver, says, “Doing trade deals and robotics without consideration of the people displaced is insane. The backlash is understandable.”

Feenberg notes, “Societies do have choices with respect to technology.” He is very right.

In sum, this long post is a message to AS that it can be stopped and we, humans, would do well to make choices because we can make them. It is both fashionable and wrong to say that technology cannot be stopped.

Economists and the reality of trade

If you read this interview with Dave Donaldson, a young economist who had won the John Bates Medal given to outstanding economists-academics below 40 years of age, you might get a clue on why economists are out of touch with reality and hence, not very popular with the media. Just sample this question and the answer. Economists have a long way to go.

Q: Obviously foreign trade is an especially important topic right now in Washington and capitals around the world. Do you think there are policy lessons that your research offers leaders in the U.S. and elsewhere?

A: I’ve worked on fairly high-level issues. I certainly haven’t tried to work on some of the complex trade agreements and trade policies that we and other countries sign and negotiate. But I think there’s a number of high-level points that my work has tried to quantify and illustrate.

Trade is rarely bad on the aggregate. … Those gains are important, at least according to the estimates I and others have come across and tried to develop. Railroads have enabled trade and railroads had a big impact on living standards. At some level, that doesn’t surprise a lot of people. But again, there’s no difference between building railroads to enable trade with other members of our country and lowering tariffs to enable trade with other members of the world. They’re the same basic principle. You’re trading with others and reducing barriers to enable more trade.

Joan Robinson was a famous economist between the wars and she talked about how, I’m paraphrasing, but how it was ludicrous to fill up our harbors with rocks. We don’t do that and if our trading partners start filling up their harbors with rocks, that’s not a good reason to start filling our harbors up with rocks, too. This idea that … the nation wins at trade or the nation succeeds by imposing tariffs – there are special circumstances where that possibly helps. But by and large, we on the whole are better off when we trade more. That basic instinct, I don’t think is controversial, because we don’t stand in the way of trade with California and Colorado. …

I’ve stressed the aggregate benefits. Of course, within those aggregate benefits, there are winners as well as losers within the same country. Obviously things would be better if that weren’t true, but unfortunately that sad truth is also the same sad truth about all of economic life. When Amazon entered the retail sector and made it harder for Wal-Mart and Kmart to do business and that led Wal-Mart and Kmart to close down some establishments, that of course is not good for the workers of those establishments. But it is good for other workers elsewhere, and it’s good for consumers on the aggregate.

That kind of churn and evolution of a market economy of course generates winners and losers all the time. We all wish that wasn’t the case. But because the gains on aggregate are large, those kinds of things are by and large worth permitting, allowing, and that’s why we allow them when they happen within the country. And as I tried to stress, I don’t think there’s anything fundamentally different about the kinds of shocks that create the aggregate benefits but nevertheless, unfortunately, have some domestic winners and losers. The fact that there are domestic losers does not per se mean that we should prevent those kinds of trades.

We should do what we can to help mitigate the losses. But the essence of economic growth involves, as [Joseph] Schumpeter called it, creative destruction. The act of creating growth, the act of making living standards better on aggregate, does just inevitably involve some people losing. And we need to find ways to mitigate that, but standing in the way of progress is unlikely to be the best way to do that mitigation.

In contrast, read the comment below by one Graham Lovell from Australia on the article by Gillian Tett on financial markets and political risks.

In a well-reasoned article, Jillian Tett has failed to mentioned one very likely possibility. That is the possibility that “protectionism” will not hurt growth, but will encourage it. It was nice to get a recognition that monetary policy is now taking a lower place and structural reform is beginning to happen.

Yet what is this structural reform to which she refers? Perhaps she meant spending on infrastructure. If so, one has to protest that that is not really reform, just a replaying of well-established Keynesian economics. The real reform, which has to come if the world is to really recover from 2008, is one that means that investment in ordinary businesses can recommence in the West. That cannot happen at the levels that are required while the West has to compete with wages in the rest of the world at a simple fraction of Western wages.

A trade re-alignment, called here “protectionism,” is required. This is a long way from “mercantilism,” a fact that is missed by many commentators. (I say that, not because Jillian Tett has confounded the two things, but because others do.) The fact is that there is little investment activity happening in the West because there is a shortage of investment opportunities. This could be why the US stock market is showing signs of exuberance – maybe investor hope that there will be things in the US in which US companies can invest, instead of trying to find the currently partly exhausted opportunities in the “emerging world.”

If this is happening, it can be put at Donald Trump’s feet, and for which he can, quite rightly, take the credit, at least when he puts his policies into place. Even in Australia, now there are limited opportunities to invest. I am a small investor In Australia, which remains “free trade heaven.” My residual investments are in the mining industry. I am hoping for a recovery there. However, much of my new investment $s are in the medical industry, in companies like CSL and Resmed, who happen to be the best in the world in their fields.

Twenty years ago there was a thriving manufacturing sector, now there are only niche players. This is a product of the drive to reduce tariffs combined with a very high $A resulting from supercharged returns from mining. So now the search for industrial players on the Australian Stock Exchange returns only two significant operators. One is a toll-road operator, the other is Sydney Airport. Is that really the best we can do in Australia in the industrial space? Well, yes it is, if free trade ideology is given open charter, as it is in Australia. Yet not every company can be “best in the world,” not in Australia, and not even in the USA. However, the current dominant economic ideology expects only the “best in the world” to survive. This is a recipe for disaster. It is what the events of 2008 exposed. It led to many voters in the UK and the USA abandoning those who support the dominant economic ideology.

My case is that “protectionism,” by which I mean a trade realignment, will not hurt growth, but is more likely to encourage it. Perhaps that possibility could also be mentioned in passing in future articles.

China March Trade Report

Chris Balding’s tweets – a compilation (April 12, 2017)

Small storm on Chinese trade data: it is very difficult to reconcile Chinese trade data with reality on two fronts. Not saying false just really straining credibility. Two examples: Exports to Latin America were up 16.4% in January and 6.3% through February. March likely show more big numbers.

Question: where is growth strong enough to drive USD exports that will likely by 10%+ in Q1?

Brazil had nominal USD GDP growth of 2.5% Feb 16->Feb 17. Even on the low side that puts GDP to trade ratio at more than 2. After March, likely well above 3 or even 4. Export growth rates being claimed seem extraordinarily large for growth we see elsewhere. One other problem the difference between the USD and RMB trade growth rates is nearly exactly the change the drop in the RMB. Sounds logical but it isn’t.

When a currency drops, importers know that the local currency price has dropped and negotiate new prices with the exporter. Example US Acme imports from Chinese Acme widget at $100 implied conversion of 600 RMB. When RMB drops, US Acme renegotiates new price rather US Acme imports from Chinese Acme widget at $100 implied conversion of 600 RMB. When RMB drops, US Acme renegotiates new price rather split the currency difference so importer does not enjoy 100% of currency drop. However, Chinese data implies this is happening.

Volumes of product out of China remain decidedly soft. Not sure yet exactly what is happening but there is more here than meets the eye. Through January/February 2017, 70% of major export categories experienced declines in the volume of exports compared to 2016.