Li Nie's Weblog

Bio: I'm Chinese, you will find out later, everything I write about is about China.




Jun 01 2009

The wrong economic agent

Most of the literature on development economy we have read so far agrees on the success of China’s export industry development in the last two decades. It is believed that the business model of export has made efficient use of domestic intellectual, natural and labor resources, and China’s economic structure is taking full advantage of globalization.   However, the unsustainability of China’s economy has been exposed and tested in this financial storm.  Also China’s financial system has not been badly damaged, China’s GDP growth that depends on export is badly hurt by the decline of westerners’ consuming ability. About 10 million of low-skilled workers who emigrated from rural China to urban cities have lost their jobs, about 6 million college graduates can not find a job, and the value of China’s holding of 2 trillion dollars deposition is dropping every minute. As a development strategist, I think there are three crucial factors we need to take into account to design a sustainable policy.  




First, exporting industry as the major economic agent is the basic problem of China’s economic structure. Its dependence on foreign market has lost the development autonomy and opportunities to increase domestic consuming ability. In the global competition of exporting, China wins by its unfair use of cheap labors. Same as Henderson’s analysis of the case of Malaysia, the lack of legal protection of low-skilled labor in China has allowed firms to rely on cheap, unskilled labour and thus missed the chance to move up to higher value-added production chain. 


Second, China’s domestic environment has been hospital to foreign investment but the opposite to its own investors. Critics have pointed out that there has been no Bill Gates or Google in China where most of world-class engineers and scientists were born. The government has no policy to encourage self-made entrepreneurship.   It is almost impossible for geniuses in China to get investment for their innovation or ideas. For example, Baidu known as China’s google and Sohu known as China’s Yahoo both got their initial investment from Silicon Valley and Wall Street. Once they have settled in China, they are subject to the the local government corruption and political constrains. Private firms of small and medium size can hardly survive in China for the lack of financial support and legal protection. The most ridiculous development policy in China is perhaps the tax on value   Therefore, enhancing domestic investment environment is crucial to solve the high rate unemployment. 


Third, China’s telecommunication system has not yet privatized, the lack of competition results in a high cost of business transaction. An international call I made in the States is cheaper than a long-distance call I made in China.  This has restrained development of network economy at inner China and stopped expansion of urban wealth to rural areas. Chinese people have not yet used wireless Internet connection, the low flexibility of network in China has also contributed to the inequality in development. However, all the above are based on an ideal process of democratization in China.

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May 26 2009

Development Vs Sustainable Development

I have carefully read Chapter 5-7 of the Globalization and Its Discontents. As a witness of the gradual development of market economy in China, it is easy for me to understand that why Russia’s transition has failed and China’s path of gradualism is a “better road to the market”. Stiglitz did a detailed argument of Washington consensus’ failure in helping Russia’s transition from arranged economy to marketed economy. But in his comparison of Russia’s failure and China’s succeed, he only told part of the story of China’s development.  


First, I do not agree with his calculation of development. Stiglitz approached the gains and loses of development by counting on GDP growth and average income, but what’s missed here is the trade-off of the economic growth, such as environmental costs, decline of social morality understand market competition and the fragile social stability for the lack of political democracy.  


China’s economic development is gradual but aggressive, its over-speed development at the cost of sustainability is a time bomb for the people and a temporary shelter for political conservatives. In the long-run, China’s exploitation and abuse of natural/human resource can hardly be paid by its capital development. Unlike the industrialization of UK and US which used early modern technology, China’s industrialization has been conducted through contemporary technology that provides higher quality for construction along with larger damage.  For example, the Three Gorges Dam project is owned and operated by the state, which has the administration power and technique resources. According to Stiglitz, the outcome of the project as economic development is creating jobs, enriching energy resource, driving GDP growth and probably increase the average income. However, what’s behind the picture is millions of people have been relocated by the government in five years, the ecological change and potential natural disaster like flooding and earthquake, and most importantly the redistribution of wealth that can only deepen the gap between rich and poor. All those elements are ignored in Stiglitz’ methodology of calculating development.  The Three Gorges Dam is a reflection of the unsustainable development of China in the last 20 years.  

Second, Stiglitz harshly criticized the fruitlessness of Russia’s democratization, but he forgot to mention that China’s stagnation in political reformation is fed by its economic development.  The high tax rate is used to keep its over-size, inefficient government rather than for social welfare. China’s education fund is less than one percent of its GDP, lower than Uganda. You will know that corruption in China is no better than in Russia if you read Losing the New China: A Story of American Commerce, Desire and Betrayal by Ethan Gutmann and Guanxi:Microsoft, China, and Bill Gates’s Plan to Win the Road Ahead by Robert Buderi and Gregory Huang. 


A weak democratic power is hardly comparable to a strong tyrannical power in terms of harm. Washington again, I believe, has lost the New China. China’s economic development has become a powerful leverage in foreign policy, which has been proved by the recent visit to China by Nancy Pelosi and Hillary Clinton. The WashingtonPost has put the Pelosi’s disappointing visit to China as the headline for yesterday’s paper and quickly took it off for whatever reason.  Any outside influence to China’s democracy seems weaker and more futile than ever.

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