We live in a grey, gray world

Our little WTO session goes to show that we live in a grey world. There are no black and whites (even for China!). People who speak the same language can’t even come to a consensus on how to spell grey, which doesn’t bode well for finding consensus on subsidies and tariffs.

 

Honestly, I wonder how much of what goes on at the WTO is affected by non-trade issues – the extent to which action at the WTO is dependent on some compromise made between countries for other purposes. As turned out from session, it wasn’t clear cut whether a country should support an initiative or not. Should we abolish all subsidies? China blankly says no, and so too did the US. The African Union was hardly a surprise on the yes side. But what of the EU? In our session the answer was yes, but surely that doesn’t hold up against the light of what the EU does itself. Take the European cows below as an example. But, honestly, what is the EU’s line? The reason why the EU traditionally votes against abolishing subsidies in this form is because of a few – basically France. There is so much outside politics at the WTO that more often than not, I think that trade issues become the scapegoat for issues in other areas.

There are two consequences, that the countries involved at the WTO clearly recognize and act upon, and I think we missed them a little during the session.

 1. Far the majority of trade issues are solved outside of the WTO. Very, very few cases are ever brought fully through the WTO machinery. Even the ascension of new members into the organization is typically handled on bilateral basis, with newcomers dealing directly with those who might oppose it. Accordingly, it is superfluous in an amendment to add that countries should have the chance to figure it out among themselves. They already do. The WTO is a last-resort-kind-of-organization.  

 2. It is customary that transgressions of trade rules can only be punished with measures in the industry in question. So, if China doesn't adhere to copyright rules, the US and others can take measures which can remediate losses, like imposing a special tax on Chinese copyrights etc... The US cannot use the copyright issue as an excuse to close out Chinese agricultural products. Thus, there is no reason to stipulate every time a resolution has to be passed, that "countries can't go crazy" and just use any trade issue as an excuse to punish others for issues not related to that specific type of trade. 

80% of our debate revolved around these, but the member countries have long since moved beyond this impasse. What we should do, in a future session, is to move beyond narrow self-interest (which is really in no-ones interest - it is a tragedy of the commons if I've ever seen one) and far beyond judicial jibber-jabber which has no real bearing on the ability or function of the WTO. We should, in other words, get real. And by we, I don't just mean people in class, but commentators on the WTO and "trade wars" which don't exist.  

My point is, it is so difficult to sit down at the table and have a real conversation when the focus is entirely on figuring out what to expect, rather than figure out how to navigate amongst opposing opinions. We spend more time trying to figure out what the next person’s move is, rather than be open about our position from the get-go and then get on with the negotiation. Misunderstood concern with procedure only serves to invalidate the process, even if it eventually turns out a result. 

Getting creative about subsidies

So, tomorrow a big challenge is before us: Voting by unanimity on questions which are fundamental to the function of the WTO. Before we all despair at the thought of having to negotiate the unanimity, I thought we might try to get a little creative.

From China’s position, agriculture seems to be the most important topic of tomorrow’s discussion. Its population, although growth has slowed, grows significantly in absolute numbers. The disposable income of far the majority of the population is on the rise, which is changing patterns of demand. The average Chinese person is consuming more meat and more consumer electronics than ever before. The problem with meat is that it tends to raise food prices exponentially. For the same caloric value, it is 11 times less efficient to raise livestock in most parts of China than it is to grow rice or wheat. Food prices are on the rise, and what’s worse is that supply can’t keep up. China thus has two dilemmas:

(1)    It depends on imports (which state companies tend to make abroad) from places like Brazil, South Africa and a number of smaller of countries.

(2)    Because supply can’t keep up, there is so much pressure on the price of most agricultural products that it threatens to sustain non-poverty status of many citizens. In other words, incomes don’t rise nearly quickly enough to keep up with food prices. And, since food is hardly consumed only by choice, a larger and larger share of income is spent on food. For some Chinese, it can be bad enough to set them back into poverty.

Inevitably, China seeks two things: to be able to subsidize somehow the price of agricultural products to make it affordable to most if not all Chinese. And, it has to encourage whatever measure increases the capacity of other agricultural economies while prices are kept down.

How do we reconcile this with the interests of other countries in the game?

Allowing China to subsidize its domestic agricultural sector would alleviate some of its problems, but there are a number of reasons why that isn’t the solution in the context of the WTO. Although it would perhaps in principle be a justified subsidy, it undermines the process at the WTO. Domestic subsidies are a little like subsidizing dolphin friendly nets. It’s for a good cause, but it has adverse effects on the competitiveness of foreign producers.

Why not subsidize consumption then? Well, if you’ve ever been to a gas station in Venezuela, you’ll know why. It can go horribly wrong. People consume indiscriminately and consumption raises massively. In Venezuela there’s more oil where it came from, but the potential to expand Chinese agriculture is close to its limit. Improvements in technology have barely kept up with the loss of arable land from environmental problems, and pure mismanagement. Subsidizing consumption only worsens the problem.

What do we do?  I wonder if we could get creative about subsidies. There must be some way to differentiate between different types of subsidies, or capture the effects of subsidies on import prices. Perhaps China could simply subsidize imports up until a certain limit? But, honestly, I can’t even begin to comprehend the economic consequences of such a move. Any thoughts? 

Being bullish - reason or folly?

Okay, so I must admit that I had to go look up "bullish" in the dictionary. It still doesn't make intuitive sense to me, but from the context of Dickovick's own post, I take it to mean something like "optimistic" about China's future.

Well, perhaps I am bullish then. Certainly, held up against many others who study China - and especially against most Americans and to some lesser extent Europeans - I must seem like an optimist. There are both moral and pragmatic aspects at play here, though, which is where it gets complicated. Suffice to say that I am as pessimistic about some of the moral implications of Communist Party rule in China as most others - think human rights and so on.

On the other hand, Dickovick gets at some very pragmatic issues which are cause for concern, but this is where I am much more optimistic. After all, China handled the past economic crisis much, much better than the US, Europe or Japan. Brazil's and India's respective success as well serve to suggest that China's success was because of its "BRIC" status - large and fairly capital independent economies - but a close look at China's success shows the magnificent efficiency of the Chinese government in regulating the markets, avoiding the same economic blow that struck the west. Can it go wrong in the future? Of course it can... but as opposed to the projections of many, it is not inevitable that China's model will fail in the near future.

My own area of study is Dickovick's point number six: whether the Communist Party can hold on to power as the Chinese middle class grows and consolidates. It can, but it is unlikely that it will in the foreseeable future. It is a point in the Beijing Consensus that I will return to in my next post - I will briefly focus on a few others here.

Demography and aging: it is often mentioned in context of China, but it is a problem faced by many, many countries who experienced the baby boom of the 60s and 70s. There will be fewer people to do the work, and more people to support. And for whatever interval the average retiree lives, that will continue to be true, holding all else constant. One interesting aspect to consider is how China will/can deal with this challenge compared to the mostly very developed countries who are not starting to experience the problem. How do the different stages of the economy affect the outcome? Remember that skewed demographics in China are partly articificial - government created by the One Child Policy - whereas the same issues arose, most seem to think, from population dynamics. The wealthier you are, for example, the fewer children you'll have, on average.

The alternative, as I see it, is the Indian model. Don't restrict population growth, and as is rightly noted, there will be no demographic aging issue. The outcome, though, is a population that approaches 2 billion within a few decades (if the population does not "regulate itself"). Considering how split India already is, should we not expect an even larger population to be a source of conflict? Is India not simply postponing the inevitable? I don't know. I'd enjoy the "India take" on this issue. Kane maybe?

Consider also the implication if we look at income per capita rather than GDP. Although growth of the latter slows down, growth in the first need not if the population experiences less population growth (note that population growth doesn't need to be negative for this to be true). The overall size of the economy will grow less quickly, but its people may be more content with the development.

Regulating the economy: Last, and quite honestly least, concerns about the banking system. Most of the concerns with the banking system is tied to recent reforms which were instituted with the stimulus in 2008. The housing market is bubbling as a consequence, and consumer based spending has decreased as a function of bank reforms as well. But, China showed in the years leading up to the crisis that it was aware of and willing to mitigate some of these problems - they were reversed partly because the type of stimulus pushed (which was fairly successful), making it an interesting point to follow in the future. As the crisis wears off completely, will China return to its policy which effectively handled these issues before the crisis?

Getting at China

Besides me bringing it up in class, China has a tendency to appear in class discussions on almost every topic we have explored. To a far extent it is, I think, a consequence of China being so big – who can ignore the elephant in the room, right? And China is quite the elephant; not only is it big, it is also new; a new breed, by some accounts, of international super powers. But what is it that is so novel? Is it really novel? What are the consequences for “the west”?

The questions seem obscenely broad, but although we can only make a dent in it here or in class, I think we’d be wise to understand China. My research has revolved and evolved around China in the past year, and I would like to share some brief ideas with you, some of which are ideas of others and some of which are my own. My hope is that this might enlighten our conversation on China in the next four weeks and beyond – even if just to stir up some interest in the caveats of China’s international involvement record and more importantly our future with China. My argument will appear in a series – given the breadth it isn’t useful to publish an eight page blog post. Below here I consider authoritarianism because it was brought up in class today.  

I think we’re best off understanding the Beijing Consensus going into a conversation about China. This is no small tasks because no clear definition exists. The Washington Consensus that we discussed which includes a number of concrete policy measures advocated (read imposed) by the West on countries which received international aid or loans almost in a fashion of the Ten Commandments.

Contrarily, the Beijing Consensus is despite numerous efforts to synthesize it really just “what Beijing does”; China is the embodiment of what is understood to be the Beijing Consensus while America was never truly a model for the Washington Consensus. You might think that during the Reagan years (when the consensus largely emerged, to be coined in the early 90s) America lived the Washington Consensus, but it isn’t so. More on that on another day.

The Beijing Consensus, undefined as it is, is still an approach to understand China worth pursuing because it makes contrasting with the status quo a little easier and because of the literature has begun to be built around the concept. So, here goes…

Authoritarianism: I talked about it in class today. China has achieved under an authoritarian government the kind of growth that some observers (especially those supporting the Washington Consensus) believed were reserved for democratic countries. Although understated in this form, there was something about capitalism and democracy that seemed espoused in such a way that their combination promised the best outcome. Think of Fukuyama’s End of History argument which attempts to show this point.

But, if capitalism can be undeniably successful in an authoritarian country of China’s size that goes to show that the world’s rulers don’t have to forego authoritarian rule to bring prospering to their countries. While some authors, like John Williamson (who, incidentally, coined the Washington Consensus) are prone to ask whether the West should encourage the developing countries to adopt Beijing’s methods, a more pressing question is: will other countries want to adopt China’s methods? For the rulers those countries who have yet to achieve democracy, imitating Beijing may be quite enticing. Whether it is a good idea – which Williamson doesn’t find it to be – is nearly irrelevant to the outcome.

Let there be no doubt that I am on democracy’s side, but there are some positive consequences of the authoritarian government. In 2008 when the economy was, well, going to hell, China pushed a larger and more efficient stimulus than the American. And they did it in a matter of days, not months. Democracy, sometimes, can get in the way of itself by wanting to hear or debate most everybody’s opinion. At times, we simply don’t have the time – government with limited public involvement CAN be more efficient at times than a democratic government.

I’d be interested to know what those of you reading books on India, or have a background on India issues would have to say about this? China and India are very similar, considering how dissimilar they are from most other countries, but they have gone their separate ways. Although imperfect, India is a democracy – but how do you think this has affected the prospect for economic growth? Kane made the point that his author ascribed some of India’s lack of success was cultural, but is some of it that it has trouble “getting stuff done” democratically in such a vast and diverse country? I wonder.  

Charting China

Going into a self-chosen reading relating to IPE in or after the economic crisis that emerged in 2007-08, it wasn’t a hard choice. I chose to read Nicholas Lardy’s “China’s Economic Growth: After the Global Financial Crisis”. Seeing as China has pulled out of the worst recession since the Great Depression nearly unscathed (it maintained economic growth in the excess of 9% annually – World Bank) there have been murmurs around the community of developing countries that China might be the better model. That is, better than the American model that seemed to cause the crisis in the first place.

In evaluating China’s model in the context of the American, however, it is necessary to understand where the Chinese success came from. I don’t propose to do that here as even Lardy couldn’t have gotten at such a broad question in a single, well written book. The book is an insight into China’s economy’s inner workings, though, and for that reason it is an important read that will get us going in understanding China’s economic success over the past 5 years.

The title of the book can be somewhat misleading – it is not a story of China after the crisis. It should be clear to everyone (Yes, especially us Europeans) that the crisis isn’t quite over, or at least that it has not been over long enough that it would be meaningful to analyze the period. The book instead examines China’s behavior during the crisis and what the consequences will be for the Chinese economy in the aftermath of the crisis – its central thesis is that China is not on the right track for sustained medium term growth. In the words of professor Smitka (of East Asian Economics at W&L), Lardy has been an observer of China’s economy from before there was much an economy to observe; this book is a sharp portrait of an economy in trouble that is tethered in China’s economic history as much as its future.

To Lardy, China’s success rests largely on an attribute which rests on the authoritarian nature of Chinese government. When it came time to pass legislation for a Chinese stimulus package a lá the one pushed here in the US, it acted swiftly and in adequate measure. Lardy points out, as did Shambaugh when he was recently on campus, that China’s stimulus was well timed and of an effective size. Consumption did not fall significantly in China as it did in so many other places and China accordingly pulled out of the crisis before it truly hit.

Much of the book is devoted to a technically heavy analysis of specific initiatives that the Chinese government took, most of which I will not recount here. However, in the context of the recent class discussion about China’s housing bubble and its economic prospects it is in order to mention the most important. China rolled out a 586 million dollar stimulus as opposed to the American 787 billion, a small difference considering that the American economy is more the twice as large as the Chinese (p. 6). Beyond the size, however, the structure was also different. Whereas much of the American stimulus consisted of tax cuts (supposedly to incentivize consumption) the Chinese government poured money into the economy by government spending. This was actually a reversal of past Chinese initiatives which had worked to slow Chinese growth, which was perceived to be out of control. Moreover, the Banks’ reserve requirements were slashed and they were able to lend more, and at lower rates spurring consumption as well.

The implication for the housing market was an exacerbation of the housing bubble, since house buyers could access fund more readily where they had before been restricted. Accordingly, the housing prices rose drastically. This is one of Lardy’s concerns: increased bank lending has helped along economic growth, but it has also made worse the possible burst of the bubble – one which could send the Chinese economy spiraling like the American did.

Lardy offers remedies which are almost exclusively along traditional economic lines: stop regulating and let the market take care of it. If the lending rate was not artificially high, the bubble wouldn’t exist. A host of other policies followed, as if read out of a Washington Consensus red book.

Lardy himself notes that China’s political environment is somewhat at odds with these policies. Although we attribute a lot of central control to the communist party, most policy is carried out locally where local governments have a slew of good reasons to ignore central economic policy. Most local government revenue, for example, stems from property taxes which grow larger with the housing prices. Until the bubble bursts, locals are best off leaving it alone.

But Lardy misses the mark in his attempt at discussing the political implications of the economy’s future. It is overwhelmingly clear today that the party’s legitimacy is carried far by its ability to lift the living conditions of the population rapidly. To slow the Chinese economy back down, especially by shutting the vast public out of the market for loanable funds, is a politically dangerous step. Arguably, a burst of the housing bubble would be even worse for the public’s belief in the communist government, so the party is faced with walking a very fine line. Leaving the economy up to the market – even though it may well be the best economic policy – is simply not feasible in China. The books conclusion thus falls apart a little, being impractical and bordering on irrelevant. The economic analysis is sound, but it is a poor attempt at meshing it within Chinese politics.  

Is religion the source of all evil? Including my unhappiness?

This is a reaction to Hal’s comments on the protestant work ethic (PWE). The comments turn out to revolve around a different topic altogether toward the end, but without creating a laundry list of answers; I’ll start at the top.

Hal suggests, referring to the PWE: “we should know that this theory is not only morally reprehensible… it is also incorrect.” Well, I for one am a protestant and certainly reprehensible, but I have no morals. Perhaps for this reason, I fail to see what is morally reprehensible about the theory – especially the use of the theory to discuss possible paths of development (which is, after all, all our classmate did). To suggest instead that religion gets in the way of human development would seem morally reprehensible to many (millions of people, I’m sure), but it is nonetheless a proposition which we have to make to investigate the origins of development – controversial as it quite clearly is. If we were, as scholars, to refrain from what to some seems morally reprehensible, there would be no forum for Hal to write such a post. Although I don’t agree with the greater part of it, it furthers the debate.

I am not learned on the Bible. But I take Hal’s word for it: if you were to read it word by word you COULD read it the way he does. Clearly each man and certainly each division within Christianity reads the bible in each their way – thus their different divisions. Weber, even though I am more inclined to believe his reading more than my own, had his own reading. My point is this: you can reject a reading of the bible because you read it differently. That’ll hold up in church, but it won’t hold up amongst scholars. It is an incomplete argument.

But I want to quickly move away from the Bible, because the PWE has less to do with the way the authors of the Bible worded it (or the translators). Whereas the PWE existed at one point amongst many in that format, it has become so much more than that. Let’s assume that religion affects culture, and vice versa (cause otherwise the sociologists come after us), then need the PWE exist only in the church? The answer seems to be no. Indeed, most will tell you that the work ethic permeated European culture in many places, and as religion has declined, the work ethic may not have in the same way.

Also, is it inconceivable that the pursuit for something other than wealth will make you rich? The work ethic in northern Europe is frequently cited (though, I have seen no studies) as the reason why hundreds of thousands of people go to work every day even though their salary is less than what unemployment would amount to? It is one of the reasons why welfare can function so efficiently there. The welfare system would be ruined – and many thousands of people with it (who are out of the job to no fault of their own and because inflationary pressures means that there is such a thing as “healthy unemployment” for a country). The pursuit for wealth – or greediness – of everyone (and yes, I am just as greedy as anyone else) above all, could in fact be anti-wealth.

Furthermore, I think the argument is flawed because it is based on a single assumption: that progress is the generation of wealth. Hal writes: “Christianity, especially Christianity which stems directly from scripture, is anti-wealth and prosperity”.  The biggest mistake, I think, is to equate “anti-wealth and prosperity”. Look up prosperous – it needs not equate wealthy. Synonyms are flourishing, thriving and triumphant, while antonyms are depressed and unsuccessful. They can all connote success in wealth generation, but they can also all connote success in other aspects of life. Like, for example, feeling fulfilled as a person because you work virtuously – the fact that it may not generate wealth does not make you any less prosperous in the actual meaning of the word. Though, Hal’s use of prosperity assumes that to live a fulfilling life we must generate wealth.

Hal goes on to argue: “All churches want their sheep to be poor and unlearned.” If anything, THAT is morally reprehensible. The controversy does not lie in his claim that some churches wish power over the adherents, nor even that he says “all”. Many others have made these claims. No, what is offensive is the use of “sheep” because the inevitable meaning must be that those of us who go to the church do so as subjects of repression. Can no adherent to Christianity be a truly free individual and chose to go to church?

Also, I’d like to invite you all to circuit the churches and city halls of America. Where are you most likely to find a homeless getting a meal? Where are you most likely to find a pro-bono lawyer offering legal advice? Where are you most likely to get a bed at night? If your answer is “City Hall”, I promise you, you live in a truly unique place. To suggest that churches across the board, and across time, are power machines with no care for those who attend them is simply offensive.    

All in the same boat, aren't we?

So, a thought occurred to me while I watched the Republican response to Obama's State of the Union (which I didn't see, so I won't judge). The speaker - a former governor of Indiana, I think - was talking about Obama's record of pitting one part of the American people up against another. But, the speaker says, "we're all in the same boat", pointing to the fact that Americans are all in a crisis and we need to get out of it together.

Though an adept metaphor, he did leave out a small detail that nagged me a little: we might all be in the same boat, but while the one percent are dining with the captain on the bridge, forty million poor Americans are the ones rowing the (damn) boat, and the lower middle class are the ones serving up the extravagant feast on the bridge.

Should we make sure they have benefits - like the occasional pothole for a breath of fresh air? Or, a chance to see - much less decide - where the boat might be heading? I don't think so. Then who'd row the boat? Fancy seeing the captain try to return home when we've got nothing but countervailing winds wherever we look? No, you better return to your position at the oar.

BUT, FOR THE 50% at the bottom: fear not! So long as you're on the boat, you can dine with the captain, because through hard labor everything is possible. Never mind that most people on the bridge would rather spend their money keeping you off the bridge, than they would spend their money to expand the amount of people who'd fit at the table. And never mind that we're in such a hurry to make you row faster that we'd rather neglect your sustenance in the long term to see the boat sail a little faster in the short term.

Until your day of success, though, be happy that we let you row the boat.

P.S. http://en.wikipedia.org/wiki/Sarcasm