LIARS, LIARS: SUSAN BARNES, YURI YOSHIZAWA and PETER D’ERCHIA

Equal opportunity "corruption"

http://www.voxeu.org/index.php?q=node/3693

Abstract: "Would reducing corruption increase trade? While corrupt customs
officials extorting bribes from exporters may impede trade, those who take
bribes to circumvent formal trade barriers may help it. This column estimates
that when tariffs exceed 25%, the pro-trade effects of corruption may dominate."

Love the concept! You can extend it to other situations.

Corruption has a bad reputation because inter alia, the briber is believed to have received an exorbitant privilege for having the right connections. Let's call this "unfair" form of corruption. But there are more "fair" or "equal opportunity" versions of corruption. For example, imagine a situation in which corruption gets something done faster. Imagine if everyone has the option of paying a bribe of varying degrees to speed up a business application. This should actually result in greater allocation efficiency, because the most productive people/companies would get more done. This is the norm in the private sector, but even existent in the public sector in developed nations. (Of course, sometimes pure economic justifications violate other qualities we cherish. And it assumes the distribution of wealth and resources are fair to begin with and not the result of excess corruption.)

I had a bit of an experience with a situation earlier this month, when I lost my passport on Saturday coming into Dulles airport. I needed a new passport for my return to China the next Monday (5 business days). Going through the official State Department channels for urgent requests, the earliest I could get an appointment was Friday in Boston and New York, or Wednesday if I could travel to Connecticut. However, a quick Google search finds dozens of passport agencies that can get a passport from the State Department within 24-48 hours for a hefty fee ($200-$300 plus government charges). Fortunately, my passport was turned into lost and found just before I submitted my new passport application.

When a country goes cukoo over that we call swine flu...

Swine flu a pandemic now? Yes, but all pandemic means in this context is that it's spread has been fairly far-flung. It still has proven to be only as lethal as regular flu. Yes, it can mutate, but so can regular flu. The WHO has encouraged member states not to over-react. Try telling that to the Chinese.

Returning from my college reunion in US a few days ago, we were greeted on the tarmac by a haz-mat team in full battle gear. They scanned everyone with a temperature gun and then we disembarked. The next day the Beijing health bureau sent over a nurse wearing a face mask to my apartment with a care package of face masks, a thermometer and 3 or 4 pamphlets, including one on TCM (traditional chinese medicine) remedies for H1N1:

Some entrepreneurs are trying to monetize off of this. I received this inane email last month:

ARE YOU CANCELLING TRAVEL
PLANS BECAUSE OF H1N1 INFLUENZA CONCERNS?

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Director Business Meeting Places and Videoconferencing
Regus AsiaPacific

Chinese Economy Going With Tried and True

Martin Wolf has a good piece in the FT about the need for tackling the world's imbalances and thus, changing the structure of the Chinamerican economy. An excerpt:

Much of the extraordinary increase in China’s aggregate savings is the result of rising corporate profits (see chart). It would surely be possible to tax and then spend a part of these huge corporate savings. The government could also borrow more: at the 3.6 per cent of GDP forecast by the IMF this year, its deficit remains decidedly modest. It is also hard to believe that a country such as China should be saving half of its GDP or running current account surpluses of close to 10 per cent of GDP.

Exactly, China can spend much more on policies that are consumption promoting, such as in housing, education and medical welfare. Many developing countries cannot spend in this manner due to some form of the poverty trap - low capital per person and inability to borrow to raise the level of capital. But not China, which has more capital than domestic demand AND the ability to use deficit spending [to boost consumption/welfare]. But as it stands, we're seeing the tried and true formula of increased investment rather than consumption spending, as you see in the following chart. We also have myriad anecdotal evidence that newly extended credit is indeed going into infrastructure and other government favored investment projects. This is awful news for badly needed structural reform.

However, to play devil's advocate, I'll name a few reasons China's presumably astute economic planners might be justified in their conservatism. The first is that the actual level of government debt might be twice the official statistic. Local governments in China, typically barred from issuing debt, have turned to other channels such as commercial legal entities. One report estimated local government debt at around RMB 4 trillion. But even adding SOE and other implicit obligations, China's overall debt level would be much higher but still low compared to many other economies. This brings us to a second and related government worry. One reason China's debt level is relatively low is the low liabilities promised by the government to its citizens. As China's populations ages, even modest expansion of the social welfare net would incur large potential liabilities. And a third argument is that China's bureaucracy is simply not fast moving enough to be able to accommodate a large expansion in social spending without waste and corruption. Not just China --- think of all the FEMA trailer and payment scandals following Hurricane Katrina.

Similarly, while the international monetary system is indeed defective, this is hardly the sole reason for the world’s vast accumulations of foreign currency reserves. Another is over-reliance on export-led growth. Nevertheless, Governor Zhou is correct that part of the long-term solution of the crisis is a system of reserve creation which allows emerging economies to run current account deficits safely. Issuance of SDRs is a way of achieving this goal, without changing the fundamental character of the global system.

China is seeking to engage the US. That is itself enormously important. However self-seeking its motivation, that is a necessary condition for serious discussion of global reforms. Yet China must also understand an essential point: the world cannot safely absorb the current account surpluses it is likely to generate under its current development path. A country as large as China cannot hope to rely on such large current account surpluses as a source of demand. Spending at home must still rise sharply and sustainably, relative to growth of potential output. It is as simple – and difficult – as that.

The reason this is a critical issue, says Wolf, is that

Fiscal deficits are now generally far bigger in countries with structural current account deficits than in those with current account surpluses. This is because the latter can import a substantial part of the stimulus introduced by the former. The Organisation for Economic Co-operation and Development forecasts a jump in US public debt of almost 40 per cent of gross domestic product over three years (see chart). It is quite likely, therefore, that the next crisis will be triggered by what markets see as excessive fiscal debt in countries with large structural current account deficits, notably the US.

As Michael Pettis and others consistently point out, on a macroeconomic levels, global accounts must balance. China has a lot to do with cleaning up these imbalances. I hope to see them move much more quickly to deal with it.

Trip: Guests in a Guest Home

I went with Ashley to Fujian Province for a few days, and one of the more interesting experiences was venturing out to rural Xiamen to stay in one of the Hakka "Tulou" (土楼 - literally, "earthen building") structures. Although Ashley is Hakka, she could not understand the dialect of the region we were traveling in. And many of the occupants of the tulou spoke not Hakka, but Min-nan (the dialect of Xiamen and Taiwan).

The Hakka are an interesting group. Although considered a subgroup of the majority Han ethnicity, the Hakka have often been treated as a minority and are sometimes referred to as the "Jews of China" owing to their diaspora triggered by historical wars. These resulted in their displacement throughout Southern China and Southeast Asia. Many ethnic Chinese in Malaysia, Singapore and Indonesia are Hakka. The word Hakka itself (客家) literally means "guest families", the moniker assigned to them by local residents where they settled. Continued persecution and tensions over land was a large part of the drive behind the fortress-like Tulou structures. Wells located inside guarantee a supply of fresh water. Strength in numbers also helped, as each structure housed over 20 nuclear families, usually part of one extended family. With many younger people traveling into the towns and cities for work, most Tulou seem underoccupied and it's not too difficult to negotiate lodging with the occupants. We paid USD 10 for our "renovated" room with electricity and a television (the Communists have worked hard to wire up the remotest outposts to their propaganda machine). But that's the rural China equivilent of 5-star pricing.

I highly recommend a visit, and can refer the sites we visited. For me, the trip helped to stimulate some of my views on Chinese rural land reform.

Dallas Fed Blames U.S. Homeownership Promotion Policies

Wow, buried in this article in their economic letter was this very direct attack against the U.S. government's homeownership policies:

"However, their federal charters and oversight also led the two GSEs to invest in privately issued nonprime mortgage-backed securities, primarily to meet the public policy goal of expanding homeownership."

Hello Mr. Stiglitz

From Mr. Stiglitz:

What the Obama administration is doing is far worse than nationalization: it is ersatz capitalism, the privatizing of gains and the socializing of losses. It is a “partnership” in which one partner robs the other. And such partnerships — with the private sector in control — have perverse incentives, worse even than the ones that got us into the
mess.

Alright, I am not yet qualified to comment on the merits of the rescue plan. But I have to disagree with him on an axiomatic level--- isn't public cost / private gain a general result of many government policies? When we sponsor or subsidize the education of the student from a poor family, aren't we taking money from wealthier families and transferring it to a poor family, with private gains (increased personal income)? But we do it, not simply on the basis of charitable principles, but because we expect public gains.

And one more thing.

Private gains? Pensions, 401k and individuals that form the public are heavily invested in the large firms receiving bailouts. Public losses? Taxpayers are skewed towards the rich in terms of disproportion of taxes paid, thanks to progessivity.

Given this, is it not deceptively simple to deploy the "private gain" vs. "taxpaying public" loss argument? It is simply not as clear a dichotomy as that.

Another swipe at the Huns

Is Germany's disagreement over stimulus spending just a matter of differences with timing?

The folks in New York pointed out yesterday that the US unemployment rate has always led the Germans. With nothing different expected this time around, given the current trajectory of US unemployment we'll see German unemployment soon breaking above 10 and possibly even into the teens. We'll see what they think of stimulus spending then.

The U.S., due to its more flexible private sector, is ahead of the curve than Europe. If the continentals are forgetting this inconvenient fact, we're certainly seeing a reminder today.


U.S.


Germany

Source: Bloomberg

Emphasize the Efficiency in Energy Efficiency Please!

Thought of the morning: Why are the Germans still subsidizing solar? It seems they have marginally better solar potential than Sarah Palin's front porch. Wouldn't it be better to anschluss North Africa and put the panels there?

Or give the subsidies to the US, which is behind but fortunately, fast catching up with large projects in California and the South/Southwest.




Source: Solar Energy Industries Association Year in Review

以怨报德: China's disingenuous complaint

I find the recent voices (from as high up as Wen Jiabao) about China afraid of losing in its investments in US Treasuries to be either uninformed or disingenuous.

Yes, on a superficial level the Chinese currently own X amount of US securities, which include Treasuries ($800 billion?), agency debt and other instruments. But that’s only its current market value if you evaluate it on a Micro level.

When China received dollars as part of its trade surplus with the United States, it could have done whatever it wanted with them. Why did it plow it into Treasuries and agencies? As a deliberate national policy to keep the RMB from appreciating, and to provide employment and economic growth. It was the best policy available to China at the time, especially given competitive pressures from neighboring Asian economies. If Americans had not been so prodigious with their spending since the 1980s (see chart), the Chinese economy would not have grown so quickly and many fewer peasants would have been urbanized and many fewer Chinese would have built up human and physical capital.


Chart 1: Asia's Sugar Daddy, US Savings Rate

The Treasuries are likely not worth in the long-run what they are today, because in the long run the imbalances have to unwind. In fact, success of China's economic policy would ceteris paribus, result in appreciation against the dollar as the Chinese economy expands. And it was far better to grow the economy faster and “lose” some money on this "vendor financing" of the United States. In the real economy, this policy translated to quicker urbanization, more technology and skill transfers, and experience running businesses, etc. Imagine an apprentice or an intern willing to work for a master for low pay. The experience and skills are worth it. In fact, when you are young and entry level, you want your boss to display some sloth and give you more work to do. You need the experience more than the money.

So in conclusion, no one told China they had to buy Treasuries. They did it as deliberate national policy to hold the value of the RMB constant, and got a lot of benefits in the form of a faster growing economy and more development of skills in China (sorry to say this for the third time). In fact, one of the first things they teach students of economics is that Macro-level analysis (economic growth) is much different animal than Micro-level (gains or losses in a balance sheet). For example, an stimulate fiscal policy might lift government debt, but in many situations it might lift long-run growth to be able to cover the deficit. However, a deficit level is much easier to criticize than a counterfactual (what if stimulus was not spent) is able to defend. Similarly, I think it's arguable that China investing its export earnings into the USD may have been ultimately better for China's own growth because 1) unless the Chinese really start to ramp up domestic demand, it's unclear a shortage of capital is China's major problem, given much overcapacity 1) the U.S. at the time (and even today) is better able to deploy capital to truly innovative purposes. These innovations do not necessarily show up in any balance sheets (micro), but clearly they show up in GDP (macro) when the Chinese also benefit from these innovations without directly paying for them. Maybe it's only geeks such as me that have an appreciation for some of the simple things in our lives that aren't so simple. Think of the algorithms behind MP3s and web videos. Or the idea behind Facebook (Chinese copy: Xiaonei and Kaixingwang) and instant messaging (Chinese copy: QQ).

Look, I'll be the first to point out that the US economy has a lot of housekeeping to do right now. Excesses in the US also caused excesses in China. But let's just not forget that it takes two to create the two sides of an imbalance. If China and other Asian nations ran their own economies in a well balanced way that gives real opportunities to their citizens, they would not have had to depend on exporting to American consumers to grow their economies. Granted, young developing economies with no credit in the world need to do that and I’ll cut China some slack for that. But even Japan continues to depend on exports decades after its industrialization.

More Badness Ahead

I was just on a conference call with one of America's top [paid] fund managers. He believes there's still more shoes to drop in the financial sector. He didn't say how much he has calculated in capital shortfall, but pointed out the IMF's $2.2 trillion as a good guess, which means we're only halfway there (around $1.1 trillion so far).

He also said some European banks are even more leveraged than American banks, and many emerging markets are just now having their shoes drop.

FUN times ahead!

* I should note he also pointed out Nouriel Roubini estimated $3.6 trillion. What a depressing dude.

Random Anti-Japanese IM

So I logged into QQ to see another anti-Japanese instant message floating about ---

学这么多年英语,突然发现一个有趣现象:
clever 聪明的
honest 诚实的
intelligent 智慧的
noble 高贵的
excellent 卓越的
smart 机灵的
elegant 优雅的
把以上这些英文字的头一个字母
放一起就是：Chinese---中国人
junk 垃圾
adult 色鬼
prostitute 婊子
ass 蠢驴
nasty 下流
evil 魔鬼
scamp 流氓
excrement 臭狗屎
把这些英文的第一个字母
放在一起就是：Japanese---日本人!
是中国人就在你的每一个群里发一次
真是佩服李白，在唐朝就知道骂日本人了:
日暮苍山兰舟小，
本无落霞缀清泉。
去年叶落缘分定，
死水微漾人却亡。
日 小
本 泉
去 定
死 亡
请让中国人骄傲一下


As a Chinese person myself, I find this to be rather a bit of 报喜不报忧. To be honest, I'm not exactly sure I'd describe Chinese people as a whole to be 1) honest 2) noble or 3) elegant. As for excellent, intelligent and smart, well, those attributed have to be proven over time and require a system that can channel human excellence into actions. As for clever? I'll definitely give Chinese people clever.

What are some other attributed one can apply en-mass to CHINESE if I were an anti-Chinese Japanese netizen:


C
Cultural Revolution
Copiers
Communist

H
Hived-minded
Hypocritical

I
Impoverished
Imperialistic

N
Nihilistic

E
Envious

S
Spitters
Smelly


Just a few to get started...