Friday 8 October 2010

The great 1959-1961 famine

You have to hope that economists also read history books.

The book below is one of the best books I have ever read. It comes highly recommended for those interested in China and Chinese economics.

If one was to read this book and then read the paper below you might arrive at a different conclusion as to the cause of the great famine.

The Institutional Causes of China's Great Famine, 1959-61

Xin Meng
Australian National University - Department of Economics; Institute for the Study of Labor (IZA)

Nancy Qian
Yale University - Department of Economics

Pierre Yared
Columbia University - Graduate School of Business

September 2010

NBER Working Paper No. w16361

This paper investigates the institutional causes of China’s Great Famine. It presents two empirical findings: 1) in 1959, when the famine began, food production was almost three times more than population subsistence needs; and 2) regions with higher per capita food production that year suffered higher famine mortality rates, a surprising reversal of a typically negative correlation. A simple model based on historical institutional details shows that these patterns are consistent with the policy outcomes in a centrally planned economy in which the government is unable to easily collect and respond to new information in the presence of an aggregate shock to production.

The following book deals directly with the famine. The title gives it away.



Why did China industrialise after England?

To an economist this is an interesting question. I have read widely on this subject. This paper provides a possible answer although by no means all of it.

For that we need to look at England colonies, slave labour and massive imports of raw material. China did not have an "empire" that England accumulated during the Victorian era. This enabled capital to accumlate and the shortage of labour required the design of labour saving devices - this was not necessary in China for obvious reasons.

"Why China Industrialized after England"

Economic Inquiry, Vol. 48, Issue 4, pp. 860-863, October 2010
BARRY S. KAHN, affiliation not provided to SSRN

Although industrialization first occurred in England, it is thought that China, not England, may have been the world leader in technology at the time. Yet, China did not industrialize until 150 yr after England and nearly a century after less advanced European countries. This represents a puzzle because two-sector neoclassical growth models, such as Hansen and Prescott (2002), that accurately match industrialization, require that more technologically advanced countries industrialize at an earlier date. I find that a model that accounts for cross-country heterogeneities in population density accurately predicts the timing of industrialization in China.


Population Wars - India v China

Interesting article on China's population relative to India's.

I have included a number of quotes.

The Battle of the Billionaires: China Vs. India [Globalist]

Together, China and India currently contain nearly two out of every five people in the world — and are equal in size to the world population in 1950.

I like that statistic - together they are equal to the whole world's population in 1950. That puts it in context fantastically. Here is another mind bender:

China’s and India’s demographic size may also be appreciated by noting that each of their populations is larger than those of Africa, Europe or the entire Western hemisphere.

So where do they live:

Also, while most Chinese and Indians still live in rural areas — 55% and 70%, respectively — China will soon become predominately urban, perhaps as early as 2015. In contrast, India is expected to remain mainly rural at least until mid-century.

So what about the future - now we get to fertility. We all know about China's one child policy and its aging population (certainly relative to India). What is remarkable is how high it was in the 1950s at 6 children per woman.

Although fertility levels in the mid-1950s were about the same in the two countries — at six children per woman — fertility rates have declined much faster in China than India, due in part to China’s one-child family policy. Today, China’s fertility is below replacement and one child less than India’s — 1.8 compared to 2.8 children per woman.

So what about the (controversial) gender mix - here China and India share similarities. I detect the raw material for large armies and a future war. Technology means this trend is likely to get worse if anything.

Both China and India have significantly more males than females, in sharp contrast to demographics in most other nations. This atypical gender imbalance is due in part to the use of prenatal ultrasound scanning to abort female fetuses.

So when will the race end?

As a result, India is expected to overtake China as the most populous country in the world in less than two decades, perhaps around 2028.

The question remains whether the world is able to feed the increased number of people given the environmental degradation in both countries. Moreover, China's one child policy may not last the test of time.

The conclusion - will Malthus be proved correct after all of will technology save the day. Climate change, war or a new super virus will probably kick in at some point and reduce populations dramatically.


Soros speaks: "China must fix the global currency crisis"

Whilst George Soros and the US are happy to hammer the Chinese over the overvalued RMB I am pleased to see that Wen Jiaboa is finally coming out and explaining the true implications of a revaluation policy.

This is important and should not be underestimated.

Wen's argument is that:

..."forcing Beijing to revalue its currency would lead to a "disaster for the world"".

Why? Because of the increased changes of social unrest of course. In this blog this is something I have been writing about for months if not years. This factor has been key to China's exchange rate policy all along. His warning is correct:

"Many of our exporting companies would have to close down, migrant workers would have to return to their villages".

"If China saw social and economic turbulence, then it would be a disaster for the world".

This issue needs close attention.

So let us now look what George has to say:

"China must fix the global currency crisis"[FT]

The prevailing exchange rate system is lopsided. China has essentially pegged its currency to the dollar while most other currencies fluctuate more or less freely. China has a two-tier system in which the capital account is strictly controlled; most other currencies don’t distinguish between current and capital accounts. This makes the Chinese currency chronically undervalued and assures China of a persistent large trade surplus.

Most importantly, this arrangement allows the Chinese government to skim off a significant slice from the value of Chinese exports without interfering with the incentives that make people work so hard and make their labor so productive. It has the same effect as taxation but it works much better.

This has been the secret of China’s success. It gives China the upper hand in its dealings with other countries because the government has discretion over the use of the surplus. And it protected China from the financial crisis, which shook the developed world to its core. For China the crisis was an extraneous event that was experienced mainly as a temporary decline in exports.

It is no exaggeration to say that since the financial crisis, China has been in the driver’s seat. Its currency moves have had a decisive influence on exchange rates. Earlier this year when the euro got into trouble, China adopted a wait-and-see policy. Its absence as a buyer contributed to the euro’s decline. When the euro hit 120 against the dollar China stepped in to preserve the euro as an international currency. Chinese buying reversed the euro’s decline.

I would ask again that readers refer to my previous post on what China can actually do with its surplus. Surplus' are not always good.


Rural earnings in China and the financial crisis

Apologies once again for a lack of recent posts. This management game takes up a lot of my previous blogging time.

It is very interesting to get some figures on the impact of the financial crisis on employment in China. I will be following this up shortly with a link to the current "currency" debate taking place in the national press.

The bottom line is that China is now coming out to explain it's position - something it should have done a while ago (see next post).

The numbers are large and the recovery impressive. 49 million laid off and over 1/2 rehired within a short space of time.

Interesting reading.

The Impact of the Global Financial Crisis on Off-Farm Employment and Earnings in Rural China

Jikun Huang
Chinese Academy of Sciences (CAS)

Huayong Zhi
affiliation not provided to SSRN

Zhurong Huang
affiliation not provided to SSRN

Scott Rozelle
Stanford University - Freeman Spogli Institute of International Studies

John Giles
World Bank

October 1, 2010

World Bank Policy Research Working Paper No. 5439

This paper examines the effect of the financial crisis on off-farm employment of China's rural labor force. Using a national representative data set collected from across China, the paper finds that there was a substantial impact. By April 2009 off-farm employment reached 6.8 percent of the rural labor force. Monthly earnings also declined. However, while it is estimated that 49 million were laid-off between October 2008 and April 2009, half of them were re-hired in off-farm work by April 2009. By August 2009, less than 2 percent of the rural labor force was unemployed due to the crisis. The robust recovery appears to have helped avoid instability.

Keywords: Labor Markets, Labor Policies, Work & Working Conditions, Tertiary Education, Crops & Crop Management Systems