Obstacles to taming the "Dirty Dragon"

H/T Time China for a post that makes reference to 4 obstacles to the greening of China. Time reiterate that the following list amounts to nothing more than saying that the entire problem is related to "corruption". I disagree with this statement.

China has already come on a remarkable journey in the last 20 years. The speed of development is bound to lead to teething problems and China is on a very steep learning curve. As incomes rise China's environmental record will improve. Corruption can be tamed. This however all takes time. China needs support to achieve its environmental goals. The 4 obstacles listed below are all valid however and whilst change will not be rapid (and certainly not as quick as the West would want) it will eventually happen in my opinion.

China has a lot of problems to deal with from food prices, creating jobs for millions each year, censoring blogs (like this one) and environmental degradation on a vast scale.

My feeling is that the environment was seen as the least of its problems although it is quickly moving up the list of priorities.

Ranking the Obstacles to Sustainable Development in China

Obstacle #1 The biggest obstacles are unrealistic economic goals defined in economic terms (GDP) which are then exaggerated at lower levels. Economic growth goals need to be relaxed, said Zheng. The development ministries such as the State Development Planning Commission, the State Economic and Trade Commission are much more powerful than the protective ministries such as the State Environmental Protection Administration (SEPA), the State Forestry Bureau (although some Chinese experts say that Forestry is more of a forest-exploiting than a forest-protecting agency.)

Obstacle #2 The second greatest obstacle to sustainable development is the private interest group-like behavior of ministries and local governments. This results in conflicting goals as each ministry and local government seeks its private advantage first and prevents a coherent policy from being implemented. This second obstacle is related to the weakness of law and the ineffectiveness of the central government in imposing policy upon different ministries and upon local government.

Obstacles #3 The third obstacle is the widespread corruption of Chinese government officials. This is closely related to obstacle #2 above. The perception of widespread corruption by government (that the government does not obey the law) probably also makes it harder to persuade Chinese people to comply with laws and weakens the authority of government generally.

Obstacle #4 The fourth obstacle is the poor quality of decision-making by Chinese government officials. This fourth obstacle is due to limitations in personal integrity, education and knowledge of many officials [Note: The Chinese term that expresses a person's quality (suzhi) is a blend of personal integrity, education, and general knowledge. End note] but also to the poor quality of the statistics they base their decisions on. Some Chinese academic say that the elimination of the social sciences from university curricula in the early 1950s (but making a comeback today) has resulted in very narrowly educated officials and scientists who don't understand the big picture. Premier Zhu Rongji's government in 1998 launched a campaign still underway to stop the widespread falsification and exaggeration of statistical data that local governments send to the central government.

Blog Awards - "China Economics Blog" nominated

With only a couple of days left this is an impassioned plea to readers to VOTE. Winning is now a mathematical impossibility (that is not strictly true) as China Law Blog has it all sown up but a wee push will ensure this blog is not bottom and achieves a creditable finish :-)

VOTE HERE

There's a rat in the kitchen, what am I going to do?

Some how I missed this article. "China invaded by 2 billion rats" is a good enough story but when one also throws in some climate change, too much snake and owl on the menu and the likelihood that "rat" will soon be joining them and you get a blogger's goldmine.

The economics comes from all of the above. Demand from customers for snake means no snakes left to eat the rats - a classic externality. The demand from consumers for more goods and rampant materialism leads to greater CO2 emissions and hence climate change that may have contributed to the recent flooding. The Chinese government building the three gorges dam that cost billions so that it could be used to control the floods but may also have contributed to the increase in rats. Finally, the ability of the Chinese to substitute rat for other meat and for it to have a cost.

One point of clarification, it appears that what us Brits call mice, the Chinese call rats. What do the Chinese call rats?

This Guardian article is great - it goes straight for the economics. Forget the human misery, lets talk business.

'Rats' on the menu after China swamped by 2 billion rodents [Guardian]

The business management philosophy that one person's crisis is another's opportunity may perhaps never have been taken to such bizarre extremes.

A plague of 2 billion mice in central China was described just days ago as being so bad that it resembled a scene from a horror movie with roads and hillsides turned black with rodents.

But in a remarkable display of entrepreneurship, businessmen are catching, shipping and selling the eastern field mice, also known locally as rats, to the southern city of Guangzhou, where restaurants are reportedly offering rodent banquets to diners notorious for their unusual tastes.

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According to Beijing News, businessmen from Guangzhou - the provincial capital of Guangdong - were offering 6 yuan (40 pence) for a kilogramme of live rodents.

The Guardian then decides to mention as an aside the fact that:

The infestation was caused by some of the worst flooding in 50 years in central China. In the past two weeks, more than 400 people have died, 105 are missing and more than 3 million have been forced to evacuate their homes as a result of the deluge.

Another externality (in addition to the eating of owls and snakes):

In the ensuing war on rodents, local people beat hundreds of mice to death. Some used ferrets, others so much poison that more than 1,000 cats and chickens were also killed.

Assuming that the cats were trained rat killers the use of poison would appear to be rather hasty.

Finally, forget the great wall of China, the great mouse wall of Hunan could be the next great tourist hotspot. Is £400,000 a lot? We need to get the Contingent Valuation guys on the job.

Hunan province is attempting to raise more than 6m yuan (£400,000) to build a 24-mile wall to prevent future mice invasions.

H/T: Treehugger - who conclude their article with a fine "economics" phrase.

Two Billion Rats Invade China: From Eco-Disaster To Exotic Delicacy

Rats are being sold in greater numbers at live food markets in Changde, at the western end of the lake. From there, animals make their way to un-distinguished plates in restaurants in neighboring Guangdong province. The government has denied the news, saying that bans on wild animals still stand. But Guangdong, the home of Cantonese cuisine, is known for its exotic taste for everything from turtles to sharks to cats. And in China, where there's demand, there's supply -- and vice versa.

China and the concept of "Quality Fade"

China Law blog have written an excellent review piece on the topic of "quality fade" - the idea that, for specific deals, the Chinese exporter will begin to decrease the quality of the goods supplied (by using cheaper inputs) so that margins are improved.

The definition given by Paul Midler is: "The deliberate and secretive habit of widening profit margins through a reduction in the quality of materials."

This is a cost of outsourcing and of course it is in some respects, the price the West has to pay if it wants cheap imports.

I have done some work on the relative quality of Chinese imports and exports looking at Chinese imports and exports of the same goods (intra-industry trade) with China's East Asian neighbours. The preliminary results suggest that Singapore and Malaysia have been increasing the quality of their exports to China more rapidly that China has been increasing the quality of their exports to these countries. This fits with the quality fade story but is very much a macro perspective and as has been pointed out, the absolute quality of China's goods are increasing in the main it is only for specific deals where "quality fade" becomes a problem.

I believe this is an interesting idea and worthy of more detailed research. The linked to article contains a good discussion of the relevant issues. The original text also includes some good comments.

China Quality Control: Darkness Before The Dawn

Very thoughtful article on China product quality over at the Knowledge@Wharton site. The article is written by Paul Midler, founder and President of China Advantage, which provides China outsourcing and supply chain management services. Paul is a Wharton MBA graduate, who has been living and working in China off and on for the last 15 years.

The article is entitled "'Quality Fade': China's Great Business Challenge." Its thesis is that the current emphasis placed on importers in preventing quality problems is misplaced. Chinese suppliers that want to play games with their product are well positioned to do so and it is very difficult for Western importers to prevent. Midler defines "quality fade" as "the deliberate and secretive habit of widening profit margins through a reduction in the quality of materials" and he sees this as pervasive in China, with no end in sight.

Is more US anti-dumping legislation on its way?

H/T Greg Mankiw.

At least the U.S Treasury can see some sense. What is the Senate up to? This is simple protectionism and should offend free thinking economists everywhere. This is short sighted in the extreme.

Treasury: Cannot support Senate currency bill

My bold and not all the text included here.

WASHINGTON (Reuters) - The U.S. Treasury said it cannot support a bill passed by the Senate Finance Committee on Thursday to give the U.S. government new tools to pressure China and other countries to adopt more market-oriented currency practices.

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"It distances the U.S. from a multilateral approach and raises serious concerns regarding U.S. compliance with international rules governing anti-dumping investigations."

Passed by a vote of 20-1, the Senate Finance Committee's measure would allow U.S. companies to seek anti-dumping duties on goods from any country that maintains a "fundamentally misaligned" exchange rate after being formally cited by the United States.

Another provision would allow the Federal Reserve to intervene in global currency markets if one year of efforts through the International Monetary Fund and World Trade Organization also failed to result in reform of targeted currencies.

The Treasury said it recognized that members of Congress want to send a strong message to China through this bill and others under consideration and added that Treasury Secretary Henry Paulson would deliver such a strong message when he visits President Hu Jintao and other top Chinese leaders next week.

But Treasury said it cannot support the bill's approach and "continues to believe that direct, robust discussions with the senior Chinese leaders, not legislation is the best means of achieving progress."

China Quote of the Day

Consider the following quote that relates to China's adoption of practices, language, technology and mathematics from the West and have a guess of its year of origin:

"If we let Chinese ethics and famous [Confucian] teachings serve as an original foundation, and let them be supplemented by the methods used by the various nations for the attainment of prosperity and strength, would it not be best of all procedures?"

Feng Guifen 1860.

See Ssu-yu Teng and John K. Fairbank, China's Response to the West: A Documentary Survey, 1939-1923 (New York Atheneum, 1963), pp. 30-35.

Later in the century Zhang Zhidong coined the phrase:

"Chinese learning as the base, Western studies for use".

The policy of "self-strengthening" from this middle 1800s has generally been considered a failure with many reasons given including Western imperialism and the incompatibility of Confucianism with the priorities of the modern state.

It is useful to contemplate on why things are different now - if indeed they are that different. Issues of quality and corruption are as relevant now as they were then. Moreover, trade and FDI between China and the West has reached record levels. This is really jsut a continuation of a trend started over 150 years ago.

See Chapter 5 of Roberts' "A history of China" for more detail about this period of Chinese history when the China and West first clashed economically and militarily.

A History of China (Palgrave Essential Histories) by J.A.G. Roberts.

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Corruption in a Developing Country Context

From theGlobalist comes an excellent easy to read summary of corruption in a developing country. China's rapid growth will cure some of the excess but it worth reminding ourselves of the impact of corruption can have on the development process.

Corruption in a Developing Country Context

Corruption plagues every aspect of society and causes more substantial damage in developing countries. As Ngozi Okonjo-Iweala, Nigeria's former Finance Minister, observed in her Sabot Memorial Lecture to the Center for Global Development, corruption affects all walks of life including education, governance and hinders progress in developing economies.

Viewed in its broadest sense, corruption is simply the misuse of public office or public assets for private gains.

It is also the misuse of these assets in a way that creates an unlevel playing field and that makes people feel injustice has been done. Perhaps this is why the average citizen in any country, in fact all of us, feel so badly about corruption.

Manifestations of corruption

Corruption may be manifested in various forms, such as theft, fraud, bribery, extortion, request for kickbacks, nepotism and patronage. A distinction is often made between grand and petty corruption.

In the case of grand corruption, big businesses are seen greasing the palms of senior state officials to receive favors.

And in petty corruption junior civil servants may be enticed to receive side payments or bribes to facilitate administrative arrangements for their clients. The existence of corruption clearly indicates that something has gone awry. And it is indeed symptomatic of weak governance and, more importantly, weak institutions.

Good governance

Of course, the desired outcome is that of good governance — a situation in which public institutions are strong, and public resources and public goods and services are managed efficiently to address the needs of society.

In the past, some skeptics often provided a rational defense for corruption based on economic efficiency arguments. It was argued that bribes helped in lowering the cost of doing business, in clearing the market, in providing incentive bonuses, and in distributing monopoly rents from a single agent to other officials who collude in sharing a bribe.

Bribes might be efficient

For example, it has been argued that in an environment where there are restrictive or bureaucratic government procedures — such as burdensome customs procedures or difficulties in obtaining licenses — bribes could actually provide an efficient way of reducing burdensome transaction costs.

Similarly, in cases where a government needs to allocate a scarce resource to various private agents, a bribe payment may help the market to clear more efficiently by allocating the resource to the highest bidder.

Bribes could also be explained as a rational incentive bonus to public sector workers whose wages may be artificially depressed.

Damaging development

The problem with many of these arguments is that they point to the microeconomic efficiency of an isolated corrupt event without examining its long-run systemic impacts.

In the long run, widespread corruption often creates much larger negative effects which can hinder the dynamic efficiency of an economy.

Affecting the poor

In Nigeria and many other countries in Africa where we have struggled with this problem, systemic corruption has diverted resources, bottlenecks in paying taxes,corrupted values, and led to rent-seeking activities in place of productive ones.

While corruption damages a country’s development, what is not at all sufficiently understood is that, in practice, it is highly regressive and inequitable. This is simply because corruption ultimately is most vicious on the poor. This may occur in various ways.

First, poor households are likely to be excluded from public services which require grease payments since the burden of corruption (that is, the cost of a bribe as a share of income) for the poor is likely to be disproportionately large compared to that of wealthier households. In this sense, bribery acts as a form of regressive taxation.

Public service

Second, in instances when public service delivery is weak due to corruption, the poor tend to be heavily disadvantaged as they may lack resources to obtain private services (in private clinics or schools, for example).

Teachers and lecturers take bribes to pass children on exams. Education, which is the one way for the poor to open doors of opportunity, is perverted — and such means of upward mobility is closed to them.

Roads to nowhere

Third, there is evidence that in a corrupt environment, government spending tends to be diverted away from social expenditures (such as health and education, which benefit the poor) towards infrastructure projects such as "roads to nowhere" or electricity projects that do not function.

Such projects are heavily transactional, yielding contracts that lend themselves to bribes.

When the environment becomes purely transactional with little focus on policy, the impacts on the poor is devastating. In fact, in a corrupt environment, actions of ministers and civil servants focus heavily on transactions rather than policies. Ample evidence exists in Nigeria of the so-called "juicy government ministries," such as Works, Power, Defense, Agriculture and Water Resources, which have large procurement budgets each year.

Non-economic effects

Finally, in instances when infrastructure projects are financed, procurement fraud leads to inflated contracts which further divert scarce public resources away from competing pro-poor programs.

A sad thing is that corruption could have even more pernicious non-economic effects on a society.

Nigeria is still fighting

In Nigeria, prior to the recent reforms, the culture of impunity and corruption that crept in under non-transparent, authoritarian regimes was so pervasive that it had corroded the psyche and moral fiber of Nigerian society.

There was complete invasion of our moral and values system, reaching well beyond the economic sphere as illustrated in the corruption examples above. Despite a vigorous fight launched against corruption, Nigeria is still fighting these ills today. But it is by no means the only country in Africa struggling with these issues at present.

Editor's Note: This feature is adapted from the Second Annual Center for Global Development (CGD) Richard "Dick" Sabot Memorial Lecture given by Dr. Ngozi Okonjo-Iweala on June 20, 2007.