The ROK president election is on the corner. It is reported that Mr. Lee Myung-bak, candidate from Grand National Party is leading the run with obvious advantages. The legend of the president candidate seems to give us many fruits of thoughts.
Mr. Lee comes from the bottom of society. He worked as a garbage collector to support his life and studies. After his graduation, he worked very hard and got the nickname of “bulldozer”. He became the CEO of Hyundai Engineering and Construction at the age of 36.
Mr. Lee is a pragmatic person and he calls himself a “can-do” leader which will make him the right person to take command of the South Korean economy. He really has shown his strong ability to transform a dream into reality. As an elected mayor of Seoul in 2002, he managed to accomplish the project to the buried Cheonggyecheon stream under the great pressure from all walks of life. He communicated with different groups and tried to persuade people into finding the beauty of future life after the project was finished. Finally he realized his dream with 1% possibility of success and brought a safe and beautiful natural stream and the traditional culture back to the citizens in Seoul. The success of the project shows Mr. Lee’s pragmatism and brings him much support from the grass-root society.
Promise on development also becomes an explanation for Mr. Lee’s high support. In contrast to the other two major candidates, Mr. Lee Hoi-chang and Chung Dong-young, Mr. Lee Myung-bak conveys the information for a better future for the somewhat stagnant nation under the disappointed leadership of current president Roh Moo-hyun. His engagement policy towards North Korea also based on the perspective that if North Korea can keep following the direction of No Nuclear and Opening-up, in ten years, South Korea can help their north brothers and sisters to reach the goal of US$3000 per capita income. The brilliant future presented by Mr. Lee surely brings him large support.
The preference showed from the Korean people brings a piece of vital information to today’s politicians: pragmatism and promise on development possess strong appeal and power. Compared to Mr. Lee Myun-bak, another candidate Mr. Lee Hoi-chang represents the old politicians who uphold strong ideology to insist a containment policy towards DPRK, while Mr. Chung dong-young seems to be lack of pragmatism. Neither of them can bring a signal of future development for the nation.
When people are voting for their president, they are not merely voting for the guy, but their life in a foreseeable future. It is not something easily interpreted as a trick of politicians. Although politicians can use different ways to make themselves quite appealing, the civil society will always try to pick out the one who is thinking about the life of the ordinary people and will act in the interest of the nation.
There are people complaining that people are always not selecting the best, but just eliminating the worst in the election. I should say that is due to the little differentiation between the candidates. If one candidate is obviously showing his/her true love for society rather his/her devotion to one stubborn ideology, he/she is bound to win. However, it is always the case that the candidates are too “political” to make them appealing to the voters even though they may be proud of their delicate decorations prepared for a long time.
09 December, 2007
24 November, 2007
The Witness of Two Solutions: Discussion on future economic development of East Asia
I. Introduction
In the modern history, the development of global political pattern is led by the western world, especially by the United States. The omnipresence of the US, to a large extent, has shaped the contemporary power distribution in Asia ever since the Second World War. The penetration of the US influence was first achieved by the bilateral relationships between the US and its Asian partners. In the late 1980s and 1990s, the US became more active in Asia through the promotion of the multilateral relationships of some institutions under the name of Asia-Pacific region which is designed to lead Asian countries to the way of globalization. However, with the recent rise of nationalism, the failure of the international help for the Asian Financial Crisis (AFC) and some other factors, more and more Asian countries are trying to find the other way to supplement the deficiency of global solution. That way is Asians-only economic regionalism, i.e. to exclude the United States as a member of the institution. The most well-known institution established to achieve that goal is ASEAN Plus Three (APT) which includes most countries in East Asia.
Is Asians-only economic regionalism a feasible and desirable way for the future of Asia? Are the United States and those international institutions losing their influence in Asia? The article first examines Asia’s economic development before the 1997 Asian Financial Crisis. It then describes the economic regionalism after the AFC. The article concludes with a possible prospect of the future economic development of East Asia.
II. Asia’s economic development before the Asian Financial Crisis
Before the 1997 Asian Financial Crisis, Asia’s economic development always seeks help from the western world. There are many reasons for this kind of dependence on the US and US-supported international institutions.
For the region itself, East Asian nations are not under something which is obviously quite common, making it difficult to promote regionalization. In terms of geography, the size of territory and the reserve of natural resources are of great variety. The various degree and institutional form of democracy and non-democracy in the region makes interactions between countries more difficult than those with similar political structure. Sharp contrast can also be found in economic development level. This region includes the world’s second strongest economy, Japan, one of the world’s most vigorous economy, China, and the world’s poorest countries as Myanmar as well. This kind of diversity in nature gives rise to the disparity and unbalance of power in the region and makes relative power gains matter a lot. This may cause perennial struggle for power and plenty and make it difficult to form sincere cooperation among East Asian nations.[1] As a result, the Asians-only economic regionalism lacks common grounds and seems not quite favorable to many East Asian politicians.
Asians-only economic regionalism has also been hindered by strong nationalism among regional members. After the Second World War, Japan develops under a burden of history. Perception that Japan is by nature a militaristic and aggressive society is widely spread among victim countries in East Asia. Any behaviors or signs towards establishing stronger military forces, denial of history or visiting the Yasukuni Shrine may trigger waves of condemnation and protests.[2] The strongest reaction towards Japan’s potential provocation in the region comes from China and South Korea. Both countries have important roles in East Asia, and China’s influence in the region is sufficient to call for a different approach when Japan proposes an unfavorable suggestion for future regionalization.
In the past years, Sino-Japan relations always face conflicts and frictions. Territory dispute on the Diaoyu Islands/the Senkaku persists while recent disputes on the border line between the two countries in East China Sea due to its abundant natural resources add to rising tensions. Japan’s support to jointly research on and develop the regional TMD system despite strenuous Chinese objections also worsens the bilateral relations. Although the fastening of mutual trade partnerships have counterweighed some negative factors in the Sino-Japan relations, 50 percent of Chinese respondents in a 2002 poll indicating that they disliked Japan while pressure on the Japanese government from the grass roots to reduce the amount of foreign aid to China increased.[3]
The sophisticated economic diversity and political rivalry make it difficult for attempts to cooperate without outside forces. To fuel economic development, East Asian countries have gradually learned to seek for global solution with years of help from the US and the US-supported international institutions.
Ever since the end of the Second World War, the US has established strong bilateral relationships with almost all the important players located in the East Asia. Under the strong support of its political, economic and military power, the US becomes a very important factor which not only influences the political development in these countries, but also fuels and stabilizes the economic development in the region.
The US established partnership with Japan under the San Francisco Peace Treaty in September 1951, which enshrined America’s efforts to integrate Japan into a network of US Pacific alliances through a non-vindictive peace. Under this system, Japan and the US become “bilateral, highly asymmetric US security alliances”; Japan also gets huge economic benefits from the US under the “asymmetrical economic arrangements” through which Japan gets an open American market while it can protect its national industries by putting restrictions on foreign firms.[4] It was these favourable terms that created the miracle of the economic giant, especially in the 1980s.
With a quite similar background as Japan-US relationships, South Korea depends on the US a lot on its national security and economic development as well. The presence of the US military forces in South Korea balances the military threat from the North Korea, and the strong economic tie between South Korea and the US is a strong support for ROK’s economy. In 2005, the United States was Korea’s third-largest trading partner, second-largest export market, third-largest source of imports, and its largest supplier of foreign direct investment.[5] The most important achievement in the economic field between the two countries is the reach of the world’s largest bilateral free trade agreement on April 2nd, 2007.[6]
As the largest country in the region, China also has its important place in the US diplomatic strategic plan. Generally speaking, Sino-American relations have largely relied on burgeoning economic ties against tensions on political and security issues. China is especially dependent on the US as an exporter market. Trade with the US represented 23.7 percent of total trade for China in 2002. The US ranks as China’s top trading partner. The US is also China’s leading partner as a source of foreign direct investment (FDI). It contributes to 9.5 percent of China’s inward FDI grew in 2001.[7]
Under the influence of the US promotion of free trade and globalization, especially after 1980s, East Asian countries began to understand more about globalization. The 1980s and 1990s witness their entries into international institutions and cooperation with global players.
In 1989, APEC was established in response to the growing interdependence among Asia-Pacific economies and to the need to advance Asia-Pacific economic dynamism and sense of community. Many East Asian countries become the founding members of the APEC forum, such as Japan, the Republic of Korea, Thailand, Indonesia, and so on.[8]
Even China gradually opens its door and finds its place in the international institutions after years of close. Chinese politicians have formed some kind of belief in globalization that it will benefit China a lot through participation in the international institutions. This participation will help China share the achievement of the world economic development and raise the recognition of China from other countries and international institutions. The entry of APEC in 1991, WTO in 2001 all shows China’s willingness to obey the international rules and behave as a responsible member of the international community.
To give an overall view, before the Asian Financial Crisis in 1997, East Asia seeks global solutions to fuel its economic growth. The US and US-supported international institutions play very important role in this course.
III. The Development of Economic Regionalism
However, the AFC serves as a turning point of the approach for East Asia to promote and stabilize its economic development. Politicians in East Asian countries find that the globalization brings not only economic booming in East Asia, but high risk of financial attack as well. “National economic security cannot always be achieved unilaterally or even bilaterally; in some cases, it may require de facto multilateral coordination or even formal cooperation.”[9] What’s more, the interest of East Asia in the global economy is not fairly and well represented in the existing international institutions. The feelings were proved when western countries in the International Monetary Fund (IMF) deeply intervened the economic policymaking of the region’s crisis-hit countries. As a result, AFC gives birth to ASEAN Plus Three (APT) which becomes one way out for the purpose of counterweighing the global solutions to economic development in East Asia.[10]
For East Asian countries, global solution has brought them tremendous benefit. Interdependence between east world and western world makes countries one economy. However, liberalism cannot fully illustrate the picture of the crisis. When in danger, the international institutions as representatives of the western world will provide help only on strict terms and will easily take over the control of the national economy to protect their own interest. This may even be practiced at the cost of the victim county’s whole social system to just stabilize the currency. Thus the role of APT is not an institution to make East Asia become totally independent, but as a measure to promote the regional cooperation and work as a backup and supplement for the region in case of the fail of the global solution to Asia’s economic development. As a result, the policies made by APT are characterized by its tentative and gradual integration and various latent links to the international institutions.
Two economic and financial cooperation measures can be used to illustrate these two characteristics: the Chiang Mai Initiative (CMI) and Asian Bond Fund Initiative (ABFI).
“The CMI is designed to provide liquidity support for member countries that experience short-run balance-of-payment deficits, with the purpose of preventing an extreme crisis or systemic failure in a country and subsequent regional contagion.”[11] Started from 2000, the initial amounts involved under CMI were only $36.5 billion for a total of 16 bilateral currency swap arrangements concluded among APT. This number is quite insufficient compared to the amount of assistance required by Thailand alone was $17.2 billion. This arrangement will necessarily lead to the supplement from the IMF or other international financial institutions. In the May 2006, the amount of CMI is raised to $75 billion. The gradual raise of the CMI amount is due to the increase of mutual trust between member countries and strengthen its ability to reduce the dependence on an IMF or the US-determined solution to financial crisis in the region.[12]
However, the CMI does not mean an Asians-only solution. The initial CMI required its member countries drawing more than 10 percent from the funds in the CMI to accept an IMF conditionality. Even after the review of the IMF linkage with the CMI, IMF conditionality will still need to be accepted at 20 percent level. This linkage is especially supported by China and Japan despite some member countries’ opposition.[13] Those important players in the region know well that without the support from the well-established international institutions, the CMI will become fragile whenever there are conflicts between member countries. The loss of US support on a CMI excluding the US influence may also have negative impact on the bilateral relations between these countries and the US.
Asian Bond Fund Initiative (ABFI) is another example. Up to present, the size of the initiative increases from $1 billion initially to $2 billion and the investment has shifted from a basket of dollar denominated bonds issued by Asian sovereign or quasi-sovereign issuers in EMEAP economies to local-currency bonds. For this initiative, Asian leaders have placed their emphasis on the Asian-Bond-Eurobond linkage. Senior ranking financial officers both from Asia and Europe had their meeting in Singapore to discuss the interests and consolidated relations between EMEAP and the EURO-system.[14]
IV. Possible Prospect of the Future Economic Development of East Asia
The precious discussion gives a general view on the background and present development of Asian regionalism. As East Asian countries benefit a lot through globalization in the past, it will not immediately give up the attempt to be involved to share the global achievement even after the Asian Financial Crisis. However, the AFC do ask the Asian politicians to make a second thought on how to develop a healthier and more stable financial market for the benefit of the region, and the world as well. The supplementary measure adopted is economic regionalism.
Asians-only economic regionalism may not be a good direction without globalization at the same time since Asia faces challenges of economic diversity and political rivalry. However, it is also not safe to have global solution only to the future of Asia’s economic development. As a result, the 21st century witnesses the use of both solutions to fuel the economic growth in East Asia. For liberalists, they will be happy to see that the globalization and regionalization helps to deepen the interdependence between countries. But they cannot illustrate the disparity in the international institutions. For realists, their prediction of the power acquisition will still be considered even within the regional economic institution. However, cooperation has been and will be seen between East Asian countries. Hopefully, East Asia will march towards a more open and cooperative future under the help of both global and regional solutions.
Reference
[1]Kim, S. S. (2004). Northeast Asia in the Local-Regional-Global Nexus. S. S. Kim (Ed.), The International Relations of Northeast Asia (pp.4-19). Oxford: Rowman & Littlefield Publishers, Inc.
[2]Berger, T. (2004). Japan’s International Relations: The Political and Security Dimensions. S. S. Kim (Ed.), The International Relations of Northeast Asia (pp.139). Oxford: Rowman & Littlefield Publishers, Inc.
[3]Berger, T. (2004). Japan’s International Relations: The Political and Security Dimensions. S. S. Kim (Ed.), The International Relations of Northeast Asia (pp.154-155). Oxford: Rowman & Littlefield Publishers, Inc.
[4]Calder, K. E. (2004). U.S. Foreign Policy in Northeast Asia. In S. S. Kim (Ed.), The International Relations of Northeast Asia (pp. 226-227). Oxford: Rowman & Littlefield Publishers, Inc.
[5]Manyin, M. E (2006). South Korea-U.S. Economic Relations: Cooperation, Friction, and Prospects for a
Free Trade Agreement (FTA). Congressional Research Service. Retrieved Nov. 17th, 2007, from http://keia.org/4-Current/CRSFTA.pdf?sort=01&seq=20060124142516.
[6]Choe, S. H. (April 2nd, 2007). U.S. and South Korea reach free trade agreement. International Herald Tribune. Retrieved Nov. 17th, 2007, from http://www.iht.com/articles/2007/04/02/asia/fta.php.
[7]Moore, T. G. (2004). China’s International Relations: The Economic Dimension. S. S. Kim (Ed.), The International Relations of Northeast Asia (pp.115). Oxford: Rowman & Littlefield Publishers, Inc.
[8]A Brief History of APEC. Canada. Retrieved Nov. 17th, 2007, from http://www.dfait-maeci.gc.ca/canada-apec/media/history-en.asp.
[9]Moore, T. G. (2004). China’s International Relations: The Economic Dimension. S. S. Kim (Ed.), The International Relations of Northeast Asia (pp.126). Oxford: Rowman & Littlefield Publishers, Inc.
[10]-[14]Sohn, I. (2007). East Asia’s Counterweight Strategy: Asian Financial Cooperation and Evolving International Monetary Order. Intergovernmental Group of Twenty-Four on International Monetary Affairs and Development.
In the modern history, the development of global political pattern is led by the western world, especially by the United States. The omnipresence of the US, to a large extent, has shaped the contemporary power distribution in Asia ever since the Second World War. The penetration of the US influence was first achieved by the bilateral relationships between the US and its Asian partners. In the late 1980s and 1990s, the US became more active in Asia through the promotion of the multilateral relationships of some institutions under the name of Asia-Pacific region which is designed to lead Asian countries to the way of globalization. However, with the recent rise of nationalism, the failure of the international help for the Asian Financial Crisis (AFC) and some other factors, more and more Asian countries are trying to find the other way to supplement the deficiency of global solution. That way is Asians-only economic regionalism, i.e. to exclude the United States as a member of the institution. The most well-known institution established to achieve that goal is ASEAN Plus Three (APT) which includes most countries in East Asia.
Is Asians-only economic regionalism a feasible and desirable way for the future of Asia? Are the United States and those international institutions losing their influence in Asia? The article first examines Asia’s economic development before the 1997 Asian Financial Crisis. It then describes the economic regionalism after the AFC. The article concludes with a possible prospect of the future economic development of East Asia.
II. Asia’s economic development before the Asian Financial Crisis
Before the 1997 Asian Financial Crisis, Asia’s economic development always seeks help from the western world. There are many reasons for this kind of dependence on the US and US-supported international institutions.
For the region itself, East Asian nations are not under something which is obviously quite common, making it difficult to promote regionalization. In terms of geography, the size of territory and the reserve of natural resources are of great variety. The various degree and institutional form of democracy and non-democracy in the region makes interactions between countries more difficult than those with similar political structure. Sharp contrast can also be found in economic development level. This region includes the world’s second strongest economy, Japan, one of the world’s most vigorous economy, China, and the world’s poorest countries as Myanmar as well. This kind of diversity in nature gives rise to the disparity and unbalance of power in the region and makes relative power gains matter a lot. This may cause perennial struggle for power and plenty and make it difficult to form sincere cooperation among East Asian nations.[1] As a result, the Asians-only economic regionalism lacks common grounds and seems not quite favorable to many East Asian politicians.
Asians-only economic regionalism has also been hindered by strong nationalism among regional members. After the Second World War, Japan develops under a burden of history. Perception that Japan is by nature a militaristic and aggressive society is widely spread among victim countries in East Asia. Any behaviors or signs towards establishing stronger military forces, denial of history or visiting the Yasukuni Shrine may trigger waves of condemnation and protests.[2] The strongest reaction towards Japan’s potential provocation in the region comes from China and South Korea. Both countries have important roles in East Asia, and China’s influence in the region is sufficient to call for a different approach when Japan proposes an unfavorable suggestion for future regionalization.
In the past years, Sino-Japan relations always face conflicts and frictions. Territory dispute on the Diaoyu Islands/the Senkaku persists while recent disputes on the border line between the two countries in East China Sea due to its abundant natural resources add to rising tensions. Japan’s support to jointly research on and develop the regional TMD system despite strenuous Chinese objections also worsens the bilateral relations. Although the fastening of mutual trade partnerships have counterweighed some negative factors in the Sino-Japan relations, 50 percent of Chinese respondents in a 2002 poll indicating that they disliked Japan while pressure on the Japanese government from the grass roots to reduce the amount of foreign aid to China increased.[3]
The sophisticated economic diversity and political rivalry make it difficult for attempts to cooperate without outside forces. To fuel economic development, East Asian countries have gradually learned to seek for global solution with years of help from the US and the US-supported international institutions.
Ever since the end of the Second World War, the US has established strong bilateral relationships with almost all the important players located in the East Asia. Under the strong support of its political, economic and military power, the US becomes a very important factor which not only influences the political development in these countries, but also fuels and stabilizes the economic development in the region.
The US established partnership with Japan under the San Francisco Peace Treaty in September 1951, which enshrined America’s efforts to integrate Japan into a network of US Pacific alliances through a non-vindictive peace. Under this system, Japan and the US become “bilateral, highly asymmetric US security alliances”; Japan also gets huge economic benefits from the US under the “asymmetrical economic arrangements” through which Japan gets an open American market while it can protect its national industries by putting restrictions on foreign firms.[4] It was these favourable terms that created the miracle of the economic giant, especially in the 1980s.
With a quite similar background as Japan-US relationships, South Korea depends on the US a lot on its national security and economic development as well. The presence of the US military forces in South Korea balances the military threat from the North Korea, and the strong economic tie between South Korea and the US is a strong support for ROK’s economy. In 2005, the United States was Korea’s third-largest trading partner, second-largest export market, third-largest source of imports, and its largest supplier of foreign direct investment.[5] The most important achievement in the economic field between the two countries is the reach of the world’s largest bilateral free trade agreement on April 2nd, 2007.[6]
As the largest country in the region, China also has its important place in the US diplomatic strategic plan. Generally speaking, Sino-American relations have largely relied on burgeoning economic ties against tensions on political and security issues. China is especially dependent on the US as an exporter market. Trade with the US represented 23.7 percent of total trade for China in 2002. The US ranks as China’s top trading partner. The US is also China’s leading partner as a source of foreign direct investment (FDI). It contributes to 9.5 percent of China’s inward FDI grew in 2001.[7]
Under the influence of the US promotion of free trade and globalization, especially after 1980s, East Asian countries began to understand more about globalization. The 1980s and 1990s witness their entries into international institutions and cooperation with global players.
In 1989, APEC was established in response to the growing interdependence among Asia-Pacific economies and to the need to advance Asia-Pacific economic dynamism and sense of community. Many East Asian countries become the founding members of the APEC forum, such as Japan, the Republic of Korea, Thailand, Indonesia, and so on.[8]
Even China gradually opens its door and finds its place in the international institutions after years of close. Chinese politicians have formed some kind of belief in globalization that it will benefit China a lot through participation in the international institutions. This participation will help China share the achievement of the world economic development and raise the recognition of China from other countries and international institutions. The entry of APEC in 1991, WTO in 2001 all shows China’s willingness to obey the international rules and behave as a responsible member of the international community.
To give an overall view, before the Asian Financial Crisis in 1997, East Asia seeks global solutions to fuel its economic growth. The US and US-supported international institutions play very important role in this course.
III. The Development of Economic Regionalism
However, the AFC serves as a turning point of the approach for East Asia to promote and stabilize its economic development. Politicians in East Asian countries find that the globalization brings not only economic booming in East Asia, but high risk of financial attack as well. “National economic security cannot always be achieved unilaterally or even bilaterally; in some cases, it may require de facto multilateral coordination or even formal cooperation.”[9] What’s more, the interest of East Asia in the global economy is not fairly and well represented in the existing international institutions. The feelings were proved when western countries in the International Monetary Fund (IMF) deeply intervened the economic policymaking of the region’s crisis-hit countries. As a result, AFC gives birth to ASEAN Plus Three (APT) which becomes one way out for the purpose of counterweighing the global solutions to economic development in East Asia.[10]
For East Asian countries, global solution has brought them tremendous benefit. Interdependence between east world and western world makes countries one economy. However, liberalism cannot fully illustrate the picture of the crisis. When in danger, the international institutions as representatives of the western world will provide help only on strict terms and will easily take over the control of the national economy to protect their own interest. This may even be practiced at the cost of the victim county’s whole social system to just stabilize the currency. Thus the role of APT is not an institution to make East Asia become totally independent, but as a measure to promote the regional cooperation and work as a backup and supplement for the region in case of the fail of the global solution to Asia’s economic development. As a result, the policies made by APT are characterized by its tentative and gradual integration and various latent links to the international institutions.
Two economic and financial cooperation measures can be used to illustrate these two characteristics: the Chiang Mai Initiative (CMI) and Asian Bond Fund Initiative (ABFI).
“The CMI is designed to provide liquidity support for member countries that experience short-run balance-of-payment deficits, with the purpose of preventing an extreme crisis or systemic failure in a country and subsequent regional contagion.”[11] Started from 2000, the initial amounts involved under CMI were only $36.5 billion for a total of 16 bilateral currency swap arrangements concluded among APT. This number is quite insufficient compared to the amount of assistance required by Thailand alone was $17.2 billion. This arrangement will necessarily lead to the supplement from the IMF or other international financial institutions. In the May 2006, the amount of CMI is raised to $75 billion. The gradual raise of the CMI amount is due to the increase of mutual trust between member countries and strengthen its ability to reduce the dependence on an IMF or the US-determined solution to financial crisis in the region.[12]
However, the CMI does not mean an Asians-only solution. The initial CMI required its member countries drawing more than 10 percent from the funds in the CMI to accept an IMF conditionality. Even after the review of the IMF linkage with the CMI, IMF conditionality will still need to be accepted at 20 percent level. This linkage is especially supported by China and Japan despite some member countries’ opposition.[13] Those important players in the region know well that without the support from the well-established international institutions, the CMI will become fragile whenever there are conflicts between member countries. The loss of US support on a CMI excluding the US influence may also have negative impact on the bilateral relations between these countries and the US.
Asian Bond Fund Initiative (ABFI) is another example. Up to present, the size of the initiative increases from $1 billion initially to $2 billion and the investment has shifted from a basket of dollar denominated bonds issued by Asian sovereign or quasi-sovereign issuers in EMEAP economies to local-currency bonds. For this initiative, Asian leaders have placed their emphasis on the Asian-Bond-Eurobond linkage. Senior ranking financial officers both from Asia and Europe had their meeting in Singapore to discuss the interests and consolidated relations between EMEAP and the EURO-system.[14]
IV. Possible Prospect of the Future Economic Development of East Asia
The precious discussion gives a general view on the background and present development of Asian regionalism. As East Asian countries benefit a lot through globalization in the past, it will not immediately give up the attempt to be involved to share the global achievement even after the Asian Financial Crisis. However, the AFC do ask the Asian politicians to make a second thought on how to develop a healthier and more stable financial market for the benefit of the region, and the world as well. The supplementary measure adopted is economic regionalism.
Asians-only economic regionalism may not be a good direction without globalization at the same time since Asia faces challenges of economic diversity and political rivalry. However, it is also not safe to have global solution only to the future of Asia’s economic development. As a result, the 21st century witnesses the use of both solutions to fuel the economic growth in East Asia. For liberalists, they will be happy to see that the globalization and regionalization helps to deepen the interdependence between countries. But they cannot illustrate the disparity in the international institutions. For realists, their prediction of the power acquisition will still be considered even within the regional economic institution. However, cooperation has been and will be seen between East Asian countries. Hopefully, East Asia will march towards a more open and cooperative future under the help of both global and regional solutions.
Reference
[1]Kim, S. S. (2004). Northeast Asia in the Local-Regional-Global Nexus. S. S. Kim (Ed.), The International Relations of Northeast Asia (pp.4-19). Oxford: Rowman & Littlefield Publishers, Inc.
[2]Berger, T. (2004). Japan’s International Relations: The Political and Security Dimensions. S. S. Kim (Ed.), The International Relations of Northeast Asia (pp.139). Oxford: Rowman & Littlefield Publishers, Inc.
[3]Berger, T. (2004). Japan’s International Relations: The Political and Security Dimensions. S. S. Kim (Ed.), The International Relations of Northeast Asia (pp.154-155). Oxford: Rowman & Littlefield Publishers, Inc.
[4]Calder, K. E. (2004). U.S. Foreign Policy in Northeast Asia. In S. S. Kim (Ed.), The International Relations of Northeast Asia (pp. 226-227). Oxford: Rowman & Littlefield Publishers, Inc.
[5]Manyin, M. E (2006). South Korea-U.S. Economic Relations: Cooperation, Friction, and Prospects for a
Free Trade Agreement (FTA). Congressional Research Service. Retrieved Nov. 17th, 2007, from http://keia.org/4-Current/CRSFTA.pdf?sort=01&seq=20060124142516.
[6]Choe, S. H. (April 2nd, 2007). U.S. and South Korea reach free trade agreement. International Herald Tribune. Retrieved Nov. 17th, 2007, from http://www.iht.com/articles/2007/04/02/asia/fta.php.
[7]Moore, T. G. (2004). China’s International Relations: The Economic Dimension. S. S. Kim (Ed.), The International Relations of Northeast Asia (pp.115). Oxford: Rowman & Littlefield Publishers, Inc.
[8]A Brief History of APEC. Canada. Retrieved Nov. 17th, 2007, from http://www.dfait-maeci.gc.ca/canada-apec/media/history-en.asp.
[9]Moore, T. G. (2004). China’s International Relations: The Economic Dimension. S. S. Kim (Ed.), The International Relations of Northeast Asia (pp.126). Oxford: Rowman & Littlefield Publishers, Inc.
[10]-[14]Sohn, I. (2007). East Asia’s Counterweight Strategy: Asian Financial Cooperation and Evolving International Monetary Order. Intergovernmental Group of Twenty-Four on International Monetary Affairs and Development.
14 October, 2007
Kimberley Process Certification Scheme
In May 2000, governments and the diamond industry gathered at Kimberley, South Africa to come up a way to stop the conflict diamonds, or “blood diamonds” which aroused much attention at that time. The solution they put forward is the Kimberley Process Certification Scheme to ensure that the purchases of diamonds in the participants do not contribute to fund violent conflicts and human rights abuses in their countries of origin.
The scheme is of good implication but may not achieve its goal efficiently due to some of the uncontrollable economic factors.
It is true that diamonds producer countries, especially those suffering rebellions, are much more willing to be involved in this scheme. The scheme helps to enhance the international recognition to the governments in these riotous countries. The goal to prevent those conflict diamonds from entering the mainstream diamond market will in principle help to weaken the financial support of the rebels.
However, the other side of the story may not be that encouraging. There may not be any incentive for importers to comply with the scheme. Actually, since the certification scheme is of “voluntary self-regulation”, the transparency and independent monitoring efforts can be questioned. Even if most of the governments participated in the Kimberley system try to comply with these rules, the lack of monitoring and inspections may still leave some loopholes for the black-market. Smugglers may still find ways to get their profit from these blood gems.
The scheme is of good implication but may not achieve its goal efficiently due to some of the uncontrollable economic factors.
It is true that diamonds producer countries, especially those suffering rebellions, are much more willing to be involved in this scheme. The scheme helps to enhance the international recognition to the governments in these riotous countries. The goal to prevent those conflict diamonds from entering the mainstream diamond market will in principle help to weaken the financial support of the rebels.
However, the other side of the story may not be that encouraging. There may not be any incentive for importers to comply with the scheme. Actually, since the certification scheme is of “voluntary self-regulation”, the transparency and independent monitoring efforts can be questioned. Even if most of the governments participated in the Kimberley system try to comply with these rules, the lack of monitoring and inspections may still leave some loopholes for the black-market. Smugglers may still find ways to get their profit from these blood gems.
19 September, 2007
Is North Korea Gambling?
North Korea is the focus of East Asia security for years. From many western people’s viewpoint, DPRK is always gambling on its nuclear programme. Many western people still cannot understand the logic of DPRK. One United States exchange student commented on yesterday’s International Relations of East Asia that he totally Kim Jung-il in DPRK does not use the money funding military programmes to fuel economic development.
However, what are the choices from which North Korea is able to choose? If you try to check the list of the bundles, not much can be used. But before that, a good estimation of the goal of DPRK should be made. Superficially, DPRK is to seek national security. Nevertheless, under the individual leadership of Kim Jung-il and the history of ruling labour party, it is not difficult to conclude that the North Korea authority wishes to keep the ruling of the communist regime.
If this is the goal, then what are the steps that DPRK can take?
Economic interdependence: Since DPRK is too small on the economic sense, even if it opens up, it is difficult for them to play a vital role in the international economic chain so as to sustain the function of the country.
International recognition: DPRK has not much leverage to win the international recognition. The present rivalry position towards the US makes it more difficult for other countries to build up normal relationship with it.
Military building (including trying to possess nuclear weapons): It seems to be the only way out. However, the possession of nuclear weapons for DPRK is just a way to deter the attempt to overthrow the communist regime of other countries, especially of the US. As a result, DPRK is balancing its way on the nuclear programme. It needs to go very carefully in order not to be destructed before its possession of the nuclear weapons.
However, what are the choices from which North Korea is able to choose? If you try to check the list of the bundles, not much can be used. But before that, a good estimation of the goal of DPRK should be made. Superficially, DPRK is to seek national security. Nevertheless, under the individual leadership of Kim Jung-il and the history of ruling labour party, it is not difficult to conclude that the North Korea authority wishes to keep the ruling of the communist regime.
If this is the goal, then what are the steps that DPRK can take?
Economic interdependence: Since DPRK is too small on the economic sense, even if it opens up, it is difficult for them to play a vital role in the international economic chain so as to sustain the function of the country.
International recognition: DPRK has not much leverage to win the international recognition. The present rivalry position towards the US makes it more difficult for other countries to build up normal relationship with it.
Military building (including trying to possess nuclear weapons): It seems to be the only way out. However, the possession of nuclear weapons for DPRK is just a way to deter the attempt to overthrow the communist regime of other countries, especially of the US. As a result, DPRK is balancing its way on the nuclear programme. It needs to go very carefully in order not to be destructed before its possession of the nuclear weapons.
29 July, 2007
The Past Catastrophe Becomes the Treasure
31 years ago, in the early morning of July 28, 1976, one of most destructive earthquakes in 20th century took place in Tangshan, an industrial city in Hebei Province. It claimed more than 240 thousand lives and more than 160 thousand people were injured.
However, the severe catastrophe does not become the obstacle for re-development of the glorious city. It becomes the motivation and the treasure. After recovering from the earthquake in 1986, the city developed very quickly with the double GDP coming in 1988 and the fourfold GDP in 1994. In 2006, the tax revenue ranks 1st in Hebei Province and 19th in China.
Nevertheless, the best treasure is not just the motivation for development. It’s the ruins and the most important thing, the care of ordinary people from the heart of Tangshan’s officials.
After the earthquake, seven sites of the ruins have been kept and three becomes the national historical sites. What’s more, the Tangshan urban planning bureau is planning to build up a memorial park to memorize those who died in the catastrophe.
It’s common that the government builds memorial tower or similar things for national heroes in China. For the ordinary lives died in catastrophe in China, it may be the very few cases to have that kind of treatment. One of the famous memorial sites for those ordinary lives is for the dead in the Massacre of Nanjing.
It is a sign to show that some of China’s local government, at least Tangshan government is trying to show more care for the ordinary peoples’ life. The memorial park may not only be a place to remember the serious catastrophe, but be a reminder of future tasks of good civil-related projects. It symbolizes the respect for peoples’ livelihood.
The catastrophe is a nightmare, but it is also a kind of treasure for the followers to build a brilliant future.
However, the severe catastrophe does not become the obstacle for re-development of the glorious city. It becomes the motivation and the treasure. After recovering from the earthquake in 1986, the city developed very quickly with the double GDP coming in 1988 and the fourfold GDP in 1994. In 2006, the tax revenue ranks 1st in Hebei Province and 19th in China.
Nevertheless, the best treasure is not just the motivation for development. It’s the ruins and the most important thing, the care of ordinary people from the heart of Tangshan’s officials.
After the earthquake, seven sites of the ruins have been kept and three becomes the national historical sites. What’s more, the Tangshan urban planning bureau is planning to build up a memorial park to memorize those who died in the catastrophe.
It’s common that the government builds memorial tower or similar things for national heroes in China. For the ordinary lives died in catastrophe in China, it may be the very few cases to have that kind of treatment. One of the famous memorial sites for those ordinary lives is for the dead in the Massacre of Nanjing.
It is a sign to show that some of China’s local government, at least Tangshan government is trying to show more care for the ordinary peoples’ life. The memorial park may not only be a place to remember the serious catastrophe, but be a reminder of future tasks of good civil-related projects. It symbolizes the respect for peoples’ livelihood.
The catastrophe is a nightmare, but it is also a kind of treasure for the followers to build a brilliant future.
18 July, 2007
The Lessons Learned from Zimbabwe (Update1)
Probably Zimbabwe will never be forgotten by economists for its world famous hyperinflation and arbitrary restrictions. The fallen from the strongest economy in Africa to the weakest in the world alert people the importance of good governance and recognition of several important things.
Property rights are one of the important things that the president, Mr. Robert Mugabe denies for a long time. From expelling the white farmers to taking control of those private diamond mines, property rights become nothing but something can be easily stolen or robbed. Why people will attend to those things which they might lose at any time? (Read the article from Time and Bloomberg.)
The setting of the price is another thing that perhaps Mr. Mugabe has never learned from anyone who has a little knowledge of economics. The determinant of price is the relation between supply and demand rather than anything else. Again, when you find some policemen came to your store and told you that you might be arrested unless you cut your price of your goods under a certain price, those policemen were probably executing the order of Mr. Mugabe. (Read the article on Economist.)
The story in Zimbabwe is miserable. Hyperinflation reaches 3,700% as officially estimated, which may be actually higher. Millions of Zimbabweans flee the country mainly to South Africa. Those who are still working finds the money they earn provide nearly zero purchasing power in the black-market, since the stores, supermarkets have already had nothing left. However, those who have access to limited greenbacks at the official rate of 250 Zimbabwe dollars to 1 US dollar can make a killing by earning 250,000 Zimbabwe dollars for just one greenback. (Read the article on Economist.)
Anyway, Zimbabwe used to be strong and is used to the extremely poor states. The case is so famous that my macroeconomics lecture always put forward the case for us to discuss. Maybe, if anything fails, there is always one thing that can assure you of immortality called great mistakes.
Property rights are one of the important things that the president, Mr. Robert Mugabe denies for a long time. From expelling the white farmers to taking control of those private diamond mines, property rights become nothing but something can be easily stolen or robbed. Why people will attend to those things which they might lose at any time? (Read the article from Time and Bloomberg.)
The setting of the price is another thing that perhaps Mr. Mugabe has never learned from anyone who has a little knowledge of economics. The determinant of price is the relation between supply and demand rather than anything else. Again, when you find some policemen came to your store and told you that you might be arrested unless you cut your price of your goods under a certain price, those policemen were probably executing the order of Mr. Mugabe. (Read the article on Economist.)
The story in Zimbabwe is miserable. Hyperinflation reaches 3,700% as officially estimated, which may be actually higher. Millions of Zimbabweans flee the country mainly to South Africa. Those who are still working finds the money they earn provide nearly zero purchasing power in the black-market, since the stores, supermarkets have already had nothing left. However, those who have access to limited greenbacks at the official rate of 250 Zimbabwe dollars to 1 US dollar can make a killing by earning 250,000 Zimbabwe dollars for just one greenback. (Read the article on Economist.)
Anyway, Zimbabwe used to be strong and is used to the extremely poor states. The case is so famous that my macroeconomics lecture always put forward the case for us to discuss. Maybe, if anything fails, there is always one thing that can assure you of immortality called great mistakes.
17 July, 2007
Money, Time and Cost
Time is money. Perhaps this is one of the most quoted proverbs. How much are you willing to pay for the time? HK$1,000? HK$1,000,000? Or countless?
Sometimes, maybe we are too naïve to believe time is valuable that we ignore the price we set for it at each different time.
I went to China Travel Service (Hong Kong) Limited to extend my passport last week. When I took the photo, waited for half an hour and was finally served, I was told that I came to the agent too early. My passport would go expire in August. But now it was only July. If I insisted to get it done on that day, the duration for extension was 2 years rather than 1 year and another $50 was needed. Well, if I came one month later, then I have to pay about $10 more for traffic fees and would wait for another half an hour and about one hour for traffic. $50 was a good deal, I thought. “I’d like to extend for 2 years then.” At that time, I was paying for time, $40 for saving about one and a half hours in the future. At that time, I was sure that the price I pay was much lower than my reservation price.
But what in hell is your reservation price? Really countless?
If the additional fee is $100, will I accept it? What about $500? What about $1,000?
Actually, I may probably reject the idea to continue the process before I reach the amount of $100. The price I set for time may probably be related to some other things, for example, the opportunity cost. Probably, I can earn $100 by working as a private tutor for one hour and a half. Then I would be just indifferent to the process if it only asks for $100. However, if the additional fee is $200, then I would just be willing to waste the time. If I don’t pay the fee, I only lost $100 equivalent of time; otherwise, I would pay $200!
In the traditional concepts, time is so valuable that it does not have a price. However, it does exist a price for exchange.
Sometimes, maybe we are too naïve to believe time is valuable that we ignore the price we set for it at each different time.
I went to China Travel Service (Hong Kong) Limited to extend my passport last week. When I took the photo, waited for half an hour and was finally served, I was told that I came to the agent too early. My passport would go expire in August. But now it was only July. If I insisted to get it done on that day, the duration for extension was 2 years rather than 1 year and another $50 was needed. Well, if I came one month later, then I have to pay about $10 more for traffic fees and would wait for another half an hour and about one hour for traffic. $50 was a good deal, I thought. “I’d like to extend for 2 years then.” At that time, I was paying for time, $40 for saving about one and a half hours in the future. At that time, I was sure that the price I pay was much lower than my reservation price.
But what in hell is your reservation price? Really countless?
If the additional fee is $100, will I accept it? What about $500? What about $1,000?
Actually, I may probably reject the idea to continue the process before I reach the amount of $100. The price I set for time may probably be related to some other things, for example, the opportunity cost. Probably, I can earn $100 by working as a private tutor for one hour and a half. Then I would be just indifferent to the process if it only asks for $100. However, if the additional fee is $200, then I would just be willing to waste the time. If I don’t pay the fee, I only lost $100 equivalent of time; otherwise, I would pay $200!
In the traditional concepts, time is so valuable that it does not have a price. However, it does exist a price for exchange.
27 June, 2007
Rational Passion
Can a rational person have great passion?
Known to be rational, economists usually seem to be lack of passion when they work. However, this illusion of mine was broken by the book, “Rational Passion: the Chinese architects in the international palace of economics”, recommended by Prof. Tao Zhigang this morning.
It is a book collecting the profiles and conversations with reporters of 16 famous Chinese economists. Why would Prof. Tao recommend this book rather than some other economics textbooks to broaden my knowledge of economics?
“It seems that you do not know those big names in Economics?” said Prof. Tao in the discussion this morning. Yes, I’m so ignorant of those economists and top development of economics. Learning economics for only two years at an introductory level, I aim more on the basic economic sense which need to be cultivated step by step. Before I entered university as a student majoring economics and finance, I even mistook economics for the calculation of money exchange. In the past two years, I began to know what economics really is, but I need to know more before I can go further.
Apart from Prof. Tao, I only have a little knowledge with Qian Yingyi and have heard the name of Bai Chong-en. I still have much to do before I can catch the development of economics.
My knowledge of Prof. Qian is also from the project I am doing under the instruction of Prof. Tao. I was recommended to read his paper “The Process of China’s Market Transition (1979-98): The Evolutionary, Historical, and Comparative Perspectives”. It gave me a clear view of the development of the market transition in China with a unexpected foundation in the early years of PRC to the current situation. It also first time reminded me the difference of planned economy between the former Soviet Union and China.
The profiles and conversations in the book give me a clearer picture of this Chinese economist and extend my understanding of China’s economic development from his paper to a much wider range.
As a Chinese, we have our advantages to review the development of China. We know much more about the culture and more details than foreigners. We also feel the real change and see the unsatisfactory issues in our life. That is the good resources of our knowledge on China’s development. However, it also brings some side effect. We are too familiar with the situation that we might underestimate some improvements without notice and regard some problems as unique ones of China.
Sometimes we may use too much concepts from western culture but ignore some practical issues. As a result, this may also bring pessimism. A good example is how to view political development without a western way of democracy. Actually, democracy is just one part of politics. In the western civilizations, they may put democracy as the base of the development. However, in an eastern culture, rule of law may play a more important role. That’s why we can see the present economic and social development under the improvement of rule of law. As a result, though the nominal political development has not been much touched as is defined as popular election, the real political development is already underway and have exerted its great power in China.
Known to be rational, economists usually seem to be lack of passion when they work. However, this illusion of mine was broken by the book, “Rational Passion: the Chinese architects in the international palace of economics”, recommended by Prof. Tao Zhigang this morning.
It is a book collecting the profiles and conversations with reporters of 16 famous Chinese economists. Why would Prof. Tao recommend this book rather than some other economics textbooks to broaden my knowledge of economics?
“It seems that you do not know those big names in Economics?” said Prof. Tao in the discussion this morning. Yes, I’m so ignorant of those economists and top development of economics. Learning economics for only two years at an introductory level, I aim more on the basic economic sense which need to be cultivated step by step. Before I entered university as a student majoring economics and finance, I even mistook economics for the calculation of money exchange. In the past two years, I began to know what economics really is, but I need to know more before I can go further.
Apart from Prof. Tao, I only have a little knowledge with Qian Yingyi and have heard the name of Bai Chong-en. I still have much to do before I can catch the development of economics.
My knowledge of Prof. Qian is also from the project I am doing under the instruction of Prof. Tao. I was recommended to read his paper “The Process of China’s Market Transition (1979-98): The Evolutionary, Historical, and Comparative Perspectives”. It gave me a clear view of the development of the market transition in China with a unexpected foundation in the early years of PRC to the current situation. It also first time reminded me the difference of planned economy between the former Soviet Union and China.
The profiles and conversations in the book give me a clearer picture of this Chinese economist and extend my understanding of China’s economic development from his paper to a much wider range.
As a Chinese, we have our advantages to review the development of China. We know much more about the culture and more details than foreigners. We also feel the real change and see the unsatisfactory issues in our life. That is the good resources of our knowledge on China’s development. However, it also brings some side effect. We are too familiar with the situation that we might underestimate some improvements without notice and regard some problems as unique ones of China.
Sometimes we may use too much concepts from western culture but ignore some practical issues. As a result, this may also bring pessimism. A good example is how to view political development without a western way of democracy. Actually, democracy is just one part of politics. In the western civilizations, they may put democracy as the base of the development. However, in an eastern culture, rule of law may play a more important role. That’s why we can see the present economic and social development under the improvement of rule of law. As a result, though the nominal political development has not been much touched as is defined as popular election, the real political development is already underway and have exerted its great power in China.
19 June, 2007
Specialization and Its Cost (Update2)
In people’s mind, Shanxi Province is always associated with illegal collieries and brick kilns which hundreds of people have been killed or wounded due to explosions of gases, collapse of mines or tortures by the foremen and the owners. People and the Press are always angry with these phenomena but curious about the continuous happening of the serious cases. Has Shanxi fallen into a vicious cycle?
When the focuses are concentrated on the social, moral, or even political systems, the economic factor may be neglected.
How could economy make Shanxi fall into the vicious cycle of illegal collieries and brick kilns? Some people argue that it’s the fault of specialization. The abundant natural resources and cheap labour forces make Shanxi Province acquire the comparative advantages in producing coal and bricks. The more specialized Shanxi Province is, the more mono-form its economy takes. As a result, the pursuit for higher profit by trading these low value-added goods drives officials and local magnates to exploit those poor peasants and migrant workers.
It seems to be reasonable. However, the relationship between workers and owners of the mines and brick kilns is all about the story of exchange. This previous argument only covers the picture of one party in the exchange. The other half of the picture from the perspective of those workers is not mentioned.
Before we check the part story of those workers, let’s get a general view for the exchange process, specialization. In economists’ minds, specializations should bring a win-win situation for both parties participated in the trade. They will tell you the stories of a painter and a carpenter, or a country specialized in sea food production and a country producing agricultural products. In their cases, specialization makes both parties better off. If that’s true, then how can we explain those phenomena in Shanxi Province?
If we give a second thought on the stories economists present, we may find that both parties are equal in the legal status. Individuals exchange with individuals and countries with countries equally. The specialization is based on the fair trade as an assumption. In this sense, Shanxi Province is getting better economically through the exchange of coal and brinks with other provinces for the goods they need. However, the tragedy happens when there is inequality between the two parties. The tragedy happens in the relationship between the owners of the mines and brick kilns and the education-inadequate peasants and migrant workers.
Why is there inequality? Maybe the answer is the lack of choices. The aim of peasants and migrant workers is to survive and support their families. If there are any better choices for the peasants and migrant workers, they will flow out of the industry which might take their lives as a cost. Since there are no other choices, they take the risk of death to do the dangerous work.
Is it the specialization limits the choices of peasants and migrant workers? To some extent, it is. The limit of choices reflects the strict ranks of jobs. However, this is one of the results of the specialization. You use your comparative advantages to do the job fit you best. However, the fittest job may not be a highly-paid or even enough paid one. Actually, this is the cost of specialization society has to pay.
Some extreme liberalists may argue that those peasants and migrant workers are so illiterate or unskilled that they should only be granted those dangerous and low-paid jobs. However, we need to solve three questions. Is it their fault to be illiterate or unskilled? Should the government participate to help them out? If the government participate, will this increase the benefit of the whole society?
The first question is quite obvious. Most of those peasants and migrant workers are born in a poor family. The environment usually does not allow them to study or develop themselves. However, the family environment has nothing to do with the children bred in it. They have no choice. The illiterate and incompetence of those peasants and migrant workers are the tragedy of society. They are bearing the cost produced by society rather than the cost produced by themselves.
As a result, the cost should be shared by society. The responsibility obviously falls to the government. They play the role of auditor to check the cost and benefit between different actors in society and finally using taxes they collected to make the second distribution of wealth.
The government’s participation is not a bad thing at least for these cases. If we assume that the increase of wealth has the decreasing rate as the consumption of other goods, then it is quite clear that the second distribution of wealth using the money from the rich to help the poor may increase the total benefit of society as a whole.
That is to say, the government plays an important role in the equal exchange when specialization is inevitable. The government should compensate the peasants and workers the social cost they are bearing. A common way is to establish a good social security system and exercise welfare policies consistently.
As a result, it can be concluded roughly that specialization can bring benefit on the equal basis, but bring some negative impact when there is. However, if the government is weak and could not provide well social security system, the cost of specialization will be very obvious. If we extent our conclusion a bit further, we may find something more surprising. If there is no government (world government as for the international arena), the specialization (globalization as it is called) may bring great benefit only to those who are strong. The small and developing countries may suffer a lot as a victim billing the cost without any compensation.
When the focuses are concentrated on the social, moral, or even political systems, the economic factor may be neglected.
How could economy make Shanxi fall into the vicious cycle of illegal collieries and brick kilns? Some people argue that it’s the fault of specialization. The abundant natural resources and cheap labour forces make Shanxi Province acquire the comparative advantages in producing coal and bricks. The more specialized Shanxi Province is, the more mono-form its economy takes. As a result, the pursuit for higher profit by trading these low value-added goods drives officials and local magnates to exploit those poor peasants and migrant workers.
It seems to be reasonable. However, the relationship between workers and owners of the mines and brick kilns is all about the story of exchange. This previous argument only covers the picture of one party in the exchange. The other half of the picture from the perspective of those workers is not mentioned.
Before we check the part story of those workers, let’s get a general view for the exchange process, specialization. In economists’ minds, specializations should bring a win-win situation for both parties participated in the trade. They will tell you the stories of a painter and a carpenter, or a country specialized in sea food production and a country producing agricultural products. In their cases, specialization makes both parties better off. If that’s true, then how can we explain those phenomena in Shanxi Province?
If we give a second thought on the stories economists present, we may find that both parties are equal in the legal status. Individuals exchange with individuals and countries with countries equally. The specialization is based on the fair trade as an assumption. In this sense, Shanxi Province is getting better economically through the exchange of coal and brinks with other provinces for the goods they need. However, the tragedy happens when there is inequality between the two parties. The tragedy happens in the relationship between the owners of the mines and brick kilns and the education-inadequate peasants and migrant workers.
Why is there inequality? Maybe the answer is the lack of choices. The aim of peasants and migrant workers is to survive and support their families. If there are any better choices for the peasants and migrant workers, they will flow out of the industry which might take their lives as a cost. Since there are no other choices, they take the risk of death to do the dangerous work.
Is it the specialization limits the choices of peasants and migrant workers? To some extent, it is. The limit of choices reflects the strict ranks of jobs. However, this is one of the results of the specialization. You use your comparative advantages to do the job fit you best. However, the fittest job may not be a highly-paid or even enough paid one. Actually, this is the cost of specialization society has to pay.
Some extreme liberalists may argue that those peasants and migrant workers are so illiterate or unskilled that they should only be granted those dangerous and low-paid jobs. However, we need to solve three questions. Is it their fault to be illiterate or unskilled? Should the government participate to help them out? If the government participate, will this increase the benefit of the whole society?
The first question is quite obvious. Most of those peasants and migrant workers are born in a poor family. The environment usually does not allow them to study or develop themselves. However, the family environment has nothing to do with the children bred in it. They have no choice. The illiterate and incompetence of those peasants and migrant workers are the tragedy of society. They are bearing the cost produced by society rather than the cost produced by themselves.
As a result, the cost should be shared by society. The responsibility obviously falls to the government. They play the role of auditor to check the cost and benefit between different actors in society and finally using taxes they collected to make the second distribution of wealth.
The government’s participation is not a bad thing at least for these cases. If we assume that the increase of wealth has the decreasing rate as the consumption of other goods, then it is quite clear that the second distribution of wealth using the money from the rich to help the poor may increase the total benefit of society as a whole.
That is to say, the government plays an important role in the equal exchange when specialization is inevitable. The government should compensate the peasants and workers the social cost they are bearing. A common way is to establish a good social security system and exercise welfare policies consistently.
As a result, it can be concluded roughly that specialization can bring benefit on the equal basis, but bring some negative impact when there is. However, if the government is weak and could not provide well social security system, the cost of specialization will be very obvious. If we extent our conclusion a bit further, we may find something more surprising. If there is no government (world government as for the international arena), the specialization (globalization as it is called) may bring great benefit only to those who are strong. The small and developing countries may suffer a lot as a victim billing the cost without any compensation.
15 June, 2007
From the NIEs to the BRICs: See the World in Your Own Eyes
The Inaugural Lecture by Professor Edward Chen Kwan-Yiu was held today in Loke Yew Hall, the University of Hong Kong. This is the lecture organized by the former students of Professor Edward Chen to extend their gratitude to their respectable teacher.
The topic was “From the NIEs to the BRICs: Development Theory Revisited”. Professor Chen talked about his inaugural lecture as the chair professor of our faculty in HKU. At that time, the lecture was about the NIEs (Newly Industrializing Economies). It gave people the enlightenment that small, resources-scarce countries with open policies could develop quickly if in right conditions. Nowadays, the world seems to have been changing. The emergence of the BRICs (Brazil, Russia, India and China) seems to suggest the repeat of history: large, resources-abundant countries can survive and develop well when small, open economies might be vulnerable in the international financial integration.
However, in Professor Chen’s eyes, the world has not changed too much. The core conditions of development for these countries are the same. The active attitude towards openness is still the most important. The role of government is still kept its place while the western world holds the laissez-faire as a creed. The cultural values different from the Christianity are both held true for the Four Little Dragons and the BRICs.
The transition from the NIEs to the BRICs was along with development from the so-called “Hong Kong Consensus” suggested by Professor Chen to the “Beijing Consensus”. Both are quite different from the “Washington Consensus”. The repeated mention of the “positive non-interventionism” and the repeated criticism of the laissez-faire policies made people remember repeatedly the environment we were living. Why his theories and hypotheses are so well-received in Hong Kong and probably south-east Asia? He sees the world from his own eyes and speaks out. That’s very important.
What I mean by seeing the world from his own eyes is about the way he sees the world. When you see the world with your own eyes, you are making assumptions and determine those very important factors that you are going to consent to. The choice of assumptions and factors sometimes come from data, but your own personal philosophy might count, which also makes culture a very important factor in social science research. The well-reception of the positive non-interventionism probably might be easier in Asia than in western world. I think perhaps that’s why Professor Chen lists culture other than Christianity as a very important factor for both models.
The topic was “From the NIEs to the BRICs: Development Theory Revisited”. Professor Chen talked about his inaugural lecture as the chair professor of our faculty in HKU. At that time, the lecture was about the NIEs (Newly Industrializing Economies). It gave people the enlightenment that small, resources-scarce countries with open policies could develop quickly if in right conditions. Nowadays, the world seems to have been changing. The emergence of the BRICs (Brazil, Russia, India and China) seems to suggest the repeat of history: large, resources-abundant countries can survive and develop well when small, open economies might be vulnerable in the international financial integration.
However, in Professor Chen’s eyes, the world has not changed too much. The core conditions of development for these countries are the same. The active attitude towards openness is still the most important. The role of government is still kept its place while the western world holds the laissez-faire as a creed. The cultural values different from the Christianity are both held true for the Four Little Dragons and the BRICs.
The transition from the NIEs to the BRICs was along with development from the so-called “Hong Kong Consensus” suggested by Professor Chen to the “Beijing Consensus”. Both are quite different from the “Washington Consensus”. The repeated mention of the “positive non-interventionism” and the repeated criticism of the laissez-faire policies made people remember repeatedly the environment we were living. Why his theories and hypotheses are so well-received in Hong Kong and probably south-east Asia? He sees the world from his own eyes and speaks out. That’s very important.
What I mean by seeing the world from his own eyes is about the way he sees the world. When you see the world with your own eyes, you are making assumptions and determine those very important factors that you are going to consent to. The choice of assumptions and factors sometimes come from data, but your own personal philosophy might count, which also makes culture a very important factor in social science research. The well-reception of the positive non-interventionism probably might be easier in Asia than in western world. I think perhaps that’s why Professor Chen lists culture other than Christianity as a very important factor for both models.
11 June, 2007
Does Opportunity Cost Matters, or the Tolerance Limit of Opportunity Cost?
The summer vacation is coming. Since our hall is undergoing a maintenance project this summer, half of the students have to move out of the hall, including those who have graduated or only applied to live for part of the summer. To give a more detailed picture, our hall has two buildings for undergraduates, the Old Wing and the New Wing. When the New Wing is under maintenance, all the students permitted to stay will have to move to the Old Wing. And this will be vice versa after one month.
Today, June 11 is initially the deadline for those students who are not permitted to stay in summer to move out. However, the college office (administration branch of our hall) announced the delay for the deadline just a few days ago. The reason is that some local graduates cannot move out on time.
This is quite a shock for mainland students. Most of the mainland students have left according to the instructions of the hall, even with very high opportunity cost. For example, I have to move to a guest room in another hall for a week which costs $200 per day. And some mainland students have to take trains and go back home with their luggage in a hurry.
Most mainland students believe that the local students should comply with the instructions announced by the college office because they have more resources and ways to meet those demands, i.e. they have lower opportunity cost. However, for most mainland students, they have not many choices. Probably, the implementation of the instructions will incur a higher opportunity cost. Why do the mainland students have to bear higher opportunity cost while those local students still insist to stay?
There is something to count: the tolerance limit of opportunity cost. Actually, mainland students have a much higher tolerance limit for opportunity cost. Generally speaking, they possess this quality for several reasons.
One important reason is that the very limited resources and choices raise the tolerance limit of opportunity cost. In this unfamiliar environment, they are frequently facing higher opportunity costs and gradually get used to the high opportunity cost. In the case of moving out of the hall, even if they can find a place to live which is quite cheap but is one week after the deadline, they will have no other choices but to pay a higher price for a place which can be moved in immediately after the deadline. However, for local students, they can go back home and put their luggage in their friends’ rooms. If these cases happen all the time, mainland students may regard it reasonable to pay a higher price.
I’d like to use one case this morning to end. One mainland student is scheduled to move into another room in our hall. However, the graduate originally living in this room did not show any signs to move out. She was sleep at 10:40 am and the room was in its original order. The mainland student was in a hurry because her flight is 7 pm. She couldn’t put any her luggage into the room.
Today, June 11 is initially the deadline for those students who are not permitted to stay in summer to move out. However, the college office (administration branch of our hall) announced the delay for the deadline just a few days ago. The reason is that some local graduates cannot move out on time.
This is quite a shock for mainland students. Most of the mainland students have left according to the instructions of the hall, even with very high opportunity cost. For example, I have to move to a guest room in another hall for a week which costs $200 per day. And some mainland students have to take trains and go back home with their luggage in a hurry.
Most mainland students believe that the local students should comply with the instructions announced by the college office because they have more resources and ways to meet those demands, i.e. they have lower opportunity cost. However, for most mainland students, they have not many choices. Probably, the implementation of the instructions will incur a higher opportunity cost. Why do the mainland students have to bear higher opportunity cost while those local students still insist to stay?
There is something to count: the tolerance limit of opportunity cost. Actually, mainland students have a much higher tolerance limit for opportunity cost. Generally speaking, they possess this quality for several reasons.
One important reason is that the very limited resources and choices raise the tolerance limit of opportunity cost. In this unfamiliar environment, they are frequently facing higher opportunity costs and gradually get used to the high opportunity cost. In the case of moving out of the hall, even if they can find a place to live which is quite cheap but is one week after the deadline, they will have no other choices but to pay a higher price for a place which can be moved in immediately after the deadline. However, for local students, they can go back home and put their luggage in their friends’ rooms. If these cases happen all the time, mainland students may regard it reasonable to pay a higher price.
I’d like to use one case this morning to end. One mainland student is scheduled to move into another room in our hall. However, the graduate originally living in this room did not show any signs to move out. She was sleep at 10:40 am and the room was in its original order. The mainland student was in a hurry because her flight is 7 pm. She couldn’t put any her luggage into the room.
01 June, 2007
Can You Keep up with China’s Stock Market?
Just a week ago, Chinese officials were defending that the rise of stamp duties was a rumor. Just two days ago, the stamp duties were suddenly nearly tripled. This was followed by a vaporized 1,240 billion market value in the stock market or 6.5% market value. The next day, it dropped another 10% but rebounded miraculously. Even my instructor in Macroeconomics wrote a comment before the sudden rebound and has to update it. Can you keep up the pace with China’s Stock Market?
One editorial in FTChinese.com told you to “relax about China’s stock market”. It sounds interesting when you are facing the sudden drop and someone is shouting against the government’s honesty and the harsh policies facing them. However, there are some truths in it.
When I expressed my concern for the collapse of China’s stock market two weeks ago, a friend of mine pacified my with the assertion that the China’s whole economy would not be influenced too much even in the worst situation that the stock market collapse. This was the same assertion as the editorial.
China’s stock market is somewhat independent and has few relations with other markets. It is bad when outside regards it as a huge opportunity for investment. However, it is good news if the opportunity turns into a burden as it is out of control itself. The limited opportunity of investment goes along with the limited risk in it.
What’s more, the assertion that the market would turn sour is still not a certain one as the yesterday’s rebound gave many people a surprise. The most important thing now probably is to try to keep up with the update information of China’s stock market.
One editorial in FTChinese.com told you to “relax about China’s stock market”. It sounds interesting when you are facing the sudden drop and someone is shouting against the government’s honesty and the harsh policies facing them. However, there are some truths in it.
When I expressed my concern for the collapse of China’s stock market two weeks ago, a friend of mine pacified my with the assertion that the China’s whole economy would not be influenced too much even in the worst situation that the stock market collapse. This was the same assertion as the editorial.
China’s stock market is somewhat independent and has few relations with other markets. It is bad when outside regards it as a huge opportunity for investment. However, it is good news if the opportunity turns into a burden as it is out of control itself. The limited opportunity of investment goes along with the limited risk in it.
What’s more, the assertion that the market would turn sour is still not a certain one as the yesterday’s rebound gave many people a surprise. The most important thing now probably is to try to keep up with the update information of China’s stock market.
23 May, 2007
Do Not Overlook the Trade Union in China
Recently, one piece of important news is overlooked by the western media. That is the visit to China of a delegation of leaders from a major US trade union, Change to Win. The relevant news can be found in many Chinese media, but not in western media.
The delegation was led by the president of Change to Win, Anna Burger at the invitation of All China Federation of Trade Unions and participated with some famous leaders of US trade unions such as James Hoffa, the son of famous Jimmy Hoffa. For a long period, the biggest trade union in the US, AFL-CIO does not commit the position of All China Federation of Trade Unions as a real trade union due to its affiliated position under the leadership of the China Communist Party. The visit of Change to Win, the second largest trade union in the US, was believed to create a new chapter of the relationship between the trade unions in China and the US.
The common ground between the trade unions probably lies in the concentrated force to help improving workers’ working and living standards. The news that All China Federation of Trade Unions organized the labor unions for some branches of Wal-mart Stores Inc. is one important catalyst for this visit. It seems to display the endeavor and strength of All China Federation of Trade Unions in helping the workers. However, there are underlying reasons.
Change to Win was founded in 2005 by 7 member unions which gave up the affiliated membership of AFL-CIO. They are International Brotherhood of Teamsters, Laborers' International Union of North America, Service Employees International Union, UNITE HERE, United Brotherhood of Carpenters and Joiners of America, United Farm Workers of America, and United Food and Commercial Workers International Union. To some extent, large proportion of their 6 million members is influenced by the globalization. As James Hoffa said, the establishment of trade unions in the foreign invested companies in China might help to adjust the balance of the competitiveness between Chinese labors and US workers. The stronger the trade union is, the higher wages they can probably negotiate with the employer.
The communication between All China Federation of Trade Unions and the western trade unions also has benefit to the side of China. All China Federation of Trade Unions is bound to find some ways to strengthen its power in the course of China’s development. Chinese government is making every effort to protect the benefit of its farmers. They believe that it is a good way to stabilize China’s economy. It is also true that a stronger trade union will help to stabilize China’s economy through providing better salaries for workers. The rationale behind it is that the higher income the workers (also the peasants) can get, the more likely they are going to consume. This will be the very solution China tries to find to the trade conflict between China and the US. If the internal supply can be promoted, the pressure for exports to support China’s economic growth will become less. This will finally reduce the business friction problem of China.
The delegation was led by the president of Change to Win, Anna Burger at the invitation of All China Federation of Trade Unions and participated with some famous leaders of US trade unions such as James Hoffa, the son of famous Jimmy Hoffa. For a long period, the biggest trade union in the US, AFL-CIO does not commit the position of All China Federation of Trade Unions as a real trade union due to its affiliated position under the leadership of the China Communist Party. The visit of Change to Win, the second largest trade union in the US, was believed to create a new chapter of the relationship between the trade unions in China and the US.
The common ground between the trade unions probably lies in the concentrated force to help improving workers’ working and living standards. The news that All China Federation of Trade Unions organized the labor unions for some branches of Wal-mart Stores Inc. is one important catalyst for this visit. It seems to display the endeavor and strength of All China Federation of Trade Unions in helping the workers. However, there are underlying reasons.
Change to Win was founded in 2005 by 7 member unions which gave up the affiliated membership of AFL-CIO. They are International Brotherhood of Teamsters, Laborers' International Union of North America, Service Employees International Union, UNITE HERE, United Brotherhood of Carpenters and Joiners of America, United Farm Workers of America, and United Food and Commercial Workers International Union. To some extent, large proportion of their 6 million members is influenced by the globalization. As James Hoffa said, the establishment of trade unions in the foreign invested companies in China might help to adjust the balance of the competitiveness between Chinese labors and US workers. The stronger the trade union is, the higher wages they can probably negotiate with the employer.
The communication between All China Federation of Trade Unions and the western trade unions also has benefit to the side of China. All China Federation of Trade Unions is bound to find some ways to strengthen its power in the course of China’s development. Chinese government is making every effort to protect the benefit of its farmers. They believe that it is a good way to stabilize China’s economy. It is also true that a stronger trade union will help to stabilize China’s economy through providing better salaries for workers. The rationale behind it is that the higher income the workers (also the peasants) can get, the more likely they are going to consume. This will be the very solution China tries to find to the trade conflict between China and the US. If the internal supply can be promoted, the pressure for exports to support China’s economic growth will become less. This will finally reduce the business friction problem of China.
14 May, 2007
China’s Economy Is at a Critical Point
News on China’s economy is always popular. In recent days, reports about China’s economy are catching eyes particularly. “China Regulator Urges Investor Awareness of Stock Market Risks”, “China's Inflation Probably Broke Central Bank Target”, “China Money Supply Rises 17.1%, Exceeding Target” and etc. (Headlines from Bloomberg.com) Those headlines are delivering the same message: China’s economy is at a critical point.
Then what is the clue for these problems? One bold guess is the unexpected inflation. It seems reasonable that since the inflation is 3.1% (an estimated number from Bloomberg. com), the negative real interest rate has forced citizens to give up saving at banks as a traditional way of investment and to turn to other financial assets, stocks in particular. In the first quarter this year, 8.58 million new accounts have been opened at brokerages. In contrast, the number for last whole year was only 5.38 million. And the investment of stocks also explains the breaking of the China’s money supply target partially. Many people even try to borrow money to buy stocks which increases the M1 greatly.
Where does the inflation come from? It may result from undervalued RMB. When RMB is undervalued, we can see great trade surplus and higher demand for RMB. To stable the exchange rate of RMB, China’s government purchases a lot US Treasury bond to create demand for US dollar artificially. This method may not give US economy a great impact as I mentioned in “A Brief Overview on RMB and the US Dollar” (May 8th), but it may have great side-effect on Chinese domestic market. One effect is mainly caused by the constant payment of Chinese Yuan, which may lead to the excess printing of RMB and cause an excess money supply. The ending of the circle is a higher inflation rate.
Whatever the reason is, it is a critical point of China’s economy. The flood of new shareholders is not from the elites or at least people with financial know-how. However, they are those who have little understanding of the risks of financial investment. The once popular saying, “there are risks in the stock market, and you should be careful when you enter it” does not prevent the irrational growth of shareholders. If the increase in stock investment could not be contained immediately, an economic bubble would be easily forming at a quick pace, especially for China, such a large and immature economy.
It is reasonable to predict that the government will try to tight its monetary policy (to raise the interest rate) seriously, as the former changes in policies do not work effectively.
Then what is the clue for these problems? One bold guess is the unexpected inflation. It seems reasonable that since the inflation is 3.1% (an estimated number from Bloomberg. com), the negative real interest rate has forced citizens to give up saving at banks as a traditional way of investment and to turn to other financial assets, stocks in particular. In the first quarter this year, 8.58 million new accounts have been opened at brokerages. In contrast, the number for last whole year was only 5.38 million. And the investment of stocks also explains the breaking of the China’s money supply target partially. Many people even try to borrow money to buy stocks which increases the M1 greatly.
Where does the inflation come from? It may result from undervalued RMB. When RMB is undervalued, we can see great trade surplus and higher demand for RMB. To stable the exchange rate of RMB, China’s government purchases a lot US Treasury bond to create demand for US dollar artificially. This method may not give US economy a great impact as I mentioned in “A Brief Overview on RMB and the US Dollar” (May 8th), but it may have great side-effect on Chinese domestic market. One effect is mainly caused by the constant payment of Chinese Yuan, which may lead to the excess printing of RMB and cause an excess money supply. The ending of the circle is a higher inflation rate.
Whatever the reason is, it is a critical point of China’s economy. The flood of new shareholders is not from the elites or at least people with financial know-how. However, they are those who have little understanding of the risks of financial investment. The once popular saying, “there are risks in the stock market, and you should be careful when you enter it” does not prevent the irrational growth of shareholders. If the increase in stock investment could not be contained immediately, an economic bubble would be easily forming at a quick pace, especially for China, such a large and immature economy.
It is reasonable to predict that the government will try to tight its monetary policy (to raise the interest rate) seriously, as the former changes in policies do not work effectively.
08 May, 2007
A Brief Overview on RMB and the US Dollar
The topic of China and the US is always hot and the relationship between China and the US is too complicated to be fully explained. There are always different views and arguments from different stances are just there to be picked up. You will never feel alone when you try to say some words about China and the US. Out of this reason, I would like to write some things about the relation between RMB and the US dollar.
A brief discussion on RMB and the US dollar would be started from 1994 when China adopted the policy to peg against the dollar at 8.28 yuan per dollar. At that time, China faced severe inflation (the inflation rate in 1994 was 24%). As a result, China took the policy of pegging against the dollar to stable the dollar prices for the goods they sold in the United States.
With the country’s ability to control the national economy increasing, China was gradually able to bring down the inflation rate at a very low level and keep the fast economic growth rate at an average of about 9%. The demand for RMB and the dollar began to change accordingly. By the early 2000s, many economists argued that the yuan was undervalued against the dollar, possibly significant so.
This point was well taken use of by those politicians in the US to explain the great trade deficit of the United States. The pressure on China’s currency to appreciate was since then became heavier. Any policies Chinese government used to keep RMB stable might be regarded as a violation of the common practice and was irresponsible for the international financial market. Is that true? Or more specifically, are those policies really hurt the United States that much?
If you are equipped with some macro-economic knowledge, you should able to establish the demand and supply model for RMB and the US. If the exchange rate between RMB and the dollars is significantly undervalued as argued, then the exchange rate should be well below the equilibrium exchange rate. This leads to a shortage between the supply and the demand for RMB. The shortage should pressure the Chinese yuan to appreciate until it gets to the equilibrium exchange rate. However, since Chinese yuan was pegged against the US dollar, Chinese government had to cover the shortage by selling RMB and purchasing US dollars. In reality, Chinese government chose to purchase large amounts of US Treasury bonds to keep the fixed exchange rate.
From the US perspective, since Chinese government purchased a lot of US Treasury bonds, the artificial exchange rate can be kept at 8.28 and thus the US dollar do not need to depreciate and the large demand for US Treasury produced by Chinese government helped to keep the US interest rate at a quite low level. As a result, the US did not need to pay large interest to keep stable of its exchange rate with other major currencies and this helped the US a lot to keep its economic growth. If the demand-supply shortage occurred for a developing country rather than the US, then probably the economy would fall into the vicious cycle of borrowing a lot of US dollars to keep the country’s foreign reserves and paying huge interests as a heavy burden.
The previous interpretation helps to articulate that the fixed exchange rate did not influence the US economy too much and since the dollar is the world currency, China compensated the US loss by purchasing its government treasury bonds. Then is there something wrong with the US trade sector as those politicians’ argument?
The US great trade deficit is a fact. No one is going to decline. However, it is not much to do with China. Although it seems that the US has a large trade deficit with China, the problem is that US has a large trade deficit with nearly all the countries and the proportion of that with China is not that large.
One way to explain the US trade deficit is the relationship between the government budget deficit and the current account which is greatly influenced by the balance of trade. To explain this relationship, we should have a look at the formula S = I + NFI, where S stands for savings, I stands for domestic investment and NFI stands for net foreign investment. In a closed economy, it is obvious that all the sources for investment are from the total savings of the country. A little different from the conclusion is that in an open economy, the savings of the whole country can invest in the domestic market and the international market as well. As a result, we get the formula S = I + NFI. If government tends to have a budget deficit, savings tend to be small. To boom the economy, the US needs a lot of domestic investment. Thus the NFI (net foreign investment) should be a negative number, which means that the US need the investment from other countries and its financial account should be positive. The zero-sum relation between the current account and the financial account then hints that the current account should be negative. That is to say the policy of holding budget deficit results in the large trade deficit. The US actually designs its development pattern itself!
There are other ways to explain why the US always has a large trade deficit. I would not explain all of them this time. But no matter how we explain the situation, Washington has the enough influence to press the counterpart in China to appreciate the Chinese yuan at least a little. China claimed, in 2005, to give up the policy of pegging against the dollar and to adopt the policy to link the value of the yuan to the average value of a basket of currencies that would include the dollar, the Japanese yen, the euro, the Korean won, and several other currencies.
The argument has not come to an end. Many US politicians are not satisfied the pace of appreciation of RMB, and they may push harder for a strong Chinese yuan. Is China able to stabilize its economy by change the value of its currency gradually? Maybe time can tell us everything.
A brief discussion on RMB and the US dollar would be started from 1994 when China adopted the policy to peg against the dollar at 8.28 yuan per dollar. At that time, China faced severe inflation (the inflation rate in 1994 was 24%). As a result, China took the policy of pegging against the dollar to stable the dollar prices for the goods they sold in the United States.
With the country’s ability to control the national economy increasing, China was gradually able to bring down the inflation rate at a very low level and keep the fast economic growth rate at an average of about 9%. The demand for RMB and the dollar began to change accordingly. By the early 2000s, many economists argued that the yuan was undervalued against the dollar, possibly significant so.
This point was well taken use of by those politicians in the US to explain the great trade deficit of the United States. The pressure on China’s currency to appreciate was since then became heavier. Any policies Chinese government used to keep RMB stable might be regarded as a violation of the common practice and was irresponsible for the international financial market. Is that true? Or more specifically, are those policies really hurt the United States that much?
If you are equipped with some macro-economic knowledge, you should able to establish the demand and supply model for RMB and the US. If the exchange rate between RMB and the dollars is significantly undervalued as argued, then the exchange rate should be well below the equilibrium exchange rate. This leads to a shortage between the supply and the demand for RMB. The shortage should pressure the Chinese yuan to appreciate until it gets to the equilibrium exchange rate. However, since Chinese yuan was pegged against the US dollar, Chinese government had to cover the shortage by selling RMB and purchasing US dollars. In reality, Chinese government chose to purchase large amounts of US Treasury bonds to keep the fixed exchange rate.
From the US perspective, since Chinese government purchased a lot of US Treasury bonds, the artificial exchange rate can be kept at 8.28 and thus the US dollar do not need to depreciate and the large demand for US Treasury produced by Chinese government helped to keep the US interest rate at a quite low level. As a result, the US did not need to pay large interest to keep stable of its exchange rate with other major currencies and this helped the US a lot to keep its economic growth. If the demand-supply shortage occurred for a developing country rather than the US, then probably the economy would fall into the vicious cycle of borrowing a lot of US dollars to keep the country’s foreign reserves and paying huge interests as a heavy burden.
The previous interpretation helps to articulate that the fixed exchange rate did not influence the US economy too much and since the dollar is the world currency, China compensated the US loss by purchasing its government treasury bonds. Then is there something wrong with the US trade sector as those politicians’ argument?
The US great trade deficit is a fact. No one is going to decline. However, it is not much to do with China. Although it seems that the US has a large trade deficit with China, the problem is that US has a large trade deficit with nearly all the countries and the proportion of that with China is not that large.
One way to explain the US trade deficit is the relationship between the government budget deficit and the current account which is greatly influenced by the balance of trade. To explain this relationship, we should have a look at the formula S = I + NFI, where S stands for savings, I stands for domestic investment and NFI stands for net foreign investment. In a closed economy, it is obvious that all the sources for investment are from the total savings of the country. A little different from the conclusion is that in an open economy, the savings of the whole country can invest in the domestic market and the international market as well. As a result, we get the formula S = I + NFI. If government tends to have a budget deficit, savings tend to be small. To boom the economy, the US needs a lot of domestic investment. Thus the NFI (net foreign investment) should be a negative number, which means that the US need the investment from other countries and its financial account should be positive. The zero-sum relation between the current account and the financial account then hints that the current account should be negative. That is to say the policy of holding budget deficit results in the large trade deficit. The US actually designs its development pattern itself!
There are other ways to explain why the US always has a large trade deficit. I would not explain all of them this time. But no matter how we explain the situation, Washington has the enough influence to press the counterpart in China to appreciate the Chinese yuan at least a little. China claimed, in 2005, to give up the policy of pegging against the dollar and to adopt the policy to link the value of the yuan to the average value of a basket of currencies that would include the dollar, the Japanese yen, the euro, the Korean won, and several other currencies.
The argument has not come to an end. Many US politicians are not satisfied the pace of appreciation of RMB, and they may push harder for a strong Chinese yuan. Is China able to stabilize its economy by change the value of its currency gradually? Maybe time can tell us everything.
02 May, 2007
Globalization and Neo-Marxist Theories
This is the first time that I realize that I am touching some political theories to explain the economic world. Originally I had the perception that there are relations between politics and economics, but I could not put forward the exact example to prove my sense.
Born in the socialist state, I was taught with some Marxist theories to understand the economic world, especially from the angle of possession of materials; however, I did not realize that.
This time, the learning of neo-Marxist theories to explain the globalization in a capitalist society helped me to bridge the gap between politics and economics.
Neo-Marxists were active during 1960s and 1970s and their theories were marginalized with the demise of the former Soviet Union. It was the heat of globalization and its stagnancy in some parts of the world that brought those theories into light again.
In liberalists’ views that globalization is the panacea for the Global South. The lower the barriers for trade and finance integration, the better the Global South countries can develop in the long run. However, no matter how better those liberalists promote their theories, they could not ensure the short-run stability for those poor countries. If what they mean by “in the long run” is foreseeable in a decade, it would be more persuasive. Nevertheless, common people without professionally trained by advanced economics or brainwashed by the western values may cast doubt on this point when the international division, using natural resources or agricultural commodities in exchange of sophisticated manufactured goods. If this openness requires more preliminary loss of partial sovereignty, then the enthusiasm of change may be even lower. These analyses lead to a picture of a poorer future than even today for those economies at the bottom of the world.
As a result, the prescription is not favored by the authorities of those poor countries. They would like to use neo-Marxist theories to excuse themselves from globalization and from the vicious cycle, at least in the short term. Even the examples of fast developed Asian Tigers and China can not eliminate their fear to be the victim of neocolonialism. They coined “semiperiphery” to accommodate those leaders in the Global South and kept their attention mainly on the dependent development and the negative effect of national bourgeoisies or compradors. They may hope that the closure of the countries to the international intercourse may not affect too much as hundreds years back countries were generally independent without much intercourse. However, the world has changed with high outside pressure and little patience. Their path may not be an easy one.
Politically speaking, it is quite confused to say which way is right or at least is with rightness. The meaning of politics itself is the struggle for solving the conflicts. However, watch the issue from an economics view, maybe it is the problem of seeking the balance. If you can not ensure the long run fruit, just try to get those easier to pick up. That does not mean that those poor countries should give up and totally secluded from the global community. They should try to prepare for the openness gradually. In the sort term, they are safe and in the long run they can try to embrace the present situation. However, the treacherous assumption is that the international political system is not that violent.
The only conclusion I want to draw at the present point is:
Try to solve the problem peacefully by economics and to avoid fierce monsters in international politics.
Born in the socialist state, I was taught with some Marxist theories to understand the economic world, especially from the angle of possession of materials; however, I did not realize that.
This time, the learning of neo-Marxist theories to explain the globalization in a capitalist society helped me to bridge the gap between politics and economics.
Neo-Marxists were active during 1960s and 1970s and their theories were marginalized with the demise of the former Soviet Union. It was the heat of globalization and its stagnancy in some parts of the world that brought those theories into light again.
In liberalists’ views that globalization is the panacea for the Global South. The lower the barriers for trade and finance integration, the better the Global South countries can develop in the long run. However, no matter how better those liberalists promote their theories, they could not ensure the short-run stability for those poor countries. If what they mean by “in the long run” is foreseeable in a decade, it would be more persuasive. Nevertheless, common people without professionally trained by advanced economics or brainwashed by the western values may cast doubt on this point when the international division, using natural resources or agricultural commodities in exchange of sophisticated manufactured goods. If this openness requires more preliminary loss of partial sovereignty, then the enthusiasm of change may be even lower. These analyses lead to a picture of a poorer future than even today for those economies at the bottom of the world.
As a result, the prescription is not favored by the authorities of those poor countries. They would like to use neo-Marxist theories to excuse themselves from globalization and from the vicious cycle, at least in the short term. Even the examples of fast developed Asian Tigers and China can not eliminate their fear to be the victim of neocolonialism. They coined “semiperiphery” to accommodate those leaders in the Global South and kept their attention mainly on the dependent development and the negative effect of national bourgeoisies or compradors. They may hope that the closure of the countries to the international intercourse may not affect too much as hundreds years back countries were generally independent without much intercourse. However, the world has changed with high outside pressure and little patience. Their path may not be an easy one.
Politically speaking, it is quite confused to say which way is right or at least is with rightness. The meaning of politics itself is the struggle for solving the conflicts. However, watch the issue from an economics view, maybe it is the problem of seeking the balance. If you can not ensure the long run fruit, just try to get those easier to pick up. That does not mean that those poor countries should give up and totally secluded from the global community. They should try to prepare for the openness gradually. In the sort term, they are safe and in the long run they can try to embrace the present situation. However, the treacherous assumption is that the international political system is not that violent.
The only conclusion I want to draw at the present point is:
Try to solve the problem peacefully by economics and to avoid fierce monsters in international politics.
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