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.

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.

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.

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.

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.

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.

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.