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Thursday, January 25, 2007


Arthur Eckart

Nonetheless, the Chinese economy doesn't add up. China seems to be dumping much of its goods below true costs (if negative externalities are included) just so it can dump even more goods below true costs (while larger volumes lower price). So, employment levels are kept too high and tax revenues increase. Also, slave wages and flexible (or disposible) labor may keep prices low. Unless competitors are driven out to raise prices, which generally hasn't been the case, because export-led economies continue to maintain high employment and remain price competitive, although China has gained market share, it may be a house of cards.


I'm still not convinced that china will one day break down because of it's central planning. they can always mend the functioning of economy with little bit of shocks, it's not the kind that collapse on one fine day.

jon livesey

I agree with Harsha. I don't believe that China will suddenly collapse. Its economy is too distributed for that. But I do think that the mounting negatives are very worrying. The Chinese themselves say that they have done too little to handle the environmental effects of uncontrolled development, and in fact, when you look at the number of fossil fuel power station under construction, that will probably get worse. I wonder if we need to put numbers on these negative effects in order to measure just where the Chinese economy is going. Just having a positive trade balance may not help if behind the scenes they are making their country unliveable. And just having a "liberal" economy may not help if political power is used to suppress the sorts of environmental protests that do seem to have an effect in the West. In other words, political authoritarianism may be just too good at keeping the lid on the boiling pot.


The India-more-efficient-than-China theory is based on the fact that China saves 50% of its GDP and produces 11% GDP growth, while India saves 29% of its GDP and produces 9% growth.But it's true that Economic Times is hardly unbiased---it's editorial stance is flag-waving jingoism combined with censorship of unwanted information. For instance, the suicides by tens of thousands of cotton farmers has been largely ignored, at least it's buried discreetly in the inside pages.
China is not going to collapse. All over the region, from Korea to Taiwan to Indonesia, regimes have allowed more freedom as they became richer. No reason why China shouldn't do the same.

Arthur Eckart

China's economy seems to be in disequilibrium more than any other country. For example, the U.S. tends to optimized the combination of production and consumption, e.g. losing little in production to gain a lot more in consumption. However, China loses more in consumption than what it gains in production. China doesn't shift towards an optimal combination, while the U.S. tends to shift towards that point. The U.S. has no control over foreign economic policies. So, it should make the best choices. In the mid and late '90s, U.S. actual output generally exceeded potential output. However, since the 2001 recession, U.S. actual output has generally been below potential output. When China (or the rest of the world) is overproducing, the U.S. should increase production when it's underproducing. This will cause the rest of the world to overproduce even more (because of increased U.S. demand), while U.S. production increases. Consequently, the rest of the world moves away from optimal production, while the U.S. moves towards optimal production. The rest of the world is overproducing more than the U.S. is underproducing. On the other side, the U.S. is overconsuming even more than the rest of the world is underconsuming. So, U.S. living standards rise faster than the rest of the world.

jon livesey

Arthur: Yes, except at the weekends, and that brings the average down.

Arthur Eckart

Jon, It's possible. However, Americans may be busy overproducing on weekdays and overconsuming on weekends. What's important is capital creation, which the U.S. does better than any other country. China attempts to create capital through low wages, disposible employment, negative externalities, etc. Many Western European countries create less capital, because of high taxes, social programs, wage rigidies, etc. Lower interest rates and lower prices induced U.S. demand, which caused saving to fall and debt to rise. However, Americans bought more, real assets and real goods, for less. China's exports to the U.S. was $260 billion and China's imports from the U.S. was $50 billion. Basically, the U.S. produces fewer and higher value goods in older industries, while shifting resources into newer industries. Many "normal goods" in the U.S. are "luxury goods" in China, because of the large disparity in per capita incomes. Also, I may add, if China is not paying the cost of $1 billion in pollution for each $1 billion in profits, it may not be creating capital. The U.S. has its own set of problems. For example, there has been a massive transfer of assets from upper income Americans, who tend to save, to lower income Americans, who tend to spend. Will the lower income or marginal homeowners continue to maintain their living standards? After years of rising homeownership, zero percent financing of vehicles and other durable goods, cheap imports, etc., financed to a large extent by home equity, many will have a tough time maintaining autonomous consumption. However, Americans have been adept maintaining autonomous consumption. So, most may at least hold what they gained.


Some very interesting discussion on China and India's development in the World Economy.


AE: "What's important is capital creation, which the U.S. does better than any other country."

Yes, by borrowing it.

Arthur Eckart

Lafayette, that's either a cynical or ignorant statement or both.


AE: "Lafayette, that's either a cynical or ignorant statement or both."

Oh? Then please explain why the Far East is buying T-bills at the rate of $1B to $1.5B a day?

AE: "Americans may be busy overproducing on weekdays and overconsuming on weekends."

That's the ludicrous part, AE. You are genuflecting at the altar of American capitalism. It's second nature.

Arthur Eckart

Lafayette, Asian export-led economies are buying U.S. Treasury bonds to maintain their high employment levels and raise tax revenues. U.S. capital creation and foreign investment in the U.S. are not mutually exclusive. The U.S. is much closer to optimal growth than most export-led economies. China is producing at an extremely large suboptimal level.




AE; "The U.S. is much closer to optimal growth than most export-led economies. China is producing at an extremely large suboptimal level."

Again, you are comparing apples and oranges.

China and the US are incomparable statistically. It is not acceptablet to compare a mature, modern nation and one that has been thrust forward from the dark ages a bare 20 years ago.

China is financing American consumption from its reserve currency, and therefore helping to sustain its US current account deficit, and you argue that the US is at "optimal growth"?

Growth of what, pray tell. Its deficit, that's what.

Arthur Eckart

Lafayette, of course, economic laws don't apply in China :) China induced U.S. consumption, which caused the U.S. to underproduce (i.e. large U.S. negative net exports). China tends to produce goods with declining prices and the U.S. tends to produce high value goods, while U.S. per capital income is over 25 times more than China's per capital income. So, China makes up in volume what it loses in value (i.e. deteriorating terms of trade) and China's consumers cannot afford many U.S. goods. The imbalance worsens, because wages are kept low in China, to make up for declining prices, and deteriorating terms of trade lower prices even more. The U.S. maintains stimulative monetary and fiscal policies to close the negative output gap. However, greater U.S. output (and income) causes China to overproduce even more. Consequently, the U.S. underproduces less than China overproduces. So, the U.S. economy is much closer to optimal growth than China.


AE: "China tends to produce goods with declining prices and the U.S. tends to produce high value goods"

In your dreams.

The US designs hi-value products and produces them abroad. Eg; The major fab plants of AMD are in Germany and Taiwan.

Germany? Yes, because it has high-output and low manpower content in the manufacturing process of chips.

Besides, China is now going to go upmarket whilst developing new markets (Africa) for its cheaper non-qualified labor content products.

They are doing EVERYTHING right. (For the moment.) They've cornered the global market on gadget-goods. They have machine-tool design shops established in Germany to learn the machine-tool market, which they will inevitably bring back to China loc-stock-and-barrel. They signed major agreements with Airbus to produce aircraft in China and with Westinghouse to obtain nuclear generating plant technology. They are investing heavily in Africa to become a major buyer of basic resources (particularly metals.)

Enough of your hubris. It's what got American into its present mess. Superlatives about American industry simply don't work anymore, AE, in the face of what is factually obvious.

The King is naked: American industry is in deep decline. And, the sooner America realizes this, the better.

Arthur Eckart

Lafayette, the U.S. leads the rest of the world combined in Information-Age and Biotech Revolution firms, which tend to produce high value goods. Also, about half of the largest corporations in the world are American. Older U.S. industries tend to produce more output per unit of input, while newer U.S. industries tend to produce higher value output per unit of input. U.S. actual output has generally been slightly below potential output, since 2001, although U.S. actual output slightly exceeded potential output in the mid and late-'90s. So, the U.S. had a slight economic boom/bust cycle. U.S. actual output may rise to and slightly above potential output over the next few years, in part, through increased exports. China has consistently followed a growth at any cost policy. Cheap imports have allowed China to gain global market share. However, the cost was too high, given intense global competition. Your assumption that China is doing everything right is ridiculous.

Arthur Eckart

Also, I may add, China's cost of gaining and holding market share has been high, because of the abundance of low-skilled labor in the global economy. The only way China can avoid intense global competition is to continue keeping prices low, which may become increasingly difficult. It seems, China is working almost for free, when "true" costs are taken into account.

Arthur Eckart

Moreover, some Chinese factories employ over 200,000 workers. In any other country, a factory that large is suboptimal to a large extent, because if demand falls, fixed costs (or sunk costs) still have to be paid. Consequently, an economic contraction in China may be devastating. So, prices are likely to remain low.

T. O.

"some Chinese factories employ over 200,000 workers"

Where did you drag that out? any sources?


AE: "Lafayette, the U.S. leads the rest of the world combined in Information-Age and Biotech Revolution firms, which tend to produce high value goods."

No, you have not understood. They design, they do NOT produce, which is why jobs are dislocating to the Far East?

Why do you insist on overlooking reality?

Arthur Eckart

T.O., I didn't save the source. It was in a paragraph of an article. Lafayette, I understood what you wrote. I wonder if you know what you wrote. U.S. revenues and profits in Information Age and Biotech Revolution firms lead the rest of the world combined, in part, because offshoring some lower-skilled jobs at cheaper wages increases productivity, e.g. lower input costs and high output prices. Consequently, the U.S. creates more capital and high-skilled jobs. The E.U. has more restrictions on offshoring, e.g. labor laws, unions, subsidization, etc. Yet, E.U. unemployment is much higher than the U.S., while E.U. per capita GDP is much lower. Also, I may add, large economies expand more slowly than small economies and the U.S. economy will continue to become a smaller proportion of the world economy. However, that doesn't necessarily mean the U.S. economy is declining.

T. O.

"I didn't save the source. It was in a paragraph of an article"

That's very original, Arthur

Arthur Eckart

T.O., I tried to find the article I read. There seems to be many very large toy factories in China. However, I found the following related article with the link below. "A big problem in the toy industry is the occupational and safety hazards because of the paint. I don't think enough attention has been paid to this," said Dr Chan. As temporary migrant workers, the girls are rarely covered by medical insurance although this is compulsory according to Chinese labour law. Some factories employ 200,000 workers, others are sub-sub-contractors with anything from a few dozen to 2,000 employees at the peak order season."


Arthur Eckart

Also, I may add, it seems globalization benefits rich countries more: "An investigation into the price of a Mattel Barbie doll, half of which is made in China, found that of the $10 retail price, $8 goes to transportation, marketing, retailing, wholesale and profit for Mattel. Of the remaining $2, $1 is shared by the management and transportation in Hong Kong, and 65 cents is shared by the raw materials from Taiwan, Japan, the U.S. and Saudi Arabia. The remaining 35 cents is earned by producers in China for providing factory sites, labour and electricity. "That investigation was two years ago. Since then the toy market has become more and more competitive," May Wong said." Also, I heard domestic oil refineries earn more profit per barrel of oil than foreign oil producers, although that doesn't seem possible. http://www.globalexchange.org/campaigns/sweatshops/china/501.html.pf


Hi Everyone,

This is a good platform to share ones views on various issues related to economy. I am a regular reader of this. It is a very good effort from the NewEconomist to comeout with such a informative and communicative blog. Congratulations!!!




A highly interesting, in-depth analysis
of the comparative economic development seen in India and China

Fair Value

India GDP (2000 to 2040)
Population 15% to 18%
Land 2% to 10%
Food Production 8% to 15%
Electricity 4% to 10%
Tech 4% to 15% (Cell Phones, Computers, etc)
Roads 5% to 15% (Roads, Waterways, Railroads)
Culture 10% to 25% (Movies, Resturants, Events)
Forex 1% to 10% (Euro, Dollar, Yuan, Taka)
Debt -1% to -15% (External, Trade Deficit)
Anticipated GDP 10% of world economy (6% to 16%)

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I'm going to invest in India

acekard 2i

I am a brasilian and we we used to learn at school almost exactly the Acemoglu’s thesis, but a long time before he published his papers!
But, who knows that? Almost no one read papers or books in portuguese.
I understand that, but if you will speak about Latin America, then I expect you read spanish and portuguese!

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