Posts tagged ‘South Korea’

In China, It's 1928

I know I have been warning about a Chinese recession/depression for a while, but it takes a while (and still will take some time) for this disaster to play out.  But the warning signs are all there.  This article today in the WSJ is a great example.  

A little over a year ago, a Chinese credit agency downgraded a government-owned financing company in this dusty industrial city. Default—nearly unheard-of in China on government bonds—was a possibility, it said.

But during discussions with lenders, city officials made sure Wuhan Urban Construction Investment & Development Corp. could keep borrowing, officials with knowledge of the matter say. The city during those discussions said it backed the finance firm, essentially guaranteeing the debt, and helped the company restructure its assets to entice investors to lend more.

Borrowing by firms like Wuhan Urban is a big reason China’s debt load is expanding. The International Monetary Fund says China’s debt is growing more rapidly than debt in Japan, South Korea and the U.S. did before they tumbled into deep recessions. Local-government borrowing is responsible for one-fourth of the buildup in China’s overall domestic debt since 2008....

Even before its latest step, Beijing had put forward plans to slow local-borrowing growth. But China’s local governments have a surprising ability to resist policies. Another central-government priority—reducing excess production in steel, cement and other industries—has foundered due to local opposition.

“The guys running local government financing operations won’t roll over and die,” says Fraser Howie, co-author of “Red Capitalism,” a study of China’s financial system. “These companies take on a life of their own.”

Perhaps we should call this the looming Thomas Friedman recession, as China goes bankrupt doing exactly what Friedman admires - building more and more infrastructure and then taking out debt and building even more.

There is absolutely no reason to believe, as folks like Friedman do, that this investment in infrastructure automatically has a positive return, and in fact there are a lot of reasons to think it does not (ie gluts of housing and basic materials).  As I have written before, like light rail spending in the US, these infrastructure investments pay their benefits mostly in prestige to local government officials and rents for politically connected contractors and government workers and not in real returns to future economic growth.

I tend to accept the Austrian theory of recessions, which I would simplify (perhaps inaccurately) as mis-allocation of capital and labor investments leading to economic downturns as the economy restructures.  The longer the reckoning is put off, the worse the recession.   These mis-allocations can sometimes be due to private causes (e.g. over-euphoric investments in early Internet companies in the late 1990's) but they often have public causes (e.g. artificially low interest rates or government programs to promote investment in a single industry like, say, housing).

I am convinced this is what brought down Japan -- after years of admiration for Japan, inc. and MITI economic management, it turns out the government had directed all capital into a few export manufacturing industries, while continuing to protect retail and agriculture locally from any real change or competition.  Which is why 25 years of government directed deficit spending has not fixed the recession -- it just doubles down on the original cause.  For those of you too young to remember, the Friedman-types of the world were all praising Japan to the hilt in the late 80's as the model we should all be following.  People like this don't admit error, they simply shut up about Japan and started praising the same behaviors in China.

The same reckoning is coming to China.  Probably not this year or the next, but within the next 5 years almost for sure.  It is 1928 in China.

Postscript:  By 1928, I mean a year of apparent prosperity before the Great Depression in 1929.  I am not referring to the nominal reunification of China or start of the "republic" under Chiang Kai-shek.

Selection Bias

I thought it was kind of interesting that upon reading this McKinsey & Co study (currently the top one in the list) on education, Kevin Drum and a number of other left 'o center blogs pulled out this one chart to highlight.  It shows starting teacher pay  (i.e. out of college) as a percent of the economy's average)


The author's of the study argue that the countries higher on this list also have better student results.  Now, I will confess that this is a pretty interesting finding in the study -- that starting teacher pay is more important than teacher pay in later years, because the key is to attract talented people right out of college away from other professions.  Interesting. 

But here is the quite fascinating selection bias by the lefty blogs:  I have read the whole report, and this is absolutely the only chart in the whole study that in any way, shape, or form might be interpreted as a call for higher government education spending.  Even more interesting is what these bloggers left out.  This is the other half of the starting teacher pay analysis Drum et. al. chose note to include, and makes clear that even this chart is not a call for more total spending:

South Korea and Singapore employ fewer teachers than other systems; in effect, this ensures that they can spend more money on each teacher at an equivalent funding level.  Both countries recognize that while class size has relatively little impact on the quality of student outcomes (see above), teacher quality does.  South Korea's student-to-teacher ration is 30:1, compared to an OECD average of 17.1, enabling it in effect to double teacher salaries while maintaining the same overall funding level as other OECD countries....

Singapore has pursued a similar strategy but has also front-loaded compensation.  THis combination allows it to spend less on primary education than almost any other OECD and yet still be able to attract strong candidates into the teaching profession.  In addition, because Singapore and South Korea need fewer teachers,  they are also in a position to be more selective about who becomes a teacher.  This, in turn, increases the status of teaching, making the profession even more attractive.

Whoops!  Don't want our friends at the NEA to see that!  Most of the study turns on McKinsey's finding that teacher quality drives student results, way ahead of any other factor, from class size to socioeconomic background:


Well, now the NEA might be getting really nervous.  Something like this might cause parents to do something rash, like demand that low-performing teachers get fired.  Gasp.

Anyway, to get back to the cherry-picking and selection bias issue, the study is pretty clear that it thinks that "more spending" is a failed strategy for improving public education

If school choice is off the table, then I would be very supportive of a program to increase starting teacher pay, funded by larger class sizes and substantial reductions in useless administrators and assistant principals.  Anyway, it is kind of an interesting study, though you may find the pdf file format really irritating to try to read.  Lots of funny formatting. 

Speaking of Technocrats...

Apparently leading technocrat and Mussolini-style-economic-dictator Robert Reich is at it again, arguing the path to freedom requires more government coercion.  Ronald Bailey reminds us that Reich was the one who advocated the US adopt Japanese MITI-style economic management, just before the American economy took off for 25 years and Japan's spiraled into stagnation.  Now, he is arguing that capitalism is the enemy of democracy:

As Freedom House points out the number of countries that qualify as free rose from just 44 in 1972 to 89 in 2005,
even as capitalism expanded around the globe. It has been hypothesized
that as incomes increase in a country (rise of a middle class), the
demand for democratic governance becomes irresistible. This seems to
have been the pattern in South Korea, Chile, and Taiwan. Will the same
thing happen in China? As a negative leading indicator---whatever Reich
predicts, the opposite occurs-don't be surprised if China becomes a
democracy in the next decade.

Trade Imbalance

Don Boudreaux responds to UAW President Ron Gettelfinger's complaint that the US has a trade imbalance in autos with South Korea:

Well, duh - that's an
inevitable consequence of specialization...

General Motors, Ford, and Chrysler each have huge trade imbalances --
to be precise, huge and growing trade deficits -- with their workers:
these companies buy far more from their workers than their workers buy
from them.  Perhaps auto makers should hire workers only on the
condition that the trade in each case is "balanced": each and every
worker must agree to spend his or her entire salary on products made by
the auto maker.  For example, a G.M. worker whose total compensation in
2007 is $60,000 must spend $60,000 on G.M. products in 2007.  Any
worker who fails to do so will be fired because of the resulting

Update:  Sorry, forgot the link.  Added it.