Why the Chinese growth rate will taper down

Many years ago, Mancur Olson wrote an insightful book about prosperity and dictatorships. He introduced the concept of rights intensive production. As countries become more and more developed, investment horizons lengthen and depends more and more upon the enforcement of contract and property rights in a tolerably honest way.

Instead of being the first entrepreneur to introduce the most basic technologies and profit handsomely, such as in China with the advent of capitalism, entrepreneurs are introducing a product upgrade or new product that is a minor improvement on current offerings. Such investments will take time to pay off.

Many years ago, an article was published in the Journal of Economic Perspectives about a survey of entrepreneurs in Russia and Poland. It was in the early 1990s. Each was asked whether an investment project that doubled their money in two years was worth the risk. The Russian entrepreneurs mostly said no, the Polish entrepreneur said yes. So insecure are the returns from investment in Russia at that time that the phenomenal returns were required before an investment was made. They would only invest if they could double the money in two years.

In many developing countries, China is an example, property rights are insecure. This means short payback periods are essential for investment. Entrepreneurs must make their money quickly. This means that as investment horizons inevitably lengthened, growth will slow because more and more technologies will not be profitable to introduce into China.

The reason that export based industrialisation is a common path to economic development for poor countries is it does not threaten the existing configuration of special interests. It does not involve deregulating any domestic industry. The export industries do not threaten the business interests and profits of existing rent seekers and ruling elites.

Post-war trade liberalisation and tariff cuts gave Korean and the other East Asian Tigers much greater access to major export markets. This allowed export production to expand without limit. This expansion did not threaten local special interests because they kept their privileges and barriers to entry into the domestic markets.

Institutional reforms and imported new technologies increased employment and incomes through this explosion in exporting in Japan and the newly industrialised countries in East Asia. This allowed the losers from the economic changes to be compensated directly or with new opportunities in the export sectors (Parente and Prescott 1999, 2005; Olson 1982, 1984; Acemoglu and Robinson 2005).

Incumbent suppliers and workers are less likely to be hurt by the adoption of more efficient technologies because output expands greatly through exporting. If a market is small and limited to one country, and output cannot be increased without price cuts, greater production efficiency from a new technology can lead to less employment and business closures. Industry insiders may oppose this. Exporting reduce the incentives for insiders to block more efficient technologies (Parente and Prescott 2005; Holmes and Schmitz 1995; Olson 1982). Distributional coalitions slow down a society’s capacity to adopt new technologies and to reallocate resources in response to changing conditions and thereby reduce the rate of economic growth. 

Many other under-developed nations did not grow because institutional sclerosis locked them into yesterday’s technologies and industries with low growth and major declines in relative incomes (Olson 1982, 1984; Heckelman 2007; Bischoff 2007). A growing accumulation of distributional coalitions – institutional sclerosis – slowed down the capacity of these under-developed countries to adopt new technologies and reallocate resources across firms and industries in response to changing conditions and new opportunities (Olson 1982, 1984; Acemoglu and Robinson 2005).

Latin America is a good example of stagnation after initial prosperity because of the accumulation of barriers to efficient production. Latin America has many more international and domestic barriers to competition than do Western and the successful East Asian countries (Cole et al. 2005).

One of the tricks in the tail that the Chinese employed was market preserving federalism. Their local governments were not allowed to block outsiders as was the case in Russia as Olivier Blanchard & Andrei Shleifer explain:

In China, local governments have actively contributed to the growth of new firms. In Russia, local governments have typically stood in the way, be it through taxation, regulation, or corruption.

There appears to be two main reasons behind the behavior of local governments in Russia. First, capture by old firms, leading local governments to protect them from competition by new entrants. Second, competition for rents by local officials, eliminating incentives for new firms to enter. The question then is why this has not happened in China. We argue that the answer lies in the degree of political centralization present in China, but not in Russia.

Transition in China has taken place under the tight control of the communist party. As a result, the central government has been in a strong position both to reward and to punish local administrations, reducing both the risk of local capture and the scope of competition for rents.

By contrast, transition in Russia has come with the emergence of a partly dysfunctional democracy. The central government has been neither strong enough to impose its views, nor strong enough to set clear rules about the sharing of the proceeds of growth. As a result, local governments have had few incentives either to resist capture or to rein in competition for rents. Based on the experience of China, a number of researchers have argued that federalism could play a central role in development. We agree, but with an important caveat. We believe the experience of Russia indicates that another ingredient is crucial, namely political centralization.

The Chinese have also used what succeeded in Latin America for some time. You have politically connected partner; a family member of a politician.

China faces two major barriers to its growth. Firstly, insecure property rights will become more important because investment horizons get longer as a country develops. Secondly, political coalitions will emerge seeking the redistribution of wealth and blocking new competition.

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Speaking of @RusselNorman’s & @Greeenpeacenz’s greater good defence

Activists have ample opportunities seek redress for their grievances through normal democratic means. This is especially so when the activist mounting the greater good defence are recently resigned members of Parliament or the immediate past leader of political parties.

Source: The Case for Disallowing the Necessity Defense in Climate Change Cases – ProfessorBainbridge.com.

The necessity defence (or the defence for cannibalism on a lifeboat defence) exists only if

  1. if the harm that would have resulted from compliance with the law would have significantly exceeded the harm actually resulting from the defendant’s breach of the law.
  2. there is no legal alternative to breaking the law,
  3. the harm to be prevented is imminent, and
  4. there is a direct, causal connection between breaking the law and preventing the harm.

Left-wing activists will be happy to know that the defence is unavailable to anti-abortion protesters because there is no harm to be avoided if the practice under protest is specifically condoned by law. Mining and offshore drilling are also specifically authorised by law.

Most of all, the greater good defence will make no difference to what Greenpeace are protesting against. A one-day publicity stunt does not change the world, much less reduce the harm from climate change. Their protesting will never prevent a imminent harm.

The purpose of lawful, peaceful protest is to implore the majority to think again and perhaps change their mind. It is not the purpose of a lawful, peaceful protest to prevent another from going about their lawful occasions. Protests should never be a means of coercing or frightening others in a democracy into conforming to your wishes.

The great virtue of a democracy is it readily enables the people, over time, to be persuaded that what they took for granted is not so and change the law accordingly. Noisy protesters from across the political spectrum stage publicity stunts to catch the public’s eye in the hope of doing this.

Peaceful protesters should always plead guilty

By pleading not guilty to maritime safety charges from his offshore drilling protest, does Russel Norman think that his vote counts for more than mine on environmental policy? He is mounting a greater good defence. Does his views count for more than mine on what is the greater good?

We resolve our differences about what is the greater good on offshore drilling, on environmental policy, on any policy by normal democratic means. That is, by trying to persuade each other and elections. We just had an election which gave us a rich taste of the political views of New Zealanders.

By openly breaking the law non-violently, accepting arrest and pleading guilty, that act of peaceful defiance implores the majority to reconsider their position. Through their passion, their sacrifice, their willingness to risk a conviction on their record, protestors are pleading from the bottom of their heart with the majority to think again and contemplate the possibility that they may be wrong.

Central to political protests is the notion is by making a lot of noise and showing your passionate disagreement, your fellow voters will respect that passion and hear you out. Instead, Greenpeace is trying to impose its conception of the greater good by harassment and court room manoeuvring rather than by their side of the argument winning at the ballot box or on the floor of Parliament.

Greenpeace deserves the respect of taking them at their word; that they want to stop offshore drilling by their protesting alone making it too difficult to continue. They are not saying we are staging a publicity stunt that respects maritime safety laws to implore voters to think again.

Protests should not be attempts to impose views on others. Civil disobedience contributes to the democratic exchange of ideas by forcing the dominant opinion to defend their views. A willingness to accept a conviction is proof that the protest is a passionate, selfless attempt to persuade voters to join their side.

Protests should never be a means of coercing or frightening others in a democracy into conforming to your wishes. Greenpeace expects others to obey the laws for which it successfully lobbied. Why does Greenpeace think they can break laws that others secured through normal democratic means?

Some find democracy frustrating because they cannot win at the ballot box even under proportional representation. Environmentalists such as Greenpeace must be the last to complain so. Greenpeace activists and environmentally conscious voters were spoiled for choice at the most recent election.

Two parties were competing principally for their vote. The older of the two spent the last four weeks of the campaign desperately rebranding itself as principally an environmental party. The new party was an environmental party that was also at peace with the market economy. The two major parties were also campaigning strongly on many policies that might win over environment minded voters.

The great virtue of a democracy is it readily enables the people, over time, to be persuaded that what they took for granted is not so and change the law accordingly. Noisy protesters from across the political spectrum stage publicity stunts to catch the public’s eye in the hope of doing this.

What is holding up legislating in many areas is not that minorities are powerless and individuals are voiceless. It is exactly the opposite. By banding together, passionate minorities can resist the tyranny of the majority. They can trade off their support in other areas in return for policy concessions most dear to them. A small group of concerned and thoughtful citizens can band together and change things by mounting single issue campaigns that influence who wins. An MMP democracy is about building winning coalitions made up of a great many different policy agendas and several parties.

If you want to reform the world, Greenpeace should do what we ordinary folk must do: change our vote, write to an MP, protest, donate to or join a political party, or run for parliament. Sometimes you win, sometimes you lose, but you had your chance at the ballot box every 3 years so you must live with the peace of a fair defeat. By pleading guilty, protesters show that they are trying to win the majority over with their deep-felt passion for which they will willingly pay the price for in court.

Climate economics (UG): International environmental agreements in practice

@NZGreens see a @geertwilderspvv fan as ready for office? #greenbaublesofoffice

Source: Rt Hon Winston Peters speech to Asia Plus Group of Wellington: Making Sense Of Political Change – New Zealand First.

Why the Romans profited from their empire but the British did not from India

The British did not develop India because that would made it a worthwhile prize for another to steal. Rome face no serious rivals so we could take a long-term view on investing in colonies.

A prosperous colony is an attractive colony to conquer so imperial army and navy resources would have deployed to defending it. Prosperous locals and locally recruited troops can switch loyalties.

An empire full of prosperous colonies makes you an attractive target for other European powers to gang up on and divide the spoils. This may explain why some colonial powers had mixed feelings about developing their colonies. Robert Lucas observed that:

Stagnation at income levels slightly above subsistence is the state of traditional agricultural societies anywhere and any time. But neither did the modern imperialisms—the British included—alter or improve incomes for more than small elites and some European settlers and administrators…

The main economic event of the late 20th century was this diffusion of the Industrial Revolution to non-European societies (begun in Japan half a century earlier), a diffusion that will surely continue throughout the 21st century. A central question is why it did not begin much earlier, during the colonial period, at the same time that the Industrial Revolution was spreading throughout Europe.

France lost its once vast North American colonies through wars. Many colonies changed hands after the countless European wars as part of peace settlements.

Australia was first colonised in 1788 as a penal colony. Very expensive to do, but the British did fill-up the only valuable part – Sydney harbour – with 60,000 mainly riffraff and low life.

This penal colony for a number of decades made the only valuable part of Australia more unattractive to other European powers to conquer. Doug Allen explains:

In the case of Australia, the hypothesis might appear silly. How much reduction in the first-best value to a continent can come from 60,000 convicts?

However, one must keep in mind that the only value of Australia at the end of the eighteenth century was from Sydney Harbour, Norfolk Island, and a few other strategic locations.

On these margins, the convicts could lower the value considerably … After the War of 1812 Britain realized the strategic significance of Bermuda and subsequently established a penal colony there.

Deirdre McCloskey pointed out that by the middle of the 19th century, British traded with India with few opportunities for exploitation. What was the price of that?

The cost of protecting the Empire devolved almost entirely on the British people. (A century earlier the British had likewise paid for the defense of the first empire, in what is now the United States; the colonials refused to pay as little as a small tax on tea for imperial defense.)

British taxpayers 1877-1948 paid for the half of naval expenditure that was for imperial defense, a by no means negligible part of total British national income each year. They paid for the Boer War. They paid for the imperial portions of World Wars I and especially II. They paid for protection of Jamaican sugar in the 18th century and protection for British engineering firms in India in the 19th. They paid and paid and paid.

What were the vaunted benefits to the British people? Essentially nothing of material worth. Bananas on their kitchen tables that they would have got anyway by free trade. Employment for unemployable twits from minor public schools. The joy of seeing a quarter of the land area on world maps and globes printed in red. Economically, it did not matter. Public education mattered a great deal more to British economic growth, as did a tradition of industrial and financial innovation, and a free society in which to prosper…

Rich countries are rich mainly because of what they do at home, not because of foreign trade, foreign investment, foreign empire, past or present.