Tag: Economic future

China’s Future, a demographic perspective

Posted on by fqzhang

Headlines around the world have often captured the economic rise of China in vivid details: its ever-expanding industrial output, its rapid increase in the amount of mega-corporations that threatened to upset the status quo (think of Lenovo, Huawei, and Alibaba), and above all, its mass market of consumers, who are only beginning to consume in quantities not hereto imagined. But in this blog post, I want to focus on another core aspect of its economy that perhaps is more crucial for China’s economy in the long run: its labor force.

Mao had famously said something to effect that the more populous a nation is, the more strength that it has. Initially, what he meant to suggest is that because China is so populous, it is able to survive a nuclear confrontation or any other national catastrophes that could have easily crippled other nations. And for a long time, China’s demographic growth had been remarkable, seeming to heed his words, growing from 543 million in 1950 to 814 million in 1970 (see graphs)China population pyramid 1970, whChina_Pop_Pyramid_2012 en the median age in the country is only 20. Of course, many nations have growth much fast than this, but for a nation the size of China, the impacts are quite noticeable. However, simply by adding raw number of people to the economy does not suggest that the economy has been growing as well. In fact, in certain years (see graph 2), the economy contracted quite severely during the Mao era. Overall the pace of growth is only from the duration of the period from to    .

This lack of growth during the Mao era can be contrasted to the beginning of the Deng Xiaoping era, where following a series of liberalizations, the economy had become more robust and dynamic, growing at over 9% percent each year for the period from 1979-2014Chinese economic growth compared to its neighbors. The implementation of economic reforms in the form of special economic zones, etc, helped to propel the economy into new economic heights. Another factor that propels this growth that is often neglected is the so called “demographic dividends”.

The past 35 years had witnessed what is often termed as a demographic dividend, whereby the nation have both low old-age population and low younger generation. This period in a nation’s history (particularly in the case of East Asia, where this effect is the most pronounced) is characterized by high economic growth. For instance, look at the demographic pyramid for 2012. The majority of the population is of working age and contributing to national economic output, at the same time, less economic resources are required to take care the elderly (in the form of healthcare, etc), and less is needed to take care of the young (in the form of education, etc). This saving of resources freed up more capital and labor for the economy, and enabled the phenomenal economic growth that we came to associate with the East Asian countries.

However, one can readily see that there is a catch to this scenario. Population all eventually age and the working population today is the retirees of tomorrow. With a rising share of the elderly, the demographic boom will quickly turn into a demographic bust. In China’s case, this will become an acute problem (see graph)China2050. Decades from now, when 20, 30 or even 40% of the population is over the age of 65, what do we do then? Economically, the burden will be ever greater on the central government to provide for the elderly, increasing tax burdens on already a smaller working age population. If there is a lesson from the Japanese experience for China, it’s that population is at the center of any comprehensive national development strategy. Failure to take into account the demographic factor will have catastrophic consequences.

A musing on the word “farmer”

Posted on by fqzhang

Here in the United States, we frequently use the word farmer to describe someone who engaes in agricultural pursuits or who derive a large source of their income from farming activities. Accoding to the most commonly used definition (as defined by the Merriam-Webster dictionary): “a person who cultivates land or crops or raises animals (as livestock or fish).” Based on this definition, a large portion (over a billion in fact, according to official figure, but like with all statistics, the true figure is much higher) is engaged in agricultural pursuits. Farmers have always been recognized as one of the largest groups of people in society, and their role in the production of food is very well appreciated. But are all “farmers” created equal?

I remember hearing about people in my hometown who are considered to be “farmers” (in rural areas of California) but were in fact large landowners who owned thousands of acres of land (chiefly planted with almond trees) and whose revenue is in excess of 10 million dollars a year. Now compare a picture of this individual with a sub-Saharan “farmer” who engages in subsistence farming (like other 60% of the population of Sub-Saharan Africa), and whose produce can barely feed his own family of 7, and you quickly get a picture of the diversity in the word “farmer”.

The word “farmer” in its modern usage is essentially an American construct, as it implies ownership of the land you are working on and have to be associated, at least in America, with large estates and strong independent ownership. The millions of people who work on those farms on a contractual basis are termed “farm workers” rather than farmers, since they are merely needed for the harvesting and planting of fruits/vegetables/crops. In many ways, being a “farmer” in the United States doesn’t seem to be a bad occupation: you receive a steady source of income and derive a sense of satisfaction from working for yourself. Granted, no one in a capitalistic society is entirely free from the fluctuations on the market or the uncertainties of weathers, but with economy of scale (which many farmers in the US enjoy), over the long run, farmers seemed to be living a decent life. With increasing consolidation in the United States in the farming industry, the small family farms are increasingly becoming a thing of the past, and we entering an age where large corporate farmers are becoming the way of the future.

For the rest of the world, “peasant” is the more appropriate term. Even in advanced developing nations like China, over 30% of the labor force engaged in farming as their daily occupation, and in the rest of the developing and underdeveloped world, the peasantry ranges from 40% to 80% of the population of the area. The peasantry is a poor lot with none of the connotations that we associate with being a “farmer”. But unfortunately, this is also the state of the world that we live in. However, to capture the true state of the world’s farming community, we should use the word “peasant” a little more.

Labor market in Japan: Is female participation the key to economic recovery?

Posted on by fqzhang

I came across this article quite recently on NPR news, “Is ‘Womenomics’ The Answer To Japan’s Economic Woes?” http://www.npr.org/blogs/parallels/2014/12/03/368143686/is-womenomics-the-answer-to-japans-economic-woes . The author posed the question of whether or not Japan’s recent policy, dubbed “Abenomics”, is going to pull the nation out of economic stagnation. One key component of this economic revitalization is to introduce women into the workplace and to provide a more talented pool of workers for the economy to draw upon. However, his policies have been controversial as well, since he is accused of helping only a small group of women, and not doing enough to help advance the careers of others. The debate, therefore, revolves around what is the economic role for women in a society such as that of Japan’s?

It is no secret that the Japanese economy is in a sluggish condition, with many structural problems present. Personally, I believe in the importance of sustained economic growth to bring benefits to society, and if having greater participation can contribute to the economic development, then I believe it is the duty of a government to help women assimilate into the workforce. This will no doubt face considerable resistance from many in a traditional society such as that of Japan, where women in the workplace, especially in jobs like manufacturing, is still something rarity, and women are expected to become the child-bearers and homemakers in society. But we must not forget the fact that the Japanese workforce is shrinking due to population decline, and immigrations are still being severely restricted in the nation. Therefore, it is imperative for Japan to increase the size of its labor force by including more women than before in order to save many of the industries in the country from being relocated elsewhere.

This sort of change requires a fundamental shift in the way a society views how their economy should be organized. If we look back at the history of Japan, we see that Japanese society reorganized itself from a feudal agricultural nation into an industrial one in the late 19th century; and post-World War Two, when Japan orientated itself to become an exporting nation, with an emphasis on electronics. These sort of changes did not happen overnight and had to overcome challenges within society, the landowners and domestic industrialists respectively. Also in each case, the government, in the form of a centralized bureaucracy and the Ministry of Economy, Trade, and Industry (METI), helped to propel the nation into greater economic advancements.

In today’s Japan, societal views of women have not changed in decades, even though the economic fortune of Japan have shifted considerably. In response to this new crisis in the labor market, I believe that the government has the opportunity to once again take a proactive role in society, and to encourage economic development by making drastic changes in the social framework. By providing subsidies to industries that hire women, by giving better childcare and social benefits, by opening technical training programs for women, the Japanese government can introduce more women into the workforce. Japan has done it before, spear-heading changes in its economy and transformed itself into the 3rd largest economy in the world today. I believe that with the right amount of political will to foster these social changes, Japan can once again become an engine of global economic growth.

Reflections on India’s hydroelectric project

Posted on by fqzhang

According to a recent article on Reuters, “India approves projects in dash for growth, alarming green groups”, author Tommy Wilkes discussed the Indian government’s approval to build the country’s largest hydroelectric power plant. The construction of this dam will upset the ecological environment of the area considerably by cutting down trees and reducing biodiversity. Therefore, the debate in this case is whether or not the government should allow a plant to be built in the state to promote the economic growth of the area and the nation, or should they look to protect the environment and to help promote the long-term environmental welfare of the region?

While it is easy to simply blame the shortsightedness of greedy industrialists or government officials only interested in tax revenues, we must bear in mind that India is a large developing nation with its own needs. For us here in the United States, which enjoys a high standard of living and free from most material needs, it can be inappropriate to pass judgment upon others that are less fortunate and are behind the American standard of living. Imagine telling the American or British industrial worker of the late 19th century to leave their jobs behind and their families starving because of concerns for the environment! We can think of society as being in a long series of progress, just the US and Western World had undergone significant environmental degradation in the past, and moved beyond that stage to the present, I believe that the rest of the industrializing world will undergo a similar process, eventually becoming more green-conscious once they had developed to a certain level. For the government of a developing nation that is responsible to the people, protecting the environment should not be on the top of the list at the present.

I know some may find this view extreme, and may offer several counterarguments. For example, they may reason, when the West was industrializing, we do not understand the impacts of pollution on the environment – but now we do, and therefore we need to tell the nations of the developing world to place the environment at the top of their priority. However, recall that Abraham Maslow, the famed psychologist, once came up with the “Hierarchy of Needs” for human beings and I would extend this logic to society as well. When a society still has its “needs” unmet – clean water, reliable source of enegy, etc – they cannot be worrying about things in the “self-actualization stage”, such as environmental justice and minimal carbon footprint.

To use the terms of ethics, we can see that what India is doing by building the dam is to maximize the most amount of benefits for the most amount of people, an utilitarian approach. This approach (first expressed by John Stuart Mill and Jeremy Bentham in the 18th century), despite its many drawbacks, do have the important advantage getting the most amount of benefits for a given limited amount of resources, something that is crucial for developing nations. However, this is not to suggest that we can simply let them off the hook for all environmental degradations, for in the interconnected world today, pollution from developing nations affect the world as much as developed ones. But we cannot judge countries in the same standards because each one has its own historical needs and priorities. As India and the rest of the world close the gap between themselves and the West, we can expect more from these countries and how they can start to make a positive impact toward the environment in the framework of their overall development.

Housing market and its implications for the Chinese economy

Posted on by fqzhang

Currently (as of late October, 2014) the Chinese housing market is at a historic high, yet housing prices have increased only modestly this year. This got me to thinking, could the booming Chinese housing market be at a turning point, and is perhaps already on a road to decline? Recently, I have read that some in China have begun to starting selling their houses, and that those who sells it the most are those with government connections. Perhaps they have some insider information on the Chinese government’s attempts to curb this housing bubble, or that they know something the rest of people in China do not? In terms of policy, I believe the best way to do this is through tightening the credit market, and raising interests rates. Its been well known that the government have been trying to do curb the proliferation of non-performing loans and easy money that is circulating in the country, and if the central bank indeed decided to raise the interest rates, the effects could be extremely profound, not only for the housing market, but for the entire economy. The construction boom occurring in China is fueled by the essentially free-loans that real estate developers have been getting through state-owned banks, many of these using their political connections. And now the housing supply have far outstripped the demand for housing, yet the price remains artificially high, with most of the new buying coming from speculators. In this situation, a crash is inevitable. Many have warned that crash is impending for many years now, yet the market took the warning in stride, perhaps factoring in the risk. Yet investors still believed that the boom is sustainable. In such a situation, even the slightest sell-offs can induce a panic.

Let’s look at a hypothetical situation. Going back to the central government’s actions. If the central bank (People’s Bank of China) had raised interest rates, the money fueling the construction would dry up, speculators would not be able to gain the necessary funding for them to construct new homes and further speculations in the market can no longer be financed. In this case, the housing will tumble investors leave the market en masse. The non-existent demand would not be able to prop up the price or to slow the decline. A fall in housing price will likely mark the beginning of a general slowdown in the Chinese economy for several reasons: firstly, the housing sector and construction is one of the largest sector in Chinese economy and much of the economy is tied to real estate in one way or another. The housing sector stimulated demands for steel, concrete, etc, and provided employment for millions of migrant workers coming into China’s cities each year. A fall in construction would result in overall lower aggregate demand in the economy since it is such a major component. Secondly, many companies uses real estate as asset to back their loans, and with a rise in interest rate as well as a fall in the housing prices, more loans would be much harder to get and the companies will get less of it because of the decline in their property values. As cheap loans have been at the basis of Chinese economic growth for years now, it is reasonable to expect that as this cheap loans dry up, the Chinese economy (which is driven by new investments) would slow as well. Non-performing loans, especially at the provincial and municipal levels in China would inevitably further exacerbate the crisis. Many state-owned-enterprises are burdened by high amounts of loans and a rise interest rates would cause them to become financially insoluble, a risk the Chinese government simply cannot take.

Of course, these risks have passed through the mind of the government officials as well, and especially since many government officials have ties to the commercial world, they would not be likely to push for legislations that would damage their commercial holdings. (On corruptions in China, click here). No one wants the housing market to decline, since everyone has so much tied into it. A decline in housing is not likely, or at least the government will sought to delay it as long as possible. However, the need to curb the wild growth in the market is needed. Once again, as many commentators have stated before, the Chinese economy needs structural reforms in order for it to sustain the levels of growth. The deep and complicated ties between political bodies, regulatory agencies, banks, developers, speculators, etc. causes the rise in property values in the first place, and now it has grown to an unsustainable level. The task before the government is therefore to curb the wild proliferation of loans without damaging the rate of economic growth and find a solution that is acceptable to all parties involved. A herculean task indeed! It remains to be seen how the government will be able to manage this crisis.