Best Line I Have Read Today

说得不好听，经济发展是要有很多枯骨的——不容许枯骨，何来一将？

That's professor Steven Cheung talking, more here.

Actually, when you think of it, the professor's statment is very Hayekian. You let more players with diverse knowledge to participate in the exchange process, a larger knowledge base will get utilized as a result and the more likely that some successful product, production process or organization form will emerge from the the competitive process.

Capital Account Liberalization: Doom or Boon?

In a forthcoming paper in Journal of Economic Literature, Stanford professor Peter Henry wrote:

The lion’s share of papers that find no effect of liberalization on real variables tell us nothing about the empirical validity of the theory, because they do not really test it. This paper explains why it is that most studies do not really address the theory they set out to test. It also discusses what is necessary to test the theory and examines papers that have done so. Studies that actually test the theory show that liberalization has significant effects on the cost of capital, investment, and economic growth.

More here.

HT to Simon Johnson for the pointer.

Institutions Vs Culture: What is the Main Driver of Economic Development

Greg Clark from UC Davis said:

Most economists think English political institutions ensuring free markets and individual incentives caused the Industrial Revolution. Consequently efforts to aid areas like sub-Saharan Africa, with living standards now BELOW those of the Stone Age, have focused on getting them "good" institutions. However, my book, "A Farewell to Alms," argues from the long historical record that good incentives -- secure property rights, low taxes, stable governments -- often just produce complete economic stagnation...

Even now dirt-poor Malawi has better economic incentives than rich Sweden, where the government seizes 50% to 60% of an extra income wage earners produce, and distributes free medical care, education and pensions. My book argues instead that modern growth is largely a cultural achievement. Societies cannot grow without a cultural transformation.

James Robinson at Harvard reacted to Clark's cultural thesis, his main point is that good insttiutions matter in a nation's economic development.

Read more here on their debate of the topic up at WSJ.

China Contemplates Reform on Stake Cap on Banks

The China Banking Regulatory Commission is evaluating whether to raise or lower the stake cap on foreign lenders' holdings in banks.

Chairman Liu Mingkang told The Standard it is now looking into synergies and problems brought about by the 20 percent cap. Any decisions will be announced by the first quarter of next year.

More here.

China should let foreign lenders have higher stakes in Chinese banks, that should be an indispensable way to wean state banks from their dependence on taxpayers' support. More importantly, it will intensify competition among banks and improve credit allocation.

Bill Easterly on ABD

Highlights:

-- United Nations Conference on Trade and Development, a body that has long distinguished itself by promoting all the bad ideas that stifle both trade and development.

-- But any Asian leader who hasn't already figured out that trade should be mainstream after Asia's world-historical trade explosion is past the point of rescue anyway.

-- Successful trade booms (and the accompanying infrastructure demand) come about through letting free market entrepreneurs run wild to find things foreigners want rather than consulting ADB bureaucrats on designing a "national development strategy."

-- All of which goes to show that the ADB's fundamental problem is that it needs advice from successful Asian countries more than they need advice from it.

More this WSJ oped.

Best Line I have Read Today

“To understand Singapore,” he said, “you’ve got to start off with an improbable story: It should not exist.”

More here. That's Singapore's founding statesman Lee Kuan Yew talking.

Land Grab: China vs India

You have read or heard a lot about how expropriation of China's rural land for industrial or property development has created social stability problems. For an example, read this.

What is new to me is that the same problem occurs in India as well, a place where the legal system is presumably better developed than China's. This is from today's WSJ:

In recent months, peasant revolts have been flaring up across the country, protesting against industrialization and the land grabs that accompany it. Harnessing the anger of rural poor, Maoist-inspired insurgents roam freely across much of central India, causing Prime Minister Manmohan Singh to call them the largest threat to India's security.

Read more here.

China vs India

In 2040, the Chinese economy will reach $123 trillion, or nearly three times the output of the entire globe in the year 2000, despite the influence of several potential political and economic constraints. India's economy will also continue to grow, although significant constraints (both political and economic) will keep it from reaching China's levels.

That is from Nobel Prize winner Bob Fogel, more here.

Can Open Borders Help the World's Poor?

Lant Pritchett said yes, here is a profile of Lant in NYT. Lant was with the World Bank before joining Harvard. HT to Marginal Revolution for the pointer.

Here's Lant's latest book Let Their People Come covered in the NYT story. In the eyes of Larry Summers, the "book may be like Milton Friedman's "Capitalism and Freedom,"which seemed "lunatic in the moment" but won converts with time".

India Fact of the Day

1) According to the Planning Commission of India, 600 million people — roughly half the population — are off the electric grid.

2) Transparency International estimated in 2005 that Indians paid $480 million in bribes to put in new connections or correct bills.

Read more here.

What's missing in the story is about the price of electricity. Who has the final say on the electricity price in the face of chronic shortfall of supply to meet demand?

Informal Finance in China, Less Important than You Think

I have always believed that informal finance serves a very important function in China's growth. Now a paper, an empirical one, forces me to think about it again.

Here is the abstract:

China is often mentioned as a counterexample to the findings in the finance and growth literature since, despite the weaknesses in its banking system, it is one of the fastest growing economies in the world. The fast growth of Chinese private sector firms is taken as evidence that it is alternative financing and governance mechanisms that support China’s growth.

This paper takes a closer look at firm financing patterns and growth using a database of 2400 Chinese firms. We find that a relatively small percentage of firms in our sample utilize formal bank finance with a much greater reliance on informal sources. However, our results suggest that despite its weaknesses, financing from the formal financial system is associated with faster firm growth, whereas fund raising from alternative channels is not. Using a selection model, we find no evidence that these results arise because of the selection of firms that have access to the formal financial system.

While firms report bank corruption, we do not find evidence that it significantly affects the allocation of credit or the performance of firms that receive the credit. We find that an important determinant of access to bank loans is the ability to post collateral, which is in turn a function of firm size, level of fixed assets and firm location.

Our findings suggest that the role of reputation and relationship based financing and governance mechanisms in financing the fastest growing firms in China is likely to be overestimated.

Read the paper here.

Government is the Source of the Problem!

Another NYT story said:

"India's drive to become a global economic powerhouse faces a huge roadblock in its inefficient, largely state-controlled financial system, analysts say. Two-thirds of India's banking business is conducted through less than 5 percent of its branches...An estimated 70 percent of Indian citizens are still not part of the banking system, while bureaucracy and inefficiencies are countering the benefits from faster growing parts of the economy, say political leaders and economists."

Can the government do anything about this?

Nope according to the story because of strong resistance from the 750,000 public bank employees, who have strong unions.

Another reason is that "[a] large part of the population is still dependent on the banking system for small requirements,"said Amitabh Verma, joint secretary of banking operations in the Ministry of Finance. Big companies are not the primary concern, he said. Corporations with international ratings"have an alternative,"he said, while these individuals do not.

Read more here.

That makes me wonder, if state-banking is indeed so effective in meeting the poor people's demand for financial services, then why is micro-finance arrangement so popular in India. Afterall, aren't all these micro-finance mechanisms set up specifically for meeting those very same demand of the poor people. Read this.

Avoid Marginalization Through Competition

Today's edition of The Standard reported on the warnings sounded out by National People's Congress vice chairman Cheng Siwei:

"Like the fabled hare being overtaken by a tortoise, Hong Kong risks losing its position as a international financial center if it sticks to its "old ways," National People's Congress vice chairman Cheng Siwei warned Tuesday in Beijing...

"If Hong Kong people focus on internal political rows but not economic development, they will be marginalized," Cheng told a media briefing less than two weeks before the SAR's March 25 chief executive election."

Read more here.

It is ultimately a time allocation problem, isn't it? If you devote more time to work on political matters, you have less time left to deal with economic issues. But then in economics, we talk about choice at the margin. That is, every one in HK is calculating whether spending one more unit of time in political activities brings higher benefit than other activities. Throw in different preferences, different opportunities confronting different people, it seems unlikely most of HK's working population would devote most of their time to political activities. Therefore, the outcome Mr. Cheng talked about would be an unlikely one.

If one were to worry about HK being marginalized, there is another consideration which is far, far more important in my opinion. That is Beijing's attempt to limit the growth opportunities of mainland cities in order to "enhance" HK's role as our country's premier interntational financial center.

In a market economy, you don't get assigned to such role, you earn it through beating your rivals in the market place. Horning HK's competitive edge through vigorous competition with other mainland cities and other global ones is the only route for HK to stay ahead. However, this is not happening, as I talked about in a previous post.

Democracy and Growth

MIT's Daron Acemoglu and Harvard's Ed Glaeser blog about democracy and growth over at the WSJ blog, read more here.

Shanghai Deserves Equal Treatment

Today's SCMP reports:

"The central government aims to take further steps to reinforce Hong Kong's role as an international financial centre, signalling its intention to highlight the city's importance to China's economy ahead of the 10th anniversary of the handover.

Analysts saw Beijing's efforts to promote Hong Kong's role as a setback for Shanghai, whose leadership has been hit by a series of corruption scandals culminating in the sacking of its former party secretary, Chen Liangyu ...

It is expected to announce more favourable policies soon, probably before the July 1 handover anniversary...

"The conclusion to the decade-long debate on the role between the twin cities has become clear now. Hong Kong, with its existing advantages, should serve China internationally, while Shanghai, with its limitations, should focus on serving the domestic market," Professor Zhong said. "

Read more here.

My response is, why shouldn't Shanghai be allowed to compete with HK? If Shanghai's legal framework and other institutions are inadequate to serve as China's international financial centre at this point in time, wouldn't it be more productive to speed up their development rather than condemn it to an insignificant role.

Why HK's is so worry about Shanghai? Afterall, it competes quite successfully with world gaints like London and New York, why it fears to compete with Shanghai?

Actually it is not correct to say HK is competing with Shanghai. As long as China has the ability to grant favorable policies to HK but not to Shanghai, the playing field is tilted even before the game begins.

Bidding Farewell to Laissze Faire in HK

In the HK Standard today:

" In an unprecedented move, the government announced Wednesday it will invest directly in movie productions to back Hong Kong's ailing film industry. Officials hope direct investment from the HK$300 million film development fund announced by Financial Secretary Henry Tang Ying-yen in his budget speech last week will bring about a revival to the industry that a senior official has described as "very important."..."

Rationale for the policy, according to Secretary for Commerce, Industry and Technology Joseph Wong:

"First of all, the film industry, is a very important creative industry in Hong Kong and [its] revival will have a lot of spill-over effects." Secondly, he argued, there are also many examples of governments playing a "more active part" in supporting film industries in France, the United Kingdom, Singapore and South Korea."

Read more here.

Yo Joe, please name one industry which does not generate spillover effects, externalities, third-party effects...or whatever fancy name you can come up with?

Oh yeah, Joe, on your second point, would you please explain to me why whatever policies other countries have implemented must be a good thing? Could they all be wrong at the same time? They might not, but we, as taxpayers who pay for the final bill, deserve an explanation not an assertion. Wouldn't you agree?

And would you please also info us Joe, what criteria you would use when deciding which movie deserves government dole ? And who has the final say when picking a particular set of criteria for such purpose in the first place?

HK's Economy, Not as Free as it Seems?

"The late economist saw what he wanted to see and ignored some fundamental accommodations in Hong Kong’s laisser-faire economy.

Milton Friedman was without doubt a great economist and, more important, one who, for good or ill, influenced politicians including Ronald Reagan, Margaret Thatcher and Augusto Pinochet. But his much quoted praise for Hong Kong was based on brief visits and a tendency, the norm among economists as most other humans, to see only what he wanted to see.

So Friedman saw low taxes, private ownership of most utilities, no tariffs, no foreign exchange controls, no government intervention in industry. The low ratio of government spending to GDP in Hong Kong contrasted with that of its then-sovereign power, Britain, and explained much about the divergent economic performances of “socialist” Britain and “free” Hong Kong...

What Friedman cared not to notice about the Hong Kong of the era of Cowperthwaite and later was that in three key areas of policy affecting the people the government was more socialist than its UK counterpart."

Read more here.

Doug North in Hong Kong

1993 Nobel Laureate Doug North will be in HK. Professor North will deliver a lecture at the Chinese University of Hong Kong on 1st March. More information here.

Back to the Basic

Singapore has just announced that it will slash corporate income tax (though it plans also to raise GST). Recently Singapore has done the right things to give its economy a boost. It has just deregulated the mail business and allowed gambling (in fact a few casinos are in the works)

No more new industrial policy initiatives, no more grand plans, no more visions.

The principle behind their recent spate of new economic policies is simple: Deregulation and Let the Market do the Work.

My sense is that with continual gobal competition, Singapore will be forced towards further opening up its already quite liberalized economy. There is simply no other options to it and there is nobody else (or nothing else to count on as it is not resource-rich) it can count on except by relying on market forces.

What about HK? Well, look north and there is somebody whom we can always count on. Deregulation, what's the rush?