Kim Jong-il, Faminist [no sic]

Kim Jong-il, Faminist [no sic]

Although it is waning, anti-globalization is still fashionable in certain circles, particularly with trustafarians and assorted Westerners with too much free time on their hands. Tilting against the evils of trade, commerce, and corporations certainly has its appeal in a Marxist sense. Today I feature the plight of a country that pretty much illustrates anti-globalization in operation: the DPRK. Trade? Get outta here! Commerce? Blah! Corporations? Thpppt! Actually, it isn't that extreme anymore [1, 2] as Kim il-Jong is experimenting with being a capitalist roader. It may be downright crazy, but some North Koreans apparently believe that, gee, maybe some of that globalization stuff isn't so bad after all. Nevertheless, analysts over at the Peterson Institute reckon that North Korea is not as self-sufficient as it would like others to think it is. At this time of elevated food prices, this is certainly not a good thing. One of my favourite romantic notions of the anti-globalization movement is the goal of self-sufficiency enabling folks to close their borders, sing "Kumbaya," and live happily ever after. Well, once again, the DPRK is on the brink of famine as Kim il-Jong ups the oppression factor a bit more. Below is the Reuters write-up; you can also read the Peterson Institute summary:

Soaring global food prices and reluctant donors are pushing North Korea back toward famine, which could see the secretive government turn even more repressive to keep control, a paper released on Wednesday said. "The country is in its most precarious situation since the end of the famine a decade ago," said the paper from the Washington-based Peterson Institute for International Economics.

Stephan Haggard, who wrote the paper with Marcus Noland, said the sharp increase in world prices for commodities had sent ripples through the communist state's economy. The authors are specialists in reclusive North Korea's trade with the outside world. "The North Korean rice market is much more integrated with world markets than most people think," Haggard, a professor at the University of California, San Diego, said by telephone. North Korea, which even in time of good harvests is about 20 percent short of what it needs, has grown more dependent on rice imported from neighboring China since a famine in the late 1990s that experts estimate killed at least 1 million people, he said.

Noland told a panel in Washington that after neglecting to reform, reimposing state controls on some trading and kicking out most foreign aid groups, "North Korea is on the precipice of a famine" that would be less severe than in the 1990s.

Pyongyang's limited foreign currency reserves, and poor reputation as a trade partner, mean the rice trade is being hit and ordinary North Koreans are feeling the squeeze, Haggard said. North Korea also lost crops and farmland last year to floods. A senior official with the U.N. World Food Program, which earlier this month warned of a food crisis in North Korea, said that in some places the price of rice had more than doubled in a year with 1 kg (2.2 pounds) costing about one-third of the monthly salary of an average North Korean worker.

The U.N. Food and Agriculture Organization said in late March it expected North Korea to have a shortfall of about 1.66 million ton(ne)s in cereals for the year ending in October 2008, which would be the largest deficit in about seven years. North Korea has in the past relied heavily on aid from China, South Korea and U.N. aid agencies to fill the gap.

But the new conservative government in South Korea has said it will tie aid to progress its capricious neighbor makes in giving up development of nuclear weapons -- on which Pyongyang is stalling. Under previous left-of-center governments in Seoul, the North could expect about half a million tonnes of rice and massive fertilizer shipments, with few questions asked -- the price the South was prepared to pay for stability of the Korean peninsula. China has its own problems keeping runaway grain prices under control, which means it cannot afford to be as generous this year.

North Korea has been successful in separating appeals for humanitarian aid from international talks on ending its nuclear weapons program and is unlikely to bend in disarmament bargaining due to the food crisis, analysts have said.

Noland and Haggard said North Korea would "ultimately weather this challenge politically by ratcheting up repression and scrambling, albeit belatedly, for foreign assistance." But without fertilizer and other aid to help farm production, it may be too late to avoid deaths from hunger in the country of some 23 million, they added.

So, Just How Capitalist is China?

I came across this interesting paper by MIT economist Yasheng Huang via Andy Mukherjee over at Bloomberg. In it, Huang tackles the question, "Just How Capitalist is China?" and comes up with a novel explanation about China's path to development. The paper summarizes the key points of his forthcoming book, "Capitalism with Chinese Characteristics." It is a fairly ambitious work that has the potential to upend some current thinking about the rise of China. Let us begin with a peek at the introduction and the main findings from the paper linked to above. Truly, it is beyond debate that the country has grown by leaps and bounds. Yet, the exact mechanisms by which it has done so, especially in terms of economic governance, remains subject to much debate that isn't likely to quiet down anytime soon. Nevertheless, the description of the research methods used by Huang make it sound like he has done fairly extensive historical and archival work towards giving us better clues:

Since 1978, the Chinese economy has grown phenomenally. This is not in dispute. By exactly what mechanisms has China managed to grow so fast? There is more room for debate on this question. The near-consensus view—or the view that has achieved the greatest traction—among economists is that China has grown by relying on unique, context-specific local institutional innovations, such as ownership by the local state of township and village enterprises (TVEs), decentralization, and selective financial controls. The conventional mechanisms of growth, such as private ownership, property rights security, financial liberalization and reforms of political institutions, are not central components of China’s growth story.

Much of the economic research on the Chinese reforms revolves around the following question, “Given the manifest inefficiencies in the Chinese economy, how do we explain its growth?” The answer, often backed up by formal, mathematical models, is that seemingly inefficient policies, practices and institutions—such as public ownership of TVEs and financial controls—perform underlying efficient functions in the specific context of China. The approach is typically inferential—i.e., these efficient functions of observably inefficient forms are inferred from China’s excellent economic performance.

This book takes a different and factual approach. It starts with the following set of questions, “Were TVEs really publicly-owned? Did China implement financial reforms prior to or concurrently with the initial economic takeoff in the early 1980s?” The research is based on detailed archival examinations of policy, bureaucratic and bank documents as well as several waves of household and private-sector firm surveys. The qualitative and quantitative data span the period from 1979 to 2006. As an illustration of the factual density of this book, I have examined thousands of pages of memoranda, directives, operating manuals, rules of personnel evaluations issued by the presidents of China’s central bank, all the major commercial banks, rural credit cooperatives, etc.

These documents are contained in a 22 volume compilation of bank documents, which, while available at Harvard and in Hong Kong, have never been examined by a Western academic. I have also gone to the raw database on TVEs established by the Ministry of Agriculture. Ministry of Agriculture was in charge of collecting data on TVEs and its data have finer ownership breakdowns than the TVE data available in China Statistical Yearbooks. Based on this body of research, here are the main findings:

--Explicitly private entrepreneurship in the non-farm sectors developed vigorously and rapidly in rural China during the 1980s;
--Financial reforms, again in the rural areas, were substantial in the 1980s and the Chinese banking system channeled a surprisingly high level of credits to the private sector in the 1980s;
--Conventional property rights security was—and still is—problematic but the security of the proprietor—the person holding the property—increased substantially at the very onset of the economic reforms;
--The Chinese policy makers in the early 1980s strongly, directly and self-consciously projected policy credibility and predictability;
--The political system, although absent of the normal institutional constraints associated with good governance, became directionally liberal early during the reform era.

Next up are excerpts from what I consider as the highly intriguing part of his explanation: small-scale and mostly private industries in rural areas have more recently been given far less attention than large-scale and mostly state-owned industries in large Chinese cities. Hence, the widening inequality gap between urban and rural areas:
Capitalism with Chinese characteristics is a function of a political balance between two Chinas—the entrepreneurial, market-driven rural China vis-à-vis the state-led and oligarchic urban China. In the 1980s, rural China gained the upper hand but in the 1990s, urban China gained the upper hand. Although China made notable progress in the 1990s in terms of FDI liberalization and reforms of SOEs, this book assigns greater weight to the rural developments in determining the overall character and the pace of China’s transition to capitalism. When and where rural China has the upper hand, Chinese capitalism is entrepreneurial, politically-independent and vibrantly competitive in its conduct and virtuous in its effects. When and where urban China has the upper hand, Chinese capitalism is tending toward oligarchy and political dependency on the state and it is corrupt.

Most economists judge China’s economic performance by its GDP data. While decadal differences in China’s GDP growth are fairly small, the economic and social implications of a more entrepreneurial version of capitalism in the 1980s and the one closer to oligarchic capitalism in the 1990s in fact differed enormously. There are substantial and real welfare consequences:

--Although GDP growth was rapid during both the 1980s and 1990s, household income growth was much faster in the 1980s;
--The share of labor income to GDP was rising in the 1980s but declining in the 1990s;
--Several studies on TFP converged on the finding that TFP growth since the late 1990s has either slowed down from the earlier period or has completely collapsed;
--The majority of the much-touted poverty reduction occurred during the short 8 years of the entrepreneurial era (1980-1988) rather than during the long 13 years of the state-led era (1989-2002);
--Income disparities worsened substantially in the 1990s, while they initially improved in the 1980s;
--Governance problems, such as land grabs and corruption, intensified greatly in the 1990s;
--In the rural areas, heavy taxation was accompanied by the withdrawal and rising costs of basic government services;
--A development that has garnered almost no attention in the West is that between 2000-2005 the number of the adult illiterate Chinese increased by 30 million, reversing decades of trend developments;
--The way the Chinese measure adult illiteracy implies that all of this increase was a product of the rural basic education in the 1990s and this adverse development coincided closely in timing with the intensification of urban bias in the policy model.