Obama's lethal game of beggar-thy-neighbour
The ‘Buy America' policy, proposed by the most protectionist Congress in memory, is a piece of disastrous economic folly
The talk at Davos is grimmer this year than last - grimmer, but also better focused. The causes and extent of the financial crisis are better understood, though the hunt is still on for ways to stop the rot penetrating the global economy. It helps, too, that some fancy theories have bitten the dust.
Last year's pet Davos theme, the supposed “decoupling” of China and other emerging titans from the American economy, the idea that they could thrive independently, has been badly mugged by reality. As the US went into a tailspin, so did Chinese exports. China's growth rate has halved, from more than 12 per cent in 2007 to just over 6 per cent; tens of millions have lost their jobs and China's (very nouveaux) rich have lost fortunes invested in collapsing housing and stock markets.
Making the first visit by a Chinese leader to Davos, Wen Jiabao, China's Prime Minister, insisted that his country would hit 8 per cent growth this year through “hard work”. But his main purpose was to showcase China's readiness to co-operate in a concerted rescue effort. If China's leaders ever bought that “decoupling” myth, they are by now badly rattled by the weight of evidence to the contrary. They know they need the US and Europe to recover, and fast, because China's thrifty consumers, most of whom have little disposable income, cannot begin to compensate for the slump in Western demand.
They also know that the Obama Administration will not tolerate Chinese policies “that put US workers and businesses at a disadvantage”: a conveniently elastic concept that could cover anything from foul play to cheaper wages. They have been told that the new Congress contains strong “anti-trade or anti-China constituencies”. Mr Wen arrives in London tomorrow looking for a stalwart free-trade friend at court, prepared to help Beijing to weather coming storms in the US-China trade relationship.
Mr Wen deserves a sympathetic ear - provided he accepts that alliances are mutual by nature and that China courts trouble by slipping export tax rebates to thousands of its manufacturers. If this year's Davos topic, “shaping the post-crisis world”, is not to look ludicrously optimistic a year hence, markets must be kept open even in the teeth of massive trade imbalances. But in mid-crisis, where we actually are, it is hugely tempting to pull up the drawbridge.
Growth indicators turn sourer with every week that passes. The IMF this week downgraded its 2009 global forecast - yet again - from 2.2 to 0.5 per cent. Its forecast, to cheer you up further, consigns Britain to the ninth circle of hell, with the economy contracting by 2.8 per cent this year, worse even than the eurozone's 2 per cent and far worse than the 1.6 per cent drop the IMF expects in the US. International trade, the great engine of the boom decades, will shrink this year for the first time since 1982.
Politicians are turning protectionist on the sly, slipping manufacturers discriminatory subsidies, dressing up state aid as training, raising tariff barriers and inhibiting global capital flows by encouraging the banks that they now part-own to intervene to concentrate their lending “at home”.
Trade leadership will have to come from Britain because it will not come from the America of Barack Obama. There, “economic patriotism” is the new protectionism, prettily wrapped in stars and stripes but just as damaging to the world's prospects of recovery as was the 1930s variety.
Is Mr Obama a protectionist? Instinctively, yes; he has never seen a free-trade deal he would actually vote for, and he talks about trade policy as a tool “to support good American jobs”. But as the election campaign wore on, he toned down his invective against foreign competition, and, because his economic team is basically free trade, the jury is still out.
The verdict, however, will be in very soon. At the behest of the most protectionist Congress in memory, Mr Obama may be about to repeat, at the dawn of his presidency, the same historic error that the much derided Herbert Hoover made just before quitting the White House in 1933. In the depths of the Great Depression, he signed into law the innocent-sounding Buy America Act. It required the US Government to use American suppliers in all public contracts. Less notorious than the Smoot-Hawley Tariff Act, “Buy America” did huge damage. It proved a disaster for US manufacturing exports and the global economy. Other governments followed suit, and it took decades to begin to reverse the closure of markets.
Now, prodded by America's mighty steel lobby, a key congressional committee has voted, 55-0, to attach a still more rigorous “Buy America” clause to President Obama's stimulus package. It bars federal funding of any public projects “unless all of the iron and steel used is produced in the United States”. The clause could be extended to asphalt, cement, heavy machinery, you name it. US dollars, the committee intones, must be used to create “American jobs in America, not Chinese jobs in China”.
Leave aside value for money. Pass over the detail that the US does not produce enough steel to meet domestic demand. Admit that, when economic activity evaporates as precipitately as it has this winter, “saving” jobs looks more important than ensuring long-term competitiveness. Admit, further, that all governments are in the hidden subsidy game right now, whether they boast about it, as in France, or deny it as stoutly as Lord Mandelson - whose “this is not a bailout” brings to mind Magritte's famous “ceci n'est pas une pipe” painting.
Agree, finally, that when you are the newly elected US President and the money you are preparing to print runs into the trillions, the queue at the trough is bound to form pretty fast. But the scale of the temptation is precisely what makes Congress's populist “Buy America” rider an irresponsible, innumerate, pernicious bit of political and economic folly.
If Mr Obama blocks this clause, he will anger the Left. If he does not, retaliation is inevitable. That will shut American workers out of “hundreds of billions of dollars of new business”. Caterpillar, to take just one example, is actively bidding for big infrastructure projects in China; it reckons that “Buy America” would kill its prospects there.
The truth politicians need to ponder is that the financial crisis has made sophisticates of us all. Most of us understand far more about how globalisation works, how the pieces hang together, than we did before everything went pear-shaped. We have made the connection between prosperity and globalisation - at the simplest level, that cheap T-shirts from Bangladesh leave us with more money for other things. We do worry about our ability to compete; we demand clear and impartial trade rules. But we can see how beggar-thy-neighbour protectionism creates more beggars - costing, not “saving”, jobs. It is time the language of politics caught up with us.
WILLIAMS: No free-ride Claus
WILLIAMS: No free-ride Claus
Walter E. Williamstype="text/javascript">document.write('
COMMENTARY:
My George Mason University colleague Professor Richard Wagner wrote the following comments, which were published by Office of the House Republican Leader.
"Any so-called stimulus program is a ruse. The government can increase its spending only by reducing private spending equivalently. Whether government finances its added spending by increasing taxes, by borrowing, or by inflating the currency, the added spending will be offset by reduced private spending. Furthermore, private spending is generally more efficient than the government spending that would replace it because people act more carefully when they spend their own money than when they spend other people's money." A short translation of Mr. Wagner's comment is: There is no Santa Claus or Tooth Fairy. Let's examine the ruse.
Suppose the value of all we will produce in 2009, our gross domestic product (GDP), totals $14 trillion. There cannot be any disagreement that if Congress spends $4 trillion, of necessity there is only $10 trillion left over for us to spend privately. In other words, if Congress is going to spend $4 trillion, it must find a way to get us to spend $4 trillion less. The most open and aboveboard method to force us to spend less privately is to tax us to the tune of $4 trillion.
You might say, "Congress doesn't have to tax us $4 trillion. They could tax us $3 trillion and run a $1 trillion budget deficit." You have that wrong. There is no way for Congress to spend $4 trillion out of our 2009 GDP of $14 trillion by getting us to spend only $3 trillion less privately. It has to be $4 trillion less.
Another method to force us to spend less privately is to print money and inflate the currency. Rising prices reduce our ability to spend privately since each dollar we hold will not buy as much. Another way is for Congress to borrow, thereby reducing our ability to spend privately. By the way, all this means that in any real economic sense the federal budget is always balanced. That is, if Congress spends $4 trillion we must privately spend $4 trillion less whether through taxation, inflation or borrowing.
The stimulus package being discussed is politically smart but economically stupid. It's that bedeviling, omnipresent Santa Claus and Tooth Fairy problem again. Let's say that Congress taxes you $500 to put toward creating construction jobs involved in building our infrastructure. The beneficiaries will be quite visible, namely men employed building a road. The victims of Congress are invisible and are only revealed by asking what you would have done with the $500 if it were not taxed away from you. Whatever you would have spent it on would have contributed to someone's employment. That person is invisible. Politicians love it when the victims of their policies are invisible and the beneficiaries visible. Why? Because the beneficiaries know for whom to vote and the victims do not know whom to blame for their plight.
In stimulus package language, if Congress taxes to hand out money, one person is stimulated at the expense of another, who pays the tax and who is unstimulated. A visual representation of the stimulus package: Imagine you see a person at work taking buckets of water from the deep end of a swimming pool and dumping them into the shallow end in an attempt to make it deeper. You would deem him stupid. That scenario is equivalent to what Congress and the new president proposes for the economy.
A far more important measure that Congress can take toward a healthy economy is to ensure that the 2003 tax cuts don't expire in 2010 as scheduled. If not, there are 15 separate taxes scheduled to rise in 2010, costing Americans $200 billion a year in increased taxes. In the face of a recession, we don't need that.
Walter E. Williams is a nationally syndicated columnist and professor of economics at George Mason University.
A Bush-lite approach to terror?
A Bush-lite approach to terror?
President Obama signs four executive orders, including one to close GITMO at his desk in the Oval Office. (Mary F. Calvert / The Washington Times)
Ever since news of detainee mistreatment at Abu Ghraib became public knowledge in the spring of 2004, Democrats have routinely denounced the Bush administration's approach to fighting terrorism, including the use of Guantanamo Bay, Cuba, as a terrorist detention facility and the use of foreign-based prisons to hold assumed terrorists. But, with President Obama in the White House, the critics are learning that the old anti-Bush talking points don't make so much sense in the real world -- especially now that a Democrat is commander in chief, with the responsibility of protecting 300 million Americans from attack.
Eli Lake of The Washington Times reported Wednesday that the president's executive order issued last week closing CIA "black sites" contains a little-noticed exception that allows the agency to operate temporary detention facilities abroad. The exception is just the latest evidence that the new administration, while eager to announce that it is ending many aspects of President Bush's "war on terror," is leaving itself room to continue some of its predecessor's practices in handling terrorist suspects. In the short term at least, Mr. Obama's relatively pragmatic handling of black sites seems to have created some fissures on the political left. Ken Gude at the Center for American Progress (CAP) said the facilities Mr. Obama hoped to keep open were not prisons but "temporary holding facilities that the CIA has used in the past for decades" - and therefore distinct from the black sites used by the Bush administration.
Naturally, the explanations from Mr. Gude and the Obama administration did not pass muster with the misnamed American Civil Liberties Union (Foreign Terrorist Assistance Union is more apropos in this case). Christopher Anders, senior legislative counsel for the ACLU, declared flatly: "Our position is that the CIA should have no detention authority ... If President Obama has taken the CIA out of the prison business, he should also take the CIA out of the short-term jailer business." Well, get over it.
So long as President Obama adopts what might be called a "Bush-lite" approach to some aspects of the war on terror, there is likely to be more conflict between ACLU absolutists and more sober-minded supporters of the president. While the two sides are both too far out in left field on this issue to suit us, at least Mr. Obama is on the playing field, unlike the Foreign Terrorist Assistance Union types.
Obama's Reagan Moment Is Now
Obama's Reagan Moment Is Now
The crisis-induced demand for action may suspend the normal laws of political gravity.
In 1981, President Reagan took office against a backdrop of economic distress and public apprehension. In that crucible, he forged congressional majorities for a massive reduction in federal income-tax rates. That "supply-side" economic agenda, which only months earlier attracted little support beyond a vanguard of conservative legislators and theorists, reshaped federal priorities for decades.
Now President Obama has taken office against a backdrop of economic distress and public apprehension. In this crucible, he is advancing a massive increase in federal spending on programs from education to infrastructure. That "public investment" economic agenda, which has struggled for years to win support beyond a vanguard of liberal legislators and theorists, could reshape federal priorities for years.
To call the economic legislation now moving through Congress a stimulus bill obscures its full implications. The measure represents the most ambitious effort in decades to swell public spending on domestic priorities such as education, infrastructure, and scientific research that many Democrats consider the foundation stones of sustained prosperity.
The Democratic plan directs billions of dollars toward relief for unemployed workers and local governments, as well as billions more for short-term projects (road construction, energy rehab projects) meant to quickly generate jobs. But it also provides the biggest surge in long-term public investment since President Johnson's Great Society in the 1960s.
"No president in my lifetime has had this opportunity to fund public investments," says Robert Reich, a University of California (Berkeley) public policy professor who advised Obama's campaign. Reich should know. As President Clinton's Labor secretary, he was the administration's chief proponent of public investments. That proved a dubious honor. Like Obama, Clinton took office pledging to close what he called "twin deficits" in public investment and the federal budget. But Clinton's first budgets sublimated investment to reducing the federal deficit. And after 1994, he faced a Republican-controlled Congress resistant to new spending.
Clinton won increases for some Democratic investment priorities. But, overall, his gains were modest. During President George H.W. Bush's four years, federal domestic public investment (on infrastructure, research, training, and education) averaged $121 billion a year, according to Office of Management and Budget figures. Under Clinton, that average increased to $143 billion (in inflation-adjusted dollars). That meant Clinton increased public investment over the elder Bush's baseline by a total of about $176 billion over two terms.
Even separating out the immediate relief for local governments and the unemployed, the recovery bill that the House approved funds about $280 billion in new public investments. That total represents "a greater commitment to public investment than Clinton was able to accomplish in all eight years," says Dean Baker, co-director of the liberal Center for Economic and Policy Research.
From a Democratic perspective, much of that investment -- for new roads, transit systems, or school construction -- serves the dual function of creating short-term jobs and encouraging long-term growth. But the bill also emphatically expands programs targeted more at the far term than the near term -- from aid to schools in low-income areas ($13 billion) to expanded college loans ($16 billion) and scientific research ($10 billion).
In normal times, Congress might never enlarge so many programs at once. But, as with Reagan's tax cut, the crisis-induced demand for action may suspend the normal laws of political gravity -- and allow Democrats to redirect federal priorities as boldly as Reagan did. "This is a once-in-a-25-year opportunity to [implement] a lot of our agenda," a top House Democratic aide says. Largely for that reason, most congressional Republicans are likely to resist the plan, no matter how many more tax cuts Obama offers them.
Success will create its own challenges for Obama. After this spasm of spending, congressional Democrats will surely divide over how much of the new funding should be made permanent -- and whether Washington can afford other Obama priorities, such as universal health care. Democrats will also face the burden of producing results. Almost all Democrats think that Reagan's tax-cutting revolution, especially as revived by President George W. Bush in 2001, failed to generate widely shared growth. Now they'll learn whether large-scale public investment can do better. "Finally, we can implement the vision," Reich says, "and ultimately test whether it was correct." With the economy flat-lining, the economic and political stakes in this experiment could not be higher.
Shelve This Stimulus Plan
Shelve This Stimulus Plan
By Lawrence KudlowWednesday night's House tally on the Democratic stimulus package, where not a single Republican voted in favor, was another shot across the bow for this incredibly unmanageable $900 billion behemoth of a program that truly will not stimulate the economy. Sure, the Democrats won on a party-line count. But Team Obama is now regrouping in the face of mounting criticism of this package.
GOP economist Martin Feldstein revoked his prior support of a stimulus plan in Wednesday's Washington Post. "In its current form," Feldstein wrote, "[the plan] does too little to raise national spending and employment. It would be better for the Senate to delay legislation for a month, or even two, if that's what it takes to produce a much better bill. We cannot afford an $800 billion mistake."
Clinton economic adviser Alice Rivlin made the same point in testimony before the House Budget Committee. Her message: Divide up the package and slow down the process.
And Sen. Richard Shelby told CNBC that Washington should "shelve the stimulus package" and instead attack the banking and credit problem first -- probably with a government-sponsored bad bank that would relieve financial institutions from their toxic-asset problem. Mr. Shelby believes the credit crunch remains the biggest obstacle to economic recovery.
Later in the day when I interviewed Senate Republican leader Mitch McConnell, he agreed with Shelby that the stimulus plan should be shelved. For the first time -- as far as I know -- McConnell pledged to vote no on the package. Instead he wants larger tax cuts and smaller spending. McConnell might be willing to change his mind if the package changes, but he told me he didn't expect that to happen.
And in what may prove to be the biggest stimulus-package hurdle of all, news reports suggest that Team Obama is contemplating as much as $2 trillion in TARP additions to rescue the banking system in one form or another. That would be $2 trillion on top of the nearly $1 trillion stimulus package.
Government spending, deficits, and debt creation of this magnitude is simply unheard of. So the added TARP money will surely imperil the entire stimulus package as taxpayers around the country begin to digest the enormity of these proposed government actions. Financing of this type would not only destroy the U.S. fiscal position for years to come, it could destroy the dollar in the process. What's more, the likelihood of massive tax increases -- which at some point will become front and center in this gargantuan funding operation -- would doom the economy for decades.
By the way, Scott Rasmussen's latest poll shows that already -- before the new TARP money is included -- public support for the humongous stimulus package has dropped to 42 percent.
It remains to be seen whether Republicans can in fact stop the stimulus package, but that certainly would be a very good idea. The long-run financial consequences will certainly force higher future tax rates -- a prosperity killer feared by Arthur Laffer. And while all the social spending gets baked into the long-run budget baseline, the short-run implications of the plan have little economic-growth potential.
Meanwhile, there's no shortage of alternative tax proposals that would truly re-ignite the economy. Former Ronald Reagan and George W. Bush economist Larry Lindsey criticized the Democrat package in Wednesday morning's Wall Street Journal, describing it as "heavily weighted toward direct government spending, transfers to state and local governments, and tax changes that have virtually no effect on marginal tax rates." Instead, Lindsey proposes a big payroll tax cut that would slice three points off the rate for both employer and employee.
Rush Limbaugh also made an appearance in the Journal. He has a clever idea to give Obama 54 percent of the $900 billion package -- equating that amount to the new president's electoral majority -- while 46 percent, which was John McCain's electoral tally, would go to a plan that would halve the U.S. corporate tax rate and provide a capital-gains tax holiday for one year, after which the investment tax would drop to 10 percent.
It was Sen. John McCain on Fox News last Sunday who started the stimulus revolt when he said he couldn't support the package and called for less spending along with a large corporate tax cut. Over in the House, Republican leaders John Boehner and Eric Cantor have successfully launched an opposition drumbeat by attacking congressional Democrats rather than directly hitting President Obama. Now all eyes will turn to Republican Senate leader Mitch McConnell to see if he can keep up this drumbeat.
Will commonsense Americans really support a massive overdose of government run amok? I seriously doubt it. This whole story has to be completely rethought.
DAILY ECONOMIC DATA
The first estimate for Q4 real GDP growth is -3.8% at an annual rate
The first estimate for Q4 real GDP growth is -3.8% at an annual rate, beating the consensus expected -5.5%. Real GDP is down 0.2% versus last year.
The weakest components of real GDP were personal consumption, which fell at the consensus expected 3.5% annual rate, and business investment in equipment and software, which dropped at a 27.8% rate. Home building fell at a 23.6% rate.
The strongest component of real GDP was inventories, which added 1.3 points to the real GDP growth rate.
The GDP price index fell at a 0.1% annual rate in Q4 and is up 1.9% versus last year. Nominal GDP – real GDP plus inflation – dropped at a 4.1% rate in Q4 and is up 1.7% versus a year ago.
Implications: Real GDP was better than the consensus expected for Q4. Nonetheless, the drop in the velocity of money was in full evidence, with real GDP falling at a 3.8% annual rate and nominal GDP down at a 4.1% rate. The drop in real GDP was less than expected because of higher inventories. That leaves two alternatives: either the inventory increase will be revised away in future reports (reducing Q4 real GDP growth) or the inventory correction in the first half of 2009 will be extremely sharp, meaning real GDP in Q1 may be even weaker than in Q4. The weakness in Q4 was concentrated in goods consumption and business investment in equipment and software. The drop in goods consumption was the steepest since 1950; the drop in equipment/software investment was the worst since 1958. Meanwhile, GDP prices fell 0.1% in Q4, the first decline since 1954. Due to energy price declines, overall consumption prices fell at a 5.5% annual rate, the largest drop on record (since 1947). Note that the 0.1% decline in GDP prices is much smaller than the 9.2% drop in the CPI for the quarter. Back in early 2008, when the CPI was going up faster than GDP prices, some analysts said real GDP was being reported artificially high. If these analysts used the same argument now they would have to suggest real GDP is being held artificially low.
Buying American
Trade policy
Buying American
Economic nationalism rears its ugly head
IN 1929 Willis Hawley and Reed Smoot, two protectionist Republicans in Congress, sponsored a bill to raise tariffs to the highest levels America had ever seen. And in the midst of economic distress, the protectionists won. The result was a round of reciprocal tariff hikes elsewhere, and a disastrous collapse in international trade.
This was exactly the sort of thing the ministers of the G20 sought to avoid when they met in Washington late last year, agreeing not to devise new trade barriers as the world economy fizzles. But the Democrats are doing just that, anyhow, in the stimulus bill currently winding its way through Congress.
House Democrats want to require that all iron and steel used in stimulus-funded infrastructure projects should be made in the United States. America’s steel producers are happy, especially since they saw their share of the world steel market fall from 7.9% to 7.2% in 2008. But American exporters fear retaliation against their goods, both in places like China, at whom the steel provisions are aimed, and in rich countries, which are already slipping domestic-purchasing requirements into their own stimulus packages (see article).
The House favours another so-called “Buy American” requirement for spending on uniforms for the more than 100,000 officers in the Department of Homeland Security. And, though it is not in the House stimulus bill, some lawmakers still favour directing the $20 billion that is being allocated for computerising medical records exclusively towards American tech firms. Such a requirement, they say, is justified in an economic-stimulus package. But critics point out that it is hardly possible to meet it (IT being such a global business), even if it were a good idea.
Such naked protectionism may violate international trade rules. But another perverse idea floating around Capitol Hill is to limit stimulus-related purchases to countries that have signed the World Trade Organisation’s agreement on government procurement. A treaty set up to encourage non-discrimination in government purchases would thus be twisted to bar the American government from buying goods from countries such as China and India.
Before Mr Obama became president, the consensus was that the ascendant Democrats would merely drag their feet on trade matters. But the huge sweep of the stimulus bill has overshadowed its elements, such as Buy American provisions. So they may yet sneak through.
Ambitions are high. Tim Murphy, a Pennsylvania congressman, is championing a bill that would give Congress power to review presidential decisions on whether or not to increase import duties in the face of sudden dislocations. Not Smoot-Hawley, but still worrying.
A great migration into the unknown
China's economy
A great migration into the unknown
Global recession is hitting China’s workers hard
AS THE lunar new year holiday winds down in China, millions of workers are expected to stream back from the countryside to jobs in the cities. But in Xinji, a fur- and leather-processing city in northern China and a big producer of holiday fireworks, there will be little to go back to. The global economic crisis has dealt a hefty blow to this once booming city.
China’s leaders are struggling to cope with the biggest upsurge of unemployment the country has faced in years. Migrants from the countryside, the main source of labour for export-oriented industries and construction sites, have been the hardest hit so far. Millions have been thrown out of work. Urban white-collar workers, for years pampered by double-digit growth, speak of shrinking bonuses and frozen wages. Some are losing jobs, too. Students, whom the government always fears upsetting, face the most difficult employment prospects since the upheaval in Tiananmen Square 20 years ago. As the Communist Party prepares to celebrate 60 years in power on October 1st, it worries that citizens will be in a fractious mood.
Xinji sits about four hours’ drive south of Beijing, in the dusty plain of Hebei province. It is typical of China’s many fast-emerging cities, driven by the big ambitions of local governments. It is now just as typical of the many Chinese boomtowns that are hitting the buffers. Xinji has suffered badly from falling demand for its clothing exports. By November, most of its factories had closed two months earlier than normal for the spring festival break. Tens of thousands of workers went back to their nearby villages, expecting to return after the holiday. Many won’t do so.
This is a huge problem for Xinji’s government, whose aspirations are symbolised by the city’s new town with its broad boulevards, an Eiffel-Tower-like structure at one crossroads and a rocket-shaped protrusion on top of the leather-clothing exhibition centre. It had been planning for an average of 13% growth a year for the rest of the decade. When thousands of Chinese factories began to halt production late last year as export orders dried up, much attention focused on the travails of Guangdong, an export-driven southern province bordering on Hong Kong. Several protests broke out as factories there closed down, leaving employees unpaid. But after making their point, many of the workers departed for their home villages in distant inland provinces. Xinji’s workers are mainly local. It cannot shed its difficulties so easily.
Nor can many other towns and cities across China. Figures relating to the country’s migrant labour force are vague. But officials believe that of more than 200m non-agricultural workers from the countryside, more than 80m work close to their villages. The proportion working closer to home has increased in recent years, as more jobs have appeared inland that offer better conditions than factory work in Guangdong and other places on the coast.
In Maoying village on the edge of Xinji, next to a leather-processing zone, the Communist Party chief, Li Qiangbao, says 400 villagers would normally be employed in nearby factories. Mr Li says he thinks many of them will still be able to find at least some work after the holiday, but they will be earning less. This may be over-optimistic. Marc Blecher of Oberlin College says Xinji is a good example of “market Leninism” in China. Its government-inspired focus mainly on one line of business helped it prosper, but may be its undoing.
In the early 1990s local leaders decided that Xinji’s future lay in leather and fur. They compelled the area’s widely scattered village-run tanneries to consolidate and move to new industrial zones where, supposedly, they could enjoy economies of scale and control pollution better. They established a huge leather and fur-trading centre and encouraged entrepreneurs to look abroad for markets.
Most of Xinji’s fur and leather exports ended up in the former Soviet Union, Russia in particular. To get around slow and cumbersome customs procedures, most Xinji exporters hired Russian middlemen with government connections to speed things up. Officials worried about this capricious system and an over-reliance on Russia, but quality was not quite good enough for a big push into Western markets. The city prospered anyway. By its own reckoning, Xinji’s economy grew by 13.4% in 2007 (close to the national rate), with leather and fur products making up about 80% of its exports of more than $200m. Until the global crisis hit, around 80% of these products were sold abroad.
“Protect Eight”
Chinese officials—Xinji’s included—often proclaim that high growth is crucial for social stability. They say that 8% is the minimum needed to prevent joblessness from triggering serious unrest (more serious, that is, than the tens of thousands of mostly small protests that occur every year in China, even at the best of times). The figure may be arbitrary, but the frequent repetition of the “Protect Eight” mantra sends a clear signal to local authorities that they cannot afford to slacken. Most of them have aimed for, and achieved, much higher targets in this decade.
The governments of Xinji and many towns like it must now be worried. Early this month Xinji’s party chief, Zhang Guoliang, told a gathering of senior officials that maintaining high growth remained “an unshirkable task”. But he lowered his sights. In 2009, he said, Xinji would strive for 10% GDP growth along with an 8% increase in farmers’ net incomes and an 11% rise in urban disposable incomes. In a city of idle or semi-idle factories, this still sounds ambitious. In the past Xinji has found it hard to benefit from export-tax rebates, such as those announced by the central government late last year in an effort to revive labour-intensive industries. Because of the dodgy methods used to ship goods to Russia, there are no receipts for claiming the rebates.
China’s system of residential registration, a legacy of the Mao era that divides citizens into urban and rural according to their parentage, means that workers from villages around Xinji who work in the city’s leather factories remain, technically, farmers. Their wages are therefore counted in the farmers’ net income category. (Xinji, like all Chinese cities, includes an urban area and a much larger rural hinterland. Its official urban population, including “farmers” who have stayed longer than six months, is around 200,000. More than 400,000 live in the countryside.) This makes Mr Zhang’s income-boosting goal an especially tough one. About a third of the income of Xinji’s “farmers” derives from the leather industry. In Maoying village around two-thirds comes from leather and other non-farming work.
Zhang Jianmin, of Minzu University in Beijing, reckons that around 10% of Chinese workers from the countryside who are employed beyond their home areas will be out of a job this year—about 15m people. Officials have little idea what will happen to them. Many, they hope, will scatter across the countryside where, though disaffected, they will at least have food and shelter. Another Maoist legacy is the entitlement of those classified as rural dwellers to the use of a piece of land. It is usually tiny, but big enough to live on.
In recent years, however, millions of farmers have lost all their land to relentless urban expansion (local governments have profited massively from selling appropriated rural land to developers). Many of these farmers have been absorbed into the urban workforce, but often not into urban social-security schemes. They face a perilous future. Millions of jobless migrants may well remain in cities, if not protesting then at least pushing up crime rates.
The central government is anxious to cushion the blow. It has made it easier for farmers to register new businesses and has encouraged banks to lend them money. Local authorities say they are providing free job training for returning migrants. President Hu Jintao has just announced big increases this year in agricultural subsidies.
But there are reasons to be sceptical. Few rural folk may be keen to start new businesses during a slowdown, even if the state-owned banks are willing to lend to them (most farmers have little to use as collateral, since their land-use rights cannot be mortgaged). Local governments in poorer provinces, where most migrant workers come from, may well balk at spending more money on training at a time when their revenues are falling. One Chinese newspaper said boosting grain subsidies would probably be offset by the continuing high cost of fertiliser.
In Maoying village a poster announces a plan to boost benefits for participants in a new rural health-care scheme, which has been rolled out across the country over the past few years. Yang Lianyun of the Hebei Academy of Social Sciences says that government subsidies for this scheme have increased by 50% this year in Shijiazhuang prefecture, to which Xinji belongs. But the impact of this may also be less than meets the eye. Even with such increases, rural residents still have to pay a large part of hospitalisation costs out of their own pockets. Some prefer not to go. On top of a 4 trillion yuan ($585 billion) stimulus package announced in November, the government said on January 21st that it would spend 850 billion yuan on extending health insurance to more than 90% of citizens over the next three years. But details of both plans have yet to be announced.
Barber-shop discontents
The government has some grounds for hoping that it can weather the rural storm. Vague and incomplete government statistics suggest that protests have been rising generally in China in recent years. Most of them have occurred in rural areas, often as a result of land seizures. In a barber shop in Maoying, customers fume about pollution and local corruption (sentiments echoed on local internet forums). But protests have been directed against local governments and have not explicitly challenged the Communist Party’s monopoly of power. There is also little sign of co-ordination among different disaffected groups.
With some notable exceptions, the party is getting better at handling unrest. In Hebei province the authorities are keen to maintain social calm, since the province surrounds the capital as well as the port city of Tianjin. Directives on dealing with “sudden incidents”, issued by Xinji last year, repeat the central government’s constant slogan that “stability is paramount”. They stress the need to placate protesters rather than respond with force.
Rural China is no stranger to sharp employment fluctuations. In 2003, during an outbreak of SARS, many migrant workers were forced to return to their villages for several weeks. Migrants in and around Beijing also experienced severe disruption before and during the Olympic games in August last year, when the government ordered the temporary closure of many dirty industries and restricted movement to the capital. Neither episode triggered serious unrest, despite the blow to incomes.
In the late 1990s, even amid the Asian financial crisis of 1997-98, China resolutely carried out a massive restructuring of its state-owned enterprises (SOEs). Some 40m lost their jobs. As many people lost their jobs each year as the number forecast for migrant labourers this year. It was traumatic for those involved, who (unlike today’s migrant workers) believed that they enjoyed jobs for life. Protests were frequent; some, in the rustbelt of the north-east in 2002, were the largest China had experienced in many years. The unrest was urban, close to seats of party power and embarrassing to a party that prided itself on being the champion of the proletariat. Yet, apart from an adjustment of party rhetoric that year towards a more pro-poor line, the political fallout was minimal.
But there are important differences between then and now. For one thing, the SOE restructuring hit blue-collar workers hard even as the middle class—a new pillar of support for the party—was beginning to grow and flourish. At the same time as closing down, selling off and merging SOEs, the government virtually gave away the housing stock attached to them. This ensured that laid-off workers still had somewhere affordable to live (they also got subsistence payments that today’s migrants would envy). And it gave the new middle class an asset base that would soar in value—until, that is, the deflation of China’s property bubble last year and the onset of the current crisis.
Restless citizens, dangerous students
Now the party faces broader discontent. China’s notoriously contentious unemployment figures, which do not cover migrant workers (no statistics are published for rural joblessness), look rosy beside those of some Western countries. But they suggest a growing problem. On January 20th the government said the urban unemployment rate in 2008 rose to 4.2%, up from 4% the previous year and the first increase in five years. The government’s target for this year is to keep the rate below 4.6%—the highest figure since 1980.
Idle graduates find a new occupationIn Xinji it is the relatively pampered urban workforce (by official classification) that has been the first to break ranks. For three days, beginning on January 8th, as many as 300 workers from the Xinji Spinning and Weaving Company gathered outside the city government’s headquarters to demand the subsistence wages promised by their employers when the former state-owned factory closed in August.
Since the SOE reforms a decade ago, the internet has become a far more widely used and powerful medium for dissent. Protesters in Xinji used it to draw attention to their complaints. Many citizens wrote messages on a local bulletin board expressing their support. One of Xinji’s deputy mayors met the demonstrators and helped to arrange payment of the overdue money, possibly (some say) with government funds. Buying protesters’ silence is a frequent tactic of local officials, who fear that visible unrest may tarnish their careers.
Among urban citizens, it is the job prospects of graduates that worry officials most. A rapid increase in the number of university places in recent years has been accompanied by declining numbers of college leavers who regard themselves as suitably employed. A record 5.6m graduated last year, nearly 650,000 more than the year before. Another 6.1m will graduate in 2009. Around 1.5m, however, were jobless at the end of last year. This month China’s prime minister, Wen Jiabao, convened a cabinet meeting to discuss the problem (“If you are worried, I am more worried than you,” he had told students during a campus visit earlier). The government said it would give loans to graduates to help them start businesses as well as to companies that employ them.
Discontent among students is particularly alarming to Chinese officials because of the historical role they have played in political upheavals, from the anarchic Cultural Revolution in the late 1960s to the Tiananmen Square protests of 1989. The authorities will be particularly vigilant around May 4th, the 90th anniversary of student-led protests that led to the birth of the communist movement, and on June 4th, the 20th anniversary of the suppression of nationwide student demonstrations calling for more democracy. The students involved in the 1989 unrest were also disheartened by grim job prospects.
But there has been little sign of political activism among students in recent years. They have taken to the streets only to make nationalist points, and in support of the government. The authorities worry about the destabilising potential of nationalist ferment too, but far less than it does about calls for democratic reform.
Whether or not unemployment brings unrest on the scale seen in 1989, the party will be severely challenged over the next few months. Disagreement is growing within its own ranks, and between different parts of the bureaucracy, over how to spend the money earmarked for stimulus measures and how to prevent it being siphoned off, or pocketed, by local governments. President Hu and Mr Wen will face considerable pressure to do more to help farmers and the urban poor. Just before the lunar new year the government announced unprecedented one-off payments totalling 9.7 billion yuan to 74m people living close to the poverty line. President Hu also sought to burnish his political credentials by visiting Jinggangshan, an area known as the cradle of the Chinese communist revolution.
In January 2008 a law was implemented that made it harder to fire employees. Now some complain that it is being widely ignored. Other laws are being stretched, too. In December Xinji’s environmental bureau said that in order to “address the negative impact” of the crisis, it would “simplify” procedures in order to provide swift clearance for those projects that would create “little” or no pollution—a strong hint that it was lowering its guard.
Wu Xiaoling, a former vice governor of the central bank and now a senior legislator, is said to have suggested recently that GDP growth should cease to be used to judge officials’ performance. Improving “public welfare” should instead be given top priority, she said. Messrs Hu and Wen want to keep both the pro-growth and the pro-welfare camps happy (more welfare spending, they reckon, could help consumers to save less and spend more). But most of all they want local governments to keep factories and businesses open.
Lonely beaches
The Caribbean economies
Lonely beaches
A fall in tourism, and other body blows
IT IS the time of year when the island nations of the Caribbean normally expect their hotels and beaches to be packed with sun-seekers. But this year, cash-strapped North Americans and Europeans are staying at home. Visitor numbers will fall by up to a third, reckons Harold Lovell, who chairs the Caribbean Tourism Organisation. The hotel association in Tobago says that only one bed in three is occupied. Atlantis, a mega-resort in the Bahamas, laid off 800 staff in November, while flights to Nassau, the capital, have been cut by a quarter. The picture is similar in the Dominican Republic, while a strong increase in tourist arrivals in Cuba tailed off in the last three months of last year.
The scarcity of tourists has halted some ambitious expansion plans, and is a blow to fragile economies. The Bahamas had approved investments worth over $20 billion over the next five years. Mayaguana, a sparsely populated island of crystal seas and white sand, was set for a $1.8 billion resort with the world’s longest airport runway. Now its torpor may remain undisturbed. Baha Mar, a $2.6 billion project in Nassau that would have employed 4,400 building workers, has been stopped by the withdrawal of its American casino partner. Other large developments are on hold in Jamaica, St Lucia and Anguilla.
Since the 1990s, most big Caribbean tourism projects have been planned around second (or third) homes for babyboomers. Grand designs show a sprawl of houses and apartments arrayed around a small but pricey hotel, a golf course and marina, and perhaps a casino. Most of the development is financed by sales of unbuilt real estate, much of it as timeshares. Plunging housing markets and the credit crunch have put paid to all that.
There are other sources of woe. Trinidad’s ten-year energy boom has suffered a jolt from falling oil and gas prices. Smaller islands which prospered from offshore finance worry about tighter international controls. And remittances from workers abroad have fallen.
In Jamaica, remittances shrank by an average of 14% in November and December compared with the same months in 2007. The price of bauxite, Jamaica’s other big earner, has more than halved since its peak last July. Many among the island’s middle class lost their savings last year (and some their homes), in unregulated investment scams.
With government revenue already below target, Jamaica has nevertheless cut taxes. Others would like to do so. But many Caribbean nations are highly indebted. With finance tight, raising cash from asset sales is harder: Jamaica failed to meet its target of privatising its sugar industry, and the Bahamas its telecoms, by the end of the year. After a decade of borrowing in the markets, Caribbean governments have once again become clients of the international development banks.
Joining the stimulating party
Canada's budget
Joining the stimulating party
A pragmatic budget has given Stephen Harper’s government a new lease of life—but not necessarily a long one
MORE than in many countries, in Canada the question of how to respond to the world recession has become muddied by party politics. During the campaign for last autumn’s general election, Stephen Harper, the Conservative prime minister, ridiculed the opposition for daring to suggest that his government might post a budget deficit in a country that has come to prize fiscal virtue. Having won a second term, though once again without a parliamentary majority, Mr Harper promptly almost lost it over a government economic statement in late November. In this his finance minister, Jim Flaherty, again rejected the need for fiscal stimulus but threw in some partisan measures. That prompted the disparate opposition to gang up to try to oust Mr Harper—a fate he evaded only by persuading the governor-general, who acts as Canada’s head of state, to shut down parliament for seven weeks.
In that period the economy has slithered towards recession. So this week’s budget was of more than usual interest. In the event, Mr Flaherty showed a surer touch than in November. Jettisoning his party’s ideological commitment to small government, he came up with new spending and tax breaks worth C$40 billion ($33 billion) over the next two years. Much of the money will go on maintaining roads, railways and ports and in encouraging home improvements. The government is also adding C$50 billion to its C$75 billion fund to buy mortgage-backed securities from banks, to encourage them to lend. For the first time since 1996 the federal budget will move into deficit, with a shortfall of C$34 billion in the fiscal year starting in April. Deficits will total some C$85 billion before the federal finances return to the black in four years time, Mr Flaherty forecasts.
Previous Liberal governments worked hard to cure Canada of an addiction to deficit financing. In losing his fiscal virginity, Mr Flaherty blamed “the synchronised global recession”. Certainly Canada is vulnerable: it has been hurt by recession in the United States, which buys three-quarters of its exports, and by falls in the prices of its commodities. Private-sector economists consulted by the government expect the economy to contract by 0.8% this year, bouncing back to growth of 2.4% in 2010. The darkening economic outlook, especially in Ontario where the car industry is concentrated, has softened public opposition to deficits.
But has Mr Flaherty got the dose right? The economy remains relatively strong. Canada’s banks are much better regulated, and sounder, than their American counterparts. The central bank began to inject liquidity into the banking system a year ago, and has slashed its benchmark interest rate to just 1%. A weaker currency (see chart) will help exporters. Mark Carney, the central bank’s governor, expects the economy to start to recover late this year (though he says this may not be apparent until early 2010). If so, monetary policy may deserve more of the credit than fiscal stimulus.
The government’s more immediate concern is survival. On this it may have little to fear for now. The separatist Bloc Québécois and the leftist New Democrats (with 86 seats between them) both said they would vote against the budget. But Michael Ignatieff, the new leader of the Liberals, whose 77 of the 308 seats in the House of Commons are vital, said he would back the budget, provided Mr Flaherty offers quarterly reports on how the extra money is being spent. “We’re putting the government on probation,” he said.
Mr Ignatieff is unenthusiastic about his predecessor’s idea of an opposition coalition. It suits the Liberals better to let the Conservatives take the blame for the recession while rebuilding their own finances, organisation and ideas. As for Mr Harper, while the budget shows that he is a pragmatist, it is not popular with some in his own party. Since November, his authority is no longer unassailable. He is living on borrowed time as well as money.
No comments:
Post a Comment