Confucianism and Trade Imbalances

The enlightened dictatorship of money

Posts Tagged ‘education

China’s failed apprentice system – Part 1

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According to Michael Pettis, there are three main forces behind China’s economic imbalances (i.e. its trade surplus): currency manipulation, repressed interest rates, and low wages.  I have dealt with the first two (which are closely connected) in The Chinese View of Money, at least marginally, tying it all to the concept of face.  Wages are both simpler and more complicated than monetary policies. Here and in the next three posts, I will use anecdotes to show how low wages are also a function of its culture, and where improvements need to be made.

Deliberate economic policies can have strong effects on culture. As an opposite example to China’s trade surpluses, consider trade deficits. Today trade deficits have a bad name, being associated with Southern European countries, but back in the day, right up until the financial crisis, many economists thought that  trade deficits were good for the economy. Crazy, I know, but think about this in the context of the roaring ’90’s: we were only thinking about growth. A healthy trade deficit county will have certain values related to its financial position – that its word is its deed, and that investment income is equivalent to any other kind of income. Abstract concepts like trustworthiness are of paramount importance for a healthy debtor, and it was these values that advocates of a “strong dollar” thought were more important than interest payments on debt.

Now think about the opposite situation, a trade surplus country.  I’ll talk about Germany here, to get outside of Asia.  The most important feature of Germany’s business environment is its its “hidden champions” – smaller companies, typically with a focus on engineering, with a global presence.  This economic model works because of its famed apprentice system, which emphasizes vocational training over high education.  This rigid career path for new labor market entrants helps keep wages low, with all sorts of other knock-on effects to the economy.

Germany adopted this model in a deliberate attempt to increase its exports. It tried to pay off its interwar debts by printing money, but the debts were in foreign currencies so the extra money just went towards hyperinflation. They found that they could only pay off their debts with goods that the Americans actually wanted, hence the export economy was born. This mentality has remained, and when the Euro was created, they secured an undervalued exchange rate. Since then, they have successfully resisted attempts to raise their prices to parity with the rest of Europe, in the name of their past experience with hyperinflation.  The German apprenticeship ‘culture’ is really just the result of a few carefully-chosen policies (and other European countries who have tried to imitate the culture without those policies have not been as successful.)

The German wartime economic system was later adopted by Japan, and then copied again by China. Does this mean that everything is the Germans’ fault? I don’t think so.  This interpretation of history doesn’t consider why Asian countries selected this model to imitate out of other alternatives – and it also ignores important differences between the Asian and European versions of the model. Instead, what I hope to show here is that the Asian apprentice system comes from deep-seated cultural attitudes, and that it produces trade surpluses as a consequence, opposite to Germany’s path to this point. Germany’s system emphasizes increasing productivity as a way to keep wages down, whereas the Chinese system simply seems to be interested in keeping wages down, regardless of the effects on productivity. Thus in the next two posts I will present a couple of examples of non-export sectors where the apprenticeship system is most apparent, and show how it is stifling efficiency (without even getting into innovation) – these will be aviation and health care.  My final post will be about solutions, but if you can’t wait until then, you could start by rereading my post on the nightmare of China’s accounting.

I have created a category for this series of posts, so you can access the others by clicking on the category name below.


Written by Maofucious

August 19, 2012 at 10:02 PM

The Chinese view of money

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A few months ago, I was at the National Palace Museum in Taipei with a Chinese travelling companion. We were looking at some cute little drawers for storing doodads. Of course, these were used by royalty, so the deal was that each one was specially made for the objects to fit in it, i.e. if you had a comb, there would be a place to put that comb, and only that comb. She remarked something about how that was a place you could put your money.  Clearly, that was not cash she was referring to. That got me thinking about the traditional Chinese and Asian view of money, and how it differs from the Western view.

My theory is that money in Asia is tied in closely with the social institution of face (a concept that originated in China). China of course independently invented paper money, and their concept of money apparently emphasizes its role as a medium of savings over its role as a unit of account, as we tend to think of in the west as an arbiter of value. Their experiment with money without fundamental value ended with hyperinflation, which might explain why such trinkets are seen as possessing value in themselves. It might also relate to the value Confucianism places on other real investments like infrastructure and education – not to mention the way luxury markets work in Asia.

I ran into something today that might shed more light on the differences. In China, the rich and powerful can hire body doubles to do their prison time for them. Surprisingly, this is not a recent phenomenon.

“Replacement convicts” are not new. For centuries, the use of criminal substitutes was among the first things Westerners would mention when discussing China’s legal system.  … Some imperial Chinese officials who admitted to the use of substitute criminals justified its effectiveness. After all, the real criminal was punished by paying out the market value of his crime, while the stand-in’s punishment intimidated other criminals, keeping the overall crime rate low. In other words, a “cap-and-trade” policy for crime.

So, markets in everything. This reminds me of something else (pdf) I ran across at some point. In Korea, there is apparently an active sex-selection market for children. Parents take a look at the sex ratio in their locality among 20-29 year-olds. Eventually, things come into balance, although the girls end up being born to worse-off families, and the boys to better ones. Less controversially, marriage and other family relations are also seen in the context of money.

It seems that Asian cultures don’t have many of the ethical hangups related to money that Western cultures do. Another association to make here is to the Sun Zi conception of war, ‘economics by other means’ (as opposed to Clausewitz, “politics by other means”), a conception that has been born  out by modern Asian history.  Understanding what money means in Asian cultures might help one better understand economic warfare in the context of current trade disputes.

I leave with one final association. In a system with financial repression, it can be more important to keep the government out of your savings than to understand what it is you’re really investing in. Hence, gambling in Macao is used as an outlet for savings, and it may in some sense be more legitimate than ‘ordinary’ savings through the banking system. This may have something to do with Chinese attitudes towards both gambling and financial markets.

Written by Maofucious

August 5, 2012 at 12:38 AM

Taboos don’t just come from the government

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The Atlantic had an interesting article recently about China is opening up to its past WRT the Great Leap Forward famine – perhaps the largest in world history in terms of raw numbers.  The article includes fascinating anecdotes about how the history is being told, now that younger people are asking the right questions.  Chinese people are independently discovering some of the aspects of China that outsiders find most distasteful.  It seems some Weibo users have come close to independently discovering that the fact that Mao actually did worse things to China than the Japanese did.

Wonderful things can happen if the government would only let people freely discuss these things, right?  The byline of the article asks, “Half a century after the famine that killed perhaps 30 million people, censors have quietly loosened their ban and citizens are moving past the taboo. Why now?”

In fact, the article produces no evidence that there ever was a comprehensive ban on this subject, and it goes strongly against my perceptions.  When you try to talk about Tiananmen, my experience is that people will say, “you shouldn’t talk about that,” whereas when I talk about the Great Leap Forward famine, they say, “what?”  This site shows that the Great Leap Forward is mostly allowed as a search term.  But maybe this is recent?  I went and checked, and it turns out that Wikipedia specifies that the Great Leap Forward and associated terms have been unblocked at least since 2005, when the section on terms that were not blocked was created.  Based on this, I would say the Atlantic article is at the very least guilty of omission here.

A common misperception holds that the government is the primary force holding back people’s creativity and questions.  Outsiders often question China’s ambition to build their higher education system, for instance, based on the role of the government.  After a couple of months’ experience working at a top Chinese university, I would say it’s a little bit different from that.  It’s more a matter of lacking intellectual curiosity to begin with.  Long story short, an ordinary college professor (aside from a few superstars) can expect to make a salary about 6X times lower than I could be making right now as an English trainer.  The government doesn’t operate in a cultural vacuum; it’s the entire country that works this way.  Westerners like to focus on the government, because it’s something tangible, but that sometimes causes them to miss the real story.

Written by Maofucious

July 26, 2012 at 10:09 PM

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Human factors blindness

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James Fallows’ new book China Airborne has been receiving high praise from unusual suspects, including Tyler Cowen (a micro- guy with no particular interest in China, who said it was one of his favorite books this year), and The Peking Duck, who declared upfront that “few topics could bore me as much as avionics and the aerospace industry” before praising it highly.  So I really need to get a hold of a copy – but in any case, I already have a few comments based on a portion quoted in The Peking Duck’s review.

but [China] lacks the “soft” ingredients necessary for a fully functioning, world-leading aerospace establishment. These include standards that apply consistently across the country rather than depending on the whim and favor of local potentates. Or smooth, quick coordination among civil, military and commercial organizations.

These “soft” ingredients are a huge part of air safety.  About a decade ago, Korean Airways was on the verge of going bust because of air safety concerns, before experiencing major improvements.  These concerns were largely of the “soft” variety, and particularly relating to Asian culture: copilots would not speak up to pilots’ mistakes; former military pilots were promoted unfairly; expat pilots were treated poorly.  The leap from an organization that meets expectations most of the time and on that never makes a mistake – as airlines are expected to do – is largely based on culture, not technology.

In February, a flight going into Haikou was forced to divert due to weather.  Long story short, it received a runaround from three airports before landing in Shenzhen with only a few minutes’ worth of fuel left.  A Chinese media account of the story from last week notes that the Shenzhen airport communicated with the plane using non-standard language, causing a misunderstanding that caused it to first attempt another landing in Guangzhou (which was also rejected due to weather).  It also notes that the airport staff would be dealt with “severely,” with no further explanation of the exact communication problem.  This example illustrates how important it is to be unambiguously clear when you have a ticking time bomb-type of situation.  And the Chinese (or Asian) educational system, with its fixation on multiple choice tests, does not really teach communication very well.  (For all you English teachers out there, don’t let you students convince you that they have writing skills in their native language – just not English!)

I don’t want to say any more about this particular situation, not being an expert.  In general, however, I note a blindness in Asian cultures towards human problems (beyond simple punishment), and a fixation on technological solutions.  This attitude can be seen in Japan, towards Fukishima; in China, towards the Great Leap Forward Famine, and in countless other situations.  One situation that I learned about last week in a lecture from an NGO working in North Korea is that they see their food situation as their number one priority, and fuel as second.  The NGO wants to move them towards mechanized agriculture, which requires – fuel.  But they can’t get the North Korean bureaucrats to see the problems as being connected in any way, and they won’t sway from the above language.  Most other types of Asians can at least see how technical factors can often relate to each other, but even then the human factors seem to go over their head.

The implications of this mindset go far beyond air safety.  In fact, this forms the basis for an almost stupidly simple way to explain Asian trade imbalances: whereas increasing supply is a technological problem, getting people to spend more and increase demand is a human problem, and thus more difficult for them recognize and solve.  It can get more complicated from there, but that’s the core.

Written by Maofucious

June 28, 2012 at 12:08 AM