Confucianism and Trade Imbalances

The enlightened dictatorship of money

Posts Tagged ‘face

China schooling the US

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I knew it had to happen someday.  The rough consensus among China-watchers is that the best precedent for China’s rise, at least in the realms of economics and business, is Japan.  One peculiar phase of the Japanese-American relationship was when Harley-Davidson ended up redoing its entire production methodology based on what it had learned from its Japanese rivals (who were willing to help, in order to defuse trade tensions.)  The Japanese Production System might have been inspired by an American consultant (Deming), but American companies never became world-class experts in applying it.

I ran into an article the other day, although minor, that marks the first time I’ve ever heard a similar story about China.  Ford’s China social marketing team was sent to the US to train their counterparts there.  Many people know that the Chinese government controls almost every form of communication.  The word 宣传 sort of shares the meanings of “propaganda” and “marketing;” ‘red envelopes’ are an expected practice at press conferences.  And of course Facebook and other American-based social networking services are blocked.  But focusing on the top-down aspects of this phenomenon neglects that it comes equally from the bottom up. Despite all of the censorship, there really is a vibrant Chinese internet. People simply expect their information to come from sources close to them – another aspect of the Chinese attitudes towards geography I’ve mentioned several times before.

A lot of this seems very different from Japan.  Innovative marketing and Kanban production are very different things, implying very different personality types.  It’s important when making the comparison to Japan to note that there are some deep-seated differences that have nothing to do with Capitalism or Communism.  On the other hand, these examples do both come from the auto industry – an important status symbol in either production or consumption.

Written by Maofucious

December 9, 2012 at 3:26 PM

Tech wars and value rigidity

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The Washington Post this week had an interesting article about Japanese manufacturing.  I don’t inherently trust Western declinist views of Japan, and clearly the Washington Post is aware of the political context of its piece.  (It had another piece a few months ago on Japanese fondness for the fax machine, which while cute, clearly had a political subtext.)  But in the manufacturing article, this section stood out to me as being plausible:

Those who study the consumer electronics industry describe a decade of missteps and miscalculations. Japan’s giants concentrated on stand-alone devices like televisions and phones and computers, but devoted little thought to software and the ways their devices synced with one another. As a result, their products don’t always work in harmony, in the way an iPhone connects naturally with a laptop and a digital music store.

In the heyday of Japanese manufacturing, quality was the typical selling point of an electronics product, whereas today that’s changed.  Now, I can’t help think about this comment in light of the current rivalry between Google and Apple over maps.

Apple has just released its iPhone 5, which has been heavily criticized for its premature mapping technology. For some background, Apple has been making huge profits in China.  Its products are must-have items, which I would put in the category of luxury “face” goods.  These small, integrated electronics goods are quite suitable for Asian consumer preferences, of which I’m reminded every time I try to take my laptop on the bus to do reading, and can’t fit it on my lap.  These are the sorts of things that are more expensive in China than abroad, because of occasional supply shortages.

Google, with its mission to “organize the world’s information and make it universally accessible and useful,” has had a tougher time in China.  One might point to specific disputes it has had with the government regarding censorship, but I wonder if there’s a deeper cultural undercurrent here.  Its most innovative projects now involve geographical information, and it is pushing its maps to new frontiers (South Pole?  underwater?).  This sort of work has also been banned in China, where geographic information is extremely sensitive.  (Curiously CCTV anchor Yang Rui, in an unrelated and totally unprofessional rant against foreigners, accused us of compiling GPS data, among other things – giving us more of an insight into his mind than reality.)  Satellite maps are required to have a certain amount of inaccuracy, so that anyone bombing China will be forced to use map view.  In some ways, this mirrors Google’s prior larger controversy over censorship, but it is also different.  There are no blatant political  motives here, but I think there are more in the way of cultural biases.

So I wonder if China, in its clamor for handheld devices popular in its heyday (which I would say ended around 2009, when the stock market started its quiet death plunge) is going to miss out on the next wave of geographical technology, just as Japan also did when high technology ceased to be about things simply not breaking down?

Written by Maofucious

October 2, 2012 at 5:47 PM

Posted in Confucianism

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IQ, language, and political economy

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There hasn’t yet been enough controversy on this blog, so I will now talk about race and intelligence.

The American Conservative (who I don’t normally read) has an article on how Asian IQs seem to be invariant to economic development.  Asians in general (now I’m talking about Asian immigrants to the US) aren’t rewarded for their above-average IQs.  This guy (apparently an academic who wants to remain anonymous) thinks it’s because their verbal-analytic skills lag other races, compared with visuospatial skills. This shortcoming makes it more difficult for them develop lawyer-type skill sets, and it ultimately impacts economic growth.  I won’t comment on his theory of an IQ cutoff for economic development, and gaussian vs. linear regression, but I did notice that the way he treats his data to subtract 6.5 points from Asian IQ statistics.

All of this fits into my preconceived notions of how the Chinese language fits in with the culture.  (The Chinese language is a cultural foundation for all Confucian societies.)  Chinese has no grammar, using classifications and complex rules of the type lawyers would be expected to understand.  At best, all of its rules are situational, applying to groups of a few words.  (In policy terms, I would relate this to industrial growth policies.)  The language is also hierarchical (with an obvious political analogy) as certain themes reappear in related contexts.  I think the best way to illustrate this might be in reference to my point in the last post about little kingdoms and geography.  Place names typically have two characters.  One of those characters is likely to be some kind of moniker for the area as a whole, and so you are likely to see that character in the names of smaller districts (down to danwei) within the district, or around the  district.  One example off the top of my head is Guangdong province, which borders Guangxi and has Guangzhou as its capital.  (Dong is east; Xi is west; and zhou might be translated as -ville; although these transformations don’t always follow these sorts of formulas.)  This process is replicated in the the highly transparent evolution of the characters themselves.

This sort of setup makes it natural to base economic growth on evolutionary trial and error, arbitrated by face. This entire process creates a strong sense of conservatism that helps mediate between the highs and lows of economic development – what the American Conservative article was getting at.  Also, I suspect this relation to characters and geography has something to do with why Asians’ visuospatial skills are so well developed.

None of this, by the way, says anything about the direction of the causality.

Written by Maofucious

September 22, 2012 at 9:38 PM

China’s failed apprentice system – part 3

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This the last part in a series on why wages are so low.  I will collect a few thoughts here, and see if it turns out into a coherent whole.

I realized that an important part of this situation, which I shouldn’t leave out, is really simple: Chinese discrimination against Chinese.  I had a Chinese client a couple of weeks ago who wanted to speak to me, and only me.  He only spoke Chinese, and I explained to him that I would have to refer him to my colleague for any meaningful communication to take place. He still wanted me to be his point man, even though I really didn’t have much to say to him. This seems to be an issue particularly in the Southeast, where I lived for two years.  (The client was from Ningbo.)  (See also this story from Nanjing, for instance.)

Anyway, earlier in this series I retold this story that a friend told me about aviation because it highlighted two things I had heard about healthcare:

  • People who go half of their careers without being able to do any real hands-on work, because of their bosses’ delicate egos.
  • Employers owning their employees’ work licenses and refusing to let them leave for other work.

The second factor is due in part to what might be the single most unappreciated fact about China: how local everything is.  During the Maoist era, localities were told to make their own arrangements for health, and these sorts of bureaucracies tend to end up as bottom-up patchworks just as often as top-down structures.

This system goes all the way back to China’s feudal past.  Land is extremely important in China.  For this reason, Google Maps isn’t allowed to match satellite images up exactly with its maps.  North and South are not universal attributes – highways in Beijing will direct you towards Guangdong, rather than the South Pole (which is a practically equivalent distance from there) since one is in China and the other is not.  Even public spaces become like little kingdoms, as there are walls put all around the place restricting walking routes.  (I will someday get a picture of the South Railway MRT station in Beijing, which has a series of metal railings fencing off areas of absolutely nothing.)  I could spend an entire post or more talking about Chinese spatial orientations.  This also has to do with feng shui, and, at its core, land might be linked with the concept of face.  That’s how fundamental territorial divisions are to the Chinese psyche.

So China is full of these little kingdoms, relics in the more recent (Communist) past of the danwei work-unit system.  This leads to a surplus of little kings, who don’t like to see their status challenged.  We can see these leaders acting like little kings now with the accounting standoff: they are not used to being questioned, even when it comes to increasing efficiency.  These relationships are born from tradition, not from any notion of maximizing shareholder value.  As a final example of the importance of physicality in Chinese law, any company document must be notarized by a company stamp, which functions as the official company signature.  A great deal of power is placed on the owner of the stamp – typically the management of a company, not the shareholders.

Wages are often set so low that they even fail to maximize profitability.  Healthcare is a very good example of the result: there are lines outside of clinics, sometimes for days, for top doctors.  Meanwhile, for everyone else, healthcare is getting more violent – yes, violent.  Attacks on hospital workers are becoming frequent enough (in the context of a generally low-crime society) that police are being stationed inside the hospitals.  For the workers, healthcare is unprofitable enough (despite this demand) that it’s not really a particularly sought-after profession.  The whole system is geared not towards maximizing value, but towards preserving these little fiefdoms.

Written by Maofucious

September 21, 2012 at 11:12 PM

An update on the short-selling situation

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There have been a number of worrying developments following the accounting standoff, which has already seen Deloitte employees threatened with life inprisonment for doing their job.  The WSJ reported in July on how short sellers are now feeling their safety is being threatened.  The Globe and Mail has an excellent article on how local police in Henan Province allowed themselves to be used as sock-puppets for a company that wanted to investigate a short seller.  The Canadian researcher may end up in prison for two years on charges of “disseminating false facts to impair another person’s commercial reputation.”

The state-run Xinhua service, demonstrating a surprising lack of understanding of Western capital markets for a media organization that has international aspirations, had an editorial last week calling for the SEC to “seriously investigate the short sellers” for unspecified charges.  Well, the SEC can’t just make short-selling illegal retroactively – the writer/editor seems to think that they can just make up charges to fit the political situation.

But I will give them the benefit of the doubt,and assume ignorance, rather than the level of planning implied by a Reuters piece calling this an “official editorial.”  The question is, where does that ignorance come from?  The author clearly had some reason to think the US would do that.  I have two ideas:

  • Defamation laws in Asia are much stronger than in most Western countries, because of the social role of face. In China, it can be a criminal offense.  If you report negatively on somebody, you better have it right. Part of the deal right now is that short sellers have been attacking companies that were apparently better prepared for it.
  • From more of an economics standpoint, Asians don’t have very well-developed attitudes towards risky investments.  The Hong Kong Stock Exchange weeds out risky stocks, which go on to the US. The American attitude is that with risk must come disclosure, but by avoiding risky investments, there is no need to strongly consider alternate viewpoints.

Now, my thought is that these two points are one and the same.  Face, as a social structure, implies a certain attitude towards risk, because if you have face, you don’t want to lose it at the end of the trading day.

Written by Maofucious

September 13, 2012 at 9:41 AM

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