China is a crony capitalism built on systemic corruption and raw political power.
Property rights are not secure, a politically connected entrepreneur, with the full backing of the coercive power of the state, could simply expropriate the value from ordinary people.
4 kinds of capitalism:
(1) state-guided capitalism: government sets industrial policies and directs investment
(2) oligarchic capitalism: empowers and enriches the few at the expense of the many
(3) big-firm capitalism: accentuates the dominance of big firms and suppress innovation
(4) entrepreneurial capitalism: small and innovative businesses drive growth
On the surface, it does not seem to matter whether Chinese capitalism is entrepreneurial or state-led.
But it does matter:
(1) social opp--arrangements for health care and education--contracted during the fast GDP growth period of the 1990s.Rising illiteracy is probably the most monumental legacy of the policy model of the 1990s.
(2) personal income per capita grow much more slowly than GDP per capita
(3) it is well established that China today is among the most unequal societies in the world. Certain groups or individuals are privileged over others to grab a larger share of the economic gains.
10/06/2012
What's wrong with Shanghai?
The story of Shanghai is of two extreme. At one extreme, Shanghai is viewed as a model of economic development and as a symbol of a rising and prosperous China. At the other extreme, there is virtually no real knowledge about this city.
Much of the admiration for Shanghai is based on visual evidence. Although it is true that Shanghai has had excellent GDP performance, much of this performance seems to have only moderately improved the living standards of the average Shanghainese. A huge portion of Shanghai's GDP accrues not to Shanghai's households as personal income but rather to the government in the form of taxes and to corporations in the form of profits. Corporations in Shanghai are either heavily controlled by the government or their control rights are shared with foreign investments. The exalted GDP numbers translate into only modest levels of household income in Shanghai.
In the 1990s, Shanghai's GDP growth was not pro-poor and since the late 1990s, its growth has been sharply anti-poor.Whereas Shanghai households enjoy the highest wage level in the country, they earn very little money from their asset ownership.
There is no hard evidence that Shanghai is innovative. Despite a rich history of business creation and risk-taking, entrepreneurship is almost completely missing in Shanghai today.
Shanghai is rich but an average Shanghainese is not. A huge share of the economic gains go to the government and the state-controlled businesses. In 1980s, when Shanghai's GDP per capita declined against the rest of the country, the income of its average residents was actually gaining, and this was especially true for its rural residents. A state-controlled economy can grow without improving the economic well-being of its average residents.
Shanghai's per capita property income is very low (the sources of property income are comprised of interest and dividend payouts or income from property rentals)
Many observers believe that Shanghai experienced a Renaissance in the 1990s, but the truth is that for Shanghai's average households, the massive growth brought about very little in wealth creation.
The incomes from interest and dividend payouts represent the incomes derived from the savings set aside by households in previous years. That Shanghai's property income is so low indicates that there is a very low savings rate.
The growth in joblessness took an extreme form in Shanghai. In the 1990s, not only did employment grow at a slower rate than GDP, the size of employment actually contracted.
Shanghai started out as a leader in patents in the 1980s but ended as a laggard in the 1990s. Shanghai was showered with resources from the central government.
The Shanghai model has four integral components.
(1) a highly interventionist state
(2) a systematic and deep anti-rural bias in its economic policies
(3) a biased liberalization in favor of foreign capitalists at the expense of indigenous capitalists
(4) Shanghai is favored by the central government and might have been showered with massive resources
The Shanghai model, formulated in the last five years of the 1980s, was a precursor to China's anti-rural bias and repression of small-scale and labor-intensive entrepreneurship in the 1990s. The Pudong project, which in its essence ks built on a massive taking of land from rural incumbents, has had a powerful demonstration effect and was widely emulated in the rest of China beginning in the late 1990s. The Pudong model contributed to rising land grabs in China as many local governments sought to create their own versions of urban miracles. The tactics include forcible evictions of long-term residents, large-scale demolitions of existing housing stock, collusions with corrupt real estate developers, and below-the-market-price land requisitions.
Because of its privileged position in Chinese politics in the 1990s, Shanghai was able to amass a huge amount of financial resources supplied from the rest of the country.
In the 1990s, as the Chinese central state was investing heavily in a few urban metropolis such as Shanghai and Beijing, the same central government under-funded rural health and education.
Shanghai is the quintessential state-led capitalism.
Much of the admiration for Shanghai is based on visual evidence. Although it is true that Shanghai has had excellent GDP performance, much of this performance seems to have only moderately improved the living standards of the average Shanghainese. A huge portion of Shanghai's GDP accrues not to Shanghai's households as personal income but rather to the government in the form of taxes and to corporations in the form of profits. Corporations in Shanghai are either heavily controlled by the government or their control rights are shared with foreign investments. The exalted GDP numbers translate into only modest levels of household income in Shanghai.
In the 1990s, Shanghai's GDP growth was not pro-poor and since the late 1990s, its growth has been sharply anti-poor.Whereas Shanghai households enjoy the highest wage level in the country, they earn very little money from their asset ownership.
There is no hard evidence that Shanghai is innovative. Despite a rich history of business creation and risk-taking, entrepreneurship is almost completely missing in Shanghai today.
Shanghai is rich but an average Shanghainese is not. A huge share of the economic gains go to the government and the state-controlled businesses. In 1980s, when Shanghai's GDP per capita declined against the rest of the country, the income of its average residents was actually gaining, and this was especially true for its rural residents. A state-controlled economy can grow without improving the economic well-being of its average residents.
Shanghai's per capita property income is very low (the sources of property income are comprised of interest and dividend payouts or income from property rentals)
Many observers believe that Shanghai experienced a Renaissance in the 1990s, but the truth is that for Shanghai's average households, the massive growth brought about very little in wealth creation.
The incomes from interest and dividend payouts represent the incomes derived from the savings set aside by households in previous years. That Shanghai's property income is so low indicates that there is a very low savings rate.
The growth in joblessness took an extreme form in Shanghai. In the 1990s, not only did employment grow at a slower rate than GDP, the size of employment actually contracted.
Shanghai started out as a leader in patents in the 1980s but ended as a laggard in the 1990s. Shanghai was showered with resources from the central government.
The Shanghai model has four integral components.
(1) a highly interventionist state
(2) a systematic and deep anti-rural bias in its economic policies
(3) a biased liberalization in favor of foreign capitalists at the expense of indigenous capitalists
(4) Shanghai is favored by the central government and might have been showered with massive resources
The Shanghai model, formulated in the last five years of the 1980s, was a precursor to China's anti-rural bias and repression of small-scale and labor-intensive entrepreneurship in the 1990s. The Pudong project, which in its essence ks built on a massive taking of land from rural incumbents, has had a powerful demonstration effect and was widely emulated in the rest of China beginning in the late 1990s. The Pudong model contributed to rising land grabs in China as many local governments sought to create their own versions of urban miracles. The tactics include forcible evictions of long-term residents, large-scale demolitions of existing housing stock, collusions with corrupt real estate developers, and below-the-market-price land requisitions.
Because of its privileged position in Chinese politics in the 1990s, Shanghai was able to amass a huge amount of financial resources supplied from the rest of the country.
In the 1990s, as the Chinese central state was investing heavily in a few urban metropolis such as Shanghai and Beijing, the same central government under-funded rural health and education.
Shanghai is the quintessential state-led capitalism.
10/05/2012
A great reversal
Politically, the post-Tiananmen conservative leadership mounted a nationwide crackdown on China's private sector. The prevailing economic policy in the 1990s was to favor the urban areas over the rural areas and to favor foreign capitalists--FDI--over indigenous capitalists.\
Fittingly, 1989 marked both the decadal and policy turning points.
In the 1990s, China reversed many of its productive policies of the 1980s, with real consequences.
The barriers to entry or to expansion of rural entrepreneurship increased profits to incumbent businesses, thus explaining why non-farm business income increased in the 1990s.
The TVEs succeeded in the 1980s and failed in the 1990s for exactly the same reason--- that they were substantially private. It was the national policy environment that changed between the two decades.
Fittingly, 1989 marked both the decadal and policy turning points.
In the 1990s, China reversed many of its productive policies of the 1980s, with real consequences.
The barriers to entry or to expansion of rural entrepreneurship increased profits to incumbent businesses, thus explaining why non-farm business income increased in the 1990s.
The TVEs succeeded in the 1980s and failed in the 1990s for exactly the same reason--- that they were substantially private. It was the national policy environment that changed between the two decades.
10/04/2012
Renewable resources
Renewable sources of energy are not green and the nuclear industry should make a product beside electricity.
A few decades ago, some visionaries dreamed of an all-electric society. Today people convert about 35–40% of all primary fuel to electricity. The fraction will rise, but now even electricity enthusiasts (as I am) accept that finally not much more than half of all energy is likely to be electrified. Reasons include the impracticality of a generating system geared entirely to the instant consumption of energy and lack of amenability of many vehicles to reliance on electricity. Surrendering the vision of an all-electric society is a minor nuclear heresy.
In the USA and much of the rest of the world, including Canada, renewables mean dammed rivers. Almost 80% of so-called US renewable energy is hydro, and hydro generates about 60% of all Canada’s electricity.
The demand for electricity varies widely from hour to hour, day to day, and month to month. Electricity demand is typically highest during the daytime hours and lowest at night. It tends to be very high on unusually hot or unusually cold days and is lowest at night on mild spring and fall days. Demand typically reaches its highest levels during only a few hours each year. There is also a minimum “base” aggregate demand that is sustained through the entire year.
Electricity is the ultimate “just in time” manufacturing process, where supply must be produced to meet demand in real time.
A few decades ago, some visionaries dreamed of an all-electric society. Today people convert about 35–40% of all primary fuel to electricity. The fraction will rise, but now even electricity enthusiasts (as I am) accept that finally not much more than half of all energy is likely to be electrified. Reasons include the impracticality of a generating system geared entirely to the instant consumption of energy and lack of amenability of many vehicles to reliance on electricity. Surrendering the vision of an all-electric society is a minor nuclear heresy.
In the USA and much of the rest of the world, including Canada, renewables mean dammed rivers. Almost 80% of so-called US renewable energy is hydro, and hydro generates about 60% of all Canada’s electricity.
The demand for electricity varies widely from hour to hour, day to day, and month to month. Electricity demand is typically highest during the daytime hours and lowest at night. It tends to be very high on unusually hot or unusually cold days and is lowest at night on mild spring and fall days. Demand typically reaches its highest levels during only a few hours each year. There is also a minimum “base” aggregate demand that is sustained through the entire year.
Electricity is the ultimate “just in time” manufacturing process, where supply must be produced to meet demand in real time.
10/02/2012
The entrepreneurial decade
China in the 1980s witnessed an explosion of indigenous, completely private entrepreneurship, but almost all of this entrepreneurship occurred in the rural areas of the country. It was not an agricultural phenomenon.
Township and village enterprises spearheaded China's massive rural industrialization.
In the 1980s, Chinese peasants experienced the most rapid income gains in history. Per capita rural income between 1978 and 1981 grew at a real rate of 11.4 percent, the urban/rural ratio of the purchase of consumer goods fell from 10 to 1 in 1978 to 6 to 1 in 1981. According to a rural survey, rural per capita income more than doubled between 1978 and 1984, and real rural per capita consumption increased by 51percent between 1978 and 1983.
The consensus view is that rural reforms accounted for the largest segment of the income gains.
Chinese capitalism is heavily rural in origin. Rural entrepreneurship was also virtuous because it emerged first and developed fastest in the poorest regions of China.
Many of the largest manufacturing private-sector firms hail from backward, predominantly agricultural provinces of China.
The Cultural Revolution might have laid the foundation for the post-reform takeoff of rural entrepreneurship.
In the 1980s, there were two cross-cutting dynamics in the income distribution trends. One was a rise of within-rural inequality; the other was a decrease in rural/urban inequality.
Township and village governments assumed controls of private firms as a matter of political prerogative rather than on the basis of their share of capital contributions. In 1980s, China did not have a legal framework to accommodate large-size private firms. The logic of township control had nothing to do with economics; it was deeply political.
The very reason for the failure of township and village enterprise is that the business environment for rural entrepreneurship turned dramatically adverse in the 1990s.
Are TVEs really public?
The TVE label owes its origins to the commune and brigade enterprises created during the Great Leap Forward. But the cast majority of TVEs had nothing to do with the Great Leap Forward. Instead, they completely new entrants during the first half of the 1980s.
Enterprises sponsored by townships and villages are the collective TVEs. The rest of the firms under the TVE label are all private businesses or entities.
In general, the developed parts of China were more state-owned.
The initial triggers of growth can often be "humble" in nature. These reforms amount to nothing more than some relaxation of existing constraints on the private sector. No fundamental institutional reforms--those aiming at property rights protection, for example-- are needed.
Property rights protection in China, now or in 1980s, is very poor, but relative to the Cultural Revolution period, the marginal improvement was huge. Directional liberalism was the source of Chinese incentive to go into entrepreneurship. (Directional liberalism describes the idea of an economy that lacks many key features of liberal capitalism, but is nevertheless moving in that direction with sufficient speed to reassure investors that they’ll be able to keep their gains.)
The price of directional liberalization: property rights is not institutionalized.
Township and village enterprises spearheaded China's massive rural industrialization.
In the 1980s, Chinese peasants experienced the most rapid income gains in history. Per capita rural income between 1978 and 1981 grew at a real rate of 11.4 percent, the urban/rural ratio of the purchase of consumer goods fell from 10 to 1 in 1978 to 6 to 1 in 1981. According to a rural survey, rural per capita income more than doubled between 1978 and 1984, and real rural per capita consumption increased by 51percent between 1978 and 1983.
The consensus view is that rural reforms accounted for the largest segment of the income gains.
Chinese capitalism is heavily rural in origin. Rural entrepreneurship was also virtuous because it emerged first and developed fastest in the poorest regions of China.
Many of the largest manufacturing private-sector firms hail from backward, predominantly agricultural provinces of China.
The Cultural Revolution might have laid the foundation for the post-reform takeoff of rural entrepreneurship.
In the 1980s, there were two cross-cutting dynamics in the income distribution trends. One was a rise of within-rural inequality; the other was a decrease in rural/urban inequality.
Township and village governments assumed controls of private firms as a matter of political prerogative rather than on the basis of their share of capital contributions. In 1980s, China did not have a legal framework to accommodate large-size private firms. The logic of township control had nothing to do with economics; it was deeply political.
The very reason for the failure of township and village enterprise is that the business environment for rural entrepreneurship turned dramatically adverse in the 1990s.
Are TVEs really public?
The TVE label owes its origins to the commune and brigade enterprises created during the Great Leap Forward. But the cast majority of TVEs had nothing to do with the Great Leap Forward. Instead, they completely new entrants during the first half of the 1980s.
Enterprises sponsored by townships and villages are the collective TVEs. The rest of the firms under the TVE label are all private businesses or entities.
In general, the developed parts of China were more state-owned.
The initial triggers of growth can often be "humble" in nature. These reforms amount to nothing more than some relaxation of existing constraints on the private sector. No fundamental institutional reforms--those aiming at property rights protection, for example-- are needed.
Property rights protection in China, now or in 1980s, is very poor, but relative to the Cultural Revolution period, the marginal improvement was huge. Directional liberalism was the source of Chinese incentive to go into entrepreneurship. (Directional liberalism describes the idea of an economy that lacks many key features of liberal capitalism, but is nevertheless moving in that direction with sufficient speed to reassure investors that they’ll be able to keep their gains.)
The price of directional liberalization: property rights is not institutionalized.
Sports market outcomes: leagues, team location, expansion, and negotiations
Leagues enable owners to pursue economic goals and objectives that they cannot pursue as successfully acting alone, such as setting a season schedule, organizing championships, and implementing rule changes.
Single-entity cooperation defines the actions that owners must take to make league play happen in the first place.
(1) setting the schedule: Balanced scheduling, home and away, is essential to the success of the league. Leagues need to act in their single-entity capacity to include all teams in the schedule. To generate widespread fan interest and league growth, stronger teams must play weaker teams as well as other strong teams in order to cultivate broad fan interest.
Another important element is the season length.
(2) Setting the rules: Rules are changed to attract fans.
(3) Cooperation and championships: Determining a champion is very economically valuable. Adding playoffs does 2 things: it extends the season and fan interest for a few teams; it reduces the returns to buying talent.
Joint venture cooperation: The economics of league behavior
Once owners act together in pro leagues to set the stage for competition on the field, they may also act together to raise profits for member owners. All cooperative actions that do not make play happen are called joint ventures. In a joint venture, all owners in the league surrender part of their autonomy to allow the league to act on their behalf. Joint ventures are cooperative acts aimed at increasing profits relative to acting individually.
(1) The definition and protection of individual owner territory. The league is allowed through franchise agreements (a contract between the league and an owner that clearly specifies what it means to own a pro sports team) to define a territory and ensure that no other members locate within that territory.
This managed absence of substitutes allows individual teams to maximize profits as monopolies in their sport in their territory.
(2) Quantity restrictions: 2 indicators
a. rival leagues do form occasionally, indicating that the previous league size was too small in the eyes of the fans of the rival league
b. every time a league announces that it plans to expand, a long line of candidate-owners forms in the hope of becoming the newest addition to a league.
,
Single-entity cooperation defines the actions that owners must take to make league play happen in the first place.
(1) setting the schedule: Balanced scheduling, home and away, is essential to the success of the league. Leagues need to act in their single-entity capacity to include all teams in the schedule. To generate widespread fan interest and league growth, stronger teams must play weaker teams as well as other strong teams in order to cultivate broad fan interest.
Another important element is the season length.
(2) Setting the rules: Rules are changed to attract fans.
(3) Cooperation and championships: Determining a champion is very economically valuable. Adding playoffs does 2 things: it extends the season and fan interest for a few teams; it reduces the returns to buying talent.
Joint venture cooperation: The economics of league behavior
Once owners act together in pro leagues to set the stage for competition on the field, they may also act together to raise profits for member owners. All cooperative actions that do not make play happen are called joint ventures. In a joint venture, all owners in the league surrender part of their autonomy to allow the league to act on their behalf. Joint ventures are cooperative acts aimed at increasing profits relative to acting individually.
(1) The definition and protection of individual owner territory. The league is allowed through franchise agreements (a contract between the league and an owner that clearly specifies what it means to own a pro sports team) to define a territory and ensure that no other members locate within that territory.
This managed absence of substitutes allows individual teams to maximize profits as monopolies in their sport in their territory.
(2) Quantity restrictions: 2 indicators
a. rival leagues do form occasionally, indicating that the previous league size was too small in the eyes of the fans of the rival league
b. every time a league announces that it plans to expand, a long line of candidate-owners forms in the hope of becoming the newest addition to a league.
,
Team cost, profit and winning
Under the profit maximization hypothesis, owners make decisions about their venues, players, and media contracts in order to maximize the difference between total revenues and total costs.
In the short run, elements of the team production are fixed. This includes anything covered by contractual obligation in force during production. For sports teams, the primary fixed inputs are talent, on and off the field, and the facility in which team plays. To clarify, if any of the resources used to produce winning are fixed, the owner is in short-run situation. Whenever all elements of the process are variable, then the long run is under consideration.
The essence of the short run is that some decisions about putting winning in front of fans have already made.
Short run total costs= total fixed costs + total variable costs
Better teams will have a higher total fixed costs because they will choose to put together a more expensive set of player during a given season. Total variable costs might rise at a decreasing rate over some low range of output, but once diminishing returns set in, total variable costs must begin to increase at an increasing rate.
Long-run total cost is the relationship between winning percent and the cost of obtaining it.
Long-run total costs are simply the sum of the player costs(salaries) as more stars are added and winning percent increases. It is the cost of winning percent that the team owner seeks to find.
As teams choose higher winning percents, in the long run total costs rise. Tension between winning and costs. The more an owner wants to win, the more it is going to cost.
In the long run, if costs eventually rise faster than revenues, then profit maximization constrains owners in their pursuit of winning.
Profit variation can harm balance.
The competitive imbalance doesn't necessarily mean that small market teams are not profitable.
Profit-maximizing owners will beef up on talent if they believe that doing so will raise revenues at a greater rate than the costs of making it happen. Only if the last owner made horrible mistakes or has the same vision as the new ownership but no money should we expect the new owner to alter the level of team quality.
In the short run, elements of the team production are fixed. This includes anything covered by contractual obligation in force during production. For sports teams, the primary fixed inputs are talent, on and off the field, and the facility in which team plays. To clarify, if any of the resources used to produce winning are fixed, the owner is in short-run situation. Whenever all elements of the process are variable, then the long run is under consideration.
The essence of the short run is that some decisions about putting winning in front of fans have already made.
Short run total costs= total fixed costs + total variable costs
Better teams will have a higher total fixed costs because they will choose to put together a more expensive set of player during a given season. Total variable costs might rise at a decreasing rate over some low range of output, but once diminishing returns set in, total variable costs must begin to increase at an increasing rate.
Long-run total cost is the relationship between winning percent and the cost of obtaining it.
Long-run total costs are simply the sum of the player costs(salaries) as more stars are added and winning percent increases. It is the cost of winning percent that the team owner seeks to find.
As teams choose higher winning percents, in the long run total costs rise. Tension between winning and costs. The more an owner wants to win, the more it is going to cost.
In the long run, if costs eventually rise faster than revenues, then profit maximization constrains owners in their pursuit of winning.
Profit variation can harm balance.
The competitive imbalance doesn't necessarily mean that small market teams are not profitable.
Profit-maximizing owners will beef up on talent if they believe that doing so will raise revenues at a greater rate than the costs of making it happen. Only if the last owner made horrible mistakes or has the same vision as the new ownership but no money should we expect the new owner to alter the level of team quality.
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