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March 11, 2016

Whatever is Abnormal is Suspicious

Writing about web page http://arstechnica.com/information-technology/2016/03/china-is-building-a-big-data-plaform-for-precrime/

China is investing heavily in its capacity to monitor and evaluate the attitudes and behaviour of the population. On 14 June 2014 the State Council issued a Notice concerning Issuance of the Planning Outline for the Construction of a Social Credit System. The plan envisages that by 2020 every adult Chinese citizen will have a social credit rating.

In a market economy, a person's credit is based on the record of what you earn, spend, borrow, and repay. You gain credit by demonstrating that you can handle money within the law and by honouring your debts. In China, "social credit" is partly financial, but it's also cultural and political. Social credit is gained, not just by handling money honestly and non-corruptly, but also, on a reasonable interpretation of the official language, by knowing the right people and showing the right attitudes in your social and political behaviour.

In other words, just as you can lose financial credit by breaking money rules, you will lose social credit by knowing the wrong people and saying the wrong things. And these things will interact, so that if you know the wrong people or say the wrong things you will put at risk your ability to borrow and to find responsible employment.

What's it all about? Based on its official motivation, the programme

uses encouragement to keep trust and constraints against breaking trust as incentive mechanisms, and its objective is raising the honest mentality and credit levels of the entire society.

Thus, it's explicit that social credit is an incentive mechanism aimed at behaviour change at the level of the population. Every single adult must must understand the norms that China's ruling communist party sets for personal behaviour in economic, cultural, and political life. Break those norms and you lose trust. Lose trust, and there wil be personal consequences. No one will be beyond the system.

Communist regimes have always aimed to classify their subjects for political reliability, but classification was usually crude and error-prone. Stalin's "usual suspects," (described in my new book One Day We Will Live Without Fear) were anyone who from a non-proletarian background, anyone educated under the old regime, anyone of foreign origin or experience of life abroad, anyone with religious beliefs, and so forth. In Mao's China people were classified into "red" and "black."

What the Chinese authorities have in mind today is a classification that is more sophisticated in every way: multi-dimensional, continuously calibrated, and above all comprehensive.

It's not hard to see the benefit for the party leadership. The party authorizes the norms that you should follow, but enforcing those norms throughout society is an unremitting slog. Through comprehensive "social credit" rating of the population, based on big data, the rulers gain a system that sets up clear incentives for every single citizen to conform in every aspect of their lives. If you have the wrong friends or you're indiscreet on social media, you lose the promotion or you are denied the loan you hoped for. So most people will be persuaded to conform.

Plus, the system will also identify the minority that isn't persuaded, and so resists the official incentives, and it marks them out as security risks.

Recently my attention was grabbed by the technology website Ars Technica discussing China's investments in big data collection such as CCTV:

The authorities are watching for deviations from the norm that might indicate someone is involved in suspicious activity (my emphasis).

I knew I had seen this somewhere before. So I looked for it, and here's what I found:

Our communists should be concerned every day to study and know more deeply processes that are essentially anomalous, that is, incorrect, deviating from the general rule of processes and phenomena, and in a timely way to obtain alerts leading to the exposure of persons intending to carry out hostile actions that can lead to serious consequences (my emphasis again).

This was nearly fifty years ago: on 24 April 1968, Lt. Col. Matulionis, an officer of the Soviet Lithuania KGB, was speaking to a meeting on counter-intelligence priorities of the day. (The documentary record is held on microfilm by the Hoover Institution Library & Archives, where I consulted it.)

Communism in Europe and China had common roots. After that, they went different ways. China today looks very different from the Soviet Union. But in respect of what makes a security risk, China's secret policemen have retained exactly the same idea as the Soviet KGB. An ordered society has normal processes. Good citizens follow those norms. When social norms are disrupted, the result is "anomalous, that is, incorrect."

That's where the secret policeman steps in. What is anomalous is incorrect. It arouses suspicion of a crime, and what is suspicious must be investigated for evidence. Who is behind this, and is the hand of the enemy at work?


September 02, 2015

World War II: China's Losses in a Grim Perspective

Writing about web page http://www.chinadaily.com.cn/world/2015victoryanniv/

Today is the seventieth anniversary of Japan's surrender in 1945, marking the end of World War II. It seems timely to give some thought to the impact of Japan's war on China. Where does World War II rank in the disasters that befell China in the twentieth century?

Japan attacked China twice, the first time in 1931 by occupying Manchuria (the modern provinces of Heilongjian, Jilin, and Liaoning), the second time in 1937 by launching all-out war to conquer China and turn the whole country into a Japanese colony. For this reason, 1937 is usually taken as the outbreak of World War II in Asia.

In 1946 China's Nationalists estimated China's war deaths from 1937 to 1945 at 12.8 million (the figure is given by Sally Paine, The Wars for Asia, Cambridge University Press 2012, p. 214). Since China's total population was around 500 million at that time, the loss was enough to slow the population's natural increase, although not to reverse it.

For China, however, World War II was nested in another war, the Civil War of the Nationalists against the Communists. This war began in 1927 and continued until the Communist victory in 1949. The intensity of the Civil War was highly variable. During much of World War II, for example, the Nationalists were fighting the Japanese while the Communists sat it out, protected by secret agreements between the Soviet and Japanese governments. Then, after Japan's defeat, the Civil War resumed. There are no firm figures for China's total of war deaths over the 22 years from 1927 to 1949, that is, in the Civil War, the loss of Manchuria, and World War II, but 20 million is a not unreasonable number.

Once World War II was over, most economies recovered quickly. That's roughly what you'd expect when war demands are relaxed, peacetime social norms and legal guarantees are restored, and trade is allowed to recover. China's postwar recovery could not begin until 1949. In the 1950s China's economic recovery was rapid at first.

In 1958, however, China's Communist Party led by Mao Zedong accelerated national economic mobilization into a vast "Great Leap Forward," which forced the farmers into people's communes and set out to industrialize the country overnight. The outcome was a famine that, according to Yang Jisheng's Tombstone (Allen Lane 2012: chapter 11), killed around 36 million people in three years. Losing 12 million people a year for three years was more than enough to offset the population's natural increase, causing the population to decline absolutely.

So there it is. World War II cost China around 12.8 million lives over eight years -- between one fifth and one quarter of all premature deaths in the war worldwide. This was a shocking outcome and a terrible tragedy. But compared with the Great Leap Forward, which took 36 million lives in 3 years, it is not even close.

In every year between 1959 and 1961 China lost as many people as in all the years of World War II. The famine caused by its own government in peacetime was worse than the war against Japan.


May 22, 2014

Gas and Geopolitics

Writing about web page http://www.energylivenews.com/2014/05/22/china-russia-gas-deal-solves-both-their-problems/

China and Russia (represented by the Russian state oil major Gazprom) have signed a deal that will supply China with gas worth up to $400 billion over 30 years. Since Energy Live News and International Business Times have quoted my views, I thought I'd put up the full version, which goes like this:

For China the Gazprom deal solves an energy problem. For Russia, it solves a market problem: Russia needs to sell its energy sources somewhere, but has spoiled its traditional market among the European democracies to Russia’s south and west by applying economic and military coercion to Ukraine.

Both China and Russia are governed by authoritarian regimes. Major bilateral trade deals among such regimes have a long history. Exactly what they mean depends greatly on context, sometimes unpredictably so. In the late 1930s Hitler encouraged bilateral trade deals between Germany and countries to Germany’s east not out of friendship, but because he considered them to be part of Germany’s future colonial sphere. Most notorious of these was the German-Soviet trade deal associated with the Molotov-Ribbentrop pact of 1939, which was followed within two years by all-out war. After World War II Stalin deliberately fostered bilateral trade deals between the Soviet Union and countries like Poland and Hungary in order to tie them into the Soviet economic sphere; for the same reason he prevented them from making bilateral deals with each other. These deals were followed by closer integration, not conflict.

No one envisages war between Russia and China, but it is important to remember that ultimately the governments of these two countries see each other as rivals in the global balance of power. China’s population and wealth are rising faster than Russia’s; Russia remains an Asian power, but the balance of power in Asia is moving steadily against Russia. Smiles around the table in Beijing do not betoken true affinity.

As authoritarian rulers (and the commercial entities under them, like Russia’s Gazprom) approach bilateral deals, they have an advantage and a problem. The problem is that everyone understands the signatories are not necessarily the real principals. The real principals are Russia’s Vladimir Putin and China’s Xi Jinping. No court will punish either of them if one of them chooses to break the Gazprom contract in future. The advantage they have is over open societies, where public opinion counts. In an open society, public distaste can sometimes get in the way of business. No human rights issues are likely to derail the China-Gazprom deal.


September 16, 2013

Rebalancing China — rebalancing the world

Writing about web page http://www.ft.com/cms/s/0/03377ccc-16e0-11e3-9ec2-00144feabdc0.html#axzz2ezCPilYN

Last week I went to Downing Street for an informal discussion about Britain and China ... No, not with the prime minister, but between some academic China watchers and a couple of prime ministerial aides. Here I can only say what I said myself, but I thought afterwards whether I could package it for general interest. Here's the basic idea.

The Chinese government is currently trying to rebalance the economy. This will create both opportunities and risks for a country like Britain that exports worldwide and also has some world-class corporations that are willing to invest worldwide. It's important to be aware of what the opportunities are, and also the risks.

What does rebalancing mean? It means, primarily, trying to build China's mass market for consumer goods and services. The composition of China's spending must shift somewhat away from government and infrastructure towards consumption and the mass market. This does not mean that the government will become unimportant or that China will stop building new towns, universities, and transport systems. All of these are already huge and since the economy is still growing relatively rapidly they will remain important and also continue to grow. But net exports and capital formation together account for well over half of China's GDP, making one of the highest saving rates ever recorded for a modern economy. In other words, there is a lot of room for consumer spending to grow more rapidly at the margin, if only the pressure of government spending on infrastructure and military projects will allow it.

When China's prime minister Li Keqiang says "we will expand consumer demand" (in the FT, 8 September 2013), that doesn't make it happen, of course. The UK coalition government has talked about rebalancing our economy away from financial services to manufacturing for some time. That hasn't made it happen. Even in a totalitarian police state, rebalancing the economy can be quite difficult. Stalin's first attempt at rebalancing came in 1932, the last year of his first five-year plan, when too much capital formation and rearmament were killing off millions of people from famine. Rebalancing was urgent -- literally, a matter of life and death. The second five year plan was being written. It was supposed to rebalance the economy back towards consumption. Consumption did recover, but it was not a great deal more than a dead cat's bounce. After a year or two investment and rearmament took off again. The whole economic system had been designed around creating a surplus for accumulation and military spending. Given that, it was pretty hard for it to do anything else.

China's economic mechanism has also been designed around accumulation and military spending. An important problem with rebalancing China towards consumption is that success might weaken the drivers of the mechanism underlying China's huge success of the last 30 years. This mechanism is the rivalry of China's provincial leaders, each of whom compete with each other to win favour with Beijing and promotion to Beijing by pushing the growth of production in their own province. That growth depends a lot on infrastructural investment. If the provincial leaders can't push infrastructure as strongly before, then Beijing will have made it harder for them to compete. If they don't compete as strongly, the economy may falter, undermining the core purpose of rebalancing.

Still, China's ruling party has come to accept that a growing mass market can stabilize society and relax social tensions, making China stronger internationally. So let's suppose they can make it happen. There are opportunities here for British businesses to meet rising consumer demand, whether by exporting or by investing in China and producing within China's borders. As people get richer they want to be healthier, and better informed, and to enjoy faster communication. There is sure to be rising demand for things like telecoms and pharmaceuticals that Britain is good at making and doing.

One problem with exporting to China and investing in China is that China's market is very wide -- too wide, in fact. It is spatially highly dispersed, because too many Chinese live in small towns and rural settlements. It is also not very well integrated, with significant barriers to internal trade across provincial boundaries -- a product of the inter-provincial rivalry that has helped China's past growth. In other words, if you sell to the Chinese, you might expect to go to a market of 1.3 billiion people, but what you actually reach is one of 30 or so provincial markets. Of course, this isn't so bad because a typical province in China is the size of a European country in population, which is pretty big. It's also true that China's market integration is most likely improving over time. Still, it doesn't yet add up to the idea of selling a lightbulb to every Chinese family.

Another problem is that China's market has many, many opportunities for vested interests to conspire with government officials against competitive threats (and therefore against the consumer). Corruption remains a huge problem. China's government is currently waging an anti-corruption campaign. Anti-corruption is fine, but the campaigning aspect is problematic. The best way to reduce corruption is to reduce product market regulation and have open, competitive markets and the rule of law. China's communist party continues to prefer party rule to the rule of law. The result is that, when you see a person (like Bo Xilai) or an organization (like GlaxoSmithKline) targeted for corruption, you can't really be sure whether they are guilty as an impartial court would see the evidence, or whether the political authorities decided to make them guilty of something and then make the evidence up.

That's a particular risk for foreign investors in China. Of course, foreign investors face risks everywhere. Anyone who has followed the recent history of BP in the United States will be aware that a foreign corporation can become a target even in a liberal democracy with an independent judicial system. The point may be that at least BP had first to do something wrong before it became a target. In a corrupt police state like China's, in contrast, you can get into trouble even if you did nothing wrong. Or perhaps, more accurately, there are contexts in which everyone bends the rules, or the rules may be so complex and pervasive that you can't operate at all without breaking them somehow. Then, the foreign investor either sticks to the rules, which leaves you unable to compete, or you compete and break the rules like everyone else, but that means you are making yourself ever vulnerable to those in power. Indeed that might be one purpose of a rule book that no one can adhere to conscientiously.

Finally, helping China to build its mass market is an opportunity for British business, but it is important to recognize that for China's leaders building the mass market is not an end in itself but an exercise in national power-building. Prime minister Li acknowledged this when he linked China's mass market with sustainable growth and both of the latter with "national strength." In other words, if we help develop China's consumer market, we should do so with open eyes: we are also colluding with a project that is designed to reduce our own country's relative power and influence in the world to China's benefit.

Is that a reason to stand aside? In my view, not at all. In the long run, free trade and investment have civilizing power. (In case anyone thinks that's snobbish, I mean it literally: free exchange develops civil-society institutions in ways that governments cannot.) Countries that make themselves economically interdependent are are then somewhat less likely to come into conflict. That's not a deterministic statement, by the way. The power of trade is double edged, because trade can be exploited to build national power. The civilizing influence of trade takes lots of time. It works through probabilities, not certainties. It's an average thing, with plenty of variation and historical counter-examples.

So we should trade with China and invest in China with our eyes open. We should remain aware that China's rulers are heirs to the communist tradition. In this tradition the world is an arena for a zero-sum power struggle in which, in the long run, one country's gain is likely to be another's loss. These leaders want China to develop its mass market not for the sake of consumer welfare but because a more sustainable Chinese economy and a more stable society will better support their national and international strategic goals.

The benefits that we should seek from economic interaction with China are those that will flow to the citizens of both countries, and to consumers as well as producers. For example, the benefits of trade and investment will come back to the British economy not only through our exports to China's growing market but also by access to imports from China that lower prices and raise living standards in Britain.


August 08, 2013

Unlearning the History of Communism

Writing about web page ttp://www.pieria.co.uk/articles/men_make_their_own_history_but_they_do_not_make_it_as_they_please

On the Pieria magazine website there has been an exchange of views on capitalism and socialism. I guess it is my fault; on 28 June I contributed a summary of some remarks on the subject. I concluded:

Liberal capitalism isn’t perfect, but it has done far more for human welfare than communism. It has been the solution more often than the problem. Last time capitalism experienced some difficulties, many countries went off on a search for alternatives. That search for alternatives led nowhere. It wasn’t just unproductive. It was a terrible mistake that cost many tens of millions of lives. Lots of people have forgotten this history. Now is a good time to remember it.

On 31 July, the blogger UnlearningEconomics responded:

In my opinion, this view rests on a highly selective interpretation of events. It requires that we gloss over two major historical points: first, the historical circumstances of existing communism; second, the history of capitalist countries. It fails to acknowledge the fact that existing socialism occurred primarily in undeveloped countries, which we would naturally expect to exhibit lower standards of living than developed ones. It ignores the deliberate campaign of destruction and sabotage toward the socialist states by the capitalist states, a process comprehensively documented by US foreign policy critic William Blum (Blum, 2003). It also requires that we define past and present abuses of capitalist states as somehow 'outside' capitalism, in order to place ourselves above the (real or imagined) abuses of the communists.

I do not hope to defend anyone's atrocities, though I am happy to refute some of the absurd exaggerations that sometimes pervade these debates. In any case, my main aim is to show two things: first, the abuses of existing socialist states are better explained by their political circumstances than their innate evils of the ideology; second, capitalist countries have a similarly abhorrent record, one which is not so easily explained by political necessities. My rendition will definitely annoy capitalists and anti-communists by being too sympathetic toward communism, which is a dirty word for many. It will also potentially annoy communists and socialists by not being sympathetic enough and repeating some of the more simplistic mainstream narratives. However, the important thing is that we examine the history of both systems in context, rather than lazily parading the kill count of the other side to try and shut down debate.

UnlearningEconomics (below I'll call him or her "UE") goes on to present "brief" (but, for a blog, quite lengthy) histories of both communism and capitalism. The general story is that if communism has had a bloody history it is mainly because communist revolutions occurred under unfavourable circumstances and had to struggle against the encirclement and aggression of the surrounding capitalist states; as for capitalism, it has its own bloody history, which is too often ignored.

What is there here that we can agree on? Perhaps we might agree that twentieth century warfare was terrible enough that it could damage social norms and other institutions of a relatively poor country like Russia or China; in such conditions organized minorities with unscrupulous leaders could seize power and use it to do terrible things. The efforts of other countries to intervene and prevent this, then as now, were largely fruitless or even counterproductive; perhaps they should not have tried, although politicians are not generally selected for lack of ambition and public opinion too often demands that something must be done.

UE goes beyond this to suggest that somehow history has been unfair to those same minorities and psychopathic leaders by allowing them to seize power only under terribly adverse circumstances. We owe it to them (the argument seems to go) to compensate them for their disadvantage; we should allow them at least a few decades of unchallenged power, so that they have a fair chance to show what they can achieve. But this seems completely unhinged.

In bringing up my children, I tried to teach them that people show their inner qualities when things go badly. It is easy to look good when things go well. Only good people will still be good when things go badly; adversity reveals character. I believe this rule can also be applied to politics. It is when things go badly that we see political leaders and their programmes and ideals put to the test.

Can systems be blamed for atrocities of whatever kind? It is not systems that take food from the mouths of the hungry or put bullets into the back of anyone’s head. People do this. But the system matters, nonetheless. What the system does is to leave more or less scope for the concentration of power in the hands of people who are inclined to exploit it without restraint. Liberal capitalism at least allows the separation of economic power from politics and decentralizes decisions to firms and households in markets. This is because, in the words of North, Wallis, and Weingast (2011), it is an “open-access order.” Communism is a “closed-access” order that restricts who may exercise political power and concentrates control of the economy in the hands of that privileged elite. Given that, ask which of these systems is more likely to permit the abuse of power and allow abuses to be hidden from the public gaze?

When general outlooks clash, it is not always enough to stay with generalities. Sometimes we have to get down with the particular facts. History is full of good stories, and UE tells some of them well. The problem is that not all good stories are true, but this becomes evident only when they are confronted with the detail. So, I will confront some of UE's history with the detail. I will not cover everything; I will focus for the most part on the "brief history" of communism, where I think I have more to offer.

  • UE says: Unfavourable views of communism ignore “the fact that existing socialism occurred primarily in undeveloped countries, which we would naturally expect to exhibit lower standards of living than developed ones.”

This is seriously incomplete. Existing socialism occurred in relatively few undeveloped countries, and generally only in those weakened by war (Russia, China, Korea, and Indochina). Central Europe would scarcely have counted as undeveloped; there the precondition was war followed by military occupation. Cuba may be the only example of a country that had a communist revolution without a foreign war. In 1945 in several places the boundary of “existing socialism” was laid down in the middle of a region that was previously economically and ethnolinguistically integrated. As well as showing that warfare counted for more than lack of development, these examples also provide natural experiments for the long run consequences of system change. Think of Estonia versus Finland, East versus West Germany, and North versus South Korea. For discussion see Harrison (2013).

  • UE says: Unfavourable views of communism also ignore “the deliberate campaign of destruction and sabotage toward the socialist states by the capitalist states” (citing William Blum).

Again, seriously incomplete. The UE view of postwar history rests on selection, overstatement of the capacity of outsiders to intervene in Russia and Eastern Europe, exaggeration of popular support for communism (the most popular communist party in Europe at the end of the war was probably the French party with no more than a quarter of the popular vote), and ignorance of the documented process whereby Stalin’s secret police entered Eastern Europe in 1944 and 1945 “embedded” with the Red Army and armed with a template for dictatorship that they began to apply immediately, regardless of whether or not communists were in the government (Applebaum 2012). Far from resenting western "sabotage," millions of Central and East Europeans felt abandoned by the West as Stalin crushed their hopes for national self-determination. Finally, it forgets that the one American initiative that could have decisively altered the trajectory of Eastern Europe was not “destruction and sabotage” but Marshall Aid, which Stalin instructed his allies to reject.

  • UE says: The unfavourable conditions of the Russian Revolution are shown by the fact that “Russia had suffered the worst losses out of any country during the war.”

No. It is hard to imagine that Russia would have suffered the Revolution without three years of world war, and it is true that battle and non-battle deaths of Russian soldiers up to 1917 were heavy (1.8 million). At the same time Russia's losses were fewer than Germany’s absolutely, and (given Russia’s large population) were proportionately fewer than of those of Britain, France, Italy, Serbia, Rumania, Austria-Hungary, Bulgaria, and Turkey (Broadberry and Harrison 2005). Russia’s economic loss of GDP per head up to 1917 was less than that of Austria, Finland, France, Germany, Greece, Hungary, and Turkey (Markevich and Harrison 2011). The latter conclude: “We have seen that the economic decline up to 1917 was not more severe in Russia than elsewhere. In short, we will probably not be able to explain why Russia was the first to descend into revolution and civil war without reference to historical factors that were unique to that country and period.”

  • UE says: “By the time Joseph Stalin took (absolute) power in 1929, many – including, perhaps, himself – believed the threats the USSR faced were justifications for his purges and the Gulags.”

Seriously incomplete. There is no “perhaps” here: Stalin had a precise understanding that is now well documented (e.g. Khlevniuk 1995; Simonov 1996; Davies et al. 2003; Harrison 2008; Velikanova 2013). In 1921, 1924, 1927, and 1929 there was no foreign threat. But rumours of war were frequent, because the Soviet Union’s strategy of inciting revolution and mutiny abroad kept Soviet foreign relations in a state of continual tension. In domestic society, Stalin's secret police told him, every rumour was destabilizing; peasants and workers started to wonder when the chance would come to get rid of the Bolsheviks. Stalin was aware that above all he had to secure the regime internally and externally and that drift could only weaken him. This is why he launched Soviet society simultaneously on the courses of forced industrialization, mass collectivization of the peasantry, and political violence. Justification? Yes, of course, if taking power and holding it are sufficient motivations. Not otherwise. Khrushchev was personally responsible for tens of thousands of killings under Stalin, and this left him with a bad conscience. In trying to come to terms with it he blamed Stalin many times but not Hitler, the CIA, or anyone else outside the country.

  • UE says: “The country did face a very real Nazi threat that, failing industrialisation, it would not have been able to overcome.”

No. Stalin changed course towards industrialization, collectivization, and mass violence in 1929, when there was no significant external threat. The Nazis came to power in 1933, and no European leader (including Stalin) recognized the threat from Hitler before 1935. Before Hitler, a threat to Siberia appeared from the East in 1931 with the Japanese annexation of Manchuria. These threats came after, not before, Stalin’s “revolution from above.” As for whether the Nazi threat justified Stalin’s policies after the event, I have written about this in many places (most recently Harrison 2010).

  • UE says: “This reasoning is consistent with the fact that once Stalin died and the more immediate western threats disappeared, ‘de-Stalinisation’ took place: the Gulags were softened and reduced in size; the cult of personality was dismantled … things certainly improved once the Nazi threat had been eliminated.”

No. The Nazi threat was eliminated in 1945. The softening of the Soviet regime after 1953 had everything to do with Stalin’s death and nothing to do with the disappearance of “immediate western threats.” De-Stalinization took place not because of the disappearance of western threats but because the entire Soviet leadership was tired of living in fear of their own lives, and then went further because Khrushchev and Mikoyan had bad consciences about their own responsibility for past mass killings. The Gulag was dismantled immediately, not because of the disappearance of western threats but because Lavrentii Beriia had long before determined that it was an economic drain and a source of social contagion but Stalin had prevented him from acting on his findings. There was bitter resistance to dismantling the cult of Stalin from other communist leaders (especially Mao), not because of western threats but because it threatened their own legitimacy (and their own cults). The cult of Stalin was dismantled but was soon replaced by the cult of Khrushchev.

  • UE says: “The Great Leap Forward (GLF) … undoubtedly caused a large degree of famine, surely because of the over-centralised and inflexible nature of the policy.”

Seriously incomplete. A centralized, inflexible policy was enough to start a famine, but it does not begin to explain explain how the famine proceeded, nor does it explain the secrecy that then shrouded it for decades.

Think about what is required for an act of policy to cause millions of famine deaths. Here is the problem: When people starve to death, they do not die suddenly and unexpectedly. It takes them months, even many months to weaken, become sick, and die. Some die before others. Some die of hunger; some are carried off by diseases to which they lose immunity. Some die at home; some drop dead in the street. Some die passively; some steal or even kill for food; a few turn to cannibalism. In other words, a policy that causes millions of famine deaths (such as in the USSR in 1932 to 1934) or tens of millions (in China in 1958 to 1960) cannot go unnoticed by those carrying out the policy.

In fact, in both the USSR and China, the famine process worked like this (Davies and Wheatcroft 2004; Chen and Kung 2011). First, the leaders issued quotas for the collection of food, province by province. They also gave the provincial leaders to understand that their future depended on meeting the quota. The provincial leaders competed to raise more grain than their neighbours in order to show loyalty and to save their own lives and the lives of their families. And they passed these incentives down the line to their subordinates charged with doing the actual work. When some people reported that the quotas were too heavy, or they resisted or dragged their feet, they were arrested and others took their place. Food collections began and the first people started to die. When some people reported that other people were dying, they were told that this was just “simulation or provocation”: enemies were maliciously withholding food and starving their own children to cause trouble (Davies and Wheatcroft 2004, p. 206).

While the first ones were dying, the people responsible for extracting grain from the villages had to go deeper and deeper into the countryside to find food and take it by force. On every journey along all the different routes they took, they had to go past the people from whom they had already taken food, who were now dead or dying, to find more food that they could take. In China, the provincial leaders of lower rank had more to prove and Chen and Kung (2011) show these people tried harder, so that more grain was collected and more people died in their provinces. Returning from every journey past the already dying and dead people, they sometimes reported what they had seen (although it was sometimes “forbidden to keep an official record”) but in public they had to remain absolutely silent about, not just at the time but for the rest of their lives. The same applied to everyone with business that required them to move around the countryside. While they were doing this, others had to be ordered to stop some of the dying people who were not dead yet from moving out in search of food elsewhere. They had to be ordered to stop them because the food that had been collected and stored elsewhere was destined for others; if the dying people were allowed to eat it, it would not be available to feed Stalin’s Great Breakthrough or Mao’s Great Leap Forward. A particular reason for these orders is that when hungry people are allowed to mix with people that have enough to eat, it is extraordinary difficult to stop kind people from giving some of their food to starving families; the Germans found this in occupied Europe when they tried to cut Jewish communities off from food, and this is one reason why they first herded Jews into ghettoes and later decided to accelerate the Holocaust (Collingham 2010, pp. 205 ff). Finally, both at the time and later, the surviving victims and perpetrators alike learned never to talk about it, perhaps not even to their children. As a result, witnesses of terrible things (such as Yang 2012) often concluded the events they had seen were isolated and exceptional.

In other words, the “over-centralised and inflexible nature of the policy” was enough to start a famine, but further deliberate actions were required to ensure government priorities for food supplies when millions of people were dying of hunger. All this must be read into the “over-centralised and inflexible nature of the policy,” and it suggests why those words do not begin to provide a full explanation.

  • UE says: “It is also worth noting that the remaining Cold War paranoia was certainly not a USSR-only phenomenon, with McCarthyism and the red scare in the US reaching levels which now seem ridiculous to most.”

No. McCarthyism was ridiculous and, partly as a result of it, the FBI missed many Soviet agents that were actually at work in American government and society after the war (Moynihan Commission 1997).

  • UE says: “In Poland, the popular party Solidarity wanted some form of worker ownership – in other words, socialism – until, in desperation, they had to turn to the IMF, who made capitalist policies a condition for any aid. In Russia, Boris Yeltin’s ‘free market’ reforms were resisted, which was met with force; similarly, in China, the Tienanmen Square massacres were not made in favour of capitalism but in favour of democracy and worker control” (citing Naomi Klein).

No. None of us can possibly know what demonstrators in China or elsewhere “really” wanted. Politics is the art of the possible, and for this reason people tend to express their choices strategically, in the light of the constraints they perceive and the choices they expect others to make. I saw this myself in Russia: As long as the communist party was in full control, many dissenters preferred to limit their demands by appealing to rights guaranteed by the Soviet constitution, asking for a return to “true” Leninism, calling to rehabilitate Old Bolsheviks like Trotsky and Bukharin, and so forth. Only when the communist monopoly gave way did it become politically and psychologically possible for free thinkers to go further; some didn't but many did. UE refers to IMF conditionality in a disparaging way; but why would a responsible aid donor give aid without wishing to rule out uses of its resources that would be damaging or counterproductive? UE relies on Klein’s Shock Doctrine as a source; on its use of evidence see Harrison (2009).

  • UE says: “While estimates of deaths from Mao’s GLF are exaggerated using dubious estimation techniques (which effectively allow the demographers to pick the number arbitrarily), little to no cover has been given to the increase in Russian deaths during the ‘transition’ to capitalism, which, by a reasonable estimation method of simply counting the increase in death rates, claimed 4 million lives between 1990 and 1996” (citing Utsa Patnaik).

No. UE (or perhaps Utsa Patnaik) seems to confuse demographic studies with the literary and journalistic accounts written by people who do not have a good understanding of error margins. Demographers know that when people die in numbers so large that they are not recorded individually there is always an error margin. The error margin has several sources: mismeasurement of the population before and after the shock, imputation of normal mortality during the shock (required to infer excess mortality), and correctly apportioning the birth deficit between babies not born (or miscarried) and babies born and died within the famine period. In other words the best available estimation techniques give rise to ranges rather than point estimates, and it is from these ranges that nonspecialists feel entitled to pick and choose.

As for the cause of Russia’s mortality spike in the transition years, the research attributing it to mass privatization (Stuckler and McKee 2009) has been widely disseminated; less well known is that it has also been thoroughly criticized (Earle 2009; Earle and Gehlbach 2010; Brown, Earle, and Telegdy 2010; Battacharya, Gathmann, and Miller 2013; see also reply by Stuckler and McKee 2010). In the last years of the Soviet Union Gorbachev’s anti-alcohol campaign temporarily prevented millions of Russians from drinking themselves to death. However, it did not alter their desire to drink. Their deaths were postponed and so stored up and waiting to happen when alcohol became cheaper again and more easily available. Thus, the increase in Russian deaths during transition is more plausibly attributed to an increase in the availability and collapse in the price of alcohol.

I’ll conclude on the subject of atrocity. UE writes: “I do not hope to defend anyone's atrocities, though I am happy to refute some of the absurd exaggerations that sometimes pervade these debates … the important thing is that we examine the history of both systems in context, rather than lazily parading the kill count of the other side to try and shut down debate.” I noticed that the UE blog goes further, wishing to move debate on from “disingenuous ‘Black Book of Communism’-style kill count porn” (the "Black Book" reference is to Courtois et al. 1999).

This shocked me. Is there room for debate over the scale, causes, and significance of the excess deaths that arose around the world from communist policies? Absolutely. Should any figure in the Black Book of Communism be above discussion? Of course not. But kill count porn? The demand for these people to be remembered and their suffering acknowledged comes from the victims themselves. “We were forgotten. For our broken lives. For our executed fathers. No one apologized. If we don’t preserve the historical memory, we shall continue to make the same mistakes” (Fekla Andreeva, resettled as a child with her “kulak” family, whose father was executed in the Great Terror, cited by Reshetova 2013; see also Gregory 2013).

References

  • Applebaum, Anne. 2012. Iron Curtain: The Crushing of Eastern Europe 1944-56. London: Allen Lane.
  • Bhattacharya, Jay, Christina Gathmann, and Grant Miller. 2013. Gorbachev’s Anti-Alcohol Campaign and Russia's Mortality Crisis. American Economic Journal: Applied Economics 5(2): 232-60.
  • Broadberry, Stephen, and Mark Harrison. 2005. The Economics of World War I: an Overview. In The Economics of World War I: 3-40. Edited by Stephen Broadberry and Mark Harrison. Cambridge: Cambridge University Press.
  • Brown, J. David, John S. Earle, and Álmos Telegdy. 2010. Employment and Wage Effects of Privatisation: Evidence from Hungary, Romania, Russia, and Ukraine.”Economic Journal 120, no. 545: 683-708.
  • Chen, S. and Kung, J. (2011), ‘The Tragedy of the Nomenklatura: Career Incentives and Political Radicalism during China’s Great Leap Famine’, American Political Science Review, 105(1): 27-45.
  • Collingham, Lizzie. 2010. The Taste of War: World War Two and the Battle for Food. London: Allen Lane.
  • Courtois, Stephane, Mark Kramer, Jonathan Murphy, Jean-Louis Panne, Andrzej Paczkowski, Karel Bartosek, and Jean-Louis Margolin. 1999. The Black Book of Communism. Ed Cambridge, MA: Harvard University Press.
  • Davies, R. W., and Stephen Wheatcroft. 2003. The Industrialisation of Soviet Russia, vol. 5: The Years of Hunger: Soviet Agriculture, 1931-1933. Basingstoke: Macmillan.
  • Davies, R. W., Oleg Khlevniuk, E. A. Rees, Liudmila P. Kosheleva, and Larisa A. Rogovaia, eds. 2003. The Stalin-Kaganovich Correspondence, 1931-36. New Haven, CT: Yale University Press.
  • Earle, John S. 2009. Mass Privatisation and Mortality. The Lancet 373 (April 11), p. 1247
  • Earle, John S., and Scott Gehlbach. 2010. Did Mass Privatisation Really Increase Post-Communist Mortality? The Lancet 375 (January 30), p. 372.
  • Gregory, Paul R. 2013. Women of the Gulag. Stanford: Hoover Institution Press.
  • Harrison, Mark. 2008. The Dictator and Defense. In Guns and Rubles: the Defense Industry in the Stalinist State, pp. 1-30. Edited by Mark Harrison. New Haven: Yale University Press, 2008.
  • Harrison, Mark. 2009. Credibility Crunch: A Comment on The Shock Doctrine. University of Warwick. Department of Economics.
  • Harrison, Mark. 2010. Industry and the Economy. In The Soviet Union at War, 1941-1945, pp. 15-44. Edited by David R. Stone. Barnsley: Pen & Sword.
  • Harrison, Mark. 2013. Communism and Economic Modernization. In The Oxford Handbook in the History of Communism. Edited by Stephen A. Smith. Oxford: Oxford University Press.
  • Khlevniuk, Oleg. 1995. The Objectives of the Great Terror, 1937-38. In Soviet History, 1917-1953: Essays in Honour of R. W. Davies: 158-76. Edited by J. M. Cooper, Maureen Perrie, and E. A. Rees. New York, NY: St Martin's.
  • Markevich, Andrei, and Mark Harrison. 2011. Great War, Civil War, and Recovery: Russia’s National Income, 1913 to 1928. Journal of Economic History 71:3, pp. 672-703.
  • Moynihan Commission. 1997. Report of the Commission on Protecting and Reducing Government Secrecy. Senate Document 105-2 Pursuant to Public Law 236, 103rd Congress. Washington, United States Government Printing Office.
  • North, Douglass C., John Joseph Wallis, and Barry R. Weingast. 2011. Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History. Cambridge: Cambridge University Press
  • Reshetova, Natalia. 2013. Women of the Gulag. Hoover Digest no. 3, 108-115.
  • Simonov, Nikolai S. 1996. "Strengthen the Defence of the Land of the Soviets: the 1927 War Alarm and its Consequences." Europe-Asia Studies 48(8): 1355-64.
  • Stuckler, David, Lawrence King, and Martin McKee. 2009. Mass Privatisation and the Post-Communist Mortality Crisis: a Cross-National Analysis. The Lancet no. 373 (January 31, 2009): 399-407.
  • Stuckler, David, Lawrence King, and Martin McKee. 2010. Did Mass Privatisation Really Increase Post-Communist Mortality? – Authors’ Reply. The Lancet 375 (January 30, 2010), pp 372-74.
  • Velikanova, Olga. 2013. Popular Perceptions of Soviet Politics in the 1920s: Disenchantment of the Dreamers. Basingstoke: Palgrave.
  • Yang Jisheng. 2012. Tombstone: The Untold Story of Mao’s Great Famine. London: Allen Lane.

March 10, 2013

From 1914 to 2014: The Shadow of Rational Pessimism

Writing about web page http://www.ft.com/cms/s/0/e29e200a-6ebb-11e2-9ded-00144feab49a.html

China’s territorial claims and bellicose actions in the Western Pacific have aroused concerns about where this process could lead. In The Shadow of 1914 falls over the Pacific (in the Financial Times on 4 February), Gideon Rachman asked whether we are watching a re-run of events that led to the outbreak of World War I in 1914.

Then, a rising power (Germany) was challenging the established power (Britain) for a say in world affairs and a share in the world's colonial territories. It was not Germany's plan to make war on Britain; German leaders wanted only a say and a share. The economic, military, and naval power that they built was not made to go to war, only to prevent Britain from blocking Germany’s demands. They wanted to ensure peace and to command respect. The war that then came about was not meant to happen. The war would not have happened at all if allies, agents, proxies, and third parties beyond their control had not helped to bring it about.

Replace Britain by the United States, Germany by China, and Austria-Hungary, Russia, and Serbia by Japan, Vietnam, and North and South Korea, and you have Rachman's story in a nutshell. Rachman's conclusion is hopeful, however: China's leaders have tried to learn from history. That, and the inhibitions added by nuclear weapons, will help to avert war.

What was the role of calculation in the outbreak of World War I? Rachman writes as though the war was not calculated at all:

Leaders on all sides felt helpless as they were swept towards a war that most of them did not want.

But something is missing here. While the war was in some sense unwanted, the leaders were not helpless: they chose war. It was a calculated decision, and it was not a miscalculation: those who favoured war correctly estimated that victory was far from certain. They had a war plan for a quick victory over France that relied on a high speed military manoeuvre on a colossal scale, a decision by Britain to abstain, and a Russian mobilization that would obligingly wait until the German Army was ready to switch its focus from West to East. They knew it was an outrageous gamble.

Critical to this story was something that I will call rational pessimism. By 1912, Germany no longer felt itself the confident, rising power once led by Bismarck. Germany’s leaders had come to fear the future. Their own attempts to secure Germany’s rightful place in the sun, they feared, were leaving Germany ever weaker.

These fears were well founded. Externally, the balance of power was tilting away from Germany. More countries were adhering to the anti-German alliance of Britain and France. Britain and Russia were rearming at a pace that nullified Germanys’ own efforts. Given time, Germany would only become weaker. Within Germany the balance was tilting away from monarchism and conservatism towards parliamentary socialism. The fiscal demands of rearmament were opening up new social divisions. Germany’s Prussian bureaucracy and aristocracy felt itself more and more besieged.

Increasingly the calculation became: If we fight, we may lose but at least there is a chance that we win. If we remain at peace, we certainly lose. From this point of view the war was a gamble, but it was not a miscalculation. It was simply the choice with the highest expected value. For this reason the leaders of the Central Powers went to war full of foreboding, but they went to war anyway.

In July 1914 the German chancellor Bethmann Holweg confided in his friend Kurt Riezler, who wrote in his diary:

Russia’s military power growing fast … Austria grows ever weaker … This time things are worse than 1912, because now Austria is on the defensive against the Serb-Russian agitation. … The future belongs to Russia, which grows and grows into an ever great weight pressing down on our chest.

The chancellor is very pessimistic about Germany’s intellectual condition. Frightful decline of our political niveau. Individuals are becoming ever smaller and more insignificant; nobody says anything great and honest. Failure of the intelligentsia and of the professors.

This pessimism was general. When Germany’s Wilhelm II was informed of the Austrian ultimatum to Serbia, he wrote:

Now or never.

In Vienna, Kaiser Franz-Josef wrote:

If we go under, we better go under decently.

(The latter quotes are from Holger Herwig’s The First World War: Germany and Austria-Hungary, 1914-1918, published in 1997 by Arnold).)

From this perspective it becomes crystal clear why North Korea’s predicament is so dangerous. Day by day, North Korea is provoking enemies and losing friends. The tensions within the country are largely unknown but surely increasing. What insider would predict a peaceful future for the Pyongyang regime that is better than today? What does Kim Jong-Un have left to lose from gambling on conflict, no matter how poor the odds? Rational pessimism is surely tilting North Korea’s choices towards war. Still, we are not there yet.

As for China itself, the threat of war should be thought of as one for the future. It seems unlikely that China’s leaders would ever choose to gamble everything on a major war as long as they expect to gain more from a continuation of peace. Their optimism is a bulwark against war.

The risk is that optimism is fragile. China faces many problems that could sap the confidence of its leadership. Edward Luttwak (in The Rise of China vs the Logic of Strategy, published in 2012 by the Belknap Press of Harvard University) has written that China is pursuing an impossible trinity of prosperity, diplomatic influence, and military power. China’s economic growth may falter. Even if economic growth is sustained in China, the chances are that at some stage the West will recover its prosperity and technological leadership. Meanwhile China’s rearmament and territorial claims are losing it friends in Japan, Vietnam, and India. At home, there are protests over a range of issues that widens continually: the rule of law, corruption, censorship, inequality, wages and working conditions, land grabs, and pollution. China’s rulers rely on xenophobia and stories of foreign encirclement and penetration to manage these threats to their legitimacy.

Putting all this together, it is not hard to envisage a future in which China’s leaders would become rational pessimists. Would they then be held back by knowledge of history and by the possibility of nuclear war? Maybe. Is Kim Jong-Un restrained by these things today? So far, yes. If Germany’s rulers in 1914 could have seen the future, would they have chosen differently? Perhaps. Unfortunately, we can’t be sure.


February 04, 2013

Alternatives to Capitalism: When Dream Turned to Nightmare

Writing about web page http://cpasswarwick.wordpress.com/overview-2/peking-conference/proposed-topics/

On Friday evening I found myself debating "Socialism vs Capitalism: The future of economic systems" at the Peking Conference of the Warwick China Public Affairs and Social Service Society. The organizers also invited my colleagues Sayantan Ghosal, Omer Moav, and Michael McMahon, who spoke eloquently. The element of debate was not too prominent because we all said similar things in different ways. I'm an economic historian and the great advantage of history is that it gives you hindsight. Anyway, here is what I said:

Let’s start from some history. There was a time between the two world wars when the capitalist democracies, like America, Britain, France, and Germany, were in a lot of trouble. In 1929 a huge financial crisis began in the United States and went global. There was a Great Depression. Around the world, many tens of millions of farmers were ruined. Tens of millions of workers lost their jobs.

As today, people asked: What was the cause of the problem? One answer they came up with was: Capitalism is the problem. Lots of people decided: the problem is the free market economy! The government should step in to take over resources and direct them! The government should get us all back to work! The government should get us building new cities, power stations, and motorways!

Another answer many of the same people came up with was: Democracy is the problem. Lots of people decided: the problem is too much politics! We need a strong ruler to stop the squabbling! Someone who can make decisions for the nation! Someone who can organize us to build a common future together!

So there was a search for alternatives to capitalism. Different countries tried different alternatives. The alternatives they tried included national socialism (or fascism) and communism under various dictators, like Hitler and Stalin.

What happened next? On average the dictators’ economies did recover from the Depression faster than the capitalist democracies.

(Here's a chart I made earlier to illustrate the point, but I did not have the opportunity to use it in my talk. Reading from the bottom, the democracies are the USA, France, and the UK; the dictatorships are Italy, Germany, Japan, and the USSR. You can see that Italy does not conform to the rule that the dictators' economies recovered faster. Without Italy, the average economic performance of the dictatorships would have looked even better.)

Seven major economies in the Great Depression

But solving one problem led to another. Before the 1930s were over the dictators’ policies had already caused millions of deaths. A Japanese invasion killed millions in China (I'm not sure how many). An Italian invasion killed 300,000 in North Africa. Soviet economic policies caused 5 to 6 million hunger deaths in their own country and Stalin had a million more executed.

And another problem: As political scientists have shown, democracies don’t go to war (with each other). Dictators go to war with democracies (and the other way round). And dictators go to war with each other. The result of this was that in the 1940s there was World War II. Hitler, Mussolini, Tojo, and Stalin went to war -- with the democracies and with each other. Sixty million more people died.

After the war, capitalism recovered. In fact, far from being a problem, it became the solution. By the 1960s all the lost growth had been made up. Think of the economic losses from two World Wars and the Great Depression. If all you knew about capitalist growth was 1870 to 1914 and 1960 onwards, you’d never know two World Wars and the Great Depression happened in between.

(To illustrate that point, here's another chart I made earlier, but did not use. It averages the economic performance of Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Italy, Netherlands, New Zealand, Norway, Sweden, Switzerland, the UK, and the USA.)

great_depression_ver_3.jpg

After World War II fascism and national socialism fell into disrepute, but communism carried on. In China, Mao Zedong’s economic policies caused more deaths. In 1958 to 1962, 15 to 40 million people starved. Communist rule led China into thirty years of stagnation and turmoil. After that Deng Xiaoping made the communist party get its act together. And the communists forgave themselves for their past and agreed to forget about it.

Here's the takeaway.

Liberal capitalism isn’t perfect, but it has done far more for human welfare than communism. It has been the solution more often than the problem. Last time capitalism experienced some difficulties, many countries went off on a search for alternatives. That search for alternatives led nowhere. It wasn’t just unproductive. It was a terrible mistake that cost many tens of millions of lives. Lots of people have forgotten this history. Now is a good time to remember it.

Postscript. At one point I thought of calling this blog "Alternatives to capitalism: the search for a red herring" (a "red herring" is something that doesn't exist but people look for it anyway.) But I realized that would have been wrong, because alternatives to capitalism have actually existed. The problem with the alternatives is not that we cannot find them. It is that the people who went searching for them fell into a dream and woke up to a nightmare.


November 07, 2012

The Value of a Vote and China's Governance Deficit

Writing about web page http://www.bbc.co.uk/news/world-us-canada-20233064

Whatever you think of the outcome this morning, it's clear that American voters placed a high value on their chance to choose the next president. In the East Coast states buffeted by Hurricane Sandy, where many are homeless or without power, turnout was heavy.

That's not how it is in China, where the next leadership will "emerge" in a few days' time from the communist party's eighteenth national congress.

Although not a professional China watcher, a few months ago I began to notice a rash of articles telling us how much better off China is with its supposedly meritocratic leadership selection process. What's more, we are told, it's such a great system that the Chinese people themselves endorse it. China's leadership, although selected in secret by unknown rules, is apparently "legitimate." I saw this first in February in an influential article in the New York Times by the Shanghai "venture capitalist" Eric X. Li on Why China's Political Model is Superior. In August the China-based academic Daniel A. Bell was extolling the merits of China's meritocracy in The Huffington Post. A few days ago the China pundit Martin Jacques repeated the same message in the BBC Magazine.

Some contributions in this vein refer to the empirical research of the Harvard political scientist Tony Saich. Saich has carried out repeated opinion surveys in China. These indicate that Chinese respondents are generally more critical of the lower tiers of government. However, high proportions are "relatively or extremely satisfied" with higher tiers, and their satisfaction rises with distance so that at least 80 percent are satisfied with China's central government. Moreover, satisfaction levels have been rising over time.

An alternative source gives a different picture. The Worldwide Governance Indicators dataset measures perceptions of the quality of government in over 200 countries since 1996 on six dimensions -- Voice and Accountability, Political Stability and Absence of Violence/Terrorism, Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption. Each indicator is based on hundreds of individual underlying variables, taken from a wide variety of data sources. Each indicator is scaled from +2.5 to -2.5, with the global average set to zero. (The dataset is described by Daniel Kaufmann, Aart Kraay, and Massimo Mastruzzi, "The worldwide governance indicators: methodology and analytical issues," Policy Research Working Paper Series 5430, issued by the World Bank in 2010; RePEc handle: http://ideas.repec.org/p/wbk/wbrwps/5430.html).

The advantage of the Worldwide Governance Indicators is that they are worldwide; they allow one country to be measured against others on a uniform methodology. For China I'll give you the 2011 results, but the Worldwide Governance Indicators go back to 1996 and they are fairly stable over time.

In the table below, the first column shows that the data include most countries in the world. The second column shows the percentage of countries that score below China on each of the six dimensions. The third column shows China's score. Since we are also given the standard errors associated with the scores, we can also work out whether China's difference from the world average (zero) is statistically significant. An asterisk indicates that China's score is significantly above or below zero at 5 percent.

China in the World Government Indicators 2011

Three things stand out:

  • China scores below the median country in the world in every dimension except one: effectiveness. China's citizens definitely agree that their government can make decisions and carry them out.
  • In two dimensions, effectiveness and regulatory quality, China's score is not signficantly different from the world average. In the other four, it is significantly below.
  • In voice and accountability, China is grouped among the worst countries in the world.

How can we reconcile China's deficit in the Worldwide Governance Indicators with praise for the "legitimacy" of the communist one-party state? I'd start from Tony Saich's finding that Chinese people are least critical of the level of the government that is farthest from them. It would seem that in their society there is still a place for the myth of the "just monarch": the benevolent ruler in the faraway capital city.

According to this myth, the just ruler thinks of nothing but the plight of his people. But his will is said to be distorted by ambitious and corrupt intermediaries -- his ministers, the provincial barons and local authorities, who stand between the people and the king. The king relies on the people to tell him of the injustices from which they suffer; supposedly, only he can put them right. If they will reach out to him directly, bypassing those that pervert his intentions, he will answer their prayers and petitions and right their wrongs.

People who believe this can thus reconcile personal experience of oppressive and corrupt rule with the idea of a kindly but distant ruler who will eventually vindicate them.

One reason the myth endures is that it is open to manipulation. A ruler who is not benevolent but self-interested and power-seeking can exploit it to remain in power. From time to time he will give up some local princeling to assuage popular anger and build his own legitimacy. Stalin did this; Mao did it; today's Chinese communist party does it.

But managing the mythology of benevolent dictatorship is like riding a tiger. For the myth of the just monarch does not make the people passive; on the contrary, from time to time they may rise up in the name of the ruler to act directly against those that oppress them. (See for example Daniel Field, Rebels in the name of the tsar, published by Houghton Mifflin in 1976.)

Finally, in many peasant societies, as China was until quite recently, this myth has persisted until the illusion is shattered by some collective blow. There will be some setback, some outrage, or some scandal that is too deep for the myth to endure -- at least, until some new ruler emerges who can once more take up the mantle of the true king.


October 15, 2012

Markets versus Government Regulation: What are the Tail Risks?

Writing about web page http://ideas.repec.org/a/aea/jeclit/v45y2007i1p5-38.html

Tail risks are the risks of worst-case scenarios. The risks at the far left tail of the probability distribution are typically small: they are very unlikely, but not impossible, and once or twice a century they will come about. When they do happen, they are disastrous. They are risks we would very much like to avoid.

How can we compare the tail risks of government intervention with the tail risks of leaving things to the market? Put differently, what is the very worst that can happen in either case? Precisely because these worst cases are very infrequent, you have to look to history to find the evidence that answers the question.

To make the case for government intervention as strong as possible, I will focus on markets for long-term assets. Why? Because these are the markets that are most likely to fail disastrously. In 2005 house prices began to collapse across North America and Western Europe, followed in 2007 by a collapse in equity markets. By implication, these markets had got prices wrong; they had become far too high. The correction of this failure, involving large write-downs of important long term assets, led us into the credit crunch and the global recession.

Because financial markets are most likely to fail disastrously, they are also the markets where many people now think someone else is more likely to do a better job.

What's special about finance? Finance looks into the future, and the future is unexplored territory. Only when that future comes about will we know the true value of the long-term investments we are making today in housing, infrastructure, education, and human and social capital. But we actually have no knowledge what the world will be like in forty or even twenty years' time. Instead, we guess. What happens in financial markets is that everyone makes their guess and the market equilibrium comes out of these guesses. But these guesses have the potential to be wildly wrong. So, it is long-term assets that markets are most likely to misprice: houses and equities. When houses and equities are priced very wrongly, chaos results. (And in the chaos, there is much scope for legal and illegal wrongdoing.)

When housing is overvalued, too many houses are built and bought at the high price and households assume too much mortgage debt. When equities are overvalued, companies build too much capacity and borrow too much from lenders. To make things worse, when the correction comes it comes suddenly; markets in long term assets don't do gradual adjustment but go to extremes. In the correction, nearly everyone suffers; the only ones that benefit are the smart lenders that pull out their own money in time and the dishonest borrowers that pull out with other people’s money. It's hard to tell which we resent more.

If markets find it hard to price long term assets correctly, and tend to flip from one extreme to another, a most important question then arises: Who is there that will do a better job?

It's implicit in current criticisms of free-market economics that many people think like this. Financial markets did not do a very good job. It follows, they believe, that someone else could have done better. That being the case, some tend to favour more government regulation to steer investment into favoured sectors. Others prefer more bank regulation to prick asset price bubbles in a boom and underpin prices in a slump. The latter is exactly what the Fed and the Bank of England are doing currently through quantitative easing.

Does this evaluation stand up to an historical perspective?

We’re coming through the worst global financial crisis since 1929. Twice in a century we've seen the worst mess that long-term asset markets can make -- and it's pretty bad. A recent estimate of the cumulative past and future output lost to the U.S. economy from the current recession, by David H. Papell and Ruxandra Prodan of the Boston Fed, is nearly $6 trillion dollars, or two fifths of U.S. output for a year. A global total in dollars would be greater by an order of magnitude. What could be worse?

For the answer, we should ask a parallel question about governments: What is the worst that government regulation of long term investment can do? We'll start with the second worst case in history, which coincided with the last Great Depression.

Beginning in the late 1920s, the Soviet dictator Stalin increasingly overdid long term investment in the industrialization and rearmament of the Soviet Union. Things got so far out of hand that, in Russia, Ukraine, and Kazakhstan in 1932/33, as a direct consequence, 5 to 6 million people lost their lives.

How did Stalin's miscalculation kill people? Stalin began with a model that placed a high value (or “priority”) on building new industrial capacity. Prices are relative, so this implied a low valuation of consumer goods. The market told him he was wrong, but he knew better. He substituted one person’s judgement (his own) for the judgement of the market, where millions of judgements interact. He based his policies on that judgement.

Stalin’s policies poured resources into industrial investment and infrastructure. Stalin intended those resources to come from consumption, which he did not value highly. His agents stripped the countryside of food to feed the growing towns and the new workforce in industry and construction. When the farmers told him they did not have enough to eat, he ridiculed this as disloyal complaining. By the time he understood they were telling the truth, it was too late to prevent millions of people from starving to death.

This case was only the second worst in the last century. The worst episode came about in China in 1958, when Mao Zedong launched the Great Leap Forward. A famine resulted. The causal chain was pretty much the same as in the Soviet Union a quarter century before. Between 1958 and 1962, at least 15 and up to 40 million Chinese people lost their lives. (We don’t know exactly because the underlying data are not that good, and scholars have made varying assumptions about underlying trends; the most difficult thing is always to work out the balance between babies not born and babies that were born and starved.)

This was the worst communist famine but it was not the last. In Ethiopia, a much smaller country, up to a million people died for similar reasons between 1982 and 1985. If you want to read more, the place to start is “Making Famine History” by Cormac Ó Gráda in the Journal of Economic Literature 45/1 (2007), pp. 5-38. The RePEc handle of this paper is http://ideas.repec.org/a/aea/jeclit/v45y2007i1p5-38.html.

Note that I do not claim these deaths were intentional. They were a by-product of government regulation; no one planned them (although some people do argue this). At best, however, those in charge at the time were guilty of manslaughter on a vast scale. In fact, I sometimes wonder why Chinese people still get so mad at Japan. Japanese policies in China between 1931 and 1945 were certainly atrocious and many of the deaths that resulted were intended. Still, if you were minded to ask who killed more Chinese people in the twentieth century, the Japanese imperialists might well have to cede first place to China's communists. However, I guess there is less national humiliation in it when the killers are your fellow countrymen than when they are foreigners.

To conclude, no one has the secret of correctly valuing long term assets like housing and equities. Markets are not very good at it. Governments are not very good at it either.

But the tail risks of government miscalculation are far worse than those of market errors. In historical worst-case scenarios, market errors have lost us trillions of dollars. Government errors have cost us tens of millions of lives.

The reason for this disparity is very simple. Markets are eventually self-correcting. "Eventually" is a slippery word here. Nonetheless, five years after the credit crunch, worldwide stock prices have fallen, house prices have fallen, hundreds of thousands of bankers have lost their jobs, and democratic governments have changed hands. That's correction.

Governments, in contrast, hate to admit mistakes and will do all in their power to persist in them and then cover up the consequences. The truth about the Soviet and Chinese famines was suppressed for decades. The party responsible for the Soviet famine remained in power for 60 more years. In China the party responsible for the worst famine in history is still in charge. School textbooks are silent about the facts, which live on only in the memories of old people and the libraries of scholars.


July 29, 2012

The China Deal: Why China's economic success is fragile

Writing about web page http://ideas.repec.org/p/cge/warwcg/91.html

Why has China succeeded where Russia failed?

The explanation that is most widely shared is that the Chinese rulers kept political control and used it to reform the economy gradually. They pursued Deng Xiaoping's "four modernizations" (of agriculture, industry, defence, and science and technology) but rejected calls for the so-called "fifth modernization" (democracy). In the Soviet Union at the same time, in contrast, Mikhail Gorbachev abandoned the levers of totalitarian control. He allowed the Berlin Wall to be pushed over. The Soviet communist party imploded; insiders "stole the state." The Soviet Union collapsed and Russia entered a decade of near anarchy.

This explanation has obvious appeal but is incomplete on closer inspection. It is widely believed that the Soviet leaders did not try the China solution of gradual economic reform without political reform. The historical record shows, however, that this is untrue. Over a period of many years, while their system of one-party rule was completely intact, the Soviet leaders tried all the reforms that the Chinese communists followed to revitalize their economy. This included several experiments with a household responsibility system, the so-called zveno, in agriculture (1933, 1947, and 1966); a regional decentralization (from 1957 to 1965); and several rounds of public sector reform (beginning in 1965), culminating in new laws to reduce the compulsory obligations on state-owned enterprises, allowing them to supply the market directly at higher prices (1987), and to permit private enterprise (1988).

In other words, rash political reforms are not the factor that decided why communism failed in Russia. The collapse of Soviet rule came only after the gradual economic reform initiatives that worked in China failed in Russia.

We must look somewhere else, therefore, to explain China's success. In a survey of Communism and Modernization, I suggest that the answer must begin with China's capacity for continuous policy reform. To break out of relative poverty and catch up with the world technological leader, an economy must undergo continuous reform of its policies and instutions. Continuous policy reform is fragile. The reason for its fragility is that, as the economy undergoes successive stages of modernization, policy reform at each stage must infringe upon the vested interests formed in the previous stage. Where continuous reform becomes blocked (as in Italy, for example), the economy will lag and fall behind. From the 1970s, the Chinese economy institutionalized a capacity for continuous policy reform. This is what has enabled China's spectacular rise.

Continuous policy reform was a by-product of China's system of "regionally decentralized authoritarianism" (described by Xu 2011). This system set China's 31 provincial leaders to compete with each other economically and also gave them considerable freedom to choose how to do so. Those leaders who could make their provincial economy grow faster, if necessary by attracting labour from neighbouring provinces, would rise politically; the laggards would fall. Such incentives were very strong.

Deng Xiaoping allowed the provincial bosses to strike a "China deal" that created new space for private business to come out of the cold and thrive within market socialism. This opening of markets to private entrepreneurs, modest at first, became much more radical than the limited "deals" struck in the Soviet Union and Eastern Europe. Economic reforms under European communism gave legitimacy, at most, to low-powered, short-term profit-based incentives, insider lobbies, and shady sideline trading networks.

In China the main limit that was placed on market access was political: China's new business class must continuously demonstrate its loyalty to the one-party state. The best way to prove loyalty was through political and family connections to the regime. This raised the danger of the new business class exploiting their personal links to power to grow rich without economic effort. One answer, but an imperfect one as we see today, was to expose them to foreign competition. In fact, there was more product market competition in export markets than across China's internal provincial borders.

A crucial and completely accidental advantage on China's side was its size. The Chinese population was so large that its 31 provinces each formed an economic region with tens of millions of people -- the size of a large Western European country. In contrast, the Soviet Union decentralized economic management across a much larger number of much smaller provinces, averaging little more than a million people each. Unlike a Chinese province, the typical Soviet province was highly dependent on its neighbours. The danger was that a Soviet provincial boss could gain more by sabotaging his neighbours than by honest effort within his own limited sphere. In the Soviet Union regional rivalry turned out to carry high costs and few if any benefits.

If regional rivalry was not productive within the Soviet Union, why did it not work across Eastern Europe as a whole? After all, each East European country had considerable freedom to experiment with national economic models, and was more like a Chinese province in size and diversity than a Soviet province. Nonetheless, international competition did not work any better than interprovincial rivalry. Most likely, East European communist leaders had too much job security and tenure, did not depend on doing better than their neighbours to keep their jobs, could not be promoted to Moscow, and, even if they succeeded economically, could not build on success to attract labour from their neighbours because international borders, even within the communist brotherhood of nations, were rigidly sealed.

It may also have been a factor that East European and Soviet leaders just did not "get" continuous policy reform. They thought catching-up growth could be achieved by one-off reforms or interventions. It is also a good question whether Chinese leaders "got" continuous policy reform, or whether they stumbled across a design for it by accident.

Either way, the result was this: The recipe that happened to make communism work in China was tried and did not work in Europe. That raises a question of vast proportions: Will the same recipe continue to work in China's future?

Here we come back to the fragility of continuous policy reform. China's level of output per head has multiplied several times over the level of the 1970s. It must multiply several more times before China can approach the level of the world's richest countries. This is a very long haul. For China to maintain the continuity of policy reform over the distance is beyond unlikely. At some point, some coalition of interests is bound to form that will be strong enough to block it, at least for a time. At that time China's oligarchy must be willing to intervene on the side of movement, not stability. If not, the China deal will come unstuck.

References:

Harrison, Mark. 2012. Communism and Economic Modernization. CAGE Working Papers no. 92. University of Warwick. Repec handle http://ideas.repec.org/p/cge/warwcg/91.html.

Xu, Chenggang. 2011. The Fundamental Institutions of China's Reforms and Development. Journal of Economic Literature 49:4, pp. 1076-1151. Repec handle http://ideas.repec.org/a/aea/jeclit/v49y2011i4p1076-1151.html.


I am a professor in the Department of Economics at the University of Warwick. I am also a research associate of Warwick’s Centre on Competitive Advantage in the Global Economy, and of the Centre for Russian, European, and Eurasian Studies at the University of Birmingham. My research is on Russian and international economic history; I am interested in economic aspects of bureaucracy, dictatorship, defence, and warfare. My most recent book is One Day We Will Live Without Fear: Everyday Lives Under the Soviet Police State (Hoover Institution Press, 2016).



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