lunedì 3 febbraio 2014

Obstacles in the way in Longitude febbrario.

pea di Ro

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Obstacles
in the way


Will China drive the world economy in the twenty first century? or will it become the main player in the Pacific Region (as described in Longitude No. of July 2103)?
We will attempt to answer these questions on the basis of both research not generally available to the general audience and recent economic data. We will place emphasis on the constraints on growth and development and attempt quantitative estimates.
After a slowdown in 2011-2013, which was deemed to be an aftermath of the global economic recession, China appears to be on a path towards a strong recovery: in 2013 GDP grew by 7.7 per cent (and as much as by 9.1 per cent in the last quarter), industrial production is once more expanding by ten per center p.a. China badly needs a fast growing manufacturing sector to absorb the bulging labor force transferring from the rural sector to urban areas. Although these data are based on official World Bank statistics, many statisticians have doubt about the quality and hence the reliability of the raw material China provides to international organizations for their world wide comparisons. Most likely, the GDP and the industrial production data are slightly overestimated, whereas the unemployment data are grossly underestimated. Most economists, even Chinese, argue that total-factor productivity (TFP) average annual growth – 3% in1978–94 and 2.7% in 1995–2009 – explains much of China’s rapid economic growth . However, according to Harry Wu’s calculations (thus computations by a well respected American naturalized scientist of Chinese descent) , average TFP growth was only 0.3% a year and negative in 1984–2001 . As underlined by Chinese economist, Yuhan Zhang, these numbers suggest that China’s growth in the past three decades was generally characterized by a poor TFP, with underlying inefficiencies in the growth pattern. The road towards more consumption-driven growth will be bumpy. With the stimulus package that has poured a huge portion of the country’s GDP in financial resources into the State sectors, the momentum of investment will continue for several years. In the meantime, China has the fiscal resources to spur another round of massive investment in the seven industries considered strategic by the Government , although in light of current inflation and local debt a new stimulus package is not expected to be soon introduced. Foreign Direct Investments FDI, as a minor part of the story, is also expected to grow as a consequence of openness of interior city clusters, continued global economic recovery, very low interest rates in developed economies, as well as renminbi appreciation. As such, investment growth will remain high and its share of GDP will be reluctant to pick up sharply until rebalancing measures become more effective in the medium term.
China is diversifying its export markets, yet most of its exports are manufactured products. In the next two to three years, exports may rebound strongly and current-account surpluses will continue. After the mid-2010s, exports might face more challenges as a result of smaller supply of young skilled labor (emigrating from the countryside to the urban  areas) and China’s move towards higher value-added and technology-intensive industries in central and western areas. Imports are likely to rise faster than exports, reflecting strong demand and the higher price of oil, commodities, and capital goods.
Increasing private consumption and leveraging its share to 50% will also be a challenge. In 2012 and in 2013, private consumption grew faster than GDP, supported by solid employment and wage growth and increased government social expenditures on pensions and healthcare. But the Chinese stimulus program and ongoing massive investment in the emerging ‘strategic’ industries have already led to overcapacity and huge nonperforming loans, which will ultimately be paid off by Chinese households. Starting this year 2014, Chinese private consumption will likely be hampered. In the past two decades, China’s consumer confidence index and consumer expectation index have had an overall downward trend. Future improvement depends on systemic reform.
More significant than these quantitative projection is the assessment of Amy Chua, a well known Professor of law and globalization at Yale University and author not only of academic literature by also of three world wide best sellers on China and the world economy. Chua is of Chinese descent and has widely and deeply studied the immense country. In her view, China lacks the institutional basis for long term development. In a discussion with us, she raised a very well thought out point: ‘If a Caucasian wants to acquire the Chinese nationality, no one in Beijing can give any advice on how to go about it, on the legislation, on the procedure, briefly on the process’. In very drastic terms , she added:  How can we think that after a thousand years of stagnation, a large and over populated country can become a world leader? At most, the prospects are to be a regional leader, unless the constraints on development prevent even that goal’.
The Chinese leaders are aware that the country has had an enormous economic growth in the last three decades, but with a high price for its own people and long term sustainable development.  Hu Jintao delivered his concerns about the pollution in the country at the Communist party's 18th Congress. He spoke about the situation of ‘health hazards’ and waste disposal such as treatment and alternative sources of energy. Hu Jintao indicated ‘We should launch a revolution in energy production and consumption, impose a ceiling on total energy consumption, save energy and reduce its consumption. Energy consumption and carbon dioxide emissions per unit of GDP as well as the discharge of major pollutants should decrease sharply. We should leave more space for nature to achieve self-renewal. We should keep more farmland for farmers, and leave a beautiful homeland with green fields, clean water and a blue sky to our future generations’. Air and water pollution and scarcity of raw materials are not the only constraints on the development of the country. Other major constraints are lack of natural resources (especially water), social issues, language problems, and human rights policy dilemmas.
The main issues of today’s China are lack of raw materials and especially the pollution of water basins. They adversely affect China due to the large industrial production base needed to maintain employment at socially and politically acceptable levels. As pointed out by Greenpeace, in China, hundreds of millions of people are without access to clean drinking water and water labeled as ‘drinking’ is severely contaminated with hazardous chemicals. Water pollution not only affects personal consumption; the wastewater pollution within China has affected the environment, society, and agriculture. David Stanway, a Reuter reporter, has created a web site which shows how in parts of China, in the not too distant future, increases in flood and drought will exacerbate rural poverty, have a negative impact on rice crops and cause a rise in food prices and costs of living. The depletion of water resources of the area also provokes damages to the climate. On the eve of a global climate change conference in Stockholm, the UN climate body organization proved that shrinking glaciers in central Asia and the Himalayas would affect downstream water resources in river catchments, which include China. The Chinese journalist Niu Shuping documents how street-level air pollution blanketed many northern cities last winter and spilled over into online appeals for Beijing to clean water supplies, especially after rotting corpses of thousands of pigs were found in a river that supplies water to Shanghai. To understand that phenomenon, it is necessary to specify that in the Chinese territory there are more than 40% of the planet’s water resource. Thus, why is China undergoing a water crisis? As mentioned earlier, the real problem is not the lack of water but the inability to use it properly. This situation is the result of two determinants: a) the increasing demand for water and b) pollution of the soil. In recent years, the demand for water has increased since for decades in the last millennium, Chinese population was fed almost exclusively on rice and other grasses. Now the diet has changed and includes meat (and as a consequence protein) with positive implication on health and life expectancy. The need for water has increased because protein food requires higher intakes of fluids to the body. Another determinant for the huge and growing demand for water is given by the large amount of water that is necessary for factories. In fact, in China, more than 70% of the electricity comes from coal, which explains the environmental degradation of the country because coal is the most polluting source of energy. Thermal power plants need large amounts of liquid for cooling. The coal industry uses as much as 20% of water consumption in China, while agriculture takes another 62%. The Asian Development Bank (ADB) studied water resources in China over the last 50 years; ADB estimates water availability per capita in China has decreased 60% in the last five decades and may suffer a further loss of 10% by 2025. The Chinese National Committee on Water Resources Research has determined that 90% of the groundwater is contaminated with industrial waste. In 2010, the study said that more than half of the groundwater tested in 183 industrial cities can be considered undrinkable. Also, the water transport systems are so inefficient that according to a 2002 study, an average of 21.5% of water was lost because of leakage or evaporation in 408 city.
This poor management of water has caused the drying up of the Yellow River with highly negative economic and environmental consequences. In addition, although badly required because of the soil aridity, various irrigation projects have often been inadequately appraised under the technical and economic aspects. According to the World Bank and ADB , several of them have been a useless waste of water and money. In 1997, to ensure a continuous, albeit modest, supply of water from the Yellow River, for the first time, the Government imposed limitations on the amount of river water that each Province could use and appointed a committee for the protection of the river as well to verify that a minimum flow of 50 cubic meters per second arrive at the sea.
On the other hand, the Chinese soil is full of rare metals (in 2009, 95% of world consumption of these materials came from its mines). However, the extraction and the treatment of rare minerals can only be done through the use of acids and chemicals that cause the Chinese soil to become barren. This large use of industries in China explains why there is a shortage of raw materials.
The severe shortage of raw materials and supplies explains China’s interest in Africa and in its yet to be exploited reserves. In 2012, trade between China and Africa reached nearly $ 200 billion, about 20% more than in 2011. Due to the large amount of raw materials that it uses to keep industrial production thriving, China has adopted a policy of long-term supply. Beijing is interested in Brazilian steel, Argentine iron, Chilean copper, nickel and mineral resources of Cuba, Canada and Australia. For example, the Chilean group Codelco (12% of world production of copper) has signed an agreement of $ 2 billion with the Chinese company Minemetals for 55,000 tons of copper annually
 One of the major social problems, and constraint on growth, is the aging of the population. This phenomenon creates serious financial difficulties in areas such as health care and pensions. There are two main determinants that have contributed to aging of the population; the first is the one-child policy, and the second is the progressive increase in life expectancy. A social policy constraint is the dualism city-countryside. Many people migrate to cities illegally increasing the phenomenon of black market employment. ‘Legal’ newcomers to urban areas, mainly students, live in dorms on-site but there is only one toilet for 55 workers and one shower for 90 workers. In order to earn minimum wage, workers are forced to work overtime meaning they are often standing up for 12 hours with short meal breaks and return to dorm rooms without enough hot water.
A key limit to development (and even to National cohesion) is the linguistic diversity within the country's borders. The Chinese language, better known as ‘mandarin’, has been the lingua franca for centuries as most widely used by the bureaucracy through the Empire, first, and the People's Republic of China, later; however, all users of the varieties of spoken Chinese have always utilized   a conventional common written language that, from the beginning of the twentieth century, has been called "Chinese vernacular". Consequently, the Chinese make a clear distinction between writing ( wén) and spoken ( / Yǔ). The spoken languages belong to at least three main ‘families’: the original Honan group of languages, the Uralian languages (spanning from Korean to Hungarian, Turkish and Finn) , the Indo-Chinese languages (Khmer, Vietnamese). The differences are much more deeply rooted than those between  the European languages, almost all of Indo-European stock. In a recent visit to China of one of us, the ‘National’ guide and the ‘Shanghai’ guide spoke to one another in Italian because they could read the same ideograms but could not understand each other in their respective ‘vernaculars’. In a well known novel by André Malraux, it is recalled that in the 1930s, in Shanghai, Chinese communist intellectuals used French as their communication vehicle because most of them had studied in Paris and read Marx and Lenin in French translations. When Chiang-Kai-Check armies were approaching Shanghai and there was a need for a Communist newspaper, they gathered to draw an ideogram to mean ‘Communism’ in the maze of ‘vernaculars’; eventually, they agreed on merging the ideogram meaning ‘work’ with that meaning ‘sky’ (in Chinese, it means also ‘heaven’)- i.e. work leading to heaven.
In this article, we have reviewed the main constraints on China’s development. A huge country, an immense but ageing population, lack of effective and efficient institutions, the lack of a common spoken language, a severe shortage of natural resources, especially water.
We do not dare to make a long term quantitative forecast. Oscar Wilde used to say that ‘projections are difficult when they concern the future’. They are especially hard if the basic data are questionable. For the reasons explained in this article, China is compelled to a policy spurring growth in order to avoid social and political troubles originating from an expanding population with not even a common spoken language. However, it is unlikely that the country can maintain a 7% p.a. GDP growth rate. More likely, in the next five-ten years, the policy makers should target a gradual slowdown to a 5% p.a. growth rate. Otherwise, China may wake up under a cold shower.

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