Global Economics and Management

China's Falling Birth Rate

Some of the trends we study in class are very much at the forefront of public discourse: the rise of populism, the increase in inequality, the emergence of new technologies. Some trends, however, are more hidden. Nonetheless, they are often no less important than the visible ones. The example of China's falling birth rates is a case in point. Indeed, the situation with birth rates in China is a huge source of concern for the future of that country. As we will study in more detail in Module 9, the rapid ageing of the Chinese population and the eventual decline of its working-age population will put a lid on long-run growth there. A recent article over at Bloomberg contains details and numbers. This chart says it all:

The situation is so dire that population growth in China in 2021 was basically zero.

Why did this happen? Here is my quick take. Explosive birth rates in China following the Second World War led to the imposition of the One-Child Policy in 1980. The policy was enforced very stringently, and so, with a small lag, it led to a dramatic decline in births as seen in the chart above. In 2015 the policy was relaxed, but that did not lead to more births. On the contrary, the downward trend continued. It did so in part for cultural reasons: the one-child policy had lasting effects on family's fertility norms. The socially acceptable norm became to have fewer children. This was likely the result of social contagion and imitation. Growing levels of per capita income and education in China also contributed: birth rates tend to fall across the board when countries rise up in the income and education ladder. Then the COVID pandemic did not help: China is not the only example of plummeting birth rates as a result of the pandemic.

We will have a chance to discuss this issue in much more detail later in the class, of course. There are many interesting nuances that I am sure you will be eager to discuss. For instance, might these falling birth rates help the environment? To every coin there are two sides!

A Pair of Articles on the State of American Education

1) Via the excellent Bari Weiss, an article from ProPublica and the New Yorker, on the devastating effects of COVID-related school closures on children, especially the poorest and most vulnerable of them. The effects on US inequality will be profound and will last for decades.

2) From the WSJ, it appears there is now a large gender gap in college-level education.(Hat tip: Ivo Welch; the article is also cited in Bari Weiss's Substack post, linked to above). The figures cited in the article are simply staggering. Combined with other diagnoses of the plight of young men (declining labor supply, increasing time spent playing video-games), the article makes for sobering reading.

Is the situation similar in other countries? I would guess the tendency is there, but less pronounced. China recently cracked down on gaming. Such a dramatic policy would not be feasible in Western democracies. In fact, it is not clear what policy intervention could address the issue effectively.

Ken Rogoff on China's Currency

Over at Nikkei Asia, Professor Rogoff of Harvard (as you know, one of my favorite economists) discusses the growing clout of China in the monetary sphere. It is a wide-ranging interview, full of wisdom. One of the themes that it raises is that the world monetary system is likely to become multipolar - with the RMB dominant in Asia, the Euro in Europe and the US dollar in the Americas. This echoes one of the major themes of part 3 of Global Trends. Yet according to Rogoff, this could be a temporary phenomenon: 

"Unipolar is the usual. Multipolar is usually transitional. It's not a stable equilibrium, because there are networking effects that are very powerful, and that tends to prevail. So, if we see China become as important as Europe is today, I suspect there would be a transition to where someday it became the center."

I recommend reading the whole thing.

The Quad, China and International Realignment

Over at Foreign Affairs, Kevin Rudd, the former Prime Minister of Australia, gives an overview of the history and purpose of the Quad, a new alliance involving India, Australia, Japan and the US. It is a great article, which covers a lot of ground on the most consequential strategic realignment of recent years. The most significant aspect of the Quad is the rapprochement between India and the US. This is the culmination of a process that began after the end of the Cold War. That India and the US would become close strategic allies was inevitable. The growing power of China and the deteriorating relations between Pakistan and the US were prime factors. We will see how it plays out, but as Prime Minister Rudd describes, China seems to be taking the emergence of the Quad quite seriously. Money quote: 

"But the worst-case scenario from Beijing’s perspective is that the Quad could serve as the foundation of a broader global anti-Chinese coalition. If the Quad were to draw other Asian countries, the EU, and NATO into efforts to confront or undermine China’s international ambitions, it could over time swing the collective balance of power definitively against China. The Quad could also lay the groundwork for a broader allied economic, customs, and standards union, which could reshape everything from global infrastructure funding to supply chains to technology standards. The Biden White House’s senior Asia official, Kurt Campbell, has already spoken of the need to provide a “positive economic vision” for the Indo-Pacific; Beijing fears that the Quad could become the fulcrum for such an effort."

As we embark upon our exploration of new geopolitical risks in Global Trends, this article could not come at a better time.

The Return of Industrial Policy?

Over at the Wall Street Journal, Greg Ip has written a fantastic article analyzing the return of industrial policy in many Western countries. Prompted by the economic success of China, governments are increasingly directing resources to favored industries. The WSJ article does a great job at outlining the costs and benefits of such an industrial policy.

My general view is that these efforts rarely deliver the promised results. The success of China is not primarily due to industrial policy but to the set of market-opening policies that China put in place starting in the 1980s. In fact, a good argument could be made that China's efforts to direct resources to certain industries or activities has resulted in huge amounts of waste. The reason is that, as Greg Ip outlines, industrial policy allocates resources on the basis of politicians' perceived "strategic priorities" rather than on the basis of market signals. And politicians are not very good at picking the next big thing. Instead, they subsidize certain industries largely out of political expediency - things like "how many jobs will I get in my district". This can be a recipe for short-run electoral success, but it is rarely a recipe for long-run economic growth.

With that on the table, and with a presumption that many of you will disagree with the preceding paragraph, I am sure we can have a healthy debate in the comments section!

My Weekly Press Roundup

A few items that I found notable this week:

1) Mervyn King's warning on Central Banks' addiction to quantitative easing. And Dr. Doom strikes again. Both of them are a little too pessimistic on our economic future, in my view. But listening to pessimists is a good way to avert the worst case scenario, so they play a useful role.

2) Tyler Cowen on titles. I'm not so sure I agree...

3) The horror!

4) Niall Ferguson on China's attacks on tech and decoupling with the US. Note that the piece is not just critical of China, but also of the US. I think I mentioned this article in our last class, but never got around to posting it.

5) India is greatly under-reporting deaths from COVID. By the way, so are many other countries. Excess mortality data will reveal the true toll of the pandemic better than official numbers, once all is said and done.

New Monetary Developments

Module 4 of Global Trends deals with innovations in the monetary sphere. Over at Bloomberg, the excellent Niall Ferguson put together a great essay summarizing some of the most recent developments concerning money. It is recommended reading. The essay ranges widely, from cryptocurrencies (including the most recent innovations in that area) to the history of money and its functions, to the pioneering role of China in monetary innovations, to the requisite response of the US and its allies. Although I do not agree with everything that Ferguson says there, in particular his seeming infatuation with Bitcoin, nonetheless every paragraph is full of insights.

One part that stuck in my mind was this quote from the article:

"For the true believers, Bitcoin and DeFi are the first steps toward a libertarian Nirvana. In a widely quoted tweet, crypto guru Naval Ravikant added steps three to seven:

Bitcoin is an exit from the Fed.

DeFi is an exit from Wall Street.

Social media is an exit from mass media.

Homeschooling is an exit from industrial education.

Remote work is an exit from 9-5.

Creator economy is an exit from employment.

Individuals are leaving institutions."

What is the Verdict on the US-China Trade War?

Chad Bown of the Peterson Institute for International Economics has written a fascinating report on the US-China trade war. The bottom line: it was a gigantic failure for the United States. Compared to the counterfactual of no trade war, US exports to China fell dramatically, opening up the way for competing suppliers to fill the gap. The cost has been particularly severe on US manufacturing. Look at Figure 6 in the report. One telling example concerns the US auto sector. Let me quote from the report:

"The US auto sector provides an excellent illustration of how even temporary trade war tariffs can inflict long-term damage. By 2017, China had become the second largest export market for American vehicles. Then, in July 2018, China retaliated with a 25 percent tariff on US autos. (In a savvy economic maneuver, it simultaneously lowered its auto tariff on imports from the rest of the world.) US exports to China fell by more than a third (see figure 3). Tesla accelerated construction of a new plant in Shanghai, arguing that Trump's tariffs on auto parts, China's retaliation on cars, and the resulting uncertain trade picture, made it no longer competitive to manufacture electric vehicles destined for China in the United States. For similar reasons, BMW shifted some production destined for China out of South Carolina. By the end of 2020, US auto exports had still not recovered."

In 2020 the bilateral trade deficit between the US and China fell by about 10%. But this is almost surely due to the severity of the COVID-induced recession in the US, compared to China, which tamed US imports from China more than its exports to China (look at the striking graph of imports and exports in the linked WSJ article). Overall for 2020, the total US trade deficit was at a record high. So much for protectionism leading to smaller trade deficits.

The truth, which we will explore in Module 9, is that trade deficits have almost nothing to do with trade policy, and everything to do with the balance between consumption and savings. Americans - both households and the government - like to consume a lot. The Chinese are more thrifty. The deficit comes from this, not the trade regime.

The Fallout from the Huawei Dispute

Later today, in the first Winter 2021 class session of Global Trends, we will discuss the case of Google in China. Recently, Forbes wrote about the effect of the China-US dispute over Huawei on other non-Chinese tech companies: Apple, Samsung, and Google. Very timely.

The downside risk is not on the 5G infrastructure front, where the US blacklisted Huawei but where alternatives (albeit sometimes more expensive) do exist. The fallout is on the smartphone market: Huawei developed its own smartphone OS, Harmony, and is making it available to other smartphone manufacturers, possibly affecting Google's share of that market - ironically, affecting one of Google's last remaining area of presence on the Chinese market! (Android is the most popular mobile OS in China, though it is stripped of all Google services there).

The Google in China case started in 2000. It is still ongoing, as the article above shows.

The State of the South China Sea Dispute

In Module 7 of Global Trends, we look at the big geopolitical risks of our times. As an illustration, we discuss the South China Sea dispute. Just in time for the Winter 2021 iteration of the class, Bloomberg came out with an excellent article summarizing the state of that dispute. The piece contains great pictures, data and writing on the very tense situation in this crucial part of the world. Recommended!