Abstracts from The American:
Are we encouraging the creation of too many low-productivity businesses?
Policymakers believe a dangerous myth. They think that start-up companies are a magic bullet that will transform depressed economic regions, generate innovation, create jobs, and conduct all sorts of other economic wizardry. So they provide people with transfer payments, loans, subsidies, regulatory exemptions, and tax benefits if they start businesses. Any businesses.
Take, for example, the remarks of President George W. Bush, who said in a speech to the Small Business Week Conference in 2006, “Small businesses are vital for our workers…. That’s why it makes sense to have the small business at the cornerstone of a pro-growth economic policy…. The Small Business Administration is working hard to make it easier for people to start up companies. We understand that sometimes people have got a good idea, but they’re not sure how to get something started…. And so we’ve doubled the number of small business loans out of the SBA since I came to office.”
In general, start-ups are not the source of our economic vitality or job creation.
This is bad public policy. Encouraging more and more people to start businesses won’t enhance economic growth or create a lot of jobs because start-ups, in general, aren’t the source of our economic vitality or job creation.
You might be startled by this position, going, as it does, against the grain of most popular arguments. It might even seem illogical to you. After all, companies such as Apple in computers, Microsoft in software, Google in Internet search, and Genentech in biotechnology are all examples of wildly successful start-ups. Federal Express and Wal-Mart were also start-up companies not too long ago. So, surely, these companies must have contributed to economic growth?
Yes, of course they have. But those companies are not typical start-ups. The typical start-up is a company capitalized with about $25,000 of the founder’s savings that operates in retail or personal services. Odds are pretty good that it is a home-based business, and the founder aspires to generate around $100,000 in revenue in five years. So even at the time that Apple, Microsoft, Google, and FedEx were founded, they weren’t anything like the typical new business.
To get more economic growth by having more start-ups, new companies would need to be more productive than existing companies. But they’re not. A study by economists John Haltiwanger, Julia Lane, and James Spletzer, published in the American Economic Review Papers and Proceedings, combined data from the U.S. Census and other sources to look at the relationship between firm productivity and firm age. The results showed that firm productivity increases with firm age. This means that the average new firm makes worse use of resources than the average existing firm, which is not what you would expect if economic growth benefits more from the creation of new firms than from the expansion of existing ones. And you shouldn’t think that the typical start-up makes up for its poor productivity when it gets older, because the typical start-up is dead in five years.
This pattern makes sense: there shouldn’t be a positive correlation between economic growth and the rate at which typical start-ups are formed over the long term. Economist Niels Noorderhaven and his colleagues, in an article published in Entrepreneurship Theory and Practice, have explained how as countries become wealthier, the rate at which they create start-ups falls. Societal wealth leads average wages to go up, which encourages business owners to use machines to replace work that used to be done by hand. Capital (the machinery) is subject to greater economies of scale—the reduction in the cost of production that comes from generating things in higher volume—than labor. As a result, the increased use of capital leads companies to grow in size and hire people who would otherwise have gone into business for themselves.
Moreover, as economist Martin Caree and his colleagues have shown in a study published in Small Business Economics, when countries get wealthier and real wages rise, the opportunity cost of running your own business goes up, because the amount of money that you could have earned working for someone else increases. This increased opportunity cost leads more people to go to work for others than when real wages are lower.
Finally, as countries get richer, they change where economic value is created: first from agriculture to manufacturing, and then from manufacturing to services. Economist David Blau, in a study in the Journal of Political Economy, has explained that as the source of economic value shifts from activities where self-employment is more common, such as agriculture, toward activities where self-employment is less common, such as manufacturing, the proportion of people running their own businesses drops.
(...)
In fact, if we look at the correlations between rates of new firm formation and economic growth over the medium to long term, we see that firm formation declines as economic growth increases. (...)
We also have ample evidence that when governments intervene to encourage the creation of new businesses, they stimulate more people to start new companies disproportionately in competitive industries with lower barriers to entry and high rates of failure. That’s because the typical entrepreneur is very bad at picking industries and chooses the ones that are easiest to enter, not the ones that are best for start-ups. Rather than picking industries in which new companies are most successful, most entrepreneurs pick industries in which most start-ups fail. So by providing incentives for people to start businesses in general, we provide incentives for people to start the typical business, which is gone in five years.
And who is most likely to respond to those incentives and start businesses? Not the best entrepreneurs. We know that unemployed people are more likely to start businesses than people who have jobs. Why? Because they have less to lose by becoming entrepreneurs. After all, it’s less costly to you to start a company if your alternative is watching daytime TV than if it is taking home a paycheck from a job.
The problem is that people who are unemployed also tend to perform worse when they start companies than people who quit their jobs to start businesses, probably because their bar for what kind of business to pursue is much lower. So policies designed to increase the total number of new businesses disproportionately attract the worst entrepreneurs.
Okay, new firm formation might not enhance economic growth, but, as everyone knows, new firms create more jobs than existing firms, right? As John Case, commentator for Inc. Magazine, explained, “Most of the 20 million new jobs created during the past 15 years came not from established giants, the companies that had led America’s growth up till then. The jobs came from companies that were smaller, newer—or both. They came from that ‘independent entrepreneurial sector.’”
But Case, and the others who make the same argument, are wrong. Very few people work in new firms. Companies with at least one employee that are less than two years old account for only 1 percent of all employment in the United States, according to analysis published in Regional Studies by economists Zoltan Acs and Catherine Armington. By contrast, companies with at least one employee that are more than ten years old account for 60 percent of all employment in this country.
(...)
It also takes a lot of entrepreneurs to create lasting jobs. To get one business employing at least one person ten years from now, we need 43 entrepreneurs to begin the process of starting a company. And how many jobs will that startup have, on average, ten years after it was founded? The answer is nine. In short, 43 people have to try to start companies so that we can have nine jobs a decade from now. That’s not the spectacular yield that you might expect if you read the press reports about the job creation of start-ups.
So far we have talked about the jobs that start-ups create as if they are the same as the jobs in existing companies. But they’re not. They’re worse. On average, jobs in new firms pay less, offer fewer fringe benefits, and provide less job security than jobs in existing firms.
The data show that jobs in new firms are more likely to be part-time than jobs in existing fi rms. Moreover, jobs in the average new firm do not pay as well as jobs in the average existing business. In their book The Entrepreneurial Process: Economic Growth, Men, Women and Minorities, sociologists Paul Reynolds and Sammis White found that the average new job paid 72 percent of the average statewide wage in the firm’s first year and that the wages in those firms were still below the state average when they were four years old.
Jobs in new firms also offer fewer benefits than jobs in existing firms. David Bernstein analyzes the Federal Reserve Board’s survey of small business finances for an article in Applied Economics, and finds that businesses become more likely to offer a pension plan or health insurance coverage to their employees as they get older.
The size of the difference in the tendency of new and existing firms to offer health insurance is substantial. A study by Alison Wellington, published in Contemporary Economic Policy, showed that men who work for others are three times as likely, and women who work for others are six times as likely, to have health insurance as those who work for themselves. Moreover, preliminary data from the Kauffman Firm Survey show that, in 2004, only 23.2 percent of new firms offered health insurance to their full-time employees.
Clearly, creating typical start-ups isn’t the way to enhance economic growth and create jobs.
So what is? It’s pretty straightforward. Stop subsidizing the formation of the typical start-up and focus on the subset of businesses with growth potential. Getting economic growth and jobs creation from entrepreneurs isn’t a numbers game. It’s about encouraging the founding of high-quality, high-growth companies.
To get more economic growth by having more start-ups, new companies would need to be more productive than existing companies. But they’re not.
A tiny sliver of startups accounts for the vast majority of the contribution to job creation and economic growth that comes from entrepreneurial activity. According to data from the National Venture Capital Association, since 1970, venture capitalists have funded an average of 820 new companies per year. These 820 startups—out of the more than two million companies started in this country every year—have enormous economic impact. A report posted on the Venture Impact website explains that, in 2003, companies that were backed by venture capitalists employed 10 million people, or 9.4 percent of the private sector labor force in the United States, and generated $1.8 trillion in sales, or 9.6 percent of business sales in this country. Moreover, in their book The Money of Invention: How Venture Capital Creates New Wealth, economists Paul Gompers and Josh Lerner report that in 2000, the 2,180 public companies that received venture-capital backing between 1972 and 2000 comprised 20 percent of all public companies in the United States, 11 percent of their sales, 13 percent of their profits, 6 percent of their employees, and one-third of their market value, a figure in excess of $2.7 trillion dollars.
Instead of just believing naively that all entrepreneurship is good, policymakers need to recognize that only a select few entrepreneurs will create the businesses that will take people out of poverty, encourage innovation, create jobs, reduce unemployment, make markets more competitive, and enhance economic growth.
Therefore, as unfair as it might sound, policymakers need to “stop spreading the peanut butter so thin.”
They need to recognize that all entrepreneurs are not created equal. They need to think like venture capitalists and concentrate time and money on extraordinary entrepreneurs, and to worry less about the typical ones.
How? First, we need to reduce the transfer payments, loans, subsidies, regulatory exemptions, and tax benefits that encourage marginal entrepreneurs to start businesses. Since the average existing firm is more productive than the average new firm, we would be better off economically if we got rid of policies that encourage a lot of people to start businesses instead of taking jobs working for others...
Scott Shane is the A. Malachi Mixon III Professor of Entrepreneurial Studies at Case Western Reserve University and the author of “The Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors and Policy Makers Live By" (Yale University Press), from which this article is excerpted.
viernes, 9 de enero de 2009
Brazil Oil Finds May End Reliance on Middle East, Zeihan Says
This is how the world looked like back in late April 2008, with oil heading to 147 US$ making the very expensive offshore Tupi field feasible.
From Bloomberg:
Brazil's discoveries of what may be two of the world's three biggest oil finds in the past 30 years could help end the Western Hemisphere's reliance on Middle East crude, Strategic Forecasting Inc. said.
Saudi Arabia's influence as the biggest oil exporter would wane if the fields are as big as advertised, and China and India would become dominant buyers of Persian Gulf oil, said Peter Zeihan, vice president of analysis at Strategic Forecasting in Austin, Texas. Zeihan's firm, which consults for companies and governments around the world, was described in a 2001 Barron's article as ``the shadow CIA.''
Brazil may be pumping ``several million'' barrels of crude daily by 2020, vaulting the nation into the ranks of the world's seven biggest producers, Zeihan said in a telephone interview. The U.S. Navy's presence in the Persian Gulf and adjacent waters would be reduced, leaving the region exposed to more conflict, he said.
``We could see that world becoming a very violent one,'' said Zeihan, former chief of Middle East and East Asia analysis for Strategic Forecasting. ``If the United States isn't getting any crude from the Gulf, what benefit does it have in policing the Gulf anymore? All of the geopolitical flux that wracks that region regularly suddenly isn't our problem.''
Tupi and Carioca
Brazil's state-controlled Petroleo Brasileiro SA in November said the offshore Tupi field may hold 8 billion barrels of recoverable crude. Among discoveries in the past 30 years, only the 15-billion-barrel Kashagan field in Kazakhstan is larger.
Haroldo Lima, director of the country's oil agency, last week said another subsea field, Carioca, may have 33 billion barrels of oil. That would be the third biggest field in history, behind only the Ghawar field in Saudi Arabia and Burgan in Kuwait.
Analysts Mark Flannery of Credit Suisse Group and Gustavo Gattass of UBS AG challenge the estimate for Carioca. Lima, the Brazilian oil agency director, later attributed the figure to a magazine.
Flannery told clients during an April 16 conference call that 600 million barrels is a ``reasonable'' estimate and suggested Lima may have been referring to the entire geologic formation to which Carioca belongs.
Supply Boost
Carioca is one of seven fields identified so far in the BM- S-9 exploration area, part of a formation called Sugar Loaf.
If additional drilling by Petrobras, as Petroleo Brasileiro is known, confirms the Tupi and Carioca estimates, the fields together would contain enough oil to supply every refinery on the U.S. Gulf Coast for 15 years. Petrobras said it needs at least three months to determine how much crude Carioca may hold.
Zeihan said that beyond supply gains from Brazil, it will take a tripling of Canadian oil-sands output and greater fuel efficiency to end Western reliance on Middle East oil.
The U.S. imports about 10 million barrels of oil a day, or 66 percent of its needs, according to the Energy Department in Washington. Saudi Arabia was the second-largest supplier in January, behind Canada.
Persian Gulf nations accounted for 23 percent of U.S. imports, compared with Brazil's 1.7 percent share. Brazilian crude output rose 1.9 percent last year to 2.14 million barrels, according to the International Energy Agency.
``Hemispheric energy independence sounds a little pie-in- the-sky given that this hemisphere already is generating one- third of overall global demand,'' said Jason Gammel, an oil analyst at Macquarie Bank Ltd. in New York. ``It's pretty tough to talk about self-sufficiency unless we were to see food-based biofuels taking an even bigger role in the next five to 10 years than is already mandated.''
Offshore Fields
Zeihan predicts a 2012 start to production at Tupi. Technology needed to tap fields like Tupi, which sit hundreds of miles offshore beneath thousands of feet of rock, sand and salt, hasn't been developed, he said.
Petrobras, Chevron Corp., Royal Dutch Shell Plc and Norsk Hydro ASA plan to start pumping oil from eight Brazilian fields in the next 2 1/2 years that will produce a combined 1.02 million barrels a day, enough to supply two-thirds of the crude used by U.S. East Coast refineries.
More discoveries will follow in Brazil's offshore basins, most of which have yet to be opened to exploration, Zeihan said. Repsol YPF SA, Exxon Mobil Corp. and Devon Energy Corp. are among the producers scouring Brazil's waters for reserves.
``The finds they've got so far are just the tip of the iceberg,'' Zeihan said. ``Brazil is going to change the balance of the global oil markets, and Petrobras will become a geopolitical supermajor.''
From Bloomberg:
Brazil's discoveries of what may be two of the world's three biggest oil finds in the past 30 years could help end the Western Hemisphere's reliance on Middle East crude, Strategic Forecasting Inc. said.
Saudi Arabia's influence as the biggest oil exporter would wane if the fields are as big as advertised, and China and India would become dominant buyers of Persian Gulf oil, said Peter Zeihan, vice president of analysis at Strategic Forecasting in Austin, Texas. Zeihan's firm, which consults for companies and governments around the world, was described in a 2001 Barron's article as ``the shadow CIA.''
Brazil may be pumping ``several million'' barrels of crude daily by 2020, vaulting the nation into the ranks of the world's seven biggest producers, Zeihan said in a telephone interview. The U.S. Navy's presence in the Persian Gulf and adjacent waters would be reduced, leaving the region exposed to more conflict, he said.
``We could see that world becoming a very violent one,'' said Zeihan, former chief of Middle East and East Asia analysis for Strategic Forecasting. ``If the United States isn't getting any crude from the Gulf, what benefit does it have in policing the Gulf anymore? All of the geopolitical flux that wracks that region regularly suddenly isn't our problem.''
Tupi and Carioca
Brazil's state-controlled Petroleo Brasileiro SA in November said the offshore Tupi field may hold 8 billion barrels of recoverable crude. Among discoveries in the past 30 years, only the 15-billion-barrel Kashagan field in Kazakhstan is larger.
Haroldo Lima, director of the country's oil agency, last week said another subsea field, Carioca, may have 33 billion barrels of oil. That would be the third biggest field in history, behind only the Ghawar field in Saudi Arabia and Burgan in Kuwait.
Analysts Mark Flannery of Credit Suisse Group and Gustavo Gattass of UBS AG challenge the estimate for Carioca. Lima, the Brazilian oil agency director, later attributed the figure to a magazine.
Flannery told clients during an April 16 conference call that 600 million barrels is a ``reasonable'' estimate and suggested Lima may have been referring to the entire geologic formation to which Carioca belongs.
Supply Boost
Carioca is one of seven fields identified so far in the BM- S-9 exploration area, part of a formation called Sugar Loaf.
If additional drilling by Petrobras, as Petroleo Brasileiro is known, confirms the Tupi and Carioca estimates, the fields together would contain enough oil to supply every refinery on the U.S. Gulf Coast for 15 years. Petrobras said it needs at least three months to determine how much crude Carioca may hold.
Zeihan said that beyond supply gains from Brazil, it will take a tripling of Canadian oil-sands output and greater fuel efficiency to end Western reliance on Middle East oil.
The U.S. imports about 10 million barrels of oil a day, or 66 percent of its needs, according to the Energy Department in Washington. Saudi Arabia was the second-largest supplier in January, behind Canada.
Persian Gulf nations accounted for 23 percent of U.S. imports, compared with Brazil's 1.7 percent share. Brazilian crude output rose 1.9 percent last year to 2.14 million barrels, according to the International Energy Agency.
``Hemispheric energy independence sounds a little pie-in- the-sky given that this hemisphere already is generating one- third of overall global demand,'' said Jason Gammel, an oil analyst at Macquarie Bank Ltd. in New York. ``It's pretty tough to talk about self-sufficiency unless we were to see food-based biofuels taking an even bigger role in the next five to 10 years than is already mandated.''
Offshore Fields
Zeihan predicts a 2012 start to production at Tupi. Technology needed to tap fields like Tupi, which sit hundreds of miles offshore beneath thousands of feet of rock, sand and salt, hasn't been developed, he said.
Petrobras, Chevron Corp., Royal Dutch Shell Plc and Norsk Hydro ASA plan to start pumping oil from eight Brazilian fields in the next 2 1/2 years that will produce a combined 1.02 million barrels a day, enough to supply two-thirds of the crude used by U.S. East Coast refineries.
More discoveries will follow in Brazil's offshore basins, most of which have yet to be opened to exploration, Zeihan said. Repsol YPF SA, Exxon Mobil Corp. and Devon Energy Corp. are among the producers scouring Brazil's waters for reserves.
``The finds they've got so far are just the tip of the iceberg,'' Zeihan said. ``Brazil is going to change the balance of the global oil markets, and Petrobras will become a geopolitical supermajor.''
jueves, 8 de enero de 2009
Paul Krugman: Trade and inequality, revisited
An old Paul Krugman essay(June 2007) from VoxEU:
It’s no longer safe to assert that trade’s impact on the income distribution in wealthy countries is fairly minor. There’s a good case that it is big, and getting bigger. I’m not endorsing protectionism, but free-traders need better answers to the anxieties of globalisation’s losers.
During the 1980s and 1990s, there was considerable concern about the possible role of globalisation in contributing to rising income inequality, especially in the United States. This concern was based on standard economic theory: since the 1941 Stolper-Samuelson paper, we’ve known that growing trade can have large effects on income distribution, and can easily leave broad groups, such as less-skilled workers, worse off.
After economists looked hard at the numbers, however, the consensus was that the effect of trade on inequality was probably modest. Recently, Ben Bernanke cited these results – but he recognised a problem: “Unfortunately, much of the available empirical research on the influence of trade on earnings inequality dates from the 1980s and 1990s and thus does not address later developments. Whether studies of the more recent period will reveal effects of trade on the distribution of earnings that differ from those observed earlier is to some degree an open question.”
But the question isn’t really that open. It’s clear that applying the same models to current data that, for example, led William Cline of the Peterson Institute to conclude in 1997 that trade was responsible for a 6% widening in the college-high school gap would lead to a much larger estimate today. Furthermore, some of the considerations that once seemed to set limits on the possible inequality-promoting effects of trade now seem much less constraining.
There are really two key points here: the rise of China, and the growing fragmentation of production.
First, thanks to the rise of China, OECD imports of manufactured goods from developing countries have continued to rise rapidly since the early 1990s. Cline’s estimate of income distribution effects was based on data from 1993, when US imports of manufactures from developing countries were approximately 2% of GDP; now that number is close to 5%, and rising rapidly.
At the same time, the rise of China has prevented, for the time being, a development that I and others expected to mitigate the effects of trade on income distribution: up-skilling by the developing country exporters. “As newly industrializing countries grow,” I wrote in 1995, “their comparative advantage may shift away from products of very low skill intensity.” And that’s exactly what happened – for the countries that were the major exporters of manufactured goods to the OECD then. As John Romalis has shown, the exports of the original group of Asian newly-industrialising economies have shifted dramatically away from labour-intensive toward skill-intensive products.
But along has come China, which is far more labour-abundant now than the NIEs were then. A simple indicator is relative wage rates: in 1990, according to the US Bureau of Labor Statistics, the original four Asian NIEs had hourly compensation costs that were 25% of the US level. Now the BLS estimates that China’s labour costs are only 3% of US levels.
In 1995 I also believed that the effects of trade on inequality would eventually hit a limit, because at a certain point advanced economies would run out of labour-intensive industries to lose – more formally, that we’d reach a point of complete specialisation, beyond which further growth in trade would have no further effects on wages. What has happened instead is that the limit keeps being pushed out, as trade creates “new” labour-intensive industries through the fragmentation of production.
For example, the manufacture of microprocessors for personal computers is clearly a highly sensitive, skill-intensive process. Intel’s microprocessor production, however, now takes place in two stages: the “fabs,” which print the circuits on disks of silicon, are all located in high-wage advanced countries, but the assembly and testing, in which those disks are cut into individual chips and tested to be sure that they work, is conducted in China, Malaysia, and the Philippines.
Outsourcing of services, in both directions, adds to the possibilities of unequalising trade. The skill-intensive pieces of production processes that mainly take place in the third world are often now located in the OECD – for example, Lenovo, the Chinese computer company, has its executive headquarters in North Carolina.(that was june 2007!)
What all this comes down to is that it’s no longer safe to assert, as we could a dozen years ago, that the effects of trade on income distribution in wealthy countries are fairly minor. There’s now a good case that they are quite big, and getting bigger.
This doesn’t mean that I’m endorsing protectionism. It does mean that free-traders need better answers to the anxieties of those who are likely to end up on the losing side from globalisation.
From WSJ:
Tax the rich more heavily to thwart an economically crippling political backlash against trade prompted by workers who see themselves–with some justification–as losers from globalization. . . . using the tax code to slice the apple more evenly is far more palatable than trying to hold back globalization with policies that risk shrinking the economic apple”.
Also a 6-page essay on Foreign Affairs written by a former G.W. Bush's economic advisor:
Summary: Globalization has brought huge overall benefits, but earnings for most U.S. workers -- even those with college degrees -- have been falling recently; inequality is greater now than at any other time in the last 70 years. Whatever the cause, the result has been a surge in protectionism. To save globalization, policymakers must spread its gains more widely. The best way to do that is by redistributing income.
It’s no longer safe to assert that trade’s impact on the income distribution in wealthy countries is fairly minor. There’s a good case that it is big, and getting bigger. I’m not endorsing protectionism, but free-traders need better answers to the anxieties of globalisation’s losers.
During the 1980s and 1990s, there was considerable concern about the possible role of globalisation in contributing to rising income inequality, especially in the United States. This concern was based on standard economic theory: since the 1941 Stolper-Samuelson paper, we’ve known that growing trade can have large effects on income distribution, and can easily leave broad groups, such as less-skilled workers, worse off.
After economists looked hard at the numbers, however, the consensus was that the effect of trade on inequality was probably modest. Recently, Ben Bernanke cited these results – but he recognised a problem: “Unfortunately, much of the available empirical research on the influence of trade on earnings inequality dates from the 1980s and 1990s and thus does not address later developments. Whether studies of the more recent period will reveal effects of trade on the distribution of earnings that differ from those observed earlier is to some degree an open question.”
But the question isn’t really that open. It’s clear that applying the same models to current data that, for example, led William Cline of the Peterson Institute to conclude in 1997 that trade was responsible for a 6% widening in the college-high school gap would lead to a much larger estimate today. Furthermore, some of the considerations that once seemed to set limits on the possible inequality-promoting effects of trade now seem much less constraining.
There are really two key points here: the rise of China, and the growing fragmentation of production.
First, thanks to the rise of China, OECD imports of manufactured goods from developing countries have continued to rise rapidly since the early 1990s. Cline’s estimate of income distribution effects was based on data from 1993, when US imports of manufactures from developing countries were approximately 2% of GDP; now that number is close to 5%, and rising rapidly.
At the same time, the rise of China has prevented, for the time being, a development that I and others expected to mitigate the effects of trade on income distribution: up-skilling by the developing country exporters. “As newly industrializing countries grow,” I wrote in 1995, “their comparative advantage may shift away from products of very low skill intensity.” And that’s exactly what happened – for the countries that were the major exporters of manufactured goods to the OECD then. As John Romalis has shown, the exports of the original group of Asian newly-industrialising economies have shifted dramatically away from labour-intensive toward skill-intensive products.
But along has come China, which is far more labour-abundant now than the NIEs were then. A simple indicator is relative wage rates: in 1990, according to the US Bureau of Labor Statistics, the original four Asian NIEs had hourly compensation costs that were 25% of the US level. Now the BLS estimates that China’s labour costs are only 3% of US levels.
In 1995 I also believed that the effects of trade on inequality would eventually hit a limit, because at a certain point advanced economies would run out of labour-intensive industries to lose – more formally, that we’d reach a point of complete specialisation, beyond which further growth in trade would have no further effects on wages. What has happened instead is that the limit keeps being pushed out, as trade creates “new” labour-intensive industries through the fragmentation of production.
For example, the manufacture of microprocessors for personal computers is clearly a highly sensitive, skill-intensive process. Intel’s microprocessor production, however, now takes place in two stages: the “fabs,” which print the circuits on disks of silicon, are all located in high-wage advanced countries, but the assembly and testing, in which those disks are cut into individual chips and tested to be sure that they work, is conducted in China, Malaysia, and the Philippines.
Outsourcing of services, in both directions, adds to the possibilities of unequalising trade. The skill-intensive pieces of production processes that mainly take place in the third world are often now located in the OECD – for example, Lenovo, the Chinese computer company, has its executive headquarters in North Carolina.(that was june 2007!)
What all this comes down to is that it’s no longer safe to assert, as we could a dozen years ago, that the effects of trade on income distribution in wealthy countries are fairly minor. There’s now a good case that they are quite big, and getting bigger.
This doesn’t mean that I’m endorsing protectionism. It does mean that free-traders need better answers to the anxieties of those who are likely to end up on the losing side from globalisation.
From WSJ:
Tax the rich more heavily to thwart an economically crippling political backlash against trade prompted by workers who see themselves–with some justification–as losers from globalization. . . . using the tax code to slice the apple more evenly is far more palatable than trying to hold back globalization with policies that risk shrinking the economic apple”.
Also a 6-page essay on Foreign Affairs written by a former G.W. Bush's economic advisor:
Summary: Globalization has brought huge overall benefits, but earnings for most U.S. workers -- even those with college degrees -- have been falling recently; inequality is greater now than at any other time in the last 70 years. Whatever the cause, the result has been a surge in protectionism. To save globalization, policymakers must spread its gains more widely. The best way to do that is by redistributing income.
Does globalisation pacify international relations?
Philippe Martin, Thierry Mayer and Mathias Thoenig from VoxEU:
Using a large dataset of military conflicts, trade created by regional trade agreements is shown to be pacifying, but greater overall openness has the opposite effect. Logically, this means that bilateral trade pacifies bilateral relations, but raises the chance of conflict with third countries.
European integration was, from its origins, a project of peace, shaped by the destruction and suffering brought by the two World Wars. Economic integration, it was believed, would lead to increased economic interdependence and better understanding, both generated by trade flows. The objective was to make conflict unthinkable, and judged from this point of view it has been a great success. The European experience seems therefore to prove Kant and Montesquieu right. Both philosophers held the view that trade between nations is a pacifying force as illustrated by this quote from Montesquieu (1758): “The natural effect of trade is to bring about peace. Two nations which trade together render themselves reciprocally dependent.” Outside Europe, this vision of trade as an engine of peace has also been very influential: MERCOSUR was created in 1991 in part to curtail the military power in Argentina and Brazil, then two recent and fragile democracies with ongoing disputes over natural resources and borders. These disputes are still present but have not escalated into military conflicts, which can, at least partly, be interpreted as a consequence of MERCOSUR. After the end of the Cold War, some commentators went further and interpreted the forces of globalisation as putting an end to centuries of inter-state conflicts, some going to the point of predicting “the end of history”. If indeed, trade between countries promotes peace, as suggested by the European example, then it seems logical that the dramatic increase of trade flows at the global level should lower the number of violent interstate conflicts.
European integration was, from its origins, a project of peace, shaped by the destruction and suffering brought by the two World Wars. Economic integration, it was believed, would lead to increased economic interdependence and better understanding, both generated by trade flows. The objective was to make conflict unthinkable, and judged from this point of view it has been a great success. The European experience seems therefore to prove Kant and Montesquieu right. Both philosophers held the view that trade between nations is a pacifying force as illustrated by this quote from Montesquieu (1758): “The natural effect of trade is to bring about peace. Two nations which trade together render themselves reciprocally dependent.” Outside Europe, this vision of trade as an engine of peace has also been very influential: MERCOSUR was created in 1991 in part to curtail the military power in Argentina and Brazil, then two recent and fragile democracies with ongoing disputes over natural resources and borders. These disputes are still present but have not escalated into military conflicts, which can, at least partly, be interpreted as a consequence of MERCOSUR. After the end of the Cold War, some commentators went further and interpreted the forces of globalisation as putting an end to centuries of inter-state conflicts, some going to the point of predicting “the end of history”. If indeed, trade between countries promotes peace, as suggested by the European example, then it seems logical that the dramatic increase of trade flows at the global level should lower the number of violent interstate conflicts.
So what went wrong? Why is it that globalisation, interpreted as trade liberalisation at the global level, has not lived up to its promise of decreasing the prevalence of violent interstate conflicts? Since 1970, the occurrence of military inter-state conflicts has remained constant, whereas global trade as a percentage of world GDP has more than doubled. Looking at a larger time span, figure 1 suggests that during the 1870-2001 period, the relation between trade openness (the ratio of trade to GDP at the world level) and war is nothing but simple. The first era of globalisation, at the end of the 19th century, was a period of rising trade openness and of multiple military conflicts, culminating with World War I. Then, the interwar period was characterised by a simultaneous collapse of world trade and of conflicts. After World War II, world trade increased rapidly while the number of conflicts decreased (although the risk of a global conflict was obviously high). But again, since 1970 trade flows increased dramatically, but there is no evidence of a lower prevalence of military conflicts – even taking into account the increase in the number of sovereign states.
To go further, we have tried to understand the reason why the logic of pacifying trade seems to work at the bilateral or regional level but cannot be simply extended at the global level.
To go further, we have tried to understand the reason why the logic of pacifying trade seems to work at the bilateral or regional level but cannot be simply extended at the global level.
Our conclusion, based on extensive empirical work using a large dataset of military conflicts on the 1950-2000 period, and taking into account many other possible determinants of conflicts, is that the intuition that trade is good for peace is only partially true. The part that is true is that two countries that trade more bilaterally indeed have a lower probability of a bilateral conflict. The intuition is that bilateral trade generates economic gains that are put into danger if a dispute between two countries escalates into a military conflict. We indeed check that the destruction of bilateral trade following bilateral conflicts is large and persists for twenty years. Hence, higher bilateral trade flows are a measure of the opportunity cost of such a conflict and create an incentive to accept concessions to avoid military escalation.
However, it is wrong to take the seemingly logical next step and conclude that globalisation leads to more peaceful relations between countries. In fact, we find that countries that are more open to trade with the rest of the world are more inclined to military conflicts. Another way to put it is that two countries that trade more with each other pacify their bilateral relations but make it more likely that a conflict will arise with a third country. The interpretation of this seemingly provocative result is that when two countries are very open to trade, the bilateral economic dependence and therefore the opportunity cost of a bilateral conflict are lowered. The incentive to make concessions in order to avert escalation is weakened when globalisation provides economic insurance during bilateral conflicts by diversifying trade partners.
Globalisation is by construction an increase in both bilateral and multilateral trade flows. What then was the net effect of increased trade since 1970? We find that it generated an increase in the probability of a bilateral conflict by around 20% for those countries separated by less than 1000kms, the group of countries for which the risk of disputes that can escalate militarily is the highest. The effects are much smaller for countries which are more distant.
Contrary to what these results (aggravated by our nationality) may suggest, we are not anti-globalisation activists even though we are aware that some implications of our work could be (mis)used in such a way. The result that bilateral trade is pacifying brings several more optimistic implications on globalisation. First, if we think of a world war as a war between two large groups or coalitions of countries, then globalisation makes such a war less likely because it increases the opportunity cost of such a conflict. Obviously, this conclusion cannot be tested but is a logical implication of our results. From this point of view, our work suggests that globalisation may be at the origin of a change in the nature of conflicts, less global and more local. Second, our results do confirm that increased trade flows created by regional trade agreements (such as the EU) are indeed pacifying as intended. Given that most military conflicts are local, because they find their origins in border or ethnic disputes, this is not a small achievement. These beneficial political aspects of regional trade agreements are not usually considered by economists who often focus on the economic distortions brought by their discriminatory nature. Given the huge human and economic costs of wars, this political effect of regional trade agreements should not be discounted.
This opens interesting questions on how far these regional trade agreements should extend – a topical issue in the case of the EU. The entry of Turkey in the EU would indeed pacify its relations with EU countries (especially Greece and Cyprus), but also increase the probability of a conflict between Turkey and its non-EU neighbours. However, our simulations suggest that in this case, the first effect dominates the second by a large margin.
More generally, our results should be interpreted as a word of caution on some political aspects of globalisation. As it proceeds and weakens the economic ties of proximate countries, those with the highest risk of disputes that can escalate into military conflicts, local conflicts may become more prevalent. Even if they may not appear optimal on purely economic grounds, regional and bilateral trade agreements, by strengthening local economic ties, may therefore be a necessary political counterbalance to economic globalisation.
However, it is wrong to take the seemingly logical next step and conclude that globalisation leads to more peaceful relations between countries. In fact, we find that countries that are more open to trade with the rest of the world are more inclined to military conflicts. Another way to put it is that two countries that trade more with each other pacify their bilateral relations but make it more likely that a conflict will arise with a third country. The interpretation of this seemingly provocative result is that when two countries are very open to trade, the bilateral economic dependence and therefore the opportunity cost of a bilateral conflict are lowered. The incentive to make concessions in order to avert escalation is weakened when globalisation provides economic insurance during bilateral conflicts by diversifying trade partners.
Globalisation is by construction an increase in both bilateral and multilateral trade flows. What then was the net effect of increased trade since 1970? We find that it generated an increase in the probability of a bilateral conflict by around 20% for those countries separated by less than 1000kms, the group of countries for which the risk of disputes that can escalate militarily is the highest. The effects are much smaller for countries which are more distant.
Contrary to what these results (aggravated by our nationality) may suggest, we are not anti-globalisation activists even though we are aware that some implications of our work could be (mis)used in such a way. The result that bilateral trade is pacifying brings several more optimistic implications on globalisation. First, if we think of a world war as a war between two large groups or coalitions of countries, then globalisation makes such a war less likely because it increases the opportunity cost of such a conflict. Obviously, this conclusion cannot be tested but is a logical implication of our results. From this point of view, our work suggests that globalisation may be at the origin of a change in the nature of conflicts, less global and more local. Second, our results do confirm that increased trade flows created by regional trade agreements (such as the EU) are indeed pacifying as intended. Given that most military conflicts are local, because they find their origins in border or ethnic disputes, this is not a small achievement. These beneficial political aspects of regional trade agreements are not usually considered by economists who often focus on the economic distortions brought by their discriminatory nature. Given the huge human and economic costs of wars, this political effect of regional trade agreements should not be discounted.
This opens interesting questions on how far these regional trade agreements should extend – a topical issue in the case of the EU. The entry of Turkey in the EU would indeed pacify its relations with EU countries (especially Greece and Cyprus), but also increase the probability of a conflict between Turkey and its non-EU neighbours. However, our simulations suggest that in this case, the first effect dominates the second by a large margin.
More generally, our results should be interpreted as a word of caution on some political aspects of globalisation. As it proceeds and weakens the economic ties of proximate countries, those with the highest risk of disputes that can escalate into military conflicts, local conflicts may become more prevalent. Even if they may not appear optimal on purely economic grounds, regional and bilateral trade agreements, by strengthening local economic ties, may therefore be a necessary political counterbalance to economic globalisation.
Cultural assimilation, cultural diffusion and the origin of the wealth of nations
Abstacts from a very interesting essay by Quamrul Ashraf and Oded Galor(VoxEU):
"A thousand years ago, Asia was ahead. Why is Europe richer now? Asia was geographically less vulnerable to cultural diffusion and thus benefited from enhanced assimilation, lower cultural diversity and greater accumulation of society-specific human capital; this was an edge in the agricultural stage. Greater cultural rigidity, however, diminished the ability to adapt to a new technological paradigm, delaying their industrialisation.
At the start of the 2nd millennium CE, civilisations of Asia were arguably well ahead of European societies in both wealth and knowledge. By the 12th century, China employed water-driven machinery to make textiles and coke-based smelting to produce iron, technologies that would not appear in Europe for more than five hundred years. Yet, during the process of the Industrial Revolution, the technological leaders of the pre-industrial era were leapfrogged by European economies that accelerated into the modern age of sustained economic growth.
What can explain the delayed emergence of sustained growth in China and other leading agricultural societies? Theories attempting to explain the origins of the remarkable transformation of the world income distribution have often focused on sociocultural factors, geographical conditions, or sociopolitical institutions, emphasising a hierarchy of attributes in terms of their conduciveness to innovation and their ability in fostering industrialisation.
The premise of the cultural hypotheses is that societal norms, customs, and ethics can be ranked in terms of their ability to nurture technological innovation and capitalist development. In contrast, geographical explanations attribute Europe’s earlier escape from the Malthusian trap to its favorable natural-resource base, abundant rainfall, temperate climate, lower disease-burden, and proximity to the New World. Finally, institutional perspectives provide a variety of explanations, ranging from geography to colonialism, for the arrival (or absence) of social arrangements protecting private property and promoting innovation.
Existing explanations, however, do not simultaneously account for technological gaps across civilisations in the Malthusian epoch and reversals in their economic performance, associated with the differential timing of their take offs into the industrial era.
In a recent CEPR discussion paper, we offer a theory that encompasses both regimes, arguing that the interplay between the forces of cultural assimilation and cultural diffusion, determined in part by geographic factors, played a significant role in giving rise to differential patterns of economic development across the globe, contributing to the Great Divergence and reversals in economic performance.
In contrast to the cultural and institutional hypotheses, which posit a hierarchy of cultural and institutional attributes in terms of their conduciveness to innovation and their ability in fostering industrialisation, our theory suggests that the desirable degree of the relative prevalence of cultural assimilation versus cultural diffusion varies according to the stage of development.
Enhanced cultural assimilation is optimal within a given stage of development, but is detrimental for the transition between technological regimes. Thus, while cultural traits themselves do not necessarily have a differential effect on the process of development, it is the variation in the relative strengths of the forces of cultural assimilation and cultural diffusion, determining the diversity of these traits, which is instrumental for comparative economic development.
Productivity is enhanced by diversity-driven accumulation of general human capital but reduced by inefficiencies in the intergenerational transmission of society-specific human capital that is associated with diminished assimilation. Thus, societies that were geographically less vulnerable to cultural diffusion benefited from enhanced assimilation, lower cultural diversity and greater accumulation of society-specific human capital, flourishing in the technological paradigm that characterised the agricultural stage of development. This greater cultural rigidity, however, diminished the ability of these societies to adapt to a new technological paradigm, delaying their industrialisation and take-off to a state of sustained economic growth.
Culture and the wealth of nations
Our thesis is based on three fundamental elements.
First, cultural assimilation (i.e., the homogenisation of cultural traits within a society), enhances the intergenerational transmission of society-specific human capital, an observation consistent with empirical evidence on the development-promoting effects of greater social cohesion. Cultural homogeneity augments total factory productivity in the use of presently available technologies.
Second, cultural diffusion (i.e., the spread of cultural traits from one society to another) generates flexibility that expands an economy’s production-possibility frontier and enhances its ability to adapt new technologies, a view consistent with evidence on the creativity-promoting effects of workforce diversity. Thus, unlike existing sociocultural hypotheses describing a hierarchy of cultural attributes conducive to innovation and industrialisation, our research highlights cultural heterogeneity, not particular norms, as playing a critical, and ambiguous, role. While productivity is fostered by diversity-driven accumulation of general human capital, it is diminished by inefficiencies in the intergenerational transmission of society-specific human capital, associated with greater heterogenietiy.
Third, the accumulation of general human capital pushes a society towards industrial rather than agricultural production, as there is a smaller degree of complementarity between the advancement of the knowledge frontier and the stock of agriculture-specific productivity. This growth of latent manufacturing productivity ultimately leads to the adoption of industry in later stages of development, paving the way for a take-off from the Malthusian epoch. Thus, advancements in knowledge and invention promote socioeconomic transition to a new technological regime that is potentially more advanced in terms of per capita income.
(continue...)
"A thousand years ago, Asia was ahead. Why is Europe richer now? Asia was geographically less vulnerable to cultural diffusion and thus benefited from enhanced assimilation, lower cultural diversity and greater accumulation of society-specific human capital; this was an edge in the agricultural stage. Greater cultural rigidity, however, diminished the ability to adapt to a new technological paradigm, delaying their industrialisation.
At the start of the 2nd millennium CE, civilisations of Asia were arguably well ahead of European societies in both wealth and knowledge. By the 12th century, China employed water-driven machinery to make textiles and coke-based smelting to produce iron, technologies that would not appear in Europe for more than five hundred years. Yet, during the process of the Industrial Revolution, the technological leaders of the pre-industrial era were leapfrogged by European economies that accelerated into the modern age of sustained economic growth.
What can explain the delayed emergence of sustained growth in China and other leading agricultural societies? Theories attempting to explain the origins of the remarkable transformation of the world income distribution have often focused on sociocultural factors, geographical conditions, or sociopolitical institutions, emphasising a hierarchy of attributes in terms of their conduciveness to innovation and their ability in fostering industrialisation.
The premise of the cultural hypotheses is that societal norms, customs, and ethics can be ranked in terms of their ability to nurture technological innovation and capitalist development. In contrast, geographical explanations attribute Europe’s earlier escape from the Malthusian trap to its favorable natural-resource base, abundant rainfall, temperate climate, lower disease-burden, and proximity to the New World. Finally, institutional perspectives provide a variety of explanations, ranging from geography to colonialism, for the arrival (or absence) of social arrangements protecting private property and promoting innovation.
Existing explanations, however, do not simultaneously account for technological gaps across civilisations in the Malthusian epoch and reversals in their economic performance, associated with the differential timing of their take offs into the industrial era.
In a recent CEPR discussion paper, we offer a theory that encompasses both regimes, arguing that the interplay between the forces of cultural assimilation and cultural diffusion, determined in part by geographic factors, played a significant role in giving rise to differential patterns of economic development across the globe, contributing to the Great Divergence and reversals in economic performance.
In contrast to the cultural and institutional hypotheses, which posit a hierarchy of cultural and institutional attributes in terms of their conduciveness to innovation and their ability in fostering industrialisation, our theory suggests that the desirable degree of the relative prevalence of cultural assimilation versus cultural diffusion varies according to the stage of development.
Enhanced cultural assimilation is optimal within a given stage of development, but is detrimental for the transition between technological regimes. Thus, while cultural traits themselves do not necessarily have a differential effect on the process of development, it is the variation in the relative strengths of the forces of cultural assimilation and cultural diffusion, determining the diversity of these traits, which is instrumental for comparative economic development.
Productivity is enhanced by diversity-driven accumulation of general human capital but reduced by inefficiencies in the intergenerational transmission of society-specific human capital that is associated with diminished assimilation. Thus, societies that were geographically less vulnerable to cultural diffusion benefited from enhanced assimilation, lower cultural diversity and greater accumulation of society-specific human capital, flourishing in the technological paradigm that characterised the agricultural stage of development. This greater cultural rigidity, however, diminished the ability of these societies to adapt to a new technological paradigm, delaying their industrialisation and take-off to a state of sustained economic growth.
Culture and the wealth of nations
Our thesis is based on three fundamental elements.
First, cultural assimilation (i.e., the homogenisation of cultural traits within a society), enhances the intergenerational transmission of society-specific human capital, an observation consistent with empirical evidence on the development-promoting effects of greater social cohesion. Cultural homogeneity augments total factory productivity in the use of presently available technologies.
Second, cultural diffusion (i.e., the spread of cultural traits from one society to another) generates flexibility that expands an economy’s production-possibility frontier and enhances its ability to adapt new technologies, a view consistent with evidence on the creativity-promoting effects of workforce diversity. Thus, unlike existing sociocultural hypotheses describing a hierarchy of cultural attributes conducive to innovation and industrialisation, our research highlights cultural heterogeneity, not particular norms, as playing a critical, and ambiguous, role. While productivity is fostered by diversity-driven accumulation of general human capital, it is diminished by inefficiencies in the intergenerational transmission of society-specific human capital, associated with greater heterogenietiy.
Third, the accumulation of general human capital pushes a society towards industrial rather than agricultural production, as there is a smaller degree of complementarity between the advancement of the knowledge frontier and the stock of agriculture-specific productivity. This growth of latent manufacturing productivity ultimately leads to the adoption of industry in later stages of development, paving the way for a take-off from the Malthusian epoch. Thus, advancements in knowledge and invention promote socioeconomic transition to a new technological regime that is potentially more advanced in terms of per capita income.
(continue...)
Successful assimilation of immigrants - Esther Duflo
Esther Duflo from VoxEU:
Resentment of immigrants is hard to explain on economic grounds, according to research on US data, and recent work on British data finds no real difference in assimilation rates between Muslim immigrants and other immigrants. Populist rhetoric may do more to create a rift than any religious or cultural feeling these immigrants have brought with them and transferred to their children.
Immigration stirs up strong enough fears to justify questionable measures of protection against it – from arrests at the doors of French schools to the border wall that separates the USA from Mexico.
Economic research suggests that the intensity of these reactions seems completely disproportionate to immigration’s real economic impact on the local population. David Card has shown that even massive waves of immigration (like the arrival of Cuban boat people on the coasts of Florida) don’t result in lower salaries or fewer jobs for local people in the US. In a recent survey article, he concluded that the “new immigration” assimilates just as well as previous waves had, and that the wages and employment prospects of natives are not any lower in cities that received more migrants2. Furthermore, Patricia Cortes also showed that an increase in the number of immigrants causes a price-drop in the sectors where they’re concentrated (i.e., the service and food industries, and child care); this benefits the local population.
Economic reasons don’t seem to provide a sufficient explanation for the persistent distrust of immigrants among the native population. It seems that in part, this distrust can be attributed to the feeling that each new wave of immigrants is unique and cannot assimilate, and that the very fabric of our societies is threatened by the presence of these strangers. Just as 19th century Italian immigrants angered the French proletariat with their outward display of religion (they were disparagingly nicknamed “the christos” by the French working class), today many predict that the new wave of Latino-American immigration is essentially unable to assimilate, because it is too distant from “traditional” American values (i.e., Anglo-Saxon and Protestant values). According to Samuel Huntington, one of the most prominent political scientists in the US, this fundamental incapacity to adapt exemplifies the “shock of civilizations”: the great conflicts of the twenty first century will take place along religious lines, amongst eight great “religions” of the world.
In Europe, Muslim immigration is today’s prime example of this “shock of cultures”. Every suburban riot and every bus burned is taken as an example that children of Muslim immigrants don’t consider themselves British or French. If the French played cricket, Muslim youth would certainly fail Tebbit’s “cricket test” (the British minister infamously asked which side Britain’s Asian immigrants would support in a Pakistani-English match).
Even in England, where the attitude towards immigration and assimilation is more relaxed than in France, the terrorist attacks of recent years gave rise to alarming observations that children of Pakistani and Bangladeshi families weren’t able to adapt to British society. This was made particularly salient by the video message of one of the July 7 London bombers (British-born but whose parents were from Pakistan), which said “your democratically elected governments continuously perpetuate atrocities against my people and your support of them makes you directly responsible, just as I am directly responsible for protecting and avenging my Muslim brothers and sisters”, clearly contrasting “we” and “you”.
But aside from a few anecdotes and these dramatic, but isolated examples, it has never been shown that young Muslims stay foreign to the culture of their adopted country more than any other immigrants. On the contrary, a recent study from Alan Manning and Sanchari Roy, of the London School of Economics, suggests that there’s no real difference in the pace of assimilation between Muslim immigrants (essentially Bangladeshis, Pakistanis, Somalians and Indians) and other immigrants. Manning and Roy study the response to the question asked in an annual survey which asked about what nationality the respondent associate with. The specific question is “What do you consider your national identity to be? Please choose as many or as few as apply?” There were six possible responses: British, English, Scottish, Welsh, Irish and Other. The author grouped British, English, Scottish and Welsh together under the heading “British”, and take the answer “British” to this question a sign of assimilation. Among those who were born in England, 94% of persons asked consider themselves British; whereas those in Northern Ireland are 24% less likely to identify as British (they consider themselves as Irish). Second-generation children of immigrants identify less often as British, but not to a large extent (from 2% to 5% depending on the country), and it is similar across countries – in other words, children of Pakistani immigrants identify as British at least as often as the children of Italian or Chinese immigrants.
Religion doesn’t have any impact on the answer to this question. Moreover, this variable doesn’t seem to change over time; the youngest group of immigrant children aren’t less English than other, older immigrant children. Even events like September 11th, the war in Iraq or July 7th, had no effect on young Muslims’ feeling of being English. Furthermore, from the third generation, the difference (in response to this question) between the offspring of immigrants and that of native British people completely disappear, for all nationalities.
These results strongly suggest that there is no erosion of British identity amongst the children of immigrants. However, they could still feel British, but have different values. To explore this question, Manning and Roy turned to a survey of “values”, conducted on 15,000 people, 5000 of whom were children of immigrants. The survey focuses on the “rights and obligations” of those surveyed (example of rights are freedom of speech, freedom of thoughts, freedom of religion, right to be treated fairly and equally, right to free education etc….; examples of responsibility include “to help and protect your family; to educate children properly, to obey and respect law. Etc..”. Once again, there is no difference between Muslims and others on the number of rights and responsibility that they think they should have; and this is born out by looking at specific rights individually.
Manning and Roy rightly conclude that, on the basis of available evidence, Huntington’s pessimism - that Muslim immigrants will prove “indigestible” to non-Muslim societies, seems unjustified indeed. If anything, the constant reminders of “native” Europeans that there is “us” and “them”, the new, scary, Muslim immigrants and their offspring may do substantially more to create a rift than any religious or cultural feeling these immigrants have brought with them and transferred to their children. .
Resentment of immigrants is hard to explain on economic grounds, according to research on US data, and recent work on British data finds no real difference in assimilation rates between Muslim immigrants and other immigrants. Populist rhetoric may do more to create a rift than any religious or cultural feeling these immigrants have brought with them and transferred to their children.
Immigration stirs up strong enough fears to justify questionable measures of protection against it – from arrests at the doors of French schools to the border wall that separates the USA from Mexico.
Economic research suggests that the intensity of these reactions seems completely disproportionate to immigration’s real economic impact on the local population. David Card has shown that even massive waves of immigration (like the arrival of Cuban boat people on the coasts of Florida) don’t result in lower salaries or fewer jobs for local people in the US. In a recent survey article, he concluded that the “new immigration” assimilates just as well as previous waves had, and that the wages and employment prospects of natives are not any lower in cities that received more migrants2. Furthermore, Patricia Cortes also showed that an increase in the number of immigrants causes a price-drop in the sectors where they’re concentrated (i.e., the service and food industries, and child care); this benefits the local population.
Economic reasons don’t seem to provide a sufficient explanation for the persistent distrust of immigrants among the native population. It seems that in part, this distrust can be attributed to the feeling that each new wave of immigrants is unique and cannot assimilate, and that the very fabric of our societies is threatened by the presence of these strangers. Just as 19th century Italian immigrants angered the French proletariat with their outward display of religion (they were disparagingly nicknamed “the christos” by the French working class), today many predict that the new wave of Latino-American immigration is essentially unable to assimilate, because it is too distant from “traditional” American values (i.e., Anglo-Saxon and Protestant values). According to Samuel Huntington, one of the most prominent political scientists in the US, this fundamental incapacity to adapt exemplifies the “shock of civilizations”: the great conflicts of the twenty first century will take place along religious lines, amongst eight great “religions” of the world.
In Europe, Muslim immigration is today’s prime example of this “shock of cultures”. Every suburban riot and every bus burned is taken as an example that children of Muslim immigrants don’t consider themselves British or French. If the French played cricket, Muslim youth would certainly fail Tebbit’s “cricket test” (the British minister infamously asked which side Britain’s Asian immigrants would support in a Pakistani-English match).
Even in England, where the attitude towards immigration and assimilation is more relaxed than in France, the terrorist attacks of recent years gave rise to alarming observations that children of Pakistani and Bangladeshi families weren’t able to adapt to British society. This was made particularly salient by the video message of one of the July 7 London bombers (British-born but whose parents were from Pakistan), which said “your democratically elected governments continuously perpetuate atrocities against my people and your support of them makes you directly responsible, just as I am directly responsible for protecting and avenging my Muslim brothers and sisters”, clearly contrasting “we” and “you”.
But aside from a few anecdotes and these dramatic, but isolated examples, it has never been shown that young Muslims stay foreign to the culture of their adopted country more than any other immigrants. On the contrary, a recent study from Alan Manning and Sanchari Roy, of the London School of Economics, suggests that there’s no real difference in the pace of assimilation between Muslim immigrants (essentially Bangladeshis, Pakistanis, Somalians and Indians) and other immigrants. Manning and Roy study the response to the question asked in an annual survey which asked about what nationality the respondent associate with. The specific question is “What do you consider your national identity to be? Please choose as many or as few as apply?” There were six possible responses: British, English, Scottish, Welsh, Irish and Other. The author grouped British, English, Scottish and Welsh together under the heading “British”, and take the answer “British” to this question a sign of assimilation. Among those who were born in England, 94% of persons asked consider themselves British; whereas those in Northern Ireland are 24% less likely to identify as British (they consider themselves as Irish). Second-generation children of immigrants identify less often as British, but not to a large extent (from 2% to 5% depending on the country), and it is similar across countries – in other words, children of Pakistani immigrants identify as British at least as often as the children of Italian or Chinese immigrants.
Religion doesn’t have any impact on the answer to this question. Moreover, this variable doesn’t seem to change over time; the youngest group of immigrant children aren’t less English than other, older immigrant children. Even events like September 11th, the war in Iraq or July 7th, had no effect on young Muslims’ feeling of being English. Furthermore, from the third generation, the difference (in response to this question) between the offspring of immigrants and that of native British people completely disappear, for all nationalities.
These results strongly suggest that there is no erosion of British identity amongst the children of immigrants. However, they could still feel British, but have different values. To explore this question, Manning and Roy turned to a survey of “values”, conducted on 15,000 people, 5000 of whom were children of immigrants. The survey focuses on the “rights and obligations” of those surveyed (example of rights are freedom of speech, freedom of thoughts, freedom of religion, right to be treated fairly and equally, right to free education etc….; examples of responsibility include “to help and protect your family; to educate children properly, to obey and respect law. Etc..”. Once again, there is no difference between Muslims and others on the number of rights and responsibility that they think they should have; and this is born out by looking at specific rights individually.
Manning and Roy rightly conclude that, on the basis of available evidence, Huntington’s pessimism - that Muslim immigrants will prove “indigestible” to non-Muslim societies, seems unjustified indeed. If anything, the constant reminders of “native” Europeans that there is “us” and “them”, the new, scary, Muslim immigrants and their offspring may do substantially more to create a rift than any religious or cultural feeling these immigrants have brought with them and transferred to their children. .
Morality matters for economic performance
Guido Tabellini from VoxEU:
Economic backwardness is typically associated with a wide range of institutional, organisational and government failures – and these along many dimensions. In numerous poor or stagnating countries, politicians are ineffective and corrupt, public goods are under-provided and public policies confer rents to privileged élites, law enforcement is inadequate, and moral hazard is widespread inside public and private organisations. There is not just one institutional failure. Typically, the countries or regions that fail in one dimension also fail in many other aspects of collective behaviour.
An influential body of research in economic history, political economics and macroeconomics has shown that both economic and institutional backwardness are often a by-product of history – appearing in countries or regions that were ruled centuries ago by despotic governments, or where powerful élites exploited uneducated peasants or slaves (North 1981, Acemoglu, Johnson and Robinson 2001). But what is the mechanism through which distant political and economic history shapes the functioning of current institutions?
In a recent working paper (Tabellini 2007), I argue that to answer this question we have to look beyond pure economic incentives, and think about other factors motivating individual behaviour. One of these factors is morality. Conceptions of what is right or wrong, and of how one ought to behave in specific circumstances, exert a strong influence on behavioural aspects that directly affect economic outcomes. The list included voters' demands and expectations, citizens' participation in group activities, the extent of moral hazard inside public organisations, and the willingness of individuals to provide public goods.
Values also evolve slowly over time, as they are largely inherited from previous generations. Thus morality, defined as individual values and convictions about the scope of application of norms of good conduct, is an important channel through which distant political history can influence the functioning of current institutions.
Is there any evidence supporting this idea? Exploiting attitudes revealed by opinion polls in The World Value Surveys (Inglehart et. alii 2000), I seek to capture a distinction between values consistent with "generalised" vs "limited" morality. Conceptually, the distinction concerns the scope of application of norms of good conduct (whether towards everybody or just in a narrow group with which the individual identifies). Generalised morality means that individual values support a generalised application of norms of good conduct in a society of abstract individuals entitled to specific rights.
To measure the diffusion of norms of generalised vs limited-morality at an aggregate level, I rely on two variables.
The first is generalised trust towards others (Trust).
This variable has been extensively used in many studies, with two alternative
interpretations – a) as belief about the behaviour of others, and b)as an indicator of moral values and trustworthiness.
The two interpretations are not mutually exclusive. Beliefs are likely to be extrapolated to others’ normative conceptions of how one ought to behave. Moreover, experimental evidence supports this additional interpretation of Trust as an indicator of individual values.
The second variable seeks to measure the values transmitted from parents to children, exploiting a question that asks about the qualities that are appreciated in children. As an indicator of diffusion of generalised morality, I take the percentage of respondents who appreciate respect and tolerance for others in children (Respect). To reduce the scope of measurement error, I consider the average of these two variables, Trust and Respect.
In the paper, I consider evidence from a variety of sources and present two main findings.
First, distant political institutions left a mark in current values, as measured by Trust and Respect. This is evident from individual data on 2nd generation US citizens. Descendents of immigrants from countries that over a century ago were ruled by more democratic political institutions are today more likely to display generalised trust. It is also confirmed by aggregate data on European regions. Within European countries, Trust and Respect are more widespread in regions where centuries ago executive powers were constrained by the prerogatives of independent judiciaries, or by a Chamber of political representatives. Although the precise mechanism of cultural transmission remains to be pinned down, the inference that political history influences current attitudes and values is robust and not dependent on controversial identifying assumptions.
The second finding concerns the contemporaneous link between values and institutional or economic outcomes. This link emerges from a variety of samples. Aggregate cross-country data reveal that countries where generalised morality is more widespread have better governance indicators and specialise in sectors that rely on well-functioning legal institutions. European data also shows that regions with more Trust and Respect are more developed today, and have grown faster since the mid 1970s. Within Italy, voters in regions with higher indicators of generalised morality are also more willing to punish political incumbents who misbehaved.
Since values are endogenous, causality here can be inferred only under additional identifying assumptions. The method of identification exploits the slow-moving component of values. In the cross-country data, I use grammatical rules of the language spoken in the country as an instrument for values. The idea is that language evolves very slowly and its grammatical structure reflects distant ideas and cultural traditions that no longer matter for the functioning of institutions except through current values. In particular, two rules governing the use of pronouns in spoken conversations are correlated with current cultural traits as measured by Trust and Respect. The correlation is strong both within multilingual countries and across countries speaking different languages.
I then consider the component of current values explained by these two grammatical rules, and show that it is robustly correlated with indicators of the current quality of government, and with patterns of specialisation in production. If these grammatical rules are not also directly correlated with other unobserved determinants of the dependent variables, this is evidence of a causal effect of values on governance outcomes and on comparative advantages in specific sectors.
In the within-country data, I exploit a similar methodology, except that I use distant political history in the region as an instrument for current regional values. These regions have been part of a unitary state for over 150 years, but before unification they were governed by very different political institutions. Identification assumes that, after taking into account indicators of economic development at the time of unification, distant political history matters for economic performance only through regional values. The component of current regional values explained by distant political history is strongly correlated with current economic performance in the region. Under the identifying assumption, this is evidence of a causal effect of values on economic development.
These empirical findings do not precisely pin down the mechanism through which values influence economic and institutional outcomes. There are several possible channels of influence, such as the functioning of political institutions, including local governments, or the organisation of production, or the willingness of citizens to respect the law. In fact, all these channels could be relevant, and the working paper presents evidence that, in Italian regions with better values or with a tradition of political independence, voters are more willing to punish incumbent politicians accused of criminal behaviour.
This line of research points to an exciting new research agenda.
Three questions in particular seem important.
First question: how do individual values influence institutional outcomes? In principle, this can happen in several ways, through bureaucratic behaviour, through voters' behaviour, or by making citizens more or less law abiding. Which of these alternative channels is more important in practice?
Second, how do values evolve over time? Why do current values reflect the functioning of political institutions in the distant past? What is the precise mechanism of cultural transmission for values supporting generalised morality? Does it take place within the family, or in other environments? Does it reflect purposeful deliberation or is it an unintended by-product of other activities?
But perhaps the most important question of all concerns the policy implications of these findings. What policy instruments are more appropriate to an environment with adverse cultural traits, and which policy interventions ought to be avoided? Does political decentralisation facilitate the acquisition of favourable values, and is self-government something that can be learnt through experience? And what can be done to facilitate this collective learning process? The promotion of economic development would become much easier if we could answer these questions.
Economic backwardness is typically associated with a wide range of institutional, organisational and government failures – and these along many dimensions. In numerous poor or stagnating countries, politicians are ineffective and corrupt, public goods are under-provided and public policies confer rents to privileged élites, law enforcement is inadequate, and moral hazard is widespread inside public and private organisations. There is not just one institutional failure. Typically, the countries or regions that fail in one dimension also fail in many other aspects of collective behaviour.
An influential body of research in economic history, political economics and macroeconomics has shown that both economic and institutional backwardness are often a by-product of history – appearing in countries or regions that were ruled centuries ago by despotic governments, or where powerful élites exploited uneducated peasants or slaves (North 1981, Acemoglu, Johnson and Robinson 2001). But what is the mechanism through which distant political and economic history shapes the functioning of current institutions?
In a recent working paper (Tabellini 2007), I argue that to answer this question we have to look beyond pure economic incentives, and think about other factors motivating individual behaviour. One of these factors is morality. Conceptions of what is right or wrong, and of how one ought to behave in specific circumstances, exert a strong influence on behavioural aspects that directly affect economic outcomes. The list included voters' demands and expectations, citizens' participation in group activities, the extent of moral hazard inside public organisations, and the willingness of individuals to provide public goods.
Values also evolve slowly over time, as they are largely inherited from previous generations. Thus morality, defined as individual values and convictions about the scope of application of norms of good conduct, is an important channel through which distant political history can influence the functioning of current institutions.
Is there any evidence supporting this idea? Exploiting attitudes revealed by opinion polls in The World Value Surveys (Inglehart et. alii 2000), I seek to capture a distinction between values consistent with "generalised" vs "limited" morality. Conceptually, the distinction concerns the scope of application of norms of good conduct (whether towards everybody or just in a narrow group with which the individual identifies). Generalised morality means that individual values support a generalised application of norms of good conduct in a society of abstract individuals entitled to specific rights.
To measure the diffusion of norms of generalised vs limited-morality at an aggregate level, I rely on two variables.
The first is generalised trust towards others (Trust).
This variable has been extensively used in many studies, with two alternative
interpretations – a) as belief about the behaviour of others, and b)as an indicator of moral values and trustworthiness.
The two interpretations are not mutually exclusive. Beliefs are likely to be extrapolated to others’ normative conceptions of how one ought to behave. Moreover, experimental evidence supports this additional interpretation of Trust as an indicator of individual values.
The second variable seeks to measure the values transmitted from parents to children, exploiting a question that asks about the qualities that are appreciated in children. As an indicator of diffusion of generalised morality, I take the percentage of respondents who appreciate respect and tolerance for others in children (Respect). To reduce the scope of measurement error, I consider the average of these two variables, Trust and Respect.
In the paper, I consider evidence from a variety of sources and present two main findings.
First, distant political institutions left a mark in current values, as measured by Trust and Respect. This is evident from individual data on 2nd generation US citizens. Descendents of immigrants from countries that over a century ago were ruled by more democratic political institutions are today more likely to display generalised trust. It is also confirmed by aggregate data on European regions. Within European countries, Trust and Respect are more widespread in regions where centuries ago executive powers were constrained by the prerogatives of independent judiciaries, or by a Chamber of political representatives. Although the precise mechanism of cultural transmission remains to be pinned down, the inference that political history influences current attitudes and values is robust and not dependent on controversial identifying assumptions.
The second finding concerns the contemporaneous link between values and institutional or economic outcomes. This link emerges from a variety of samples. Aggregate cross-country data reveal that countries where generalised morality is more widespread have better governance indicators and specialise in sectors that rely on well-functioning legal institutions. European data also shows that regions with more Trust and Respect are more developed today, and have grown faster since the mid 1970s. Within Italy, voters in regions with higher indicators of generalised morality are also more willing to punish political incumbents who misbehaved.
Since values are endogenous, causality here can be inferred only under additional identifying assumptions. The method of identification exploits the slow-moving component of values. In the cross-country data, I use grammatical rules of the language spoken in the country as an instrument for values. The idea is that language evolves very slowly and its grammatical structure reflects distant ideas and cultural traditions that no longer matter for the functioning of institutions except through current values. In particular, two rules governing the use of pronouns in spoken conversations are correlated with current cultural traits as measured by Trust and Respect. The correlation is strong both within multilingual countries and across countries speaking different languages.
I then consider the component of current values explained by these two grammatical rules, and show that it is robustly correlated with indicators of the current quality of government, and with patterns of specialisation in production. If these grammatical rules are not also directly correlated with other unobserved determinants of the dependent variables, this is evidence of a causal effect of values on governance outcomes and on comparative advantages in specific sectors.
In the within-country data, I exploit a similar methodology, except that I use distant political history in the region as an instrument for current regional values. These regions have been part of a unitary state for over 150 years, but before unification they were governed by very different political institutions. Identification assumes that, after taking into account indicators of economic development at the time of unification, distant political history matters for economic performance only through regional values. The component of current regional values explained by distant political history is strongly correlated with current economic performance in the region. Under the identifying assumption, this is evidence of a causal effect of values on economic development.
These empirical findings do not precisely pin down the mechanism through which values influence economic and institutional outcomes. There are several possible channels of influence, such as the functioning of political institutions, including local governments, or the organisation of production, or the willingness of citizens to respect the law. In fact, all these channels could be relevant, and the working paper presents evidence that, in Italian regions with better values or with a tradition of political independence, voters are more willing to punish incumbent politicians accused of criminal behaviour.
This line of research points to an exciting new research agenda.
Three questions in particular seem important.
First question: how do individual values influence institutional outcomes? In principle, this can happen in several ways, through bureaucratic behaviour, through voters' behaviour, or by making citizens more or less law abiding. Which of these alternative channels is more important in practice?
Second, how do values evolve over time? Why do current values reflect the functioning of political institutions in the distant past? What is the precise mechanism of cultural transmission for values supporting generalised morality? Does it take place within the family, or in other environments? Does it reflect purposeful deliberation or is it an unintended by-product of other activities?
But perhaps the most important question of all concerns the policy implications of these findings. What policy instruments are more appropriate to an environment with adverse cultural traits, and which policy interventions ought to be avoided? Does political decentralisation facilitate the acquisition of favourable values, and is self-government something that can be learnt through experience? And what can be done to facilitate this collective learning process? The promotion of economic development would become much easier if we could answer these questions.
Knight fever: People care for awards - Bruno Frey
Bruno Frey, brilliant as usual makes an important point in this VoxEU short essay:
"Social recognition is a powerful force, and awards ranging from state orders to tournament prizes motivate people in fields ranging from the arts to military service. Here is why economists should take note and study such incentives.
If an alien were to look at the social life of people on earth, it would be stunned by the enormous number of awards in the form of orders, decorations, prizes, and titles. It would be hard pressed to find any area of society in which awards are not used. Awards are equally ubiquitous in monarchies as they are in staunch republics. In the French Republic, for instance, the légion d’honneur plays an important role, and 3,000 such awards are conferred annually. In the United States, the President and Congress bestow highly esteemed medals both for civilians (e.g. the Presidential Medal of Freedom) and for military personnel (e.g. the Congressional Medal of Honor). It is well known that a flood of medals and titles (such as “Hero of the Soviet Union”) were handed out in communist countries, such as the Soviet Union or the German Democratic Republic.
Awards are also of central importance in the arts, culture, and media. A few prominent examples are the Academy Awards (Oscars), the prizes handed out by the film festivals at Cannes, Venice, or Berlin, the Grammy award for artistic significance in the field of recording, and the Brooker or the Pulitzer Prize in literature. In sports, athletes receive the honour of being chosen “Sports Personality of the Year” and of being admitted into one of the many Halls of Fame.
Despite the importance of awards in society, economists have largely disregarded them. While some literatures in economics, such as the literatures on signalling, tournaments, and incentives in principal-agent relationships, or the more recent works in psychological economics on esteem, identity, status, and reputation provide insights into isolated aspects of awards, they are hardly able to capture and reveal the many different aspects involved in the functioning of awards.
Standard economics concentrates on monetary compensation because it is a fungible and efficient incentive mechanism (Prendergast, 1999). Recently, intrinsic motivation has also been taken into account (Bénabou and Tirole, 2006 and Frey, 1997). Awards are intermediate; they are extrinsic but predominantly non-material. There are important differences between awards and monetary compensation making it worthwhile to analyze them separately.
The material costs of awards may be very low, or even nil, for the donor, but the value to the recipient may be very high.
Awards are always made public. In the case of companies, award recipients are announced on the intranet, displayed on bulletin boards, or celebrated in a specially arranged ceremony. In contrast, the size of monetary compensations, i.e. salaries, tends to be hidden.
Accepting an award establishes a special relationship, in which the recipient owes (some measure of) loyalty to the donor. Monetary compensation in contrast typically does not induce loyalty.
Due to their vague nature and global, ex-post performance evaluations, awards are better incentive instruments than monetary payments that typically have to be clearly specified contractually ex ante, when the recipients’ performance can only vaguely be determined ex ante and/or measured ex post.
Awards are not taxed, while monetary income is.
These considerations make clear that there are indeed many major differences between awards and monetary compensation..."
More here.
Chinese companies worldwide
Philippe Gugler from VoxEU:
"Some of the recent, high profile acquisitions of Chinese companies have become widely known. The acquisitions of IBM’s personal computer business by the Chinese Lenovo or MG Rover by Nanjing Automobile Group Corporation are famous examples. After all, we will soon see the first Chinese car company actually producing vehicles in Europe! Other outward investments of Chinese companies, such as investments in the natural resources industry in Africa, are known to the wider public as a phenomenon, but with few insights into the Chinese companies executing these investments. Finally, who would have guessed that already in 2004 there were 360 Chinese companies invested in the German city Hamburg alone?
Looking at the motivations of Chinese multinational enterprises (MNEs) to go international, most scholars agree that classical motivations play the key role for Chinese companies to invest abroad: Chinese MNEs are to various extents market-seeking, resource-seeking, and strategic asset-seeking. Market-seeking motivations are the logical consequence of China’s export-oriented policy over the last years. Investments abroad mean an avoidance of trade barriers and the facilitation of exports of domestic products. Famous examples for market-seeking investments include home appliance and consumer electronics manufacturers such as Haier, TCL, and Huawei Technologies. China’s tremendous need for natural resources is in sharp contrast to the poor availability of resources in the country. Chinese companies have thus developed great activities in resource-seeking FDI and execute them basically independently from the target country or region. Destinations for Chinese outward FDI in natural resources include African as well as Central Asian countries, along with Australia, Russia and Canada. Due to the strategic importance of the sector, most active Chinese multinational enterprises are state-owned – the top three Chinese outward investors are SINOPEC, CNPC, and CNOOC. Finally, strategic asset-seeking motivations play a key role for Chinese investors abroad. Investments to purchase assets are often aimed at the acquisition of business information and concrete intangible assets such as advanced proprietary technology, as well as immobile strategic assets. The acquisition of foreign technologies and brands is often regarded as a short cut to establishing a company as an internationally known, quality producer with a portfolio of the latest technologies and services and an efficient distribution channel. Industry knowledge reports a large number of famous examples of Chinese strategic asset-seeking FDI, including SAIC, the largest Chinese car producer acquiring the Korean SsangYong, the Holley Group acquiring Philips CDMA chip design departments, and the D’long Group investing in the German Fairchild Dornier.
To this extent, Chinese outward FDI may well be explained with the established theory of multinational enterprises. Do outward FDI activities of Chinese MNEs thus also constitute a classical example of this theory? It does not seem so. The theory, originally developed in a Western context and for Western companies, may not be able to completely explain the phenomenon and reveal all motivations and characteristics of Chinese multinational enterprises. A number of aspects seem to be particularly unique to Chinese companies.
They may be categorised as 1)expertise and technology-based features, 2)access to home country resources, and 3)features of cultural proximity.
1)Chinese firms may have a particular expertise in managing large, complex markets, such as infrastructure projects in telecommunication. Moreover, multinational enterprises with a Western background tend to be experienced in operating in stable markets with transparent regulation and weak government influence. Contrary to that, Chinese firms are likely more capable of dealing with troublesome regulation and navigating around opaque political constraints, given their greater experience with such institutional features. Such experiences may put Chinese firms arguable in a better position than many other non-Chinese firms.
2)Home market characteristics also play a very important role for Chinese companies. In a broader perspective, all extensive government interference with the activities of firms may be seen as an element of home country activities. In China, for example, companies that have been designated as “national champions” will receive the government support necessary to overcome their late-coming disadvantage internationally. This can include financial aid and political interference.
3)Finally, cultural proximity in a wider sense constitutes an explanation for investments in various culturally proximate regions, be it real, physical proximity or perceived proximity due to a similar culture. These factors may take the function of a door opener and catalyser for business development.
The main motivations of Chinese multinational enterprises to invest internationally are thus motives derived from their operation in an international capitalist market economy.
Chinese MNEs have mostly market-seeking, resource-seeking, strategic asset-seeking, and efficiency-seeking motivations. Chinese MNEs are to this extent part of global business undertakings. The traditional theory on multinational enterprises offers valuable tools to analyse their activities.
However, the particular Chinese characteristics in this process are eye-catching and make the emergence of Chinese MNEs a special phenomenon. It is becoming increasingly obvious that the most important differences between Chinese and Western MNEs going international are not found in their motivations but in the special characteristics of their home country in terms of resources and the Chinese institutional and cultural context. In coming years, we will see whether these differences constitute a temporary facet of Chinese firms until they can fully compete internationally or whether the theory of multinational enterprises must adapt to consider these characteristics as ongoing elements of multinational enterprises’ motivations and strategies".
Social engineering
Esther Duflo's on one-child policy, from VoxEU:
China’s one-child policy led to an explosion of the boy-girl ratio in the ‘80s and ‘90s. As this “only child” generation reaches adulthood, problems – including rising crime rates – are starting to appear. China is gradually getting rid of the vestiges of its communist past. But the demographic policy of the 1980s and 1990s planted a time bomb, and its effects are just starting to be felt. Its best-known aspect is the one-child policy, first put in place in 1978 and still in practice, though in a more relaxed form. Today, a couple made up of two only-children are allowed to have two children. In rural regions, a couple whose first child is a girl is normally authorised to have a second. But in the ‘80s and ‘90s, the one-child policy was strictly applied, albeit not uniformly across regions. Parents were penalised for births “outside quota”. They were fined and were financially responsible for the education and health-care of “extra” children. Envisioned by Deng Xiaoping, this aggressive fertility control strategy marked a rupture with the Mao period, which had launched the slogan “more people, more power”. Xiaoping considered fertility control essential to getting a handle on the economy, the foundation of China’s success. The one-child policy was a great success in terms of controlling fertility. But in a country where there was already a strong cultural preference for boys, it resulted in a serious imbalance between the number of girls and boys; the widespread use of techniques for determining a foetus’s sex opened the door to sex-selective abortion. The preference for boys, sex-selective abortion, and excessive mortality of young girls isn’t an exclusively Chinese phenomenon and isn’t therefore entirely due to the one-child policy. This phenomenon is seen in India, Taiwan, Pakistan, and even in the United States in communities made up of immigrants from these countries. But the one-child policy accentuated this imbalance, by “forcing” parents who wanted at least one boy to eliminate girls from the first children born to them. For example, in Taiwan, where fertility wasn’t controlled, the liberalisation of abortion in 1986 led to significant sex-selection of children, but only starting with a couple’s third child. In the People's Republic, governors in each province had some latitude in implementing the policy, and in certain regions, since the ‘80s, parents have been allowed to have a second child if their first-born was a girl. In these areas, the boy-girl ratio is more or less normal for first-births and catastrophic for second births. All of these factors combined, including the one-child policy, led to an explosion of the boy-girl ratio in the ‘80s and ‘90s: there were about 102 boys for 100 girls among children born in 1978, and more than 112 boys for 100 girls among those born in 1998. Today, there are 37 million more men then women, and there are as much as 120 boys born for 100 girls. This “only child” generation is now reaching adulthood. A child born in 1980 is now 28 years old, and China is beginning to realise the consequences of this demographic imbalance. Among 16-25 year olds today, there are nearly 110 boys for every 100 girls. Boys are having trouble getting married. And young men, particularly single ones, have more behavioural problems and commit more crimes than young women. It has been argued that the “frontier town” mentality of the United States is responsible for its high propensity to violence. Since 1998, the number of crimes has risen 13% per year on average. Seventy percent of criminals arrested are between 16 and 25 years old, and 90% are male. To what extent is the rise in the number of young men responsible for the increase in crime? A recent study by Chinese and American researchers: “Sex ratio and crime: Evidence from China’s one-Child Policy” (by Edlund, Li, Yi, and Zhang) answers this question by comparing the increase in the number of crimes between 1998 and 2004 in regions where the one-child policy was strictly enforced with the same increase in regions where parents were allowed a second child if the first were a girl (where the boy-girl ratio is much closer to normal). They conclude that the one-child policy explains one-seventh of the increase in crime. Besides the mechanical effect of the increase in the proportion of boys (and therefore potential criminals) in the population, the difficulty that young men have getting married is probably one source of this phenomenon. A long-term study of Vietnam veterans in 1998, cited in a recent New Republic article, provides some clue as to why. The subjects' testosterone levels, which are linked to aggression and violence, dropped when they married and increased when they divorced. Men who remain single maintain high levels of testosterone, which may make them particularly aggressive. Another factor is that of being raised as an only child. One study shows that girls born in regions where a second child was permitted have stayed in school longer than those in regions where they were the only child. It seems that far from creating competition, siblings benefit each other. The only-child generation is perhaps a generation of lonely children. Whatever the case may be, and even though the one-child policy is on the decline, it will continue to haunt China for decades to come.
Here IbnBattuta: what I would really like to check is the boy-girl ratio among college degree educated.
Shared Capitalism
Alex Bryson and Richard B. Freeman from VoxEU:
Shared capitalism schemes, in which workers are given larger financial stakes in their employers, are growing in popularity. This column summarises recent evidence that may explain the growth – shared capitalism seems to boost productivity.
Shared capitalism, by which we mean firms that pay all or almost all employees in part on the basis of performance of their enterprise or workplace, has traditionally been viewed as a niche part of an economy; John Lewis in the United Kingdom, Mondragon in Spain, and at one point United Airlines in the United States. In its 1991 PEPPER (Promotion of Employee Participation in Profits and Enterprise Results) Report and in ensuing reports, the European Union endorsed ownership and profit sharing.
Our analysis shows that in the United Kingdom and United States, and to a growing extent in other advanced countries, shared capitalist modes of pay and work arrangements have increased way beyond niche economic status.
Today, more employees have a bigger financial stake in their firms than ever before. Forty-four percent of US workers have part of their pay linked to company performance, either through ownership, stock options, profit sharing, or gain sharing. In Britain, one-fifth of private sector workplaces have share ownership schemes covering one-third of employees (Bryson and Freeman, 2008).
Some of the growth in share ownership in Britain over the last quarter century (and in Employee Stock Ownership Plans in the United States) is attributable to government tax privileges given to firms that pay workers with ownership stakes. But some of the growth is also part of a movement towards incentivising workers through collective forms of pay (Bryson, Pendleton and Whitfield, 2008). Despite the United Airlines bankruptcy, overall employee ownership in the US has not fallen. In the United Kingdom, an increasing number of firms, some with very different ownership models, have joined the Employee Ownership Association, which represents the growing co-owned sector.
Is this any good for the economy?
The narrowest theory of worker behaviour says it can’t be any good. Workers will free ride on the back of others instead of trying harder because of the financial incentive. Under UK tax law, employees have to hold onto shares for three years before they benefit from the tax breaks. Shares can go down as well as up. And worker effort and activity is only one factor influencing the company’s performance. Aside from CEO and top executives, few employees have sizeable holdings that give them both a large financial stake and influence on decisions.
But share ownership and other forms of shared capitalism are large and growing. Shared capitalist enterprises are meeting the market test. So do they really lead to better performance?
Isolating the effects of share ownership on performance through econometrics is tricky. Estimating production functions or profit functions from administrative or survey data is subject to all sorts of problems. Firms do not choose the schemes randomly. Nor do they choose other inputs randomly. Share capitalist companies may be those that have identified benefits in sharing the rewards of company performance with their employees, but other firms have chosen to be “lean and mean” because that pays off for them. Many believe that the firms adopting share schemes have more sophisticated managements than firms that do not, and that it is that management leadership that really matters, not the scheme.
Evidence from the United Kingdom
Two new studies for Britain find, as best as one can with this type of data, that yes, indeed, shared capitalism works for UK firms beyond the fabled John Lewis. They also find substantial differences in the effectiveness of various schemes and that effectiveness differs in combination with other practices.
The first study, commissioned by HM Treasury, is the largest study of share ownership ever to have been undertaken in Britain. Linking administrative data taken from HM Revenue and Customs records to company performance data, the authors find “on average, across the whole sample, the effect of tax-advantaged share schemes is significant and increases productivity by 2.5% in the long run”. They also find that “there are further benefits to be gained from operating several types of schemes” (Oxera, 2007a, 2007b). And they found that schemes chosen by firms without tax advantages tended to pay off more than those with tax breaks.
Our work based on nationally representative workplace data from the 2004 Workplace Employment Relations Survey, finds positive effects of share ownership on workplace productivity variously defined, with the effects being much more pronounced when shared capitalism schemes are deployed in combination. Among the single schemes, share ownership has the clearest positive association with productivity, but its impact is largest when firms combine it with other forms of shared capitalist pay. This may explain why British firms are increasingly choosing multiple collective pay systems (Bryson, Pendleton and Whitfield, 2008).
The findings on shared capitalism in the United Kingdom mirror , to a considerable extent, results from the United States in the 2000s. Researchers at NBER went beyond the production function methodology to survey tens of thousands of workers in firms concerned about what makes shared capitalism work more or less effectively under a research project on ”Shared Capitalism” (Blasi, Freeman, Kruse, 2008). The research, to be published as an NBER volume in 2009, shows that shared capitalism improves outcomes for companies and their workers. For example, owning company stock strongly predicts both an innovation culture and willingness to engage in innovative activity. They also find that shared capitalism and high performance work policies have stronger effects in predicting an innovation culture when they are combined in a setting that encourages worker co-monitoring.
We have learned a lot about shared capitalism schemes as a result of this recent research but much still remains to be understood.
Firms often change the specific schemes they use. The schemes appear to have larger positive effects in some sectors and firms than in others (with almost no evidence of any negative effects). Absent experimental data, it is possible that the analyses have not identified true causal effects on performance. Neither the Treasury-sponsored study nor ours felt sufficiently confident in the magnitudes of the estimated effects to assess whether the tax privileges given shared capitalist arrangements are socially optimal. And neither we nor the NBER researchers feel sufficiently confident that we have identified the right mix of schemes and other policies that guarantees success with shared capitalism. But taken together, the growth of shared capitalist forms of pay and the econometric evidence that it pays off for firms and workers gives a picture that diverges greatly from the old view that this is just a small niche part of capitalism.
In UK OEA members include the John Lewis Partnership, Arup, Unipart, Mott MacDonald, Blackwell, Martin Currie, eaga and Baxi Partnership; long established co-owned companies like Scott Bader and Tullis Russell; and a diverse range of other successful enterprises.
The Employee Ownership Association represents a thriving sector worth around £25 billion annually and growing.
To have a proportion, in 2007 25 billion pound represented a 2.25% of total GDP!!
Shared capitalism schemes, in which workers are given larger financial stakes in their employers, are growing in popularity. This column summarises recent evidence that may explain the growth – shared capitalism seems to boost productivity.
Shared capitalism, by which we mean firms that pay all or almost all employees in part on the basis of performance of their enterprise or workplace, has traditionally been viewed as a niche part of an economy; John Lewis in the United Kingdom, Mondragon in Spain, and at one point United Airlines in the United States. In its 1991 PEPPER (Promotion of Employee Participation in Profits and Enterprise Results) Report and in ensuing reports, the European Union endorsed ownership and profit sharing.
Our analysis shows that in the United Kingdom and United States, and to a growing extent in other advanced countries, shared capitalist modes of pay and work arrangements have increased way beyond niche economic status.
Today, more employees have a bigger financial stake in their firms than ever before. Forty-four percent of US workers have part of their pay linked to company performance, either through ownership, stock options, profit sharing, or gain sharing. In Britain, one-fifth of private sector workplaces have share ownership schemes covering one-third of employees (Bryson and Freeman, 2008).
Some of the growth in share ownership in Britain over the last quarter century (and in Employee Stock Ownership Plans in the United States) is attributable to government tax privileges given to firms that pay workers with ownership stakes. But some of the growth is also part of a movement towards incentivising workers through collective forms of pay (Bryson, Pendleton and Whitfield, 2008). Despite the United Airlines bankruptcy, overall employee ownership in the US has not fallen. In the United Kingdom, an increasing number of firms, some with very different ownership models, have joined the Employee Ownership Association, which represents the growing co-owned sector.
Is this any good for the economy?
The narrowest theory of worker behaviour says it can’t be any good. Workers will free ride on the back of others instead of trying harder because of the financial incentive. Under UK tax law, employees have to hold onto shares for three years before they benefit from the tax breaks. Shares can go down as well as up. And worker effort and activity is only one factor influencing the company’s performance. Aside from CEO and top executives, few employees have sizeable holdings that give them both a large financial stake and influence on decisions.
But share ownership and other forms of shared capitalism are large and growing. Shared capitalist enterprises are meeting the market test. So do they really lead to better performance?
Isolating the effects of share ownership on performance through econometrics is tricky. Estimating production functions or profit functions from administrative or survey data is subject to all sorts of problems. Firms do not choose the schemes randomly. Nor do they choose other inputs randomly. Share capitalist companies may be those that have identified benefits in sharing the rewards of company performance with their employees, but other firms have chosen to be “lean and mean” because that pays off for them. Many believe that the firms adopting share schemes have more sophisticated managements than firms that do not, and that it is that management leadership that really matters, not the scheme.
Evidence from the United Kingdom
Two new studies for Britain find, as best as one can with this type of data, that yes, indeed, shared capitalism works for UK firms beyond the fabled John Lewis. They also find substantial differences in the effectiveness of various schemes and that effectiveness differs in combination with other practices.
The first study, commissioned by HM Treasury, is the largest study of share ownership ever to have been undertaken in Britain. Linking administrative data taken from HM Revenue and Customs records to company performance data, the authors find “on average, across the whole sample, the effect of tax-advantaged share schemes is significant and increases productivity by 2.5% in the long run”. They also find that “there are further benefits to be gained from operating several types of schemes” (Oxera, 2007a, 2007b). And they found that schemes chosen by firms without tax advantages tended to pay off more than those with tax breaks.
Our work based on nationally representative workplace data from the 2004 Workplace Employment Relations Survey, finds positive effects of share ownership on workplace productivity variously defined, with the effects being much more pronounced when shared capitalism schemes are deployed in combination. Among the single schemes, share ownership has the clearest positive association with productivity, but its impact is largest when firms combine it with other forms of shared capitalist pay. This may explain why British firms are increasingly choosing multiple collective pay systems (Bryson, Pendleton and Whitfield, 2008).
The findings on shared capitalism in the United Kingdom mirror , to a considerable extent, results from the United States in the 2000s. Researchers at NBER went beyond the production function methodology to survey tens of thousands of workers in firms concerned about what makes shared capitalism work more or less effectively under a research project on ”Shared Capitalism” (Blasi, Freeman, Kruse, 2008). The research, to be published as an NBER volume in 2009, shows that shared capitalism improves outcomes for companies and their workers. For example, owning company stock strongly predicts both an innovation culture and willingness to engage in innovative activity. They also find that shared capitalism and high performance work policies have stronger effects in predicting an innovation culture when they are combined in a setting that encourages worker co-monitoring.
We have learned a lot about shared capitalism schemes as a result of this recent research but much still remains to be understood.
Firms often change the specific schemes they use. The schemes appear to have larger positive effects in some sectors and firms than in others (with almost no evidence of any negative effects). Absent experimental data, it is possible that the analyses have not identified true causal effects on performance. Neither the Treasury-sponsored study nor ours felt sufficiently confident in the magnitudes of the estimated effects to assess whether the tax privileges given shared capitalist arrangements are socially optimal. And neither we nor the NBER researchers feel sufficiently confident that we have identified the right mix of schemes and other policies that guarantees success with shared capitalism. But taken together, the growth of shared capitalist forms of pay and the econometric evidence that it pays off for firms and workers gives a picture that diverges greatly from the old view that this is just a small niche part of capitalism.
In UK OEA members include the John Lewis Partnership, Arup, Unipart, Mott MacDonald, Blackwell, Martin Currie, eaga and Baxi Partnership; long established co-owned companies like Scott Bader and Tullis Russell; and a diverse range of other successful enterprises.
The Employee Ownership Association represents a thriving sector worth around £25 billion annually and growing.
To have a proportion, in 2007 25 billion pound represented a 2.25% of total GDP!!
miércoles, 7 de enero de 2009
A fast deflating bond bubble?
From FT.com Alphaville:
Investors shunned one of the most liquid and safest assets in the world on Wednesday as a German bond auction failed in a warning for governments seeking to raise record amounts of debt to stimulate their slowing economies. It is the first eurozone bond auction of the year and an ominous sign of potential trouble ahead for governments around the world, with an estimated $3,000bn expected to be issued in sovereign debt this year — three times more than in 2008.
The auction of 10-year bonds failed to attract enough bids to reach the €6bn the government wanted to raise. Although a number of German bond auctions failed last year, it was almost unheard of before the credit crisis.
Meyrick Chapman, a fixed-income strategist at UBS, said: “When a German bond auction fails, then that does suggest there is trouble ahead for governments wanting to raise money in the debt markets.
“There was certainly a supply/demand imbalance because of the large amount of issuance in the last quarter of 2008 and the large amount due in the coming months. Before the financial crisis, German bond auctions just did not fail.”
In fact, the timing of this failed bond auction is far from ideal. US Treasuries have been in under pressure in recent days partly because a glut of new issuance is about to hit the market. A total of $166bn in fact, this week.
Perhaps the bond bubble is starting to deflate.
Investors shunned one of the most liquid and safest assets in the world on Wednesday as a German bond auction failed in a warning for governments seeking to raise record amounts of debt to stimulate their slowing economies. It is the first eurozone bond auction of the year and an ominous sign of potential trouble ahead for governments around the world, with an estimated $3,000bn expected to be issued in sovereign debt this year — three times more than in 2008.
The auction of 10-year bonds failed to attract enough bids to reach the €6bn the government wanted to raise. Although a number of German bond auctions failed last year, it was almost unheard of before the credit crisis.
Meyrick Chapman, a fixed-income strategist at UBS, said: “When a German bond auction fails, then that does suggest there is trouble ahead for governments wanting to raise money in the debt markets.
“There was certainly a supply/demand imbalance because of the large amount of issuance in the last quarter of 2008 and the large amount due in the coming months. Before the financial crisis, German bond auctions just did not fail.”
In fact, the timing of this failed bond auction is far from ideal. US Treasuries have been in under pressure in recent days partly because a glut of new issuance is about to hit the market. A total of $166bn in fact, this week.
Perhaps the bond bubble is starting to deflate.
Is Financial History Bunk?
From PaulKedrosky:
I ask myself that question a lot lately, almost every time I read something where the analysis compares the current “recession” to the average of something in a prior recessionary period.
For starters, there are precious few prior periods, with less than a dozen downturns worth the name in the last century. So we’re already working from a tiny sample size.
Second, there are oodles of reasons to expect that such situations are closer to unique than analogous. Is the previous example a recession? A depression? Was it in the U.S.? Where were rates going into it? Was it consumer led? What was inflation at the outset? Where was unemployment? What triggered the downturn? What was consumer debt load? I could go on and on, but you get the point I’m sure: History is awfully flawed as a guide for what is going to happen next when you’re dealing with small sample sizes and when inter-period situational variance is so high.
So, why do it? Why talk about which sectors lead in/out? Why mention that this is the best two-day week in modern market history? Why talk about the length of typical recession since WWII? Why go to any of those lengths? In part because it makes people feel better, which is nice; in part because it gives market analysis the patina of a science, which is wrong but also nice. And, yes, there is also that sometimes there is even some validity to it -- that, all else being equal (which it rarely is), we might things to unspool in a similar way this time as they did the last time something like this happened.
The risks of financial history are higher than ever though. We have more data, better analytical tools, and more people crunching the data, so we can expect to see data on pretty much anything we want to see. There will always be someone tearing apart something to find something interesting, so something interesting will be found. My friend James Altucher has always been great on this subject, ripping holes in pretty much every data-driven rule of thumb by which people claim to trade and/or find market tops and bottoms. They mostly don’t work.
Anyway, I’m torn on the subject, but I’m also increasing skeptical of any and all comparisons to prior historical periods. I don’t buy trough P/E, or recession length, or relative valuation, or interest rate, or sectoral rotation arguments, or… you get the picture. I love data, but I’m increasingly close to being an outright nihilist when it comes to over-reliance on historical financial data without any truly coherent supporting rationale. We are in a grand experiment with no real history to draw on, and anyone who pretends otherwise is deluded or selling something, or both.
I ask myself that question a lot lately, almost every time I read something where the analysis compares the current “recession” to the average of something in a prior recessionary period.
For starters, there are precious few prior periods, with less than a dozen downturns worth the name in the last century. So we’re already working from a tiny sample size.
Second, there are oodles of reasons to expect that such situations are closer to unique than analogous. Is the previous example a recession? A depression? Was it in the U.S.? Where were rates going into it? Was it consumer led? What was inflation at the outset? Where was unemployment? What triggered the downturn? What was consumer debt load? I could go on and on, but you get the point I’m sure: History is awfully flawed as a guide for what is going to happen next when you’re dealing with small sample sizes and when inter-period situational variance is so high.
So, why do it? Why talk about which sectors lead in/out? Why mention that this is the best two-day week in modern market history? Why talk about the length of typical recession since WWII? Why go to any of those lengths? In part because it makes people feel better, which is nice; in part because it gives market analysis the patina of a science, which is wrong but also nice. And, yes, there is also that sometimes there is even some validity to it -- that, all else being equal (which it rarely is), we might things to unspool in a similar way this time as they did the last time something like this happened.
The risks of financial history are higher than ever though. We have more data, better analytical tools, and more people crunching the data, so we can expect to see data on pretty much anything we want to see. There will always be someone tearing apart something to find something interesting, so something interesting will be found. My friend James Altucher has always been great on this subject, ripping holes in pretty much every data-driven rule of thumb by which people claim to trade and/or find market tops and bottoms. They mostly don’t work.
Anyway, I’m torn on the subject, but I’m also increasing skeptical of any and all comparisons to prior historical periods. I don’t buy trough P/E, or recession length, or relative valuation, or interest rate, or sectoral rotation arguments, or… you get the picture. I love data, but I’m increasingly close to being an outright nihilist when it comes to over-reliance on historical financial data without any truly coherent supporting rationale. We are in a grand experiment with no real history to draw on, and anyone who pretends otherwise is deluded or selling something, or both.
Robot density map
From ForeignPolicy's Blog:
Anyone know how to say "Resistance is futile. You will be assimilated," in Japanese? Not suprisingly, the land of the rising sun blows away the competition on IEEE Spectrum's robot density map.
Anyone know how to say "Resistance is futile. You will be assimilated," in Japanese? Not suprisingly, the land of the rising sun blows away the competition on IEEE Spectrum's robot density map.
Some basic pattern in Chinese history
Francesco Scisci from AsianTimes:
In the past 150 years, China's complex cultural values have been under constant attack, forcing revision. That is, not only did China have to undergo the same structural changes as the West in a shorter period, at the same time it also underwent dramatic cultural changes.
(...)China arrived to the fast phase of modernization pretty late, with a larger gap to fill in less time. China also didn't have much confidence, as it had been defeated by foreign powers, invaded and almost totally conquered by Japan, and had won only a small war against India. It managed to gain an almost honorable draw with America in Korea in the 1950s (with Russian support) and with Vietnam in 1979 (with some American assistance).
Furthermore, China had no affirmed tradition of digesting foreign culture into its own mold and changing itself in the process. It had the opposite tradition, of making anything foreign "Chinese", which occurred several times in Chinese history. The last time was with the minority Manchu invaders, who eventually were completely Sinified (or Hanized). One could argue that Buddhism vastly changed China, but the current perception is that, in fact, China changed Buddhism even more. Now, the situation is completely different, and there is no doubt that China is changing to adapt to a Western values-dominated world, rather than the contrary.
The country that faced the "foreign devils from the ocean", yang guizi, during the Opium Wars in the mid 19th century dramatically changed in the following century and a half - to the point that contemporary China can be regarded as only superficially similar to the country it was during the Opium Wars. In fact, the whole social and personal context, which defines and influences ideas, ambitions and world-views, has been totally transformed in these 150 years.
The change started with the family, the cell and basis for society and the state. The ideal family in the 19th century was unchanged from the times of Confucius, some 2,000 years before: three generations under one roof. The older man had many wives and even more children. Each male heir also had many wives and children, all living together in a large courtyard, resembling a small village of dozens of people.
In the courtyard, there were also many servants. The females of the clan were betrothed to neighbors, who then gained a closer relationship with the family. In this way, whole villages or even towns were under the control of one family. Each relative had a name indicating his precise relationship to the speaker. There were no vague appellations like "aunt", "uncle" or "cousin". There were terms such as "uncle, first younger brother of my father" (da shufu) or "uncle, second brother of my mother" (er jiufu), and so on. Cousins also bore different names, accordingly.
It was an intricate cobweb of relations in which each individual had his or her precise place. A male child grew up thinking that if he studied hard and if he were virtuous and filial, he would pass official exams, become a successful mandarin, inherit the family fortune and establish his own large family home. Then, he would pick the brightest of his heirs and support that child through his studies, continuing the glorious family tradition.
That was an ideal. Most men had only one wife, as they could not afford more. Some men, poor, had no wives; and some, just a little less poor, had to share a wife with their brothers. Yet, the ideal family was one man, many wives and many, many children.
For the emperor, this was an issue of state security. The emperor had many wives to make sure he had many children and could choose the fittest from them to succeed him. The successor had to be male, but not necessarily the first born from the first wife, as was the situation in Europe. The Chinese system tried to make sure the emperor was not incompetent, which could be the case with the European system where God chose the successor - namely, the first-born.
The issue of family and keeping only one wife was the stumbling block in the conversion of a Qing emperor to Catholicism. The Wanli emperor might have entertained the idea of converting to Catholicism, as many of his closest advisors were Jesuits, but he could not accept the idea of having one wife, as this would alter the rules for succession in China. However, the Jesuits in the 17th century knew that they could not compromise on the rule of succession: the king's many wives and their children had been the very issue that had caused a split between England and Rome the century before with Henry VIII and Elizabeth. Elizabeth died in 1603, seven years before Italian Jesuit priest Matteo Ricci's demise in Beijing in 1610.
This ideal of the family persisted until the communists took over in 1949. After the May Fourth movement in 1919, the idea of one wife was introduced as progressive and modern. However, Kuomintang (KMT) leader Chiang Kai-shek had more than one wife, as did many senior KMT officials.
Conversely, the Communist Party broke the old mold and introduced puritanical rules imposing just one wife. This was already a major break with tradition, but an even greater break came in the 1980s with the one-child rule. This completely reversed the old pyramid of relations. A hundred years before, a grandfather could be served by scores of grandchildren all vying for his favor.
In 1980s, one couple, some of them being two single children of single-wife marriages, could have as many as four grandparents all hovering around their single child. Then, there would be six adults spoiling one child. This is the phenomenon of the "little emperors". The children were spoiled, but also under enormous pressure. They had the responsibility to succeed for their family's glory.
In larger families, this responsibility was spread among scores of siblings who first had to learn to live with each other. The one child born after 1980 had to be number one in his class to be sure to get into a good high school, which, in turn, guarantees a place at a good university in the extremely selective Chinese education system.
But this, of course, is impossible. What happens, then, in most families, if the one child fails to get into a good university and has no hope for a good job? How do the children reconcile themselves with their lot? Will they be frustrated and angry? They are no small number - millions of children fall into this generation. How will these people impact society, the state, the world and culture in the next 20 years?
One thing is sure, China has never experienced a generation like this, and neither has any society in the world, so it is difficult to forecast trends. Because the situation is so widespread, the Chinese government has realized the problem and is trying to address it. But before turning our attention to the answer, first we have to look at how the Chinese government itself has dramatically changed.
Since unification in the late 3rd century BC, China was ruled by an emperor, a supreme head of state, ultimate source of power and decision-maker. Possibly, there were "emperors" even before then, such as the son of heaven (tianzi) of Zhou times, but he was likely more of a religious and ceremonial figure than a real political monarch.
The imperial system really started with the first emperor of the Qin Dynasty (221 BC-207 BC) - Qinshi Huangdi. The system underwent many changes, but there was always one constant: the emperor did not run the administration of the country. That duty was largely entrusted to a body of ministers and officials who were selected on the basis of merit. The emperor embodied the interests of the state, as the state was his. It was a mechanism similar to that of modern companies differentiating property and management. The owner, or major stock-holder, sets the goals and decides the broad direction and the interests of the company, such as its stability and welfare. The emperor's interests coincide with the interests of the population, or in our comparison, the employees in a company. The citizens want to lead comfortable safe lives, and creating this environment ensures a stable hold on power for the emperor.
In the middle, between the emperor and the people, there were officials who had the job of running the country and maintaining stability. It is easy to see how people recognized their interests as coinciding with those of the emperor, and as a result both the emperor and the people blamed officials if something minor went wrong. If something major was wrong, it meant the emperor had lost his marbles, he did not understand his and his people's interests, or heaven did not want him to rule - and that was the end for him and the dynasty. They would be replaced by a new emperor and dynasty, setting new standards for the old stability game.
In the 20th century, Chiang Kai-shek and communist leader Mao Zedong also followed this pattern. Although they did not call themselves "emperors", they were the ultimate embodiment of the interests of the state and the ones who set the grand directions. Deng Xiaoping's rule (1978 to the early 1990s) was softer, but he still commanded great respect. Jiang Zemin (president from 1993 to 2003), was something in between.
However, the real radical change occurred at the beginning of this century, with the smooth transition of power from Jiang to Hu Jintao, the current president. That transition confirmed that both men were not emperors. They are Communist Party officials promoted because of merit to become head of state, but they do not embody the ultimate interests of the state. They cannot make the ultimate decisions alone - they have to reach a consensus among top leaders.
And they cannot even choose their own successors: Hu's post was decided by Deng (Jiang might have preferred Zeng Qinghong), and Hu's successor Xi Jinping was not decided by Hu alone (who might have preferred Li Keqiang). Both Jiang and Hu are top managers, but this raises a new question: who embodies the interests of the state and of the people?
In democracies, those interests are represented by the electoral body, which votes for the head of state and other representatives. In modern China, there are no elections and the "legitimization" offered by the leaders is simple: we are in power because we are in power. If nobody topples us, then we are legitimized to stay. We can stay in power by granting economic growth and development that spreads welfare to the whole population, although unequally.
However, legitimization is only part of the issue. The larger issue is: who decides the broad direction for the country to take? What are the criteria and standards to judge the performance of officials and top managing-rulers? Here, there are two arenas that have a greater and lesser voice in deciding on performance and setting goals.
The less powerful arena (whose voice is growing) is public opinion, which is conveyed by a number of channels, such as local media, blogs on the web, social surveys and local elections. This does not form a black and white picture, but reveals in which direction general interests are moving, or not moving. For instance, on the issue of environmental protection, 10 years ago people were less responsive to it, now they are more receptive.
A more powerful arena influencing China's leaders is a pool of experts, old party cadres called on to discuss different policies. The opinion of experts is solicited when considering any given policy, and the opinion of retired cadres, who now have no vested interests, is also tapped to consider the promotion of party officials. Tens of thousands were consulted to set the program for the Communist Party Congress in 2007, and 5,000 helped write the draft.
Even after retirement, officials have access to some levels of internal news bulletins and maintain privileged channels of communication with the top leadership. Therefore, they influence the broad decision-making process.
But the system is not transparent, opening many avenues for corruption. For example, middle- and low-level party officials who are backed by companies can try to climb up the official ladder by distributing presents and favors to higher-ranking officials. Companies, especially if they are state ones, can try to move policies by offering gifts and favors to officials.
It was to counter this that the party moved toward appealing to academic experts, with no personal interest in the issues involved, and retired cadres, also without personal interests.
The whole process is secretive and thus not open to wide interference. But even this is not watertight, and the leaders know it. For this reason, they are now pushing for some form of democratization, although they are concerned about the shortcomings of that system as well.
The party faces a major dilemma over how to move forward, especially as, for many people, the ultimate goal is to be "emperor".
At the southern end of Tiananmen Square in the capital Beijing, next to Zhengyang Men ("The Midday Gate") and about 200 meters from Mao's mausoleum, there is a spot where people take pictures of their children dressed as little Manchu emperors, sitting on a throne.
The place is symbolic: the ancient gate once opened on the nei cheng (inner city) and the buildings of the imperial government. Every day, there is a line of parents, mostly from the countryside, holding their children by the hand and waiting to take pictures as a sign of good luck. Each parent wants his or her only child to be successful - to become an emperor.
For centuries in ancient times there were only two ways to be successful. The first was to lead a rebellion or follow one - to topple a dynasty and become the emperor, or part of his circle. This was the method of Liu Bang (the founder of the Han Dynasty, 206 BC-220 AD), Zhu Yuanzhang (founder of the Ming Dynasty, 1368-1644 AD), and Mao Zedong ( founder of the "communist dynasty"). The path is extremely dangerous - one could easily lose his head - and the possibilities of success are very slim.
Second, an ambitious young man could pursue a career as an imperial official. He could take the challenging exams, and if he passed become even the top official of the empire. This path had no risk - nobody would kill the youth who did not pass his exam. And it was relatively easier. Although the official bureaucracy was tiny compared to the population, hundreds of officials were promoted every year, giving the average person a much better chance to succeed this way than by rebelling against the system. For this reason, most people first tried to become an official.
However, the exam system was not perfect, and many rebel leaders began as students who had failed the imperial examinations, like the famous Hong Xiuquan, who started the Taiping rebellion that in the middle of the 19th century almost toppled the Qing Dynasty (1644-1911 AD). If these brilliant people had earned a post, perhaps there would have been no rebellion, or a much more modest one.
There is a less common path to try to make a fortune for oneself - clever people could go into business. This path, however, was not as glorious as the choice of being an official, the top of the social hierarchy. And although not as risky as being a rebel, it was far from secure. Officials could easily concoct all kinds of excuses to seize the property of rich merchants. Business, concentrated in cities, was tolerated but not exalted, and businessmen had to be careful not to eclipse the wealth of local officials, who had to remain officially the richest in the area.
Businessmen could protect their assets in two ways: befriending officials or having their son pass state examinations and become an official. The second choice was safer and considered more socially respectable than the first. The remainder of the people, the vast majority of the population, were peasants who were bound to the land and had all types of constraints to leaving their place and moving on.
Furthermore, officials and peasants were the stronghold of stable power, the guarantors that nothing would change and the imperial power would be unchallenged. Business, with its drive to accumulate wealth and invest in new ventures, was a force for instability and change. This had to be tolerated for several reasons, but the imperial power could not allow business and enterprise to grow to threaten the emperor's stability.
This situation has changed in the past 30 years. Officials are still selected through a complex party system, with courses and exams, but now business is exalted for the first time in Chinese history. Business is central to the drive for fast development, which is the paramount task for the nation to recover its former might and glory. This has many consequences.
On a personal level, being a businessman is now as glorious as - or perhaps even more than - being an official. When the best kids at university are chosen to join the party and have an official career, they feel it is an honor that they must accept. But this career is long, very difficult, full of traps and rewarding only at the end - if, at about age 50, one has managed to survive the political selection and become a senior official.
Most young people prefer to try to become businessmen. They can be successful early in their lives, they are freer since they are not subject to strict party discipline, and they can enjoy themselves with the money they make. A businessman can have his own enterprise and decide what to do with minimal official interference. In other words, each young person can become the little emperor of a small empire, a possibility that did not exist in the imperial past.
Besides, trying one's hand in business is easier and far less risky than trying to start a revolution to become emperor.
On a social level, the changes brought by business and enterprises must be "digested" at every level by the system. Formerly, the imperial system could stop businesses from threatening the status quo. Now the nation wants to improve the status quo, and therefore it has to push for new businesses and then factor in the constant changes to the social and political fabric of the nation. Moreover, business-driven growth means urbanization, depopulation of the countryside, decimation of the peasant class, the end of ancient rural China and the birth of a new, urbanized China. This course will follow the only existing pattern for urbanization - the Western one.
Most importantly, the overall system has discarded the ancient notion of stability and embraced the notions of change and development. This is a deep cultural change, confirmed by the official Chinese rhetoric about stability. When the leaders stress the need for stability, they are looking for some balance in a situation that has inherently rejected it. And if everything fails, the government thinks, there must be something to appease the public. In the West, those appeasements were traditionally sports and religion.
(...)
The Mozi (Mocius), by the philosopher Mozi (470 BCE ca - 391 BCE), possibly the earliest text of systematic philosophy in China, begins its earliest part (4th century BC) by discussing the importance of promoting capable people as high officials (Shangxian pian, or to venerate the wise). It is claimed this is an ancient tradition from the Shang Dynasty (2nd millennium BC), which in turn was taken from the most legendary ancient Chinese emperors - Yao, Shun, Yu and Tang - who selected their successors on the basis of merit, regardless of origin. Shun and Yu had very humble origins.
Confucius, about a generation older than Mozi but referring to the earlier cultural tradition of Zhou (starting around 1,000 BC), also stressed the paramount importance of education and upbringing over birthright in the promotion of officials.
The original and enduring Chinese cultural belief is of a self-made man - the senior official born out of a peasant family or the top general starting off as a foot soldier. In this sense, social mobility was encouraged, and this may have created a strong bond in society.
In fact, as we have seen, there were two channels for upward mobility: the selection of officials, which was open to all, and the revolution (geming). The second is particularly important in comparison to Western tradition. Since the early first millennium BC, there has been a tradition of change (ge) of the Mandate of Heaven (ming).
Essentially, the idea was that the dynasty would rule until it was overthrown. The toppling was seen as legitimate when it was successful, evidence that heaven had withdrawn its graces from one emperor and granted them to another. The emperor, Son of Heaven, had to hold onto its power. His success in so doing proved his ritual and religious legitimacy. Large natural disasters and social uprisings confirmed the waning of heaven's favors.
Besides selected officials, each dynasty had its court of aristocrats - relatives of the emperor or descendents of the closest comrades of the founder of the dynasty. They, and the relatives of the senior officials, had varying influence. But this influence faded with the decades, as the generations grew away from the original connection. Furthermore, each change of dynasty completely wiped out the former aristocracy and established a new one. The Mongols eliminated the Song aristocrats, so did the Ming with Mongols, the Manchu with the Ming, and the communists with the Manchu.
This created a situation in which there is no aristocratic continuity stretching back hundreds of years, as there is in Europe. At most, Chinese aristocrats can claim a lineage of 300 years. Presently, there is no official aristocracy, but the siblings of senior leaders are called taizi dang (princelings). However, even they can claim an aristocracy that is less than 100 years old. This means that social mobility is strong, and aristocracy has not played as conspicuous and continuous a role as it has in Europe.
In the past 150 years, China's complex cultural values have been under constant attack, forcing revision. That is, not only did China have to undergo the same structural changes as the West in a shorter period, at the same time it also underwent dramatic cultural changes.
(...)China arrived to the fast phase of modernization pretty late, with a larger gap to fill in less time. China also didn't have much confidence, as it had been defeated by foreign powers, invaded and almost totally conquered by Japan, and had won only a small war against India. It managed to gain an almost honorable draw with America in Korea in the 1950s (with Russian support) and with Vietnam in 1979 (with some American assistance).
Furthermore, China had no affirmed tradition of digesting foreign culture into its own mold and changing itself in the process. It had the opposite tradition, of making anything foreign "Chinese", which occurred several times in Chinese history. The last time was with the minority Manchu invaders, who eventually were completely Sinified (or Hanized). One could argue that Buddhism vastly changed China, but the current perception is that, in fact, China changed Buddhism even more. Now, the situation is completely different, and there is no doubt that China is changing to adapt to a Western values-dominated world, rather than the contrary.
The country that faced the "foreign devils from the ocean", yang guizi, during the Opium Wars in the mid 19th century dramatically changed in the following century and a half - to the point that contemporary China can be regarded as only superficially similar to the country it was during the Opium Wars. In fact, the whole social and personal context, which defines and influences ideas, ambitions and world-views, has been totally transformed in these 150 years.
The change started with the family, the cell and basis for society and the state. The ideal family in the 19th century was unchanged from the times of Confucius, some 2,000 years before: three generations under one roof. The older man had many wives and even more children. Each male heir also had many wives and children, all living together in a large courtyard, resembling a small village of dozens of people.
In the courtyard, there were also many servants. The females of the clan were betrothed to neighbors, who then gained a closer relationship with the family. In this way, whole villages or even towns were under the control of one family. Each relative had a name indicating his precise relationship to the speaker. There were no vague appellations like "aunt", "uncle" or "cousin". There were terms such as "uncle, first younger brother of my father" (da shufu) or "uncle, second brother of my mother" (er jiufu), and so on. Cousins also bore different names, accordingly.
It was an intricate cobweb of relations in which each individual had his or her precise place. A male child grew up thinking that if he studied hard and if he were virtuous and filial, he would pass official exams, become a successful mandarin, inherit the family fortune and establish his own large family home. Then, he would pick the brightest of his heirs and support that child through his studies, continuing the glorious family tradition.
That was an ideal. Most men had only one wife, as they could not afford more. Some men, poor, had no wives; and some, just a little less poor, had to share a wife with their brothers. Yet, the ideal family was one man, many wives and many, many children.
For the emperor, this was an issue of state security. The emperor had many wives to make sure he had many children and could choose the fittest from them to succeed him. The successor had to be male, but not necessarily the first born from the first wife, as was the situation in Europe. The Chinese system tried to make sure the emperor was not incompetent, which could be the case with the European system where God chose the successor - namely, the first-born.
The issue of family and keeping only one wife was the stumbling block in the conversion of a Qing emperor to Catholicism. The Wanli emperor might have entertained the idea of converting to Catholicism, as many of his closest advisors were Jesuits, but he could not accept the idea of having one wife, as this would alter the rules for succession in China. However, the Jesuits in the 17th century knew that they could not compromise on the rule of succession: the king's many wives and their children had been the very issue that had caused a split between England and Rome the century before with Henry VIII and Elizabeth. Elizabeth died in 1603, seven years before Italian Jesuit priest Matteo Ricci's demise in Beijing in 1610.
This ideal of the family persisted until the communists took over in 1949. After the May Fourth movement in 1919, the idea of one wife was introduced as progressive and modern. However, Kuomintang (KMT) leader Chiang Kai-shek had more than one wife, as did many senior KMT officials.
Conversely, the Communist Party broke the old mold and introduced puritanical rules imposing just one wife. This was already a major break with tradition, but an even greater break came in the 1980s with the one-child rule. This completely reversed the old pyramid of relations. A hundred years before, a grandfather could be served by scores of grandchildren all vying for his favor.
In 1980s, one couple, some of them being two single children of single-wife marriages, could have as many as four grandparents all hovering around their single child. Then, there would be six adults spoiling one child. This is the phenomenon of the "little emperors". The children were spoiled, but also under enormous pressure. They had the responsibility to succeed for their family's glory.
In larger families, this responsibility was spread among scores of siblings who first had to learn to live with each other. The one child born after 1980 had to be number one in his class to be sure to get into a good high school, which, in turn, guarantees a place at a good university in the extremely selective Chinese education system.
But this, of course, is impossible. What happens, then, in most families, if the one child fails to get into a good university and has no hope for a good job? How do the children reconcile themselves with their lot? Will they be frustrated and angry? They are no small number - millions of children fall into this generation. How will these people impact society, the state, the world and culture in the next 20 years?
One thing is sure, China has never experienced a generation like this, and neither has any society in the world, so it is difficult to forecast trends. Because the situation is so widespread, the Chinese government has realized the problem and is trying to address it. But before turning our attention to the answer, first we have to look at how the Chinese government itself has dramatically changed.
Since unification in the late 3rd century BC, China was ruled by an emperor, a supreme head of state, ultimate source of power and decision-maker. Possibly, there were "emperors" even before then, such as the son of heaven (tianzi) of Zhou times, but he was likely more of a religious and ceremonial figure than a real political monarch.
The imperial system really started with the first emperor of the Qin Dynasty (221 BC-207 BC) - Qinshi Huangdi. The system underwent many changes, but there was always one constant: the emperor did not run the administration of the country. That duty was largely entrusted to a body of ministers and officials who were selected on the basis of merit. The emperor embodied the interests of the state, as the state was his. It was a mechanism similar to that of modern companies differentiating property and management. The owner, or major stock-holder, sets the goals and decides the broad direction and the interests of the company, such as its stability and welfare. The emperor's interests coincide with the interests of the population, or in our comparison, the employees in a company. The citizens want to lead comfortable safe lives, and creating this environment ensures a stable hold on power for the emperor.
In the middle, between the emperor and the people, there were officials who had the job of running the country and maintaining stability. It is easy to see how people recognized their interests as coinciding with those of the emperor, and as a result both the emperor and the people blamed officials if something minor went wrong. If something major was wrong, it meant the emperor had lost his marbles, he did not understand his and his people's interests, or heaven did not want him to rule - and that was the end for him and the dynasty. They would be replaced by a new emperor and dynasty, setting new standards for the old stability game.
In the 20th century, Chiang Kai-shek and communist leader Mao Zedong also followed this pattern. Although they did not call themselves "emperors", they were the ultimate embodiment of the interests of the state and the ones who set the grand directions. Deng Xiaoping's rule (1978 to the early 1990s) was softer, but he still commanded great respect. Jiang Zemin (president from 1993 to 2003), was something in between.
However, the real radical change occurred at the beginning of this century, with the smooth transition of power from Jiang to Hu Jintao, the current president. That transition confirmed that both men were not emperors. They are Communist Party officials promoted because of merit to become head of state, but they do not embody the ultimate interests of the state. They cannot make the ultimate decisions alone - they have to reach a consensus among top leaders.
And they cannot even choose their own successors: Hu's post was decided by Deng (Jiang might have preferred Zeng Qinghong), and Hu's successor Xi Jinping was not decided by Hu alone (who might have preferred Li Keqiang). Both Jiang and Hu are top managers, but this raises a new question: who embodies the interests of the state and of the people?
In democracies, those interests are represented by the electoral body, which votes for the head of state and other representatives. In modern China, there are no elections and the "legitimization" offered by the leaders is simple: we are in power because we are in power. If nobody topples us, then we are legitimized to stay. We can stay in power by granting economic growth and development that spreads welfare to the whole population, although unequally.
However, legitimization is only part of the issue. The larger issue is: who decides the broad direction for the country to take? What are the criteria and standards to judge the performance of officials and top managing-rulers? Here, there are two arenas that have a greater and lesser voice in deciding on performance and setting goals.
The less powerful arena (whose voice is growing) is public opinion, which is conveyed by a number of channels, such as local media, blogs on the web, social surveys and local elections. This does not form a black and white picture, but reveals in which direction general interests are moving, or not moving. For instance, on the issue of environmental protection, 10 years ago people were less responsive to it, now they are more receptive.
A more powerful arena influencing China's leaders is a pool of experts, old party cadres called on to discuss different policies. The opinion of experts is solicited when considering any given policy, and the opinion of retired cadres, who now have no vested interests, is also tapped to consider the promotion of party officials. Tens of thousands were consulted to set the program for the Communist Party Congress in 2007, and 5,000 helped write the draft.
Even after retirement, officials have access to some levels of internal news bulletins and maintain privileged channels of communication with the top leadership. Therefore, they influence the broad decision-making process.
But the system is not transparent, opening many avenues for corruption. For example, middle- and low-level party officials who are backed by companies can try to climb up the official ladder by distributing presents and favors to higher-ranking officials. Companies, especially if they are state ones, can try to move policies by offering gifts and favors to officials.
It was to counter this that the party moved toward appealing to academic experts, with no personal interest in the issues involved, and retired cadres, also without personal interests.
The whole process is secretive and thus not open to wide interference. But even this is not watertight, and the leaders know it. For this reason, they are now pushing for some form of democratization, although they are concerned about the shortcomings of that system as well.
The party faces a major dilemma over how to move forward, especially as, for many people, the ultimate goal is to be "emperor".
At the southern end of Tiananmen Square in the capital Beijing, next to Zhengyang Men ("The Midday Gate") and about 200 meters from Mao's mausoleum, there is a spot where people take pictures of their children dressed as little Manchu emperors, sitting on a throne.
The place is symbolic: the ancient gate once opened on the nei cheng (inner city) and the buildings of the imperial government. Every day, there is a line of parents, mostly from the countryside, holding their children by the hand and waiting to take pictures as a sign of good luck. Each parent wants his or her only child to be successful - to become an emperor.
For centuries in ancient times there were only two ways to be successful. The first was to lead a rebellion or follow one - to topple a dynasty and become the emperor, or part of his circle. This was the method of Liu Bang (the founder of the Han Dynasty, 206 BC-220 AD), Zhu Yuanzhang (founder of the Ming Dynasty, 1368-1644 AD), and Mao Zedong ( founder of the "communist dynasty"). The path is extremely dangerous - one could easily lose his head - and the possibilities of success are very slim.
Second, an ambitious young man could pursue a career as an imperial official. He could take the challenging exams, and if he passed become even the top official of the empire. This path had no risk - nobody would kill the youth who did not pass his exam. And it was relatively easier. Although the official bureaucracy was tiny compared to the population, hundreds of officials were promoted every year, giving the average person a much better chance to succeed this way than by rebelling against the system. For this reason, most people first tried to become an official.
However, the exam system was not perfect, and many rebel leaders began as students who had failed the imperial examinations, like the famous Hong Xiuquan, who started the Taiping rebellion that in the middle of the 19th century almost toppled the Qing Dynasty (1644-1911 AD). If these brilliant people had earned a post, perhaps there would have been no rebellion, or a much more modest one.
There is a less common path to try to make a fortune for oneself - clever people could go into business. This path, however, was not as glorious as the choice of being an official, the top of the social hierarchy. And although not as risky as being a rebel, it was far from secure. Officials could easily concoct all kinds of excuses to seize the property of rich merchants. Business, concentrated in cities, was tolerated but not exalted, and businessmen had to be careful not to eclipse the wealth of local officials, who had to remain officially the richest in the area.
Businessmen could protect their assets in two ways: befriending officials or having their son pass state examinations and become an official. The second choice was safer and considered more socially respectable than the first. The remainder of the people, the vast majority of the population, were peasants who were bound to the land and had all types of constraints to leaving their place and moving on.
Furthermore, officials and peasants were the stronghold of stable power, the guarantors that nothing would change and the imperial power would be unchallenged. Business, with its drive to accumulate wealth and invest in new ventures, was a force for instability and change. This had to be tolerated for several reasons, but the imperial power could not allow business and enterprise to grow to threaten the emperor's stability.
This situation has changed in the past 30 years. Officials are still selected through a complex party system, with courses and exams, but now business is exalted for the first time in Chinese history. Business is central to the drive for fast development, which is the paramount task for the nation to recover its former might and glory. This has many consequences.
On a personal level, being a businessman is now as glorious as - or perhaps even more than - being an official. When the best kids at university are chosen to join the party and have an official career, they feel it is an honor that they must accept. But this career is long, very difficult, full of traps and rewarding only at the end - if, at about age 50, one has managed to survive the political selection and become a senior official.
Most young people prefer to try to become businessmen. They can be successful early in their lives, they are freer since they are not subject to strict party discipline, and they can enjoy themselves with the money they make. A businessman can have his own enterprise and decide what to do with minimal official interference. In other words, each young person can become the little emperor of a small empire, a possibility that did not exist in the imperial past.
Besides, trying one's hand in business is easier and far less risky than trying to start a revolution to become emperor.
On a social level, the changes brought by business and enterprises must be "digested" at every level by the system. Formerly, the imperial system could stop businesses from threatening the status quo. Now the nation wants to improve the status quo, and therefore it has to push for new businesses and then factor in the constant changes to the social and political fabric of the nation. Moreover, business-driven growth means urbanization, depopulation of the countryside, decimation of the peasant class, the end of ancient rural China and the birth of a new, urbanized China. This course will follow the only existing pattern for urbanization - the Western one.
Most importantly, the overall system has discarded the ancient notion of stability and embraced the notions of change and development. This is a deep cultural change, confirmed by the official Chinese rhetoric about stability. When the leaders stress the need for stability, they are looking for some balance in a situation that has inherently rejected it. And if everything fails, the government thinks, there must be something to appease the public. In the West, those appeasements were traditionally sports and religion.
(...)
The Mozi (Mocius), by the philosopher Mozi (470 BCE ca - 391 BCE), possibly the earliest text of systematic philosophy in China, begins its earliest part (4th century BC) by discussing the importance of promoting capable people as high officials (Shangxian pian, or to venerate the wise). It is claimed this is an ancient tradition from the Shang Dynasty (2nd millennium BC), which in turn was taken from the most legendary ancient Chinese emperors - Yao, Shun, Yu and Tang - who selected their successors on the basis of merit, regardless of origin. Shun and Yu had very humble origins.
Confucius, about a generation older than Mozi but referring to the earlier cultural tradition of Zhou (starting around 1,000 BC), also stressed the paramount importance of education and upbringing over birthright in the promotion of officials.
The original and enduring Chinese cultural belief is of a self-made man - the senior official born out of a peasant family or the top general starting off as a foot soldier. In this sense, social mobility was encouraged, and this may have created a strong bond in society.
In fact, as we have seen, there were two channels for upward mobility: the selection of officials, which was open to all, and the revolution (geming). The second is particularly important in comparison to Western tradition. Since the early first millennium BC, there has been a tradition of change (ge) of the Mandate of Heaven (ming).
Essentially, the idea was that the dynasty would rule until it was overthrown. The toppling was seen as legitimate when it was successful, evidence that heaven had withdrawn its graces from one emperor and granted them to another. The emperor, Son of Heaven, had to hold onto its power. His success in so doing proved his ritual and religious legitimacy. Large natural disasters and social uprisings confirmed the waning of heaven's favors.
Besides selected officials, each dynasty had its court of aristocrats - relatives of the emperor or descendents of the closest comrades of the founder of the dynasty. They, and the relatives of the senior officials, had varying influence. But this influence faded with the decades, as the generations grew away from the original connection. Furthermore, each change of dynasty completely wiped out the former aristocracy and established a new one. The Mongols eliminated the Song aristocrats, so did the Ming with Mongols, the Manchu with the Ming, and the communists with the Manchu.
This created a situation in which there is no aristocratic continuity stretching back hundreds of years, as there is in Europe. At most, Chinese aristocrats can claim a lineage of 300 years. Presently, there is no official aristocracy, but the siblings of senior leaders are called taizi dang (princelings). However, even they can claim an aristocracy that is less than 100 years old. This means that social mobility is strong, and aristocracy has not played as conspicuous and continuous a role as it has in Europe.
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