Does China need to innovate?

Does China need to learn how to innovate? Does it need to enact better intellectual property protection and protection of property rights? The answer, it seems, is no. Whilst I’ve never been a fan of headlines which pose questions to which the answer is ‘no’ (Is Evolution wrong?), I think its a pertinent question to answer because it goes against every economist’s gut instinct. Of course you need to innovate to prosper!

Have no doubt, China will eventually need to build up its ability to innovate new business models and technological solutions. But that time is nowhere close. Why is that? The answer lies in standard macroeconomic theory.

In the long run, growth is driven by increases in productivity, by which I mean improvements in technological processes and industrial methods. It might be something big like the invention of the production line or ‘Just In Time’ manufacturing or it might be a slightly more efficient way to paint cars. It might be the invention of a new product, or an adaptation of a new product. It might be diversifying a new product – as long as it improves the economic well-being of the people, it is an innovation that increases productivity.

In highly developed countries, such productivity can only come from innovation. That is why the United States invests so much in R&D and in its universities. But in developing nations like China, productivity growth can come from emulating the innovations of other nations. In fact, economic growth will actually be faster (since its faster to copy than to do your own work; haven’t you ever cheated on a test before?)

Won’t these benefits run out? They will eventually, but that time is a long way off. China’s GDP per capita (after a decade of pure 10% economic growth) is still only 1/5 as big as the US (20%). China may overtake the US as the world’s biggest economy as soon as 2013, but it will still be a developing nation. According to the best projections (by the Economist Intelligence Unit, Goldman Sachs and Global Insight), China will grow between 4-7%pa until around 2025. Even then, its GDP per person will still only sit at around 42.3% of the US (according to the most optimistic forecast for China by Global Insight. Global Insight projects 6% growth against 4% by the Economist Intelligence Unit and Goldman Sach).

That last paragraph contains faulty logic – you can’t look at averages and make broad generalisations in that way. Many industries will fully converge with developed nations and will require innovation. In other areas, China simply cannot grow because there is no market for them. Take manufacturing – when China is the world’s largest economy, can it still be the factory of the world when its incomes are going to start rising?

An excellent illustration is the online sector. This article by the Economist highlights how Chinese companies are simply appropriating Western innovations. They are adapting them to the Chinese market and even improving upon them – but ultimately, Chinese growth is not innovation-led. It’s just a matter of technological convergence. It’s also a good example of an industry that must learn to innovate since its approaching full convergence pretty quickly.

Whoops!

The North Carolina House of Representatives accidentally passed an important constitutional amendment in April this year.

Representative Jean Farmer-Butterfield, whose name is surely no accident, accidentally voted for the Bill instead of against it. She had originally opposed the Bill in two earlier votes.

The amendment introduces a term limit on the Speaker and the President Pro Tempore of four years. Democrats are opposing the measure, arguing it places the legislature at a disadvantage vis a vis the executive. Presumably the NC Governor has no term limits. I have no strong views either way, but I find the whole situation deeply amusing.

It reminds me of the story of how the law which originally enacted ‘habeus corpus’ (which literally translates to ‘having the body’) was passed by a single vote because the guy counting the votes counted a particularly fat MP twice. Having the body indeed.

 

Free Speech; Free Market

An interesting line in David Marr’s article in today’s Herald. Marr asked Bob Carr whether he “had heard it said that the purpose of the tabloid press is to persuade the working class to vote Tory?”

So here’s an interesting question, if we have free and competitive markets and if we have free speech and free media, why don’t we have a left-wing tabloid press to persuade the working class to vote for the (supposed) party of the worker? If we have free markets and free speech, then surely if the left’s political agenda was truly beneficial to the working class, then a left-wing tabloid ought to be quite popular.

There are several rebuttals to this, but I find them unpersuasive.Firstly, we don’t have free and competitive markets. Australia has a oligopolistic media market with reasonably high barriers to entry into the print media. But barriers to entry into the online media are reasonably low – one simply needs to gain critical mass. America has the Huffington Post, a left-wing tabloid if there ever was one. Mud-racking, badly fact-checked rubbish dressed up as ‘news’. So why hasn’t, e.g. Larvatus Prodeo, become a left-wing tabloid? Fairfax media, publisher of smh.com.au is actually faring better than the publisher of the print SMH, so its not as though Australians aren’t going online for news. If we assume free speech, then any new entrant can quickly grow in appeal through word of mouth alone.

Secondly, a purist economic doctrinaire would tell you that a code of journalistic ethics and the Press Council acts like an enforcer for a cartel, deterring new entrants. (Similar arguments are applied to the Bar Council, AMA and other professional bodies). I agree with these arguments to an extent, but I can hardly see why.

Third, just because, objectively speaking, the left’s policies are better for the working class, doesn’t mean that you can always convince them they are better, even in a free speech environment. True – but you can make compelling arguments and hold your own ground. If you had a genuinely strong argument, you’d garner enough readers to make your newspaper reasonably profitable.

So the only answer that I can reasonably agree with is that the Left’s policies don’t benefit the working class or that the working class are pre-disposed towards conservatism. Economic conservatism has given more benefits to the working class than any redistributionist policy of the Left. And on social conservatism, if you can’t make genuine arguments that persuade the working class to vote Left then the only conclusion can be that they are pre-disposed towards voting Tory.

I don’t think anything I’ve said is terribly controversial. There is a good reason the Labor Party has abandoned the working class (despite a recent resurgence in the NSW branch) – there are no long-run electoral prospects for them in wooing them. And I think the ALP should abandon the working class. By adopting intelligent economic conservatism combined with a healthy dose of social liberalism, they can fill the void which the Liberal Party has vacated on both fronts.

I think in the very long-run (let’s say, the next fifty years), we’ll see a complete reversal of the ALP and LNP’s roles. The ALP will become the new classical liberal party, defending good economic and social policy based upon principles of rationality, liberalism and empiricalism. The Coalition will regress to a Tony-Abbott/One Nation party, with social conservatism combined with a curious amalgam of economic conservatism and occasional protectionism.

Whilst a radical pronouncement, it has happened before. In the US, the Republicans and Democrats completely reversed their constituencies some time in the last century. The Australian parties will reverse their’s sometime in the next century.

Public Service Announcement

Well blow me down! Or don’t. It could cost you $2000!

Insurance company Aviva did some research on past ridiculous legal claims that, bizarrely, succeeded despite gross incompetence (and dare I say, contributory negligence) on the part of the plaintiff.

One of these included a payout of £1,796 to an artist who was blown over by a gale of wind. Who could he possibly have sued? God? The government for making a pavement without taking into account people who might be blown over by the wind?

(See the Guardian article linked above for the full list)

Two Constitutional Issues

There are two current constitutional issues in the air that I’ve not yet mentioned. The first is statehood for the Northern Territory.The second is the challenge to the school chaplaincy program.

There is now a Statehood Steering Committee undertaking consultations in preparation for a referendum on Statehood in the future. This includes the preparation of a new State Constitution for the NT (as well as deciding whether to change its then defunct name). George Williams is assisting the NT Parliament with the constitutional convention and has written on the issue.

The constitutional requirements are quite clearly stated in Chapter VI of the Constitution. There is no legal requirement for a full Australian referendum, the power to admit new States is vested exclusively in the Commonwealth Parliament in s 121:

The Parliament may admit to the Commonwealth or establish new States, and may upon such admission or establishment make or impose such terms and conditions, including the extent of representation in either House of Parliament, as it thinks fit.

Some, however, might argue the Australian people have a (political) expectation of a referendum (or, rather, a plebiscite) on the issue. It is true that the Australian people won’t be directly affected. The State of the NT shall not be given extra Senators, unless the Cth Parliament confers them. Only the original States are guaranteed an equal number of senators (s 7). Nonetheless, making the NT a separate State does deprive other Australians of their constitutional powers, namely to interfere in NT affairs in a way not possible for a full State. I don’t see why, if that power is exercised through the Parliament, why the people cannot relinquish that power through Parliament as well. But as I said, that’s a political question rather than a constitutional one.

Ultimately, it will be hard to justify reasons for depriving Northern Territorians the same rights as other Australians. Practically speaking, however, there are some reasons – surrounding Commonwealth power over indigenous title issues, uranium mining etc etc. These, however, might be resolved by imposing terms and conditions when the NT becomes a State. s 121 does not permit the imposition of terms after it becomes a State. Of course, a condition could be that the Cth can amend the NT Constitution even after it becomes a State. That becomes an awkward constitutional question if the NT constitution (as preserved under s 106 of the Cth Constitution) allows them to amend their constitution by a referendum, but that referendum Bill conflicts with the term or condition imposed under s 121 of the Cth Constitution.

Another issue I’d raise is whether the democratic infrastructure exists to support a fully independent State in the NT. It’s State Parliament has only one House and only 25 members. You barely have enough MPs to form a State Cabinet, for crying out loud! NSW Cabinet has 22 Ministers; we have almost as many Ministers as the NT currently has MPs! And there is no upper House to keep the lower House in check; are there even enough Shadow Ministers to keep the Ministers accountable?

Their electors are spread over 1.3 square kilometres, but they have a lower population than the ACT or any State. Is there a territory-wide media that can properly disseminate territory political discussion in a sufficiently meaningful way to ensure the NT is properly governed?

I don’t know the answers to these questions. But, if the NT people think they are able to self-govern, I for one say that we should let them even without an Australia-wide referendum. Equally, however, I think they should not be given a full complement of senators or MHRs disproportionate to their size. The Senate has never truly acted as a States’ House, so justifications based upon equality for States don’t quite make sense since those Senators don’t defend State interests, but follow the party line.

The Deficit

Perceptive analysis as always from Posner J on the Budget deficit. I’m not sure I agree with his description of the Republicans being enraged at Obama because of his centrism. The Posner/Becker blog is one of my favourite blogs (and one of the few I still regularly read, along with Bob Carr’s blog).

I also think its time to re-post this graphic:

Interest repayments are currently 6% of all money spent by the US Government. It is equivalent to 1/3 of all spending on non-social security/defence items. If the present position is absurd, imagine how absurd it will be if interest rates rise because the US’s credit rating drops. As the Atlantic has previously warned, interest rates can rise before the August 2 is reached. The reason that they have not already risen is that the markets continue to have confidence that the problem will ultimately be resolved (whether on the floor of the House or additional accounting tricks). If that confidence is shaken, it could have disastrous consequences for the US Budget and the US economy generally.

On the flip side, the deficit must be cut somehow, whether by tax rises or spending cuts. As Posner says, the deficit should not be allowed to grow faster than the economy in the long run.

It’s interesting that someone as eminent and respected as Posner, also a University of Chicago economist, is recommending that the Republicans accept a ratio of 1:3 tax rises to spending cuts. Others, such as David Brooks have preferred a 85:15 ratio (based upon past budget crises around the world which have been successfully navigated). I believe the Obama position is currently a 60:40 scenario.

I for one prefer the 85:15 ratio. Firstly, there has thus far been no political incentive to cut entitlements. We should cannot expect there to be any incentive to do it in the future – we must take advantage of this opportunity whilst we still can. Secondly, when you look at past budget reductions during a financial crisis, the 85:15 ratio has been a formula for success. We should stick with what we know in these times of uncertainty.

Abbott’s Double Dissolution

So, if elected in 2013, Abbott wants to hold a double dissolution election almost immediately afterwards so he can repeal the carbon tax.

That’s brilliant because:

(1) If elected, he’ll be forced to stick to that line given how much crap he gave Gillard about her election promise not to price carbon

(2) People hate going to elections twice unnecessarily

(3) A double dissolution election mathematically favours small parties like the Greens (since you need a smaller quota to get one of the final seats)

So, even if the double dissolution line marginally increases his chances of being elected in 2013, they more greatly increase his chances of either losing in 2014 or facing an even larger Green majority in the Senate. Whoops.

This is the sort of off-the-cuff commentary that gets Abbott into trouble.

T-Poor

I’ve always doubted Pawlenty’s economic credentials, seeing him as the kind of Republican who chants economic mantra without the firm belief and resolve to go with it. But now, here’s pretty compelling proof – the Minnesota finances are in ruins and the State is in selective default only a few months after he left office.

http://www.nytimes.com/2011/07/14/us/politics/14pawlenty.html?hp

Poor effort.

Plato on party reform

“Mankind will never see an end of trouble until… lovers of wisdom come to hold political power, or the holders ofpower…become lovers of wisdom”

– Plato, The Republic

Does Bob Carr count?

Was I wrong?

Was I wrong? It turns out the Greens are in favour of privatisation and outsourcing after all.

The Greens-dominated Marrickville Council just  outsourced its garbage collecting. It informed workers in a four line email that also informed them they could no longer conduct union business during work hours. When the garbos decided to go on strike, the Greens brought in strike-breakers.

But, if I was wrong. So was everyone else. I wonder if the Greens also secretly support Workchoices. We know they secretly supported the Soviet Union.