Nuclear City: how to help China choose to build new nuclear instead of coal power

Carbon emissions increase 3% per year

Fig. 4. (a) Energy intensity, defined as energy consumption (Gt of oil equivalent) divided by real gross domestic product (trillions of 2005 U.S. $), and (b) carbon intensity, defined as fossil fuel carbon emissions (GtC) divided by energy consumption (Gt of oil equivalent). Energy intensity of China is normalized to 1.56 that of the United States in 2005. — James Hansen 2014

How are we doing on transitioning off fossil fuels? Renewables activists would have us think we are making more progress every year. In truth, we are making less, not more, progress towards zero-carbon emissions. The global production from non-hydro renewables is about equal to one years growth in energy consumption. At the end I’ll offer further evidence on just how serious our situation is.

As a thought experiment, imagine that less developed regions (LDRs) such as Brazil, China, India, Indonesia were building 100% new nuclear plants instead of coal plants. In this imaginary future, we would be close to stabilizing the GHG concentration of our atmosphere. I say “close to”, because if the LDRs are willing to choose nuclear over coal, there is no-problem-whatever with USA, UK, EU accomplishing the same.

Can you imagine China and other fast-growing LDRs giving up coal? I absolutely can imagine it.

Rich country politicians and media spend most of their time talking about what rich countries should do. Not about what China will decide to do based on self-interest. For now, let’s stop talking about rich countries. Instead, let’s talk about what we can do that makes China decide to grow their energy supply using only low-carbon options.

To keep it simple, let’s just talk about China – as a proxy for all the less developed nations (LDRs). China has already demonstrated that:

  • The leadership wants to decarbonize their economy.
  • They will not sacrifice significant economic growth to build zero-carbon power.
  • China will do whatever it takes to avoid a shortfall of energy supply relative to demand.

If we could deliver to Beijing the whole technology package for low-cost, fast-build nuclear the leaders would be very interested. I do not think that political motivation to decarbonize is the main problem in China.

Alternatively, we can keep doing what we are doing. In the absence of any serious political leadership, dedicated scientists and engineers in the national labs, universities and a few startups are working hard to innovate. They are developing new nuclear designs that are walk-away safe, fast to mass-manufacture, mass/volume efficient and fast to deploy. None have enough funding to innovate at any reasonable speed.

Worse is that to actually bring their new design to the market is effectively impossible – both in cost and elapsed time. The innovators must pay the entire cost of teaching the NRC staff about their new technology, then pay to the NRC the entire cost of certification, then pay the cost of building first of a kind commercial scale plant, while creating a complex supply chain that suits the new technology. And so forth. Such institutional barriers also mean that nuclear innovation does not suit venture capital funding, where most funds would expire long before the product began to earn a return.

To make this innovation remotely feasible requires a complete reform of the regulatory framework, and a top level commitment by the national leadership to actually decarbonize. What do you think is the chance that this is going to happen in America? At least before such time as Norwegian beachfront becomes a hot vacation property market.

OK, so it isn’t going to happen in America. Not in Germany. Not even in France. Keep in mind that among the western nations there are powerful, entrenched political and economic interests who are quite happy with the status quo. And extremely unhappy with the prospect that the old hydrocarbon economy would be uncompetitive against carbon free nuclear energy.

These institutional impediments are similar to that faced by low-performance political systems. You can easily name many such nations just in South America and Africa. China had a similar problem coming out from under the curse of Mao. Deng Xiaoping knew he had to liberate the Chinese economy, including attracting foreign direct investment from the “running dog capitalists.” If Deng had tried to reform the entire Chinese nation at once, well he would have had his legs cut off in a heartbeat. The Army and the wealthy who controlled the SOEs would make sure that the status quo was not destabilized.

Deng wondered whether the Hong Kong model could be replicated in new locations that would not threaten the entrenched interests? Maybe in a place like Shenzhen (one of the first four Special Economic Zones). If that worked, then politically it would be much easier to progressively extend the new successful rules to the rest of China. That is roughly the path that Deng Xiaoping set for China.

Oversimplifying, Deng’s SEZ initiative is similar to the concept that prof. Paul Romer has been evolving around the term “Charter Cities“. These are new development zones “chartered” with proven-successful rules. These charters allow families to opt-in to live and work there; allow investors to opt-in to build infrastructure and factories. Therefore creating a competition of cities: competing for residents, investors and markets.

Why can’t we adapt the Charter City concept to create a Nuclear City SEZ? A place where:

  • Taxes and rule-of-law are attractive to investors.
  • Efficient, suitable regulations can be developed.
  • Ample sites are available for constructing new reactors, from demonstration to commercial scale.
  • The new nuclear supply chain can be grown.
  • Factories and skilled labor can be developed to produce as many designs as can compete.

Where would be the ideal place to locate your Nuclear City? China is the obvious place because they have:

  • An almost insatiable need for enormous amounts of carbon-free energy.
  • The political commitment to economic decarbonization.
  • Ample low-cost capital to invest in new plants whose costs are front-loaded.

To progress from imagining to reality we need two things:

  1. Nuclear life-cycle cost to be comparable to coal.
  2. Nuclear deployment rate at least as fast as coal.

How can we accomplish this? Particularly in a climate where America is having to shut down paid-for, nearly zero-carbon nuclear plants? Where Germany is closing ALL of their paid-for, nearly zero-carbon nuclear plants? And Japan? The MDRs (more developed regions) are setting a shockingly awful decarbonization example for the LDRs.

I believe that nuclear fission can be built out at the cost, scale, and rate required to substitute nuclear for coal. This is a decision for China, not a decision for Western politicians. That means developing and deploying low-carbon energy that is dispatchable, scalable, and “cheaper than coal” in terms of System LCOE (including intermittency costs, not just LCOE).

Serious people talk about the expense of new nuclear. In fact the challenge is even bigger than achieving cost parity – a necessary but not sufficient condition. Aside from low cost, we need to make rapid progress on many human fronts. We can thoroughly simulate new reactors on our super-computers, yet this kind of fast-paced effort depends on real people:

  • Growing the nuclear people skills.
  • Growing the safety culture.
  • Growing a sensible regulatory capability.
  • Creating a new high volume supply chain.

Now, imagine that China has committed to creating such a Nuclear City. How can the old nuclear powers marshal their resources to dramatically accelerate the day when nuclear deployment is so attractive to China that they substitute nuclear for coal. Here’s a sketch:

  • The nuclear-technology nations (US, UK, France, et al) offer a nuclear cooperation and technology sharing agreement with China. The idea is to put your best ideas, your best people and your capital into this project — for the long term (decades).
  • Reform the legal framework that prohibits exporting peaceful nuclear power technology.
  • Lose the popular political idea that “We are competing with China”. Substitute the idea that “We are working together to save the planet while we get rich together”.
  • Lose the idea that dirty energy must be expensive. Substitute the idea that clean energy must be cheaper.
  • Invest national R&D funding into the Nuclear City cooperation.

So, why would the various players be motivated to cooperate? Let’s summarize some perspectives:

Update — James Hansen proposes nuclear cooperation  2/24/14 I’m reading Jim’s latest letter this morning Renewable Energy, Nuclear Power and Galileo: Do Scientists Have a Duty to Expose Popular Misconceptions? I just came to the part of his letter where he addresses the topic of this post. Here’s a fragment:

Second, the United States and China should agree to cooperate in rapid deployment to scale in China of advanced, safe nuclear power for peaceful purposes, specifically to provide clean electricity replacing aging and planned coal-fired power plants, as well as averting the need for extensive planned coal gasification in China, the most carbon-intensive source of electricity. China has an urgent need to reduce air pollution and recognizes that renewable energies cannot rapidly provide needed base-load electricity at large scale. The sheer size of China’s electricity needs demands massive mobilization to construct modern, safe nuclear power plants, educate more nuclear scientists and engineers, and train operators of the power plants.

The United States nuclear industry and universities have much to offer, and in turn they have much to gain by cooperating in development of modern safe nuclear power in China. Opposition to nuclear power in the U.S. has slowed but not stopped progress in nuclear technology. However, the realistic size of the market in the U.S. for improved nuclear designs, as well as for evolving still more advanced designs, is limited, at least in the near-term. Furthermore, for reasons that do not need to be debated here, construction time for a nuclear power plant in the U.S. is of the order of a decade, while it is as short as 3-4 years in China. Thus deep nuclear cooperation between the China and the U.S. over the next 1-2 decades could produce both (1) base-load electricity in China that allows China’s carbon emissions to peak within a decade and then decline, as is essential if climate is to be stabilized, (2) an opportunity for both countries to achieve progress in nuclear technology and thus a basis for comparing the merits of the most advanced renewable and nuclear technologies.

Jim has a lot more to say, a whole page on this general topic — I highly recommend that you read his new letter.

What is in it for “China”?

  • Manufacturing, deployment and operations capabilities will be developed locally (as with AP1000 deal).
  • Chinese human resources can be developed faster when working alongside western scientists, and when taught by the western experts (many of whom are retiring, their deep knowledge soon to be lost to society).
  • Chinese leaders do have to live in their high-pollution cities, a daily reminder of the priority to transition away from coal.
  • Fundamentally this is a very large scale engineering and project-management undertaking — China’s politicians are comfortable with that kind of approach.

What is in it for the existing IP stakeholders?

  • Long term profits. Instead of going out of the nuclear business (like Siemens), they have a chance to be part of the biggest revolution since the beginning of the industrial age.
  • A chance to be shareholders in the new energy infrastructure – to be part-owners in the new utilities and infrastructure.
  • The IP to be contributed is now owned by governments and shareholder companies. A necessary condition is that the existing IP owners must be satisfied that this cooperation will allow them to protect their share of the return on existing IP, as well as the return on the future IP. That’s a negotiation – Silicon Valley law firms can help with options.
  • In this planet-scale effort, it is better to be cooperating than competing.
  • Scientists at the national labs, at experienced suppliers like B&W, these people know that China et al can contribute many very capable engineers and scientists. The scale of the Chinese contribution is being demonstrated already by such as the well-funded MSR development program at the Shanghai Institute of Applied Physics (CAS/SINAP). In 2012 the project had a $350 million budget and a staff off 334 that was supposed to grow to 750 by 2015.

What is in it for the investors?

  • The scale of this planet-wide market opportunity is easily big enough to attract private investors if the political risk is covered.
  • Building the first large scale deployments in China, by itself, eliminates much of the political risk.
  • The nation-partners will have to put up enough risk insurance to lubricate a public-private partnership. I think that means largely insurance against political risk. Against the risks of the familiar Greenpeace lawyering and demonstrating, but also the Rule of Law risk in the non-western jurisdictions. It’s an interesting question: how far will Greenpeace get demonstrating in front of new Chinese nuclear plants?
  • China has demonstrated the political capability to generate MUCH larger amounts of capital than needed to get this going. So DFI (Direct Foreign Investment) may be a case of the outsiders knocking on the door, asking to be let in.

What is in it for Western politicians?

  • I don’t know, because there isn’t much reward here within their motivational framework of about two years. Suggestions?

This challenge is not really technical — it is almost entirely political. The Western institutional structure makes it effectively impossible to achieve rapid progress. France could not rapidly convert from zero to 80% zero-carbon nuclear today. Politically France-could-not-do-it-today. It’s difficult to put into words how large this challenge is. Two charts help me to visualize what is happening on the ground, first Robert Wilson’s recent essay Renewables Growth: Ignoring The Whole Equation shows how insignificant are the 2011 contributions from all hydrocarbon sources + nuclear. In other woods, renewables are detectable but insignificant . Jeff Terry summarized Robert’s essay as “…fossil fuels dominate for decades”.

2011 Everything Else swamps Renewables

Second, this chart is completely self explanatory. Nevertheless I highly recommend that you read the source: Roger Pielke Jr.’s Clean Energy Stagnation.

China’s leaders don’t want to suppress criticism of the government. In fact, they probably like it

Andrew McAfee is coauthor with Eric Brynjolfsson of Race Against the Machine. If you have not read the book, please do. Then (or first) read Tyler Cowen’s Average is Over. Then please report back here your take on the future, and how we can best navigate where we will be in 20 or 50 years.

Meanwhile, for a quick read I recommend the fascinating McAfee piece Big Data Reveal Three Surprising Facts About Chinese Censorship. The future ramifications of Big Data are impossible to foresee — but this is an excellent example of surprising results today. Excerpt:

Crimson hexagon, which King cofounded, constantly collects a huge amount of social media from around the world. By seeing which of this content later disappeared from within China the team gained an unprecedented view into a dark and fascinating topic: which aspects of its people’s speech a modern totalitarian regime wants to suppress. This view also allows us to make better-educated guesses about why and how this censorship happens. What we learn from it would have surprised even Orwell.

(…snip…) As the old saying goes, “the mountains are high, and the emperor is far away.” Not any more, since the advent of social media. Citizens use these tools to complain loud and long about corrupt local officials. This provides a great way for Beijing to know who’s stealing above their station, and hence who to crack down on when the kleptomania and/or public pressure to do something about it mount too high. It’s a perverse result, but free online speech turns out to be the top despot’s great friend, because it allows him to keep his underlings in line.

China fact of the day

Tyler Cowen:

…the pace of actual trade settlement in renminbi has failed to keep up [with its role in finance]. It still accounts for just 0.8 per cent of the global total, a lower share than the Thai baht or the Swedish krona.

That is from the FT, via Amni Rusli. The recently reported fact that the renminbi is now the #2 trade financing currency seems to be simply measuring the carry trade, not the true ascendancy of the Chinese currency as a global reserve currency.


An Economics Masterpiece You Should Be Reading Now: Justin Yifu Lin’s “The Quest for Prosperity”

My reading list is overflowing, but it looks like Clive Clook’s recommendation has to go on the top of the Development Economics list. Are you ready for “new structuralism”?

The most valuable new book I’ve read this year is Justin Yifu Lin’s “The Quest for Prosperity.” George Akerlof, a Nobel laureate in economics and a man not given to reckless overstatement, calls it “a masterpiece.” I’d say that’s right.


Lin … was an observer and participant in China’s economic miracle. From 2008 until earlier this year, he was the World Bank’s chief economist. Today he’s back in China, at Peking University.

Lin’s book is intellectually ambitious. He sets out to survey the modern history of economic development and distill a practical formula for growing out of poverty. It’s a serious undertaking: Lin isn’t trying to be another pop economics sensation. But “The Quest for Prosperity” is lightly written and accessible. It weaves in pertinent stories and observations, drawing especially from his travels with the World Bank. He leavens the economics skillfully.

Two Schools

Essentially, he proposes a middle way between two contending schools: structuralism, which emphasizes barriers to development that government intervention is needed to overcome, and the neoclassical approach, which stresses market forces and frowns on industrial planning. He calls his hybrid “new structuralism,” suggesting a closer affinity with the first. (That branding is a bit misleading, but I can see that the alternative — new neoclassicism — doesn’t roll off the tongue.)


China’s Success

Structural transformation, of course, is exactly what China has achieved. Elsewhere Lin has acknowledged that China needs further policy reforms and that all is not well. Yet the country’s success of the past several decades is indisputable — and this is no Soviet-style industrialization mirage. Russian factories sold their output to captive markets. Nobody with a choice ever bought a Soviet-made car or television. China’s outward-looking producers are world-class. I’m typing this on a best-of-breed Apple Inc. laptop, manufactured in China.

As I argued in my last column, China is a capitalist country. But how did it get that way?

Lin’s answer draws on both development paradigms. He sees a vital role for government in overcoming barriers to development. But interventions, he argues, must respect compelling market realities. Of these, the most important is international comparative advantage. Poor countries have lots of cheap labor. For them, capital-intensive heavy industry isn’t the way to go.

For today’s developing countries, Lin says, the global economy is the indispensable setting, and looking outward is the sine qua non of rapid development. On the input side, that’s because of the opportunity it affords for technologically driven catch-up growth. On the output side, it’s because the world is a market for exports. On this view, “export pessimism,” the idea that poor countries couldn’t prosper through international trade, was one of the biggest mistakes of the import- substitution school. Globalization is the poor’s best friend.

Currently $15.37 on Kindle.

The economic legacy left by the baby-boomers is leading to a battle between the generations

Voters need to understand that US demographic trends are bad for growth, and very bad for the total future tax burden. But majority rule democracy is not well-designed to find an optimize solution to the growing conflict between aging retirees and the working population that pays for the elderly benefits. 

This Economist analysis seems to conclude that inflation is the only politically feasible outcome:

(…)Sadly, arithmetic leaves but a few ways out of the mess. Faster growth would help. But the debt left by the boomers adds to the drag of slower labour-force growth. Carmen Reinhart and Kenneth Rogoff, two Harvard economists, estimate that public debt above 90% of GDP can reduce average growth rates by more than 1%. Meanwhile, the boomer era has seen falling levels of public investment in America. Annual spending on infrastructure as a share of GDP dropped from more than 3% in the early 1960s to roughly 1% in 2007.

Austerity is another option, but the consolidation needed would be large. The IMF estimates that fixing America’s fiscal imbalance would require a 35% cut in all transfer payments and a 35% rise in all taxes—too big a pill for a creaky political system to swallow. Fiscal imbalances rise with the share of population over 65 and with partisan gridlock, according to other research by Mr Eschker. This is troubling news for America, where the over-65 share of the voting-age population will rise from 17% now to 26% in 2030.

That leaves a third possibility: inflation. Post-war inflation helped shrink America’s debt as a share of GDP by 35 percentage points (see article). More inflation might prove salutary for other reasons as well. Mr Rogoff has suggested that a few years of 5% price rises could have helped households reduce their debts faster. Other economists, including two members of the Federal Reserve’s policymaking committee, now argue that with interest rates near zero, the Fed should tolerate a higher rate of inflation to speed up recovery.

The Economist does not link the IMF study which they referenced. I think it is: The Challenge of Public Pension Reform in Advanced and Emerging Economies, December 2011. Excerpt on reform options:

IMF pension reform chartA. Advanced Economies

32. Most advanced economies face the double challenge of high debt and rising age- related spending, particularly in health care (Figure 12). A number of countries with above-average levels of pension spending also face large projected increases in age-related outlays (Austria, Belgium, Finland, Greece, Portugal, and Slovenia). In some other countries with below-average levels of pension spending today, projected increases in age-related spending are substantial (Luxembourg, Korea, New Zealand, Switzerland, and the United States).

33. Pension reforms that curtail eligibility (e.g., by increasing the retirement age), reduce benefits, or increase contributions can help countries address these fiscal challenges. The trade-offs across these choices are illustrated in Figure 13. Beyond what is already legislated, with no increases in payroll taxes and no cuts in benefits, average statutory ages would have to increase by about another 21⁄2 years to keep spending constant in relation to GDP over the next twenty years.23 Relying only on benefit reductions would require an average 15 percent across-the-board cut in pensions. Relying only on contributions would require an average payroll rate hike of 21⁄2 percentage points. To keep pension spending as a share of GDP from rising after 2030, additional reforms would be needed: for each decade, retirement ages would have to increase by about 1 year, benefits cut by about 6 percent, or contribution rates increased by about 1 percentage point.

Also on future liabilities The Financial Impact of Longevity Risk, April 2012

Patrick Chovanec: China’s Solyndra Economy

Patrick Chovanec is keeping a watchful eye on the squishy areas of China’s economy. It’s not just the banks and the over-leveraged local authorities – the subsidized renewables are under stress.

On Aug. 3, the owner of Chengxing Solar Company leapt from the sixth floor of his office building in Jinhua, China. Li Fei killed himself after his company was unable to repay a $3 million bank loan it had guaranteed for another Chinese solar company that defaulted. One local financial newspaper called Li’s suicide “a sign of the imminent collapse facing the Chinese photovoltaic industry” due to overcapacity and mounting debts.

President Barack Obama has held up China’s investments in green energy and high-speed rail as examples of the kind of state-led industrial policy that America should be emulating. The real lesson is precisely the opposite. State subsidies have spawned dozens of Chinese Solyndras that are now on the verge of collapse.

(…) Chinese solar companies blame many of their woes on the antidumping tariffs recently imposed by the U.S. and Europe. The real problem, however, is rampant overinvestment driven largely by subsidies. Since 2010, the price of polysilicon wafers used to make solar cells has dropped 73%, according to Maxim Group, while the price of solar cells has fallen 68% and the price of solar modules 57%. At these prices, even low-cost Chinese producers are finding it impossible to break even.

Continue reading

A Stunning Visualization of China’s Air Pollution


NASA image: Satellites Map Fine Aerosol Pollution Over China

Were you thinking of a China holiday perhaps? The interactive images in this Atlantic article might dampen your enthusiasm: 

(…) China’s censors have tremendous power in print, online, and even in public spaces such as Tiananmen Square. But when it comes to air pollution, even the Chinese government can’t obscure the facts. People see and breathe it every day.

The debate over whose statistics are most “accurate” can be confusing — how to sort out truth from spin? That’s why a group of us at the Asia Society decided to launch China Air Daily, a website that provides up-to-date information on air pollution in the country’s largest urban sectors, and even compares them to major cities from elsewhere in the world. 

So if you need to fly to China, check out China Air Daily first.

China estimate of the day

Here’s a useful perspective on China’s infrastructure spend-up from GK Dragonomics via Tyler Cowen:

Another study, by Andrew Batson and Janet Zhang at GK Dragonomics, a Beijing-based research firm, finds that China still has less than one-quarter as much capital per person as America had achieved in 1930, when it was at roughly the same level of development as China today.

Here is more, and I thank David Levey for the pointer. The post as a whole considers whether China is overinvesting and concludes maybe not. Here are further debates on how China is doing.

[From China estimate of the day]

The Apple Boycott: People Are Spouting Nonsense about Chinese Manufacturing

Tim Worstall at Forbes tackles some of the lies and uninformed rubbish of the daily news cycle. Tim credits the NYT series as being the source of the anguish, but surely a lot of this nonsense derives from the “theater” of the now-discredited Mike Daisey. If you are quoting the execrable Daisey from the This American Life episode then you need to study RETRACTING “MR. DAISEY AND THE APPLE FACTORY”:

Ira (Glass) writes:

I have difficult news. We’ve learned that Mike Daisey’s story about Apple in China – which we broadcast in January – contained significant fabrications. We’re retracting the story because we can’t vouch for its truth. This is not a story we commissioned. It was an excerpt of Mike Daisey’s acclaimed one-man show “The Agony and the Ecstasy of Steve Jobs,” in which he talks about visiting a factory in China that makes iPhones and other Apple products.

The China correspondent for the public radio show Marketplace tracked down the interpreter that Daisey hired when he visited Shenzhen China. The interpreter disputed much of what Daisey has been saying on stage and on our show. On this week’s episode of This American Life, we will devote the entire hour to detailing the errors in “Mr. Daisey Goes to the Apple Factory.”

Daisey lied to me and to This American Life producer Brian Reed during the fact checking we did on the story, before it was broadcast. That doesn’t excuse the fact that we never should’ve put this on the air. In the end, this was our mistake.

We’re horrified to have let something like this onto public radio. Many dedicated reporters and editors – our friends and colleagues – have worked for years to build the reputation for accuracy and integrity that the journalism on public radio enjoys. It’s trusted by so many people for good reason. Our program adheres to the same journalistic standards as the other national shows, and in this case, we did not live up to those standards.

It is shocking how gullible are the producers of This American Life. It seems obvious to me that they wanted to believe Mike Daisey’s emotional story about big bad Apple destroying the lives of underage workers making iPads. So they did not factcheck properly – “the story was so good it must be true”. The only good news is that they are taking some very small responsibility for their mistakes in giving credence to Mike Daisey’s lies. But they take no responsibility for any harm done to the workers at Apple. Not a single word of apology to Apple, Apple workers or Apple shareholders. Not a single word.

Back to Tim Worstall at Forbes:

It would appear that there’s momentum being gained for the idea of boycotting Apple‘s products over conditions in the company’s manufacturing chain in China. This is a very silly idea and there is much nonsense being spouted about those conditions.

Apple, the computer giant whose sleek products have become a mainstay of modern life, is dealing with a public relations disaster and the threat of calls for a boycott of its iPhones and iPads.

The company’s public image took a dive after revelations about working conditions in the factories of some of its network of Chinese suppliers. The allegations, reported at length in the New York Times, build on previous concerns about abuses at firms that Apple uses to make its bestselling computers and phones. Now the dreaded word “boycott” has started to appear in media coverage of its activities.

“Should consumers boycott Apple?” asked a column in the Los Angeles Times as it recounted details of the bad PR fallout.

Two of the New York Times articles are here and here. Dan Lyons weighs in here.

Essentially, the list of charges is that the near 1 million people who work for Foxconn (about 230,000 of whom produce products for Apple, the others assembling for Dell, HP, just about every electronics company in fact) have to work long hours for low pay in dangerous conditions.

Well, yes, they’re poor people living in a poor country. That’s what being poor means, having to work extremely hard to make very little. Yes, that is a harsh thing to say but then reality can indeed be harsh.

To show that it’s not just uncaring neoliberals like myself who say such things why not try reading Paul Krugman on the subject of sweatshops? Specifically, here, on what would happen if we were to try and stop the manufacturing being done in such poor places:

First of all, even if we could assure the workers in Third World export industries of higher wages and better working conditions, this would do nothing for the peasants, day laborers, scavengers, and so on who make up the bulk of these countries’ populations. At best, forcing developing countries to adhere to our labor standards would create a privileged labor aristocracy, leaving the poor majority no better off.

And it might not even do that. The advantages of established First World industries are still formidable. The only reason developing countries have been able to compete with those industries is their ability to offer employers cheap labor. Deny them that ability, and you might well deny them the prospect of continuing industrial growth, even reverse the growth that has been achieved. And since export-oriented growth, for all its injustice, has been a huge boon for the workers in those nations, anything that curtails that growth is very much against their interests. A policy of good jobs in principle, but no jobs in practice, might assuage our consciences, but it is no favor to its alleged beneficiaries.

And a very important point, again from Professor Krugman, about what determines the wages that are paid:

Wages are determined in a national labor market: The basic Ricardian model envisages a single factor, labor, which can move freely between industries. When one tries to talk about trade with laymen, however, one at least sometimes realizes that they do not think about things that way at all. They think about steelworkers, textile workers, and so on; there is no such thing as a national labor market. It does not occur to them that the wages earned in one industry are largely determined by the wages similar workers are earning in other industries. This has several consequences. First, unless it is carefully explained, the standard demonstration of the gains from trade in a Ricardian model — workers can earn more by moving into the industries in which you have a comparative advantage — simply fails to register with lay intellectuals. Their picture is of aircraft workers gaining and textile workers losing, and the idea that it is useful even for the sake of argument to imagine that workers can move from one industry to the other is foreign to them. Second, the link between productivity and wages is thoroughly misunderstood. Non-economists typically think that wages should reflect productivity at the level of the individual company. So if Xerox manages to increase its productivity 20 percent, it should raise the wages it pays by the same amount; if overall manufacturing productivity has risen 30 percent, the real wages of manufacturing workers should have risen 30 percent, even if service productivity has been stagnant; if this doesn’t happen, it is a sign that something has gone wrong. In other words, my criticism of Michael Lind would baffle many non-economists.

Associated with this problem is the misunderstanding of what international trade should do to wage rates. It is a fact that some Bangladeshi apparel factories manage to achieve labor productivity close to half those of comparable installations in the United States, although overall Bangladeshi manufacturing productivity is probably only about 5 percent of the US level. Non-economists find it extremely disturbing and puzzling that wages in those productive factories are only 10 percent of US standards.

Finally, and most importantly, it is not obvious to non-economists that wages are endogenous. Someone like Goldsmith looks at Vietnam and asks, “what would happen if people who work for such low wages manage to achieve Western productivity?” The economist’s answer is, “if they achieve Western productivity, they will be paid Western wages” — as has in fact happened in Japan. But to the non-economist this conclusion is neither natural nor plausible. (And he is likely to offer those Bangladeshi factories as a counterexample, missing the distinction between factory-level and national-level productivity).

I quote at such length because it is an extremely important point. Wages paid to manufacturing workers in China are not determined by the productivity of those specific workers. They are not determined by US wages, by the profits that Apple makes nor even by the good intentions of the creative types that purchase Apple products. They are determined by the wages paid by other jobs in China and that is itself determined by the average level of productivity across the Chinese economy.

But now to the specific complaints that are being made. There are three that are being repeated around the intertubes as being particularly outrageous.


Tim’s graphic above summarizes some of Tim’s following points. But best to get over to Forbes to read the whole thing which includes all the resource-links that I left out above.

China: banks look increasingly unstable

China’s banks benefit from regulated spreads – the banks can only lose money via bad loans. But they do not book the majority of their bad loans, so reported profits are a fiction. The regulated spreads implement the Beijing policy of financial repression – transfers from savers (who earning next to nothing) to borrowers (who pay below market rates).

Beijing has driven Chinese growth by credit-driven spending, much of that wasted. This spending is driving up price levels but has not generated productivity gains. Result is 4.5% inflation, massive unrecognized bad loans, while businesses can’t get needed credit. Now what?

This WSJ editorial has it about right:

The optimistic spin on Beijing’s latest monetary easing is that policy makers are choosing to focus on growth instead of worrying about inflation, and maybe that’s true. But it pays to consider a less rosy alternative explanation: Beijing might not be “balancing” growth versus inflation—and it might not have much of a choice.

At first blush the move announced Saturday—a cut in the required reserve ratio governing what percentage of deposits banks much store with the central bank—seems like more of China’s monetary same. The measure releases roughly 400 billion yuan ($63.5 billion) into the banking system. The conventional explanation is that Beijing is worried about access to credit becoming too tight for businesses and, since everyone claims inflation will dissipate later this year, is engaging in some prudent pump-priming. Tinkering with reserve ratios is one of Beijing’s favorite policy tools.

But something has changed this time around: capital outflows. That fine-tuning approach presupposes a system in which capital controls keep money more or less locked inside the system. Before now, money not deposited with the central bank could be used only for credit creation.

Increasingly, another option is opening up—sending or keeping money abroad. Some $34 billion might have left China in the last three months of 2011. There are also signs that some exporters are keeping their earnings in dollars offshore rather than converting to yuan and putting that money into the banking system.

January saw a return to net inflows, but then banks face another drain on liquidity, increasing competition for depositors. Banks are creating a range of “wealth-management products,” which are often risky credit-related products that create substantial off-balance-sheet liabilities, in an effort to woo depositors. There’s frequently a big mismatch not only between the high interest rates offered on these products and the regulated low rates banks can charge on loans, but also between the short maturities of deposit products and the longer terms of loans.

All of this together seems to be putting a liquidity squeeze on the banks. (…)

(…) It might seem odd to worry about inflation, capital outflows and tight liquidity at the same time, but that’s a consequence of China’s distorted financial system. Because allocation of capital remains politicized, a significant portion of the credit stimulus has gone into wasteful projects; since that money is not creating real growth or productivity gains, it chases too few goods at higher prices.

Meanwhile, those who need cash—including bankers and small and medium-sized businesses—can’t get it. Liquidity injections might help bankers with short-term funding. But absent broader reform, that cash will only follow earlier credit down the inflationary rabbit hole.


This highlights what is set to become China’s most serious policy dilemma of 2012: how to balance the risk of inflation against the risk of financial instability. This is a far more perilous tightrope than the old growth-vs.-inflation acrobatics.

Read the whole thing »