Twitter: Joshua Gans- @jodiecongirl Actually, it says more about you that you've heard of them!
- @jodiecongirl I think it says that economists don't just assume rational agents but are attracted by them too. Talk about a value conflict.
- @jodiecongirl Why uninteresting? Think of Alex P. Keaton, Quark , Sheldon and Dogbert.
- RT @freakonomics: Freakonomics Movie is released via iTunes tomorrow: http://bit.ly/9YveA3 [I'm gathering the kids for a Friday night movie]
- Am I to understand that we are now in the path of a Hurricane? http://bit.ly/daitO9 This aint the tropics.
Readership
Jul
31
Freemium and price discrimination
by Joshua Gans | Filed Under Economics | 4 Comments
I have been reading Chris Anderson’s Free (for free). I’ll post a review when I am finished but I got interested in the notion of freemium. The idea is that you sell two versions of a product. A ‘lite’ one for free and another one with more features for money.
In a sense, this looks like nothing more than third degree price discrimination or as Hal Varian has called it ‘versioning.’ But there is a difference: the low priced product is free which means that people buying that have some consumer surplus. Interestingly, the standard analysis of price discrimination suggests that that should not happen and the price should be higher leaving those consumers with no surplus and also a product with a sub-optimal number of features. We do get the latter but clearly not the former. The implication of this is that the full version of the product will be priced too cheaply to maximise profits. Consequently, there is more to freemium than just versioning and, indeed, it must be that the free pricing option leads to other benefits: the principal one most likely being that it is useful to ‘try before you buy.’ This will maximise profits, however, only if, in expectation, a consumer’s surplus is zero and some consumers regret wasting their time trying the product. I suggest that data from the iTunes App Store will illuminate on this whole issue but someone is going to have to extract that from Apple.
Jul
29
Do Teachers Matter?
by Andrew Leigh | Filed Under Economics | 3 Comments
A psychology study hit the headlines last Friday under the banner ‘Teacher quality makes little difference, study shows’.
Jul
29
Liberals and conservatives
by Sam Wylie | Filed Under Economics, Politics | 14 Comments
If you believe in freedom of individuals to live without interference or persecution. If you believe that the state exists to serve individuals, rather than the opposite. If you believe in free markets. If you favour private property over state ownership and self reliance over collectivism. If you have a cosmopolitan rather than local perspective. If you have the progressive impulse to continually reform our institutions. If you believe that our actions should be governed by reason rather than tradition. Then you are a Liberal.
If you put great store in tradition. If you believe that much of what passes for progress is really change for change sake. If you define yourself by regional or national affiliation. If your perspective is local rather than cosmopolitan. If you believe your values would not be out of place in the past. If you cherish you family history in the military or on the land. If you believe that much has been left behind in the rush to modernity. Then you are a Conservative.
The page for ‘conservative’ in wikipedia has a photo of Malcolm Turnbull (and Mahmoud Ahmadinejad). But Turnbull is not a conservative, he is a liberal. Read more
Jul
28
Yesterday I spent several minutes of my life that I’ll never get back reading Kevin Rudd’s diatribe. Apparently the economic reforms of the Hawke-Keating and Costello-Howard era were all for nothing and we need to roll it all back. Michael Stutchbury’s disection in the Australian today got it spot on – don’t waste 10 minutes reading Krudd, spend 5 reading Stutchbury here.
Jul
28
Human capital formation and asset returns
by Sam Wylie | Filed Under Economics | 2 Comments
McDonalds (the hamburger chain) is sponsoring free access to a maths education site called mathsonline.com. It explains Year 7-12 maths in a large set of short flash media segments. Each 2-7 minute segment explains just one thing and has a corresponding problem set. My kids use a different math education site called Mathletics. The mathsonline.com is better at explaining the material but it not as game like, so motivation to participate might be an issue. But I like it, and good on McDonalds for sponsoring it.
Even in their current primitive form, these online maths sites do things that teachers and textbooks cannot. They explain the material in a dynamic, step by step approach that is much more powerful than a passive textbook. They zero in on the students weaknesses and address them. They appeal to the spirit of fun and competition to motivate, and they get parents more involved. Even better, they are cheap. A Mathletics subscription through a school costs $10 per student per year. I wonder what will be the effect of children all over the world having access to low cost (or zero cost) maths education. More generally, what will be the effect of lowering the cost of human capital formation by orders of magnitude? Read more
Jul
28
Dietonomics
by Andrew Leigh | Filed Under Economics | 3 Comments
My oped today is on the economics of dieting. Full text over the fold.
Jul
27
Federal government announces income tax increase.
by Stephen King | Filed Under Economics | 2 Comments
Interesting times for health care in Australia. See the article from the Australian here.
One point in particular struck me:
Australians face paying a higher Medicare levy to fund a universal dental health scheme.
Now, the silly thing is that the Medicare levy has never covered the cost of the government funded services under Medicare. It is simply a tax. So there are really two stories here:
- Federal government to reform Medicare and health system more broadly; and
- Federal government to raise income taxes.
The tax rise will be ‘flat’ in that it will be a constant percentage rise on taxable income for all income earners. But rather than talk about a tax rise it sounds much better to talk about the Medicare levy and health care reform.
Jul
27
The Other Idiot Box, Part II
by Andrew Leigh | Filed Under Economics | 2 Comments
One of our ANU RSSS visitors, Jacob Vigdor, has an opinion piece in today’s Australian about the (negative) impact of home computer use on test scores. He writes:
Jul
27
Elsevier are experimenting with different ways of publishing scientific articles. Here is their site. At a first glance neither article looks groundbreaking. But this one has an interesting feature — a discussion section. That makes the paper more ‘wiki’ like and this is something that is surely valuable.
But here is the thing. Elsevier are presuming that they can research and work out the optimal paper layout and then implement it. When it comes down to it, there are discipline specific idiosyncrasies and also individual specific ones. What we want is a standard for paper content classification — abstract, introduction, methodology, results etc — and then to have API’s that allow others to present and manipulate the content as they see fit. It is the content of the paper that needs to be covered by open standards not the presentation.
Jul
26
Why the NBN needs to be a boring infrastructure company.
by Stephen King | Filed Under Economics | 3 Comments
Due to popular demand (i.e. one request) here is the op ed that I wrote on the NBN from the AFR on July 15th.
Jul
25
Academics and Harry Potter
by Joshua Gans | Filed Under Economics | 3 Comments
Here is an article I wrote for The Punch.
Harry Potter’s Uneasy Relationship with Academia
Joshua Gans, The Punch, 28th July 2009.
Last weekend marked the launch of the 6th in the now 8 part movie saga that is Harry Potter. As is surely apparent by now, the movies sit not as a substitute for the books but a complement to them. They succeed where they can visualise magic that cannot be done in words — the creatures, the castle and a large part of the action. But they fail where the books have their most significant: in the complex characters and the deeper moral issues.
But in Harry Potter and the Half Blood Prince one of those deeper but unstated moral issues arose neatly and somewhat humorously in the movie: the role of academia. It came in the form of Professor Slughorn, a marvelously imagined character who is a teacher who cares only about the best in the class and seeks them out to the exclusion of all others. He, in turn, is a character that is perhaps the most instrumentalist of at least the ‘good’ guys in the saga. Slughorn at various points commits self-interested acts claiming ‘academic purposes.’ For instance, he is caught removing valuable leaves from a plant, claiming their scientific merit but we know being motivated by the black market value.
That, however, is not where this issue comes to the fore. It is hard to describe it without giving away too much of the plot but Slughorn cites the very same ‘academic’ disclaimer when handing over clearly dangerous knowledge to a young Voldemort. Slughorn later clearly realises his error and attempts to cover his tracks but the message is clear: there is a danger to the academic shield.
Now I am not going to opine about that dilemma although being an economist who routinely puts research into the public domain, I have faced Slughorn’s choice and have worried about it. But what is more interesting is the entire subtheme in Harry Potter of an anti-academic bias. This might seem funny with so many respected characters being affectionately and authoritatively titled ‘Professor’ but let’s look at the evidence.
First, why is a High School education considered enough in the wizarding world. It would seem to me that having to learn magic as well as standard fare would put a greater premium on a longer period of education. Where is the secret college at Oxford that surely must come next for the academically-gifted Hermione? Can a secondary education really be enough for the career paths the students started choosing early on?
Second, dropping out of high school is something not treated with concern. Fred and George fly away on brooms out of school and into a flourishing retail business. But by the seventh book, and I am not giving too much away here, all three main characters have dropped out of school — yes, to pursue the greater good — but what other childrens’ novels would have ever contemplated such a message?
And then finally, there is an underlying current of what all that magical knowledge is good for. Wizards know how to cure the ill, repair efficiently, and also a variety of psychological enhancements we need not go in to. But somehow, all that knowledge remains tightly held apparently to protect the Muggles from greater disruption but surely some leakage could do a world of good.
Standing back, there is an uneasiness with academia and knowledge throughout the series. But unlike other issues they remain unstated as an undercurrent. One wonders whether the apparatus of the saga could actually have been put to good use opening them up to debate.
Jul
25
Archiac postage prices
by Joshua Gans | Filed Under Economics | 4 Comments
Australia Post wants to raise the price of stamps to 60 cents. That would mean a 10 cent increase over two years. You know the story: population is growing, having an all points delivery system is mostly fixed costs, but the internet is killing post traffic. You need to recover the fixed costs from a smaller base and so prices rise. That is a good argument for the direction of the increase (I can’t say much about the magnitude) but it is also contributing to a death spiral as that price increase will only reduce post traffic further.
I am not sure what regulatory constraints the ACCC is working under but the issue here is that the stamp pricing itself is surely the problem. I’m not concerned about the subsidy from short distances to greater distances (that is, today just matching the competition). It is the focus on the envelope delivery price in contrast to the prices of delivering other physical packages.
What the ACCC should do in this review is consider pricing structure and whether it should be freed up or whether it should expect Australia Post to do better. I suspect that the stamp price cap is all about being able to offer certain discounts to business. What is probably required is a revenue cap on Australia Post (for all its services) with the stamp price fixed forever as a transitional mechanism. Put simply, that price is hardly reflective of what should be regulated in Australia Post in this changing environment.
Jul
24
Broadband Institute
by Joshua Gans | Filed Under Broadband | Comments Off
I just attended the launch of the Institute for a Broadband-Enabled Society (IBES) founded by Professor Rod Tucker here at the University of Melbourne. The launch was conducted by Victorian Premier John Brumby (who kicked in on behalf of the State initial funding of $2m plus an extra $5m for the development of applications in the IBES’s lab) and Broadband Minister Stephen Conroy. I’m on the Executive Committee of the Institute. The Institute is very multidisciplinary and aims to develop broadband applications to complement the National Broadband Network. It is well-positioned in an area that was identified by the Cutler Review last year as one that should be a priority for the government in innovation. It will be interesting to see what develops.
Jul
24
The Market for Fossils
by Kwanghui Lim | Filed Under Economics | Comments Off
Last week, the BBC broadcast an interview with palaeontologist Jorn Hurum, who led the research into the fossil called Ida. A podcast is available from http://www.bbc.co.uk/programmes/p003lrtc. Ida is 47 million years old and an almost complete specimen. It is believed to be an early primate, making it an important evolutionary link. The BBC interview contains a first-hand account of how he ended up buying the fossil on behalf of the Oslo Natural History Museum. The deal was initiated at a vodka bar in Hamburg where Jorn was shown several photos of Ida by a fossil dealer. Ida was initially thought to be an ancestor of the Lemur. Subsequent research shows that it was most likely to be a primate instead (although this is still hotly debated). While Jorn has been criticised for paying around $750,000 for the fossil, it must in fact be worth a lot more than that. Interestingly a number of other scientists have suggested that a “market for fossils” should not exist at all; I suppose they think of fossils as repugnant goods.
Jul
24
It’s called “the gale of creative destruction” so called by Joseph Schumpeter to describe the process by which new innovations displaced old. It is the core of economic progress. From The Daily Show, a literal gale of activity in the field of wind … it speaks for itself.
| The Daily Show With Jon Stewart | Mon – Thurs 11p / 10c | |||
| iFeud | ||||
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Jul
23
Tying networks and mobile phones
by Stephen King | Filed Under Economics | 2 Comments
It is always interesting to see how competition differs between countries. Mobile phones provide a good example. As this article notes, in the US mobile networks and handsets are tied. Only AT&T has the i-phone, only Sprint has Palm-pre (at present) and so on. This ‘tied’ competition is very different to Australia where most networks offer a range of phones including the most popular models.
So, why the difference?
Jul
23
Wryside Economics of Education
by Andrew Leigh | Filed Under Economics | Comments Off
My second Wryside Economics talk on ABC Radio National Life Matters today was on two big issues in the economics of education – conditional cash transfers and class size reductions. If you’re interested, you can download it here.
Jul
22
Paul Romer proposes a “theory of history.” 52 minute long video. As always, stimulating.
Jul
21
FoodWorks and grocery wholesaling
by Stephen King | Filed Under Economics | Comments Off
The ACCC has cleared the acquisition of 45 supermarkets by FoodWorks from Wesfarmers (i.e. Coles). One big plus from this is that it may provide FoodWorks with the mass of stores that it needs either to set up its own grocery wholesaling operations or to join with Franklins to increase the size of its wholesale operations. As the ACCC grocery report made clear, currently most independent supermarket retailers in Australia have only one credible source of wholesale supply for dry groceries – Metcash. Competition in wholesaling would improve the ability of these independent retailers to compete against the two large integrated chains – Coles and Woolworths (the major supermarket chains or MSCs).
Jul
21
Moon shot
by Joshua Gans | Filed Under Economics | 9 Comments
I was alive but I was too young to remember the first moon landing. But as I was growing up, and definitely before I turned 10, there was a sense that more was to come. A moonbase in 1999 depicted on TV seemed plausible. Casual space travel by 2001 seemed almost under-stating what could be done. Even The Economist feared Europe dropping out of having a role contributing to advancement. Yet here we are. People went to the moon and then did not return for 34 odd years and counting. I do not recall that prediction being made even if there were constant voices against the expense of all of this space travel.
This hit home as I showed my 10 year old daughter this terrific website: wechoosethemoon.org. It is tracking in ‘real time’ the whole moon expedition. At any point in time you can see what was going on exactly 40 years ago.
“What’s this?”
“It is showing where the lunar lander is. You see, here it is in orbit around the moon. They are about to land.”
“What? There are people up there now? Is that possible?”
“No, it is just showing what happened 40 years ago.”
“Oh, yes. That’s what I thought. We don’t do this anymore.”
And there you have it. It is hard to have these conversations and feel that somehow we have failed. The current generation believe what is true, that such space travel is as much as a dream as it was prior to the 1960s. I know that some will say that was all well and good given the cost. But the cost of the entire space program over that time, in today’s dollars, was $176 billion. And yes, that, in retrospect was too costly. Not because of the resources it took but because the expense surely had value in knowledge created that would built up and lead to greater things. To not have reinvested on the back of that achievement was to erode the capital value of the initial expense. Almost impossible to conceive at the time, the moon landings were a short-term policy and not a serious commitment to the future. It will leave us and the next generation wondering what could have been.
Jul
20
More Evidence on Cash 4 Class
by Andrew Leigh | Filed Under Economics | Comments Off
A recent randomised evaluation from Wisconsin has potential application to the debate over Australian proposals to link school attendance to income support.
Conditional Cash Penalties in Education: Evidence from the Learnfare Experiment (stable link, ungated link)
by Thomas Dee
Wisconsin’s influential Learnfare initiative is a conditional cash penalty program that sanctions a family’s welfare grant when covered teens fail to meet school attendance targets. In the presence of reference-dependent preferences, Learnfare provides uniquely powerful financial incentives for student performance. However, a 10-county random-assignment evaluation suggested that Learnfare had no sustained effects on school enrollment and attendance. This study evaluates the data from this randomized field experiment. In Milwaukee County, the Learnfare procedures were poorly implemented and the random-assignment process failed to produce balanced baseline traits. However, in the nine remaining counties, Learnfare increased school enrollment by 3.7 percent (effect size = 0.08) and attendance by 4.5 percent (effect size = 0.10). The hypothesis of a common treatment effect sustained throughout the six-semester study period could not be rejected. These effects were larger among subgroups at risk for dropping out of school (e.g., baseline dropouts, those over age for grade). For example, these heterogeneous treatment effects imply that Learnfare closed the enrollment gap between baseline dropouts and school attendees by 41 percent. These results suggest that well-designed financial incentives can be an effective mechanism for improving the school persistence of at-risk students at scale.
Jul
20
Greens for uranium mining
by Sam Wylie | Filed Under Economics | 6 Comments
Peter Garrett, the Federal Environment Minister, was heavily criticised after he approved the Four Mile uranium mine in north of South Australia on July 14. Critics of Garrett have charged him with being a hypocrite; citing his two terms as President of the Australian Conservation Council and his Senate candidacy with the Nuclear Disarmament Party in 1984. I don’t find his position on uranium mining especially hypocritical
The global circumstances are vastly changed in the 25 years since 1984. That was a particularly tense year in the Cold War. In December 1983 the US began deploying pershing and cruise missiles in the UK, Germany and Italy in response to the Soviet deployment of their new SS-20 missiles. Nuclear war between the super-powers seemed a real danger. The Doomsday Clock of the Bulletin of Atomic Scientists went down to three minutes to midnight in 1984, the second worst setting of all (only 1953 was worse). But in 2009 nuclear war is no longer the greatest threat to the global community. Global warming has taken over in those 25 years as the greatest threat. Read more
Jul
19
Chinese investment
by Mark Crosby | Filed Under Economics | 5 Comments
Mid-week I contradicted the Finance Sector Union and was accused of being right wing, but by yesterday, after the following piece in the Age I was accused in some “interesting” correspondence of being a Chinese spy. But it is worth expanding on a couple of points in my Age piece. My point in the article is simply that I don’t think the Hu affair will derail Australia’s trade and investment relationships with China – we are simply too dependent on each other to reverse course easily.
I usually try to focus on the economics and steer clear of other issues in writing on China, because economics is my comparative advantage rather than me not having a view. But clearly there is a lot of sensitivity around the Hu case, and after writing this piece I was accused of being insensitive to Stern Hu and his family, and too apologetic to the Chinese.
Firstly, the Hu case is not going to be solved by an aggressive attack on China’s government, such as Barnaby Joyce’s jumping up and down and accusing China of trumping up charges against Hu. It is in Hu’s interests, and Australia’s broader interests to pursue this case quietly and through diplomatic channels rather than loudly through the press, as anyone who understands the Asian concept of “face” will attest. See Ross Cottrill’s Asialink essay which makes this point quite clearly in the context of our defence relationship with China. Since I can’t have anything to add to the debate, in my view it is counterproductive for me to participate in this debate through the press.
Secondly, is Hu getting fair treatment? Clearly he is not getting the treatment that he would in a similar case in Australia, but he is getting the same treatment as his Chinese co-accused. I certainly agree that China’s human rights record is not where it should be, but it has steadily improved in the past 30 years. On the basis of China’s reform record we should not expect China to move quickly to western style democracy or human rights, and as above, it is more productive to quietly encourage and assist human rights improvements rather than go the Hollywood route of loudly condemning China’s human rights record.
Some of the media reporting has assumed that Hu is an innocent aussie caught up in Chinese fun and games. The reality is we cannot know yet if the charges against Hu are true or not. If they are false then we ought to feel very sorry for him and hope that this issue is resolved quickly. If the allegations are proved right then it goes to show once again that Australian citizens ought to avoid at all cost getting arrested overseas as in many countries it is much less pleasant than being arrested in Australia. Business practices that are dodgy in Australia are dodgy in most places, so avoid them. China does have problems with corruption, but as a businessperson you are extremely unwise to get caught up and think that it is compulsory to participate.
Follows is the Age piece…
The detention of Stern Hu has brought into question a lot of assumptions regarding our trade relationship with China. Many see the arrest of Hu as retaliation for Rio’s rejection of the Chinalco offer, as well as a reaction to Australian government dealings more generally with Chinese investment in Australia. Some question whether the Australia-China relationship will be permanently damaged by this affair.
In my view this affair will turn out to be a small bump in the long road to China’s full integration into the world economy through trade and investment, and part of that will be a continuing fruitful and prosperous trade and investment relationship with Australia. China’s continuing economic growth, as well as social and political development is very important to us and to reverse course on our trade and investment relationship is simply not possible.
It is all very well to point to China’s murkiness with regard to the arrest of Hu, and to the murkiness surrounding the iron ore trade and China’s state owned enterprises. But our Foreign Investment Review Board processes would seem just as murky to outsiders. One thing that seems clear is that our foreign investment rules need to be more transparent. Currently FIRB recommends a course of action to the Treasurer, who makes a decision based on “the national interest.” It should be possible to spell out more clearly exactly how national interest is determined and what kind of investments are likely to be rejected.
One factor that is clear is that Australia needs foreign investment. China currently has a large amount of money to invest, and is particularly interested in doing so in areas such as resources and banking. The reason that we seem to have seen an upsurge in Chinese investment recently in Australia is that China is catching up in terms of overseas investment to where it should be already. While China early on opened up its economy to trade, it remained until recent years very restrictive with regard to investment flows. Until quite recently Chinese citizens and corporations were prohibited from almost all offshore investments, and foreigners investing in China were required to invest in Chinese businesses through joint venture arrangements.
These “capital controls” proved to be useful during the Asian Financial Crisis, as China was unaffected by outflows of foreign funds that decimated countries such as Thailand. But these capital controls are gradually being loosened, which is why we are seeing Chinese investment now. Foreign companies investing in China are now allowed to start a wholely foreign owned company in China, and Chinese companies and individuals are able to invest offshore – though these activities are still more regulated than in most other countries.
The result of past capital controls is that Chinese investment in Australia is very small. Foreigners hold stakes in our economy which total $1.7 trillion (about one and a half years worth of GDP). China’s investments in Australia account for only $8 billion of this – less than half of one percent of the total. Japan accounts for $90 billion, the US $418 billion and the UK $427 billion of our foreign ownership. Clearly there is a lot of room for further Chinese investment here and our close relationship with China through trade should logically lead to more of a Chinese stake in our economy.
Australia’s investments offshore amount to around $1 trillion. Again, China is under-represented, with our investments in China amounting only to $7 billion. There is no economic reason why our investment shares in and out of China should be so small – or why investments from two large English speaking countries should be so large.
It does make sense for each large investment in Australia to be treated on a case by case basis, as currently occurs. But the case against Chinese investment on the basis that many of the Chinese companies have high levels of state ownership or intervention is flimsy. Have investments by American hedge fund managers always been in our national interest? Chinese interests are generally about resource security, which does not have any obvious conflict with Australian national interests. The key for Australian businesses and individuals is to understand the investment opportunities that China provides, and also to expect Chinese entities to continue to be interested in acquiring shares in our companies. But China is long way from owning the farm!
Jul
18
Amazon.com as Big Brother
by Joshua Gans | Filed Under Economics | 6 Comments
News today that Amazon.com activated its ability to take back eBooks from its Kindle Reader.
This morning, hundreds of Amazon Kindle owners awoke to discover that books by a certain famous author had mysteriously disappeared from their e-book readers. These were books that they had bought and paid for—thought they owned.
But no, apparently the publisher changed its mind about offering an electronic edition, and apparently Amazon, whose business lives and dies by publisher happiness, caved. It electronically deleted all books by this author from people’s Kindles and credited their accounts for the price.
And the books retracted? Ones by George Orwell, including 1984. Come on. If this were April 1, this would be a perfect April Fools Joke. But it isn’t and the threat to the whole eBook model is significant. To placate publishers, Amazon lets them be fickle. But this destroys consumer confidence with all publishers. Think about it. If a book becomes a best seller, a publisher can retract it and then charge everyone (past and future) a higher price to get it again. It is the worst sort of hold-up.
If this sort of shenaningans continues, the publishing industry is likely to be Napstered and it will serve them right. Music publishers expressed frustration when Apple fixed music prices and played hardball. I suspect they will in the future see this as a necessary evil to protect them from each other.
[Update: apparently, the Orwell books were 'unauthorised' editions. Not sure that changes my basic argument though. Amazon needs to therefore be religious about what gets put up. For known works, one would think that should be straightforward.]
Jul
17
China to the rescue
by Mark Crosby | Filed Under Economics | 2 Comments
Crikey asked for a 500 word piece on China’s latest GDP numbers and their impact on us. The piece follows…
China’s second quarter GDP numbers, released yesterday were widely reported in the Australian press as further evidence that the global economy has turned the corner, and it’s all up from here. Hopefully that is correct, but as always, reading China’s GDP numbers is as much art as science.
The headline number is GDP growth over the year to the end of the June quarter of 7.9%, up from 6.1% growth in the first quarter. China’s GDP growth slowed dramatically in the last couple of months of 2008 and into the first quarter of this year, but is now showing signs of picking up very quickly in the second quarter. The major reason for the pick up is the effectiveness of China’s stimulus package. Most major Chinese cities have detailed plans for their cities out to 2030 or beyond – these plans include great detail on public transport and road requirements. With these plans in place it is possible for provincial and local governments to speed up spending programs if funds are provided to do so.
The willingness of China’s central government to expand monetary policy has enabled banks to lend to state owned enterprises, and so China’s stimulus package has very quickly led to huge spending on public infrastructure. Fixed investment grew by over 40% in real terms over the past year, mostly representing this huge increase in infrastructure spend. Interestingly, this increase in spending has not been strongest in the usual growth engines in China such as Shanghai, Beijing, and the export oriented areas around Guangdong province. Instead, second tier cities and provinces away from the coast are expected to grow quicker than average throughout 2009 – particularly in Sichuan province where earthquake reconstruction continues, but also in places like Inner Mongolia.
China currently has around 130 million workers in the urban centres who have migrated from the countryside. It is commonly claimed that China needs 8% GDP growth to create enough new jobs to support these migrant workers, as well as to create jobs for additional migrant workers as they move to cities. If growth falls too far below 8% then rising urban joblessness will create social unrest and put pressure on the central government to support the economy.
This pressure is one of the reasons why the central government has been willing to support the stimulus program in China. Moving forward however, China needs to move towards an economy that is driven more by private investment and by consumption, rather than by investment that is state driven. Encouragingly, retail sales grew by nearly 17% in the past year, but this stronger growth in consumption needs to continue. For China’s economy to have sustainable growth in the medium to long term, China’s reliance on investment by state owned enterprises needs to be reduced. But in the short term the Chinese government will continue to support growth through loose monetary policy and heavy funding to state owned enterprises for infrastructure and related projects. With this being the case I think that we can expect to see China’s economy grow at around 8% in 2009 and in 2010.
The implications for Australia of this growth are very positive. Not only is China growing reasonably strongly, but the emphasis on infrastructure makes this growth very resource intensive, which of course is a good thing for Australia’s resource exporters and for our economy.