World Bank memos

Enzo Michelangeli em at
Thu Dec 3 18:53:02 PST 1998

-----Original Message----- From: Henry C.K. Liu <hliu at> Date: Thursday, December 03, 1998 11:58 PM

>Enzo Michelangeli wrote:
>> Surely they must feel the need for good
>> answers to give to their children, should they ask why Chinese people
>> under the colonial yoke have managed to achieve a per capita income
>> times higher than in their own country.
>Hong Kong's propsperity has been achieved despite of, rather than because

Precisely my point. Why a territory under foreign domination does so much better than the sovereign motherland? Failing to provide a convincing answer to such a fundamental question may be very dangerous for a government.

>Before the opening up of the China market in 1978, Hong Kong propsered as a
>merchant during the Korea and Vietnam wars and during the Cold War in
general as
>an embargo buster. It has little to do with capitalism or free market.

Why? busting embargoes is very consistent with free trade.

> In
>it was based on closed markets. The myth of Hongkong being a shining
example of
>Asian free enterprise was created by Thatcher 15 years ago as a ploy to
>British residual interest in Hong Kong after its return to China in 1997.
>was also a strategy to lure American interests to Hong Kong. Hong Kong's
>market capitalism is only 2 decades old.

Cowpertwhite (or how the heck its name was spelled) lived much before that.

> Among the folklure of Hong Kong
is a
>saying that it is hard to be a capitalist unless one first acquires capital
>either illegally or unethically. Horatio Alger type attitude will only get
>person a decent job. There is another Hong Kong truism: an university
>is only useful for wealth preservation; it is rather useless, and in fact a
>negative, when it comes to wealth creation. And it is supported by
>evidence. The fact is: most of Hongkong's wealth had been created by
>non-capitalist means. And its largely still true. Very feel HK natives
>believes in capitalism in the American sense of that term.

Ah, so this is the answer that the Chinese leaders give to their children: they are richer than us because they stole the money. Does this fairytale apply also to Taiwan or Singapore? Anyway, the free-market propaganda must have infected their minds as well, at least when they are on HK soil. For example, here is what in 1994, Zhou Nan (then director of Xinhua News Agency in HK, and certainly not a liberal) was saying, blasting the pension scheme proposed by Chris Patten:

--------------------------------------- (From an article by Chris Yeung on South China Morning Post of November the 17th).

China's top man in Hong Kong las night made a scathing attack on the Government's pension plan, warning of financial dangers and erosion of business confidence.

Zhou Nan, local director of Xinhua (the New China News agency), warned that transplanting a Euro-socialist pay-as-you-go concept into the territory - referring to the Government's old age pension scheme - would be too costly for Hong Kong both now and after 1997.

Without mentioning the pension scheme, he said the territory's successful policy of low tax an a balanced budget would be jeopardised "if we drastically expand budgetary deficits and overcommit ourselves with regard to benefit payments and other expenditures in the transition period".

Mr. Zhou, speaking at the Hong Kong Management Association's annual fellowship dinner, was making an address in English for the first time since he took over Xinhua in 1991.

His criticism of the pension scheme was by far the clearest sign from the Chinese Government that it will oppose the scheme when it is tabled for discussion at the Joint Liaison Group.

Government officials have strongly hinted that they would drop the plan if China said no.

Under the scheme announced in July for consultation, all eligible residents would get a monthly pension of HKD 2,300 (USD 295) in 1994 dollar terms, when they reached 65. The money would come from a proposed contribution of 1.5% of the employee's monthly income, paid by both employees and employers.

Despite the collapse of the "through-train" arrangement, Mr. Zhou argued that China's decision to disband the three tiers of government in 1997 was "instrumental in reducing the uncertainties over Hong Kong's political transition".

Mantaining economic prosperity, the Xinhua chief said, was beginning to figure more prominently as 1997 approached.

Citing the dynamic growth of the mainland economy, he said the "China factor" was a positive one that could not be removed or replaced.

"However, there is a possibility that another key element in Hong Kong's economic success, namely, it's economic structure, might be changed on purpose." Mr. Zhou said.

"In my view, it will be ill-advised for anyone to attempt this for sake of one's political positioning.

"We are seeing disconcerting signs of attempted changes, proposed in the name of lofty causes. These will definitely bring serious impact on the future of Hong Kong.

Although Hong Kong needed to develop new infrastructure projects and care for the poor and the old, Mr. Zhou said this must be done carefully, taking into account "the cost to the taxpayer, the cost to budgetary balance and the cost to Hong Kong's overall economic structure and its free market orientation".

Referring to a World Bank report on pension schemes released in September, Mr. Zhou said the "pay-as-you-go" pension strategy in some Western countries had a history of grossly under-estimating liabilities and grossly over-estimating funding projections.

"The World Bank's statistics and analysis are not irrelevant to Hong Kong's situation", he said.

"I remember dining in a Chinese restaurant in New York many years ago. After dinner the waiter served fortune cookies, and a message that I got read: `The person sitting right next to you isn't going to pay for his meal'.

"This American-made practical joke has an ironic sense of reality in today's Hong Kong.

"Drastically expanded benefit payments and benefit commitments are being offered in the disguise of a free meal. The departing colonial authorities are not going to foot the bill. The taxpayers of Hong Kong will.

"All the `beneficiaries' will see money being shifted from one pocket into another, with a government bureaucracy serving as value-subtracted intermediary", Mr. Zhou said.

He indicated that the price to be paid by the Special Administrative Region would be "budgetary imbalance, tax hikes, reduced financial market liquidity which will result in eroded foreign investors' confidence".

"We must watch very closely every spending move made by the [Hong Kong] authorities, either in cash or in terms of committments. Hong Kong's future will depend on our vigilance and our perception, and most of all, on our desire and ability to uphold the Basic Law", he said.

Noting the concerns raised by local people over the "massive spending package", Mr. Zhou sad "an accountable government should give such considerations a high priority". ---------------------------------------

No that I disagree with Zhou, eh. Patten is a little weasel.

>> Certainly, but nobody will ever invest in places with terrible
>> infrastructure and plagued by officers asking for kickbacks, unless
>> is cheap enough to guarantee high returns. And I'm not only talking of
>> foreign investors: Chinese capital is as smart as any. Which is why it's
>> been traditionally held offshore.
>So labor and environmentl abuses are caused by corruption and backward
>infrastructure? That was what the drug smuggling British tried to argue,
>opium smoking was the fault of Chinese culture rather than British
>It seems to me that such abuses occur because they are permitted to occur,
>sometimes legally, most of the time illegally.

It's not matter of culture, but of tradeoffs: those who have little money prefer to spend it for basic necessities, and environment doesn't appear to be perceived as one. And regarding the application of the law, who's in charge now in China?

>By the way, there are no kickbacks to officials in China. There are
>type special relationships that I described in my previous posts that are
>cultural specific, but impersonal kick backs are extremely rare, not
>the Chinese are innately more ethical, but becasue the social structure
>that type of corruption ineffective.

So why every now and then there is a new campaign against corruption? Was the mayor of Beijing thrown to jail just as an exercise? And how exactly giving extensive power to state bureaucracy, especially with the lack of a free press, makes corruption "ineffective"? Worldwide experience tells otherwise. Anyway, I was not referring specifically to China, but to most poor countries. If returns on investment were as large as you say, nobody would produce a single pin in America or Europe anymore. The fact is: low wages are just one factor, which is often offset by bad infrastructure and scarce rule of law. The opposite is actually true: when those other costs fall, the wages increase sharply, even without any political action: it's simply an issue of higher demand for labour deriving from the accelerated investment. Which is why Shenzhen has much higher wages than Chengdu, and HK than Shenzhen.

> Even since China shifted from its extreme
>leftism, overseas Chinese capital has chosen China as the location of
>rather than staying offshore, oftern even at lower returns. It shows that
>maximization of return on capital is not an all overriding factor.

On the opposite, the political shift in China that has attracted their investment precisely by allowing higher returns. And of course, speaking the same language is an additional facilitating factor.

>> HK is in a much better position than China, and the pollution is not that
>> bad, even though more could be done. And it will, because highly paid
>> professionals care about health more than workers who have more immediate
>> worries (which explains why people in poor countries smoke much more than
>> rich countries). But it's *wealth* that is bringing in a cleaner
>> environment, not social policy. Otherwise, Calcutta would be a garden and
>> Carmel a dump.
>You are totally off on this point. Wealth appears to have produced more
>pollution than its ability to clean it up.

The industrial society, in its early stages, does produce more pollution than rural life, but after a while it also produces the resources necessary to clean up. And interestingly, the masses, who know what it means to be poor in the countryside much better than starry-eyed intellectuals do, prefer to it the problems of urban life, even at these early, polluted, exploitative stages.

If you want my opinion, one of the major reasons why attempted implementations of socialism keep failing is that socialists appear to consider overproduction as a structural flaw, whereas abundance is precisely what people need and want. In short term, falling prices cause discomfort to some, but they are just the expression of the fact that higher volumes of product require less labour (largely due to technological factors). Seeing in them the end of the world because it reduces the workers' bargaining power is short sighted: first of all, because workers are also consumers, and they WANT abundance at low prices. Secondly, because lower wages simply express diminished demand for certain types of jobs, and the right answer is to upgrade the workers' skills, and if possible fostering their entrepreneurial attitude, not preserving the existing production relationships in a salaried job framework for fear of dismantling the "revolutionary class".

Cheers --


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