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inKim Jong Un could be preparing to open up his country's economy.

Bringing to mind the old Korean saying that “even a rat hole occassionally sees the light of day,” Kim Jong Un could be preparing to open up his country’s economy.  This appears to be the most positive development out of NK in our lifetimes.

Recall that the wishful thinking of Kim Dae Joong’s “Sunshine Policy” and nuclear oversight deals with the U.S. were just one way streets, used as yet one after another bargaining lever by an intractible regime. What makes this radically differerent this time is that it is a NK initiative, a first.  And Park Gun Hae is likely just the  right SK leader to deal with the situation in a mature, cautious and forward looking manner.

Spiegal Online reports that North Korea is enlisting German help to prepare it to open its economy.

This follows on an unprecedented address on New Year’s Day by the young North Korean leader Kim Jong Un in which he called for a “radical” economic renewal for the country and an end to decades of conflict with South Korea. According to Spiegal:

Now, a German media report says he is moving quickly to fulfill at least the first pledge.

According to an article to be published on Saturday by the daily Frankfurter Allgemeine Zeitung, the communist regime in Pyongyang is preparing to open up the country’s economy to foreign investors. Moreover, it has enlisted the assistance of German economists and lawyers to lay the groundwork for the move.

[One of the economists involved in the plan] told the paper that the country is primarily interested in modernizing its laws relating to foreign investment. Such a move would be revolutionionary for North Korea , which has long been largely cut off from the rest of the world by virtue of its heavy-handed regime. The country’s economy is in a shambles as a result. But since Kim Jong Un took over from his late father just over a year ago, there have been signs of change.

His New Year’s address was the most obvious indication that he is prepared to embark on a path different from the one followed by his father, Kim Jong Il. Indeed, even holding such an address was a departure; it marked the first such speech by a North Korean leader since Kim Il Sung held the last one in 1994.

Furthermore, Kim was surprisingly open about the poor economic situation in which his country finds itself. He pledged renewal, indicating that it would largely be dependent on continued technological advancement. He also highlighted last month’s rocket launch, saying it was a boost for “national self-esteem.”

 North Korea watchers have long speculated about how the young Kim would stand with its military leadership, and the economist cited above notes that “the military will not want to give up power. “

The question is whether the young Kim’s reform efforts, if serious, will be able to overcome military resistance. But it is significant and heartening that this question, once unthinkable, would be asked at all.

Still, Tom Coyner wisely advises caution:

It is intriguing, but it is premature to say that real change within the DPRK is at hand.  Too often those outside who have reported that significant change within the DPRK is on the cusp have been disappointed.  Sometimes blame for these failed forecasts may be laid at the feet of the North Koreans, but in almost all cases, the fault has been with westerners being too quick in trying to see something that does not actually exist.  Habitually we try to view North Korea from our reference points and not from the often startling different reality that makes up the North Korean state.

But is this case different?  The fact that this speculation stems from Germany rather than the normal sources of false rumors – S Korea, Japan and the US – may make the story by default to be a bit more credible.  But as I normally warn, it is much too early to say.  At best we may view this as a small “heads up” event as being worthy of putting on our radar screens.  But that is all – at least for now.

 

Tom Coyner, president of business development firmSoft Landing Korea, and author of the Korea Economic Reader, writes in The Korean Joong Ang Daily  about a Korean social problem that doesn’t sound all that foreign:

Getting to the crux of corruption

by Tom Coyner
Korea JoongAng Daily
Nov 19,2012

Whenever I read a news item regarding Korean corruption, I have mixed feelings. Usually, the article is based on the latest finding by a well-meaning NGO that focuses on the corrupting influence of big business on government without adequately addressing the root causes or even the breadth of corruption. Korean corruption doesn’t limit itself to envelopes and car trunks of cash being paid by business people to government officers.

So one may ask oneself, “Can Korea end its many forms of corruption?” That is the essential question, and the obvious answer is “no.”

I don’t mean that as a cynical observation. Rather as much as I recognize Korean corruption having greatly decreased from its much higher levels of 30 years ago, the nature of Korean society precludes corruption from being significantly reduced from present levels.

When I was a Peace Corps volunteer in the Korean countryside in the 1970s, virtually everyone lived in poverty by U.S. standards. Some lived in squalor, but the overwhelming majority lived simply and frugally. Those who were considered well-off at that time and place would nonetheless have been considered to be poor by American standards. However, the relatively well off often had an attitude that could be haughty given that their well-being was measured in the context of their villages and towns.

At the other end of the scale, Korean public servants were paid ridiculously low wages, as is the case in many developing countries. They actually needed outside income to live relatively comfortably and send their children to schools and universities. Often, the only plausible means for this large societal segment was to receive “gratuities.” One could normally count on having to pretty consistently pay 10 percent to get various matters handled. Eventually, the Korean government realized that low public sector wages were a poor value.

Today, Korean public sector workers overall get decent wages, steady employment and superior retirement benefits – so much so that the competition to get these jobs often even by over-qualified applicants is quite severe.

In any case, wealth, which many people may assume to be the end goal of corruption, is only relative. Rather, social power, as defined within one’s social context, is the real corrupting influence. And the corruption is not limited to government officials and business tycoons. NGO executives, particularly when the left wing is in power, find themselves in privileged positions and, unsurprisingly, as we witnessed under Presidents Kim Dae-Jung and Roh Moo-hyun, there was a 10-year spike in corruption involving NGOs.

If corruption were measured by money or goods, then we might consider a limit on luxury handbags and gold watches. But the fact is, on the other extreme, if someone has 10 gold watches and two dozen luxury handbags, there will be a quest for even more. One can say the motivation is greed, but it’s obviously not greed for even more handbags and watches. More likely, these well-off individuals are driven by envy of anyone else possessing the same or a greater number of goods newer or higher quality or status.

The fundamental problem is that being a member of Korean society is very much a status-conscious undertaking, partially based on insecurity as to whether any individual or family truly deserves its presumptive ranking.

What is less controversial is whether a Korean is in possession of enviable goods or amounts of money. And to make matters even more competitive, success, achievement and social ranking are more narrowly defined in Korea than in many advanced societies.

Consequently, once an individual or family feels secure that they are not in danger of being left behind, they immediately recalibrate their insecurity so as to try to catch up to, if not lead, other people in the next higher levels of society.

Ergo, my conclusion is this: Some improvements in reducing corruption will likely be made by new legislation, regulations, enforcement, or the likes. But until Koreans essentially ease up on themselves and learn to be happier with who they are and what they possess, envy and insecurity will drive otherwise intelligent individuals to participating in foolhardy acts, including corruption.

So can corruption be effectively reduced in large measure from present levels? Perhaps. Will we see substantial reductions? I’m doubtful.

On the other hand, Koreans have surprised both the world and themselves many times over. At the same time, the causes of corruption rest on the bedrock of Korean cultural and group psychology fundamentals. At best, I can only hope matters may improve over time. And who knows? They just may.

The hidden horrors of North Korea

The Hidden Horrors of a Holocaust

Melanie Kirkpatrick‘s book,  “Escape from North Korea: The Untold Story of Asia’s Underground Railroad,” relates the experiences of North Koreans who have fled the country.  Through them, we now are now coming to know a great deal about a regime that is worse than can be imagined.

An event hosted by the Hudson Institute in New York City, in which Ms. Kirkpatrick and a panel of experts discussed the topic was featured on CSpan’s Book TV. The clip is 1 hr, 40 minutes, and worth every second. It features compelling accounts by foreign policy expert Jay Lefkowitz, Joseph Kim, who escaped at the age of 13, and Korean American Stephen Kim, who, while working for Walmart in China, became involved in the New Underground Railroad, and spent 3 years imprisoned there.

WATCH IT HERE

Too Much New Information To Continue Ignoring

Linda Chavez, discussing the plight of those who have survived the terror of North Korean concentration camps writes:

 While much of the world’s attention is focused on the Assad regime’s appalling assaults against Syrian citizens…another human rights atrocity occurring on a much larger scale garners far less attention.

North Korea’s new leader, Kim Jong-Eun, has done what few expected when he assumed power after his father’s death last December. Instead of loosening control in the most totalitarian nation in the world, Kim Jong-Eun has actually expanded the number of North Koreans subject to forced labor, torture, starvation and death in the totalitarian nation’s prison camps.

The camps, known as kwan-li-so, form a hidden gulag where those accused of crimes against the state are imprisoned. An estimated 200,000 people serve in these camps…Although the sentences may be for ten years or less, most prisoners die in the kwan-li-so before completing their terms.

Prisoners work 12-18 hours a day under inhumane and dangerous conditions in mines, quarries, and factories. Accidents maim and kill many, but more often starvation takes an unimaginable toll. The average prisoner receives only 100-200 grams of food a day — the equivalent of about one cup of white rice — with virtually no protein. But even rice, a staple of the Asian diet, is often unavailable. Corn is the usual substitute, which leads to pellagra, a disease that brings on skin lesions, mental confusion and eventually dementia.

But perhaps the most heinous aspect of the camps is that not only are those accused of “crimes” but their entire families imprisoned…Now Kim Jong-Eun, the latest in the Kim dynasty that has ruled the DPRK since 1948, has expanded this barbaric practice. The young Kim has now instructed that both older and younger relatives of anyone caught trying to flee the country will be sent to the kwan-li-so.

Even knowing the horrific consequences, North Koreans will continue to try to leave. Since the devastating famine in the mid-’90s when as many as 2.5 million people starved to death, some 15,000 North Koreans have reached safety in South Korea or third countries.

Many more live secretly in China, where their plight is not much better than in the DPRK. These refugees are under constant threat of being turned over to North Korean authorities by the Chinese government or even being kidnapped and forcibly returned by DPRK agents who cross the border for that purpose.

Yet most people in the West either are unaware of what is going on in North Korea or choose to ignore it. And the U.S. government reserves what little outrage it displays on the rogue nation’s nuclear program.

It may become more difficult to avert our gaze, however, as new information leaks out about exactly how bad conditions are in the kwan-li-so. An updated report of the Committee for Human Rights in Korea, “The Hidden Gulag: The Lives and Voices of Those Who Are Sent to the Mountains,” now includes eyewitness testimony from 60 former prisoners along with 30 pages of satellite images of the camps.

Unless that changes, North Korea will continue to starve, torture, and kill its people while we look the other way.

What if There Were a Holocaust and Everyone Just Ignored it?

Thanks to thousands of defections of people fleeing the country, including some high-level individuals, despite the fear of torture and imprisonment for themselves and their families if caught, we now know how inconceivably bad things are.

  • 33% are undernourished, with an entire generation of children physically and mentally impaired.
  • For over a decade, up to 300,000 have fled seeking basic necessities such as food and medicine.
  • More than 200,000 “violators” are overworked, tortured, raped or executed in five political prison camps.
  • The majority are women, and more than 80% of those who have fled become sexually trafficked.
  • Chinese authorities hunt them and send back hundreds to punishment or execution each week.
  • An estimated 300,000 are hiding in the underground today.
  • Between 1 to 2 million died in the devastating famine in the mid-1990s due to natural disasters, the collapse of the PDS (Public Distribution System) and government neglect and mismanagement.

Here’s How to Get Involved:

Like the Underground Railroad of the 1800s that saved more than 30,000 slaves, the current underground railroad is a network of safe houses and escape routes from North Korea to China, Mongolia, Russia and Southeast Asia. LINK (Liberty in North Korea) is involved in rescuing. protecting and resettling the refugees:

  • Rescue Refugees: “TheHundred” campaign, rescues North Korean refugees hiding in China to shelter in Southeast Asia, to be resettled  to South Korea and the United States.
  • Support a Shelter: LiNK supports orphaned North Korean and stateless children in China with education, food, transportation and protection. Their shelter in Southeast Asia assists refugees in their processing for resettlement and prepares and educates them during their wait.
  • Resettlement: The “Liberty House” program provides educational and financial assistance and case management services to North Korean refugees we have resettled in the United States and South Korea through LiNK’s communities and networks.
  • Awareness: LiNK raises awareness of the North Korean human rights and refugee crisis and provides opportunities for you to directly participate in local chapters, which focus on raising awareness in local communities, advocating and fundraising for LiNK’s programs.

Visit LinkGlobal.org for information and to donate.

Click to view the Facebook Marketing Humor and Wisdom Page

Advertising Slogans Lost in Translation

from American Demographics

Here’s why it’s not about translation, but trans-adaption.

Braniff slogan: “Fly in leather.”
Spanish translation: “Fly nude.”

Purdue slogan: “It takes a tough man to make a tender chicken.”
Spanish: “It takes a horny guy to make a chicken hot.”

Pepsi’s slogan: “Pepsi Brings You Back to Life.”
Chinese: “Pepsi Brings Your Ancestors Back from the Grave.”

Coca-Cola: the name Coca-Cola
Chinese characters: “Bite the wax tadpole.”
(later changed to characters that mean “Happiness in the mouth.”)

Clairol: “Mist Stick” curling iron
German: Shit stick (mist is slang for manure.)

Snap! Principle of Multicultural Marketing:

It’s not about translation. It’s about trans-adaption.

China’s exports (by $billions)

Now You Know It – Now You Don’t

Kyle Spencer in his article in Seeking Alpha focuses on today’s “point of Western fear” of Asian business – Chinese exports. China’s rise to power has supposedly been its export sector:

In 2010, The New York Times ran an awe-stricken editorial praising the ability of China’s “resilient, low-cost manufacturers to keep selling abroad despite a slump in global consumer demand as a result of the financial crisis.” The Economist raved that Chinese factories “have made so much, so cheaply that they have curbed inflation in many of its trading partners.” The date given for China’s assumption of America’s throne depended on who you asked. Deutsche Bank predicted that China would become the world’s largest economy in 2040. HSBC said 2050. The World Bank said 2030. Goldman Sachs said 2020.

A survey conducted by Pew Research Center shows that the perception is that China has now surpassed the West is held by majorities in many Western nations, including:

  • 62% of Germans
  • 57% of English, French and Spanish.

However, only 29% of Chinese nationals believed that China was #1. Something doesn’t add up.

What Does “Made In China” Really Mean?

Spencer shows that the notion that China’s current growth is due to its export sector is false. The Chinese economy has not been ta primary beneficiary of its export growth, and, despite the growth of China’s export share, the actual contribution of exports to the Chinese GDP has barely risen.  Here’s why:

Today, “Made in China” doesn’t usually mean the product was actually manufactured there. Rather, it was only assembled in China.

The assembly of products like the iPhone in China accounts for a tiny fraction of the input cost, as shown below. No more than the $8 Foxconn charges to assemble the iPhone actually goes towards the Chinese GDP. Where does the rest go? To Taiwan, South Korea and Japan.

Retail Price Memory Chips Touch-sensitive display screen Wireless Chips Camera Total Cost of Materials Foxconn Assemblycosts
$599.00 ($199 w/2-year contract) $28.20 $37.00 $23.54 $17.60 $188.00 $8.00

Net Exports Fall

While the chart below shows Chinese exports as a percentage of GDP (red) towering over U.S. exports as a percentage of GDP, appearances can be deceiving.

Figure 1:

The export/GDP ratio greatly overstates the actual export share of China, for two reasons:

  1. China has been shifting from goods with a high content of domestically-sourced components toward a much larger percentage of imported components, which decreases the domestic share of export revenues.
  2. The export/GDP ratio calculation is inaccurate, and includes “rampant double counting.” Thus the increases noted do not actually correspond with an increasing export share.

A look at net exports provides a much different picture. Net exports have actually been negative over the past two years:

Figure 2:

The Figures Are Deceiving

Annual surveys show:

  • 45 million of the 228 million Chinese industrial employees work in the export sector.
  • But there are 795 million in the work force (out of a total population of 1.35 billion.)

The point: 45 million Chinese workers in companies that operate on small margins like Foxconn’s cannot possibly produce $1 out of every $3 in China (33%), as shown in Fig. 1 above.

In plain English, the chart (Figure 1) is deceiving. Figure 2 is a more accurate indicator of the export sector’s contribution to the national economy.

Spencer then pulls out this table from the China Statistical Yearbook, that “dispels any lingering faith we might have left in the Chinese export myth.” In 2010, trade contributed a mere 6.4% toward the Chinese GDP, while 52% of it came from investmemt

Fig. 3: Investment vs. Trade as a % of China’s GDP

Takeaways

In judging the health of the Chinese economy, disregard  he Chinese export/GDP ratio. Investment, not exports are what drive the Chinese economy. Measurements such as non-performing loans, rather than exports are a much better determining factor when gauging the health of the Chinese economy.

Viral Dance Craze!

See the ABC news story about the viral craze here.

I’ve written about how entertainers have launched careers by going viral. Justin Bieber was discovered in 2008 on YouTube and got his first single released in 2009, and Colbie Caillat saw MySpace as an opportunity to launch a brand that the traditional media didn’t know quite what to do with. A new star was launched on Youtube – Psy, a Korean pop singer, whose invisible horse-riding rap video went viral.  See my post highlighting The Socioeconomic Message Behind Korean Singer Psy’s “Gangnam Style.”

As a result of his overnight viral success in America, on Friday, 9-14-2012, the Today show extended their Summer Concert Series by a week just to showcase the singer. A crowd of mostly Korean fans but some Americans as well flooded Rockefeller Plaza. Psy not only performed but interviewed, breaking two major barriers that Korean entertainers have striven to overcome: getting recognition from American audiences, and breaking the conversation barrier.

NewsFeed estimates that thousands of fans were packed to catch a glimpse of the entertainer.After his initial performance, he gave a second performance, teaching the Today hosts and the crowd how to do the four-step dance that’s stormed the world. The whole Today staff joined in – even fill-in host David Gregory of Meet the Press. Earlier that week on the Ellen show, Psy showed Britney Spears how to do the dance.

The Awesome Power of Social Media Untethered

It couldn’t have been more of a surprise. For years, Korean entertainers have tried unsuccessfully to break through, and this 34-year-old Korean rap star accomplished it so suddenly and easily by becoming an overnight social media phenom. Psy said in a sit-down interview before he took the stage:

I just uploaded this video only for the Korean viewers, and within 60 days, I’m here.

“Gangnam Style”, released in July, has become a viral success, the most-viewed K-pop song on YouTube and getting around six million views every day.

WATCH:

The Viral Phenomenon

The Atlantic’s Max Fisher has an insightful article on Gangnam Style, Dissected: The Subversive Message Within South Korea’s Music Video Sensation. Somehow, Psy (Park Jaesang), an unlikely Korean singer, has succeeded where the K-Pop entertainment-industrial-complex and its canned superstars have failed so many times before: making it in America. The track “Gangnam Style” went viral, earning 49 million hits on YouTube since its mid-July release. American rapper T-Pain was retweeted 2,400 times when he wrote “Words cannot even describe how amazing this video is.” Pop stars expressed admiration. Billboard extolled his commercial viability, and the Wall Street Journal posted it as one of “5 Must-See” response videos. A CNN anchor said: “I have to admit I’ve watched it about 15 times. Of course, no one here in the U.S. has any idea what Psy is rapping about.”

American teens React to the video:

The Economics

So what is it about? Max Fisher discussed the video with Adrian Hong, a Korean-American consultant and oft-quoted observer of Korean issues, and summarizes his findings by writing that Park’s “Gangnam Style” video lampoons the self-importance and ostentatious wealth displayed by the residents and frequenters of Seoul’s posh Gangnam (Gang River South) disctrict , with Psy playing a clownish caricature of a Gangnam man. He writes:

The video is rich with subtle references that, along with the song itself, suggest a subtext with a surprisingly subversive message about class and wealth in contemporary South Korean society. That message would be awfully mild by American standards — this is no “Born in the U.S.A.” — but South Korea is a very different place, and it’s a big deal that even this gentle social satire is breaking records on Korean pop charts long dominated by cotton candy.

One of the first things Hong pointed to in explaining the video’s subtext was, believe it or not, South Korea’s sky-high credit card debt rate. In 2010, the average household carried credit card debt worth a staggering 155 percent of their disposable income (for comparison, the U.S. average just before the sub-prime crisis was 138 percent). There are nearly five credit cards for every adult. South Koreans have been living on credit since the mid-1990s, first because their country’s amazing growth made borrowing seem safe, and then in the late 1990s when the government encouraged private spending to climb out of the Asian financial crisis. The emphasis on heavy spending, coupled with the country’s truly astounding, two-generation growth from agrarian poverty to economic powerhouse, have engendered the country with an emphasis on hard work and on aspirationalism, as well as the materialism that can sometimes follow.

Gangnam, Hong said, is a symbol of that aspect of South Korean culture. The neighborhood is the home of some of South Korea’s biggest brands, as well as $84 billion of its wealth, as of 2010. That’s seven percent of the entire country’s GDP in an area of just 15 square miles. A place of the most conspicuous consumption, you might call it the embodiment of South Korea’s one percent. “The neighborhood in Gangnam is not just a nice town or nice neighborhood. The kids that he’s talking about are not Silicon Valley self-made millionaires. They’re overwhelmingly trust-fund babies and princelings,” he explained.

Parodying the Twisted Dream of Upward Mobility

See the subtitles By Jea Kim:

The article quotes U.S.-based Korean blogger Jea Kim who wrote at her site, My Dear Korea:

“In Korea, there’s a joke poking fun at women who eat 2,000-won (about $2) ramen for lunch and then spend 6,000 won on Starbucks coffee.” They’re called Doenjangnyeo, or “soybean paste women” for their propensity to crimp on essentials so they can over-spend on conspicuous luxuries, of which coffee is, believe it or not, one of the most common. “The number of coffee shops has gone up tremendously, particularly in Gangnam,” Hong said. “Coffee shops have become the place where people go to be seen and spend ridiculous amounts of money.”

Psy hits all the symbols of Gangnam opulence, but each turns out to be something much more modest, as if suggesting that Gangnam-style wealth is not as fabulous as it might seem. We think he’s at a beach in the opening shot, but it turns out to be a sandy playground. He visits a sauna not with big-shot businessmen but with mobsters, Kim points out, and dances not in a nightclub but on a bus of middle-aged tourists. He meets his love interest in the subway. Kim thinks that Psy’s strut though a parking garage, two models at his side as trash and snow fly at them, is meant as a nod to the common rap-video trope of the star walking down a red carpet covered in confetti. “I think he’s pointing out the ridiculousness of the materialism,” Hong said.

Cause for Reflection?

The biting socioeconomic commentary in the song by Park Jaesang (Psy) may give cause for reflection about some of the debilitating socioeconomic issues America faces. Take, for instance, the “Joe the Plumber syndrome” where aspiring upward climbers like small businessmen are deluded by the rightwing propaganda into thinking they have more in common with the 1% (so-called “job creators”) than the poorest among us, and are convinced to support policies that are actually behind the growing wealth disparity. Like the Korean Gangnam Dream, the American Dream has today become an economic nightmare of growing wealth disparity, downward mobility and economic illiteracy.

In conclusion, if there’s some hope that Koreans are starting to get the message, there’s hope for America.

Tom Coyner of Soft Landing Consulting, which provides services and resources for companies interested in doing business in Korea, posts some interesting links and analyses of the recent copyright infringement suit Apple brought against Samsung.

Some highlights:

Coyner’s Comment

“Long ago, trade economists noted the best guarantee a developing economy to start playing by international rules is when it starts creating its own intellectual property worth defending.

Korea is in many ways, has long ago passed that point.  And yet, in some ways, it has not yet reached that development milestone.  As I  have repeatedly pointed out, Korea has yet to develop a market-defining product.  It has produced hundreds of thousands of very good to excellent products, many of which have been significant improvements on the original designs created by others.

The Galaxy line of products is a good example of this.  Putting aside patent issues for the moment, it is not enough to produce high quality products that are often better in various ways than the originals.  Producing improved copycat models requires priorities that limit basic R&D.  While some R&D is put into improving the original product design, huge amount of resources must be devoted to setting up production lines capable of generating large volumes of high quality products in very, very short time frames.  This is Samsung Electronics primary global competitive advantage.  But the tradeoffs include being branded as a copycat and being forced to also compete on price, which means much smaller profit margins than the true innovating companies.”

Check out the blog entry here.

Check out Soft Landing Consulting here.

This is not to say there is anything wrong per se, at least for the short- to long-term, with this business mode.  But there are also some structural weaknesses, particularly given that Korea has to watch its backside with up and coming competitors, such as China today, and possibly Thailand and Indonesia tomorrow.  The Koreans need to find the means to move up the food chain in terms of basic R&D and market-creating innovation.  Otherwise, they may risk emulating their Japanese mentors yet one more time.

Turning to the below selection of articles, I have chosen a couple of articles that give a good summary of what happened in San Jose as well as a contrary court case that took place in Seoul coincidentally(??) a day before the US court decision.  But first I lead with a marketing analysis that interestingly enough appeared in today’s Samsung-owned newspaper, the Korea JoongAng Daily.

Related Article:

Korea Times: Samsung “Reeling in Shock” After Apple Verdict

Failed States Index: China in Worsening Economic Decline

 Stuart Staniford  in his blog entry notes that China is in Worsening Economic Decline. Working with The Fund for Peace/Foreign Policy Failed State Index, he lists the fastest degrading countries and finds China to be in position 6 on that list.
China declined from an overall score of 72.3 in 2005 to 84.6 in 2009, just 5 points from hitting the 90 threshold to be on “Alert” status – the highest category on the list, along with Zimbabwe, Somalia, and Afghanistan.

An Alarming Downward Trajectory

If the average trend of the last five years were to continue, it would reach this status in about 2011:

Causal Factors

The many factors in this are shown in the list and graph below:

  • I-1. Mounting Demographic Pressures (Demographic Pressure)
  • I-2. Massive Movement of Refugees or Internally Displaced Persons creating Complex Humanitarian Emergencies (Displaced People)
  • I-3. Legacy of Vengeance-Seeking Group Grievance or Group Paranoia (Vengeance Seeking)
  • I-4. Chronic and Sustained Human Flight (Human Flight)
  • I-5. Uneven Economic Development along Group Lines (Uneven Development)
  • I-6. Sharp and/or Severe Economic Decline (Economic Decline)
  • I-7. Criminalization and/or Delegitimization of the State (Criminal State)
  • I-8. Progressive Deterioration of Public Services (Deteriorating Services)
  • I-9. Suspension or Arbitrary Application of the Rule of Law and Widespread Violation of Human Rights (Human Rights)
  • I-10. Security Apparatus Operates as a “State Within a State” (State within State)
  • I-11. Rise of Factionalized Elites (Factionalized Elites)
  • I-12. Intervention of Other States or External Political Actors (External Intervention)

This shows how these indexes have been evolving over time for China:

The largest component of the worsening score is “Sharp and/or Severe Economic Decline” – which has soared from 0.5 to 4.5.  By comparison, Spain in 2009, in the midst of major post-bubble recession, has an economic decline score of only 1.3.

According to Staniford. this is so unbelievable given China’s rapid and precipitous growth, that he questions the validity of the calculations:

Economic decline is one of the few things on the Failed State Index measures for which there are reasonable quantitative indicators: the IMF produces GDP estimates for just about all the countries in the world, so it’s easy for others to figure out if a given country’s economy is contracting or growing.  If the Fund for Peace can’t get “Economic Decline” in the largest population country in the world right, then they certainly don’t deserve a big spread in Foreign Policy magazine every year.

New News is Bad News

I have addressed the serious long-term structural problems that threaten to derail the Chinese economy over the next few decades here before. To make matters worse, short term prospects have dimmed considerably of late. Growth has slowed precipitously in the short term – down to 7.5% from 10%, and a real estate bubble is threatening to burst.
Now, there’s more bad short-term news: the slowdown that’s been underway since late last year is definately accelerating. The rebound that most economists had expected in China in the second half of the year following rate cuts in June and July has failed to materialize.  Data showed inflation fell to a 30-month low and industrial production dropped to the lowest in just over three-years, while retail sales numbers also missed expectations. The numbers are prompting some bears to grow more confident that the much-feared “hard landing” scenario for China is finally underway.
Patrick Chovanec, Associate Professor at Tsinghua University’s School of Economics and Management, told CNBC that China’s economy is, in reality, probably growing at about 4 to 5 percent right now. Growth of around 5 percent or below, is seen by many economists as a “recession” in China’s case.

China July trade surplus unexpectedly shrinks

V. Phani Kumar in MarketWatch  notes that China’s trade surplus unexpectedly narrowed in July. Exports barely grew from the prior month, while imports increased at a smaller rate. Following reports of anemic growth in monthly industrial output and retail sales, concerns about China’s economic outlook adversely affected equities, commodities and “risk currencies” like the Australian dollar.
  • The trade surplus dropped from $31.7 billion in June to $25.1 billion for July, 2012.
  • It fell far short of estimates of $35.2 billion in a Dow Jones Newswires economists’ survey.
  • Exports rose just 1% from last year vs. an 8% expectation, and June’s 11.3%.
  • Imports expanded just 4.7%, vs. an expected 7%, and June’s 6.3%.
IHS Global Insight economists Alistair Thornton and Xianfang Ren write:
Trade data has come in dramatically below expectations — the worst export growth number (excluding Chinese New Year) since November 2009 — highlighting the risk that the external environment poses to an economy. This confirms that the strong export numbers in May and June were, as expected, complete anomalies.

Is a Stimulus Coming?

However, Deepanshu Bagchee,  Managing Digital Editor, CNBC International notes  that, rather than being glum, investors are betting on still more stimulus, propelling stocks and the Australian dollar higher.  China’s Shanghai Composite finished up 0.6% on release of the bad economic news Thursday, August 9, 2012  John Woods, Chief Investment Strategist for Asia Pacific at Citi Private Banking said on CNBC’s Worldwide Exchange:

It’s one of these situations where it’s so bad, it’s good. The numbers were pretty lackluster… there were some signs, in my view of stability, but little in the way of recovery.

Some Optimism

Economists and strategists expect more rate cuts as well as cuts in the reserve requirement ratio (RRR.)

The government has expressed their intention to bring future investment projects forward, and now that growth is their top priority.

On top of that, local governments have been, in the last few months, announcing massive plans to stabilise growth, and some have suggested banks to lend to local governments for growth stabilisation purpose.

Much Doubt

Most analysts don’t expect China to go in for another big stimulus package along the lines of its 2008-2009 program, when China announced spending worth $586 billion or around 14% of its GDP.

Economists also point out that the window for more monetary stimulus may be closing, as higher food prices are likely to lead to an acceleration in inflation later this year, limiting the room to manoeuvre. And, further, incremental rate cuts may not work any more, so Jing Ulrich, Chairman of Global Markets, China at JPMorgan, says policymakers will have to “get much more creative to boost the economy.” In fact, that stimulus spending is blamed for many of China’s economic problems in subsequent years, including local government debt and over-investment in housing and higher inflation.

Business Insider explains the low expectations for government stimulus:

There is very little doubt, to our mind, that this series of weak numbers will put more pressure on the government to ease policy further. However, let us review a few facts: the People’s Bank of China has already cut interest rates twice and RRR has been reduced three times since late last year.

Regarding local governments’ moves to stabilize growth:

Surely, many of these have not been implemented (especially the local governments stimulus), and we still have no idea just how much of these investment plans will actually come through. However, with the easing that has been done, obviously it is not working yet. This is consistent with our belief that it will require much more stimulus in order to ensure growth can get above 8%. What have actually been implemented (mainly in forms of interest rates and talks of stimulus) were far from what we would regard as “enough”. The problems that are left now is whether the government is willing to stimulate the economy like crazy (as they did in 2009), and whether the government still has that ability.

What can China do? Not much. Jing Ulrich holds out one last hope – that China could try cutting taxes to support domestic demand:

China is in a unique position because it does have a very strong financial and fiscal position. The central government has a very strong tax intake, it can afford tax reductions, while other governments cannot.

That’s doubtful since the U.S. historical example shows that tax cuts haven’t  had any effect as an economic stimulus.

 Is the Government Willing to Undertake Massive Stimulus? 

According to Business Insider, no:

The fact that the real estate market warming up in the past few months has already caused some concern. As we believe that it is next to impossible to ease policy to stimulate growth while at the same time cool the real estate market, this leaves the government in a position that limit their willingness to implement full-on easing. While the government is not likely to implement extremely harsh measures to curb home prices at this point as the economic slowdown is getting much worse than most expected, it is not likely that they would like to ease either.

Is the Government Able to Undertake Massive Stimulus? 

Recent data indicates that the government actually has few tools to wield. Despite interest rate cuts, loan growth isn’t growing, and deposit  growth remains weak.

Business Insider’s guide to China’s monetary policy explains that the central bank creates money to prevent Chinese Yuan from appreciating during the period of inflows and massive trade surplus, to create more liquidity in the banking system. However, the central bank has been doing the opposite – withdrawing money from the foreign exchange market to prop up the Chinese Yuan, and tightening the money supply. Even though the central bank can cut reserve requirement ratio – and has already done so in the past – to offset this, it can only cut the ratio about 20% or so.

While the government could run up a higher deficit to create growth, the smaller trade surplus and capital outflow severely limit the central bank’s ability to ease credit.  And while government directed lending (i.e. forcing state-owned banks to lend) has been a key monetary tool, banks’ ability to extend credit when the country is facing shrinking trade surplus and capital outflow is still very limited.

 “Staring down the bottomless pit”

Business Insider points out that the phrase, “the consensus is expecting a recovery in next quarter during every quarter” remains unsupported.

Unfortunately, we just don’t see that, and we doubt if the government has the willingness at this point to do much more, and we doubt whether the government really has the ability as the market thinks. We do not see convincing signs of recovery (except, perhaps, Wen Jiabao making waves every other week), and we even struggle to see signs of stabilisation.

If we see anything, we are seeing a bottomless pit.

Related Articles

Worldwide Survey Provides Valuable Customer Insights

An Ernst & Young study of retail banking customers around the world examines the views of more than 28,500 banking customers in 35 countries, gathered in March 2012. The 62-page survey which can be  downloaded here  provides insights into bank customer behaviors, including:

  • How many consumers have switched?
  • How many customers plan to switch and why?
  • Why are US customers they switching?
  • How many banks do they use?
  • What kind of banks do they use for different purposes?
  • Are they really satisfied and trusting of their banks?

How Many Have Switched Banking Providers?

  • 34% of customers worldwide have changed their main banking provider
  • 74% have done so in the last 10 years (marginally lower than in 2011.)
  • In the US and Canada, the number increased from 38% in 2011 to 45% in 2012.

How Many Plan to Switch and Why?

Customers planning to change banks worldwide since 2011:

  • increased from 7% to 12%.
  • 50% cite high fees and charges as the primary reason.
  • high fees or rates on deposits is the primary reason most switch primary banks.
  • Poor rates on accounts is an important factor for U.S., Canadian and European customers.

Top 10 Reasons U.S. Consumers Are Switching

Customers want more than a better deal and moreover, want the flexibility to shape the relationship, contacting their bank whenever and however they choose. They may prefer online channels for simple transactions, but demand high-quality, personalized services for more complex transactions.

  1. High fees.
  2. Poor account rates.
  3. Poor branch experience.
  4. Proximity of branches.
  5. Service failings.
  6. Lack of personalized contact.
  7. Poor call center experience and range of products.
  8. Poor internet/mobile experience.
  9. Poor brand image
  10. Poor adviser competency

How Many Banks Do Consumers Use?

Banking consumers are diversifying their relationships since 2011— spreading their money around.

  • Customers using only one bank dropped from 41% to 31%.
  • Those with three or more have increased from 21% to 32%.

Which Institutions Consumers Use For Specific Products

Customers tend to:

  • use their main bank primarily for checking, savings, credit cards,
  • diversify more for investments, retirement, insurance, mortgage, personal loans and car loans.

Are They Really Satisfied and Trusting?

Satisfaction High, Trust Low: Ernst & Young found that overall satisfaction remains high. However, trust levels remain low.

  • Consumer confidence dropped 40% globally.
  • In Europe’s more beleaguered countries it’s nearly double:
    • a 72% drop in Italy and 76% in Spain.
  • In the U.S., 50% say confidence in the banking sector has decreased over last year.
    • 9% say they are more confident.
    • 40% say there’s been no change in their feelings.

Bottom Line: What Should Banks Do?

Banks need to focus on providing a better customer experience to reduce churn and attrition rates. Ernst & Young researchers say that in order to retain their customers, banks must adapt their business models to cater to increased demands and also accommodate a wide range of customized services and products.

In contrast, the 3 models most commonly pursued by banks are based primarily on:

  • low-cost competition, or
  • high-touch service and/or
  • accessibility.

The Ernst & Young report offers this advice:

  • Make low-cost digital channels customers’ preferred choice. Banks should encourage customers to use digital channels whenever possible by using price incentives.
  • Make pricing and service promises transparent. Pricing is critical to customer satisfaction, but most customers have no idea how much they pay each year. Transparency over pricing and service promises is vital if banks are to deliver something customers value.
  • Offer tiered levels of customer experience. Customers should have the option to buy into certain products and services, and the ability to earn upgrades through loyalty, whether in terms of longevity or the share of wallet handled by a particular bank.
  • Encourage customer self service. Banks needs to improve the way they provide information and advice to interest and convince self-directed customers, including financial planning tools, ranges of product and pricing bundles.

Large, full-service banks need to defend market share against new entrants which offer greater specialization, while retaining the ability to meet a wide range of needs and sustain profitability.

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