Red Links, 9-16-10

After the Storm (The Economist)East Asia is becoming a more mature and complicated place, demographically, politically, and economically. And, it’s not all bad. There are real gains to applaud. Now, though, cranking out the successes is no longer like manufacturing. It’s marginally costly, whether it involves a currency, building a city, or keeping a military alliance.

A herd of feral goats on a tiny unpopulated island in the East China Sea live in blissful unawareness of a diplomatic storm brewing around their remote habitat. Since September 7th, when the Japanese authorities arrested the crew of a Chinese fishing boat near the islet, one of the biggest rows in years has erupted between the two countries. Though resentful of the Japanese, China also worries about keeping its own nationalists in check.

Down below, The Economist urges Tokyo to cling tighter to the U.S. for military protection. But, actually, I’m beginning to hear the boy crying wolf with these island squabbles. What’s important here is not, that tensions increase with each incident, but that both countries back down every time. Neither is willing to take irreversible military action, when scoring diplomatic and domestic points will suffice. No, what Beijing and Tokyo need is to find ways to score domestic points without exploiting goat-infested rocks.

  • An Exercise in Fertility

  • The Singapore dream, as commonly defined, comprises five Cs. The catalogue of cash, car, credit-card, condominium and country-club membership leaves some glaring alphabetical omissions. None more so than “children”. Singaporeans these days tend to have small families. In this as in much else they resemble Asia’s other “little tigers” (Hong Kong, South Korea, Taiwan), and tiny Macau. In one ranking of “total fertility rates” (TFR, a measure of the number of children a woman can expect to bear in her lifetime), these five places huddle together at the bottom of a list of all the world’s countries. Fearful of rapidly ageing populations and, in many cases, loth to contemplate the alternative—large-scale immigration—governments have tried to encourage child-bearing. They have failed.

    The trend towards smaller families is a supercharged version of a pattern seen everywhere: as people get richer, live in cities and women are better educated, they have fewer children. And these places have seen economic growth at rates surpassed only in China, where fertility has also plunged, but growth has been accompanied by a coercive one-child policy. Even so, the tigers’ declines in fertility rates have been astonishingly quick.

    In the developing world as a whole, fertility rates fell by half, to three, in the 50 years to 2000. In South Korea the TFR fell by two-thirds in 20 years from the early 1960s. In Taiwan it dropped from 6.5 in 1956 to 2.2 in 1983 and 1.7 in 1986. So for three decades, fertility rates have mostly been below the “replacement” level—of just over 2.0 in rich countries. Last year the TFR was 1.22 in Singapore, 1.15 in South Korea and 1.04 in Hong Kong. In Taiwan it was 1.03, and the government’s planning agency forecast a further decline, to 0.94% in 2010, as women defer having babies during the Year of the Tiger (inauspicious, oddly). These are unprecedented levels for places unaffected by war or famine.

    (…)

    The other governments have also been encouraging their citizens to stay put and multiply. In keeping with its dirigiste traditions, South Korea actually has a five-year plan to encourage breeding, and a TFR target of 1.7 for 2030. Maternity pay is to be changed from a fixed, and low, rate to 40% of salaries. Employers are to be forced to allow mothers to work flexible hours, and the state will pay the school fees of second children. Hong Kong, of course, sets greater store by laissez-faire principles. So there was quite a fuss in 2005 when the chief executive, Donald Tsang, declared that families should have three children. The fertility rate, 0.97 in 2005, has barely budged since.

    (…)

    It is not just Asian countries that find it hard to boost birth rates once they are in decline. Economic incentives cannot always trump a shift in values. Nor is the self-centred consumerism of the “five C” dream exclusive to the newly industrialised tigers. Elsewhere, too, children, worse than merely not making the cut, actually get in the way. But the rock-bottom fertility rates in the tigers give the problem particular potency.

    (…)

    So too does the difficulty of the obvious alternative—large numbers of immigrants. For Taiwan and Hong Kong, where mainland China provides an inexhaustible supply of potential incomers, the fear of being swamped makes this a particularly touchy issue. In Taiwan legislation to open universities, which are short of students, to a mere 2,000 mainlanders provoked parliamentary brawls before being passed in August. In South Korea, where increasing numbers of men are finding brides in the Philippines and Vietnam, the metro in Seoul is plastered with a government campaign against the stigma on “multicultural families”.

    Even in Singapore, a city of migrants, where more than a third of the population are foreigners, immigration is the hot political issue. On national day in August the prime minister, Lee Hsien Loong, devoted a chunk of his speech to allaying concerns about the influx of foreigners, and justifying the need for them in a small, crowded island. The final reason he listed was straightforward: “to make up for our shortfall in babies”. Even little tigers cannot have it both ways.

  • Now for the Bionic Kan

  • But vanquishing Mr Ozawa and holding onto his job for a while longer were the easy bits for Mr Kan. Problems, from a strong yen to an angry China, are already dictating his agenda. Without a two-thirds majority in either upper or lower house, his party will have to forge ad hoc coalitions with the opposition to pass legislation, making him even less a master of his own destiny. And rival parties will be tempted to exploit divisions in the DPJ exposed by Mr Ozawa’s challenge, encouraging them to push for concessions in forthcoming budget discussions. All of which suggests Mr Kan’s will be a weak government that may not last.

    The main task for Mr Kan, if he wants to reverse that perception, is to articulate some policies that make sense to the many urban voters who support his party—even if they earn him criticism in what many see as the short-sighted national media and the bunker-like bureaucracy. He may win shallow applause for his government’s decision on September 15th to intervene to weaken the yen for the first time in more than six years (see article). This sent the stockmarket soaring.

    But a better idea would be to focus on boosting innovation and productivity so as to rival Japan’s cheap-currency competitors like South Korea and China. He could, for example, encourage business clusters near technology institutes to bolster enterprises like Mr Sankai’s. Bizarrely, such parks barely exist in Japan.

    Meanwhile, an ugly spat with Beijing over the arrest of a Chinese trawlerman for fishing in Japanese waters (see article) could help clarify two important messages. The first is that Japan has an interest in overcoming more than a century of mistrust between the two countries to build stronger economic ties with China—even if that means fishing in each other’s hotly disputed waters.

    The second is the importance of maintaining a strong security alliance with America, especially while Japan’s relations with China remain as rocky as they have shown to be in the past few days. It will not be easy. This week Mr Kan’s chances of implementing an agreement signed with the United States in May to relocate a marine base in Okinawa were dealt a further blow when a local election favoured candidates opposed to having the base dumped on their town. But stirrings of anti-Japanese protests in China would be a good opportunity to remind the Japanese how useful their friendship with America remains, says Takashi Inoguchi, a Japanese political scientist.

  • Even Harder Than It Looks

  • Since the late 1990s, several large state-owned Chinese companies have listed their shares. These initial public offerings typically included “cornerstone” investments by big Western firms. For example, BP, Exxon and Shell (three oil firms) and ABB (a Swiss-Swedish conglomerate) took strategic stakes in PetroChina and Sinopec (two big Chinese oil companies). Alcoa, an American aluminium company, invested in Chalco, a Chinese one. And Western banks bought chunks of the leading Chinese state banks when they were listed.

    Foreign firms brought several things to the table: capital, technology, management skills and the prospect of better corporate governance. The Chinese press often referred to them as “elder brothers”. In return, these Western firms wanted access to China’s huge domestic market.

    It did not work out that way. The Chinese state-owned firms did not need capital so badly that they were prepared to cede control to foreigners. Some also found that the Westerners had less to teach them than they had hoped. “Fly-in” expat managers were often unfamiliar with China, says David Michael, a partner at the Boston Consulting Group. Chinese firms tended to learn more from multinationals that had taken the trouble to build their own large sales forces in China, he says.

    Chinese firms no longer feel like little brothers. China Mobile now has a market value half as large again as Vodafone’s. PetroChina is much bigger than BP. Both Chinese firms are now rich enough to buy whatever expertise they want.

    Western energy companies were quick to notice this shift. BP, Shell, ABB and Exxon all sold their holdings in state-owned Chinese firms by 2005. Alcoa got out in 2007. Financial firms followed, in whole or part, during the financial crisis. When China’s state-owned Agricultural Bank was recently listed, no big Western bank bought a significant stake.

    Western firms grumble about their failure to turn their stakes in China Inc into a foothold in the Chinese market, but not too loudly, so that they do not annoy the government. Besides, thanks to a rising stockmarket, most made sacks of money from their investments.

    A few have not yet cashed out. Telefónica, a Spanish telecoms firm, owns 8.8% of China Unicom and politely rebuffs bankers who advise it to sell. AT&T has 25% of a telecoms business in the Pudong district of Shanghai. Despite regulatory problems, it provides a nationwide service from Pudong, largely to multinational clients. It is a nice business, but a far cry from the dreams some Westerners once had about China.

  • Because I Kan

  • In Japan, the argument for stopping yen appreciation is partly a psychological one, economists say. Though exporters have complained noisily about the currency, they continue to reap solid profits abroad and the repatriated earnings may help lift the yen. A stronger currency does most damage to confidence about the future: it tends to depress the stockmarket, which dampens exporters’ risk appetites. Japan’s main stockmarket surged by 2.5% immediately after the official yen sales.

    Intervention is a deal with the devil, however. Currency manipulation from a G7 country such as Japan could undermine efforts to persuade China to refrain from artificially cheapening its own currency. Given that Japan’s trade with China is bigger than its trade with America, its beggar-thy-neighbour policy might perversely end up beggaring itself.

  • Natural-Born Gliders

  • It was when he was reading about flying fish to his children that Haecheon Choi, a mechanical engineer at Seoul National University in South Korea, realised just how amazing these flying feats are. But when he looked at the scientific literature he found that the aerodynamics of their fins had not been fully explored. So, together with Hyungmin Park, a colleague at Seoul National University, Dr Choi set out to discover more.

    The scientists caught a number of darkedged-wing flying fish and had them stuffed with their wings fixed in different flying positions. Then they popped the fish into a wind tunnel to calculate their lift-to-drag ratios, sometimes called the glide ratio. When the shape of a wing creates more lift from the air passing around it than it does drag (air resistance), an aircraft will fly. And the higher the ratio, the farther the aircraft will glide. This means if you cut the engine on a small Cessna with a lift-to-drag ratio of 7:1 it would fly seven metres forward for each metre of descent.

    As the researchers report in the Journal of Experimental Biology, compared with other flying animals the fish score well at 4.4:1. This makes them more efficient than swallowtail butterflies (3.6), fruit flies (1.8) and bumble bees (2.5). Flying fish are just as effective at gliding as birds that are known for being strong flyers, like red-shouldered hawks (3.8) and petrels (4). Nighthawks (9) and black vultures (17) make more impressive gliders.

    In trying to explain why the fish are so good at gliding, Dr Choi theorises that the positioning and shape of their large and flat pectoral fins at the front and the smaller pelvic fins at the back create a flow of air that accelerates towards the tail of the fish. This faster-moving air provides the pelvic fin with additional lift.

    The experiments also revealed that the fish could glide even farther if they were just 4-5cm from the bottom of the wind tunnel. When the experiment was repeated with a tank full of water in the bottom, the fishes’ lift-to-drag ratio rose from 4.4 to 5.5. This, the researchers believe, is caused by the surface of the water smoothing out a vortex of air coming off the flying fish and reducing drag. A similar thing, called ground effect, can happen when an aircraft gets very close to the ground. Flying fish, it seems, use this effect to their advantage as they skim across the sea.

    Dr Choi and Dr Park believe there are still more interesting aerodynamic tricks to be learnt from flying fish. And, as engineers, they wonder if any of these features could be incorporated into aircraft. In years to come, if you see aircraft with strange fin-type wings then you will know where that idea was fished up from.

  • Sizing Up China’s Cities

  • According to several scholars, most of China’s cities remain too small to take full advantage of what economists call “agglomeration economies”: the benefits that people or firms enjoy from their proximity to others. These benefits include the ready availability of customers, specialised suppliers, a pool of skilled labour, or the tricks of the trade that a firm can learn almost by osmosis from its neighbours.

    How big should cities be? In many countries, city sizes follow a remarkably regular pattern, known as the rank-size rule. According to this law, the biggest metropolis in a country will have roughly twice the population of its nearest rival; three times the population of the third-ranked city; and so on. Multiply a city’s rank by its population and the result will match the size of the biggest city. Some scholars believe the law is a statistical artefact, bereft of economic meaning. But others argue it has at least one strong implication. For the law to hold, small cities cannot grow systematically faster or slower than big ones. Speed must be largely independent of size.

    China makes a habit of bending the rules of economics. Do its cities obey the rank-size rule? The fit is not perfect. China’s small cities are too dispersed and its big cities are too even in size, according to Zelai Xu of the Central University of Finance and Economics in Beijing and Nong Zhu of the National Institute of Scientific Research in Quebec.

    Messrs Xu and Zhu show that China’s cities became more equal during the 1990s, especially in the first half of the decade. This was partly because small cities grew faster than big ones. But it was mostly because China created 190 new cities largely by fiat, relabelling big towns as small cities. Thus even as China’s urban population grew by 54m from 1989 to 1995, the average population of its cities fell, from 325,000 to 313,000.

    China’s small cities exploded in number. But its biggest metropolises conspicuously failed to explode in size. As BCG notes, only 27m Chinese live in cities of more than 10m, compared with 58m Indians and 32m Brazilians. Shanghai may have sprouted dozens of skyscrapers and Beijing may boast half a dozen ring roads, but China’s big cities are still surprisingly small.

    This partly reflects a conscious policy. Although China’s rulers have embraced urbanisation, they still seem wary of mega-cities. They have made it easier for rural folk to obtain permission to settle in a middle-sized city than in a large one. The minimisation of China’s maximum cities may also be an indirect consequence of China’s model of growth. In favouring industry over services, China may have prevented its big cities achieving the economic density of a Hong Kong or Tokyo. Service firms, which stuff their staff into cubicles, use less land per employee than manufacturers, which array their workers along factory lines. They also benefit even more than manufacturers from agglomeration: “Service firms serve one another,” observes François Gipouloux of France’s National Centre for Scientific Research.

    China’s economy would benefit from a stretching out of the distribution of its cities, argue Ting Jiang of Hong Kong University of Science and Technology and co-authors. But how might such a divergence come about? It might, they speculate, happen as an unintended consequence of the government’s push to expand higher education. Since the bigger cities have the most universities, their expansion will draw youngsters from the hinterland to the metropolis. And with a degree (and a job), their graduates should win permission to stay.

    In front of Nanjing University’s ivy-clad tower, a graduate poses for a photograph in his gown, mortar board and Reeboks. Perhaps this cultured, cerebral place will find itself at the vanguard of China’s urban competitiveness after all.

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