With healthcare one of the items on the General Election agenda, Professor Dale Tussing takes a look at the Chinese experience.
It is quite a jump, from the health care system of the Republic of Ireland, population just over 4 million, to the health care system of the People’s Republic of China, where just under 4 million people call themselves doctor! With a colleague, I have been investigating the Chinese system lately and have hopes of publishing our research findings someday soon. I will share with readers here some of what I have learned.
Recently an on-line journal called FP: Foreign Policy (Foreignpolicy.com) included China (together with Russia, the USA, and Turkmenistan) as having achieved one of the four worst health care reforms in the world. A system which was once globally admired is now despised. As China’s productivity soared, something bad happened to health care. What happened? I want to answer that question and assess current Chinese efforts to rebuild their health care system.
The Communist Party of China (CPC) came to power through revolution in 1949. They began to build healthcare institutions, often in areas that had never been served by doctors, hospitals, or clinics. That was especially true in rural areas, which held the vast bulk of Chinese population, and which still today accounts for a large majority. In 1958, the commune system established collectivized agriculture, and shortly thereafter China built a system of Cooperative Medical Care (CMC), based in communes. Care was inexpensive, partly because it was rudimentary.
Primary care was provided by paramedics with limited education and training, who became known as the “barefoot doctors”. Care was predominantly traditional Chinese medicine, or TCM, relying on herbal medicine, much of it grown by the barefoot doctors in their own gardens. Participation was universal and compulsory. Under this regime, life expectancy almost doubled (from 35 years to 68) between 1952 and 1982, and infant mortality fell from 200 to 34 per 1000 births.
The World Health Organization, meeting at Alma-Ata in 1978, was inspired by the Chinese rural CMC system to issue a declaration about the possibilities for health care in third-world countries. Ironically, it was in the same year of 1978 that the Chinese leaders began the process of abandoning the system. The “household responsibility system” and markets replaced the communes. The CMC system was ditched. It had been based on the communes, and without major changes would be inconsistent with the new rural economy. Moreover, the CMCs had enemies in the Chinese leadership.
There must have been something special about the year 1978. The radical Chinese shift to privatize their economy occurred in the same year that privatisation began in earnest in Western Europe, Great Britain, and the United States. In the USA, President Jimmy Carter brought in Professor Alfred Kahn, the Cornell economist who introduced privatization in many areas, beginning with deregulation of commercial air service. Professor Kahn died in January of this year. Just two years later, Ronald Reagan, who was to accelerate the process, was elected president. In Britain, Margaret Thatcher became Prime Minister in 1978, and began her campaign to undo nationalization by privatizing large parts of the British economy. In Western Europe, privatization began in several countries in 1978.
In China, the result of privatisation was that the majority of the population lost their health insurance, and almost all medical care began to be sold on an out-of-pocket basis (the process of marketizing medical care was a process that took a long time, not overnight after 1978. Even till this day, many government employees continue to enjoy “free” healthcare). Many people with serious illnesses could not get care, and they became disabled or died. Most barefoot doctors returned to farming, and those who continued as paramedics began to charge fees. China’s primary care system virtually disappeared and has never really been replaced. Most Chinese people seek care from hospital-based specialists.
Is the China of today a socialist state? The central government and the CPC still have much control, and public ownership of enterprises is still widespread. But the example of health care shows how misleading appearances can be. Almost all Chinese hospitals are government-owned. But government subsidies were drastically reduced, and by the 1980s had fallen to 5% to 10% of hospital expenses. Hospitals had to rely primarily on their own revenues, and doctors relied on hospitals for their incomes. Doctors began to prescribe drugs, often medically inappropriate ones, in enormous quantities, and hospitals, rather than drug stores, sold them. Half to 60 percent of Chinese medical expenditures became allocated to drugs, as compared with about 10 percent in the USA and about 15 percent globally. Hospitals remained nominally public, but they had become effectively private – with decisions made by administrators and doctors in their own interests. And care became grotesquely distorted.
The fraction of Chinese health expenditures paid out-of-pocket by families is a telling statistic which graphically shows the astonishing twists and turns of Chinese health care in the last generation. That share was a laudable 20% in 1979, but it rose steeply to 32% in just four years, a change of a magnitude few countries have experienced, absent major war. But that was just prologue. Ten years later, in 1993, the proportion stood at 42%. The peak occurred in 2001 with 60 % of health care expenditures coming from individuals. The figure today stands at close to 40 percent. This figure can be misleading. Many Chinese families cannot afford to pay for treatment of major illnesses and injuries. The out-of-pocket share is depressed whenever care is not covered by any third party but patients and their families cannot afford the out-of-pocket payment.
Cutbacks in health care spending were part of general cutbacks in social welfare spending, and indeed in government spending in general, both absolutely and in relation to GDP.
China has attempted to navigate a middle course in recent years, pursuing a health insurance strategy. Leaders created the New Cooperative Medical Care (NCMC) system in 2003. The name harks back to the successful and popular CMC system of the Mao era, but the NCMC is an insurance system, not a health care delivery system. The ambitious new system had a number of flaws, chief of which was perhaps the fact that not enough money had been allocated. That is a problem which persists today, despite significant increases in government subsidies to insurance.
In 2009, Chinese leaders released a massive document, “Opinions of the CPC Central Committee and the State Council on Deepening the Health Care System Reform,” setting out plans for the future development of the health services. It is long and rambling, and hard to summarize, but some points may be noted:
• Health insurance was to be universal by 2010.
• Hospitals could reduce their dependence on drug sales only gradually.
• The government assured that everyone would have access to at least “basic” medical care.
What is basic care? That appears to be an important question, though the expression remains undefined. The document promises not only basic care, but also basic medical security or insurance, covering basic care to treat basic conditions, using “essential” medicines, all of which is backed up with basic public health. Whatever may be the exact meaning, the purpose and effect of assuring basic care is to limit public outlays on health care. And the government does not undertake to pay for even basic care.
The health insurance system is decentralized, with provinces establishing programme details. Thus it’s impossible to say whether the goal of universal coverage was achieved by the end of 2010. But because of inadequate funding, the drive for universal coverage comes at a very high price. Most provinces cover little or no outpatient care. High deductibles must be met annually before coverage kicks in. There are very high co-pays, with patients often paying half of the after-deductible bill. And perhaps worst of all, there are annual per-patient limits on insurance coverage. The result is that, while there very well may be universal coverage, it remains true that tens or hundreds of millions of Chinese would not be able to afford medical care if they became seriously ill or badly injured.
Chinese leaders seem sincere in their desires to ameliorate the terrible consequences of destroying the health security system, and much of the delivery system, in the late 1970s and throughout the 1980s. They are trying to build an insurance-based system consistent with the state capitalist system they have constructed. But the system they have developed is thus far still a mess. There are many economic incentives which will have perverse consequences. For example, insurance coverage of in-patient but not out-patient care will encourage doctors to hospitalize patients unnecessarily, when out-patient care would suffice, in order to make treatment eligible for insurance reimbursement.
The most serious problem, however, the one which is the source of most of the other problems, is under-funding. Chinese medical care expenditures hover around 5% of GDP (about half of European proportions). Until Chinese leaders are ready to increase significantly government funding for medical care, it will be difficult if not impossible to create a medical care system which is adequate, efficient, and fair.
Dale Tussing is Emeritus Professor of Economics at Syracuse University, in Syracuse, New York. His publications on the Irish health care system date back to the early 1980s. Together with Maev-Ann Wren, he was commissioned by the Irish Congress of Trade Unions in 2005 to conduct a broad study of Irish health care policy, to inform Congress's positions on health care. A version of the report was published in 2006 by New Island Press as How Ireland Cares
Showing posts with label china. Show all posts
Showing posts with label china. Show all posts
Monday, 7 February 2011
Wednesday, 11 August 2010
China (IV) - China and Western Economics
Paul Sweeney: Western economists believe that their model is superior because it is supposedly market-led, has better technology, better social structures, the rule of the law and better commercial applications, so says economist, Stephen King. He argues the contrary – that the West has dominated the world by rent-seeking and plundering the world’s physical, natural and human resources.
In a review of a book by King, “Losing Control: the emerging threat to the Western Prosperity,” FT columnist, Martin Wolf seems to concur with the author, stating that “Western policy makers do not understand how far the rise of emerging counties is changing the world. They suffer from the illusion they are in control of events. But events control them instead.” ... “Also important is the rise of “state capitalism”: governments, not markets are managing the outflow of capital from emerging countries, Wolf says.
A number of authors, economists and political commentators are now arguing that the world is changing rapidly, with the rise of Asia and the BRIC countries. Many policymakers have not yet realised the extent of the changes, which are well underway. Even the conservative Economist magazine this week (7th August) had a feature on increased state involvement in the economy and industrial policy. It warns, correctly, against political patronage using state assets. However, recognising the clear trend, it also set out its case for better state involvement in business and for industrial policy, with reasonable suggestions.
In the first blog I said that China, Asian, Russian and other major economies are not following the Western economic orthodoxy. Some are authoritarian states and all are highly critical of neo-liberal economics. They have a sceptical view of “free market” economics, which events have proven to be correct.
For example, the Russian state is backing a vertically integrated national champion in fertilisers. Andrei Sharonov, Former Deputy Economy Minister and banker said recently that “ideologically the state is interested in a national champion in the sector that can compete on a global level.” Russian holds one-third of world’s potash and wants to diversify from oil and gas and consolidate the industry which is predicted to grow at 2.4 per cent per annum to 2020, and also to safeguard food supplies.
For wild risk taking in the West, there is both a private big reward and then state bailout, which at present, looks as it will be permanently guaranteed and without significant behavioural change.
One aspect of the change is that many other states see an active role for state companies, which they may utilise in a mercantilist ways. Further, over time anyway, the role of the state and state activism in the economy waxes and wanes. It just seemed that privatisation and de-regulation was the order of the day, as it was for about 20 years. That has changed dramatically. The state is back in the market and thus the phase of privatisation and de-regulation is now on the wane (except in the minds of the Irish Cabinet, some in the Dept of Finance and the usual conservatives).
In fact nationalisation on a massive scale has taken place. Ironically, it occurred mainly in the West, where liberal economics dominated. This change has of course been re-active, unplanned, unanticipated and unprecedented. Yet the changes are worthy of study, particularly as the state apparatus often gets things wrong; reacts rather than acts; is slow to spot trends; and slower to see major changes.
Asian and BRIC policy-makers are especially critical of the supposed superiority of the neo-liberalism which they believe was at the root of the Crash of 2008 in the West. Embarrassingly, for free market fundamentalists, is that this is happening not long after many Western economists sneered at the Asian model after its crisis in 1997 (“Crony capitalism” it was dubbed, but from which Asia bounced back, in spite of IMF attempts to impose deep Washington Consensus policies on its economies – for which the IMF has been rightly criticised). And, as China is so large – it took over as the world’s largest exporter from Germany last year – it is already challenging the Western liberal orthodoxy on a large scale in practice, in many sectors and areas.
There are major implications for economic theory and for citizens worldwide if liberal economics and Western ideas cease to be dominant (not cease) in much of the world. Of course, there are differing views in the West, but even many social democratic parties, e.g. New Labour, did succumb to the siren calls of neo-liberalism, only to find their economies wrecked on its rocks. The collapse of the Soviet Union was supposed to lead to the universal adoption of liberal economic theory, within varietal frameworks of capitalism. To say that the programme is not going to plan is an understatement.
Another book on the subject is by Stefan Halper – with the unambiguous title “How China’s Authoritarian Model Will Dominate the Twenty-First Century.” In addition to the argument in the title, Halper also argues, as I did on the blog on China and Africa, that China is gaining influence by investment and cheap “no stings attached loans” (he does this in some detail). He says too that China has no qualms at doing business with nasty regimes either. (Did any of the imperial states and were they not nasty themselves?)
Twenty years ago it seemed that the state was on the defensive with Thatcher and Reagan breaking up the post-war consensus. Soviet Communism collapsed and the World Bank and the IMF were enforcing the “Washington Consensus” of privatisation and liberalisation on governments. Today, new and varying forms of state capitalism from Chinese to Mid Eastern and Russian varieties are on the ascendant.
And in the West, the state is now intervening in the economy on a scale perhaps even greater during the Second World War and its aftermath, nationalising and/or controlling banking, finance, the motor industry and also strengthening regulation. It is doing so reluctantly, without a real plan and is certain to make major errors, but may be involved for longer than it thinks. Then it may decide to remain consciously involved, and work to do so effectively.
Thus state intervention is not being undertaken in a considered, planned way, but in reaction to the near collapse the economy due to the excesses of liberal market economics, where de-regulation and a naïve belief that the market worked best on its own and that the perverse incentive structures in boardrooms led to apparently “great profits”. These views were so dominant that those who challenged them were largely unheard. Today the state is blundering its way in response and making many mistakes.
I hold that active state involvement in the economy has an important role, provided the form of governance is the best, especially for directly owned commercial enterprise, which must be at arms length.
I said that I would return to the idea of a new invigorated role for the Irish state companies, possibly emulating some aspects of Chinese strategy in my conclusion of this mini series on China. However, since them I have written on it in the Irish Times (link here) and so will not repeat the points made.
It was seen that 37 of the Fortune top 500 global companies in are Chinese companies, most of which are state controlled and many more are state owned or former companies.
For the first time a Chinese company entered the top ten world companies in turnover (not market cap) in 2008 at 10th. And last year, it rose to 7th place.
In the top 100 there is the China National Petroleum at 13th largest company in the world, Japan Post at 11th, Pemex (the Mexican state Petroleum Company) at 31st, Norway’s Statoil at 36th, France’s state-owned EDF at 57th largest company and Deutsch Telecom at 61st. And many more.
I just heard that Sany, one of the largest Chinese machinery groups, is to establish a manufacturing base near Cologne which will employ several hundred Germans making concrete pumps! It will also have and R&D unit, challenging German’s best engineering firms within its own heartland. It employs 60 there in a subsidiary already.
It was interesting that the Chinese sovereign wealth company was behind a possible bid for Liverpool last week. (Why, I don’t know, except that the team has a big following in Asia).
An active expansion of Irish commercial state owned companies into foreign markets, on their own or in partnership with Irish and indeed foreign, including Chinese firms, will add value. To sell them off is to take the Low Road. It would be deeply regrettable if McCarthy recommend this, but the Terms of Reference are as narrow as a boreen.
We also seriously need to clean up Irish entrepreneurship, reform its appalling corporate governance, shift its core focus from “shareholder value,” to a wider stakeholder basis; from short-termism; dull introspection; and to force many corporations to bring in fresh talent to their boards, within a framework of radical reform of Irish company law.
However, this reform of corporate governance has to include a reform of a) the way in which people are appointed to the boards of state companies too; b) the way in which their strategies are determined by government and by the elite civil servants in the major governing Departments. Civil servants should no longer have to worry about commercial companies day to day policy, except to ensure it is adhering to broad guidelines. These strategies should be more explicit.
This can be made more transparent for commercial state companies under a State Holding Company as Congress proposed in 2005 and which FG have adopted. Not alone will it set clearer objectives, give access to capital (and rapidly too), but also assist Ireland in a major investment programme outside the strictures of the Growth and Stability Pact. Eurostat has made clear determinations which would allow a commercial state holding company borrow and such would be outside the G&SP. It, with specialists, would be far able to assist in major investment strategies than civil servants do today, when a state company has major investment /divestment plan.
It has been seen in the series of blog posts that the Chinese state companies are being utilised strategically by their Government to spread their investment widely, sectorally and geographically; to buy technology through ownership and control; to control vast natural resources in many areas; to grow their state companies and generate wealth and employment; and to train Chinese management to the highest levels and in the widest areas of skills.
In a somewhat similar way, but on a lesser scale, and with no “imperial” ambitions, Irish State companies should be harnessed, with the private sector, to again play a major role in developing the Irish economy. Instead of the passive, small-scale approach, as has been the weak Government policy on state companies up to now, we could be bolder and more innovative. If FDI does begin to dry up, and with the appalling legacy of so many “leading” Irish private sector companies, the next government really do not have a choice but to take the High Road – the developmental road – with our state companies.
I have pointed out that Ireland has a major (private sector) enterprise deficit. We also know that the state has made major policy errors which have cost citizens and indeed many good businesses dearly and will continue to do so for many years. Ireland has had the biggest collapse in national income of a staggering 20 per cent (GNP) in just three years. Our economy has lost many years of income and wealth and many have suffered hugely. Much of this was avoidable.
But the gross errors made in both the private sector and in economic policy in the public sector have both emerged from the same root problem. This is the commitment to a delusional belief in the workings of markets on their own, without supervision, and to a turbo-version of shareholder value and destructive competition – was competition, the more intense, not always good? – within the boards of Irish banks and other companies, boosted by perverse executive incentives. The former dominated and regrettably, still strongly influences the highest levels in the public sector and the latter was in the private sector, especially banking. If certain key public servants and public regulators had not been in awe of self-regulating markets and the apparent superiority of the private sector, the Crash of 2008 would have been far smaller.
There have been changes in bank regulation and at the Central Bank, but much more reform is required. Without major changes in attitudes, especially to a realistic view of markets and of what is the public interest by some top public policymakers /regulators, combined with major changes in company law and national and international regulation, the crisis will be prolonged and is likely to recur.
In a review of a book by King, “Losing Control: the emerging threat to the Western Prosperity,” FT columnist, Martin Wolf seems to concur with the author, stating that “Western policy makers do not understand how far the rise of emerging counties is changing the world. They suffer from the illusion they are in control of events. But events control them instead.” ... “Also important is the rise of “state capitalism”: governments, not markets are managing the outflow of capital from emerging countries, Wolf says.
A number of authors, economists and political commentators are now arguing that the world is changing rapidly, with the rise of Asia and the BRIC countries. Many policymakers have not yet realised the extent of the changes, which are well underway. Even the conservative Economist magazine this week (7th August) had a feature on increased state involvement in the economy and industrial policy. It warns, correctly, against political patronage using state assets. However, recognising the clear trend, it also set out its case for better state involvement in business and for industrial policy, with reasonable suggestions.
In the first blog I said that China, Asian, Russian and other major economies are not following the Western economic orthodoxy. Some are authoritarian states and all are highly critical of neo-liberal economics. They have a sceptical view of “free market” economics, which events have proven to be correct.
For example, the Russian state is backing a vertically integrated national champion in fertilisers. Andrei Sharonov, Former Deputy Economy Minister and banker said recently that “ideologically the state is interested in a national champion in the sector that can compete on a global level.” Russian holds one-third of world’s potash and wants to diversify from oil and gas and consolidate the industry which is predicted to grow at 2.4 per cent per annum to 2020, and also to safeguard food supplies.
For wild risk taking in the West, there is both a private big reward and then state bailout, which at present, looks as it will be permanently guaranteed and without significant behavioural change.
One aspect of the change is that many other states see an active role for state companies, which they may utilise in a mercantilist ways. Further, over time anyway, the role of the state and state activism in the economy waxes and wanes. It just seemed that privatisation and de-regulation was the order of the day, as it was for about 20 years. That has changed dramatically. The state is back in the market and thus the phase of privatisation and de-regulation is now on the wane (except in the minds of the Irish Cabinet, some in the Dept of Finance and the usual conservatives).
In fact nationalisation on a massive scale has taken place. Ironically, it occurred mainly in the West, where liberal economics dominated. This change has of course been re-active, unplanned, unanticipated and unprecedented. Yet the changes are worthy of study, particularly as the state apparatus often gets things wrong; reacts rather than acts; is slow to spot trends; and slower to see major changes.
Asian and BRIC policy-makers are especially critical of the supposed superiority of the neo-liberalism which they believe was at the root of the Crash of 2008 in the West. Embarrassingly, for free market fundamentalists, is that this is happening not long after many Western economists sneered at the Asian model after its crisis in 1997 (“Crony capitalism” it was dubbed, but from which Asia bounced back, in spite of IMF attempts to impose deep Washington Consensus policies on its economies – for which the IMF has been rightly criticised). And, as China is so large – it took over as the world’s largest exporter from Germany last year – it is already challenging the Western liberal orthodoxy on a large scale in practice, in many sectors and areas.
There are major implications for economic theory and for citizens worldwide if liberal economics and Western ideas cease to be dominant (not cease) in much of the world. Of course, there are differing views in the West, but even many social democratic parties, e.g. New Labour, did succumb to the siren calls of neo-liberalism, only to find their economies wrecked on its rocks. The collapse of the Soviet Union was supposed to lead to the universal adoption of liberal economic theory, within varietal frameworks of capitalism. To say that the programme is not going to plan is an understatement.
Another book on the subject is by Stefan Halper – with the unambiguous title “How China’s Authoritarian Model Will Dominate the Twenty-First Century.” In addition to the argument in the title, Halper also argues, as I did on the blog on China and Africa, that China is gaining influence by investment and cheap “no stings attached loans” (he does this in some detail). He says too that China has no qualms at doing business with nasty regimes either. (Did any of the imperial states and were they not nasty themselves?)
Twenty years ago it seemed that the state was on the defensive with Thatcher and Reagan breaking up the post-war consensus. Soviet Communism collapsed and the World Bank and the IMF were enforcing the “Washington Consensus” of privatisation and liberalisation on governments. Today, new and varying forms of state capitalism from Chinese to Mid Eastern and Russian varieties are on the ascendant.
And in the West, the state is now intervening in the economy on a scale perhaps even greater during the Second World War and its aftermath, nationalising and/or controlling banking, finance, the motor industry and also strengthening regulation. It is doing so reluctantly, without a real plan and is certain to make major errors, but may be involved for longer than it thinks. Then it may decide to remain consciously involved, and work to do so effectively.
Thus state intervention is not being undertaken in a considered, planned way, but in reaction to the near collapse the economy due to the excesses of liberal market economics, where de-regulation and a naïve belief that the market worked best on its own and that the perverse incentive structures in boardrooms led to apparently “great profits”. These views were so dominant that those who challenged them were largely unheard. Today the state is blundering its way in response and making many mistakes.
I hold that active state involvement in the economy has an important role, provided the form of governance is the best, especially for directly owned commercial enterprise, which must be at arms length.
I said that I would return to the idea of a new invigorated role for the Irish state companies, possibly emulating some aspects of Chinese strategy in my conclusion of this mini series on China. However, since them I have written on it in the Irish Times (link here) and so will not repeat the points made.
It was seen that 37 of the Fortune top 500 global companies in are Chinese companies, most of which are state controlled and many more are state owned or former companies.
For the first time a Chinese company entered the top ten world companies in turnover (not market cap) in 2008 at 10th. And last year, it rose to 7th place.
In the top 100 there is the China National Petroleum at 13th largest company in the world, Japan Post at 11th, Pemex (the Mexican state Petroleum Company) at 31st, Norway’s Statoil at 36th, France’s state-owned EDF at 57th largest company and Deutsch Telecom at 61st. And many more.
I just heard that Sany, one of the largest Chinese machinery groups, is to establish a manufacturing base near Cologne which will employ several hundred Germans making concrete pumps! It will also have and R&D unit, challenging German’s best engineering firms within its own heartland. It employs 60 there in a subsidiary already.
It was interesting that the Chinese sovereign wealth company was behind a possible bid for Liverpool last week. (Why, I don’t know, except that the team has a big following in Asia).
An active expansion of Irish commercial state owned companies into foreign markets, on their own or in partnership with Irish and indeed foreign, including Chinese firms, will add value. To sell them off is to take the Low Road. It would be deeply regrettable if McCarthy recommend this, but the Terms of Reference are as narrow as a boreen.
We also seriously need to clean up Irish entrepreneurship, reform its appalling corporate governance, shift its core focus from “shareholder value,” to a wider stakeholder basis; from short-termism; dull introspection; and to force many corporations to bring in fresh talent to their boards, within a framework of radical reform of Irish company law.
However, this reform of corporate governance has to include a reform of a) the way in which people are appointed to the boards of state companies too; b) the way in which their strategies are determined by government and by the elite civil servants in the major governing Departments. Civil servants should no longer have to worry about commercial companies day to day policy, except to ensure it is adhering to broad guidelines. These strategies should be more explicit.
This can be made more transparent for commercial state companies under a State Holding Company as Congress proposed in 2005 and which FG have adopted. Not alone will it set clearer objectives, give access to capital (and rapidly too), but also assist Ireland in a major investment programme outside the strictures of the Growth and Stability Pact. Eurostat has made clear determinations which would allow a commercial state holding company borrow and such would be outside the G&SP. It, with specialists, would be far able to assist in major investment strategies than civil servants do today, when a state company has major investment /divestment plan.
It has been seen in the series of blog posts that the Chinese state companies are being utilised strategically by their Government to spread their investment widely, sectorally and geographically; to buy technology through ownership and control; to control vast natural resources in many areas; to grow their state companies and generate wealth and employment; and to train Chinese management to the highest levels and in the widest areas of skills.
In a somewhat similar way, but on a lesser scale, and with no “imperial” ambitions, Irish State companies should be harnessed, with the private sector, to again play a major role in developing the Irish economy. Instead of the passive, small-scale approach, as has been the weak Government policy on state companies up to now, we could be bolder and more innovative. If FDI does begin to dry up, and with the appalling legacy of so many “leading” Irish private sector companies, the next government really do not have a choice but to take the High Road – the developmental road – with our state companies.
I have pointed out that Ireland has a major (private sector) enterprise deficit. We also know that the state has made major policy errors which have cost citizens and indeed many good businesses dearly and will continue to do so for many years. Ireland has had the biggest collapse in national income of a staggering 20 per cent (GNP) in just three years. Our economy has lost many years of income and wealth and many have suffered hugely. Much of this was avoidable.
But the gross errors made in both the private sector and in economic policy in the public sector have both emerged from the same root problem. This is the commitment to a delusional belief in the workings of markets on their own, without supervision, and to a turbo-version of shareholder value and destructive competition – was competition, the more intense, not always good? – within the boards of Irish banks and other companies, boosted by perverse executive incentives. The former dominated and regrettably, still strongly influences the highest levels in the public sector and the latter was in the private sector, especially banking. If certain key public servants and public regulators had not been in awe of self-regulating markets and the apparent superiority of the private sector, the Crash of 2008 would have been far smaller.
There have been changes in bank regulation and at the Central Bank, but much more reform is required. Without major changes in attitudes, especially to a realistic view of markets and of what is the public interest by some top public policymakers /regulators, combined with major changes in company law and national and international regulation, the crisis will be prolonged and is likely to recur.
Friday, 30 July 2010
China (III) - Beijing's scramble for Africa
Paul Sweeney: This is the third of four (maybe five) posts on China. The first examined Chinese investment and the second FDI in China and its impact on workers’ rights and trade unions in the “communist” state. This one is about Beijing’s scramble for influence and resources in Africa.
China is Africa's second-largest trading partner after the United States. The continent needs China’ extensive investment to rebuild its failing infrastructure. Chinese companies are replacing Western companies with contracts to build roads, railways, pipelines, hydroelectric dams, and to upgrade ports.
Chinese interest in Africa is direct and indirect; large landholdings, factories, investment and construction of infrastructure etc. For example, China is rebuilding oil-rich but corrupt Nigeria's poor and inefficient railway system. However, China will supply nearly all the equipment and technical personnel, and at prices which it determines. And in line with other projects in Africa, China will supply most of the workers.
China also requires the energy supplies and huge minerals resources of Africa. The comrades in Beijing know that West African oil reserves are a resource that can reduce its dependence on volatile Middle Eastern markets.
The United States and the West are aware of the growing Chinese involvement and investment in Africa. While the United States does not have a colonial past (except as the first colony to break free) as do the major European countries, it is still viewed as the world’s only Superpower today by many in Africa. So the Chinese are welcomed.
U.S. legislation forbids aid for projects that may transfer U.S. jobs abroad, while Chinese aid is actively encouraging Chinese companies in key industries and also to even move factories to Africa. China's aid is often non-transparent, and many investments pay no attention of local interests and ignore local communities.
Ireland’s Tullow Oil is siding with the huge Chinese state oil company China National Offshore Oil Company (CNOOC) rather than with US companies. "Our shareholders believe in Africa," its boss, Aiden Heavey says. American investors, by contrast, are still wary and "tend to stick offshore". Tullow grew from nothing into the top third of the FTSE 100 with a market capitalisation of Stg£11.3bn, thanks to two of the biggest oil discoveries of the past decade, remains to a great extent "unexplored". Even last week Tullow found more oil in Ghana.
Tullow is negotiating with France's Total and CNOOC to farm out at least half its assets in Uganda's Lake Albert basin, where it has played the main role in the discovery so far of 750m barrels of oil. The deal would deliver a "hell of a combination", Mr Heavey argues.
"The Chinese will be very helpful in building up other industries and CNOOC is a very attractive option there because the Chinese have proved in the past that they will put the infrastructure in place," Heavey said, adding that Total brings oil expertise, financial firepower and long experience in Africa to the equation.
Chinese companies are also considering the purchase of interests in Nigerian oil companies, including the stakes currently held by major American companies.
Beijing is encouraging Chinese companies to buy great tracts of farmland abroad, particularly in Africa and South America, to help guarantee food security. Concern over food supplies has increased in China, Japan and Russia. Russia plans to form a state grain trading company to control up to half of the country's cereal exports. Cofco, China's state-owned food processing group, is working with Itochu, the Japanese trading company, to buy grain and other agricultural commodities in global markets to build pricing power and so combat rising food costs.
The congested roads in Nairobi are being widened and repaved as "a gift from the people of China.” While the investment will ease congestion for Kenyan motorists, it is really secondary to Chinese interests which require modern infrastructure to move African commodities to ports for shipment to China. It has been reported that China recently purchased half the farm land under cultivation in the Congo!
In Namibia, China established its first overseas military base to track its satellite and manned space flights.
The issue of Chinese involvement is not uncontested, and is turning nasty in parts of Africa. In Nigeria, the Movement for the Emancipation of the Niger Delta (MEND) has said it will expel all Chinese workers in the area. In April 2007, nine Chinese workers were killed in an attack by armed men on an oil field in eastern Ethiopia.
In South Africa, the textile union claims around 100,000 jobs have been lost as Chinese synthetic fabrics replace cotton prints in street markets across Africa and, in 2007, South Africa's unions threatened to boycott anyone selling Chinese products, including on street markets. Rene N'Guetta Kouassi, the head of the African Union's economic affairs department, warned: "Africa must not jump blindly from one type of neo-colonialism into Chinese-style neo-colonialism" (AFP, September 30th 2009).
China is known to work uncritically with some of the nastiest regimes in Africa. It sells arms, jet fighters, and military vehicles to Zimbabwe, Sudan, Ethiopia and, in the UN, China has used its veto power to block sanctions against tyrannical regimes in Sudan and Zimbabwe.
Sudan, with its huge oil reserves, is the largest recipient of Chinese investment. It sells two-thirds of its oil to Beijing. China has been criticised for its links with this government for its role in the ongoing crisis in Darfur.
The working conditions in many Chinese aid-funded projects are poor. Many Chinese developers still see environmental destruction as the price to be paid for economic progress. For example, the Bui Dam will flood a major part of a national park, and will probably generate much greenhouse gases. This dam, in Ghana, is an example of China's resource-backed lending. In 2007, China Exim Bank, the Chinese state import-export bank, approved $562 million in loans for this hydropower project on the Black Volta River. Ghana mortgaged its cocoa exports to access this loan.
China is also investing $1bn in a coal project in Mozambique’s Tete province. Wuhan Iron and Steel, one of China’s biggest steel producers, will spend $200m on an 8 per cent share of Riversdale, an Australian company developing two coalfields there. Wuhan will also commit a further $800m to the Zambezi coal reserve. The coal is one of the world’s largest untapped reserves of coking and thermal coal. Coking coal is used to make steel, while power plants provide a market for thermal coal. Wuhan will buy about 40 per cent of the coking coal produced from Zambezi, and the company will have the right to purchase at least 10 per cent of that produced from the neighbouring Benga project. And another Chinese company will build connecting infrastructure to get the coal to port by barge!
Many Chinese firms employ large numbers of local workers in many projects, but wages remain low. However, there is evidence that African workers are learning new skills because of the availability of Chinese-funded work. Taking advantage of low labour costs, the Chinese are also building factories across Africa. "China consistently respects and supports African countries," Yan Xiao Gang, China's economic attaché in Ethiopia, told the BBC. "It never imposes its own will on African countries, nor interferes in the domestic affairs of African countries."
On the plus side, Africa does well when commodity prices are high, and it is China which has pushed them up, with its huge demand. Poor African consumers like the cheap Chinese goods. Chinese migrant traders are increasingly selling cheap clothes, plastic goods, shoes, and household wares. In many of the smallest towns and the largest cities in Africa, Chinatowns are emerging up, with bazaars selling cheap imports from China. But against this, as African economies continue to export unprocessed goods, its indigenous manufacturing industry fails. And those cheap imports have threatened the collapse of Africa's textile industry, and local manufacturing. Most African countries have now a growing trade deficit with China.
African governments like China's loans which are cheaper and have much fewer strings attached than loans from the IMF or World Bank. Chinese interest in Africa is stimulating other countries and firms’ interest in the continent, and so investors and traders are setting up shop there. China's gifts to modern-day Africa will soon include a major new conference centre at the headquarters of the African Union in Addis Ababa.
In conclusion, China’s interest in Africa brings many benefits to the continent’s 50 states and its peoples, with its huge demand for resources, its investment in infrastructure, and its cheap goods for its citizens. China also gives less tied and cheaper loans than the ideologically-laced loans from the IMF and World Bank. But on the other hand, we have seen that uneven international development means that African industry is threatened, and while workers have jobs and roads, they are being exploited too.
China’s scramble for Africa is an interesting space, with many shades of history repeating itself. In the next post, I shall examine the role of Chinese state companies, just as Ireland’s short-sighted government establishes the Privatisation Board.
China is Africa's second-largest trading partner after the United States. The continent needs China’ extensive investment to rebuild its failing infrastructure. Chinese companies are replacing Western companies with contracts to build roads, railways, pipelines, hydroelectric dams, and to upgrade ports.
Chinese interest in Africa is direct and indirect; large landholdings, factories, investment and construction of infrastructure etc. For example, China is rebuilding oil-rich but corrupt Nigeria's poor and inefficient railway system. However, China will supply nearly all the equipment and technical personnel, and at prices which it determines. And in line with other projects in Africa, China will supply most of the workers.
China also requires the energy supplies and huge minerals resources of Africa. The comrades in Beijing know that West African oil reserves are a resource that can reduce its dependence on volatile Middle Eastern markets.
The United States and the West are aware of the growing Chinese involvement and investment in Africa. While the United States does not have a colonial past (except as the first colony to break free) as do the major European countries, it is still viewed as the world’s only Superpower today by many in Africa. So the Chinese are welcomed.
U.S. legislation forbids aid for projects that may transfer U.S. jobs abroad, while Chinese aid is actively encouraging Chinese companies in key industries and also to even move factories to Africa. China's aid is often non-transparent, and many investments pay no attention of local interests and ignore local communities.
Ireland’s Tullow Oil is siding with the huge Chinese state oil company China National Offshore Oil Company (CNOOC) rather than with US companies. "Our shareholders believe in Africa," its boss, Aiden Heavey says. American investors, by contrast, are still wary and "tend to stick offshore". Tullow grew from nothing into the top third of the FTSE 100 with a market capitalisation of Stg£11.3bn, thanks to two of the biggest oil discoveries of the past decade, remains to a great extent "unexplored". Even last week Tullow found more oil in Ghana.
Tullow is negotiating with France's Total and CNOOC to farm out at least half its assets in Uganda's Lake Albert basin, where it has played the main role in the discovery so far of 750m barrels of oil. The deal would deliver a "hell of a combination", Mr Heavey argues.
"The Chinese will be very helpful in building up other industries and CNOOC is a very attractive option there because the Chinese have proved in the past that they will put the infrastructure in place," Heavey said, adding that Total brings oil expertise, financial firepower and long experience in Africa to the equation.
Chinese companies are also considering the purchase of interests in Nigerian oil companies, including the stakes currently held by major American companies.
Beijing is encouraging Chinese companies to buy great tracts of farmland abroad, particularly in Africa and South America, to help guarantee food security. Concern over food supplies has increased in China, Japan and Russia. Russia plans to form a state grain trading company to control up to half of the country's cereal exports. Cofco, China's state-owned food processing group, is working with Itochu, the Japanese trading company, to buy grain and other agricultural commodities in global markets to build pricing power and so combat rising food costs.
The congested roads in Nairobi are being widened and repaved as "a gift from the people of China.” While the investment will ease congestion for Kenyan motorists, it is really secondary to Chinese interests which require modern infrastructure to move African commodities to ports for shipment to China. It has been reported that China recently purchased half the farm land under cultivation in the Congo!
In Namibia, China established its first overseas military base to track its satellite and manned space flights.
The issue of Chinese involvement is not uncontested, and is turning nasty in parts of Africa. In Nigeria, the Movement for the Emancipation of the Niger Delta (MEND) has said it will expel all Chinese workers in the area. In April 2007, nine Chinese workers were killed in an attack by armed men on an oil field in eastern Ethiopia.
In South Africa, the textile union claims around 100,000 jobs have been lost as Chinese synthetic fabrics replace cotton prints in street markets across Africa and, in 2007, South Africa's unions threatened to boycott anyone selling Chinese products, including on street markets. Rene N'Guetta Kouassi, the head of the African Union's economic affairs department, warned: "Africa must not jump blindly from one type of neo-colonialism into Chinese-style neo-colonialism" (AFP, September 30th 2009).
China is known to work uncritically with some of the nastiest regimes in Africa. It sells arms, jet fighters, and military vehicles to Zimbabwe, Sudan, Ethiopia and, in the UN, China has used its veto power to block sanctions against tyrannical regimes in Sudan and Zimbabwe.
Sudan, with its huge oil reserves, is the largest recipient of Chinese investment. It sells two-thirds of its oil to Beijing. China has been criticised for its links with this government for its role in the ongoing crisis in Darfur.
The working conditions in many Chinese aid-funded projects are poor. Many Chinese developers still see environmental destruction as the price to be paid for economic progress. For example, the Bui Dam will flood a major part of a national park, and will probably generate much greenhouse gases. This dam, in Ghana, is an example of China's resource-backed lending. In 2007, China Exim Bank, the Chinese state import-export bank, approved $562 million in loans for this hydropower project on the Black Volta River. Ghana mortgaged its cocoa exports to access this loan.
China is also investing $1bn in a coal project in Mozambique’s Tete province. Wuhan Iron and Steel, one of China’s biggest steel producers, will spend $200m on an 8 per cent share of Riversdale, an Australian company developing two coalfields there. Wuhan will also commit a further $800m to the Zambezi coal reserve. The coal is one of the world’s largest untapped reserves of coking and thermal coal. Coking coal is used to make steel, while power plants provide a market for thermal coal. Wuhan will buy about 40 per cent of the coking coal produced from Zambezi, and the company will have the right to purchase at least 10 per cent of that produced from the neighbouring Benga project. And another Chinese company will build connecting infrastructure to get the coal to port by barge!
Many Chinese firms employ large numbers of local workers in many projects, but wages remain low. However, there is evidence that African workers are learning new skills because of the availability of Chinese-funded work. Taking advantage of low labour costs, the Chinese are also building factories across Africa. "China consistently respects and supports African countries," Yan Xiao Gang, China's economic attaché in Ethiopia, told the BBC. "It never imposes its own will on African countries, nor interferes in the domestic affairs of African countries."
On the plus side, Africa does well when commodity prices are high, and it is China which has pushed them up, with its huge demand. Poor African consumers like the cheap Chinese goods. Chinese migrant traders are increasingly selling cheap clothes, plastic goods, shoes, and household wares. In many of the smallest towns and the largest cities in Africa, Chinatowns are emerging up, with bazaars selling cheap imports from China. But against this, as African economies continue to export unprocessed goods, its indigenous manufacturing industry fails. And those cheap imports have threatened the collapse of Africa's textile industry, and local manufacturing. Most African countries have now a growing trade deficit with China.
African governments like China's loans which are cheaper and have much fewer strings attached than loans from the IMF or World Bank. Chinese interest in Africa is stimulating other countries and firms’ interest in the continent, and so investors and traders are setting up shop there. China's gifts to modern-day Africa will soon include a major new conference centre at the headquarters of the African Union in Addis Ababa.
In conclusion, China’s interest in Africa brings many benefits to the continent’s 50 states and its peoples, with its huge demand for resources, its investment in infrastructure, and its cheap goods for its citizens. China also gives less tied and cheaper loans than the ideologically-laced loans from the IMF and World Bank. But on the other hand, we have seen that uneven international development means that African industry is threatened, and while workers have jobs and roads, they are being exploited too.
China’s scramble for Africa is an interesting space, with many shades of history repeating itself. In the next post, I shall examine the role of Chinese state companies, just as Ireland’s short-sighted government establishes the Privatisation Board.
Sunday, 18 July 2010
China (II) - Investment in China
Paul Sweeney: Many thanks to all those who commented on the first post. A few responses are made by me on that post for those who are interested. This is the second of four posts on China.
In the first post I examined the huge growth of Chinese investment in the rest of the world. In this post I will briefly look at the other side of the investment coin – foreign direct investment in China and unionisation in MNC plants and offices. The growth in FDI into China quickly grew to over $108bn in 2008, the last figures from UNCTAD. This is equivalent to 6% of total investment in China. Outward investment from China was $52bn in 2008 and is undoubtedly higher today.
Western firms have been pouring investment into China. On 8th July, Peugeot announced a €1bn joint venture with a Chinese car company in new plants in China.
Yet some MNCs are baulking. Google’s decision to exit its Chinese business because of censorship was unusual as it is a major company which was willing to make a strong statement – eventually! However, a compromise was reached recently with the Chinese government in early July and Google will stay. In its licence-renewal application, Google pledged to “abide by Chinese law”. The level of censorship to be imposed and accepted by Google is as yet unknown. Other foreign firms put up with intimidation and often have to indulge in bribery to Communist Party officials.
The recent harsh prison sentences imposed on four Rio Tinto employees in Shanghai for bribe-taking of between seven and 14 years for bribery and theft of commercial secrets (only one of them admitted the second charge) has scared many western firms. The employees were three Chinese and one an Australian of Chinese descent. The American Chamber of Commerce in China found that many American firms feel shut out of Chinese markets because of “discriminatory government policies and inconsistent treatment by the legal system.”
One advantage for western multinationals in this “workers’ state” is the absence of free trade unions. There are only yellow unions in China. They are similar to the yellow unions in Ryanair or Quinn Insurance – not free trade unions but in-house “representatives.” The All-China Federation of Trade Unions, (ACFTU), the country’s union organisation, is closely linked with the Communist Party. Union representatives in companies have to be approved by the union federation. They are thus linked, perhaps indirectly, to the Chinese government. So unionisation can link in the state into management.
Yet Chinese workers in many plants have been ignoring the state controlled unions and confronting management. The ACFTU has been forced to increase its efforts to recruit members after industrial unrest, which stopped the China operations of two Japanese carmakers.
At the Honda plant, worker representative, Ms Li issued an open letter on behalf of the 16 employees chosen by workers to negotiate on their behalf, during the strike which closed Honda’s China operations for a week. “We must maintain a high degree of unity and not let the representatives of Capital divide us,” the letter urged. “This factory’s profits are the fruits of our bitter toil ... This struggle is not just about the interests of our 1,800 workers. We also care about the rights and interests of all Chinese workers.” The strike was quickly followed by two other strikes in two other Honda plants in China. Yet at rallies, most Honda strikers were fearful of the state and hid their faces with surgical masks and few would give their full names to the media.
The result: the workers won a 25% increase in pay to €230 a month! Most commentators do not think even 30% pay rises will lead to noticeable price increases in the West, but are more worried that strikes will disrupt supply chains. If this happens, the authoritarian state may step in.
Most foreign companies do not accept unions to date. But many commentators are saying that if they want to operate in China, they may have no choice from now on. It has been seen that the Apple IPod is made under very stressful conditions for its non-unionised workers, many of whom were so stressed that they have committed suicide. Great, progressive steps to prevent more suicides have been taken by Apple’s supplier. For example: Nets to prevent jumping off factories have been put up, “counseling” and pay rises have been “imposed” by Foxconn, the kind sub-contractor, to reduce stress! It is largely controlled by one staggeringly rich man.
Foxconn is the world’s largest contract electronics manufacturer, whose clients include Apple, Dell and HP. Some assert that it is one of the better employers with a fine campus with a large swimming pool and many other facilities at its “factory town” in Shenzhen, near Hong Kong. Yet it has been shaken by the high-profile series of suicides. And rightly so, for a fine pool is no good when you are treated like a serf in the factory working very long hours, doing repetitive and really tedious work under quasi-military guard. And other employers are even more nervous too. Whether free trade unions will be allowed to operate remains to be seen, but it is unlikely in the short run.
Up till recently, big companies have been welcomed in China for providing foreign capital and skills, and they were not asked by the state to allow the workers to organize (nor have workers been given this right in law), or rather, to be told by government what union to accept. Unions are mild in China but there is now a 2% charge on payroll in the companies where unions do exist. It may be used for workers' health care and other “benefits”. The FT reported that “They are actually telling us [to establish union chapters], not asking us,” said one foreign executive in Suzhou. “The feeling from everyone was – we just got a 2 per cent tax.” “In Europe or America, having a union is like having a [rival] manager in the company,” said a government official. “Here a union is to help the company be more productive.” Well those are two views of the comrades and the MNCs!
This increased worker militancy may impact on consumers as costs will rise at key stages in the thousands of supply chains that bring them electronics, clothes and toys. Workers are more skilled an,d with greater investment in capital and in skills, productivity is rising. The workers’ share was not at all equitable and they are now becoming more militant. Thus wages and then prices will rise. This is not bad as it would help reduce Chinas huge foreign surpluses in time, though for many Chinese products, like electronics, labour costs are but a fraction of total costs. Increased wages and salaries will re-orientate consumption to China’s growing middle class too, shifting more consumption to the domestic market.
Unionization had been mainly been confined to those industrial hubs which have a history of union activity, such as Guangdong and Tianjin, east of Beijing. Wal-Mart rejected unionisation in China and then pulled out, and Microsoft is currently resisting a unionisation drive. The FT recently reported that the “union officials in Beijing’s financial district summoned representatives of multinational investment banks to a meeting last month at which they were encouraged to establish union chapters.” The banks included Goldman Sachs, JPMorgan, Morgan Stanley and UBS.
In the first post I examined the huge growth of Chinese investment in the rest of the world. In this post I will briefly look at the other side of the investment coin – foreign direct investment in China and unionisation in MNC plants and offices. The growth in FDI into China quickly grew to over $108bn in 2008, the last figures from UNCTAD. This is equivalent to 6% of total investment in China. Outward investment from China was $52bn in 2008 and is undoubtedly higher today.
Western firms have been pouring investment into China. On 8th July, Peugeot announced a €1bn joint venture with a Chinese car company in new plants in China.
Yet some MNCs are baulking. Google’s decision to exit its Chinese business because of censorship was unusual as it is a major company which was willing to make a strong statement – eventually! However, a compromise was reached recently with the Chinese government in early July and Google will stay. In its licence-renewal application, Google pledged to “abide by Chinese law”. The level of censorship to be imposed and accepted by Google is as yet unknown. Other foreign firms put up with intimidation and often have to indulge in bribery to Communist Party officials.
The recent harsh prison sentences imposed on four Rio Tinto employees in Shanghai for bribe-taking of between seven and 14 years for bribery and theft of commercial secrets (only one of them admitted the second charge) has scared many western firms. The employees were three Chinese and one an Australian of Chinese descent. The American Chamber of Commerce in China found that many American firms feel shut out of Chinese markets because of “discriminatory government policies and inconsistent treatment by the legal system.”
One advantage for western multinationals in this “workers’ state” is the absence of free trade unions. There are only yellow unions in China. They are similar to the yellow unions in Ryanair or Quinn Insurance – not free trade unions but in-house “representatives.” The All-China Federation of Trade Unions, (ACFTU), the country’s union organisation, is closely linked with the Communist Party. Union representatives in companies have to be approved by the union federation. They are thus linked, perhaps indirectly, to the Chinese government. So unionisation can link in the state into management.
Yet Chinese workers in many plants have been ignoring the state controlled unions and confronting management. The ACFTU has been forced to increase its efforts to recruit members after industrial unrest, which stopped the China operations of two Japanese carmakers.
At the Honda plant, worker representative, Ms Li issued an open letter on behalf of the 16 employees chosen by workers to negotiate on their behalf, during the strike which closed Honda’s China operations for a week. “We must maintain a high degree of unity and not let the representatives of Capital divide us,” the letter urged. “This factory’s profits are the fruits of our bitter toil ... This struggle is not just about the interests of our 1,800 workers. We also care about the rights and interests of all Chinese workers.” The strike was quickly followed by two other strikes in two other Honda plants in China. Yet at rallies, most Honda strikers were fearful of the state and hid their faces with surgical masks and few would give their full names to the media.
The result: the workers won a 25% increase in pay to €230 a month! Most commentators do not think even 30% pay rises will lead to noticeable price increases in the West, but are more worried that strikes will disrupt supply chains. If this happens, the authoritarian state may step in.
Most foreign companies do not accept unions to date. But many commentators are saying that if they want to operate in China, they may have no choice from now on. It has been seen that the Apple IPod is made under very stressful conditions for its non-unionised workers, many of whom were so stressed that they have committed suicide. Great, progressive steps to prevent more suicides have been taken by Apple’s supplier. For example: Nets to prevent jumping off factories have been put up, “counseling” and pay rises have been “imposed” by Foxconn, the kind sub-contractor, to reduce stress! It is largely controlled by one staggeringly rich man.
Foxconn is the world’s largest contract electronics manufacturer, whose clients include Apple, Dell and HP. Some assert that it is one of the better employers with a fine campus with a large swimming pool and many other facilities at its “factory town” in Shenzhen, near Hong Kong. Yet it has been shaken by the high-profile series of suicides. And rightly so, for a fine pool is no good when you are treated like a serf in the factory working very long hours, doing repetitive and really tedious work under quasi-military guard. And other employers are even more nervous too. Whether free trade unions will be allowed to operate remains to be seen, but it is unlikely in the short run.
Up till recently, big companies have been welcomed in China for providing foreign capital and skills, and they were not asked by the state to allow the workers to organize (nor have workers been given this right in law), or rather, to be told by government what union to accept. Unions are mild in China but there is now a 2% charge on payroll in the companies where unions do exist. It may be used for workers' health care and other “benefits”. The FT reported that “They are actually telling us [to establish union chapters], not asking us,” said one foreign executive in Suzhou. “The feeling from everyone was – we just got a 2 per cent tax.” “In Europe or America, having a union is like having a [rival] manager in the company,” said a government official. “Here a union is to help the company be more productive.” Well those are two views of the comrades and the MNCs!
This increased worker militancy may impact on consumers as costs will rise at key stages in the thousands of supply chains that bring them electronics, clothes and toys. Workers are more skilled an,d with greater investment in capital and in skills, productivity is rising. The workers’ share was not at all equitable and they are now becoming more militant. Thus wages and then prices will rise. This is not bad as it would help reduce Chinas huge foreign surpluses in time, though for many Chinese products, like electronics, labour costs are but a fraction of total costs. Increased wages and salaries will re-orientate consumption to China’s growing middle class too, shifting more consumption to the domestic market.
Unionization had been mainly been confined to those industrial hubs which have a history of union activity, such as Guangdong and Tianjin, east of Beijing. Wal-Mart rejected unionisation in China and then pulled out, and Microsoft is currently resisting a unionisation drive. The FT recently reported that the “union officials in Beijing’s financial district summoned representatives of multinational investment banks to a meeting last month at which they were encouraged to establish union chapters.” The banks included Goldman Sachs, JPMorgan, Morgan Stanley and UBS.
Sunday, 11 July 2010
China: (I) - Investment Strategy and lessons for Ireland
Paul Sweeney: When the Chinese state becomes one of the biggest shareholders in Guinness’ parent, and Volvo is bought by an obscure Chinese carmaker, Geely, it is time to examine what Chinese companies and investors are up to. Guinness, of course, is synomous with Ireland. Guinness is seen as our national drink, foreigners tell you they have drunk it and you, a Paddy, are supposed to be pleased.
Guinness ceased to be an Irish company in the late 19th century when it was quoted in London, and only recently its parent, Diageo, even considered closing its plant in Dublin, but decided not to do so. Now the Chinese Investment Company (CIC) owns 1.1% of Diageo, making it the 9th largest shareholder. The CIC is a massive Sovereign Wealth Fund (SWF) owned by the Chinese government, which is buying up shares in companies all over the world.
Over a number of posts, I will examine the role of China under three different headings. First, I will examine how extensive is the investment in companies and in countries. It will be seen that it is massive! It will also be seen that it is quite strategic and mercantilist. Thus, it does not conform to liberal economic theory. I will also examine how Chinese state companies are taking shares, in varying amounts, in all kinds of companies worldwide, through stock markets, trade sales etc.
Secondly, investment in China by Western firms and unionisation will be briefly examined.
Thirdly, I will briefly look at the debate on whether China, through its vast investment policies in Africa, is a new colonial power (and in other emerging countries and also in many developed economies, but to much smaller degrees, proportionately). Or is it simply investing benignly to maintain access to resources for its hungry factories and consumers?
Fourthly, I will show that China, Asian, Russian and other major and increasingly important economies are not following the Western economic orthodoxy. These important economies are, to varying degrees, authoritarian and if they do not reject neo-liberal economic ideology outright, they are quite wary and perhaps scornful of it. This is a major challenge to liberal orthodoxy. Yet it is to be welcomed, with some caution, by progressives who have been critical of the free market fundamentalism which led to the Crash of 2008.
One such change in “free market” policy – or one aspect of it, that is, privatisation - should now be radically reviewed. In regard to our own state companies, we might see them differently - as assets with major development value. Thus, it will be argued that the Irish Government’s decision to undertake a “stock taking” of the remaining Irish commercial state companies is timely, provided it is strategic and not short-term fire sales for a few million euro. It will be argued that the Chinese pragmatism on its state companies may be one which has some lessons for Ireland and our state companies and our much diminished (used on the private banking sector bailout) Sovereign Wealth Fund, the NPRF.
Let us begin by looking at the extent of Chinese investments. These are not the biggest investments, nor is the list comprehensive.
In June 2009, when Morgan Stanley, the US bank under government support, sought private capital, CIC subscribed US$1.2bn. Back in 2007, the Chinese Investment Company (CIC) had purchased $5.6 billion in MS common stock, or 9.86% equity ownership in Morgan Stanley.
CIC purchased, for an aggregate purchase price of CAD $435 million, 5% of Canadian company Penn West. It also invested CAD $817 million for 45% interest in a partnership to develop Penn West’s bitumen assets located in the Peace River area of northern Alberta. 2009: CIC bought in 45% of the equity in Nobel Oil Group based in Russia in late 2009, investing €300m in shares and in development. Hong Kong’s Oriental Patron acquired a 5% equity stake and the original Russian shareholders maintain their 50% stake.
Canadian mining and processing company Teck Resources sold a 17.2% stake to CIC in July 2009. It is the largest diversified mining, mineral processing and metallurgical company in Canada. The company is a major player in the production of copper, metallurgical coal and zinc. It has interests in 15 mines in Canada, the US, Chile and Peru, as well as exploration activities in four continents. CIC told Teck that it is acquiring the shares to become "a long-term passive investor" (at least a year!).
In the same time period, Chinese company, Sinopec, bought oil exploration company Addax Petroleum for $7.2 billion to develop oil sands. In June, Wuhan Iron and Steel Corp made a $400 million investment into Brazilian mining company MMX. Aluminum Corporation of China (Chinalco) took up its full entitlement in Rio Tinto's $15 billion rights offering. China expanded its interest in Mozambique’s natural resources, agreeing to invest $1bn in a coal project in June 2010.
The Chinese government invested $3 billion of its massive $1.2 trillion foreign reserves in the Blackstone Group, a major private equity fund. Blackstone is not a popular company, having been criticised as an asset stripper worldwide. It took a 12.5% stake in late 2008, and it was nodded through by the US Government because it was less than the threshold of 40% that it usually applied to prevent foreign takeovers of US corporations (so much for free markets, which, as most wise persons know, are seldom free). In contrast, in 2007, when the massive Chinese state oil company, CNOOC, sought to buy (all of the stock of) US oil company Unocal, it was stopped by the US government. Blackstone has bought up companies in China since, for example, pharmaceuticals firm Nufarm. China Investment Corp also invested €685m (£599m) into Apax Partners’ €11.2bn fund another private equity group in February 2010
Many of the major state-owned companies in China are now quoted on Stock Exchanges, and this means that they are now allowing in some private investors, but are included in international rankings of companies. It is estimated that of the top 500 global companies in the Fortune list, over 30 are Chinese state companies.
What is even more remarkable, from a policy perspective, is how many of the Fortune list of the top companies are former state-owned companies in many Western countries, and how many are still state owned, like France’s EDF, which owns much of the UK electricity industry.
In short, state companies have played a major role in developing some of the biggest enterprises of global scale throughout the world and continue to do so. Only the blind will ignore the role of state owned enterprises (SOEs) from a policy perspective. The proposed review of the Irish state owned companies must think in terms of developmental strategy, not of short term fire sales.
CIC, formed in September 2009, with RMB 1.55 trillion from the Chinese state, says that it selects investments based on economic and financial objectives, and an assessment of the commercial return and like any good Western capitalist, it seeks “to maximize shareholder value.” While it usually does not seek an active role in the companies in which it invests nor attempts to influence those companies’ operations, it may do so in certain circumstances. It seeks “long-term, stable, sustainable, and risk-adjusted returns.”
CIC states the “importance of operating responsibly – from how it runs itself and treats employees to how it selects investments. It is committed to operating responsibly and in full compliance of the laws and regulations in each of the jurisdictions in which it invests. CIC strives to contribute to the prosperity and development of local economies.”
As well as the sovereign wealth investment by the CIC, the many huge Chinese state companies are buying up stakes in private companies, taking over some outright, buying vast tracts of land for industrial type farming and buying financial assets all over the world. They are not just doing this to spread risk and diversify, as some Irish state companies like the ESB and DAA have done, but for national strategic reasons – to ensure adequate supply of minerals, oil, copper, etc., to the vast Chinese industrial complex. This is not the way of liberal economics.
In the next post, investment in China by Western firms and unionisation will be briefly examined. Meantime enjoy your Chinese part-owned pint of Guinness!
Guinness ceased to be an Irish company in the late 19th century when it was quoted in London, and only recently its parent, Diageo, even considered closing its plant in Dublin, but decided not to do so. Now the Chinese Investment Company (CIC) owns 1.1% of Diageo, making it the 9th largest shareholder. The CIC is a massive Sovereign Wealth Fund (SWF) owned by the Chinese government, which is buying up shares in companies all over the world.
Over a number of posts, I will examine the role of China under three different headings. First, I will examine how extensive is the investment in companies and in countries. It will be seen that it is massive! It will also be seen that it is quite strategic and mercantilist. Thus, it does not conform to liberal economic theory. I will also examine how Chinese state companies are taking shares, in varying amounts, in all kinds of companies worldwide, through stock markets, trade sales etc.
Secondly, investment in China by Western firms and unionisation will be briefly examined.
Thirdly, I will briefly look at the debate on whether China, through its vast investment policies in Africa, is a new colonial power (and in other emerging countries and also in many developed economies, but to much smaller degrees, proportionately). Or is it simply investing benignly to maintain access to resources for its hungry factories and consumers?
Fourthly, I will show that China, Asian, Russian and other major and increasingly important economies are not following the Western economic orthodoxy. These important economies are, to varying degrees, authoritarian and if they do not reject neo-liberal economic ideology outright, they are quite wary and perhaps scornful of it. This is a major challenge to liberal orthodoxy. Yet it is to be welcomed, with some caution, by progressives who have been critical of the free market fundamentalism which led to the Crash of 2008.
One such change in “free market” policy – or one aspect of it, that is, privatisation - should now be radically reviewed. In regard to our own state companies, we might see them differently - as assets with major development value. Thus, it will be argued that the Irish Government’s decision to undertake a “stock taking” of the remaining Irish commercial state companies is timely, provided it is strategic and not short-term fire sales for a few million euro. It will be argued that the Chinese pragmatism on its state companies may be one which has some lessons for Ireland and our state companies and our much diminished (used on the private banking sector bailout) Sovereign Wealth Fund, the NPRF.
Let us begin by looking at the extent of Chinese investments. These are not the biggest investments, nor is the list comprehensive.
In June 2009, when Morgan Stanley, the US bank under government support, sought private capital, CIC subscribed US$1.2bn. Back in 2007, the Chinese Investment Company (CIC) had purchased $5.6 billion in MS common stock, or 9.86% equity ownership in Morgan Stanley.
CIC purchased, for an aggregate purchase price of CAD $435 million, 5% of Canadian company Penn West. It also invested CAD $817 million for 45% interest in a partnership to develop Penn West’s bitumen assets located in the Peace River area of northern Alberta. 2009: CIC bought in 45% of the equity in Nobel Oil Group based in Russia in late 2009, investing €300m in shares and in development. Hong Kong’s Oriental Patron acquired a 5% equity stake and the original Russian shareholders maintain their 50% stake.
Canadian mining and processing company Teck Resources sold a 17.2% stake to CIC in July 2009. It is the largest diversified mining, mineral processing and metallurgical company in Canada. The company is a major player in the production of copper, metallurgical coal and zinc. It has interests in 15 mines in Canada, the US, Chile and Peru, as well as exploration activities in four continents. CIC told Teck that it is acquiring the shares to become "a long-term passive investor" (at least a year!).
In the same time period, Chinese company, Sinopec, bought oil exploration company Addax Petroleum for $7.2 billion to develop oil sands. In June, Wuhan Iron and Steel Corp made a $400 million investment into Brazilian mining company MMX. Aluminum Corporation of China (Chinalco) took up its full entitlement in Rio Tinto's $15 billion rights offering. China expanded its interest in Mozambique’s natural resources, agreeing to invest $1bn in a coal project in June 2010.
The Chinese government invested $3 billion of its massive $1.2 trillion foreign reserves in the Blackstone Group, a major private equity fund. Blackstone is not a popular company, having been criticised as an asset stripper worldwide. It took a 12.5% stake in late 2008, and it was nodded through by the US Government because it was less than the threshold of 40% that it usually applied to prevent foreign takeovers of US corporations (so much for free markets, which, as most wise persons know, are seldom free). In contrast, in 2007, when the massive Chinese state oil company, CNOOC, sought to buy (all of the stock of) US oil company Unocal, it was stopped by the US government. Blackstone has bought up companies in China since, for example, pharmaceuticals firm Nufarm. China Investment Corp also invested €685m (£599m) into Apax Partners’ €11.2bn fund another private equity group in February 2010
Many of the major state-owned companies in China are now quoted on Stock Exchanges, and this means that they are now allowing in some private investors, but are included in international rankings of companies. It is estimated that of the top 500 global companies in the Fortune list, over 30 are Chinese state companies.
What is even more remarkable, from a policy perspective, is how many of the Fortune list of the top companies are former state-owned companies in many Western countries, and how many are still state owned, like France’s EDF, which owns much of the UK electricity industry.
In short, state companies have played a major role in developing some of the biggest enterprises of global scale throughout the world and continue to do so. Only the blind will ignore the role of state owned enterprises (SOEs) from a policy perspective. The proposed review of the Irish state owned companies must think in terms of developmental strategy, not of short term fire sales.
CIC, formed in September 2009, with RMB 1.55 trillion from the Chinese state, says that it selects investments based on economic and financial objectives, and an assessment of the commercial return and like any good Western capitalist, it seeks “to maximize shareholder value.” While it usually does not seek an active role in the companies in which it invests nor attempts to influence those companies’ operations, it may do so in certain circumstances. It seeks “long-term, stable, sustainable, and risk-adjusted returns.”
CIC states the “importance of operating responsibly – from how it runs itself and treats employees to how it selects investments. It is committed to operating responsibly and in full compliance of the laws and regulations in each of the jurisdictions in which it invests. CIC strives to contribute to the prosperity and development of local economies.”
As well as the sovereign wealth investment by the CIC, the many huge Chinese state companies are buying up stakes in private companies, taking over some outright, buying vast tracts of land for industrial type farming and buying financial assets all over the world. They are not just doing this to spread risk and diversify, as some Irish state companies like the ESB and DAA have done, but for national strategic reasons – to ensure adequate supply of minerals, oil, copper, etc., to the vast Chinese industrial complex. This is not the way of liberal economics.
In the next post, investment in China by Western firms and unionisation will be briefly examined. Meantime enjoy your Chinese part-owned pint of Guinness!
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