Monday, February 25, 2013

China in the US MIrror: Pettis on China, Free Trade, Protection and Development

This from Michael Pettis's February 11th newsletter contains some gems on the history of economic development ...

I agree that protection has been important in the process of economic development as it was in Australia, but it must be protection with a purpose and there must still be domestic competition or other spurs to productivity growth. Subsidies are a recipe for rent-seeking and domestic favourtism. Competition is what matters even if it is protected competition initially.

Industries must have incentives to remain competitive over the medium to long-term, which is why policies of freer trade are beneficial as development progresses.

The pillars of growth

... I have often argued that the Chinese development model is an old one, and can trace its roots at least as far back as the “American System” of the 1820s and 1830s. This “system” was itself based primarily on the works of the brilliant first US Secretary of the Treasury Alexander Hamilton ...

This development model was also implicitly part of the debate in France that led to one of the most important financial innovations of the 19th Century, the creation of the Crédit Mobilier in France in 1852. The debate concerned one of the great economic questions in France, especially after the defeat of Napoleon: why had England, a country that one hundred years earlier had been poorer than France, managed to surpass France and all other countries economically and technologically, even though in the pure sciences and engineering the French were at least the equal to the British and perhaps superior?

One obvious reason had to do with the financing of the commercial application of new technology. The French banking system, dominated by rentiers and the landed aristocracy, seemed to specialize in protecting savers, in part by mobilizing capital and investing in gold or in government obligations. The English banking system did this too, but it also seemed much more willing to finance infrastructure and manufacturing capacity.

In fact more generally I have argued that the main reason “industrial revolutions” have occurred largely in England and the United States is because industrial revolutions are not driven by scientific developments but rather by the commercial application of scientific developments. For this to happen it seems that a robust financing system is key.


I will come back to this issue of the financial system, but the point here is that there have been many versions of this development model, and at least two major economic theoreticians – the German Friedrich List in the 19thCentury and the Ukrainian-American Alexander Gershenkron in the 20th – have formally described variations on the investment-driven growth model.


Aside from Alexander Hamilton, its intellectual and political godfather, the main proponents of the American System were figures like Henry Clay, Henry and Matthew Cary, John Calhoun, and even Abraham Lincoln himself. Their vision of economic policymaking was looked down upon as naïve and even foolish by most American academic economists – schooled as they were in the laissez faire doctrines then fashionable in England – but I think it is hard for any economic historian not to feel relieved that neither the academics nor the Jeffersonian and Jacksonian factions had the clout to force “good” economic policy onto US development. America got rich in part by doing the wrong things.


It was of course the post-War Japanese development model, itself based on Japan’s experience of economic development during and after the Meiji restoration, that became the standard for policymakers throughout East Asia and China. I think of China’s growth model as merely a more muscular version of the Japanese or East Asian growth model, which is itself partly based on the American experience.
There were three key elements of the American System. Historian Michael Lind, in one of his economic histories of the United States, described them as:

· infant industry tariffs
· internal improvements, and
· a sound system of national finance

These three elements are at the heart, explicitly or implicitly, of every variation of the investment-led development model adopted by number of countries in the last century – including Germany in the 1930s, the USSR in the early Cold War period, Brazil during the Brazilian miracle, South Korea after the Korean War, Japan before 1990, and China today ...

Infant industry tariffs
The “infant industry” argument is fairly well known. I believe Alexander Hamilton was the first person to use the phrase, and the reasoning behind his thinking was straightforward. American manufacturing could not compete with the far superior British, and according to the then- (and now) fashionable economic theories based on Adam Smith and David Ricardo, the implications for trade policy were obvious. Americans should specialize in areas where they were economically superior to the British – agriculture, for the most part – and economic policy should consist of converting US agriculture to the production of cash crops – tobacco, rice, sugar, wheat and, most importantly, cotton – maximizing that production and exchanging them for cheaper and superior British manufactured items.

In this way, as Ricardo brilliantly proved, and assuming a static distribution of comparative advantages, with each country specializing in its comparative advantage, global production would be maximized and through trade both the British and the Americans would be better off. While most academic US economists and the commodity-producing South embraced free trade, Alexander Hamilton and his followers, mainly in the northeast, did not (in fact differing views over free trade as well as over slavery and state rights were at the heart of the North-South conflict that led eventually to the Civil War).

Hamilton was convinced that it was important for the US to develop its own manufacturing base because, as he explained in his Congressional report in 1791, he believed that productivity growth was likely to be much higher in manufacturing than in agriculture or mineral extraction. Contrary to David Ricardo, in other words, Hamilton believed that comparative advantage was not static and could be forced to change in ways that benefitted less productive countries. What is more, he thought manufacturing could employ a greater variety of people and was not subject to seasonal fluctuations or fluctuations in access to minerals.

Given much higher British efficiency and productivity, which translated into much lower prices even with higher transportation costs, how could Americans compete? They could do it the same way the British did to compete with the superior Dutch a century earlier. The US had to impose tariffs and other measures to raise the cost of foreign manufacturers sufficiently to allow their American counterparts to undersell them in the US market. In addition Americans had to acquire as much British technological expertise and capacity as possible (which usually happened, I should add, in the form of intellectual property theft).

This the US did, and in fact I believe every country that has managed the transition from underdeveloped to developed country status (with, perhaps, the exception of one or two trading entrepôts like Singapore and Hong Kong, although even this is debatable), including Germany, Japan, and Korea, has done it behind high explicit or implicit trade tariffs and stolen intellectual property. The idea that countries get rich under conditions of free trade has very little historical support, and it is far more likely that rich countries discover the benefits of free trade only after they get rich, while poor countries that embrace free trade too eagerly (think of Colombia and Chile in the late 19th century, who were stellar students of economic orthodoxy) almost never get rich unless, like Haiti in the 18th Century or Kuwait today, they are massive exporters of a very valuable commodity (sugar, in the case of Haiti, which was the richest country in the world per capita during a good part of the late 18th Century).

But rather than just embrace protection I would add that there is one very important caveat. Many countries have protected their infant industries, and often for many decades, and yet very few have made the transition to developed country status. Understanding why protection “works” in some cases and not in others might have very important implications for China. I won’t pretend to have answered this question fully but I suspect the difference between the countries that saw such rapid productivity growth behind infant industry protection that they were eventually able to compete on their own, and those that didn’t, may have had to do with the structure of domestic competition.
Specifically, it is not enough to protect industry from foreign competition. There must be a spur to domestic innovation, and this spur is probably competition that leads to advances in productivity and management organization. I would argue, for example, that countries that protected domestic industry but allowed their domestic markets to be captured and dominated by national champions were never likely to develop in the way the United States did in the 19th Century.
I would also argue that companies that receive substantial subsidies from the state also fail to develop in the necessary way because rather than force management to improve economic efficiency as a way of overcoming their domestic rivals, these countries encourage managers to compete by trying to gain greater access to those subsidies. Why innovate when it is far more profitable to demand greater subsidies, especially when subsidized companies can easily put innovative companies out of business? Last April, for example, I wrote about plans by Wuhan Iron & Steel, China’s fourth-largest steel producer, to invest $4.7 billion in the pork production industry.

The company’s management argued that they could compete with traditional agro-businesses not because steel makers were somehow more efficient than farmers, but rather because their size and clout made it easier for them to get cheap capital and to get government approvals. They were able to invest in an industry they knew little about, in other words, because they knew they could extract economic rent. This clearly is not a good use of protection.

The lessons for China, if I am right, are that China should forego the idea of nurturing national champions and should instead encourage brutal domestic competition. Beijing should also eliminate subsidies to production, the most important being cheap and unlimited credit, because senior managers of Chinese companies rationally spend more time on increasing access to these subsidies than on innovation, a subject on which, in spite of the almost absurd hype of recent years, China fares very, very poorly.

There is nothing wrong with protecting domestic industry, but the point is to create an incentive structure that forces increasing efficiency behind barriers of protection. The difficulty, of course, is that trade barriers and other forms of subsidy and protection can become highly addictive, and the beneficiaries, especially if they are national champions, can become politically very powerful. In that case they are likely to work actively both to maintain protection and to limit efficiency-enhancing domestic competition. It was Friedrich Engels, not often seen as a champion of capitalist competition, writing to Edward Bernstein in 1881, who said that “the worst of protection is that when you once have got it you cannot easily get rid of it.”

Internal improvements
The second element of the American System was internal improvement, which today we would probably call infrastructure spending. Proponents of the American System demanded that the national and state governments design, finance and construct canals, bridges, ports, railroads, toll roads, and a wide variety of communication and transportation facilities that would allow businesses to operate more efficiently and profitably. In some cases these projects were paid for directly (tolls, for example) and in other cases they were paid for tax revenues generated by higher levels of economic activity.

It is easy to make a case for state involvement in infrastructure investment. The costs of infrastructure can be very high, while even if the benefits are much higher they are likely to be diffused throughout the economy, making it hard for any individual company to justify absorbing the costs of investment. In this case the state should fund infrastructure investment and pay for it through the higher taxes generated by greater economic activity.

For me the interesting question, especially in the Chinese context, is not whether the state should build infrastructure but rather how much it should build. In fact this is one of the greatest sources of confusion in the whole China debate. Most China bulls implicitly assume that infrastructure spending is always good and the optimal amount of infrastructure is more or less the same for every country, which is what allows them to compare China’s per capita capital stock with that of the US and Japan and conclude that China still has a huge amount of investing to do because its capital stock per capita is so much lower.

But this is completely wrong, and even nonsensical. Infrastructure investment is like any other investment in that it is only economically justified if the total economic value created by the investment exceeds the total economic cost associated with that investment. If a country spends more on infrastructure than the resulting increase in productivity, more infrastructure makes it poorer, not richer.

In China we have problems with both sides of the equation. First, we don’t know what the true economic cost of investment in China might be. In order to calculate the true cost we need to add not just the direct costs but also all the implicit and explicit subsidies, most of which are hidden or hard to calculate.

The most important of these subsidies tends to be the interest rate subsidy, and this can be substantial. If interest rates in China are set artificially low by 5 percentage points, for example, which is a reasonable estimate, an investment of $100 million receives an additional subsidy of $5 million for every year that the loan funding the investment is outstanding – and loans are almost never repaid in China. Over ten to twenty years of outstanding debt this can add 30-40% to the initial cost of the investment. This means that the recognized cost of an infrastructure project is much lower than the true economic cost, with the difference being buried in explicit and implicit subsidies.

But the bigger problem is in the value created by the investment. We can think of the value of infrastructure primarily as a function of the value of labor saved. In countries with very low levels of productivity, each hour of labor saved is less valuable than each hour saved in countries with high levels of productivity. For this reason less productive countries should have much lower capital stock per capita than more productive countries.
This should be obvious, but it seems that often it isn’t. When analysts point to high quality infrastructure in China whose quality exceeds comparable infrastructure in rich countries, this is not necessarily a good thing. It might just be an example of the amount of waste you can achieve when spending is heavily subsidized, when there are strong political (or pecuniary) incentives for expanding investment, and when there is limited transparency and accountability.

Other things matter too. If a country has low levels of social capital – if it is hard to set up a business, if less efficient businesses with government connections can successfully compete with more efficient businesses without government connections, if the legal and political structure creates problems in corporate governance (the “agency” problem, especially), if the legal framework is weak, if property rights are not respected, if intellectual property can easily be lost – then much infrastructure spending is likely to be wasted.

In fact it turns that it may be far more efficient to focus on improving, say, the legal framework than to build more airports, even though (and perhaps because) building airports generates more growth (and wealth for the politically connected) today. Weak social capital becomes a constraint on the ability to extract value from infrastructure, and this constraint is very high in poor countries with weak institutional frameworks.

Journey to the West

This issue of how much investment is enough is a very important topic that deserves much more discussion, but I think there is a very good example of why we need to be worried about how useful additional infrastructure investment in China might be. This shows up most clearly in China’s push to create development in the western part of the country.

Often when I question the economic value of China’s push to the western, poorer parts of the country (by the way economic value is not the same as social or political value, the latter of which may nonetheless justify projects that are not economically viable) I am almost always treated with the story of the American West. In the 19th Century, as everyone knows, the US went west, and most economists agree that this made economic sense for the country and was an important part of the process that led it to becoming the wealthiest and most productive country in history.

But we must be very careful about drawing lessons from the American experience. The US is not the only country in history that “went West”. Several other countries did so too, but for some reason we ignore their experiences altogether when we discuss China. Brazil, for example, went west and north in the 1950s and 1960s as it expanded from the rich southern coastal areas into the Amazon and the Caribbean. The Soviet Union did something similar after the Second World War as it went east into Siberia.

Most economists today agree that the Brazilian and Soviet experiences were economically unsuccessful and left those countries burdened with such enormous debts that they were at least partly to blame for Brazil’s debt crisis in the 1980s and the collapse of the Soviet economy in the 1970s. It turns out, in other words, that there are both successful and unsuccessful precedents for China’s going west.

What are the differences and how do they apply to China? Again, I can’t say that I can fully understand or explain them, but one major difference leaps out. In the US it was private individuals, seeking profitable opportunities, that led the move into the American West, and government investment followed. In Brazil and the Soviet Union, however, there was little incentive for private individuals to lead the process. It was the government that led, and private businesses followed only because government spending created great opportunities for profit. Once government spending stopped, so did business.

My very preliminary conclusion is that large-scale government ambitions allied to strong political motivation and funded by cheap and easy access to credit can lead very easily to the wrong kinds of investment programs. The US experiences of government investment in the 19th Century, in other words, may be a very poor precedent for understanding China’s current policy of increasing investment spending, especially in the poor western part of the country.

Brazil and the Soviet Union may be much better precedents. At the very least these gloomier experiences should not be ignored when we think of China’s policies. “Going West” isn’t always a great idea from an economic point of view and has led to at least as many, and probably more, bad outcomes as good outcomes. It is not clear why these lessons cannot possibly be applied to China.

A sound system of national finance

The third pillar of the American System was the creation of an appropriate financial system. But what does that mean? It is hard to describe the American financial system in the 19th Century as stable and well-functioning. In fact the American banking system was chaotic, prone to crises, mismanaged, and often fraudulent, and yet the US grew very rapidly during that time.

China’s banking system, on the other hand, is far more stable – in fact the favorite cliché of Chinese bankers is that while the system may not be efficient, it is very stable. What makes the Chinese banking system stable, of course, is that it is widely believed that the government stands fully behind the banks. It makes no difference, in other words, how weak the credit allocation decision is, because by controlling credit and the deposit rate, and by limiting alternatives for Chinese savers, the government guarantees both the liquidity and solvency of the banking system. As long as government credibility is intact, the banking system is unlikely to fail.

In that sense you can easily make the case the Chinese banks today are sounder than American banks in the 19th century. This might bode well for the future of the financial system in the short term, but in the long term it is not clear to me that monetary soundness and financial stability are necessarily correlated with more rapid growth.

I say this because I have seen no evidence that countries with sound and conservative financial systems grow faster than countries with looser and riskier financial systems (although they do seem to have fewer financial crises). In fact I have more than once made reference to Belgian bank historian Raymond de Roover’s provocative and profound comment that “perhaps one could say that reckless banking, while causing many losses to creditors, speeded up the economic development of the United States, while sound banking may have retarded the economic development of Canada.” Canada was blessed (or cursed, according to de Roover) in the 19th Century with being part of the Britain, and so inheriting England’s much better managed financial system.

“Reckless” banking is hard to define, and certainly it is easy to make the case the Chinese banking has been reckless, especially in recent years, but it is a very different type of recklessness. Once again I cannot say with complete confidence how China’s version of its development model differs meaningfully with the American System on the subject of banking, but I would suggest there are at least two very important differences.

First, the American financial system then (and now) has been very good at providing money to risky new ventures. It provides capital on the basis not only of asset value but, more importantly, on future growth expectations, and risk-taking has been actively rewarded. In China it isn’t clear that this is the case at all. Chinese banks favor large, well-connected, and often inefficient giants at the expense of risk-takers.

Second, although both systems were prone to bad lending, the American banking system tended to correct very quickly – in the form of a crisis – and bad loans were written down and liquidated almost immediately. This was certainly painful in the sort term – especially if you were a depositor in the affected bank – but by writing down loans and liquidating assets three important objectives were achieved. Financial distress costs were quickly eliminated (writing down debt does that in ways I won’t get into because they are well-known and much discussed in corporate finance theory), capital allocation was driven by profitability, not by implicit guarantees, and assets were returned to economic usefulness quickly.

A classic example of the last of these objectives may be the response to the railway bubble of the 1860s. During and after the 1873 crisis, a number of railroads went bankrupt, including major lines like the Union Pacific and the Northern Pacific, the latter of which even brought down Jay Cooke & Company, the leading financier of the US government during the Civil War. After the crisis some major railway bonds traded as low as 15-20% of their original face value, and so they were purchased and reorganized at huge discounts. The new buyers were consequently able to cut freight and passenger costs dramatically, in some cases by over 50%, while still earning more than enough to cover the costs of buying the railroads, and this led to a collapse in transportation costs in the US.

Liquidation, in other words, provides an important economic value to the economy. It allows assets to be re-priced, which creates a boost to the economy and prevents those assets from acting as a deadweight loss. If the railroads hadn’t been liquidated, in other words, any reduction in costs was likely to be minimal and the railroads would have been far less useful to the development of the US economy.

Comparing development models


1. Infant industry protection has worked to promote long-term development under certain conditions and has not worked under other conditions. I would argue that the key difference is that in the former case there were powerful forces that drove managerial and technological innovation and rapid growth in efficiency.

In the US case this seems to have been brutal domestic competition. If China wants to benefit from its own protection of infant industry, it is important that there be similar domestic drivers of innovation and efficiency. Note that access to cheap capital cannot be such a driver, even though it is one of the main sources of Chinese competitiveness. Access to cheap capital is just another way to protect infant industries from foreign competition.

2. Every country that has become sustainably rich has had significant government investment in infrastructure, but not every country that has had significant government investment in infrastructure has become sustainably rich. On the contrary there are many cases of countries with extraordinarily high levels of infrastructure investment that have grown for a period and then faltered.

I would argue that the difference is almost certainly the extent of capital misallocation. In some countries it has been much easier for policymakers to drive capital expenditures, and in those countries it seems to have been relatively easy to waste investment. If this is the case in China, as I believe it is, the key issue for China is to rein in its spending and develop an alternative and better way to allocate capital.

The point is that there is a natural limit to infrastructure spending, and this limit is often imposed by institutional distortions in the market economy. When this natural limit is reached, more investment in infrastructure can be wealth destroying, not wealth enhancing, in which case it is far better to cut back on investment and to focus on reducing the institutional constraints to more productive use of capital, such as weak corporate governance and a weak legal framework. The pace of infrastructure investment cannot exceed the pace of institutional reform for very long without itself becoming a problem.

3. Any economy looking to achieve sustainable long-term growth must have a “good” financial system that allocates capital efficiently and rewards the correct level of risk-taking. It is hard to determine what the characteristics of a “good” financial system are, but we shouldn’t be too quick to assume that this has to do with stability.

What’s more, while obviously the capital allocation process is vitally important, I would also suggest that the liquidation of bad loans is just as important. Bad loans, as Japan showed us in the past two decades, can become a serious impediment to growth in part because financial distress distorts management incentives in the way widely understood and described in corporate finance theory and in part because they retard the process by which bad investment is absorbed by the economy.

4. One thing I have not discussed above is the role of wages. The American System was developed in opposition to the then-dominant economic theories of Adam Smith and David Ricardo, in part because classic British economic theory seemed to imply that reductions in wages were positive for economic growth by making manufacturing more competitive in the international markets. A main focus of the American System, however, was to explain what policies the United States, with its much higher wages than in Europe at the time, had to engineer to generate rapid growth. Sustaining high wages, in fact, became one of the key aspects of the American System.

The Japanese version of this development model, as well as many of the various versions implemented in other countries throughout the 20th Century, shared its view of wages not with the American System but rather with classic British economic theory. Rather than take steps to force up wages and keep them high – thereby both driving productivity growth and creating a large domestic consumption market for American producers – many of the later versions of the American System sought to repress growth in household income relative to total production as a way of improving international competitiveness. This is perhaps the main reason why the United Sates, unlike many other countries that have implemented similar development strategies in the 20th Century, tended to run large current account deficits for much of the 19th Century.

This different focus on whether high wages are to be encouraged or discouraged is, I believe – although very little discussed in the theoretical literature as far as I know – nonetheless perhaps the most important difference between the American development model and its many descendants in the 20th and 2st centuries. I would even argue, although I cannot prove it, that one consequence of this difference is that growth in demand tends to be more sustainable when it is balanced between growth in both consumption and investment.

In analyzing China’s growth in the past three decades we seem to forget that there have been many growth “miracles” in the past two hundred years. Some have been sustainable and have led to developed country status but many, if not most, were ultimately unsustainable. Nearly all of the various versions have had some similar characteristics – most obviously infant industry protection, state-led investment in infrastructure, and a financial system that disproportionately favored producers at the expense of savers – but the way these characteristics played out were very different, in large part because the institutional structure of the economy and the financial sector created a very different set of incentives.

I would argue that in understanding China’s growth and its sustainability we need to have a clear understanding of why these characteristics worked in some cases and not in others. Most economists who focus on China seem to know little about economic history, and when they do, their knowledge tends to be limited to a very superficial understanding of US economic history. But there are many precedents for what is happening in China and not all suggest that further Chinese growth is inevitable.
On the contrary, the historical precedents should worry us. In most cases they suggest that China has a very difficult adjustment ahead of it and the closest parallels to its decades of miracle growth suggest unfavorable outcomes. Understanding why the growth model has succeeded in some few cases and failed in most will help us enormously in understanding China’s prospects.

China's Demographic Challenge

From the Financial Times

China's demographic structure has been a benefit for growth hitherto but will soon turn into a burden.

As Michael Pettis points out in his newsletter:
The one-child policy imposed at the end of the 1970s changed the subsequent age structure of the Chinese population quite dramatically and, as a side effect, created a kind of demographic boom for China. Over the next three decades, as the huge population of baby boom children matured and joined the labor force, and a relatively small number of workingmen and women grew old and retired, China’s working population grew much more quickly than the overall population. The number of working-age Chinese grew, if my memory serves, by between 1.5% and 2% a year on average since the late 1970s.

Because so few children were born after the late 1970s, this surge in the working population was associated with a huge improvement in China’s dependency ratio. A declining number of non-working-age Chinese could be supported by a rising number of working-age Chinese. 
The demographic dividend caused by the one-child policy is now of course creating a worsening dependency ratio as a declining number of workers supports a longer-living number of old people.

Monday, February 4, 2013

The Transformation of Global Telecommunication: How is Australia Doing?

During my early years of studying economic globalisation in the late 1990s I was astounded to learn that a majority of the world's population had not even used a telephone, let alone used a computer or accessed the Internet. This was mainly because the costs of telecommunications infrastructure were so high. Poles and wires cost a lot of money.

Mobile phones have changed all that. Suddenly, communication could take place through relatively inexpensive mobile phones, whose infrastructural requirements were far less onerous.

There is still a long way to go, however; despite the massive growth in access to mobile phones, around two-thirds of the world's population is still not on-line.

The International Telecommunications Union (ITU) provides a statistical picture of global telecommunications.  Made up of 193 Member States, academic institutions and around 700 private companies, the ITU, according to its website, is
the United Nations specialized agency for information and communication technologies – ICTs. We allocate global radio spectrum and satellite orbits, develop the technical standards that ensure networks and technologies seamlessly interconnect, and strive to improve access to ICTs to underserved communities worldwide.  
ITU is committed to connecting all the world's people – wherever they live and whatever their means. Through our work, we protect and support everyone's fundamental right to communicate. 
Lofty ambitions indeed and while the role of the ITU in the spread of ICTs is difficult to measure, the increased global access to mobile phones is not. Mobile phones have had a profound affect on virtually the entire world, including some of the poorest countries. There is, however, a long way to go on the global communications front, especially in terms of access to broadband in developing countries.

The last available data on ICTs is from June 2012 and makes the case for an ongoing remarkable transformation.
Mobile Cellular
  • Total mobile‐cellular subscriptions reached almost 6 billion by end 2011, corresponding to a global penetration of 86%
  • Growth was driven by developing countries, which accounted for more than 80% of the 660 million new mobile‐cellular subscriptions added in 2011. 
  • In 2011, 142 million mobile‐cellular subscriptions were added in India, twice as many as in the whole of Africa, and more than in the Arab States, CIS and Europe together. 
  • By end 2011, there were 105 countries with more mobile‐cellular subscriptions than inhabitants, including African countries such as Botswana, Gabon, Namibia, Seychelles and South Africa.  
  • Countries where mobile‐cellular penetration increased the most in 2011 include Brazil, Costa Rica, Kazakhstan, Lao P.D.R. and Mali.
Mobile Broadband:
  • By end 2011, there were more than 1 billion mobile‐broadband subscriptions worldwide. 
  • Mobile broadband has become the single most dynamic ICT service reaching a 40% annual subscription growth in 2011. Although developing countries are catching up in terms of 3G coverage, huge disparities remain between mobile‐broadband penetration in the developing (8%) and the developed world (51%)
  • In Africa there are less than 5 mobile‐broadband subscriptions per 100 inhabitants, whereas all other regions have penetration levels above 10%.  
  • By end 2011, there were more mobile‐broadband subscriptions than inhabitants in the Republic of Korea and Singapore. In Japan and Sweden, active mobile‐broadband penetration surpassed 90% by end 2011. 
  • In 2011, 144 million mobile‐broadband subscriptions were added in the BRICS (Brazil, the Russian Federation, India, China and South Africa), accounting for 45% of the world’s total subscriptions added in 2011.

Fixed (Wired) Broadband:
  • By end 2011, there were 590 million fixed (wired)‐broadband subscriptions worldwide
  • Fixed (wired) broadband growth in developed countries is slowing (5% increase in 2011), whereas developing countries continue to experience high growth (18% in 2011)
  • Fixed (wired)‐broadband penetration remains low in some regions, such as Africa and the Arab States, with 0.2% and 2% respectively by end 2011. 
  • In 2011, 30 million fixed (wired)‐broadband subscriptions were added in China, about half of the total subscriptions added worldwide, and fixed (wired)‐broadband penetration reached 12% in the country. 
  • Top performers – such as France, Denmark, the Netherlands, Norway, the Republic of Korea and Switzerland – had fixed (wired)‐broadband penetrations above 35% by end 2011.  
  • Countries where fixed (wired)‐broadband penetration increased the most in 2011 include Bahrain, Costa Rica, Ecuador, Mauritius and Uruguay. However, among these, only Bahrain and Uruguay surpassed the 10% fixed (wired)‐broadband penetration by end 2011.

  • The percentage of individuals using the Internet continues to grow worldwide and by end 2011 2.3 billion people were online
  • In developing countries, the number of Internet users doubled between 2007 and 2011, but only a quarter of inhabitants in the developing world were online by end 2011. 
  • The percentage of individuals using the Internet in the developed world reached the 70% landmark by end 2011. In Iceland, the Netherlands, Norway and Sweden more than 90% of the population are online.    
  • By end 2011, 70% of the total households in developed countries had Internet, whereas only 20% of households in developing countries had Internet access. Some outstanding exceptions include Lebanon and Malaysia with 62% and 61% of households with Internet respectively.  
  • Total international Internet bandwidth increased seven‐fold over the last five years reaching 76’000 Gbit/s by end 2011. This equates to 34’000 bit/s per Internet user worldwide.  
  • Major differences in Internet bandwidth per Internet user persist between regions: on average, a user in Europe enjoys 25 times as much international Internet capacity as a used in Africa.

Put in graphic form, these stats look like this.

The statistics show the simple fact that the greater the costs of infrastructure, the less likely it is that developing country populations will have access to the technology. Mobile phone applications are the wave of the future in the developing world. As predicted many years ago fixed-line telephones are on the way out. What is worth pondering for the future is whether fixed-broadband subscriptions will meet a similar fate in years to come.

As noted above, access to the Internet has been growing rapidly but still has some way to go, especially in the developing world. Amazingly, nearly 30 per cent of the developed world still does not use the Internet, while 75 per cent of people in the developing world are not on-line.

So what about Australia? How are we doing in the ICT world? Compared to our macroeconomic performance we are a definite laggard, although geography no doubt plays some role in this. Engineering ICT infrastructure is a harder and costlier job in Australia than it is in South Korea for example.

To measure ICT prowess, the ITU constructs an ICT index, based on the following parameters.

Australia comes in at a lowly 21st, well behind ICT supremos Korea and the Scandinavian countries. Virtually every Korean household (97 per cent) has an Internet connection and 84 per cent of the Korean population is on the Internet.

According to the ITU, there were 46.6 fixed-telephone subscriptions per 100 Australians in 2011, down from 47.6 in 2010. Australia had 108.3 mobile subscriptions/100 inhabitants in 2011, up from 101.0 in 2010. The percentage of households with a computer was 82.6 per cent in 2011, up from 81.1 per cent in 2010; and 78.9 per cent of households had access to the Internet in 2011, up from 74.1 per cent in 2010.

AIMIA, the Digital Industry Association for Australia, recently conducted a survey on mobile phone usage. In 2012, 76% of those surveyed had a smartphone, up from 67% in 2011. The mobile handset market is still dominated by Apple, with 40% of respondents (up from 32 per cent in 2011) owning an iPhone. Samsung is also improving its position from 13 per cent of respondents in 2011  to 18 per cent in 2012. Nokia is the big loser , dropping from 28 per cent to 16 per cent of respondents.


The Australian Bureau of Statistics also provides data on Internet activity in Australia. In June 2012, there were 12.0 million Internet subscribers in Australia, an increase of 4% since the end of December 2011 and an annual growth of 10 per cent.

In 2006 dial-up dominated, but by 2012 96 per cent of Internet connections were broadband.

According to the ABS, "5.9 million subscribers were using mobile wireless connections while 4.6 million were using DSL".

Download speeds have also been increasing: "The number of connections at the top end of the speed ranges (24Mbps - 100Mbps and 100Mbps or more) grew by 20% and 34% respectively, since December 2011, accounting for 1.5 million subscribers."
The amount of data downloaded via the internet (excluding mobile handsets) in the three months ending 30 June 2012 was 414,537 TB, a 20% increase since December.

At the end of June 2012, there were 16.2 million mobile handset subscribers in Australia. This represents an increase of nearly 7% over six months. The volume of data downloaded, via mobile handsets, over the three months ending 30 June 2012, was 6,610 TB, an increase of 32% from December 2011.

Australians are becoming more Internet and mobile phone oriented, but there is still some way to go before Australia joins the global top 10 in the ICT world.


Friday, February 1, 2013

China is King of Coal

China is doing well in the production of renewable energy, but it's not doing well enough to make a serious dent in its pollution problems. (click each word for some seriously scary pollution photos).

One of the problems is the growing consumption of coal to fuel its massive manufacturing sector and its incredible infrastructure development.

As the chart below shows, the growth in Chinese coal consumption and its increasing percentage of total global consumption is more than making up for reductions in coal use elsewhere, especially in the developed world.

As the US Energy Information Administration points out:
Coal consumption in China grew more than 9% in 2011, continuing its upward trend for the 12th consecutive year, according to newly released international data. China's coal use grew by 325 million tons in 2011, accounting for 87% of the 374 million ton global increase in coal use. Of the 2.9 billion tons of global coal demand growth since 2000, China accounted for 2.3 billion tons (82%). China now accounts for 47% of global coal consumption—almost as much as the entire rest of the world combined.
Robust coal demand growth in China is the result of a more than 200% increase in Chinese electric generation since 2000, fueled primarily by coal. China's coal demand growth averaged 9% per year from 2000 to 2010, more than double the global growth rate of 4% and significantly higher than global growth excluding China, which averaged only 1%.
As these graphics show (you'll need to go here for the animations!) Asian coal consumption dwarfs the consumption of the rest of the world and Chinese consumption dwarfs that of the rest of Asia. Only Europe and the former Soviet states have reduced their consumption of coal.

The huge increase in global gas supply in recent years, which will grow even further in coming years, may eventually make a difference, but don't count on it happening soon. Without wishing to downplay the importance of renewables, they also are not going to make much difference in Asia for some years yet.  

US gas exports are restricted and the US domestic gas glut is providing a fillip to US manufacturing, which suddenly appears more competitive than it has for many a year. 

The EIA provides some basic facts on Chinese energy production and consumption.
  • China had the most installed generating capacity in the world in 2011, at 1,073 gigawatts, slightly higher than the United States.
  • About 80% of China's electricity generation came from conventional thermal sources, primarily coal, in 2011.
  • Both China's electric generating capacity and its electricity generation doubled between 2005 and 2011. 
  • China was the largest producer and consumer of coal in the world in 2011, and accounted for almost half the world's coal consumption.
  • China became a net coal importer in 2009 for the first time in over 20 years.
  • China has the third-largest coal reserves in the world.
  • China was the world's second-largest consumer of oil and liquids in 2011, as well as second-largest oil importer (trailing the United States in both categories).
  • China's total oil consumption is slated to continue increasing; EIA forecasts that growth in China's demand for oil will represent 64% of projected world oil demand growth during 2011-2013.
Natural gas
  • China was the fourth-largest global consumer of natural gas in 2011.
  • Use and production of natural gas in China is rapidly increasing; natural gas production more than tripled over the last decade.
  • Consumption of natural gas in 2011 was nearly 50% higher than in 2009.
  • Nuclear power made up only 2% of total electricity generation in 2010. As of mid-2012, China had 15 operating reactors, with a total capacity of nearly 13 gigawatts, and 26 new reactors under construction, with a capacity of about 29 gigawatts.
  • While renewables made up a small fraction of the country's total electricity generation, China was the world's leading producer of hydroelectric power in 2010, and the second-largest producer of electricity from wind power.
Chinese demand for energy is driven by its continually expanding economy.

Slowing growth in 2012, plus lower energy intensity should see some declines in this rapid growth in coming years, but of course this will have a negative effect on Australian exports. China's pollution problem, it seems has been beneficial for Australia (at least in the short term!).

In the meantime, not to worry, you can always buy a can of fresh air or look at a screen of a beautiful blue sky with fluffy white clouds!