Finance Minister Jeroen Dijsselbloem unfortunately showed last week why he is not a good chairman of the Euro-group… and a good Minister after all.

Before the Dutch parliamentary elections in 2012, I had high hopes for the current Dutch Finance Minister and chairman of the Euro-group, Jeroen Dijsselbloem.

I saw this prominent PvdA (Dutch labour) member as an intelligent, gifted and sympathetic politician, who seemed less ‘slick’ and more reliable than the fast and smooth talking party-leader Diederik Samsom. That was the reason that I gave my vote to him.

Unfortunately, the first year of Jeroen Dijsselbloem as Finance Minister and chairman of the Euro-group gave me some very mixed feelings.

Positive:

• he showed decisiveness while nationalizing SNS Reaal, in order to prevent a default of this Dutch bank;
  
• Also in the Cyprus case, he showed a gutsy approach that initiated a new road ahead for the handling of defaulting banks: not at the expense of the European tax-payers alone, but partially at the expense of the large depositholders too; 

Negative:

• In the same Cyprus case, Dijsselbloem could not take away the impression – set by PM Mark Rutte – that the Cypriot banks had been treated differently than earlier (nearly) defaulting banks, as a consequence of the fact that many Russian people had their money stashed away there. “We don’t want to pay for you, because we don’t like you” does not sound like an objective and thorough decision;
  
• Dijsselbloem also made a bad impression, when he blamed his predecessor Jan Kees de Jager for the way that the latter had treated the Rabobank-Robeco bonus case. “On top of things” were not the first words that came into mind.
  
• His last blunder [to these eyes - EL] was, when Dijsselbloem skipped the annual meeting of the IMF in October – in his role as chairman of the Euro-group – in order to glue the Dutch annual budget together. The fact that the Cabinet succeeded with this budget shortly after, does not change the fact that Dijsselbloem should have been present in New York. 

For the rest, neither the domestic actions of ‘Dutch finance minister’ Jeroen Dijsselbloem, nor the foreign actions of ‘Chairman of the Euro-group’ Dijsselbloem made a lasting impression in 2013. His performance over all seemed moderate: not bad, not good, just moderate…

That was until last week, when unfortunately the narrow-minded, resentful and politically clumsy Jeroen Dijsselbloem popped up again.

This political clumsiness started last Tuesday, 19 November, when Dijsselbloem snarled at Rabobank economists that “they better should keep their mouths shut this week…”.

This was a nasty, “below-the-belt” remark upon:

• a negative report from Rabobank’s  macro-economist team about the probable anemic Dutch economic growth in 2014 – on which I fullheartedly agree!
  
• Libor-gate, in which Rabobank had been massively involved; 

Of course, the latter event was something in which the Rabobank economists were not involved at all and, on top of that, what they could have done nothing about…. 

This is equal to blaming the tellers of a bank for the circumstance that their CEO is a crook.

“Jeroen D., for all your nonsense” was the brief, but lethal reaction of BNR News Radio’s “favorite perma-bear” Kees de Kort, after the outburst of Jeroen Dijsselbloem: “You can state this, when you ‘live in a condo in Simpleville’, but not when you are the Dutch Finance Minister!”.

  

Kees de Kort, macro-economist of BNR Newsradio
Picture copyright of : Ernst Labruyère
Click to enlarge

The second political nosedive of Jeroen Dijsselbloem came in his role as chairman of the Euro-group, when he tried to teach the French a lesson. Het Financieele Dagblad (FD) wrote about this story and the follow-up by France. Here are the pertinent snips:

“France should do more. The country itself knows that too”

Dutch finance minister and chairman of the Euro-group Jeroen Dijsselbloem thinks that the European Commission should force individual countries into reforms.

Only when a country makes rock-solid agreements about this, it should get more time to get its annual budget in order. This is stated by Dijsselbloem in an interview with some financial newspapers. Indirectly, he criticises Euro-Commissioner Olli Rehn with these remarks. 

Rehn gave France two more years to reduce its budget-deficit, without adding ironclad conditions to this agreement. Nowadays, France is reluctant to carry through economic and political reforms.

Especially Germany is very worried about the tempo in which France reforms its economy and reduces its deficits. “France should do more and the country itself knows that too” was also the opinion of Jeroen Dijsselbloem.

Irrespective of  whether Dijsselbloem was right or not, he makes again the impression of being "his Master’s voice" for Germany, heavily irritating France in the process.

And to make things even worse, he still seems in favour of the mindless austerity that caused the Euro-zone so much economic harm in the past, just like his ‘boss’ Mark Rutte.

On top of that, Dijsselbloem is heavily opposing to the further integration of Europe and the European financial industry, through the formation of a European budget and banking union. 

This, in spite of the fact that such unifications would make the Euro-zone and the European financial industry much more resilient against financial shocks.

The French, represented by French Finance Minister Pierre Moscovici, reacted annoyedly. Again the FD:

The French Finance Minister Pierre Moscovici thinks that Jeroen Dijselbloem, as chairman of the Euro-group, should not take an outspoken stance in issues in which there is no broad consensus yet. 

“I don’t want to start a controversy with the minister, but as far as I’m concerned, the chairman should build on a broad consensus”, according to Moscovici, after the Finance ministers of the Euro-zone had discussed their annual budgets.

Moscovici reacted to an interview of Dijsselbloem with a.o. this newspaper, in which the Dutch Finance minister opposed to the plans to let the Euro-zone have its own annual budget. 

“Dijsselbloem made it all too clear that he does not fully agree, or should I say, does not agree at all with the French position. I repeated one more time that France attaches value to an ubiquitous and ambitious banking union and better economic guidance for the Euro-zone. This includes a permanent chairman of the Euro-group”. Dijsselbloem is also opposed against that. 

In order to reinforce the stability of the Euro-zone, it should get a buffer fund or a budget facility, in the eyes of France. “Solidarity should not be an empty concept”, according to Moscovici.

Again, Dijsselbloem showed here that he misses the political “Fingerspitzengefühl” (roughly translated “Spider sense”) to be a good chairman of the Euro-group, like Jean-Claude Juncker was before him. 

Too often, you think that you hear Dutch PM Mark Rutte or German Finance Minister Wolfgang Schäuble talk, when Dijsselbloem speaks. Instead of being a chairman for all Euro-zone countries, Dijsselbloem seems to be a chairman for himself and his bosses, chancellor Angela Merkel and Mark Rutte. 

Especially the French are allergic to such behaviour: they consider this disrespectful, as it seemingly denies the importance and power of France, the second-largest economy in the Euro-zone and one of the diplomatically most capable countries in the world. In my humble opinion, the French do have a point.

Yes, you could argue that France – as an economy – went through twenty years of anemic growth. The country only had three years with more than 2% growth (amidst the internet bubble) during this period, as the following chart by Eurostat shows:

The French economic growth 1993 - 2003
Data courtesy of: Eurostat
Chart by: Ernst Labruyère
Click to enlarge

And people could rightfully argue that the French should do much more to reform their economy, in order to make it grow harder.

However, in spite of all the undeniable high-tech developments and economic achievements of the country during the last decades, France is a country where grandeur, centuries-old traditions, cultural inheritance, enjoyment of life (‘joie de vivre’) and craftsmanship are still extremely important.

The French love their traditions and are willing to battle for every inch of them, even when this paralyses the country for a long time. Everybody, who saw the French strike in the past, understands that it is an extremely hard task to reform this country.

And to be honest, these traditions and craftsmanship are exactly the reason why so many Europeans – including yours truly – adore this beautiful country, with its astonishing landscapes and nature, wonderful food and drinks and its sometimes peculiar, but nevertheless adorable people. When France would stop to be France, it would be missed by many people in the world.

French president François Hollande could indeed do more to help the economy of the country, but I seriously doubt whether ruthlessly reforming the French economy, following a neoliberal agenda, is the answer that the country is waiting for. In case of France their are no easy answers and instantly successful recipes.

And Jeroen Dijsselbloem…? 

After his domestic and foreign nosedives of last week, he should be worried about the follow-up of his brief career as Finance Minister and chairman of the Euro-group: he seems to already have lost all credit from the French and probably from many, many more people inside and outside The Netherlands.

Ernst’s Economy in discussion at BNR Newsroom: the China issue pt II. Bernard Hammelburg speaks about China!

In the second part of BNR Newsroom, the semi-live talk radio show of BNR news radio, Paul van Liempt spoke with the “grey eminence” of foreign analysts and commentators, Bernard Hammelburg. 

His second guest was Fred Sengers, a distinguished journalist and blogger on China.

The topic changed to the new geopolitical role of China:

Paul: We're going to discuss the geopolitical relations of China. The country is f.i. 231 times bigger than The Netherlands. Which position does China have in the international diplomacy these days?!  

We start with discussing the recent assembly of the Chinese Communist party. How did you look at that, Bernard Hammelburg?

Bernard: China has a 4000 year old culture and things go traditionally at a very slow and smooth pace there. This recent assembly was the next step in a very much anticipated and smooth change process. This process will be evolutionary, not revolutionary: just a little bit more openness and change and a little bit more economic and personal freedom.

This change process comes at a very good moment. The country seemed to lose its momentum these days and there were many excesses, like corruption, self-enrichment and other political crimes. 

Bernard Hammelburg, foreign commentator of BNR
Picture copyright of: Ernst Labruyère
Click to enlarge

Xi Jinping has put an end to this in a very sensible manner, within the boundaries of what is possible in China. This was a very necessary step.

The export diminished, but at the same the internal market had grown - with 1.3 billion persons this internal market is enormously interesting for every politician, manufacturer and businessman. Just like with the United States before them, the focus of China is currently upon its internal market.

Nowadays, people have purchasing power, unlike in earlier years. The Chinese industry has to adapt to that. The current industrial production is equal to the service industry - both 48% - so these industries are starting to balance out. The government, irrespective whether it is communist or capitalist one – has to adapt to these developments in a sensible way. And I think that the current government is doing that.

Ernst: Will China be able to avoid the errors that Russia made in the nineties?

Bernard: The answer is yes. Under Yeltsin, Russia has been democratic for a very brief period of time, but Yeltsin litterally blew this democracy to smithereens. The Russians virtually never had a 'normal' period in their history. By the way, also in Russia a middle-class is developing now. This never happened before.

Still, Russia has only three export products: oil, gas and Kalashnikovs. That's all.

The Chinese have a larger, more complex and more balanced out economy and they handle it with much more care. China is f.i. building a vast defence industry now: initially, this industry had been based on imports, but they have started to export their own products now. Currently, these products can be considered as high-end, also from a technological point of view.

In earlier times, China was the country for manufacturing cheap products, clothing and microprocessors. Now the country is evolving, like Japan did in the fifties and sixties.

China is at the peak of  the world’s technological capacity these days. Today, the country is delivering highly skilled engineers at the speed of sound. The Chinese are manoeuvering very carefully and cunningly. Much more cunningly than the Russians did.

Fred Sengers: Xi Jinpin remembers the lessons of Russia in the nineties very well indeed. During the assembly of the Communist Party, he showed to the executives of the party a documentary about Russia in the years of 'perestroika' [i.e. Russian change period during the reign of Michail Gorbachev – EL]. Xi told all executives that China should not make the same mistakes as Russia did and that it should change at its own pace.

Paul: China is becoming more powerful on the world's stage. What will we notice from that?

Fred: China becomes more self-confident. The country is currently at a pivotal point in geopolitics. They still often mention themselves as 'yet a developing country': "please don't expect too much from us".

On the other hand, China states more and more often: "if you think that we have an important role in the world-economy, we want you to treat us with respect".

The Chinese politicians are not blind: they see that the only superpower, the United States, is losing influence at an alarming rate. They talk about a multi-polar world where not one country is dominant anymore.

Fred Sengers, Journalist and blogger on China
Picture copyright of: Ernst Labruyère
Click to enlarge

Paul: How do you have to look at China from a political and economic point of view?

Fred: You can't ignore China anymore. The country has become important in about every area. They understand that very well themselves.

The new policy of the Dutch cabinet towards China is, for instance: we should not be too bold against China. Instead, we should try become good pals.

When it comes to human rights, China doesn't hesitate anymore to 'return fire' when being attacked: they counter-attack the Western countries on topics like Guantanamo Bay (”Keeping people imprisoned for years without any kind of process”) or the massive evesdropping and telephone tapping in the US. "Say hi to the NSA from us"

Paul: Is it right that China does that?

Bernard: Yes, like the Chinese, the West is also not without sins and we even became more sinful recently, concerning topics like these. We like to preach in the West, but we don’t practice what we preach and we are often very hypocritical.

China, like Russia, likes to point us at this hypocrisy. We are screaming about Sochi and the gay rights in Russia, but conveniently forget to talk about the enormous amounts of executions in China: much more than all other countries in the world combined.

We also make a lot of noise about the Middle-East, but don't bother to talk about China.

Is the West right with this hypocritical policy? From a pragmatical point of view: yes! We really don't have a choice anymore.

Like President Clinton said in the past, in the eve to negotiations with China: "I cannot apply the human rights paragraph in the American trade law anymore (i.e. the Jackson-Fennick amendment). We are more dependent on China than China is dependent on us, these days". Clinton had a very keen eye for the changing geopolitical relations in those days.

Ernst: Is the Chinese regime unscrupulous to a certain regard? Or do they act from a certain compassion with the population?!

Bernard: You could say that the old Communist adage of "uplifting the poor", is something that China does extremely well. During the last five years, the Chinese minimum wage rose by 28% to €150-€200 per month. That is magnificent. What other country did so much for their poorest citizens in such a short amount of time as the Chinese did?! So I think that the Chinese government has indeed that compassion.

Fred: No country does more to fight poverty than China. And also in education, the Chinese government is making giant steps. It is too easy to talk about China in only two dimensions. Just like we lost a lot of our moral superiority in recent years, it is impossible to talk about China in black and white terms alone. Not everything they do is right and not all is wrong.

Bernard: Just one more thing. I don't believe one bit of the Chinese growth data: neither the 10% nor the 7% of growth. The growing prosperity of the poorest classes in China leads to enormous inflation, but that inflation is not incorporated in the Chinese growth data yet. Chinese growth is much lower than the Chinese state tells the world.

Haico Ebbers: There is a catch in the Chinese inflation rates. In this matter, I tend to believe the official Chinese inflation rate of about 4%. The prices for pork for instance went up considerably, but the prices for many other products went down. It is true that the Chinese government stimulates the economy, but the lower production costs of articles, due to better efficiency, leads to a lower inflation at the same time.

Haico Ebbers of Nijenrode University
Picture copyright of: Ernst Labruyère
Click to enlarge

Over the last ten years the real inflation rate in China might be 1% - 1.5% higher than the official rates, but that is about it.

Bernard: I don't agree. I always state: the Americans hang out on a limb, but always manage to find the way up in time. The Europeans talk themselves to sleep, without ever making a decision and the Chinese lie.

Haico: Of course, the Chinese statistical data are a mess. On the other hand: if you visited the country, you saw how much is going on there. And that is a lot. There is definitely growth in China, irrespective whether it is 7% or 5%. Anyway, things are changing extremely fast in China.

Guest in audience: Recently, China has been gathering enormous interests in the mining and supply chain of rare materials for the telecom industry, like Coltan. They are building strongholds around the globe to protect these interests. Is that a serious threat for Europe?

Bernard: Well yes, this is a situation to look after indeed, without directly calling it a threat.

The Americans possess the key in this process. Due to the developments at the energy markets – the US are getting more and more self-supporting with their domestic shale gas supplies –, the US are quickly losing their interest in the Middle-East.

Look at how they treat Iran these days. The Americans seem to abolish their demands concerning the development of the Irani nuclear bomb, and instead they want to end the cold war with Iran. This is a dramatical change of plans by the Americans.

The Chinese do need lots of energy from the Middle-East these days and they are entering into huge contracts with the Arabs to warrant their energy demands.

The US fleet is sailing away from the Middle-East towards the Chinese seas. The Americans definitely understand what is going on. The Europeans, as always, ... do nothing at all! The Europeans don't have a combined energy policy yet and we don't talk with the Arabs together, based upon a mutual interest.

Everybody in Europe is acting for himself and therefore Europe is much too late with sensing the newly gained geopolitical power of China, as well as the industrial, economic and military power.

Only Turkey is judging this correctly: as the second biggest member of the NATO, Turkey made a huge military order for high-tech weaponry in China, for God's sake! Right before our very eyes. Do you believe that?!

Ernst’s Economy in discussion at BNR Newsroom: the China issue!

Last Monday on 18 November, I was present again at BNR Newsroom, the semi-live talk radio show hosted by Paul van Liempt.

This week’s topic of BNR Newsroom was China. This topic was so interesting and there were so many distinguished guests, with a good story to tell, that I print the contents of this show in two separate episodes.

The first guests were:

• Professor Patrick Reinmöller of the Erasmus University’s School of Management in Rotterdam and the Cranfield School of Management, who is a core member of the China Business Research Centre in Rotterdam;
  
• Professor Haico Ebbers – International Economics – of Nyenrode Business University. Ebbers is chairman of the Europe China Institute at Nyenrode and guest professor at the Renmin University and the China Europe International Business School. 

Both these professors were extremely eloquent and shared some very interesting details on China, which is still a very peculiar country for many western people.

Paul van Liempt: We are going to talk about China. Politically, there is a lot going on in China. According to president Xi Jinping, there should be more free market in the country and less state interests in the economy. What are the consequences of this for The Netherlands, when it comes to imports and exports.

China wants to reform. Plans concerning these reforms have been presented to the outside world. A little bit more 'market' and less 'state'. How will this be in practice?

Patrick Reinmöller: First, these are very ambitious plans, in which sixty different reforms have been presented. The speech by President Xi Jinping has been magnificent, but the implementation of it will be very hard. The devil is always in the details. The current president has about ten years to implement the presented reforms, before his successor will be presented in the media. 

Patrick Reinmöller of Erasmus University Rotterdam
Picture copyright of: Ernst Labruyère
Click to enlarge

Paul: The president said that implementing these plans would lead to less growth. The Chinese population won't like this. Why did the president do that anyway?

Patrick: First, China is no small, developing economy anymore. To the contrary, it is a huge economy. It is virtually impossible to let such a large economy grow by 10% per year every year.  

Second, the Chinese economy needs a cool down, otherwise things could go wrong from a political point of view. The economy needs to remain under (political) control and it needs to turn from a manufacturing and export-driven economy into a consumption-driven economy. This should happen through a slow, evolution-like process. To achieve this, the 10% growth is not necessary anymore. 7% or 8% growth on an annual basis is more than enough for this huge economy.

Paul: In my opinion, the middle class is the most important class now in China. This middle-class should establish itself and grow larger. Is the growth of the middle class in China something that worries you? Or will it come naturally?

Paul van Liempt of BNR News Radio
Picture copyright of: Ernst Labruyère
Click to enlarge

Patrick: As an academic, I am a bit worried, but as a private person I see the enormous opportunities. In the next 12 years until 2025, the country will move 250 million people from the rural areas to the cities: this is a mindboggling operation. It is like you would move the whole population of Western-Europe to the cities in less than 12 years and you would change their lifestyle from being farmers into consumers and factory workers.

Paul: Where do you see the social and economic problems emerge?

Patrick: Moving is very awkward for Chinese citizens in general. When they move to the cities, they lose all their personal social rights and benefits, that are attached to the place where they were born. They have to build up a whole new life from scratch: without any right for social security and utilities.

Paul: So, in fact these people will become second rate citizens in the cities, even if they belong to the middle class then?

Patrick: One of the things that Xi Jinping promised to do is removing these barriers for people from the rural areas. If he achieves to do so, it would be a giant leap forwards, when it comes to a planned change of China into a consumption driven, capitalist economy.

Erik de Munk (audience): Do you think that the democratization process will bring the Chinese economy into a ‘pitstop’? Is this not a transformation process, like we saw in the Middle-East? There has been a Chinese village, Wuchan, were workers have been rioting before such a transformation took place. They have to go through a process of friction, before the transformation process is finished?!.

Patrick: My academic opinion is that capitalism and a blossoming economy don't go necessarily together with more democracy. There is not such a connection. Until now, the Chinese growth took place without a western kind of democracy.

However, Chinese consumers become wealthier and as a consequence, they might feel a diminishing need for increasing economic prosperity. They already do have a car and a television set after all. They want to invest more in the happiness, health and wellbeing of their children. Good babyfood, a healthy environment, you know, We saw that in all developing countries and we will also see it in China.

Ernst: Do you think that the Chinese government will ever loosen its iron grip on the population? We had f.i. the recent troubles with the Uyghur and Tibetan parts of the Chinese population.

Patrick: The West sees the sixty reforms as an attempt to bring the Chinese population at ease and avoid further growing unrest. The Chinese leaders do so by making promises that the circumstances on some important terrains in China will change for the better. As a matter of fact, this is an attempt by the Chinese government to maintain its iron grip on the country. Whether the Chinese government will succeed in this, I truly can't say.

Paul: Haico Ebbers, can you tell something about the economy in China?  To start with the income of the middle class?

Haico Ebbers: This is in fact the story of the possible hard landing of the Chinese Economy at the short and long term. When looking at the short term, we know that we need to push some buttons, especially the demand button in the Chinese economy.

People in China must spend their money and they must invest in the manufacturing and export of their goods. However, in the long run, we should start to look at the supply side of the economy, as only this truly opens the path to sustainable growth.

Managing the supply-side is very awkward in China: supplying a larger labour force is virtually impossible, due to the progressive aging process in China [there are many elderly people and relatively little children, due to the ‘one child’-politics – EL]. At the same time it is also hard, to supply more capital and make more investments, as the 'airports have already been built';  there is already a lot of infrastructure.

Consequently, there is only one way for growth and that way is ‘productivity’. To enhance productivity, we need to push the buttons of the supply-side of the economy: deregulation, privatization, openness and innovative behaviour.

Haico Ebbers of Nyenrode Business University
Picture copyright of: Ernst Labruyère
Click to enlarge

If you fail to do so, you get caught by the middle-income trap. You build up momentum and speed, like a plane, but when you take off - i.e. the phase in which everything should happen - your plane starts to stall in mid-air.

Many countries remain in this so-called take off phase, as they refuse to put real energy in their openness and deregulation. The following data comes from the Worldbank: from 120 investigated countries, only 18 made the leap to being a high income-level country.

It has not been an easy ride for all these countries, if you think for instance about Ireland and Greece. Nevertheless, they managed to grow into a high-income country. Therefore we know quite well what China needs at this moment.

Countries like f.i. Korea and Japan are an example for the Chinese leaders: they know from these countries which steps they should make to become a high-income level country.

Paul: This is what Xi Jinping tries to explain to his country?! That the productivity should go up substantially and that the only opportunity for such an increase in productivity is a more moderate growth?

Haico: Yes, the 7% is indeed better than the 10% growth: the productivity should go up and also the wages should go up to. It might sound strange when a country wants to increase its wages, but for China this is necessary. Higher wages always trigger innovative behaviour of workers.

Besides that, companies can only compensate these higher wages by increasing their efficiency and effectiveness, which also spurs innovation.

Paul: Are wages an underrated subject in this matter? China is quickly turning into the world's number one economy, but average wages are still not very high there, right?! Especially when you compare these wages to US and European average wages?

Haico: Many companies went to China for the market potential, not for the low wages.

However, companies that aim at the lowest loan costs would seemingly be better off in Vietnam, Myanmar and Cambodia, as the wages are much lower there than in China these days, right?!

In reality, however, this is not true; the higher productivity, as a consequence of the clustering of manufacturing companies and their suppliers and subcontractors, makes the production in China so much more efficient, that it is still worth your while to stay there.

The loan expenses per fabricated unit in China are still lower than in those earlier mentioned countries, in spite of the soaring wages. You can still make a profit through productivity improvement. This is how China is still able to compete.

Paul: But how high is that Chinese salary?

Haico: That is about $6000 in purchase power units per year for the lower middle class. Nominal it is $4000 per year.

Ernst: As a consequence of nationalistic trends around the world, we currently see a phenomena called 'nearshoring': companies, which are returning their production facilities to their home country or state.

Is that a danger for China, as it could lead to companies abolishing their production facilities in China?

Haico: The impact of (foreign) investments on the Chinese economy is not as large as we think. Western people look at China as an export driven country, in which the real money and growth is made through exporting products. However, that is not reality anymore.

The added value of investments in exports is quite low, as a matter of fact. The withdrawal of production capacity, as a consequence of nearshoring, will definitely have effects on the Chinese economy, but this effects will not be as big as you might think.

Patrick: Nearshoring is a very interesting story indeed. Initially, companies were offshoring their whole production lines to the Far East, only to realize later that it is not the most sensible solution for strategic products, which need to be at the domestic markets fast.

And now this development leads to an optimization process of the division between offshoring and nearshoring. Companies offshore all products they can offshore, but keep the products in domestic production that are strategically important for the domestic markets.

Ernst: Will the massive emergence of a Chinese middle class, with soaring purchase power, not lead to enormous shortages in raw materials, like food and commodities worldwide?

Patrick: To give a philosophical answer: Once, in the time of Malthus, we thought that the world population was growing too quickly for the world to cope with it, when it came to food and commodities.

Fortunately, the Chinese, Americans and Dutch people have been so creative that they found innovative solutions for this issue, that made this growth possible after all. They all found ways to get more produce from the soil and thus managed to keep the world population alive and healthy. I am quite optimistic about that, fortunately.

Paul: Currently, reforms are taking place in China and these reforms go into a certain direction. What is your expectation about the way in which China develops in the coming years, mr. Ebbers?!

Haico: I put my money on a soft landing of the Chinese economy. At the short term, the Chinese middle class has enough purchase power and growth potential to keep the total spending in the economy at a high level.

At the mid-range term, the challenges are the environment, income differences between poor and rich people and the Chinese system wherein social benefits are connected to the place where you are born. This system must be adjusted. The  middle class is the bedrock for the Chinese economy AND politics.

Paul: Will the enormous 'mass-migration' towards the Chinese cities not lead to massive problems and uncertainties?

Haico: In the eighties the urbanization level in China was 20%, against 50% now. Of course there are these megacities with their own issues, but in reality we hardly notice the enormous frictions between people in these cities.

China made a giant step in urbanization; of course this urbanization will continue up to 70%.  And of course there must be adjustments in the cities. People are working on social housing projects, in which new, social housing will be delivered.  People are also working on adjusting the current system for social security, in which the social benefits are only limited to the place where you were born.

I will explain this: when you move from the rural areas to the cities, you are allowed to work. However, you are not treated equally in comparison with people who were born in the city, when it comes to social benefits and privileges. This leads to social inequality.

Paul: This is an essential question, right?!

Haico: This is very important indeed, as there is already a (structural) labour scarcity. Now, there is still an influx from the rural areas to the cities, but that will change. This whole influx might even disappear in the future. That is the reason for the vast wage increases today. Consequently, there will be scarcity of labour in the future.

This is the reason that China has to make optimal usage of the enormous population that they have today, by letting this population work in the country’s factories.

Paul: Will the fact that China is on the brink of leaving its one child policy, influence this process? Women, who are allowed to become pregnant more often, will consequently make less working hours, I guess?!

Haico: Yes, they might. However, on the mid-long term this is a favourable development, as these children will become new workers in about twenty years. And at short term, there are still other ways to increase the labour participation, like increasing the retirement age.

And with 7% growth, the economy will double in size within 10 years. This enables China to become the number one economy in a number of years, like Goldman Sachs predicted.

Paul: Do you take the Chinese growth rates seriously? Many economists don't believe one bit of those data!

Haico: the economic data are much, much better than ten years ago. And the trend in China is still favourable. When you look at China, you see the enormous economic change that is happening there. 

This is the end of part one. Tomorrow, part two will be printed...