1/7 Very interesting article. A series of Chinese studies may be discovering something about the high-speed rail system that France had already learned: rather than boost the economies of secondary cities, being connected...
2/7 to the HSR may actually reduce economic activity and encourage a brain drain. Even patent applications in secondary cities have dropped significantly, according to one study, after the city was connected to a high-speed line.
3/7 If this is true, it undermines the claim that even if much of the HSR is not economically viable today, it will generate enough growth in the less economically advanced areas to become viable in the future. The value of HSR is more likely to decline than to increase.
4/7 This reinforces a point I have made many times before, including in the linked essay. The idea that concentrating investment in poorer regions will drive economic convergence is based on a confusion about what drives growth.
5/7 Poorer regions are usually poorer because their social, economic, legal, and cultural institutions prevent businesses and workers from being able to absorb high levels of capital productively.
6/7 In that case more investment only generates sustainable growth when these regions are relatively underinvested, and this doesn't mean relative to more advanced regions but rather relative to their own specific institutional capacity (what I call the Hirschman level).
7/7 Once each region has as much investment as it can productively absorb — and in China most regions reached that point well over a decade ago — more investment doesn't help. What it needs is more institutional reform.
1/4 The point of this thread is not to suggest that investment in HSR, or capital deepening more generally, is economically a bad idea. It is in fact often a very good idea – for example infrastructure investment in China in the 1990s, or in the US today – but we should ...
2/4 understand both the conditions under which it can accelerate economic development and those under which further economic development will not occur without the right institutional reforms, in which case further capital deepening can actually reduce future growth.
3/4 As a corollary, the longer an investment-driven growth model has proven successful, the more politically entrenched it is likely to become – that is certainly what the historical precedents suggest – but in fact the less successful it is likely to be...
4/4 in the future as it closes the gap between actual investment and the amount of investment the region can productively absorb.
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1/14
This article by Tim Harford is useful because it shows some of the partial thinking that often distorts discussions about trade. One area of confusion is when he discusses how comparative advantage works.
2/14
As he discusses the arithmetic of comparative advantage, he fails to emphasize that it is able to maximize total production only because each side exports the goods and services in which it has a comparative production advantage in order to import those in which it doesn't.
3/14
Comparative advantage, in other words, can only be expressed in the exchange of goods and services, which means that for the world to benefit from comparative advantage, countries should maximize exports in order to pay for imports, not to externalize weak domestic demand.
1/8 Good Keith Bradsher article on the extent of automation in the car industry: "China’s secret weapon in the trade war is an army of factory robots, powered by artificial intelligence, that have revolutionized manufacturing."
2/8 "As a result," he continues, "China’s factories will be able to keep the price of many of its exports lower, giving it an advantage in fighting the trade war."
But it is more complicated than that. Automation increases the productivity of workers.
3/8 That's a good thing if wages keep pace with rising productivity. If not, it must result in an even greater imbalance between what Chinese workers can produce in the aggregate and what they can consume, which in turn will require a greater trade surplus to resolve.
1/4 Caixin: "China reported better-than-expected year-on-year GDP growth of 5.4% in the first quarter, in stark contrast to the country’s fiscal performance — tax revenue fell 3.5% in the period, continuing a downward trend that began at the end of 2023."
2/4 According to the MoF, the main reason for the decline in tax revenues was tax rebates for businesses that spent on equipment, logistics and R&D expenses.
This helps show why it is so hard to boost the domestic role of consumption.
3/4 On the one hand, the sustainable way to boost consumption and rebalance the economy requires higher direct or indirect wages for Chinese households, but businesses cannot tolerate this because they are already losing money.
1/8 This Caixin article summarizes various proposals by Chinese academics on how to respond to Trump's tariffs. Most of these proposals focus on boosting domestic demand, but some involve expanding "free-trade" relationships with other countries, which... caixinglobal.com/2025-04-18/in-…
2/8 basically means that if the US stops absorbing China's growing trade surplus, China should ensure that other countries (mainly Europe) do so instead.
But this misses the point. Dozens of countries have already raised tariffs on Chinese goods, and this is likely to worsen.
3/8 Of course if other countries refuse to replace the US as the consumer of last resort of China's manufacturing expansion, the resulting contraction in China's trade surplus requires either that domestic production decline or that domestic demand rise.
1/5 Reuters: "Policymakers have to walk a tight rope as the yuan has come under pressure after U.S. President Donald Trump's tariff onslaught, while shrinking interest margins at lenders has continued to limit the scope for monetary easing." reuters.com/markets/rates-…
2/5 Reuters adds that "A reduction to the banks' deposit rates could alleviate net interest margin pressure at lenders and allow them to lower lending rates," but this also shows why rebalancing is so difficult.
3/5 While lowering the deposit rate would indeed allow banks to lower lending rates without squeezing their margins further, it represents a further transfer of income from net lenders in the system (households) to net borrowers (businesses and governments).
1/5 WSJ: "In the two weeks since President Trump’s “Liberation Day,” many U.S. trade partners have a clear plan to convince Washington against reimposing stiff tariffs on their exports to the U.S.: buy more American stuff."
2/5 Getting foreigners to "buy more American stuff" may seem like an obvious way to resolve US trade imbalances, but it isn't. Trade clears systemically, and without changing the domestic policies that drive savings imbalances, trade imbalances won't change.
3/5 If foreigners agree to buy more specific goods from the US, this simply shifts US imbalances between countries and sectors, without changing them in the aggregate. That's because as long as they produce more than they can invest or consume domestically, they must...