For NSDA debaters transitioning from the China topic to federal K-12 funding and regulatory reform, consider the connection between child labor, education, and income inequality.

Steve Mariotti, the founder of the Network for Teaching Entrepreneurship, tells the story of his first year teaching at a New York City high school. After success in retail, Mariotti switched to teaching a remedial class of inner-city students. Not surprisingly he had a hard time managing the classroom and was unable to teach effectively. As the end of the school year he asked his unhappy students if there was anything he had taught that they enjoyed or learned from.

Student answers focused on his discussion of business and how he had made money in retail. Mariotti was astonished students remembered details from a talk months earlier of his business buying wholesale, marketing and distribution, sales and income, etc. From there Mariotti shifted his classroom teaching to weaving course materials with practical instruction on Screen Shot 2017-05-22 at 8.36.33 AMstarting and running a business.

Through the following years Mariotti developed NFTE into a nationwide entrepreneurship program that has helped hundreds of thousands improve reading and math skills as they develop business enterprises. Here is a 2010 BBC News segment on Steve Mariotti and NFTE. Here is page on Ten9Eight, a documentary on teens competing. Here is trailer on YouTube.

 

Young people growing up in low-income households are motivated to find and follow paths out of poverty. Teachers can encourage studying in classes through high school and then college. But many struggle to see success down that path. Opportunities to earn income, even as elementary school students, can serve as learning experiences.

A number of education organizations offer opportunities for students to learn and earn. The Children’s Business Fair opens doors for students to become entrepreneurs and gain enterprise experience.

For over seventy years DECA has helped high school students develop practical business skills:

DECA prepares emerging leaders and  entrepreneurs for careers in marketing,  finance, hospitality and management  in high schools and colleges around  the globe.

Junior Achievement, another nonprofit, has long worked with high schools to help students gain business and enterprise experience.

Can you really teach entrepreneurship?,” (Washington Post, March 23, 2014) discusses both NFTE and JA programs:

“Many young people naturally have an entrepreneurial spirit, and many of them have great ideas, but what they don’t have are the technical skills,” Tricia Granata, executive director of the District’s Network for Teaching Entrepreneurship, part of a national nonprofit, said. “We can teach them things to make sure that innate entrepreneurial spirit doesn’t get wasted.” 

Where should those skills be taught? Edward Grenier, president of Junior Achievement of Greater Washington, the local chapter of a national nonprofit organization that teaches financial literacy and entre­pre­neur­ship to students in kindergarten through high school, argued that entrepreneurship education must move beyond the classroom.

Learning practical business skills may seem too materialistic or distractions from mathematics, literature, civics, and history. But poverty is a distraction too, and early work opportunities can provide new motivations to pursue a solid education.

Screen Shot 2017-05-22 at 9.06.31 AMConsider the compelling movie of rural China, Not One Less (link to Amazon page). Like Horatio Alger novels based on true stories of city and rural poverty in the U.S., Not One Less gives a glimpse of real-world city and rural poverty in China.

Many young people prefer seeking opportunities in cities over poverty in the countryside. Economic freedom includes the freedom to move, and around the world hundreds of millions have moved to shantytowns surrounding fast-growing cities of the developing world. Edward Glaeser notes in his book Triumph of the City:

Urban poverty should be judged not relative to urban wealth but relative to rural poverty. The shantytowns of Rio de Janeiro may look terrible when compared to a prosperous Chicago suburb, but poverty rates in Rio are far lower than in Brazil’s rural northeast. The poor have no way to get rich quick, but they can choose between cities and the countryside, and many of them sensibly choose cities. (from excerpt in Scientific American, April 17, 2011)

The kid that runs away to the city in the movie Not One Less seems a lot like the kids who ran away to New York City in the mid to late 1800s as told in dozens of Horatio Alger novels. These entertaining and educational stories are available free online.

Though frowned upon as unrealistic by critics, it turns out many of Alger’s characters and events reflect true stories from personal interviews and reports in the New York Times. Some sixty thousand children lived and worked on the streets of New York selling newspapers, smashing (carrying) luggage, selling apples, delivering messages, working retail, and dozens of other low-paying tasks.

Nonprofit organizations provided inexpensive housing and many were sent to live safer lives in the country. Still, over time these young “street arabs” gained job skills to raise their incomes. Alger’s “rags to riches” stories emphasize honesty, thrift, and saving, are the keys to success, along with getting an education and working hard.

Stefan Kanfer in “Horatio Alger: The Moral of the Story,” (City Journal, Autumn, 2000) notes the popularity and influence of Alger’s novels:

Horatio Alger Jr. was the biggest American media star of his day. Though nineteenth-century best-seller lists were impressionistic—and the sale of 10,000 volumes was deemed a publishing triumph in those days—readers bought at least 200 million copies of his books…

Alger was at the forefront of a phenomenally successful experiment in social reform and improvement, a broad movement that inspired poor kids to take advantage of America’s social mobility and that led tens of thousands of New York’s post-Civil War juvenile delinquents into productive lives…

New York City then was as poor at the booming cities and shantytowns across China and the developing world today:

The New York City street urchin entered the national consciousness in those years. More than 60,000 neglected or abandoned kids ran unsupervised in the streets, partly because of the fallout from the tremendous wave of immigration from Ireland and continental Europe that was taking place. With immigration came a social pathology of maladjustment to the New World: families that fell apart; alcoholism and drug abuse (opium could be purchased across the counter); out-of-wedlock pregnancies and, inevitably, neglected children…

Horatio Alger writes, in the preface to Rufus and Rose: Or, The Fortunes of Rough and Ready:

… Several of the characters are drawn from life, and nearly all of the incidents are of actual occurrence. Indeed, the materials have been found so abundant that invention has played but a subordinate part.     The principal object proposed, in the preparation of these volumes, has been to show that the large class of street boys—numbering thousands in New York alone—furnishes material out of which good citizens may be made, if the right influences are brought to bear upon them. In every case, therefore, the Screen Shot 2017-05-22 at 12.01.15 PMauthor has led his hero, step by step, from vagabondage to a position of respectability; and, in so doing, has incurred the charge, in some quarters, of exaggeration. It can easily be shown, however, that he has fallen short of the truth, rather than exceeded it. In proof, the following extract from an article in a New York daily paper is submitted:—     “As a class, the newsboys of New York are worthy of more than common attention. The requirements of the trade naturally tend to develop activity both of mind and body, and, in looking over some historical facts, we find that many of our most conspicuous public men have commenced their careers as newsboys. Many of the principal offices of our city government and our chief police courts testify to the truth of this assertion. From the West we learn that many of the most enterprising journalists spring from the same stock.”

Poor children today in America’s cities and countrysides are better fed than street children of the late 1800s New York City. But in protecting children from employment, few in poor families have the opportunity to begin earning their way out of poverty until their teens or longer. Young people in middle-income and wealthy families on the other hand, participate in many organizations and activities that teach key life and job skills, from scouting to summer camps, speech and debate, volunteer work, and part-time business tasks for friends and relatives.

Low-income children today lack many of the employment and income opportunities of children much poorer “enjoyed” in the 1800s. Blocking young people from income-earning, skill-building activities frustrates their natural urge to get ahead, as well as cuts off an avenue for gaining additional income for their family. And nearly everyone in the world was poor just a century ago. Nearly all children worked to help their families.

Maybe it was unfair and inequitable that so many children were so poor in American cities in the late 1800s. And it’s similarly unfair that so many hundreds of millions of young people in rural China and India are still poor. So many around the world today live in similar poverty in the cities and countrysides of India, China, Indonesia, Brazil, the Middle East, and across Africa. (On the positive side, the World Bank reports poverty rates around the world to be the lowest ever: “World poverty rate to fall below 10% for the first time,” CNN, October 5, 2015)

Poverty is a problem, but so are regulations that prevent young people from working legally at jobs that are safe and within their abilities. Why have adults cleaning tables at restaurants, if children and young people could do the same work safely? We wouldn’t want children working ten, twelve or sixteen-hour days, as many did in the 1800s. But what about a four-hour day that comes with a free meal, after school at a nearby restaurant? Would that be the end of the world or the thin edge of the wedge to sending children back to dark and dangerous factories? Or might working in a neighborhood restaurant be both a learning and earning experience for young people?

Here is sample from an Izzit.org video featuring economist Hernando de Soto:

Poor people are migrating to the world’s cities in astounding numbers, embracing globalization despite the risks, and when the laws they encounter don’t work for them, they create their own.

The poor kid in Not One Less (trailer) wanders the city taking in sights and sounds until he get hungry. He tries taking some leftover food from a sidewalk restaurant, but is caught. The restaurant owner gives him some food and lets him clean tables. Later the kid is”rescued” and taken back to his village in a car full of reporters eager to tell his story. “How was life alone in the city?” they ask. He replies with a big smile: “The city was great!”

Another youth enterprise story from China is in this viral video of a five-year old eager to play (or work?) with his father’s machinery. (My nephew at the same age would have jumped at an opportunity to learn these skills.)

More on this story: “He’s an old hand at this! Chinese boy, 5, drives digger on building site” (Daily Mail, November, 2012)

Wang Shuhan, from Wuhan, in central China’s Hubei Province, is only five-years-old yet he’s already an expert at operating building site machinery.

The youngster was taught by his father Wang Xuebing, who videoed him calmly driving the digger around and using its scoop to pick up and move sand.

According to Xuebing he regularly brings his son to work with him and gradually the youngster grew interested in the machine he operated.

Xuebing said: ‘I sometimes explained to him the functions of the gears within the compartment, and when he was three he asked me to have a try. Amazingly he did it.’

The Center for American Progress offers an upbeat report on China energy and reducing pollution in “Everything You Think You Know About Coal in China Is Wrong,” (May 15, 2017):

In December 2016, the Center for American Progress brought a group of energy experts to China to find out what is really happening…

We found that the nation’s coal sector is undergoing a massive transformation that extends from the mines to the power plants, from Ordos to Shanghai. China is indeed going green. The nation is on track to overdeliver on the emissions reduction commitments it put forward under the Paris climate agreement, and making coal cleaner is an integral part of the process.

The study emphasizes pollution from coal power: “vary dramatically based on the type of coal and coal-burning technology used.” And Chinese coal power plants are being upgraded to burn cleaner and more efficiently.

Drawing from the same Center for American Progress report “By 2020, every Chinese coal plant will be more efficient than every US coal plant,” (Vox, May 16, 2017), notes Chinese government coal:

efforts fall roughly along two paths: one, building cleaner plants, and two, cleaning up or shutting down existing dirty plants.

And cleaner still than coal is natural gas. China has limited supplies, but continues to increase LNG imports. “China’s LNG imports continue to rise,” (LNG World News, March 23, 2017) notes:

China, world’s largest energy consumer and the third-biggest LNG importer, boosted its imports of the chilled fuel in February by 28.5 percent year-on-year.

China’s LNG imports increased to 2.37 million mt in February when compared to 1.85 million mt in the same month in 2016, according to the General Administration of Customs data.

The country’s imports rose to 3.44 million mt in January, the second-highest monthly import level, behind a record 3.73 million mt set the month before as a cold snap across the country spurred demand.

Increased LNG imports have enabled a major energy advance: “Beijing shuts last coal power plant in switch to natural gas,” (Phys.org, March 19, 2017):

According to Xinhua, Beijing has become the country’s first city to have all its power plants fuelled by natural gas, an objective laid out in 2013 in the capital’s five-year clean air action plan.

The U.S. is boosting LNG exports, but faces competition for the China market “Can U.S. LNG Compete With Qatar, Australia?,” (OilPrice.com, May 18, 2017):

Whether for political or commercial reasons, Chinese counterparties are not offtakers of any U.S. LNG export project under construction. Regardless of past U.S. policy, it is now clear that Chinese buyers are welcome to sign deals with current or future U.S. LNG exporters. It also appears that concerns about the impact U.S. LNG exports would have on the domestic price of natural gas have been abated with Commerce Secretary Wilbur Ross indicating that officials from Dow Chemical “gave assurances that increasing exports of natural gas wouldn’t harm the U.S. industry or consumers if sales remained less than 30 percent of total output.”

China has a long way to go in replacing current coal power with hydro, solar, wind, and natural gas power sources:

Leading energy consultancy Wood Mackenzie is also bullish on Chinese LNG demand, noting, “By 2030, we expect Chinese LNG demand to reach 75 mmtpa, triple 2016 imports. This is equivalent to $26bn a year at today’s prices ($7/mmBtu), and the U.S. is keen for a slice of the pie.”

Unfortunately, even with China’s cleaner coal plants and increasing natural gas and renewable energy sources, very dirty coal plants and even home coal burning continues outside Beijing, and pollution released still drifts to Beijing skies. “Blue skies return to Beijing, but dangerous smog still blankets northern China,” (Reuters, December 22, 2016) reports that though Beijing skies cleared:

…high readings are still being recorded in other parts of northern China, including parts of the major metropolis of Tianjin which sits next to Beijing, and the province of Hebei that surrounds Beijing.

The Chinese government has long provided inexpensive heat during the country’s cold winters:

The country’s northern provinces mostly rely on the burning of hundreds of millions of tonnes of coal each year for heating.

Natural gas and electricity can be substitutes for coal in heating buildings in north China, the official Xinhua News Agency reported, citing President Xi Jinping as saying at a government meeting on Wednesday.

An earlier post looked at; “For Still-Poor China, Coal Pollution from Home Heating,” looks at the challenge of adding higher-cost solar and wind power to the energy mix, which raises costs for home electricity. When electricity costs rise, many shift to heating their homes by burning cheaper coal “Beijing’s Plan for Cleaner Heat Leaves Villagers Cold,” (WSJ, Jan. 25, 2017) reports:

https://www.flickr.com/photos/gwendolyn_stansbury/17999607946/in/photolist-skSuR-tqyGm3-6BKnGC-usQwY-C7Fo4g

Creative Commons “Coal Delivery Bicycle” by Gwendolyn Stansbury, May 15, 2015, is licensed under CC BY 2.0

Reducing emissions from heating would be among the most effective ways to limit winter smog besides cleaning up industry… Coal-burning by households is particularly dirty because it often happens without the emissions filtering required in power plants. …

But Ms. Gao, whose husband earns about $500 a month at an auto plant, soon noticed a downside.

“Electric heating has become our family’s biggest expense,” Ms. Gao said. She said she may seek a job to help pay the bill.

Despite electricity subsidies for residential consumers, villagers interviewed about their state-supplied heaters said their overall costs had risen substantially. Several said it costs around $300 to heat their homes for the winter, compared with about $200 with coal.

 

Long simmering tensions between China and formerly colonial powers, especially Imperial Japan, continue to influence trade, investment, and cultural relations, and also influence Chinese movies.

A 1994 Jet Li movie, Fist of Legend, is set in the Shanghai International Settlement.during the Japanese occupation of Shanghai. A fight scene early in Fist of Legend, pits two fighters, one apparently friendly with the Japanese, the other not. 
Screen Shot 2017-04-24 at 6.46.07 PM

The pro-Japanese guy gets thrashed, but viewers not understanding Cantonese (spoken in Hong Kong and nearby southern China) might be confused by the conversation that follows the fight.

I watched the movie on Netflix and by accident had both English dubbing and subtitles turned on. You’d think dubbing and subtitles would tell a similar story. Not here.

Comments after the fight are very different in subtitles than spoken English. (Cantonese speakers will know which is more accurate. And I’d be curious how Mandarin dubbing and subtitles are translated for this scene, and through the movie.)

In the screen captures below, readers can (barely) read the white subtitles.

Screen Shot 2017-05-11 at 10.33.02 AM The good guy (at left) in the subtitles, sort of apologizes for winning the fight:

My victory was pure luck.

You’ve come a long way. You must be very tired.

If we have the chance, next time how about I pay you a visit?

Very diplomatic, trying to ease tensions after the conflict. Maybe a nice metaphor for improving China/Japan economic and cultural relations after past conflicts.

Whoever managed the English dubbing though, didn’t get the memo. Those listening in English hear instead:

“Understand something, if you are looking for a fight at [martial arts academy]…

“…you are asking for trouble. You, or the Japanese.”

 

 

Behind China’s $1 Trillion Plan to Shake Up the Economic Order,” (New York Times, May 13, 2017) profiles China’s massive infrastructure spending across Asia, Africa, and parts of Europe. China’s government has funded vast infrastructure projects across China extending now beyond its borders into Laos, Myanmar, Vietnam, Indonesia and beyond:

Chinese money is building power plants in Pakistan to address chronic electricity shortages, part of an expected $46 billion worth of investment.

Chinese planners are mapping out train lines from Budapest to Belgrade, Serbia, providing another artery for Chinese goods flowing into Europe through a Chinese-owned port in Greece.

The massive infrastructure projects, along with hundreds of others across Asia, Africa and Europe, form the backbone of China’s ambitious economic and geopolitical agenda… creating new markets for the country’s construction companies and exporting its model of state-led development in a quest to create deep economic connections and strong diplomatic relationships.

Whether these infrastructure investments become profitable and improve trade relationships, or languish unfinished and underused, will be revealed in the coming years and decades. Both governments and private  firms can spend tens of billions building infrastructure but in the wrong place, the wrong way, or at the wrong time.

China-operated Gwadar Port in southern Pakistan

China-operated Gwadar Port in southern Pakistan

The privately-financed tunnel under the English Channel has been a success for users but not for investors. “Channel tunnel’s 20th birthday holds lesson on big projects,”(Financial Times, May 5, 2014):

As an ambitious engineering project with a price tag of billions that ran into complex difficulties, the Channel tunnel may hold lessons in the debate over the merits of other complex and expensive infrastructure projects in the making. …

“It’s a wonderful thing from which we’ve all benefited, apart from the people who paid for it to be built who lost substantially all their money,” said Douglas McNeill, investment director and analyst at Charles Stanley.

“It’s a salutary reminder of the dangers of over-optimism when it comes to major infrastructure projects.”

China’s new infrastructure spending may help the hundreds of millions still impoverished in Laos, Pakistan, and nearby countries prosper from new roads, rail lines, and ports connecting them to the world economy. Or these investments may turn out to be over-optimistic or poorly conceived and designed, as many argue government-funded infrastructure has been within China over the last decade. “Why China keeps throwing trillions in investments down the drain,” (Fortune, December 1, 2014) reports:

The delivery rate of completed capital projects, which was 74-79% in the late 1990s, has now fallen below 60%. This implies that nearly 40% of Chinese investment projects are either not finished on time or not completed at all.

The even more alarming figure, which made headlines around the world, is that ineffective investment has cost China $10.8 trillion since 1997. Sixty-two percent of the wasteful investment—$6.8 trillion—was made after 2009, when China went on an investment binge to stimulate its economy.

How much spending by Chinese central and provincial government banks building  factories, housing, and infrastructure inside China over the last decade has been for good and how much poor investments? Only time will tell. Much depends upon returns earned from factories, housing, office buildings, railways, dams, coal, solar, wind power installations, ports and airports, and highways.

The next trillion dollars spent building transportation infrastructure across Asia, Africa and Europe will face similar market tests, as revenue generated may or may not pay for the cost of design and construction.

Debt is a dangerous financial tool for private firms and for city, state, provincial, and federal governments. “Debt Crisis Shakes Chinese Town, Pointing to Wider Problems,” (New York Times, April 25, 2017) reports:

… Local companies had agreed to guarantee hundreds of millions of dollars of one another’s loans. When some of those loans went bad, the impact rippled across the city.

Zouping’s plight offers a sobering example of the problems that could lurk within China’s vast and murky debt load. A nearly decade-long Chinese lending spree drove growth but burdened the economy with one of the world’s heaviest debt loads, equal to $21,600 worth of bank loans, bonds and other obligations for every man, woman and child in the country. Debt in China has expanded twice as fast as the overall economy since 2008.

Debt problems are also significant

The China Debt Crisis Is Still Ripening,” (Wall Street Journal, May 2, 2017) looking at China’s shadow debt market:

Already, a big rebound in “shadow finance,” primarily bank-mediated company-to-company loans, is papering over the cracks in China, blunting the impact of the tighter corporate bond market. While corporate bond debt outstanding fell by 58 billion yuan ($8.4 billion) in the first quarter of 2017, shadow finance ballooned by more than 2 trillion yuan, nearly twice as much as in the fourth quarter of 2016.

As the US/China topic debate season draws to a close, it looks like the long predicted collapse of the Chinese economy won’t happen in May or June. The key question is how much Chinese government banks loaning to state-owned enterprises, combined with casino like shadow lending has distorted the still-expanding Chinese economy.

Traders Are Worried About China Local Government Debt Again,” (Bloomberg, April 6, 2017) looks also at expanding local government debt:

This new-found anxiety is a blow to a market that had started to recover in 2016 from the liability web that entangled local governments and their financing vehicles after 2008. Despite not seeing any defaults, LGFV bonds became the poster children for China’s ballooning debt problem. For many investors, the debt is symbolic of the country’s excesses in the wake of the global financial crisis, when municipalities — barred from issuing bonds on their own — used the vehicles as a way of meeting funding shortfalls.

All developed countries have mixed economies, partly market-based with private property, and partly government owned, managed, and regulated. The economic mixture varies from country to country, and often within countries. (In India the province of Kerala has long been run by communists, while Gujarat, for example, has pro-market policies.)

In China, XinhauNet reports: “SOEs have potential in mass entrepreneurship, innovation: premier” (April 28, 2017):

China’s centrally-administered state-owned enterprises (SOEs) have a promising future in boosting mass entrepreneurship and innovation, Premier Li Keqiang has said.

Premier Li said he believes centrally-administered SOEs have more potential and opportunity in implementing mass entrepreneurship and innovation as they are rich in technology, talent, capital and resources.

Government owned and managed enterprises have a mixed record across the world, with a great many expensive failures. Next door to China is South Korean, fifty years ago an impoverished country recovering from war and partition, and suffering from misguided economic policies.

In “How to Go From the Third World to the First,” (Wall Street Journal, April 27, 2017), John Tamny reports:

In the years immediately after the war, South Korea’s disastrous economic policies produced alarming inflation and food shortages.

Economic advisors from the U.S. made things worse with poor economic advice. An economics professor from Dartmouth described his early work advising the South Korean government on collecting taxes. Theater owners were fudging attendance figures to reduce tax payments. So U.S. advisors recommended the government set taxes on the number of seats in each theater rather than claimed number of moviegoers. Before long tax revenues from theaters again fell, and South Koreans were sitting on the floor to watch movies.

The John Tamny review of The New Koreans  reference early misadventures with state owned enterprises:

Mr. Breen also suggests that the South’s growth began with dictator Park Chung-hee’s “guided capitalism” in the 1960s, but, as he later acknowledges, the companies supported by Park “almost all failed.”

Still, advocated of government “guidance” and direction of economic development see success story in Japan, Taiwan, Singapore, and South Korea, all of which had heavy government involvement in their early stages of economic development. Market advocates argue most of these interventions were and are misguided, diverting resources and subsidizing failures, and slowing authentic economic development.

With mixed economies like South Korea and China (as well as Japan, Taiwan and Singapore), successes and failures can be credited and blamed on either private enterprise or government’s guiding hand, often depending upon the preferences and preconceptions of researchers. The South Korean government aided major family-owned corporations (called chaebols). The Foreign Policy article, “Success Story in South Korea” was published in 1969.

Screen Shot 2017-05-03 at 8.33.52 AMNicholas Lardy’s Markets Over Mao: The Rise of Private Business in China  (Columbia University Press, 2014) argues in a 2014 Wall Street Journal interview that State Owned Enterprises (SOEs) praised by China Premier Li Keqiang in the article above, are problems more than solutions:

[WSJ]You argue that China’s state-owned enterprises don’t have the power that their opponents say they do. What’s your proof?

[Lardy] SOEs appear to be a relatively small portion of the Chinese economy. They account for between one-third and one-quarter of GDP. But in manufacturing, SOEs only account for 20% of output. In some parts of the Chinese economy, the private sector has largely displaced state companies.

[WSJ] You also say the notion that China flourishes because of “state capitalism” is outmoded. Why?

[Lardy] State capitalism means a high degree of state ownership of production, a great deal of control over investment, a great deal of control of the banking sector and a very substantial use of industrial policy. I don’t think the term ‘state capitalism’ fits China very well because its industrial policy has been an almost complete failure.

The return on assets of state firms is plummeting. It was around 3.7% in 2013, which is less than half the cost of capital

Debt Crisis Shakes Chinese Town, Pointing to Wider Problems,” (New York Times, April 25, 2017) suggest that continued government bank financing of favored state enterprises resulted in private enterprises resorting to complex and risky cross-company debt:

One of the paradoxes of China’s debt troubles is that the country is awash in debt, yet publicly listed or privately held companies can find it hard to borrow. The state-controlled banking system lends mainly to state-owned enterprises, which can seem like a good credit risk because they have implicit government guarantees.

In response, private companies often band together, guaranteeing one another’s borrowings, to give bank credit officers more confidence that loans will be repaid. The downside is that if one company runs into trouble, it can drag down the other companies that guaranteed its debts. Those other companies, in turn, can set off their own credit guarantees from yet more companies with no direct connection to the first one.

Across China, local government fund local development through debt, and this is a huge potential problem. “China Spawns Debt Market to Ease Burden on Local Governments,” (Bloomberg Markets, January 17, 2017) reporting:

China’s economic slowdown is hampering municipalities’ ability to support the 5.6 trillion yuan ($818 billion) of outstanding onshore notes sold by local government financing vehicles, which ballooned after the financial crisis when they used them to meet funding shortfalls. The notes offer an improvement over LGFV bonds because of cash-flow visibility, analysts said.

The vast overinvestment in steel and aluminum production as well as shipbuilding and other heavy industrial enterprises across China were built on enthusiastic local government support and debt.

China’s shipbuilders go from boom to rust,” (The Australian, February 10, 2017) reports:

Until last year the Yangzhou Guoyu Shipbuilding Company was a bustling village of 6000 workers striving to fulfil worldwide orders for new ships.

Today, in a scene repeated across China’s industrial heartlands, the yard stands silent but for the howling of stray dogs around its deserted docks. Outside the closed gates is a ghost town of abandoned workers’ dormitories, closed restaurants and crumbling internet cafes.

Much of Yizheng’s 27km stretch along the Yangtze’s northern bank 320km upriver from Shanghai is now a wasteland, where idle cranes loom half-seen through choking grey haze.

Unfinished hulks of ships are left to rust.

China’s central and regional government’s enthusiasm about shipbuilding since 2000, partly as a way to absorb massive new steel production, fueled the current collapse:

Shipbuilding became a symbol of China’s industrial might in the early 2000s, when Beijing vowed to transform its modest shipbuilding sector into the world’s largest producer by 2015 — then did it five years ahead of plan. …

The result is that China’s private sector shipyards have been virtually wiped from the map, while Beijing is keeping only the most viable state-run yards alive with subsidies. …

Chinese shipyards capable of building large ocean-going vessels have roughly halved in number since 2013 to about 70, he said, while hundreds of smaller shipyards have gone bust.

So, against the optimistic claim: “China’s centrally-administered state-owned enterprises (SOEs) have a promising future in boosting mass entrepreneurship and innovation…” is the reality of failed enterprises championed and funded in the past by local and central government bonds and banks.

The steel, aluminum, and ships exported and sold below cost in world markets have likely left a hole vast and deep of unpayable debt across China.

China warns on hidden local government debt risks,” (Financial Times, March 4, 2017) reports:

Local governments’ fiscal woes come as they face the prospect of either continuing to support highly indebted state-owned enterprises, especially in steel and coal, or allowing them to close and taking on the burden of additional pensions, unemployment benefits and unpaid debt.

 

How can the U.S. government deal with security and humanitarian challenges in East African countries? The NSDA’s Public Forum resolution on SpeechandDebate.org:

Public Forum Debate – 2017 Nationals PF Topic Area: Africa
Resolved: In East Africa, the United States federal government should prioritize its counterterrorism efforts over its humanitarian assistance.

The National Interest in “Kenya’s Counterterrorism Approach is Floundering,” (August 4, 2016), reports the U.S. government is spending significant amounts on counterterrorism in East Africa:

Kenya is one of the largest recipients of U.S. security assistance in sub-Saharan Africa. Through both State and Defense Department accounts, the Kenyan government has received over $141 million in security assistance funds since 2010­—an amount that rose to $100 million in 2015 alone. Most of this financing is directed towards counterterrorism support,…

NCPA’s David Grantham, in “The Military, Nation-Building and Counterterrorism in Africa,” (Issue Briefs, National Security, April 18, 2016) is critical of complex and expanding U.S. operations in Africa:

This expensive, Department of State-led program, which is now integrated into the military’s U.S. Africa Command (AFRICOM), boasts lackluster oversight and a penchant for nation-building –‒ using multiple agencies to rebuild a given country’s political, economic and social infrastructure. In fact, its shape and language resembles failed, Cold War anticommunism programs in Latin America that ended up complicating rather than solving American security problems. (Full Issue Brief pdf here.)

This Issue Brief reviews the long history of U.S. government spending in Africa:Screen Shot 2017-05-02 at 5.53.33 PM

Under the Alliance for Progress, the U.S. government provided billions of dollars in economic aid, military equipment and civil assistance over the course of 10 years in the hope the funds would grow democratic institutions and undermine the appeal of communism. …

Despite past failures, prevailing wisdom once again says U.S. national security policies must target the ideology behind the threat in developing nations through taxpayer-funded development and modernization programs.

Interesting Africa Facts lists a lot of countries as East African. Wikipedia, however, lists some different countries: “Tanzania, Kenya, Uganda, Rwanda, Burundi and South Sudan.” South Sudan isn’t on the list from Interesting Africa Facts, nor on the list from Africa Ranking. Africa Ranking lists and gives brief overviews with maps and key facts on the geography and economies of “The 9 East African Countries.”

A connection to the current China policy topic is reported in “China’s Geostrategic Search for Oil,” (pdf) (The Washington Quarterly, Summer 2012, p. 84), with Sudan as a source for 15 percent of China’s oil imports:

Figures for 2010 reveal that 23 percent of China’s offshore equity oil production was in Kazakhstan, 15 percent in both Sudan and Venezuela, 14 percent in Angola, five percent in Syria, …

HuffPost story, “Why China Is So Invested In South Sudan’s Future,” (WorldPost, June 23, 2016) reports:

Nowhere else in Africa do China’s financial, diplomatic and geopolitical interests confront as much risk as they do in South Sudan. Beijing has invested billions of dollars in the country’s oil sector, deployed about 1,000 troops to serve as U.N. peacekeepers and committed considerable diplomatic capital to help resolve the ongoing civil/ethnic war.

Sudan Tribune reports “China controls 75% of oil investment in Sudan: minister,” (August 3, 2016). Note that this article is about China investment in Sudan, which is separate from earlier investment in South Sudan oil fields:

Sudan lost 75% of its oil reserves after the southern part of the country became an independent nation in July 2011, denying the north billions of dollars in revenues. Oil revenue constituted more than half of the Sudan’s revenue and 90% of its exports.

Not all online sources list Sudan and South Sudan as part of East Africa, but this CNBC article: “South Sudan joins East African Community club,” supports South Sudan’s inclusion:

The young, troubled country of South Sudan was admitted to the East African Community (EAC) as its sixth member (the others being Tanzania, Kenya, Uganda, Burundi, and Rwanda).

Being admitted to the regional body means that South Sudan will enjoy all the economic benefits the club currently has to offer (freer movement of labour and capital and, in principle, free trade) and will join the members as they move to increase economic integration (through a monetary union) and eventually establish a single political federation.

South Sudan applied for membership to the EAC as soon as it gained independence in 2011. However, its application was declined because of the country’s institutional weakness.

East African Economic and Rule of Law Issues

This U.S. Chamber of Commerce publication, “Building the Future: A Look at the Economic Potential of East Africa,” survey’s economic expansion in recent years. From beginning of Executive Summary:

East Africa has been the fastest-growing region on the continent over the past decade, but trade between the United States and the region’s main economies remains limited. In 2014, Kenya, Rwanda, Ethiopia, Tanzania, Uganda, and Burundi all had higher growth rates than the United States. Despite this growth, U.S. trade with the region has been marginal and represents only 5% of total East African trade. East Africa’s main trading partners are China, India, and the European Union (EU). 

Regional integration has played a key role in boosting intra-East African trade and increasing the region’s access to global markets. The East African Community (EAC), a regional economic community that was originally founded in 1967 and revived in 2000, is the leading regional organization on the continent. Since 2000, the EAC has gradually reduced tariffs, trade barriers, and bottlenecks in the region, helping members increase their trade performance.

Peruvian economist Hernando de Soto, in a short video “Markets Without Borders,” argues that the legal exclusion of most Africans from formal rule of law institutions restricts their options for engaging in world markets. DeSoto arScreen Shot 2017-05-02 at 3.53.57 PMgues that one-third of the world’s population lacks access to the rule of law, and elites of the world tend not to be bothered by that. The video looks at the informals of Tanzania as well as Peru.

DeSoto argues, at 1:30 (one minute, thirty seconds) into the Markets Without Borders that without access to legal institutions, the poor in Africa and other countries are “left out as orphans” and “will end up bringing civilization down:”

Globalization is a civilisation in the making. Civilization has always been designed by elites. And the tendency of elites has always been to feel that if it just covers themselves and maybe the top ten to twenty percent, it’s alright.

If globalization doesn’t create the space required for those who are excluded to come in. Does not give them the instruments, the tools with which  to prosper, they will be left out as orphans. And these orphans will end up bringing civilization down.

“The President’s Last Trip to Africa: Focus on Promoting Economic Freedom and the Rule of Law,” pdf (Heritage Issue Brief, July 24, 2015). This BBC News story, “How severe is the terror threat in East Africa?” also reports at the time of President Obama’s last trip to Africa”:

Long a territorially focused group with quasi-governmental ambitions to impose Sharia law at home, al-Shabab is now becoming a more mobile, networked regional presence.

This has brought it a number of benefits. Al-Shabab’s growing reach along the African coast is providing valuable new sources of funding and recruits.

This is a logical adaptation: enhanced global counter-terror finance efforts have strangled funding from the Somali diaspora, amongst other international sources.

In terms of recruitment, as foreign fighters have been drawn to Syria, the group has been overshadowed on the global stage.

Yet al-Shabab has stepped up its Swahili-language propaganda – which plays on deep-seated social, economic and political grievances in East African states.

U.S. Attacks Reveal Al-Shabab’s Strength, Not Weakness,” (Foreign Policy, March 9, 2016) reports:

At a time when the United States has grown increasingly alarmed at the spread of Islamic extremism in Africa — from Boko Haram in Nigeria to al Qaeda in the Sahel region to the Islamic State in Libya — the resilience of al-Shabab has highlighted the limits of the Obama administration’s approach to counterterrorism on the continent. American drone strikes, coupled with financial and material assistance to a 22,000-strong African Union peace enforcement mission (AMISOM), have succeeded in driving al-Shabab from most urban areas. But those policies have not prevented the group from continuing to strike civilian, government, and AU targets as it seeks to expel AMISOM and establish an Islamic state in Somalia.

So these reports look at terrorism concerns in East Africa. What about recent humanitarian concerns? “East Africa Summit to Focus on Refugees, Food Concerns,” (Voice of America, March 21, 2017) reports:

Kenya plans to shut the Dadaab refugee camp by the end of May. Dadaab is home to more than 300,000 refugees, most of them Somalis. Tens of thousands have already returned to Somalia.

Humanitarian agencies are currently struggling to save lives in Somalia, where more than 6 million people need assistance because of drought and insurgent attacks. The aid agencies warn if nothing is done, the crisis in Somalia may become worse than the 2011 famine.

The United Nations estimates more than 17 million people need humanitarian assistance in East Africa.

Last May, CNN also reported: “Kenya to close refugee camps, displacing more than 600,000,” (May 6, 2016). East African refugee camps represent and economic burden as well as terrorism and humanitarian challenges:

“Kenya, having taken into consideration its national security interests, has decided that hosting of refugees has come to an end,” Kibicho said, pointing to threats, such as the terror group Al-Shabaab.

Kenya announced the closure of refugee camps last year for the same reasons but backed down in the face of international pressure

At the time, government officials were not clear where they expected the refugees to go, other than somewhere into Somalia and out of Kenya. Kibicho’s statement didn’t address the question of where the refugees would go.

An alternative approach to refugees is found in another East African country, Uganda, as explained in: “Refugee economies – the Ugandan model,” (IREN, June 30, 2014):

Uganda has a relatively liberal policy towards its 387,000 refugees and asylum-seekers, most of whom have fled conflict in the Democratic Republic of Congo (DRC) and South Sudan. Uganda does not have refugee camps as such, but most live in designated refugee settlements where there are allocated plots of land to farm. They can, however, get permission to live outside these settlements if they think they can support themselves, and Kampala in particular has a sizeable refugee population.

Betts told IRIN: “Uganda is a relatively positive case in that it allows the right to work and a significant degree of freedom of movement. That isn’t to say that it’s perfect, but it’s definitely towards the positive end of the spectrum. The reason we chose it is that it shows what’s possible when refugees are given basic economic freedoms.”

Screen Shot 2017-05-02 at 4.43.52 PMThe Uganda model is discussed in this post: “Refugee Economics: Success of Self-Reliance Refugee Policy,” (Economic Thinking, July 21, 2014):

The Oxford study, titled Refugee Economies: Rethinking Popular Assumptions begins:

Recent displacement from Syria, Afghanistan, Iraq, South Sudan, and Somalia has increased the number of refugees in the world to 15.4 million. Significantly, some 10.2 million of these people are in protracted refugee situations. In other words, they have been in limbo for at least 5 years, with an average length of stay in exile of nearly 20 years. Rather than transitioning from emergency relief to long-term reintegration, displaced populations too often get trapped within the system.

Uganda’s “Self-Reliance” policy for refugees offers a promising model for other countries struggling with incoming refugees:

‘Self-reliance’ policy allows refugees freedom of movement, as well as the right to work or run a business. The economic lives of refugees in Uganda, how they interact with the private sector and how they use technology challenged five myths about refugees. 

Here is page with short outline and link to video discussing misunderstandings of Refugee Economics.  The full Refugee Economics study is online here (pdf).

Video from YouTube is here:

 

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