Monthly Archives: November 2010

Of highways and social inequality

Back in the 1990s, China launched an ambitious program to upgrade its road network, aiming to construct among others a 35’000 kilometer trunk highway system. As with most Chinese infrastructure projects the objective has been reached and there are now plans to build 85’000 kilometers of expressways over the next three decades.

But is the newly built highway network leading to less or more inequality in China? If one is to believe the results of a new World Bank study, the Chinese real income in 2007 would have been approximately 6% lower, had the National Expressway Network (NEN) not been built. More surprisingly, the NEN does not appear to have narrowed regional disparities, hence failing to promote economic catch-up. Some other results appear counter-intuitive:
- Real wage increases attributable to the network have been negatively correlated across the urban and rural sectors
- The very poorest areas have gained but not as much as the wealthier ones
- Rural areas do not appear to have received a significant stimulus from the presence of a large and diverse urban economy in the face of falling transport costs

In other words, the lack of overall catch-up thus far generated by the NEN is largely attributable to its effect on the urban sector of the Chinese economy, where the gains across prefectures have, on average, been larger than in the rural sector.

The good news? Unbalanced economic growth has been a feature of the development experience in all rich countries. In the long term, growth is likely to spread out again as firms take advantage of lower transport costs to escape congestion and higher factor prices.

Hacking US-based Internet traffic

Cyber-espionage is back in the spotlight. The newly released report from the US-China Economic and Security Review Commission makes great reading for those interested in economic and information warfare.

In addition to the usual discussion around propaganda and censorship in China, one can read about computer network exploitation (targeting primarily Indian diplomatic missions) and internet traffic manipulation. In the latter case, it appears that an important of global Internet traffic (15%*) was routed through a Chinese Internet Service Provider (ISP) for 18 minutes or so in April 2010 – affecting traffic to and from U.S. government (‘‘.gov’’) and military (‘‘.mil’’) sites as well as commercial sites (Dell, Yahoo!, Microsoft or IBM).

So, did China hack US-based Internet traffic? China Telecom (who owns the incriminated ISP) denies the allegations. While experts debate on whether the redirection was intentional or not (aka fat-finger mistake) a number of lessons are worth remembering. First, the technical framework on which the Internet is built depends on the goodwill of the participating ISP to play “fair”, something that cannot be presumed, either in China or anywhere else for that matter. Second, governments, businesses and individual users alike, must ensure sufficient level of encryption for information they deem sensitive but remember that it may not protect them from cyber-espionage. Last but not least, the battles for economic supremacy are increasingly likely to be fought online.

* According to C. Labovitz it is not 15% of traffic but 15% of routes that were diverted. Given that only a fraction of them propagated the traffic actually diverted could be as low as 0.015%

Biotech push

While the recent revival of industrial policies in the West may have raised the eyebrows of proponents of free markets, their use (and abuse) has long been a pillar of China’s catch-up policy in science in technology.

It is therefore no surprise to hear that the Chinese government is planning to pour more than USD 2 billion over 5 years to push the development of the biotechnology sector – the latter is actually one of them strategic industries picked by the State Council. The central planners hence pursue the new drug R&D scheme launched in 2009 and coupled with the long-term aim to develop indigenous intellectual property.

On the one hand, massive investment in the biotechnology sector makes sense since Chinese firms and research institutes would have a hard time competing with established and deep-pocketed foreign competitors in the chemical drug sector.  On the other hand, the issue with industrial policy always comes back to which of the government or the market is best at allocating resources. Some Chinese researchers are already complaining about  spreading the funds on too many projects and focusing too much on state research institutes and state-owned companies rather than private start-up companies.

Whether this new scheme ends as a success or failure of industry policy only the market can tell.

Technology and the five-year plan

For those not following Chinese politics too closely, the publication of the Party’s Central Committee proposal on the 12th five-year plan (FYP) may seem a non-event.

While they seem to be remants of the communist era (which they are) FYPs have played an important role in setting trajectories for China’s economic development or at least in giving an official annointement to already trodden paths.

A little bit like with official photographies of governments, one can try to infer from the text which topics rise and fall over the years. Take for example technology: in the 12th FYP, the word comes back 26 times. Besides the usual reminder of the importance of science and technology for economic development, technology is used next to low carbon, agriculture, high added value, nano, energy conservation, recycling, environment protection, basic frontier research, generic and… military. Probably a very good proxy for where China stands today in terms of its ambitions!