A Clutch of Silicon Dragon Eggs: How Beijing is Incubating the Next Generation of Tech Giants

Since the beginning of China’s economic reforms in 1978, China has conquered the world of low cost manufacturing. Shenzhen has emerged as the epicenter of the global electronics industry, and even inland cities have become export hubs. The next step for China’s economy is its ascent in hi-tech industries. Over the last decade, Beijing has emerged as the Silicon Valley of China. Beijing is the home of Baidu, the google of China, and more unicorns than any other city in China. In today’s podcast episode, I am going to be discussing the historical roots of modern Beijing’s tech industry, the role of the state in promoting technology in China, and some of the innovative companies produced by Beijing’s tech cluster. 

Beijing has become China’s most important tech cluster because it is the home to a disproportionate share of Beijing’s most elite universities. China’s two most prominent universities, Tsinghua and Peking, have their origins in the late 19th century, China’s “Century of Humiliation” and are the most elite Chinese universities. Tsinghua and Peking University are the Ivy League of China, and Tsinghua , and Tsinghua produces more high quality academic citations in STEM subjects than any other university aside from MIT. Moreover,  13 of China’s top 65 universities are located in Beijing, according to the Times Higher Education supplement making Beijing China’s greatest concentration of human capital. Chen Chunxian, a leading physicist at the Chinese Academy of the Sciences was the first to see the potential of Beijing’s university district after an official trip to Boston and San Fransisco. Due to his lobbying, the CAS created the Service Department which allowed entrepreneurs to use CAS labs and equipment at below market rates. The CAS helped fund many of the pioneering Chinese tech companies, the most important of which is Lenovo, which was founded by 10 CAS engineers with equity funding by the CAS.

Active intervention by the Chinese state has accelerated the growth of Beijing’s tech industry. The Great Firewall acts not only as a tool for censorship but also restrict American tech companies to operate in the United States. In December of 2009, Google controlled just under 45% of China’s market share. However, an intensification of Chinese censorship laws forced Google to leave the Chinese market, allowing Baidu to gain dominance in China.  China’ strict data localization policies force all data storage and cloud computing to happen within China, and only allow Chinese companies to run data centers. The Chinese government is also active in financing the countries tech industry. including a $47 billion fund for advanced semiconductor manufacturing, and various provincial governments have invested billions into AI. Many of China’s leading AI companies are closely intertwined with the state. For example, SenseTime, a Beijing based startup with cutting edge visual processing tools is helping design many tools for China’s surveillance state. 

While the Chinese government has assisted the rise of the Chinese tech industry, the driving force has been market forces and a new class of entrepreneurs. Chinese companies are increasingly not just copy-cats but innovators in their own right. An example of this is ByteDance, Bytedance is today the highest valued startup in the world, with a valuation of $75 billion. ByteDance’s primary business is Toutiao, a internet news and content aggregator that is ubiquitous in China. However, TikTok, a popular video sharing platform has surged to over 6 million downloads over the last month. In the case of dockless bycicle and scooter sharing, a Chinese firm, Ofo, was the pioneer. Ofo was founded by students from Peking University with assistance of an alumni funder. Ofo’s idea of dockless scooters and bikes was incredibly popular in China, and quickly expanded to the United States. Firms such as Bird and Lime in the United States are following a business model first pioneered in China. Beijing is the home to one of the most dynamic tech ecosystems in the world. It is the home to more unicorns than any other city in China, and any other except than Silicon Valley and its environs. 

Nicolas Maduro Fiddles While Venezuela is Plunged into Darkness

On March 7th, 2019 Venezuela was plunged into a massive blackout leaving the overwhelming majority of Venezuela’s people in darkness. The immediate cause of the blackout was the failure of the Guri Dam, and outages at the substations that transmit electricity from the dam to the rest of the country. According to the government of Nicolas Maduro, the outages were caused by an EMP attack orchestrated by the United States and opposition leader Juan Guaido. It is more likely that the outages were caused by a lack of maintenance of the electricity grid by the current government. Rolling blackouts have become the norm in Venezuela as low water levels in Guri Dam due to drought have compounded the governments incompetence in managing the power sector. As March 12th, the Venezuelan government has only been partially successful in restoring electricity as much of western Venezuela continues to lack electricity, and electricity has only been partially restored to Caracas. It is unclear how long it will take to fully restore electricity.

The effects of the power outage have been devastating to Venezuela. The most immediately impacted are those requiring kidney dialysis and babies in neonatal units and dozens of people have lost their lives due to a lack of electricity in hospitals. Many Venezuelans have been forced to scavenge for water in sewage drains because water pumping stations cannot work without electricity, There are growing reports of looting and chaos, and more and more people are taking to the streets to protest the lack of electricity. The oil industry has been hit hard by the power outages as well. Oil rigs in the Orinoco belt require massive amounts of electricity, and many of Venezuela’s traditional oil rigs are located in the parts of the country most impacted by the blackouts, and total oil output has plunged as total oil output is less than half of what it was before the power outages. Moreover, the upgraders that refine the heavy crude oils into lighter varieties cannot operate without electricity, nor can many of the ports that ship oil to export markets.

Venezuela’s economy stuck in a downward spiral where problems only compound other problems. Oil can only be produced if electricity generation is restored. Venezuela needs skilled workers and expensive foreign manufactured equipment to black start electricity generation. However, the collapse of the Venezuelan oil economy means the country no longer has the money or skilled manpower that it needs to restart oil production. Venezuela’s electricity crisis needs to be understood in the context of its broader political crisis. Since January of 2019, the regime of Nicolas Maduro has been challenged by a reinvigorated opposition under Juan Guaido. The United States has dramatically escalated sanctions on Venezuela, and most major powers and Venezuela’s neighbors have recognized Juan Guaido as the legitimate president of Venezuela. However, the government of Maduro has co-opted the military, the only group capable of removing Maduro from power. Venezuela today is stuck between a rock and a hard place. More and more pressure is being put on the government of Venezuela, but there is no mechanism to force Maduro to step down. Venezuela’s politics, even if electricity is restored, will remain mired in darkness until this political crisis is resolved.

“Just Fall, That is All” : Will Omar Al-Bashir Leave Power?

On December 19th, 2018 public discontent over rising inflation, cutbacks in bread subsidies and lack of employment over into mass protests in the city of Atbara. The protests spread like wildfire because they were not just about specific grievances but driven by a broader disgust against an oppressive and dictatorial regime. Omar Al-Bashir has been the dictator of Sudan since 1989, and over the last 30 years the country has seen brutal civil conflict, genocidal violence and a stagnation of standards of living. In today’s podcast episode, I will be exploring the deeper causes of the protests in Sudan. I will discuss the historic origins of the center periphery conflict in Sudan, the process through which a narrow elite closely connected to the military has come to dominate the economy, and how Omar Al-Bashir has balanced growing international support against his narrowing domestic political base.

The history of modern Sudan begins with Muhammad Ali’s invasion of Sudan in 1820. Muhammad Ali was, the face of western imperialism, attempting to modernize the Egyptian state. He wanted to recruit and arm a large army of slaves to use against his neighbors, and slaves to work his factories and cotton plantations. Merchants based from along the Nile river would organize groups of Arab nomads into slave trading parties deep into the south of the country. While the onset of British colonialism in 1899 would end the slave trade, many of the exploitative patterns would remain. The more developed Muslim and Arab North and impoverished Christian and Animist South Sudan have been at loggerheads ever since independence, fighting civil war from 1955 to 1972, and 1983 to 2005. The discovery of oil in South Sudan in 1979 has only exacerbated the crisis. On paper, the Sudanese Army is a mighty force with more than 100,000 men and could successfully hold the major urban areas. However, the SAF struggled in the impassable swamps of much of South Sudan. The Sudanese government was forced to arm local Arab militias, often of the same tribes once pivotal to the expansion of the slave trade, to control the territory. Civilian massacres and mass captive taking became normal. Over 1 million people have lost their lives, mostly from starvation. The independence of South Sudan in 2011 has not led to the demilitarization of Sudanese society. Militia groups similar to those in South Sudan were central to the genocidal violence in Darfur. and active in ongoing conflicts in South Kordofan and the Blue Nile. Many of the militias have proved impossible to control creating further conflict. It is important to emphasize that the current movement has unified opposition movements in the capital and all the outlying regions of the country. but also that the constant conflict between the central Sudanese state and the country’s peripheries is a feature of the country’s institutional history.

The history of conflict in Sudan has necessitated a large that consumes an immense share of the country’s resources. . By some estimates as high as 70% of Sudan’s national budget is dedicated to the military, and the armed forces. The Sudanese government spends 10 times more on the military than it does on healthcare and education. The Sudanese military’s reach extends beyond it’s budget allocation. The Sudanese military either directly owns, or indirectly through prominent generals and officers, own large swathes of the economy. The armed forces control everything from arms manufacture to operating airlines. By some estimate, 60% of large business transactions involve a member of the military-political elite. On paper, it might appear that military regime of Omar Al-Bashir has been a good steward of the economy. GDP PPP Per Capita has increased by 49% since 1989. However, this development was largely driven the country’s natural resource wealth. Sectors unconnected to natural resources such as agriculture have fared much worse. The British colonial government build the Al-Gezira Scheme, one of the largest and most sophisticated irrigation systems in the world to produce cotton for Great Britain’s industries. However, the government has not invested sufficient amount to maintain the irrigation networks resulting in mass siltation. Cotton production has declined from 132,000 tons to only 44,000 tons as farmers have shifted to less irrigation intensive crops. Moreover, the governments interventions into agriculture have often been kleptocratic. Sudan transferred 4,000,000 hectares of land into the hands of wealthy domestic and foreign investors, despite the fact such policies have a long and negative track record in Sudan.

It should hardly be surprising that the Sudanese government has only limited support among the people of Sudan. Mass protests by the people of Sudan have overthrown dictatorships in 1965 and 1984, and Sudan saw massive protests during the Arab Spring in 2011. The current wave of protests for the first time is uniting upper middle class professionals in Khartoum, poor farmers in farming towns, and the rebel movements from Darfur and Kordofan. Omar Al-Bashir has alienated all but a small minority from his regime. However, this small elite has been bolstered by growing international support and recognition. Sudan has been isolated since 1993, after the US placed sanctions on Sudan in the wake of the first World Trade Center bombing and under sanctions that have hit the country’s economy hard. However, President Donald Trump has been willing to overlook past human rights abuses in return for cooperation against terrorists and has removed sanctions. Moreover, Saudi Arabia has emerged as a major donor to Sudan. In return, Sudan has sent 8,000 fighters, many of them children, to the war in the Yemen. Moreover, Sudan emerged as a major corridor for refugee flows to Europe. In response to the refugee crisis, the EU through the euphemistically named, EU Emergency Trust for Africa, has disbursed $200 million to ex-Janjaweed to act as border guards along Sudan’s northern border.

Sudan is today tipped at the precipice of major change. The protesters have stayed on the streets despite a brutal crackdown that has resulted in the death of 37 people, and the arrest of thousands. Omar Al-Bashir has declared a state of emergency, and shows no signs of cracking down. It is likely the fate of Sudan will lay in the hands of the elite that surrounds Omar Al-Bashir. It is impossible to say if Sudan will get a truly democratic government, a continuation of Omar Al-Bashir’s regime, or the type of strife and breakdown seen in Libya, Yemen and Syria in the wake of the Arab Spring. Whatever the results, today’s protests will have a major impact on the people of Sudan and the geopolitics of the region.

The Cotton Boom and Slavery in Nineteenth-Century Rural Egypt, Mohamed Saleh The Hydro-Political Economy of Al-Ingaz: Economic Salvation Through “Dams are Development” , Harry Veerhoeven
ECONOMIC DEVELOPMENT AND THE HERITAGE OF SLAVERY IN THE SUDAN REPUBLIC’ PETER F. M. McLOUGHLIN
The Sudan Armed Forces and Prospects of Change
Rising Global Interest in Farmland CAN IT YIELD SUSTAINABLE AND EQUITABLE BENEFITS? Klaus Deininger, Derek Byerlee, Jonathan Lindsay, Andrew Norton, Harris Selod, and Mercedes Stickler
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Two Useless Peas in a Pod: Can Nigeria’s Next President Deliver Change

On February 23rd, 2019 Nigeria held elections for the National Assembly, Senate and Presidency. The elections pit the incumbent Muhammadu Buhari of the APC (All People’s Congress against Atiku Abubakar of the People’s Democratic Party (PDP). On paper, both candidates offer different visions for Nigeria’s future. Muhammadu Buhari has a reputation for personal integrity, and has promised strong action against Boko Haram and other insurgencies in Nigeria. Atiku Abubakar has promised a more free-market approach to Nigeria’s economy, promising to float the Nigeria’s currency, the Naira, and partially privatize the state owned oil company although he suffers from more than whiff of corruption. However, the similarities between the two candidates are more important than the differences. Both are Muslim septuagenarians from the north of the country. More importantly, both Buhari and Abubakar and the political parties they represent are enmeshed in the same networks of patronage and corruption .

The elections themselves have been deeply flawed. INEC (Independent Nigerian Electoral Commission) was forced to delay elections by one week due it’s own unpreparedness , although some fear this will give the incumbent more opportunities to rig the election. Over 39 people have lost their lives in pre-election violence, and a 128 people have been arrested on election related crimes ranging from vote buying to murder. Elections, as of 10 PM 2/25/2019 still trickling, but it appears Muhammadu Buhari has taken a solid lead, controlling 52% of the vote. It is unclear if serious election flaws or if the losing candidate will be willing to accept the results.

Whoever wins the election will more than have their work cut out for them. The combination of low oil prices and a rapidly expanded population have put serious strain on the Nigerian economy, as GDP Per Capita has fallen 8% over the last 5 years. The Nigerian government is struggling in its fight against rampant corruption. The government is struggling in it’s fight against Boko Haram, while the conflict between farmers and herders in the country’s volatile middle belt claimed more than 2,000 lives in 2018, and is only intensifying this year. Whoever wins the 2019 election will face an immense task ahead of them.





Does a Little Really Go a Long Way: Why Micro-Credit Brings Only Modest Returns

Everyday, Sufiya Begum, a 22-year old mother of 3, borrowed 22 cents from local moneylenders to buy bamboo with which she made furniture. All of her profits went back to those same moneylenders as she had to borrow at interest rates of 10% a day. Lack of access to capital and financial services has locked hundreds of millions of the most vulnerable in poverty. Many have touted microcredit as an intervention that can pull these people out of poverty, but it is unclear how effective it is in fighting poverty. Today’s podcast will be exploring the effect of microcredit on global poverty, focusing on the success of the Grameen Bank in Bangladesh, the microcredit financial crisis of India, and an examination of the empirical evidence on microcredit.

Muhammad Yunnus, winner of the 2006 Nobel Peace Prize, began his career as banker to the poor in the village of Jobra, Bangadesh. He was inspired by the story of Sufiya Begum to make small loans to 42 women. To his surprise, all 42 women paid back their loans. Banks showed little interest in adopting Muhammad Yunus’s idea, so in 1983 Muhammad Yunus created the Grameen Bank. The Grameen Bank’s model centered on organizing groups of poor women. Each individual in a group is mandated to save small amounts of money everyday, and receives financial coaching from Grameen Bank employees. Average loans are small around $170, and generally intended for small business creation. While loans are made to individual members, liability for loans are share at the village level among groups of groups. The microlending relies upon social pressure by group members and the fact most members have few borrowing choices beyond microcredit to ensure extremely high levels of repayment, Microcredit has grown at a spectacular rate in Bangladesh. Approximately 25 million Bangladeshis, about one seventh of the population, borrow $5 billion from microredit financial institutes every year, and microcredit has been credited for one tenth of poverty reduction in rural Bangladesh.

The initial success of micro-credit in Bangladesh led to it’s rapid expansion. However, as is the case in Andhra Pradesh, India, the result was overexpansion. Vikram Akula, a long time admirer of the Grameen Bank, founded SKS Microcredit in 1995, quickly turning it into one of the regions largest microcredit lenders. Akula argued that microcredit needed to attract private, profit seeking capital if it was to reach all of the poor. Vikram Akula worked to attract venture capitalists such as Seqouia Capital, the venture capital firm behind Google and Apple. The company’s expansion accelerated in 2009, as the company moved towards an IPO. SKS added 100 branch banks, trained 1,000 workers and added 400,000 borrowers in just work. Loan officers were given incentives such as expensive watches and cash bonuses for signing up as many people as fast as possible. Unsurprisingly the quality of loans dropped rapidly, and SKS loan officers had to resort to drastic tactics to coerce repayments. SKS officers threatened borrowers with violence. Scores of suicides by desperate borrowers have been documented. The public turned against SKS bank, and it’s employees were attacked if they attempted to collect loans. Eventually, the government of Andhra Pradesh stepped in, dramatically increasing regulations on microcredit and effectively shutting the for profit microcredit industry down.

Given Bangladesh and Andhra Pradesh’s opposite experiences with microcredit, it is incredibly difficult to say if microcredit has a positive impact on fighting poverty. The original research on microcredit was highly promising. Studies consistently found large positive impacts on income, especially for poor women. However, these studies were observational rather than experimental. While economists try to control for education, income and other observable variables in their analyses, it is impossible to control for everything. As a result, developmental economics is coming to use experimental methods such as randomized control trials to understand what works. In 2005, researchers created a microcredit experiment in Hyderabad. They partnered with a local microcredit lender to open branches in 52 neighborhoods, and selected 52 other neighborhoods to act as a control and collected a series of survey over the next three years. The researchers found that although households in neighborhoods with a new microcredit branch borrowed substantially more and invested more in small businesses than control neighborhoods, the impact on poverty were modest. RCTs in Ethiopia   , Bosnia ,Morocco and other places have consistently found disappointing results.

The best empirical evidence suggests that microcredit does not live up to the high hopes of the Grameen Bank, nor does it usually result in impoverishment as among many who borrowed from SKS Bank. It is instead a tool in the fight against global poverty that is useful in some circumstances. Unfortunately, there are no easy solutions to the problems of underdevelopment.

Selected Sources:

Grameen Bank, Microcredit and Millennium Development Goals, Muhammad Yunnus
The Creditworthiness of the Poor: A Model of the Grameen Bank , Michal Kowalik, David Martinez Miera
In credit we trust: Building social capital by Grameen Bank in Bangladesh, Asif Dowla
Beyond Ending Poverty : The Dynamics of Microfinance in Bangladesh, World Bank
Rise and Fall of Microfinance in India: The Andhra Pradesh Crisis in Perspective, Phillip Mader
The miracle of microfinance? Evidence from a randomized evaluation ,

Graveyard of the American Empire: Is Peace With the Taliban Possible?

On October 7th 2001, the United States invaded Afghanistan in response to the Taliban’s hosting of Osama Bin Laden and Al-Qaeda. This marked the beginning of a conflict that has the lives of 2,400 US soldiers, The toll on the Afghan people has been even higher, with over 30,000 casualties as of 2016, and 4,000 civilian casualties in 2018 alone. There is growing fatigue to this conflict in the both Afghanistan and the US, and increasing calls for a negotiated settlement with the Taliban regime. Since late 2018, Zalmay Khalizad, Special Representative for Afghanistan Reconciliation, has been trying to negotiate a peace agreement. President Donald Trump has signaled his own eagerness to dramatically reduce the number of US soldiers in Afghanistan with the hopes of a complete eventual withdrawal. There are currently parralel negotiations with Taliban representatives in Moscow  and Islamabad.


However, there are massive hurdles to achieving a long term peace agreement. The single largest is that both the Taliban and the current Afghan regime see each other as illegitimate and the Afghan government is not participating in talks about it’s own future. The Taliban have been gaining in strength for some time, and the central government only has complete control of a third of all districts in the country. While the Taliban might promise to any number of concessions to allow the US to save face, it is difficult to see what incentive they would have to follow through. The Taliban was infamous for it’s mistreatment of women and ethnic Hazara.  Moreover, it isn’t obvious that a peace deal with the Taliban will end violent conflict as the powerful warlords that dominate the government will likely be unwilling to cede any power to the Taliban.


To understand how we got to the point where we are seriously talking about the return of the Taliban, we have to understand the failure of the current Afghan political elite in building a capable state. The current elites origins lie in the Mujahideen the US armed in the insurgency against the Soviet occupation of the country between 1979 and 1989. The fighters we financed set themselves up as warlords , and between 1989 and 1996 various armed groups fought a series of brutal internecine conflicts. The ex-Mujahideen gained a reputation of brutality and corruption, and were loathed by the people. The Taliban used the failure of the warlords to sweep into power in 1996, relegating the warlords to a small corner of northeastern Afghanistan. The Northern Alliance (the remaining warlord forces) were key US allies in taking down the Taliban administration and the administration of post-Taliban Afghanistan. Men like Abdul Rashid Dostum were given power and authority. Unsurprisingly, this elite has misused it’s power to the detriment of Afghan people.

Burning Oil at Both Ends: How Hugo Chavez and Nicolas Maduro Destroyed the Venezuelan Oil Industry

300 billion barrels of crude oil are buried under Venezuelan soil, more than any other country in the world. For a long time, this immense natural resource blessing financed an enviable standard of living, with a GDP per capita similar to that of Spain or Japan. However, the country’s oil sector, the engine that powered this prosperity has been sputtering since Hugo Chavez became president of the country in 1998. Venezuela produced 3.3 million barrels of oil per day in 1998, but by late 2018 that number had fallen to only around 1.2 million barrels of oil per day. Today’s podcast episode is about the causes of Venezuela’s declining oil industry. I will discuss the origins of Hugo Chavez’s enmity with oil industry, the consequences of the systematic under-investment in new exploration and maintenance, and how the collapse of Venezuela’s institutions has reverberated back against Venezuela.


Venezuela’s oil dependence has always tied the countries economy to the price of oil. The inflation adjusted price of oil fell from around $120 in 1980 to only $17 in 1998, forcing the government to commit to severe austerity. Over 2,000 lost their lives in the Caracazo in 1999 after the residents of Caracas revolted after cuts to subsidies. It was anger against the political elite that powered the victory of Hugo Chavez in 1998 on a platform for radical change. However, Chavez quickly faced obstacles in the form of the PDVSA, the state owned oi company. Although the Venezuelan oil industry was nationalized in 1974, the resulting company absorbed the private sector managements and it’s ethos as well. PDVSA ignored OPEC quotas to maximize production. It retained as much of its profits as it could, and remitted as little as it could to the government. Hugo Chavez sacked and humiliated PDVSA’s management, including sacking senior management with a whistle like misbehaving footballers. The conflict came to a head when PDVSA orchestrated massive strikes culminating in a coup attempt. Chavez responded by firing nearly half PDVSA’s staff, 18,000 people, and almost all of it’s management. From then onwards, PDVSA became a tool of Hugo Chavez’s political agenda.

From 1998, Venezuela benefited from a spectacular rise in the global oil prices from $18 per barrel to $150 per barrel. Hugo Chavez instructed the government to use this bonanza to massively increase social spending dramatically expanding access to healthcare and education for the poor. However, only $ 3 billion of PDVSA’s $26 billion in revenue were reinvested in the company, barely enough to maintain current levels of production. Much of Venezuela’s oil production comes from the tar sands in the Orinoco basin where costs per producing a barrel of oil high and the technical expertise needed higher. Foreign investment was invited in the 1990s, but the Chavez government took a much harsher tone, taking large uncompensated stakes in multinational ventures in 2007. Most companies accepted the partial expropriation, but the act seriously disincentivized future investment. However, production declines have been most marked in traditional oil wells directly managed by PDVSA due systematic underinvestment by the state owned enterprise. Instead of preparing for the inevitable collapse of oil prices, the government ran budget deficits in 9 of the 14 years he was in power, and as a result the state was totally unprepared for the financial crisis of 2008.

Hugo Chavez died in 2013 from a sudden heart attack near the peak of his popularity. His succesor, Nicolás Maduro, a former left wing labor activist, inherited the legacy of Chavez’s reckless policies. Venezuela’s oil production decline began from 1998, but the process has accelerated since the ascension of Maduro. Chavez and Maduro both undermined the political institutions of Venezuela, politicizing the military and security forces. Maduro has promoted 2,000 officers to generalship, and officers control 11 of Venezuela’s 32 ministries and 11 of 23 governorships as well as dominating the senior management of PDVSA. However, the military is failing at its most basic task of providing basic human security. Venezuela has a homicide rate of over 50 per 100,000, making Venezuela as dangerous as Honduras or El Salvador. Piracy is rife, as armed gangs have looted the copper wiring from oil rigs costing the government immensely. Moreover, an estimated 25,000 to 150,000 barrels of oil are smuggled everyday into Colombia costing the government between $1.5 and $3 billion. Given Venezuea’s economic collapse, it should hardly be surprising that over 3 million people have fled Venezuela. Among these refugees are three quarters of all of PDVSA’s employees.

There’s a longstanding logic to the collapse of Venezuela. Hugo Chavez’s conflict with PDVSA caused him to gut the agency, and starve it of resources. Massive increases in oil prices masked the slow decline of oil production under Chavez, and became obvious after the collapse oil prices. But at that point, the economic, political and social collapse gained a momentum of its own. While there is a clear logic to the collapse of Venezuela’s economy, there isn’t any obvious path forward. Simply removing the current regime won’t draw skilled oilmen back, or restore basic human security. The process of restoring the Venezuelan oil industry is just a difficult firsts step for reviving the Venezuelan economy,.

Selected Sources:


“Full Sovereignty Over Oil”: A Discussion of Venezuelan Oil Policy and Possible Consequences of Recent Changes

Venezuela, April 2002: Coup or Popular Rebellion? The Myth of a United Venezuela

Clientelism and Social Funds: Empirical Evidence from Chavez’s Misiones

Of Note: Chavez’s Populism Threatens the Economic Engine of His Revolution



Has China Reached Peak iPhone?

On January 28th Apple announced it’s 4th quarter earnings for 2018. As widely expected, Apple saw a 5% decline in total revenue compared to the same period last year, and a 15% decline in iPhone revenue. The poor performances appear largely driven by poor performance in China where total revenues declined by 27%. Apple earned a total $52 billion in revenue from China in 2018, and the poor performance in China mean $5 billion in lost revenues. Apple is struggling in China for a host of reasons. WeChat has emerged as the central node of the Chinese internet, and WeChat works as effectively on an iPhone or an android phone. Chinese phone manufacturers dominate the cheap end of the smartphone market and companies such as Huawei increasingly competitive at the high end and Apple market share ranking has dropped to fifth.

Apple has further been hit by a slowdown in the Chinese economy. The Chinese economy grew by only 6.6% in 2018, the lowest rate in 28 years . Flaws in the Chinese financial system has led to a massive accumulation of debt, and the unwinding of this debt has led to serious stress for the Chinese economy. Donald Trump’s trade war is a further stressor on an already complicated situation. Although iPhone assembly has not so far been hit hard by the trade war, tariffs on everything from washing machines to solar panels have hit the Chinese economy hard. Massive 25% tariffs on $200 billion worth of Chinese exports were planned have only temporarily been put on hold. While China has promised to dramatically increase its purchases of US goods, rising tensions over the treatment of Huawei has put these talks into question.

Apple could potentially be hit hard if tariffs were to be raised, with increased tariffs the cost of manufacturing an iPhone increasing $60 to $160. While Apple is not going to abandon China as its primary manufacturing base, it is exploring alternate locations for iPhone assembly. For example, Apple announced a new iPhone assembly plant this December near Chennai India. While Apple has several assembly plants outside China to get around tariff barriers, this appears the first forays into export oriented assembly of iPhones outside of China with other assembly plants under serious consideration in Vietnam. While China will remain the primary base for iPhone assembly for the foreseeable future, these changing patterns of production will be very important given Apple’s volume of production.

China’s Clogged Financial Arteries: What Are the Risks of a Financial Crisis in China?

On September 15th 2008, the day on which Lehman Brothers collapsed, the global financial system suffered a heart attack that nearly destroyed the global economy. If we analogize the economy to the human body, than the financial system is like the circulatory system pumping capital to where it is needed most. In 2008, Wall Street, the system’s beating heart, failed spectacularly. In recent months, I have seen scores of articles suggesting that China’s has the same types of clogs and leaks as Wall Street, and could be the epicenter of the next financial crisis. In today’s podcast episode, I am going to explore the Chinese financial system to get a better gauge of its health. I will discuss the massive state owned banks that dominate its financial sector, the rapid rise of the shadow banking industry, and the governments response to the massive buildup of debt in recent years.

To go back to our analogy of to the circulatory system, one can think of the Big 4 Chinese banks as the arteries of the system. Although these state owned giants have lost their monopoly on the financial system, they still control around 40% of the total assets in the Chinese financial system. The Bank of China, the Industrial and Commercial Bank of China, China Construction Bank and Agricultural Bank of China all rank as among the ten largest companies in the world. While the big four banks are massive, they serve do not serve the private sector well as three quarters of their loans are given to other state owned enterprises and suffer from high rates of non-performing loans. All of these problems aside, China’s control of the financial system allowed it to rapidly respond to the collapse of global trade after the financial crisis. In November of 2008 the Chinese government announced a massive stimulus program of $586 billion, around 7% of GDP and much more ambitious in scope than the American stimulus. While the stimulus was successful in propping up the Chinese financial system, it had unforeseen consequences for the financial system .

Chinese local governments used stimulus money to borrow massively for the construction of $2.3 trillion worth of roads, highways and other infrastructure. Local governments then packaged this debt into financial products (similar to mortgage backed securities in the United States) to sell to local investors. The Chinese government has long forced banks to keep interest rates artificially low, often below the rate of inflation. However, because the Chinese government was eager to revive investment, they allowed these financial products (known as wealth management and trust products) to offer much higher yields. Savings rapidly flowed away from traditional state owned banks, forcing them to create their own financial products. Since these financial products offer depositors higher interest rates, the banks must make loans with higher interest rates. As a result, a shadow banking system emerged where banks either made high interest loans to a capital starved private sector or to other financial entities. The shadow banking has grown at a spectacular rate, and now controls $20 trillion of assets or about 87% of GDP. To shadow banking system acts as the capillaries of the system getting money to individual private sector businesses. However, the capillaries are deeply imperfect as many of the ordinary savers investing in wealth management products are mislead into believing the products are fully insured by the state, and financial entities have lent lent money recklessly in the assumption they would be.

It should therefore be hardly surprising that China has seen a worrying build up in debt. Chinese debt as a share of GDP has grown from around 150% of GDP in 2009 to around 260% of GDP. Both the US and Japan had seen debt buildup before their respective financial crisis and lost decade. However, unlike the US and Japan, the government of Xi Jinping has acted aggressively to reduce the risk of a financial crisis. The increased scrutiny on the financial sector has fallen hardest on the shadow banking sector which has seen its share of total credit decline from 45% in 2014 to under 20%. The crackdown has fallen hardest on the private sector, and it is difficult to tell whether this is because the shadow banking sector was in desperate need of reform or because of a broader ideological disfavor of the private sector by the current administration. Complicating an already complicated situation is Donald Trump’s trade war, which like the great financial crisis, is hitting export sectors hard. The Xi administration will have to decide if it must end the current financial tightening and return to the stimulus of a decade ago.

To return to the original question, the Chinese financial system is suffering from the equivalent of high blood pressure and cholesterol. The government is changing it’s diet and taking its medicine. While the situation is worrying, a financial crisis is far from inevitable. At the same time, China has a financial sector that struggles to get capital to the private sector, the most dynamic part of of the economy, and suffers from systematic moral hazard. Continued rapid growth will likely require fundamental reform. What is certain is that China’s financial system is so large today that a sneeze, much less a heart attack, will have a profound impact on the global economy.

Selected Sources

Are Chinese Big Banks Really Inefficient? Distinguishing Persistent from Transient Inefficiency , Zuzana Fungáčová, Paul-Olivier Klein , Laurent Weill

The Financing of Local Government in China: Stimulus Loan Wanes and Shadow Banking Waxes , Zhuo Chen, Zhiguo He, Chun Liu

Shadow banking and firm financing in China, Yunlin Lu, Haifeng Guo, Erin H. Kao, Hung Gay Fung

Entrusted Loans: A Close Look at China’s Shadow Banking System , Franklin Allen, Yinming Qian, Guoqian Tu, Frank Yu

The Political Economy of State Capitalism and Shadow Banking in China  , Kellee Tsai

Rumble in the Jungle: Martin Fayulu vs. Emmanuel Shadary vs. Félix Tshisekedi

On December 30th 2018, the Democratic Republic of the Congo held elections for the presidency. The elections were due in December of 2016, but has been delayed time after time. Hopes for the 2018 elections have been low, as the government had barred many leading opposition candidates from running, and government suppression of the media. The December 30th elections were deeply flawed in how they were run, with widespread accusations of ballot box stuffing and independent election monitor regularly denied access. The government shut down access to the internet after the election, delayed the vote in several major opposition strongholds because of civil strife and the ebola crisis, and delayed the announcement of results so as to give the government time to alter results.

 The three leading candidates are Martin Fayulu, a former oil executive, Felix
Tshisekedi , son of a long standing opposition leader, and Emmanuel Shadary, a prominent minister in the current government. Given the flawed election process, it was widely expected that Emmanuel Shadary would win and act as a puppet for long standing dictator Joseph Kabila. However, to everyone’s surprise it was Felix
Tshisekedi who won the election earning 39% of the vote, compared to 35% and 24% for Fayulu and Shadary. Pre-election polls suggested that Fayulu was the most popular candidate, and so it was doubly shocking to see neither the regime backed politician or the most popular win.

Rumors quickly arose that Kabila and Tshisekedi had come to some kind of arrangement where Kabila would be allowed to retain some influence if he rigged the election in Tshisekedi’s favor. Tshisekedi had earlier broken away from the united coalition against Kabila’s dictatorship and chose to run an independent candidate and had long been taking a more conciliatory approach to the Kabila administration. Moreover, the Catholic Church which has approximately 40,000 election monitors observing counting results as soon as they were made public, announced that their independent review found Fayulu to be the winner. Although Fayulu has refused to concede, the Catholic church has not called for mass protests.The post-election period after presidential elections were marred by violence in 2006 and 2011. It is unclear what is next for the Democratic Republic of the Congo.