Heated Debate from GPS

Hi, I found this great debate on the Wall Street protests between Jeff Sachs, who we studied last month, and Niall Ferguson.  We need to cover Ferguson in a bit more depth, let say starting on Friday.

See: http://www.youtube.com/watch?v=KuGuNaSiACI

Also, don't forget that homework is due on Friday, and that on Wednesday UC reps will be on campus during 4th period.  That means that we don't have a lot of class period to cover chapter 8.  Make sure you do the reading and understand the basic issues.  The problems aren't too difficult.

Lessons from the Financial Crisis for Teaching Economics

I found this interesting set of slides from a Stanford economics professor which talks about the challenges of teaching economics given the economic crisis and slow recovery.  Check it out:
http://www.stanford.edu/~johntayl/New%20Orleans%20-%20Lessons%20from%20the%20Crisis%20for%20Teaching.pdf

Final Project - Political Economy Country Assignments

G20 Countries

1. Argentina - Annie
2. Australia - Kalei
3. Brazil - Moose
4. Canada - Lance
5. China - Elvis
6. France - Jessica
7. Germany - Kevin
8. India - Amelia
9. Indonesia - Jonny
10. Italy - Ivy
11. Japan - Berlin
12. Mexico – Mark Wang
13. Russia - Simon
14. Saudi Arabia – NOT TAKEN
15. South Africa - Ivan
16. Republic of Korea - Jisoo
17. Turkey - Bobby
18. United Kingdom - Hannah
19. United States - Brittany

Non-G20 countries

20. Greece - Kerwin
21. Egypt - James
22. Hungry - Jeff

Mr. Joy's China Steel Paper

China’s Steel Industry:

The Global Financial Crisis, NDRC’s Regulatory Regime, and Technology Change For Climate Change Abatement

Paul Robert Joy

University of San Francisco

Center For The Pacific Rim

MAPS 640

Economics of East Asia

Thursday, May 21, 2009

Abstract

The global financial crisis has demonstrated the problems of China’s growth model.  Steel production, as one of the main benefactors of loose government policy on pricing and lending, has seen unprecedented growth in the past eight years.  However, the growth of the steel industry is unsustainable when taking a long-term environmental and economic outlook.  Therefore, the Chinese National Development and Reform Commission (NDRC) must enact more robust lending practices and energy pricing policies that will push smaller, less efficient steel mills out of business, while enabling consolidation of China’s larger steel players to a larger percentage of its total steel industry.  Consolidation will have substantial benefits for technological leapfrogging, allowing more efficient technologies to be put in place like Electric Arc Furnaces, and will also allow for the implementation of Carbon Capture and Storage when it is commercially viable.  Finally, China must learn to grow its economy by incorporating environmental best practices.  Waiting to be a rich, developed economy to take care of its environment is a false choice that will not transpire as long as China pursues an industrial growth path, emphasizing steel and other heavy industries over domestic consumption and equitable growth. 

Introduction

            Steel is one of the most important materials in the global economy.  It is used in hundreds of products, from cars, buildings, roads, railways, and factories, to name a few.  It is also heavily energy intensive, requiring massive amounts of raw materials such as iron ore and coal to produce its finished products, especially in China.  Because of its high dependency on coal to produce the high temperatures needed in the industrial process, it plays an important part in the current global greenhouse gas footprint.  Furthermore, demand for steel is now currently rising at an incredible clip, thanks to the economic growth of emerging markets, led by China.  China is now not only the manufacturer of the greatest amount of steel, but also the world’s biggest exporter (Wu, Houser).  Despite having only 5% of global GDP, China produces more than 33% of the world’s steel products, or over 500 Million tons annually (Martins).  This incredible ramp up of steel making capacity, as well cement and other heavy industries, has had detrimental affects to the Chinese economy.  Since 2002, China’s steel industry has contributed to China’s growing energy demand, energy intensity, and increased its rate of greenhouse gas emissions (Wu, Price).  This has increased pressures on its ecological health through increased pollution and contributed to a large number of social disturbances.  The World Bank estimates that 750,000 people die a year here because of environmental pollution, or more than 2,000 every day.  Thus the steel industry is an important area of focus, given these large environmental challenges. 

The current economic crisis shows that China’s long-term economic growth strategy is not working.  Steel growth, as an important engine of growth, has greatly contributed to systemic imbalances that now threaten China, as has a lack of regulatory policies on bank lending and pricing emanating from the NDRC.  China has sacrificed long-term growth by focusing on industrial development instead of developing its light manufacturing and service industries.  In this sense, steel is an excellent example for all of Chinese industrial development at the present time, including chemicals, nonferrous metals, cement, and iron.  Are there ways to decouple energy use and emission generation from continued growth in steel products through consolidation and technology change, given the global financial crisis?  And is it possible to move away from coal to electricity in steel’s energy mix?  Or will technological fixes only prolong China’s inability to return to a more sustainable growth path?  In my opinion, China must pursue active reform in the policy arena, especially in its bank-lending policies as well as reforms pricing policy while at the same time investing in research and development for technological leapfrogging.  It needs to reform its lending and pricing policies in order to achieve the type of consolidation that will allow these technological innovations to be brought into China.  That will allow for major reductions in pollution and in greenhouse gas emissions, creating more sustainable long-term growth.  China also needs to act fast to strengthen its regulatory regime during this time of economic crisis.  Failure to do may help economic growth in the short-term, but will undermine China’s ability to achieve politically necessary economic growth after this crisis is over. 

This paper will focus on three main forces shaping the growth and direction of China’s burgeoning steel industry.  First, this paper will dive into to the current global financial crisis, and examine how it is affecting the global and Chinese steel industries.  A discussion of the financial crisis is extremely relevant and critical at this juncture, given government action to stimulate national economies through stimulus, falling demand for steel products worldwide, and the potential changes that the financial crisis will have on economic strength in China.  This paper will then review efforts by the National Development and Reform Commission (NDRC) to promote consumptive-driven growth through bank lending and also through changes in energy pricing policies.  It will also look at the NDRC’s attempts to consolidate its steel industry to ease overcapacity and make production more in line with domestic demand, given the effectiveness (or lack thereof) of its land and pricing policies.  The NDRC has stipulated that China’s steel industry must significantly reduce the number of companies (including township enterprises) involved in steel production (“China Plans to Create Three Steel Giants”).  Currently, there are over 7000 steel companies in China, up from 3551 in 2002 (Bergsten).  Furthermore, in China’s Rise, the authors report that prices for “land, energy, water, utilities, and the environment” are not in line with relative scarcities and social preferences (pg. 120).  Finally, this paper will examine the sustainability of China’s steel industry given the context of climate change and Greenhouse Gas (GHG) abatement.  It will do so by looking at current abatement technologies such as new blast furnaces and future technologies like Carbon Capture and Storage for carbon emissions, as well as a proposal to transfer some of China’s steel capacity to Australia because of its abundant iron ore and coal resources. The global financial crisis, NDRC economic policies affecting steel industry growth, and greenhouse gas abatement technologies for the steel industry will allow for a more nuanced understanding of China’s developmental challenges both now and moving into the future. 

China is the world’s most populous country, and “its environmental problems are the most severe of any major country, and are mostly getting worse” (Liu).  Its environmental problems are creating social and political tensions within China and also in the international community.  It is also the world’s largest emitter of per annum carbon dioxide, the major climate change pollutant, of which heavy industries account for more than 60% of electricity supply heavily dominated by coal (Bergsten).  Therefore, China’s ability to clean up its steel industry and its regulatory framework are incredibly important given dangerous climate change and its affect on continued Chinese economic development moving forward.

Steel and the Global Financial Crisis

The current global financial crisis is the worst financial downturn in the post-WWII era.  While it began in the United States, it has rippled through the rest of the world, causing global unemployment, a decline in trade for the first time since WWII, decreased investment, and a large loss of confidence.  It has also proven, according to Simon Ogus of DSG Asia, that “decoupling is a fairy tale,” and that Asia is not going to separate economically from the rest of the world anytime soon.  China has suffered thirty million job losses, and has significantly reduced China’s economic growth below 10% (Naughton).  It has put a tremendous amount of pressure on the Beijing government to continue economic growth, prompted questions about the sustainability of China’s growth model, and also resulted in a US$750 billion stimulus package that accounts for 17% of China’s annual GDP.

 

As stated in the Introduction, the global financial crisis has prompted major questions about the sustainability of China’s economic growth model.  In order for China to have truly sustainable economic growth moving forward, economic experts and the Chinese government all agree that it must have a rebalancing of investment and consumption.  Steel’s rapid and clearly unsustainable growth from 2002 to the present is a symptom of this problem.  In March 2007, Premier Wen Jiabao said at his annual press conference that “China’s economic growth is unsteady, unbalance, uncoordinated, and unsustainable.”  This is a pretty significant self-criticism considering at Premier Wen had been in charge of the economy for the past five years at that time.  Nor is he alone in his criticism.  President Hu Jintao, in October of 2007, told the 17^th Communist Party Congress pointed out the shortcomings of China’s development model that “economic growth is realized at an excessively high cost of resources and the environment, and encouraged the formation of an energy and resource-efficient and environment-friendly structure of industries.”   In China: The Balance Sheet, the authors wrote the following on the topic of Chinese economic rebalancing:

Over the past few years China has become increasingly dependent on increases in investment to drive economic growth.  Beginning in 2001, investment grew much more rapidly than GDP.  As a result, by 2004 the share of investment in GDP had reached about 40 percent.  The government, starting in mid-2003 and with greater vigor from mid-2004, took administrative measures to slow the flow of lending to sectors in which it anticipated the emergence of excess capacity….This view was reiterated and refined by the central bank in its mid-year 2005 monetary policy report.  In the bank’s view, investment growth needed to slow further to allow demand to catch up with supply in sectors such as steel, aluminum, cement, real estate, and even electric power, where excess capacity was evident or predictable.  This theme has been reiterated in a number of important government documents, most notably in the Outline for the Eleventh Five-Year program, which was approved by the Central Committee of the Party in October 2005.”

                                                                                                                Pg. 26 

The question of economic balance is not a problem that developed overnight, nor will it be solved through quick policy fixes such as economic stimulus or by loosening credit in the short term.  Chinese banks are currently loaning more than US$640Bn to state-owned enterprises such as steel and the other heavy industries in the name of “supporting the economy” (Naughton).  While this will help consumer confidence in the short-term, and encourage investment, it could also slow Beijing’s ability to reduce the overall number of steel companies by encouraging local cities and townships to continue to invest in small, non-efficient steel mills (thereby slowing the flow of necessary technologies to reduce pollution, and also slowing China’s move to a more consumptive-driven economy). 

To combat the global economic crisis, Washington D.C. has endorsed and pushed for large Keynesian stimuli from national governments as a way to restore confidence and jolt the global economy quickly into growth.  China was one of the first countries to announce its economic stimulus in November 2008, prior to the G20 meeting in Washington D.C., and it has been followed by the United States, the UK, Japan, Korea, and others.  While details on the Chinese economic stimulus are still being rolled out, we do know that infrastructure will be one of the big winners, heightening demand for steel and other industrial products, and making it more difficult for China to achieve the necessary long-term economic readjustment.  According to Barry Naughton, a Chinese economic expert at UC San Diego, China’s RMB 4 Trillion stimulus package is focused on transportation investments, low-income housing, and also on technological innovation.  At the present time, it appears to be working with moderate success.  China is now experiencing a substantial economic turnaround when compared to the rest of the world.  Yet almost all of the response has been because of government response to the crisis, and not through the private sector.  Beijing is pushing the economy through a very “muscular government approach” (Naughton).  It also appears, according to Lyric Hughes Hale, that the downturn has hurt “economic and social reforms in China.”  Furthermore, she argues that necessary institutional reforms now appear to be off the table, which will hurt China in the long-term.  Loans given to large State-Owned Enterprises (SOEs), which are not long-term engines of growth, will not rebalance China’s economy away from its heavy industrial development. 

In the past nine months, the global financial crisis has had a negative affect on global steel output.  This has reduced the prices for key steel inputs, such as Australian iron ore.  It has also stabilized the price of steel in much of the world.  However, the Chinese stimulus has prompted some steelmakers to ramp up production, causing a global drop in steel prices because of a glut of supply.  In China, the price for hot-rolled steel is now US$415 a metric ton, while in the United States and Europe the prices are US$531 and US$479, respectively (Matthews).  According to the Wall Street Journal, “China, in particular, is beginning to see steel prices slide after the capacity utilization of the country’s steel mills increased in recent months to about 90% from 75%.  Baosteel, Group Corp., China’ largest steelmaker by output, last month restarted one of its idled mills in anticipation of stimulus-related construction.  Angang Steel Co., the listed arm of Anshan Iron & Steel Group Corp., China’s second-largest steelmaker, last week said it would increase production this year by 25%, or four million metric tons” (Matthews).  The price-drops in China could spread elsewhere as well, like North America and Europe (where prices are higher than in China because of labor and land costs). 

            The global financial crisis has also helped speed up the NDRC’s energy intensity target.  The NDRC wants to reduce energy intensity 20% from 2000 to 2010, and in the first quarter of 2009, it was able to achieve a drop of 2.9%.  GDP growth grew at 6.1% while energy growth only grew at 3% (Levine).  However, as stimulus spending ramps up, creating demand for more steel and other industrial products, this could hurt the NDRC’s ability to cut energy efficiency by the full 20% by 2010. 

In summary, the current global financial crisis represents an extremely important inflection point that will determine the future of Chinese economic growth.  For the past seven years, Chinese economic growth has relied on the ramp up heavy industries, including steel, as the basis for economic improvement and GDP expansion.  This has resulted in a shift in Chinese energy intensity, has called into question China’s pricing and lending practices, and probably slowed overall Chinese growth.  The current crisis represents an important opportunity for China to shift quickly to more sustainable growth.  However, the stimulus package that was announced in November 2008 has the potential to lock China into another round of heavy industrial-led growth, and could undermine its ability to achieve a better economic balance in the long-term. 

NDRC Economic Policy and Steel Industry Consolidation

This section will examine how the National Development and Reform Commission (NDRC) is adapting to the global financial crisis, and what its policies are in bank lending and in energy pricing for state-owned steel companies.  This section will also examine how the lack of strong lending and pricing policies undermine its attempts to consolidate the steel industry because of the role of local governments in distributing loan money, and their preference to give it to industries they see as integral parts of the local economy, especially steel.  As addressed in the last section, the global financial crisis has prompted the Chinese government to begin a massive US$640 Billion lending program directed mainly at state-owned enterprises, like steel companies (Leow).  Furthermore, the stimulus package has resulted in an increase in steel output, a reduction in price, and locked China into yet another round of increased energy consumption mainly through coal-burning power plants.  These policy steps go against much of what the NDRC has tried to accomplish in the past few years, as it reduces China’s ability to pursue a new growth trajectory (Rosen).  Increased bank lending and stimulus money for infrastructure will hurt necessary consolidation by giving less efficient firms access to capital, not exactly the most affective way of using valuable resources.  Government officials are using the power of the state instead of relying on more market-based mechanisms. 

Steel is a global industry with major players located in East Asia, North America, and Europe.  China is now responsible for 34% of the total global share in steel production.  However, despite steel’s geographic distribution, the share of the top ten global producers reached 27% in 2006, and the next ten accounted for an additional 8%.  Global consolidation has occurred primarily through large-scale privatization, national and regional mergers, and more recently cross-regional mergers.  In 2005, Chinese steel makers only held two of the top ten spots.  The following table illustrates the differences in steel-industry consolidation between China and the rest of the world.  Most stark are the differences in East Asia, where Japanese and South Korean firms exhibit the highest rates of consolidation (at 63 and 86 percent, respectively). 

Global Steel industry: Production, market share, and industry concentration, 2006

Country/region	Production (million tons of crude)	Share (percent of global production)	Share of top three firms (percent of domestic production)
China	422	34.60	14.10
EU-25	198	16.30	44.70
Japan	116	9.50	69.30
United States	99	8.10	59.70
Russia	71	5.80	55.10
South Korea	48	4.00	85.80
World	1,219	100	-

Source: Bergsten, et al. pg. 149

According to the OECD, steel companies have consolidated because of “an increased desire to produce finished steel near major consuming markets to avoid the costs of transportation, long delivery times, and currency fluctuations, for instance, but also to produce semi-finished steel close to raw materials or in regions with low labor costs” (MacDonald).  These are primarily market-based mechanisms.  However, Beijing’s path to consolidation is much different than its international competitors, and runs counter to local interests. “China’s steel industry is balkanized, with many provinces promoting their own champions.  Local officials often resist attempts to consolidate firms….Despite government attempts at consolidation, these industries (steel included) have further fragmented, as rising profits and local encouragement attract more companies” (Bergsten pg. 149).  China’s largest firms are still state-owned, domestically focused, and not competitive outside of China.  Furthermore, China’s steel companies are seen by the Chinese government as a strategic industry that enhances China’s economic security.  These Chinese companies are listed on China’s stock exchanges (Shenzhen and Shanghai Pudong), yet ownership is restricted.  However, these large firms are pursing sustainable best practices to make their operations more capital efficient, as opposed to many of the smaller companies propped up by local government officials.  Furthermore, national energy intensity goals enshrined in the 11^th 5-Year plan by Premier Wen and President Hu have made these large SOEs “world class” (Bergsten pg. 149).  However, they only account for 14% of total Chinese steel production (see chart below).

China’s most recent steel consolidation plans were announced through a government white paper calling for a 3-year consolidation period.  Beijing will also use government-backed funds to help Chinese steel acquire needed resources from abroad, such as iron ore and coal.  According to the Dow Jones Newswires, “Shanghai-based Baosteel Group Corp., Wuhan Iron and Steel (Group) Corp., and the combined group led by Anshan Iron and Steel Group Corp., and Benxi Iron and Steel (Group) Co. will lead the consolidation.  The three will emerge as China’s steel giants, with each having a capacity of over 50 million metric tons by 2011.”  This would make these three companies the second, third, and fourth largest steel companies in the world, behind only Arcelor Mittal (which produces over 100 million tons of steel a year).  In addition to these three, a fourth Chinese steel company called Hebei Iron and Steel (through a merger between Tangshan Iron and Steel Group and Handan Iron and Steel Group) was formed in July of 2008, which immediately became the world’s fifth largest steel group with more than 31.75 million metric tons produced.  This temporarily made Hebei Iron and Steel the largest Chinese steel manufacturer.  However, the 3-year time scale that Beijing is using is probably overly optimistic.  The Chinese Steel industry will not consolidate as quickly as the NDRC wants because of the short-term Chinese economic stimulus package ramping up steel and other industrial production, as well as a lack of reform in its energy pricing policies.  However, if policies are enacted quickly, and government remains serious in its consolidation efforts, they could be successful on a 5-8 year time frame instead of the projected 3-year time frame. 

One final area that needs to be examined when judging the sustainability of Beijing’s consolidation attempts is the area of energy pricing reform.  The NDRC has pushed for pricing reform in recent years, and data suggests that China’s industrial electricity prices are higher than the industrial world’s average.  However, “It is likely that that many industrial enterprises do not bear the full cost implied by the national average figures from the Statistical Bureau.  While the NDRC would like to see energy pricing rationalized to reduce overall energy consumption, it is sensitive to local social and economic development concerns.  Energy-intensive firms in China typically consume more energy per unit of output than their peers in the OECD (20-40% more)” (Bergsten pg. 145-6).  Increased energy intensity coupled with increased industrial production accelerates environmental degradation.  Environmental protection in China is mostly outsourced to provincial and local governments, which have chosen near-term economic growth rather than environmental protection.  Much of the pressure comes from industry, as managers threaten to cut jobs and tax revenue if enforcement of environmental statues is raised.  Therefore, while the NDRC wishes to have normal energy and electricity prices for heavy industry, too often than not national policies are diluted at a local level because of social stability and tax revenue pressures from these heavy industries. 

In total, the NDRC has dictated that 50% of China’s raw steel should be accounted for by ten producers by 2010, and by 2020 these ten producers should increase their share to 70%, eliminating more than 100 million metric tons of inefficient steel mills.  But it has also dramatically encouraged lending to state-owned enterprises as well as created a stimulus package that increases demand for Chinese steel products.  The NDRC is also playing second-fiddle to local and provincial government authorities on energy pricing controls because of the differences between Beijing and provincial/local priorities.  While Beijing may like the idea of increased environmental protection, it does not have a robust environmental enforcement agency like the US Environmental Protection Agency to make sure its policies are acted upon (Liu).  Therefore, at the onset of this economic crisis, growth continues to be skewed toward the short-term, and consolidation will not occur as quickly as the NDRC has laid out in its 3-year plan.  This will continue to have negative consequences on China’s economic imbalances, as well as lock China into higher energy growth projection, which means more carbon emissions and higher global energy and commodity prices in the near-term.    

Climate Change Technological Abatement on china Steel

Consolidation is an important aspect of the NDRC’s strategy because it will allow China to adapt global best practices that are needed to reduce its energy intensity in the steel making process, reduce carbon dioxide emissions per unit of output, and also to increase the steel champions’ ability to better compete internationally, at least in theory.  China’s largest steel manufacturers, like Baosteel, Hubei, and Wuhan Iron and Steel, are using international best practices, and are working to reduce their energy intensity.  This section will highlight some of the areas where technological change is possible, as well as future areas of technological development such as Carbon Capture and Storage that will make Chinese economic and industrial growth more sustainable, starting with current abatement pollution abatement technologies and future ones as well.  The Beijing government is well aware of its environmental problems, and is taking steps to not just encourage economic growth but also to improve environmental awareness in its government structure, especially in its SOE steel factories.  However, as we have seen thus far, technological leapfrogging doesn’t just happen on accident.  The government must create proper incentives to allow for companies to make better investment decisions that not only allow them to profit, but also allow for more equitable growth across the entire economy. 

Current Abatement Technologies

Chinese steel industry consolidation will allow its steel mills to adapt advanced technologies already used in developed countries.  These technologies include, according to a report by McKinsey’s top Chinese Consultant, Jonathan Woertzel, “top pressure recovery turbines (TRTs), pulverized coal injection (PCI), oxygen-enriched PCI, coke dry quenching (CDQ) plants, process automation, improving the use of blast furnace gas, and substituting basic oxygen furnaces (BOFs) by electric arc furnaces (EAFs) as scrap supplies increase in China.”  Basic Oxygen Furnaces currently constitute more than 87% of all steel furnaces in China, while electric arc furnaces only make up 12%.  McKinsey also reported that EAFs make up 58% of furnaces in the United States, and 30% in Germany and Japan.  A significant shift to EAFs will reduce carbon emissions by more than 200 million tons, according to McKinsey.

Furthermore, better utilization of blast furnace gas will also help to reduce carbon dioxide emissions by an additional 40 million tons.  This is a process that will be benefit a great deal from Chinese steel consolidation, as the smaller, less efficient steel plants have much lower rates of utilization than the major steel plants.  This move toward better utilization has actually already started to occur.  GSI, or General Steel Holdings, Inc., one of China’s leading non-state owned steel manufacturers based in Shaanxi province, announced last October the completion of two new blast furnaces at its Shaanxi Longmen Steel Co., Ltd. joint venture site.  Each blast furnace has the capacity to produce more than a million tons annually. 

When asked about GSI’s new furnaces, Mr. Henry Yu, GSI’s chairman and CEO said, “These two blast furnaces use less energy, coke, and require only one-third of the manpower to operate…. Against the backdrop of weakened domestic and global demand for steel, brining this new, more efficient capacity online allows us to temporarily shift from less efficient capacity, increasing profitability and capacity to our company.”  Reforms in energy prices will help many of his State-controlled competitors to also adapt these new energy efficient furnaces.  However, given the aforementioned analysis, the NDRC certainly has its work cut out for it for it in this area, especially given the current global financial crisis, and the different ways the Beijing government is driving up short-term economic growth through stimulus spending and its new lending practices to state-owned companies. 

Future abatement technologies

The most important abatement technology currently in the pipeline is Carbon Capture and Storage, or CCS.  Carbon Capture and Storage is currently in the development stages, but it will become commercially viable by 2020, thanks to efforts by Australia, the EU, the United States, and China (Price).  According to Lynn Price of the China Energy Group at the Lawrence Berkeley National Laboratory, CCS will be used at coal-fired power plants and other industrial plants, such as chemical cement, and also iron and steel factories.  It requires capturing carbon dioxide at each point source, and then transporting that carbon dioxide to a place of storage underground.  It is believed that while CCS will increase the cost of steel manufacturing and other industrial processes, it will allow for coal to continue to be used in energy generation and while simultaneously reducing greenhouse gas emissions.  Coal is the primary source of energy that is readily available in China, compared to its oil and natural gas reserves. 

Technological experts working on CCS believe it will take at least ten years for it to be commercially viable.  Therefore, the vast majority of steel factories built in the next ten years will not have CCS capabilities.  When CCS is commercially viable, these steel plants will have to undergo renovations for CCS.  When CCS is commercially viable, it has been estimated that it will reduce 340 million tons of carbon dioxide annually, more than switching BOFs to EAFs and moving to more efficient blast furnaces combined.  Also, assuming that China puts a price on its carbon emissions, implementing CCS technology would save steel producers billions of Yuan annually over the lifetime of these factories.  China’s energy production is dominated by coal-fired power plants, and coal is China’s only significant natural energy resource, especially when compared to oil and gas reserves (International Energy Agency). Therefore, pursing CCS makes sense given China’s environmental challenges from Climate Change and its national resource endowment. 

A second recommendation for future abatement concerns geographic relocation.  China is the world’s largest importer of iron ore, mostly from mining companies based in Australia like Rio Tinto.  Moving some steel capabilities from China to Australia would save additional carbon dioxide emissions because of Australia’s reserves of iron ore and natural gas, allowing for more efficient direct reduced iron production using clean natural gas as opposed to coke.  Natural gas burns more than 50% cleaner than coal in industrial and non-industrial processes, and China doesn’t have a large supply of domestic natural gas.  However, this policy recommendation is not without a whole host of problems, including Beijing’s designation of its steel industry as an important part of its national security.  Chinese policymakers care more about creating national champions than about efficient capital and resource allocation, at least right now.  They will continue to protect their national champions, much like they did when Coca-Cola tried to take over Huiyuan, the largest Chinese juice maker.  So while geographic relocation makes economic sense, it does not make political sense in Beijing right now. 

In total, emission reduction technologies current exist for China’s steel industry to reduce its energy intensity, and move to more sustainable growth in the long-term.  Moving from BOF to EAF furnaces is a proven way of reducing carbon and energy intensity, and CCS will be an important part of China’s steel industrial growth in as little as ten years time.  However, just because certain technological advances exist doesn’t necessarily translate into their rapid implementation.  Confusing NDRC policies on energy pricing, bank lending, and consolidation need to be on the same page for consolidation to have an affect on re-balancing China’s economic growth.  China’s economic planners want to take environmental concerns seriously, yet ideas of how to integrate environmental and economic planning are only in their infancy.  Daniel Reichter of Google.org has said that economic growth and environmental stewardship have been separated over the long-term, and that we are paying the price right now not only in China but globally.  Pursing a sustainable development growth strategy requires putting economic and environmental issues together when measuring the costs and benefits of government policy planning and it needs to be institutionalized so that businesses can also develop and profit while simultaneously stabilizing the Earth’s climate, preventing environmental degradation, and slowing the loss of biodiversity worldwide. 

Conclusion

            This paper has looked at the Chinese steel industry, and has determined that the growth of this industry, the world’s largest in terms of per annum output, has greatly contributed to the economic imbalance between industrial growth and investment and a lack of consumption.  The rapid growth of Chinese steel has also put the country on the track of rapidly increasing energy demand, and has also hurt environmental protection efforts within China.  NDRC policies have tried to push for consolidation of China’s steel industry by creating a select number of global champions, but its policy of consolidation has been held back by contradictory policies on energy pricing reform as well as through the global financial crisis and the decision to dramatically increase loans to state-owned enterprises in support of stimulus spending to help the economy.  While the NDRC is acting in the best short-term interest of China at the present time, it is hurting the long-term prospects of rapid Chinese economy growth by further entrenching the industrial interests, such as small, inefficient steel factories, which will make consolidation more difficult and time-consuming. 

            If China wants to return to double digit economic growth in the long-term, it must change its growth model away from investment in heavy industries.  It must also work to integrate environmental thinking into its economic planning process, as advocated by Daniel Reichter of Google.  It must also increase its investment in social services like education and health care.  This will encourage the growth of the more energy efficient consumer sector while improving the long-term growth prospects of the Chinese people.  Daniel Rosen of the Rhodium Group and of the Peterson Institute of International Economics and I had a conversation after the World Affairs Council in early April that resulted in our joint agreement that climate change mitigation through energy efficiency, such as the transfer of BOF furnaces in steel plants to EAF furnaces, was the most cost-effective way of getting to per unit cuts in greenhouse gas emissions.  Mr. Rosen said that improvements in energy efficiency as a low-hanging fruit were piling up around our ankles.  However, because of the lack of CCS, seeing actual cuts in China’s greenhouse gas emissions is currently unlikely because of the uncertain policy framework, and the consequences of promoting rapid economic growth to escape the global financial crisis.  That is why speed is of the upmost importance in setting up policies for the period after the current financial crisis.  China has navigated a large number of domestic challenges from the beginning to its opening up policies starting in 1978 to the present.  While changing the economic structure of China’s economy will be difficult and require short-term sacrifices, China’s government has demonstrated the ability to be extremely pragmatic when it comes to economic growth, given the political necessity of it.  Therefore, I have full confidence in the government’s ability to take these policy recommendations into account to get Chinese economic growth on a more sustainable growth track. 

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5. “Greenhouse Gas Mitigation for Heavy Industries.” World Bank 2008.
6. Houser, Trevor. “China’s Rise: Challenges and Opportunities.” Peterson Institute for International Economics. Washington, D.C. 24 November 2008.
7. International Energy Agency. World Energy Outlook 2007: China and India Insights. Organisation for Economic Co-Operation and Development. Paris. 2007.
8. Leow, Jason. “Small Chinese Firms Struggle to Tap Banks.” Wall Street Journal. 14 May 2009: A9.
9. Levine, Mark. “Energy Efficiency in China: Glorious History, Uncertain Future.” University of San Francisco. 29 April 2009.
10. Liu, Jianguo, and Jared Diamond. “China’s Environment in a globalizing world.” Nature 435 (2005): 1179-1186.
11. MacDonald, Scott. “Consolidation in the World’s Steel Industry.” Global Steel Consolidation. OECD Roundtable. Istanbul, Turkey. 18 May 2007.
12. Martins, Mervyn, and Pierre Managers. “A strategic shift needed in the steel industry.” D’Letzebuerger Land. 20 March 2009.
13. Matthews, Robert. “Some Steelmakers Jump the Gun in Response to Stimulus.” Wall Street Journal 16 March 2009: B3.
14. Naughton, Barry, Lyric Hale, et al. “China’s New Role in a Turbulent World.” Shorestein Institute, Stanford University. 8 May 2009.
15. Ogus, Simon, and Cindy Marks. “Asian Economic Outlook.” California-Asia Business Council. 6 May 2009.
16. People’s Bank of China. “China Monetary Policy Report, Quarter Two, 2005.” 8 August 2005. <www.pcb.gov.cn>
17. Price, Lynn, et al. “Energy use and Carbon Dioxide Emissions from Steel production in China.” Energy 27 (2002): 429-446.
18. Reighter, Daniel. “First 70 Days – Has Obama Gotten it Right?” World Affairs Annual Conference. San Francisco, CA. 3 April 2009.
19. Rosen, Daniel. “Unbalanced Economic Growth in China.” World Affairs Annual Conference. San Francisco, CA. 3 April 2009.
20. Woertzel, Jonathan. “China’s Green Revolution: Prioritizing technologies to achieve energy and environmental sustainability.” McKinsey Global Institute. February 2009.
21. Wu Jingjing. “Concentration on China steel Industry.” Global Steel Consolidation. OECD Roundtable. Istanbul, Turkey. 18 May 2007.
22. Wu Jingjing. “The Recent Development on Chinese Steel Industry.” Global Steel Consolidation. OECD Roundtable. Istanbul, Turkey. 18 May 2007.

Midterm Results & Paper Details

Hi All,
The average for the second midterm was an 85.  That is higher than the average for the first midterm by 5 points.  However, I'm sure the results are skewed because of the bonus question.

I will pass back your exams tomorrow.  Furthermore, now that we are into the second semester, it is time to start thinking about our final projects.  I have deliberately avoided the topic thus far this semester, but during this second quarter we will begin a basic literature review in anticipation for your papers to be written in the second semester.

This project is going to be economics-based, but it will also require a bit of political analysis.  The basic unit of analysis for this project will be a single nation-state with a sizable or relevant economy.  All G20 countries will be covered, and I have also decided to allow you to pick Greece, Egypt, Hungry, Ukraine, and Nigeria as well.  During the remainder of this semester you will do a basic literature review for that countries that will give you a basic understanding of its economic system, key trading partners and industries, and other relevant issues.  You will conclude your report this semester with a proposal for further study of a specific issue or industry within that country.  That is what your final paper will be based on.  My next post will give you an example of a paper I wrote back in 2009 on China's steel industry that could be a useful guide for you.  I don't expect you to do the work of a graduate student, but given the amount of time and thought you will put into this effort, it will be something you should be very proud of.

Below is a list of the countries you can choose.  I'm sure that China and the United States will be popular choices, but you will bid on these countries.  Each of you will be given 100 points, and you can use those 100 points to bid on any countries you want.  However, even if you bid on a country and don't get it, you will still loose the points you bid on that specific country.  If you go down to 0 points, I will assign you countries based on what's left.  For example, lets say you want to focus your research on China, and you bid 80 points for China.  That means you will be left with only 20 points for the other rounds of bidding.  If two or more people have bid the same amount, the winner will be determined by flipping a coin.  The goal of this, of course, is to get you to learn something new about a country or industry you presently know nothing about.  Furthermore, if you are Chinese and you win the China bid, I will grade you harder than if you had chosen Mexico, Greece, or another country.

G20 Countries

1. Argentina
2. Australia
3. Brazil
4. Canada
5. China
6. France
7. Germany
8. India
9. Indonesia
10. Italy
11. Japan
12. Mexico
13. Russia
14. Saudi Arabia
15. South Africa
16. Republic of Korea
17. Turkey
18. United Kingdom
19. United States

non-G20 countries

20. Greece
21. Egypt
22. Hungry
23. Ukraine
24. Nigeria

Midterm Review

Hi All,
The second midterm was not an easy midterm.  I will have full answers up on here later on this weekend, and I will also work to get it graded tomorrow or Sunday as well.  I also want to thank all of those who came last night for our little study session.  Hopefully that was helpful.

Also, I fully appreciate how all of you are concerned about your grades this semester.  I, however, am concerned not only about this semester, but also a year from now.  Keep your eye on the prize, and I'm sure that everything will work itself out.

Midterm Review

Hi All,
It has been too long since I posted on here.  But anyway, as we have a midterm on Friday, Thursday night at 7pm I will be available to observe take an active role in a study session at Round Table Pizza on Henderson Street.  I will be willing to stay an hour or two.

As this is a study session, attendance is purely optional.  It would be good for you to bring your corrected homework, the book, and some scratch paper.  Most of the questions on the midterm are quantitative-based.  Furthermore, there is a bonus question worth five points.

You need to understand game theory and the prisoners dilemma, comparative advantage, specialization, and international trade, and also how scarce resources are organized in different countries (based on their governments).

See you tomorrow in class and also tomorrow night!  I'm teaching Chinese tonight in McKinleyville.

HW Due Date

Just so everybody knows, the HW will be due next Monday.  Also, next week is the second midterm as well.  Girls soccer is next Wednesday (10/19) and Saturday (10/22), so we should have it on either on Thursday or Friday.  Thursday would be best for me with the end of the grading period.

Prisoners Dilemma Game Results

For James, Annie, Simon, and Brittany, their raw scores have been multiplied by 1.34 (4/3) as they only played three matches, not four like everybody else.

1.  Annie - 251 (187 raw)
2.  Moose - 242
3.  James - 230 (172 raw)
4.  Berlin - 216
5.  Kalei - 204
6.  Amelia - 192
6.  Jisoo - 192
8.  Lance - 186
9.  Brittany - 174 (130 raw)
10. Jonny - 173
11.  Hannah - 163
12. Simon - 151 (113 raw)
13. Kerwin - 139
14. Jeff - 136
15. Elvis - 130
16. Jessica - 126
17. Ivan - 117
18. Ivy - 112
19. Bobby - 73
Kevin - not ranked
Mark - not ranked

The average for group 1 was 156, for group 2 was 172, for group 3 was 172, and for group 4 was 161.

For the finals, lets have group A be Annie (1), Lance (8), Berlin (4), and Kalei (5).  Group B can be Moose (2), James (3), Amelia (6), and Jisoo (6).  Group C will be Brittany (9), Jonny (10), Hannah (11), Simon (12), Kerwin (13), and Jeff (14).  Group D can be Elvis (15), Jessica (16), Ivan (17), Ivy (18), Bobby (19), and Kevin & Mark (not ranked).  This time we will only play ten games per match.

Also, tomorrow there is that CSU Admissions presentation in the library during 4th period.  Attendance is mandatory!  See you in there!  Oh, FYI, there will be a UC presentation in November.  Lynn made the announcement today at our faculty meeting.  Time and date to be announced later.

Foreign-Born Entrepreneurs

This is a fairly interesting article on the role of immigration in the US economy.  Just now I was listening to the author, Vivek Wadhwa, on Bloomberg TV.

See: http://www.kauffman.org/entrepreneurship/foreign-born-entrepreneurs.aspx

Quiz Answers

Hi All, I have haven't graded the quiz yet, but these are my answers to those questions.

1.       A small, open country is equally productive in producing coffee and tea.  What will this economy produce if the world price of coffee is twice that of tea?  Half that of tea?  What will the country produce if the world price of coffee happens to equal the world price of tea?


Equally productive means that the cost of one unit of coffee is equal to a gain of one unit of tea.  Or in quantitative terms, if that country can produce 30 units of tea, it can also produce 30 units of coffee.  Now, if the world price of coffee is twice that of tea, lets say $2 per unit for coffee and $1 per unit of tea, then that country would gain more by specializing in coffee than in tea.  If that country produces 30 units of coffee at $2 per unit, that is $60 total.  That country would only be able to produce $30 ($1 x 30) worth of tea.  


If coffee was half the price of tea (lets leave tea at $1 and let coffee be $0.50), then tea is more expensive.  Consequently, the country should produce tea, earning $30 instead of $15.  


If the world price of tea and coffee were equal, then it doesn't matter what the country produces, as it would still earn the same amount by producing both equally, or specializing in one or the other.  


2.       True of false: If a country is more productive in every sector than a neighboring country, then there is no benefit in trading with the neighboring country.  Explain.  


This is false.  Trade between countries depends depends not on absolute advantage but on competitive advantage.  For example, in the last chapter we did a problem comparing the ROK and the USA in producing radios and chemicals.  The ROK was more productive than the USA in that it could produce 30k radios or 30 tons of chemicals.  The USA, however, had a competitive advantage in chemicals because the cost of one unit of chemicals was 2 radios.  The ROK, on the other hand, could produce one unit of chemical at a cost of only one radio.  Therefore, between these two countries, it made sense that the USA and Korea should specialize, with the USA producing 20 tons of chemicals and the ROK producing 30k radios.  

Game Theory Homework - Due Friday October 14th

Review Questions

1. Suppose General Motors is trying to hire a small firm to manufacture the door handles for Buick sedans.  The task requires an investment in expensive capital equipment that cannot be used for any other purpose.  Why might the president of the small firm refuse to undertake this venture without a long-term contract fixing the price of the door handles? 
2. Describe the commitment problem that narrowly self-interested diners and waiters would confront at restaurants located on interstate highways.  Given that in such restaurants tipping does seem to assure reasonably good service, do you think people are always selfish in the narrowest sense? 

Problems

1. Consider the following ‘dating game,’ which has two players, A and B, and two strategies, to buy a movie ticket or a baseball ticket.  The payoffs, given in points, are as shown in the following matrix.  Note that the highest payoffs occurs when both A and B attend the same event. 

B

A		Buy Movie ticket	Buy baseball ticket
	Buy movie ticket	2 for A 3 for B	0 for A 0 for B
	Buy baseball ticket	1 for A 1 for B	3 for A 2 for B

Assume that players A and B buy their tickets separately and simultaneously.  Each must decide what to do knowing the available choices and payoffs but not what the other has actually chosen. Each player believes the other to be rational and self-interested. 

1. Does either player have a dominant strategy? 
2. How many potential equilibriums are there? (Hint: To see whether a given combination of strategies is an equilibrium, ask whether either player could get a higher payoff by changing his or her strategy.) 
3. Is this game a prisoner’s dilemma?  Explain. 
4. Suppose player A gets to buy his or her ticket first.  Player B does not observe A’s choice but knows that A chose first.  Player A knows that player B knows he or she chose first.  What is the equilibrium outcome? 
5. Suppose the situation is similar to part d, except that player B chooses first.  What is the equilibrium outcome? 

2. Babbitt and Kaplan are rational, self-interested criminals imprisoned on separate cells in dark medieval dungeon.  They face the prisoner’s dilemma displayed in the following matrix. 

Babbitt	Kaplan
		Confess	Deny
	Confess	5 years for each	0 years for Babbitt 20 years for Kaplan
	Deny	0 years for Babbitt 20 years for Kaplan	1 year for each

Assume that Babbitt is willing to pay $1000 for each year by which he can reduce his sentence below 20 years.  A corrupt jailer tells Babbitt that before he decided whether to confess or deny the crime, she can tell him Kaplan’s decision.  How much is this information worth to Babbitt? 

3. The owner of a thriving business wants to open a new office in a distant city.  If he can hire someone who will manage the new office honestly, he can afford to pay that person a weekly salary of $2000 ($1000 more than the manager would be able to earn elsewhere) and still earn an economic profit of $800.  The owner’s concern is that he will not be able to monitor the manager’s behavior and that the manager would therefore be in a position to embezzle money from the business.  The owner knows that if the remote office is managed dishonestly, the manager can earn $3100 while causing the owner an economic loss of $600 per week. 
1. If the owners that all managers are narrowly self-interested income maximizes, will he open the new office? 
2. Suppose the owners knows that a managerial candidate is a devoutly religious person who condemns dishonest behavior and would be willing to pay up to $15,000 to avoid the guilt she would feel if she were dishonest.  Will the owner open the remote office? 

4. Imagine yourself sitting in your car in the St. Bernard parking lot that is currently full, waiting for somebody to pull out so that you can park your car.  Somebody pulls out, but at the same moment Mr. Craig Brown, who has just arrived, overtakes you in an obvious attempt to park in the vacated spot before you can.  Suppose Mr. Brown would be willing to pay up to $10 to park in that spot and up to $30 to avoid getting into an argument with you.  (That is, the benefit of parking is $10, and the cost of an argument is $30.)  At the same time Mr. Brown guesses, accurately, that you too would be willing to pay up to $30 to avoid a confrontation and up to $10 to park in the vacant spot. 
1. Model this situation as a two-stage decision tree in which Mr. Brown’s bid to take the space is the opening move and your strategies are (1) to protest and (2) not to protest.  If you protest (initiate an argument), the rules of the game specify that Mr. Brown has to let you take the space.  Show the payoffs at the end of each branch of the tree. 
2. What is the equilibrium outcome? 
3. What would be the advantage of being able to communicate credibly to Mr. Brown that your failure to protest would be a significant psychological cost to you? 
5. Consider the following game, called matching pennies, which you are playing with a friend.  Each of you has a penny hidden in your hand, facing either heads up or tails up (you know which way the one in your hand is facing).  On the count of ‘three’ you simultaneously show your pennies to each other.  If the ace-up side of your coin matches the face-up side of your friend’s coin, you get to keep the two pennies.  If the faces do not match, your friend gets to keep the pennies. 
1. Who are the players in this game?  What are each player’s strategies?  Construct a payoff matrix for the game. 
2. Is there a dominant strategy?  If so, what? 
3. Is there an equilibrium?  If so, what? 
6. Consider the following game.  Harry has four quarters.  He can offer Sally from one to four of them.  If she accepts his offer, she keeps the quarters Harry offered her and Harry keeps the others.  If Sally declines Harry’s offer, they both get nothing ($0).  They play the game only once, and each cares only about the amount of money he or she ends up with. 
1. Who are the players?  What are each player’s strategies?  Construct a decision tree for this ultimatum bargaining game. 
2. Given their goal, what is the optimal choice for each player? 

7. Jill and Jack both have two pails that can be used to carry water down from a hill.  Each makes only one trip down the hill, and each pail of water can be sold for $5.  Carrying the pails of water down requires considerable effort.  Both Jill and Jack would be willing to pay $2 each to avoid carrying one bucket down the hill and an additional $3 to avoid carrying a second bucket down the hill. 
1. Given market prices, how many pails of water will each child fetch from the top of the hill? 
2. Jill and Jack’s parents are worried that the two children don’t cooperate enough with one another.  Suppose they make Jill and Jack share their revenue from selling the water equally.  Given that both are self-interested, construct the payoff matrix for the decisions Jill and Jack face regarding the number of pails of water each should carry.  What is the equilibrium outcome?