How Didier Drogba has Singlehandedly Signaled a Change in China's Economy

On June 20th, Didier Drogba signed with the Shanghai Shenhua, raking in over $300,000 a week. Yes, that's a lot of money, especially in China, as it totals an annual salary of $15.6 million, placing him (according to my own calculations) just shy of the Top 10 Highest Paid Footballers in the World. That's pretty impressive for a guy on the tail end of his career at age 34, transferring to a frankly awful league in a developing country. (Samuel Eto'o's move to Anzhi Makhachkala is another example of intriguing financial and economic movements, although that one was funded by one individual's extreme investment.) While it was well known that Drogba would be going the way of David Beckham, stretching out his career by going to a less competitive, "powder puff" league (as I think of it) that's willing to pay him as much for his name as his skills, I was a rather startled to see him ending up in China instead of the MLS.

So why do I care, besides that it happens to involve two of my favorite subjects: football and China? What does a Ivronian international's decision to move to the good ole Chinese Super League (中国足球协会超级联赛) have anything to do with the Chinese economics that I'm supposedly supposed to be discussing in this blog? Drogba's move signals a change in both China's social structure and its economy.

First, signing such a huge name shows a changing opinion of football in China. Despite having at least three tiers in the professional system and being operated by a government body (Chinese Football Association), CSL is so poorly viewed in China that it can't even manage to get a television deal from the government-monopolized television broadcasting company. To put that in perspective a bit, while I was in China, I had no trouble (well, despite the time difference) watching UEFA Champions League (inter-league European competition) or Serie A (Italian league) matches on television, but never once did I see a match or coverage of CSL matches. All the football magazines I bought went on and on about European leagues but never once mentioned the CSL. The rampant corruption and China's method of selecting youth for development (discussed in The Economist's article here) are certainly partially at fault. Shanghai Shenhua's decision to spend such a hefty sum rivaling that spent in the European leagues (which are both disgustingly more wealthy and vastly more popular) signals a huge change in expectations regarding the popularity of football in China.

As any economist (or anyone who's had any discussion with me about decision-making) knows, we don't buy anything unless we expect the payoff to be greater than (or at least equal to) the cost of purchase. (Economically, there may be non-monetary payoffs (prestige, for example, but that can also translate into monetary gain from sponsorships, ect.), so looking strictly at accounting won't necessarily give you the whole picture.) So that means Zhu Jun and his staff expect Drogba to bring in at least $300,000 worth of income (monetary or non-monetary) each and every week. That's some high expectations for a club that's struggling to fill its 33,060-capacity stadium (Old Trafford, Manchester United's ground, in contrast, seats over twice that). So popularity must be looking up! Why, exactly, I couldn't tell you. Chinese players certainly aren't getting any better and expats certainly haven't decided to switch to local football from European leagues. So natives must be taking to it, perhaps due to increased interest in European leagues thanks to expat or Western influence or simply a shift toward a different sort of sport preference. Regardless, Shanghai Shenhua plainly believes the face of Chinese sports is changing.

So there's the social shift. What about the economic shift? The economic shift is somewhat veiled in that it is a transition that has been taking place for quite some time, but it is now taking a new form. China is now willing to spend on football as a luxury good. Despite a huge population that should translate into a huge potential talent pool, China doesn't compete well on the world stage (they didn't even qualify for the World Cup in 2010 and only qualified for the 2008 Olympics because they hosted it), as "Olympic medals or World Cups...are luxury goods. Even for a government, there are choices to be made: the Chinese may have decided that athletics [gymnastics] gives more bang for its buck than football."(1) Investing in sports is risky and China's poor performance in football in comparison with gymnastics  means the payoff is unlikely to be very high (in economic terms, the discount rate is high due to poor expectations).

But something has changed! Didier Drogba is certainly a luxury good, a man whose salary prices him out of most countries' leagues. China isn't new to consuming luxury goods to the extent that it has been accused of "malconsumption," choosing luxury goods over more essential goods that raise the true standard of living. In fact, although China's overall economy has slowed down from its astronomical growth, luxury brands are still selling strong, on pace to top Japan as the world's largest luxury market, consuming a fifth of the world's luxury brands totally a projected $27b in 2015. (2) But this market has been limited to luxury cars, clothing, handbags, fragrances... It's a new thing for China to begin splurging on luxury footballers. China's luxury market is growing by about 18% annually and it seems some of that growth is coming in the form of sports (and not just the extremely popular NBA China). So if you're looking to invest or advertise, you might consider getting involved with the good ole Super League. Don't be surprised if you see Maotai as Shenhua's new sponsor sometime soon!

(1: "China and football: World Cup economics", The Economist, http://www.economist.com/blogs/freeexchange/2010/07/china_and_football)
(2: "Slowdown in China? Not for luxury brands", CNN Money, http://money.cnn.com/2012/04/24/markets/china-luxury-brands/index.htm)

Labor Unions in China: Why you should be expecting them.

You should probably print screen this, because this is probably the only time you'll ever see me propose the organization of labor unions. So here it is: China needs labor unions.

I'm sure you're familiar with (at least, if you're American) the figure of speech "owing your soul to the company store," referring to late 19th-century to mid 20th-century coal mining towns, where "Miners were paid by scrip, in the form of tokens, currency, or credit, which could be used only at the company store. Therefore, even when wages were increased, coal companies simply increased prices at the company store to balance what they lost in pay." (1) So what's my point? No, the Chinese are not mining coal. Okay, well, yes, they are. A lot of it. But that's not what I'm talking about. What I'm talking about is the 21st-century Asian equivalent.

If you're a little clueless about the Chinese economy or population, you should know a few things. Roughly 120 million Chinese citizens are migrant workers (12 million of Shenzhen's 14 million are migrant workers), leaving their families from inland rural China to work in factories on the south-eastern coast, sending back the bulk of their earnings to support their aging families  who are almost always gripped by poverty. Only 10% of these workers have ever achieved education beyond middle school (2). They work in labor-intensive, low-skill jobs, often in factories producing for export.

Wages in China are increasing (3), driving up the cost of production of all those cheap exports that we Americans enjoy, but what's helping to keep the cost of production low at all (well, besides a seemingly endless supply of willing labor)? One factor is certainly the working conditions: cheap, minimalist, "efficient." Take, for example, Apple supplier Foxconn (富士康), who has received thorough scrutiny after more than a dozen employees committed suicide in just a few years. At firms like Foxconn, migrant workers live on site in snug dormitories (which charge rent) where they basically hot bunk. While the facilities usually include social facilities like a coffee shop, bar, dance club, lounge, etc., employees have little time (or money) to enjoy them, as they work long, sometimes 12-hour, days. The long days, which leave employees exhausted, keep workers from venturing out of the dorm life and sending home all their earnings keep them from spending money on leisure of any kind. This leaves many employees feeling isolated and hopeless as they fail to form relationships in or outside the factory and fail to earn enough to support themselves outside the factory as well as their families back home.

Is it the factory's fault that labor is plentiful and if one worker won't work under those conditions, another will? No, certainly not. I'm not trying to demonize firms like Foxconn. Most of them aren't making much profit anyway, squeezed by their clients, and are just trying to keep their costs as low as possible. But what does this mean? Are Chinese factory workers forever cursed to owe their souls to the company store?

For once, labor unions are the answer. Chinese workers need some bargaining power and labor unions would be a way to do it. Some villages have already started organizing marches and movements which have had mixed results.

But here's the problem: independent labor unions are illegal.

Shoot. There goes my theory. There is a single, national trade union federation, representing 193 million workers as of 2008: the All-China Federation of Trade Unions (4). It's a government-affiliated labor union, which, if you ask me, is entirely redundant. A labor union is meant to organize workers to protect them when no one else will. Workers don't need a union if the government goes to bat for them itself, which is one of the reasons unionization has declined in the US over the last few decades (structural change model). Frankly, a government- and party-affiliated labor union seems a bit redundant. It also means things aren't going to get better as they are. The government isn't protecting workers and workers don't have a way to organize to protect themselves.

So how long until Chinese workers experience better working conditions? Not until the government gets on the workers' side. At present, the government's incentives are not in line with the workers', because the government is focused on whole-economy growth. GDP growth doesn't need workers to be happy, just to produce, especially since the primary impetus of growth at present is exports, which sell primarily because they are cheap. They're cheap in part because labor is cheap. So until the government and the workers' incentives run in the same direction, we won't see organization or protection of workers.

What does this mean to you, though, if workers do manage to organize? Organization means cost of production go up. Cost of production goes up means price of the good goes up. That means paying a bit more for your beloved iPad (the $500 price tag already affords Apple over $200 in profit (5), although this profit margin has fallen a bit with newer models). How much are you willing to spend to assure better working conditions for Chinese workers?

(1: West Virginia Archives & History, West Virginia's Mine Wars, http://www.wvculture.org/history/minewars.html)
(2: China Labor Bulletin, Migrant Workers in China, http://www.clb.org.hk/en/node/100259)
(3: globalEDGE, Production Costs in China Rise as Wages Increase, http://globaledge.msu.edu/Blog/post/1123/Production-Costs-in-China-Rise-as-Wages-Increase)
(4: The Economist, Membership Required, http://www.economist.com/node/11848496?story_id=11848496)
(5: PC World, Apple's iPad Profit: Breaking it Down, http://www.pcworld.com/article/188196/apples_ipad_profit_breaking_it_down.html)

Want more? Try out this video lecture by Chinese labor activist Han Dongfang in Montreal, February 2007.

Student Loans and the Demise of American Responsibility

So, pardon me for going off my theme for this blog, but I've been wanting to write a post about this for quite some time, so please enable me here for a bit.

I'm sure you've heard at least a hint of all the calls to energize the economy by forgiving student loans. To be straight-forward, I think this is an absolutely awful suggestion, fueled, in part, by my generation's refusal to take responsibility for our choices (further manifestations are, in my opinion, seen in my generation's views on religion, morality, abortion, intellectual property rights, alcohol, marijuana...).

Let me briefly outline the seemingly-brilliant idea: As of 2007 (and rising since), about 60% of America's 8,986,150 college students carry student loans with average debt per student as high as $22,700. On top of this, college students are now carrying record-high credit card debt, with the average balance (2009) of $1,645 and 21% of students carrying a balance between $3,000 and $7,000. The average student also has 4.6 credit cards to his name. With all of this debt on their shoulders, once students finish school and begin to produce and consume, they are crippled by this debt, forcing them to pour a large portion of their earnings into repaying student loans at "high" interest rates, fueling private banks (read: the "1%"). If student loan debt is forgiven, young college graduates will be free to spend this money in the economy or invest (save towards buying a house, for example), stimulating the economy without huge loss to the government or banks.

So, here's my problem with this whole argument, and it's not even my moral compass having a heart attack, screaming that students made a commitment and must fulfill their responsibilities. My problem, primarily, is an economic one. Let me go through the failures of this theory categorically:

1. Not all debt is debt accrued for educational purposes.
   
   Debt in America is sky-rocketing (dangerously, if you ask me) across all demographics, not just students, with the average credit card debt of an indebted household over $16,000 (as of March 2010), so why should students be any different? Holding debt is, apparently, becoming less and less costly (perhaps because society now accepts it as part of life and therefore it has lost much of the social stigma attached to being indebted in the past), so people are more and  more willing to hold debt...at rapidly increasing rates. Borrowing doesn't begin once education begins. Despite what might be expected, taking out student loans is rarely the beginning of someone's indebtedness; only about 15% of college freshmen had a zero balance in 2008, the average balance being near $1,000. Something tells me (based on personal experience) much of that spending hasn't been on books, but instead on midnight IHOP runs, Chipotle burritos, shopping trips to the new and exciting mall, music festivals with friends, Greek organization dues, beer... Pardon me for not believing the government should pardon loans so that I can afford to buy more beer.
   
2. Issuing private loans on education is risky.
   
   There's a reason interest rates are "high" on loans issued for things like education: it's risky. Unlike a loan used to buy a house or car, the education you receive can't be repossessed if you don't pay. There's no guarantee for a bank, nothing to cover their losses. Don't forget that banks are businesses, and businesses are just like people: we do nothing unless we can gain (or at least not lose) from it. A bank can't afford to offer loans that don't pay, or at least break even, so the higher interest rates help protect the bank in two ways: a) increase the payment on the loan, so even if you stop paying before you've paid it off, they can still be okay, b) weed out loan-seekers that value their education less, as only students who value their education at a rate equal to or greater than the interest rate will accept the loan. Because these students show dedication to their education, they are also more likely to show dedication to their commitment to pay back the loan.
   
   Because private lending for education is so risky, the government has stepped in, offering government and government-protected loans to offset the risk to the bank. The government has chosen to take the loss if a student fails to pay back his loan because the government values the education of citizens very highly (potentially higher than students do, and probably higher than it should, based on the falling return to college degrees and rising college-graduate unemployment/underemployment rates).
   
3. Forgiven debt will not necessarily increase market consumption.
   
   Really, the idea of forgiving debt isn't really new at all. It's been tried on the international scale to stimulate developing economies since the mid-90s, including a huge movement called "Jubilee 2000," calling for universal debt forgiveness for HIPCs in 2000. Except it didn't work. Like, at all. The problem with debt forgiveness revolves around two things: the root of the problem (is debt really the disease, or is it just a symptom?) and incentives. Forgiving debt does not change the relative cost of consuming vs savings, but merely increases income, so spending patterns don't change, just the volume. While this may not entirely be an issue with forgiving student debt (since the end goal is simply to increase consumption, the variety of which is irrelevant), it certainly doesn't aid our economy as proponents of the movement would like to think. Why? Because one of the primary instigators of the economic woes is consumers' poor consumption choices. Blame it all you like on predatory lending, but the fact of the matter is consumers chose to spend more than they had. Why would this change simply because they have more money to spend? The cost of borrowing has not increased (quite the contrary, it would decrease! I'll explain this more in my next point). People's preferences for consumption don't change because they have more to spend. A thrifty person that wins the lottery generally doesn't cease to be thrifty.
   
4. Debt forgiveness sets a precedent for future irresponsibility.
   
   This is the biggest deal, in my opinion. This whole thing could be viewed as a bit of game theory, a game between students and the government. Who pays the loan? If this were a single, non-repeating game, the government could forgive the debts, set the books back to zero and start again, no lasting consequences because everyone will operate on the assumption that this will never happen again. Ever. But how does that work? This would set a dangerous precedent: the government forgave our debts before, they could do it again. While no one may consciously say this, recognizing its childishness, the underlying assumption that this could potentially be a repeating game will forever sabotage this plan. This, again, popped up with the Jubilee 2000 attempts. Why would individuals be any different than countries?
   
5. Who pays the lenders?
   
   Frankly, money doesn't grow on tress. I think everyone knows this. So where does the money come from to pay the lenders? Lenders gave money to schools (via students) to pay for students' education, so who pays them back if the students don't? Here are our options: students (the designed payer), government (better known as taxpayers, aka you), schools or no one. Obviously we need not discuss the 'students' option, so let's discuss the government. So, regardless of whether the government pays private loan-issuers or simply forgives all government loans, the results are the same (the magnitude alone changing): a huge budget deficit. Money went out that won't come back. Who funds a budget deficit? Taxpayers. How do we fund a budget deficit? Raising taxes. Last I checked, student-loan holders also paid taxes, so their taxes are going to increase to pay for the loans their not paying. True, the burden will be lighter as more people are paying for their loan. But are you willing to pay even higher taxes to fund other people's education loans? Raising taxes seem to be a huge political problem already, so this may not be a politically viable option. So what about schools? Can't schools repay the loans they were paid with? I wouldn't expect a car lot to repay the loan I took out to buy a new Aston Martin or the guy from whom I bought a house to pay the loan I used to pay his mortgage. Asking a school to pay back the loans will effectively force the cost of tuition even higher, creating a vicious cycle.
   
   So, what if no one pays the lenders? What if they're just wiped off the books? Well, from a private lender's perspective, hundreds of banks would go under, unable to get past the gigantic red marks all through their books. We've already seen banks collapse and require countless bailouts from the government. We can only imagine what would happen if we took ~$1 trillion out of their books from student loans. From the government's perspective, we're back to taxpayers. The 2012 election is already being characterized by the budget deficit and national debt. How will voters feel if we add about $1 trillion dollars to the equation? Likely, not good at all.

Those are my problems with student loan debt forgiveness. I'm sure it's not the best argued or researched and likely not unique, but it's my thoughts off the top of my head. I'm staunchly against this movement for the above reasons and open for discussion. The sources for the data quoted are below:

(American Student Assistance, Student Loan Debt Statistics, http://www.asa.org/policy/resources/stats/default.aspx)

(Creditcards.com, Credit card statistics, industry facts, debt statistics, http://www.creditcards.com/credit-card-news/credit-card-industry-facts-personal-debt-statistics-1276.php#Debt)

(Nerdwallet.com, American Household Credit Card Debt Statistics through 2012, http://www.nerdwallet.com/blog/credit-card-data/average-credit-card-debt-household/)