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China’s Incredible U-Turn: Can It Be Done?

By Shlomo  Maital    

 

 I’ve just returned from a Workshop at the huge Shanghai Zhangjiang Science Park, in Pudong, Shanghai.  This massive park houses some 200,000 workers (2/3 have college degrees), thousands of companies, many startups, several incubators, and generates $30 b. in GDP.  With the help of 21 experts, I ran a Workshop to map the park’s innovation ecosystem. 

   The scale of the place is amazing.  It could house all of Israel’s R&D workers, with room to spare.  It has deep pockets, with the backing of the national government.  The incubator building where the Workshop was held is spanking new, with a lovely atrium, parquet floors and 12 stories of offices. 

    In a remarkable coincidence, the two biggest economies in the world chose their leaders, within two days (America, last Tuesday; China, last Thursday).  China’s next President Xi Jinping, and probable Prime Minister,  Li Kequiang,  will attempt to implement a major U-turn.  After the current leaders Hu Jintao and Wei Jaobao led China through the global crisis, with only a minor slowdown, the next leaders will try to move China up the economic food chain, toward Created in China and Innovated in China, as China’s wages rise making “Cheap China” more and more expensive.  This is a difficult goal.  China’s society is rule-based.  China’s ruling elite holds the place together by a massive public security operation (which costs more than the external defense spending).  How can you get an entire society to be more innovative, when it is taught to follow the rules from an early age?  Yet, it is happening. I met entrepreneurs at ZJ Park, who are no different from Israeli or American startup youths. 

  China’s scale is mind-boggling.  China created 39 m. new college grads in the past decade, and now produce 6 m. every year. 8.9 per cent of the population have college education, (or 117 m. people), up from 3.6% in 2000.  According to the BBC, by the end of the 2020 decade four of every 10 college grads in the world will be Indian or Chinese.  China is also aiming at producing 22 m. vocational school grads, building its vocational education system to supply well-trained factory workers.  By 2020, 29 per cent of the world’s college grads will be Chinese , compared with 11 per cent for the U.S.   This massive quantity of college grads will in itself generate quality – with that many college-educated people, at least some of them will doubtless be highly creative and enterprising.

    America focuses on China’s cheap manufacturing as a threat.  It should focus instead on China’s enormous historically-unprecedented effort to shift from low-cost manufacturing to high-value innovation.  We will watch the two new leaders closely, as they lead China in an incredible unprecedented U-Turn toward creativity.     
 

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Should Obama & America Leap Off the Fiscal Cliff?

By Shlomo  Maital   


 

 

  Today’s Global New York Times has a column by economist Paul Krugman, advising newly-re-elected President Obama to … jump off the fiscal cliff. 

  What IS the fiscal cliff and why should Obama leap off it?

    “The United States fiscal cliff is the effect of a number of laws which, if unchanged by Dec. 31, will result in tax increases, spending cuts, and a corresponding reduction in the budget deficit beginning in 2013.  The Congressional Budget Office, an objective source,  estimated in May   that allowing current law to take effect would reduce the deficit by a net $560 billion in 2013, roughly half the $1.2 trillion 2011 deficit. But real GDP growth in 2013 would be reduced to 0.5% versus 1.1%, with a high probability of recession during the first half of the year (a 1.3% GDP contraction).  The reason for the recession is simple:  The huge falloff in public spending (and demand), with no compensating increase in demand or spending from any other source. ” 

    Krugman thinks Obama was wrong to give in to the Republicans in 2011, when the Budget Control Act was passed, raising America’s debt ceiling but chaining Obama to draconian spending cuts in 2013 if the deficit was not cut.  This time, he advises Obama to call their bluff.  The Republicans’ business supporters will blink first, he claims.  They know that if Obama really does leap off the fiscal cliff, which will happen if no new legislation and no new budget is passed,  business will be the first to suffer (along with the rest of Americans and the whole world – when the world’s biggest economy dives, so will the world’s economy). 

  But if you listen to House Speaker John Boehner, he is more determined than ever to sock it to Obama and not give in. 

   Can the world tolerate this kind of political brinkmanship?  Is it responsible for America to bring its own economy to the very edge of the cliff, together with that of the rest of the world?  Is this behavior acceptable for the nation whose currency is still, and for the foreseeable future, the world’s money?

   Stay tuned.  Whatever happens, it will be messy and very risky and unpleasant.  

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
November 2012
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