When looking at data that plot average growth rate of GDP to log GDP per worker/capital, evidence of convergence can never been found. Unless we restrict the countries to OECD countries, introducing once again sampling bias. There are might be three reasons behind this lack of backing from data.
1. true lack of convergence. This may imply the standard growth model that economists have been so happy with are incomplete at least or wrong.
2. The fundamentals (I mean fundamentals in a narrow sense--institutions mainly, not including education, which I would want to be modeled endogenously) are different. It is very reasonable to expect that rich countries tend to have good fundamentals while poor countries might not.
3. Poor countries tend to have reversals in fundamentals due to political instability brought by poverty. this point is similar to point 2, but there is a subtle difference in that, point 2 takes a static view of poor countries, on average, have bad institutions. While this take a more dynamic view. If I take a Markov Matrix to represent the chance of countries staying on or changing into different state of institutions (effective, mediocre, and bad), the function of going from good to bad (relatively) should be a decreasing function in the wealth of the country. This can be partially confirmed by the shape of the distribution. The band of growth rate is often narrow at the wealthy end, and VERY broad at the poor end. ( there is some outlier at the wealthy end and I will talk about these in "A New Way of calculating GDP and Its Implications for Theories"). If we clean out periods of regression resulting from institutions reversals, we might get good evidence for convergence.
Tuesday, September 14, 2010
on technological progress and growth
Prof. Love said I have comparative advantage in trade, analyzing things with heterogeneity. Ok, let me do this.
In growth theory, so many models (Ramsey, Solow, Cass-Koopman) has used a single commodity model. I think this simplification could be modified. I would divide the economy into two industries--technology-intensive and labor-intensive (euphemism for technology-nonintensive). If Country A is a leading country in technological innovation, while country B is only catching up by borrowing the innovation from Country A. However, there is a time lag because of the patent law. Also, Country B also has to incur some cost in using the technology developed by Country A to adapt it to its own country. With this setting, I wish to show that country A will always have a comparative advantage in the technology-intensive industry, and thus specializing in it, while country B, never specializing in industry B. Thus, even with the possibility of technology leak, the technological progress made by country A will not be shared by country B, because country B does not have the industry with the innovation.
There are two extensions to this model.
Extension 1:
Consider countries specializing in many different industries (exogenously determined). Progress made in basic R&D may benefit one industry exclusively (or a weaker version, disproportionately)--leading to rapid technological innovation in that industry. Thus, countries where that sector is bigger will benefit more, leading to higher growth rate. This might be a case for industrial strategic planning as done by Japan.
This line of thought has implication for interpreting data on growth. When we look for evidence of divergence or convergence based on a couple of decades' data, what we see might be distorted--countries may concentrate in different industries depending on their wealth. For example, what we see as evidence for divergence might merely be result of the industry that rich countries (like banking) focused on had a boom in that time period. A boom in an industry can last for some extended period of time, thus 20 year period data should be interpreted carefully.
Extension 2:
This is complicated and I have not yet thought it out. I might want to add heterogeneity in the quality of final products making it more compatible with new trade theory.
In growth theory, so many models (Ramsey, Solow, Cass-Koopman) has used a single commodity model. I think this simplification could be modified. I would divide the economy into two industries--technology-intensive and labor-intensive (euphemism for technology-nonintensive). If Country A is a leading country in technological innovation, while country B is only catching up by borrowing the innovation from Country A. However, there is a time lag because of the patent law. Also, Country B also has to incur some cost in using the technology developed by Country A to adapt it to its own country. With this setting, I wish to show that country A will always have a comparative advantage in the technology-intensive industry, and thus specializing in it, while country B, never specializing in industry B. Thus, even with the possibility of technology leak, the technological progress made by country A will not be shared by country B, because country B does not have the industry with the innovation.
There are two extensions to this model.
Extension 1:
Consider countries specializing in many different industries (exogenously determined). Progress made in basic R&D may benefit one industry exclusively (or a weaker version, disproportionately)--leading to rapid technological innovation in that industry. Thus, countries where that sector is bigger will benefit more, leading to higher growth rate. This might be a case for industrial strategic planning as done by Japan.
This line of thought has implication for interpreting data on growth. When we look for evidence of divergence or convergence based on a couple of decades' data, what we see might be distorted--countries may concentrate in different industries depending on their wealth. For example, what we see as evidence for divergence might merely be result of the industry that rich countries (like banking) focused on had a boom in that time period. A boom in an industry can last for some extended period of time, thus 20 year period data should be interpreted carefully.
Extension 2:
This is complicated and I have not yet thought it out. I might want to add heterogeneity in the quality of final products making it more compatible with new trade theory.
recent things
This summer is horrible. Actually, not the summer perse but the consequences. After getting back from the summer, I feel so out of shape, and when I went tot the pool, today, I realized that I had to redo the whole torturing process of getting used to swimming. This is not the worst, after all, I can, after some time and with some effort, recover that strength. But the worst is in economics. This week, I have not generated any worthwhile ideas after reading the paper. I hve some random ideas from time to time, but the quality is significantly lower than last term's and when I actually present them, I do not feel convinced and lost interest even in presenting them in the first place. What has gone wrong with me?
I hope this is just a transitory thing, and no hysteresis is present. Hmm, maybe after reading some more thought provoking paper, I would be able to get some new ideas. Oh, yes, Love asked me to build a file on my ideas. Should do that when I have time, but it is kind of ironical for me, since I have little of value of keep track of right now.
I hope this is just a transitory thing, and no hysteresis is present. Hmm, maybe after reading some more thought provoking paper, I would be able to get some new ideas. Oh, yes, Love asked me to build a file on my ideas. Should do that when I have time, but it is kind of ironical for me, since I have little of value of keep track of right now.
Tuesday, June 8, 2010
中肯，理智的评论：走出“六四”悲剧的阴影
来源: 民族之林 于
要学会走出“六四”阴影
《联合早报》2009
● 张汉音 作者曾在新加坡任教，目前是台湾辅仁大学社会学系教授与系主任
二十年前中国大陆的六四事件是一个政治悲剧，是一个需要吸取教训、但应该走出其阴影。
一批满腔热血、希望国家通过政治变革走向美好未来的学生，由于对国情和世界情势缺乏深刻的理解，不懂得中国在现在这个阶段不适宜採用西方式的自由与民主政治制度，也不懂得西方式的自由与民主制度未必就是最理想的制度，结果，在国内政治制度的某些弊病的刺激下，在胡耀邦逝世的悲情冲动下，决定以悼念胡耀邦逝世为动员旗帜，通过大游行，来宣示主张立即引入西式自由的政治诉求。
他们的行动兴奋了西方世界的神经。在西方反华势力的大规模 “声援”下，学运的核心分子受到了鼓舞。他们把最初要求为胡耀邦“平反”，改为高悬“打倒邓小平”的横幅，更在天安门广场耸立起象徵美国制度的自由女神之像；并且把学运拉上了与民主政治相违背的不妥协之路，“不达目的，誓不罢休”。主张中止绝食示威和撤离天安门广场的学运领袖被撤换，整个学运和不了解大局的数十万市民同情者，被操纵在客观上与外国反华势力相呼应的几个头脑简单的极端分子的手中。如是便导生了一次完全超乎执政党预料之外的严重政治危机。
如果激进民主派的愿望得以实现
中国的近代历史和苏联的解体历史告诉我们，激进民主派所主张的在现阶段照抄西方式自由制度的愿望一旦实现，或者纵然只是戈巴乔夫类型的主张在当时和现在的中国获得实施，中国所得到的就不是善良的学生们以及善良的国内支持者们所想像的那种社会自由、政治民主、官员廉洁和国家全面发展，而是国内战争、国家裂解和经济大倒退，如同前苏联那样。
苏联解体之后，从1991年到20世纪末，俄罗斯国内生产总值比1990年下降52%（1941年至1945年的战争期间仅仅下降22%）；卢布贬值，物价飞涨五千多倍；俄罗斯人均预期寿命下降了4岁。此外，在俄罗斯阻止车臣独立的战争中，死亡人数达数万人之多，俄国与格鲁吉亚交战期间又有数千人亡命于枪弹之下。
可以断言，中国如果被极端民主派导入前苏联的覆辙，除了国家的分崩离析与国际地位的一落千丈，中国在经济和人的生命方面所蒙受的灾难一定不会小于俄国。
不仅如此。韦伯（Max Weber）曾经指出，任何大国都不希望自己的邻国强大，担心邻国的强大会挑战和威胁他自己的强者地位。这是百年之前的论点。由于当今地球村的时空压缩，那时的邻国和现在的邻国已经不是一个概念。在当今的时代，美国或西欧的某些国家不喜欢中国复兴强大已经如同他们不喜欢地理邻国强大一样，再加上这些国家向来笃信弱肉强食的强霸逻辑，所以从冷战时代开始，直到二十一世纪的今天，除了在冷战后期需要联华制苏而有所收敛之外，美国一直没有放弃过牵制和抑制中国的发展，没有放弃过以人权和民主的名义去支持达赖喇嘛以及留住美国的中国极端民主派、极端自由派，支持中国国内的异议分子，希望他们在某个时候能够扮演推翻中国执政党和分裂中国国土的角色。
法国虽然与美国有别，但是从萨科奇总统和巴黎市长支持达赖喇嘛的做法，我们也不难看到他们的用心。这些国家的这种黑黑的一面，可以解释为什么在六四之前，美国和西欧会有那麽强大的势力要为天安门广场上的反政府抗争擂鼓呐喊，并且提供资金援助。这些事实也可以帮助我们作出这样的合理推断：即使在中国裂解之后，他们仍然不会就此罢手，他们还会像对付俄国和南斯拉夫那样，进一步挤压中国和操弄中国内部的亲西方势力以及其他破坏势力，以尽可能多地牺牲中国利益的方式来断除中国将来作为大国而崛起的可能性。
邓小平的“壮士断臂”决策
在此次学运期间，时任总理的李鹏曾经与学生代表谈判，劝学生以大局为重撤离天安门广场，结束示威活动，但是没有成功。时任总书记的赵紫阳去广场看望学生，劝他们停止绝食，也没有成功。政府宣布戒严，依然没有成功。
于是中国的执政党便面临一个极其困难的选择：要么答应学运的要求，立即实行美国式的言论自由制度，让邓小平下台，其实也是让共产党下台，任由激进的民主派和自由派把中国引入万丈深渊；要么採用暴力对极端分子实行镇压，但是极端分子混在无辜和不明大局的学生与市民之中，受到后者的保护，採用暴力必然会伤害无辜，决策者会为此而付出沉重的政治代价。
这是一种没有赢、只有输的决择，是一个究竟要顺水推舟、选择大输、抑或是逆势而动、选择小输的抉择。
邓小平是一个具有超凡睿智与洞察力的政治家，也是一个具有卓越务实精神和超强政治意志力的政治家。他不像戈巴乔夫那样天真。他也懂得中国还暂时不能满足民众的一些理想主义的期待，像美国那样开放媒体和其他许多公共场合的言论自由，因为他看得到常人看不到的后果：现在的中国一旦完全开放言论自由，西方反华势力必然会乘机而入，西藏、新疆和内蒙的分裂主义分子必然会乘机而起，中国必然会分崩离析，经济改革必然会半途而废，中国必然会再一次被远远地抛在世界主流的发展历史之外。
事实上，此次学运恰好显示，目前的中国只要稍稍放开一个西方式的政治自由缺口，就会有人把它搞成冲击社会根基的滚滚洪水，导致不用暴力则难以制止的失控局面。作为一个卓越的务实主义者，邓小平比胡耀邦、赵紫阳更加英明、更加果断地在理想和现实之间划出了一道界限：把今天归于现实，把理想留到明天。
于是，邓小平做出了他一生之中最痛苦的抉择：壮士断臂——用沉痛、但是可以承担的个人政治代价和政党政治代价，去换取解除那更加沉痛、而且中华民族已经不能再予承担的代价。
邓小平的决定引起了极端民主派的深仇大恨，也难以得到欣赏西方式民主自由制度的一部分知识分子的谅解。但是他的决策挽救了中国的经济改革、国内和平和大陆的政治版图完整，挽救了民族的复兴之路。
回首“六四”,最重要的是要引以为鉴，把复兴中华的路走得更加理性。
极端民主派要做的不是继续制造为他们自己平反的舆论，更不是想方设法地唱衰大陆发展或者在大陆的执政党与民众之间挑拨是非，制造混乱，而是要反省自己在六四学运中的错误主张以及他们对一百余名无辜死难者应付的原罪之责，做一些有利于人民团结和国家发展的建设性工作。
中国的执政党更需要吸取教训，要在领导经济发展的同时尽快实现政府的廉洁化和公仆化；要认真倾听民众的声音，倾听反对者的声音，将这两种声音的表达和回应纳入合法的制度化轨道；要在中国探索出一条符合中国国情、在民众接受度和功能有效度方面不低于美国的民主政治道路。
要学会走出“六四”阴影
《联合早报》2009
● 张汉音 作者曾在新加坡任教，目前是台湾辅仁大学社会学系教授与系主任
二十年前中国大陆的六四事件是一个政治悲剧，是一个需要吸取教训、但应该走出其阴影。
一批满腔热血、希望国家通过政治变革走向美好未来的学生，由于对国情和世界情势缺乏深刻的理解，不懂得中国在现在这个阶段不适宜採用西方式的自由与民主政治制度，也不懂得西方式的自由与民主制度未必就是最理想的制度，结果，在国内政治制度的某些弊病的刺激下，在胡耀邦逝世的悲情冲动下，决定以悼念胡耀邦逝世为动员旗帜，通过大游行，来宣示主张立即引入西式自由的政治诉求。
他们的行动兴奋了西方世界的神经。在西方反华势力的大规模 “声援”下，学运的核心分子受到了鼓舞。他们把最初要求为胡耀邦“平反”，改为高悬“打倒邓小平”的横幅，更在天安门广场耸立起象徵美国制度的自由女神之像；并且把学运拉上了与民主政治相违背的不妥协之路，“不达目的，誓不罢休”。主张中止绝食示威和撤离天安门广场的学运领袖被撤换，整个学运和不了解大局的数十万市民同情者，被操纵在客观上与外国反华势力相呼应的几个头脑简单的极端分子的手中。如是便导生了一次完全超乎执政党预料之外的严重政治危机。
如果激进民主派的愿望得以实现
中国的近代历史和苏联的解体历史告诉我们，激进民主派所主张的在现阶段照抄西方式自由制度的愿望一旦实现，或者纵然只是戈巴乔夫类型的主张在当时和现在的中国获得实施，中国所得到的就不是善良的学生们以及善良的国内支持者们所想像的那种社会自由、政治民主、官员廉洁和国家全面发展，而是国内战争、国家裂解和经济大倒退，如同前苏联那样。
苏联解体之后，从1991年到20世纪末，俄罗斯国内生产总值比1990年下降52%（1941年至1945年的战争期间仅仅下降22%）；卢布贬值，物价飞涨五千多倍；俄罗斯人均预期寿命下降了4岁。此外，在俄罗斯阻止车臣独立的战争中，死亡人数达数万人之多，俄国与格鲁吉亚交战期间又有数千人亡命于枪弹之下。
可以断言，中国如果被极端民主派导入前苏联的覆辙，除了国家的分崩离析与国际地位的一落千丈，中国在经济和人的生命方面所蒙受的灾难一定不会小于俄国。
不仅如此。韦伯（Max Weber）曾经指出，任何大国都不希望自己的邻国强大，担心邻国的强大会挑战和威胁他自己的强者地位。这是百年之前的论点。由于当今地球村的时空压缩，那时的邻国和现在的邻国已经不是一个概念。在当今的时代，美国或西欧的某些国家不喜欢中国复兴强大已经如同他们不喜欢地理邻国强大一样，再加上这些国家向来笃信弱肉强食的强霸逻辑，所以从冷战时代开始，直到二十一世纪的今天，除了在冷战后期需要联华制苏而有所收敛之外，美国一直没有放弃过牵制和抑制中国的发展，没有放弃过以人权和民主的名义去支持达赖喇嘛以及留住美国的中国极端民主派、极端自由派，支持中国国内的异议分子，希望他们在某个时候能够扮演推翻中国执政党和分裂中国国土的角色。
法国虽然与美国有别，但是从萨科奇总统和巴黎市长支持达赖喇嘛的做法，我们也不难看到他们的用心。这些国家的这种黑黑的一面，可以解释为什么在六四之前，美国和西欧会有那麽强大的势力要为天安门广场上的反政府抗争擂鼓呐喊，并且提供资金援助。这些事实也可以帮助我们作出这样的合理推断：即使在中国裂解之后，他们仍然不会就此罢手，他们还会像对付俄国和南斯拉夫那样，进一步挤压中国和操弄中国内部的亲西方势力以及其他破坏势力，以尽可能多地牺牲中国利益的方式来断除中国将来作为大国而崛起的可能性。
邓小平的“壮士断臂”决策
在此次学运期间，时任总理的李鹏曾经与学生代表谈判，劝学生以大局为重撤离天安门广场，结束示威活动，但是没有成功。时任总书记的赵紫阳去广场看望学生，劝他们停止绝食，也没有成功。政府宣布戒严，依然没有成功。
于是中国的执政党便面临一个极其困难的选择：要么答应学运的要求，立即实行美国式的言论自由制度，让邓小平下台，其实也是让共产党下台，任由激进的民主派和自由派把中国引入万丈深渊；要么採用暴力对极端分子实行镇压，但是极端分子混在无辜和不明大局的学生与市民之中，受到后者的保护，採用暴力必然会伤害无辜，决策者会为此而付出沉重的政治代价。
这是一种没有赢、只有输的决择，是一个究竟要顺水推舟、选择大输、抑或是逆势而动、选择小输的抉择。
邓小平是一个具有超凡睿智与洞察力的政治家，也是一个具有卓越务实精神和超强政治意志力的政治家。他不像戈巴乔夫那样天真。他也懂得中国还暂时不能满足民众的一些理想主义的期待，像美国那样开放媒体和其他许多公共场合的言论自由，因为他看得到常人看不到的后果：现在的中国一旦完全开放言论自由，西方反华势力必然会乘机而入，西藏、新疆和内蒙的分裂主义分子必然会乘机而起，中国必然会分崩离析，经济改革必然会半途而废，中国必然会再一次被远远地抛在世界主流的发展历史之外。
事实上，此次学运恰好显示，目前的中国只要稍稍放开一个西方式的政治自由缺口，就会有人把它搞成冲击社会根基的滚滚洪水，导致不用暴力则难以制止的失控局面。作为一个卓越的务实主义者，邓小平比胡耀邦、赵紫阳更加英明、更加果断地在理想和现实之间划出了一道界限：把今天归于现实，把理想留到明天。
于是，邓小平做出了他一生之中最痛苦的抉择：壮士断臂——用沉痛、但是可以承担的个人政治代价和政党政治代价，去换取解除那更加沉痛、而且中华民族已经不能再予承担的代价。
邓小平的决定引起了极端民主派的深仇大恨，也难以得到欣赏西方式民主自由制度的一部分知识分子的谅解。但是他的决策挽救了中国的经济改革、国内和平和大陆的政治版图完整，挽救了民族的复兴之路。
回首“六四”,最重要的是要引以为鉴，把复兴中华的路走得更加理性。
极端民主派要做的不是继续制造为他们自己平反的舆论，更不是想方设法地唱衰大陆发展或者在大陆的执政党与民众之间挑拨是非，制造混乱，而是要反省自己在六四学运中的错误主张以及他们对一百余名无辜死难者应付的原罪之责，做一些有利于人民团结和国家发展的建设性工作。
中国的执政党更需要吸取教训，要在领导经济发展的同时尽快实现政府的廉洁化和公仆化；要认真倾听民众的声音，倾听反对者的声音，将这两种声音的表达和回应纳入合法的制度化轨道；要在中国探索出一条符合中国国情、在民众接受度和功能有效度方面不低于美国的民主政治道路。
Thursday, June 3, 2010
quotes from a movie
Erica:
The more predictable we are, the more vulnerable we are.
I blame instinct and training.
As a mother I know that if someone tried to hurt my son, there's nothing I wouldn't do to stop them.
The next blood that spills is gonna be theirs.
Anna is fighting dirty. We want to win this war; we can't bring knives to a gunfight.
Sometimes you have to lie to people to protect them.
We have to fight them the same way they're fighting us - one step at a time.
That's what Anna does. She takes our emotions...uses it against us.
Anna:
There is no greater incentive for a human male than a damsel in distress.
If we've learned anything is that emotion is weakness. Love is the greatest flaw of humans and our best tool to break them.
While they play politics, we'll take action.
I welcome opposition. It can only strengthen one's agenda.
There will always be obstacles in your way. It's not if you remove them, but how.
Father Jack
Rattlesnakes are God's creatures, too. Doesn't mean they're good for us.
If we're gonna win this war we can't go off the rails. We can't lose sight who we are.
The more predictable we are, the more vulnerable we are.
I blame instinct and training.
As a mother I know that if someone tried to hurt my son, there's nothing I wouldn't do to stop them.
The next blood that spills is gonna be theirs.
Anna is fighting dirty. We want to win this war; we can't bring knives to a gunfight.
Sometimes you have to lie to people to protect them.
We have to fight them the same way they're fighting us - one step at a time.
That's what Anna does. She takes our emotions...uses it against us.
Anna:
There is no greater incentive for a human male than a damsel in distress.
If we've learned anything is that emotion is weakness. Love is the greatest flaw of humans and our best tool to break them.
While they play politics, we'll take action.
I welcome opposition. It can only strengthen one's agenda.
There will always be obstacles in your way. It's not if you remove them, but how.
Father Jack
Rattlesnakes are God's creatures, too. Doesn't mean they're good for us.
If we're gonna win this war we can't go off the rails. We can't lose sight who we are.
聪明
"身边满是聪明的人－－数学哲学天文外语。但是聪明的人未必是智慧的人。"
--摘自“斯语”
Oh God, Please make me wise enough to know what I want from life.
Oh God, Please make me smart enougth to get what I want from life.
Oh God, Please make me courageous enough to dismiss what others think of me.
--摘自“斯语”
Oh God, Please make me wise enough to know what I want from life.
Oh God, Please make me smart enougth to get what I want from life.
Oh God, Please make me courageous enough to dismiss what others think of me.
Saturday, May 15, 2010
What economic policy should China adopt?
Professor Rogoff from Harvard and author of the book This Time is Different, commented that Chinese real estate is facing a burst, which will lead to a nation-wide recession, which will in turn impede regional and global growth. His prediction is based on his extensive research on financial crisis in that every financial crisis is preceded by a run-up in real estate price that is unsustainable, and ultimately leads to a banking crisis and then to a currency crisis. However there is something dubious in his arguments. Though the run-up in real estate prices is a necessary condition for a financial crisis, it is not a sufficient one. His extensive documentation did confirm the former, but not the latter. Thus the fear of a full-blown financial crisis is overly-exaggerated. Second, even if a burst in real estate takes place and leads to a banking crisis, the following links are less concrete and my observation on the subject leads to the conclusion that the burst might be a blessing in disguise, which I will analyse shortly.
Even though the rising real estate price does not justify over-pessimistic forecasting, it should be noted that the distortion in real estate prices has and will impair the efficiency of Chinese economic development. Then how should the central government respond? My prescription differs from many policy makers and economists in that it accepts "cold-therapy" as the optimal way of deal with the bubble. In other words, it turns away from the method of "constraining the bubble" and let price decrease in a gradual way, which might be theoretically appealing, but impossible in practice. Another difference lies in its holistic treatment of three major monetary areas: inflation, exchange rate and over-heating. Here is how it will work:
1. through fiscal policy, monetary policy and administrative policy of command economics, the government should burst the real estate bubble in one stroke.
2. what many feared--NPL (non-performing loans) will take place for sure. The banks will suffer, but the PBC can purchase all these NPL's from the commercial banks by printing money. Meanwhile, the PBC should increase reserve requirement (RR) dramatically to freeze liquidity to prevent possible inflation resulting from increase in money supply. This act will return a healthy balance sheet to commercial banks, which never had that.
3.Inflation should not be curbed to 2%. It could be higher. The reason we fight inflation is that common people's life will be harder because of inflation, but once the real estate price has decreased, the life is much more bearable even with inflation, and with a low housing price, people do not have the need to save that much for housing in the future, as will lead to an increase in domestic demand.
4. Inflation could be beneficial. Assuming relative PPP holds, RMB will face depreciation pressure, relieving it from appreciation pressure. Hot money inflow will decrease, further relieving the PBC's need to sterilize and maintaining an onerous international reserve.
5. Who will get hurt? Speculators' in the real estate market. Fortunately, they are the robber barrons of the country with disproportionate amount of wealth. (They were first from the export industry from Wenzhou, and now the coal mining barrons from the notorious ShanXi province). Thus a negative wealth shock to them will not significantly reduce aggregate demand. Another benefit is to teach the Chinese investors an lesson on risk, which they have forgotten after thirty years of relative calm and stable development. This lesson will be valuable especially if China wish to liberalize its financial sector in the future.
6. Financial Reform MUST be carried out at the same time! With a bail-out, the moral hazard problem must be contained with regulation. "No second bail-out" must be made credible, whether through criminal laws or other way. State for example should refrain from coercing the banks into policy lending through administrative tools. Policy lending can still be carried out, but not through coercion but through more market-oriented ways--like subsidy to lending, or partial insurance on that specific policy lending. This part, I admit, is hard to implement, both because of political reasons but also economic ones.
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