Author Archives: Michael Hendrix

Ode to a box

I am writing today in praise of the humble shipping container. Anonymous and hopelessly boring, this simple metal box has transformed international trade and us with it. “Every day, over 15 million containers are moving around at sea or on land, or standing in yards waiting to be delivered. They account for about 90 percent of the world’s traded cargo by value.” The history of these incredible boxes, how they move across the world, and where they go demonstrate the implications of trade and the need for more open trade policies.

Step inside a modern-day shipping container and you’ll find 8’ by 8’ by 20’ of soulless corrugated steel. It is simply a wooden floor, a door on both sides, and a handful of rivets holding it all together. Technically known as the intermodal container, these boxes can be transported anywhere in the world on container ships, tractor trailers, and freight trains through an integrated system of ports, cranes, and warehouses.

A 2008 BBC documentary called The Box tracked the movement of a single intermodal container as it journeyed across the world. Over the course of a year, it was filled with 15,000 bottles of scotch straight from a Scottish distillery, tape measures in China to be sold at Big Lots stores in Los Angeles, auto parts in Singapore bound for Japan, and 95,000 cans of cat food for hungry kittens in Southampton.

A man named Malcolm McLean brought all of this about in 1955 when a simple thought dawned on him: What matters in trade is the cargo, not the transportation. If you want to transform trade, he thought, you had best start by packing goods as efficiently as possible and standardizing their transport across the world. Before what become known as containerization caught on, a quick glance into the hold of a ship would have revealed a vast array of goods in every shape and size, packed and loaded individually. Bulk cargo was a terribly inefficient way of transporting goods that hadn’t changed much since the time of the Roman Empire.

Manufacturers soon realized how a more efficient transport system could drastically cut their costs. Within a few short years, new ports arose, rail lines were refigured, and trucks lengthened to accommodate these intermodal containers. By 2000, the price of bulk sea freight had plummeted by 65-70 percent since its 1950 peak. For less than the cost of a first-class ticket, a 35-ton shipping container can traverse the 11,000 mile distance from a coffee factory in Malaysia to a supermarket warehouse in Ohio.

Yet it’s never smooth sailing for shipping containers. Ship a container from Mumbai to Los Angeles and you’ll have to fight your way through some 25 different middle-men, from cargo brokers to financiers. Each set of goods in a container comes with about 30 to 40 different papers to sign, which multiply exponentially with each container and customer. 5 agents then spend 3 hours on average inspecting the container, which is a lot of time for a port receiving 330,000 containers a month. Once the container actually moves, different modes of shipping – by sea or land, rail or road – have their own body of regulations, which then differ at each at level of government – local, state, national, and international.

The sheer volume and opacity of container shipments is an opportunity for port administrators and inspectors to seek bribes or kickbacks, and also provides opportunities for illicit or black market trading, which has indeed skyrocketed over past few decades. A whole new network of smugglers has emerged, specializing in the movement of goods across borders rather than producing and selling specific goods. This network poses a major threat to democracy and human rights as documented in Illicit, a book by former Foreign Policy editor Moises Naim.

Yet the shipping container has delivered plenty of good news for human development. In Southeast Asia, Vietnam cut the percentage of its population living on less than a dollar per day from fifteen percent in 1993 to two percent in 2002 thanks to the shipping container. Vietnam is now a global leader in exporting everything from rice to pepper, while having less poverty than either China or The Philippines.

The effect is further pronounced in Nigeria. The industrial zone in northern Nigeria’s capital, Kano, feels like a wasteland in the day and a gangster’s paradise at night. Kano suffers no shortage of people or potential, not to mention rail lines running past the heart of its prosperous past, the Old City, straight to the sea. Yet it’s choked by red tape and crony leaders who never saw the potential shipping had for the country. Contrast that with Onitsha, where the main bazaar buzzes with traders hawking the latest flat-screen televisions brought in on ship from across the world. While some in Onitsha have built fortunes off the dynamic port, the common man has seen no end of benefit either. Compared to elsewhere in Nigeria, living in Onitsha means 50 percent higher income, a two-thirds increase in literacy rates, and an independent banking system extending credit to entrepreneurs.

And then there’s Santos, the largest port in Latin America both by size and cargo tonnage. Sugar and soya beans emanate from this port as well as the coffee exports that lend the docks an unmistakable aroma, while receiving imports of the fertilizer and natural gas needed to fuel Brazil’s booming economy. The shipping container has provided a tremendous economic boost to Brazil, once the object of constant ridicule due to its consistent failure to fulfill its economic potential.

Shipping containers are seen at the Port Newark Container Terminal near New York City July 2, 2009. (Photo: REUTERS/Mike Segar)

Inventions like the telegraph first bridged the communication divide, but it wasn’t until the advent of the shipping container that the cost of transportation plunged to a level that allowed the process of globalization to finally return to being the political and economic force it once was in the centuries between Christopher Columbus and the Great Depression.

The history, courses, and destinations of the humble shipping container have truly changed the world, casting a bright light on the real benefits and the real dangers of increased global trade, leaving plenty of suspense still to be found in the otherwise unglamorous world of shipping containers.

Capitalism with entrepreneurial characteristics

(Photo: Reuters/Joe Tan/Files)

China is often held up as a model of state-directed, market-driven growth, symbolized in the slogan “Capitalism with Chinese Characteristics.” Yet, in a recent cover story by The Economist, the authors found that perhaps a more accurate model may be symbolized by a small warehouse in Zhejiang, a coastal province situated on the shores of the Taiwan Straits.

Inside the cold, dimly lit factory, workers assembled components for electrical tools that are sent to manufacturers across a “horizontal network of trade and capital.” Outside the factory sit the fruit of their labor: Jaguars, BMWs, and Porsches. China’s private sector accounts for some 70 percent of its GDP, 93 percent of all of its companies, and 92 percent of its workers. Yet, something in the warehouse wasn’t quite right.

For one thing, the factory’s owner wouldn’t let The Economist use his name, for fear of the consequences. Why? It’s because for all of this entrepreneur’s success he still operates squarely in what’s known as the “informal sector,” or the part of the economy that sits outside of formal regulations and taxation. No one quite knows the percentage of businesses in China that operate in this shadow economy, but as The Economist sees it, these entities are the true engine of China’s growth and point to the profound need for reform in China if broad-based development is to continue.

China’s booming economy, growing influence, and rapidly expanding military undoubtedly makes the country a formidable force in the world today. Significantly, this success seems to have come outside the Western narrative of rights and governance. As such, many see in China’s rise a new model for development in the 21st century, and one that’s particularly attractive to other developing countries.

What is China doing right? By almost any standard, China has developed at a terrific rate. On average, its GDP has grown by 11 percent each year for the past 30 years. Measured at purchasing power parity, this translates to an almost tenfold increase in GDP per head over the same period. China’s hard currency reserves are the largest in the world, mainly in dollars fed by an immense trade imbalance with America. Poverty fell by over 50 percent since 1981, and infant mortality by 40 percent since 1990. Telephone access in this same period rose more than 94-fold. Yet, it is not the rate of development alone that is impressive. Japan grew at similar rates up until the 1970s. So did South Korea until the Asian financial crisis of 1997. Neither country though came from the desperate level of poverty found in China when reforms began in 1978 or boasted the incredible size of China’s population and territory.

With all of this success, is there a Chinese model to follow? Certainly, China’s approach has been highly pragmatic and linked to its own unique interests and capabilities. Many have tried to define this approach in general, applicable terms, the most famous attempt being the so-called “Beijing Consensus.” As described by Joshua Ramos, the Beijing Consensus is “practical and ideological at the same time”, centering on a “ruthless willingness to innovate,” a strong sense of national defense and strategic interests, and a steady accumulation of the ability to project power asymmetrically. If there’s a model, it can be found in mixed ownership, state champions, heavy state intervention, and decentralization of innovation to local townships and villages.

What is more striking is not what constitutes the Chinese economy, but what doesn’t. Market economies normally display a large degree of private ownership, secure property rights, liberal financial markets, and relatively open political institutions. These attributes are not fully part of China’s economy as of yet.

There is a critical piece of history that I have passed over, though, and in its telling one finds an often overlooked aspect of China’s development. In 1978, China had just emerged from a devastating famine that killed nearly 45 million people, most immediately a result of a disastrous agricultural policy. The average Chinese was living on less than a dollar a day and could barely get by. In the popular telling of the story, this is when Deng Xiaoping called for the “reform and opening up” of China. The reforms began in the rural areas with townships and village enterprises spearheading a decentralization of control, the development of local markets, public-private ownership of property, and increased access to finance.

That opening up has now developed into what The Economist calls China’s “bamboo economy.” While it is true that many of China’s largest companies are state-owned, “alongside the mighty state engine myriad smaller ones are whirring – and probably more efficiently.” A recent study found that investing in completely private Chinese firms yielded a nearly 10 percent greater return on equity than investing in state-backed entities.

It would seem that running unencumbered by the red tape of bureaucracy would be a good thing. In abstract, entrepreneurs are freed from “direct state management” and the thicket of licenses, titles, and taxes that often stifle economic growth. Factories and firms can emerge quickly to meet a perceived demand, and local politicians steer clear of them because they need the high rates of growth that this entrepreneurism brings.

Yet, in this environment, entrepreneurs are also subject to the whims of bureaucrats and find it hard to access the capital needed to grow their businesses to maturity. There “is ample scope for abuse” by public officials, hence the fear by the factory owner in Zhejiang at being publicly referenced. Corruption is only a step away; officials demand a piece of the action and informal entrepreneurs are ready to supply it if only for the sake of staying in business. In fact, as The Economist’s correspondent went in to the factory, he saw one local official leaving a meeting that isn’t supposed to have happened with a firm that isn’t allowed to exist.

There is a rule of law deficit in China, one that no amount of fiscal surplus can paper over for long. The Economist is right to call attention to the growing challenge of informality in China, as well as the dynamic nature of private sector entrepreneurialism that lies at the heart of China’s growth.

Justice in the kingdom of Kandahar

An Afghan man drinks tea as he listens to conversation between U.S. Army soldiers of 2nd Platoon, Charlie Company, 1st Battalion, 17th Infantry Regiment of the 5th Stryker Brigade, and other villagers, Tuesday, May 18, 2010, in Afghanistan's Kandahar province. (Photo: AP)

As you read this post, over 12,000 NATO troops are fighting pitched battles with hardened Taliban fighters for control over Kandahar province. The New York Times is reporting that Western forces have “seized the initiative from the insurgents” and are assuming the commanding heights of the province. The overarching goal is to use every instrument of NATO power – military, economic, and political – to clear away insurgents, hold the population center, and build institutions and infrastructure. But I want to step away from all of that for a moment. Though this part of the conflict is significant, it’s also all-too-distant from everyday life. It’s really in the everyday struggles that this war will be won or lost.

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The Battle for Commodities

(Photo: The Moscow Times)

Against a backdrop of rising commodity prices there is a titanic struggle happening in many parts of the world for control over natural resources and the resulting cash windfall.  Resource-rich countries are seeing this as an issue not just of economic gain but of national security.  Who owns what resource is becoming ever more important to economic growth and state power.  Enter Norilsk Nickel.  It may be one of the largest companies you’ve never heard of and a central actor in the Battle for Commodities.  Revenue has rarely been so high and the stakes so great for Russia as it crawls toward economic recovery.  What’s happened though is that this Battle for Commodities has been reenacted in the boardroom, and lost amidst the struggle is one of the most important issues for Norilsk Nickel’s future, not to mention that of Russia: corporate governance.

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The need for transparency in China

From Reuters: A labourer carries a window at an under-construction residential area in Wuhan, Hubei province November 29, 2008. (Reuters/Stringer/Files)

A series of articles have come out in recent months that might lead one to believe that something just isn’t quite right with the Chinese property market. Like the finding that there are apparently enough vacant properties in China to house 200 million people. That 65 percent of commercial properties in Beijing are empty. That buildings are blown up soon after being completed simply so they can be rebuilt. Perhaps it is the stories of ghost cities. That Chinese developers have taken to hiring young Westerners to pretend to be heads of (non-existent) Western firms that are supposedly commissioning building projects.

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Development: It’s Complicated

Sometimes you come across an article or a post that makes you say, “Huh, now that’s interesting!”  This research from two noted academics made me do exactly that.

In 2007, a developmental economist and a physicist joined forces to try to paint a clearer picture of one of the most complex systems on earth: a nation’s economy.  Albert Einstein once said that “politics is far more complicated than physics.”  So too is economics, it would seem.  Ricardo Hausmann and Cesar Hidalgo created something that they call the “product space” to show how development is bound up in the complex structures of production.  While we intuitively know that complexity matters, it was their research that allowed for it to be measured and mapped.  The result gets to the heart of development.

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What If?

BP Deepwater Horizon oil rig

The BP Deepwater Horizon oil rig ablaze. (Photo: U.S. Coast Guard)

What if the oil well currently leaking in the Gulf of Mexico were owned by Rosneft, the Russian state-owned oil company, and not BP?  This is an apt question to ask upon reading Ian Bremmer’s new book, “The End of the Free Market,” and it points to the challenges introduced by the rise of state-owned enterprises (SOEs) across the world.

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