Human Capital Losses

Published on Author kuveke

Where there is money there are attempts to dodge taxes. This has been true everywhere in the world. Tax shelters are a continual concern in the US and is not uncommon to read about individuals who have successfully or not sheltered millions from the IRS. At the same time companies do this as well, by moving their headquarters to locations that are more tax friendly. Countries then struggle to find the balance between drawing wealthy individuals and businesses to areas where tax policy is not a deterrent while trying to draw as much revenue as they can. Success is crucial because on top of the revenues that can be provided from the companies and individuals, companies and money provide jobs and draw other companies and wealthy people which offer positive economic multipliers. This is the reasoning behind offering subsidies to companies to locate a factory or headquarters in your city/town/ect.

China has not been very successful at keeping wealth. As we have learned in this class China for the last two hundred years has been seen as a way to riches, but as we are slowly learning not a place to live. A recent survey conducted by the Hurun Report found that 64% of Chinese millionaires have plans to emigrate, citing a number of reasons including health and education. On top of this one might speculate that a desire to preserve wealth is an emigration motive as leakages are reporting tens of thousands of Chinese placing their wealth in offshore safety havens. While confidence in the Chinese economy rose for the first time in five years in the group surveyed economic conditions alone have not been enough to deflate emigration ambitions, especially in the wake of economic reforms. A worry of China now is to hold on to the human capital that they have. With economic growth slowing a loss of successful entrepreneurs and business leaders will only compound economic troubles.

Further reading

8 Responses to Human Capital Losses

  1. Yes, we cannot expect to see the kind of growth in China in the future that we have seen in the past few decades–this rapid “catch-up” growth, which has not reflected its own true cost to future growth potential, is unsustainable. However, if China plays its cards right, we can expect to see relatively stable–and sustainable–growth over the next few decades. This all hinges on the government’s willingness to further privatize industry, while promoting technological and institutional reform. The government should focus its subsidy on public services, healthcare, education, and clean energy (while continuing to up regulations on coal production); and promote institutional and structural changes to ease the transition from industry to service and shift capital away from housing and urban development.

  2. I agree with Asher’s point that China would certainly benefit from increasing the privatization of industry. This would provide an incentive for successful entrepreneurs and business managers to remain at home in China. Everybody wants autonomy, especially in terms of controlling your own company. However, I will also add that it does not seem surprising that China has been losing human capital. Economic restrictions aside, it faces a number of issues that detract from quality of life there. For example, ever present smog is certainly not a pleasant fact of life, nor are the notoriously unpredictable roads stretching across the country.

    • And what industries aren’t privatized other than things that elsewhere are monopolies (water, sewage, electric power) or otherwise regulated (airlines)? In addition, in many cases the government may be the only (or overwhelmingly dominant) shareholder but exercises little or no control over management. So in American Wheels we see that Shanghai GM is 50% government owned, there’s no intervention in management – they’re a passive (and given the joint venture’s profitability) very happy shareholders.
      Overall I think you’d find that “State Owned Enterprises” are much less important than you (and most others) assume.

  3. I would also say that China could benefit from a full democracy and free market, but it all depends on how much freedom China is willing to give their companies. There is a positive relationship between free markets and positive economic trends for China. The more freedom that China gave companies, the better the economy has done. So I absolutely agree with Asher when he says that China would benefit from further privatization of industry.

    • Yes – but that’s without “democracy” (which will surely vary from the US model, if and when it comes). Wouldn’t some version of a elected representative political system lead to subsidies for agriculture, jingoistic politics, the cementing in place of non-uniform rules and regulations, and greater difficulty in changing policy? Of course the current political economy has its own challenges along other dimensions, so it’s better to expect “democracy” to be different rather than necessarily better or worse.

  4. There are very real limits on transfering wealth across national boundaries, those of China included. Net financial flows must equal net exports (with various accounting provisos), and much of the net assets China owns are controlled by the PBOC and held in short-term government bonds.
    Of course emigrating has potential tax advantages, and someone who obtains legal residency elsewhere need not actually live there. And how many of these individuals have actually spent substantial time outside China? We need to take such opinion surveys with a large dose of salt.

      • Ah, but do you become rich in China due to superior human capital or because of (i) luck, (ii) family contacts, (iii) skill in gaining promotions within the CCP through brown-nosing and being obedient and particular because you (iv) bend the rules?
        As a devil’s advocate, surely China gains by dumping such people on other countries!