Barry Naughton On China’s Economic Rise

so today we're looking at reform era china and we have professor barry naughton who's going to be talking with us about his recent contribution to a terrific book that uh hopefully many of you will get and benefit as i have from reading it's called engaging china and it's edited by ann thurston and it's come out from columbia university press uh professor natan will talk more about that in just a moment but we're joined today as our co-host we have professor nanja with us from the usc marshall school of business uh professor jaw is a distinguished scholar she joined usc in 2009 and she is the gra a graduate of beijing university and the university of toronto she's widely published just to highlight some recent articles she's been writing on corporate governance and innovation uh the connection between the two she's looked at ownership patterns and whether or not that works out well for the overall company's success she's looked at political questions political embeddedness and strategic use of political connections uh she's a terrific member of the university of southern california faculty and we're delighted to have her with us today she's also an academic leader she's one of the hosts one of the leaders in a regular seminar that looks at economics and business in china so we're delighted to have professor zhao with us and she'll join in asking questions during the q a session but our lead speaker today is professor barry naughton who's not a stranger to usc microphones although today's microphone is in his own office uh he has spoken for us a couple of times and i would encourage you and we'll put links up in the chat a little bit later to look at that those earlier presentations in 2011 and in 2016. in 2011 he was our lead off speaker at a conference focusing on the state of the chinese economy and he highlighted key issues that have really dominated discussion about china's economy and issues connected to china's economy over the ensuing decade five years later we had him back and he participated in our china card conference which looked at politics and policy in the united states towards china and he took us on a deep dive on some of the issues that china was combating internally but also some of the political spillover here in the united states you know with that he is he publishes widely uh one of his articles uh that he actually cites in this particular chapter but which i read a couple years ago has the very provocative title is china socialist and that was published in 2017 he looked at if china was socialist what characteristics would it have and then compared that with what he saw on the ground professor naughton has written extensively on these questions uh his first book growing out of the plan chinese economic reform 1978 to 1993 in fact won the ohio prize uh a true a true honor before this path-breaking work he's subsequently contributed as an editor to many different volumes and has participated in the creation of three widely used textbooks the first of those is the michigan book china adapting the past confronting the future but he is the sole author of the two most influential textbooks used to teach about china's economy in 2007 the chinese economy transitions in growth and then a revamped version of that the chinese economy adaptation and growth which came out in 2018. professor naughton holds the so-con lot chair of chinese international affairs at ucsd the university of california san diego's school of global policy and strategy we are so happy to have you back with us barry please the floor is yours thank you so much clay gosh what a warm uh introduction i feel i feel very welcome and at home this is the um the story of me looking back trying to be retrospective and think about how we understood china's economy over the past few decades and what we got right as economists in particular and what we got wrong now obviously this is a big topic right because there's a like everything in america today there is a highly politicized version of this question uh the highly politicized version says uh americans got china wrong they thought it was gonna be a prosperous semi-democracy how foolish they were now we have to be realistic um that's you know way oversimplified but i think it really makes sense for people to go back and and try to be explicit about what they thought then what they expected uh and uh and the ways in which things turned out differently because nobody has a crystal ball and when we're you know when we look at the emergence of china over 40 plus years of course this is the biggest most ground shaking event changing the world that we live in in the past few decades so of course we're not going to understand the whole thing so let's go back and see what we got right and what we didn't anticipate and in the process of that maybe there are a few areas as well where we should be critiquing our judgment and and thinking about how we could have done it a little bit better now this you know my effort is not something that i came up with it's part of a a project a conference that was convened as a kind of festive for mike lampton who of course as you know has been contributing fundamental work about chinese politics and u.s china relations since the 1970s uh he's retiring from some of his uh some of his jobs and uh as you might expect if you know mike he didn't want some kind of celebratory mishmash fest strip kind of thing he wanted a group of scholars to come together and look at a set of clearly related focused questions so actually i can't take any credit for the title what did we get right what did we get wrong all those kind of things that was actually the the assignment for everybody who participated in the conference i have to say the others really aren't very good at following instructions i don't think anybody else really tried to answer that question what do we get right what do we get wrong that doesn't mean their chapters aren't great they are really really interesting but what happened is people tended to um pick crucial critical issues and and critical events where perhaps uh an opportunity was missed or where engagement what looked like engagement to the united states maybe didn't look like engagement to china and you know all kinds of different and very very creative uh perspectives um i guess maybe from a lack of imagination or something i just did what i was told to do and and that was to say what did what did we think then what did we get right and what did we get wrong and so as part of that in in carrying through with that i uh sort of ended up with a paper in three parts the first part is what we got right which is pretty simple but very very fundamental the second part will be about what we didn't incorporate into our viewpoint at that time but you'll see that what i'm going to argue is it's not realistic to have expected us to incorporate these things into our viewpoint at that time and in particular nobody in for example the 1980s or even the early 1990s could possibly have envisioned the dramatic restructuring of the global economy of global production network of the american corporation uh and some other things but that's that's probably the biggest thing and and and that the impact of of the set of unanticipated events most of which are bigger than china they involve china but they're also bigger than china the impact of almost all of these was to accelerate china's rise and accelerate the speed with which its impact on the rest of the world had to be was felt and had to be adapted to so the the basic theme of the second movement is uh it's an allegro movement in other words that there was a acceleration of change due to a a whole set of different factors uh and that in some ways made it more difficult for the world to absorb china and integrate china smoothly into the world economy and then the third part is a is well what did we get wrong and of course we could say there are a number of things we got wrong but the basic idea is going to be that economists in particular because of our focus on the process of economic reform i think we're late to grasp the fact that after jurongji the the objectives of chinese policymakers really shifted in fundamental ways and we can start to trace this shift as early as 2005 certainly 2006 before the global financial crisis but then intensified by the global financial crisis and that are the delay in sort of recognizing the way that china's had changed china had changed and the reasons for that change have made it a little bit more difficult and contributed to the very difficult opposition between china and the united states which seems to be so firmly embedded in our relationship right now so in other words i think it's part of understanding how things went not just went wrong in the sense between china and the us but but why they went so wrong so fast and why it's so hard for us to get out of it and so hard for the chinese to get out of it as well assuming that they want to all right so that's the basic uh structure of this talk let me start with the the first thing uh foreseeing a china miracle i mean you sometimes hear people say that uh oh we never imagined that china could grow so fast for so long and there's a little bit of truth to that in the sense that china did grow a little faster and a little longer than probably most people predicted but the basic idea that china in the 1980s could be a miracle economy that it could grow very very fast for a couple of decades that definitely was what economists predicted and what they were talking about what was structuring their their thinking and i think the clearest example of this is this this great book by dwight perkins by perkins kind of the dean of china economist at harvard uh sort of half a generation older than really anybody else who's uh who's a major analyst of china um and you know back in 1986 he looked at the situation he's you know he put a question mark at the end of the title asia's next economic giant question mark but that's just him being cautious it's quite obvious when you read the book that what he's saying is look japan south korea taiwan they did this and china's going to do it too that's the basic fundamental point of the book what's interesting about this quote is what's the limit that he sees in this it's it's food production right which nobody talks about today right china has enough food no there's no doubt about that but you know as we started this process and this is already 1986 so uh china had already experienced tremendous gains in the rural sector following the adoption of the responsibility system uh but still you know here perkins was seeing the potential constraint on the agricultural side on the food side as being the one thing that might hold china back and so since we know in retrospect that that was in fact resolved fairly smoothly um you know that just shows us that the the prediction of a dramatic sustained rise from china is something that was uh valid i think it's fair to say this was widely accepted by economists at the time true there was a minority group that claimed that gradual reforms couldn't work and that therefore china wasn't doing enough but that within the china economics community that was always a pretty small group and this viewpoint really informed economists views through the 1990s because a really funny thing happened in the 1990s of course tiananmen was this huge shock to the political system to deeply undermine the position of reformers the conservatives reactionaries really were in charge of economic policy for about three years from the middle of 1989 at least until 1991 so many many people became pessimistic about china and economists were a little bit pessimistic immediately after tiananmen but quickly swung to optimism and the reason they swung to optimism was that in the early 1990s china started to do bold things to revivify the economic reform agenda there's actually a you know a document from one of these third plenums right there are many famous third plenums in china's uh political history and one of them was in 1993 and it listed you know 50 things they were going to do to be honest at the time including economist nobody took it that seriously because we had all been living through a dozen plus years where policy was incremental would move forward would go back no blueprints ever made any sense you know lots of policies succeeded but there was never any sense of design grand design to the process so nobody took the third plenum uh manifesto very seriously except that in the next couple of years all of the things that got laid out in this blueprint started to get done right and so economists being focused on that piece of the puzzle really started to look at um really started to think of the chinese policy process as something that was working something that was functional in particular in its ability to sometimes pay short time costs in order to reap long-term benefits i have a quote in the article from um sorry i have a difficulty remembering people's names now but um i'll think of it in a second but he's he he talks about china in the wake of the global financial crisis sorry the asian financial crisis of course that's way back 1997 he says china's in just as deep a hole as anybody else but china is digging out more quickly than the other east asian economies and i think that really was sort of a brilliant observation that captured what was going on in china in the 1990s um and so by the time we got to the turn of the century and george had agreed on the terms of wto membership world trade organization membership uh he had taken the really tough steps to close down a lot of the state enterprise sector um and so these were the really really hard things that were essential to sort of completing the first era of china's economic reform so economists were especially optimistic and especially satisfied they felt in some sense that china had made it now what happened at that time if we put ourselves back at the beginning of the 2000s right so we're looking at at this economy the chinese economy that uh as i said the second ago has apparently made it i mean they you know they passed this hurdle that uh a lot of people said they could never do right to shrink the state enterprise sector laid off 40 million people right in state in factories and collective factories um and manage their way through that really difficult period so what what do we expect then well frankly we expected the pace of change to slow down right i mean the tough stuff had been done yes there was going to be a benefit from these reforms and so growth would benefit from it but on the other hand a lot of people thought that the very high growth period was over and that you know china's growth would slow down and actually remember a conference in uh in beijing in 2001 that the development research council of the state council called because some people had been telling them that china's growth momentum was going to play out and there would be a big slow down and so they decided to have a conference on this topic and um and and to their credit they invited about half and half domestic and international economists something you can't quite imagine happening today uh and there was a consensus around the room no china's not gonna slow down a lot but it will probably slow down a little so that's what everybody thought and it didn't happen instead china accelerated now here's something that we economists didn't anticipate the acceleration of china's growth after about 20 2004. a lot of which has to do certainly with its entry into wto because exports took off at especially rapid increase and so the potential that was always there for sort of export-led growth which hadn't really been the case before there have been some of it but now all of a sudden boom this caused an acceleration this we didn't anticipate now what's going on i think to understand that acceleration we need to bring in four factors it's not just a single factor not just wto membership it's four different things that i call accelerators because they either removed constraints or they made the process of economic growth easier increased productivity increase lowering transaction costs so the first was the impact of the demographic dividend demographic dividend meaning a window of opportunity right where because birth rates are falling and death rates are falling there's a window that opens up where the labor force grows very quickly while the dependency rate declines everybody knew that would happen but people didn't pay as much attention 20 years ago or 30 years ago to the importance of demographic dividend as they do today and what it meant for china was that in the 1990s urban labor markets went through a surprisingly rapid transformation in the 70s of course everybody was terrified about unemployment due to surplus labor and then all of a sudden in the 1990s the growth rate of the urban labor force slowed way down as lower birth rates among the urban population kicked in and it became increasingly obvious first of all that well china could reduce employment at state-owned enterprises and not face a revolution you know because people would generally speaking be able to find new jobs even if it takes them a while but even more important that it was okay to start reducing the barriers that kept rural people out of the cities and so by the late 1990s we start to see this and then especially after the turn of the century right the pace of migration steps up because demographic conditions are more favorable right there are fewer new urban workers and so there's room especially as exports boom there's room for rural to urban migration to take off and that means abundant cheap labor powering the export boom that's going on exports are pulling the labor labor is keeping costs low it's a virtuous cycle that reminds us of what happened in japan korea and taiwan earlier but was even more powerful just because it's bigger but also for other related reasons the second accelerator was the information technology revolution right of course we just take it for granted today that i t hardware is at the core of of many of the issues between china and the united states but it's exactly at this time right the end of the 1990s in the beginning of the 2000s that new communications technology falls in place so broadband communication cell phones you know fax machines at first and then broadband software connections all these things happen at about the same time and in 2001 the end of 2001 which is just as china's going into the wto taiwan decides okay companies in taiwan that produce laptop computers and desktop computers you may start to move assembly and other types of relatively sensitive operations over to the mainland we're both going into the world trade organization things are opening up we feel a little bit more secure that barrier is being reduced of course the quotas on textile and garments were also eliminated at the same time so so even beyond just wto there are these other factors that are giving an additional boost to china and this these technological factors weren't just affecting china of course they were affecting the united states as well american corporations were arguably some of the leaders american corporations and taiwan corporations and korea corporations were the leaders of this process american corporations that had been you know arguably out competed by japan japanese corporations in the 80s and early 90s now started to come back and establish their dominance in many information technology hardware spheres and as they establish this new model of disaggregated production networks that meant they could retain certain key links within the united states they could cooperate with korean and taiwan firms to carry out other key technology intensive links but keep them in taiwan or korea and then outsource lots of labor-intensive production to wherever labor costs were lower well where were labor costs lower of course in china in the china mainland and so there was this massive global restructuring it wasn't because of china right but china was a big driver of it because it had such strong capabilities combined was still such low wages in part because of this flood of rural to urban migrants right so that facilitated the global process and of course in turn this became a big driver of china's export growth and ultimately its gdp growth so if we put these factors together we can say do we understand now why china's growth accelerated after 2004 and the answer would be yeah yeah we do between 2004 and 2010 china rode this incredible export driven boom where the export boom was in turn in fact driven by this global restructuring of production networks um and then finally this the speed of this process and of course we could spend you know day we could have a whole conference on this process how it worked uh what the strengths and the shortcomings were but let's just pull back for a second from china to the united states and my point here is simple that for the united states to deal with the impact of china it would have been a lot easier if the process was a little slower instead what we saw was this very very rapid restructuring and it meant that u.s winners were bigger winners faster and and that meant in particular big corporations because big corporations could see that all this was happening they had people in charge of logistics over at apple uh that's you know that's where there were people who could say ah you know we can move the assembly part over to china and save a bunch of money there apple's emergence as the world's most profitable corporation in some years also dates from this from this program right and so look at the change within the u.s economy if we just look at all corporate profits as a share of gdp look at this shift that occurs right around 2002. so in other words just as china is taking off and accelerating so american corporations are experiencing this sort of step up in profitability a step up in profitability that has been maintained all the way through the present which means ultimately that shareholders and pension funds that are invested in shares have done quite well because corporate profits have been strong growing as fast as or faster than gdp now i'm not claiming here that oh china is the driver of all this um but china is a park driver right china is one of the things that's going on here and it enables u.s corporations to carry through this restructuring process that definitely improves economic efficiency definitely improves corporate profitability and definitely widens income gaps in the united states between people who share in the corporate bounty either because they're executives or their shareholders and people who didn't either because they're poor to begin with and have no assets or more importantly because there are workers in factories that uh were import competing sectors in other words that felt the flood of felt the competitive impact of the flood of chinese imports and this is definitely something that we got wrong the economist government the economists have a very standard way to look at what happens to the economy when it had it faces new kinds of trade and the the way that we look at it virtually all economists look at it is there are adjustment costs there is friction but econom economies are pretty flexible pretty adaptable and you know adjustment maybe takes 18 months in most cases something like that uh and then factors of production meaning workers and capital and land move into new use that's higher productivity and lower cost from the imports so everybody is potentially better off and you know what economists discovered when they looked at this crucial period and and hear the the crucial work was this piece by auteur dorn and hanson in the american economic review around 2018 uh shows that that adjustment process just didn't work that because the impact was so great right that the and so fast that what happened is instead of having formerly uh uh manufacturing districts that were impacted by imports instead of having them shift into new kinds of production or services what happened was there were essentially miniature local recessions or depressions where employment dropped even employment in non-manufacturing sectors because there were fewer wages there was less demand they just weren't able to adjust properly so by the time we get to the global financial crisis in 2009 people are already feeling pain right american parts of american society are feeling pain there's more anger uh there's more frustration and there's more of a sense that elites who've told people that this process was manageable and was going to end up working for everybody every month so in other words four accelerators that put together increased china's growth even beyond what we had anticipated back in the 80s gave it an additional almost decade of very high speed growth and also made the economic and political issues between the two countries much tenser and more difficult to resolve so here's the corporate profits that i showed you um and uh and so that's full stop that's one uh that's the second movement so there's also a third movement and that is that i argue that we did get something wrong in my view because economists were so focused on a set of issues about market-oriented economic reform we saw that in the 90s and throughout the premiership of jerome g that the desire to push china towards a more efficient market economy was clearly the predominant objective of the chinese leaders that mattered and of course for economists we were also meeting on a quasi-regular basis with our counterparts with economists in china who absolutely shared those same objectives they thought as we did that as long as china persevered in the economic reform process that it would be uh that that would continue to contribute to uh further economic growth and improvement of living standards for everybody and as a result it took us a long time to see i think that after juwonji stepped down and one jab all became the premier and the objective of policymakers in china began to undergo a fundamental change of course they never swung to become against economic reform market-oriented reform because after all if you can if you can achieve other objectives that you want and also have a more efficient market economy why not but policy makers began to be much more concerned with carrying out other national objectives and in particular national strength and new kind of high-tech drivers but also a set of policies that we might with all do uh uh with all due hesitation call common prosperity of course it's just been reintroduced by xi jinping as a as a key objective but we can already see that in the 2000s whereas chironjia had neglected some of the sort of social welfare functions of government punjab clearly came in and said hey we've neglected this for a while let's let's bring some of these uh measures in and in retrospect let's look at a a graph it's actually a graph that i've been following literally for decades because it shows so clearly that in the 90s that low point there in 1995 just shows that in the early phases of reform even though there were many many successes those successes came at the cost of a reduction in state capacity in terms of the government's ability to get stuff done right and so the turnaround in 1995 is a remarkable thing because it shows the success of economic reforms especially tax reform but also a set of other uh market related reforms that also contributed to this recovery and i think it makes sense to say wow at this low point the low point in the valley here china really faced some sort of existential challenges could it do could it achieve the goals they wanted to achieve it really wasn't clear they had to reform right and and so when we get up to let's say 2006 notice we're kind of uh near 20 of gdp as a budgetary revenue and we've got a balanced budget there for a year and you know i think outside economists tend to look at this as good this means the reform based institutional uh innovations have done their job this vindicates reform and hopefully will allow a new period of renewed economic reform but it didn't happen and it didn't happen largely because for policy makers it was more the case that previously they had been driven to reform by the absolute need to for example welcome foreign investment in high-tech fields in order to develop those sectors that they saw as being part of the future but now after a few years into the century they were starting to look at a situation where they had money they had resources and they had the opportunity to choose among different kinds of political objectives here's a different kind of graph that shows uh that it's not just fiscal revenues it's also other things like land revenues social insurance premiums so that the overall fiscal position became much more comfortable and of course i'm not even talking here about how they resurrect the banking system and and create credit reserves which can are also available to support the objectives of um of policy makers so so what happens i mean wenjabao was he a success or not well actually in one area when java was a huge success right he rebuilds rural services creates a you know rudimentary public health system begins a very modest program of industrial policy rebuilding military strength etc etc all these things not easy to achieve and so an impressive record but on the other hand in terms of economic reform he really sort of doesn't achieve anything and so we should have seen back there that the basket was changing and after the global financial crisis when java actually makes a statement at the national people's congress where he says yeah of course we have a market economy and market forces should play their role you know yeah we've all agreed about that but what's new is now we have to make best use of the socialist systems advantages which enable us to make decisions efficiently organize effectively and concentrate resources to accomplish large undertakings in other words he's saying yeah we got a market economy but now the key thing is to use state power to achieve the things that we really want so here's the last slide the conclusion the focus on reform a market-oriented reform it really helped economists get ahead of the game in the 1990s but in a sense i think keeping that focus on economic reform and not seeing how the other objectives of policymakers were now at least as important and maybe more important meant that economists kind of slipped behind the curve in a way so that some of the changes that uh certainly xi jinping since xi jinping came to power in 2012 have been very surprising very dramatic and very tough for the rest of the world to stomach as we analyze china's behavior as we figure out how to adapt to to china's you know much greater influence and and activism and engagement with the world as we think about say the world trade organization as we think about the imf there's sometimes a tendency to think that oh china's still driven by market-oriented reform considerations i think it's pretty clear that it's not that xi jinping in particular has a new model of maximizing national strength and if if market oriented reforms help him do that fine but if they don't then he's not interested and i think this is a change that economists were a little bit late in seeing even though they got the big picture basically right all right i'll stop there barry thank you so much for this wonderful presentation uh based on your chapter in the engaging china book uh you've told the story of how a relatively poor china becomes an economic superpower and how success uh in one realm uh doesn't mean that the same priorities will continue and so that's very much evident in your presentation again friends we welcome you to contribute to our discussion by submitting your questions via the q a button but right now let's turn to professor nanja from usc to raise a question for professor nan thank you so much clay and and and thank you so much barry is always a it's a it's always a great pleasure to uh uh to listen to your presentation have a and have a conversation i enjoyed your enjoyed your presentation and and also your book chapter um so for those who haven't haven't read the book chapter it was written with such clarity about very complex problems and yet with such modesty and openness for that it invites uh discussion so i do have some questions i want i'd like to to raise it to you to see what you think about these issues um you have provided very clear illustration of um some strong top-down forces that that actually it's that steered china into the reform direction and also maybe changing course i was i was wondering that if you could share your thoughts on some maybe there are some bottom-up approaches or some bottom-up forces for example the reform is like the train is moving in around the rail and you can derail it but then there would be hopefully some resistance of of of switching course into let's say a much less market-oriented uh direction so i was wondering what you think about um that option well actually uh not alternative forces maybe somewhat simultaneous force that is at work yeah yeah i think that that completely makes sense um but what's funny in a way is if we if we go back to the sort of mid mid point of the first decade of the 21st century um [Music] you know economists are all enthusiastic oh look what we've achieved but i think the feeling among the chinese population forgive me for sort of imputing to hundreds of millions of people a feeling it's kind of ridiculous but but i think the feeling was more um oh we need a rest we need a break from reform we're we're much better off but for that reason we can afford to go a little bit more slowly so i don't think that policymakers felt pressured at that at that point and and really in a way to me one of the greatest mysteries is how come people don't go around talking about how great jurong g is well of course partly it's because you know we've got a new gang in town and they don't really want us to talk about general g very much but i think it's also because people people forget you know people associate the junji with the pain and they don't of of unemployment i mean in particular people in cities and they don't show associate him so much with the subsequent economic acceleration even though that could never have happened without all the things he did so so i agree a fuller theory would certainly need to to bring in grassroots and bottom-up forces much more fully yeah and some of those grassroots forces of course is you know are the local party officials and you know these folks who have to meet ends you know when you have that financial revenue gap that you're talking about uh they're the ones that are on the front lines of that uh barry uh thank you for highlighting jurong g he comes through in the chapter as this uh under-appreciated hero of the chinese economic reform and economic growth now over and over you mentioned that one of the remarkable things about the chinese party state and you see it as a great strength was that it was able under jurong g for example to do hard things that in the short term had serious costs that inflicted real pain on tens if not hundreds of millions of people but that there was uh an awareness that there would be a long-term benefit and a willingness to sacrifice in the short term for that long-term benefit now at the conclusion you were just talking about you know uh or in response to none you were saying uh about diminished levels of happiness and things like that that people were ready for a break by 2003 maybe we need to lighten up on economic reform but can you come back to this question about being able to make short-term sacrifices in order to achieve hard long-term gains is the chinese party state still capable of that that's a very good question and a difficult one i mean we know uh i don't know if you recall back in uh back in the early 90s um larry lau and and ying chien uh at stanford talked about a reform without losers uh which they recommended as a as a great way to get reforms going but also kind of implied that the system was fragmented enough that was very hard to impose costs on people even if they were necessary and good for the uh good for the society as a whole so churanji seemed to have this window where first of all you know all the elders had passed on so there was really nobody looking over his shoulder except john zamen who was basically supportive and he had this you know state crisis that he could sort of point to to people and say this is not a joke you know we've got to do this so i i do think that was to a certain extent a temporary set of conditions at the same time it seems like xi jinping has amassed so much power and yet we do see this pattern where a lot of difficult reforms have have failed right not and not because they've been applied and didn't work and caused all these costs but because they cause some disruption and then they're pulled back and i think i feel like i don't understand that well enough uh if that is system characteristic or is it just xi jinping's extreme security uh cautiousness i just don't know yeah barry i think this is a this is a nice moment to actually loop in one of the questions raised by one of our audience mr edward story who asks you to comment on whether the u.s can learn something about industrial policies in china and he made this i thought it's kind of interesting he made a comment that the only place where i can see he sees in the u.s that having that industrial policy is the department of defense other than that is missing i was i was wondering how would you comment on this question yeah i you know i think i i mean i think there's there's something to that um [Music] but i guess i mean i guess let me let me start by sort of laying out what i think my ideal is i mean my ideal would be what we might call a soft-touch industrial policy based on a robust democracy right so that people participate in this and there are lots of checks on it um so do we have stuff we can learn from china sure of course you know it's a it's a huge great country that does lots and lots of things um and does it make sense for us to move a little bit away from the kind of you know super market fundamentalist ideology absolutely but let's not move too far you know i think if we move uh i think china's way too far over on the state-led side if we move a little that's fine but let's not go too far because that's not our relative strength now thank you for that and that's related to an another point that you make in this you know in your presentation where you show that public revenues are greater than 30 of gdp and so this is you know hugely impressive right that state capacity is at this level and even though common prosperity poverty alleviation or various themes uh china has massive inequality and maybe you could say something about this uh does it come down to having a rich and therefore uh capable state was that the only goal well maybe it was the the fundamental goal on which other goals were based um and you know which obviously would resonate in terms of chinese history would resonate in terms of the communist party uh and its objectives and goals so i think probably we underestimated that and and that probably a lot of people in china just saw that as the you know as the the precondition for everything else um today i mean it it's funny probably a lot of people have in the audience and probably clay yourself have been looking at the speech that she's being made uncommon prosperity and of course it's so it's striking that he basically promises nothing uh it's almost like well we're going to talk about common prosperity and we're going to ask the rich people to help but that's because right now i'm really not comfortable putting any more actual resources into it and so i think that's uh that shows that's revealed preference as economists say there's plenty of money there they could uh put money into more social services but they would rather put it into industrial policy that's great um and barry i also have a question about uh um actually a bigger question about what you think about uh the inevitability of this change of course when i read your chapter i i had i thought i saw two sets of arguments one is that this might be some sort of a concerted effort in that we have we now have weak states capacity so therefore we're going to do this reform but once we become stronger we're going to scale back and so for example you raise the example of how china did not really carry out the promises to wto to actually um to to substantively um there you but then you also mentioned this very interesting debate actually within the party of which direction to go and once that somehow got over overwhelmed by the other side so what do you see of this word is it is coincidentally we happen to have this leader whoever says you know the power and ego um i wonder what is your sense of uh is this is it is there a kind of almost deterministic causal reason why we're going to see this change or or there is a bit of a randomness in there i'm a big believer in randomness so i i don't wanna um i don't wanna claim inevitability in this um i think uh if we had been stepping back a little bit you know 20 years ago and saying well wait a minute when they resolve these problems where are they going to go we probably should have plugged in more the idea that once china becomes a strong state again it's going to behave in different ways so i think we should we should have seen that it was inevitable that it would be a factor but the outcome no i don't think it's inevitable at all i think um [Music] uh you know the personalities i remember a reform-oriented economist in china tell me around 2005-2006 uh we're hopeful that who jintao will unite you know with a more of the reform wing and push forward a new wave of reform and he could have but he didn't want to why did he not want to i don't know why he didn't want to but for whatever reason he didn't you know i think that could have happened um maybe if the global financial crisis hadn't occurred that would have made a big difference to uh not that that caused things but that there were trends already in place and then the global financial crisis kind of ended arguments in some ways i think so yeah and even today i mean we've got these two great powers neither seems to be able to figure out a way to take a step back you know i mean there are risks in everything but can nobody take a risk in stepping back i mean i think china has a lot to gain by stepping back from confrontation but they don't seem in the least bit interested at this moment leadership makes obviously a giant difference uh we've been talking now about the current leadership you highlight in your chapter and in your presentation previous leaderships and talk about leadership groups and talk about that uh it's really uh like non i think that this is a wonderful chapter it should be mandatory reading for so many people and one of the things that has come up in the q a where uh for example eric heyer and some others have been talking about american responses to china's rise and in the you know the the united states wanted china to join the wto uh under certain conditions including that china would meet various obligations and eric has asked you know uh should we have asked for more uh what you know was that was that an option these kinds of these kinds of things in your presentation you highlighted this long-term corporate trend uh in a new direction in corporate america uh in the chapter you use financialization as as this term and so you know overall uh you know you you have automation you have all of these different factors you have outsourcing and these kinds of things uh and yet profits go up and you know that's great for shareholders not so great uh for people in certain communities that you know otter and others look at can you say a little bit more about american expectations on the political side and now what uh americans ought to ought to expect from their leaders uh sure that's an easy question huh um first of all hi eric good to hear from you um i don't think the problem was with the wto accession agreement um i think uh that really the us did a remarkable job at sort of pushing china to commit to certain things that were specifically designed to sort of make the chinese system more transparent and and put some clear boundaries around certain policies the problem is more that uh in 2004 567 the u.s kind of lost interest in this and lost interest in the wto didn't push china too much at what were at first modest uh falling away and of course the wto courts are very very legalistic so for instance you know if you subsidize an export that's clearly wrong if you subsidize an entire industry that's okay you know so uh because in general nobody could imagine that somebody would spend hundreds of billions of dollars to subsidize entire industries um so i don't think the problems with wto um uh i you know what should we be doing now i mean i think we should make clear to china that there are ways to stabilize competition but um i don't think um i don't think there's any appetite in the united states in either party for a more generous policy shall we say which because people feel that that hasn't achieved results and so i think we're just looking for a modis vivendi you know i want to go to to nan for another question but uh perhaps today we have this announcement that uh xi jinping and joe biden are to have some sort of virtual summit uh over the next week and we had the announcement of some sort of agreement to cooperate on climate change and so maybe this is leadership stepping at least sideways on confrontation uh i think this is a great thing yeah i strongly support stepping sideways thank you and and non we we have a only a few more minutes but let me go to nan now for uh another question thank you clay uh let me ask a question that actually um is resonates with one of the questions raising in q a but alicia webb's question which is this balance between soe state and enterprises and private owned enterprises and in fact yesterday in the workshop we had a ton gonzo visiting us and we had this discussion of um even prior to see we have already had this quoting quote the state advances in private retreats and looks like it's ongoing so would you would you it's dangerous to predict but would you say that like the private sector the development is going to further contract and to be dominated by the by the state of that sector altogether i don't know if i'd go that far but what worries me a lot is that um this the share of the state sector has has at least stabilized and maybe it's increasing but i don't i don't i haven't i don't think the data is good enough for the last couple years to know for sure but in any case it's stabilized but the party is now specifically telling state-owned enterprises to be you know members of the national team they're not just supposed to be maximizing profits and and acting like you know profit maximizing market-oriented corporations which is what the idea was uh back in the early years of the 2000s they're expected to do a bunch of other things and that means it's it's harder to hold them to performance it means they have weak softer budget constraints and now this is spreading into the private sector uh where uh you know obviously if you were running one of the big internet companies you'd have to you have to think a lot now about what the party wants what the government wants you know you have to be very very careful so um yes we definitely need to watch whether the state share increases but i'm also maybe even more worried about the deteriorating incentive environment both within the state sector and within the private sector and that speaks to a feedback loop uh that you highlight in the chapter about getting messages not just to those running these businesses but state policy makers uh that sort that you know that particular issue and in the chapter in your presentation and in earlier presentations you've talked about uh you know the gigantic investment in these strategic industries uh and again you've been talking about that to our audience for quite some time and you've suggested that the returns on that have been uh disappointing in many respects and this speaks to what you were just talking with not about uh you know where you have true in truly innovative private companies that have become globally competitive in the tech sector and others and yet those now are undergoing some you know some reassessment and the leaders of those companies don't quite know what to do so maybe you could say something about this feedback loop uh that provided the right information to the right people at the right time well of course i mean for economists the easy answer is well markets are a really good feedback loop and so you know restricting the scope of markets really hurts um i think right now 2021 china's doing two things that really limit that the effective feedback one is in terms of industrial policy they're no longer just investing in the areas where they think hey this is a target of opportunity they're also saying oh this is a vulnerable point we have to invest there too even though we have no comparative advantage we know we're going to lose money but we have to do it because of the security challenge from the united states so that's going to really mess up the assessment of what the return to investment is because it's going to be much lower and that means growth is presumably going to be much lower the second is yeah this idea that there are certain things that we don't want to do and that private firms can't do too much so that for the first time since really 1978 government policy is saying no no there are certain types of economic activity that we want less of um which i think is not promising for the chinese economy uh thank you uh nan do you have a question i think we're running short on time right we we are we are getting closer to that witching hour and in the chapter barry you also highlight that one of the problems for a propaganda state is while information flows up so that you can get some information everybody else is getting a different message much of the time or an incomplete one and maybe you could say something about the role of information and how information flows have become more constrained in the current era um it's great if i said in the chapter i don't remember what i said at all but that sounds that sounds right i mean uh you know if we go back to 2005 uh you know china wasn't a perfect place by any means but it it it sure was good enough if you know what i mean i mean from the standpoint of of an outsider it's like why would you criticize this system seems to work pretty good there's a diversity of voices there's a there's a emphasis on competitive markets again it's not perfect but the assumption is that most sectors can be driven by markets so we're getting information both from the both from the economy and from different different voices in the public sphere not even thinking about you know wechat and things like that but just publications that are that are uh widespread um so you know we've seen a steady tightening of that incrementally for for 15 years now at first the steps were pretty small but they sure haven't stopped so um i think it you know there are i mean i i don't want to be a china bear but i think you have to say that there we can see you know five six seven eight things that we predict should reduce the performance of the chinese economy and maybe we're starting to see that in some areas thank you for that and thank you for you know a career of research that has made it possible for you to speak with such clarity on such an important issue highlighting and i should again remind audiences go and look at those uh 2011 talk that 2016 talk uh professor naughton was already talking about the demographic dividend that pays off big in the 1990s and early 2000s but now is posing some great challenges uh he anticipates uh this emphasis on indigenous innovation and then the the current made in china 2025 plan the emphasis on dominating strategic industrial sectors there's really so much there for for everyone uh to consume but i'd like to offer the last the last comment uh to you know you professor naughton but first if none if you have a concluding question please feel free to ask it um i actually was so one of the audience asked a question that we discussed you know i'll be discussing with my colleagues for i would say multiple years so far uh but um um it's very difficult okay we'll have a limited time i'm going to throw it out at you and maybe you don't have time to to complete your answer which is fine but i'm really curious do would you say there will be a decoupling happening between u.s and china or maybe china in a global market economy um so i think i'd give that a firm yes but if we if by that we mean a direction of change yes i think we'll see i think we'll see the pendulum swing but if we interpret that too strongly as really meaning that these two giant economies will return to a situation where they have relatively few uh economic links no i don't think that will happen unless unless something terrible happens uh so i think it's uh it's a process that yes will will happen and it'll be costly to both sides and and then hopefully we'll reassess thank you and indeed thank you in 2016 you used the expression uh we're joined at the hip and not happy about it on either side that we have this interconnectedness and that the complementary aspects of each other's economy were starting to disappear and competition was indeed becoming the rule of the new road uh friends i hope that wherever you are uh that you'll join non and i in thanking barry for a wonderful chapter for a terrific presentation

Channel: USC U.S.-China Institute

Views: 5,641

Keywords: usc, us, china

Id: vtSh3JyjS4M

Length: 70min 27sec (4227 seconds)

Published: Thu Nov 11 2021