Yukon Huang: Debunking Myths About China's Economy

you it's my great pleasure to introduce tonight's guest ukon Wong you kinda is an expert on China's economy and its impact in the East Asian region and the world he was country director at the World Bank from 1997 to 2004 and currently serves as a senior fellow in the Asia program at the Carnegie Endowment for international peace his most recent book is cracking the China conundrum why conventional economic wisdom is wrong Yukon it's great to have you here and I think if you pretty much if your subtitle is why everybody else is thinking is wrong it means you have something to add to this conversation and tell us why it's right so I'd like I'd like to ask you just to sort of hit the high points for a second and I will say that having read the book it's clear to me that you in fact have a really interesting story to tell so if you could give us a little bit of an insight as to what the primary purpose of writing the book was that would be great you know when I was living in in Beijing working for a World Bank for seven seventy years and then I continued live there since I have an apartment came back to Washington semi-retired joined Carnegie and Carnegie wanted me to write about China and I said well I'm not sure I never wrote for the public and I started weeding reading what people talked about whether they were writing about in Washington and the first thing that struck me Bruce is what people in Washington worry about I didn't worry about it all in China and what I worried about in China people wursten didn't worry about and that made me wonder how come why is that location obviously matters but when I got into it and thought about it and I mean comments by training I used to teach economics I've traveled throughout China every single province to China for many weeks I said it myself there's a lot that people write that I sleep just basically wrong okay at first I thought it was a Western problem a problem Washington probably new york or london frankly when i mark got into it further further I realized I had a problem I had gotten it wrong I was working under a framework that was very Beijing centric very world bank centric so that's the title of my book conventional economic wisdom is always wrong and the question is who is conventional it could be the general public it could be commas and fragile people working in China it could be Chinese specialist it could be Western policymakers it can be Chinese policymakers so in my ten chapters I cover topics where each of these audiences the people will have a vision of China are basically wrong and I start off with public perceptions there are two fundamental questions that I started off with pew and Gallup survey Americans every year for 20 years the question is who is the world's leading economic power okay 15 years ago 70 percent of Americans would say we are only 10 percent would say China today 70 percent of Americans say China is okay very few people think America is 30 percent think America is now if you ask the same question to the Chinese who was the world's leading economic power they will overwhelmingly say America is so who's right who's wrong this is ironic things usually try to boast about yourself not by the others and the Chinese are writing America's leading economic power but why do Americans not realize this now if you go back 15 years same time period the question slightly different essentially do you like or dislike China are you unfavorable or favorably disposed to China it's hard to imagine but 15 years ago overwhelmingly American views of China was positive and today is quite negative even five or six seven seven years ago it was quite positive but I'm sure everyone in the audience today anyone who knows trying it fairly well but I actually find it kind of hard to imagine that these were so strongly positive okay and my book is basically say why because much of these views are wrong and why they'd wrong because their economic factors shaping these views which are totally misunderstood so I begin with public perceptions and then I go on to technical issues debt trade for investment corruption political liberalization foreign policies and here's what people think Western views American views a very important point it's always wrong it was wrong the policy recommendations are wrong no wonder the us-china foreign policy dialogue is so messed up you begin with the wrong perceptions you're gonna have the wrong policy recommendations and you know it's a regional thing too I mean I think generally speaking the coast particularly the West Coast understands I think a little more in-depth why China matters so much we just did a major study on inbound investment from China and innovation and one of the things that was interesting in that discussion when we had roundtables in Washington I mentioned to the privately it was very negative people were like you're giving away too much away to the Chinese out here it was the opposite that told us we were being I'm sorry in DC they said we were too positive and it was a much more negative situation on the west coast they said that it was that we were actually too negative that we should be more welcoming of Chinese investment more positive and I said I must be doing something right because both sides were unhappy but the truth of the matter is I think this Coast has a much more healthy relationship with China and what China represents can you you can't go a little more into that why the why the negativity and the perception well just take the point you mentioned you were talking about Chinese investment into the United States let's talk a little bit more about US investment going to China what is conventional wisdom if you're in Washington where I live conventional wisdom says that too much of America's foreign investment is going to China this B's a job loss at least loss of competitiveness it's not good for the American economy so the question is what percent what percent of America's foreign investment goes to China how large is large so to give you a hint Japan Taiwan South Korea next door they invest 20 to 25% of the foreign investment in China that is large okay so how much of America's foreign investment goes to China on average over the last ten years the answer is 1% practically nothing but conventional wisdom thinks it's very large but the reality is it's almost negligible then the question is quite different are so little for any that's been going to China rather than too much same things true power trade us runs a 500 million billion dollar trade deficit with China 300 billion of that bilateral deficit is attributed to China who counts for 60% of Li has a 60% of this deficit because it has a huge surplus so the average American would say if I could just deal with China's massive trade surpluses with us we can solve the trade deficit here in the US and the economy would be much stronger that's conventional wisdom so in my chapter on trade I basically explained why there is no relationship no connection at all between America's trade balances and China's trade balances even though everybody thinks there is now how do I explain that to a to an average audience because economists do a terrible job on this it's so technical it doesn't make any sense you have to learn all sorts of principles that have you go to graduate schools too so I make it very simple go back to the year 2000 America didn't have significant trade deficits back then and then it got really large about two thousand three or four or five really big almost destabilizing look at what was happening in China China wasn't even running any significant surpluses for that period from 2000 2005 America's huge deficit became the largest leave arived in but China hadn't had generating any surpluses at all so how could try to be actually causing America's trade problems when they didn't have any surpluses if you take this iPhone that we all have 650 million dollars produced in China $650 produced in China exports America how much of that iPhone because Apple produces all its products in China how much of that iPhone actually stays in China or is attributed to China the answer is $25 $250 parts components cameras the the computer cells in there come from South Korea Taiwan Japan and then 200 three hours comes from it's pure profit for Apple okay now if you think about the foreign investment question I posed to you earlier Apple produces everything in China that it sells here the iPhones the iPads whatever the watch is okay how much does Apple invest in China you think it'd be huge the answer isn't zero Apple has no foreign investment in China all those plants equipments factories financed by a Taiwanese company that produces this so if we have these kinds of convention wisdoms about trade and foreign investment which is totally wrong and because it's totally wrong we talk about the policies that the US should be having to deal with these ecological it's totally wrong also so and what one area I think is interesting to me is artificial intelligence Party Congress recent party Congress just laid out you know artificial intelligence is one of the areas they want to go in and that includes robotics and automation I think one of the questions I'd ask you know ask you is how does that factor in both the trade deficit to this idea that that you know the job loss in both America and China I mean it's one of the points you make is China's the world's first country to go get get grave before it basically gets rich it's done both simultaneously but wouldn't it wouldn't automation be for the Chinese a necessary way of maintaining an older or graying population for China the labor force in sheer absolute numbers has been shrinking for three or four or five years it has no choice in the future except to become more innovative and to become more automated the numbers of people who are employed in manufacturing in China has been declining four five or six seven years the interesting thing is the numbers of people who were employed in manufacturing in the US has been increasing for five to six years but conventional wisdom would suggest the opposite that we're losing industrial jobs in China actually versus happening and versus happening for a very peculiar common reason China has now gotten to the income level where services are starting to take off so the manufacturing sector is starting to shrink the service sector is growing very rapidly so for the foreseeable future manufacturing is going to decline and what they have in manufacturing is going to have to be heavily automated because they basically don't have the labor force today for it anymore would you go in a bit to explain one of the things you talked about in the book is the unbalanced growth that was essentially pioneered by dung shopping and can you talk a little bit about why that's actually not such a bad thing in your opinion for for China and for the global economy I have to explain the term first sorry all right you know don't shopping is seeing is the person who triggered the economic opening up in China in my book I called him the unbalance reformer it's a very strange term what do I mean by unbalanced no sharp being in there around 1980 basically said we've had decades of communist socialist development fervor evenly developed we spread our industries our people everywhere we spread our poverty everywhere we're very poor but we have equality so he deliberately unbalanced the country in the sense of saying I'm gonna concentrate all my incentives my resources along the coast I'm gonna open up China to the external market I'm gonna promote trade so he shattered practically 70% of the government budget to three or four provinces essentially ignoring the other 25 this is very unbalanced this created a highly competitive specialized the economy geared to the external market so this is geographically imbalanced it also led to what I call economic imbalances investment shares of the economy soared the consumption share of the economy fell trying to extraordinary rapidly now this was very good for China because they're so-called unbalanced growth geographically unbalanced growth economically has led to wage increases of 12% a year compounded for 20 years we the United States are quite happy if our wages go up by two to three percent for a couple years but think about it being compounded for twenty years so it didn't penalize the average Chinese their incomes the welfares of soared it also made China incredibly productive so what I say my book is in the West or other economists they tend to view onion bounces is somehow bad and I basically write it's actually the key to giant success the the one things you point out or talk about is the fact that that the mega cities in China such as Beijing and Shanghai which both have a population each has a population of well over 20 million particularly Shanghai you basically say that that in fact not only are these cities not large enough they need to grow a bit more and what it's an interesting perspective and one that I actually think it would be worth exploring can you give us a little bit of an insight into that well I don't know how many of you have been to China if you have you probably went to Beijing if I went to Guangdong we probably into Songhai so these are our sons own if you're a business person these are cities with populations of 20 million or more and you go back 15 years there are 10 or 12 and then the image is too many people traffic is terrible pollution horrendous government planners view is our mega cities are too big but control the vibration of people into the big cities they want them to move to the smaller cities in China so in my book I said that's conventional wisdom this is the view of the Chinese leadership this is actually the view of many people who travel and visit China that China's big cities are too big and by now you know Lee the theme in my book conventional wisdom is always wrong China's big cities are actually too small if they had more people if these cities were thirty thirty five million and they were located in the right way were developed in the right way there'd be less pollution less traffic problem less congestion so what do I mean China has a very unique policy as a restrict residency policy you cannot move easily and if you go to the big cities and you do it without formal blessing you don't have formal residency rights forty percent of the people in China's major cities along the coast are illegal migrants in a sense that they don't have residency rights that means they can buy homes they can't drive our car this children cannot go to local schools they don't have social services okay so you're heavily discouraged if you go to these big cities but you are encouraged to go to small so Beijing Shanghai if you if you go to Beijing Shanghai very few people realize that the course center of Beijing is Songhai today after all this growth in the size of the cities there are 20% fewer people they've been moved to the suburbs moved out so Beijing when I went there in the late 90s there the third Ring Road a Beltway now the fourth the fifth the sixth the seventh they're all moved out when you move further out and you got to get to your job when you do you drive in ok it costly is pollutions congestion this horrendous thing the core center of Beijing actually has fewer people 20% fewer people today then did have 10 years ago so my basic point in the in the in my book is China's big cities are actually too small they need more people but they need to be able to live in the in the center because globally that's what big cities do like a New York or whatever or London or Tokyo and in fact they keep characteristic of China's big cities is that they're less dense than big cities elsewhere globally and turn in small cities they're actually more dense than small cities elsewhere is the complete opposite of what a normal kind of a over an urban development would give you so I'd like to hit a bit here maybe on the the intersection pain politics policy and and economics it's actually I think one of the great strengths to your book one thing I'm curious about is the role of corruption which is I think if you talk to your average American they would probably tell you that as a very corrupt society we all know that that it China's in the middle of a major Xi Jinping's anti-corruption Drive has been a major feature of China's domestic policy for at least the last three years I'd like you to chat about that because you again take a Korean view on that one too so what is conventional wisdom about corruption we teach everybody that the more corrupt you are as a country the slower you grow this is particularly relevant for developing countries so you look at it gypped or Indonesia and India or the Middle East or whatever you see very corrupt situations in Latin America and the Nu and you see that it seems to be causing the country to grow slower it hits investment if you don't invest you don't grow that's the first conventional wisdom the second conventional wisdom we all have is that the rich you are as a country the less corrupt you're likely to be so Europe the United States rich countries are less corrupt in developing countries that's conventional wisdom so what do I say it's wrong for China I'm shocked okay why is it corruption in China has directly made or allowed trying to grow more rapidly than normal why is it that the richer it gets the more corrupted gets it directly contravenes these two principles nevertheless the the general conventional wisdom as applies to other countries is correct so what is it about China that makes it different from an India or Indonesia or Egypt okay or Argentina or Ukraine and the answer in my book is this is a mixed economy the state controls the ownership of all key resources but the private sector is able to generate higher returns if it could use these resources so when don't show up being faced this problem the problem that the state controlled everything and this is a socialist state and you can't privatize it that would go against the the ideology but he realized that to get better returns he needed to get it into the hands of private entrepreneurs but politically you couldn't privatize these assets so corruption is the me by which these resources the use of these resources are transferred from the state ownership to be used by the private sector and then the question is what about the government officials and the party are they supportive of this and the answer is yes because when they transfer it over for use they share in the benefits and the faster the country grows the more you have to share now that's different from other countries if you're in India these resources are already in the private sector the private sector wants to do something what it needs the permission of a government official is somebody okay and so what is the incentive for the government official the incentive for the government official is gee how do I get make some money out of this well I need a bribe but I hold something back and more a hold of back the more he'll pay me so basically I will get a bribe by stopping something that's corruption impedes growth in China the official is motivated to share in the transfer and to encourage greater production and you're better off this is truly unique to China but this is also a problem because CGP as you said wants to Kirk Russian why is he want occur corruption because corruption carried to such extreme becomes unsustainable morally unacceptable inequality is created so he's clamping down on this but there's a problem if it's been the primary force for driving faster growth and you curb this what do you substitute that with and this goes back to your point there implications for political liberalization the rule of law the nature of institutions in China which have not yet been grappled with so this is in my book highlighted as a major big issue that needs to be dealt with in the coming years well speaking of political liberal liberalisation it does seem to me that this is one of those topics I mean we've associated growth especially you know kind of rapid growth you know in a sophisticated technological society with democracy openness and liberalism in fact of arguments have been made by a number of thinkers that you really can't have true innovation in authoritarian regime because it goes into many unpredictable ways so I'm wondering if you see China's growth in the long term as as being constrained by the fact that this assists the system is not showing in fact if anything it's showing terms or showing signs of becoming more authoritarian so do you see this as a long-term impediment impediment to China's growth or do you think it's going to overcome it just going through an evolutionary process think about this here's a country has been growing at almost 10% a year for three decades what does conventional wisdom say in our textbooks about growth and development it says you need the rule of law you need strong institutions you need inclusive institutions to grow rapidly validate across many country experiences so how come a country with frankly limited development of rule of law relatively weak or or what I call institutions which are not quite right limited accountability in some ways grow at 10% a year for three decades okay so what is it that makes China different from an India Indonesia a Bangladesh Colombia or African or Nigeria two things extraordinarily competitive economy because it competes externally very always open in terms of trade secondly extraordinarily compared internally because the provinces compete against each other you have 25 30 provinces they both operate they invest they do businesses and you have state enterprises and your private firms they all compete the in India the states do not compete with each other now how does that how does the province compete a province competes because it supports economic activity but it competes because the head of the province the party secretary of a province or the governor of the province doesn't come from the province he's a point from Beijing with the mandate that he needs to basically develop improve and do something to get the conditions better he competing with leaders elsewhere and they succeeds he gets promoted so somebody like Xi Jinping has worked through four or five major leadership positions in different parts of China and if he does well gets promoted this creates a competition that you do not see that's very different now your question about whether this can continue is it is a very interesting difficult question there's a lot of what I call issues of social tensions china measures or records the numbers of social incidents a social incident is when more than two or three people get together in protest it could be trivial it could be a family argument if you have a big enough family it could be a argument of a firm whatever it is ten years ago that number would be something like thirty forty thousand protests a year that's a lot but you have a big country okay and it got close to her thousand and they stopped publishing this number okay it's very large social protests and the cost of dealing of social protest in China is expensive so the cost of the internal security maintenance of the internal security grows rapidly it's an economic issue it's an economic issue because that cost is greater than the cost of supporting China's military so here we are on the West we worry about these battleships these planes these other things well if we don't realize is and the money that's pouring into that which is monitored by the the the Washington authority that Defense Department the internal security cost to try and now exceed the army the military cost so this is a big issue so many protests going on now here's the interesting question what does conventional wisdom say about protests when we talk about protests air spring Thailand Indonesia we ask the question is this going to be destabilizing is this going to bring down the regime so you see lots of articles which talk about potentially destabilizing a situation in China and the great irony is this kind of view is is wrong protests in China in historical view has helped strengthen the top leadership protests and other country tends to weaken the top leadership how could that be okay and the answer is because China's a huge country which is recently decentralized so protests tend to be against local officials who are accused of being unfair I'll not behaving properly or corrupt or whatever it is so you're protesting against local officials and in desperation at the very end you actually appeal to the leadership in Beijing to help this actually strengthens they tend to be seen as the savior of the country rather than the the force which might be driving the the consequence so this is what I could call why the regime has been very very strong actually very successful in in keeping the system going protest is actually the substitute for in some ways the rule of law or demonstrations because it gives a signal to the government of what is the problem and then they can deal with it so this is very unusual the question however is can this continue right and it's also I think the question of what kind of a drag it produces for China's economy over time as I said to you the economic cost of this is significant the frictional cost now as the economy becomes more complicated it's because more services oriented less industrial oriented it is an issue in my book I basically talk about what are the likely forces they would drive what I would call political liberalization over the longer term and I spend a lot of time reading about political scientist writing about democracy human rights and and case examples of what might be the path for China and again my book says that's conventional wisdom is totally wrong what would be the right comparators for China so one question yeah you know I think I've danced around a little bit I should just address it directly as this whole issue of social stability which I think you know it's acknowledged to be we ever every country in the world has issues of social stability we have it certainly in United States but we have different mechanisms you know elections and things that release at that tension in China I think social stability is a greater concern to a one-party state so a couple questions one is what's the role of state-owned enterprises in that because an enormous amount of China's economic power was tied up in an SOE state-owned enterprises and yet much of the innovation I think comes from the private sector you don't expect a lot of innovation out of SOE so I'm wondering if you can address that that's something of that conundrum because I do think in the long run if China is going to be an innovative country it's gonna have to focus more on there on the private sector now all right my book basically highlights this is a country which is increasingly dominated by services less by industry increasingly dominated by private companies rather than state companies there will be state companies in this ratite areas areas like the use of the internet banking China is advancing much faster than we would have ever expected when I went to China and if you go to China you probably will say it I need my bank account I need to make sure my credit cards are fine and I suddenly realized people don't use checks okay people don't using use credit cards it's really coming actually quite difficult to travel there because everyone pays all their bills with their phone okay they've skipped a generation we are way behind in some ways okay then this is happening in there in the Alibaba let's compare the Amazons they're doing all sorts of things so in my book I actually highlight this this kind of a question will this drive what I call the need or forces for what I call more systemic political liberalisation and my answer to that yes here is probably will in some form but how long will it take I compare joining with other authoritarian regimes which are economically very successful because that's my comparator and the answer is they're very few authoritarian and economic successful but South Korea and Taiwan are two examples okay now finally kind of interesting that Taiwan and South Korea became politically liberal in the same year at the same income level the same level organization at the same levels of services heist value services why is that in my book I speculated about the information flow and the need to Semin eight the link-up and this is where I think is it pressure on the system and it's going to be increasingly filled over I would say the next ten years so I'll take some questions from the audience here and if you have them I just think hold them up when will and when and how will China address its debt problem how successful will it be and what are the implications for the global economy conventional wisdom says that China has a financial problem a debt problem 99% of the financial papers will say that so I have a chapter 30 pages I have it on there and my point is dad's not a problem in China it's actually a good thing not a bad thing so how did I turn a concerned everyone has into a good thing well first of all let me just point out what is China's debt ratio that is household government corporate debt as a share of GDP the number is 260 percent it's very high because it used to be hard in 50 so it's going up a hard percentage points it's 260 percent of GDP is this good or bad it's exactly the same as America's it's the same as England's if you rank the top 80 countries it's right in the middle it's lower than most developed it's higher than most developing and then the question then is what is China are developing or developed country and the answer is neither really it's something in between it's exactly therefore what I would predict it to be so it's level it's not the issue what is the issue is it increased so rapidly so why did it increase so rapidly because the analysts say every country where it increased this rapidly over a 10-year period every one of them has collapsed why not China and I basically argue there's something very different about China that is not true in any of these other countries but no one realizes it and is the role of land prices now here in San Francisco you're very familiar with land prices and property so your property price is dumb over ten years you start worrying about whether is too high you worry about a bubble right so what happened to proper prices in China over the last ten years they went up 600 percent six time increase okay now when the property prices go up six-fold affects not only houses which are new shopping malls even roads because it's a land value debt surges right and the issue then is is this sustainable is a crash coming and the conventional wisdom would say if some property prices go up 600 percent you surely have a crash and the answer in my book of you don't have one why is it because there was no private property ten or fifteen years ago so the surge is going from practically nothing to something which is what you'd expect for Asia so the question now is if you go to Beijing property prices are high but are they too high so what is the right comparator so I use India let's compare property prices in India New Delhi with Beijing Bombay with Songhai now India per capita incomes are one third China's its growth rate over the last 15 years is about half conventional wisdom would say that India's property prices today would be somewhat lower than China's in fact they're twice as high but no one writes about India having property bubble but everyone writes about China so my book I point out that this is a country where the debt surge is largely because of the surge in property and it's a catch-up because they didn't have private property it's really just bringing it up to what is normal but no one actually realizes that because it's the only country that has this phenomenon every other countries had private property forever so this is a very unusual situation are you worried about social social stability especially that from an income disparity point of view well China's GE coefficient G Cove uses a measure of inequality right so one a coefficient of one means that one person owns everything as GE coefficient zero means that everybody's income is exactly equal so a good number or something like point four when it gets to 0.5 or fifteen five or six he gets very high so tries indicator of inequality when it started off with under doing it was like 0.25 very low so she's the economy very equal its soared to 0.45 close to 0.5 became very unequal very much like Latin America numbers very unequal but it is exactly the same as Americans by the way it's the same Singapore's the same as Malaysia that's not unusual what is unusual in China is the distribution of wealth is very unequal the ownership of assets and the people who have property but even that is a bit strange because the people are billionaires or those who have somehow got into property somewhat that's true in the United States but not so much you know I say so I think it's the Internet it's the e-commerce that's where the real wealth is in China it's the property but the interesting thing in China about property and that kind of wealth unlike America is the ninety ninety maybe ninety five percent of the Chinese own their homes okay and that's because in late 90s the state gave the rights the homes or to everybody when you're in rural urban area you could buy your property from the state for a fairly nominal amount so you have a very interesting situation in China a very large number of what I call average people have a build up equity that Americans don't have how much you were lucky now in the u.s. to have own home they do so there's a wealth build-up that's just pretty broad but there's also a a concentration of wealth build up from those who happen to have a much greater access to property so I have a question here that says can you explain the one belt one Road initiative and its effects on the American economy the one belt one Road is this proposal to essentially take the Silk Road land roads connecting Asia with Europe the maritime roads that go through Southeast Asia Malacca Straits the Middle East the canal to Europe so there's a maritime route there is a land route China's under Xi Jinping has made this I would say there major foreign policy economic venture the biggest one I think Xi Jinping thinks that this will be defining foreign policy initiative for the coming three or four five decades and it will reshape relations think of China people call China the Middle Kingdom okay and what Xi Jinping basically said is for a Middle Kingdom all we've been dealing with is the Pacific Japan Taiwan South Korea US Canada and when they looked that way these days let's just see a lot of problems okay so he says let's look at the direction Central Asia Southeast Asia the Middle East cross Russia to Europe and they said I think I see friendlier faces okay so the one belt one road is a program to support the building of infrastructure power plants connectivity logistics connecting 65 countries potentially costing maybe one or two trillion dollars and China says this is good for everybody because if we can link up it'll improve investment trade it'll be good for everybody and its infrastructure why is it infrastructure is so important because China basically says that's how we made it people actually realize it but it was the building of infrastructure that made China such a great economic or a trading nation and if we can just increase these links so the issue for the u.s. is the falling is this bad or good now the good aspect is global growth stability if it happens is good for anybody 18 billion dollars has been allocated to Pakistan from from China for this program and several corridors China's view is the falling if I can actually stabilize Pakistan basically bring development and deal with this issue rising terrorism and disaffected communities everybody benefits I can't deal with this in terms of a military security approach but if I can channel and create trade channels maybe that will be my concentration to the what I would call the the problems in the Middle East so I personally think that as long as these projects make sense as long as countries know what they want and they're and they're doing it properly the one Bell Run Road is in theory good fairy bite now how can the us benefit directly well the money in the flow is up to anyone who wants to participate in join so American designers transport logistics engineers people were dealing with any of these kinds of trade issues the financing issues those opportunities are open to everyone Chinese media that the Communist Party and have has has been using the Trump administration the 2016 US elections is an example of a failure of West of the West and in particular the u.s. especially the US democracy it's also used to praise and portray China's political system and economic policy visa vie other countries as a more in a more positive light can you comment on the effectiveness of this I think that certainly with the the elections here the US as well as what I would call political maneuverings in Europe whether it's a brexit or the challenges in Germany or other other areas or basically raising questions about stability and the direction of democracies globally I think it's an issue that everyone has to wrestle with and they are obviously saying that the weaknesses the strengths of the Western systems are not being exposed and what we have in China in comparison looks a little bit better for the for the Chinese themselves let's go back a little bit further go back to the global financial crisis for two decades or three decades China was saying our model for economic development growth and financial development was the West but they turned out to be also vulnerable instability now having said that if you pull the Chinese the Irish people you see in their results tremendous admiration for that what we call the u.s. its values is systems as institutions the things that we all take for granted here in many ways that's why you see so many Chinese trying to send your children to school here so if you whether you're here or here in the US or whether you're in Europe the thing that I find striking is how many Chinese are going to overseas for schooling not just for graduate school but for elementary school in high school so you have a president who sent his daughter an undergraduate at Harvard okay that is an very unusual fact so this what I would describe it is they both the love-hate relationship in terms of the views of what America stands for is a big big issue of discussion I think this is an issue that both sides have to think about for the future that leads into my next question which what will happen in the US China relate trade relationship because of the US it says leaving the TPP we actually never joined it but but withdrawing from from the TPP and we have now a Chinese analog to it or some people think of it as a China Chinese analog to it so where do you think the u.s. relationship with China is in the trading trading world is going to go after during and after Trump's administration well as an economist I basically say to myself that we come as have done a terrible job and try to explain the benefits of trade we've always tried to say that free trade or open trade or globalization it's going to be good for everybody and the answer is that one will not be good for everybody there will be winners and losers in theory there are more winners than there are losers but there are definitely losers we do not have a good way of compensating losers in a democracy we can't just say you are losing your job and please move here and get something else it doesn't isn't that easy so if we don't have a good system for dealing with this so if we fail miserably in for that we don't know how to deal with productivity increases which leads to job losses so much of the trade tensions in America is because of productivity increases some estimates of maybe 70% of the job losses have been proactively increases but nevertheless it is true the trade creates jobs here destroys jobs there and they're not the same people so we don't know how to deal with this issue so I think the trade tensions between China the United States are certainly going to get worse in the coming year when President Trump came back from his visit in China most people had as big sigh of relief because they visit when reasonably well in terms of the press forecasts and no tensions but now most people who are close to the ground realized that there's going to be what I call a lot of provocative actions probably coming in terms of the administration certifying China's behaviors not being fair and equitable potentially living of punitive tariffs just declared China's a non market economy a couple days ago why is that significant it it allows more flexibility for US policymakers to slap punitive tariffs on China so a system of retaliation is going to occur so in my book I basically say of course this is really bad for everybody I emphasize of course that America's trade problems trade deficits have nothing to do with China if you think about it America has had a trade deficit every year for 40 straight years and you go back far enough try wasn't even significant but America's had deficit for 40 straight years so how do you explain that America can have a deficit 40 straight years because you in the audience you run a household you would realize of course you can't be totally borrowing or spending more than you earn for 40 straight years somebody would stop lending to you your bank would not let us happen the answer is very simple it's because America's dollar is the global currency and this is something that not technical people do not understand if the dollar is the global currency and want to hold it globally America must run a trade deficit because that's the only way that you can get the US dollar out there globally you run deficit you pay your bills and dollars the world uses these dollars for trade or for whatever purposes so as long as the dollar is the global currency America will always have a deficit has nothing to do with China or Japan or Mexico or Canada nevertheless policymakers and the general public constantly think that is being caused by somebody and then we have this issue about foreign investment we think there's something wrong then we invest too much in China we actually don't invest enough so the solution to this is what about the TPP and clearly America should have been in the TPP should have stayed with the tipi it's good for America but here's the great irony it was being sold as something to sort of like contain China things China wasn't part of the TPP and think about what the purpose of the TPP is is to set high-level standards and trade environmental labor practices if you really want to influence China you want trying to be part of the TPP you want them to be bound by these rules you want to change their behavior you want to umpty up the ante so my book basically says now I want your merica be in the DVP leave the DVP but America should ask trying to be in the TVP because America's goal is to set the standards for the world okay now China's leading another a trade discussion called the our step which does not have the u.s. in it my message for China is she should ask China you should ask the US to be part of this I think I did didn't I and America's not quite ready for this right now so trade issue is kind of funny you only succeed if you can get everybody to be part of it yet we constantly talk about excluding people well making it by louder doesn't make any sense and I think it's also a lot of legitimate concerns about American companies not being received in a impartial and open fashion in China there are many areas where American comes cannot invest and certainly my book basically says China needs to realize that by opening up the sector's to more foreign companies both sides will benefit will generate jobs for Americans or Jerry jobs or Chinese what's the incentive for them to do that China has actually realized that they've already started saying I'm going to open up they've already opened up certain financial sectors they can open up more sectors so they made the decision but these are very slow in China well I think they may be moving kind of slowly here in the United States too one of the things you were mentioned earlier about this I think one of the interesting issues for me and the Trump administration is the you know who's running the policy on and commerce you know on trade is it Wilbur Ross is it Peter Navarro and light Heiser I mean there are some serious issues now and I guess it's not really in the realm of your book but it's worth noting I mean would you say a the Trump administration's approach to China so far has been effective and B who's gonna win this tussle in Washington to decide kind of how we do interact with the Chinese and with the rest of the world well the first thing I would point out is that what I call aunty China sentiments in terms of trade and foreign investment it's not exclusively a Republican view the Democrats have always shared this okay after you go back historically the Democrats were more protectionist and Republicans and now to me is any comments I just made by the fact that both Democrats or Republicans they all share this kind of protectionist kind of sentiment and what we were relying upon Archie was the leadership whether they are the at the presidential level or the advisory or economist levels that they would understand a little bit more of what's going on and get above this kind of a view that trade or investment is bad for jobs and that kind of a problem so I think that collectively both sides have a problem in terms of trying to recognize this but the irony in China of course is that Xi Jinping now sees the virtue of of pushing a supporting globalization or freer trade because China's benefited enormously from this process and America now seeing as being protectionist and the great irony of course is you know 20 years ago is likely the opposite the US Europe were arguing for free trade developing countries were saying it's not fair we lose jobs except except now it's exactly the opposite such tremendous turnaround in events I think we're in for a very difficult period the Western economic political systems have not been able to deal with the issue of how do I deal with the people who lose out with globalization in effective manner either in our tax systems or social infrastructure we don't have it they don't have a means at doing so how do we deal with productivity changes how do we deal with the fact that wage increases in the US have not been more than 1 percent a year for ten years now in some ways it just doesn't happen anymore we haven't been able to deal with this in a constructive fashion you could argue that I think it's interesting I mean if you look at American policy now which is to reduce taxes to put more at least theoretically put more financial decisions in the hands of the individual and then you take a country like China or even Canada or France which has a much more socialized medical system you know a pension system you could probably argue that in fact in some ways the Chinese may be better prepared for this than the United States that's a leading question I recognize that I think they are better prepared for it in a in a particular way that's not so obvious sometimes when Xi Jinping talks about his strategies programs for example he came out with this industrial program this at the party Congress he launched the vision of the China that vision is 35 years broken into two 15 year periods so his vision of what he wants trying to be is defined by vision of what he thinks China should be in the year twenty forty nine with streams of policies and things that should be to be implemented if you contrast that issue being able to think long term but the problem we have in America we were essentially motivated by a congressional election or a two-year election or a presidential cycle and everything is geared toward winning that and what you has to do about it it really makes it difficult to think about long term issues in a more neutral and balanced way we're just heavily catering to what I call conventional wisdom and as my book says the Commission wisdom is actually wrong then the strategies organizations there as you pursue in a long-term sense tend to be wrong and but I also will say that in my book I point out the same thing as a problem for China but in different ways so turning to environmental concerns pollution makes it hard to breathe in China I'll say major cities affects health and longevity of the population is this a problem can it be solved and when I think there's a kind of a bigger picture here to which is that of course it too feeds into social stability but an important point to make is that it's worse than India than it is in China now in the major cities but I guess the question is twofold one are they Chinese going to address the issue and two if they are going to address it what are the motivations for that I think this is a very good question when I went to China in 1997 first time landing in Beijing I saw the Sun maybe twice a month and maybe once a once a week planes couldn't land in Beijing so pollution is a problem Beijing today but relatively speaking exactly a lot better than it was you know you know 15 20 years ago so it's actually improved why is it that Xi Jinping is willing to sign on to the climate change initiatives why is he willing to basically say we are trying to deal seriously with environmental concerns and we'll set targets well I see experimenting with carbon taxes and other kinds of issues that we want him to talk about in this country why is it there's such a big difference between the the leadership used in China to today compared to ten years ago and compared with America because when I first went to China 10 or 15 years ago I don't think the leadership wanted to talk about climate change didn't want to talk of pollution they didn't want that the the particulate readings to be publicized because the citizen would become unhappy so what is funded money changed won the middle class is now more prosperous they're breathing this air that worried about pollution is a serious issue so politically today they worry more about the environment than they worry about jobs because the number of people in the labor force is actually shrinking so it's not jobs that's an issue it's a quality of life now the second thing here it's kind of interesting what is the leadership how's the leadership deal with this issue of environmental concerns and climate change in a different way than we have here in America and the difference is in China they see dealing with climate change and environmental issues as a growth strategy that you can make money from this that you can develop new technologies produce better equipment you can sell to it yourselves you can sell to others it's a growth driver here in America for what reasons we see an environment in climate change as inhibiting growth as a cost burden obviously we spread it among policy makers in the public in a way that makes it sound like this will cost us jobs whereas in China they think it'll gain jobs ok different really important point and we've done a lot actually on this issue of sustainability and I think one of the interesting things about the Chinese is that they've actually that too full process of one wanting to deal with it but the second point is really important which is it is a business opportunity it will save companies in the long term and I think China's really recognized that traditional wisdom and in the u.s. believes that a growing middle class will challenge the authority of the party the Communist Party and the ruling elites and the question is for comments this is this flaw was a little bit for my earlier questions about you know authoritarianism and liberalisation but what what are your views on that well issue here if you're talking about political liberalisation in the growing middle classes what is the middle class what do they aspire to and for three decades the view was that Chinese were aspiring for a better life and they're coming from poverty so if your incomes are increasing by ten percent a year for every year and jobs are relatively abundant you don't worry too much all political liberalisation that was what don't show up being was operating under Xi Jinping sees this quite differently now in the nineteenth Party Congress last month he dropped references to growth targets he talked much more about the quality of growth mm-hmm he talks more about this concept of a harmonious society both internally and externally okay and he sees this as the issue or where Chinese to go over the next several deck so it's not something you achieve one year it's basically a view of trying to prosperous harmonious innovative and also globally powerful country all right okay so there's a there's also a nationalism in this remember 200 years ago China was by far the world's globally most powerful economy there sank to nothing so this is a different kind of power in my book are called trying the abnormal economic power the abnormal power the abnormal great power the first developing countries they'd be a global power the first great power that gets old before it gets rich the first returning great power there are all sorts of things which are different about China's a great power than normal great powers it also means that you operate differently if you don't truly understand that it gets more difficult to deal with a great power so this is all part of the issue nationalism comes in a different kind of quality of life economic prosperity contingent some way through innovation and then your question about political liberalization representation freedom in various different ways I personally think that that is a natural aspiration of people and it within this system they talk about greater representation greater flexibility in this but coming from within the party so the key for them is therefore also preservation of the party the reform has to come from within the party so any question of looking at China evolution a political sense has to look at that evolution as what kind of evolutions do we see that come from within an authoritarian regime rather than being coming from the outside and if one studies that more carefully one has a better idea of what are the possible mechanisms and I talked a little bit about this in my book with that kind of pressure point might emerge from I fought and we talked a little bit about this before they before the event it is interesting the last 200 years has been for the United States since its inception has been largely a climb to global prominence for China and there's a fascinating economist and English economist Angus Madison who looked at global GDP I mean China and India together in 1500 accounted for about 60% 65% of the global GDP I think in in 1950 it was down around 4% so that change was enormous so China you know in most of the time the United States has been a country China has been not a major part of the economic system the global economic system but if you're Chinese you look at the last 200 years and just say okay that was not such a great 200 years but we're back for the United States though it changes a perception because the night we don't have that history and wonder if you can just briefly because we're pretty much running out of time here comment a little bit up on that if as an American and I see a rising China and people right about to sit at his trap rising major power confronting and the dominant power you're gonna surly have a conflict I don't see that as being an appropriate analogy there's two things we have to realize emerging market economies including China are going to grow at three or four or five percent six percent faster than developed countries so they're gonna converge China is a very big country so it's going to be the world's biggest economy what is it that shift is gonna happen and it's gonna be changing political power relations of some form but what is really important for America what's important for America is not that there's relative convergence doesn't happen it will happen just a question how long it takes it's that American continues to grow and because it's income levels here we are we have a $16,000 per capita GDP China's around 10 or 12 where five times as big okay even though China grows at five or six percent as long as we grow at two-and-a-half or three in a sustained fashion in an absolute sense I would say America's prosperity its global role can continue in what I call a reasonable reasonably useful and powerful role so it's what is really important therefore is for America to get its own act together don't worry too much about them growing in four or five or six we have to worry about make sure that we continue to grow two or three and we do this and our income is six times as large the absolute increase in America's GDP frankly it's still gonna be greater okay so this is what I call a relative as opposed to absolute convergence we've we focus too much upon relative issues we just need to make sure that an absolute since the US continues to prosper and prosper in the right way so you're come we're out of time one last question really brief are you bullish or bearish on the relationship between US and China moving forward my view about as an e-commerce as always is that we have all have incentives for improving our lives that's true for the Chinese is always true for Americans the question is whether our systems have the structures and scent avait see that and they can understand that I think that we are in a difficult period right now in America we're focusing too much of narrow things we don't think long term I think to me it's the biggest child the biggest thing I've learned from working on China for the last since I went to work on China in 1997 before that I worked on other countries the biggest thing I learned about China was the power of long term thinking and be able to act on a long term we don't act the long term we don't have any long-term plans on anything actually far as I can see whether it's education or infrastructure or health we don't have any long-term views about what we want to be 15 years from now they do and the beginning it's easy to sort of like to divide this and say it's unrealistic but the reality is that China when they develop these long-term plans they pretty much follow these things very carefully and the issue for me is how do you introduce that kind of strategic long-term thinking how do you give that validated in America and then for the u.s. in tuning with China get China in terms of the same wavelength in terms of what a mutually compatible paths and what does this how do you define this both economically and politically I mean to me frankly if both sides are doing well economically there's a lot of flexibility to have what the choice would call win-win solutions right now we tend to focus too much on win-lose I do something which is that you're gonna for me but it's gonna hurt you and that's what we're doing right now under protectionist kinds of discussions with China well in that I'm gonna end this in the program but the book is called you can Wong cracking the China conundrum and you can get it here tonight he'll sign copies you con thank you so much for what was a really interesting insight into the relationship between the US and China thank you for waiting [Music]

Channel: World Affairs

Views: 1,028,113

Rating: 4.3812304 out of 5

Keywords: World, Affairs, china, united states, economy, economic development, communist party, asia

Id: XepCi0I_g6I

Length: 65min 18sec (3918 seconds)

Published: Fri Dec 01 2017

Reddit Comments

[u/YamatoTensei]

Great video, lots of info

[u/thepensiveiguana]

46 mins was not about corruption but trade