Understanding China's Market Reform Strategy

this is rob johnson president institute for new economic thinking i'm here today with isabella weber an assistant professor at the university of massachusetts at amherst we're here to talk about many things but her marvelous new book on china and i underscore marvelous called how china escaped shock therapy the market reform debate has come out this year and it's causing quite a stir many of my friends have been knocking on my door you gotta read this book you gotta read this book i did now i'm saying it to you you gotta read this book you gotta read this book isabella thanks for joining me today thank you so much for having me it's really a great great pleasure to have a chance to discuss my book with you thank you so much for the invitation well it's how they say it's our pleasure and you have a lot to teach which people will learn about here in this next 45 minutes to an hour but let's talk about first before we get in between the covers of the book and other thoughts that you have i need to understand what inspired you to choose this topic and to write this book what what what's going on inside your heart that brought this tremendous effort to the surface yeah there were really two sources of inspiration the first one was when i was an undergraduate student and exchange student at beta peking university i'm studying economics there and i was quite struck by finding that our chinese professors were using the same economic textbooks by american economists that we were studying from back in berlin and that seemed quite puzzling to me since it seemed obvious that the chinese economy was organized in ways quite different from the german or american economy while at the same time the economics seemed to be identical so that kind of raised the question on my mind how could economics play a role in china when it was being taught in the exact same way as it was being taught in these radically different contexts the second source of inspiration i think has to do with me being someone who grew up in in germany in the 1990s when there was a sense of triumphalism around the the end of the cold war and the reunification of our country um but by the time i entered university we were in the middle of the great recession and um east germany had had by no means um developed in the ways in which people had hoped in in in the 1990s and i was then um for a brief period working um for german foundation on the china desk so i had a chance to attend conversations between um chinese delegations and their german counterparts in particular the chinese delegations were interested in meeting former officials from the german democratic republic so there was as a young undergraduate graduate just graduated at these meetings and especially at one occasion with the last prime minister of the german democratic republic who to me was an unknown entity i didn't even know his name before and who clearly at that point was um a basically ordinary retired person where on on the other side um the the chinese delegation that was from some organization related to the state or party um i don't even recall which which one it was but it was quite clear that that that history had played out um radically differently between those two sides at the table so the question of how could history have played out so differently in the two contexts in in german democratic republic um and um and uh and the people's republic of china um was kind of an implicitly obvious question in that context so being an economist and taking this together with the first question that came to me when i was an undergraduate student in beijing it led me to try to study the intellectual foundations the kind of economic thinking if you want that would have underpinned china's market reforms and that has shaped um china's path as being quite different and quite distinct from from the other transitions from socialism that we have observed elsewhere well i understand uh you know from looking into your book that you addressed a question that many people were asking how did china do so well when russia the soviet former soviet union did so poorly in the what you might call adopting the orthodox economic shock treatment and china shows a different path and it's not just how did they do well how did they get the confidence to do well what's the what's the process of intellectual exploring and learning that brought them to that fork in the road where they chose a better path yeah um i think it's important that in the 1980s it was really an open-ended question how china would reform and was also an entirely open-ended question what would happen to china's position in the world in the year 1980 china's gdp per capita was less than that of sudan or haiti so we are really talking about an incredibly poor country that of course had made substantial progress in terms of infrastructure development basic industrialization education public health and all of that during the mao years but nevertheless was still an incredibly poor country right so in that sense the starting point between russia and china was quite radically different and was not at all a foregone conclusion that history would look like as as it did um in in the 1990s so what i'm doing in the book is i'm trying to understand how um how economists really or economic thinkers who were involved in the debates at the dawn of reform were thinking about the question of what next and how to reform the system how to introduce market mechanisms into what at the times there was largely a command economy the contrast with russia is not to say that the chinese cure would have worked in the russian case but i think it rather stand as a warning that the stakes that were involved in the debates in the 1980s in china were incredibly high which is not to say that it would have been the outcomes would have been identical as in russia and all of that but still the the scale and depth of collapse that followed shock therapy in russia i think illustrates that things could have gone quite terribly wrong in china as well had had history evolved differently and i know uh in china from reading the history of the various uh imperial regimes their sensitivity to social discord and social disruption is very high because many emperors fell from not foreseen and obviously because of the sheer scale and size of population and a large geographic scale it's a it's a formidable challenge when i first went into china uh about 1990 a gentleman took me out to lunch and he said yes i work with this planning agency and so forth and he says mr johnson the migration that's taking place right now is as if every citizen of the united states of america went to baltimore and then walked across to san diego california the whole country he said we can't do these things too rapidly we have to do these things in a gradual continuous way the transformations are important but can you imagine the american people stomping across the country with no infrastructure nowhere to sleep no this and that he just was very animated and it woke me up quite clearly that the kind of things i'd learned as a phd student in textbooks or whatever might not be germane to the type of challenge that he was facing yeah um this is of course in 1990 right so this is after um after the big clash and the massive crash down in 1989 and in fact the spiraling out of control in 88 of of of prices so i think it's important to remember this is i think in some sense also the story of my book that in the 80s ideas of very rapid change and in fact so-called package sorry package reforms that would have involved overnight price of realization and um very radical tax and wage reforms that that would have that would have been quite drastic and quite fast were very much on the table which is something that we we have largely forgotten so we we tend to take the idea of gradualism as a foregone conclusion but rather than seeing this as predetermined by something inherent in the chinese constellation what i'm trying to argue in the book is that there was a real debate and that there was a real intellectual and political struggle over the direction and approach of reform yes and so how but look i'm thinking of this like a a theater play how did people come together to debate or uh how did people tour the world who were chinese who had responsibility to be to come to the place where they could arrive at a a plan or a vision of how to do this yeah thank you very much for this question i think one of the things that many of the people that i've interviewed have stressed is that the 1980s was really a quite unique space for communication in in china itself in the sense that after the cultural revolution economics as a discipline was pretty much shattered at the same time economics as a discipline was being re-established very quickly and was being set in command so you had this contradiction of of a discipline that was really just just being revived just being recreated and at the same time being elevated to to a very powerful position in in the recreation of the chinese system one specific alliance that emerges in this context is between young chinese intellectuals who had spent their youth in the countryside often from the teens to the mid-20s during the cultural revolution some of them went voluntarily many were basically forced to go to the villages who returned in the late 1970s when deng xiaoping reinstated the university entrance exam but who continued to have their allegiances with the countryside since they had lived in these villages for extended periods of their life and in fact during their 20s um had often engaged in extensive reading circles discussions in some cases even very low key experiments with the question of how to reorganize the chinese countryside how to reorganize the political economy of agriculture and these emerging young reform intellectuals formed an alliance with first generation revolutionaries that in china unlike in russia were still around the 1980s some of them had also been or i mean considerable number of them had also been ousted during the culture revolution so they themselves were returning to the centers of power after a whole period of of being removed from the system and often also having spent quite extended periods in the countryside um in in some cases in re-education camps um in some cases in prisons in some cases um in in in in situations of of of manual labor and in in other settings but anyways they were removed from their positions of influence and returned themselves to the center of power and this older generation revolutionaries of course also had grown into economic thinking about economic policy making not least during the chinese civil war when the countryside was incredibly important and when they were using techniques of economic warfare that involved using market mechanisms to reintegrate the economy and overcome hyperinflation in fact there are interesting episodes of communist trading agencies outspeculating speculators by pulling together certain kinds of commodities and thereby flooding the market with a certain commodity and thereby reversing the certain price spikes in specific kinds of commodities but that's that's just a footnote the point being that these first generation revolutionaries had firsthand and extensive experiences in using market mechanisms as a policy tool so when these two groups return to the cities return um to to to the centers of power to join the efforts of really rebuilding the chinese economic system they form a very peculiar and very unlikely alliance so this was one force in the in the reform debate on the other hand um economists who used to be established economists um in in in the pre-cultural revolution era of course also returned to the cities um many of them were actually trained in more or less soviet orthodoxy um and formed an alliance which we can broadly think of as an alliance between um um this group of of of um people who were trained in economics proper um with with young scientists who were at the time studying the latest techniques and in mathematics and computer science and so on so um this was a quite quite extraordinary um mix of people and quite extraordinary setting of communication and debate um in in in trying to to remake china really i remember uh earlier this year there's a documentary filmmaker named adam curtis who's with the bbc and uh you did a i think it was a six part series called i can't get you out of my head and it kept shifting between the united states britain china and a little bit of russia in the earlier paces but he was basically talking about disorientation and he had a big episode about how mao's wife was essentially very influential then set aside and then try to come back and that post-cultural revolution uh how they say intensity of filling the void was was a very very market it had a very big impact on me just to watch that signal and i can't imagine being an intellectual and being courageous after having been sent to the countryside but obviously things to change yeah um and we have to remember that some degree of change of course already happened still under mao the nixon visit happens in 1975 before mao's death several of the key leaders including chanyun and dongxia ping temporarily returned to beijing and all of that but then after mao's death in 1976 it is that that there cannot be a question that the attempts of late maoism at continuous revolution and mobilizing the masses and and and all of that is is entirely over um the the hair of ma rogoffen um the dedicated hair of of of mao um then attempts another big push more or less a soviet style big push um this time however um meant to be an internationalized version of big porsche industrialization fueled by foreign technology and financed by petroleum exports however these projected petroleum findings were never found so that this kind of model of working towards industrialization very quickly ran out of steam and in fact um brought the danger of foreign indebtedness as uh as bronco milano which in a recent post has also been um discussing um in in relation to my book um brought the danger of foreign indebtedness um right up on the agenda in china so that it was clear that that model also couldn't work so there was really the question of what now how can we move forward while while it became clear fairly early on as my impression that that more market would be on the agenda already in 1979 deng xiaoping talks about how markets could not be limited to capitalism how socialism should be able to also use markets and all of that even though it's not yet an official national policy to move towards markets it's very much in the discourse it's very much on on the minds of the reform economists but the big question that arises is even if we agree we want more market how do we introduce market mechanisms into a system that previously has basically been run as as a command economy with elements of of of planning and elements of of of anarchy so um so how do we introduce market mechanisms starting from from from the industrial organization that was inherited from the mile period and that is really the big question of the reform debate of the 1980s so on my mind of course there is tension between those who want reform and those who don't want reform but from the interviews that i've led my senses that the tension between those who were dedicated to market reforms but disagreed on the right approach to pursuing marketization was at least as intense as that between those who who who were in principle um skeptical of moving towards the market and those who who argued for for more markets i once made a video with a gentleman who lived in hong kong i believe he was dutch named frank de carter and he had written a book about the cultural revolution in its aftermath in this period and i don't uh recall a great deal about it but the kind of the what michael severity and scale of the challenge and and also he had talked about uh people who had been moved to the countryside were experimenting with markets particularly local agricultural markets so that there was a little bit of a foreshadowing of greater reliance on markets yeah there was a foreshadowing both in terms of um very local um experiments but also intellectually in the sense that um that the people like chenitz or jung mu and so on would have already started to discuss how agriculture could be organized differently and would also have already started to engage in conversations with very senior leaders such as huiao bang who in fact as as it so happens in the early 70s apparently according to to some of these younger reformers was more radical than the younger reformers themselves so clearly the question of how to move from a more or less universally collectivized form of agricultural production to one that involved more household responsibility and and more more orientation towards market incentives um was already being debated um relatively early on but the kind of dynamic that it took on after deng xiaoping ascended to power after 1978 i think still does mark a qualitative and quite dramatic shift and that has to do both with marketization but also with the adjustment of the so-called price scissors under the mao system the relative prices between agricultural goods and industrial goods were set such as to organize a continuous extraction of surpluses or tragically at some points of course even more than surpluses um from the countryside to to the to the urban industrial economy so in 1978 deng xiaoping raises the planned price for um for agricultural goats substantially which actually is an important element in the take off of agriculture and then of course the the first experiments that are happening in in the late 1970s uh possibly not entirely new just because of what you what you just referred to but what i think is qualitatively different is that um the central leadership starts to pick up on this and um and sends out research delegation and carriages some of these young intellectuals such as chinese young and so on who returned to the cities to go out and research how these experiments are playing out and report back and analyze and systematically evaluate what to do with these experiments and whether they can be transferred into national policy which then um prepares the ground for for this these changes to move from bottom up um small scale peripheral experimentations to towards becoming um national policy well i remember as i mentioned earlier my friend who had talked about the migration of the entire population across the united states was over the course of our lunch describing to me the scale of the needed change in how food was produced and distributed uh i remember reading uh years later a man a physician who's at the cleveland clinic he was at cornell at the time named colin campbell wrote a book called the china study about the transformation of diet from subsistence farming to being in an urban area and working i would say eating more protein in this case pork fish and other things but how the production of food for a population of that scale could be transformed so that there was not starvation and so that people could be mobile i think that's a fabulous i don't know we might both experiment in human organization to learn from yeah and um i think this is a very important point to keep in mind in the sense that it was of course not simply about marketization it was not simply about moving towards a more efficient kind of economic system but it was really also about development right it was really about lifting people out of poverty and trying to solve the basic problem of food provisioning and um and and provisioning of other basic needs that that that had still been um had had not been um addressed uh sufficiently um satisfactory um so that that certainly is is an incredibly important element of the starting point of reform in fact many of my interview partners were stressing i'm saying in the beginning of reform this was not a theoretical question of whether market is better or or plan is better or or what what is the ideal type of system but it was really a question of addressing the problem that about 200 million persons were still poorly fed and poorly clothed and that someone like chen yun had come to the conclusion that if um reform wouldn't wouldn't be successful then um the local carters from the countryside would be leading the masses um to to the gates of the cities and basically demanding a better material um conditions so that was in that sense a very pressing problem of of of of basic needs um in some sense more directly than uh than the question of idealized um idealized visions of of perfect market economies or something like that yeah when i read your book i had this vision of kind of what i would call idealistic figures the person from the west the advanced economies are way ahead of china you got to just do that system as soon as possible to get up and moving and then you have a different perspective in china understanding the scope and the scale of these transformations and they're viewing the market not as salvation they're viewing the market as a tool unless you said underlying development objectives and the market as a means to an end not as an end in itself and i i find it very interesting to follow the dialogue that you presented yeah so um that is certainly the perspective that in the end prevails in the 1980s but towards the mid-1980s the idea that you could not have a hybrid system you could not have plan and market at the same time since this will be creating too much friction and would in fact um create a situation that possibly would be worse than the system before reform was becoming a more and more pronounced um kind of opinion so for those young people this was during the just after the reagan and thatcher uh people came on stage and so you were hearing that other side of the debate quite vividly throughout the west yeah so this is really um the same kind of logic as as the rise of neoliberalism has has brought to the policy agenda in in other places um interestingly um this this kind of way of thinking about economic system reform in the chinese context was introduced by people like milton friedman who visited china already early on however it was also importantly articulated by eastern european emigre economists such as otter sheikh um bruce um straminsky and so on um who who were who used to be involved in reforms in their own countries um and then basically were exiled after these reforms had failed and they had a sense that the attempts at gradualist reforms in eastern europe basically had played out to be a failure so therefore they thought that um the the economic system could not be reformed by tinkering around with the existing institutions but that instead you had to find a holistic solution that would provide a blueprint for different kind of economy and then the task would be to really um overturn the existing um system and create that kind of blueprint which is a radically different logic from that that ultimately prevailed in china where instead the existing planning institutions and institutions of the planned economy were used as entities for market creation and actually as active elements that that helped to quite literally create a market infrastructure instead of assuming that by abolishing the plan and by abolishing the institutions of of the plant economy a market economy would be arising like phoenix from the ashes just just spontaneously by itself so as you move on in the 80s and you read and study the development strategies our knowledge intensive thing i mean obviously after 2000 knowledge intensive strategies and education and tech related things have taken hold but what was what was the strategy related to foreign direct investment and which might called the inward infusion of knowledge at the time that your book is focused on yeah um so there is of course uh the special economic zones that already start in the late 1970s but that is then being elevated um to a much more um systemic strategy towards the late 1980s under the label of the so-called coastal development strategy which is still really designed by jiaozi young even though he's often not being given credit for it since it only really takes off in the 1990s when when jasyang has long left the scene or has been long forced out so the the idea of the coastal development strategy was basically to use china's advantage in having very cheap disciplined labor and a relatively good infrastructure and to use this to basically attract foreign direct investment then export goods initially predominantly in the light industries and thereby generate an export surplus that would then enable china to finance the upgrading of its upstream industries um to to improve its technological base and also to learn from foreign management techniques and and tech technology sorry technologies but um all of this always with an eye on avoiding um foreign indebtedness so that a strategy of expert surplus would give china leave a to import certain um things that were critical for for for the country's development without having to um rely too heavily on on on foreign credit um as such so that kind of strategy was designed in the late late 80s um it was basically modeled on the experience of the east asian tigers so the idea was that that taiwan and korea by that time had more or less um developed so much that wages had risen and that they had more or less were on the way to losing their comparative advantage in low-wage export-oriented manufacturing so that china could basically take on um that that that gap that was opening up and and thereby also of course importantly rely on capital from from from the east asian tigers so basically um really really step into the gap that was um opening up as these economies um were on their way towards um climbing up the value chain i also remember in that window of time the japanese were starting to engage in outward foreign direct investment where their awareness their manufacturing uh prowess would be subject to great competition as the human capital developed in the tigers but on the scale of china as well and my sense was in this i worked in investments and emerging in non-japan asia primarily at that time was that when the chinese devalued quite markedly in 1994 it reoriented the direction or the pattern of foreign direct investment both out of japan but from many places around the world towards china and of course the what you might call whole that emerged in the balance of payments of places like malaysia and thailand then played out in the asia crisis thereafter in the substantial devaluations that they uh endured but i think you're you're s you're seeing what is as something the scale of china makes a successful transformation their influence on the world indirectly not i'm not talking about in debate now but the influence of the size and scale the potential of that economy becomes very very powerful yeah and i think this is also something that has been on the minds of chinese reformers not in the sense of trying to forge ahead to become more powerful than anyone else but in the sense of being acutely aware that china china's size makes it a huge responsibility to take the domestic problems very seriously and that the problems or the challenges i should say of reform presented itself quite differently and the challenge of development itself presented itself quite differently in in the chinese context compared to much smaller countries including the neighboring east asian countries so that that that acute awareness of the scale of the problem i think is is there throughout in another meeting in my life later i was meeting with the chinese government official and he said he was criticizing the united states for not engaging in more transformational assistance the population and he could see the anti-chinese sentiment building towards uh as it relates to globalization and the stress that america was under and he said something to me he said the americans never understood that if tonga wanted to develop a few of their people could come over get educated in american colleges they could tie us up with a special trade agreement and america would be the tugboat that would pull changa up the ladder but he said when we're four times the size of the united states when we start this development at 1 40th of the per capita gdp when they tie us to them we were so big we could swamp the tugboat that you couldn't pull us up we pulled you down or we met somewhere in the middle that and that his point was there are gains from trade but the americans mismanaged it and the american elites are now under great pressure and the american elites are blaming china yeah i just wanted in relation to that stress one aspect of the coastal development strategy that actually resurfaced in the context of the so-called dual circulation strategy that has been emphasized in more recent years and that is that the coastal development strategy i think was never meant to turn cha all of china into basically an export manufacturing zone um for for companies headquartered in europe and the united states right rather the idea was as as i've tried to say um to to generate um an export surplus which then could be used to develop china's own economy and to develop it in a way that it would be a complete economy in the sense that it would have all the important sectors within its own domestic system rather than just being a supplier or just being the workshop of the world as of course it has been for for for for um for the last two decades or so but the ambition i think has long been to move beyond being being the the work bank of companies headquartered elsewhere but to develop eventually develop competitiveness and develop whole industries within within its own system which i think is important in trying to understand the relationship between the united states and china since it kind of shows that the chemerica type of relationship where china was the work bank and the u.s was the the headquarters so in terms of that relationship that we used to read on the back of of our iphones until very recently designed in california and manufactured in china right um that that wasn't gonna last from the chinese perspective um from pretty much if you read the documents from the late 1980s that it was already on the agenda that china did not want to just be the the manufacturer but it it it it it realized that it had to take that place in the in the first instance in order to develop the preconditions for more ambitious industrial development yes which is not to say that there has been one great conspiracy that dates back to the late 1980s but just in terms of the development strategy i think that has been um has been inherent and as we saw uh you might say the americans had the misperception that they were going to fall into line is that supply platform the chinese was using their surplus and their investments and some of the foreign direct investment to improve their understanding of knowledge intensive value added and i think the china 2025 report when it was released created the stark contrast between the two visions but i'll tell you a great story i had a woman that i worked with at the united nations from china who was a descendant of confucius and she did a lot of work with me when we were forming inet building a conference in hong kong meetings in shenzhen and i met her father and one day there's a thing there's like a consumer uh electronics show a convention in las vegas every year and i'm sitting at home and this gentleman who's the father calls me and he says i'm coming to new york tomorrow would you like to have lunch and i said yeah sure so i sit down in this italian restaurant this man walks in with this box and he said we're gonna have lunch but i gotta ask you first he said we just won the grand prize at the consumer electronics show and you have to find a way to give this to senator joe biden and i said okay and i knew joe biden was about to get what's called a four freedoms medal at the roosevelt institute which is a place i was affiliated with but i said i'll try i don't know him well i worked in the senate for a few years but i'll do that so he then sits down he takes out another copy of the phone and he shows me this phone and he said joe biden came and gave a speech to us in shenzhen about how we were going to make the parts that america was going to design these phones and it frustrated us so much that we went and developed our own phone and we brought it to the las vegas show we won the grand prize and i want you to give this to him to thank him for inspiring us to build our own phone that could compete with the apple iphone and i will say the graphics were beautiful it actually had 3d for the video i watched a picture of a plane landing on an aircraft carrier which is perhaps an ominous symbol but the uh but the whole idea of the pride of climbing up that value chain was in evidence at that launch it was really really very market yeah um yeah i think this is a great anecdote and it uh and encapsulates so much of of of the development of u.s china relations in the last years i think it's also important to remember that of course china has been incredibly reliant on american technology and american software and so on until very recently right i mean we see this with the computer chips shortages we see this with the big announcement um very recently that uh that that uh huawei might now um have developed its own um operating system for for smartphones because all the chinese phones previously have been operating on google android right the chinese state-owned banks were running on on on on software that was basically um cisco kind of software and so on right so you have you you you have had a lot of american software right at the heart um of the chinese system in fact you you probably still have a lot of american software right at the heart of of of of china's system right so i think in some sense we had the tipping point i mean it's kind of the the the the staggering thing is that china some chinese come i mean the whole story around 5g kind of is a story of a chinese company reaching the technological frontier in an infrastructure technology that is incredibly important for the world right and this is in some sense a first i mean one when has it been the case that a non-european or american company has reached the technological frontier in a key technology that everybody will rely on that is i mean i cannot come up with another example so i think this is a lot of the tension that we are dealing with has to do with these with these kind of questions the energy that i see now as polarizing has something to do with that chinese not conforming to an american vision of the system as rochelle would talk about but there's another side to it that i i'm interested in exploring with you which is your book suggests that there was kind of an experimental improvisational way in which chinese officials view the markets as a tool and when you look at the united states now or parts of europe the uk you see a lot of distress because unbridled reliance on the market is not doing everything that it should in relation to education gender and racial inclusion climate and even one might say the episode of the financial crisis of 2008 and 9 where the state had to snap their fingers and come forward with roughly 800 billion dollars because of how we say misdeeds or or misunderstandings related to an unbridled market process can the west learn from the way in which the chinese approached economic development for the economic transformations that the west needs to make in the next phase that it appears the biden administration is embarking upon or these some subset of them yeah thank you this is a great question just to be sure china's transformation and reform has of course come along with very deepened inequalities environmental issues and especially inequalities along lines of gender and ethnicity so just just to be sure that that there's no romantic conversations will happen i'll i'll interject one other thing that really surprised me some people came to visit me they make something called the her run report report about wealth concentration and they this was 2015 and they came into my office and they said we've done this study there are 535 people between the congress and the senate and then there's the supreme court justices and there's the obama cabinet and all together they're worth six and a half billion dollars he said and there are about 203 people between advisers and members of the national people's congress and aggregate them all together in an economy that's two-thirds the size and they're worth 70 billion dollars and they said so the concentration of wealth and the question of whether politics can broadly serve people where people act like the chinese economy is more receptive and sensitive will be tested by this concentration of wealth in what in america we call plutocracy and shortly there after wang shicham led something called the anti-corruption campaign so i sensed that in some ways they were responsive i don't know enough about the internal coalition politics and what was really on the agenda but it really was the case that i guess i'm putting an asterisk on my question to you along with gender and other things the danger of money politics controlling governance that the market now has captured the state might be even higher in china than it is in america yeah um i think this is a very stunning figure that you just reported and immensely interesting it might also tell us something about the distribution of rich people between different sectors of elites right across politics and and and and the financial world and all of that um to maybe start by going back to your um initial question i think what we can possibly learn from the chinese is to think not as much in dichotomies of state versus market but to see rather possibilities for state market participation as a possibly productive arrangement which in some sense the initiatives that we can that we now see coming out of dc in terms of public investment agencies is is basically something along these lines right where the idea is that there is a publicly owned entity that would be quite literally participating in the market by investing in certain needed infrastructure which is not the same as just doing monetary policy and hoping that by lowering the interest rates this infrastructure would be forthcoming by itself but at the same time it's also not the same as planning right because i mean it requires a degree of planning but it's not it's not the kind of um old-style planning where you have a whole apparatus of planning and institutions that really can can implement from from from the very top to the bottom um to the to the very details on on on on on the ground um so i think in in that regard um we we might be able to to learn something from china at the same time i think it is quite ironic that at the very moment um when the us is at at at probably the height of a debate around redefining the relationship between the state and the market in ways that we haven't seen in decades at the same time the demonization of a different kind of state market relationship in china is also reaching a peak so it seems like that there are two to quite contradictory discourses happening at at the very same um same moment in in time um which i'm not sure if it's necessarily helpful um for for either of these two discourses i have a friend who's a member of the us government works on national security in china and he said to me i'm so discouraged because we're not learning from the chinese model that's been demonized our model is failing i'm wondering if we need an alien to invade this planet and teach us all how to do economics the right way for people as we said about two weeks ago and uh but i think i think you're you're exactly right that the it's almost indigestible to learn the lessons and what you might call the echoes of a cold war nationalistic mentality in the united states would make it very hard to stand on center stage and admire and emulate the chinese explicitly but we can see i think there's actually also an implicit lesson of the chinese trajectory i do not think that we can understand china's reforms by conceptualizing it as having copied the singaporean model or having copied um the practices of of west germany in terms of its social market economy or something that i do not think that the chinese have in a wholesale fashion imported another country's model but what they did do is that they have studied very carefully specific policies and have studied very carefully under what kind of conditions these policies were implemented in other countries and then compared these conditions very carefully with their own local conditions and then have asked themselves what of these foreign policies can we implement in our own context possibly with a certain adaptation to the specific conditions that we are facing and in fact the chinese of course have not been shy at all in learning from from american experiences in the 1980s one of the interesting experiences that um that china did did did study um was the post-war transition of the united states from the war economy to back to a more market-based economy where some similar challenges emerged as in the context from the transition from a socialist plant economy to a more market-based economy so of course those two cases are not entirely identical but there are certain parallels that make that make the comparison relevant and um in the united states of course there were almost universal price controls um at the peak of of of world war ii and then after the war um in fact a number of um of of chinese sorry of american high-profile economists including several presidents of the american economic association including prominent names like paul samuelson and irving fischer we're actually warning against liberalizing prices too quickly and we're arguing that prices should be liberalized in a fashion that whenever bottlenecks were overcome in a specific production line then the prices could be liberalized so let's say if there's a bottleneck in steel then only once the supply of steel has caught up you can liberalize the price for steel that didn't happen in the american case um basically because of of the political dynamic that was playing out at the time um which then resulted in as as the atlanta fat has actually just been arguing recently right which then resulted in in a period of rather high inflation that canceled out a lot of the savings that were accumulated during the the second world war thanks to the very high growth rates during the war and the price stability that had been achieved by the price controls during the war so the this kind of experience was studied carefully in china in the 1980s and actually helped um inform someone like um like leaning and others who were arguing against the idea of rapid price hybridization in the context of china's own transition now ironically as the um as the atlanta fat um has been arguing um the the caring situation after the covet pandemic has a certain parallel with the with the transition from from from the war economy in the sense that the economy had been kind of on hold and it's now going back to a different structural pattern right which involves important bottom acts as we have seen with the shooting up of commodity prices so i think it's it's really it's really not um trying to copy from china in any kind of wholesale fashion or trying to pursue some sort of a beijing model or something like that i think that that would be absurd but i think there is an important lesson in in um thinking creatively about history and taking historical lessons seriously and adapting them to um two contemporary and big policy questions and um in in that regard i think um the the chinese have have been quite successful and at at several critical locations i'm learning a lot in listening to you today because the kind of questions that are often asked to me may not be the right questions in other words china learned how to make a transition toward the market from the state and use gradualism rather than shock treatment it appears now in the realm of climate and other things that some of the western countries particularly the united states have to make a transition towards a greater role for the state and so it's it's not at the point of war demobilization it's at the what i'll call climate war preparation infrastructure knowledge intensive rebuilding of uh schools and other things and so i think the sustainability whether it be environmental financial or social depends upon the the pragmatism that that's the part that i loved in reading your book it's the pragmatism the non-hardened ideological improvisational experimental mindset but it's going in a different direction than china had to go in the period that you described in your book yeah um i think one aspect of the chinese approach in the 1980s that is also worth noting is that there's a very clear distinction between what i'm calling in the book i'm building on the so-called state ancient statecraft theory of heavy and light the what is heavy and what is light that is a very clear distinction between the important and essential and not so important and peripheral which is a distinction that after the covet pandemic should seem quite familiar to us since we have all gone through about a year of um reducing the economy to its essential core right so we should have a pretty good empirical reference point and what is essential and and what might not be as essential and i think that um china's transformation was really organized around an acute awareness of how how certain essential part system are hanging together and that one one should not one should not take rush movement in the essential parts of the system one can liberalize quickly in the in essential parts you can't liberalize factories that are producing bikinis overnight nothing wrong with that but you cannot liberalize your steel sector overnight because if you liberalize your steel sector overnight all downstream industries will be shocked right if you liberalize your your um your bikini um factory then that that would not have any any rep effects throughout the system so i think that kind of logic of understanding very clearly what are the essential parts and what are the less essential parts and then thinking about how one can steer the essential parts towards a transformation of the system as a whole is it's really is really another important lesson that emerges from from the chinese story and i think that in fact this is something that we can see as part of the government practice to some degree until today if we look at um how the chinese are dealing with their own inflation question then we can see that um they the they have basically um made it very clear that monetary policy that is uh cracking down on through monetary policy is the means of last resort instead what when what the chinese are trying to do is to contain the price rises of essential goods first thereby avoiding ripple effects throughout the system and thereby containing cost push inflation by focusing on the essential element that is that is unleashing that that kind of that kind of dynamic rather than by constraining monetary supply for the economy as a whole so that kind of logic we can see again and again in in in all sorts of economic policy decisions and you've recently written a very uh interesting provocative piece in project syndicate about how the chinese efforts to address inflation may have benefits for other countries most perhaps particularly the united states yeah i mean if um inflation is the biggest threat um to to um to the prospects for for investing on a large scale into urgently needed infrastructure then the fact that china is moving towards containing its own inflationary dynamic and taking this together with the consideration that of course i'm given the current structure of supply chains any kind of major increase in in investments into physical infrastructure would involve quite significant imports of of machinery and so on from china then i think it it becomes clear that in fact china's containment of inflation if anything is helping the american project of trying to rebuild its own its own economic base so i think this is a lesson that can possibly help us to um think about the post-corvette recovery in in terms that might be more more mutually beneficial rather than seeing it predominantly as american recovery somehow being in exclusively in competition with china

Channel: New Economic Thinking

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Id: z8ETp8pMliQ

Length: 60min 10sec (3610 seconds)

Published: Mon Aug 30 2021