How Did China Succeed? | Joseph E. Stiglitz | BI Norwegian Business School

[Music] [Applause] well two real pleasure to be here in - to receive this award from BI the there are two things that maybe I should comment in the beginning first the Year 1943 that bi started was also an important year for me because it was here I was born and the second thing is one of the areas that bi has done very important work is environmental economic sustainability and that is one of the areas that I've been very committed to and and and very engaged and in the work of bi it's been very important in that area the topic that I'm talking about Mike seemed to be a very narrow and particular topic but the reason I wanted to talk about this in a way is that probably the most important issue that economic economics can address is how do we design our economic system how does our whole economic and political system work together and there are many different forms of economic system there was communism there's capitalism there were many variants of the market economy there's Yugoslavian socialism and the one I'm going to talk about is a very much soui generous which is China's economic system which no one knows exactly how to describe it but it's clearly in many ways been very successful one of the important points I want to make is more general though than just about China and that is that at the end of the Cold War there was I think a mistake made by many people in in the West Fukuyama wrote a very influential book called the end of history and the conclusion of that book was basically that the victory of Western liberal Western democracies and economies over communism was the end of the arc of history now everybody would be converging to this new economic model of liberal democracy well I think there was a vast misinterpretation of the success it was not our success but communism failure that was really at play and there was a kind of complacency in the years that followed where we took the fact that we were growing as evidence that our economies were successful but GDP as expen mentioned is not necessarily a good measure of success GDP was going up but say in the United States most Americans were not participating in this growth to the point for instance to just give you a couple of statistics to see the nature of the failure the median income of a full-time male worker in the United States and having a full-time job those are the lucky ones is the same adjusted for inflation as it was 42 years ago and at the bottom real wages are the same as they were 60 years ago so while we thought our economy was successful for very large fractions of our society it was not in terms of health the United States is one of the places where research is going on and making breakthroughs and medicine in all kinds of ways but life expectancy in the United States is in decline and that's particularly true of white males who are not college graduates and one of the reasons is Angus Deaton and encase have described as deaths of despair people committing suicide drug overdose alcoholism people giving up that life is not working so as an American I feel very strongly that our variant of the market economy has been a failure and the consequences of this failure of our version of the market economy is the rise of Trump and I'll be very frank we are very afraid of this is a new form of fascism and it has many of the symptoms of what happened in the 1930s of course it's only 30 percent of the population that our die-hard Trump bikes but just like fascism there were only a small you know I'm annuity of 30% 35% that supported Hitler it was the collaboration of the business community and other conservatives that led to Hitler's rise in the United States it's the business community and other conservatives who have joined Trump in celebration of tax cuts for the rich a tax bill that actually league will lead in a country with the highest level of inequality among all the banks countries will lead to a tax increase for a majority of those in the second third and fourth quintiles in other words for the vast majority and which will result in a country we're millions to have no health insurance we're the right to access health care has not been recognized it will result in more than 13 million people not having health insurance and our life expectancy continuing going down so these issues of the nature of an economic organization are actually paramount and they're paramount not only for our economy but also for our society and for our democracy now the story I'm going to tell if China is a story of the economics and one of the one of the hopes was that these economic advances by themselves will bring about more democratic reforms and so far there's been disappointment in that arena so I don't want to pretend that this is all the success that we might have hoped but I do want to to describe to you in some ways the where are you the the remarkable success and some of the lessons that their success has for Western economies so first one has to appreciate the magnitude of that success the it is in many ways unprecedented increase the increasing GDP has been over the period of 76 - today a little over 40 years 40 years in which America's incomes have stagnated their GDP increased 40 fold and income per capita increased 20 fold today it's the largest economy in what's called PPP purchasing power parity which is a standard way of comparing countries would because Market Basket prices differ dramatically it's an interesting story actually about the in 2015 became the larger country and it was in part a result of the revisions of how we measure PPP's and the numbers that we use and when the independent body that does the PPP came up with these revisions they had to be accepted by the different governments around the world and there were two countries that were very unhappy the u.s. because it didn't want to become number two because we all know we're number one and if the number said otherwise something has to be wrong with the numbers and the second thing was China did not want to be number one because they were afraid that they're sticking their head up it was what they would be shot at and they were absolutely right so but eventually they were persuaded this is what the numbers say statistical offices have a kind of independence I think it's really important that they have that and so that that's what the numbers say it's a largest source of global savings not a surprise because their savings rate is so much higher say done in the United States and you know personal savings in the United States during the years before the Great Recession fell to zero we've been trying to increase our savings rate China has been trying to decrease their savings rates neither of us has succeeded very well it is the largest manufacturing economy but perhaps the thing that when they should be most proud of is that while they had growth they made sure that there was at least a modicum of sharing the benefits of that growth 740 million people moved out of poverty it is the largest success in anti-poverty ever in that kind of in a 40-year span of time and they've made a successful transformation of their economy and their society in many dimensions to what they call a social market economy with Chinese characteristics education innovation physical and soft infrastructure but of course there's still more much to be done the per capita income is somewhere between a 5th and 6th the United States there are many areas of institutional development many aspects of the rule of law for instance that are deficient there are many aspects of the quality of life you know many of my students do not watch I knees students don't want to go back because they don't want to die from pollution that it really is bad although India now has taken over the rank of being the worst polluted place but but experience' it is really terrible and it's become a political problem there was one a vivid moment at the end of one of the party congresses where the premier was being criticized for not having fulfilled what they had promised to do in the environment and he said you know I have to breathe the air - and what he wanted to make clear is that he he knew how bad it was because he lived there and he was suffering and he was trying to do as much as he could and interestingly they are I was at a meeting where they were talking to the American auto industry and they so told them if you aren't all-electric within the next four years you're out of the country so whether they will actually execute it but he's making it very clear you know that it is a matter in many ways of life of death because the air is unbreathable there are high levels of there are lots of problems in the health system their trains are positive but they're still very deficient they have lots of problems of inequality including access to education especially for migrants and when you use the word migrants it's not from outside of China it's from the rural sector to the urban sector and when they come to the city if you don't have a what they called a hookah a permit to come in the city the way they enforce it is your children don't get an education it's a pretty cruel system and well they've done more to move people out of poverty than I said anywhere else they've also created the second largest number of billionaires outside the United States so at one form of inequality they've they've almost excelled which matched the level of the United States and there are some aspects of their economic policy that are worrisome the excessive reliance and debt as part of their growth model and they have not yet developed a sustainable basis of finance for the local government but the question I want to talk about mostly today is how was China so successful and at the beginning of that transition they had multiple problems they had to go from centralized control to a market system they had to shift from a largely rural economy to an urban economy they had to shift from agriculture to industry and in some ways from a very poor developing country to a an emerging market and to an innovation economy and a learning society and when you think about this these challenges you can't help but think of the contrast with a similar challenge that of Russia moving to a mark economy Russia had a more educated population much more educated particularly in areas of science it had more resources China was not didn't have the kind of natural resources that that Russia has oil and minerals it was already more industrialized it was more urbanized it had a much higher GDP yeah in the years after Russia began that transition after the fall of the Berlin Wall its GDP went down it's living standards decreased by some 25 30 percent and when we first were getting this data about how bad gdp was going down when I was at the World Bank we were worried whether our data was right I mean it was too dramatic and after all the ideology had been so strong everybody said going to a market economy is supposed to lead you to be wealthy and so the incomes were supposed to be going up you know in math we always say well maybe they made a sign mistake but they were going down faster than anybody thought they would be going up but interestingly and this relates to what I said a minute ago when we started getting data on what was happening to life expectancy we knew that things were really bad their life expectancy was going down and in fact when I started seeing the data for the u.s. life expectancy going down it reminded me of the Russian data it was a sign of societal disillusion of society coming apart and in the Soviet Union it was literally coming apart but in the United States it isn't the political system isn't well difficult it's coming apart but but the they it is really I think one ought to take really seriously that those data on declines on life expectancy and what we also saw in Russia was a process of deindustrialization to the point today that Russia is in its exports is almost totally dependent on Natural Resources as dependent as a poor African country is on Natural Resources so it's gone from this you know powerful industrial economy to a natural resource economy dependent oil and gas and cyber warfare well what are the ingredients the Chinese success there are three ideas I want to put forward one is a kind of pragmatism a very nine non-ideological it began with the recognition that this transition that they were facing was a new problem no one had solved it before so there was no model that they could go towards they could try to learn from the experiences of other countries but as you extracted lessons from those other countries it was clearly one had to be very careful because the situation in China was totally different from what those other stories were were so that was the key challenge they face that they want they they worked very hard to learn the lessons and they talked to people from all from all over I went I first engaged it with them in 1980 in 1981 they brought me over and we talked to spent several weeks together talking and they talked to other people like an arrow and and and and so they actually tried to learn from other people they were very open but they also were shaping their own destiny part of that pragmatism was with Champa what they called crossing the river by feeling the stones that you they knew that they couldn't just plunge ahead they they they just had to feel their way you know a very difficult path the second thing which was really markedly different from that of Russia was gradualism in contrast to shock therapy my colleague at Columbia got pushed this idea Jeff Sachs shock therapy Larry Summers put the shock therapy and the idea was if you did things very rapidly you would come out it would be a bat a big shock but you come out somehow cleansed of the 70 years of communism and a new person it didn't work it was a shock but there was no therapy and the result I think has been devastating both for the economics and for the politics but well one has to have gradualism gradualism means greater than zero and there were some places in in the former Soviet Union where the gradualism meant nothing happening and they didn't change so one had to have some kind of a mixture of speediness doing some things very rapidly but other things gradually and that required judgment and that was where people like sachs and summers really fail if they didn't they didn't think about what things you could do quickly and what things needed longer transition times and thirdly they recognized that at each stage of development when required new institutional arrangements new policies and that meant the mark shift and policies in each decade of their development within a context of continuity you would have you could have thought you know after they were very successful in 80s to say okay now we have the right model and try to the same model in the 90s that there worked in the eighties that would be the natural inclination that all of us would do and that's what our politicians would tell us to do but they realized that in ten years in the 80s they had really transformed the economy and the economy that they were entering into in the early 90s was a different economy than they had in 1978 and what works in 78 was not going to work in 1990 in 19 in 2000 and so it was this recognition that the fact that something worked in the past was not necessarily evidence that would work in the future because the circumstances could have changed there's one more thing I want to emphasize the next in a way very relevant to some of the debates going on today and I'll explain why and that is the recognition of the importance of learning and that what separates developed in developing countries is as much a gap in knowledge as a gap in resources that they realized that as well that there were huge gaps in knowledge within a country that could be even larger than gaps between countries and that you know one of the things that business schools try to do is to make sure that everybody's at the frontier the reality is most people are well below the frontier and so closing that gap between the frontier and where the average practices are is one of the big challenges and really what a lot of good management practices are about the that meant they had heavy investments in education and they sent many students abroad about more than ten percent of our students in Columbia are Chinese and Extro of an awful lot of the other major American universities they learned from others they at the very beginning they said opening being open to others was essential part of their development strategy is openness was critical part of that was engagement in trade but it was also a matter of listening to the experiences of others the the reason why I say this is almost a very relevant today for all countries is that if we think about why our standard of living in the West is higher than it was 250 years ago why we are living say average life expectancy of 80 years rather than 40 years it's not because we saved more it's really because we learned more it's all based on research and that is what's transformed our society and in a way Adam Smith when he wrote The Wealth of Nations could not have fully appreciated this because it was before we went into a learning economy he talked about a pin Factory commerce and that's important but in terms of transforming our societies and increasing a living standards extending our longevity what has made the biggest difference is research on learning learning by doing perhaps you know it's big learning big steps of little steps those are the things that are important the reason why I dwell on that said this moment is the United States seems not to have learned this lesson for the first time in our tax bill we actually imposed a tax on universities and a majority of the Republican Party believes that universities are bad things so you have this you know the the wealthiest country in the world would arguably not recognizing what is the source of wealth and going about systematically trying to destroy the processes by which you increase the wealth of the country so I think one of the things that one should really bear in mind well as I say it's not just innovation it's about transmitting ideas reckon what they were very successful with in doing was recognizing that it was learned in one part of the country had to be transmitted to the rest so the beginning of their development strategy they tried things in the East Coast and Guangzhou and provinces along the east coast but then they recognized there was a big gap between the East Coast and the west coast and they deliberately hack strategies to close that gap and they can fully succeed in closing the gap but they make sure the gap didn't increase and it they succeeded in reducing it to some extent and so the successes in eastern China have been replicated in much of the rest of the country and finally as they've moved into the 21st century they become more and more a focus on becoming an innovation economy and those who've been watching that the trade war essentially what Trump has demanded is they give up that aspiration to be by 2025 a modern technology technological country China won't do that and therefore I think there is a real risk globally of a significant trade war because the demand what what the US is demanding is unacceptable when should be unacceptable to China I want to spend a few minutes talking about some specific institutional innovations that contributed Chinese success I giving you a broad view but actually the success of the magnitude of China had required developing some institutional innovations ways of organizing society organizing production that were different from the way things were done before and there was a lot of innovation in that in ways that were in ways that were not there had not really been experiments like this and it required judgment but also I would say some economic theory but it was a very different in each of the cases I'm going to describe the conventional wisdom and economic said these would not work so the IMF the World Bank opposed almost all these changes because they said these won't work but they did work so the first is what was called the individual responsibility system in agriculture before that they had produced things and communes where everybody worked together and they shifted that to into basically individual farms and that provided strong incentives as economists have predicted but what they didn't do is give it give private property ownership to land and you might say well that was essential isn't it for success the answer was no ownership of land you could think of that was you know you want to make sure that the land is well managed taken care of and the community could make sure that that was done but privatizing land would have opened up a hornet's nest of debates about private property versus public distribution of wealth good luck of having a good fertile piece of land versus a none fertile piece of land it was just a huge hornet's nest and what they said is we don't have to address that issue let's go first and just make sure that people have the right incentives and let's monitor make sure that they are using the land well so and it worked they got what I would say is 95 percent of the benefits that they would have had going all the way to privatization without the huge distributive cost that would have come from full privatization and in fact one of the most contentious areas in China today is inequalities associated with land and in one way I would say that they pushed privatization too fast on land and land is the one scarce resource in China it's their natural resource and it is the source of their what might be called their natural resource curse and as I say what what happened in in in China is in such marked contrast with the countries in the former Soviet Union that were ideologically committed to quick privatizations so what happened in the Soviet Union they privatized or Moldova and Locke's you know and what happened agricultural production it declined precipitously and the institutional frameworks associated with production change were eroded and poverty and inequality increased one of the hardest problems and this is a little bit of technical issue was something that could only appreciate it from a historical perspective and having been through that debate the price system that they had in 1976 was a planning price system they had a kind of a planning framework and that out of that came some prices those prices had nothing to do with market prices so the question was they knew they were the wrong prices they knew that those prices were not reflecting real scarcity as we would teach it in a standard economics course of course the marginal value of a resource but they didn't know how to go from here to there and that was where in some of the macro economists in the United States and in Sweden pushed Russia to go to shock therapy they say well don't worry about that detail of how you make the transition just do it and that's where you had the the the the part of the breakdown in Russia and what they did is create what was called the dual price system what they did is they said we'll use the old prices for 80 percent of the production and then that number what 7760 percent but on the margin will let there be competitive prices so what they did is they got the advantages at the margin of incentives without the distribution cost of a sudden change so it's a brilliant solution the idea of having to pry systems was an anemone people who like in the IMF they just said this is never going to work but it did and so that's where a simple ideology you know gave the wrong idea that they had tried to face key issues of how do you combine concerns about distribution with concerns about incentives and they came up with this solution a third institutional innovation was the TV's the township and village enterprises we had a big debate at the beginning when I said we were part of the discussion we had an 88 one in the beginning of the Chinese transition well and then it came up again in the beginning of the Russian transition what was more important in a market economy incentives or property rights may be the standard course in economics are talking about both incentives prices and property rights and so you say well why don't you do both welcome you can't do everything at one time institutionally so that raised the question if you had to choose what was more important and basically the advisors to Russia said property rights and Ken arrow and I said competition and incentives were more important so in the case of Russia what happened was you didn't you you they thought they were giving private property they had voucher privatization they had all kinds of privatizations but really what they did is have property theft and the value of the state wealth you know trillions of dollars went into the pocket of maybe 10 20 oligarchs it was the largest theft in the history of mankind and the level of corruption embraced even American academics there's a very nice book that just came out a couple of weeks ago code because they caught that describes the role of one of Harvard's economics professor who was the adviser to Russia and something called the rule of law project under the USAID it's an amazing story and some of you should might enjoy reading it it's an amazing story because as they were teaching about the rule of law they had their accounts and Cayman Islands and they were using inside information to make money off of the Russian people in the Russian government massively well-known in Russia and begin to be and they were convicted this particular individual was convicted of conflict of interest and Harvard took the strong action of depriving him of the name of his chair so there there there was in this privatization process huge what I call bribery zation corruption competition I don't want to say the other system was free from corruption but competition decentralized competition actually led to a race to create a market industrial economy and [Music] the TV E's were these little enterprises in each little community and and the communities had existed before so you used the social capital that was already existing you didn't destroy everything you used the social capital but you converted it to create an industrial economy and and it worked the one of the big differences between the Russia and the China model was the theory reform the idea that the people like Schleifer in summers had was that if you gave people private property they would then have the incentive to create a well-functioning market economy they made two mistakes first of all they forgot that part of the rules that they gave Russia demanded IMF the demand to this was that they have open capital markets so as the Russians were stealing money from the government they were taking that money out of Russia and using the rule of law in the UK in the united states to protect their wealth and didn't want a rule of law in russia because they wanted to continue to be able to steal inside of Russia so it was an optimal framework you stoled within Russia because there was no good rule of law and you could protect the property by taking it out of the country and use the rule of law in the West it was an ideal arrangement that the IMF had organized for theft the and in a way you shouldn't have expected Rockefeller or Gates to be the enthusiast of strong competition policies and that's what they wanted you know or you wouldn't want somebody who is engaged in corporate theft to be the Advocate of corporate governance so I think they had totally the wrong theory well as I said the Washington Consensus policies said that TVs wouldn't work because they had ambiguous property rights they were still government they were operated by the town a Township in the villages and they said well public sector can't work but it did and I think as I said apparently by using the existing institutional infrastructure developing new institutions and through competition but also because it was at the local scale there was a kind of monitoring that was going on that you couldn't have done at at the national scale but at the local scale you could do that monitoring but on the other hand the TV's have a scale limitation so when they went into the next phase of the development in the last 15 years the TVs have played a much less important role throughout this development one of the important instruments of economic policy has been industrial policies identifying priority sectors but not exclusive focus on them they use the exchange rate to promote exports some people call that exchange rate management us calls that exchange rate manipulation it's actually the same thing it's banks on whether you're doing it or some other country is doing it but in some ways I one has to recognize that China may have been lucky they began the development strategy just at the moment when the West was very open to importing manufacturing goods it was a moment where because there were a large profit opportunities in the West that sustained the opening with wrong without regard to the effects and workers over the over the effects and the overall economy so in a way China's success is testimony to the failures of democratic politics in the United States in Western Europe because the rules the game were designed worked to advantage American corporations Western European corporations with no attention paid to the consequences to the workers as the United States d industrialized now some countries in Europe did pay attention and they did have active labor market policies that shifted workers from the old sectors that were dying into the new sectors and Scandinavia has been very good in these active labor market policies which I think are really important in the United States we didn't do that even though economic theory said opening up of trade between an banks country like the United States and China West events would result in lower real incomes for unskilled workers there's a missing Stover theorem and it was unambiguously clear even though we were getting cheaper goods real incomes of unskilled workers would go down and it's only if you had a mystical belief in trickle-down economics would you think otherwise but our politicians did have a mystical belief in trickle-down economics and they asserted this over and over again and so even when you know in the Democratic Party we tried to get Trade Adjustment Assistance we try to have some active labor market policies when we couldn't because of concerns about austerity and not enough budget concerns they wouldn't work we went ahead anyway there is a growing sense the United States though that actually the agenda on the right was to increase unemployment and suffering you say why would they anybody you know why do people want suffering well it was part of a concerted agenda if you look at to weaken the bargaining power of workers and drive down the wages which increases profits so if you look at this from a conservative point of view the reforms and our labor laws and reforms in the way antitrust policy was enforced that reform is a not the right word but changes in those laws changes in corporate governance and implicit understandings the legal frameworks and in the investment agreements in the trade agreements the investment agreements they gave more secure property rights if American firms invested abroad than if they vested at home which meant that they were encouraged to invest abroad which also meant that if the firm if workers came to affirming we want higher wages and the firms know if you we give you if you continue to demand higher wages we're going to leave that was more credible so I think it was a deliberate strategy to drive down the wages of workers and it worked in terms of the economics that I described before it did drive down the wages but it has now led to these this political backlash with which we are dealing so there is a relationship between China's success and some of the problems that we're facing it wasn't inevitable we could have managed it better we should have managed it better but we didn't but just as a footnote the point I'm making is that that was a particularly Africa won't be able to follow the manufacturing export-led growth model that led to the success of East Asian countries including China in fact now globally manufacturing employment is in decline in any country that believes that manufacturing should be at the center of their economic policy is misguided it can be part of it it can't be at the center well let me just conclude by SEP some let me just conclude by a set of remarks about that in a way that pertain to all countries but we're we're china realized this in a way more forcefully than many others have and that is that reform is a never-ending process that societies are always changing technology's changing and therefore the policies that are going to make a society successful have to change in a corresponding way for China China's entering a new stage of development it's facing critical problems of inequality health environment livable cities markets won't solve those problems in fact many of those problems have been created by the fact that they had markets that were too unfettered to under-regulated they're going to have to regulate them better there are further questions posed by changing globalization the recognition of the risks of excessive financialization the West I believe hasn't succeeded in adequately taming financial markets as you know this is this week is the 10th anniversary Lehman Brothers and and a lot of people are talking about have we done enough I think it's absolutely clear no and what's particularly disturbing is the Trump administration is trying to undo the inadequate things that we've already done again I was at a dinner right before the inauguration of Trump where one of his chief economic advisors was there I don't normally associate with his people might make it clearer but it was an embassy dinner so I and I didn't know he was going to be there anyway and he was talking about how he was going to deregulate the financial sector within weeks after taking office and the first thing that struck me is he clearly had no idea of our democratic processes yeah he really thought you know Trump is the dictator he gets to write rewrite all the rules no no none of these processes that we put in place as democratic checks against authoritarian leaders no knowledge of that was just so clear but the second point I was going to ask what somebody who asked it before I did quizzically didn't we have a crisis in 2008 and the implicit answer was that was ancient history and we have to move on but it's not ancient history and I think the risks are very much with us one of the concerns that I increasingly seeing in China is that as China grows the influence of vested interest will grow and you can feel it already another just a little anecdote every year when I go to China I often talked to the finance minister and I've been pushing them to move away from their debt finance growth model to more tax financed in particular I'm telling them they need a carbon tax and it would raise a lot of revenue it would help clean up their air pollution exceed me an obvious idea and the finance minister every year says great idea and he says we have some political problems which he means the auto industry the coal industry this you know steel industry and so forth we're gonna work on it next year we go through the same conversation as China has grown and it has taken on many of the features of a modern vested interest economy we're getting change is becoming more difficult and that of course is is very worrisome but the principles that guided China in the first 40 years are likely to continue to be relevant and that by that I mean the pragmatism crossing the river by feeling this still stone they're going to be new problems not fully foreseen would that appear it will have to address these problems using insights from theory and past experience and the second critical point is openness there is much to be learned from experiences of others and from the ink sykes of non-ideological economic analysis and again we're in a particular moment where I hate to keep coming back to the United States but we're a little bit obsessed with with our problems one can't help but reflect on the closed mindedness of our current administration of not looking around you know if you think you're number one and you think that you're the there's nothing to learn from anybody else that is part of the beginning of the end so we hope that this is just a temporary interlude but as we reflect on what makes I know successful in the ways it is I think there are a lot of lessons for all of us to think about how we can make our own economy successful for all of us thank you thank you very much

Channel: BI Norwegian Business School

Views: 416,679

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Keywords: research, finance, economics, financial crisis, Joseph E. STiglitz, BI Norwegian Business School, China, USA

Id: Iaw4n9IZDdc

Length: 54min 42sec (3282 seconds)

Published: Fri Sep 14 2018