William Overholt: "China’s Crisis of Success”

it's a new academic year and we've been doing this series now it's our fifth academic year doing these monthly contemporary China events the Paulson Institute in partnership with Harris school which bill was the public policy school here kind of like the Kennedy School at Harvard where Bill is based since it's a new academic year and I see a lot of new faces some old faces I think what I'll do is I'll just say something quickly about the Institute in the series and then I'll say something about bills so the Institute is a contemporary China focused Institute on campus we work largely on macro economics and also on environmental issues in China we call ourselves to think and do tank most of the think side is macroeconomics and the do side is mainly environmental programming in China we used to be right here on Woodlawn so I used to get up here every month and say come knock on our door come visit us come talk to us about China but we've just moved our office downtown so like the Glitter Center and some of the other University of Chicago associated centers and Institute's that are downtown we're a little harder to get to now we're down on the on the mag mile on Michigan Avenue however we're still both individually and collectively around campus and we're gonna we decided even though we'd moved we'd keep doing this series it's a good way to talk to people on campus about China and keep people focused on what's going on which has never been more important in my view than it is now as things start to unravel a little bit between the US and China and in some areas I would argue in China too so this is a monthly series we do all kinds of topics we do economics we do politics we do society we do culture we have lots of interesting speakers lined up for this year we do it monthly we're gonna do one on media and the propaganda system in China we've got one on China and Africa lined up we have one on us-china relations we have one on the history of economic reform in China and what we can learn from that and we have some others too but bill Overholt an old colleague and friend is gonna kick us off and he's got a new book China's crisis of success I think you're gonna have some copies up so if anybody wants to buy a copy afterwards you can do that and Bill will sign it for you Bill's been around a long time with China and in different walks of life which is a good thing he's been around academic institutions but he's also been in banking he's run a global Research Institute and now is hanging your hat mainly at Harvard and writing but is still involved with lots of different interest groups and constituencies on China from war colleges to banking and financial services institutions and others I've always liked bills writing because you're a bit of a contrarian and not firmly ensconced in the conventional wisdom of which there's a lot these days when I was a couple of years into my ph.d program in the early 1990s your book the rise of China came out one of the first books around that said China was gonna rival the u.s. as a kind of pure competitor superpower really called the shot on a lot of aspects of China's rise and Bill has this new book out called China's crisis of success which I like because as I said at a time when there's a lot of conventional wisdom going around you'll see if you read the book and hopefully as we hear Bill talk that he hasn't much more diverse and complex view I think on China where people tend to see relentless success bill sees a lot of failure as well and reactions to it where people see a kind of totalitarian unity bill sees a lot more pluralism and where some people see China's policies particularly toward the outside world but especially internally being driven by a sense of triumphal success the way I've read your work is that you see a lot more complexity to that too and in fact some of it is driven by what we might call a reaction to failures of the system not just to the successes many of which are obvious for everybody to see so Bill's gonna kick us off for the for the mirror and as I said we do this every month and even though we're not on campus anymore keep in touch with us we've got our whole team is back there Damion ma how's the song didn't McMahon and all the people that work with us the think tank side our work by the way we've rebranded a little bit it's called macro polo now so it's it's a constituent part of the Paulson Institute but if you want to look at some of the work we're doing it's it's branded as macro polio RG of the Paulson Institute so you can check it out it's a slightly different web platform okay so bill we're very casual we'll have you come up and talk for half hour 40 minutes and then do your own QA and you'll find this is always a very lively group with lots of questions and lots of people know a lot about China in any case welcome everybody we're looking forward to the year and please join me in welcoming bill overhaul to Chicago welcome thanks Evan sit down thank you all for coming out to hear about China on Columbus Day it's a particular pleasure to talk at this institute if we had Hank Paulson Treasury and and Evan at state we wouldn't be in the mess with China that we're in today so I'm very happy to be here I always seem to have a viewpoint on China that's different from the conventional wisdom as as Evan mentioned there are reasons for that one is that particularly now China has the the best PR in the world and the people in Washington and in the media see this perfectly quaffed totally totally in control leader with all these titles and all the stepford bureaucrats sitting behind with the black suit and the white and they're like shirt red tie and it creates an image I also often differ with many of the China scholars and the difference is that I try to put things in a comparative perspective if you've only ever seen the color black you may not really understand anything about the color black and it's that way with studying China if you'll if you only study China you miss an awful lot so I'm going to try to put things in comparative perspective and the comparative spective that I use is China is one of these Asian miracle economies that's South Korea Taiwan Singapore to some extent Japan they all began as lemonis type holidays with extremely centralized socialist style economies important variations but this worked it worked in a particularly spectacular way and it the World Bank and the world's economists have studied these economies to death and we know what leads to their success but there are only about eight countries in the world that have followed the recipe for success now why is that isn't running a developing country all about development it turns out to be very difficult to implement all these lessons the politics is incredibly difficult so it works only in extremely simplified situations these start out and depends an exception because it was reconstructing an economy it wasn't developing from scratch you've got owners and peasants and road builders and cheap Sox manufacturers and even a government can figure out how to manage an economy like that and the politics is simplified if you notice these countries are all countries that started out extremely scared this is Japan after World War two South Korea after the Korean War Taiwan after the Chinese Civil War Singapore after very traumatic separation from Malaya and China after a really bad hair century and the simplifies the politics because the leaders know that they have to take really big risky decisions or the place is going to fall apart they do things that normal politicians would never try and the people accept things that they would never normally accept because they're scared they're scared that their families are not going to have food they're scared of civil war they're scary that their children will die before they're 5 years old so they take a level of stress that is not normal what do I mean by that well at the beginning of reform the peasants in onwe started taking back the land from the communes this went 100 100 percent against what the Communist Party stood for at the time but it endangered the most important lever of power the Communist Party had which was detailed control over the individual life of every peasant but Danks how being looked at this and he said hmm seems to be making the country more prosperous and the farmers seemed to really like it so will not only allow him to do it we'll spread it through the rest of the country and looking back especially through the eyes of economists this seems like the most obvious thing in the world to do but if you're looking forward from juncture pingas point of view this is giving up the most important lever of power the party head later the same thing happened in the city and that Zhu Rongji and Johnson Minh had to give up a lot of control over industry in lives of people in industry and again they took the risk of giving up these terribly important levers in return for economic successes that would give the party the voluntary support of huge numbers of people and it worked but they didn't know at the time that it would work I talked about the stresses that the people accept Zhu Rongji laid off 45 million people from manufacturing jobs in ten years now he found them jobs in the service economy for the most part I think how this country react to losing three million industrial jobs in ten years we're still traumatized by it our politics today to some extent follow from that and he wanted to cut the government in half and at the top levels he came pretty close can you imagine Ronald Reagan saying he's going to cut the US government in half unthinkable China's got a much bigger government to cut in half not just proportionate to the population but the bigger role on society the people accepted this because they were afraid one of the things that happens when an economy succeeds the simplicity goes away the fear goes away you get into a different situation when reform started I could see that Deng Xiaoping was just copying things that had worked policies that had worked in these other countries and so I said I wrote this book the rise of China which at the time was a very contrary to the conventional wisdom the leading review in London said this guy's Bank must have paid him a lot of money to write such nonsense but for me it was a you know when I'm Park chung-hee was doing these things in South Korea and judging I was doing them in Taiwan our our intellectual and political leaders hated it they said this is awful and it will never work but it did work and for me the only issue was could you scale it up to the size of China and that that question has been answered by the middle of Huijin Taos era he was 2013 2003 to 2013 I felt they were on a different track and started writing different things in this book is the culmination at least me with a very different image an image of leaders who are fighting the emergence of this complex economy and complex polity don't know quite how to manage it feel terribly vulnerable and this is very different from this behemoth the people in Washington perceive this this Putin like figure who is totally in control running a an economy that that has this totally controlled structure that's going to grow fast for the for the indifferent period and it's a behemoth that it's going to roll over a poor helpless Americans if we don't react very strongly that that is not my image now unlike 25 years ago when I wrote the rise of China I can't tell you what's going to happen I don't have a strong prediction except the changes coming what I can do is give you a way of thinking about where China is in its evolution and a set of indicators that you can watch and make your own conclusions so my characterization of China is that it's having a crisis of success what's a crisis is success well suppose you're Silicon Valley entrepreneur and you invent a really cool widget and it just takes off and you're making a lot of money but you're running this company essentially as an entourage and and you get to the point where you need more money and you need you need more structure you've got to lift on the stock exchange all of a sudden you need real professional accounting and real professional human resources and a public rulebook and a board of directors you have to transform the business and if you succeed it keeps on going and if you don't you get into this Elon Musk moment where maybe it'll work and maybe you won't and it could Plateau or it could crash all these miracle economies hit this point they hit it quite dramatically because because of the degree of their success you get a big success in a big crisis the crisis always manifests itself the same way the big companies start having problems and in China today the the big state enterprises can turn back their cost of capital and the economy as a whole gets into a degree of financial squeeze Shannen today has a high ratio of debt to its economy South Korea in 1979 had to borrow huge amounts of money it had a 40 percent inflation rate and in addition to the economic and financial problems politics changes character you have more demonstrations you have really powerful interest groups and huge numbers of them so the leader starts feeling that things are coming unstuck and and they have to react to that so how is China responded to this well they see the the problems of economic complexity very very clearly and I would argue that their economic planning on paper has been the most sophisticated in oral history long before si Jinping was even a clear choice for next leader the National Development Reform Commission worked with the World Bank and published a book called China 2030 so we need all kinds of market reforms and governance reforms and then after si Jinping came in what was called the third plenum published a plan started with the market allocation of resources and drew about 300 specific reform conclusions from that axiom of the market allocation of resources now if you turn a lot of the decision-making over the market you you overcome the problem of complexity you don't have to make all the decisions out of a few little offices in Beijing and in economic theory they should be more efficient but they've had problems implementing these policies the politics has gotten in the way and the response to political complexity has been a very tough crackdown try to get control and there's a lot of tension between the the economic response and the political response to very similar problems now if you go back to the early Asian miracle economies and in Taiwan the leader Jung ching-kuo was a really tough nasty character he was a member of the Soviet Communist Party he was Taiwan's toughest security chief in many ways he was much more unpleasant toward dissidents than the guys on the mainland now the mainland they put you in jail and let you rot judging what would take you out to Green Island and shoot you but he was in touch with his Society and so he allowed a very gradual evolution of a market economy and a market like political system so that the transition was relatively smooth this starts with the Gauss young Institute in 1979 and evolves through the 80s in South Korea Park chung-hee didn't get it he was going to be King Canute pushing back the tide and they had a bunch of big demonstration student demonstrations scheduled for October of 1979 the Korean CIA told him things are getting complicated you better make consistent concessions and and do some deals or it's going to be chaotic parks bodyguards said stationed sharpshooters on top of major buildings and shoot the student leaders and park went with the bodyguards so the head of the Korean CIA and there's the second most powerful man in Korea a good friend of Buck Jung he invited him out to dinner with two pretty girls and shot him in the head because he he thought otherwise Korea would be completely chaotic so Korea had a little more difficult transition than Taiwan did in many ways China has chosen a super sophisticated version of of Taiwan's economic evolution but an analog Park Chinese political approach by that I don't mean that C Jinping is going to get assassinated I think that's very unlikely but having characterized the situation let me go back and look how China got into this crisis of success it starts with Zhu Rongji and Jung Simon and these extraordinary market reforms in the period leading up to through 2002 they laid off 445 million people they tried to cut the government in half and this just stressed out the population again compare that with what happened with three million people in this country by the last 18 months of Jurong G's decade people were just expressing hatred of Chu Han Jie he's back to being a hero today which is which is right but they just couldn't take it anymore so they got a new leadership under who Jintao where the the promise was harmonious society now harmonious society had all sorts of layers of philosophical meaning but the operational meaning was no more jus on Gmarket reforms and so market reform pretty much came to a halt but there was also a problem on the political side you had nine leaders in the Politburo Standing Committee a lot of disagreements and they worked by majority vote we have an institution that works that way it's called the US Supreme Court decisions were very judicious but not very fast or decisive and who Jintao himself had although he early in his life he'd been known as very lively skirt-chasing kind of guy had very severe diabetes and so he was rather sluggish and his rather sluggish government to face a new phenomenon rise of very powerful interest groups under Jung Simon they they spent their time centralizing control getting control of that National money supply getting to a position where they could move military leaders from one district to another getting to where they could easily fire a governor of a province under who chintala they seemed to be losing this the ministries weren't necessarily listening to the Prime Minister the local governments weren't necessarily listening to the central government the military was doing all kinds of things that weren't weren't on the basis of orders from on high and these really powerful interest groups and we think the the National Rifle Association is a powerful and renewable let me tell you about a really powerful interest group the petroleum faction in China they had control of the flow of energy for China and there was a market price and there was an official price and they were pocketing the arbitrage between them so making tens of billions and the head of it Joe Yongkang was one of the nine people running the country and he was trying to security chief now there's there is a powerful interest group Chinese interest groups are the size of European countries and the power of European countries they're a lot more unified often than than European countries so here's a economic and political dilemma that the leaders are facing eight years ago what do they do well the economic theory is market allocation of resources the political theory is we gotta centralize things and get everything under control so you go from nine guys running the country to seven it's all guys and the seven exclude the political extremes beaujolais who liked a lot of reactionary Maoist slogans and Wong Yuen and Li yuanchao who who were called extreme reformers more democratically minded and I said the new guy will get immediate control of the military whereas who Jintao had to wait for two years and they created a National Security Council for the first time and a number of what they call small leading groups in charge of military reform economic reform taijuan policy and they put the new guy in charge of all these things so you go from from sluggish decentralized to extraordinarily centralized and interestingly they chose C Jinping who had a relatively narrow domestic political base that's important [Applause] now how does this work out well when you try to do the market reform so you find they step on the toes of all the important groups in Chinese society you let the market allocate resources party groups lose power government groups lose power the state enterprises lose their advantages and and because those state enterprises are most of the customers of the banks the banks get unhappy and in many ways the most unhappy are the local governments let me tell you about local government we studied when I was running a think-tank in Hong Kong Foshan fabulously successful city per capita income of $15,000 for when we were studying in a way ahead of the rest of China and their debt service their interest payments plus their principal payments it's a hundred and ten percent of their tax revenues they solved that by taking land from the peasants putting in a little infrastructure and selling it back at ten times the original price that worked pretty well for a long time what is reform what is reforming reform means the interest rates are freed and go up and so that hundred and ten percent becomes a bigger number and you're not supposed to take so much land from the peasants so your revenues go down another thing that means in the past they didn't have to provide social services to the rural migrants who are 50 percent of their puppy nation under reform they're supposed to end up providing education medical care and unemployment insurance and pensions so basically their social costs double now if you're the mayor the local party secretary see my god they're trying to kill us and you push back so the pushback is very strong the military is also getting reformed all that many of the leading generals were were put in jail and their staff was reduced by 300,000 it's very risky for a government to take on every powerful interest group in society at the same time I joined the banking world because of some predictions I've made for instance that when I saw the Shah of Iran having alienated every important interest group I started saying he's he's going to be a goner and I saw the I saw this happening in Poland in 1980 is my first country risk review for a bank that I did there's no more risky strategy for any government than taking on every powerful interest group in society at the same time nobody is taking the kinds of risks that C Jinping it is taking so how do you work on this well you the first term is for consolidating power takes five years get ready and the second term just started is supposed to implement these reforms and they got thinking they're awful lot of people who are going to be unhappy about these reforms so we better allow a third term just in case because there gonna be people who want to rollback all the policies and they may even come after the folks who implemented these unpleasant policies so that's that's been the thinking implementing the policies turned out to be very very difficult the powerful tool for rolling the interest groups is the anti-corruption campaign and get in jail Yongkang of the petroleum faction that i mentioned earlier but the anti-corruption campaign creates another problem it scares everybody if your implement if I'm implementing a reform and I'm stepping on your toes what are you gonna do you're gonna say I'm corrupt and I probably am so I feel very vulnerable so instead of pushing really hard and reform I'm gonna try to hide under the table I want to be the kid sitting in the back row that the professor won't call on and so reforms have tended not to happen very much and those facing this situation every time xi Jinping is faced with a choice between having his cake and eating it he says I'm gonna have my cake and eat it too he doesn't make the big decisions he says we're going to have market allocation of resources but the manufacturing program for 2025 and innovation are going to be achieved by providing huge subsidies of 1.7 trillion dollars over a period of years to state enterprises is that market allocation of resources I'm not going to talk about all these but these choices are the indicators you can watch to see how China is going I'm going to tell you I can't predict the outcome except except I can predict that things aren't going to remain the same but you can watch these things I go through the full list in the book since we're going to market eyes the state enterprises but we're in creeping to increase the role of the party committee inside each enterprise and not just in the state enterprises but in all private enterprises these party committees are going to have veto veto power or control over this the business strategies of the companies si Jinping gives wonderful speeches about the importance of the role law but he says we've got to strengthen the party commission that actually oversees the verdicts there are some problems here this tight control is supposed to create both the reality and the perception of national stability and and if you're if you're American media person or a politician in Washington why it looks like he's really got things under control you talk to Chinese people they see this as an unstable risky situation it's been years since I met a middle-class or upper-class family that wasn't trying to get its money and its kids out of China now who who's you do you want to take the view of the commentator from Washington or New York or the Chinese people so he's in a very complicated position on policy so the conventional wisdom is that this is the most powerful leader since about Satan and the evidence he's defeated all his adversaries very decisively and he's got all these titles and he's been very popular on corruption and on environment corruption it's kind of fading because people are starting to feel is is a little bit too factional but on the environment he is still very very popular and he's doing good things but these things are different from the ability to implement difficult policies his indecisiveness doesn't look to me so much like my let's say tongue or Deng Xiaoping it looks more like Teresa may in the United Kingdom is he the new Putin it's almost the opposite yes they're both authoritarian but she is a creature of the Communist Party and he remains a creature early Communist Party Putin's party is a creature of Putin it exists to serve Putin the Russian economy exists to serve Putin Xi Jinping is a guy who's been given a job to do so we have a situation where a leadership that feels well very vulnerable and a leader who feels very vulnerable are reacting as much as possible against that and you can buy the image or not but I I see the essence of the situation as vulnerability part of the vulnerability is that this problem of political political complexity has always proved to be relentless and again you read every American policy magazine Foreign Affairs foreign policy they say oh we got it wrong these these pressures don't have the effect we thought they would well we don't know what the effect is things take time in China but they're having a very powerful effect what we're seeing is a very strong reaction against these pressures and there all sorts of groups who are not doing overt things at this point but who are very unhappy and the lesson of history is that this unhappiness has consequences let me just take this one group that's very important business executives entrepreneurs these people throw their lives in the building of business and the party secretary calls up and he says I got a new project downtown and I need you to contribute a million dollars to it and the million dollars needs to be in my bank account by next week or you're shut down entrepreneur has no choice deposit the million dollars right now I talk to a lot of these people and they're very unhappy about this and they're unhappy that their friends are just disappearing all the time nobody knows who disappeared those local thugs was at the local discipline inspection Commission is it the central discipline construction Commission and you can't ask because then you may disappear under the current economic situation where the government is trying to get debt under control the local leaders still have the same responsibilities for creating growth and educating kids and building roads but their ability to get money is less and less and less the banks are putting the squeeze on them what do they do they take more and more from the local businesses now if you read studies of history Barrington Moors Lord and peasant and the making of the modern world the relationship between a government and its bourgeois entrepreneurial class is very very consequential it takes time for those consequences to become apparent but they do become apparent eventually so we shouldn't assume that because China's got a thorough terian system that that is functioning right now that these pressures are not going to have some kind of consequence and right now China's in a spiral where the more people organize and complain the more the government feels threatened and the bar and what's threatening keeps getting lowered so now almost any religious group is seen as threatening and five women getting together to complain about being groped in public is seen as threatening and it's kind of a slow spiral it's it's it's difficult to know again exactly where that ends but it it probably ends somewhere different from where we are today doesn't mean that western-style democracy is inevitable it definitely is not and our policies of having that kind of ideological war against China make it much less likely because then what our policies do is mean that if China goes to our kinds of elections and so on and defeat at the hands of a foreign enemy and no Chinese leader can accept defeat at the hands of a foreign enemy at the same time China's not had some kind of grand collapse they have built a very solid system as Japan did as South Korea did as Taiwan and Singapore did and here I part company almost completely with the majority of American social scientists and I just I'll just pick on a few of these the great development economists of our ear awesomo Glo and Robinson at Harvard and MIT they have shown very convincingly that if you want to sustain economic growth over a long period of time you have to have an inclusive society not a society who are a few people on top or grabbing everything and they assume the political and inclusiveness and economic inclusiveness are the same well let me tell you how to and they make a lot of negative comments about China it's a non inclusive society well let me tell you how to build an economically and socially inclusive society in one of these poor countries first you take the society's major asset which is land and you redistribute the land and land reform so everybody gets something and then you educate everybody on all these countries did it unlike say India where a third of the people are illiterate and half of the women are illiterate and then you give everybody a job mostly in the modern economy by building the right kind of infrastructure and having the right kind of rules you attract labor intensive manufacturing everybody becomes over gradually a worker in textiles and computer assembly again this doesn't happen in a place like India or the Philippines because they're incapable of building infrastructure and enforcing the rules in a way that it's attractive to locate those textile companies and computer companies there and then who are the major beneficiaries of all these jobs women you go to a textile company or a computer assembly company and you have 11 Taiwanese guys and 8,000 Chinese women and it's still very unfair that's 11 Taiwanese guys but most of the employees are women in traditional society is all agriculture and the only thing that counted was muscle power and then men had somewhat bigger muscles so it was very patriarchal this women go 500,000 1,500 miles to get these jobs first year they have a rough time second year on there's a whole literature on this you start feeling the only thing that's gonna make me succeed is me and I'm gonna succeed and it's the women who end up exposed to modern society and so women who end up with a little nest egg that can be the down payment on a home and this shifts the whole balance of society there are feminists who are writing about the remaining problems of women and Chinese to say which are very severe but if you compare with India where these things don't happen the difference is dramatic and on all the scales of the World Bank and the United Nations Chinese women come out very high I'll give you one indicator of how things have changed the woman used to have to bring a dowry in order to get married now the man has to prove that he has an apartment she won't date you unless you have an apartment very fundamental and then you give everybody a home guess which country in the world has the right height highest rate of homeownership China 85% the u.s. various between 62 and 64 percent and then you have a great property price inflation again Japan has experiences Korea Taiwan Singapore and China is probably just peeking out these pieces of property that everybody has become very valuable but everybody ends up with a stake in society that's an inclusive society on the other hand you hold an election in a country of landlords and peasants the landlord's get together they get elected and they screw the peasants India you have great Indian Institutes of Technology but half the population doesn't get educated you have world-class hospitals and the same is true in the Philippines in Thailand the peasants don't have any money to contribute to politicians they don't have to know how to organize that they get left out the world-class hospitals are for the elite your kid has about five or six times the chance of dying before he's one year old in India than in China and the mother has a much higher chance a lot higher chance of dying so this is an inclusive society they're fixing their environment they're digging out a very deep hole but unlike India they're dealing with it and so on on on the other major issues so as in Korea and Taiwan and Singapore the basic system is very basic institutions are very solid they're give me a lot of issues at the top a lot of issues of economic and political management but they've built a very solid system how might this all work out well the this the precision thing group says he's going to consolidate power and then implement reform economic reforms and somebody else will do political reform one thing nobody says by the way is that things are going to remain the same China's great strength is that they see themselves a developing place economically and politically this compare is contrasted with the old Soviet Union or racially haven't Andropov and so on thought we've we've created the ultimate system it's going to take over the world it's going to stay the same another possibility is they'll do successful economic reform and then have a political crisis because they won't deal with the politics the worst outcome is if they fail at economic reform failure would mean the interest groups taking over the way they took over in Japan Japan had this great take off and then five interest groups essentially took ownership of the Japanese political system in the late 70s and growth when it wasn't the 1990 stock market and property market collapse that left Japan relatively stagnant it it this all happened in the late 1970s continued and then because they turned inward and these interest groups took over it protected themselves against domestic and foreign competition China then would stagnate maybe around $15,000 per capita in Japan they stagnate around 45,000 that's pretty comfortable at $45,000 per capita 15,000 is a third of Japanese incomes and the Chinese people are never gonna accept that so if they succeed in economic reform they've got to deal with the politics so they fail at economic reform they've got to deal with the politics so I can't tell you exactly what the outcome is going to be but I can't I can tell you it's gonna be different ten years from now than it is today you mentioned you just revealed this whole progress of Chinese political system you mentioned 2mg and I have an anecdote here in 2000 I remember in the People's Congress the press conference to set some some reporters in the question so now we have the mock mock rattle collection in the village level well we wait one way we have in provincial even national level and Jun Jie's word literally was in soon as possible I hope which is running in direct conflict with you know what's happening this year in the same venue you know in People's Congress so my question is it looks like some people Pertwee it there's a epic must full calm long game is a big calm carried out by different different generations of Chinese leaders even though they sometimes in politics power struggle but they still manage to work together and secretly for this long even though they you know occasionally literally want to kill each other so my question is what do you think drives this kind of policy shift is that really our craft crafty you know long game strategy routine so-called a hundred marathon or is it you know the she was you know the later generation leaders are actually refuting the plan laid out by the former you know generation leaders or it's more nuanced than both of these views it's like different generation are working you know basically independently on their own agenda but they converge to a seemingly Kohi coherent policy which seems work work as well until you know pretty recently for China so what kind of thing do you think are driving this shift and direction thank you a great question one of the things you notice when you step back from from the details is each generation of leaders responds to the weakness of the last generation done shall pay now easily responded to miles problems who Jintao's harmonious society was a response to the excessive stress of Zhu Rongji Xin Johnson in three forums the current centralized system is a response to the the inadequacies of who Jintao's political control and reform slow-slow reforms and so they've been in touch with their society at the same time as in this country where you know we've always had strongly contending views and so far it's sort of worked out you you have this incredible contention that under Mao it got out of control dunks helping achieved a kind of balance you know as dung didn't try to grab all sorts of titles he governed for a while as honorary chairman of the Chinese bridge player Society he allowed a certain degree of open opposition chun-yin opposed a lot of his urban reforms there was a propagandist named little Dane who was very nicely in opposition but there was a kind of balance I think Johnson Minh will go down and as more and more of a genius he kept he kept leaping and and Zhu Rongji in the same government and not killing each other now the leaders are trying to figure out how to keep things on track in that sense at beta in every August the the real leaders the ones who don't have to have titles get together and talk about what needs to be done including they choose new leaders and this year they got together and kind of central theme was Xi Jinping is overdoing it how do we how do we get things back under control there there's the China's weakness is that there's no institutionalization of a system that that keeps things in balance over time despite all the contention Deng Xiaoping was able to create its designate leaders and to create certain norms but some of those norms are are getting destroyed now and I think a lot of people in China have some of the same concerns that we Americans have many of us Americans have about Trump so they've done pretty well from from 1978 until until now but but there there are no absolute guarantees I think they they have two advantages one they evolved very capable leaders who really care about the country as a whole and divert into it a little anecdote when they published China 2030 the guy the Chinese guy who was in charge of that excuse me had the office across the hall from me at Harvard and I said great plan but you've got a very diverse group of potential leaders what makes you think they'll implement your plan and he said well mister overall yes our leaders are very diverse well we have an advantage over you our senior leaders are all numerous they could see what was happening in the economy they all know what the problems were but there are no guarantees I have a question so China has been changing his demographic policies recent years and I wonder is a would you change or would you comment on any of your analysis result in in the perspective of demographic situations in China yeah so their demographic squeeze is going to become as serious as Japan's and in Japan and had very drastic consequences if you just run the numbers it is theoretically possible through a combination of Education urbanization and increased competition that she could completely overcome yet the of the demographic deficit those policies are not being pursued to a degree now that would overcome it and one of the consequences is you get a huge number of retired people and and a lot of people who have to change jobs and the welfare costs of dealing with all that just go through the roof and they were investing at remarkably accelerated rate to deal with that under siege in ping they're putting more money into things like the military and their rate of investment is is looking less adequate to deal with those problems so I think they are I think they're gonna separate some of the difficult consequences of the demographic deficit the change to the multi child family from one child policy it is interesting because the reality is that almost all of the concept what we see is the consequences of the one-child policy are actually simply consequences of giving women more than an eighth grade education everywhere in the world when women have more than an eighth grade education the number of babies they have - they want decreases drastically and so if you look at at comparable demographics in India meaning groups getting an eighth grade education the patterns are about the same the wind child policy had very serious human rights consequences but the demographic consequences were probably pretty marginal and from that you won't be surprised that changing to a multi child policy isn't having anything like the consequences they had hoped the women don't seem to be having a lot more children and in any case even if they did it would it would be a full generation before that would make any difference to the economy the word of freeze reform has become a controversial issue in China itself part of the reason is everyone whatever they do say that they are carrying out our pursuing some form of reform and in fact a lot of the dissatisfaction today is about how certain policies are carried out in the name of reform but in fact the retro aggressive rather than progressive so you list particularly in thinking about the potential outcomes the importance of economic reform can you elaborate a little bit on the reform as you see that's needed for China yeah well the thing that too many Americans focus too much attention on is state enterprise reform and they should be going to a more competitive basis they're not they're being consolidated in the national champions they should have to compete equally for financing there they're getting a higher share of total financing they should face more private and foreign competition they're effectively eating a lot of their private domestic competition and the foreigners are are getting squeezed so that's really not happening some kinds of reform have happened interest rates are largely market interest rates today the the foreign exchange rate is largely a market rate today is managed around the edges but it's it's pretty close to a market exchange rate they had intended to make the Chinese currency important global currency like the dollar and in support of that they had a whole program of reducing capital controls and allowing money to flow it out freely because you can't be a global currency unless unless people have guaranteed access to the domestic markets because because people are scared and trying to get their money out of China they've had to reimpose a lot of capital controls so the the whole remember internationalization has got actually gone backwards I I published a book about that a couple of years ago and I italicized one sentence in the book which was it's the the downside of all [Music] the risks to women or an under the internationalisation are on the downside and I now thank God for that sentence because it's gone more to the downside than I would have expected they are they're trying to get they're trying to get private companies fair access to financing that's not happening there that the credit to the private sector is declining private sector investment which is which is where most of China's growth comes from and almost all new jobs come from dropped from 18% growth rate to 2% now back to about six 6% is less than the growth of the overall economy so there are many many of these areas where China's had the most success is moving industry upmarket they need to get out of making cheap socks and into making higher value-added stuff and they've allowed the market work to work there they've they've accelerated the effects of the market I've done a fantastic job there so it's a very mixed bag while ago you talked about how China needs institutions to maintain balance that reminds me Winston Churchill in his biography of his ancestor Marlborough talks about politicians that he called trimmers who were able to tack from one way to another to achieve some great public good and so in that view it was a kind of active politics certain kinds of leaders couldn't bring about to balance but it strikes me that Xi Jinping is not that kind of leader that in fact his moves toward reform are really pseudo reforms the anti-corruption campaign being a big example that the real objective remains keeping the monopoly of power of the Communist Party but is it possible that there could be a market a pro market faction and then a pro like public good faction and that there were be a politics about maintaining balance between those that talented political leaders could do we might say the same thing is needed in the United States that this is a problem of a kind of coalition that benefits from political machine versus a more open competitive market system yeah I think that's a good point and this is one of the places where we have to be the Americans have to be very careful about lecture in China because we had these kinds of politicians like richard lugar and republicans and Bill Bradley and the Democrats who who focused on the country and maintained the kind of balance and we've gotten rid of almost all those in the Congress so we can't stand on a moral platform and and and criticize China China is full of and the Chinese government are full of pro-market reforms and there's some of the most capable people in the world the people at China's central bank National Development Reform Commission and Ministry of Finance many of these people we would be really proud if they were leading parts of the American government the previous central bank governor I got you know Joe was extraordinary C Jinping has these people in this government Lu ha and graduated of Harvard's Kennedy School he is Xi Jinping's top economic adviser and he understands the market he's a very very sensible admirable economist and economic manager so they have these people political side they also have a cadre of of senior leaders who think first about the country and secondly about themselves or anything else so there there always is a potential for for balance for overcoming mistakes and that is also true on the political side you know when who Jintao was vice president of the country and president of the central party school which trains top leaders central party school worked very hard on on three scenarios for democratization and so some of us thought that maybe when he became party secretary we would see very fundamental political reform and it didn't happen but we still have senior academics and senior officials who come to Harvard and talk about the importance of rule of law talk about the importance of some kind of democratization so it's if there's any single point I could I can leave you with it's most important it's just as it turns out we have not reached the end of history in the Western world China China has not reached the end of history and I think one of China's great strengths is that they know they haven't reached the end of history I think even see Jinping would say 25 years from now both the economy and the politics will be quite different he and other people would probably disagree very fundamentally about different in what way but that they understand that things change and have to change and that that this is a developing system thank you very much for coming [Applause]

Channel: Paulson Institute

Views: 7,602

Keywords: China, Paulson Institute, Harvard, University of Chicago, Harris School, US-China Relations, Beijing, Kennedy School of Government, Overholt, China’s Crisis of Success, Political Science, International Relations, Economic Development, Political Theory

Id: uEfVMEk2UeA

Length: 77min 24sec (4644 seconds)

Published: Mon Oct 22 2018