Is there are an ideological divide over China’s regional divide?

Headlines in the Chinese official media over the last couple of days have been dominated by Xi Jinping’s tour of Yinchuan, in the western province of Ningxia. The visit was the occasion for some stirring rhetoric about helping poorer regions like Ningxia; on his first day, Xi declared that

No region or ethnic group can be left behind in the drive to build a moderately prosperous society by 2020 (到2020年全面建成小康社会,任何一个地区、任何一个民族都不能落下)

He also made a speech at a conference on poverty alleviation that emphasized the duty of the prosperous eastern provinces to aid the inland. In a no-doubt-deliberate echo of Deng Xiaoping’s famous formulation that “we permit some people and some regions to become prosperous first,” Xi said that

The first to prosper should help the latecomers, to achieve the final goal of common prosperity (实现先富帮后富、最终实现共同富裕目标)

The conference was about a system where wealthier cities and counties in the east are “paired” with poorer counterparts in the west, which Xi praised because

a gradual reversal of the trend of widening regional gaps in development has been achieved, and poverty alleviation in impoverished western regions and old revolutionary areas has made great progress (区域发展差距扩大的趋势得到逐步扭转,西部贫困地区、革命老区扶贫开发取得重大进展)

(For the sources, here are links the first round of official reports in Chinese and English, and the ones on the poverty alleviation conference in Chinese and English)

Of course, it’s stretching the truth a bit to say that China’s regional gaps have been narrowing; the widening regional gaps in the current slowdown have been a huge subject of huge public debate. But I’m more interested in what Xi’s comments show what he thinks should be done: of course, regional gaps should narrow; of course, funds must flow from wealthier provinces to poorer ones. So this latest propaganda push seems like a very clear example of the egalitarian-Maoist strain of thought that is still very powerful in Chinese economic thinking.

Which is interesting, because some people who are close to Xi seem to have have been pushing back quite strongly against this line of thought. In early May, the People’s Daily carried a now-famous interview with an unnamed “authoritative personage,” who is widely assumed to represent the views of Xi’s top economic advisors (Barry Naughton’s recent piece in the China Leadership Monitor is the best overview of the debate). The piece got headlines for the way that it directly attacked stimulus policies and openly expressed worries about debt and slowing growth, all in a rather harsh tone unprecedented in recent official discourse. But the “authoritative personage” also attacked the notion that widening regional gaps are inherently bad, and must be aggressively tackled by the government. Here is the passage, in my translation:

Question: At the same time that the economy is slowing, we have also noticed that the trend of divergence has become more pronounced: the stabilizing and improving trend in the economy of the eastern coastal region has strengthened, but some resource-dependent provinces in the northeast and the west are still experiencing economic difficulties. Some foreign media call this “two worlds.” What signal does this trend of divergence send?

Authoritative Personage: Divergence is a necessity of economic development. …

In the “new normal,” we need to optimize the allocation of resources, develop new growth drivers, and form a new industrial structure. Therefore the faster divergence happens, the better. Whether we are talking about regions, sectors or companies, one part of them will, following the “80-20 rule,” obtain 80% of the benefits, and stand out from the rest as having a bright future. And there is another part that will experience hardship, but will also learn a lesson and will know what to do next. To me this is not a bad thing.

Since China began reform and opening up, the divergence in the economy has accelerated, and in this process there has emerged a group of vibrant regions and competitive sectors and companies with famous brands. After the global financial crisis, divergence in the world economy accelerated, our country entered the new normal, and domestic economic divergence further intensified. Last year, in analyzing the first quarter’s economic trends the Party Central pointed out that as long we actively adapt to the new normal, and focus on innovation and qualitative efficiency, then the trend of development will be relatively good; if not, the pressure will be very great. This year this trend has continued and even intensified, so while some are happy others are worried.

In the foreseeable future, amid economic divergence, vibrant regions and internationally competitive sectors and companies will continue to arise, but some regions, sectors and companies will encounter more and more difficulties. … The people in these regions, sectors and companies have now shed their illusions, are relying on themselves, are taking the initiative to promote reform and innovation, and are striving to catch up.

The “authoritative personage” is presenting a more classically laissez-faire view, where regional gaps reflect the workings of market forces, and the failures in the backward regions are in fact necessary for them to develop further. Xi himself on the other hand seems to be more comfortable in a more paternalistic and interventionist mode. This of course is not the first time that different parts of the leadership have sent conflicting messages about the economy, and is another indication that the economic strategy at the moment is rather confused.

When “It’s the economy, stupid” falls short

I read the news today, oh boy. For some clear thinking if not reassurance, I recommend an essay by Yascha Mounk at Project Syndicate, in which he surveys various people’s takes on the recent global political instability, and comes down fairly hard against the economists’ argument that all this stuff is the result of stagnating incomes. Here is a condensed excerpt, though the whole thing is worth reading:

In what sense are politicians as different as Trump, Erdoğan, and French National Front leader Marine Le Pen connected? Does the anger that has set so many countries’ voters against their political establishment have common causes – and, if so, are there common remedies that can halt the rise of populists? …

According to Bill Emmott, former Editor of The Economist, the reasons are straightforward: “the interests of ordinary people have been subordinated to those of the elite.” … Harvard’s Dani Rodrik agrees, arguing that “the internationalization of markets for goods, services, and capital drives a wedge between the cosmopolitan, professional, skilled groups that are able to take advantage of it and the rest of society.” …

The problem with these explanations is the mismatch between the root causes of popular anger and the form this anger takes in most countries. Supporters of Trump or the Netherlands’ Geert Wilders may blame free-trade agreements for eroding job opportunities; but the bulk of their energy and anger is directed not at prevailing economic orthodoxy, but at social policy. The defining feature of their political brand is hatred of immigrants, not of the World Trade Organization. …

Joschka Fischer, a former foreign minister of Germany, has a more radical view of the economic causes of an essentially cultural rage. He argues that the “White Man’s World” is under attack from the “globalization of labor markets, gender parity, and the legal and social emancipation of sexual minorities.” Immigration is the “issue that brings that prognosis home (not just metaphorically) to today’s angst-inspired nationalists.”

Fischer’s view helps to explain a puzzle identified by Daniel Gros, Director of the Center for European Policy Studies in Brussels. If losses from globalization “account for the rise of populism, they must have somehow intensified in the last few years, with low-skill workers’ circumstances and prospects deteriorating faster vis-à-vis their high-skill counterparts.” But “that simply is not the case,” Gros shows, “especially in Europe.” While the economic transformations of recent decades help to explain falling trust in existing political institutions, it is facile to assume that it is primarily globalization’s immediate losers who support the populists, much less to expect that an upswing in the business cycle will halt the populists’ rise. …

The most optimistic observers emphasize that the costs of globalization stem from politics, not economics. As J. Bradford DeLong of the University of California at Berkeley argues, income stagnation was caused not by globalization, but rather by politicians who have “failed to implement policies to manage globalization’s effects.” … But if such desirable policies exist, why should our political systems, having failed to pursue them in the past, be able to do so now?

In my view, the choices facing us in the next decades may be far starker than the optimists admit. There are three reasons why attempts to shore up living standards are unlikely to stem the populist threat: the right policies might not be adopted; even if they were adopted, they might fail to redress economic grievances sufficiently; and, most important, even if they did redress economic grievances, they would not necessarily defuse the culturally-based anxieties of many citizens. As Harvard’s Ricardo Hausmann emphasizes – and as the Brexit vote clearly showed – the “sense of ‘us’” is more important to many people than achieving greater success through integration with “others.” …

This implies that redistribution and compensation of globalization’s losers will not be enough, and that liberal democracy is likely to become an increasingly unstable political compound.

I find this convincing albeit somewhat depressing. I think it’s pretty clear that the Trump phenomenon is mostly about white identity politics rather than economic issues, and that the Brexit vote was also mostly about English nationalism rather than economic issues. Greg Ip’s recent column has a good summary of research on anti-immigrant sentiment, and how it is in fact driven mainly by national identity rather than economic issues.

The benefit of an economic explanation of the populism/nationalism/whatever thing that is going on in so many different countries is that it can unify what is being explained: all these events are manifestations of the underlying trends in the global economy. I’m don’t find the economic explanations that convincing, but the alternatives are admittedly more complicated. If the working-out of national identity issues is central, as it indeed seems to be, that makes it harder to explain in terms of a cross-country phenomenon.

So I don’t have the unifying field theory for all this, but I do think it’s worth thinking more about how to understand nationalism. One basic conclusion is that politics is not in fact economics by other means, but actually about politics. And there is no more crucial political task than defining the nature and boundaries of the political community. Reflexively looking for the hidden economic interests underlying a political position is a Marxist fallacy if there ever was one–invoking “it’s the economy, stupid” is not always the smart move.

Three books on Russia

I’ve been on a bit of a Russia kick in my nonfiction reading of late. In part that was because I felt like knowing more about the history of Communism would help me understand China better, and in part because I just wanted to know more than what I learned from my initial immersion in its 19th-century literature at university. So far I’m batting a thousand, as all three of the books I somewhat randomly chose have turned out to be very worthwhile:

  • Orlando Figes, Revolutionary Russia 1891-1991: A HistoryA concise and very nicely written general history, which did exactly what this kind of book is supposed to: conveyed the big picture in a clear and vivid way, and made me want to learn more about many specific questions.
  • Rosemary Sullivan, Stalin’s Daughter: The Extraordinary and Tumultuous Life of Svetlana AlliluyevaOverly long, as is so often the case with biographies, but still consistently fascinating and moving. She was dealt a horrible hand from birth, and tried valiantly to live an ordinary and decent life anyway–it is impossible not to feel sympathy for her, though she also made many poor choices. The book is definitely about her and not really about Stalin, though it still conveys something of an insider’s perspective on the USSR.
  • Charles Clover, Black Wind, White Snow: The Rise of Russia’s New NationalismOne of the most interesting pieces of intellectual and political history I’ve read in a long time. The book starts as quirky historical detective story, digging out the origin of some unlikely ideas in an unusual cast of characters, including Russian aristocrats and structural linguists. Then it morphs into a more journalistic account of recent Russian political history, detailing how those unlikely ideas came to have real political force. Altogether an excellent explanation of where Russia is today and how it got there, highly recommended. Check out this excerpt for a taste.

I haven’t decided what Russia book I’m going to tackle next, but I do feel like I need to know some economic history of the Soviet Union, and have added some recommended titles to my list.

What I’ve been listening to lately

  • Chris Potter – Song For Anyone. I first heard Potter’s searching tenor sax when he was a member of the late, great Paul Motian’s bands, but am only now catching up on his solo work. His Imaginary Cities, a work for a large ensemble including a string quartet, got a lot of notice last year, but it was not the first time he had put together a big group. I also enjoyed this 2007 recording, which is perhaps even more accessible.
  • Ike Quebec – 1944-1946. Quebec would go on to record many moody, bluesy albums for Blue Note in the 1960s, but his big tone is also a treat in these earlier small-group swing sessions.
  • Charlie Mariano – Deep In A Dream. Mariano’s keening alto sax was one of the key ingredients in Mingus’ masterpiece, The Black Saint and the Sinner Lady, and I’ve been on the lookout for more of his work ever since that first exposure. His distinctive tone makes this 2001 album of ballads compelling listening.
  • Archie Shepp & Horace Parlan – Goin’ Home. For me, this album encapsulates Shepp’s transformation from avant-garde firebrand to mellow elder statesman of jazz. These 1977 duets on gospel melodies are long, ravishing, emotional.
  • Jones-Smith Incorporated. In 1936, just before Count Basie started his classic big-band recordings for Decca, he made four small group tracks featuring Lester Young’s first recorded solos. “Shoe Shine Boy” “Evenin'” “Boogie Woogie” and “Oh, Lady Be Good” are available on several swing-era compilations, but somehow I had managed not to hear them until this year. The producer John Hammond famously called these sessions “completely perfect,” and he was right: their understated craft is a true delight. They just make you wish Basie had recorded more in small groups, which he did not until much later in his career.

Why targets make sense for healthcare liberalization

In working on my Paulson Institute paper on service-sector liberalization, I ended up putting a lot of emphasis on one seemingly minor component of the 12th five-year plan on healthcare. Among its many goals, the plan includes a target for raising the share of hospital beds in private hospitals to 20% by 2015; while the 2015 figures aren’t available yet, that share did in fact rise from 11% in 2010 to 17% in 2014 (see chart below). This seemed to me a useful example of how to use China’s planning system to drive liberalization rather than just increased output. And reading the excellent recent CSIS report on China’s 13th five-year plan, by Scott Kennedy and Chris Johnson, I find that I am not alone. The section on healthcare includes this comment from an anonymous interviewee:

One Chinese health care expert suggested that perhaps the best benchmark of whether the various reform proposals would actually transform the system would be to focus on the proportion of hospital beds that are in private hospitals. In order for that figure to rise dramatically, for example, to 60 percent, it would likely require changes in other areas of the system, including the development and marketing of drugs, the professional status of doctors, and the availability of private insurance.

So the reason to set a target for the private sector’s market share is to push people in the system to figure out all the different things that need to change in order for the target to be achieved. Rather than get bogged down in precisely specifying the means, the authorities can just specify the ends. The CSIS report puts it rather better than I originally did in my paper. This logic I think further supports the idea that these kind of targets should be more widely adopted if the Chinese government wants to ensure that its rhetoric about greater opportunities for the private sector is actually matched by reality.

The expert’s proposal for a very high and aggressive target for the private sector’s share of healthcare would certainly be controversial. As Kennedy and Johnson write, the complexity of healthcare markets makes it hard to simply argue that a much greater private-sector role would be uncomplicatedly good for everybody:

There is no consensus that a fully market-oriented health care system would yield better health care outcomes for Chinese society. Some worry that if things were made easier for foreign pharma[ceutical companies], private hospitals, doctors, and private insurers, the cost of health care would rise, and many who now are well treated would be priced out of the market. …

Would more thoroughgoing marketization serve China much better? It is hard to know for sure, given that there are both successful and failed examples of privately-based, market-oriented health care system.

On the other hand, they do note the ways in which the corruption and inequality in the Chinese healthcare system is linked to the high levels of state dominance:

China’s almost 3 million doctors have been prisoners in this state-controlled system. They are not classified as regular workers, and they are tied to their hospitals just the way SOE and government employees used to be fixed to their official work units. As a result, hospitals have gotten away with providing meager wages to their doctors of only a few thousand yuan per month. Not surprisingly, it is hard to attract promising minds to consider medicine as a profession. …Because of their terrible pay, some of those who do become doctors have been driven into corruption, taking bribes (masked as commissions or event fees) from drug companies and distributors in the hopes they press their hospitals to acquire certain drugs and encourage their patients to use them. Several sources reported that doctors also earn a large portion of their actual take-home pay from bribes from patients hoping to receive their care.

The 13th five-year plan for healthcare has not yet been published, so it will be interesting to see what happens to that private-sector target.

Public vs private hospital beds

What is socialist about “socialism with Chinese characteristics”?

Deng Xiaoping’s classic slogan is wonderful because of its strategic ambiguity: just what are those Chinese characteristics anyway? And this slipperiness has led to a tendency to think of “socialism with Chinese characteristics” as a kind of dodge, a way of saying, yeah, China is really capitalist but we just don’t want to admit it, wink wink nudge nudge. I’m not sure that was ever correct, and no one less than Xi Jinping himself seems to be urging us not to think that way. In his now-famous speech on Deng’s legacy, Xi had a pretty good one-liner: “Socialism with Chinese characteristics is socialism, and not some other -ism.” And Xi repeated that line again in his speech on Friday for the 95th anniversary of the founding of the Communist Party.

Yet for a speech that was billed as heavily ideological, and whose theme was supposedly the eternal verities of Marxism, there is not a huge amount of ideological content to be found. To me the speech feels not so much ideological as highly nationalist. Xi says the Communist Party’s main achievement is not realizing socialism in one country, or some other Marxist shibboleth, but “the march of the Chinese nation with its more than 5,000 years of civilization toward comprehensive modernization.” There is plenty of Deng-style pragmatism (“Whether socialism with Chinese characteristics is good depends on the facts, on the judgment of the Chinese people”) and focus on economic growth (“Development is the Party’s top priority in governing and reviving the nation, and is the key to solving all of China’s problems”).

So it would be easy to interpret “socialism with Chinese characteristics” as just meaning whatever makes China rich and strong. And such an interpretation would be pretty consistent with Deng’s own fundamentally nationalist perspective. Yet I’m not sure we can really view the Communist Party as pure maximizing pragmatists completely unconstrained by history or ideology–surely it does make a difference that the Party comes out of the socialist tradition? Of course, the most obvious consequence of the Party’s historical trajectory is its commitment to authoritarian rule. The political meaning of “socialism with Chinese characteristics” is so obvious that it hardly needs stating: the continued rule of the Chinese Communist Party. Or, as Xi put it on Friday, that the “choice of the Chinese Communist Party to lead China’s great revival is correct.”

But I’ve also been wondering whether there are other, more purely economic consequences: what do Chinese leaders think are the fundamentals of socialism that they cannot abandon and still call themselves socialist? So far, I’ve come up with two answers. And as so often, one of Deng’s own pithy comments provides the best summary. In a 1985 interview with American journalists, Deng said: “In the course of reform we shall make sure of two things: one is that the public sector of the economy is always predominant; the other is that in developing the economy we seek common prosperity, always trying to avoid polarization.” I think that’s exactly right.

I would propose, then, that in practical terms the “socialism” part of “socialism with Chinese characteristics” means 1) a continued large role for state-owned enterprises, and 2) generous regional development policies aimed at offsetting the inequalities produced by market forces.

That the Communist Party is committed to SOEs will probably not surprise many people. Still, it’s worth recalling just how deep the historical roots are. The economic model that China’s post-1978 leaders have been working with owes a lot to Lenin’s New Economic Policy of the early 1920s in Russia. To recover from the excesses and economic disasters of the early Bolshevik period, Lenin proposed a mixed-economy model, in which market mechanisms and private firms play a major role but SOEs occupy a strategic position (the famous phrase “the commanding heights” is often attributed to Lenin at this time, but it appears only in fragmentary form in his collected works; Nikolai Bukharin, the theorist of the NEP, should probably get the credit). This mixed model did not last long in Russia, but it has persisted for some decades now in China. Given that Chinese Communist Party documents still refer to “the basic economic system with public ownership playing a dominant role,” I am probably on pretty safe ground in saying that the Party feels that it cannot give up SOEs.

The regional development angle may be a bit less obvious. But I think it also has deep roots in a different strand of socialist thought: Maoist egalitarianism. Here a good guide is John G. Gurley’s 1970 essay “Capitalist and Maoist Economic Development,” a treatment of Maoism that is unusually sympathetic. Gurley introduced a distinction between capitalist “building on the best” (investing in the places and people with the greatest comparative advantage) and Maoist “building on the worst” (deliberately investing in the places and people that are disadvantaged). Here’s how he summarizes the difference:

Capitalist development, even when most successful, is always a trickle-down development. …. In many ways, then, Maoist ideology rejects the capitalist principle of building on the best, even though the principle cannot help but be followed to some extent in any effort at economic development. However, the Maoist departures from the principle are the important thing. While capitalism, in their view, strives one-sidedly for efficiency in producing goods, Maoism, while also seeking some high degree of efficiency, at the same time, in numerous ways, builds on “the worst.” … Maoists build on the worst not, of course, because they take great delight in lowering economic efficiency, but rather to involve everyone in the development process, to pursue development without leaving a single person behind, to achieve a balanced growth rather than a lopsided one.

Mao and Deng

Mao and Deng

Deng was very explicit that his reforms rejected Maoist egalitarianism in its pure form; what he derided as “everyone eating from the same big pot” was a recipe for poverty and backwardness. But he also made clear that his acceptance of some economic inequality was purely instrumental; as he told Mike Wallace“We permit some people and some regions to become prosperous first, for the purpose of achieving common prosperity faster. That is why our policy will not lead to polarization, to a situation where the rich get richer while the poor get poorer.

So at the level of principles egalitarianism was not totally abandoned. And one of the most consistent ways in which this principle has been expressed is in repeated efforts to boost China’s less developed regions: from the inland development projects of the 1960s and 1970s, to the “Great Western Development” project launched by Jiang Zemin in 1999, to the “Revitalize the Northeast” campaign under Hu Jintao after 2003. All of those plans were very clearly in the spirit of “building on the worst.” In the latest egalitarian gesture, the State Council announced, just before the Party’s July 1 anniversary, an aid program for the isolated mountainous areas where Communist revolutionaries sheltered during the civil war.

So a large role for state-owned enterprises and regional development plans are features, not bugs, in the China economic model. Unfortunately a lot of the obvious waste, inefficiency and misallocation in the Chinese economy in recent years are also attributable to these features. If I’m right about the political importance of these two policies, then fixing those problems could be quite challenging.

Explaining catch-up growth with China and commodities

The World Bank’s latest Global Economic Prospects report may be a 194-page document, but most of the attention it got was for one little infographic. The Financial Times focused its coverage on the chart, and the Economist also made it one of their charts of the day. As the bank helpfully made the underlying data available, it is easy to reproduce, so here is the original:

World-Bank-EM-catchup

That’s indeed a very nice chart, showing that catch-up growth is not a constant phenomenon, but one that has risen and fallen over the last couple of decades. I like the chart too, but when I first looked at it, I thought: I’ve seen that curve somewhere before. Because I’m interested in regional growth patterns, I have been looking at catch-up growth within China: how quickly have poorer provinces been closing the income gap with the wealthier provinces? (I chose Shanghai as the reference point, since it has been the most developed part of China for many decades.) And when I took my provincial catch-up data and overlaid it with the World Bank’s global data, this is what I got:

catch-up-comparison

I would say those trends are pretty much the same: fewer places experiencing catch-up growth in 1997-2001, a widening of catch-up growth to more places from 2002-2012, and more recently a sharp fall off. So that’s pretty interesting: catch-up growth within China, and catch-up growth across lots of other developing countries, seems to follow the same pattern.

One possibility is that catch-up growth is just a function of growth, and so when global/China GDP growth is slow, catch-up growth is less widespread. But this doesn’t explain why catch-up growth has faded so sharply in the last couple of years: while both global growth and trade volumes are not doing that great, they also have not gotten suddenly worse. What has declined very sharply are commodity prices, thanks to an oversupply generated by producers who thought China’s housing construction boom would go on longer than it actually did. So I think commodities may be more important for the pattern of emerging-market catch-up growth than the World Bank acknowledges.

This does not mean that I’m arguing commodity exports are actually a great thing and that it’s really too bad that commodity prices have fallen. I firmly agree with the conventional wisdom that commodity exports are not an effective or sustainable way for developing countries to become rich. But remember what is being measured in these lovely charts: not the number of people whose incomes are converging with developed-country standards, but the number of countries (basically a diffusion index). And my intuition would be that more developing countries are, if only by default, commodity exporters, simply because the alternative development model–exporting manufactured goods–is in fact quite hard to do.

The data support this intuition. If I split developing countries into two baskets, manufactures exporters and commodity exporters, on the simple criterion of having more or less than half their exports in manufactured goods (a concept I borrowed from Jon Anderson), the majority of developing countries are in fact commodity exporters. For the low and middle-income countries in the World Bank’s World Development Indicators database, only 33 of 96 countries had more than 50% of their exports in manufactured goods in 2011. The same pattern holds internally within China: while most of China’s population is concentrated along the coast, most of its provinces are not. Of China’s 31 provinces, only 10 are officially classified as “Eastern.” The diffusion index for catch-up growth within China will therefore be dominated by the central and western provinces, and these provinces have more commodity-driven economies. To be precise, I estimate that the mining and metals share of GDP is higher than the national average in all but four of the 21 central and western provinces.

This pattern of catch-up growth is not just a statistical artifact, but gets at a real phenomenon. The same economic role has been played by a group of provinces within China’s borders, and a large group of countries outside China’s borders. Both prospered by supplying materials for China’s housing boom (the underlying cause of the commodity boom), and both are seeing that prosperity erode now that the housing boom is fading. I keep discovering that housing is the answer to many economic questions about China; it seems that Chinese housing also explains a lot about the patterns of global growth.