A very fine reallocation of resources

The launch of China’s reform era is conventionally dated to 1978, when the Communist Party’s Third Plenum agreed on a major change of economic strategy. But a major sign that China was embarking on a new direction came a year earlier, in 1977, when Deng Xiaoping directed universities to restart entrance examinations. Many universities had by that time reopened, after closing for a few years at the height of the Cultural Revolution. But admission was still reserved for “workers, peasants and soldiers” and admission decisions were largely driven by political recommendations. Deng’s instruction to de-emphasize politics and emphasize competence were a welcome sign that rationality and pragmatism were on the way back.

The general outlines of this story are well known, but I enjoyed the details in this account:

Young people, many of whom had seen their schooling opportunities delayed for more than a decade, hastily dusted off their textbooks and began studying to prepare for the college entrance exams. That year, 5.7 million entered their names for the exams, and 273,000 were enrolled. Because the number of applicants far exceeded the expected figure, for a time the authorities could not procure enough paper to print the exam papers. The problem was not resolved until the central authorities made the urgent decision to ship in all the paper previously allocated for the printing of the fifth volume of the Selected Works of Mao Zedong.

I just love that last bit–it perfectly captures how poor and politicized China was at that time. The quote is from Breaking Through: The Birth of China’s Opening-Up Policy, a book by former vice-premier Li Lanqing (in English translation).

The consequences of that decision to reallocate resources away from propaganda and towards education were far-reaching, and the experiences of that first wave of new students have been subject of numerous books and articles. Many of the people who took those 1977 exams and enrolled in university went on to become rather influential figures (see these recollections by longtime foreign correspondent Jaime FlorCruz, who was one of them).

Indeed, we may now be living at the peak of the influence of the so-called Class of 1977. A September press conference ahead of the celebration of the 70th anniversary of the People’s Republic of China gathered together three of China’s top economic technocrats: central bank governor Yi Gang, Finance minister Liu Kun, and National Bureau of Statistics director Ning Jizhe. In an unusually personal moment for such an event, they mentioned that all three of them had taken the college entrance exams in 1977.

September 24, 2019: (l-r) Moderator, Ning Jizhe, Liu Kun, Yi Gang

What I’ve been listening to lately

  • Don Cherry – Art Deco. After playing a lot of world music, flute and percussion in the 1970s, Don Cherry re-engaged with the jazz tradition in this fine 1988 recording. It’s a reunion of the Ornette Coleman quartet, with James Clay in the sax chair, that ranges from Charlie Haden playing folk tunes on the bass to a respectful take on “Body and Soul.” Clay’s playing is absolutely stellar, as Ethan Iverson emphasizes in his appreciation of this album.
  • Charlie Haden – The Ballad of the Fallen. The second album by Haden’s Liberation Music Orchestra project is much less well known than the 1969 original, but I think it’s even better. The fusion of jazz and Latin American folk music is more assured and convincing, and Carla Bley’s arrangements are gorgeous.
  • Lee Konitz – The Lee Konitz Duets. A startlingly original and diverse recording that still sounds completely fresh 50 years later. Konitz plays duets with several musicians on different instruments, before combining everyone into a larger group session. A huge variety of sounds and styles.
  • Myra Melford – Snowy Egret. A quintet featuring the wonderful Ron Miles on cornet plays Melford’s compositions just beautifully–they take many surprising turns while remaining very listenable.
  • Art Blakey – The Freedom Rider. In honor of Blakey’s centennial I spent some time exploring some of the massive pile of Jazz Messengers recordings I had never got around to listening to before. This one really stood out: all killer, no filler, with Wayne Shorter and Lee Morgan in the front line. As a bonus, the cover is one of the best-ever Blue Note photographs.

Who deserves the Nobel for China’s economic development?

The awarding of the Nobel Prize in economics to three academics “for their experimental approach to alleviating global poverty” has prompted some caustic commentary about how much, or little, global poverty has actually been reduced by the highly targeted, small-scale policy interventions evaluated by such experiments.

It’s well known that most of the reduction in global poverty in recent decades, however it is measured, is accounted for by rapid economic growth in big Asian economies. On the World Bank’s numbers, China alone accounts for about 60% of the decline in the number of people living in extreme poverty worldwide (China’s poor population declined by 742 million people, while the world’s declined by 1.16 billion people).

The contribution of randomized controlled trials to China’s poverty reduction has been, to a first approximation, zero. Yao Yang, the dean of the National School of Development at Peking University, wrote in an English-language op-ed that “Experiments might help policymakers improve existing welfare programs or lay the foundation for new ones, but they cannot tell a poor country how to achieve sustained growth.” In a similar vein, Harvard professor Dani Rodrik tweeted: “Remarkable how little today’s development economics has to say about the most impressive poverty reduction in history ever.”

So if the Royal Swedish Academy of Sciences were to award a prize for “contributions to sustained economic growth in China,” who should it go to? This is not a straightforward question. The prize is usually given to academics for contributions to theory and research, not to practitioners for implementing economic policies. As Bruno Frey noted in a 2018 article on China’s absence from the history of winners of the economics Nobel, “It may be argued that the Chinese economy has been successful without the help of high-ranking academic economists.” There are also few Chinese economists that appear in lists of the most-cited scholars–possibly because Chinese economists have historically tended to focus more on advising their own government than publishing in English-language journals.

It’s true that the decisions that led to China’s sustained economic growth were not mostly driven by research published in peer-reviewed journals. But that does not mean that economic ideas did not play a role in those decisions, or that the role of economists was not important. At least, as long as one does not hold to an excessively credential-focused definition of “economist” as meaning only a person holding an economics PhD. Pieter Bottelier’s recent book, Economic Policy Making in China (1949-2016): The Role of Economists, introduces many of these Chinese economic thinkers, few of whom are widely known abroad. One figure particularly stands out: Xue Muqiao. Bottelier writes:

I agree with Wu Jinglian that Xue (who died in 2005, when he was almost 101) was the most important Chinese economist of the 20th century. He was already involved in economic policy and management before the establishment of the PRC in 1949, and after 1949 under Mao. He then became one of the principal architects of market reform under Deng Xiaoping. The evolution of Xue’s thinking on how to develop a “socialist economy” mirrors Deng’s.

While Deng Xiaoping is these days often remembered mainly as an economic reformer, in fact he was not a specialist in the economy, and largely delegated economic management to other leadership figures. Xue seems to have been quite influential in the formation of Deng’s economic thinking.

Xue is particularly famous for is a letter he wrote in 1977, after Mao’s death but before reforms had begun, to Deng and Li Xiannian that laid out many of the problems in the economy. He focused in particular on agriculture, noting that farm output had grown no faster than the population despite collectivization and massive investments in machinery. The letter is translated in the English-language Collected Works of Xue Muqiao:

The CPC Central Committee has pointed out the importance of having agricultural production catch up with industry’s Great Leap Forward. The Ministry of Agriculture and Forestry has recently proposed twelve significant measures to attain this goal. It recommends an increase of investment into agriculture of RMB 30 billion. These measures are necessary, but I think it is more important to implement agricultural policies that improve farmers’ lives, and that arouse their enthusiasm for agricultural production. … It is hard to motivate farmers if growth in agricultural production cannot bring corresponding growth in income. Any interest in working suffers if extra work is not rewarded. … Boosting farmers’ enthusiasm for agricultural production therefore outweighs improving the conditions for agricultural production.

“Enthusiasm” is the term often used in Chinese during this period for what we would today call “incentives.” And there is no economic insight more fundamental than “incentives matter.” This early insight by Xue laid the intellectual groundwork for the later decision to allow farmers to break out of agricultural collectives and farm their own land–a massive change in incentives for agriculture that resulted in a huge boom in productivity. For Xue to be able to break through the deadening grip of Maoist political correctness and recognize that incentive problems were keeping China’s rural population mired in poverty must surely be counted as an intellectual achievement of the highest order.

Over his long life and career, Xue did much more than write one well-timed and well-placed letter. The economic historian Fan Shitao last year made a catalog of Xue’s achievements in the pages of Caixin magazine, in a letter arguing that “Xue should be credited with making the most comprehensive contributions to China’s early reform and opening-up.” I won’t reproduce the entire thing here, but here are a few highlights:

In a long speech presented to the Central Party School in autumn of 1978, Xue was the first official within the ruling Communist Party elite to criticize the catastrophic consequences and painful economic lessons of Mao’s “Great Leap Forward.” By warning that similar mistakes should not be replicated in the future, Xue’s speech paved the way for subsequent adjustments to China’s economic policies. …

As the most authoritative expert on price in the Communist Party, Xue was the first person to point out that price reforms were key to China’s economic reforms. He also differentiated between overall price stability and flexibility of individual prices. In agreement with German economic expert Armin Gutowski, Chinese American economist Gregory Chow, and experienced economist Edwin Lim, Xue promoted price reforms, which was one of the major decisions of the Third Plenary Session in 1984. …

In 1978 Xue pointed out that instead of administrative regions, economic development should focus on economic zones based on resource flows. The economic zone in Shanghai contributed to its becoming one of China’s most capital-abundant cities. Xue’s proposal also later led to the launch of other regional development plans.

So Xue’s intellectual influence can arguably be detected in agricultural decollectivization, the overhaul of central planning, the transition to market prices, and the coastal export manufacturing boom. That is a pretty staggering list.

Of course, China’s decades-long series of economic reforms had no one author or leader. But China’s system of closed-door debate and collective decision-making has long obscured the important contributions of individuals like Xue, and Du Runsheng, another major figure in rural reform.

Xue Muqiao

Rawski on the costs built in to China’s system

Loren Brandt and Thomas Rawski, two of the best economists and economic historians working on China, have a new edited volume out under the somewhat daunting title of Policy, Regulation and Innovation in China’s Electricity and Telecom Industries. It promises to be essential reading for anyone interested in how industrial policy works in China–a topic that, thanks to the massive scale of various subsidy programs like Made in China 2025 and the US trade war that has been launched in response, is now of far more than specialist interest.

I have not yet read the book, but I did watch a September 26 event at CSIS in which Brandt and Rawski discuss their work, under the catchier title “Can China’s industrial policy work?” Sadly, if not surprisingly, the book does not provide a simple answer to that question. Here is how Rawski put it:

We have no big theory. We cannot predict which policies will produce success and which policies don’t. We see the same policies affecting the semiconductor industry, which has done very poorly, the thermal power equipment industry, which has done well, and ultra-high-voltage power transmission, which is a world leader technologically. What is the key? Perhaps it is the difficulty of the technical obstacles that these firms confront. Perhaps it is quality of management. It’s hard to say. There’s no simple way of saying what works and what doesn’t work in China’s industrial policy.

If they do not have simple answers, they do provide a lot of important insights into how China’s system, with its hybrid of market mechanisms and top-down political direction, actually works. I particularly liked the concept of “system costs” which Rawksi brings up in his very interesting discussion of the electricity industry (these are my notes from the video, lightly edited):

Another feature that we see across the board is that they prioritize technical objectives over economic objectives. I think this partly reflects the Soviet legacy. One of the lessons of this book, for me at least, is that the legacy of Soviet influence in the Chinese economy is much larger than I thought it was when we started out on this project. The objectives of the Made in China 2025 program read like the first Five-Year Plan. There’s no discussion of markets, there’s no discussion of competition–it’s about physical targets.

Another important conclusion is that this is a system that has very high built-in costs. Electricity provides a vehicle for looking at this because it’s simple: there’s one product, five firms produce half the output, two firms distribute 90% of the output. So by looking at a very small number of firms we can see what’s going on in the whole industry. We can quantify some of the system costs people like Ken Lieberthal associate with China’s “highly negotiated” political system.

Negotiation means time and energy, and to us that means system costs. In the American electricity industry, the share of managers is 6.8%; in China it’s 17.8%. You need this extra manpower to work things out. We find that the cost of generating and delivering electricity is 30% higher in China than it is in the US, even though the ingredients are cheaper in China than they are in the US.

Our authors find many areas in which technical upgrades produce no economic benefit. As one engineer at a power plant said to us: we spent a large amount of money improving our equipment to lower our coal consumption, but of course if we had just increased the utilization of the existing plant, we could have gotten the same reduction in coal consumption at zero cost. Many episodes of this sort. We find low utilization in the telecom networks, in the electricity grid. In the US, engineers recommend 15% extra capacity compared to peak load in power systems. In China, the provincial average is 90%. In Inner Mongolia, which is the biggest power generating province, it’s over 200%.

And finally, quality issues. A deputy minister says that Chinese machinery is useful but not too reliable because of small defects. In high technology industries, this is very dangerous.

So what we’re looking at is a tug of war. We see huge resources being poured into innovation, we see the creativity and entrepreneurship of the Chinese people and Chinese firms. This is good. And we see also system costs and inefficiencies which are moving in the other direction.

The Q&A also covers China’s role in the global productivity slowdown, safety in nuclear power, the use of labor in coal mining, and other interesting topics. Worth watching.

Kindleberger on the loss of technological leadership

The following passage by the economic historian Charles P. Kindleberger, from his slim book Foreign Trade and the National Economy, was written in 1960-61 but feels remarkably relevant to the present moment:

Technology today spreads in some degree through illegal imitation, including the pirating of design and industrial espionage, but mainly through licensing, direct investment, a simple reading of technical literature, foreign education, and so on. There is little doubt that the speed of diffusion of technology has increased not only among developed nations but between developed and underdeveloped. There need be no direct communication. That one country can produce a particular article may be sufficient spur to others, as Russian, French, and Israeli work in atomic energy may demonstrate.

Technological leadership is harder than ever to maintain, although historians may think it was never held long. The result is that trade based on technical leadership must keep changing, for any given technical gap is foredoomed to closure.

As a general principle, to me that seems probably right. China is busy trying to close many technological gaps between its own industries and the global leaders, and the forces of technological diffusion suggest that time is on its side. Does that mean that the US, by imposing export controls on Chinese makers of telecom equipment, semiconductors and supercomputers, the US is engaged in a hopeless strategy doomed to failure? Not exactly. Historical inevitability can take a long time to play out, and the difference between technological gaps closing in 5 years, 10 years or 20 years is very much a nontrivial one for companies and nations.

And using this general principle to make predictions about how leadership in specific technologies plays out is not always going to work. Kindleberger’s own observations about the threat to US technological leadership from Europe have held up less well:

It looked for a time as though the technical gap between the United States and other developed countries was an enduring feature of international trade. Isolation from the battlegrounds of two world wars, plus an economic history of great labor scarcity relative to land, and later to capital, gave the United States an interest in innovation which was more widespread among the populace and among economic sectors than in other countries.

This view can no longer be held with assurance. … Europe and Japan are innovating positively. Major developments in the particularly American field of innovation–the automobile–have mainly been of European origin: the disc brake, the two-stroke engine, independent springing, and so on.

Particularly interesting is the new spirit of innovation in France, which has produced in the 1950s the Caravelle and Mystere in airplanes, the Citroen DS 19 and “deux chevaux” (two horsepower) in automobiles, high-voltage long-distance electric transmission, and direct transmission at 25,000 volts to electric locomotives. These and other equally radical departures from simple imitation of leading technical performance suggest a surge of independent innovation in France…

The general principle that technological diffusion is going to happen does suggest that the best way to combat the loss of technological leadership in one area is to open up technological leadership in a new area. The US did this fairly successfully in the decades after Kindleberger’s book was written. It still seems that the best response to today’s technological challenge from China (and others) is not going to be a bunch of delaying actions, but a renewed push forward.

Housing and the Chinese middle class

I have thought for a while that China’s privatization of urban housing is one of the most important and least understood events in its modern economic history. The entry into the World Trade Organization in 2001 has been exhaustively studied and its effects are still being vigorously debated today. The downsizing of state-owned enterprises in the late 1990s has also been repeatedly dissected and analyzed.

Housing privatization, which like SOE reform had its high-water mark around 1998-2003, has received much less attention. Which is strange, because the launch of a private housing market not only created the Chinese business cycle as we know it–basically all of China’s booms and busts over the past two decades have been driven by housing–but created the major source of private household wealth. So it seems obvious to me that housing reform deserves a comprehensive economic and social history, which I have not yet seen.

I dug into Luigi Tomba’s 2014 book The Government Next Door: Neighborhood Politics in Urban China in hopes of getting closer to that. He seemed to immediately grasp the central role of housing in the transformation of urban Chinese from socialist functionaries to a prosperous bourgeoisie. In the introduction he recalls how his initial fieldwork in Beijing in the early 2000s looking for a “middle class,” he found that

Most of the young people I was talking to did not fit the image of the wealthy entrepreneurs that dominate the mainstream portrait of a glamorous Chinese middle class often presented by the international media. Rather, they seemed to be, in large part, professionals and public employees whose housing careers often owed much to their position “within the system” of public employment.

That initial insight led Tomba to start to piece together the complicated story of just who got housing and how. Still, this book is not a complete account of housing reform, nor does it claim to be. Only one chapter of his book is really about housing reform, and most of the rest is too heavy on political-science jargon and too light on detailed history for my taste. But it does contain some important insights on how housing works in China, particularly its political implications:

Housing privatization, which began with a massive transfer of housing stock from public to private hands in the 1980s and 1990s, has provided an opportunity to engineer a middle class systematically, through selective incentives and subsidization. It also built on the converging interests of local governments and developers in selling and developing their land, which remains the main source of income for urban governments to balance their budgets and finance infrastructural projects. These policies have inevitably favored those who had already been privileged by the unequal redistribution of housing in the socialist period because of their employment in the public sector. The resulting boost for a property-holding middle class went therefore mostly toward employees and families actively employed in the public sector, who became the first large cohort of Chinese homeowners during the housing reform of the late 1990s.

The key point here is that housing privatization replicated and amplified, rather than overturning, the pattern of inequality inherited from the planned economy. In that system, there was little inequality in wages or money income, but there was greater inequality in living standards, because housing and consumer goods were preferentially allocated to those with higher political status. The combination of SOE downsizing and housing privatization did remove some socialist foundations, particularly the ironclad guarantee of a job and housing for urban residents. But reform replaced them with something that would prove much more valuable over the longer term: privileged access to assets that were rapidly appreciating in value. So rather than weakening political support for the Chinese government, housing reform bolstered and broadened it:

China’s long-term processes of privatization and reform have, in fact, worked to reinforce, rather than reduce, the legitimacy of the authoritarian rulers, as the state and its policies are perceived by the weakest groups as the last line of defense against the deregulation of the market and by the middle classes as the guarantors of newly acquired “rights.” …

It is increasingly becoming clear that the political apparatus of the socialist hierarchical state is still in place; after more than three decades of marketization, there is little sign of the system that would successfully supplant it. Its role in defining the practices of power is still overwhelming, although perhaps more fragmented and not felt as directly by some of its citizens as in the years of mass campaigns and class struggle.

So China’s housing privatization, in addition to being one of the largest transfers of wealth in history, may also have been one of the most successful political strategies.

What I’ve been listening to lately

It’s been a while since I’ve done one of these, so a lot to catch up on:

  • The Savory Collection 1935-1940 – A huge pile of great jazz from the swing era, most of it unheard since it was first broadcast on the radio. Highlights for me so far are the tracks from John Kirby’s sextet, the jam sessions with Fats Waller, the solo piano tracks by Joe Sullivan (a rare example of extended improvisation from this period), and some sterling performances by Coleman Hawkins and Benny Carter. There’s also a lot of live Count Basie, with his band at its peak.
  • Dr. John – Bluesiana Triangle. I had never heard of this 1990 album until it was mentioned in a few of the obituaries after his passing in June. Of course I grabbed a copy immediately: who could pass up Dr. John playing with David Newman (who was in Ray Charles’ band back in the day) and Art Blakey! People seem to want to call it a jazz album because of the personnel, but it’s not really: as the title indicates, they are playing the blues, and wonderfully well. Rest in peace, Mac.
  • Allen Toussaint – American Tunes. Continuing on the theme of recordings by now-departed giants of New Orleans music, this posthumously released session is something of a follow-up to Toussaint’s jazz album The Bright Mississippi. This one is more deliberately wide-ranging but also brilliant. Would any other piano player — could any other piano player — move so easily from interpreting Bill Evans’ “Waltz for Debby” to Professor Longhair’s “Big Chief”? And his takes on two Ellington tunes, with guest vocals by Rhiannon Giddens, fulfill the promise of the title, magnificently pulling together a century of American musical tradition.
  • Ari Brown – Ultimate Frontier. A stalwart of the Chicago jazz scene who should be better known, and one of very few musicians to play both sax and piano at a high level. I originally encountered his sound in Kahil El’Zabar’s Ritual Trio. This 1995 recording was Brown’s first under his own name, and is a consistently excellent of set of soulful spiritual jazz.
  • Jacob Miller – Who Say Jah No Dread. One of the keystone recordings of dub reggae is Augustus Pablo’s King Tubbys Meets Rockers Uptown. Much of the raw material for that masterpiece came from these less well-known sessions that Pablo produced with vocalist Jacob Miller. The vocal tracks are powerful and compelling–it’s no surprise the dubs turned out so great as well.