Who won the battle of ideas in China?

Ideological struggle in China is not dead, only hidden. That is perhaps the shortest possible summary of Jude Blanchette’s lively intellectual history of China’s neo-Maoist movement, China’s New Red Guards. He aims to demolish the simplistic idea that China’s populace has agreed not to ask political questions in exchange for economic prosperity, and show how fierce debate over ideas has been a consistent feature of Chinese political life even after the death of the Mao and the end of the Cultural Revolution.

His book contains a lot of fascinating and little-known history, starting with the left-wing criticisms of the renewed economic reforms launched by Deng Xiaoping and Jiang Zemin in 1992. Those critics were quickly muzzled, but they sowed the seeds for what would become, in the late 1990s and mid-2000s, a lively intellectual movement that challenged China’s government for not being socialist enough. Blanchette vividly captures the ferment of the period. A particular highlight is his account of the public furor that a few clever intellectuals stoked with allegations of corruption in privatization of state firms, which led the government to ban management buyouts of SOEs. The substantive and symbolic victories for leftists accumulated even faster after Xi Jinping came to power in 2012, and at times the neo-Maoists can barely contain their glee. One of the most striking passages comes toward the end:

“We won,” the nationalist writer Wang Xiaodong told me. “Maybe I didn’t win personally, but our ideas won.” Looking at the policies Xi adopted in his first five years in power, Wang saw much to commend. China had moved away from relying on the market to allocate resources, it had reversed what he saw as a decade-long trend of restricting the growth of China’s state sector, and the party was now embracing the idea of “national champion” firms serving China Inc. “The state of SOEs today is strong, roughly what I called for in the 1990s,” Wang said. “My position has basically been realized.”

It is tempting to read Blanchette’s book as a narrative arc in which the leftists move from despair in the 1990s to triumph in the 2010s. The structure of the book encourages this reading, as does the fact that it is often written from the perspective of the neo-Maoists themselves.

That would not be correct. It is hard to say the neo-Maoists have triumphed when they are still regularly censored and when Xi is still pursuing “rightist” policies like opening up China’s stock markets to more foreign investment (Wang Xiaodong’s victory lap is also from the perspective of a strong-state nationalist; he is not really a neo-Maoist). Blanchette makes this quite clear from the start, pointing out that the government is happy to use neo-Maoists as internet attack dogs when they serve its purposes, and happy to shut them up when they are not.

In short, Xi Jinping is in control of the neo-Maoists, not the other way around. Indeed, the neo-Maoists are well past their prime: they thrived in the more unfettered online environment of a decade ago, and like other schools of thought they now have very little space for open discussion. There is no longer any serious battle of ideas in public. So the story of ideological struggle in China over the past decade is not exactly one of the triumph of a fringe leftist intellectual movement. Rather, it is really the story of the triumph of Xi Jinping, who has imposed an increasingly stifling uniformity on the intellectual sphere. Like it or not, understanding the intellectual world of China today requires grasping Xi’s ideology.

While Xi is proficient at delivering “dog whistles” that excite the neo-Maoists, he is not one of them. Rather, his ideology draws on multiple sources, as the excellent book Inside the Mind of Xi Jinping, by the French journalist François Bougon, makes clear. Bougon seems to have constructed his short and vividly written book through the simple strategy of reading a lot of Xi Jinping’s speeches and articles, and taking them seriously. By tracking down Xi’s various inspirations, he provides a more comprehensive overview of the important strands in China’s intellectual scene over the last couple of decades.

In addition to the neo-Maoists, these include the so-called “New Left” and “Neo-Authoritarian” thinkers, who tend to endorse nationalism and a strong state but without following the neo-Maoists into nostalgia for the Cultural Revolution. The most important of these is undoubtedly Wang Huning, a law professor from Shanghai who advised many previous leaders and has now been elevated to the ruling Politburo Standing Committee. Wang is credited with helping former leader Jiang Zemin draft his “Three Represents” policy that led to the admission of private entrepreneurs to the Communist Party–a decision seen as a disastrous mistake by the neo-Maoists. If someone were to write a book profiling the neo-authoritarians, Wang’s rise to top echelons of power would surely also deserve a “we won” moment.

Xi also regularly cites classical Chinese sources, including those from the schools of Daoism, Legalism and Confucianism. In doing this he of course he goes very much against the example of Mao, who wanted to expunge Confucius and other feudal remnants from modern China. The revival of traditional culture is another important recent intellectual movement in China, and one with wide influence and popular appeal. Bougon observes that “the alliance of Confucianism and Marxism…defies logic to an outside observer.” But to an insider, the political logic is quite clear: Confucianism and Marxism are in different ways both sources of national pride for China, and a nationalist government should harness them both.

Bougon perceptively argues that Xi’s ideology is ultimately an attempt to combine three distinct traditions: the socialist tradition originating with Mao; the heritage of Chinese traditional culture; and the prosperity-focused reformist tradition of Deng Xiaoping. All three traditions have appeal in today’s China, and attempting to combine them is not an original strategy. Xi’s predecessor Hu Jintao also tried to merge invocations of traditional culture with appeals to both socialism and economic modernization. Xi’s political skill is demonstrated by how he can better command support from adherents of all three traditions, and by how he has more convincingly combined these threads into a ruling ideology.

One of the best examples of the daring and verve of Xi’s intellectual fusion is one of his very first speeches, given on January 5, 2013 but not published until some time afterward (you can read Tanner Greer’s translation of the whole thing, or my translation of the key passages). This speech has become famous for its insistence on the equal status of China’s “two historical periods”: the 1949-78 period of socialism, and the post-1978 period of reform. Xi argued that “these two periods are not separate from each other, and are not at all fundamentally opposed” and that neither period can be used to “deny” or “repudiate” the other. Many people initially took this as a sign that Xi wanted to reverse economic reforms and bring back Maoism. In fact, as Bougon explains, it was political triangulation, Chinese-style:

He calls for a synthesis of the two first eras of the regime, the Mao era and the post-Mao era—between the Revolution, and ‘Socialism with Chinese characteristics’. He wants to perpetuate a form of capitalism that is under the aegis of the Party, as imagined by Deng Xiaoping—even if this involves glossing over the Party’s blunders under the rule of Comrade Mao.

In political terms, this meant that Xi struck a blow to both the left and the right. … It is also absolutely forbidden, therefore, to use one past to spite the other; to invoke Mao against opening up, or to criticise Mao in the name of opening up.

In this speech, Xi rejected the liberals’ call for jettisoning Mao–but he also rejected the neo-Maoists’ call for a reversal of economic reforms. In my view, this political synthesis is in the end not so different from the one imposed by Deng Xiaoping and Jiang Zemin in the 1990s. Jiang made it clear that conservatives nostalgic for the 1950s would not be allowed to stop economic development, and that liberals sympathetic to the 1989 protesters would not be allowed to erode Party rule. Despite a lot of twists and turns since then, China’s ruling ideas in some ways have not changed very much.

The Coasian argument for duplicate investment

China’s car industry seems to defy the logic of specialization. The industry had its origins in two big state-owned facilities founded decades ago: First Automotive Works, based in Changchun, Jilin province, and Second Automotive Works, based in Wuhan, Hubei province. Now known as FAW Group Corp. and Dongfeng Motor Corp., their corporate successors are still among China’s leading automakers. But auto production has spread far from its original locations: Guangdong and Shanghai are now the leading producers, and in fact most of China’s 31 provinces produce at least some cars. Rather than clustering in a few specialized regions, auto production is spread across the whole country.

This pattern holds true for many other industries, from steel to solar panels, and has long been seen as a sign of how China’s peculiar institutions distort market forces. From the Maoist push for local self-sufficiency in the 1960-70s to local protectionism and the debt-driven drive for growth in later decades, political pressures are seen as having led to unnecessary and duplicate investments across regions. As Ronald Coase and Ning Wang write in their 2012 book How China Became Capitalist:

Through specialization and trade, any specific industry will be concentrated in a few areas and different areas will specialize in supplying different products in accordance with their particular advantages. As a result, the fact that many regions in China make duplicative investments in the same industry is taken as unambiguous evidence of the presence of policy distortions in the economy, contradicting the economic logic of specialization and trade.

There are many interesting things about their book, starting with its authorship: Coase was over 100 years old at the time of its publication, and it was his last major work before his death in 2013. Rather than a theoretical treatise, most of the book is a quite detailed historical account of Chinese economic policymaking based on primary sources in Chinese. It is distinguished from more standard accounts both by its factual narrative, which de-emphasizes the role of Deng Xiaoping and emphasizes the contributions of local figures and other leaders, and by how it places these those developments in a clear analytical framework.

Their discussion of the pattern of duplicative investment across regions is the occasion for one of the more interesting and unconventional arguments in the book: that these seemingly superfluous investments are actually a sign of regional competition, and that this regional competition is an important motor of China’s economic development. The fact that every locality in China seems to want a car plant and a steel plant is not, on their argument, a sign that Maoist self-sufficiency still holds sway in China, but an indication that every locality can now participate in a unified national market. The competition among regions may seem wasteful from the perspective of returns on capital invested, but it has benefits to human capital and overall development:

Without some degree of duplicative investment across regions, it would be impossible to allow regions to compete with each other head-on. If we view the development of a market economy as an open learning process, in which economic actors must figure out what to produce and how to organize the production, some “waste” in duplicative investment on the part of firms is inevitable.

While duplicative investment has led to the underutilization of physical capital, it has at the same time helped to spread manufacturing technologies and significantly improve workers’ skills all over China. The gains in human capital outweigh the losses from the underutilization of physical capital. From a different angle, the repetitive and duplicative investment across China can be seen as an effective mechanism of social learning: quickly spreading industrialization to a largely agrarian economy.

This is an interesting and persuasive argument. China does have many patterns that tend to look bad at the firm level but are good at driving overall economic development–a distinction that Coase and Wang refer to using Alfred Marshall’s distinction between “internal economies” (within the firm) and “external economies.”

But I wonder whether this is another example of an argument that works for one phase of China’s development, and not for all. The narrative of events in their book mostly ends in the late 1990s, and does not deal with post-2008 events at all. The patterns of local government-led investment in China has changed substantially with the explosion of debt-driven infrastructure projects since 2008. The dynamics of elite politics and policymaking are also quite different these days, and have lost many of the positive features that Coase and Wang highlight. It is not a given that gains to human capital will always outweigh losses on physical capital, and the balance may have shifted by now.

The best books I read in 2019

This is now the eighth year in which I’ve written up my favorite reading (see links below for previous installments), and every year it ends up being one of the things I most enjoy writing. 2019 is no exception: I have lots of good books to share. Since there isn’t a good way to rank books I like, the lists are in alphabetical order by author:

Nonfiction

  • Joseph Conrad, The Mirror of the Sea. Though usually described as a memoir, this book could not be more different from the personal confessions that lately typify the genre. Instead, it is a lovely set of interconnected essays about nautical life, and more fundamentally about the joys of craft and profession. I also enjoyed another classic 19th-century nautical memoir, Richard Henry Dana’s Two Years Before the Mast, which has some amazing moments although also many longueurs.
  • Fuschia Dunlop, Every Grain of Rice: Simple Chinese Home Cooking. I enjoyed Chinese food for years, but it was not until I ate at home with my Chinese family that I really got it. This book captures that delightful hidden culture: not just cooking techniques, but a whole way of eating and structuring meals. I did not know recipes could be beautifully written, but hers are: concise, precise, poetic. And every one has been a hit in my house.
  • Daniel Immerwahr, How to Hide an Empire: A History of the Greater United States. The United States is not quite accurately named. The country is composed of states, but not only states: there are also various territories and possessions, and also, at one point, colonies. Immerwahr’s history of the US from the perspective of its margins is eye-opening, and includes not only lots of little-known information but much fascinating analysis of foreign policy, war, and even technology. A further appreciation is here.
  • Timothy Larsen, The Slain God: Anthropologists and the Christian Faith. As an undergraduate in anthropology, my intellectual heroes were the British social anthropologists of the mid-twentieth century. They combined deep immersion in empirical research with systematizing intellectual ambition in a way that few social scientists have since matched. Larsen’s lively intellectual history of the period brings their debates and ambitions to life, and his focus on religion is unusual and illuminating. I wrote more about this book in my post “Atheism and the objective understanding of society.”
  • Charles C. Mann, The Wizard and the Prophet. An overstuffed masterpiece from the brilliant science writer. I couldn’t believe how ambitious Mann’s structure was, combining a dual biography with in-depth discussions of technical issues in agriculture, energy and climate change, but somehow he pulls it off.
  • Oliver Sacks, The River of Consciousness and Everything in its Place: First Loves and Last Tales. My favorite parts of these posthumously-published essay collections are Sacks’ pieces on the history of science, which are some of the best I have ever read. Sacks beautifully conveys his deep and affectionate engagement with a tradition of intellectual inquiry stretching back to Freud, Darwin, Davy, and others. I wrote more here.
  • Christina Thompson, Sea People: The Puzzle of Polynesia. How did humans come to settle all those tiny islands scattered across the Pacific? Just as interesting as the answer to this question is how the answer was arrived at. Thompson’s fascinating book is a great example of how effective it is to approach a question historically.

Fiction

  • Ted Chiang, Exhalation. The second collection of mind-bending and heart-rending vignettes from the master of the science-fiction short story. Perhaps not quite at the exalted level of Stories of Your Life and Others, but still very good.
  • Tom Franklin, Crooked Letter, Crooked Letter. A pitch-perfect evocation of growing up in the Deep South in the 1970s. That is where and when I grew up, and I can tell you that Franklin gets every detail exactly right. Oh, but technically it’s a murder mystery.
  • W. Somerset Maugham, Ashenden, or the British Agent. One of the very first portrayals of espionage in fiction (from 1929), and still one of the best. I pulled this one from Ethan Iverson’s amazing list of recommended crime, detective and spy fiction; another very good one from his list is Brian Garland’s Hopscotch.
  • Daniel Mason, The Winter Soldier. A startlingly vivid portrayal of a young Polish doctor’s travails in the Great War, emotionally wrenching and free of cliché.
  • Andrew Miller, Now We Shall Be Entirely Free. A dreamlike piece of historical fiction following a traumatized soldier’s search for normalcy after his return from the Napoleonic Wars.
  • Guzel Yakhina, Zuleikha (translated by Lisa Hayden). The best novel I read this year: huge, engrossing, enthralling. Winner of multiple prizes in its Russian original, its appearance in English translation should also be a major literary event.

Previous lists: 2018 | 2017 | 2016 | 2015 | 2014 | 2013 | 2012

Capacity to transform

That is the title of a chapter in Charles Kindleberger’s 1962 book Foreign Trade and the National Economy. I immediately loved the phrase, and found that it helped me crystallize some thoughts.

The capacity to transform, in Kindleberger’s formulation, is essentially an economy’s ability to re-allocate resources in response to market signals. He discusses it in the context of exports, but it is clearly broader than that:

Capacity to transform is capacity to react to change, originating at home or abroad, by adapting the structure of foreign trade to the new situation in an economic fashion. … A higher price leads to more labor, land, and capital being attracted to a given product, and more output. A lower price results in reduced production.

The capacity to transform varies. Kindleberger thought that traditional societies with pre-modern economies had a lower capacity to transform, as social strictures prevented people from changing occupations or established business practices. The process of economic development is thus in some sense the process of increasing the capacity to transform:

These reactions require responses to profit and to income differences on the part of entrepreneurs and owners of factors which disregard traditional usage. Entrepreneurs are ready to shift to new occupations, labor to take on unaccustomed tasks. There must be occupational, spatial, and probably social mobility to accommodate the shifts of factors required by evolving economic opportunities. Upward social mobility must be possible through economic success, and not only through the army, church, and politics. A minimum of education and literacy are required–more is better–to permit the retraining of labor and its instruction in new tasks.

But he saw clearly that capacity to transform does not simply rise in a straight line, and varies from place to place and time and time. The mobility of labor, workers moving changing locations and jobs to better their pay, is one of the most obvious indicators of capacity of transform. Yet there are numerous examples of workers who did not respond in that way to price signals:

Underdeveloped economies are not alone in their incapacity to adapt. … Distressed areas, pockets of unemployment, and low-income industries and regions are found in countries of all levels of average income.

The reasons for incapacity to adjust are social in developed countries as well as underdeveloped. In Lowell, Massachusetts, the young do not move away when the cotton mills cut back output; they share the work on short time, or take turns in working full time in the mills and drawing unemployment relief. The green valleys of Wales similarly clung to their youth when coal was depressed in the 1930s. Brittany and the Southwest in France and the South of Italy contained disguised unemployment in agriculture, along with industrial workers at less than average national wage rates who refuse to migrate to increase their earnings.

Similar failures of mobility have gotten increased attention in economics in recent years, as research has shown that in countries as different as India and the US, workers often did not move away from regions with declining industries. Here is a recent op-ed on this point by fresh Nobel laureates Esther Duflo and Abhijit Banerjee: 

When jobs vanish and the local economy collapses, we cannot count on people’s desire to seek out a better life to smooth things out. The United States population is surprisingly immobile now. Seven percent of the population used to move to another county every year in the 1950s. Fewer than four percent did so in 2018. The decline started in 1990 and accelerated in the mid-2000s, precisely at the time when the industries in some regions were hit by competition from Chinese imports. When jobs disappeared in the counties that were producing toys, clothing or furniture, few people looked for jobs elsewhere. Nor did they demand help to move or to retrain — they stayed put and hoped things would improve. As a result, one million jobs were lost and wages and purchasing power fell in those communities, setting off a downward spiral of blight and hopelessness. Marriage rates and fertility fell, and more children were born into poverty.

From that, they conclude that in general, “Financial incentives are nowhere near as powerful as they are usually assumed to be.” And they are surely right that “status, dignity and social connections” are the main motivators for human beings, who are fundamentally social creatures.

But it still seems that it would be more productive to treat capacity to transform as a variable, and try to understand how it changes over time and how it varies among different places. The decline in the mobility of labor over recent decades in the US is well-documented, and surely calls out for some kind of theory.

Kindleberger seemed to think that a weakening capacity to transform in advanced economies–like a loss of labor mobility, or the phenomena Tyler Cowen has grouped under the labels of “stagnation” or “complacency”–was part of the natural course of history. He did not quite offer a theory of this, but he sketched the outlines of a model:

Capacity to transform probably follows a pattern. In traditional societies it is minimal. With exposure to the modern world it increases. At some stage in the growth process it reaches a peak, and then there seems to be some diminution in it.

Kindleberger cites the adage “three generations from shirtsleeves to shirtsleeves” (which has an exact counterpart in the Chinese saying 富不过三代 “wealth does not survive three generations”) to illustrate our intuitive understanding that success can weaken the drive to change. So one could posit a “Kindleberger curve” in which capacity to transform first increases as the economy develops, and then decreases.

Such a curve would be close to the mirror image of what James Galbraith proposed, in his 2012 book Inequality and Instability, as the “augmented Kuznets curve,” which shows how inequality evolves as an economy’s level of income rises. Simon Kuznets had originally argued that in the early stages of the transition from traditional agriculture to industry, inequality would first rise as incomes rose, but as that transition advanced further, inequality would decline substantially even as incomes kept increasing. Galbraith recognized that in the decades after Kuznets wrote, inequality in industrialized countries had stopped declining and started to rise again. He argued that another structural transition, involving a rising economic role for finance and high technology, was responsible. Galbraith therefore augmented Kuznets’ original curve by adding an upward swing at the end:

Based on the experience of the US, it seems like the downward slope of the augmented Kuznets curve should roughly coincide with the upward slope of the Kindleberger curve, as should the subsequent rise in inequality and decline in capacity to transform. Since inequality could itself constrain the capacity to transform, and reduced capacity to transform could entrench inequality, these two changes could be related.

But while a declining capacity to transform can be problematic, this does not mean that capacity to transform must always be maximized. Kindleberger also wrote that “Worse than not being able to respond to an economic stimulus may be, under certain circumstances, responding too much.” The examples he gives of “capacity to transform with a vengeance” are less about the re-allocation of labor and more about investment flows: how lags in production of agricultural goods or housing can encourage too much investment in response to higher prices, resulting in a crash later on.

This made me think of China, and its policy-driven booms and busts. Typically, money floods into a sector when it receives government favor and subsidies, leading to a surge in production, and later overcapacity, falling prices, and a shakeout as the government reconsiders subsidies (see: solar panels, wind power, electric vehicles). In terms of labor, the willingness of Chinese migrant workers to uproot themselves and their families also shows no shortage of capacity to transform, but perhaps at too high of a social cost. So while capacity to transform in the US may now be too low, China’s might be too high.

Re-reading the chapter again, it’s still impressive to me how Kindleberger, in this short and quite casual treatment, managed to identify some of the major issues that are still puzzling economists some 60 years on. His concept of “capacity to transform” feels overdue for revival.

Also, here is my previous post on another interesting part of this Kindleberger book.

The afterlife of Marx’s footnote on Chinese currency

The number of times a Chinese person has cited Marx is by now, with the Chinese Communist Party approaching its centennial, surely uncountable. The number of times Marx cited a Chinese person is countable, and small.

It is an interesting piece of socialist trivia that in his Capital, Marx mentions only one Chinese person by name: Wang Maoyin, who held a position something like chancellor of the exchequer under the Xianfeng emperor of the Qing dynasty. He appears in footnote 36 to Volume 1, Chapter 3, the chapter on money and the gold standard, where Marx mentions Wang being reprimanded for a monetary proposal he had made to the emperor.

This mention has not, of course, escaped notice in China. The English-language Peking Review in 1983 excerpted an article about Wang that explains the background:

The debate took place between 1853-54 during the reign of Emperor Xianfeng of the Qing Dynasty. Wang Maoyin, Vice-President of the Board of Revenue and Population, opposed a proposal to mint copper coins in large denominations. During the debate, Emperor Xianfeng was in favour of coining this devalued currency. He and his ministers mistakenly held that the value of metal currency was determined by the state and that the people could not violate it. At the time, the capitalist commodity economy was not developed in China. Wang Maoyin understood that “the state may determine the value of the currency, but cannot impose restrictions on the prices of commodities.” To counter devaluation which results from issuing unconvertible metal currency, Wang suggested that a limited amount of convertible banknotes be issued. The emperor not only refused to accept his suggestions, but dismissed him from office.

The economic historian David Faure, in his China and Capitalism: A History of Business Enterprise in Modern China, also credits Wang for being one of the early Chinese thinkers to be aware of the “independence of the market”: the reality that the state could not simply dictate economic outcomes, because companies and people would respond to its actions. This idea was an independent development out of China’s own “statecraft” tradition of literature on the practical management of resources, taxation and markets. Faure summarizes Wang’s argument as “although the government had the power and means to devalue the coinage, it did not have same power and means to prevent the people from raising prices.”

At the time of the Peking Review article, the idea that economic activity was a realm subject to laws of its own was making a comeback in China. The people who were trying to move China away from arbitrary, politicized decision-making argued that the government had to respect reality and “seek truth from facts.” The idea that there were economic laws, and that China needed to figure them out and respect them, was an important piece of the intellectual framework of the early reform era. It’s interesting how vehement the author of that 1983 piece is on this point:

This footnote by Marx indicates that there is an economic law governing the relationship between currency and commodities, which is independent of man’s will. Marx affirmed the correct view of Wang and jeered at the self-indulgent rulers who knew nothing about the objective laws of economics.

It’s pretty obvious who the author is using Marx to implicitly criticize here, just a few years after the death of Mao, the end of the Cultural Revolution and the trial of the Gang of Four.

But while the invocation of objective laws of economics was, in the political context of the 1980s, usually a way to argue for the government to step back from interference in the economy, it does not have to serve that function. Xi Jinping is himself clearly a believer in such objective laws, but he sees them as enabling rather than preventing a strong government. Because such objective laws exist, they can be understood and mastered; as I put it in an earlier post, Xi thinks that there are laws of history, and they work in China’s favor.

Statue of Wang Maoyin in his ancestral village in Anhui

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

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.