A European inspiration for Chinese decentralization

A lot happened in China in 1978, the year conventionally used as the starting point for the reform era. One of the many fascinating events of that year was the five-week journey of a group of Chinese officials, led by Vice Premier Gu Mu, to France, Germany, Switzerland, Belgium, and Denmark. Today, when such visits are a regular occurrence, it is hard to comprehend the significance of this trip, and just how much it must have blown the minds of the Chinese officials. Gu and other officials saw first hand, and for the first time, just how advanced Western technology was and how high living standards were in these countries.

Ezra Vogel, in chapter 7 of his Deng Xiaoping and the Transformation of China, compares the overseas trips that Chinese leaders made in 1978 to the Iwakura Mission of 1871-73, which helped inspire Japan’s modernization. Gu Mu’s authorized memoirs also discuss this trip, and in the book he actually reproduces a large section of the subsequent report he wrote for the Party leadership (I picked up a copy of the English translation of his memoirs at the Foreign Languages Bookstore in Beijing).

His report made a big impression, and is usually credited with helping inspire the high-level decisions made soon after to open China up to foreign trade and develop science and technology. But Gu’s report also discusses several other issues, and I was particularly interested in the part where he argues for decentralizing authority on economic matters to local governments. This was inspired by what he saw in Europe: for instance, Gu remarks on his meeting with the governor of the German state of Bavaria, who offered him a handshake agreement for a $5 billion loan over dinner.

Decentralization would become one of the most distinctive features of China’s reform era, and local governments’ freedom to pursue economic growth is usually given a lot of credit for China’s subsequent success. So it’s worth reading Gu’s arguments in full:

On the improvement of the economic management system. The key to this question is how, under the uniform planning of the central authority, to allow local governments to accomplish more. Chairman Mao once said, one of the important reasons why the economy of European countries had developed so fast was that their countries were comparatively small. The central and local governments had division of power and could handle affairs flexibly. What we saw during our visit bears this out.

For example, in West Germany, the local governments at the state level enjoy relatively wide power. Many affairs can be handled once decided by a state government. This is beneficial to economic growth. Rhineland State only has a population of 3.6 million and it has a revenue of 10 billion DM (about 8 billion renminbi) for the state government to handle. Apart from administrative expenditure, this revenue is used in developing agriculture, local transport, education, urban construction, environmental protection and so on. Industrial construction is invested by capitalists and not included.

We have provinces and municipalities that are larger than some European countries, but their authority in managing the economy is very limited and hence they lack initiative. In planning, finance and managing materials, provinces and municipalities have not become real actors. The local governments do not have much power. For many affairs they have to come to Beijing. Often to address a single problem they have to go to several departments and wait several months without a result. This state of superstructure makes our socialist state machine seem inflexible and poorly adapted to the development of economic foundations.

If this problem is not solved and if we do not give full play to the initiative of local governments under the uniform planning of the central authority, our economy will lack vigor and there will be no high-speed economic development worth talking about.

This is a useful reminder that decentralization is not an immutable feature of the Chinese system, or something that happened automatically just because China is a very large country. Clearly Gu saw that in the 1970s the Chinese system was too centralized to be efficient, and that it needed to be more decentralized. (Jae-Ho Chung’s book Centrifugal Empire: Central-Local Relations in China also argues that the Maoist emphasis on local autonomy in the 1970s was largely rhetorical, with most localities compelled to follow the same political campaigns and economic priorities.)

It’s fascinating to learn that one of the most distinctive features of China’s economic model was, at least in part, inspired by the example of Europe. This history seems particularly relevant now, given that China’s current leadership is often focused on the problems decentralization has created, and looking for ways to push the pendulum back the other way (see this post from 2017 on the recent shift away from decentralization and its potential implications).

Three ways of looking at China and its history

A friend recommended I read Rana Mitter’s Modern China: A Very Short Introduction, and being a big fan of the Very Short Introduction series I was happy to do so. I’m glad I did: although the book surveys some fairly familiar material, it also puts forth some interesting historical ideas. What I found most useful is Mitter’s suggestion that our interpretations of modern Chinese history usually fall into one of three categories (the following are my terms not his):

Traditionalist. This is the view that “China has not essentially changed” despite the upheavals of the 20th century: that Mao and Deng were “new emperors” (as one book put it), that China is fundamentally Confucian and still on the same trajectory as in the rest of its supposed 5,000 years of history. This interpretation is quite common in popular discussions of China, and is implicitly invoked every time someone calls it “The Middle Kingdom” or talks about how Chinese foreign policy is still taking tips from Sun Tzu’s Art of War.

Socialist. This is the view that 1949 is the dividing line in Chinese history, and that the Communist victory in the civil war changed everything. Mitter associates this view mostly with romantic leftists of the 1960s, who were sympathetic to the Chinese revolution and willing to give Mao the benefit of the doubt. But there is a more contemporary version that also has a lot of currency, which emphasizes the present-day continuities with state socialism: how China remains politically authoritarian and how state-owned enterprises still play a major role in the economy.

Nationalist. This is Mitter’s own view: that the true dividing line in Chinese history is 1911, when the Qing dynasty was overthrown, not 1949. Since then Chinese politics has a “mass politics where there was a social contract between government and citizen” in which nationalism provides the major source of legitimacy. Both the Nationalists and the Communists sought national sovereignty, a strong state and economic development: Mitter sees both parties as engaged in “one long modernizing project.”

The standard academic thing to do would be to admit the obvious point that all three views have elements of truth and call for a nuanced combination: clearly some elements of Chinese traditional culture are still relevant, clearly it matters that the Communists and not the Nationalists have been in power since 1949, and clearly nationalism is a central issue in Chinese politics. So it’s nice that Mitter does not do this, and plants his flag firmly in the last camp. One of the more interesting passages in the book is his assertion that:

The Communist Party of today has essentially created the state sought by the progressive wing of the Nationalists in the 1930s rather than the dominant, radical Communists of the 1960s. One can imagine Chiang Kai-shek’s ghost wandering round China today nodding in approval, while Mao’s ghost follows behind him , moaning at the destruction of his vision.

There’s definitely something to this, but ultimately I’m not sure that I buy it. As regular readers will recognize, the legacy of Chinese socialism has been one of the major themes of this blog since I started writing it. So it’s probably no surprise that, if forced to choose among those three views of Chinese history, I might have to choose door #2, the socialist one.

These days it seems like it is not China’s similarities to other modern nations and economies that are most salient, but its differences. And if you interrogate the source of those differences, a lot of the time the answer is socialism and not Chinese traditional culture.

The Simurgh fable of democracy

Guzel Yakhina’s Zuleikha is one of the best novels I’ve read in while, a vivid, emotionally resonant tale of a Tatar woman caught up in the Soviet Union’s disastrous collectivization of agriculture in the 1930s. It was wonderfully translated by Lisa C. Hayden (her blog on Russian literature is great; here is her 2015 review of the novel in the original Russian, written before it went on to win Russia’s Big Book Prize).

The focus is very much on the texture of daily life rather than politics (Stalin is barely mentioned). Ultimately, it’s about how a bunch of kulaks and exiles make a community for themselves amid authoritarian politics and great physical hardship. It’s rather hard to excerpt, but this bit–a tale that Zuleikha tells to a child–captures some of the book’s themes in a more direct way (although most of the book is not at all like this):

Once upon a time there lived in the world a bird. Not just any bird but a magical bird. Persians and Uzbeks called the bird Simurg, Kazakhs said Samuryk, and Tatars say Semrug. And this bird lived on top of the highest mountain. Nobody could see Semrug – not wild animals, nor birds, nor humans. They knew only that his plumage was more beautiful than all the worldly sunrises and sunsets combined. At one time, while flying over the faraway country of China, Semrug dropped one feather, clothing all of China in radiance, so the Chinese themselves turned into skillful picture painters. Semrug was not only splendidly beautiful but his wisdom was as boundless as the ocean.

One time, all the birds on earth flew to a big celebration to revel together and rejoice at life. The festivities were spoiled, though, because the parrots started arguing with the magpies, the peacocks quarreled with the crows, the nightingales with the eagles … And from that great quarrel there arose in the world such a hullabaloo that all the leaves began falling off the trees and all the animals grew frightened and hid in their burrows. A wise hoopoe flapped his wings for three days, calming all the enraged birds. Finally, they settled down and let him speak.

‘What is the use in spending our time and energy on factions and feuding,’ he told them. ‘We need to elect a shah bird among us to lead us and bring quarrels to an end with his authority.’ The birds agreed. But here was the question: who should be elected as their head? They began squabbling again and a scuffle nearly broke out, but the wise hoopoe already had a suggestion. ‘Let us fly to Semrug,’ he proposed, ‘and ask him to become our shah. Who, if not he, the most wonderful and most wise on earth, should be our sovereign?’ This speech went down so well that a large brigade of eager birds prepared right then and there to make the trip. The flock soared into the sky and set off for the highest mountain in the world, in search of his illustrious highness, Semrug.

A flock as vast and black as a cloud soared into the sky and set off for the highest mountain in the world, in search of his illustrious highness, Semrug. The birds flew day and night, not pausing to sleep or eat, until the last of their strength was all but gone, and finally they reached the foot of the mountain they had been seeking. There they had to abandon flight, as the path ahead could only be trodden on foot. For it was only through suffering that they could ascend to the top.

In the Valley of Confusion – which was shaken by thunderstorms – night and day, and truth and untruth were muddled. Everything the birds had come to know through such hardship during their long journey was swept away by a hurricane, and emptiness and hopelessness reigned in their souls. The progress they had made seemed useless to them, the life they had already lived, worthless. Many of them fell here, defeated by despair. The thirty most steadfast remained alive. Bleeding, mortally tired, their feathers singed, they crawled to the final vale. And there, in the Valley of Renunciation, all that awaited them was a smooth, unending watery surface, with eternal stillness over it. Beyond, there began the Land of Eternity, to which there was no entry for the living. …

The birds realized they had reached Semrug’s dwelling place and they felt his approach through the growing gladness in their hearts. Their eyes squinted from the bright light that filled the world and when they opened them, they saw only one other. In that instant, they grasped the essence – that they were all Semrug. Each individually and all of them together.

That is also, by the way, essentially the idea behind the last episode of Game of Thrones (which in fact I rather liked). Of course, ideas don’t make novels great, the writing does–and that’s what Yakhina and her translator very much deliver.

Arguing about infographics with Galileo

I recently signed up for data vizualization guru Edward Tufte’s one-day course, mostly as an attempt to burnish my chart-geek credentials. I got rather more than I bargained for: the course was not really about how to make better infographics, or even about how to give business presentations (though both topics were addressed). It was more of a long ramble through Tufte’s mind and his obsessions–which are not so much data as information more broadly, and not simply vizualization but communication more generally.

This finally became clear to me during an enjoyable but initially somewhat puzzling discussion of his recent visits to his doctor. It seemed like a stream-of-consciousness digression at first, but then it became clear he was thinking through a serious issue: how to best communicate critical information in a stressful setting. (Tufte’s tip: write out all your medical concerns at home before going to the doctor, then hand over the document at the appointment). If you can’t get your doctor to understand what you need, he was implicitly saying, then what hope do you have of getting people to understand anything less important?

But while Tufte’s concerns are not limited to charts, he has spent a lifetime thinking through what he called the “perennial” problem of how to represent a multidimensional world in the two dimensions of the page or screen. At the end of the day, he pulled out a first edition of Galileo Galilei to show how the great minds of the past had grappled with the same issues. He rhapsodized over Galileo’s tiny, in-line sketches of Saturn, which clearly inspired his own advocacy of “sparklines” (tiny charts embedded in text at the same size as the text), as well as some beautifully precise illustrations of sunspots.

Tufte also showed an engraved portrait of Galileo, in which he has appears with an engaging smile, and called him “funny, bright-eyed…a bit like Richard Feynman.” It was clear that he felt he knew Galileo as a person through his work, and felt a deep connection to someone who had been working on the same problems: the rigorous collection of data and its careful presentation.

I was particularly sensitive to this dynamic because I had just finished reading Oliver Sacks’ loving discussion of the great early chemist Humphrey Davy, contained in his posthumous essay collection Everything in its Place: First Loves and Last Tales:

Humphry Davy was a boyhood hero to virtually everyone interested in chemistry or science in my generation. We all knew and repeated his famous experiments, imagining ourselves in his place. Davy himself had had such ideal companions in his youth, particularly Newton and Lavoisier. Newton, for him, was a sort of god; but Lavoisier was closer, more like a father with whom he could talk, agree, disagree. His own first essay, which Beddoes had published, while taking strong issue with Lavoisier, was in effect a dialogue with him. …

When I came to write my first book, Migraine, in 1967, I was stimulated by the nature of the malady and by encounters with my patients, but equally, and crucially, by an “old” book on the subject, Edward Liveing’s Megrim, written in the 1870s. I took this book out of the rarely entered historical section of the medical school library and read it, cover to cover, in a sort of rapture. I reread it many times for six months, and I got to know Liveing extremely well. His presence and his way of thinking were continually with me. My prolonged encounter with Liveing was crucial for the generation of my own thoughts and book. It was just such an encounter with Humphry Davy, when I was twelve, that had originally confirmed me on the path to science.

I do not think my experience is unique. Many scientists, no less than poets or artists, have a living relation to the past, not just an abstract sense of history and tradition but a feeling of companions and predecessors, ancestors with whom they enjoy a sort of implicit dialogue.

Tufte’s on-stage dialogue with a four-hundred-year-old work by Galileo was, among other things, a demonstration of how effective it is to teach and learn about science in a historical way, as a sequence of personalities, problems, and arguments.

Yasheng Huang on historic human capital in China and India

The always interesting MIT professor Yasheng Huang has done a long podcast for the University of Pennsylvania’s China series. He starts off by criticizing people who compare China and India to argue that China’s authoritarian state capitalism is better for growth than democracy, and dives into economic history to explain why that isn’t right (quotes are from my notes, lightly edited for readability):

If you want to make an apples-to-apples China and India comparison, you need to control for other differences between the two countries. And the basic thing you need to control for is the quality and quantity of human capital. I would argue that unambiguously, China has done a thousand times better than India in terms of human capital development: public health, public education. Historically speaking, in part because of the exam system, China has always had a very strong tradition of literacy, being able to read and write. There is some evidence to suggest that China’s mass literacy in the 17th and 18thh centuries was comparable to that in Britain. This is going way back. I do see that as a huge strength.

A lot of the growth differences between India and China and India are really explained by that. So there is a fundamental attribution error that many people have committed. When they look at the differences between China and India they say, one is a democracy and one is an authoritarian system, one has better GDP growth and the other has worse. Little do they know that there are other differences. It’s these other differences that explain the growth difference between China and India. I would say that human capital explains 80% of the differences. Maybe we should take that more seriously.

China has always had something behind its back to have good, solid economic performance. Even in the 16th and 17th centuries they had pretty good performance by the standard of that time. In that sense, I’m not a free market fundamentalist. I see the state as being absolutely critical in building the human capital base. This is what the Chinese did historically, and also what the Chinese did during the Communist period, and also what the Chinese state is doing today. For that I give them an A-plus, I celebrate their achievements.

Huang said he is working on a new book that will investigate these historical foundations to China’s growth today (and also said he is working on an updated edition of his well-known bookCapitalism with Chinese Characteristics to incorporate post-2008 events).

There is perhaps a tinge of motivated reasoning here, as Huang is clearly looking for ways to explain China’s economic growth miracle without giving the credit to Chinese state capitalism. But I’m sympathetic to the idea that pre-1949 China, rather than being the backward feudal hellhole of Communist propaganda, was in fact pretty well equipped for modern economic growth–at least, once it could manage to put an end to foreign invasion, civil war, and aggressively backward government policy. Indeed, Huang’s arguments echo points made by the great economic historian Dwight Perkins, who also emphasized the importance of pre-20th-century China’s functional bureaucracy and solid education:

China’s capital city had a population of over one million people as early as the Song Dynasty, if not before, and supplying such a city required tens of thousands of merchants, transport workers and the like. Commerce on this scale requires records, and to use records an individual must be able to read at least numbers and some characters.

We do not yet have a reliable estimate of the level of literacy in 19th century China, but among males a basic level of literacy could have been as high as 30-45%. Among the highest income 5-10% of the population, literacy must have been nearly universal, and for many at this level literacy went way beyond basic.

A relatively high level of literacy by pre-modern standards did not lead to sustained economic growth prior to the 20th century, but it did lay the foundation for the creation of a modern high-quality education system, at least when one compares the education system that existed in China in 1949 with what one found in much of the developing world on the eve of that world’s attainment of independence from colonial domination.

(The source is Perkins’ The Economic Transformation of China, pp. 7-8.)

The challenge, of course, is to produce more rigorous measures of historic human capital and educational achievement that could test these impressions. It will be interesting to see what Huang comes up with.

William James on the value of doctorates and diplomas

Greg Ip at the WSJ has a nice piece responding to the ruckus over the nominations of Stephen Moore and Herman Cain to serve on the Federal Reserve Board. It’s obvious from the Fed’s own history that the mockery of Moore for not having published peer-reviewed journal articles, or not having a Ph.D. in economics, quite misses the point. As Greg nicely puts it, the real question to ask about someone who is may need to make economic policy decisions is whether they are a disciplined thinker, not whether they have a certain credential.

By coincidence, I also recently read an essay by William James entitled “The Ph.D. Octopus,” originally published in the Harvard Monthly in March 1903 (it was reprinted in his essay collection Memories and Studies which is out of copyright and freely available). Some of James’ sentiments still ring quite true:

America is thus as a nation rapidly drifting towards a state of things in which no man of science or letters will be accounted respectable unless some kind of badge or diploma is stamped upon him, and in which bare personality will be a mark of outcast estate. It seems to me high time to rouse ourselves to consciousness, and to cast a critical eye upon this decidedly grotesque tendency.

James worried that the institutionalization of graduate degrees, and in particular their use by employers to screen potential hires, would cause all kinds of negative consequences:

To interfere with the free development of talent, to obstruct the natural play of supply and demand in the teaching profession, to foster academic snobbery by the prestige of certain privileged institutions, to transfer accredited value from essential manhood to an outward badge, to blight hopes and promote invidious sentiments, to divert the attention of aspiring youth from direct dealings with truth to the passing of examinations…

James was deeply aware of the tension between universities’ avowed mission of free intellectual inquiry and their economic function as producers of credentials, and hoped that the former would discipline the latter:

Our universities at least should never cease to regard themselves as the jealous custodians of personal and spiritual spontaneity. They are indeed its only organized and recognized custodians in America today. They ought to guard against contributing to the increase of officialism and snobbery and insincerity as against a pestilence; they ought to keep truth and disinterested labor always in the foreground, treat degrees as secondary incidents, and in season and out of season make it plain that what they live for is to help men’s souls, and not to decorate their persons with diplomas.


Rediscovering the importance of export discipline

The new IMF working paper on industrial policy, by Reda Cherif and Fuad Hasanov, has gotten a lot of notice, and indeed it is very clear, comprehensive, and useful. But for anyone who has already done some reading on the history of successful Asian economies, particularly Taiwan and South Korea, it is not exactly surprising stuff. Here for instance is their quick summary of the key characteristics of these economies’ successful industrial policies:

  • Intervene to create new capabilities in sophisticated industries: Pursue policies to steer the factors of production into technologically sophisticated tradable industries beyond the current capabilities to swiftly catch up with the technological frontier.
  • Export, export, export: A focus on export orientation as any new industrial product was expected to be exported right away with the use of market signals from the export market as a feedback for accountability. As conditions changed, both the state and the firms adapted fast.
  • Cutthroat competition (at home and abroad) and strict accountability: No support was given unconditionally although performance assessment was not necessarily based on short term profits. While specific industries may get support, intense competition among domestic firms was highly encouraged in domestic and international markets.

The combination of a focus on exports with tough competition sounds a lot like what Joe Studwell, in his 2013 book How Asia Works (which is not cited in the IMF paper’s bibliography), called “export discipline.” His explanation is clearer and punchier:

Governments in all the major economies of east Asia tried at some stage to nurture domestic manufacturers. That those in north-east Asia succeeded, while those in south-east Asia failed miserably, turned on a small number of policy differences. By far the most important of these was the presence – or absence – of what I call ‘export discipline’.

This term refers to a policy of continually testing and benchmarking domestic manufacturers that are given subsidies and market protection by forcing them to export their goods and hence face global competition. It is their level of exports that reveals whether they merit state support or not. …

Where export discipline has not been present, development policy has become a game of charades, with local firms able to pretend that they have been achieving world-class standards without having to prove it in the global market place. In south-east Asia, the energies of entrepreneurs were directed towards fooling politicians rather than exporting.

I would still recommend Chapter 2 of How Asia Works as the definitive comparison of successful and unsuccessful industrial policies in Asia.

The point of such a comparison is to move beyond sterile debates over whether industrial policy can ever work, since in fact basically all countries have some kind of policy for promoting particular industries. As Cherif and Hasanov put it, “The key question is, if many countries have been conducting industrial policy anyway, what should the right way to do this be.” The presence or absence of export discipline should be a useful way to evaluate whether industrial policy is likely to be successful.

Even within Asia this lesson is not as widely appreciated as it perhaps could be. For instance, former Chinese finance minister Lou Jiwei recently made a surprisingly harsh public criticism of Made In China 2025 (for which he has apparently been forced into early retirement). He called it a waste of taxpayers’ money and an unwarranted intrusion of government: “those industries are not predictable and the government should not have thought it had the ability to predict what is not foreseeable.”

While I have a lot of respect for Lou, I’m not sure this is the strongest criticism of Made in China 2025. It’s not clear that “the market” would necessarily pick different industries as being desirable to invest in now: the ideas that people have about what technologies are going to be important in the future don’t seem to be that different across the public and private sectors. The Chinese government have have a plan to promote artificial intelligence, but private venture capital firms are also throwing plenty of money at that sector as well. Semiconductors are one of the key sectors targeted by The Made In China 2025, and I don’t think many people are seriously arguing that semiconductors won’t be important in the future.

This is not to say that venture capital investors are necessarily going to be right about the future either, just that both government officials and venture investors can read the same things and are influenced by the same conventional wisdom. This point is not original to me: I picked it up from Brad DeLong’s 2010 book with Stephen Cohen, The End of Influence:

Americans like to say scornfully that industrial policy is about “governments picking winners.” Picking winner industries is not that hard—even for governments. Most countries trying to climb the ladder of quality and industrial sophistication through selective promotion compiled pretty much the same lists at the same time. Even at the leading edge of the technological frontier, the industries that governments are tempted to promote are largely the same ones picked by the analysts and brokers at investment firms such as Merrill Lynch, Nomura, or Rothschild’s.  …

Picking “winner industries” is not the hard part; winning is. It is difficult to create actual winners, companies that develop into successful competitors.

And that, of course, is where export discipline comes in.