Dialogue between Daokui Li and Paul Romer: Be Prepared for In-Depth Sino-US Competition
The Economic Summer Summit, which organized by the Beijing News on August 6th, Chinese economist David Daokui Li and 2018 Nobel Laureates Paul Michael Romer shared their thought on major subjects concerning current situation.
Paul Romer, rewarded the Novel Prize for his contributions to endogenous growth theory, was chief economist and senior vice president of the World Bank. David Daokui Li, leading economist in China and Dean of the ACCEPT, offered his solutions for China’s transitional period in his new book China’s Experience.
In the dialogue, Mr. Romer believes that political polarization over health measure was U.S’ biggest mistake and China should look for new export market. For him, China overpasses U.S in handling the virus and is more efficient in terms of government system in 2020.
Li concerns that the world will be divided in two after the pandemic in which part of the countries will be in control of the situation while others don’t. In this case, world economy will have automatic delinking and decoupling.
When mentioning Sino-U.S relationship, the two thinks that confrontational relationship would be inevitable in the next 2-3 decades. However, two countries should, instead, engaged in friendly competition. They both are convinced that people should be prepared for Donald Trump’s new policies ahead of the Presidential Election but don’t overact. Paul further noted that It’s a political attempt to try stoke this rivalry between the United States and China.
Political polarization over health measure U.S’ biggest mistake
DK: Don't you agree that we are in the greatest recession since world war II worldwide?
PR: Yes, it is the worst depression or recession since world war II. It's the worst in my lifetime. And it's not over.
We have countries that have been hit with this pandemic at different times. One of the interesting facts is that it spread most quickly in some of the countries that are best connected through things like air travel and meetings. And so relatively more affluent, more connected countries. It's coming to the developing world with a lag.
So you have countries like China where it originated first, where you're kind of past the early peek. You now in this kind of maintenance phase of a kind of a low level kind of vigilance, you have to maintain. You got the United States which mismanaged it. And so we're still fighting a very active pandemic. It has to anticipate that many countries, not just the United States, but also in the developing world, will be fighting an active pandemic, I think for months, at least say the next 6 to 12 months.
DK: China, in my view, has mostly in a status where the country is able to contain very accurately occasional recurrence of the pandemic. And meanwhile, trying to restore the economy and social activities to normalcy. The biggest concern for China is the connection with the rest of the world. Now my question is, what is the single most important problem of the U.S. administration in dealing with this pandemic? I mean the White House.
PR: Early on, very early on, officials from China with experience, were saying, the biggest mistake in the United States is that you're not using masks enough. And unfortunately, wearing masks became a politicized issue in the United States that If you're a supporter of president trump, you're less likely to wear a mask. So the biggest single failure is polarization, our our political polarization over a simple health measure, which is that everybody should be wearing masses.
China should look for other export market
DK: My biggest worry is that after the pandemic, or maybe in one year, the world will be divided into two parts, the small world, very small world, sub world we in which the pandemic is much under control, like China. Possibly, Korea and South Korea and Japan and southeast Asia. The other east world where the pandemic still ongoing so that the world economy will be divided so that we will have automatic delinking, decoupling. You worried about this process?
PR: I think there will be kind of Europe and Asia, will be part of the world which is going back to normal. But I think the Americas and much of the developing world will be still fighting this fight. Even a year from now, I think it'll still be ongoing.
Many developing countries, including China, when it was first opening up, thought of the United States as the first market trying to enter the first place to go sell their goods and services. And I think many countries, including China, will have to look for other export markets right now because the U.S. and the Americas, the parts the rest of the developing world may not be as as active market, may not have as much active demand as places like Europe. And so it'll be a refocusing of where your trade links are and your intellectual exchanges where this takes place.
Extensive virus testing more important than giving money
DK: What is the single most important thing for the U.S to do?
PR: I think to put it very bluntly, the best thing we can do in the United States would be to copy what the officials did in Wuhan, which is to do, you know, very extensive testing, find out who's infected, put those people into isolation and really get the pandemic under control. The thing that's holding us back from doing that we don't have enough testing capacity. But if we just put our minds to it, we can do throughout the United States the same thing they didn't move on.
DK: Which is more important than is simply giving money to people who are umemployed. Right?
PR: Absolutely. What we see is if you give money, you can get a conventional, then a burst of employment. But then with that employment, comes faster spread of the virus. And then policy starts to shut down. And people start to stay away because they're afraid.So that stimulus only gives you a temporary burst. And then it hits faster growth of the virus and it stops.
DK: Now in China, we've seen examples of the examples after Wuhan, where the virus has recurrents, for example, as of today in the problem in the autonomous region of Xinjiang, and also in Dalian, However, in China, the policy is very accurate. They quickly, they focusing on the problem region and then isolate the region so that the economy of the whole country is not affected.
PR: This is the right way to do it. I mean, it's kind of an analogy. With kind of recurrent responses, I think perhaps you could have even more ongoing frequent pre testing throughout the country. You want to have this ability to respond and do much more testing, much more contact tracing any time you see a recurrence. So it's gonna be a mixture of some measure that gets the prevalence down, some ongoing testing and surveillance that's watching for problems, and then a burst of contact tracing and testing. Or as long as it takes to get the vaccine, which will be the ultimate way we suppress it.
Chinese government system more effective than that of U.S in 2020
DK: Now pretend we are historians. And we are having these conversation 20 years from now, like 2040, or 2050. What would you say about the biggest change of the pandemic to the global economy or economic thinking?
PR: When people look back on, say, the 1980s, I think that the opening up in China will be a single most important worldwide event, single most important historical events of that time.
I think when historians look back at this moment, what they may say is that this is the moment where China clearly surpassed the United States along one dimension. It was more able to respond to this pandemic. It was more effective in responding than the U.S. was. Even though China wasn’t doing a better job than the U.S in some criteria, on this measure of a government that can actually respond effectively to a challenge and deal with uncertainty, a new problem, China was more effective than the government system in the United States.
Both effective government and market needed
DK: In China, I mean, as economists are often arguing that the Chinese government, in many things, are more capable in managing the society in governing the society. We're not being all areas, but in certain areas more capable. Right? Your father, your father was a governor of Colorado, right Roy, and your father was famous for building airport. Correct? They call him the Airport Roy, right?
PR: It’s just called the Denver International. that was an interesting case where they built that airport on time and it on budget, at a reasonable cost. So this is actually a case where a government, it was a state government, and local government, you know, government actually did something and got it done in the United States. We seem to have this experience that every time Japan, with the airport, that every time we try to do something for our government, it can't get the job done.
And so I think there may be two moments that there are two changes that we see in this moment when we look back historically: One was that China showed that its government was actually more effective than government in the United States; Two, I think everybody in the world is going to make this shift and recognize that a government that can do its job is essential for progress. And so if you don't have a government that can do the other side alongside of the market, you won't see real progress.
We got caught up in this big historical wave after world war II arguing, you know, the government is the problem. Just get the government out of the way the market will fix everything. And what this pandemic shows that just there are many other things that show it. They need both an effective government and an effective market to have progress. And unfortunately, in the United States, we're not only trying to limit the job of the government, but we're also starved of resources so that it can’t actually do the jobs it needs to do.
We're going to be on a whole new trajectory in the rest of this century thinking about how do we get systems of government which are strong enough to do the jobs that we want them to do. In the 20th century, we saw like fascism in Europe. And we were very afraid that governments that were too strong for the threat. In this century, what we're going to realize is that governments that are too weak is the real threat.
DK: I'm personally very, very happy and excited to hear that because for me, I've been working the past two years something a venture, academic venture, which I call a new branch of economics: Government and Economics.
PR: You might be right on the cusp of what could be the most important intellectual development of this century is rethinking this relationship. Sometimes I like to describe it in terms of there's some things we can do on our own with no explicit coordination. So it just is in a decentralized way. That's kind of what the market does. There are other things where we have to coordinate our actions with each other. And that's the only way for us to do some things together.
DK: Exactly. Now in my view, the government is a single most important player in a marketplace. Think of it right. In the U.S. 35% of GDP goes through the hands of government officials, right? To do the budget. Right? And we you pay tax. In China we also pay taxes and the portion of this part is growing. We interviewed government officials. And we wrote a book called the Lesson from China.Lessons from China, published in Chinese. And the single most important finding here is that proper incentives, proper economic incentives on the part of the government officials is super important. They should have the right incentives to support the market and to solve problems for the market rather than go against the market. Normally we think of government going against the marketplace, right market mechanism.
No ownership share in SOEs not the most effective
PR: There are many markets that just can't even exist, they can't function unless the government is prepared, the playing field.
I think there's also an interesting historical dimension to this, which is think about like air travel. At a very low level of development and a low level of government capacity, it's easier to run a state owned airline than it is to actually set up a regulatory system that can have a safe market airline system. So in the early phases, you have a government which is broader. Then over time what happens is the government gets narrower but stronger, so that a good strong government can say, we'll make sure the airplanes are safe. We'll let the private firms run the airlines and will delegate that to the market. So that the evolution over time is towards the government, which is strong but narrow. And in the United States is what we have is a government which is very broad but relatively weak. What we really need is to enhance that dimension of its strength.
DK: That's a wonderful example, Paul used the airline sample. Early on when the markets were not there, the Chinese government set up state owned enterprises to do many things. Later on, when the markets are already operating, right, then they retreat, they privatize as stable enterprises. And then let market go.
PR: Economists from the west and then Chinese economists who were kind of persuaded by economists from the west thought that he end point of that evolution was one where the government has no ownership share in the SOEs.
DK: Indeed, China is big experiment ground for economic ideas. So many municipal governments are now trying various ways with the idea of relax or passive ownership of enterprises. For example, the city of Shenzhen, the city of Shenzhen, which use that its biggest, the single most important property development of the whole world. So in the city of Shenzhen, they are holding passively shares in many private enterprises in the form of government ownership because this is a way for them to manage their public finance. And in case of emergency, they can sell some assets and use revenue to boost local economy.
National government should keep a playing field for sub units
PR: We often think of government as the national government. But when you have local governments, like municipalities or provinces, you get some extra flexibility. I think there might be some real flexibility and advantages that come from that kind of system
DK: That one way to explain the success of Chinese economy of the past four decades is by your personal example. You can think of China as consisting of hundreds of governors. They were very they're very capable, very much focused on local economy and are competing with each other. And then eventually successful cities emerge. And unsuccessful cities have to yield to undo what they did. So this is simple way to explain the Chinese success.
PR:I think more than 10 years ago and started thinking about this problem of unwinding the HUKOU system, it occurred to me there's a very important way that China could change the nature of competition between the different cities. Like most countries right now, we put a burden on local governments to care for the disadvantaged. But that means that if more people who are poor or sick, more people, children come into a city. That's a bigger burden on the budget of that city. So cities trying to keep the poor, the disadvantaged away and it shuts down an opportunity for for these disadvantaged people to get access to the modern economy.
So I think it's very important to take the responsibility for transfer payments like payments to cover basic schooling, basic health, even any other basic assistance. If people come to a new city, the national funds per person should follow the people. So then more cities would be willing to say there's a strategy we're having trouble competing with Shenzhen to get the university graduates. But we could compete by being the place where people get their first job a in a manufacturing firm.
DK:Now Paul you're right on target you're right on spot. Chinese government Chinese local governments were competing for capital, they were competing for projects. Now gradually they are competing for labor, because China is facing labor shortage, right?
PR: Exactly. When you talk to them you know they all want the college educated
DK: And also young people, they don't want old. Me, if I go to Shanghai, I'm unable to get the Shanghai Hukou, they wouldn't give me that because my score based on my age is too low, they want young PHD from the Tsinghua.
PR: There's a phrase in English of managed competition in a sense the job of the government is to manage the competition.
So that what emerges from it is something that is what a society wants and if a society wants that for example, provide opportunity for everyone to reduce inequality to offer everyone a good life. Then you wanna manage the competition between cities so that every city has an interest, an incentive to compete to attract anybody who will come to that city.
And once again, China may end up being the leader on coming up with a system for creating that kind of competition because you have this huge advantage because you have so many cities. You could have the most competitive market of cities that compete with each other, the most competitive market for cities of any country in the world.
DK: China actually, politically, it’s more unified than many other countries. However, economically, very decentralized, many cities are competing with each other.
Get prepared for more confrontational Sino-U.S relationship
DK: Now switching to a little bit heavy topic, the U.S. China relation. In China, we are, including myself, people like myself, we are very frustrated because we don't know whether the USA we used to know, I lived in the U.S. for almost 15 years, started my PHD on working there in university. So I have students on politics there, right, that you know. But nowadays we are very frustrated by the White House, by president trump. The White House seems to, from time to time, surprise us with shocking policies in the world. Now what's going on there?
PR: I want to emphasize is that many of us in the United States are equally frustrated. I think we need to prepare for the following.
Some of this difficult relationship is specific to the individuals. So if trump and he leaves office, if the republicans are no longer in control, we'll see an improvement in China U.S. relationships. But somebody else will come along. And there will still be a temptation to try and blame China for political problems in the United States. So I think, on average, the relationship at the political level between the United States and China is going to be a little bit more difficult going forward.
China is now an equal, in many ways, the United States, as I said in some ways, is actually even better. That kind of sense that you're dealing with another entity, which is strong, perhaps better on some dimensions, and lead to this sense of vulnerability on the U.S. side, which can then turn into a certain amount of kind of hostility. So I think the official relations between China and the United States in the next two decades or three decades will be a little bit more confrontational than they've been since 1980. And it's just unfortunate. But I think it's almost inevitable.
DK: Paul, from China, I have the following view. I believe that after president trump, whether it's in 100 days or in 4 and half years and better after him, anybody coming to the White House will be better, even though the new president, after trump might be nationalistic, might be very populist. But my argument is that, that person most likely will be more, in a way rational, in a way more respectful. So that China, can work with, can work with that person.
PR: Yeah, I think there's good reason for that.
China - U.S should friendly compete over urban development and technology
PR: They could compete by trying to build like more and more aircraft carriers and military force. This is clearly a very bad thing.
I'll tell you the competition that I would really like to see. I think China may increasingly get into the business of more city scale real estate development. I think it will do it partly to finance the Belt and Road Initiative that pay for all of the infrastructure. They could be brand new like Shenzhen. They could be like other Chinese cities. China will try and encourage the development of cities around the world that are successful, that create value on the underlying land and help pay for the infrastructure.
The United States and China could be competing with each other to see who could run the cities that are most attractive and give the most opportunity to disadvantaged people from all over the world. If we could compete that way, we would actually benefit the world. And we benefit each other because we learned from each other about how the how to create a better life for hundreds of millions of people.
DK: The example is between London and New York city. Right? They're friendly competition. U.S. senator Chuck Schumer, whether I do like him, I don’t know. Chuck Schumer, U.S. senator from New York city. He proposes, I think, at that station, which is something called unlimited support for scientific research, which normally U.S. is now winning off.
PR: People like you and me, the intellectuals can really move on our own to create a kind of the right kind of interaction between countries is by building deeper intellectual networks, these academic networks where there's research and communication and the usual kind of competition.
What I'm thinking about is that something like, as you said, the competition when the UK and being London and New York, except again, that was that kind of competition that was trying to attract people who are very rich, very well educated, working in the finance industry. But what the U.S. and China need to do is try and create new cities where we're not competing for investment bankers, We’re competing for people who are leaving, people who don't have a high school education, people living with their families, from countries where they can't get a job. That's a different kind of competition. But it's the one that would really benefit the world.
Be prepared but don't overreact over U.S presidential election
DK: In the coming 100 days or three months before the U.S. presidential election, what should China be prepared? What should China be prepared for any, in quotation marks, crazy policies from president trump, what kind of things China should be watch out for? I think maybe embargo of computer chips from Japan and Korea to China, crazy things.
PR: We've seen that they've been attempting to try and blame virus, the pandemic on China. And as I mentioned, I think China has actually been much more helpful in pointing the way for us to manage. But they'll still try to blame China. There could be some more attention about chips. It’s a political attempt to try stoke this rivalry between the United States and China.
I think in general, this is a time where there's a lot more uncertainty. So what every country, every government leader, every business leader should be doing is planning for unexpected developments. It’s just, it's much more uncertain. So I think it's not just decisions the top that there could be like more populist movements that raise concern about immigrants and an anti-vax movement.
DK: My proposal to my government, I think which you agree that is to be prepared for crazy things from president trump. Do not play the game, do not play the game of retaliate easily.
PR: Don't encourage this. Some of it is like what I call attention getting behavior. And if you just ignore it often will go away. So it's like small. Be prepared but don't overreact.
DK: It's like baseball,ice hockey. When one team is not doing well, the team may look for cheap shots. They look forflagrant foul. That hoping the other team will do about a big fight, then taking the attention away from the game. The White House may pick a fight. They pick a fight in places where China do not want fight.
