SAGE successfully holds policy session at the 20th IEA World Congress

The 20th International Economic Association (IEA) World Congress was convened in Medellín, Colombia from December 11-15, 2023, where a delegation of researchers from the Society for the Analysis of Government and Economics (SAGE) and Tsinghua University's Academic Center for Chinese Economic Practice and Thinking (ACCEPT) attended the annual event and held a policy session entitled China and the US: The Perspective of Government and Economics, in addition to presenting research in an academic session on Government and Economics.

On the fourth day of the conference, Thursday, December 14, SAGE and Tsinghua ACCEPT successfully delivered a policy session with the theme of China and the US: The Perspective of Government and Economics, which reviewed and analyzed some of the major opportunities and challenges facing the world economy from the perspective of government and economics. Participants in the roundtable discussion included Dani Rodrik, President of the IEA and Professor of Harvard University, David Qingzhong Pan, Professor and Executive Dean of Schwarzman College at Tsinghua University, and Huang Zhangkai, Associate Professor in the Department of Finance at Tsinghua University's School of Economics and Management and Tsinghua ACCEPT Researcher.

Huang Zhangkai (center), Associate Professor in the Department of Finance at Tsinghua University's School of Economics and Management and Tsinghua ACCEPT Researcher, chairs and moderates a policy session on China and the US: The Perspective of Government and Economics at the 20th IEA World Congress on December 14, 2023, with speakers including Dani Rodrik (left), President of the IEA and Professor of Harvard University, and David Qingzhong Pan (right), Professor and Executive Dean of Schwarzman College at Tsinghua University.

The following is a full transcript of the policy session:

Zhangkai Huang:

Good morning, everyone. Welcome to this panel discussion on a very hot topic right at the moment – the US and Chinese economy from the perspective of government and economics. I think I probably do not need to introduce Professor Dani Rodrik to you, who is sitting to the right of me.

I'm Zhangkai Huang from Tsinghua University, and sitting left to me is Professor David Pan. Professor Pan is the acting dean of Schwarzman College of Tsinghua University. I just told Professor Rodrik that Professor Pan is holding a very important position today: Because of the unfortunate decoupling between our two countries, there are now only 300 American students studying in China. And more than 20% of them are studying at Schwarzman College. So you see how important Professor Pan's work is.

I think I'll probably start by sharing with you the status quo of the Chinese economy. I understand that many of you are very worried and interested in the reason and the likely impact of a slowing down of the Chinese economy, and I'm going to focus more on the Chinese side. I think the biggest driving force for a sudden slowing down of the Chinese economy in the past 10 years is due to some domestic forces. First of all, the whole governance aim of the Chinese government has undergone a profound shift in the past 10 years. During the reform period, the priority of the Chinese government was economic growth and economic development. Ever since I was in high school, we were told that the main contradiction of the Chinese society was the contradiction between people's increasing desire for a better material life and the backward productive forces. If you often read Chinese government documents, you will realize that the Chinese Communist Party has this long tradition of putting everything into some philosophical terms. So to solve that contradiction, the priority, of course, is to achieve high economic growth.

And to achieve high economic growth, you can try everything, even things that are unimaginable according to the orthodox Communist ideology. For example, Jack Ma is a member of the Communist Party, which is something unimaginable in the Soviet Union. However, about 10 years ago, that aim started to change. In the 19th National Congress of the Communist Party in 2017, it was declared that the contradiction of the Chinese society is the one between people's increasing desire for a better life and the uneven and unbalanced development of the economy. So this means that China is no longer a poor country, and we no longer need to focus primarily on economic growth, but rather on other issues, like anti-corruption and redistribution of wealth and things like this. So one can tell that economic growth as a policy aim has been gradually and quietly sidelined.

The second reason for the slowing down is the change in the governance structure of the Chinese government and the Chinese economy. During the reform period, China was known for being pragmatic and experimental---“Black cat, white cat, the one that catches the rat is the good cat”. That is the famous quote of Deng Xiaoping. And how did China practice reform? Unlike the former Soviet Union, we did not copy doctrines from Harvard, we tried to cross the river by feeling the rocks. We had a very experimental and gradual approach, which almost sounds very much like British empiricism. And how could we do experiments and how could we cross the river by feeling the rocks? Obviously, China adopted a kind of decentralized approach. The provinces, the municipalities, and even counties were given lots of power. Many of the successful economic reforms in China during the reform period were not designed. Rather, they just emerged. So all those amazing things were the results of a bottom-up process. 

However, in the past 10 years, as some of you may have already known, that process has been reversed. We experienced lots of centralization in the past 10 years. Especially in the past five and three years, it was not only centralization into the top, but also centralization into the hands of just one man. With this centralization, we no longer see those very vibrant and innovative practices. This changed the incentives of government officials, whose priority changed from pursuing local economic growth to the implementation of the policies set by the central government. And to show their loyalty, they often overreact. And this creates lots of rigidity, unlike the pragmatic image of the Chinese government during the reform period. I think a very vivid case of that was China's COVID policies, especially what happened last year. And the second problem caused by this over-centralization and a change in the government's aim is information problems. Because of this huge gap between information generation and gathering and the top decision-making, the top has to rely on the reporting of various issues from all of China, which is just a mission impossible. And because of their distorted incentives, I think government officials would just report the information they would think would please the top. And the top would only strategically select information which is consistent with his priors. So there are no Bayesian updates in policymaking. It becomes very difficult to change the policy once the policy has been set unless something dramatic happens as we saw at the end of last year.

I think this explains a lot about the sudden drop in the speed of economic growth ever since 2013. People may refer to lots of negative factors that may hinder China's economic growth, for example, an aging society and things like this, but all those factors did not take place overnight. So they cannot explain the sudden drop. It's almost as if you can do an RDD analysis using this breakdown in the speed of economic growth. The factor which underwent an abrupt change is the way the Chinese economy was governed. 

However, fortunately, it seems that this year, the government finally realized the unfeasibility of those policies. As we see this U-turn in COVID policies (otherwise I would not be able to be here), we see lots of rollback in the previous policies. We see the rollback of the crackdown on the tech companies and we see some rollback on the crackdown on the real estate. And also our president made this famous speech early this year. He told a group of prominent private business owners “I treat you as our guys”. This is a big step back for him.

So my view is that the Chinese economy still has great potential to grow. People are talking about the Japanization of China, but China is very different from Japan. Back in the 1990s, the Japanese economy was already at a level comparable to that of the U.S. But today, even in PPP terms, the Chinese per capita income is only something like 20% of the U.S. level. So there's still a big gap to fill. And if we look at the supply side, although China now faces an aging population just like South Korea and Japan, the quality and the structure of our human capital have undergone some very profound and structural improvement in the past 20 to 30 years. Now we have about 10 million college intakes each year and about one-third of them are majoring in STEM. So there is a big supply of high-end human capital. And if we look at the output, starting from 2018, Chinese companies now rank the number one in the number of PCT patents. These are relatively high-quality international patents. And in the last year, Chinese universities surpassed U.S. universities as the number one in the Nature index. There's still a big gap between the most advanced technologies of China and the U.S. But then if you look at the supply side of human capital, I think China still has a huge advantage. But how could we make use of that very precious human capital? That really depends on the government’s reversal of the previous reversals.

If we take a more optimistic view of the future, it seems that the Chinese government is back on the right track. So hopefully, next year or the year after next, the Chinese economy and the economic growth speed will be stabilized. These are my views on the status quo and the future of the Chinese economy.

Dani Rodrik:

Thank you. This is really a fascinating story and I think you've really covered an extraordinary amount of ground in very interesting ways.

And I think hearing both about how the priorities in economic policy have shifted away from economic growth as well as how the structure of governance is sort of moving from a much more decentralized to a more centralized and therefore necessarily rigid form of governance... so that has been some of the problems. And obviously, China was never quite the democracy in the Western sense of the word.

But for the longest time, I think one of the things that served Chinese economic development very well was this willingness to learn, to experiment and be very pragmatic but always have this Bayesian updating, as you said, which is sort of having these lines because so much of policy was local and following up and monitoring what worked and what didn't work. In many ways, it was the mechanisms of policy mimicking some of the best aspects of democracy, which is you learn basically what works and because there are these mechanisms of accountability and you can never go too wrong because you get voted out in a democracy. But, some of these features seem to have been lost and it's also good to hear that there might be some reversals in the directions that ... I want to say a little bit about US-China economic relations and I'm not going to be focusing on the geopolitical context. All of that is very well known. It's not our area of expertise, but I'm going to focus on the economic dimension of this.

And one way of perceiving what's happening in US-China economic relations today is that basically these two economies are so different that in some ways there is this inevitable conflict from the nature of sort of two very different economies. I'd like to argue that in some ways, many of the conflicts are now the result of these two economies having become a little bit more similar in terms of their economic policy. So in some senses, the similarity that's causing the tension and in particular that the US today is emulating some of the strategies that actually had worked out quite well in China during its development and very high growth phase in prioritizing some domestic economic needs and at the expense of the international economy or the rules of the international economy, if you will, because in that sense, what the US is doing today is what China really practiced to great benefit.

To put all of this in a bit of context, let me repeat what I once heard from a Chinese policymaker about what China's approach to the world economy was during its high-growth phase and how China opened up to the world economy. He said, our strategy was that we opened the window, but also we put a mosquito net. So the open window got us the fresh air. In other words, we got the technology, we got access to markets, we got capital. And the mosquito net, the screen, allowed us to keep the harmful elements out. And so in other words, you didn't want sometimes too much competition or you didn't want too many short-term capital inflows. You wanted to have the room to practice your industrial policies.

And I think the kind of pragmatic and experimental policies that we just heard were what enabled this very, this phenomenal experience of economic growth. So leveraging the world market on the one hand, but combining with an internal strategy that in many ways violated the precepts of what a country is... joining the world economy and turning towards the market they were supposed to do. So the extensive use of state enterprises, extensive use of industrial policies, trying to push China into areas of new comparative advantage.

So if those of you who were in the plenary just heard David Atkin, essentially Chinese industrial policies were really trying to do what the core of that model highlighted as the important driver of growth, which is just pushing your products that you were producing and exporting a little bit closer to your capabilities through a variety of industrial policies in ways that if you had simply relied on markets, you would not have been able to do. Similarly on the financial front, China sort of manages capital flows, manages exchange rates to ensure that it could maintain a competitive currency, that domestic economic management was not overwhelmed by short-term capital flows and so forth. So many of these were sort of violations of the precepts of what came to be known as sort of principles of good economic policy in the West and China was blamed for these deviations from what orthodox economic policy called for.

I think nonetheless, because precisely because these policies ended up producing more growth and created a bigger Chinese economy, ultimately this was a benefit to the rest of the world as well. It's... for Latin American countries, it created a lot of demand for their natural resources as the Chinese economy grew. For US and Western investors, you created a much bigger market than you would have otherwise had.

So in hindsight, these sort of deviations from the rulebook were not just good things for China, they were good things for China's trade and investment partners as well. There was a problem of course, and the problem in the US is known as the China trade shock. And that it's, I should say... so what is the China shock story? The China shock story is that to a large extent, I should say maybe to an important extent, the rise of Trump and a similar kind of economic populism in the United States was causally linked to China's imports, China's exports in the US market.

There's a very well-known paper by one of my colleagues, Gordon Hanson and others, David Autor and a couple of other authors that looked at the impact of Chinese exports in local labor markets and what impact that had for support for Trump in the 2016 presidential elections. And there was an interesting counterfactual in this paper that didn't, this paper eventually got published in the American Economic Review, there was an appendix that didn't get published where the authors did a counterfactual analysis where they asked the question, suppose the Chinese exports to the four critical swing states in the United States in the 2016 presidential elections had risen only by half as much. Then they show that in fact, those swing states would have gone the way of Hillary Clinton. And Hillary Clinton would have been the president instead of Donald Trump. So I don't, when I say this, I'm not blaming China because I think it was, the problem, was much more with the policymakers in the United States and also in Western Europe where there was similarly a... story about the rise of far-right nationalism that is associated also with the European version of the Chinese shock. I think the fault lies quite frankly with the utter unwillingness of policymakers in the West to deal with the consequences of this and simply turn to their voters and electors and just say, well, this is globalization, this is how markets work. Just adjust, get yourself an education, move somewhere else where you can get a job. And so this created a kind of political backlash where quite, I think understandably, a lot of people, a lot of workers, a lot of regions sort of felt like their political elites were no longer listening to them and they weren't paying attention. And I think that that created at some point Bill Clinton said that globalization is the economic equivalent of the season’s changing of the rain. So it's like a physical phenomenon that you cannot alter.

There's nothing you can do about it and you just have to grin and bear it. And so when your political elites are talking to you in those terms, it's sort of easy to understand how the center, right and the center-left, actually loses credibility. And there is that kind of a political backlash.

But we know now it's not just Trump. I think Biden has come. And in many ways, Biden has continued Trump's policies, but actually Biden's policies have been, unlike Trump, which was ad hoc, just completely sort of unprincipled, I think there is a general strategy and principle behind Biden's approach, which is to take an approach to globalization that in many ways mirrors that story about the open window with a screen, which is to say that, well, you know, you're just... simply just being open to globalization and playing by sort of accepted rules of the level, it didn't, you know, didn't work very well for a large segment of the US labor force, so what we're going to be doing is essentially ensuring that we can have not just a robust economy that works for the top multinational corporations and the big banks, but for large parts of the economy as well. So that's part of, you know, these new sets of industrial policies on chips and others.

It's also saying that, well, you know, during this hyper-globalization era, we completely overlooked the climate transition, so we're going to put that on the forefront of our economic policies. And you have these industrial policies under IRA.

And then the final plank is to say, well, you know, we naively believed, and they should have believed that really, that, you know, as China joined the world economy, that China would become an economy and a country more like the West with sort of, you know, those kinds of political institutions and economic governance mechanisms that were much more closer to the West. I think that was a very naive belief from the outset, but it was quite clear by 2022 or 2020 that that wasn't really going to be the reality, that the Chinese economy was going to be very different, potentially posing some national security concerns, and therefore the final thread, the final component of this reorientation of US economic policies is also to say that we want to make sure that our national security interests are featured in our economic relations.

And therefore the strategy of what the national security advisor has called the “small yard, high fence” strategy in the United States, in other words, we're going to, you know, carve out a small yard of these national security sensitive technologies, and that we're going to put a very high fence around them to ensure that those, you know, don't leak and reach the hands of the Chinese military security establishment and so forth. I think the articulation of a strategy like that makes a lot of sense.

The risk of course is that that small yard becomes bigger and bigger as you sort of expand it and so there are lots of practical issues. But I think the nice thing about the US having articulated this strategy is that it has rhetorically given an instrument, a tool, a weapon for not just China but also independent observers to say, this is your strategy, you said “small” yard.

So you have to explain, you have to communicate why you're putting things into the yard and why sometimes the yard expands, why it is expanding. So I think it's a very, actually, important vehicle for having a conversation and dialogue between the US and China. Because I don't think it's the case that China cannot understand why or the general principle of... why is it that the US is acting this way, because it is the same general principle of the screen that is on the window. It's exactly the same thing as the Chinese strategy.

But I think it becomes very important for the two sides to understand why if Chinese is engaging in certain types of industrial policies, why it is doing it for purposes of its own; when the United States is engaging in its own industrial policies or national security policies, what are the rationale for that rather than doing it in a very, very opaque kind of a way. 

So this is why I sort of end up on this point that it's actually... the conflicts are arising from the fact, in many ways, the US now is emulating or mimicking sort of the post-1978 or post-1980s strategy of China towards the world economy. And so I think on the one hand, the United States has to understand that China is an economy that's very different, that's going to use very different tools, there's no point asking China to become more like the US. So I think there has to be much greater tolerance for Chinese industrial policies and subsidies, saying that this generally has worked well in the past and we're not going to be the judge of what's good for China's own economy and if these subsidies go wrong, the cost will be borne mostly by the Chinese economy, not by Americans.

But I think it's by the same token, it's important for the Chinese government to understand that when the United States is engaging in policies that's looking out for its own economic, social, environmental and national security concerns, that that's also understandable, that it's not fair or it's not reasonable to blame the United States for not playing by a set of hyper-globalization rules that China never played by in the first place. So does that necessarily mean, therefore, that I don't think there's any necessary inherent conflict on the economic dimension between US and China? As long as there is that understanding that it is possible to create a set of relationships that one can characterize as peaceful economic coexistence. So why do I say peaceful economic coexistence? I'm just harking back to the sort of era in the political domain during the Cold War between the Soviet Union and the United States where there was this period of peaceful coexistence that took place only after Moscow, the Soviet regime understood that you were not going to have a communist revolution in the United States, and the United States understood that the Soviet regime was there to stay at least until eventually it collapsed.

So once each side understood that they are very different societies, very different regimes, then the objective became coexistence rather than a predominance or, you know, sort of undermining the other regime. And I think sort of on the economic dimension, I think the best that we can hope, and I think it's not a bad outcome as well, is sort of if these two countries understand their respective needs, their differences in their economic structure, and enable each side to have wide latitudes in the way that they pursue their own economic objectives, and focusing their dialogue and their discussions on some areas where there might be genuine concerns about beggar-thy-neighbor policies, where one country is doing something purely to hurt the other, I think, or, you know, areas where there can be common cooperation such as public health or the global climate transition, where obviously both sides understand that it's a common issue. But I think, you know, this principle of peaceful economic coexistence would be essentially a step back from the key understandings in the hyper-globalization era where China was expected to abide by a certain set of rules, which it never intended to do, or that the United States was simply, you know, supposed to remain completely open to China, to Chinese trade and investment, regardless of social and distributive consequences or consequences for its national security.

So I think it's still possible, but I think both sides have to understand that the rules of the game have changed. 

Zhangkai Huang:

Yeah. Okay, thank you.

That's certainly very insightful and lots of material. And Professor Rodrik just mentioned the previous Cold War, actually, it was the first time that I realized that the origin of IEA was during the Cold War, and people would like to build a bridge between the West and the Soviet Union. But actually, I don't think we are having a new Cold War. I would call it a Cold Peace. China is very different from the Soviet Union due to, I think partially due to, globalization.

Before I flew to Colombia, because my wife knew that I would be away for more than a week, on Sunday afternoon, she bought lots of food in Sam's Club in Beijing. And on Monday morning, I dropped off my children at school in my Tesla. Then I called a taxi to the airport using Didi. That's China's version of Uber. So you see this technology spillover. And Didi was founded by lots of American institutional investors. At the airport, I bought myself a cup of coffee in Starbucks. So you see that because of globalization, China and the US are really closely interconnected.

And China is unlike Russia, which exports mostly oil. So China's... I think your colleague has an economic complexity map in the Harvard Growth Lab... okay, so China's economy is very complicated, which involves lots of connections and exchanges with other countries. Of course, globalization may create some negative shocks to certain groups of people, like the people you mentioned. But I think if we do some kind of counterfactual, which is very difficult to do, had it not for globalization, if we shunned China from the global economy, what would the world be like? I think the world would be in a much more dangerous place. Justin Lin mentioned in the previous session that China has been very peaceful during its rise. You may not buy his argument, but I think he forgot to mention one fact: China hasn't fired a single bullet in decades. Several years ago, China had these very unfortunate border disputes with India. The two most populous countries in the world decided to solve the conflicts using rocks and sticks. This is something that never happened in world history. I think it's fantastic if we could solve our disputes (with) rocks and sticks. Of course, if we could solve that by “rock, paper, scissors” that would be even better. But I don't think this is because the Chinese and Indians have a higher level of morality or rationality. I think one of the reasons for both countries to have exerted this kind of self-restraint is because of globalization: your actions would have serious feedback and consequences from other countries. And my naive understanding of the Russian invasion of Ukraine is that, well, if the Russian economy is as complicated as the Chinese, they would probably think twice before they did this. So I think we should all thank globalization for cooling down all those tensions. 

And you also mentioned that—oh, by the way, I'm glad to hear that the US is learning from the Chinese practice, because for 40 years, we have been learning from you. In China, when we say best international practice or international experience, that actually refers exclusively to US experience and US practice. I think the Chinese industrial policy has been a little bit overrated. Yes, some of those policies seem to work, but we don't know why. I think we know more about the virus than we know about industrial policy. We don't know why they work, and we don't know why they don't work. Let me give you an example. Because of this top-down nature in the governance structure developed in China in recent years, and because people think that, well, those industrial policies seem to be working and seem to be responsible for the Chinese economic rise, today many local governments are becoming limited partners in many domestic venture capital firms. Those venture capitalists have very complicated feelings about this. On one hand, they welcome the injection of capital, but on the other hand, the government capital has very strong political priorities. The money would be exclusively diverted to areas like chips and things like this, and they're not interested in consumption. And there is another thing: this constrained and distorted the behavior of those venture capital firms, which have accepted a huge injection of local government funds. We know maybe 10 percent of the investment by the venture capital firms would succeed. This is how the industry is working. But then the government will never accept only a 10 percent success rate: this sounds like a crime to them. So they would only be interested in investing in less innovative but safer projects. As we can see, well, these venture capital firms are becoming more like commercial banks. I think this is not good in the very long run. So if the US is learning the Chinese experience, perhaps you have to be careful. 

Okay. Professor Pan.

David Pan:

Okay. Thank you, thank you. Zhangkai, thank you. Dani.

So both professors covered a lot of essential points. And good morning! So nice to see you here. And I’ll just try to give some additional information on the two topics, China and China-US relations, economic relations.

And exactly 45 years ago, in December 13, 1978, that's China's policy changed after the Cultural Revolution, and economic development became job number one. And after that, 45 years, China reached today's situation.

In 1990, I started to work, my first job was in Tsinghua, my university now. And you can take a guess how much money I had in pay, the salary, the monthly salary. You can take a guess.

Audience Member #1:

1990? 

David Pan:

1990, yes. 

Audience Member #1:

Nine zero.

David Pan:

Nine zero.

Audience Member #1:

In dollars? 

David Pan:

In dollars, monthly. 

Audience Member #1:

500.

Audience Member #2:

200. 

David Pan:

500, you're the boss.

You're the boss. You're the president. Ten dollars.

Audience Member #1:

Per month?

David Pan:

Ten US dollars per month, my salary in Tsinghua. But today, in the years past, it's 10,000. So that means a thousand times increase.

And it's only 33 years, right? So that's changed a lot. And that's, we call it economic development is job number one. But it's still that.

And now, China in the past years, why we have that growth? I mean, average growth rate is 9%. Over 9%. Why that? So a lot of reasons.

Decentralization and others. And you can learn a lot from overseas, open up and reform. And for me, two points to share with you.

The first one is entrepreneurship. You know, in the production function, there's labor and the capital. And one factor, I think, is in China in the past years, entrepreneurship. We have over 40,000, sorry, 40 million companies. And most of them are private. And we have SOE, another factor, another character in China, economic development. But the private sector started from zero 45 years ago, now we have 40 million private companies. That are a lot of entrepreneurs. So they work so hard, day and night, and we call it 7-11. They work seven days and 11 hours a day. And so that's entrepreneurship in China’s economy. And all those years, they're full of activities.

Another one is the government, which really plays a role, whether decentralized or centralized. Why? Because the government provides a lot of public goods. You know, (has) anyone been to China? You know, you take the bullet train, right? So before from Shanghai to Beijing, Beijing to Shanghai, it took twenty hours. But now four hours. You can go anywhere. So (in the) early 1990s, I went to the US, New York. I (felt) shocked, impressed.

Why? Because everywhere is a highway, right? But in China, (that time) none. Only one was under construction from, in the northeast, from Dalian to Xianyang, two cities. Only one.

But now, we have high-speed trains, and that's (also) in the rural. That's the advantage over the US, and we have more highways than the U.S in just 33 years. So that is the government playing the key role in providing public goods.

And all the villages, all the villages, we have 2,800 counties. And over that, we have almost a million villages. Almost all the villages now have a road.

Because if you want to get rich, you have to (build) the road first. So that's the government playing a key role in the last 45 years. 

And in the future, you know, today, we really have faced a lot of challenges and problems. You know, the real estate market, 20 years ago, it was like Japan, other countries, Thailand, and it started going down. And 15 years ago, I should say, the housing price is probably only 5% of the US, New York. And now, in Beijing, the housing price is above the US. And it's more expensive, almost the most expensive in the world. And now, today, we've got a problem. And starting from a realistic (view) … you can see the historical data, we have met the problem and (it) started from the real estate market, the housing market.

And also, we're facing, you know, after COVID, we're facing a lot of deflation. There are some, some, as Zhangkai has mentioned, some policies may (have) changed a little bit, and we'll have to make an adjustment to our policies. And also, also, you know, there's an export problem in the last three years. And all of these challenges we're facing today. 

So what's the future? So for the future, for me, two points.

The first one, as Zhangkai mentioned, every year we have 11 million new college students. They provide high quality talent, human resources, human capital. And 4 million are working on, I mean, studying in science and engineering, technology. So (this) really gives new human capital to the market. So there will be new startup companies, new entrepreneurs, and new employees in the market.

It's a new generation. You know, today, there are a lot of challenges in the technology, AI, a lot of issues, but (there’s) a new generation. Because we work in the university, we work with the students every day, and we believe they will give us a new bright future.

So that's number one. And there's number two. The government finally realized we need to adjust our policies, domestically and globally, and make that policy suitable to our new state of development, whatever they call that.

Someone will ask a lot of questions about the Belt and Road Initiative. Why this? A lot of reasons. One thing is, you know, that China has the production capability, not only for domestic, but also for overseas. So there's the steel, there's coal, there's a lot of production capabilities. And we always say that domestic consumption is not enough, and we try to implement different policies, but absolutely there is a problem with globalization, and that's why we have some kind of a new initiative. So that's, the government will make adjustments for their policies in the future, like 45 years ago, economic development is job number one. And I think it still is.

And if we keep that, the government will play some kind of a role, that's China's special characteristics. And also, entrepreneurship is (in the) Chinese DNA. Some Chinese DNA, I can share with you, you know, all over the world, when the new year is coming, so (everyone) always says “happy new year, happy new year.” But in Chinese, we don't say “happy new year.” Why? We say, what? “Gong Xi Fa Cai.” It means to make you rich, make you rich. So that's why … they want to make economic development, so that's true.

And so there's still confidence, but still many problems like the housing market and deflation and the stock market. You can see the stock market, back to the 2008 stock market in China, (the) Shanghai Stock Exchange, and (the) New York Stock Exchange, both of the indexes (were) 6,000. But today, China's stock market is 3,000, US is 36,000, 12 times difference. It's a big problem.

Because everyone, everyone’s stock, I mean the traders, lost their money, and how many traders in China (do) we have? We have 50 million traders in the stock market. So that's really a big problem. You can see the problem.

But, to me, I feel confident for the future because, you know, China has some kind of DNA to make economic development. 

And the US-China relations. Okay, you know, last year there's still a deficit of over 360 billion US dollars, the trade deficit between the US and China. But US (and) China (are) big trade partners, we should keep best partners in the future. Why? Because in the last years and years, China is no longer like before, the big manufactur(ing) country, but it's still there. Why? Because (it’s) the low price, the products (have a) low price, high quality, and they deliver on time.

So that's the reason, maybe (they’ve) replaced orders from other countries, but here China still has a lot of advantages. So that's why China’s export and import last year were still growing, but for the US and China, the trade is maybe decreas(ing). And now there are some manufacturers from China investing in Mexico.

But eventually, still, China and the US are very, very close. And what's the risk over there? Many. But for me, as I mentioned once, you know, unpredictab(ility) is the biggest risk.

So why is it that China, even the ordinary people don't understand, they didn't understand before and today, for Donald Trump, because Donald Trump is unpredictable. So that's why you know we feel the risk, being with the US. So if we have more predictab(ility), so let's make China-US relationship, mostly the trade and economic relationship, make the US-China economic force benefit, (both) trade and (the) economy benefit, right? Better off. And so that's also I feel the confidence, as Zhangkai mentioned.

And so I come from the Schwarzman College, we have students 80% overseas, 40% from the US. And so that's the students' future, they understand China. As Dani mentioned, we, US and China, we need to understand each other.

Otherwise, you know, (we) always misunderstand and it gets a gap (that’s) bigger. So that's for the future. So that's why we attract a lot of US students to come to China to understand each other.

We send a lot of students to the US from China. So last year, we had 280,000 Chinese students studying in the US, but only, as Zhangkai had mentioned, only 350 in China. So that's another big deficit.

So we try to get the deficits smaller and smaller and a better future. Okay, thank you. Thank you so much.

Zhangkai Huang:

Okay, thank you, David. Can I have a very quick response to both of you? David just mentioned that China achieved tremendously in the past 40 years. He earned only 10 dollars a month 30 years ago, now he is one of the richest professors in China. And Dani mentioned that China kind of fell short of the American expectation that the market economy and the access to WTO will bring China more towards a Western-style polity. I think actually these two things are kind of interconnected. In China, we're very proud, and we're saying that, well, China has achieved within 40 years what the West has achieved in the past two centuries. But people's mindset and the political institutions cannot evolve at such astonishing speed. So I think we have to be patient. If we still believe in convergence, and if we realize that the average Chinese citizen loves money as much as the average American citizen, and we also love freedom as much as the average American---these are the more powerful underlying forces. 

One of my favorite stories that I read (was) Lee Kuan Yew's biography. In the book, he recalled that in 1967, Richard Nixon was running for president and he organized this global trip to promote his image. And with the advice of Dr. Kissinger, Nixon went to Singapore to pay a visit to Lee Kuan Yew to ask his opinion about Asia, and in particular about China. In 1967, China was in her lowest slump. So your country was sending people up to the moon, and my country was sending people down to the countryside. I think the external observers then would think that China must be crazy, and the country looked hopeless. But Lee Kuan Yew was very confident. He was confident in the Chinese people. He was confident in the Chinese culture and Chinese civilization. And he told Nixon that what Mao was doing was like painting on a mosaic. It will not last long. And when rains come, it will disappear. So I strongly believe that rain will come, and it may come tomorrow.

Dani Rodrik:

I hope you're right. I think I'm a little bit less optimistic than you that there is necessarily this inexorable trend towards countries becoming more democratic.

That's not exactly what you said. But let me put it in those terms. I mean, I think democracy is a very difficult thing to achieve and to maintain.

I think you're absolutely right that everybody in the world has similar aspirations. So it's not a matter of culture or the people being very different in terms of their basic aspirations. But I don't necessarily believe that there is an inexorable trend towards greater democracy.

I don't think that democracy is under threat in the United States. I mean, I don't think that democracy will continue in the United States if Trump wins the next election. Especially liberal democracy, which is not just majority voting.

It's also sort of fundamental protection of rights and rights of minorities and so forth. This is a very difficult thing to achieve and maintain. So, but that's an aside.

So I don't think anything in the US-Chinese relationship going forward should necessarily hinge on the nature of either the political regime or the economic regime. Let me be very honest. I mean, I think when there are severe human rights violations in China, I think everybody who loves freedom ought to be sort of discussing this and criticizing Chinese government policy.

As a matter of US government policy and foreign policy, while standing up for human rights, I just don't think there is much of a chance that the U.S. government could change Chinese government policies and that it could probably backfire. So I don't think US relations with China should be determined primarily by considerations or whether, in fact, by standing up for human rights, whether you are able to change Chinese government policies or not. I think it's much more important to establish a certain trust and certain rules of the game and there’s a very limited ability of outsiders to shape the evolution of China's political regime.

Zhangkai Huang:

Okay, Dani, I think I agree with you that even in the future, China's trajectory will look very different from what the US looks (like) today. But I think China actually is being affected or changed by the US and the rest of the world in a more subtle way. It's not like the US Congress passed a bill condemning China and China changed. But rather, I think because of all those underlying forces and because of China's role in the global economy, I think the Chinese government realized that its policies and its actions would have far-reaching reactions from outside and from other countries. This would act as a very powerful correcting force for China. I remember James Steuart once famously asserted that “the modern economy is the best straddle ever invented against the folly of despotism.” So I think China benefits from the fact that China is a large market economy and it's a large open market economy. So that's why we see lots of reversals this year. And that's why we see China seeking reconciliation actively with the US and with Europe. And that's why we see China, as well as India, have shown a lot of self-restraint in their border disputes. I think these are the positive factors. But they may not appear to be very powerful, and they may not be easy to read in mainstream media. But if you take a careful look, you do see these changes. So that's why I'm still very optimistic.

I think, it is this the quote of (Vaclav) Havel that hope does not mean the conviction that something must happen, but it's the certainty that something is right regardless of the outcome, and it will eventually win in the future. 

Dani Rodrik:

With that I'm completely in agreement. 

Dani Rodrik:

So maybe we should turn the mic to our audience. Do we have time left?

Zhangkai Huang:

We do have time, but maybe we should have time for some questions.

Yes, please.

Audience Member #3:

You didn't talk much about the rule of law. So... I'm from Germany.

I'm Patrick Brawny. I'm from Leipzig University in Germany. And there's a lot of talk in the media about democracy, democracy, democracy.

But when you listen to a historian, is it Niall Ferguson? He talked about why the West was successful and rule of law and property rights, that was really important. Also, when you discuss Latin America's development versus the United States' development, differences in the rule of law, you see explained in differences in outcomes. So how do you see the development of the rule of law, the state of the rule of law in China? I mean, if you look at some stocks in the stock market, there have been interventions, let's say, and they had effects on investors.

Outsiders couldn't quite follow what's going on. 

Zhangkai Huang:

Yeah, rule of law. Well, I think history usually moves two steps forward and one step backward. Rule of law is good in the sense that it promotes economic growth. But I think that feedback may take a very long time to realize. So hopefully, my government is going to be smart enough to realize this very important feedback of rule of law on economic growth, and they would have strong incentives, they would have enough incentives to protect the rule of law. But talking about China's stock market, that's another story. 

Audience Member #4:

So this conversation was a great relief since I heard many, many things that I wish were said more often and aren’t. I think you come out far too optimistic.

So can I just pick through how, while I agree with almost so many things that you've said, I come out in a different place. I think Dani's absolutely right. It wasn't the China shock.

It was the American incompetence shock. We really should relabel that thing. I also think my view is that you're right in saying we don't really know what works.

There's lots of stories. My own reading of that would be to say something like, really, the magic in China was that it stopped doing absolutely atrocious and destructive things. It just stopped.

It wasn't what it did, it's what it stopped that produced it. I mean, it took an enormous amount of incompetence and malevolence to hold all of that productivity down until 1978. And they just stopped.

And there was a clear, I think the macroeconomic part of the growth story is undertold. So the maintenance of an undervalued exchange rate, maintenance of... very disciplined fiscal(ly), so no extremes in either direction, no accumulation of debt, so in getting you into debt issues and so on, all of the negatives. And also, one of the stories often told, and you try to sort of depend on which mouse works, which cat works.

I would sort of say it's rather different. If you look at the decollectivization thing, yes, it was done sequentially, but that was a form of sequential action.

It was a decision to decollectivize agriculture. 

Zhangkai Huang:

Yes.

Audience Member #4:

So distinguish the form, which is many cats, or whichever cat. Actually, the substance was, we are going to decollectivize agriculture.

And we're going to do that first, that sequencing mattered. So all of that, I think, is great. So why, since I am so much in accord, with what you say, that I wish this stuff would get elevated, but I come out in a different place.

I think the danger looking ahead is that on both sides of this relationship, you have a propensity of policy lurches. 

Zhangkai Huang:

Yes. 

Audience Member #4:

China's history is economic history, going back to 1949, is characterized by phenomenal lurches.

And those lurches, I think, have carried on past the Mao period. But a long period where, you know, Deng Xiaoping's lurch was predominant. You've described how in 10 years, we’ve lurched back in the other way.

You're taking an optimistic view that the recent step is in the right direction. I say, no, that's another lurch. The propensity for that degree of instability in core policymaking remains. And as Dani pointed out, that propensity is now rising in the United States, too.

So you've got two big players now, both (having the) propensity to lurch... is how I see the sort of the danger and the threat now. And in regard to China, the propensity to lurch immediately looks to me to be aggravated by at least two things. Nobody knows how to undo the housing problem.

It's just this gigantic thing of, unprecedented virtually anywhere else in the world, how to unravel that without creating major dislocations at some point, either in the financial sector or the real (estate) sector or in the housing sector just itself. And the other thing which people really don't know how to do or see is while you're optimistic that eventually people's preference for money and for liberty will prevail, transitions to that are almost always highly disruptive. You do not glide into that.

You go through the French Revolution or you go through the revolutions in the United Kingdom or you have any number of revolutions that's brought the communist regimes elsewhere to an end. It is not. The end point might be stable, the transition is highly unstable.

I think the issue is two big economic powers becoming lurch-prone. That's the threat. I think.

Zhangkai Huang:

Well, Dani? 

Actually, I agree with you.

So maybe we have... how many questions? One more question? 

Dani Rodrik:

Maybe one more question.

Audience Member #5:

Yes, thank you. Rafael Trapasso from the UACD in Paris.

UACD in 2009 produced a report on rural China to show how the problem of place-based policy was there. And you said that the government was able to deliver a road infrastructure to better connect rural places to metropolitan areas to promote rural development. My question is, it's become difficult now to deliver more infrastructure, more roads, more electricity.

So at a certain point, do you fear that there will be an increasing geography of discontent in China that could, I won't say Yellow Vests in China, but something that might undermine the apparent stability of the government? 

Zhangkai Huang:

Okay, I have a very quick answer to that question, but from a very different angle. It was an answer provided by a researcher at the University of Wisconsin, a Chinese scholar there studying population. His answer to that is no, China is going to be stable, and no more protests.

The reason is very simple. China is now an aging society. If you look at history, usually those protests and social instability took place when there was a large population of young people. The surprising side effect of an aging society is that, well, old men don't fight. And we now have an aging society.

Indeed, my speculation on why China took a very different direction 10 years ago may also be related to aging. With the population aging, the policy looks to be more and more conservative and less and less innovative. 

Sorry. We can continue our discussion afterward. We have to call it a day. Okay. Thank you, everyone. Thank you, Professor Dani Rodrik. Thank you.