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Discussion With Barry Naughton, January 24, 2020

Discussion with Barry Naughton, January 24, 2020

Post Series: 2020: Volume 19, Number 2
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Editor’s note: Dr. Barry Naughton, the China Research Center’s 2020 annual lecturer, sat down for a wide-ranging interview with China Currents Managing Editor Penelope Prime and Center associates John Garver, Georgia Tech professor emeritus, and Li Qi, professor at Agnes Scott College, on January 24, before the devastating impact of the coronavirus was widely known. Dr. Prime followed up by email with Dr. Naughton with a question about the pandemic on May 9. Below is the January interview followed by the May 9 question and answer.

Dr. Barry Naughton is the So Kwanlok Professor at the School of Global Policy and Strategy, University of California, San Diego.  Naughton’s work on the Chinese economy focuses on market transition; industry and technology; foreign trade; and political economy. His first book, Growing Out of the Plan, won the Ohira Prize in 1996, and a new edition of his popular survey and textbook, The Chinese Economy: Adaptation and Growth, appeared in 2018.

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Prime:  Dr. Barry Naughton is the China Research Center’s 2020 Annual Lecturer.  We are very pleased to have him here today.  Dr. Li Qi from Agnes Scott College and Dr. John Garver from Georgia Tech are also joining us. 

Dr. Naughton, what inspired you to earn a Ph.D. in economics and how did you come about your interest in China?

My interest in China came about first, unlike probably a lot of economists who study China. I became very interested in China and Chinese language in the 1970s for a lot of the wrong reasons really.  I had romantic illusions, both about the nature of Mao’s socialism in China and about the idea that China could present an alternative way of thinking.  So, I like to say I was attracted to both Maoism and Taoism at the same time. 

Prime:  Interesting, and why Economics?

In some sense econ had always seemed like a powerful way to look at the world and so once I decided to get serious about studying China, for me it was natural to go do further study in economics.

Prime:  What have been the most significant changes you have seen in Chinese society going back to your first visit?

My first visit was in 1982 and of course, tremendous differences in all areas, but I guess two dimensions seem most significant to me.  One is just the level of human capital and awareness and skills–at that time China was still so far behind the world in everything and now it’s caught up in most things.  But the other thing that was most striking to me when I first arrived in China was it became clear pretty quickly that people were still scared, that they had to watch carefully what they said and their interactions with foreigners.  And that surprised me: not the fact of it, but how clear and palpable it was.  And then in the 20 years after that, you saw that fear disappear and young people in particular became self-confident, interested, open-minded, exploring and it was such a wonderful change to see and I hope we don’t lose that.  I don’t think we’ve lost it yet but there has been some regression lately in the ability of the Chinese government and society to tolerate open-minded free thinking.

Prime:  Your topic today at the annual lecture focused on innovation and technological change in China.  What drew you to this topic and what have been the big takeaways?

Well, I’ve always been interested in the interaction between the government and the market in China and, of course, for so many decades that movement was toward more market and less government.  Then about 10 years ago the pendulum started to swing the other direction as the government found new instruments for intervening in the market and a new desire to shape China’s development in more of a high-tech direction.  So in some ways it was just a continuation of what I’ve always been interested in. But in addition, I was really struck by the fact that the image of a high-tech China had become the driving force that motivated so much of government policymaking not only in economic realms but also in international and strategic affairs and everything else.  It really seemed this was a key piece and we needed to understand it better, or at least I needed to understand it better.

Prime:  What do you think caused that pendulum to swing back?  I think it was under Hu Jintao really, not President Xi and it seems in hindsight somewhat stark that change and unexpected from our point of view.  So how do you read that?

Let me say as a prelude, one of the striking things is there is no abrupt turning point.  We see in so many different dimensions policy gradually stalling out and then very, very slowly moving in the reverse direction. So, it’s really hard to call a turning point.  From a purely economic standpoint, I think the most powerful explanatory factor is reform is costly and scary and so people don’t do it unless they have some kind of crisis, some kind of challenge.  And it’s easy to see in China from the ‘70s through the ‘90s the nature of the crises and how the government responded to it.  So I think one part of the answer is there were no crises in the early 2000’s and economic growth actually accelerated after China’s entry into the World Trade Organization, and everything seemed fine, so why take chances, why take risk, why reform?

But I don’t think that’s enough of an explanation.  I mean that helps, but I think there are a lot of things we don’t quite understand.  Clearly part of it has to do with forces in the Communist Party who always felt that the party needed to reinvigorate its mission and consolidate its power, and it’s funny, a lot of things that Hu Jintao did back then which seemed kind of romantic and backward looking but not very important now seem surprisingly important and foretelling, things that Xi Jinping has done much more intensively.  So, I think a lot of it is the nature of Communist Party governance and aspects of that that we underestimated.

Prime:  Would you tie that into the current administration’s approach of cracking down on liberalization and information as maybe the party feeling we have to be in control or we’re going to lose control? 

I wonder. It seems plausible, but first of all I have to say I don’t know. And the second thing is it seems that often when people go too quickly to the need to preserve power as an explanation, it gets a little—it starts to become making excuses for people.  I don’t feel at all like the fact that Xi Jinping, or Hu Jintao before him, think that they need to crack down in order to maintain social stability is either a good explanation or in any case an exculpatory factor. We could just as well say look at this society, it’s the most successful society by many metrics in the history of the world and the people on top of it say, oh we’re afraid that we’re going to be overthrown if we allow basic freedoms to people?  To me that is just such a weak argument.

Qi:  In terms of balancing market and government power, is it fair to say that recent economic events in western economies (such as the subprime loan crisis back in 2008) did not inspire confidence and aspiration in the typical market- dominated model, as China evaluates its own system that produced its proud achievements?

Sure, that’s totally fair, in terms of both a sense of pride, and the real things China has accomplished. And a sense of disappointment at the U.S. in the 21st century, because even before the global financial crisis, there was the Iraq War (in 2003) where U.S. acted as the sole world superpower. In the end, even the economic cost-benefit calculation could not justify that decision for the US to intervene in Iraq. And it certainly showed the U.S. as an actor who is not committed to a rule-based global system.

Qi:  The doubt in the western model and system does not seem to come from only the top leaders, but is more widely shared now even among average citizens. I felt in the ‘80s and ‘90s, Chinese people generally and genuinely wanted to learn everything from the West because that represented higher productivity, more wealth and better ways of doing things. But now, even if we acknowledge that people’s views can be influenced by propaganda, there is this suspicion that American society and the way things are done there are not necessarily better anymore.

Who wants to be like Trump’s America?  Nobody in particular looks at Trump’s America and says I want our country to be like that.  Maybe some leaders in various places say I can adapt some of those techniques of leadership.

But I guess what’s funny about it is that there are lags in how anybody perceives their experience. Let’s say we pause in 2005 and we’re in China. First of all, we’ve accomplished so much in terms of economics, and we paid prices for it too (for example, we paid a big unemployment price and other dislocations).  But we got the payoff in terms of growth. So, you would think that that leads people to say, “the reforms were good, and the price paid was worth it.”  But generally speaking, that’s not the conclusion people came to.  They came to the conclusion that, as you said, therefore there’s a China way and it’s not the U.S. way, and it’s different and we should be proud of that.  Well, that’s true but there’s a subtlety there and part of that conclusion should have been that Zhu Rongji took some big risks and they paid off.

Another thing about 2005 is that Chinese society at that time was completely acceptable from a foreigner’s standpoint.  In other words, the criticism of China and human rights had pretty much disappeared, because I think Americans could look at China and say this is certainly not a democracy and it’s certainly not free speech, but there is this area that’s been carved out and everybody knows where the red lines are and within that area you can say a lot of different things and have a lot of different discussions, and who are we to pass any kind of judgment about that system? A system that seems perfectly fine, and they start to move away from it!

Prime:  Yes, but they talk a lot every year about what reforms are going to do.  So, the rhetoric about reforms hasn’t gone away, but not that much has happened.  Can you talk about that a little bit given the failure of the financial reforms, for example, which seems to be something they really do want to do but it hasn’t succeeded?

Yes, it certainly hasn’t succeeded.  On the other hand, they really seem to be trying to restart the financial reforms again now.  So, I think, you know, maybe the best thing that could be said about the trade war is it does seem to be creating a source of external pressure that maybe is substituting for that sense of economic crisis that was a reform driver before.  So, they do seem to be doing some things.  Now, the reforms are limited and uncertain and we’ll see what happens but at least there’s a feeling of movement again and so that helps. Of course, whether economic reform without political liberalization, without serious openness to the outside world can work, that’s a whole new set of issues way too complicated to address here.

Qi:  You had translated a lot of Wu Jinglian’s work.  It was so interesting to me because there is always this fascination and eagerness (at least from the China side) to learn about what American scholars are saying about China’s economy.   But we rarely see the same level of interests here in the U.S. to find out what Chinese economists were saying or their schools of thought about the whole economic system and the reform path.  Can you tell us a little bit more about your decision to translate Wu Jinglian’s work?

Sure. I’m delighted that you asked this.

To me it just seemed natural because he’s somebody whose thinking is interesting and whose personal role in trying to influence the policy process is really, really important.  He is not always right, of course.  There were so many different and contending ideas, but he was just there from the late ‘70s until very recently being super knowledgeable about what the existing policy and political context was and pushing and pushing and pushing.  How can somebody do that for 40 years without just making you have an enormous respect for them?  I do think there is a revival of interest especially in the ‘80s when it was so open and there were so many people and debates, some were really intense and involved actual bad feeling, but now a lot of people seem to want to retrieve their role and claim some credit for all the good things that happened.  At the time the key thing was the focus on moving forward.  But now looking back on it, we saw so many different dimensions, different views and realities.

Prime:  Not top down.

Yeah, that’s right.

Prime:  Coming back to innovation, China is really focusing on this right now as are many countries, but they don’t talk about innovation in terms of reforms, so there seems to be a distinction.  Can you talk about that?

That’s a really, really important observation.  I mean it’s funny, when you go back to the 2006 Long Term Plan on Science and Technology, which in retrospect we can see was very clearly the beginning of this accelerating industrial policy push, but when you look at the document and when you look at how Westerners interpreted it at the time, it actually seemed to be pretty reformist.  It was as much about creating a richer innovation ecosystem supporting intellectual property rights to a certain extent.  Remember they were much worse off then, overall, with respect to funding, research and development, and innovation outcomes.  So, a lot of that has been achieved but what hasn’t been achieved is creating a more competitive, open environment for innovation.

Look at the tech giants like Alibaba and Tencent that were formed in the 1990s through international capital markets.  They’re not industrial policy products at all and so, yes, it’s been very disappointing to see the inevitable erosion of market forces in the innovative sectors because of this bigger state presence.  Even when people still want to participate in certain innovative sectors within China, they find, well, I have to compete with the government who has very, very deep pockets.  I saw a result that I haven’t been able to trace so I’m not 100 percent sure it’s right: the government share of the venture capital market in China declined until 2014 and then turned around and started to increase significantly since then.  So absolutely there is a reversal happening where the government is squeezing out certain types of innovators and squeezing out market forces from the high-tech sector. 

Garver:  Is there still a voice for market-based reform that argue trends like these are bad?

Oh, definitely there’s a voice but it’s muted.  You don’t see it trumpeted in the official media and therefore in the public discourse.  There are lots of people who feel this way but, of course, those people have to be careful because they probably have some investments of their own and in this environment, you have to have a government partner so the voices aren’t heard as clearly and coherently as they should be.

It’s more intimidation that they are careful to modulate the way they express their views.  I think if you get together a couple of people from high tech sectors and banking sectors after dinner having a couple of drinks, they’ll be very, very critical, but you’re not going to see a really coherent article in the press.

Qi:  In reflecting on 40 years of reform, what is still the weakest link?  You can argue, for example, some of the product markets are very market driven and competitive.  Would you say the financial decision-making and the allocation of resources is still the weakest link?

Yeah, definitely.  Not just the financial sector but the banking sector in particular. You can’t help but notice that in the last year-and-a-half there’s been progress in the financial sector liberalization but not so much in the banking sector.

Prime:  It is striking that investment hasn’t fallen which was one of the goals in terms of a share of GDP.  It’s actually risen and as it’s risen, growth has slowed.  So just simple macro math says efficiencies have gotten worse and worse, so how can any economy sustain that or for how long? 

Well, it depends how they handle debt, right?  I mean you can sustain—I mean, again, sort of the Iraq War, what did we spend, $2 trillion on the Iraq War?  What did it get us?  Nothing.  Does that mean our economy will collapse?  No.  It just means we’re worse off because that money was raised through taxes and to a certain extent through national debt.  So as long as those markets are healthy you can do that for a long time.

Qi:  In terms of misallocation of resources, why not invest more resources on Chinese people and public services (such as public health and education)? Penny and I had a paper that showed, rather than always boosting GDP via investment, there were important benefits of investing more in public services. You also mentioned that total factor productivity had been declining or disappeared, why not invest more in public services?

The basic premise of economics is that there are trade-offs for everything and that implies that you’re operating efficiently when the marginal return is the same across different sectors. But that doesn’t seem to be at all true in China right now.  It seems that the marginal return to government investment in health care and elementary education will be far higher than the marginal return to semiconductor labs and other kinds of industrial policy.  So absolutely I think there is a clear evidence of misallocation.

Prime:  Barry, from your vantage point, how do you see U.S.-China relations today and going forward?

Well, I think there’s no question that relations are getting worse and I think they’ll continue to get worse.  I mean the first phase of the trade agreement is interesting because it does give us a pause maybe for a year or a year-and-a-half. We’re in this ironic situation where if China follows through with this commitment to buy $200 billion incremental goods by 2021, even though there’s some decoupling going on, this means there actually would be a certain amount of goods recoupling.  And, you know, there’s this discussion about can the U.S. economy provide $200 billion goods to China and, of course, the answer to that I think is we can if the businesses that provide those goods have confidence that the market is stable so that they are willing to reallocate resources in a way that supports that supply.  But then when we say that, we realize, no, of course they don’t have that kind of confidence.

Prime:  Given all of the sensitive issues and the changes that have happened, what advice would you give young scholars who are thinking about doing China studies and research on China?

Great question.  I’d say dive into it.  It’s more fascinating than ever.  Although we’ve got some really serious problems and you can’t even rule out overt conflict between the countries, but the interaction between the incredible dynamism of Chinese society and the Chinese economy and just the dynamism of this gigantic generation of people especially in their 20s and 30s who are going to be on some level the main drivers of world history.  Chinese people in their 20s and 30s will determine everything.  If we can understand them, if we can influence them, if we can cooperate with them, it’s the most interesting, the most exciting thing in the world.  So, I hope we get more young scholars to study this process.

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Here is the May 9 email exchange between Dr. Prime and Dr. Naughton:

Prime: Since we met in January, the coronavirus has struck. What are your views now on the steps that China’s leaders took in response and the evolving U.S.-China relationship?

The initial instincts and responses of the Chinese government in the face of the coronavirus were damaging and increased the threat to the world, there’s no question about that.  They suppressed information about the virus and still haven’t provided the opportunity for a thorough and transparent examination of the source of the virus.

But it also produced heroic responses among Chinese doctors, scientists and frontline health care providers, and an individual hero, the late Li Wenliang.  Li’s simple statement “a healthy society should have more than one voice (健康的社会,应该有多个声音)” is something that won’t ever be forgotten.  We should also remember that Chinese scientists posted the genome sequence of the virus on January 11, 2020.  We in the U.S. had two months to mobilize a response, and, generally speaking, we wasted it.  The Chinese response, on the other hand, has been crude but effective.  Since their nationwide lockdown went into effect on January 23, they have gradually throttled the virus and appear to have stopped its spread.

The U.S.-China relationship, in the course of all this, has gone from bad to worse.  Mutual recrimination has become the main content of the relationship.  In both countries, the top leaders are desperate to avoid being blamed by their own people, and eager to put the blame on foreign countries.  It’s hard to be optimistic in this context.

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