Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Joe Wisn't Thal and I'm Tracy all Away. So Tracy,
Speaker 1: we've been talking about China a fair amount lately. We
Speaker 1: had that recent episode with Dan Wong about um some
Speaker 1: of the specific industries that China is cracking down on,
Speaker 1: like online education and video games and so forth. And
Speaker 1: we talked to Travis Lundie specifically about the stress to
Speaker 1: say the least, at the real estate developer developer evergrand
Speaker 1: But really it feels like we can't get enough of
Speaker 1: the China story. And I every time we do one
Speaker 1: of these episodes of My Head is just like filled
Speaker 1: with like a hundred more questions all China, all the time.
Speaker 1: I mean, both of those stories provoke some pretty big,
Speaker 1: sort of existential questions about China and its economy. I
Speaker 1: mean specifically the crackdowns. Uh. You know, we saw a
Speaker 1: lot of people sort of scratching their heads and basically going, well,
Speaker 1: China built up you know this market economy, um, it
Speaker 1: built up it's stock market, it's technology sector. It's all
Speaker 1: supposed to be kind of um capitalist in style, and
Speaker 1: now it seems to be cracking down in a very
Speaker 1: um centrally ordered way, and what does that mean for
Speaker 1: China's market reforms? And then on the other hand, we
Speaker 1: saw a lot of people going, well, you know, it
Speaker 1: was never that free market. It's always been essentially ordered economy,
Speaker 1: and this is everyone just sort of waking up to
Speaker 1: that fact. But I think there is a big question
Speaker 1: mark over where exactly the Chinese model is going right now. Yeah,
Speaker 1: and it kind of occurred to me, like there is
Speaker 1: this tension. So one of these things. One of the
Speaker 1: things that Dan Wong points out is, Okay, China is
Speaker 1: like very keen to remain an industrial powerhouse, to be
Speaker 1: good at manufacturing, and of course that's been a theme
Speaker 1: of all the conversations that we've had with Dan, is like,
Speaker 1: you know, wants to be good at like hard tech
Speaker 1: and building a wide body or planes and semiconductors, etcetera.
Speaker 1: But on the other hand, you know, an ever grand
Speaker 1: is sort of a perhaps a symptom of this. And
Speaker 1: I think that you coined the term the giant wall
Speaker 1: of money that just slashes around China, which is like,
Speaker 1: from at least from my outside perspective, the Chinese economy
Speaker 1: is whether it's real estate or people at home trading
Speaker 1: like iron ore futures. It's an economy that's like it's
Speaker 1: riven with speculation, right, hugely financialized, I think is the
Speaker 1: right word. So like, on the one hand, yes, they
Speaker 1: want to make things, uh, Dan spoke about this idea
Speaker 1: of the German model and getting closer to you know,
Speaker 1: high quality manufacturing. But on the other hand, it seems
Speaker 1: like there is a lot going on in sectors is
Speaker 1: real estate, construction, UM even banking, finance, fintech. Some of
Speaker 1: the biggest companies in China of course have UM financial
Speaker 1: payments arms as well. So it just feels very financialized
Speaker 1: and sort of abstract at the same time. Yeah, and
Speaker 1: I guess the last thing I would say about this
Speaker 1: is putting it all together what we've talked about so far,
Speaker 1: like and this is gonna sound sort of like trite.
Speaker 1: Maybe it feels very real, like you know, it's always
Speaker 1: you know, I feel like over the last several years
Speaker 1: news out of China it's like, Okay, you know, they're
Speaker 1: gonna they want to tamp down on real estate speculation,
Speaker 1: or it's like are gonna make it harder to buy
Speaker 1: a fifth home or whatever. It is something about this
Speaker 1: moment feels extremely real, as in, let's take a turn
Speaker 1: in a different direction. And I don't know if that's true,
Speaker 1: but the combination of things, the letting, letting ever grand
Speaker 1: get to where it is, the effect that that is
Speaker 1: likely to have on the real estate sector, it feels like, um,
Speaker 1: this is a this is a pretty big moment. Well.
Speaker 1: I think also when you wipe out billions of dollars
Speaker 1: worth of market value on some of your biggest companies
Speaker 1: through the crackdowns, that tends to focus people's attention quite
Speaker 1: a bit as well. Exactly right. So I want to
Speaker 1: understand further where China is going, what its goals are,
Speaker 1: how it understands the sort of how it sees economic management.
Speaker 1: So I'm very excited about our guest today. She is
Speaker 1: the author of a new book. We're gonna be speaking
Speaker 1: with Isabella Vabor. She is an assistant professor of economics
Speaker 1: at the University of Massachusetts Amherst and the author of
Speaker 1: the book How China Escaped Shock Therapy the Market Reform Debate.
Speaker 1: This book is getting a lot of praise taking a
Speaker 1: big sweep at the big historical look at China's approach
Speaker 1: to liberalization, or how it thinks about capitalism and markets.
Speaker 1: So maybe the perfect person to contextualize this moment right
Speaker 1: now Isabella. Thank you so much for joining us. Thank
Speaker 1: you so much for having me on this so so
Speaker 1: and crazy and it's a great privilege and honor to
Speaker 1: join you today. Very very kind of you to say,
Speaker 1: you know, let's just start, like, Okay, the title of
Speaker 1: your book, how China Escaped Shock Therapy, What does that mean?
Speaker 1: I mean, I guess I have some sense of shock
Speaker 1: therapy in the development contexts, the idea of like we're
Speaker 1: going to rip the band aids off, the nationalize all
Speaker 1: the industries, free trade. Obviously China hasn't done that. But
Speaker 1: why is this the lens that you've decided to take
Speaker 1: to sort of like understand Chinese capitalism? Yeah, thank you.
Speaker 1: That's a great question. To go back to the ninety
Speaker 1: eighties to understand what's going on with China today is
Speaker 1: a somewhat unorthodox decision. But at the same time, in
Speaker 1: the context of the increasing talk around the new Code
Speaker 1: War and so on, I think it makes sense to
Speaker 1: go back to the end of the previous Code war
Speaker 1: and to go back to the initial decade of market
Speaker 1: reforms in which I think to some extent China's approach
Speaker 1: to marketization and its basic state market relations were shaped. Now,
Speaker 1: why to focus on shock therapy. In the eighties, shock
Speaker 1: therapy was a policy doctrine that really swept the word
Speaker 1: in some sense, even the Foker shock can be thought
Speaker 1: about as as one form of shock therapy. But more concretely,
Speaker 1: in the context of the transitions from socialists or communists
Speaker 1: or whatever you want to call it economies to market economies,
Speaker 1: that kind of was the policy choice of the day.
Speaker 1: This was technically speaking, a policy package that was composed
Speaker 1: of four elements, that is, price liberalization and macro economic
Speaker 1: austerity as the first two elements, which taken together is
Speaker 1: considered the big bank. Where the idea is that liberalizing
Speaker 1: all prices helps you to get prices right, and then
Speaker 1: imposing microeconomic restraint helps you to keep the general price
Speaker 1: level under control. Then this was meant to be complimented
Speaker 1: with trade liberalization to integrate the economies into the global market,
Speaker 1: and with privatization to basically lay the institutional foundations for
Speaker 1: a functioning market economy. Now, even the most diehard shock
Speaker 1: therapist thought that privatization was a slow and complicated process
Speaker 1: of rebuilding institutions, so that the most shocking element of
Speaker 1: shock therapy was really price liberalization and market economic austerity.
Speaker 1: So much on the technical composition of these policies, but
Speaker 1: I think in a more broader sentence, the idea of
Speaker 1: shock therapy and encompasses the idea that you have to
Speaker 1: create markets by having the state withdraw from the economy
Speaker 1: and basically by destroying the plan to make space for
Speaker 1: markets to emerge spontaneously. Now, we think of China's state
Speaker 1: as UM very powerful, and as the recent episodes have showed,
Speaker 1: UM continuing to be incredibly powerful in the economy. Right,
Speaker 1: so we tend to think that gradualism, experimentalism, pragmatism are
Speaker 1: just inherent in China's approach, and therefore this is just
Speaker 1: like somehow what China does, which to some extent is true.
Speaker 1: But by going back to the nineteen eighties and to
Speaker 1: the struggles over market reforms, I'm kind of complicating this
Speaker 1: story by suggesting that in fact, in the first decade
Speaker 1: and to some extent throughout the reform period, that we're
Speaker 1: alternative ways of thinking about marketization and the idea of
Speaker 1: shock therapy or the basic idea of needing to have
Speaker 1: the state withdraw from the economy in order to create
Speaker 1: functioning market economy was very much present in China, um
Speaker 1: and in many ways has been a position. It has
Speaker 1: been advanced throughout the last decade. Could you maybe talk
Speaker 1: a little bit more about how what you just described,
Speaker 1: you know, the market reforms of the eighties under Dang
Speaker 1: Shao Ping, how those actually stacked up against the socialist
Speaker 1: philosophy that was prevalent at the time. Because again, I
Speaker 1: think this is I believe Joe mentioned this in the intro,
Speaker 1: but this is sort of one of the tensions that
Speaker 1: people struggle to understand in China. On the one hand,
Speaker 1: it's a self professed communist state that's trying to take
Speaker 1: care of everyone and wants to centrally direct resources. But
Speaker 1: on the other hand, certainly in the nineteen eighties they
Speaker 1: were talking about price liberalization and other types of things
Speaker 1: that one wouldn't necessarily associate with that kind of socialism. Yeah,
Speaker 1: great question. Um So I think to understand what was
Speaker 1: going on, one kind of has to go back to
Speaker 1: the late nineties seventies and ask oneself where was Chinese
Speaker 1: economy and society yet at the dawn of reform, and
Speaker 1: I mean this is a moment um. A couple of
Speaker 1: years after Male's death in nineteen seventy six, the count
Speaker 1: revolutionists clearly all for people who have been leading the
Speaker 1: Kaich Revolution arrested. But in addition to the failure of
Speaker 1: the idea of continuous revolution and ever more communist forms
Speaker 1: of political organization and mass um mass mobilization during the
Speaker 1: Kaich Revolution, there's also a failure under a mouse dedicated
Speaker 1: hair Hua film, which is a failure of a renewed
Speaker 1: attempt at big push industrialization. Now, a big push industrialization
Speaker 1: in some sense was the Stalinist kind of idea of
Speaker 1: planned industrialization. In that case, there was a big ten
Speaker 1: year plan, and the idea was that China's catch up
Speaker 1: ambition could finally be realized in this ten year plan.
Speaker 1: That ten year plan failed quite dramatically, basically because of
Speaker 1: reasons that in some sense are quite timely, which are
Speaker 1: in the seventies. China was finding quite substantial petroleum resources,
Speaker 1: and the basic plan had been to export petroleum and
Speaker 1: then import um international technology know how in capital goods
Speaker 1: and then basically achieved rapid planned industrialization but fueled with
Speaker 1: foreign knowledge and technology. Now, the projected petroleum findings were
Speaker 1: not forthcoming, so that by the late seventies this model
Speaker 1: had very quickly run out of steam. But China was
Speaker 1: still a very poor country. It yes, it had achieved
Speaker 1: basic industrialization, advancement, its public health, infrastructure and so on
Speaker 1: during the MAOIs period. Nevertheless, just to give you a sense,
Speaker 1: the GDP per capital in China in night was still
Speaker 1: less than that of Sudano Haiti, So we are really
Speaker 1: talking pretty severe poverty for large parts of the country.
Speaker 1: So there's a sense of we need to redo the
Speaker 1: economic system in order to um to move forward, in
Speaker 1: order to realize the ambition of the revolution that was
Speaker 1: not only about creating a non alienated society and all
Speaker 1: of that at least like big political ambitions, but it
Speaker 1: was also about making China escape from backwardness and poverty. Right,
Speaker 1: So in that context, there's basically re orientation in the
Speaker 1: understanding of communism and socialism, where the idea is that
Speaker 1: under Mound China had tried to achieve two revolutionary forms
Speaker 1: of um of organization without having the material foundations in place.
Speaker 1: So ifone goes back to kind of orthodox historical materialism
Speaker 1: or an orthodox reading of marks understanding of the development
Speaker 1: of history. Then there is a sense that the social
Speaker 1: relations or the social organization of society should, to some
Speaker 1: extent plays correspond with the material foundations of society. Right.
Speaker 1: In other words, you cannot leap from a medieval agricultural
Speaker 1: society straight into for communism or something like that. Right. Um.
Speaker 1: So in the late seventies there is basically this huge
Speaker 1: ideological shift where the idea is that in order to
Speaker 1: lay the foundations for socialism and the future UM, China
Speaker 1: had to backtrack on socialist organization in the present and
Speaker 1: had to quote unquote make up lessons from capitalism in
Speaker 1: order to lay the foundations the material foundations that economic
Speaker 1: development foundations um Um that that would be necessary in
Speaker 1: order to achieve um higher forms of socialist organization or
Speaker 1: maybe even in the very long run, eventually some form
Speaker 1: of communism um in the distant future. So as such,
Speaker 1: the socialist ambition has been um in some stence postponed
Speaker 1: to some future date, which then raises a question whether
Speaker 1: this applies that it has actually been given up. So
Speaker 1: this actually no, this is great because this sort of
Speaker 1: gets it where I was going to go with the
Speaker 1: next question. And I think if you like talk to
Speaker 1: people about China, there is this assumption of a linear trajectory.
Speaker 1: And I don't mean experts, I mean just sort of
Speaker 1: like general commenters, people in business, etcetera. That there is
Speaker 1: this assumption of a linear but perhaps slow trajectory towards
Speaker 1: something that looks like a fully liberalized economy, a liberalized
Speaker 1: capital account, an economy in which they're understanding the Chinese
Speaker 1: understanding of IP laws are roughly similar to what they
Speaker 1: are in other they're developed economies, an economy in which
Speaker 1: foreign foreign companies can more or less do business at
Speaker 1: the same level, the same plane field as local companies,
Speaker 1: And obviously China is not there, but it's a sub
Speaker 1: sort of like, Okay, this ongoing process of liberalizing step
Speaker 1: by step and so forth in one day, maybe that's
Speaker 1: where China get to. But you know, it seems like
Speaker 1: both like what you're saying and also what we've seen
Speaker 1: with some of lately is maybe this assumption of a
Speaker 1: straight line liberalization on a slow It's definitely not shocked therapy,
Speaker 1: but a straight line liberalization. However, slow may just be
Speaker 1: the wrong premise to begin with. Yeah, um, so the
Speaker 1: subtitle of the book is the Market Reform Debates, right,
Speaker 1: And it's really about two competing understandings of how market
Speaker 1: economies work. And one understanding of a market economy is
Speaker 1: that basically there's one model of market economies which is
Speaker 1: pretty much what we think of as best than market economies,
Speaker 1: or a form of market economy that can more or
Speaker 1: less capture with one economic model, so that marketization basically
Speaker 1: means moving towards one kind of fully liberalized type of
Speaker 1: market economy, right, which is basically in line with what
Speaker 1: you just said, and which is in some sense the
Speaker 1: underpinning assumptions of the most extreme case that is shock therapy.
Speaker 1: On the other hand, the idea of experimentalist gradualism that
Speaker 1: ultimately prevails in China. These markets not as the goal
Speaker 1: in itself, but these markets as a tool in China's
Speaker 1: own process of transformation, where they are bigger political, developmental, economic,
Speaker 1: social goals in which the market can be used to
Speaker 1: serve China to move towards the implementation of these goals.
Speaker 1: But marketization is not a goal in itself. Now, that
Speaker 1: of course always bears the potential that if you I mean,
Speaker 1: if you pursue the second approach and you have intense marketization,
Speaker 1: it always leaves open the first approach because as you
Speaker 1: get more markets, markets take on their own dynamic they
Speaker 1: I mean, powerful interests are created and so on. So
Speaker 1: in essence, I think that China did try to pursue
Speaker 1: the second approach in the nineteen eighties, but the challenge
Speaker 1: from the first approach kind of has been there all along. UM,
Speaker 1: and the understanding of commentators of what China is doing
Speaker 1: has also often been primarily guided by the first idea
Speaker 1: of marketization being basically the same as for liberalization being
Speaker 1: the same as bestinization. So using maybe the second framework
Speaker 1: and the idea that you touched on earlier of China
Speaker 1: sort of having to postpone some of its socialist goals
Speaker 1: in order to get the market reforms under way. When
Speaker 1: you see what China is doing now, when you look
Speaker 1: at the various crackdowns, um and things going on, I mean,
Speaker 1: there have been so many headlines over the past few weeks,
Speaker 1: but there's certainly been a lot of statements about creating
Speaker 1: a more equal society, making sure that you know, education
Speaker 1: is a priority and parents don't have to necessarily spend
Speaker 1: a ton of money in order to um secure their
Speaker 1: kids education. There are a lot of socialist principles that
Speaker 1: are running through some of these crackdowns. So I'm curious
Speaker 1: how you're viewing that in the context of your historical
Speaker 1: framework and whether or not it is maybe like the
Speaker 1: long awaited return to Chinese socialism. Yeah, well, I'm I'm
Speaker 1: not sure if I can decide, but it's the big
Speaker 1: way to return to social that's fair enough, But I
Speaker 1: can't try to provide some some historic perspective. So part
Speaker 1: of that second approach to market ice station was also
Speaker 1: to start from the non essential parts of the system
Speaker 1: and basically create a market dynamic in ways that allowed
Speaker 1: the state to keep control over the core parts of
Speaker 1: the system. So keep control over the essential strategic industries,
Speaker 1: keep control over, if you want so, the commanding heights
Speaker 1: of the economy. So there is a sense that your
Speaker 1: unleash market dynamics at the margins of the system. But
Speaker 1: then eventually, if these margins actually become core of the system,
Speaker 1: then there might be a re calibration of the relationship
Speaker 1: between the state and the market in these areas. So
Speaker 1: if you take for example, private tutoring, as long as
Speaker 1: private tutoring is just something that a few elites relying
Speaker 1: on in order to make sure that their kids get
Speaker 1: into the right schools. Then this is maybe not socialists,
Speaker 1: but it's a marginal phenomenon. When it comes to a
Speaker 1: point that private tutoring becomes so important that basically all
Speaker 1: middle class families fear that without private tutoring, their children
Speaker 1: have no chance of passing the university entrance exams and
Speaker 1: basically have no future, then suddenly private tutoring becomes part
Speaker 1: of a very essential element of the economy and society.
Speaker 1: It becomes an essential part of the education system. So
Speaker 1: I think that to some extent, what we see what
Speaker 1: these crackdowns is a redefinition of the relationship between the
Speaker 1: state and the market, as some of these sectors that
Speaker 1: used to be much I have crossed the line towards
Speaker 1: becoming really essential. This is I think similar with a
Speaker 1: lot of the e commerce platforms. Where as long as
Speaker 1: this is just a bookshop for some second handbooks, then
Speaker 1: it's a kind of really secondary, right. But once this
Speaker 1: becomes the main form of retail, as the pandemic has
Speaker 1: illustrated quite dramatically, then suddenly this is a platform that
Speaker 1: is basically running the retail economy of the country. Right,
Speaker 1: So from that perspective, I think we can, i mean,
Speaker 1: maybe make sense of why in certain sectors there is
Speaker 1: such a regaining of control that of course does not
Speaker 1: explain the timing and why it's happening. Now, this is
Speaker 1: more like saying okay, kind of fits in a more
Speaker 1: general pattern, but it's it's it's not predictive in the
Speaker 1: sense that we could have said okay, therefore it would
Speaker 1: have happened in So the big thing, you know, you
Speaker 1: mentioned the tutor tutoring and so forth, But the sort
Speaker 1: of the big elephant in the room, at least from
Speaker 1: my perspective, seems to be the sort of extreme level
Speaker 1: of financialization in speculation. And I mentioned this in the intro.
Speaker 1: But you know, I've followed Tracey's writing on China for years,
Speaker 1: and you know, people in the US like to trade
Speaker 1: stocks and cryptocurrencies, but it seems like even like more
Speaker 1: extreme in China. And you have like people at home
Speaker 1: trading iron or futures from their computers and trading oil
Speaker 1: futures in a way that I don't think very many
Speaker 1: people in the US do. And then of course you
Speaker 1: have housing, which okay, on the one hand, is probably
Speaker 1: sort of like a core basic and necessity, but it's
Speaker 1: obviously a highly financialized, speculative world, and we see this
Speaker 1: sort of coming to a head with evergrand how much
Speaker 1: has that financialization essentially been I mean, is that a failure,
Speaker 1: the fact that so much of the economy has been
Speaker 1: so much speculation, so much financialization. Do Chinese elites perceive
Speaker 1: that as having been a failure to let that become
Speaker 1: so rampant? Yeah, that's a great question. Um, certainly, I
Speaker 1: think there is a sense that speculation has gotten out
Speaker 1: of hand, hence the crackdown. Right at the same time,
Speaker 1: I think that this massively rapid marchetization that we have
Speaker 1: observed throughout the last decades is part of the dynamic
Speaker 1: that the party itself has created, and that has led
Speaker 1: also to this massive markeetization of the behavior of individuals
Speaker 1: who have become market oriented in ways. Um, I fully
Speaker 1: agree with what you say, a really unusual now beyond
Speaker 1: what I have seen in the US or I'm from Germany,
Speaker 1: clearly beyond what people in Germany are doing. I think
Speaker 1: that kind of goes back to another point, Um, that
Speaker 1: you made in the intro, which is this idea that
Speaker 1: UM we either see China as being totally capitalists and
Speaker 1: market or UM as the centrally ordered or planned economy.
Speaker 1: So then either we see the fanitialization simply as the
Speaker 1: result of of this um massive capitalist economy, or we
Speaker 1: see it as a totally abnormal phenomenon in relation to
Speaker 1: what is supposed to be a centially ordered economy. Right,
Speaker 1: I'm kind of proposing a third perspective, which is that
Speaker 1: it's a state constituted market economy where the state has
Speaker 1: been the driving force behind marketization, has unleashed markets and
Speaker 1: finance realization in across the economy and across sectors in
Speaker 1: the hope of unleashing in a massive growth dynamic, which
Speaker 1: they have achieved, but always at the danger of kind
Speaker 1: of like dancing with the tiger, where this can take
Speaker 1: on a dynamic of its own that is so so
Speaker 1: powerful that things get out of control. As regards financial
Speaker 1: stability and real estate, there is the sense of being
Speaker 1: at the brink of things getting out of control, hence
Speaker 1: the crackdown. This is actually what I wanted to ask
Speaker 1: you next, which is you know, again using that sort
Speaker 1: of framework that you just describe a sort of middle path,
Speaker 1: how should we be looking at ever, grand So it
Speaker 1: does feel like China is in a tight spot here,
Speaker 1: in a difficult situation, because on the one hand, it
Speaker 1: has said repeatedly that it wants to introduce moral hazard
Speaker 1: into the system, It wants more fiscal discipline from its
Speaker 1: real estate developers, precisely because they've built up so much debt.
Speaker 1: But on the other hand, as you mentioned, a lot
Speaker 1: of that financialization was basically driving China's economic growth. So
Speaker 1: the authorities presumably also want to avoid a really big
Speaker 1: destabilizing shock of a big failure that then cascades through
Speaker 1: the property market. So it seems like they're in a
Speaker 1: really difficult position. Yeah, I've actually been surprised how little
Speaker 1: referenced there is to the seven Asian financial Crisis and
Speaker 1: the Langdong housing market turmoid in that context, and by
Speaker 1: no means an expert of that, I can just really
Speaker 1: talk of the cuff on this topic. But my sense
Speaker 1: is that in the late nineties, UM there was this
Speaker 1: slogan of basically the forest being about to catch fire,
Speaker 1: and there were also big companies that were basically let go,
Speaker 1: even state owned companies, companies that were also active in
Speaker 1: the real estate sector. So I think that to some
Speaker 1: degree we see something very similar happening where there is
Speaker 1: a sense that the situation in the real estate sector
Speaker 1: has become exceedingly dangerous, as you point out, unless many
Speaker 1: people have been saying for a long time, so that
Speaker 1: there's an attempt of basically letting go of ever grant
Speaker 1: before the whole forest catches fire. So it's kind of
Speaker 1: like preparing for a big storm to come, so you
Speaker 1: kind of get rid of the weakest parts in order
Speaker 1: to make sure that if the storm actually comes you
Speaker 1: are you are prepared. So in that sense, um, this
Speaker 1: might be more targeted than it looks at the surface.
Speaker 1: And that seems to also be an important difference with
Speaker 1: the with the Lehman brother moment um. I mean, there
Speaker 1: was this whole build up to this, this um, this
Speaker 1: situation with the three lad Ryans and the increased capitalization
Speaker 1: requirements and all of that that from the perspective of
Speaker 1: the Chinese government clearly must have led to turmoil in
Speaker 1: in in the real estate sector. Right, So as such,
Speaker 1: I think this is preparing, I mean, basically cutting parts
Speaker 1: that are clearly very unstable in order to kind of
Speaker 1: secure the larger market, so kind of preventing the contation
Speaker 1: before it even happens. But whether this will work or not,
Speaker 1: it's it's an open question. And this is obviously a
Speaker 1: speculative interpretation, right, I mean, it's it's very interesting, this
Speaker 1: sort of like prairie fire idea. It's like you try
Speaker 1: to have some you have a burn, but you sort
Speaker 1: of hope that it could be a controlled burn and
Speaker 1: then the ecosystem becomes healthier. Are there other times? I
Speaker 1: mean if you look at the sort of like the
Speaker 1: long scope of Chinese I guess Chinese usage or Chinese
Speaker 1: taming of market, or you can think of similar approaches
Speaker 1: of having done some sort of like let someone go
Speaker 1: or let some pain persisted some parts of the economy,
Speaker 1: and the hope that in the grand scheme of things,
Speaker 1: it makes the system more resilient and robust. I've already
Speaker 1: mentioned the Asian financial crisis. I think the privatizations of
Speaker 1: the late nineties actually might be another one where there
Speaker 1: was this whole slogan of grasping the big and letting
Speaker 1: go of the small, where basically the idea was to
Speaker 1: let go off small unprofitable state on enterprises with largely
Speaker 1: outdated capital stocks in order to consolidate the state on
Speaker 1: enterprise actor and UM thereby basically strengthen the viable parts
Speaker 1: of the state and enterprise system. So in some sense
Speaker 1: this is also to preserve the phil at pieces and
Speaker 1: getting rid of the bones if you want so. Obviously,
Speaker 1: this is a very different kind of scenario compared to
Speaker 1: the realistic estate sector now, and in some sense it's
Speaker 1: it's a reverse logic in in in that it is
Speaker 1: letting go in the sense of letting go to the
Speaker 1: market of the small enterprises. But nevertheless, I think this
Speaker 1: this underpinning logic of preserving the essential, viable UM strategically
Speaker 1: most significant parts of the system by sacrificing some other
Speaker 1: parts might be to some extent a parallel. So one
Speaker 1: of the things that stands out from talking to you
Speaker 1: now is this idea of UM. You know, I think
Speaker 1: Joe mentioned this as well, but the idea of China's
Speaker 1: economic development not necessarily being a straight line in terms
Speaker 1: of ideology. So you know, you can have trade offs
Speaker 1: and interactions between free market reforms and socialist goals. And
Speaker 1: there's an argument that's been made and I think we're
Speaker 1: hearing it more and more that the West is sort
Speaker 1: of growing more similar to China's economic model UM than
Speaker 1: perhaps the opposite case, the idea of China actually growing
Speaker 1: more capitalist in western in style UM. Some of our
Speaker 1: previous add thoughts, guests like Victor Schwetz over at McQuary
Speaker 1: has has made this argument, the idea that because of
Speaker 1: covid UM, because of the pandemic and the economic crisis
Speaker 1: after that, a lot of people feel that governments should
Speaker 1: have more of an active role in how the market
Speaker 1: works and how the economy works. A lot of people have,
Speaker 1: you know, received unemployment benefits, a lot of people are
Speaker 1: in favor of in first structure spending or maybe some
Speaker 1: type of green deal, that sort of thing. So I
Speaker 1: guess my question is what lessons can the West learn
Speaker 1: from China's economic development? Yeah, great question, thank you, If
Speaker 1: you don't mind, I would like to make a quick
Speaker 1: comment on the idea of not a straight line. So
Speaker 1: one of the things that I actually found in my
Speaker 1: research on the nineteen eighties that a lot of the
Speaker 1: first generation revolutionary leaders repeatedly we're arguing that China had
Speaker 1: to go back to the strategies of UM the Civil
Speaker 1: War and the immediate post liberation era, when the communists
Speaker 1: were fighting and economic warfare against the nationalists in the
Speaker 1: context of rampant hyper inflation. In that context, the communists,
Speaker 1: as revolutionaries, as career fighters, as um as people who
Speaker 1: were dedicating their life to the project of a communist revolution,
Speaker 1: we're actually playing the market, and we're building up commerce
Speaker 1: structures and we're recreating market links in the so called
Speaker 1: liberated based areas. So in that sense, at the very
Speaker 1: beginning of the Communist revolution, in the decades of revolutionary
Speaker 1: struggled towards the revolution, the use of the market as
Speaker 1: a tool in pursuit of socialist goals was an essential element.
Speaker 1: So as such, yes, there's no straight line, because then
Speaker 1: there is of course the whole moul Is period and
Speaker 1: the treachers search for for an economic model in that context. Nevertheless,
Speaker 1: this theme of using the market is one that is
Speaker 1: really quite deeply ingrained in Chinese history. To the question
Speaker 1: of how this links to the West and whether the
Speaker 1: West can learn from China. In the book, I actually
Speaker 1: also have a chapter on the World War two economy
Speaker 1: and the immediate post war economy in the United States,
Speaker 1: And that is for a reason in the sense that
Speaker 1: in the eighties, when China was starting to create a
Speaker 1: new kind of economic model, it was also looking to
Speaker 1: the experience of the United States with planning, price controls
Speaker 1: and pretty direct guidance of the state over the economy
Speaker 1: in the war and its aftermath. So in that sense
Speaker 1: we are seeing a increasing appreciation of industrial policy and
Speaker 1: a certain rethinking of the state market relationship in the
Speaker 1: vest that is inspired by China. But I think it
Speaker 1: is not simply following China's example, but in fact it
Speaker 1: is also quite deeply rooted in in the postal history
Speaker 1: of the United States itself. So what I'm trying to
Speaker 1: get here is that I think, um, it is a
Speaker 1: good idea to not simply think in terms of China
Speaker 1: and the United States, is these totally opposite models that
Speaker 1: always have been different and that inherently are somehow completely
Speaker 1: um not alike, but rather to see that there are
Speaker 1: has worka constellations that are in the US that have
Speaker 1: inspired China, and then there are also elements now in
Speaker 1: China that are inspiring um the bdonomics and the redoing
Speaker 1: of public investments on in the US. But in some
Speaker 1: sense this is part of a history of mutual inspiration
Speaker 1: rather than too economic models that have developed in silos
Speaker 1: and that now like suddenly are looking at one another.
Speaker 1: I want to bring up another sort of like I guess,
Speaker 1: complicating aspect of the story. In China. We've talked about
Speaker 1: real estate, and this is something that you know, Matt
Speaker 1: Klein and Michael Petters brought uh discussed a lot in
Speaker 1: their book trade Wars or class Wars, which is that
Speaker 1: there is this class dynamic obviously in China. And part
Speaker 1: of the reason, for example, that we may or that
Speaker 1: there has been so much real estate speculation or so
Speaker 1: much investment in housing, is because many in many people
Speaker 1: have been deprived of savings opportunities, investment opportunities, so called
Speaker 1: financial oppression. That there are basically policies designed to minimize
Speaker 1: the incomes of workers and to maximize the wealth of
Speaker 1: the elites. That the social safety net is not particularly
Speaker 1: robust in China, and therefore that requires people to save
Speaker 1: a lot for themselves, that deprives domestic demand and so forth.
Speaker 1: I'm curious from your perspective, you're talking about these like
Speaker 1: different tracks, these different models for thinking about Chinese economic development.
Speaker 1: But how much of a problem or how much will
Speaker 1: the rubber hit the road in your view, if China
Speaker 1: continues to sort of go down to path in which
Speaker 1: there really are sort of deprivation of safety net and
Speaker 1: income opportunities for the typical working class. One of the
Speaker 1: outcomes of marketization was the dismantling of the social safety
Speaker 1: net that was there under the plant economy. Right. So
Speaker 1: whereas in the European context, at least, we often think
Speaker 1: of the social safe safety net as part of the
Speaker 1: economy that is basically protected from marketization, and it is
Speaker 1: organized based on principles of state provisioning rather than some
Speaker 1: profit driven individual incentives of private or state firms. In China,
Speaker 1: a large part of what we would consider as part
Speaker 1: of of socio baffare has been very deeply marketized. So
Speaker 1: in that sense, to go back to your entry question
Speaker 1: of the of whether it's a capitalist or plant economy,
Speaker 1: and that sense, China economy, even though the state plays
Speaker 1: such an important role in the market, actually in some
Speaker 1: sense it's more capitalist than some of the European countries. Now,
Speaker 1: to go back to your question of class relations and
Speaker 1: how viable that that is in in in the medium run,
Speaker 1: I think that the tensions um within China are of
Speaker 1: course considerable as regards inequality and so on. But my
Speaker 1: sense is that um the pandemic has actually created pretty
Speaker 1: widespread sense of proud within the Chinese people and a
Speaker 1: sense that the system is actually I mean, it has
Speaker 1: its flaws and all of that, but um as regards
Speaker 1: public safety and so on, it is actually working quite
Speaker 1: well for them, which which was quite unexpected when we
Speaker 1: look back to early UM twenty. Now from a more
Speaker 1: marker economic perspective, I think there's can be little doubt
Speaker 1: that an increase in domestic demand is absolutely important. Um
Speaker 1: So in that sense, I agree with the analysis of
Speaker 1: Klient and Patties, even though as regards trade I wouldn't
Speaker 1: see the class tension only in China, but I would
Speaker 1: see this as as being linked also to class tensions
Speaker 1: and in the rest of the wor. But on the
Speaker 1: social safety net question, like there has been at least,
Speaker 1: that's one of the questions I've had in my mind
Speaker 1: is like, is that going to get built in a
Speaker 1: more robust way. Is there going to be a significant
Speaker 1: investment in say public health or something resembling social security
Speaker 1: such that, I mean, as you mentioned, are ways with
Speaker 1: China's maybe even more capitalist than Europe. Do you expect
Speaker 1: that to be part of, part of part of this
Speaker 1: new path. I think so yes. I think that as
Speaker 1: as Dan Juan was also saying, UM, the doing circulation
Speaker 1: and common prosperity at two big slogans that as the
Speaker 1: pretty wake, but that kind of complementary the sense that
Speaker 1: doural circulation means strengthening of domestic demand and UM common
Speaker 1: prosperity means the goal, whether this will be achieved or not,
Speaker 1: of moving towards that kind of olive shaped income distribution,
Speaker 1: and also improved provisioning of public services for large parts
Speaker 1: of China's population, which these two things go hand in
Speaker 1: hand in the sense that if there is an improved
Speaker 1: social safety net, then households have to save less privately,
Speaker 1: can spend more. Therefore can enhance UM domestic demand UM
Speaker 1: and therefore this is I think quite consistent with the
Speaker 1: idea of tour circulation. I think one aspect that might
Speaker 1: be interesting to take into account in the most recent
Speaker 1: developments is that my impression is that there's a sense
Speaker 1: in China of UM preparing for via the realist his sector,
Speaker 1: but also more broadly preparing for a continued heightened instability
Speaker 1: in the global economy, so that the timing of this
Speaker 1: regaining control over strategically important sectors I think is also
Speaker 1: connected to an attempt to kind of ring fans the
Speaker 1: Chinese economy and prepare the Chinese economy for um possibly
Speaker 1: pretty major turbulences had um And of course these attempts themselves,
Speaker 1: as for example, in regard to climate change, can then
Speaker 1: again unleashed termoils as we have just seen in the
Speaker 1: energy market. Right, So it's not not necessarily the case
Speaker 1: that trying to prepare for turmoil and trying to come
Speaker 1: up with with policies that facilitate the kind of fast
Speaker 1: structure change that seems to be um necessary not only
Speaker 1: in China but around the I in order to respond
Speaker 1: to climate change. Maybe a smooth right, But I think
Speaker 1: that this is kind of part of the context in
Speaker 1: terms of what we have been seeing and what we're
Speaker 1: probably gonna see in the next months to come. So
Speaker 1: this is one more thing that I realized we haven't
Speaker 1: touched on during this entire conversation, which is going to
Speaker 1: influence the question, but to what degree is China actually
Speaker 1: worried about the middle income trap? Because we used to
Speaker 1: hear all the time that you know, this was like
Speaker 1: the ultimate threat to China's economy. They were really really
Speaker 1: worried that they would go the same route as various
Speaker 1: other Asian emerging markets and they would never be able
Speaker 1: to get out of it, and that this was sort
Speaker 1: of informing all of their economic policy decisions in the
Speaker 1: way they were structuring their economy. But I don't know,
Speaker 1: it feels like you don't hear so much about that anymore.
Speaker 1: So I'm wondering if that's no longer perceived as like
Speaker 1: a major threat. Yeah, interesting question. I mean, it seems
Speaker 1: like that, at least until very recently, has been a
Speaker 1: sense of new confidence in in China in terms of
Speaker 1: its UH, its economic model and so on. But I
Speaker 1: think that the strengthening of industry and the attempt to
Speaker 1: reach and resources into semiconductor industries and to basically ensure
Speaker 1: that China is um is strong in the upstream technology
Speaker 1: intensive industries that has also been touched upon in the
Speaker 1: interview with then One, in some sense can be seen
Speaker 1: as part of china strategy to try to avoid being
Speaker 1: trapped in in a middle income situation. Since I think
Speaker 1: this is seen as some sort of a precondition for
Speaker 1: the creation of native companies that have global competitiveness, which
Speaker 1: again is at least one element of trying to um
Speaker 1: not get stuck in a income trap, but instead for
Speaker 1: to head to the technological frontier in key sectors, which
Speaker 1: then has implications for the growth model. Well, uh, Isabelle,
Speaker 1: I think that's a great place to leave it. Really
Speaker 1: appreciate you coming on. Congrats on the new book and
Speaker 1: all the praise it's getting. And thank you for joining
Speaker 1: us on Outlock. Thank you so much for having me.
Speaker 1: This has been great pleasure. Thank you for your great questions.
Speaker 1: It's an honor to join you. Thanks. That was so good.
Speaker 1: Really appreciate it. Thank you so much. So I found
Speaker 1: it really helpful, Tracy, this sort of big picture historical sweep.
Speaker 1: I mean, I think that like, look, this idea that hey,
Speaker 1: you know other Dan has talked about this before another,
Speaker 1: this idea of like markets serving a broader purpose and
Speaker 1: markets not being an end to themselves. But I think, uh,
Speaker 1: Isabella did a really good job sort of talking about
Speaker 1: this just like it's kind of dangerous, it's risky, like
Speaker 1: things can get out of control. And I think she
Speaker 1: used the term dancing with the tiger at some point,
Speaker 1: and I think thinking about like Evergrand or maybe the
Speaker 1: rise of say the private tutoring industry, even though it
Speaker 1: doesn't have the same financial implications, sort of a good example.
Speaker 1: It's like you can aim for that, and China has
Speaker 1: arguably done a good job, you know, obviously lifting millions
Speaker 1: of people out of poverty, but there are risks left
Speaker 1: it right to the model when you introduce markets to
Speaker 1: the world, right, I mean to me, Evergrand is sort
Speaker 1: of the the ultimate expression of that tension. But I
Speaker 1: think two things that stood out for me from that conversation.
Speaker 1: One was this idea that you know, China is willing
Speaker 1: to allow markets to build up certain industries and kind
Speaker 1: of ignore them until they actually become pervasive and important. Um.
Speaker 1: And again, like, I think this is something that you've
Speaker 1: seen most clearly recently with the consumer tech crackdowns. Um,
Speaker 1: it does feel like everyone realized what an enormous part
Speaker 1: of the economy those had actually become, and so the
Speaker 1: authorities started paying more attention to them. And then the
Speaker 1: other thing that stood out to me was this idea
Speaker 1: of a sort of fluid relationship between socialism and capitalism.
Speaker 1: So this idea, that it doesn't develop in a straight line,
Speaker 1: or your ideology doesn't necessarily um unfold in a straight line,
Speaker 1: and that um, you know, China and the West can
Speaker 1: actually share some characteristics. So Isabella had that great example
Speaker 1: of you know, Western economies after World War Two in
Speaker 1: the nineteen fifties and nineteen sixties, where there was a
Speaker 1: lot of government expenditure on infrastructure and social programs. Um.
Speaker 1: And I that's also a great reminder that these things
Speaker 1: can ebb and flow. Yeah. Absolutely, that is super helpful.
Speaker 1: And you know, I guess maybe another way I'm thinking about,
Speaker 1: you know, because we started, when we started doing these
Speaker 1: recent series of China episodes. I'm sure we'll do more
Speaker 1: in the near future. You know, as I keep going
Speaker 1: back to this question, like what is the what is
Speaker 1: the goal here? What what's the so called like endgame?
Speaker 1: And I'm starting to feel like maybe it you know,
Speaker 1: it's like you have these like two tracks, the something
Speaker 1: that resembles more socialists, something that resembles more sort of
Speaker 1: like Western style liberalism and capitalism. Does feel like what
Speaker 1: we're seeing right now is a sort of recognition that
Speaker 1: China perhaps had gone too far down the sort of
Speaker 1: like liberalized track, it is trying to make a hard
Speaker 1: pivot to the other one. And I think maybe you know,
Speaker 1: Isabella brought up like this idea. It's like, Okay, it's
Speaker 1: one thing if an e commerce company sells books or
Speaker 1: use books online. It's another thing if like they also
Speaker 1: run like every like payment system that everyone uses. And
Speaker 1: so maybe there's just the sort of recognition that right
Speaker 1: now there's this moment to like skip over to the
Speaker 1: other skip back to the other track, and remind everyone
Speaker 1: what the purpose of all this is. Yeah, totally. And
Speaker 1: again we've spoken about this before, but there are plenty
Speaker 1: of Western governments out there who would probably like to
Speaker 1: do a similar thing with their tech companies, And of
Speaker 1: course the difference would be, you know, they would do
Speaker 1: it in a different way, and it would take years
Speaker 1: and years to get done, and no one would agree
Speaker 1: on what actually needed to be done, um, in order
Speaker 1: to curb big tech. But um, you know where we are.
Speaker 1: And again, it kind of like goes back to that
Speaker 1: idea of similarities between the two economic models, or at
Speaker 1: least they sort of like switch back and forth maybe
Speaker 1: between socialism and capitalism more than we actually real eyes
Speaker 1: absolutely well, lots more. I'm sure we'll be talking about
Speaker 1: this a lot more in the in the weeks to come. Yeah,
Speaker 1: so much more to come. Okay, shall we leave it there?
Speaker 1: Yeah's leave it there? All right. This has been another
Speaker 1: episode of the All Thoughts Podcast. I'm Tracy Alloway. You
Speaker 1: can follow me on Twitter at Tracy Alloway and I'm
Speaker 1: Joe Why Isn't All? You can follow me on Twitter
Speaker 1: at the Stalwart. Follow our guest Isabella Faber on Twitter.
Speaker 1: She is at Isabella M. Faber, Assistant Professor of Economics,
Speaker 1: UMass and the author of the new book China Escaped
Speaker 1: Shock Therapy the Market Reform Debate. Be sure to follow
Speaker 1: our producer on Twitter, Laura Carlson. She's at Laura M. Carlson.
Speaker 1: Follow the Bloomberg head of podcast, Francesco Levi at Francesca Today,
Speaker 1: and check out all of our podcasts at Bloomberg under
Speaker 1: the handle at podcasts. Thanks for listening to