Yes.

And I'm

very

very.

Thank you so much Dan And thank you for

inviting me to Georgia Tech and

later the Emory University who
gave lectures about issues

related to Chinese economy when
Chinese economic development.

It was like George head.

You know classroom learning things like
that textbook and that kind of learning

but we also had learning laboratory and
in the field.

So the idea was to platforms for

mostly management school students to learn
about the Chinese economy economy and

businesses in both countries
not just by observing but

also by doing projects in
those countries where you're

teaching a course called Global
intrapreneur issue where we send out about

one hundred sixty students to
nineteen developing countries and

they work as teams or local
entrepreneurs China India send out about

fifty students a year to work
with local entrepreneurs so

my research entrepreneurship
sort of more micro use rooms.

I always felt that as I'm going through.

Maybe I could.

And there are other academics and
the pushback that I always get

specially from my Chinese friends
in Chinese called the criticism is

criticize about it.

So I was always troubled by that pushback.

And instead they're revising my view
that maybe I can help the Chinese and

the printers in the way
that may be limited so.

So this is my other activity that takes
about sixty percent of my time but

my topic is more on the macro
the Chinese economy.

We're going to touch on some micro
Yes it was an entrepreneurship.

But that's more a side story to the micro
macro story in terms of the agenda.

So I'm going to start a question which is

unique and this is pressure
of the relevant discussion

after the financial crisis there
is a lot of rethinking about

whether or
not the Western economic model right

not just for the West but also for
other countries and there's a sense

otherwise no one is Beijing Consensus
seems to get lots of things right.

So you don't regulate financial system.

You don't centralize politics.

The government has a powerful
managerial role which will play.

You know they don't have a crisis they
don't have the excesses of Wall Street and

they have so much

more intellectually is more powerful
it was before the financial was even

before the financial crisis there was a
lot of fascination with Beijing Consensus.

So I'm going to pose that question

and get to the issue of whether or
not it is successful

talk about challenges Chinese economy.

The biggest one having to do with

imbalances within the Chinese economy
there are two hundred imbalances that

people talk about the one
kind of imbalance that

occupies much of the attention of
the policymakers in this country has to do

with the balance of the trade relationship
between China and the other states.

I want to use that question during the Q.

and A about that.

I'll be happy to answer but
the problem is the imbalance within this

Chinese economy consumption investment and
things like that.

That's a that's a there's
a huge challenge there and

I think to talk about the balance is
a productive way to think about some

of the China model and

then I'm going to try to

get to this question why consumption
as a percentage share of the G.D.P.

has declined substantially and so

basically the imbalance with
the Chinese economy has to do with low.

The share of the consumption and
rising share of exports.

So I'm going to try to explain why
that consumption has declined and

this is a critical issue
to think about the cost

in order to have a meaningful
discussion on the policy

you're true is that we
kind of deal with that.

Usually if we don't think
about the cost issue.

We can have a wrong
policy prescriptions and

then I'm going to look back
at the last three decades and

this part of the presentation comes
fairly directly from my latest

book and so I think that's one area

of difference between my own
view of the Chinese economy and

China China scholars the conventional
view is that if you look at Chinese.

Reforms in the last three decades.

You started out the country started
out with some incremental steps and

gradually deepened reforms.

Right.
So it started out with some capitalistic

reforms.

Maybe in the countries in
certain geographies and

then they expanded to other regions and so

that view of Chinese reform says that
Chinese reforms get progressively more

liberal more more more deepening my view

the best the most liberal
era of Chinese reforms and

both politics and
you can happened twenty years ago and

since then there has been
a substantial setback and

reversal of economic and

political policies and

I'm going to highlight rural Yukon and
me illustrate.

That reversal of

consumption that we're talking about

part of the country that matters
been part of the country

and we have time that

one part of the presentation
that didn't come from a book

this part pushed back people

just talk about you when you collect it.

So the idea is that the rural migration
substantially increased the income growth

of the rural residents.

So you can't really just look at
the people who live in the country.

So you need to look at those
other people working this if one

of the reasons I didn't talk about those
issues is because I didn't have three

years and
together with Chinese researchers in China

the number of migrant surveys and

the rural migrants and

let me say that the survey results
completely reinforce the view

with that economy and

even up to the period probably
up to two thousand and

five and so
I'm going to show share with you with some

of the I think there's nothing there
that contradicts this view with that.

The rules set back huge consequences for
you.

Konami growth and income development and

then if we have time we talk about
some short or long term policy issues.

OK So time them although consensus.

Let me give you all

the following

country G.D.P. growth very fast.

You know one percent for moments that
decade government savings doubled.

Within a period of six or
seven years rapid

industrialization as measured by the fall
of Agriculture employment by one

third which is a measure of income

inequality is very high the higher
you go the more it is so

so this country point

five very high level of income inequality.

And there's also countries
lagging personal income

growth right wage growth
relative to G.D.P. So

sometimes it's very confusing
when people refer to G.D.P.

income national income income

that matters more is actually the pay that

the actual pay the actual wage
the actual salary that we receive

we receive usually the national
income is a good predictor of

personal income under certain situations.

The two things can diverse you can have
very rapid growth of national income very

low or you've got a negative
growth of personal income.

Basically the last thirty years the media
person of income growth is very very flat.

Where's he has run this country
also has that characteristic

it is a country that is
foreign direct investment and

the government had a lot of favorable
policies toward foreign investors.

If you call me something five percent

of the assets of the top one hundred firms
in the country belong to the state sector

one party system there's no
political competition and

also inspired and admiration for

the for the system for example
Wall Street Journal has the article

that this is a country that has something
to teach us about economic growth.

So so I present the characteristics
of this country

audience and then tell me which country.

I'm talking about.

So I would do this in Chinese.

So they know exactly what I'm
talking about many people

there was this is China right so we
recognize many characteristics growth of

government which is
a more subtle point those

people who know about Chinese economy
would know that means raise a very high.

That's true but a part of this is that
actually the government saving the person

or saving private savings rate is
identical to other developing countries.

So there's there's nothing uniquely.

Terms of the private savings rate is
the government savings rate that is high.

So China has industrialization
we all know that

China has a very high level
of income inequality.

This is something that I
pointed out in my book

Personal Growth Chinese academic speaking

to recognise that fact about Chinese
government even government is not

talking about the key thing is not G.D.P.
growth is the personal income right.

So they know that China.

I would say that fifteen years and

twenty years wage growth
rather than G.D.P. growth.

China is obsessed with
foreign direct investment

control of the economy very heavy handed

state owned enterprises in China
of very very important history and

one party system I don't
have to remind my audience

that actually I gave this lecture
that they after the overprice or

forces that message for China.

You know Tom Friedman
if you read VERY about

including its environmental management
mazing for Tom Friedman will have

such a view because he is able somehow
he's able to see through the fog of

the precise composition of the material
was all of these buildings.

He has already have the best
environmentally friendly

material was and
he cited an example in Beijing.

I don't know how you can see that.

From three feet away.

But anyway so there Myers

in the West about Chinese
development strategy.

So which country is this actually Brazil

and the period in the sixty's and
seventy's.

In fact Brazil was known having
miracle years during that decade.

I was told that it is the first time

the word miracle is you to associate

association with economic stuff.

Usually it's a miracle when we
mean some sort of religious event.

This is actually the first time the word
miracle is that who referred to you.

Konami development there is
miracle growth of use Asia.

Actually that word was invented for
Brazil.

So they had very good period and

then since then maybe on to
two thousand and three or so

since then it was one you can
only disaster after another which

inspired the saying that Brazil has
a lot of shows and it will always

have a lot of potential there was
a lost decade of the financial crisis.

When he was started out much
richer compared with one Korea

now it is probably one fourth as
rich as those you call them is

hyperinflation they began to
reform the country began to do.

OK And then they had a crisis until about
two thousand through two thousand and

three President Lula.

Became the president the country was my
financial crisis in fact studies show that

not just macro indicators for
Brazil was poor but also Michel economic

indicators were terrible by
productivity and those measures.

So the idea here is there's nothing.

About certain and certain characteristics
that today we see in China.

One could argue that China is not exactly.

I see I see I list some similarities
there obvious other differences.

So I'm not saying that China is
going to have exactly the same

results as Brazil but
in terms of economic policies

in terms of economic and in terms of

certain institutional character if
there are differences in culture.

There are differences.

For example is occasional time that has
a much better job because you may be the.

So those other things also matter where
you can only grow so I'm not saying that

the countries are identical the savings
rate countries is also different but

in terms of economic policy in terms
of institutional characteristics.

There are some alarming similarities
between China today and

Brazil in the ninety's sixty's and
then his seventy's.

So this whole argument that you need
a higher level of income inequality

it would generate economic growth
that actually came from Brazil right.

But what happened later
terribly encouraging.

If you look at the rest of us Asia.

The rest of it was able to grow
very very for house without any.

Very high level of income right so
this whole idea that

somehow it's very natural for
high level of income inequality.

It's not true.

Let me get to the imbalance question.

Having to do with the consumption but
you say.

So if you look at consumption
as a ratio to G.D.P.

China started out in the early ninety's
about forty five percent of the G.D.P.

and forty five percent is already but
by the standard of a centrally

planned economy this is about
normal sort of fluctuated

it went down with forty five percent.

Something happened that caused this

ratio to go down substantially so
roughly thirty five percent.

I thirty five percent China probably
has the lowest consumption for

G.D.P. ratio among all of the major
economies that I know all

this is

the ratio for that is China.

So for the United States.

It is either very high level and
since the recent

China has declined and
basically all of the problems

between China in the United States the
currency problem the imbalance in balance.

Even some of the political
have to do with this gap.

So the gap is getting wider and
wider How do you close this gap.

So the view is you need to
revalue their currency to close

this gap we can have a separate
discussion whether that's the right.

Show here is that there is
a project if you can make faces for

the problems between China and
the United States.

This is China compare with two other
developing countries Brazil and

South Africa so basically you don't
see the same pattern most other

you can imagine and then there's
a theory that says all that's because

I Chinese are and

the Chinese got the full gallop
a person named Confucius

the Confucian culture use Asian culture.

I'm always intrigued by the idea that
someone who lived two thousand years ago

is blamed for trade imbalances today but
that aside the culturally still nation.

Typically works when you explain
the difference between China and

the one that is states in a given point
in time it doesn't really explain

why the consumption has declined
over time push him away.

And then he learn to use today

the virtues of Confucianism so
that probably has not changed.

If anything is probably have moved
away from Confucianism today.

And all that kind of things so

that you know cultural
examination was a short ride.

And also last time I checked Korea and

Japan are also Confucianists
the society there and

they don't have the path and so the
cultural exclusion is extremely weak and

yet it is invoked by many and China India.

There are some differences there
are some similarities the similarity

is also sort of trending down
in terms of the consumption.

Sure of the G.D.P. but that's because it
started out with a very high consumption

G.D.P. ratio seventy percent and
India the government

has been mostly saving right so
the government has a deficit.

Essentially the only
way I mean if you were

you would know that the country needs
that infrastructure using investment.

The only way for the country to mobilize
a resource not the only way but

one of the major ways is
to increase the savings and

reduce the consumption and so
there is a decline but that client.

First of all takes place
from a very high level.

Secondly there's a very
good economic rationale for

why that decline sure that occurred.

Whereas those things don't
apply in the case of China.

So let me step back first

is a problem is a real
issue then the question is

in the last three years in the aftermath
of the financial crisis whether or

not a good job terms of rebalancing so

there are some statistics that
say that now it's consuming

increasing by a rate that has higher
than one would argue with that.

Probably yes that's a problem
that happened before but

maybe now the country toward rebalancing

So the question is rebound thousand and

nine the retail numbers increased by.

Fifteen percent of G.D.P.
is growing aid and consumption is fifteen.

You know you still have a God but
that gap is going to be close.

So it's not a big issue.

This is the trick

when you do work on Chinese economy.

You really need to pay
attention to the definition of

the economic system has

a lot of data but it doesn't have nearly
as much information as you would think so.

There's a difference between the two
some of the data are totally meaningless

whether there is information
of value is a separate issue.

But here we need to pay
special attention to how

the Chinese define consumption but

when they release consumption they
are very careful how they describe it.

They say social retail consumption.

Most of this they don't already know that

word consumption I was on
that word mismatch that

concept with the same
concept in the United States.

I actually pay attention
to the word social because

no other countries define
consumption that way.

Why do they attach a word
social before that.

It turns out that the reason why they
attach the word social to the term.

Is because when they collect consumption.

They include both household
consumption people like you and me but

they also include consumption
by government agencies by

large scale institutions.

So it is critical to know the consumption
growth fifteen percent is it coming from.

Household isn't coming from
the government consumption.

The reason is that when we talk about
rebalancing we're not really talking about

government spending and

whatever fancy dinner and fancy drinks.

We're really talking about
to spend more money.

So it is critical to know which part
of the consumption is driven by

the government consumption which
part of the consumption is driven

by the household consumption.

So this is a fascinating important
question but the answer is I don't know.

So I'm just raising this issue and

we have to estimate.

You know is that the share of
government consumption in these social

radio consumption has recent
substantially in the last twenty years.

So in that sort of a below ten percent.

Now it's about twenty five
percent thirty percent.

So we don't have the most recent three
thousand and eight two thousand and nine

when I talk to researchers and
people who are familiar with these things.

There is that almost all of
the growth consumption came

from the government consumption
car purchase things like that

very little from the household consumption
and I have to say this is confirmed by our

survey how room by room I have
actually reduce their consumption and

we also have some of the urban problems.

So these are they also
reduce their consumption.

So you know obviously this is a.

For the rest of the country.

But if you start with the reasonable
assumption that financial crisis hit

there was a lot of anxiety in
the economy households began to

reduce hundreds of before and
then you have fifteen percent of

the consumption growth a lot of
growth must come from elsewhere so

and again you know I don't
have direct evidence and

it's very difficult to collect evidence
but is there a reasonable hypothesis

that we get to the second part of this
discussion which has to do with how

do we understand the consumption decline
it is very important to think through this

question before we begin to advocate
certain policy directions and instruments.

The place of the explanations why is

that the Chinese are saving a lot

because they don't have Social Security
they don't have health insurance.

They don't have education or coverage.

So what is known as a precautionary
savings hypothesis.

If you talk to.

I have economists working on China.

In fact that you call them is
a professor all these people

believe that if you so that that's their
view it's because Chinese are saving for

much because they don't have
a good social security system.

The other hypothesis is question or
spending hypothesis.

So essentially the difference between
a true is is the following the first

hypothesis says the Chinese are saving
a lot of income that is growing very fast.

So you would save more and

more share of income so
that to finance consumption.

So.

That implicitly says that
income growth is very fast.

It's a saving behavior
that reduces consumption.

Secondly it's not the savings
rate it is the income

growth the income growth
is slowing down and

you can have the same savings behavior
when the income growth is slowing down.

You have exactly the same
savings behavior.

The consumption of that so.

These are extremely different
matter which you'll believe

if you believe in the first view which is
basically sort of the official view and

now then you would say then which would
be Social Security which will provide for

education my own view is that situation

I would argue support the second

which is the income growth
that is the problem.

It is not the higher savings rate.

So as I said before this is
almost identical to the private

savings rate Africa South Africa India
about twenty twenty three percent.

It's not excessively high.

So there's more importantly if you

look at the private savings rate over the
last fifteen years and it has not risen.

It has exactly the same.

So if the consumption has has come down.

If the savings rate has remained the same
Something else must have come down.

It is the income growth that has come down
is the personal income relative to G.D.P.

has come down to the low consumption so
basically the second.

Hypothesis was say the things you
need to worry about have to do with.

Policy.

Maybe institutional barriers and
things like that.

While this you accept the second then
the policy implications are actually

very significant then you are talking
about wage bargaining right.

Then you are talking about unions in
the organization of the workforce.

If you are talking about the factors
affecting a point you are talking about

the service sector reforms and
so the second hypothesis.

What call for far bigger reforms
are substantial institutional reforms.

Let's compare the first hypothesis
rights is the first hypothesis basic and

yeah everything is kind of funny except
you don't have those following elements.

This is probably one of them and
the second.

There's a says no no actually
a lot of things you do

not find they need to be reformed.

In addition to these other things right.

So these are very very different.

How about this is very important
to go through that they know which

one is actually driving
the consumption decline.

So let me get to the this is where I
want to get to the rule is you right.

So it is the very often we don't pay

them nearly as much attention
to the rule issues as

we should have and
what you see in the data.

It is visible in the urban database most

visible in the rural data is
that the rural income growth

declined substantially in
the one nine hundred ninety S..

It began to recover a little
bit since two thousand and

five maybe two thousand and
four but there was a period of time

that the rural personal income
growth slowed down magically.

The reason why the rules
actor is important is just

the sheer number of
the rural residents right so

we're talking about even today
seven hundred million residents.

They live very low income.

So essentially they have to spend
almost all their income they earn.

So they have a huge collective they
have a huge effect on consumption.

Individual or they may not consume
much but seven hundred million people

put it together consume a lot so
their consumption behavior.

Is extremely sensitive to their income
development when their income growth and

I'll show you later in the one nine
hundred eighty S. the rural income growth

was extremely fast and then their
consumption growth was also very fast

in the one hundred ninety even today
their income growth has slowed down.

There's still growth.

OK So let me be very clear there's
growth which is the growth rate

has come down substantially.

And then the consumption growth
rate has come down substantially as

well it's really very simple.

I mean the consumption is really
a function of income as opposed to

a function of our savings rate.

This is by who is the governor
of central bank and

so you know he presumably
has more data than we do.

He shows that there's no net
increase in the household

savings rate here in the period of the you
know he looked at between one thousand and

two and two thousand and seven private

savings rate national savings rate.

Is Rising much of that comes
from the governments and

the corporate savings mostly among
the state owned enterprises.

So remember the Brazilian
characteristic in the case of

Brazil with the private
savings rate was negative but

much of their savings came
from the government sector and

stay on enterprise exactly the same
happened in the last twenty years.

So let me.

So this is where I think it's important
to look at the past thirty years so

structural imbalances in
Chinese economy today.

Basically I mean you know some
people would not buy that

they don't hear different was
the way by the last thirty years.

First it was very much a bottom up and

started by small business

sector in the financial sector and
this is when you personal income growth

the G.D.P. growth exceeding G.D.P.
growth and basically this is that

if you look at the seventy's
there was a gap

between personal income growth in G.D.P.
growth but over time what you observe

the closing off and even personal
income growth exceeding G.D.P.

growth by maybe by a small margin.

So basically another story.

I have a chapter in my
book where the title.

What is wrong which on high has nothing
to do with the fact I was born and

raised in Beijing.

Although maybe that has
something to do with it.

Shanghai.

Basically the Shanghainese control
of China and then the ninety's.

And that's what massive they
think is wrong with China.

It was urban bias urban bias at
the expense of the countryside

urbanization all of this sort of this huge
scale that you observe in China today

started in Shanghai in the early ninety's
and then other regions began to call for

it basically this time although
it's actually very simple you use

police you use the power of
the government of the peasants.

Basically to take over their land for
nothing and then sell the land for

a lot of money in your pocket
the difference between the two so

if you would be very interesting and

market on the buy side for buying
the land the government is the only buyer

on the sell side competition right.

Foreigners the people putting

people from joining for the land assets.

Doesn't take Georgia Tech.

Rocket scientist to know that this
is a very good business model for

the government.

So there's no.

Competition on the south
side pocket the difference.

The difference between the body and

then the difference between
base of corruption and

spending and street and
things like that right.

So that's basically the Shanghai model and

now you see the replication
of that model other cities.

That's why we're talking
about those people

being victims from their houses
some of them brought in themselves.

With their I mean the reason is not
because they have you know incredible

motion or attachment to the bricks and
the concrete of their houses.

It's because they don't get paid for

them to believe that this
transaction economically worthwhile.

So you know I may have some
emotional attachment to my house.

But if you offer me
a million dollars that.

My emotional disappear very very quickly.

I'm not going to burn myself to death so

there's sort of basically
came to Shanghai and

but the difference is you didn't have so

many rural residents and

also Shanghai was beginning to do
the early one nine hundred ninety S.

and then the value of the land was low.

So essentially for the for
the people being you think to the value

the difference between the market
value is not as big as it is today.

So but
that more the Shanghai my own view is

that this is the single most destructive
practice that one can think of.

By the way Brazil was the exactly the same
thing in ninety six that the government

was coming to confiscate land from the
peasants kick them out so that factories.

And the problem with
that motto is surprised.

I'm not surprised that Brazilians
made that mistake I'm surprised

that Chinese made that mistake.

The reason is that even
though I grew up in China.

We all learned about Marxism one
of the things that Marx said

is that capitalism has always this.

The reason is the capitalists are so
bad and greedy.

They don't pay their workers
enough money to consume

the products produced by the factories.

So he forgot about the export and
all these other things but

that's actually very good
although you would lower

the cost of production but by lowering
the cost of production you learn from

you can basically a cost to one person
is an income to another person.

So perhaps prime brought me here and

they said they will pay me some money for

them is not very high income
to me is not very high either.

So essentially.

A person plays toros in the economy.

He's a producer.

He's a consumer.

So whether he's in a static
sense what is good for

production lower in the business cause or
in the production cause.

Could be very bad for consumption.

The reason why Marx got this thing wrong
is as I say he forgot about export.

So when you have an export driven economy.

You can kind of avoid this problem for
a while.

So essentially the what has happened
is that the production cost over low.

Because the production cost over.

The income growth is also very low but
that doesn't matter because the stupid

Americans are buying just meaningless
stuff from China right so Walmart.

You know Christmas stuff but basically you
need somebody somewhere in the universe.

So the fact that the Chinese
themselves don't have the high

you can avoid this problem for one voice
the Marxist problem for a while but

you cannot avoid it forever so

that this is a long lecture about
how much I don't like Shanghai

the policy now is sort of I would say it's

a clear recognition of the problem
between fast growth and low income growth

and then some willingness to
make social policy adjustments.

So to help the poor.

OK so to reduce the human wave
that happened in the presence.

You know I don't know if
people here know the Chinese

peasants pay more higher income taxes
as compared with the urban residents.

I mean just one of the most repressive
tax systems in the whole world.

The current leadership abolish
that thinking two thousand and

four two thousand and five and their

distribution so if you read their speech.

They're talking about that
the emphasize the income.

Now as opposed to their next
five year plan they make

explicit they say the goal is not G.D.P.
the personal income.

I think these are the right policy.

These are the things moving the country
in the right direction and I think that

the issue is without political reforms
whether one party system such a low.

By the vast powerful
interest groups whether or

not you can realize these policies.

I mean that's a separate issue.

Right.
So the policy

directions are the right ones.

The issue is whether or not given
the current system you can do that.

Let me let me show you some of

the lecture not just this is
a complicated picture of religious focus.

This is the personal income per
capita income growth the blue

represents the one nine hundred ninety S.
and today.

This is the G.D.P. per capita G.D.P.
growth address that all for

inflation and today.

If you look at the G.D.P. growth.

So this period is higher than before.

If you look at it there
are some differences but

the differences are not huge.

So there are some differences
in terms of G.D.P.

growth among these three decades but
the differences are not huge.

If you look at the rural income growth.

The difference is dramatic.

And this is there

are some that one can argue with this
is not as high as it has because

in the ninety eight it was difficult for
government to collect information.

Mostly.

So if you don't have accurate
inflation data you can

overstate the people the most

conservative estimate the rural income
growth in the one nine hundred eighty S.

probably between eight to ten
percent say nine percent.

This is this is by the way or fish or

they are all in the ninety's
is lower than four percent.

I'm here with you and
he's the differences between night and

day I have done more research on this.

This is all facial official public data.

I've looked at as if they

agree on the very high.

Maybe eight percent nine percent.

Some of the growth is
the low as two percent.

There is from the National Bureau
of Statistics.

I got hold of that from
the Ministry of Agriculture.

They're basically similar instruments.

The difference is that
they make this public and

they don't make the other data public
look at Ministry of Agriculture data

very similar maybe half
of this growth rate

pick up of the growth since
two thousand and three.

So the rule situation in
the one hundred ninety S. and

early two thousand was
extremely extremely dire and

that is principal reason why
consumption has declined.

This is some of it.

Actually all of it except the numbers.

This is the Ministry of Agriculture data.

This is the lowest twenty percent
the next lower the middle twenty percent

middle high twenty percent and
the highest twenty percent.

If you.
Look at ninety ninety five thousand there

is absolutely no growth on the part
of the lower twenty percent

of the Chinese peasants
Chinese rule households and

much of the growth took place
in the higher income group.

So this is the reality of the nine
hundred ninety S. and the what

exactly the policy reversal
was let me just show you one

that a lot of policy reversals
the key the key thing

financial risk to finance and
this is something that many

people don't know in the one nine hundred
eighty S. the Chinese government undertook

substantial financial
liberalization providing money

to private entrepreneurs providing
money for them to do business and

things like that basically in micro
finance started in China long before.

And that enabled the brain
of the countryside.

Because if you run a small business
in the capital in the finance

in the one nine hundred ninety S.
And this is from survey data the access

to finance by the rule of households
to run private businesses

declined substantially quite substantially
why this is the Shanghai model.

If you want to build skyscrapers
the money has to come from some.

Where it can come from capitalising
Kong Kong would have one

that's one source of capital the other
source of capital from the peasants.

So essentially you're restricted
in the countryside and

channel the resources to
build skyscrapers and

the airports stadium

is a classic sort of infrastructure boom.

But many people don't question

the finance the Chinese peasants

who finance the consumer
say that's a good policy.

You can say all the infrastructure is more
important than financing the present but

the minimum conditions for us.

And think about this question is no
board of financing infrastructure of.

My own view is that this is a very very
unproductive way to allocate resources and

the way to grow the economy
is to make the peasants rich.

So they can consume then you don't
have to depend on status for

export and things like that you can have
social stability political stability.

You can have happiness and
all that rather than having skyscrapers.

By the way are the cheapest
among that your place in

the world and I don't know if you know
that there was a building attached

to the Chinese Central Television
which was burned because

they were playing firecrackers and
so it was it was a hotel.

So that's a tragedy in the hotel
brand new hotel was burned down.

We don't have another complication.

The rabbit hole you China they
are among the lowest in the world.

So there's a there's an oversupply
of infrastructure hotel airports.

Maybe even highways in China where is the
peasants in China seven hundred million of

them are underfunded starved of capital.

It is very difficult to come
up with a moral argument or

you can only argument in
support of that decision.

Let me first of all there
are a lot of others.

So let me just so
let me just short of this as a concluding

this is a survey we conducted thousand and
nine

taking all of the inflation rate of G.D.P.
and

this is the starting wage
of the rural migrants

basically flat five years
six years seven years.

Where is G.D.P. substantially.

That's surplus that has
to be absorbed somewhere

that has to be absorbed maybe
in Boston has to be absorbed.

And so this is where the challenge
is when the absorption

of the United States is being
reduced by the financial crisis and

maybe further by high
unemployment in the country and

maybe by bad economic growth and
maybe by Republicans.

You might have you.

China has to figure out how to
absorb that surplus one way or

the other one way and they're doing that.

So there they are allowing
the other is to bring down this.

I mean there are some point the gaps.

So basically they're going forward
to raise the wages of the.

That may require not just policy
interventions but may require unions and

so that's a political thing rather
than just a narrow economic thing

where you have a recession
right to bring down the line

that's a recession or miraculously emerge.

You know and.

Consume again.

So basically one of these
three things has to happen

in the next five or
six years to resolve this imbalance.

And I hope it is a combination of rising
in the green line which is the wage growth

and maybe the U.S.
economy beginning to recover rather than

a really bad recession on the part of

the Chinese going to make up because that
could be politically extremely damaging.

Thank you very much.

I thank

you thank you

very personally.

You know he comes from the right place and
you thought

it's also good because I've just joined
partly the College of Management

the person coming from
the College of when it meant.

Showing us how to be ethical thinking
about the poor and the laborers and

their refreshing have was you know we
usually call the culture of management

to show how to make business rich but
not the small business.

Exactly.

The order to make the business
reach we should make everybody

which is a good point.

I will say that I would tend to
agree with but there is a cynical

view is that not only
Americans are consuming but

we have no clue how to produce in China
has no problem because of a forgotten

the war will stay in China because
nobody else know how to do it anymore.

So here between these will be poor but

there's no other options out there to look
at all the American big multinationals and

all the shit that we buy.

Produce in China and
we actually have no clue how to build one.

And I'm not sure that there is
any option as to produce it in

the prices we're willing to pay now.

So that's one option.

And I would like to hear your views
about that but before you go on.

I think we should open the floor and
see some questions to John because

I'm puzzled why your choice.

Why a great.

Yeah yeah

well you

know so I think I think they
are there are good reasons

but there are reasons that they are not

as close as that between China and Brazil.

I mean basically I think
the Chinese economy is

a company and among high.

Socialism.

So where's that's not the case with
this would be when you when there

is you know completely communist

not just Socialist being among the highest
but also in lots of other things.

China has clearly moved away
from that very very far away.

So so I think the analogy is the last

you know like the role of the F.B.I. So

there is a I think then you know it's
from my previous book set in China.

I didn't ever have a very

you know positive view of life as many
people do so I Brazil had a lot of.

And that's so even that So Brazil and
China are far more open and

true for investors to foreign trade but

if you actually in the sixty's
many people later on.

Compare.
Brazil favorable they would South Korea

in terms of being open
in terms of trade but

actually if you look at their
export growth was phenomenal.

And it was nine percent ten percent.

It was only pale by comparison and

seventeen percent fifteen
percent of growth South Korea.

So but to grow export by eight percent ten

percent that's actually not
a rather trivial achievement.

So when you have all the elements for
take off from that point of view.

Yet they fail because

my own view is that they
fail because they don't have

the sustainable source of growth which

is a basic which is increasing
wealth among the population and

maybe on the supply side and
things like that.

So this is where I worry about China.

So basically you have a strong
government you have a strong G.D.P.

but you actually have a Frys your
household you Konami Foundation and

from that point of view I
always thought that for

China to be so dependent on the United
States in terms of the export and

all of that is actually extremely
strange because this is a huge country

trade should play a very
small role in the.

And yet it has played a much larger role

than you would expect given
the size of the country.

You know I think that's
an interesting hypothesis whether or

not Soviet Union would have
had a longer life expectancy.

If it was able to export I think.

So I mean if you look at in
terms of the early seventy's

seventy five but
you say they have no sources of growth.

Other than labor and capital.

They don't really have driven growth and

it was abundantly clear that they
couldn't grow their way out.

China.

You know this is why my criticism
of Chinese economy I don't think

that same situation and.

And I think the Chinese economy
is much more open and so

the other way framing the issue
is that even though I don't think

export our magic bullet for
economic growth.

Thank God China was open exports are the
time when they screen themselves right so

otherwise it would have
been a long time ago.

So that's basically sort
of a sort of a residual

You know something that
as a savior as a savior.

Because you have done lots of bad
things you need these other things more

money yes.

Yeah yeah.

As a ratio.

Yeah yeah yeah

yeah yeah

yeah.
So I think I think

you're right about car
produced in the house.

I think when we talk about consumption
typically think about repeat

consumption in a way and
rather than one time consumption.

You can you know you can retire
the car very very quickly.

You know I bought a car in two thousand
and five I could repeat my consumption by

getting rid of my two thousand and
five car and buy another one.

So it is that's one so
is the repeat consumption and

if the if were just right so if
the piece is this big the piece the size

of the piece is not going very fast
then basically the way you cut the piece

some of the things you say right so
now the piece is this big but

I gave the penny.

Then you will get less pieces which
means that when you have this right.

You probably know the Chinese
are saying about buying a house and

they have to save it.

I cannot because you know I can't

I don't know I can't because
I have to buy a car.

So that's that's basically cutting
the piece in different ways as opposed to

buying a house and buying cars.

You know the way that is so you

can say this is a bad practice but in
the United States a lot of it is actually

found by savings by your own saving
this is financed by the credit market.

So you don't have to forego

other consumption to finance
those those other things.

So I'm not saying this is a good thing or
the reason why where

the current situation is because we
did that before two thousand and

eight the point here is that the thing
you are talking about is really

the allocation of consumption
rather than consumption per se.

Clearly the room.

You know how much you actually consume

you will buy durable goods and
things like that the numbers are very low.

So there are now two hundred
thirty million workers

in addition to this kind of thing.

Think about the two hundred
thirty million in the economy.

They are making this money.

This is more than that in the countryside.

There's no question about that this is

what this picture says
is that that's true.

Worker wage that's where you income.

Because industrial workers.

So essentially once you
become an industrial worker.

You don't you don't have this expectations
that your income is going to grow.

Well what happens there.

Psychologically that you believe that
the growth of your economy as a result

of the evening I recorded is a one time
event we know that if there's one time.

If there's one time game and

this is a criticism of the tax credit
policies in the United States.

If people view this as a one time they're
not going to consume they're going to

save or pay down the debt
exactly the same thing here.

So for example think about two
hundred thirty million of people

will have low expectations of
income growth in the future.

Whatever money they earn.

They set aside.

They don't consume and because

you pay them basically stacking wages but
they become very efficient workers.

So you can produce more you can produce
more you can produce more of those things.

So essentially you are crazy.

I mean this strategy is
creating a lot of producers but

not a lot of consumers and basically
the D.V.D.'s have to be exported so.

So the the so I agree with you.

We do observe large
urban areas this vibrant

seem to be the vibrant consumption
of cars and housing but

that's that possibility by
there is a theorem in China.

So it's all about young people

remember the scene from them.

But you know it's because
they want to buy a house.

I mean that's doesn't increase
consumption per se it's just

that there's more consumption of
housing stuff that's consumption.

I don't know because the other thing.

So it doesn't.

So this is where foreign journalists
are absolutely wrong about China

because they visit the car

they see this all while people are buying
this isn't buying what they don't see

because they're buying all these things
they're not buying other things right.

So they're don't observe the observer is

there observe the things
that they can see.

Yes Yes

OK

yeah

yeah.

So let me say first and then try

to guess what details

of what they have done when you
were paid and things like that.

So there I believe that China.

There's thinking on the me.

So it's capitalism rather
than sort of theirs and

secondly there are some really important
details we need to pay attention to.

So this has no sort of moral or

that kind of connotation in the way
that you wish the term the Chinese

leader is I think they just use the term
rationalize and defend whatever they do so

they tend to like and then they say those
are characteristic there those are Chinese

characteristics and without having to
justify why those are Chinese characters

that it's a bit like that with the Chinese
friends and colleagues I often say there

are a lot of other Chinese characteristics
that you've got real small fees for women.

That's not that's why they
do get rid of that right.

So that's doesn't justify keeping it.

You have to think it is the right thing
to keep it as a Chinese characteristic

The second thing is that when you have
these are the there is talk about certain

other things reforms of the hospital they
often say This is international practice.

You know we've got to
do these things right.

So like raising the prices of the hospital
is raising the prices of education and

you know first of all I doubt
that international practice.

Secondly there it doesn't bother them
that this is not Chinese characteristic.

So basically it's a political you know
political thing that they're used to

justify whatever they do because
they're actually quite far.

You know adopting foreign characteristics
you know given that this is a country

you can't really challenge
the political the directly many people

actually have that scholars have this
view all the time how there is a special.

And I just think this is just not
this is all the justification for

the things they want to keep and
when they don't want to

keep certain Chinese things they
will get rid of these houses.

How many houses have they demolished.

I mean if I can think of one thing
that is unquestionably a Chinese

characteristic it is the traditional
houses in Beijing right.

Ninety percent of these traditional
houses are being demolished.

There they don't talk about how
these kind of sticks anymore.

I mean it's just it's really
really bizarre right.

So I think it's just a political
convenience has no you know academic.

Merit behind it.

Yes OK yeah

yeah

yeah.
So I have I've written a few article

was making exactly that
point it where you were so

I mean I don't really view those things as
you know I don't same way I don't view.

The success of the Beijing Olympics
something magical moment

and I mean I guess as an academic I just

I mean I don't like to go through
these events myself so I don't really.

I just think these
are stupid things right.

So I just trying to
probably they manage that.

Better but I just don't think these
are that important to me is important.

So let me get let me get to that point.

So it has not worked.

So that's why

if you look at forty to eighty five or

eighty eight growth rate was very slow.

There's no question of it since
then it has picked up substantially

seven percent eight percent and

I would argue there were a lot of skeptics

about India and the recent performance
I mean there has proven them wrong.

And so that's so
when you say it has not worked.

I mean I I mean I question
that question that premise

a little bit because if you look at even

before the current sort of seven
eight percent growth period.

If you look at two thousand and

five when they had modest growth
four percent five percent.

The only reason why many
many people including you.

That didn't work is because
we were comparing India

which China was growing at
seven percent eight percent.

So if you're growing up five percent and
it's not working as compared

with that if you look at if you
just forget that China exists.

So just forget that if you
compare our their major you call

them a developing economy in that
period India was a shining star.

There was a shining star.

There were very few other developing
economies that matched Indian performance.

So this is very tricky right so
it has to do with how you frame the issue

and even though I don't like to go through
sports I do watch basketball games.

So I know a few names in the basketball
net who is a very good player

but if you compare him
always with Michael Jordan.

He looks stupid he looks really bad but

that doesn't mean that having that
there is not a good basketball player.

So this is the problem with this
problem of being always compared with

the highest performing economy in
the whole world instead of saying

you are just the second best
which is the right conclusion.

People say You are a disaster.

That's a very strange way of
drawing the conclusion if you're

the second best student in a math
class relative to a math genius.

I can say you know I'm not as good as the
math but why do you say I'm a disaster.

So this is this is the whole problem with
the way that people look at China and

then they exaggerate these other
differences in terms of politics in terms

of the other things but he's China India.

So that's one thing I want to say the
second thing I want to say is that India.

As impressive performance I would
argue as compared with China

in the following sense.

There are a lot of reasons
to expect India not to grow.

Let me begin with the most fundamental one

if you look at the successful
you can amazing the world.

They tend to be in the temperate
zone of the world very difficult for

a tropical economy countries who grow and
get their spy they are growing

the third thing I want to say maybe
this is to be the last comment but

last thing I want to say if you look at
the period where there was not growing.

It was even though it was a democracy.

It was the most centralized
dictatorial democracy.

If you look at the period it has
grown basically since ninety two.

India has all the political reforms
that make the country more democratic

more transparent and more accountable.

The press freedom is more today
as compared with his seventy's.

You know India Gandhi was
basically almost as a painter and

it was actually so
this is actually whole idea doesn't

just not true even for

political reforms in the village
governance reforms the Constitution

gave people access to information
access to information act.

And I think many many other
states probably the media

are completely private
there is more press.

India today in terms of democracy
is far more democratic compare with

historical situation and yet
it is growing the fastest.

So if you run statistical analysis
actually these two things go together.

Either way I didn't touch on this when
the Chinese peasants were growing very

fast in terms of their income growth China
was most liberal in terms of politics.

Most of the broad political reforms and
there was a quite a bit of media.

So that's not always go with

success I don't think it's
a one to one relationship but

it is not the political always
you cannot make growth.

Thank you.