SOME PARTS FROM AN IQ2 TRANSCRIPT
Clearly, the rule of law is much more developed here. Property rights are more secure, and we encourage innovation by protecting intellectual property. As a result, the American economy is far more innovative. The Googles and Facebooks and Apples of the world are American companies. Nothing comparable has come from China. We permit individuals to move freely in search of jobs and opportunities. For hundreds of millions of rural Chinese, there is no such freedom. Corruption and abuse of power by government officials is far more prevalent in China. And crony capitalism, which is certainly an aspect of American life, is absolutely rife in China. As usual, there is a lot to be said on both sides. And in the final analysis, this debate is not just about economics but about which system, American democratic capitalism or Chinese state capitalism, will be the model that developing countries around the world admire and seek to emulate.
And your partner also saying that China does not do capitalism better than America, Minxin Pei. Minxin, you are a professor at Claremont McKenna. You were born in China, but you’ve been here 27 years and counting. You’re a dual citizen. You also have another duality. You’re a political scientist with a Harvard Ph.D., but you also have a Master’s in creative writing.
First of all, Orville said that China is a fickle mistress. And so getting China right is hard.
And one thing we do all need to admit is that the level of volatility in outcomes in China over the next 10 to 20 years is vastly greater than the level of volatility in the United States or in Europe or Japan. Can China make it? Can they fundamentally transform their economic and political system? A country of 1.3 billion people. We know they need to it. The World Bank just made it very clear. The Chinese government admitted it themselves. Doesn’t mean they can do it, it’s never been done before. It’s a bet. I’d bet against. But it’s a bet. If you have to make a bet, you bet on the United States. Lots of people do, that’s why the U.S. still has the world’s reserve currency. I don’t know even where to start on this frankly, having just heard that China needs to bribe the right bureaucrats--but same in the United States, we’re not as above board about that... That’s on its face ludicrous, right? China is a system where if you want to do well, the highest levels, 52 percent of the GDP -- 62 percent of the GDP is state-owned enterprises, absolutely there is no rule of law. There’s no transparency. You don’t have as many regulations in China as the U.S. That is true. Does that mean China does capitalism better? No. It means that if you’re China and you want to move a village and build a road, you can. It is not clear to me that that is capitalism in its most effective or even most rapacious form. That’s the state doing what it wants to do for the state.
That’s the problem. You want to talk about state intervention? We’ve got it. We’ve got it in China. Look, it’s unfortunate to me we’re even debating this. Five years ago, we wouldn’t. It shames me. It shames me as an American because there are people out there that believe that the United States can’t do capitalism as well as China. There are countries now that are doing capitalism better than the United States. If we were having this debate about Canada, we wouldn’t have as much of a problem. We wouldn’t, right. On a lot of fronts -- I’m willing -- I’m not saying the United States is worse on everything.
I’m saying that life increasingly, if you look at issues like the deficit for the U.S., if you look at financial regulations -- I’m not going to stand behind all that. But I am going to go after China, because ultimately we have a problem. Look, the Chinese system is not just capitalist; it’s state capitalist. State capitalism is a system where the state is the principal actor in the economy. And it uses markets ultimately for their own political gain. If it turns out that profit is useful for their political gain, they’ll go for it. If it turns out it isn’t, they’ll go against it. And that’s true whether we’re talking about Chinese firms or whether we’re talking about Western firms. I mean, Facebook’s doing a pretty good IPO, but they’re not in China. Why? China doesn’t want Facebook in China. It’d make a lot of money. It’d make a lot of money for China. That’s not the point, right. That’s not capitalism. That’s a problem. Ultimately, when we’ve seen state capitalism work globally, it works until it fails.
And it works because despite the fact that the state is massively inefficient, and I suspect Peter admits that the state is massively inefficient, and it is in lots of forms, but it can hide its inefficiency through cheap stuff. Argentina was state capitalist, looked as good as the United States in the Western hemisphere over 100 years ago until they ran out of cheap land. And then they started defaulting. Venezuela looked great on cheap oil. Not so much anymore, right. China’s looked great for 34 years on the basis of cheap labor. China will ultimately run out of cheap labor. So, what we have in China is this extraordinary car with a huge engine going very fast down a long road. And that road has been straight for 34 years, but coming up there’s a big turn in the road…. And we’ve never seen steering.
And the fact is that if you are China, there’s one thing you’re going to have a very hard time doing. There are no more Zhu Rongjis and Deng Xiaopings in China. You don’t have strong individual leadership. You have leadership by consensus, individuals that are moving together very incrementally. They’re very cautious. They understand the importance of the stakes they are playing for. The one thing that you will not do well is go after your own intrinsic interests. The state-owned enterprises that are providing you money -- that’s where the inefficiencies are going to be as labor gets more expensive. That’s where the inefficiency will be when the United States and other Western multinationals stop giving them technology to rip off. Another problem with Chinese state capitalism is it creates enemies, you know. There are a lot of folks around Asia. They see the Chinese economic miracle, but they’re begging the United States to maintain a presence.
Why? Because China does capitalism better than the United States? I don’t think so. We got to watch what people do, not what people say, what they do. Did you see that piece in the Wall Street Journal, talked about the disposition of Chinese millionaires, how over 50 percent of Chinese millionaires say they prefer to live in the United States than China? And yeah, it’s about quality of life. Yeah, it’s about the environment. Yeah, it’s about opportunities for their kids. It’s also about no rule of law in China and worrying about corruption and the sanctity of their assets over the long term. Your assets are okay tomorrow. The United States, we’re over-litigious. China doesn’t have that problem. You don’t have to worry about lawyers in China. You have to worry about someone ripping off your stuff or being forced out of the country or not being heard from again. Now, maybe Peter believes that those 50-plus percent of Chinese millionaires are stupid. Because ultimately, the United States is in decline, and so they shouldn’t be coming here, in which case, fine, but then China’s millionaires aren’t that bright. And those are the entrepreneurs, so we shouldn’t bet on them either way. You’re in a catch-22, sir.
You know, I’m interested in what the Chinese do with their money. I understand that the Chinese are saying that they don’t like the U.S. dollar as a reserve currency, but where are they putting their cash? In the U.S. Now, Ron Paul and Peter say they shouldn’t do that, and then we’re in big trouble. Okay, well, when are they going to stop? Because I don’t believe the Chinese are stupid. For me, that’s not an interesting analytical model. For me, what’s interesting is presuming the Chinese understand their Intelligence Squared U.S.
interests and they’re putting all that money into treasuries because they believe that’s safe over the long term. We are entering an environment of fear. We’re entering an environment of volatility. When things get more volatile, we don’t just bet on go-go-growth any more. We put our money under the mattresses. Central banks do that too. And in that environment, the world’s largest economy, also ultimately the most resilient, the United States of America. Thank you very much.
Thank you, Ian Bremmer.
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I'm not going to speak in Chinese. I think that the impression that China is doing capitalism better than the U.S. is understandable. That's because it's a very superficial impression. One reason why that impression is widespread is that China has been growing fast. But there's a reason China is growing fast. Low income countries tend to grow much faster than rich countries because they have much bigger growth potential. Just think of two things. Consumption of energy. Chinese consumption of energy is about one-fourth of the U.S. consumption.
So the Chinese, if they consume more energy, they will grow a lot faster. The same with steel production. China consumes one-tenth of the steel that the average American consumes. So if they want to reach American consumption, they need to build a lot of steel plants, and that makes economic growth. So first of all, do not judge whether a country does capitalism better or worse by just looking at its growth numbers. Second is that when you compare the two countries, the U.S. and China, you have to look at facts. This presentation is nothing but man [spelled phonetically] the facts. So what are the facts? If you look at corporate profits, U.S. companies are far more profitable than Chinese companies. And that is to think that we can trust Chinese accounting.
And then you look at tax collection. I have to disagree with Peter.
He says the Chinese, they collect less taxes than U.S. The opposite is true. The U.S. government takes about federal/state, about 30 percent of GDP. The Chinese government collects 35 percent. But that’s not the end of the story. Because in the U.S., you actually get something back from the government in the form of Social Security, health care, Medicare, Medicaid. In China, you get very little back because the bulk of government taxes are spent on government consumption, administration. If you go to China and get treated to a 20-course meal, you think great, that’s Chinese hospitality. But don’t forget, it’s being paid for by Chinese taxpayers. Not in the USA. You do not get that kind of treatment when you go to Washington, D.C.
And then you look at whether China’s growth is using less natural resources.
And here the U.S. is three times more efficient as China. Because for every dollar of GDP produced in China, China has to consume three times more in terms of its natural resources, water, clean air, land. The U.S. in other words, is a lot more efficient. Then you look at international comparisons, and here we’re using third-party numbers. And here, China does not look nearly as good as the U.S. Corruption. There’s a NGO based in Berlin called Transparency International. It publishes every year, a global index called Corruption Perception index. This index, the U.S. is ranked 24th in terms of, as the least corrupt country in the world. China is ranked 75. So if you think our average politician in Washington is corrupt, wait until you meet a Chinese politician.
Then you look at overall economic competitiveness because capitalism is known for its efficiency and competitiveness. Here, the U.S. is ranked not number one, number five. What about China? China is number 26. So way, way behind the U.S. Then you look at something like innovation ranking. The U.S. is number seven; China is 29. You look at ease of doing business. This is by the World Bank. Because, a real capitalist country should be one in which it is very easy to do business. Overall ranking for the U.S. is number four in the world. China is number 91. Then starting a business, U.S. is number 13; China is number 151. Getting credit, the U.S. is number four; China is number 67. The list goes on and on and I don’t want to bore you.
Finally, I want to imagine, what will the politburo members think about this debate? If for some reason, they’ve learned that in New York City, they’re debating whether China does capitalism better than the U.S. I think their first reaction is not to laugh.
Then the second reaction, they say the Americans are really easy to impress. You stage an Olympics. They think China is number one.
You build the world’s largest high-speed rail at enormous cost. They think the U.S. is falling behind. Then you lend the Americans $2 trillion. They think, China is definitely number one. So, the third thought that would come to their mind is that the Americans have very short memories, because when Sputnik was launched, everybody thought the Soviet Union was to dominate the world.
And then in the late 1980s, I think in this city, people should have good memories about who was buying the Rockefeller Center, right. Japan was dominating the headlines. Everybody thought Japan was doing capitalism better than the U.S. Now, look at where Japan is after 20 years. So, I think what we’re seeing here is not that China does capitalism better than the U.S.; we are experiencing a period of self-doubt. I’m sure the real issue is not about China. The real issue is about the U.S. The U.S. can do capitalism much better than it does, but China, at least for the moment and for the foreseeable future, will not be doing capitalism anywhere better, anywhere close to the U.S. in terms of competition, efficiency, even social justice.
Look, the United States has so many strong intrinsic advantages in terms of not just the matter of where the dollar sits but also, I mean, 30 percent of the world’s calories comes from the United States. People are increasingly fighting over food. That’s a real problem for China. The environment in China is absolutely falling apart. If you look at environment-adjusted GDP, it’s so much worse than the growth you see presently. We already heard from Minxin about just how much more profitable American multinationals are than Chinese SOEs, and yet that China is moving more in the direction towards SOEs, not towards private sectors, especially since 2008.
All of these things are problematic, and the ability of the Chinese to suddenly make a decision to go away from the dollar, you have to go into something. What exactly are you going into? You’re going into the euro in an enormous way. I don’t see that in terms of massive growth opportunities. You’re going into Japan? We already said we had two lost decades there. You’re going to go into gold or hard commodities? You can do some of that. You can only do so much. And as you go away from the dollar, you of course ruin the position that you have in the rest of those dollars. So China’s not going to do that. They haven’t, and they’re not going to.
Minxin Pei, take on the question of whether the existence of Social Security compromises the U.S. claim to be capitalist, which I think is Peter’s point.
I don’t think so, because capitalism produces efficiency, but it also has a lot of risks. Modern capitalist societies are a lot riskier than traditional agrarian societies because in a modern capitalist society, once you lose your job, you really have no source of income. You cannot grow your own potatoes. Let me just say something about China. The debt we know about -- because Peter says that in the U.S., you -- every citizen gets a lot of -- is responsible for a lot of government debt. The same thing is true of China, because the Chinese national debt is actually higher than the American debt. In China --
What are you talking about?
Okay. In China, the nominal debt is low, 20 percent, but the Chinese government knows better than Bernie Madoff, okay, does a much better job in hiding its liabilities. It would --
We owe them over $2 trillion.
No, two trillion dollars is not -- is foreign exchange reserve and I --
Well, that's three trillion, if you want --
No, no, that's three trillion.
Are you saying that liabilities exceed that?
Oh, the Chinese liability is about 80 percent of GDP. The U.S. public health debt is about 60 to 65 percent. The trouble with the Chinese people is that after paying taxes, having their government incur so much debt, they get no Social Security, they get no social protection, so that's why I think even capitalists are coming to this country, to enjoy some kind of protection.
Clearly Chinese citizens are doing better on average than they were before. There's no question, although if you ask where a lot of the profitability from that development has gone, it's gone to the United States. I mean, you look at Apple, you look at the manufacturing of the iPad, $9, $10 is captured by China, about 60 goes back to Apple and its shareholders, most of whom are American. I like that trade, right? I mean, there's a reason why American multinationals actually do better, but we have a problem in the United States with an increasingly large percentage of Americans, right, a book that I think you probably have read by Charles Murray, "Coming Apart," increasingly, they're not doing as well.
They don't have as much opportunity. We have to address that because if not, long term those folks are going to get upset. But they're not going to be as upset as the hundreds of millions of Chinese that will eventually face a crash and will have no opportunity, no option to really revolt against --
Second point, if you want to talk about Chinese profitability compared to American, look at the few -- the dozens of firms in China that are supposed to be some of the best in breed that have wanted to come to the United States to list. And they list, and they -- I
and we get inside the books, and we realize they're completely cooked, and they get in massive trouble. And even you know sort of billionaire brilliant folks like John Paulson, who figured out the big --
-- absolutely lose lots of money on that. But yet we do not have -- these companies are not anywhere near as sustainable or profitable as the Chinese government makes them out to be, and that is a fundamental structural problem.
Well, people inside China are not very optimistic either about the country’s future prospects. The high growth period for China is over. I urge you to read the World Bank’s latest report on China called China 2030. It’s free for downloading on the World Bank’s website. This is what it says. From now on until 2030, if China does well, its average growth will be somewhere between 6 and 7 percent.
And if China does not do the set of reforms the World Bank recommended, probably China cannot even achieve a much reduced level of growth because China is coming into an era where savings will be a lot lower. The population will be a lot older. The environmental costs will be a lot more visible if you -- I’m sure a lot of you have been to Beijing. In the future when you’re in Beijing, you should bring along a space suit.
Yeah, I don’t think that China has that kind of luster internationally. And it’s part because the Chinese system is really one that is focused on China, period. One of the major problems China has is that for them to build the state capital system, they have to support China and the Chinese market. Where the system that the United States supports is really one of having as much access to global competition in markets as possible. And ultimately, that’s a much more efficient system. The United States corporations benefit from it. We’re the ones who are pushing the WTO. We’re the ones who have been pushing the Doha around. When that doesn’t work, we go for the TransPacific Partnership, the TPP.
The U.S. still makes -- does a lot of things wrong. That’s like this broader debate. The U.S. does a lot of things wrong on capitalism but still vastly more effective than China. The U.S. has a lot of problems in human rights, but China isn’t in the same league, right, not on the same league sheets. Let’s be very clear. And while I think that a certain level Intelligence Squared U.S. - 33 - 3/14/2012
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of human rights abuses facilitates rapacious capitalism, especially in the short term, in the long term, it will bite you in the hiney. And there are other places that you get problems, too. I did talk about transparency and the fact that places like Facebook and Google and Twitter are a problem for China because they want to own that data. They want to control it. They want to shape it. They want Chinese state Internet just like they have state capitalism. That’s a problem for them. When I think about responses in terms of general transparency, in the United States you do actually know largely what your officials are up to. Solyndra was a disaster. It was a bad thing for the United States. Peter and I will agree on that. But we found out about it. And we found -- on balance, people got egg on their faces.
Here I would say the advantage is emphatically on the American side because we have immigration. China does not and China has one of the most rapidly aging populations. And the lower reaches are not being replenished with the one-child policy, so it’s going to have a huge burden of taking care of elderly people and not have younger people coming in on the bottom to support them. That’s going to be a giant problem.
I agree with Orville, not surprisingly. And furthermore, it also leads China to export not just capital when they try to extract commodities for example in sub-Saharan Africa, but also labor because they need to do something with those men. That’s a problem for African countries that want to have employment in addition to Chinese cash. And eventually it leads to a backlash. Again, Chinese state capitalism is a problem not just because of domestic inefficiencies but because of the backlash it creates globally. That’s one we haven’t started to experience yet because China isn’t big enough yet. But as it gets bigger, it’s going to get squeezed.
question is as China, like other low and mid-income countries, moves up the value chain, it’s going to eventually have to start to turn ideas into products instead of just assembling products. How do you expect that to occur in China, given the current status of intellectual property rights and in other related terms like that where it’s just very hard to create ideas and own them in China?
This is a huge problem for China. And China is creating intellectual property, and as it does, I think it’s going to bring itself to heel. One hopes it will, and it simply must or it can’t be a world player. But China must move up the value chain, because the labor is getting more expensive. They’re just lower down than we are. America doesn’t do much manufacturing anymore, not as much as it used to. It’s had to move up the value chain into knowledge and information technology. That’s China’s challenge too.
No, I think that it’s absolutely a problem, and I guess I would say that I’m more skeptical than Orville they’re going to be able to do it. I see the problem as you do, in part because the educational system doesn’t support it. They create a lot of engineers, but they don’t create a lot of entrepreneurs and a lot of innovators because they’re still teaching by rote as opposed to teaching students to actually question, you know, sort of what’s behind. And there’s a reason why so many folks that create things in the United States are college dropouts or, you know, sort of came from these kind of unusual background systems. They really want to know not just what four times four is but also why it works that way. That doesn’t work well within authoritarian system. Again, human rights are a part of that. Transparency is a part of it. I think when you look at the U.S. system, you have to put it all together. It works in part and it’s resilient in part because it’s so integrated, the political and the economic together. You can’t take the politics out of the Chinese economic system. If you could, they’d be doing much better right now and they’d have a longer term trajectory that I’d be much more supportive of.
As the World Bank’s prognosis shows that the slowdown is coming no matter what. The debate is when it’s going to happen and the speed at which the slowdown is going to happen.
What the Chinese government is going to respond -- there are two paths. One is to double-down and to do the things they’ve been doing, that is a lot of investment in infrastructure that’s going to yield increasing returns and growth will continue to slow. And that will be a dead end. The other will be a very different trajectory; that is, to really become capitalist, which means to increase domestic consumption, to allocate capital much more efficiently, incidentally, in China, the capital market as we know it does not exist. Most of the savings is allocated through the state-controlled banking sector. So, they’ve got to change that. And they’ve got to privatize state-owned enterprises -- lots and lots of things that can be done to avert that kind of dramatic slowdown. But that means China will have to do capitalism.
if you are a private entrepreneur in China you cannot go into -- you cannot open a private bank. You cannot get into telecom services. You cannot get into energy. You cannot get international resources. You cannot get into 14 other very important sectors because these are the sectors reserved for state owned companies. You cannot get bank loans. You don't have secure property rights. If you get into a dispute with another entrepreneur, with another businessman, whether you win that dispute does not depend on whether you have a good case, it depends on whether you know the communist party secretary in charge of the legal system.
This matters. I know that the Chinese are doing more patents. They're small, they're engineering patents, there's a slight improvements on processes. Don't take away from them. They're very smart in China. They're being educated well. They're great. But if you want to talk about the game changing stuff that you want to bet on that's going to make the world work over the next 20 years, overwhelmingly that stuff is being driven in the United States of America. I don't know if it's Bill Gates's new battery technology that's going to work and be the next game changer, it's going to be in biotech, it's going to be in nanotech, but if you want to make that bet -- and, by the way, the Chinese central bank wants to make it, too -- you're going to make it here. I love the fact that we live in a society as well where broad ideologies can come together, work together, and make lots of money. I applaud the fact that we live in a place that a guy like Peter Schiff can make an