Lecture 4: Fusing Capitalist Economics with Communist Politics: China and Vietnam

Lecture 4: Fusing Capitalist Economics with Communist Politics: China and Vietnam

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00:07
so today's agenda we're going to start with why why am I talking about China and Vietnam we're then going to talk about reform in China in the period leading up to the 4th of June 1989 which is the [ __ ] Square massacre we'll then talk about gentlemen in the 1990s that will lead us into a discussion of what I'm calling the sequencing debate of political and
00:38
economic reform once it was clear that communism was going to be replaced by capitalism there was a huge debate about well is it better to have political reform first or economic reform first try to do them together and we'll talk about that sequencing debate which will lead us into a larger discussion of what since the 1950s has been known as modernization theory the thesis that economic modernization will eventually
01:10
produce demand for and the establishment of democracy and that will then leave us to think about the future so China and Vietnam today China so far has built the equivalent of Europe's entire housing stock in just 15 years in November 2015 Beijing replaced the substantially larger 1,300 tonne santwon bridge in
01:40
just 43 hours between 1996 and 2016 China has built 2.6 million massive roads including 70,000 miles of highways connecting 95 percent of the country's villages and overtaking the u.s. as the country with the most extensive highway system by almost 50% over the past decade China has constructed the world's longest high-speed rail network 12,000 miles of rail lines that carry passengers between cities at speeds of
02:13
up to 180 miles per hour China now has more high-speed rail tracks than the rest of the world combined so that's one of any number of video clips one could pick pick to just give a snapshot of the incredible transformation of the Chinese economy over the last couple of decades and indeed over the the last decade I went to Beijing last year for the first time
02:41
in about 12 years and 12 years ago you know there were lots of pot holes in the streets there was still rickshaws on the highways you go you go to Beijing today it's just miles and miles of skyscrapers and every conceivable every conceivable multinational is there you just it's it
03:14
it looks like just West Los Angeles Times you know a hundred so you can't overstate and it will put some statistics up in a little while but the the economic explosion in China since the 1970s has been phenomenal and then here's another snapshot this is Vietnam if you talking about the 80s
03:45
what Vietnam looked like we go to cities you didn't see the light electricity got no car in the street Vietnam was so isolated from the wall with the dáil Moy economic reforms of 1986 the government hoped to move toward what is now called a socialist oriented market economy when the Vietnamese government asked for hands-on advice the IMF did not refuse the call
04:17
little T don't put in number boy yeah I'm gonna bash our window I Ching they might repeat Nantucket okay I think they if you use the analogy Vietnamese economy sa eco flying up there are two wings one is internal institutional reform and the other is opening to trade free to start their own companies the Vietnamese people created
04:48
more than 30,000 private businesses in the first ten years spurring growth that averaged seven percent throughout the 1990s if you look back in the late eighties and early nineties we have the first FDI law ever we opened up the opportunity for newly established private firms to engage in international trade and that was complemented with a major push to attract foreign direct
05:19
investment into Vietnam the economy has grown at about seven percent per year since 1990 second globally only to China so these are the two most successful examples of post-post communist systems that have remained authoritarian but have been transforming their economies into capitalist arrangements and that
05:50
differentiates them from the other post communist systems that have retained authoritarian rule if we think about North Korea or we think about Cuba they have not transformed their economies so the the this is one thing that differentiates them from the other post communist authoritarian systems post communist economies retaining communist authoritarian political systems and they
06:24
account for a large part of the economic success in the world in the last decade just to take one or two decades it's just to take one example one of the one of this that one of the encouraging stories of our time is if you if you take the long view of things the number of extreme number of people and even the percentage of the population both living in extreme
06:55
poverty has really gone down over the past two centuries and much of that much of that decline has come in the last few decades of course this is a worldwide indicator but if you look at where's what is accounting for most of this decline you can see that the main action has been in in East Asia so the this is the blue line up here where poverty
07:27
again this is a number of people living on a less than a dollar twenty five a day which is a World Bank's definition of extreme poverty so most of the changes of course have come in the developing world but if you compare East Asia for example to Africa in East Asia is by far the lion's share of that it would reduction in extreme poverty now of course not all of that is the is
07:58
China and Vietnam they're countries like South Korea that have massively improved there are other countries in that part of the world not to mention Singapore where poverty rates have decreased massively nonetheless China and Vietnam are relatively impressive stories on this front as well this is a picture of reductions in poverty in Vietnam and if
08:30
I'd had gone back before 2010 the numbers would have you know there would have been higher up there as well but you can see even in this last difficult decade and despite the fact that ethnic minorities within Vietnam and not doing as well as as others we've seen very low rates of people living in poverty in Vietnam China you can see the the headcount living below the
09:03
official poverty line is the red line the the headcount below 1.9 US dollars a day is the Green Line again you can see massive reductions in poverty by many estimates the they vary but many estimates say that since the since the reforms in China I should in in the late 1970s somewhere between 400 million and
09:35
half a billion people have moved out of poverty now there's another line on this chart which I don't believe which is the Gini coefficient which measures is a measure of inequality and I don't believe I believe that the inequality in China has gone up a good deal more if you look at here this is comparing the top and bottom quintile but again this is data
10:05
provided by the Chinese government you can see that the in per term of per capita income they're showing an increase in inequality from 3 times to about 8 times and land and consumption less of a change so I would just say two things about these statistics that and a reason these are common least based on Chinese government statistics my guess
10:35
is the that the inequality in China is a lot higher and particularly this is this is comparing quintile so that's a top 20% but just as in the US and just as in many other capitalist countries that we'll talk about later in the course if you look at the top 5% the top 1% or the top 0.1% you're going to see massive increases in inequality and that puts on the table a dilemma that's going to be worth thinking about as we progress
11:07
through the course and talk about some other countries which is that while inequality within countries just about anywhere in the world has gone up over the last four decades worldwide global inequality has actually come down and the number of people living in poverty has come down dramatically as we've seen but if you if you read say the Millennium Goals or you go to the World Economic Forum meetings which I
11:39
have done from time to time you'll see politician after politician and policy wonk after policy wonk standing there saying we need policies to reduce poverty inequality it's like almost one word poverty and inequality is one word but this is what we're seeing here is something that's going to come back to us in in multiple ways during the course it's not obvious that all good things go together and it may well be the case
12:09
that the price of reducing inequality the price of reducing poverty is tolerating significant increases in inequality we have to think about those trade-offs in various settings in any event in both China and in Vietnam you've seen massive decreases in poverty big increases in inequality in not as high by most measures in Vietnam again
12:41
though it's hard to know what statistics to believe on these matters but most scholars seem to think this less inequality in Vietnam than in China so the first answer why are we talking about China and Vietnam today is that by virtually any measure they have been economically successful but then the second and in some ways more interesting reason we're going to look at them is they challenge a lot of accepted wisdom
13:12
about capitalism democracy and the relations between them because here we have two very repressive authoritarian systems transforming their economies into successful capital once so that's the puzzle we're going to be wrestling with for the rest of today's class in one form or another so let's think about what has happening in
13:43
China before gentlemen after Mao's death in in 1978 things were going to change very rapidly just to give you a sense up until the end of the Cultural Revolution in China this is this is a picture of comparing Chinese and Japanese per capita GDP and as you can see this is a period of explosive economic growth in Japan after World War two of course from a very low base because the whole
14:18
economy had been destroyed it's a little when people talk about the Japanese minute miracle it's a little bit misleading if we took this back to you know 1925 the this not line would have come down because of the that collapse produced during the war so it's not from it's a recreation to some degree of what had existed before the war but nothing like the levels that were developed that were seen in the in years after but as
14:49
you can see per capita GDP in China was basically flat there was no economic development to speak of 1978 Mao is now dead the third plenum of the Communist Party Central Committee led vice premier soon-to-be premier Deng Xiaoping calls for officials to to start liberating their thinking to start seeking truth
15:18
from facts an ironic statement perhaps in light of our own discussions of fake news and and manipulation of the truth that we're coping with today but but to innovate an experiment in in the economy and officials were instructed this is when they started you know China had been very closed and inward-looking and they they began going in large numbers abroad they started
15:52
applying for courses at places like you know MIT Business School they started trying to learn from other development models and this is going to be the beginning of experimentation with new forms of capitalism this is also when the the big special economic zones in China were created these these massive islands of experimenting with capitalism
16:25
if you like most most of the world's special economic zones and we'll talk a bit more about them in other countries later are sort of industrial parks they are you know 40 or 50 company firms they get some preferential tax treatment and the idea is to attract foreign capital the ones being set up in China were enormous they would sort of giant cities with schools and shops and people lived
16:57
in them in their entire lives and the idea was to experiment with capitalist economics in self-contained ways this is also when they start opening up to foreign direct investment this is when companies like Cummins truck engines come to China one of the biggest multinationals in China today started in the in the late 1970s early 1980s and so
17:27
this seemed to be a little bit like the Prague Spring and indeed in the late 1970s people started talking about the Beijing Spring and there was much more criticism of the government tolerated people started publishing things that you would have been thrown in prison for five years early or even olia and there there was something of a Thor there was something called the
17:58
democracy wall in in the she'd on district of beijing was created a kind of a kind of graffiti wall if you like on which people publish criticisms of the government but the the vast majority of the political criticism was backward-looking it was criticism of the Cultural Revolution criticism of Mao criticism of what had been done in the past mistakes that had been made in the past and of
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course that wasn't going to stay that way and so before long the democracy wall protestors started shifting their it their attention from attacking the past to attacking the current leadership in China and again at a a lot of demands
18:59
now for more democracy we Jinzhong was a protester who came out and made very strong criticisms of the government and this went on until late 1980 only 1981 and then there was a lot of pushback from the regime and so much of the 1980s were this this era of testing political testing by student movements there was
19:31
there were organization of student groups on Chinese campuses there was a lot of criticism of the government interspersed with push backs so dang came out and made very clear that when he was talking about experimentation with reform he was talking about economic reform he was not talking about reforming the political system and he reaffirmed what he called party rule and
20:03
the Socialist Party he focused on technical questions his four modernizations had to do with agriculture the industrial economy the military and technology technological innovation they started attacking what they called spiritual pollution there was an anti spiritual pollution campaign in 1983 and there was an anti bullying realization campaign in
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1987 and whoo-yah bong was who had been a member of the Central Committee who'd been one of the most energetic reformers was actually fired from the Central Committee of the Communist Party so it was it was this period of back-and-forth but a lot of growing protests nonetheless in the 1980s and it was also a time when the economy wasn't doing
21:06
that well particularly for consumers in urban areas we saw a lot of inflation and that led to estera tea programs cutbacks on on spending by the government which produced further escalation of protests although the economic reforms continued so if you look at that foreign direct investment in China you can see it starts it's it's very low there but it's going to
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accelerate dramatically over the 1990s so then in in in in 1989 in the summer of 1989 if somebody had said where is where is there going to be political reform it would have been a pretty good bet especially given what was going on Eastern Europe it would have been pretty a pretty good bet that there was going to be significant reform in China the
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student groups were active just as in in in in many European countries and this erupts in nineteen thousand June 19th and square perhaps as many as a half a million even more in the history of communist China there has never been anything like this for the first time in huge numbers the ordinary men and women of Beijing the old drivers join a
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student protest in their support to what is now taking on appearances peaceful popular uprising against the oppressive communist rule protests will produce results the government will respond to the students demand for meaningful dialogue as opposed to cosmetic reforms that's a student's lon
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so these protests were going on and it soon became clear that the regime was not going to tolerate them and tanks started appearing in gentlemen square [Music] so that pig that's not that different from the video we were looking at outside the White House in Russia when when Gorbachev claimed when Yeltsin climbed the tank and it there was the real expectation among many of the
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protesters that the Chinese army would not attack its own citizens and they certainly were appeals going out to that effect but they turned out that they were wrong the noise of gunfire rose from all over the center of Peking it was unremittingly on the streets leading down to the main road to tian an men square furious people stared in disbelief at the glow in the sky listening to the sound of shots heading down the road was a
25:31
hazardous business but hundreds of people cheered as buses were set alight an army trucks caught fire too they yelled and shouted and then as troop lorries were seen moving down the road there was gunfire from those lorries the troops have been firing indiscriminately but still on the streets the bicycle rickshaws scooped up the injured others
26:01
were shunted onto bikes and pedaled to hospital many were carried away by frantic local residents there was confusion and despair among those who could hardly credit that their own army was firing wildly at them young people was singing the Internationale to a background of gunfire after hours of sleep and facing a line of troops the crowd is still here this shooting stuck the killing and down with the government
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a huge volley of shots just as I left the front line caused panic the young man in front of me fell dead I fell over him two others were killed yards away two more people they wounded on the ground near me in the streets many came up to us shaking with anger and disbelief and fear many were terrified saying there would be retribution there was not one voice on the streets which did not express despair and rage tell
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the world they said to us so that was the beginning of a massive crackdown huge numbers of people we never really got statistics we believed as the number of people were killed at cinnamon but it was very large numbers of people were killed the huge numbers of people were imprisoned after that massive political crackdown and in sharp contrast again
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this is June of 1989 when the the revolutions all over Eastern Europe the thaw is going on the Soviet Union is not intervening in the liberalisation movements in Eastern Europe and of course five months later the wall came down in Germany but China went a very different path that the massive political repression of this dissent but
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it did not stop the economic reforms and the economic transformation and as you can see here the this is just foreign direct investment in China it just throughout the 1990s it increases the fact that it's decreasing as a share of Chinese GDP tells you how much the economic the domestic economy is developing as well so that even though
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as a as in in absolute numbers foreign direct investment is going up by leaps and bounds it's a declining share of the growing Chinese economy which is becoming a powerhouse and here you can see the the astonishing growth rates that have been recorded in China since 19 since 1989 you can see by 1991 they
29:15
were recording already double-digit growth rates and they have been the highest growth rates in the world virtually every year since if you look at manufacturing in China and we'll talk more about manufacturing this is between 2006 and 2016 as you know modest increases in in the US and Japan
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just three-fold increase in manufacturing in in China just just absolutely dramatic industrial takeoff comparable story on a smaller scale about Vietnam transforms itself from a an extremely poor country into an a very successful middle-income economy it's still mephista Khanna me in East Asia
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but it is second only to China in terms of economic growth so these huge success stories and they have been studied to death there have been armies of scholars trying to understand the reasons for this success and in the readings I gave you you get some sense of the variety of explanations that are out there that are trying to account for the dramatic
30:48
success in China and Vietnam and most of these explanations suffer from what economist and political scientists refer to as the pathology of selecting on the dependent variable that is everybody focus all of their attention on China at Vietnam and trying to look for characteristics that explain the outcome but of course that's not how you do social science so you have to think about the independent variable because if you select only on
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the dependent variable namely in this case economic success you may be missing what's really causing it by looking not seeing other countries that have done the same things that have not succeeded so for example Alexander Gershon Krone was famous for the idea that late developers have an advantage they have an advantage because they don't have to necessarily go through all the stages this is sort of the opposite of a first
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mover advantage which we talked about about in tariffs in in the EU so the idea is that late developers can skip some of the stages you look in in Africa you can create a banking system without banks today because people couldn't do banking on their cell phones right they don't have to go through all the stages so that this is this is one so these were relatively late developers well they were relatively late developers but there plenty of relatively late
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developers that haven't had this kind of success all over all over Africa or in much of Latin America elsewhere in East Asia so the fact of being a late developer alone is obviously not the advantage they were they were predominantly rural at the start and that that they saw the argument this is in the malevsky and London paper the fact that they didn't
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have any efficient urban economies to dismantle this is they didn't have a big inefficient economies to dismantle made it easier that as they orbit eyes the urban eye in relatively efficient ways again there are many many predominantly agrarian countries that have not that have not been as successful as them people point to Confucian values you know
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Confucianism above everything else values order so they say oh well it's it's Confucian values but of course there are countries with Confucian values that have not been particularly successful economically the most obvious and dramatic illustration being North Korea Confucian values haven't done anything for the North Korean economy education both China and Vietnam have
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made huge investments in education they're making bigger investments for example than we are making in education K through 12 education but also technical education science education the few things to say about that most of the investments in education have become have have come later after the economic takeoff but also there are a country you know Russia is an extremely well-educated population countries
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Ethiopia has now got every child in school they've one of the first African countries to have such high levels of K through 12 education but they have not been replicating this success there was a less entrenched command communist system the molesky and London Peace makes them have some put a lot of credence in this idea that in the the Soviet economy for example was this
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massively inefficient but deeply entrenched communist economic system that once they started to dismantle it the whole economy fell apart China and Vietnam partly because they were mainly rural economies in the 1970s didn't have these a big entrenched communist economic command economies
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that had to be dismantled they they involved gradual reform they did not and we'll come back to this in more detail in a few in a few minutes but they did not simply replace the communist system with the with a capitalist system in the Soviet Union there was no choice because the communist system itself just imploded it just collapsed it became completely dysfunctional and so they
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were starting from Ground Zero in both China and Vietnam there was a a gradual experimental approach as I've already mentioned in China in the special economic zones opening their economies to foreign direct investment which enabled the creation of joint ventures with foreign firms and allowed the economy to grow in particular sectors
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not trying to reinvent wholesale a new system experimentalism and decentralization they'd evolved a lot of power to make decisions about economic performance to regions provided that they delivered what was required by the central government there was much less micromanaging from the center of how the different economic
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enterprises were run and how local officials met their goals again putting less demand on the central leadership to know what to do in every circumstance when very often they didn't know what to do and they knew that they didn't want didn't know what to do competition within the state sector and between the state sector and the private sector so they created big state-owned
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enterprises particularly in China but they introduced competition among them and they required them to compete in the private sector and they require and they they shut down inefficient state companies it's it should be said that it's it's very difficult to get a grip on the differences between the state sector and the private sector that means very much in China partly because many
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of the many of the private sector companies get funding from state banks but also because many of the top leadership of private sector firms are members of the Communist Party and have to be members of the Communist Party and so that you know that raises a question well they might be nominally private but what does it mean in terms of their influence ability by the party on the other hand the flipside of that is that
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it means that this the leadership of the Communist Party is hearing a lot about the needs of business all the time because there are many business people business leaders are in the Communist Party and making the case for what they need so there's the the system is is relatively competitive for a a state sector dominated economy export oriented
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growth model again this is pointed to by many scholars that this is this export basically producing for foreign markets manufacturing goods for foreign markets has been extremely successful there are many other countries in the world again that have produced for foreign markets that have not been as successful relatively good accountability and the rule of law so the the system of
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accountability it's interesting in China while you can't attack people for political reasons you can attack officials for being inefficient and corrupt and that is usually being the the path by which people have pushed for accountability and reform u-hall Wong in the chapter I I put in in with the readings from his book tying the autocrats hands points out that this
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had been a pretty effective increase in the demand for the rule of law with respect to commercial matters not political matters commercial matters in the sectors of the economy that are dominated by foreign investment and the reason he gives and I think it's it's plausible the reason he gives is that domestic firms have access to elites to solve their problems through informal
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networks the so called why she relationships that they build the distinguishing guanxi from corruption is often easier said than done but they have access to informal dispute resolution mechanisms whereas the foreign firms do not and so the the parts of the economy in which the foreign firms are big have been where there's been a lot of demand for the creation of courts to resolve disputes
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and wong who's a very impressive political scientists harvard makes the case that it's this demand for the rule of law as a condition for attracting foreign investment that has fed that development of course the the subtitle of his book is tying the autocrats hands something and and the rise of the rule of law in china I was recently at a panel with him where he said maybe we should now be talking about the rise
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decline of the rule of law in China because as that olia shy slide showed you foreign investment is becoming a less important part of the Chinese economy so thanks to the extent that the demand for the rule of law is coming from the foreign investment sector it might be diminishing leadership so leadership several people have noticed
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that if you look at authoritarian systems that one way to classify them is that those that have managed to renew themselves will find mechanisms of renewal versus those that have not so if you think about the Arab monarchies in the Middle East they essentially you know they stagger on until the King dies pretty much that's what happens in monarchies or you know dictatorships in Africa and Latin America they stagger on
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until the dictator dies you know or and even in in the Middle East you know Assad is followed by his son you get another Assad and that's true in some of the the communist authoritarian systems like North Korea you know Kim jong-il Kings on food you know just again you have you have aging ossifying leadership's that don't manage to renew themselves and so kind of drag
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Li a country into them and best as they become geriatric whereas some authoritarian systems seem to have come up with mechanisms to renew themselves and this if you said if you said to most people maybe most people in this room who are the leaders of Vietnam most people would have no idea who they are it's a it's a triumvirate they they do get replaced over time or you think about Burma
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again there's no cult of personality the these are these are countries in which they have renewed themselves and in China often mal it seemed like they had really figured out a way to avoid the trap of charismatic leaders indeed boshi lie had been a member of the Communist Party who was quite charismatic and if some years ago was kicked out and thrown in prison and his
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wife and alleged to be involved in a murder many Western scholars interpreted that as he was too charismatic and the Chinese didn't want they tried charisma they saw where it went with Mao and they were into this model where people would not not be able to be at the helm for more than a decade and it's so it seemed like to extent that you need young vigorous leadership that countries like China and Vietnam had solved this problem which is hard
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for authoritarian systems to do because there's no automatic mechanism of renewal and if a charismatic figure comes along it's very difficult to get them out so there was another reason people pointed to so this is I think 11 reasons you could pull out of those review essays and no doubt people could come up with more and the truth is nobody knows there's no silver bullet
45:47
yet it's the there are some combinations of these things they're things like luck but these are out there as the main explanations for why these these countries have been so successful right it then puts on the table the question well how sustainable is this success should we be expecting it to continue going forward and can we have long-term
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successful capitalist authoritarianism this if you like is the question put on the table by the success of these countries now over a period of two decades beyond the wildest dreams economically of any observer and maybe anybody even in those countries along with very repressive political regimes and so how to think
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about that well there's some questions to wonder about with respect just to the economies one is that since 2008 we have seen a resurgence in the growth of the state sectors of these economies this is partly as I intimated right at the beginning of today's lecture that now that the Washington Consensus is in bad odor people are now talking about the Beijing consensus until 2008 China made
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no attempt to export its development model elsewhere they'll kind of back on their heels about the Washington Consensus that is no longer true not only is the state sector in in the Chinese economy expanded they are now training people from many developing countries in economic management pushing a very different model of state-led
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growth from the model that was being pervade in the Washington Consensus and and to the extent that the state sector it's going to be less efficient that raises questions about how sustainable these growth rates are because even though relatively efficient compared to other command economies they're less efficient than the private sector in
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those countries and elsewhere then there's what Steinfeld in in that playing our game book that I put on there calls the smile curve of profitability and so this is this is the idea which he actually takes from somebody called Stan she this is the idea that if you look at if you look at where the the biggest profitability and manufacturing comes
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from most of it is either at the R&D phase research and development upstream or it's in the manufacturing and marketing downstream if you think about where is the where is the money made out of an iPhone right it's it's people who come up with the basic technologies make a lot of money and then the people who put it together do the marketing make a lot of money so the solid curve here what it's telling you is that the man you need to be made in the manufacturing
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this is just low wage labor you know and these are these people working on assembly lines that's not the source of great profitability but that has been where most of the economic action has been in these economies the dotted line is that realizing that the Chinese have started to try and and move further up the smiley curve in both directions so they tried to get more involved in
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research and development and more involved in marketing and and sales but of course they do that largely by imitating sort of creating if you like generic versions are copying technologies and then copying marketing methods and if you do that that tends to move it means everybody else can do it too and so you if you like are sawing off the branch you're sitting on and so it's not clear that they're going to be able
50:27
to continue to be profitable picking winners the economists always criticize central planning because governments pick winners and governments don't know how to pick winners they don't know where are going to be as the successful parts of the economy that is less of a problem in the early stages of industrialization you know what you have to do you have to build cities you have to build roads you have to build housing you have to put in electricity you have
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to put in water once you get into complex economies it's very much more difficult to know where the successful innovations are going to be and where they're not going to be and so the government's might start to make a lot of bad bets as government's often do when they start to pick winners so as as growth becomes more complex it becomes less likely that you're going to have even relatively efficient political
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leadership successfully keep picking winners in the economy changing leadership and corruption the story I told about China's leadership in the last five years seems to have gone out the window so now as Donald Trump complains she's limping might be there for life and Trump clearly somewhat envious about
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that idea but the the ten-year term limit has now been abandoned at his request he's and he is a very charismatic figure certainly the most powerful Chinese leader since Mao and so it may well be that the the mechanism for ensuring leadership renewal is breaking down or has perhaps even broken down in Vietnam they had almost a
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separation of power system with different leaders responsible for different parts of the political and legal system and that also seems to be breaking down or at least under strain from reports that it's possible to get I already mentioned you have Wong's point that to the extent that their rule of law in the economy was dependent on demand from the foreign sector that might be going away as foreign
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investment as a proportion of the Chinese economy is actually shrinking and given the trade was a comment that we're now in they might be shrinking a lot further than we talked about before and so that plus the leadership changes might mean that we're going to see increases in corruption again inefficient management different forms of corruption then the the next thing and this is going to now we're
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going to start transitioning to talking about politics is that when you create big industrial workforces working on assembly lines eventually they start to make demands they start to want higher wages and this is so-called flying geese theory of economic development this is the idea that capital is going to go to wherever labor is cheapest and so if you
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look here this these these are wages in China Mexico and Vietnam what you can see is that you know since the beginning of this century wages in China have gone up quite dramatically and they're now substantially above wages in Mexico and wages in Vietnam which while they've gone up have gone up nowhere near as much and so if you look at this is
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called the labor cost index which basically measures the cost of producing one unit of output you can see that there - the cost of labor has gone up in China quite dramatically during this century and that is meant that the geese are flying out of China they're flying to places where labor is cheaper this is the Nike plant in Ho Chi Minh City which
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I visited in March of 2001 it was run by aide a Vietnamese management company with about 20,000 Vietnamese women working in it there the whole thing consisted of it looked like four giant football stadiums this is about an hour's drive outside of Ho Chi Minh City which used to be Saigon it looks like four giant football fields
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but all of them built out of aluminum you can see they could be packed up and put into a you know into a bunch of planes and flown off to somewhere else at relatively low cost and here some of the people working what strikes you about these please pictures what's notable about these pictures
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yeah they're all women yeah oh my all women and the management and they're all Vietnamese the management of all Taiwanese and old men by the way almost all men are yeah what else is striking and if the picture is quite captured it's it's incredibly labor-intensive this this these machines looked like that twenty or thirty years old making a Nike running shoe is is split into about you know 35 different tests one person
57:00
is cutting the little pieces one into the cut with a cutting machine one person is putting drew on what you know there it's an unbelievably labor intensive because labor is so cheap that after all is why they went there and indeed I spend the day there and walking around with a mid-level manager and I asked him his personal history and he said he said well I used to manage a plant like this in China so I said well
57:32
what's the biggest difference between managing a plant like this in China and manage a plant like this in Vietnam and the answer was the Vietnamese argue less and work harder and I'm sure that was exactly true because the Chinese workers had been doing this kind of work for longer and they had different you know had started developing aspirations and so so Nike had moved the plant to
58:01
Vietnam and so the idea would be that of the flying geese theory that eventually demands for higher wages will cause the geese to fly and you know Vietnam will get this benefit for a while but then the geese will fly to Cambodia or wherever the next places or maybe Zimbabwe now this is also exacerbated in
58:34
the coming economy by the the probability that a lot of these jobs are going to eventually be going to technology that that is the technology is going to become so cheap that it will no longer be worth it to pay even starvation wages and so the geese might stop flying all together but it's it's again going to put stress on economies that are dependent a lot on manufacturing for feeding their
59:04
populations slowing growth and regime legitimacy a lot of people have argued that the legitimacy of these regimes depends upon their delivering growth yes they don't have election so they don't have political accountability but people have been satisfied because the standard of living has been going up they've been doing a lot better economically they've become they're employed and they they have prospects have had prospects
59:36
for upward mobility as growth slows in these economies which almost every economic projection predicts that it will that's going to become harder and harder to sustain and so you're going to get pressure and maybe resurgence of political dissent and they're going to be strains on those economies so despite the many reasons that people cite for the success their reasons also to wonder
01:00:07
how sustainable these models might be and this leads us to thinking about the relationships between political and economic reform during the transition in Eastern Europe in 1989 people started worrying a lot about this and this was the debate these were the debates about shock therapy you know should we have a dramatic reform right away get the pain
01:00:37
over with and then do political reform or should we do political reform first or do them in tandem and I put three people up here because they are ideologically from very different places Adam svorski is a former Marxist he wrote a book called democracy in the market in 1991 Hannes corn either wrote to a free economy is a riff-off Hayek's road to serfdom so he was a kind of libertarian and Jeff Sachs was a kind
01:01:08
of middle-of-the-road policy wonkish economy but they all made the same argument which was essentially this if you if you think about if you think about an collapsing communist economy as the old system is dismantled eventually people are going to be thrown into distress and it's going to get so bad think you're gonna per capita income is going to fall below the poverty line eventually things will get better
01:01:39
yeah but if what if you democratize here then all of these people are going to be angry and they're going to use their democratic rights to stop the reforms and so instead of turning the corner you're going to just keep crashing down and so the the shock therapy people said no let's let's not democratize until this point once the worst economic pain has been experienced so these
01:02:11
technocrats had the same kind of hubris as we were talking about last time they really thought that they understood everything about market economies but they got a lot of things wrong for example both paths have turned out to be successful if you compare Poland that had shock therapy with the Czech Republic that went with gradualism they've both been there among the two most successful yet former communist
01:02:41
economies in Eastern Europe of course Poland's four times the size and and so on but they they both have had very successful development paths so it's not cleared made that much difference the other thing that it ignores and this is really important it's not only the losses from form who mobilized it's the widows who mobilize as well the people who get things out of the reforms don't want things to go away and so it's far from
01:03:14
obvious that democratizing why you're doing Economic Development is only going to empower the people who want to stop it on the contrary it might actually help economic reform go along the economic advantages of gradualism get lost so one of the big secrets of success in China and Vietnam was this two-track pricing system where they
01:03:44
created a second economy next to the state sector not instead of the state sector so basically people were told if you couldn't produce two at the government set price what's your quotas required you on top of that you can produce as much as you want and sell it at market prices and so that was the way one of the ways in which a market economy was created alongside the socialist sector and didn't depend upon its destruction
01:04:16
those are the kind of advantages you forego when you go for when you go for shock therapy and this leads to a broader set of questions about modernization that I just want us to end with which is that the old modernization theorist said that economic development would produce Amanda inevitably produced demands from them for democracy and I'm giving here one just you can find a million statements like this but here
01:04:49
the person saying the effects of socio-economic change rising literacy income and urbanization rates along with the improvements of communications technologies reduce the cost of collective action D legitimize the autocratic rule and foster demands for greater democracy as a result authoritarian regimes which have have a relatively easy time ruling ruling poor and agrarian societies find it increasingly difficult and ultimately impossible to maintain
01:05:19
their rule once socio-economic development reaches a certain level that was a scholar talking about China five years ago the trouble with modernization theory is that the logic is very unclear why exactly is modernization going to produce a demand for democracy and if you if you sort of troll through it you find at least three arguments there so the the most famous one first made
01:05:50
famous by Barrington Moore was that it's all about the bourgeoisie no Bush y'see no democracy and I've mentioned some other modernisations theorists there and so there the thinking seemed to be that as you got a middle class a middle class is going to want Bush where our freedoms they're going to want to be able to travel they're going to want their kids to have opportunities and so they're going to put pressure on the regime to change nonetheless if the bourgeoisie
01:06:22
are getting everything they want it's not obvious that they're really going to demand changes particularly if their lifestyles are improving there's certainly no inexorable logic why that might happen so they're in a second variant this really goes back to Marx and Engels but I put up some more recent scholars of it it's not about the bourgeoisie it's about the working class it's the working class no working class no democracy and and you've got to have an industrial working class that is
01:06:53
going to get angry as it's relative and perhaps absolute position eventually deteriorates and they're going to demand so it's going to be pressure from below and so this is what the these scholars argue in different ways then a third group of scholars say actually it's all about war that when governments fight wars what they need is people to pay for the wars and people that fight the wars and so they're going to have to make concessions when they tax people with
01:07:26
income and they're going to have to make such concessions when they ask people to fight I should have put Michael Clemens book up here unfinished business he points out that every single increase in in political conditions for african-americans in the US has been associated with a war that getting getting them to fight has involved making political concessions there again
01:07:57
you know you have to wonder well now when you no longer need large armies to fight wars you can doing it with drones and so forth maybe that pressure won't be there and we've been fighting wars for the last two decades on debt so we don't have to make concessions to the unborn we're going to be paying these debts so there were these these different logics but the upshot for the future in thinking about the future is that democracy is
01:08:28
not inevitable it depends upon contingent historical struggles there's no reason to think it will spring from processes of economic development and modernization they're conditioned under which it will and we'll talk about becomes more likely and we'll talk about them later but it's not obvious even if these economies do falter and wages stagnate and they start to lose legitimacy they might just become more repressive there's no
01:08:58
obvious reason to think that they will democratize perhaps they will but perhaps they will double down and in a post for kody Foucauldian world this may take the form of what he referred to as the gentle way in punishment rather than throwing large numbers of people into prison so picture your life in a place where everything you do what you buy and how you behave is tracked the government gives you a school and the score is a
01:09:35
measure of how trustworthy you are is a citizen and determines what you're allowed to do like ever boarding a train getting a mortgage all goes back to this score it's called Social Credit the system's eyes are in Big Data artificial intelligence and roughly 200 million surveillance cameras the scores go from 350 to 950 and are based on habits and
01:10:06
behavior buy clothes or diapers it's good a lot of alcohol too many video games not so good and it's mandatory when it goes national social credit scores will be assigned to every one of China's citizens for life in 2014 the Communist Party called for a system to allow the trustworthy to roam everywhere under heaven while making it hard for the discredited step the model is a place called wrong
01:10:38
Chung it's in Shandong Province its orderly streets are spotless cars slowed down which is unheard of in China words like honesty and credibility appear on propaganda posters display cases show pictures of wrong tones most honored citizens you start with a thousand points and you can print out your report any time you lose points for things like jaywalking littering tossing cigarette butts or
01:11:11
spreading rumors cameras do a lot of the surveillance work but it's pretty analog - like posters that lists the ways you can gain or lose points and each night Giovani local TV shows the surveillance highlights of the day Crayola and then there's Joe I need she's an information collector a paid enforcer who walks around and writes down deeds about her neighbors I feel for like the man who carried a drunk person home things like this are good
01:11:44
deals she said but the farmer overheard swearing and being rude yeah bad deed maybe yes yeah her quota is 10 a month woman she likes the work thinks the city's better for it was here on Thursday [Music] you

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