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- [00:10]
A
Hello, and welcome to the China's Gilded Age edition of Slate Money, your guide to the business and finance news of the week. I'm Felix Salmon of Axios. I'm here with Emily Peck of HuffPost.
- [00:25]
B
Hello.
- [00:26]
A
I'm here with Anna Shymansky of Breakingviews.
- [00:29]
B
Hello.
- [00:30]
A
And most excitingly, we are here with Professor Yuen Yuen Ang, who is a professor at the University of Michigan. Professor Ng, what do you profess and tell us about your new book?
- [00:42]
B
Hi. Thank you very much to Slate Money for having me. I am a professor of political science at the University of Michigan, and I specialize in the study of China's political economy as well as the political economy of emerging markets more broadly. So my new book looks at the relationship between corruption and capitalism in the context of China and its parallels with America's Gilded Age.
- [01:11]
A
So that's exactly what we're going to be talking about this week. We're going to look at corruption. We're going to look at whether and when corruption can actually cause growth rather than impeding growth. We're going to look at what kind of parallels there are with the United States both in the 19th century and also today. We're going to wonder just how corrupt the United States is and whether there's a double standard going on. We're going to look at a few other countries as well, like India, Brazil and Russia. We're going to have a whole Slate plus segment on the future of China and what's going to be driving that. It's a really fascinating deep dive, and it is all coming up on Slate Money. Professor Ang, let's start with you and your book, which is fantastic and really changed the way that I thought about corruption. The last time I thought about corruption in any kind of great detail was back at the when Jim Wolfensohn was running the World bank, and he said, we're gonna have a big crackdown on corruption, and this is the most important thing that the World bank is going to care about. And, and it wasn't obvious that that had much effect on anything. But you kind of say that this idea that corruption is this big monolithic thing, it's not very helpful. And you have a rather clever way of sort of breaking it up into constituent parts and saying, well, some things are very different from other things.
- [02:36]
B
I'm glad you started off with Wolfenstern. The analogy that he used to describe corruption is that corruption is a cancer. And so I have a different analogy in my book, and what I wanted to do in this book is to first of all unbundle corruption and offer a different analogy. The one that I use is that corruption is like drugs. So all drugs are harmful, but they have different types of harm. So I divide corruption into four kinds. And the first pair of corruption is what I call corruption with theft. And corruption with theft is unambiguously harmful because it's a one way street and only the corrupt official benefits and no one else does. And with corruption with theft, we can divide that into two types. The first is what I call petty theft. So think about a police officer coming to shake you down for protection money. It's a one way street. Nobody benefits from that activity except the corrupt police officer. That's petty theft. And then the other kind is what I call grand theft. Embezzlement of money from public accounts into private Swiss bank accounts. So both of these, I compare them to toxic drugs. We can think of them as cocaine, for example, drugs that are directly, unambiguously harmful with no benefits. And then there is a second pair of corruption. This is corruption with exchange. They involve an exchange of money or privileges for benefits. And that I distinguish into two subtypes. The first is what I call speed money. Speed money means bribes that you pay to low level officials to overcome regulatory hurdles or, or delays. And speed money, I compare that to painkillers. So sometimes we have to take painkillers to reduce our pain, to get over an annoyance or inconvenience. But painkillers doesn't actually benefit your health and if you take too much of becomes harmful as well. Speed money is different from the fourth category, which is the feature of my book, I'm going to call it access money. Access money are bribes or privileges that you pay not to low level bureaucrats, but to the highest, most powerful political players. Not because you're trying to get over a hurdle or trying to get speed, but you're trying to get access, you're trying to get privileges, exclusive deals. And I call them steroids. They're the steroids of capitalism. So steroids help you grow big muscles, but they come with very serious side effects over time. So once we have these four types of corruption in mind, with the analogy of four different types of drugs, we get this clear understanding that corruption actually comes in very different varieties. All of them are harmful, but they harm in different ways. The crux of the book is that in certain types of economy, including America's Gilded Age and, and China's Gilded Age, the period that we currently see the most dominant type of corruption is access money. So they are fueled by the steroids of capitalism. It doesn't mean that it's all good because I've said steroids comes with serious side effects. These side effects will build up over time. They do not show up directly on GDP numbers.
- [06:25]
A
But when people talk about Washington D.C. being a swamp, that's what they're talking about, right? Is the access corruption.
- [06:33]
B
Absolutely. Except that I think in American discourse we use every single word except corruption. So we might say, you know, money politics, we might say buying influence, but, but just not the word corruption. And I think it's because there is this sort of a normative feeling that corruption is something that happens to poor people, that happens to third world countries, and that rich, wealthy democracies are above corruption. And so what I wanted to do very simply in this book is to say, well, I think we need to call it corruption. It's just a different type. It's a sophisticated type. It's transactional, legalized, institutionalized. And the history of capitalism is not that we eradicated corruption and then had economic growth. The history of capitalism is that the structure of corruption went from thuggery, embezzlement and theft and evolved into influence peddling.
- [07:38]
C
And one point you make in the book that I think is so interesting and overlooked in the US is in China, corrupt politicians are often extremely competent. They've made incredible progress. And when you say it's on steroids, it's because they've succeeded in building airports and shopping malls and just driving like insane economic growth and doing a great job at it. So I think that gets overlooked too, that you can be both corrupt and extremely competent. Because we don't see that as much here in the US or even that.
- [08:14]
A
The corruption can, you know, a bit like steroids, the corruption can boost growth. And this is, I think, something which Jim Wolfenso never admitted, was that some types of corruption, at least in the short term, can actually be beneficial for growth.
- [08:29]
B
Right. And I think that, I think it's, it's. Of course it was very important and necessary for Wolfenstein to say corruption is a big problem. It was a big step forward at the time because back then, you know, development agencies like the World bank avoided talking about corruption. You know, they wanted to work in a kind of apolitical, technical setting. So war is important for him to bring in corruption. But I think what was critically missing in that conversation was the failure to acknowledge double standards. So corruption was conceived as something that only poor countries have. So all of the focus was on poor country types of corruption. So we Understand what it means to have a police officer shake you down for a bribe. That's brilliant, brazen, that's thuggery. And we see that. But the conversation had not elevated to the point where we were willing to recognize that rich countries have corruption too. It's just that that corruption is sophisticated, it's legalized. And if you really think about it, the impact of rich country corruption is actually tremendous. If you think about regulatory capture, state capture, and the effects on things like the 2008 financial crisis, on the failure to take climate action, on the failure to regulate the financial system the way that we should. In fact, its impact is absolutely huge. But the focus of the World bank and most NGOs and governments has been on the third world, poor country type of corruption. And I'm not saying that that's not important. I'm just saying that all of it is important and we need to bring all of it into our understanding.
- [10:19]
D
One of the things I thought was interesting in the book when you were talking about access money, was how it actually aligned incentives of local officials with the long term economic growth of the region and the country. And one, I'd be curious if you talk a little bit more about that. And also do you think that that is similar to the type of corruption you see in the developed world or is it different?
- [10:40]
B
So the argument that I was trying to make in the book is to explain how incentives work in the Chinese political system. And the phrase that I use is profit sharing. So at both the high, middle and low levels of the Chinese bureaucracy, the incentive function in the form of profit sharing. So anyone who works in a company knows what profit sharing is. It's basically employees having a direct share of revenue Prof. Produced. And even in corporations, profit sharing is used only sparingly. It's used very carefully because it has perverse effects, right? When you, when your employees are too obsessed with the bottom line, they may ignore kind of other important objectives like customer satisfaction and so forth. So, so even in companies we use profit sharing very sparingly. What is really remarkable and maybe controversial and problematic about the Chinese bureaucracy is that profit sharing is actually carried out to a large extent in a communist bureaucracy, which is probably one of the biggest paradox of our times, that a communist bureaucracy practices a capitalist system to the extreme. So how it works is that the Chinese bureaucracy is very large. It's not one monolithic thing. If we divide it into just two parts, think about the top 1% and the rest of the 99%, the top 1%, the local leaders the party secretaries, these are individuals who have tremendous power and autonomy over local jurisdictions. And their incentives, their financial and career incentives are completely tied to the prosperity of the local economy. And then the rest of the 99%, the people who are not leaders but are local civil servants, what I show is that they have fringe compensation, things like allowances, bonuses and perks. These are tied to the ability of the local government and local agencies to make money, which is pretty mind blowing. Again, remember that this is supposed to be a communist bureaucracy. So you have this entire bureaucracy who, whose payoffs, both financial and career, is linked to economic outcomes. So everyone is just feverishly promoting growth. So that's the good part that Felix is talking about.
- [13:04]
A
And the amount they get paid is their sort of base salary is tiny. Right. If you want to sort of get a living wage as a bureaucrat in China, you need that profit sharing component of your pay.
- [13:17]
B
Yes, absolutely. Let me give you some concrete numbers just to put that in perspective. So under Xi Jinping, China had raised the formal civil service wage in 2014. So that was the first time that they have increased formal wages since 2006. And after wages were raised in 2014, the highest paid official, who is the president himself, xi Jinping, gets US$825 a month. That's the highest. Right. And so you can imagine what the numbers would be at levels below him. And in 2006, the entry level civil servant in China, someone who's fresh out of college, just joined the civil service. The formal wages back then were US$45 a month. And this is, I think this is a surprise to many people, perhaps even to some Chinese listeners, because we hear so much about China being a superpower, being this tremendous second largest economy. That's a challenge to the US and so forth. And it's, I think it's important to remind people that China is still a developing country. And if you just look at the state of the public administration, the constraints that have, that they deal with the wage scale itself tells you that this is a developing country. And so you're right, Felix, they couldn't live on formal wages and they needed this fringe component.
- [14:53]
C
And one thing in the United States, one of the keys to reform from our Gilded Age was raising the pay of civil civil service workers. That was like, that's always looked upon as like, that's how you get rid of corruption. You just give everyone a raise so they don't need to do their crime anymore and they can just make a decent living. But that hasn't happened yet in China. And I don't know that it will exactly happen.
- [15:20]
A
There are like fiscal problems with that. Right. It's easier said than done.
- [15:24]
B
Yeah. And so I think that's where we can take really useful lessons from American history. And that is why Emily is right in pointing out that if you look at 19th century American public administration, it was the same situation. Like bureaucrats historically are actually either not paid by the government or paid very little. And their real income comes from exploiting the privileges of office, whether it's bribe taking or monopoly trade. Or in the U.S. court officials would actually take a cut of court fees for, for example, that was in American history. And so because we have already gone through the historical reform to have a modern bureaucracy today, we have forgotten about the messy process that took place over 50 to 100 years to get to this point. So China is still undergoing that process. The Progressive era was more than just raising civil service wage. It was reforms on multiple frontselectoral reforms, political reforms, administrative reforms. And this is the process that China is still only going through.
- [16:37]
D
Now I had a question about that because the movement from the kind of post civil war Gilded Age through the Progressive Era to kind of everything through like 1940s, 1950s, a lot of that was bottom up. And I wonder what the difference is going to be in China, because yes, you've had this anti corruption purge, but everything has been top down. So how does China go through some of those reforms when you are in an authoritarian system?
- [17:03]
A
And also I want to jump in and ask related to that, is there actually an incentive for a top down reform of that nature? Given that the current system, with the way that different regions are competing against each other to be more successful, and given that it is creating growth, what is the incentive for the top level of the Chinese government to actually implement those kind of reforms?
- [17:32]
B
Yes, Anna is right to ask about the differences between the Chinese and American system. The differences are obvious because one is a democracy and the other is a top down authoritarian regime. And so in America's progress progressive era, the primary methods of fighting corruption were using democratic mechanisms. So muckraking journalism, independent prosecutors, electoral reforms, it was very much bottom up. The difference in China is it's a mixture. After Xi Jinping became president in 2012, he decided to use the top down apparatus, apparatus of the party machinery. And so this is the grand anti corruption campaign that we've been hearing about since. But that's actually a late component of anti corruption in China. If you move the dial backward as early as 1998, China actually at that point implemented its own version of the Progressive era, not using bottom up democratic mechanisms, but, but by building state capacity, so doing really boring things like counting the number of officials in the bureaucracy, like figuring out who is getting paid or not getting paid, making sure that citizens can pay a fine by going to the bank instead of being extorted by the police, and a range of other really boring but essential administrative reforms. And so because of the these reforms that took place back in 1998, if you look at my book, the number of corruption with theft cases dramatically dropped. They really worked and they're very much equivalent to progressive era administrative reforms. What's interesting in China is that it's kind of similar but yet different from the American case because at the same time after 1998, the amount of bribery, especially on a grand scale, just absolutely exploded. So it's kind of so. So think about two lines crisscrossing, you know, corruption with theft going down and bribery absolutely exploding. And why that happened is because all of these administrative reforms can only control low level extractive stealing types of corruption, but they have no leverage over transactional grand corruption. And as China's economy grew, it became integrated with the world economy. There were just so much more commercial opportunities, grand bribery exploded. And you also have to think about corruption and rents as part of the reward system of the Chinese Communist Party. So this gets back to Felix point about are there incentives to do top down reforms? And so why is it that there was such a long delay until 2012 before the President said, okay, you know, crony capitalism is so out of hand, like we need to do something about this. And the reason for the delay is precisely because these corruption in rent is sort of part of the reward system for the CCP to get communist officials to embrace capitalism. And the way to think about that is to think about the contrast with the Soviet Union, the former Soviet Union, which said we're going to have economic and political reforms, but it did not promise its officials that if you join us in this game, you're going to benefit, except you have to stay in my game. And the way that the CCP did it is we're going to have capitalist reforms. And implicitly I'm going to promise the officials that you guys are going to benefit if you stay with us. And so for that reason it was, it took a very long delay before the new president came in 2012. And he said, okay, crony capitalism, it was a reward system, but now it's totally out of hand. And I'm going to do something about it.
- [21:40]
C
I guess my question was, so the way Chinese bureaucrats are able to enjoy the fruits of the economic activity that they help create the profit sharing, that's good. And it spurs economic growth. And then I was thinking about that in the US and wondering like, we know our infrastructure is crumbling, we need high speed rails, we need to fix the roads, la la la la la. We need a lot of, we need a lot of what China is doing over here. So what if we did that? What if we gave people profit sharing incentives for economic growth and we had governments and bureaucrats and politicians working together to build stuff as opposed to what they do now, which I'm not exactly sure I can even explain to you what they do now. But I guess the question is, should civil servants here do a little profit sharing too, or is it just not a good idea?
- [22:34]
B
No, no, they should not do that. They should not do that. It will make, make things worse. And let me explain why. It's because the process that China went through at the early part of its growth, it's sort of like being a teenager and having teenager problems. And so they had teenager solutions. The problems that we are facing in the US today, they're not teenager problems, they're sort of old people problems. It's the problem of old mature capitalism economy that has become too much captured by interest groups and too ossified. And so we need a different type of solutions tailored to the current circumstances, which is really healing democracy again and facing some hard problems including things like just, you know, interest groups and democracy failing to be truly representative and accountable. So it's not about going forward backward and trying to become a developing country again. Because, because what China did at the time was, was because it was a very constrained and communist developing country. And in order to both reward the officials and incentivize them to feverishly promote growth, it did profit sharing. But we are way past that. You know, we did that in the 19th century. And so when we are facing 21st century problems, we need 21st century solutions. We can still learn some lessons from both Chinese history and American history in fact, but they cannot be just blindly copied.
- [24:12]
A
Can I ask you to talk a little bit about the differences between these, I guess what you'd call the BRIC countries? In Brazil, obviously there's been a huge political upheaval all surrounding corruption with the car wash scandal. It's brought down virtually every president you can think of. It brought in this crazy right winger that we have right now in Russia. As you say, it seems that they have exactly the wrong kind of corruption for any kind of economic growth. China seems to have the right kind of corruption for economic growth, even though it's bad in the long term. And India has a lot of petty corruption that seems to be just kind of retarding economic growth. Is that a good overview? Are they all very different from each other?
- [25:05]
B
Glad you asked that because I had a chapter in the book dedicated to comparing China with other countries. And I went further to actually conduct my own corruption perception survey because I was dealing with deeply unsatisfied with the corruption perception index. For those who are in finance and risk assessment, they do use the CPI a lot. So the CPI is a measure of perception of corruption across countries. And using my own survey, what I did is to, instead of just asking people, how corrupt do you think China or Russia or Brazil is? We bring break down those perceptions into how prevalent do you think different types of corruption are? So we actually get to measure structures of corruption and then compare them systematically between China, Brazil, India, the us, South Korea and so forth. So it gives us a very nice structural comparison. And then I'll take the example of China and India, which I find to be one of the most fascinating pair of comparisons. China and India have almost identical total corruption scores. They're almost identical on the CPI scale and both countries are known to have a big corruption problems. But when you look at my survey, what it reveals is that even though the total corruption score is the same, the composition of the score is different and that matters a great deal. So in China, the most dominant type of corruption is access money. So paying big bribes to elites to buy deals. Whereas in India, the most common type of corruption was speed money. So paying petty bribes to many low level officials in order to get over hurdles. So if you think about the difference, to put it simply, in India, officials are extracting bribes from their ability to stop you, you from doing business. In China, officials are collecting bribes for their ability to help you do business. And that is a mile of difference. That is many miles of difference. And one of the quotes that I use to make the comparison is a quote from an official in New Delhi who said that if you want me. And this is a quote from Professor Bart, an intern. He said that if you want me to speed up a file, I can't do that. But if you want me to stop a file immediately, I can do it. And that quote itself, I think reflects how power is monetized in a fragmented democracy. That power comes from veto, right from blocking you. Whereas in China, because it's authoritarian, power is very concentrated individuals, it's the opposite. Like I don't like files are not relevant. In China, if you find the party secretary, he has near absolute power over what you can do in his jurisdiction. So people pay a lot to buy his access and deals from him.
- [28:12]
A
And if I'm in America, if I hire some kind of lawyer or expediter to get a building permit or a liquor permit or something like that, that's speed money, right? That's me trying to pay money to speed things up. That's a form of corruption.
- [28:30]
B
I think the specific example you gave is a bit of mixture of both and in reality it overlaps. But yes, I would say overall that's speed money in the sense that you're paying regular low level officials and trying to get a license faster rather than trying to buy a monopolistic privilege, for instance, or trying to change the laws so that you don't have to pay taxes.
- [28:54]
A
I think my favorite example of speed money is actually going back to Jim Wolfensohn, who wanted very much to be the president of the World bank, which is always an American. And he had a big problem with that, which was that he wasn't an American, he was Australian. And so it took him about a week because he was this very rich, important banker to find the right person on Capitol Hill and become naturalized. Those of us who've gone through the naturalization process know it takes a very long time indeed. But unless you're Jim Wolfenstein and he became a US citizen kind of overnight, just like Rupert Murdoch did when he wanted to buy a bunch of TV stations. And that's the kind of, you know, petty corruption which is so obvious. And like, I love the irony of Wolfensohn himself being the great crusader of garbage corruption when he was such an obvious recipient of it and user of it.
- [29:47]
B
On that note, there's a book that I really enjoyed reading. It's called the Hypocrisy Trap by Professor Kathryn Weaver and it talks about the issues that you mentioned, which is all this talk about anti corruption, but the hypocrisy that sometimes comes along with it.
- [30:05]
C
I'm sure we'll get into this when we talk a little bit more about how corruption is sanctioned and kind of legal now in the United States. I just thought that was so interesting and kind of mind expanding to think about because you shared that CPI index where countries are ranked from, you know, most to least corrupt, and the US is seen as least corrupt. But it's actually quite corrupt that they're seen that way because they've legal, we've legalized so many of so much of the corruption and we're so influential in the world that we kind of get to see say that we're not corrupt even as we're super corrupt.
- [30:40]
A
Right. The scandal isn't what's illegal, the scandal is what's legal.
- [30:44]
B
Yeah, right. Yeah, exactly. That's well put.
- [30:48]
D
I just maybe one last question in terms of comparing China to other developing economies because I'm curious why you think China has been so much more successful in this arena. Because I'm thinking of mid century. You had a lot of developing economies at the time, particularly thinking of Latin America where you had a lot of really state run development and it didn't end spectacularly well. There's, there was a period of time it worked and then ended in some disaster later on. And I'm curious why you think at least right now it appears that China's doing a better job of it.
- [31:22]
B
You mean a better job as an economically overall. Yeah.
- [31:26]
D
Why do you think that the corruption that we're seeing seeing in China, just as you've seen in a lot of other places, is continuing to lead to significant economic growth in a way that we didn't necessarily see in other places that also had fairly top down systems and significant amounts of corruption?
- [31:44]
B
Well, for a couple of reasons. But first let me backtrack and clarify. I'm very, very cautious about the statement that oh, corruption is leading to growth. I really wanted to stop and, and make sure that everyone gets it clear because when people hear a statement like that, almost immediately they would conclude that oh, corruption is a good thing and we should all go and do more corruption. And so let me pause and say that some forms of corruption, rich country corruption, does not impede growth and it even stimulates commercial activities. But, but I'm not saying that it's a good thing. I'm not saying we should do more of it. Okay. I just want to make that very clear. Right. And your question about why is it that China has been able to channel its corruption over time to access money compared to other countries. That's sort of how I would understand it. Because if you look at the evolution of corruption in China, it wasn't like in day one in 1978 when they opened markets, then oh, boom, you know, flip the switch and all of a sudden they changed their nature of corruption. It wasn't like that. It was a long evolutionary process. And if you look in the early days, 1980s, 1990s, even 2000s, China's corruption was much more like India's and Brazil's. It had all types of corruption. Petty bribery was rife, embezzlement was rife. The central government felt that it had very little control over local officials, which is running amok on their own. And so what makes China different was, number one, the Central government by 1998, as part of its ambition to become a global capitalist economy, really put in hard efforts to build administrative capacity. And you don't find any equivalent efforts in many other parts of the world. And so those efforts are very much like progressive era administrative reforms. They really did make a difference. So before anyone else, you know, runs and says, oh, China has corruption so we can have more corruption too. That's. Which is not my point. You should really look at the corruption profile in one's country and ask, you know, has this country been effective at controlling embezzlement and petty bribery? And on that front, China has really had real effects. So one of the numbers that I cited is the Transparency International's Bribe Payers Index, which is a survey that measures how often people had to pay petty bribes. And on that index, China did way better than countries like India, Cambodia and Vietnam. So petty bribery in China, it exists, but is much lower than in these other developing countries. And so if you, if you think about the whole profile, if you think about portfolio of corruption, China has controlled other growth, damaging types of corruption in. It was in the category of access money that went out of control.
- [35:03]
A
I really want to move on to the big news that we've been following for the past couple of years is this escalating war between the US And China, which we can always be thankful it's just a trade war. But the most salient part, part of that war right now is this attempt by the US government to ban WeChat and TikTok in the United States. And we don't know how that one's going to play out, but obviously it was part of. It was an aggressive act in that war. It was an act taken by the US Government against China. And what's super fascinating to me in terms of the context of this discussion is that the proposed solution to this is basically a very complex deal which no one entirely understands, involving Oracle. But the only reason that this seems to pass muster is that Oracle is run by this guy, Larry Ellison. Larry Ellison is a good friend of Donald Trump. Larry Ellison and Donald Trump have been talking on the phone a lot. And Ellison persuaded Trump that his Solution where he takes a small minority stake in TikTok would suffice to assuage Trump's concerns about TikTok, which were always kind of fictitious anyway. And this seems to me to be an absolutely prime example of exactly the kind of corruption that you're talking about, that you have access to the highest levels of government, and if you are the kind of rich business person who has that kind of access, you can do deals that no one else can could do. And it seems to me that in the case of this TikTok thing, the degree of corruption that we're seeing in the United States is actually greater than the degree of corruption that we're seeing in China.
- [36:58]
D
And I would also say the fact that the minute it came out there was criticism of it is significant, that it wasn't like this happened and nobody knew about it and this happened and people were fine with it. The minute there was even a, a suggestion that this person was a friend of the president and got this potential deal, it concerned people.
- [37:21]
A
Right, exactly. So we have that kind of a little bit of democratic constraints on corruption, although I don't think that's going to stop Ellison or Trump. But more generally, is it useful to look at the trade war through this corruption lens? I think that when the Chinese complain about American companies and the American companies say, well, we are nothing to do with the government, and there's this understanding that the Chinese don't even understand that difference. They're like, well, you're American and America is this kind of monolithic thing which we're dealing with. And certainly in the other direction, the United States deals with Chinese companies as kind of avatars for the government. If they want to put punish the Chinese government, then they will crack down on Chinese companies like Huawei, for instance. So that kind of conflation of the government and the corporate sector is happening precisely because of assumptions on both sides that the other one is corrupt. Right.
- [38:25]
B
So the issue that you are trying to get at in this particular context is less about corruption per se, less about than about the conflation of companies and governments. So in this case, I do think we need to step away from corruption and specifically look at this issue, which is an important one in the Context of the U.S. china Trade and tech war. There is a common, very, very common misunderstanding in the US that successful Chinese companies are all national champions handpicked by the government to grow into the size that they have today, and that they are all unfairly advantaged by subsidies and preferential treatment. That is not true. In many instances. Take the case of Alibaba, for example. If you look at the history of how this company came about, it actually, the e commerce industry in China actually was able to flourish precisely because the government ignored them. The government paid no attention to them in the 1990s and 2000s. And in a context where retail, just traditional retail in China was so bad, that constraint then pushed entrepreneurs like Jack Ma and others into creating an e commerce industry. And what the Chinese government does is that it only begins to pour its attention on successful companies after they have become successful. And sometimes Chinese companies are actually quite resentful of this attention because it knows that it can bring with it this negative, you know, negative image and hostility from Americans as being seen as too close to the government. But they have little choice in that context.
- [40:43]
C
One thing that you, in the piece that you shared with us, that you wrote about the difference between China and the U.S. when it comes to technological advancement was in the U.S. there's a lot of support and innovation at the very ground level in tech, like new big technologies and ideas, whereas in China, it's a different kind of technological skill and advancement. Could you talk a little bit more about the difference there?
- [41:10]
B
Sure, I'm happy to. In this particular piece was in Project Syndicate and it's called the Myth of the Tech Race. And what I argue is that one of the most neglected features of this tech race is the fact that the US and China have very different comparative advantages in technology. So when people think about the tech race, they use the language of the space race, right, which was formed the previous Cold war. And everyone is obsessed with cutting edge technologies like 5G AI, quantum computing. And the worry is that China, by virtue of its authoritarian power and ability to pour billions into the market, is able to catch up in, in cutting edge technologies. But if you actually look on the ground, what you find is that China's advantage in technology is not in basic science and seminar innovation. Its real advantage is in the commercial application of technology. Its innovation takes the form of business innovation. So China is very good at commercial commercialization. It can take an existing piece of technology and make it cheap and accessible and fun to use. So TikTok is a very good example of exactly that. But TikTok is not a cutting edge technology in the sense when we think about Tesla or sending a rocket to the moon and so forth, it's a consumer based technology. So those are the things that China is very, very good at. But this feature is neglected both by Washington and by Beijing because the officials at the highest level are only interested in cutting edge technologies, which is crazy.
- [43:07]
A
Because if you think about the idea of one country's companies dominating some sort of tech area, it's precisely the ability to do things at scale cheaply, which matters. It doesn't really matter who invents it. Right. So if you look at something like gene sequencing, you know, that was invented in the United States and Americans kind of worked out how to do it. But now if you want your genes sequenced, you go to Beijing and you can get it done for like a couple hundred bucks. And it's done at scale there. And China more or less owns that sector. And that's the thing that matters, right, rather than who invents it.
- [43:46]
D
Well, not if you don't have access to the underlying technology. I mean, I think that's part of what we're saying.
- [43:50]
A
But all underlying technologies ultimately become common, commoditized, Right. The idea that you can keep underlying technology in one country forever, it just doesn't work. Look at, say, the most important one, which is nuclear weapons technology. People tried very hard to keep that within certain countries, but eventually, if Pakistan wants a nuclear bomb, Pakistan is going to get a nuclear bomb.
- [44:15]
C
Well, I think the important thing is you have to have someone invent the technology. You have to have someone commercialize and, and scale the technology. You absolutely need both. And the important thing is understanding that so that the US can tap into its maybe at this point superior R and D capabilities and work with China and actually collaborate. And Professor Ong had this great example, which is clean energy. In this case, it's crucial to the world that we improve clean energy technologies and we scale them. So if the US and China could stop like having fights about TikTok and tariffs, there could actually be productive research and, you know, expansion and scale to solve like a global problem. But instead we're like nitpicking about things that actually, as she explains, are not productive and are represent a total misread of what's going on, perhaps, right?
- [45:15]
B
Yeah, absolutely, you're right, Emily, about the point on cooperation. To the extent that China and the US have different comparative advantages in technology, it means that there is plenty of room for cooperation. Because I'm good at doing one thing and you are good at doing another thing. And in the area of clean energy, which is so important, the US Has a clear advantage in creating those cutting edge technologies. And where China has an advantage is in commercialization, because China has a domestic market that is many times larger than the US So it has the capability to take a given technology and make it cheap and accessible. And that's what we need for clean energy to work. It's over and above having the right equipment you need to make it accessible. So this is a clear example where there is room for cooperation. Unfortunately, that's not where the policy and media attention is because everyone is fixated on who is going to quote, unquote, win by monopolizing a given special technology.
- [46:28]
A
So one of the questions in the vice presidential debate which neither candidate answered was like, how would you characterize the relationship between the United States and China? Are they enemies? Are they adversaries? Are they competitors? Mike Pence didn't answer that question. Kamala Harris didn't answer that question. So now I'm going to come to Yuan Yuan Ang. How would you answer that question?
- [46:51]
B
Well, of course the US and China are not enemies. There is so much to be gained from cooperation and mutual understanding. And we've already seen that in the past decades. And this is also, I should stress, a bilateral relationship that is not just about the US And China. If the two countries decide that they are going to treat each other as enemies and go to war, it is a global catastrophe. Like every part of the world is filled with feeling the effects of escalating tensions between US and China. The thing about the answer to the question that was posed to the vice presidential candidates is that I think in the current U. S China relations there is a very powerful self fulfilling prophecy at play. Right? So the hawks in the Trump administration decided that, that China is an enemy. And then they have very effectively played up this narrative of China being an enemy. And then China has helped this narrative in many ways in its apparent projection of global ambitions, in its own authoritarian revival, in its kind of wolf warrior diplomacy. So in a sense both sides are, are contributing to this escalating tension.
- [48:21]
C
I would like to say that I believe that China and the US are frenemies, that is, they are friends. But it's very tense. It's very tense. And they talk behind each other's backs and all that.
- [48:32]
A
So let's have a numbers round and tell us, Professor Ng, what is your number?
- [48:37]
B
My number is 1.5 million. And this is the number of officials that China has discipline under the anti corruption campaign by 2018. So the current number must be larger than 1.5 million.
- [48:56]
C
That's a lot.
- [48:57]
B
It's a lot.
- [49:00]
C
What does discipline, what do you mean by discipline? What are the actions that the Chinese government?
- [49:04]
B
Oh, it's a broad definition. So it's everything from Being asked to drink tea with an investigator to being executed.
- [49:15]
A
That's a wide range. Right. I know which one of those I would prefer, to be honest.
- [49:23]
B
The tea poison. Sometimes you can bring your own tea. So I'll bring my own tea.
- [49:33]
A
Emily, do you have a number?
- [49:35]
C
I do have a number, Felix. It is not related to China. Sorry.
- [49:38]
A
Okay.
- [49:39]
C
My number is 865,000. That is the number of women who left the labor force in September.
- [49:46]
B
It is.
- [49:47]
C
And that compares to 216,000 men. This is in the US we are in a crisis of just incredible proportions. And not enough people talk about it. But part of the reason so many more women than men left the workforce in September is because in the United States, our children are not all going to school right now. Many of them are home because we're in the midst of a pandemic that hasn't been controlled because schools haven't gotten clear guidance from the federal government. So, blah, blah, blah. My kids only go to school two days a week. We're contemplating keeping them home. For many parents, this is a total disaster because there's not good childcare in the United States, and. And someone has to be home with the kids. And you can see from the numbers, it's typically women. And as I wrote this week in a piece for HuffPost, women are not okay. Everyone I've spoken to, whether it's a high income woman who's able to work from home and is juggling remote learning with all her other responsibilities, or a very low income woman who can't work at all because they have to be home with their kids and they can't find a job where they work remotely. Everyone is really in a state of crisis right now. So I felt it was important to note.
- [51:08]
A
It's important to note My number is 50 million, which is the number of dollars that Square, the payments company, has decided to spend out of its own balance sheet, buying up Bitcoin for no obvious reason. They just came out with this press release saying, we spent $50 million on Bitcoin. And everyone's like, why? And they're like, something, something leadership, something crypto, something like you've been able, like individuals have been able to buy Bitcoin using the Square Cash app for a while now. And Square will buy Bitcoin on your behalf and hold Bitcoin on your behalf if you happen to want such a thing. But why Square itself would spend $50 million on Bitcoin is something which I can only chalk up to what I call billionaire whimsy. This is one of those things where square is so valuable. And Chuck Dorsey is, you know, he comes up with an idea in the bathtub one day and then next thing you know that they're putting bitcoin on their balance sheet. No one knows why, but who's going to stop them?
- [52:09]
C
Isn't he coming up with his ideas in like a sauna or something? Coming off like a five day fast?
- [52:14]
A
I think. I think he comes up with ideas on his like 5 mile barefoot walk to work every day or whatever it is that he does.
- [52:21]
D
My number is far less exciting than that. My number is $400 million. That is the fine on Citigroup for their failure to improve risk management and data governance, which I think we all saw when they had the infamous $900 million misspayment. So I thought I would just kind of close the circle on that story that they have been fined and this.
- [52:48]
A
Was a massive fine.
- [52:50]
D
It's a very large fine, yes.
- [52:51]
A
And it was related. They signed a deal in 2013 saying like, whoops, we haven't done a very good job with anti money laundering. We're going to do better. And what the Fed and the OCC said was like, you know that whole promise to do better you made in 2013, you still haven't done better. Your anti money laundering controls are still crap. And it's astonishing how Citigroup has failed to get its act together in this regard. And I would note that just this week we had the announcement that Morgan Stanley, one of its big competitors, is spending $7 billion buying Eaton Vance in a big M and a transaction. Citigroup would never be allowed to do that. Like, they have a huge number of regulatory shackles on them right now. And the regulators are saying no, you can't even think about acquisitions or growth via acquisition or incorporating some other company until you've managed to incorporate yourself. But it really does look that Citigroup is too big to manage that. It's just impossible to get a handle on this beast.
- [53:57]
C
Can I ask what happened to the 900 million? Did they send it back?
- [54:01]
A
Oh, yeah. What's the latest on that?
- [54:02]
D
They're still dealing with that. There's still lawsuits going back and forth.
- [54:07]
A
Crazy. I think that's it for us this week. Thank you very much for listening. Thank you very much to Jessamine and Molly for producing. Thank you to Yuen Yuen Ong for appearing. Thank you all for sending emails to sleepmoneyleep.com and we will talk to you next week on Sleep Money.