C (6:32)

And so the sort of metaphor here that you're making with economic long Covid is that it's not the virus itself that sort of has caused these lingering symptoms, but the, the kind of overactive immune response on the part of the state that has stuck with us. Right, that's sort of that sort of thing.

D (6:47)

Thank you for bringing it out. Yes, that is what I wanted to convey.

C (6:50)

Sure. Good, good. Zoe, you, you, you wrote about this. Obviously you took up Adam's article and you wrote a really interesting critique of it. If I understand your critique correctly, some of what Adam has written you sort of agree with, but the emphasis is slightly different. I'd love to hear your kind of basic take on the story that Adam tells about this and where your view of it differs.

E (7:13)

Really, I understand this situation. As you know, President Xi Jinping, he did not assemble China's economic time bomb, but I do think he should be blamed for having shortened the fuse. And if I can explain this a little bit more, you know, this is how I view the Chinese economic problems. I view it as having the problem of four Ds, including debt, demographics, demand and decoupling. I think Professor Pattis can explain this in terms of the structural problems way much better than I do, especially in terms of the debt, demand, demographics and all that. What I think President Xi Jinping's, you know, his share of the responsibility here is that it is really with regard to how his policies accelerated the trajectory of decoupling. And you know, a lot of these four Ds that I talked about, you know, debt, demand, demographics, decoupling, a lot of these problems have long been evident, as Professor Pattis noticed and he's written widely about this. And President Xi Jinping and his predecessor, they were aware of these problems, but they really didn't do enough to mitigate these long standing issues. So therefore, I think it's unfair to blame Xi Jinping entirely for creating all these problems or for the lack of economic recovery post Covid. And that's why I think he didn't assemble the time bomb. However, really his responsibility is in terms of the last decoupling. So this is where I think I agree with Dr. Poston in terms of the policy missteps that he did have been highly consequential. But I would differ with Dr. Poston in terms of the role of the decoupling or for that matter, the identifying COVID 19 as a critical juncture. I would argue that actually, you know, the critical juncture happened several years before zero Covid, COVID 19 as well as zero Covid. Because if you remember back in 2013, President Xi Jinping already put out his own personal explanation, his own explanation to what does he mean by what he thinks deepening reform and opening up means. And in writing and in his speech, he's specifically talking about, you know, for reform and open up really is about the emphasis of the state sector, the role, the leadership of the party in economics and finance. And in a way he has been quite honest. And then why this matters for decoupling and why this relates to Covid. I would say that the net effect of zero Covid was actually to make President Xi Jinping overconfident that his assertive foreign policy could be persuasive. And you know, many of us probably still remember the initial shock of COVID The Chinese government response has been, was relatively successful in terms of control the virus, the spread of the virus compared with the rest of the world. And in a way, the Chinese government response actually is very much reflective of their, you know, the governance philosophy in Chinese crisis is the same term like, it's like crisis and opportunity is Wei and Ji and Wei is very much like Sun Tzu kind of chaos. There is great opportunity. And this is also where I think President Xi Jinping, his draconian zero koi policies actually created the dent not just for himself, but exacerbated. Exacerbated, not agreed. The previous, you know, demographic debt and demand problem, you Know, before COVID or before 2019, when we think about the Chinese economy, it looks like Monet is like impressionist painting. It looks beautiful from afar, but it looks like a jumbled mess up close. But after Covid, the problem still exists, but it's now like a Jackson Pollock in the sense that it looks like a jumbled mess from afar and a jumbled mess up close. So from that perspective, I really don't think President Xi Jinping should be blamed for the lack of recovery or for the assemble the time bomb, but he actually did shorten the fuse.

C (11:23)

I like this. We've moved from a sort of medical metaphor to an artistic one. Just in defense of Jackson Pollock, you know, Chase May Dipper, you know, some people like those jumbled messes. That's interesting, though, because what I also. I'm thinking about what you said about the overconfidence, that it's. It's good to remind ourselves that in the early phases of the pandemic, you know, there was reason for the Chinese government and for the CCP to believe that what they had done was sort of correct and they were doing so much better. That's an interesting thing that I think we tend to forget in our, you know, in our presentism. Speaking of presentism, I think, Michael, your contribution here and your critique, if I understand it again correctly, and you can explain this more thoroughly, is that you see the roots of some of the problems that China is now facing far earlier than both Adam and Zoe and sort of not only see them there, but believe that they were sort of foreseeable and even foreseen. Can you explain exactly what you mean by that? And whereas Adam has talked about the turning point being. Or maybe not the turning point, but the point of no return being 2020, Zoe has talked a little bit about 2015 and 2013 with Xi's arrival on the scene. You put. I think you seem to put this turning point closer to around 2006. And I'm curious about what are. What are the factors, what was happening then that sort of cast the die in your point of view?

B (12:52)

Well, thanks very much, Justin, and thanks, Adam and Zoe. The other famous Adam Toos refers to me as the structuralist, and I think that's accurate. I think it's a much more structural argument as to what happened with China. Basically, the Chinese growth model, this sort of the high savings, high investment model, is not particularly Chinese. Many countries have followed it, and it always seems to follow a pretty similar path. You have a period of very rapid, healthy growth followed by A period of very rapid, unhealthy growth driven by a surge in debt and then a difficult adjustment. And one of my favorite economists, Albert Hirschman, talked about this way, way back in the 1970s. And what he argued is that this is what happens to a successful development model. A successful development model, by definition, makes itself obsolete because it resolves the problems it was designed to address. And then you need to shift the model. And if you don't shift the model, you end up developing a different set of imbalances. And he also noted that almost no one shifts the model. And the reason, he argued, is because a successful development model creates a series of institutions that disproportionately better benefit certain constituencies that become very powerful. And it's very hard to shift the model because of the blocking efforts by those constituencies. Well, you know, he died before the whole China story, but he could have been talking about China. And so what I would argue is that this high investment model made a lot of sense in the, in the 1980s and 1990s, when China was possibly the most underinvested economy in the world. But with the fastest growth rate of investment, they closed the gap pretty quickly between what they had and what they could productively absorb. Now, at that point, you're supposed to shift to a different model, but no one ever does. Not Brazil in the 1970s, not Japan in the 1980s, not the Soviet Union in the 1960s. And that's when you end up with very high investment rates that are no longer productive. So when that happens, you start to see debt grow faster than gdp. So this is a pretty old story. I would argue that most people would say the problem began in 2009, 2010. I think it started earlier than that, but it doesn't matter. At some point we started to see this unsustainable acceleration of debt in order to maintain high growth rates. And here's where another economist that I cite a lot, Janice Corni, is very important. Corni argued that in these types of economies, you have a shift from the hard budget constrained part of the economy to the soft budget. As long as you want high growth rates, because the hard budget constrained part of the economy, for example, the private sector won't systematically engage in non productive behavior. If they do, they go bankrupt. So if you want to maintain higher growth rates than the real economy can deliver, then you have to increasingly shift activity to the soft budget constraint, which in China was largely local governments in the property sector. And so as a result, the problems in China predate Xi Jinping in fact, back in 2012, remember when Xi Jinping became party secretary, we all agreed this was a good thing because he was a pragmatist and a market guy. And back then I argued that if you looked at the historical precedents, what was very likely to happen was a recentralization of economic decision making because the conflict over adjustment would be so difficult that without a recent of power, they would probably fail to do it. So I would argue that all of this was already baked into the pie before COVID Now, I agree with Adam and Zoe that Covid mattered. And I think it mattered because it accelerated what was already a pretty bad process, not just in China, but in the U.S. europe and the rest of the world. So we saw the debt pick up even more rapidly. And more importantly, during that period, we saw the household share of GDP drop. And what was particularly bad, we saw income inequality increase, which put even more downward pressure on consumption. So I would argue that that's the basic problem. And if I could summarize it in a snappy phrase, I would say it's not that the recentralization of the economy caused the slowdown. I would say it was the slowdown that caused the recentralization of the economy.

C (17:29)

That's interesting. And you have the causal arrows reversed in a sense, from where Adam does. You see the same factors, but you see them affecting each other in a different sequence, almost.

D (17:39)

Can I add.

C (17:40)

Yeah, please, please jump in.

D (17:41)

Yeah, yeah. And I just want to affirm Dr. Liu and Professor Pettis's characterization. Seeds are very different points of view. As you just said, Justin, causality runs the other way. I would make two points, I think. First, the structural, the heavy duty structuralist version, which Michael argues for, is too dismissive of the agency of both the party and the average Chinese household. If you look at the period, even including the period Michael talks about, there's an enormous growth in private sector employment, in returns on private sector assets, in private sector investment, as my colleague Nick Lardy documented in market. So for Ma and then starting in 2015 and accelerating, she turns it around. But then again, the households don't react until we have the zero Covid in the way that I identify. And so to me, while the structural problems are there, it both exaggerates the determinism coming out of the structural problems and also, frankly, their magnitude. All economies slow down, all economies accumulate over time. There was nothing inevitable that you couldn't have put more money in the private sector and gotten higher returns than you did the last several years. Anyway, just to say I Think Michael and Zoe are being perfectly fair, contrasting views. But just that would be my point of difference. I don't think their model fits the developments that I saw.

C (19:08)

Right. Let me ask you to clarify one thing though, and I'll ask. And that will probably generate a response either from Zoe or Michael. You say this wasn't inevitable. And I guess what I'm curious then is that it's really sort of a political question and I'm wondering if it wasn't enough, why were the choices made that you see as having led to this point where there was agency? You talked about the household spending patterns. What about on the policy question? What was the particular policy choice? And why do you think that was the choice that the CCP opted for instead of the other choices that presumably you think might have, if not averted the current situation, at least pushed it further off into. Into the future?

D (19:53)

I'm not a good enough Chinese expert, I'm a macroeconomist to do that, but I would have. I think there are two clear contributing factors. One is that not to over personalize this, but in an autocratic system, the views of the leader do matter. And Xi's views clearly from the time he took office, but particularly from 2015 forward, were that the market had gone too far, the party had gotten soft, the people had gotten soft, and you to deal with it. A second factor is you can argue how much instead of what something none of the three of us have mentioned yet, the external environment, how much, although Zoe makes reference to the remilitarization needs to be fair. So how much this is a reaction to perceived threats or external ambitions and that pushes you in this direction. But I think it's ultimately mostly about control. And that's why again I tried to speak of the long Covid. It's the immune system responses you kindly invoked. It's not because the Communist Party ever was not in control. It was that the Communist Party's self control broke down. That unlike Deng and his successors, she broke this. No politics, no problem, compact. And I don't know if it's inevitable, but it's very hard for an autocratic system, a party, to resist that temptation for decades. It's amazing to me how long China did.

C (21:22)

Right. Yeah, that's one of the things that comes through in your, in your, in your piece originally is that it's. It's sort of like they were the image that I had in my mind and I, I almost put this in, in the edit and I decided it was, it was not, it wasn't okay. For Foreign Affairs. I'll do it now though, as it was that image of, you know, the old Roadrunner cartoons.

D (21:37)

Yeah, right.

C (21:38)

You know, where Wile E. Coyote kind of goes out over the, over the edge of the road and is sort of running on air until suddenly he realizes and drops. That's kind of the image that I got from your analysis of recent Chinese economic history. Zoe, I want to go back to Michael in a second, but so Adam mentioned something that I did want to bring in because one thing that your essay talks about is this question of Xi's kind of a broader foreign policy and its effect on some of this, the sort of the re. Embrace of nationalism, what you describe as this civil military fusion and its effect on the Chinese economy. Can you pick up where Adam left off there and kind of talk a little bit about that context in which this happened? Because that's also on our minds now, I think with, with the APEC summit happening this week and with a meeting between Biden and Xi. And I'm sure that some of our attendees are going to want to hear a little bit about that. So it'd be interesting to hear your take on that.

E (22:30)

I do think President Xi Jinping's elevation of the civil military fusion strategy to the level of national strategy.

C (22:38)

Can you just explain what that is quickly? What, what you mean by that?

E (22:42)

So this did not, this so called strategy did not start from Xi Jinping. It's the whole, the whole civil military fusion started during Hu Jinta's era. The idea is to empower or basically mobilize China, the whole, whole of the society, whole of a nation element blurring the, the nature of military and the private sector and the civilian in terms of technological advancement and technological self sufficiency. So President Xi Jinping really elevated that into the level of national strategy and combining that with made in China 2050. So a lot of this really triggered alerted Western politicians and in particular here US policymakers in Washington D.C. and in response, US policymakers accelerated a lot of the pre existing mechanisms such as export control, such as investment screening. And now we are in an era of outbound investment screening. So if Xi Jinping were, if President Xi Jinping did not put this accelerate a lot of these policies to such a higher level, I do not think it would trigger such a response from the United States. And as a consequence what used to benefit China's economic rise on the one hand, international confidence in the Chinese economy as well as policy predictability. And then on the other hand, China see easy access and A cheaper at a lower cost to advanced technologies, investor market, those things are no longer there. And I would agree with Dr. Posten in that, you know, President Xi Jinping, a lot of his policy misstep did matter. But I would say that it matters before COVID and more specifically, he removed the predictability and the lack of political drama that used to benefit the Chinese economy.

A (24:40)

We'll be back after a short break.

E (24:44)

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C (25:06)

Michael, both you and Adam sort of tell this, this story that to my kind of layperson's mind, it brings to, to mind this expression that at least when I was, you know, a college student, I, I learned which was the middle income trap, right, that there was this kind of problem where, as you put it, a system was developed to solve a certain set of problems. And then once it, it solved those problems, it became obsolete and you had

D (25:31)

to, you had to switch.

C (25:32)

Is that essentially what you're describing? Is that another name for what you're describing or is that different from what you're talking about? And regardless of whether what the answer is there, I guess my question for you is if China missed its opportunity or the opportunity it had some time in the aughts to shift growth models, do you only get one chance as a, as a regime type, or do you, is this the kind of thing that you can, you can kind of, you can try again, you can keep adapting. What, what's your, your view of that?

B (26:04)

Well, to address the middle income trap, it's not a phrase that I really like because it seems to me that we often trot it out to mean we don't know. So it must be the middle income trap. But you know, I would call it an investment trap because, because it affected all countries that had very, very high investment growth models. Japan, which is certainly not a middle income country, it's quite a rich country, also went through this trap. Poorer countries like Brazil in the 1960s and 70s and so on. There was about a dozen, two dozen countries that went through this growth model. And what's really striking is how they all follow the same pattern. You have very rapid healthy growth followed by very rapid, unhealthy growth, followed by a very difficult adjustment. And the adjustment can range. I talk about the American style adjustment, which Brazil followed too, which is a rebalancing in the form of a crisis. So the United states in the 1930s, you'll remember GDP contracted by 35%. Household income contracted by half of that. Brutally painful, but it rebalanced and it was quite quick. In Japan, what we saw is that GDP growth went from roughly 4 or 5% to around half a percent. Consumption growth dropped by a lot less. I don't have the per capita numbers, but the per capita numbers look like they dropped from around 3% to 2%. So it wasn't as brutal an adjustment, but it took a very long period of time. And what's really striking about this, and Darren Acemoglu and James Robinson do a series of very interesting papers on this, what's really striking is how politically disruptive it's always been, except for two types of political systems. They argue highly competitive political systems, which seems to mean robust democracies, and then highly non competitive, which basically seems to mean a highly centralized autocracy. By the way, an example of the latter was China in the 1980s, a series of reforms ferociously opposed by the party, but with a highly centralized leadership that were able to implement the reforms anyway. So I think that's a really important part of it. We always see that. And that's why I argued that if you were going to advise xi back in 2012, you would have said either become a democracy or recentralize power. That's part of the process. Now, I realize my answer is getting a little bit long, but I wanted to talk a little bit about the rise and fall of the private sector. What really seems to drive the private sector in China has been a combination of domestic consumption and exports. And so domestic consumption bottomed out around 2010, 2011, with household consumption at a truly surreal 34% of GDP. And after that, we started to see a partial recovery of consumption. And the private sector benefited from that. But that more or less stopped a couple of years before COVID And during COVID we saw again the consumption share of GDP go down. And that's much more important than exports. And so I would argue that what's really driving the expansion and contraction of the private sector has really been the distribution of income to the household sector. I think that's what's really been key.

C (29:18)

I want to thank all three of you. I want to thank our friends at the Peterson Institute, and I want to thank everybody who attended this morning. Best of luck to you and thanks again.

A (29:34)

Thank you for listening. You can find the articles that we discussed on today's show at foreign affairs.com the Foreign affairs interview is produced by Kate Brannan, Julia Fleming dresser and Molly McEnany. Special thanks also to Grace Finlayson, Caitlin Joseph, Nora Revenaugh, Asher Ross, Gabrielle Sierra and Marcus Zacharia. Our theme music was written and performed by Robin Hilton. Make sure you subscribe to the show wherever you listen to podcasts and if you like what you heard, please take a minute to rate and review it. We release a new show every other Thursday. Thanks again for tuning in.