08 Apr 2014

Can China Lead?

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A little over 100 years ago, the Chinese empire fell. 2000 years of imperial tradition ended, virtually overnight. After a century of searching for its political and moral core, China is once again poised to become the dominant global power. HBS Professors Bill Kirby, Warren McFarlan and Regina Abrami recently wrote Can China Lead? : Reaching the Limits of Power and Growth. Professor Kirby joins The Business to talk about China's major challenges and whether it will ever fulfill its potential. And then he breaks into song.



The Business is a podcast from Harvard Business School that ran through 2015 and took a unique look at the business world through conversations with HBS faculty and entrepreneurs. It has since been replaced by Cold Call, a new podcast that distills the legendary HBS case method into digital form. Subscribe to “Cold Call” on iTunes, and iTunesU or follow us on SoundCloud.

 

Transcript

Brian Kenny: Our guest today is Professor William Kirby. He’s a historian of modern China, whose work examines China’s business, economic and political development. His most recent book, co-authored with Regina Abrami and Warren McFarlan is titled, Can China Lead: Reaching the Limits of Power and Growth. It’s on Harvard Business Review Press. Professor Kirby, welcome.

William Kirby: It is a pleasure to be here Brian.

BK: Can I call you Bill?

WK: You may.

BK: Great, okay. Tell us a little bit about your book and what you mean when you say, “Can China lead?”

WK: Well, it’s a book that’s based on the presumption that’s very widely held around the world to some degree in China, too--but not universally in China--that if the nineteenth century was, in many ways, a European century, and the twentieth century or at least the second half of it was an American century, how could the twenty-first century not--given this rate of growth that we have seen--be the Chinese century. And it is a reasonable assumption if you assume that several centuries ago, in the eighteenth century and the early nineteenth century, China was the largest economy in the world. The richest people in the world were Chinese. It had among the best infrastructural systems for that day of any major empire, and it seems poised to recapture leadership in all of these areas. We look at the different areas where China has the potential to lead, and we talk about the fault lines, particularly in the Chinese polity, that limit China’s capacity for leadership.

BK: Are these just challenges, are they just growing pains that they are going through, or is it something deeper?

WK: I think it is something deeper. I think, first of all, China over the last 30 years has grown extraordinarily well. It is still paying the price--and we have to realize this--for the first 30 years of the People’s Republic, when China went backward fast while the rest of East Asia sped forward. The catastrophe of those first 30 years helps to explain the kind of catch-up growth that we have had over the last 30 years. Our book argues in some sense when you look at entrepreneurship, now re-unleashed education, infrastructure--if you look at those three areas and you look at the capacities of the Chinese people for invention and entrepreneurship and the capacity for the government for investment--you could argue how can China not lead? But we believe that without political reform, without a serious change in a political system that has shown that it can do many things extremely well, China is not going to be able to lead into the twenty-first century on the basis of a political system that dates from the Soviet Union of the 1920’s.

BK: Do you think that the leaders in China are watching developing democracies, take India, for example, and trying to learn from what they’re doing, or do you think that they’ve got it wrong and that China feels like they are on the right path?

WK: I think a number of people in the Chinese government think that they are on the right path in terms of what they know how to do. This is a government run almost exclusively by engineers. They know how to build roads. They know how to build high-speed rails the likes of which, sadly, we will never see in our lifetimes in this country. They don’t know how to build enduring political systems of civilian control, which make the best use of the talent of the Chinese people. They don’t trust the people to make their own decisions, and so if you are in a school today in China, you get a comic book version of the history of your own country. You can’t easily criticize the directions of policy. You can comment on them. You can critique them quietly, but you cannot openly criticize. You have a political system that from a distance looks powerful, looks extremely powerful. It can get things done that no other political system on earth seemingly can get done--the Three Gorges Dam project, these highway networks, high-speed trains, massive expansion of education, and so on. Yet it is fundamentally insecure. Why is that? Why, for example, when a writer such as Liu Xiaobo writes an essay and has a petition? Why is he given a sentence of 11 years and, in some sense, given the Nobel Prize for his peaceful opposition to the government? It is because the government knows sadly, perhaps, much better than we on the outside, how insecure its actual political grasp of the Chinese people is.

BK: Can you talk about the Party’s role in Chinese government? I think most westerners don’t really understand. They conflate the two. Do outsiders distinguish--should we distinguish somehow between the Party and the government?

WK: You were more able to do that in the 1980’s and even in the 1990’s than you are today. We are in the moment when the Party has always dominated government and has never allowed government to be independent of Party control. The same is true of military. But we are in the moment when the Party is asserting ever greater control over all aspects of society or seeks to--under Mr. Xi Jinping--seeks to assert greater control over all aspects of society, over universities, over businesses--now even private businesses with the need to have Party cells in the course over state-owned enterprises. And it’s a sign, again my own personal view, of weakness rather than strength. A sense that they have to reassert their authority, reassert their legitimacy because they cannot take it for granted; and it would not automatically be willingly given by the Chinese people had they had a choice.

BK: What’s it like running a private enterprise in China with the government watching over your shoulder?

WK: Historically, and today, private enterprise is the great engine of Chinese economic growth. What’s interesting to us as we looked at the growth of private enterprises is that the last decade-- two decades ago--the decade of the 1990’s, was one in which the state moved out of a number of areas. A number of SOE’s were closed too. State-owned enterprises were closed because they were inefficient and bloated. They kept the more successful ones. They kept the larger ones. They let go of the smaller ones. But in the last decade state-owned enterprises have come back, and they have come back in a large way and making it difficult for newer, private enterprises to compete on the same turf. Now, there are reasons why all countries have some realm of state-owned enterprise. Strategic industries in many countries are state owned, railroads--

BK: Utilities--

WK: --utilities, and so on. In China’s case, the same is true of mobile communications, things of this sort. But, China, if you wanted to start a winery--I just taught a case on the wine industry in China in my MBA class this afternoon--if you want to start a winery, you’ll find that the largest companies with large, large market share are state-owned enterprises. Red wine, it seems, is a strategic industry. It just happens to be an incredibly profitable industry, and the state-owned enterprises have enormous benefits of capital from state-owned banks that private enterprises do not get, and it is a very uneven playing field. That’s why, a couple of years ago, I went to the annual festival associated with Alibaba’s company Taobao; and Mr. Jack Ma, the extraordinary entrepreneur, the creator of Alibaba and Taobao, said to 15,000 people gathered in the stadium, “State-owned enterprises are big because they are state-owned. We’re big because we’re good.” He said in plain words in Chinese, “they are the so-called state-run companies, we are the real state or country-owned companies. We are the national champions.” It is more interesting played in Chinese, but it was a forceful political statement.

BK: I was at a dinner a couple of years ago in Hong Kong with a small group of very successful business leaders who were doing business out of Hong Kong but also in China, and the general sentiment at the table was you can’t expect to reach a certain level of success in China without being accused of some sort of malfeasance or crime at some point. Is that just part of the table stakes of becoming a successful, you know, owner of a private enterprise?

WK: Well, if you are the owner of a private enterprise and you want to succeed, you can never wait until what you want to do, or you can seldom wait, until what you want to do is obviously and with 100% clarity legal. That is to say, some of the great entrepreneurs of the last two decades have driven their businesses through regulatory gray zones, areas that are neither legal or illegal but not yet prohibited by the government, not yet monopolized by the Party state, and often with extraordinary success. But, then regulations can change, sometimes overnight, and you can find yourself out of business. The larger difficulty is the inevitable corruption that comes with such a large bureaucratic system in which such large numbers of officials are so poorly paid. What do you imagine was the annual salary of President Hu Jintao, the president of the country before President Xi Jinping?

BK: In U.S. dollars?

WK: In U.S. dollars. So President Obama makes $400,000. How much does President Hu make?

BK: I’ll say $450,000.

WK: $450,000?

BK: Yes.

WK: I am sure he would have loved to have made $450,000. The answer is U.S. $11,000.

BK: Wow.

WK: So, if you a Party secretary of a district in Shanghai, you are not going to make as much as the President of the country. You might make a third of that or less. You cannot possibly live on that. There will have to be other forms of income. Now, you do get housing, you may get car and driver, etc., but you still cannot make a living. Chinese officialdom, and this goes back centuries and centuries, have always been underpaid and always been compensated in part by what used to be called customary fees. Today, of course, these customary fees still happen. They are a part of doing business, and yet they are potentially illegal whenever the government wants to crack down on you or on someone else. If you are a businessman, for example, and you need real estate for your business, who owns the land? Who owns the land in every part of China? It’s the government. For the first time since the Tang Dynasty, which fell in the tenth century A.D., the government owns all the land. And not just the central government, it is the local government. So you have to deal with local government officials who have de facto property rights over all land under their jurisdiction; and in order to get the property that you may need for your business, you will have to deal with these people. I do not want to say that everybody in China at the local government or in the business is corrupt. It is simply not true. But they do have to do things because of the structure of both ownership and compensation that in other countries one does not have to do.

BK: What’s the biggest misperception that business leaders from the West have when they try to enter the Chinese markets?

WK: Okay, I think the biggest misperception is that there is one Chinese market. China is the size of the continental United States. It has provinces the size of European countries with economies that will soon be the size of major European countries. Success in one part of China can constitute an enormous level of success and very, very few products--there are very few products, there are some, of course--but very few products are nationwide products. You need success, you need a foothold, not just in Beijing. You need to know the people on the ground in the area where you will be working, where you will have partners, or where you will have investors, where you will have customers. You need to work at multiple levels at once. It’s a complicated place. Knowing politics, knowing whom to talk to in government, is going to be a very much larger part of your job in China than elsewhere. The government, national, regional, local, is everywhere; and you might as well get used to it, and you do have to deal with them.

BK: So if you were advising the head of the Party in China how to address some of the challenges that you call out in the book, what would you tell them?

WK: Well, what I have told friends in China, including those in reasonably high places and what our book says, too unless you have institutions that are apolitical and honest, honest police force not a politicized police force, honest courts not a politicized set of courts, and a more open press that can investigate officials. It is unpleasant, nobody likes it, but it really is important in dealing with corruption. If China had those three things, I think without elections it would have a much more transparent system, and the people would have much more faith in the government that led them. Let me put it in a different way. A little bit more than a hundred years ago, the Chinese empire fell. Two thousand years of imperial tradition ending virtually overnight. All of the things that had integrated China and, particularly, the values that have kept China together, but also the political system that that had tried to inculcate those values across the empire--gone, virtually overnight. The experience of the last one hundred years is how do you build a new country in a modern world and still be Chinese? There is a sense among many people in China that one needs to go further back in time to look for some of those values that had held this place together and that had allowed the country to lead, not just in martial terms, not just in material terms, but also in moral terms. And yet, what Chinese beliefs are today are a mystery, sadly, often to many Chinese. The government, to its credit, seeks to move in this direction without knowing how to do it. President Hu Jintao talked about having a harmonious society something that sounded ancient and Confucian. Mr. Xi Jinping said yesterday that the Chinese Communist Parties should be a protector of the legacy of Confucius. This is the same Party that destroyed virtually every Confucian temple in the country during the Cultural Revolution. They are grasping for some historical straw for legitimacy in China’s past, and I think that their successors, with luck, will find it.

BK: So China is investing in its infrastructure. It’s building roads, it’s building the high-speed railways that you mentioned. What’s next for them?

WK: It’s investing finally, as it were, in the people and in the poorest of the people. You know, this was a regime that came to power in principal with the support of farmers, and yet no part of the Chinese population has suffered more over the last 65 years than farmers. They lost their land, they lost their capacity to determine what they could grow, at what they could sell it. Many of them lost their lives in famine. Now they are losing their land again to developers. China faces the challenge that if it cannot rely in this export driven economy today on continued growth in Europe and North America, where are its next markets? The largest next one is actually at home, but that means investing in the many people who have not been winners in the Chinese economic miracle over the last 30 years--the people who are immiserated, comparatively speaking. It’s true. Hundreds-of-millions of people have been lifted out of poverty and, in our view, not lifted by the government. They have lifted themselves. So, in some sense, the government has realized that its next market in China, is internal. These vast internal potential markets made up of hundreds of millions of people who are, nevertheless, too poor at the moment to consume. How do you invest in them? One way--which I think is a very positive step--is to invest in health care. China actually believes, but has never practiced it--the government now claims to believe in universal health care. It has never had it. Health care has always been weak and expensive in China, particularly for poor people. But, now, they want to put at least a framework of support under rural families so that they do not have to save every last dime for the catastrophic illness that will come because 70% of the men smoke--smoking, naturally, government-owned cigarettes from government-owned enterprises. So, if one can put a social safety net, health insurance, make education less expensive for rural people and better, because the best schools and the least expensive schools are in the most elite areas of the country. If they can do this, then you have a market there that can begin to consume the goods that China’s private enterprises, whether they’re clothes, whether they’re household enterprises, are making in a way that they cannot today. I think this is both a big challenge, but an enormous opportunity to invest finally in the health, education, and welfare of Chinese farmers. If that happens, that would be probably the most revolutionary act for Chinese farmers that the Chinese Communist Party has ever done.

BK: Does that create another problem for them to deal with, though, in the form of a rising middle class with expectations for higher wages?

WK: China’s wages are going to be higher. There isn’t any way around it. Yet if the market is there and the logistics make serving that market simpler and faster than, for example, outsourcing everything to Bangladesh or someplace else wages will grow.

BK: Playing on the title of your book, not can they lead but do you think will they lead?

WK: I think that China has the capacity to lead without question; in business, in education, to have the greatest universities in the world. You know, 100 years ago the greatest universities in the world were not in this country, they were in Western Europe. The chances of Chinese leadership in this area are extraordinary and no country is investing more in education than China. But it will not need, if these institutions are fettered politically, fettered intellectually, not allowed to be independent of mind, independent of thought, and not allowed the freedom of action to take the leadership positions. If I were to look ahead 30 years, I see a China that is richer economically, stronger, surely, militarily. Third I see a China that will probably be more decentralized politically. Probably a China that has more than one time zone, it is the sense of centralization in China that everybody is on Beijing time. And if China can get to that situation and without a political explosion then I think China does have great leadership capacity. But I think that without political reform, without a sense of what happens after the Chinese Communist Party because it’s a rule of history, Brian, no political party, and I say this as a historian, and feel free to come up with a counter example. No political party rules forever. The question is not if, but when and how the Chinese Communist Party seats power to someone else. The question really is when does that party determine, or when do leaders in that party, the interest of China, the long term interests of China are more important than the interests of the party itself in maintaining power. When that moment comes, China will lead.

BK: I wouldn’t dream of challenging you on that one Professor Bill Kirby. Thanks for joining us today.

WK: My pleasure. Thanks so much.

BK: I heard you have a fun way of remembering the Chinese Dynasties. Can you take us out with it?

WK: I would be happy to. [singing in Chinese] “Shang Jao Chin Han, Shang Jao Chin Han, Sui Tang Zhou, Sui Tang Zhou, [phonetic] [inaudible] republic, [inaudible] republic, Mao Zedong, Mao Zedong.”

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