Israeli model holds the answers to China’s quest for technology and innovation — Yasheng Huang

MIT Sloan Prof. Yasheng Huang

MIT Sloan Prof. Yasheng Huang

From South China Morning Post

It is widely understood that China needs to move from an investment-intensive growth model to one based on science, technology and innovation. But before I take up this subject, let me take a detour to tell a tale of two countries.

Both countries are small. One has a population of 5.5 million people; the other has a population of 8 million. In both countries, the dominant ethnic group is about 75 per cent of the population and minority groups make up the rest.

Both countries are rich. One country has a per capita gross domestic product of US$52,000 and the other country has a per capita GDP of US$35,000.

Both countries have faced existential security threats from the outside and armies in both countries have mandatory conscriptions. One country was actually kicked out and evicted by its now much larger neighbour, because the union would have threatened the political dominance of the main ethnic group. The second country is located in a region surrounded by hostile nations.

Read More »

A presidential truthfulness oath – Yasheng Huang

MIT Sloan Prof. Yasheng Huang

MIT Sloan Prof. Yasheng Huang

From Project Syndicate

On January 20, 2017, Donald Trump will be sworn in as the 45th president of the United States. I say “sworn in,” rather than “assume the presidency,” because, under Section I of Article II of the US Constitution, Trump cannot actually become president unless he takes an oath of office, publicly committing himself to uphold the Constitution and perform to the best of his ability while in office. That is, of course, the case for all presidents. But, given how Trump comported himself during the campaign, it is particularly meaningful in his case.

Until now, Trump has made no effort to behave in an honest or reliable way. Technically, he didn’t have to. The US does not require any sworn statements from the men and women who run for president, nor does it have any enforceable code of behavior or constraints on the kind of rhetoric that can be used. Candidates may conduct themselves however they see fit.

This approach is based on the assumption that we can trust the candidates’ judgment. People seeking the country’s highest office should know how to balance the political imperative of winning votes with a sense of responsibility for the feasibility of – and reasoning behind – their policy promises.

By and large, experience has vindicated this view. The US has had the good fortune of choosing largely from among presidential aspirants who adhere to generally accepted norms. With Trump, it seems that fortune has turned into bankruptcy.

Read More »

China must draw the right lessons from the failures of its one-child policy — Yasheng Huang

MIT Sloan Prof. Yasheng Huang

MIT Sloan Prof. Yasheng Huang

From South China Morning Post

In 1983, the UN gave China and India awards for their efforts to control the population. The recipient for India was its then prime minister, Indira Gandhi. She famously pushed for a compulsory sterilisation campaign and even suspended elections in order to enforce it. Her programme failed miserably, and one of its enduring effects is a pervasive distrust of India’s health care system, which still plagues public health efforts today.

By contrast, China’s one-child policy was in place for 35 years until this October, when the government announced a shift to a “one couple, two children” policy.

The contrast in duration between the Chinese and Indian population control policies cannot be sharper, and it is this, among other differences, that prompted some Western observers to argue that the authoritarian Chinese system is more capable of enforcing politically tough but economically rational policies.

The reality is much more complicated. It is true that India has a higher fertility rate than China and it is also true that India could not enforce population controls as effectively as China has. But there are many other differences between China and India that would account for a lower fertility rate in China, regardless of policies. Chinese women enjoy a higher socio-economic status than Indian women. Chinese basic education and public health are far superior to those in India. All these factors would have led to a declining fertility rate in China even if China did not have the one-child policy in place.

Read the full article at South China Morning Post.

Yasheng Huang is the International Program Professor in Chinese Economy and Business and a Professor of Global Economics and Management at the MIT Sloan School of Management.

China’s economic policymakers have to learn to let go if they want to establish credibility — Yasheng Huang

MIT Sloan Prof. Yasheng Huang

MIT Sloan Prof. Yasheng Huang

From South China Morning Post

The ability of the Chinese government to control is undisputed and unparalleled compared with governments in other countries and, indeed, compared with the Chinese state during imperial times. If the stock market does not go up, then prevent it from going down by shutting it down. If too many investors want to cash out their positions at the same time, just charge them with “malicious intent to sell” and arrest them as proverbial chickens to scare off the monkeys.

The problem is that a government so focused on and obsessed with controls is not one that cares about or is particularly good at establishing credibility. A government needs credibility when it tries to convince others to do its bidding without the ability to dictate actions directly.

In his book, The Courage to Act, Ben Bernanke wrote about how US Federal Reserve officials debated and deliberated long and hard about particular words and phrases, and even about the usage of different punctuation marks, in their communiqués with the public.

The reason is that the effectiveness of the Fed does not depend on its ability to arrest people at will but on how it is perceived by market participants – whether it is perceived as being capable, deliberative and above all credible. If the Fed lost the confidence of the market, much of its influence and leverage would evaporate.

Read More »

The end of China’s growth model — Yasheng Huang

MIT Sloan Prof. Yasheng Huang

MIT Sloan Prof. Yasheng Huang

From The Boston Globe

Stock markets continue to respond strongly to China’s economic woes, fearing a crippling slowdown since China suddenly devalued its currency two weeks ago — a move widely interpreted as a desperate attempt to support growth.

But Chinese growth in the future will be limited until the government makes fairly substantive structural reforms.

China’s growth model is one in which the role of the state in the economy has become more intrusive. For years, many US observers hailed China’s government-led and investment-heavy model as a pillar of strength. Their favorite comparison is between the spunky new airports in Beijing and Shanghai and the supposedly dilapidated New York JFK and Los Angeles airports. While comparison has an element of convenience to it — you have to depart from a US airport and arrive at a Chinese airport when you visit China — the “airportology’’ is flawed, because it doesn’t take into account that China has clearly overbuilt, and at a considerable cost to its middle class.

Read More »