Intelligence Squared

A Pox on Both Your Houses

Why Minxin Pei will argue that America does capitalism better than China—barely—at the Slate/Intelligence Squared live debate on March 13.

Minxin Pei
Minxin Pei

Courtesy the Carnegie Endowment.

Minxin Pei wears many hats: Born in Shanghai, he became a dual Chinese-American citizen after moving to the United States to attend graduate school at Harvard. He has served as director of the China Program at the Carnegie Endowment for International Peace and teaches government at Claremont McKenna College. Pei is the author of China’s Trapped Transition and From Reform to Revolution—and despite his harsh words for both the Chinese and American economic systems, he’s also a bit of a jokester. (When I asked him how the United States fit into the global balance of power, he subtracted points for the Washington Dulles International Airport.) Pei has high hopes and fears for his two home countries: He thinks China and America should embrace their growing interdependence, but he’s dismayed at the greed shown by both Communist Party bureaucrats and leaders of what he calls the “Capitalist Party of the United States.”

I recently spoke with Pei over the phone about American and Chinese forms of capitalism and the social forces that are beginning to challenge China’s one-party rule. Below are excerpts of our conversation.    

Slate: In the Slate/Intelligence Squared debate on March 13, you’ll argue against the motion that China does capitalism better than America. Does that mean America does capitalism better than China?

Minxin Pei: Yes. If China does not do capitalism better than the U.S., than obviously the U.S. does it better than China.

Slate: I was thinking maybe the two systems were just different.

Pei: Well, the U.S. does not do capitalism as well as it used to, or as well as it should. You don’t have to look at China to see where America is going wrong. Let me identify a few obvious areas: infrastructure. The U.S. has been shortchanging its own economy and people by underinvesting in infrastructure for decades. So America is a First World country with almost a Third World infrastructure: aging power grids, aging bridges, aging roads, dilapidated airports.

We’ve also been underinvesting in public education. As a result, we are falling behind in terms of producing highly skilled people who can compete in the global economy.

Finally, we’ve allowed certain sectors to have a lock on the economy. The financial sector is way too big. Also the health care industry. Health care accounts for more than 17 percent of the GDP; federal revenues from taxes are about 16 percent. So, in other words, we now have the choice of either a second federal government or the health care sector.

Slate: What can American economists learn from China?

Pei: Not much. The only thing they can learn is that government needs to invest. China invests too much in infrastructure, but the U.S. doesn’t do enough. In the modern economy, in the civilized world, government does have a role to play in economic activity.

Slate: What does that role look like, ideally?

Pei: It looks like the United States in the ‘50s and ’60s. Best case scenario, the government invests in infrastructure (the interstate highway system is a great example), basic research, environmental protection, and public education on primary, secondary, and tertiary levels. Take, for instance, the GI Bill, a scholarship program for soldiers returning from World War II. The government doesn’t have to do what China does, which is give companies a lot of subsidies and invest in technology. That gets the state into the uncapitalist business of picking winners and losers—business with which it never does a very good job.

Slate: I have this list of data in two columns. On one side is America, and it says, “jobless decade,” “30 years of flat median wages,” “trade deficit,” “a shrinking middle class” and “extraordinary gains in wealth, but only for the top 1 percent.” Then, on China’s side, it says, “a 12.5 percent rate of annual growth,” “10 percent wage increase,” “expanding middle class,” “49 percent growth in tax revenue for 2011”—

Pei: Using growth as an indicator of whether one country does capitalism better or worse than another is not reliable. Growth is determined by many things other than the quality of a state’s capitalist institutions. The biggest determinant is the level of economic development. The U.S. is already a highly developed country, so the demand for goods and services is constrained. China is a very low-income country. When it began to grow 30 years ago, its average income was something like $300. The U.S. at that time was $13,000.

Investment also encourages growth. If you invest more in a product, you can grow a lot. China has been investing more than 35 percent [of its GDP]. The United States is investing less than 26 percent.

Slate: What would be a better indicator of China’s progress?

Pei: The essence of capitalism is economic efficiency. Assessing efficiency means looking at whether Chinese companies are more profitable; at whether, given one unit of investments, China produces more than the U.S. If you study these indicators, the United States outperforms China across the board.

Slate: In an article in the Economist, Aldo Musacchio at the Harvard Business School wrote, “State capitalism today is a system in which governments have realised that profitable state-owned enterprises (SOEs) make the state stronger. Thus, even if large state-owned firms have a ’double bottom line,,’ in which social and political objectives are important, profitability has become a key goal.” How would you respond?

Pei: State capitalist countries are all one-party or nondemocratic systems. What they understand is not that economic efficiency is going to keep them in power (though of course it may help). It is their control of violence, the police and the army. Having a more efficient economy may be less costly, but at the end of the day, if you give Mr. Putin a choice between that and retaining complete control of the instruments of violence, I have no doubt which he will pick.

Slate: You’ve written that China’s economic growth has unleashed social forces that might destabilize the Communist Party.

Pei: There’s a good reason that very wealthy countries today, except for the oil- producing ones, all have democratic systems. The social culture in nations that achieve a high level of income is very different. They have a more diverse and highly educated society, more access to information, and it’s a lot easier to organize political activities, to challenge those in power. Economic growth produces social forces that are fundamentally incompatible with non-democratic political systems.

You see, the main driver of China’s modernization is education. China produces 7 million college graduates every year. Meanwhile, urbanization in China is rising at 1 percent per year—and 51 percent of the Chinese people are already living in urban areas. So 1 percent: We’re talking about 7 to 8 million people becoming urban residents every year. Let’s project this trend out and look at what the situation in China would be in 2030. We’d see a net increase of college graduates in the neighborhood of 70-80 million, assuming no increase in the capacity of China’s universities. We’d see another 80 million people moving to cities. That’s a lot of people. And not all of them are going to be members of the Communist Party; many of them will find their political system distasteful.

Slate: What will be China’s biggest challenge going forward?

Pei: Their biggest challenge is not in the economic realm. They will need to make a smooth transition to democratic governance. This process is going to happen in the next 20 years, regardless of the wishes of the ruling party. There is a historical rule: No one-party system has survived beyond the age of 74. The Chinese Communist Party has been in power for 62 years. So we’re talking about breaking a historical record within the next 15 years.

Slate: Given all this potential instability, should the United States explore ways to reduce its economic ties to China?

Pei: That will be very difficult. The two economies have become interdependent. American firms rely on Chinese workers to produce their goods and American service sectors count on the Chinese market to generate demand. What the U.S. really needs to do is clean up its own act. We need a better tax system, so that the government can finance its basic functions; human capital investments; and more social services for the poor. We need to reduce inequality.

Over the past 15 years, executives in America’s Capitalist Party have become almost indistinguishable from Communist Party members. They’ve used their power to give themselves absurdly high pay; they have no accountability to shareholders; and they’ve created a new caste, which is now exercising enormous political power. The American Capitalist Party is very worrisome.

Slate: How do you think China and U.S.-China relations will look in 20 years?

Pei: If China remains under one-party rule, the relations cannot be good. The question is, how bad will they get? The United States and China have a deep strategic distrust of each other. I can imagine more competition, and not necessarily economically, but definitely in terms of military power.

Slate: Should we be worried that China is financing such a large share [$2 trillion] of our debt?

Pei: No, we should welcome it, because the U.S. needs cheap capital and China can supply that, for now. China will probably start losing money soon. But we should encourage them to lend money to us, and no one should lose sleep over how much they lend.

Slate: Your debate partner, Ian Bremmer, suggested earlier that the Chinese are proud of their economic system and have a favorable view of state capitalism. Do you agree with him?

Pei: No. I hate to challenge my debate partner, but the Chinese prime minister himself, the chief economic officer of the government, says, “The Chinese economy is unbalanced, inefficient, and unsustainable.” You cannot characterize those words as “proud.”

Slate: What are your hopes for China?

Pei: My hopes are fairly straightforward. I hope its economic growth will continue, albeit with higher quality goods, less pollution, and more social justice. I hope for more implementation of individual welfare. Most importantly, I hope that China will become a democratic country. China is an outlier in the world—it is even less democratic than Russia! With the Arab Spring, it stands among a dwindling group of one-party regimes and dictatorships. I don’t think that’s right. A country with such a rich ancient history and civilization should not remain the odd man out.