[MUSIC] Okay, you're saying. Professor Zweig, you've given us this model. You've talked about all these factors that explain China's opening to the outside world. But does this model actually work? Does it really help us understand China's opening to the outside world? Now, so let's look at some of the factors that I raised. The first was elite politics and the attitudes of leaders. And here, the most important person in the whole process was really Deng Xiaoping. But he had some important assistants, particularly the Prime Minister, and then the Party Secretary, Zhao Ziyang, who was very, very important. But back in 1978, Deng emphasized China's need for technology, capital, management skills, that they needed to borrow this from the world, and he believed that China could control what he called the mosquitoes and flies, which were really the Western values that would come in through the screens, and that he felt that China could still manage it. Though, he wasn't surprised with the Tiananmen events in June of 1989, because those were actually the mosquitoes and flies that he was worried about. But when we think about top leaders, it was the figure I showed you, the two by two figure China was starting up there in the upper-left quadrant with autarky, and Mao had insisted on autarky. He had slogans that said that China should be self-reliant. And so you needed someone like Deng Xiaoping to come along and say it's okay if we engage in global trade. We can have some degree of autarky and global engagement. Now, after June 4th, China decides to close down to the outside world, and the outside world decides to close down onto China, right? And in that period of time, you really do need someone like Deng Xiaoping to open up the system again. And this is 1989, and in 1991, the Soviet Union collapses, and the leadership of China is just really scared about the outside world, and they're trying to keep a tight control on things. But Deng is convinced that he needs to open up to the outside world, and that that's the way he's going to save China, so he goes South, and he invites local officials to open up to the outside world. And this is something that provincial leaders all along the coast really wanted to do, so he creates for them the opportunity that they're looking for. Now, in the model, I would say the really important part of it that you can't leave out is that central leaders need to permit some liberalization. They need to decrease the regulations slightly so that the signals from the global market, the domestic actors can actually know the prices, know the benefits, know what we call them, know their interests, and they can see the benefits that might be derived from these kinds of global transactions. Now, in terms of the relative prices in goods and services for China, we can focus on two aspects. As I mentioned before, one is labor, the other is technology. And in the late 1980s and 1990s, Chinese began, they recognized that bringing in foreign technology that was unavailable in China. So you go out, you get this technology, and you actually bring it in, often through a joint venture, that you could produce goods for which there was no competition in the domestic economy. And you could then get extra normal profits. You could charge more for the good, because there was a no competition, and very few firms had that same technology. So that was one good way that people could, or firms could charge high prices and make a lot of money until somebody else began to bring that technology in and then compete for those profits. This situation also, as I mentioned before, creates incentives for moving goods across the China, out of China, right? So social goods, social groups you could benefit from exports, labor. They could benefit from bringing in management skills of mobilizing the factories, running the factories more effectively, and then exporting those goods internationally, and they could make a lot of profit on that. I also talked before about the bureaucrats and the fact that bureaucrats become the facilitators, and at the same time controllers. They actually become the gate keepers, right? What I call here he gate keepers or those linkage agents who really controlled those channels of global transactions. Now, as bureaucrats, they're quite cautious. And so, in '78, '79, beginning into the 1980s, they really, the bureaucrats really blocked the opening. They try and hold back. They think that they want to keep control. They want to keep control of their foreign trade companies, if they work in a foreign trade company. They may want to keep foreign influences away, but they started to get the message, and the message was that they could only charge fees if they let goods cross the border. It doesn't do you any good to stop a good going in or out. No one's going to give you a payoff. No one's going to give you a kickback for letting that good go through if you don't let it go through, right? So as I like to say, no flow, no dough, right? And dough being the American slang for money. So as long as there is no flow, there is no dough, and the bureaucrats recognized that. So beginning around 1984, they started to allow more transactions to go on than the center really preferred. So that became very important. Now, as the flow of goods really picked up, as the numbers of transnational exchanges picked up, and the center had tried to maintain it's approval process, because they were still trying to keep those regulations in some, keep some control over, keep those regulations working. They found that they couldn't approve so many applications for joint ventures, for special zones, for high-tech zones, for trades, all that kind of stuff. And so they decided, and this is a very, very important part of this whole process of opening up is they decided to decentralize the channels of global transaction, and they decided to let the local governments monitor the process for the center. And here, you get what in political science or sociology would call a principal agent problem where the center allows it's agents to act on its behalf, but it really can't control those agents very well. And so what we see is the decentralization of foreign trade, and here I will show you a slide that shows that the decentralization really happens in Jiangsu and how it dramatically changes the make up of who's controlling exports and who's getting the benefits from it. So if we go back here to 1985, this is before the reform, as I said bureaucrats are still in control around 1984-85, they're resistant to giving up a lot of control. And here, you can see that in terms of foreign trade in Jiangsu province, which is a major exporting manufacturing province, 100% of exports from Jiangsu were still going through the hands of centrally controlled foreign trade companies, which meant that the money was coming up to Beijing by and large, and the center was in control. Municipal-level foreign trade companies. So foreign trade companies for cities, there were no foreign trade companies for cities in Jiangsu, and there were no joint ventures, right? Then 1988. Here you have the results in '89, but in 1988, Zhao Ziyang carries out a major reform, and he allows for the emergence of many local foreign trade companies. And by 1989, there are about 6,000, so we go from nothing to about 6,000 foreign trade companies. And so within one year, they get control of 9% of the foreign trade in the province, and joint ventures start to take place in the cities and in the countryside, and so they have controlled 4% of the exports. Let's move this forward, and what we see is the share of the Central Government, the foreign trade companies continues to decrease. And particularly, remember I said 1992, Deng Xiaoping takes his trip south. That involves greater decentralization, because the number of flows are increasing, provinces and cities are getting more influence, and you can see here an amazing shift in three years where the central trading companies lose half, right? They go from controlling 50% of the foreign trade to only 25.4% of foreign trade. The city foreign trade companies, the municipal cities, it goes from 24% up to 40%, and the joint ventures really become much more important player. They are already controlling 34%, 35% of the exports. And so by 1997, when you look at this, the joint ventures, which we'll talk about, the rural joint ventures, they come to dominate exports. The municipal trade companies are the second with 36%, and the central foreign trade companies are down to just over 21%, yet if you look at the flow of foreign trade, the center actually doubles it's amount of foreign trade. So clearly, there's a major jump in foreign trade, right? A factor of 10, and by this point, there's been a reallocation of who's controlling the foreign trade. Now, local governments also had incentives. Part of the system that goes on, part of the reforms that happened at this time, one of the key reforms is what's called the Financial Responsibility System. And the idea here was that the center made a deal with local governments. And it said that local governments at the provincial level, and then the provinces said it to the municipalities and the cities, and then they said it to the counties. Each level set a predetermined amount of taxes that that level would have to send up to the next level or as a kind of tax farming system. But the quotas for how much you had to send up were set and would be the same for three years. So if you're a local government, and you can collect more taxes in year two or in year three, then you were committed to passing up in year one, you got to keep all of those taxes, right? And what we saw in the world, in local cases, in China where places were quite successful in this process, what we saw was what was called extra-budgetary funds where the budgets of these local governments would get bigger and bigger, because they owned a lot of enterprises, they could mobilize the local governments. The local governments could mobilize factories to engage in international trade. They could export labor intensive goods, and they could make a lot of money through taxes, and they didn't have to send those taxes up to the central government. If you were a city, you didn't have to send it up to the province, so you got richer and richer. And so this created an enormous incentive for local governments to find ways to make more money. And the easiest way in those days, two ways. One was export labor-intensive goods, you can make a lot of money. And the other was to bring in technology into joint ventures, produce goods that had high demand in the domestic economy, and therefore you could get a lot of profits from that. So that was a great incentive and a great opportunity for local governments to do this. And when the center relaxed, its regulations are created, new channels of global transactions, local governments look for ways, use those global transactions to increase their tax base. Now, the policy process in this whole period involved a cyclical process where the center would deregulate some of its controls, would decentralize some of its controls, and then the localities would very quickly push very hard to take advantage of the opportunities that emerged, because of this deregulation and decentralization. But the problem was that if everybody rushed, many of these localities learned the kind of economic idea of the first mover getting the advantage, right? So as soon as a deregulation or a decentralization, some territory would be opened up, some new opportunity would emerge, the joint ventures would emerge, things like that. New, easier to get a joint venture, then these local governments would just charge. They would just go boom. They would go as fast as they could to open up these opportunities and take advantage of these opportunities, and so the center would always crack down, because they would get chaotic. Things would get out of control, and so the central leadership would say, hey, this is going on too fast. We have to slow down. We have to close it down a bit. We have to retrench and introduce more regulation. Now, that by itself then created this incredible cycle of deregulation and fevers. And so, for example, in 1984, 12 cities were declared open coastal cities with each of those cities having an export processing zone where firms could pay less taxes so long as they exported what they wanted. And I know that in many cities in Jiangsu province, for example, when they saw this process in 1984, in 1985 they started to try and take over land, because they wanted to be ready for the next time that there was a deregulation or decentralization. We also saw, in 1988, 1989, 90 cities established high tech zones. There was an experiment in Beijing. The advantages of these high tech zones was that you could import technology, equipment duty free. So big incentive to set up a zone, get labeled as a zone by the central government. A high tech zone, you go out, you get the equipment, your economy is going to boom, your taxes go up, you're only paying the taxes based on the first year quota, so you're going to keep a lot of money, local governments then have the incentives. So what happened is each time the center eased these constraints, local governments, firms, or individuals used these new opportunities to link to the outside world as quickly as possible, because they had seen previously how after too many people feverishly utilize the opportunities, the government had tied up. And so in this period of time, particularly in the '90s, we see the zone fevers, joint venture fevers, fevers to go study overseas. Because you want to get out, you want to get out before they decide that they're not going to let anybody else go out to study, right? Because the easing of constraints was often short-lived. And if you missed your chance this time, it could be several years until the next opportunity emerge. So after 1984, and I think particularly after into the 1990s, these liberalizations triggered local fevers for international exchanges or for establishing these channels of global transaction. And even, in fact, if the center close down some of these extra zones, some of these foreign trade companies, the level of openness after each of these frenzies was always greater than it had been before the fever began.
