Transcript of the Interview with Lawrence Lau (劉遵義)
China Boom Project, Asia Society
2010
Lau, Lawrence (劉遵義)
Vice-Chancellor, Chinese University of Hong Kong
Industry: Academic
Lawrence J. Lau was born on China's mainland in 1944, is Vice-Chancellor of the Chinese University of Hong Kong. He received his primary and secondary schooling in Hong Kong. He furthered his studies in the United States, graduating with a BS in Physics and Economics from Stanford University in 1964, and receiving his MA and Ph.D. degrees in Economics from the University of California at Berkeley in 1966 and 1969 respectively. He joined the faculty of the Department of Economics at Stanford University in 1966, becoming professor of Economics in 1976 and the first Kwoh-Ting Li Professor of Economic Development at Stanford University in 1992. Professor Lau specializes in economic development, economic growth, and the economies of East Asia, including that of China. He developed in 1966 one of the first econometric models of China, which he has continued to revise and update ever since. He has authored or edited five books and published more than 160 articles and notes in professional journals. He is also an international adviser to China's National Bureau of Statistics.
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Transcript
Interviewee: Lau, Lawrence
Interviewer: Andrew Smeall
Date: June 03, 2010
Place: New York City (USA)
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R: Interviewer
00:00:03
LL: You are gonna sit.
00:00:04
R: Yea, let me just check. If you could just say your name for me?
00:00:07
LL:Larry Lau.
00:00:09
R: Sounds good, sounds good.
Okay, so the goal of this project is to create an archive for students, professors, and researchers in the future to look back and figure out what we thought at this moment that caused China’s boom, so for the benefit of those historians thirty years from now, could I start by just asking you to introduce yourself tell us your background, how did u become interested in Chinese economics, econometrics.
00:00:52
LL: I’m Larry Lau, I’m the president of Chinese University __ of Hong Kong, and I taught economics at Stanford for over forty years before moving to Hong Kong, I first got interested in China by building the first econometric model of China back in 1966, you know, way before it became fashionable. And in 1979, I visited China as an adult for the first time. And then I’ve been going back quite regularly. I’ve taken a great interest in the Chinese economy and have often been called upon to advise the government on various aspects on economic policy.
00:01:41
R: So in 1966, when you first built your models, it was obviously quite tumultuous year for China politically. So I’m wondering if you could first talk about what you were thinking in 1966. Obviously it was very difficult to foresee at that point what China would become, so when you started to develop this model, what were you looking for?
00:02:05
LL: Well I think the interest then was to see whether we could try to forecast how the Chinese economy would do. At that time there was very limited data, but there happened to
2 be a few pieces they published in the 50s and early 60s, and that’s the base on which we built this model. It really was quite interesting that subsequently I discovered somehow the Chinese were able to obtain a copy. When I was teaching econometrics in China in the summer of 1980, I happen to walk past a student, and he happened to have a copy of my model translated and stamped “secret”. I asked him for a copy, at first he didn’t wanna give it to me, I said look there’s nothing in it that I didn’t know already. So, it was quite interesting.
00:03:07
R: So there’s this first ten years of the cultural revolution. How did you built your model, and where did it succeed? Where did it fail?
00:03:15
LL: It was long time ago, and I think Cultural Revolution is a very unusual period in the sense that pretty much nothing is normal, I can’t say that the model worked very well, but when I visited China for the first time in 1979, I actually used that model. I came up with a prediction of around 8% growth. And everybody in my delegation which includes Pro. Lawrence Klein, Kenneth Arrow___, and various other distinguished professors, everybody thought I was too optimistic, but in retrospect, I was still 2% too low.
00:04:06
R: So maybe starting out from 1979 on when you first visited China, how would you break, subdivide the boom from that point on? Without being too artificial, how would you break it?
00:04:24
LL: I would say that from 1979 to maybe about 1989 -’92, that’s probably the first period. And there’s very much a period which there’s a lot of trial and error. You’ve probably heard the saying that “you are crossing the river by touching the pebbles,” right? What is really interesting is that by 1978/’79, right after the Cultural Revolution, I think the Chinese people, they became so desperate that they were willing to try anything, you know, including opening up the economy, sending students overseas in large numbers. You have
3 to remember, that the former Soviet Union as backward as it was back in 1917, never sent students overseas, so for China to do that in ‘78, ‘79, it was very bold. I think nobody at the time expected the economy to do so well, they were convinced that whatever that they have been doing did not work, so let’s try something else, so it was very much a period of experimentation, you have on the farms, this responsibility system, in which farmers were encouraged to produce for a free market, once they completed their quota, so this released immense energy and productivity, and then they tried to extend this through the manufacturing, the industrial sector, which sort of worked but not completely. You have for a long time the so-called township enterprises and villages enterprises, grew very very fast, but all of these began to disappear as a force around, I will say, the early 90s.
00:06:46
R: So you’ve worked a lot on this two-track model and the market.
00:06:51
LL: Right, correct.
00:06:54
R: So I was wondering if you can talk about what you’ve just mentioned the SOE and the TVE. First of all, throughout the 80s, how did the government maintain credibility and..
00:07:08
LL: That is a very good question. In fact, it really is the two track system that made it possible. If you compare the Chinese experience with the Soviet experience, the Russian experience. It is precisely the Russia that didn’t use the two-track system that Russia actually had to go through ten years of declining GDP, per capita GDP. Now in the Chinese case, they actually had the two-track system in the following way. Everybody in the 80s, they still had to satisfy the plan, that’s your first responsibility, but after you have completed your plan, or your commitment under the plan, you can do whatever you want and sell it at the open market. If you think about it for a moment, what this did was to make sure there were no losers, you know. Because if you didn’t want to participate in the free market, you just continue doing what you have been doing. You would be paid the same way, and your input would still arrive, and you will still have enough money to buy food because you have ration tickets, so everything under the plan would still work, but if you wanted to, you worked extra, produced extra, and that you can sell entirely on the free market. So that is really what happened during this period, I would call it “reform for the losers”. Because by keeping the plan intact, you could actually protect all the vested interests. You have the incentive for people to work beyond the plan and they will get to keep whatever they were able to generate beyond the plan, so that’s very successful. But
4 for the losers, it’s important: no one became worse-off, I will say probably during the first ten years.
00:09:19
R: Until what happened?
00:09:21
LL: Well I think by the time you look at the mid 90s, then it’s not so clear that everybody would benefit, some people would benefit a great deal more and so forth. Because by that time, the plan as a percentage of the total had become very small, and so even if you were able to keep whatever is under the plan, sometimes you weren’t able to catch up with your neighbors, who were making big gains because they were participating in the free market. So if you insisted not going into the free market, you are gonna suffer relatively. Now compared to the beginning, you are not worse off, but if you compared with your friends, let’s say, in the early 90s, if you didn’t go into the right industry or you are not adventurous enough, you would basically stay there, while they would be much better-off.
00:10:35
R: So at that time in the mid-90’s, the plan is gone, They’ve grown out of the plan. What was the key move that China did then to keep the growth coming?
00:10:48
LL: Ah, that is a very interesting question. We all remembered June 4th, 1989. In fact the economy stagnated right after that in 1989, ‘90, ‘91. In 1992, Mr. Deng Xiaoping made a very bold move. He had this famous Southern Tour. That actually changed expectations because all of a sudden, people changed their expectation of the future. China is gonna move again, so they’d better invest and so forth. And the result was, ‘93 and ‘94 were huge boom years, and ‘95, because everybody was switching gears, investment grew very quickly and economy grew very quickly.
00:11:53
R: So I wanted to ask you definitely about that period which led to the explosion of SEZs ___ and the role of Hong Kong, but first I want to review quickly, you mentioned Deng Xiaoping. Obviously, Deng Xiaoping is central to the boom, and we gave him a lot of credit, but are
5 there any other figures that you would give credit to or how much credit does Deng really deserve. Is he the architect?
00:12:23
LL: Well I think he is the architect because you can say that the ‘78 reform was very much due to his support, and then the ‘92 Southern Tour was very much his. And then if you really asked Shenzhen was really his baby, and this idea “One Country, Two Systems” was also very much his innovation. So I think he is really quite important, because I think nobody else would have the same stature as Deng, who could basically, you know, turn things around.
00:13:19
R: So then let’s talk a little bit about... well first, when does Hong Kong come into play, or quote and quote, overseas and Chinese in general?
00:13:28
LL: I think the Hong Kong people actually went in quite early. I think in the beginning of the mid 80s. They were very crucial in the beginning period because people weren’t sure what’s going on and many Hong Kong people would go into Shenzhen and invested there, set up factories and so forth. They had the advantage of cultural affinity, but you know, most of them are Cantonese, so they could work well with the people in Guangdong Province and so forth. They have connections through overseas, so they can really make what we called “processing and assembling” plans work. if you think about it for a moment, that is also one way of making sure there were no losers because initial enterprises being set up by the foreign investment in Shenzhen and Guangdong area. They had to bring in all the raw materials from outside, all the machinery, and they had to export everything, right. If you think about this, what is happening. This means these people, these enterprises basically would not take away anything from the domestic economic system, right? Because they are not buying imports from the domestic, so that doesn’t interfere with the plan. They are also not selling into the domestic system, so it also doesn’t interfere with the plan. So the only thing that is being made use of was the surplus labor, so it is a net gain. All they were doing was to assemble the foreign parts and re-exporting it, just making a little bit of labor income.
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00:15:43
R: I want to sort of ask..um, you talked just in your presentation today about the role that China could potentially played as stabilizing influence for the world economy. I know the two are not directly related but just kind of play off those two ideas. What stabilizing and catalyzing role does Hong Kong play?
00:16:11
LL: I think Hong Kong was very instrumental in the beginning, setting up these enterprises because Hong Kong is very good has foreign connections and very good at doing light industry products, most of these were light industry products, but what Hong Kong is not well-known for is high technology and heavy industry, so by the time you get to the 90s, it’s the Taiwan enterprises that began to have a much greater contributions because they are in to things that are, at least look high-tech, and they also have an automobile industry, steel industry, none of the industries Hong Kong would have.
00:16:59
R: How did 1997 change Hong Kong’s relationship?
00:17:03
LL: I think what has changed is a __. In 1997 you have what is called the East Asia Crisis. One could say that up to that point, especially in the 80’s but also up to that point, Hong Kong has been very helpful to Chinese development, but I think beginning in 1997, that role begins to be reversed, that is, precisely for the reasons I gave that Hong Kong has no heavy industry no high technology industry. It really could not continue to be as helpful and then because of the crisis and price bubble and so forth, so it became the other way around, that is gradually, Hong Kong’s prosperity becomes very much dependent on Chinese prosperity. And now you know, for example, HK has benefited from the influx of mainland tourists. I think without these tourists, the employment rate would have been much higher.
00:18:17
R: So now looking at the 2000, maybe could you briefly run us through how you saw China’s economy evolved in this decade?
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00:18:29
LL: Okay, 2000 is also interesting, but we have to go back to look a little bit at the fundamentals. China has very high savings rate, that actually guarantees that most Chinese investment can finance internally, you know, doesn't need foreign loans and so forth. It also has surplus labor, huge market, so it has all the ingredients that will enable it to grow very fast. I think that’s number one, but I think 2000 and for that whole decade, what really is important is that China has a seat in the WTO. For most of that decade, China was actually benefiting from its membership in WTO. So you have seen a huge export growth, that is very much as the beneficiary of the WTO, that many of these quotas disappeared. But I think that phase is over, that entering-WTO phase so now it reached more or less saturation. And neither the US nor the European economies in the position of raising imports substantially. So it’s now going through a re-orientation towards the internal market because now there’s enough income domestically to provide the demand. And I think something like own-occupied housing, it probably would provide a lot of demand, not just the housing itself, but cement, steel, glass, other building materials, but electrical appliances furniture, carpets, curtains, and household goods. So there’s enormous pent-up demand that will help drive China’s economy.
00:20:49
R: So this period 2007, 2008, and 2009. I guess you’ve seen two changes, what you have just mentioned that China re-orienting towards the internal market, and the so-called global financial crisis, and that the two may be related. You also mentioned today in your remarks you see China’s economy is still twenty years away from G2, the group of two. It is an arbitrary figure, again, but I just want to ask you...
00:21:24
LL: What I meant to say is it would be at least 15 to 20 years before China’s GDP is the same as the US’s GDP, but on the per capita basis, that’s still, it will take another 20 to 25 years. China’s GDP per capita might become comparable to the US’s GDP per capita, maybe it has to be after the middle of the century, so it’s still a long time.
00:21:55
R: But what I want to ask is do you think this period, even though we are still 20 or 50 years away from parity. Will historians, you think, we are speculating, will they look back at this
8 period, as the moment when that relationship changed, when it didn’t become the US and China but sort of a more equal?
00:22:18
LL: Well, I think it could be. I think the global financial crisis is a turning point. Things don’t change automatically, you need some important event to trigger it, and I think there is actually a great deal of room for both countries to get together for mutual benefit. Things have to be win-win. I think the other things I want to say is that, many things, relationship between two people two countries, really depends very much on the expectations, which can be self-fulfilling. If two country think they are eventually gonna be friends, and they both behave accordingly, they will naturally become friends. If they both are very suspicious and eventually become foes and enemies, they will eventually get to that position. I think that’s quite important for us try to lay the foundations for a long-term collaboration, to make that possible. Now if you think about it in the European context, France and Germany fought three wars in a hundred years, with no real conclusions. But I think you can say now today, given the European Union and the structure, it is impossible for them to go to war at all, and I think that is very healthy, and I think that’s something similar. I don’t think there’s any conflicting interest between China and the US that cannot be resolved. I think even as difficult a question as Taiwan can probably, given enough time, can probably be resolved peacefully.
00:24:32
R: Last question, I wanna ask you to predict a little bit. Deng Xiaoping said that the reform of China might be a one hundred year process. It may be artificial to break it up into decades or periods. But I want to ask you, are we in the middle of the process, or are we at the end of one stage and starting a new one? Are you optimistic?
00:25:01
LL: I think there are two things. If you are talking about the economy, I think we might be in the middle. We have past thirty years, and given another thirty, forty, fifty years. It will probably, if everything goes well, China will reach a per capita income and GDP that is comparable to the US. I think more worrisome, and probably still at the very beginning, is the political reform. That’s gonna take a long time because I think if you look around, political reform is not only about the structure, it is really about the substance. You can go
9 through the emotions of having elections, but it may not give you what you want, because substances is important substance depends very much on building up a culture, and that is very difficult. That will take a generation or two. You have to respect the rule of law, and most importantly you have to learn to lose gracefully. Achowledge defeat gracefully. I mean what’s happening in Thailand could well happen in China, and there will be chaos. Because people have to learn, as Mr. Guo, that you respect the rules, you play by the rules, and you lose and concede gracefully. That is culture; that takes a long time to get to that point to the ting of preserving the system is much more important than winning or losing that particular context, and that is really hard. I think that’s gonna take two generation.
00:27:18
R: Great, thanks you so much. Dr. Lau I would just ask you on camera that you are aware this is for the Asia Society, that clip of this interview may appear in
*The full-length video of this interview is available in the online repository of Rutgers University Libraries: http://rucore.libraries.rutgers.edu
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