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. --------------------------------- Transcript Interviewee: Lau, Lawrence Interviewer: Andrew Smeall Date: June 03, 2010 Place: New York City (USA) 1 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.