Ann Lee: What the U.S. Can Learn from China

hello everyone welcome to this at Google authors talk and today we have an Lee who is a senior fellow at Deimos an adjunct professor of economics and finance University sorry New York University a formal had a former hedge fund partner and the frequent commentator at networks like CNBC Fox and CNN when she worked in China she was a former visiting professor at pecking university and a economic adviser to Chinese economic officials and today she is here to talk about her book with the u.s. can learn from China open-minded guide to treating our greatest competitor as a grit as our greatest teacher welcome I really want to thank Google for hosting me today such an honor I flew in from New York and it’s much warmer here and thank you all for taking time out of your busy schedule to come here my talk especially to such a serious topic like this because I know that sex money and violence cell and this book is missing all three actually the other day I was thinking to myself if my publisher wanted to sell more books perhaps they should have put on a different cover that was more misleading perhaps something with Kim Kardashian walking down the wedding aisle with Yao Ming that might have been a little bit more national enquirer but anyway I’ll get into the book now oftentimes people do ask me why did I write this book and it’s a particularly interesting question especially for those who know me because i had spent at least a decade on Wall Street as a bond trader and a credit derivatives trader and so I didn’t do much writing then in fact a friend of mine said to me that I was the only woman he ever met who replied to his emails in one word sentences it was either yes no or maybe so obviously i was very motivated to write an 80,000 org manuscript and the truth of the matter is who said I was very concerned about the direction that the u.s. was headed and this concern actually started as early as 2005 when I was working at a very large hedge fund at the time I was trading credit derivatives and saw many structured product deals come across my desk and these products are what most people now know to be toxic assets the ones that caused a 2008 financial crisis and I have seen a lot of irregularities in these deals and what confirmed my suspicions were that I had attended some of these broker-dealer dinners where overheard some of these investment bankers actually rag and joke about the fact that they were able to secure billion dollar deals secured with nothing but baseball cards this was deeply concerning to me and I even tried to raise the flag with the SEC suggesting that they investigate this market but when it became apparent that nothing was going to get done that was when I decided to leave Wall Street I had seen previous bubbles such as Asian crisis Internet bubble and I really believe that this was going to be far worse and that someone had to warn the public and alert them of what was happening I went into academia at that point and I proceeded to write a paper detailing how some of this fraud was perpetrated and I tried to send it to various government officials and the media in fact one of my friends who had worked at Fox Business received a copy and so when I got a call from a fox producer I thought that I was being invited to talk about my paper unfortunately she asked me and can you please come on to debate whether Paris Hilton is a great American hero because she’s a big consumer unfortunately I didn’t accept that that that invitation but that was indicative of some of the mentality that was going on leading up to the crisis and so when it finally happened it was neither surprising or shocking to me what really actually

surprised me was to the extent Wall Street and government having come together and so when President Obama had Tim Geithner and Larry Summers the very people that had Wall Street in their back pocket joined his economic team it wasn’t Obama where I was deriving most of my hope for the nation interestingly it was really China for some of you who may remember China was a mere backward agricultural society only 30 years ago in fact they were written off as a lost cause so even though China was this great world empire for thousands of years they had fallen to practically a semi colonial state 200 years ago when Western nations invaded the nation and it was very shameful and embarrassing too many Chinese at the time to folks like dung Xiaoping Enzo and I who were the Communist Party revolutionaries when they were intellectuals going to Paris they experienced firsthand the prejudice and the treatment that was very unfriendly from foreigners and they attributed a lot of this to the fact that they thought it was because China was such a weak nation and so they vowed to make China strong and so this small group of friends turned this kernel of an idea into this big movement that allowed them to eventually take over the country in just 20 years unfortunately when they took over the nation they did not succeed in making China strong they in fact did the complete opposite because they were so married to ideology they had many of the wrong people in place they obviously had some of the wrong policies in place and so this plummeted the nation into a state where millions of people died from starvation in fact more people died from that than in World War two but fortunately some of these folks such as done shopping did not give up the dream of making China strong they continued and persisted in trying out what would work for China and through trial and error over many different policies they finally came together and found a set of ideas that would help put China back on the right track these set of ideas are basically what I discussed in my book I wrote this book believing that these ideas would actually be workable in a democratic capitalist society modified but there are certain elements that are true for all societies and while I realize that these two countries are very different there are also many similarities and I don’t advocate everything China what I’m talking about are some of the best practices of China that we can learn from because all nations have their weaknesses and strengths and if we only dwell on the weaknesses we are missing an opportunity to learn about what they do right because learning can be a two-way street they’ve learned plenty from us and we can learn from them because while the u.s. is a very strong nation we’re still not perfect we make many mistakes and so if we can find a way to set aside our prejudices and take the best from the west and integrate them with the best of the east perhaps we can advanced civilization and create a better world for all so I do cover a lot of ideas in my book and I’m not going to have enough time to go over all of them but I would like to highlight at least a couple major themes that I think are particularly relevant in the presidential election year one of the ideas I discuss is the idea of leadership selection today I think the United States is suffering from a crisis of leadership our politicians are pulling at historic lows poll after

polls show that 60 minutes recently reported that Congress had an approval rating of nine percent and movements such as Occupy Wall Street have been spreading like wildfire these are very disturbing trends because as soon as a nation where the people do not think their government is legitimate government could start taking more drastic actions in order to maintain the status quo and keep them people in government in power and we’re starting to see signs of this President Obama had signed a bill into law on New Year’s Eve so that any American now can be detained indefinitely by the military without trial without evidence and this is actually a serious incursion into our civil rights it makes it more important than ever now that we get the right leaders in place and while we’ve had all sorts of attempts at campaign reform as a way to improve the system 2008 still remains a record year where private money went into the election cycle so that today democracy here is more is not no longer really one person one vote but one dollar one vote so what can we learn from China in this regard especially since most people regard the Chinese government as a dictatorship well if you ask many folks outside of the US in fact you’ll get a different opinion some people regard China’s having the best technocrats in the world and if you ask many of the Chinese citizens they have very high approval ratings of their government Pew Research out of DC here has conducted research polls opinion polls in China for several years now consistently showing that the opinion polls of the government have been hitting over eighty percent and this approval rating seems to be in sharp contrast to the protests and the land over land grabs in the country but those protesters tend to be very critical their local government officials not of the people who are running the show in China so how did they get this level of legitimacy among their people what can we learn well the Chinese have a belief that the honour of running a nation should only belong to the people who’ve earned the right to do it this idea of earned authority is very similar to the idea of a corporation where we don’t elect a CEO to the top based on some popularity just know the person who gets to run the organization has earned the right through an entire career proving that they have the skills and the knowledge to produce beneficial change and so if you want to go work in this Chinese central government you first have to take a competency test by the time you’re 35 if you don’t pass this test then you must stay in the private sector and this is a very difficult test I personally have not seen it but it has a past rating of less than twenty percent so right off the bat they attract a lot of the brightest minds in China to go work for the government and by having that cut off they restrict the the conflict of interest that can happen between the private and public sector something that we’ve seen in our own government now once you become a government official there you then are rotated to different positions in the government for five-year terms and you can’t serve a position for more than two terms and while you’re in this position you get evaluated 360 degrees Allah McKenzie style and then if you do well you get promoted and if you don’t you get demoted and your compensation reflects that and they try to do this so that there’ll eyeing aligning the

government’s roles with the interests of society this way so that it is about helping produce productive change not based on money and compensation alone so for example if you’re a government official you could be put in a position to be a university president of a major university then you must demonstrate during that time how you’ve improved that institution perhaps you’ve increased the number of foreign exchange programs to other universities around the world maybe the number of graduates from the University went up in terms of their ability to get high paying jobs so they get measured on the number of factors and this happens throughout their entire career so by the time they get considered to be a high-level official for the Politburo or the Standing Committee they would have already served decades in their nation in various roles showing that they have produced productive change and and have benefited millions of Chinese so many of these Chinese citizens then view that these people at the top have a collective wisdom that they know what to do in terms of leading a nation that they have selected the best people for the job now how can we take that and incorporate into the u.s. because I’m obviously not advocating that someone must go through the ranks of government here to become president of the United States but what I’m saying is that there are certain elements that make sense I suggest in my book why not introduce a competency test for policymakers here today the only area where we provide these tests are two foreign to our Foreign Service who become our ambassadors to other nations but virtually every other agency doesn’t require this and our system today where the saying to victor go the spoils is more true than ever when President Obama or anybody else becomes the head of state will have the plum book where they can appoint different high-level positions throughout government these tend to go to people who are probably their high campaign donors or other people who they opal it achill favors and this may not necessarily be in the public interest for instance President Bush had appointed Michael Brown to be head of FEMA during Hurricane Katrina this guy had no emergency management experience whatsoever and yet he was charged to run this thing and we saw the results of what happened so I am NOT suggesting we replace our systems but perhaps we improve it and another idea is a thought well maybe we should restrict the revolving door today it’s a well-known business model where someone can go get elected into Congress or work in a regulatory agency and then leave and go to the private sector set up a shingle on K Street and become a lobbyist and are millions of dollars that way this sort of conflict of interest again can be very harmful to the public interest another idea I bring up is perhaps we should demand track records of people who want to seek higher office this could be a great way to vet who is qualified so that they have to have shown they’ve led an organization and have provided beneficial change that they have shown that they have the moral compass to help society another major theme I want to talk about is the idea of having long-term visions because today I really worry that our nation is suffering from a disease that I call short-termism we have politicians who can really only think in terms of two-year election cycles we have a lot of corporations who have to meet short-term profits demanded by Wall Street I don’t think there are enough people who are actually taking a step back and

asking where do we want to be in 10 20 years time and how are we going to get there so again I turn to the Chinese system and say where can we learn here the Chinese have institutionalized something called the five-year plans as a way to avoid the temptation to have short-term band-aids I know a lot of folks have dismissed this idea because they associate five-year plans with central planning of top-down and of the disasters under Mao but what I’m suggesting today is that the way they practice five your plans now is very different from what happened then today it is more of a goal-setting exercise where the government articulates their priorities of where they’d like to see the economy in the future and therefore they set performance targets associated with different areas of the economy for instance in their latest five year plan 2011 to 2015 they articulate that they would like to see a greener economy so how are they going to get there they put specific performance targets such as they want to reduce carbon emissions by seventeen percent per GDP unit by the time they hit 2015 they want to increase energy efficiency in buildings by sixteen percent per you know GDP and the people who are charged with making these changes will have the autonomy to come up with a variety of solutions that will help them get there that incorporate the power of the private sector so they will use a combination of carrots and sticks such as tax hikes on high polluting industries tax incentives for cleantech and various other investments that will be very inviting for foreign companies in the US in Europe to come in and work jointly with the Chinese in order to come up with these solutions that will help them meet this target now the closest thing the US has to of this kind of top-down priority setting is the US federal budget the OMB basically prepares this for the president that should reflect his spending priorities and and basically they make the allocations to the different agencies the difference is that there are almost no performance targets associated with how we allocate our taxpayer money it is the equivalent of a CEO having a strategic plan where you would hand over money to a department and not demanding that they produce any results and as a result of having received that money now if we have the situation it is no wonder that our taxpayer money goes into all these agencies and it’s like a black hole where we don’t see any results after trillions of dollars of spending we still have significant unemployment in this country we are also the largest spender in healthcare and yet we have some of the worst outcomes in health care of all developed nations so perhaps if we borrow this idea of setting performance targets that the Chinese use it might drive more transparency and more accountability in our government to help align what they’re doing with the rest of society I guess I’m running a little low on time so maybe I’ll just wrap up here for now and then open it up to questions and and I understand there’ll be book signing afterwards so there’s a microphone there right are there any questions so I actually don’t doubt your assertion that china is run by technocrats at least at the top I think who Jintao is widely respected as a very technical person my question is what’s really their motivation because it appears that in the developed world as well as in the developing world most politicians are

motivated by money and power right so that’s why the corruption in the system so what motivates the top leaders in China and why do you think there’s no corruption there at the top I think that it’s a way of weeding and and trying to find the more enlightened people to come to government the corruption that we often hear about in China is happening at the local government level where they are running the smaller towns and villages like a foster city or redwood city and these people do not take competency tests and do not get rotated around these people stay in these towns for 40 years right and that’s where all the corruption is where they have absolute power and there’s no way to kick them out and that’s why the Chinese government right now is trying to experiment with this idea of democracy at the local level in order to try more accountability at those levels I would think that the way they attract and motivate these people like I said is the the incentive system and it probably comes partly cultural Confucianism which has been part of the Chinese culture as well as many Asian cultures there value scholarship not because it’s supposed to help make you wealthy the idea is that education and educating oneself is for the common good for the common good of society if you are more educated you understand the complexities and you understand how to be a good citizen you make the society better and that is a philosophy that I think many of these people hold and and so I actually address culture in another chapter in my book yes so you mentioned earlier an interesting statistic about the approval rating of i think it was around eighty percent or so and my personal experience growing up I grew up in a very repressive country with a repressive regime where the approval rating was officially quoted as you know exceeding ninety percent and the president was routinely elected with ninety-nine percent of vote even though those are basically manufactured numbers they were false so I probably a more cynical than some when it comes to hearing these numbers but I’m wondering if you can talk a little bit more about that eighty percent seems like an astonishingly high approval rating and if true it it’s remarkable and good but I’m just running yes this or thoughts on them I would be skeptical too if they were coming from Chinese polling services but this is actually coming from an American polling service who do similar poles with Americans and find that consistently you know around twenty percent of americans are approving our government and so they publish these results online and and so because it’s coming from an objective source I’m more inclined to believe that and that they can’t be manufactured that way so you make the case that Tom the top leadership in China is more meritocratic because I’m sorry I small meritocratic meritocratic because I socratic because he was or the I’m sorry the top let’s go make the case that the top leadership in China is more meritocratic because they’re not driven by politics short-termism and so on so do you see that of like people in remote areas of China if they are if they have have the merit like Tibet or other regions can make up make it to the top leadership of China in communist party so the question is do the other people believe they can make it to the top if they do people believe yeah yeah and Huijin tell wen jiabao are exactly two examples both of them did not come from privilege at all they didn’t have revolutionary you know background from their parents or anybody else they came from the poor rural areas of China and because they were able to prove themselves over time you know past the testing get involved and proved themselves through merit they got to the top and therefore in some ways it’s almost more democratic because it doesn’t rely on you being able to be a billionaire to run for office or that you sell your soul to a corporation it’s about you making it to the top on your merits of your own performance hi I wonder if you could explain for me what fuels your optimism for the u.s. it

seems to me we have one party that is now giving us indefinite imprisonment without trial we have another that’s openly discussing the plausibility of abolishing the Department of Education and most interestingly the public of the US show a willingness to vote for these nutjobs so in a democratic system where people are democratically racing for the bottom how is it that you’re still standing up here and talking about policy and not simply moving to a more sensible country I believe my sense of optimism comes from the fact that small groups of people can affect powerful change and that’s why I started out with the story about dunk shellping and and his other colleagues and even if we look at our own history in the United States we’ve made tremendous changes and reforms which started with small numbers of people and it took a long time it took many years to abolish slavery it took decades also to give the right to vote to women so you have to fight hard for them and obviously the folks who benefit from the system today are going to fight hard to maintain the status quo but if more and more people understand and spread the word like what happened with Occupy Wall Street I think that I think that it’s possible and so that is why I remain hopeful I so if the approval rating is so high why is there so much censorship by the government they seem to be hiding things from a general public and brainwashing them so if they’re already very popular there is no need to do something like that why do you think that’s something I know that often comes up and I would say that the government ah the government’s reason to me when I was over there as a professor was that they were worried not so much their own legitimacy because they’re obviously very popular but that they worried about people were trying to be subversive to the government and this is probably no different than a fear that our government has of al-qaeda trying to subvert and recruit people into that movement and so what have we done we’ve actually gone around killing people like Osama bin Laden right so I think that this perception of of a national security threat is something they view as real just like we view that putting in x-ray machines at all our airports is a real security threat even though many people think it doesn’t work so so I think it’s easy for us to be judgmental and critical about what other nations you know will use in terms of their policies but if we only hear one side of the story it’s it’s probably not in our position to to be saying they’re doing something right or wrong but if in terms of openness and about this idea of censorship i would say that yes it would be nice to make to see China be more open and the direction has actually been more open because back 30 years ago under Mao everything was state-controlled there was no private press no information from the outside and today is quite different you go to China there are tens of thousands of magazines thousands of newspapers you know hundreds of thousands of books from outside of China that get imported into China so that they can develop a very robust discourse and introduce lots of great ideas from the outside and when i was there in china I’d witnessed on chinese TV very serious debates between officials about different policies even a friend of mine he was also at peking university named michael pettis he keeps a blog on on the website and he used to work at Bear Stearns as an investment banker and he even writes on his blog that the debates about the currency and about many other issues are more fierce in China than even here in the US so I

think the censorship is probably overstated in terms of what they do sensor and and i would say that some of that censorship does happen here as well so in the modern era most officials in high office in China come from an engineering background whereas in the u.s. mostly come from a lower background how do you think this difference affect the policies over the two countries and how can we have more engineers in u.s politics I’m glad you asked that question because I published an article recently in The American Prospect addressing that idea because not only do we want to have a more balanced legislature oh it’s also a more immediate in our job situation today we have three million jobs that go unfilled in the United States for six months or longer most of them are in technical fields and the hiring managers and the CEOs a lot of these companies basically say they can’t find the talent to fill them and when you look at oh what kind of degrees that college graduates are having in 2010 over 80,000 of them came from performing arts and less than 13,000 in electrical engineering and so we vastly need to rebalance our talent portfolio in this country and one of the ideas I suggested was given that student loans can be so onerous to so many kids why not provide the incentive of forgiving a student loan if they graduate with an engineering degree or some other technical degree in order to provide an economic incentive for more students to study this area that could be one way of addressing it and and yes the the characters of debate and policies do reflect the backgrounds of our leaders I talk about when i talk about that in one of my chapters called special economic zone because while our leaders can debate ad nauseam about whether this policy is better than another policy they do so without a lot of concrete evidence and results the Chinese however basically say why don’t we just test it out they have a very scientific approach to economic policy so that it’s very similar to a scientist that says well we have this hypothesis we think it will do this but let’s test it out and that’s what the Chinese do and they get a lot of results are reported by independent observers and then they decide whether to roll out a policy at a national level and so if we had more of that kind of systematic thinking about testing our policies we might have a completely different economy at this point so your idea that people with set objectives measure whether the objectives are achieved it’s a very alluring idea I like it except it’s got a few major problems one is you have to set objectives that are treatable you have to get consensus for the objectives and probably the hardest you have to actually have measures that say yes we achieved them actually it was our policies achieve them rather than something that was going to happen anyway so I wonder whether the Chinese when they were measuring each other how accurate they’re being if we’re if you take something that was at mouths level industrialization not very much let in lots of Western technology you’re going to have this rapid rate of industrialization we’ve seen other countries with or without very good government so do they know how much of the improvement came from good government versus just letting capitalists do things well obviously things that happen in the economy are very complex and even today many economists get those things wrong right there economic models that Miss many variables I’m not saying that that system is perfect or that you can completely tease out Oh whether it’s just policies or some other exogenous factor but if you look at what happened with China before they started on these policies they clearly had plenty of cheap labor that

obviously were not productive and if you think that’s the only answer you can still look at Africa or many other places where they are not growing and being as dynamic as they are so clearly there are things are doing right that are making sense here and and so I suggest that hey if we aren’t sure then why don’t we test it out in different areas right our 50 States used to be called 50 laboratories of democracy now why can’t we basically turn these 50 states in two laboratories of Economic Opportunity and there really is no harm in doing it if the federal government and the states work closely together to come up with the right design of trying these things out because there is no harm in just trying out and trying to find the truth of the matter so I hope that doesn’t answer your question that’s what I’m getting at i’m not i’m not trying to actually disagree you i’m just saying that if we want to do this it’s non-trivial you just just say oh let’s make objections let’s go measure them if you were going to go try to study china and you’re going to figure out why are they successful it may well be part of it a large chunk of its due to government but how do you even tease that out because they have a lot of different policies there that you’re trying they may have various ones that are better than us how do we know which ones those are if the whole country is industrialized and rapidly we can ascribe to the wrong factors and adopt things would actually be worse so how do we well my answer is that it always does start with the government right because anyone that succeeds is the result of the institutions and the support network that you find yourself in even Warren Buffett had said publicly there would be no way he can be Warren Buffett as billionaire if he had grown up in India you are the product of what is around you and the institutions that the government have set up all right well thank you so much for your time and attention really appreciate it thank you