China in a flat world.

Jagdish Bhagwati: I don’t think so.

China I think is a big problematic area right now for itself in the sense that its capitalist economics is okay; but its communist politics is a big question mark. A lot of its growth is export oriented. When you run a communist system with lack of human rights in all sorts of areas, you become immediately vulnerable to people saying, “This is not kosher.” 

Because it’s a communist system, it exaggerates the occurrence of things, like we have seen recently, namely __________ of all possible safety and other requirements. Because there is no countervailing power in the system at all.

There are four elements of a democracy which really help countries like India, and whose absence really hurts China in things like environment damage, safety conditions, all of the things which really are necessary for good governance and growth.

One, to have NGOs [nongovernmental organizations] who take up your cause when something is going on.

Two, you could have opposition parties who can also bring things simply because they ____________.

Three, an independent judiciary.

And fourth, an independent media. They don’t have anything like that. So anytime any dissent occurs, which is beginning to happen in China, they just take to the streets.

And how it’s going to develop is very, very problematic.

I talked to a very important CEO who is in both India and China. He was being asked the usual question. I can’t identify him. Or maybe I can. It was Jeffrey Immelt of GE. And he said of General Electric – I’ve heard this from so many CEOs – that for the next 10 years, China is a great opportunity. After that India.

So the reason being exactly that you’ve got rule of law. You’ve got all these different elements for democracy. Maybe it goes slower in terms of change and so on. It’ll have its ups and downs, but nothing quite so dramatic. This huge question mark of what China’s going to do.

I remember – my wife is a Russian expert – being asked way back on India and China comparison about 30 years ago or something just when Mao and ________ were both alive. And she was asked, what was going to happen to China. And she said, “It depends on whether __________ dies first or Mao dies first.”

Now that’s what we are dealing with, much like in the Soviet Union. Who was going to take over the Soviet Union after [Joseph] Stalin? If ________ had taken over, it would have been far different than when [Nikita] Khrushchev took over, right? And so on.

So I think that is something we don’t have in our  democratic systems.

I’m betting on India for that reason.

If China manages to make the transition instead of erupting into authoritarianism, repression and so on, as the destructions and demands develop, then of course they’ll be tough competitors. But at the moment, I see nothing really to worry very much about it. And the Chinese fundamentally are still into manufacturers. They’re not into services in any big way.

Right now they’re going through exactly the kind of thing which the Japanese did with their huge accumulation of reserves. They had started buying up things which are going kaput, just like the Japanese bought up Empire State and all sorts of things. And they lost tons of money. And the investors in Hollywood didn’t understand at all, and we took them for a ride on that one.

And the latest one in China, which was when they bought up Blackstone of Pete Peterson and so on. So Pete Peterson turned into a billionaire from a millionaire, and the Chinese were left with a can of worms. So they are worried about it now. But this is going to be their problem, and not very much our problem in the sense that they will have to sort out what they are going to do with the reserves. Because it would be foolish on the part of people accumulating those reserves, because it doesn’t produce anything very much for them. And my suspicions will gradually wind down because they will spend their monies basically on building infrastructure and so on; building up, therefore, demands for all kinds of things from us – cement and construction contracts and so on.

The very fact of it accumulates so much __________ reserves, it serves as a guarantee that they can’t do anything with it except bring it down in ways which will build; which their system requires infrastructure and so on.

And who are the people who can really do great things like that – and including the better service sector and financial services and so on – except us, right? So we have a very good state, provided we don’t panic.

So I’m not worried about China.

Tom Freidman, etc. always said that the Chinese will start producing the sorts of things which you and I will produce. Because they’ll have more people like you and me, because they’ll produce more skills. And therefore they’ll drive down the prices of what we are producing right now. Because we’re exporting all sorts of stuff which they will start producing, and therefore push down our prices; and thereby put our economy. What they forget that, as countries grow more similar in an endowments – meaning they have more engineers. They have more computer scientists. They have more doctors. They have more all sorts of people like us. In that sense they are getting more like us, right?

The economists call it “endowments”. Does that mean that is going to happen? Our welfare is going to go down? I would say no, because economics now has a new theory in international trade. We talk of trade in similar products.

In New York if you walk down Madison Avenue and you see all these men’s fashions. You see Giorgio Armani. You see Calvin Klein. Our own indigenous guy. You see Pierre Cardin, French. You see __________, though he’s moved now to Chelsea. But you used to see him. Japanese settle in Paris. You see all kinds of people as you go down. They are all __________. They’re all in the same industry, producing the same basic products like suits and jackets and so on. But they compete. So they’re specialized in similar products, each with little niche markets. So what you get is a tremendous increase in trade and variety.

So as countries get more similar, they trade in similar products.

So one of my students, Robert Feenstra, has actually calculated, using the new theory of trade in similar products, the gains from trade in similar products with a post-war rise of Europe, because we put Europe back on its feet and made it more similar to us. We could have kept them down, right? But we didn’t. We didn’t do that with Japan. And really, several billions of dollars annually of gain from trade in similar products.

Recorded On: Aug 14, 2007