John Nye: evaluation

Transcript context

…What’s the untold story of how China itself managed to reform? Well, that is a deep issue, but I have a theory, or rather theory is too strong a word. There is a phenomenon I’ve observed that I really haven’t seen written about. One of the things that, for me, is very unique about China that not many people have discussed in any real detail is the extent to which China began its reforms outside of the biggest cities. Just thinking about that alone, to begin with Guangdong and Fujin provinces and those regions, places like Shenzhen, Guangdong, Fujin, Xiamen — to think about those cities and regions is quite remarkable. Virtually every major reform always involves the major centers of commercial power, but those would have been Beijing and Shanghai, and they were totally left out of it. In my view, that occurred for a number of reasons. One is that, by avoiding that, you avoid the usual problems — political, economic problems of interfering with the rents of the established companies. Second, you have plausible deniability if it fails. You say, “Ahh, what did you expect of the backwater?” Third, Fujian, of course, is Fujianese, which shares a language and ethnic heritage with the majority of the people in Taiwan, and in Guangdong is Cantonese, which, of course, shares ethnic heritage and the language with Hong Kong, who are mostly Cantonese. One of the things that’s very interesting in the early parts of China’s reforms, you had investors from abroad, mostly from Taiwan and Hong Kong, investing in China in a period in which China did not have formal property rights. Family and ethnic connections were often used to make informal social deals to maintain these relations. Moreover, the Chinese government was well aware that if they defaulted in some way, then they were giving up the future stream of investment that would come from these places. So in many ways, this was very, very unusual. The final and most unusual aspect about China’s reform is, once these new regions started to grow, the center was not successful in shutting them down. You need to understand that throughout history, whenever central powers saw regional powers in their countries develop, you often crushed it. Even this happened in conflict between the king and the big city. The good example is Francois I of France, who often had, because of the problems that people like Doug North have talked about, a credible commitment, could not borrow money except with very high interest rates. But by uniting with the city of Paris, he was able to actually borrow at lower interest rates than he could by himself. Yet he broke those deals, and he allowed himself to go back to higher interest rates because he was fearful that Paris becoming too powerful would weaken his authority. And in the period particularly of the Reformation, seeing people like John Calvin being protected in Geneva was a concern that Paris would become a hotbed of reform or a hotbed of opposition to the central powers of the French government. If I think about the economy of Taiwan, two things strike me. First, in international supply chains, Taiwan reaps a pretty high percentage of value added, but at the same time you’ve had wage stagnation at the median in Taiwan longer than almost anywhere. How do we put the economic picture of Taiwan together?…

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