Economist Sheng Hong Says the Young Should Learn to Strive in a Flawed Society

"Every era has its problems. 'These are bad times' has never been a reason to complain or to run away. We are all born into a flawed society. So the most interesting, most enjoyable thing a person can do with a life is to change that society a little, by his own effort. I think this is what everyone ought to do."

In the version of our conversation that he checked over himself, Sheng Hong gave it a title: "Striving in a Flawed Society."

Sheng Hong, 64, is a well-known Chinese economist and director of the Unirule Institute of Economics, an independent Chinese think tank. He was among the first scholars in China to introduce and study new institutional economics.

On the afternoon of February 12, he received us in his office. We began with the 40th anniversary of China's reform and opening-up — his home ground. Since the late 1980s he has worked on the structure, origins and evolution of institutions; the clash, mixing and integration of civilizations; and international political economy. His books include The Division of Labor and Exchange, China's Transitional Economics, In Search of a Stable Form of Reform, The Scholar Sets His Heart on the Way, and An Economic Interpretation of Confucianism.

A month on, as we prepare to publish this interview, we are glad to see Premier Li Keqiang state plainly in the government work report that "thinking must be further emancipated, reform further deepened, opening further widened." At the same time we cannot help noticing that the consensus built up over many years — about institution-building, the direction of reform, the spirit of openness — is being spent down.

The interview runs to 16 questions: economic growth, urbanization, the demographic dividend, land reform, state-owned enterprise (SOE) reform, health care reform, tax rates, and more. These are the topics that have been argued over throughout the reform era and that the public still cares about. Read it as an attempt to define that "consensus," and to take stock of 40 years.

Sheng Hong has much of the Confucian bearing he admires, and he takes Confucius's line — "If the Way prevailed under Heaven, I, Qiu, would not trade places" — as his own standard. "Every era has its problems," he told QDaily. "'These are bad times' has never been a reason to complain or to run away. We are all born into a flawed society. So the most interesting, most enjoyable thing a person can do with a life is to change that society a little, by his own effort. I think this is what everyone ought to do."

From late 2017 into 2018 we have been talking at length with people from every corner of Chinese society, looking back over 40 years of change — to mark the anniversary of reform and opening-up, and in the hope of a better society ahead. The Sheng Hong interview is one part of that larger project.

We will keep publishing it topic by topic.

A year ago QDaily ran a series called "Is This Society Too Good to Young People?" Our argument then was that the generation before us, and the generations before that, had left us a society rich in things and thin in spirit — exactly what Sheng Hong calls a "flawed society." And as he hopes, effort is close to the only option the young have.

The series we are about to run continues last year's. Only now we are surer of one thing than we were then: this is everybody's business — the young, the generation above them, and the generations above that, working at it together.

Because in the end it is the young, and those younger still, who have to live with this society.

Striving in a flawed society. First we have to make ourselves better.

Making ourselves better means understanding this society, facing it, and repairing or correcting as much of what is wrong with it as we can.

It is a long road. We hope the reporting we are doing together with the intellectual community gives QDaily's readers more to think about.

It is a hard road. But just as it is the young who end up carrying the problems, it is the young who will end up solving them.

Let's get to work.

Q = QDaily

S = Sheng Hong

How Should We Read the Real GDP Numbers?

Q: In January the National Bureau of Statistics reported that China's GDP grew 6.9% in 2017 — the first acceleration in seven years. What do you make of that figure? Why did it happen?

S: China is huge, with different parts, different industries, different regions. What any one person feels is local; it depends where you stand. If you work at Alibaba you may feel growth is extremely fast; if you are in a sunset industry, a traditional industry, you feel things sliding. Different people feel different things. On top of that, people have come to distrust the official numbers, because a string of provinces have been caught padding their statistics. The National Bureau of Statistics may say "our system is different from theirs," but the national structure and the provincial structure are politically isomorphic. By isomorphic I mean the statistics bureau is not independent. In that sense we have reason to doubt the official figures. I have an article on FTChinese — have you seen it?

Q: China's Two Economies.

S: Yes. I did some analysis there. There is a new economy and an old economy, layered on top of each other and cancelling each other out, and the result comes to roughly 4-point-something percent. That isn't necessarily right — it's a cautious estimate. We also have substitute indicators. There's the Li Keqiang index, though even that isn't necessarily accurate now. One of its components is the growth rate of electricity generation, since industrial growth and commercial growth both consume power. But the shift in industrial structure has made that indicator unreliable. Another is total logistics volume. All of that data exists now. And by total logistics volume, average annual growth from 2014 to 2017 was about 4%. 2017 was indeed higher, about 6.7%. These are substitutes, not precise, but they give us something to judge by — and nobody suspects local or central government of faking them. So for these years on average, I think something around 4.5% is closer to the truth.

2. Why "Mixed Ownership" SOE Reform Isn't Reform

Q: Over the long run, where does China need to improve if it wants growth to pick up again? Could you go into detail? I remember you wrote in China's Two Economies: "Urbanization is a steady engine of China's medium- and long-term growth. Urbanization and the giant-country effect together mean the Chinese economy will still grow fairly fast. The new economy and the old economy will add to that or subtract from it. Government and ordinary people alike have a duty to advance the new economy and reform the old one. New institutions will replace old ones in the end, but not necessarily quickly."

S: Right. China's advantages are those two things: the so-called giant-country effect, which can hold a long-term edge in international trade, and urbanization. Both are fairly steady. But what actually happens depends on how the new economy grows and how the old economy is reformed. Over the past few years, reform of the old economy has been very slow — or rather, there has been essentially no reform. By old economy I mean state-owned enterprises. The SOE reform measures now on the table, as I see them, are almost not reform at all. One is setting up Party committees to make corporate decisions. That is plainly wrong. Running an economic body through the decision-making machinery of a political organization is plainly wrong. The other is mixed ownership. That is fundamentally a non-market method — arranged and ordered by the government, not the outcome of these firms negotiating voluntarily. In that sense there has basically been no SOE reform.

There may be a little reform here and there. Crude oil imports, for instance: the two oil majors' import monopoly was broken, and last year about one third of crude was imported by private firms. That matters — but how much? These private firms import crude and refine it at lower cost, yet they cannot set the price. They cannot compete with the two majors on price. So it doesn't mean much. More refined product may also be exported. Whether any of this can push China's crude or refined-product market toward real market pricing is still an open question. As long as the SOEs go unreformed and run real losses year after year, they will drag growth down.

3. Why "Bringing Rural Collective Land to Market" Produced a Case Like Xihongmen

S: On land, we think the real reform is bringing rural collective land to market — really to market. By "really" I mean into the land market of urbanization. Land subcontracted back and forth among villagers is market behavior, but it doesn't mean much, because the use of the land doesn't change. What matters most is that farmers have the right to change what the land is used for. Mainly this is the suburban land around cities: rural collectives should be able to sell directly, negotiate directly with developers, or build on it themselves or with a partner. There are pilot programs for collective land entering the market, but they come with many restrictions. One is that the land may only be used for industry. Look closely and you see that industrial land is generally cheap land. The local-government strategy is to keep industrial land cheap and commercial and residential land expensive. The logic is that cheap land attracts corporate investment; once there is investment, people have to live nearby, there will be more workers, more consumption, more buying. Then, with the other hand, government charges high prices for commercial and residential land. The current reform lets rural collectives into the industrial land market without letting them capture the gains of urbanization, so it doesn't amount to much.

There is also the question of what counts as a rural collective. Take Xihongmen township in Beijing's Daxing District — everyone knows the clearing-out of the so-called "** population" happened there. But what else is it? It is Beijing's only pilot site for rural collective land entering the market. Why did it happen there? Why were they pushing so hard? Because Xihongmen township wanted that land. It passed itself off as a rural collective, which it is not. A rural collective should be the village, or the villagers' group. The township government wanted to use the policy to make money for itself. It took the right away from the villages, then went to market and sold the land and pocketed the proceeds — that is why it had every incentive to drive people out.

Bringing rural collective land to market is right in direction, but the details are a serious problem. How much it means remains to be seen. Reforms like this are tinkering; they can't do much. Nothing like the reforms of the 1980s and 1990s, which were bold and sweeping. There are a lot of interest groups now that don't actually want reform — that's why it looks like this. But reform can't be avoided either, so they go through the motions. And so, because the land system isn't reformed and the SOEs aren't reformed, our growth potential stays bottled up.

4. What Would Happen If Rural Collectives Could Dispose of Their Own Land?

Q: You've just named two things that matter most for China's growth: SOE reform and land reform. Have you calculated what these two reforms would do to China's growth if they were carried out?

S: I've written it all up — last year and the year before. Our estimate is that in 2013 the return on net assets of China's industrial SOEs was -3.8%, on net assets of about 52 trillion yuan. If that return rose to 6.2%, the profits would equal 8.7% of GDP. Put the other way round: the SOEs are holding China's growth back by roughly 8.7%.

On land reform: if rural collectives around cities had full rights to dispose of their land, they would change what it is used for. Instead of farming, they would build — villas or whatever — and rent or sell to city people. And not only in the suburbs; any village with tourist value could do it. If that happened, GDP growth would be at least one percentage point higher. Here's a small, concrete example. Ergun, at the northern tip of Inner Mongolia, has a Russian village. A family there can make 40,000 to 50,000 yuan a year from tourism. Farming would bring in 4,000 or 5,000. Ten times the difference — a thousand percent increase. There are a great many places like that; if even one rural place in a thousand is like this, you get very large growth. That's the one percentage point I mentioned. It is possible.

5. Why the Claim That Growth Slows or Stalls Once "Industrialization Is Complete" Is Wrong

Q: Some economists think the slowdown after 2012 is normal, because China has finished industrializing and can no longer hold such a high growth rate. What do you think?

S: Not really. It isn't as if there is no new technological stage after industrialization. Take the Internet age. Of course the Internet added little at first, but in the past couple of years electronic retail alone has added about one percentage point a year to growth.

And there's the point I made earlier: urbanization isn't finished. Urbanization takes far more investment than industrialization. Many people think investment means industry. It doesn't. There is a Nobel laureate, William Arthur Lewis, who said modern economic development has two parts: industrialization and urbanization. Urbanization is the lasting engine of modern development. Why? Because it creates enormous demand for investment in urban infrastructure. The sums are vast — about 2.5 trillion yuan in China in 2015. From here on it will be at least 3 trillion or 4 trillion a year, maybe more. My rough estimate is that the next 20 years will need about 117 trillion yuan of urbanization investment. Then there is housing. What does urbanization mean? Rural people moving into cities. They need somewhere to live, so you have to build. Real estate is another huge piece. And when rural people move to the city their incomes rise above what they earned in the countryside, because they've changed industries. They live differently. In the countryside there is a lot you don't need to buy. In the city you have to buy everything, including things only city people use — and buying is easy, because there's a supermarket next door, while in the countryside you have to travel a long way. That is the momentum urbanization itself generates. China's urbanization rate is now about 56%. If the target is 80%, there is a long way to go. So the "industrialization is complete" argument misses urbanization, and misses the rise of the Internet economy and of new technology.

6. Why Government Shouldn't Set a City's Population Total

Q: My next two questions are about urbanization. Since 2017, big cities like Beijing and Shanghai have been rebuilding themselves and running population-control policies — Beijing evicting the ** population, Shanghai saying it will hold its population under 25 million. How does that strike you? What do you make of these policies?

S: The people who write these policies don't understand what a city is. They think a city is a target a government sets according to its own idea of a city. It isn't. A city is an outcome of the market. The defining feature of a city is that people cluster. Why do people come to the city? Because once they cluster, they get what we call market network externalities. Meaning what? Once we are clustered together, it becomes possible for us to trade with one another. If we were all in the countryside, 300 meters apart, trade would be impossible, because we are too far away. Shorten the distance between people and the chance of trade rises. So a city means people clustering, and clustering produces market network externalities. Trade, once it happens, produces gains from trade. Trade creates value. With trade the market can put a price on a good, and the price is a signal — it tells you how much demand there is for this good, for that good. We then decide, from that price, whether to produce it. First you need a market; the market brings network externalities and more trade; the trade produces prices; and the price tells you that making this product is profitable. That brings industry to the area around the city. That is the chain of logic.

So why do people come to cities — Shanghai, say, with more than 24 million? They have their reasons. They come to make money. They certainly wouldn't come if there were none. So when the government says it will set a population number — on what basis? It could say water. But Shanghai has no water problem, sitting at the mouth of the Yangtze. And Beijing — didn't Lu Ming produce the data on the spot last time, showing Beijing is not short of water? People do their own cost-benefit sums. If everything is reasonably priced, a person can work out whether moving to a big city is worth it. Why should a government fix a city's population? This is pure planned-economy thinking. There is no case for it. Very few governments anywhere in the world set a city's population size. The Tokyo metropolitan area has 57 million people.

7. Up to 2.4 Million People May Come to Beijing Every Day for Medical Care — What Can Government Do About Clustering?

So Shanghai's cap of 25 million makes little sense. Beijing has one too — no more than 28 million. Beijing's is more complicated. Beijing is the seat of the central government, and a great deal of central tax revenue has gone into Beijing's municipal construction, so that a city which did not itself create anything like that much wealth receives a disproportionate share of investment in infrastructure and public services, health care and education included. Better infrastructure, better public services, better hospitals and schools then pull in more outsiders. It is not balanced. They say 700,000 people come to Beijing every day to see a doctor. Add the people who come with them and it is 2.4 million. Then the people in Beijing who serve them add another seven or eight million. Every day. Why? Because Beijing's medical resources are too good. Distribute medical resources more fairly and Beijing would not be flooded like this every day. So the problem of Beijing's size is at bottom a problem of China's political structure. Under that structure, government has more power to allocate resources directly, and it allocates more of them to Beijing. If people are free to move, they are bound to move to Beijing. That deserves some reflection. So if you really want fewer people, distribute resources fairly and cut the so-called high-end population. Not that we think they are high-end — those are the people with no creativity at all, who contribute nothing to society, and much of what they do is harmful.

The other point: Beijing can be big, that's fine, within reason — we are not saying the bigger the better. But you have to use fiscal resources fairly; you cannot keep pouring more into Beijing. Why does it happen? Simple: the decision-makers are Beijingers. That's the logic. Let government allocate resources and officials will allocate with a bias — the good resources go to the places nearest them. Very simple logic. So this kind of practice is plainly wrong.

8. Has the Demographic Dividend Disappeared?

Q: There's also China's demographic dividend. Do you think it's gone? Why?

S: Cai Fang could probably answer this better — it's his specialty. By their account it is already gone. The dividend is a dynamic thing: today two people support one, tomorrow three people support one. That is how it looked when family planning began. Why? Because there were so many people. A family used to have three children, the couple earned the money, two people supporting three. Then family planning allowed two, and later only one. With one child, two people support one. That's the surplus. But look at it now and it's the other way around. Family planning has been in force for many years, those only children have grown up, and each faces four elderly parents. That's the problem now. It is already negative. For China this is a very heavy burden — more people to support — so there is no demographic dividend.

9. A Warning: Why the Northeast's Problem Is a Problem of SOEs and SOE Culture

Q: From an economist's point of view, do you have thoughts on the Northeast's current troubles?

S: One of the Northeast's problems is the institutional one everybody criticizes. First, property rights there are not effectively protected. That is the biggest problem. We have heard many cases from the Northeast: a company does well, a government official takes an interest, and says to the founder, how about giving me half the equity? The founder says, why would I give you anything? And the official says, so you won't hand it over — and has him jailed, sentenced to death. I remember a case in Heilongjiang like that. There are a great many such examples. It's the same principle: because administrative power faces no constraint, nothing counterbalances what an official does. The official says this businessman is guilty, and administrative power controls the judiciary directly, controls the courts. The court says you're a mafia boss, you're running an illegal fundraising scheme — they can find plenty of charges. And China has no tradition of following judicial procedure strictly. Then you are in real trouble. He can convict you of whatever he likes. Suppose you're in business to make money and every other policy looks good — tax exemptions, cheap land — none of it helps. Why? Because if you make money and it gets taken from you, the sums come out negative. Worse than negative: you can lose your life along with it.

The other side is that state-owned enterprises make up too large a share of the Northeast. Part of it is the SOEs themselves — inefficient, loss-making. Part of it is the SOE culture they bring, which is especially bad. It has no wish to compete in the market and earn a living. It wants to haggle — with the provincial government, with the central government — for a bigger share of the distribution, a bigger slice of the cake. It doesn't want to bake the cake. That habit of mind runs very deep. The year before last I saw a news item about some SOE reform for the Northeast. Before any reform appeared, the central government had already set up a "Northeast Industrial Revitalization Fund." I thought, Northeasterners really are something. Before reforming anything, they got the money out of Beijing first. That culture is especially bad. In the end you have to create wealth yourself. So the Northeast's overweight state sector produces an SOE culture in which people don't try to compete in the market and earn a living, but go to government and carve out a bigger piece of the wealth that already exists.

10. The Positive Side of the Northeast's Economy: Why Population Loss Makes Sense

S: There is another way to see it. Since the Northeast is part of the country as a whole, the Northeast not developing doesn't mean Northeasterners aren't getting rich — because Northeasterners have all moved inside the pass, into the rest of the country. The Northeast's growth is slow because people have left. So you can't look at it that way. A city that had 10 million now has 9 million, and grows 2% — that is still growth, and GDP per capita has risen. That is Northeasterners developing; they are in fact making money, and you can't just say the Northeast is doing badly. Because when you look at development, not every place grows every year. Many inland counties grow very slowly. Why? Because every year they lose people. Analyze it properly and you can't say those counties are doing something wrong. Why? Because they are inland; they have no great geographic advantage. Why don't people go to the coast? To the east? To the big cities? So we see many inland counties simply losing population — and you can't say flatly that the place isn't developing. How can an inland county compare with Shanghai? It can't. It doesn't attract me. But is an inland county official any worse than a Shanghai official? Not necessarily.

Q: In some places GDP per capita has actually risen — possibly faster than the national average.

S: Right. And of course it isn't that the central or western regions can't develop. They do. Places like Baotou in Inner Mongolia and Yinchuan in Ningxia are growing fast.

11. Why the Foreign Exchange Problem Is Really About the Safety of Private Entrepreneurs

Q: What do you make of China's current foreign exchange problem?

S: Over the past two years capital has been leaving in large amounts, private firms especially investing abroad, while their investment at home grows very slowly. This is about whether the assets of private firms in China are safe, whether property rights are protected. We have seen some appalling cases: very large holdings seized by administrative power, and the owners' own freedom and lives left unprotected. That may be the biggest problem of all. Chinese private entrepreneurs feel unsafe, so they invest abroad. We have run surveys of private entrepreneurs these past two years, in Zhejiang and in Guangdong, and a substantial share said they plan to emigrate. Because nobody knows what China's institutions will look like in the future, or whether the basic principles of reform and opening-up will hold. They may not hold. Recently someone posted on an official Weibo account about "abolishing private ownership," and someone else said, not yet — fatten the pig before you slaughter it. Such talk is terrifying. Though the central government is aware of it too.

Q: Right — there have been some documents and some court rulings recently.

S: Yes. Last year the central government issued a document on equal protection of property rights, and made some effort. Some cases got reasonably fair verdicts — the Kaiqilai case a while back, where Kaiqilai won. Kaiqilai is a private company; on the other side was a state institution backed by the Shaanxi provincial government, and Kaiqilai still won. These are important signals that the government does want to protect property rights. But the big question is whether protecting property rights is an expedient or a principle being followed. The economy is slowing; so many private firms are investing abroad, and their domestic investment is growing very slowly — 2% the year before last, extremely low. And private firms are the main engine of China's growth and employment. I have given the numbers before: more than 90% of GDP growth comes from private firms, and 100% of new jobs — and that has been true for more than a decade.

So this is fairly serious. If private investment growth falls away, what then? The problem has to be solved at the root: property rights have to be protected as a matter of principle, made a genuine constitutional principle rather than an expedient or a policy. We've always called it policy, and policy changes. This should be constitutional: property rights are protected at all times. That is the fundamental thing — really protecting private firms, really restraining the officials who use their power to strip private entrepreneurs of what they own. Do that and people's minds will settle. The restrictions on capital outflow these past two years are inconvenient, but on the whole they haven't reached an extreme. You can still remit $100,000 a year, say. Most people can live with that limit. If your child is studying abroad, you can pay the tuition. Try to buy a mansion and the money is probably blocked. Making a large investment is harder still. The approach is certainly a bad one; it puts the cart before the horse. The root is safety — safety of property and safety of the person. Fail at that and people will run.

12. How a "Good" Design Like Medical Insurance Distorts Prices and Widens the Supply Gap

Q: This is the eighth year since the new health care reform plan formally took effect. Looking back over those eight years, what do you make of it? What problems remain? Where should the effort go next?

S: Last year we published a full research report on China's medical system, China's Medical System: Theoretical Research, Assessment of Effects, and Reform Proposals. The system has many problems. One is that the reform produced universal coverage by medical insurance. In fact China's coverage exceeds 100% — some people are covered twice over. More than 100% coverage looks like a fine thing, but in economic terms it has very serious problems. Once a person has insurance and falls ill, 75% is reimbursed, and that distorts his behavior. He used to count every cent; now he doesn't need to. Why? Because 75% of every cent comes back. The 75% that comes back is in fact money he paid when he bought the insurance. Many people are employed, and their employer withholds it from wages and pays a share — but that's all your money, just less visible. Either way it is a sunk cost. So you may buy more, or buy pricier, and this happens to most people at the same time. Our research came to a conclusion: the more you are reimbursed, the more prices rise. You gain nothing. Say you get 75% back and pay a quarter yourself. What happens to the price? It becomes four times what it was. It used to be 10 yuan; now it's 40. Do the arithmetic. Before, you paid 100% out of pocket: 10 yuan. Now 75% comes back, very nice — but the price is 40 yuan. How much did you spend? Still 10 yuan. Except that the 30 yuan reimbursed was also your money, so you spent more. Why is seeing a doctor expensive? That's why.

13. Doctors' Low Incomes: Why They Ended Up Wrecking the Price System of the Whole Drug Market

There is also the complaint, under this system, that seeing a doctor is hard. To fix the cost of care, the first move was to hold doctors' incomes down — and that creates a problem. If doctors earn too little, few people want to be doctors; and if you say doctors can take red envelopes, taking red envelopes gets you arrested. So doctors' incomes in China are relatively low. Compared with other countries: an American doctor earns 5.7 times the average wage, a Chinese doctor 1.56 times. Medicine is complex, technical work, and a doctor's income ought to be several times the average. In China it is low, and the result is that the number of doctors and nurses has grown far more slowly than demand for care. Between 1980 and 2014, demand for medicine and medical care in China, stripped of price rises and per capita income growth, grew 40-fold, while the number of doctors grew 1.5-fold. Hence the difficulty, the queues. Add what I said earlier — medical resources are distributed badly, concentrated in big cities like Beijing and Shanghai. Why is it hard to see a doctor? Getting to Beijing is hard; then you queue in Beijing, which is harder. These problems are all serious. We have never had much good to say about the so-called new health care reform, and the emphasis on the role of government is more wrong still. The stronger the government, the worse the allocation of medical resources. Without question. So it needs reform.

14. Can a Market Solution — Lifting Controls on Doctors' Incomes — Fix the Drug Market?

Q: Do you have concrete proposals? Marketization?

S: Marketization is exactly what we emphasize. For minor illness and outpatient care, there's no need for insurance, because people can afford it out of income. Outpatient reimbursement today is a game; it does none of what insurance was originally meant to do, which was to help when you fall seriously ill and cannot pay. Helping a household that a serious illness would bankrupt — that is where it means something. Minor illness doesn't need it. But the whole insurance system today is upside down: most people spend their days working out how to get reimbursed for minor complaints. It is a reimbursement game, and a huge waste of resources. So I say minor illness needs no insurance, and for serious illness the patient should bear a much larger share — 70%, say. That is, cut the reimbursement share sharply: 70% out of pocket for serious illness. If that is still unaffordable — if it exceeds 40% of that year's income, say — then it is beyond what insurance should handle. Our proposal is a national relief fund for catastrophic and serious illness: if a year's medical bills exceed 40% of income, a government fund should step in. We estimate the fund would spend around 200 billion yuan a year, which is a small figure.

Controls on doctors' incomes should also be lifted. Leave doctors' incomes alone. Higher incomes are what will draw more people into medicine. More doctors mean more supply. The next step is to free drug prices. Why were drug prices controlled in the first place? Because doctors' incomes were capped, so almost every hospital used drugs to subsidize care. Doctors weren't paid enough, so drugs were priced high and a cut of the drug price went to the doctor as income. If doctors' incomes were set by the market, drug prices could be freed.

15. How Should We See the 40 Years of Reform and Opening-Up? Interest-Group Monopolies and the "Death Tax Rate"

Q: 2018 is the 40th anniversary of China's reform and opening-up. Looking back over those 40 years, what strikes you most?

S: That's too big a topic. Briefly, the 40 years split into two halves: the first 20 and the second 20. The first 20 were basically a period of reform advancing. Advancing means that in the economy things moved toward the market, and in thought and culture there was continuous emancipation, a continuous lifting of the pressure that cultural despotism had placed on Chinese heads. There was economic opening to the outside world, and opening in thought and culture too — exchanges with other countries in literature, in theory, in textbooks, in scholarship. For a long time there were no obstacles. We used to hold an international conference whenever we felt like it. Now I can hardly imagine holding an international conference here. That was the first 20 years.

But in the second 20, as wealth kept pouring out, interest groups did work out how to cut themselves a bigger slice of the wealth that market reform kept producing. The first method for cutting a bigger slice is monopoly. PetroChina and Sinopec — both groups were formed in the late 1990s, and that was the watershed. They monopolized every part of oil, upstream to downstream, at home and abroad. Complete monopoly. Monopoly gets you a bigger slice: because they sit upstream, the monopoly price of crude and refined product amounts to pulling an extra share of wealth out of every enterprise and every consumer. Our estimate is that the two majors' monopoly price for refined product is 31% above the average of the major countries. We have studied all of this — the SOE research and the monopoly research are published. We can see very clearly how practiced they have become at capturing monopoly profit and at taking a larger share of it. Why have the banks been so slow to open to competition, so unwilling to let private banks in? Same reason: monopoly.

The other piece is the tax rate. We have research on it, and some articles — have you read them?

Q: "The death tax rate." (Note: first put forward by the scholar Li Weiguang, who argued that China taxes too heavily, and that a 40% tax burden means death for Chinese firms — hence "death tax rate." It set off a controversy at the end of 2016.)

S: Right. I also have an article called "Unchecked Fiscal Spending Is the Main Driver of the Rising Macro Tax Rate". Between 1996 and 2015, general public fiscal revenue as a share of GDP rose by 12 percentage points. That is plain enough. The 1980s and 1990s were a low-tax era; after that, rates kept climbing, taking a bigger share from firms and households. This produced a self-aware interest group. They are politically powerful, so they now face off against the rest of society, wanting a bigger share and wanting to protect the share they have. That is the problem of the second 20 years — to some degree it is counter-reform. But they also know they cannot go too far, cannot kill the market. Kill the market and there is nowhere left to take a bigger share from. They want private firms to produce, and once the producing is done, to take the larger part through monopoly and taxation. That is the whole picture of the 40 years.

16. Striving in a Flawed Society: What Should Young People Do?

Q: A lot of people feel these are not good times. What can any one person do in an era like this?

S: "These are not good times" is a sentence you could say in any era. Some people don't quite see it; they feel unlucky to have been born into this one. In fact every era has its problems. So the problem of "these are not good times" doesn't exist. Every era has problems — and that is precisely where our pleasure comes from. Meaning what? We are all born into a flawed society. So the most interesting, most enjoyable thing a person can do with a life is to change that society a little, by his own effort. I think this is what everyone ought to do. People fall into a real trap here: why was I born in China and not in America? That is an enormous mistake. You think America has no problems? America has plenty. America may be a bit better off than China right now, but that is because generation after generation of Americans kept working at it, improving things bit by bit. Read American history and you see it. People imagine America had a few genius founding fathers who wrote a constitution that was obeyed and enforced at once, and everybody was happy ever after. That is simply not what happened. America's present was bought with the blood and sweat, and sometimes the lives, of many generations of Americans.

So it makes no difference where you were born — wherever you were born, be a person of that place and do that place's work. China has many problems, true, but China also has much that is good, and many good traditions. You certainly live in a flawed society; and it is precisely because you live in a flawed society that you have something to do. We have to work at changing it.

Confucius said: "When the Way prevails under Heaven, show yourself; when it does not, withdraw." When the Way prevails, I come out and do things; when it does not, I live in seclusion. That is what he said to other people. What he said about himself was: "If the Way prevailed under Heaven, I, Qiu, would not trade places." Meaning what? Even if the Way did prevail somewhere under Heaven, I, Kong Qiu, would not trade for it. I stay here. He lived in the Spring and Autumn period, rites collapsed and music in ruin, war after war, the Way nowhere to be found. And his position was: even if there were a place where the Way prevailed, I would not go there; I would stay where it does not and get to work. That is what "I would not trade" means. That is: I live in this flawed, incomplete society, make some effort, and change it.

So I think "these are not good times" has never been a reason to complain or to run away. Think of it this way and the pleasure comes from exactly this: you are meant to work at what is flawed and incomplete. It is the same as what Unirule does. Why has Unirule lasted this long? Very simply, I'd say: we have been through a great many hardships, far too many — but every time we get something done, we are happy. We feel we have achieved something.

(More reports to follow, published on a rolling basis)

People featured in this report:

Sheng Hong: economist, director of the Unirule Institute of Economics, an independent Chinese think tank. His books include The Real Red Line Is the Market and An Economic Interpretation of Confucianism.

He says: "We are all born into a flawed society. So the most interesting, most enjoyable thing a person can do with a life is to change that society a little, by his own effort."

Cover image: a still from the film Dead Poets Society, from Douban.