 My name is Steve Seng. I'm the director of the Sours China Institute. On behalf of Sours, let me welcome you all to the fifth WSD 100 Distinguished Lecture at Sours. This is a series of lectures by distinguished scholars or practitioners whose scholarships or insights based on policymaking and international engagement with some of the most important issues of our time. Previous distinguished Honda lecturers who spoke on China, Sir John Keyes, the former prime minister of New Zealand, Professor Tom Christiansen of Columbia University, and Tony Abbott, a former prime minister of Australia. This series is named after WSD and Dr. Honda. WSD stands for Worldwide Support for Development, which is a Japan-based non-profit organisation. Dr. Haruhisha Honda is a great philanthropist who is committed to support disadvantaged people and communities all over the world. As the most progressive of leading English universities, Sours stands in the forefront in promoting the understanding of subjects close to the heart and interest of Dr. Honda and the remit of WSD. For today's lecture, I'm delighted to present to you Professor Barry Norton. Barry holds the Sogwan Lok Chair at the School of Global Policy and Strategy at the University of California, San Diego. He was educated at the University of Washington in Seattle and at Yale University, where he earned his PhD in economics. His work on the Chinese economy has focused on market transition, industry and technology, foreign trade, and political economy. He is, in my view, one of the most respected economists working on China. He is the author or editor of nine books that I know of. Perhaps there are even more that I am not completely up to date with. And I would like to flag up a couple of them in particular. The first sole author book that Professor Norton has written is Growing Out of the Planned, which came out with Cambridge University Prize in 1995. And it won the O'Hara Prize in the following year in 1996. His survey book on the Chinese economy, which is indeed called The Chinese Economy, Adaptation and Growth, which was published in 2007, has been revised, expanded, and republished. And it is still very much standard text being used. His most recent book, which was released in 2021, is The Rise of China's Industrial Policy 1978 to 2022. The subject of his lecture today is a leverage to steer the Chinese economy, Xi Jinping, as system builder. With that, let me invite Professor Norton over to you. My phone here just to keep me honest and on time. It's really a great pleasure to be here. And it's a great honor to me that many of you have come. It's a beautiful day outside. I know you can't count on that in London. And before I start, I guess I want to confess something. I have an ulterior motive in this talk. I want to convince you that the economic system in China matters and that it's changed a lot under Xi Jinping in ways that make a profound difference. I mean, economic systems are things that usually are backstage. I mean, we're very conscious of the individual policies and the people who make the policies, all those things. But economic systems sort of recede into the background most of the time, because they don't change that fast usually. But Xi Jinping is a really unusual character. And Xi Jinping, from the beginning of his rule, has been a tinkerer with institutions. He's changed here. He's changed there. He's really made an effort to shape China's institutional character. And what I want to do today is go through some of those changes and try to convince you that if we think about China today, if we think about its economic policies, the way its economy is performing, just the way China behaves in the world, that behind that is also a fundamental shift in the institutions of economic and political and social management that have been created by Xi Jinping. Now, let me say right away that this is not to deny something else. We know that Xi Jinping is very much a personalist leader. He shaped China in his own individual into an instrument of his own individual power. He has a personalist system. But my point here to start would be simply that Xi Jinping, yes, he's a personalist leader. There are other personalist leaders in Turkey, Putin, in Russia. These are personalist leaders. But generally speaking, somebody like Putin is a personalist leader perched on top of a set of institutions. But he doesn't really change that much. Vladimir Putin works with a central bank which has independence and carries out lots of economic policies. He's perched on top of a military, which seems to have been substantially hollowed out. He doesn't systematically reshape the Russian system in the way that Xi Jinping does reshape the Chinese system. So to try and convince you of this argument, I'm going to move from politics to economics in kind of a broad arc. So I admit we're going to cover a lot of ground, maybe too much ground. I admit we can only sort of scratch the surface. But my argument here is going to be that scratching the surface actually is useful. That we can learn something about the way China has changed in the last decade that maybe many people underestimate. And in some sense, the one fundamental message, the fundamental takeaway is China's different today. That China of miracle growth, that China of dramatic dynamism from 1978 to wherever you want to stop it, 2010, 2012, is gone. And there's a new China, for better or for worse. It's Xi Jinping's China. And he created it not out of, you know, not in one breath. It didn't emerge like Venus arising out of the sea, but rather through 10 years of steady alteration of institutions. So that's my objective tonight. That's what I hope I can convince you of. And I'm going to do that through sort of three arguments. First, I'm going to say, look, Xi Jinping has changed the Chinese system in these fundamental ways. So this is mostly politics. But institutional politics, right? And I'm going to focus, of course, on the economic system, because I'm an economist, and that's my only area of expertise. And second, I'm going to argue that these changes have fundamentally changed the policy objectives and the incentive environment that most people in China face, but especially government officials. And by government officials, I include state enterprise managers, university presidents, other people like that. The China today has a really different incentive system that affects how people respond to policies and react to opportunities and challenges. And I'll talk about some of the implications of that, because I think some of the implications are quite powerful and help explain some of the things happening today. And then third, I'm going to go back to my area of specialization, which as Steve mentioned, my most recent book is about Chinese industrial policy. And I'm going to argue that Chinese industrial policy, or let's call it techno-industrial policy, because a lot of it's about science and technology, should be understood in the context of these system changes that I've been talking about, and that it has the possibility, and I would in some sense consider this the danger, of taking China's economy even further away from the global economy and creating a kind of hot house environment in which China's domestic evolution starts to diverge more, or I should say even more, than it's been diverging from the global economy so far. That's a lot, I know. But let's go through it, and we'll see if we can make it work. All right, so first, pure politics. Xi Jinping changing the Chinese system. Let's start at the top, because it all starts at the top. And right away, I think probably most people in this room already know this, Xi Jinping's governing institutions are radically different than what used to be the norm in China for many decades. And I should say throughout this talk, when I talk about when I contrast part of the Chinese system in the past with Xi Jinping's system today, by the past, I mean the Chinese system as it evolved over 30 years from the 1980s to about 2010. If you want, you can think of it as Deng Xiaoping's China. You can think of it as that China that put economics in command in some ways, and which grew and transformed dramatically and totally changed China in every aspect, and changed China into a market economy and into one of the most dynamic societies in the world. That's the baseline. That's what I'm going to contrast today's China with. So starting at the top, Xi Jinping, think of it, he's created this completely different policy process at the apex of the pyramid, where China is now governed by 10, count them, 10 party commissions that govern each specific policy area. There's one on security. There's one on finance and economics. But weirdly enough, the most powerful of all these commissions is something called the Deepening Reform Commission. And it's now acknowledged by people in China as being the most authoritative policy organ in China, which means the government, the state council, which made policy for 30 years, right? 40 years, 50, if you want, ever since 1949 under Joe and I, has been somewhat superseded by this more powerful party body, the Deepening Reform Commission. And the Deepening Reform Commission derives its clout, if we can use the kind of old Chicago slang word, from the fact that it and only it has the authority to instruct other organizations, thanks Steve, how they're supposed to restructure themselves and how they're supposed to conform to the new vision. In other words, set up to reform. But reform in Xi's China means to adapt to a new set of policy requirements. So this is very peculiar. Here's a top-down system that has just erected a set of new Communist Party bodies at the very top in order to facilitate the carrying out and implementation of specific policies. But that's only part of it, right? This increase in the role of the Communist Party, which of course we're all familiar with, and which obviously the Communist Party never went away. But what's distinctive here is the new directness of the rule and management of the Communist Party. For example, state-owned enterprises. Now here's a change. Everybody knows I think the state-owned enterprises are less important than they used to be in the Chinese economy, at least over the long timeline. But also Xi Jinping has done something quite remarkable. If you go back to the 1980s, China accepted what was called the Factory Manager Responsibility System. It doesn't sound very radical, does it? But in fact, in the context of the 1980s, this was an extremely radical change because it said that within business units, the party secretary is not the number one person. The number one person is the factory manager because at that time you just had factories. You didn't have companies or corporations like you have today. And the Factory Manager was an individual whose primary job by everybody's acknowledgment was to produce, was to sell more, was to reduce costs, was to maximize profit. And his job, in other words, he was given to a certain degree of separate authority that detached him, gave him a little bit of a sense of independence from the party hierarchy. And that system, Factory Manager Responsibility, was in place for more than 30 years throughout the Chinese growth miracle until about five years ago when Xi Jinping changed it. And he said, no. State enterprises are part of the national team. They have to represent the whole country. And the party secretary has to be the primary authority. The party committee has to consider all important decisions first, then the management fleshes it out, and then the board of directors, typically chaired by the party secretary, makes the final decision. In other words, actually here's a quote from Xi Jinping. The embedding of the party into the corporate governance system is one of the central features of Chinese-style socialism under market conditions. So he thinks it's important. And I think it's important too. And the Factory Manager system, what did it do? In other words, the Factory Manager system distributed power to an individual whose primary job was economic, was to produce growth, was to produce efficiency. And it gave them a certain standard role, and that's now been changed. So the party in this sense extends its control under Xi Jinping in a way that it never did before. Sorry, I shouldn't say never did before, but in a way that it hasn't done since the 1980s. Of course, it did before under earlier eras of Chinese development. But it's not just that the party is more important. It's also that the internal governance institutions of the party have changed. Under Hu Jintao, poor Hu Jintao, much criticized, much despised these days. But under Hu Jintao, a process of quasi-institutionalization was taking place in the Communist Party. And Xi Jinping, as soon as he came to power, started to dismantle these elements of quasi-institutionalization. Before Xi Jinping, at the point of promotion, an individual was supposed to undergo a 360-degree evaluation. You know what those are? We have an American corporation, so I don't know if you're familiar with it here. But that means your peers are supposed to evaluate you, your boss, of course, evaluates you, and then some of your subordinates evaluate you. Then you can ignore the evaluations if you want. But it's part of the process. China did that for 20 years from the mid-'90s until Xi Jinping came. As soon as he came to power, he eliminated it. He also eliminated straw polls, where you test somebody's popularity within the system. He eliminated two-term limits, not just for himself, but for everybody. The party was never strictly governed by two-term limits, but if you look in the party rules, there's a new set of party rules. They change the wording about what the norm should be and the situation for when somebody could be removed from their post, and they make it much more politicized and much more immediate. I could go on and on, but I think you get my point. Direct communist party rule without constraints, without checks and balances, has been systematically strengthened under Xi Jinping. Now, it's true. Deng Xiaoping also said many times that checks and balances were terrible, that there could never be a check on the power of the party. But still, there was a trend before Xi Jinping to create inner-party checks and balances and to consciously and purposely distribute power among authorities within the Communist Party. And Xi Jinping has purposely and intentionally reversed that. That means that there is a process going on, and let me call it institutional isomorphism to borrow a term from sociology, meaning organizations start to look more and more alike. It used to be in China there was a big difference between schools and companies and government bureaucracies and regulatory institutions, right? That difference developed in the reform era, but increasingly they've been brought to become more similar to each other. And then in 2021, in the summer of 2021, something very, very striking happened, and that is the attitude toward the government and the party towards private businesses took a dramatic turn. I mean, if you think about this episode, these episodes, you probably think of Alibaba and the listing of Ant Financial. Alibaba was set to make billions of dollars by taking their financial subsidiary, Ant Financial, and listing it on the international stock markets. And literally the day before it was canceled. And this was part of a kind of crackdown on private business that ultimately led to Alibaba, one of China's most successful and technologically dynamic corporations. Ultimately, now it's gonna split up into six different divisions and essentially retreat from the economic sphere in which it was so dramatically successful. You might also recall about this time that the private educational industry in China was dissolved because Xi Jinping decided that it was not healthy for China's children, for China's teenagers to be educated in this environment. Crucial point here is that whereas up until 2021, private business in China was really sort of granted an exemption for many different forms of political control. And in 2021, after 2021, it became clear no more exemptions, right? You're not exactly subject to this same kind of institutional isomorphism as public institutions are, but you're not exempt either. You have to be part of the team. So in other words, to summarize this particular aspect of what's going on in China, we can say that institutionally, Chinese institutional forms have become more similar. Chains of command have become shorter and the whole system has been reorganized to make it in a sense simpler and more transparent to power from the top. It's become more of a system to transmit policy, to transmit rule and its institutional features have changed. But the changes in the summer of 2021 are also a good time to pivot into my second point, which is that these changes have also resulted in a dramatic expansion of the policy objectives that the system tries to achieve. And as a result, also changes the incentive environment that everybody in the system works under. Now, many of you are probably very, very aware that an important change about China today as opposed to China a decade or more ago is the role that economic growth plays as a priority policy of policy makers. It was common 15 years ago to say about China, oh, growth is more important than anything else, right? Economic growth trumps everything. It trumps the environment. It trumps equality. It's everything is growth. And there's some reasonable reason to think that that was an accurate characterization of the Chinese system back then, and it isn't today. Now, why was it accurate back then? Well, it was accurate back then because everybody's incentives in the system were aligned behind economic growth, right? If you think one of the most obvious ways, there's a rich literature in political science that describes the Chinese political system, very hierarchical system, right? But what are the rules that govern promotion? Many people argued that until fairly recently the key feature in promotion was exactly economic growth. And there was statistical work to show that the local officials who were promoted, you could think of it as a tournament, right? Those that performed best in the economic growth tournament were the ones most likely to get promoted. And in addition to this, of course, local officials had performance indicators of which economic growth and fiscal revenues were a big part. And of course, also, economic growth means more money and more resources, means you can do a lot of things to help out your friends and relations. So strong alignment behind economic growth. But recently, Xi Jinping has said many times, starting with security, right? That security is just as important as economic growth. And in fact, if we sort of trace this process more and more, what we see is steady expansion of the diverse objectives that political leaders are supposed to achieve. And here, once again, summer of 2021 is a crucial turning point. Summer of 2021, right? That's less than two years ago. We're talking about a situation where all of a sudden, Xi Jinping starts to say, not only is economic growth not the key priority, not only are we focused on security, not only does security include, especially technological security, technological progress and technological resilience, but also, now we also, it's very important that we take seriously the objective of common prosperity. What does that mean, common prosperity? Of course, in some ways, it's just a return to fundamentals, right? A kind of fundamentalist spirit to come as party rule. But it also introduces a new policy element. But what happened at exactly the same time? This is exactly the same time, summer of 2021, where the Chinese government also starts to say, wait a minute, our birth rate is declining to dangerously low levels. We have to create a more, pro-natalist policy, right? Set of policies that support birth so our Chinese population won't die out. We have to prepare for our aging society, but we also need to increase births. Oh, wait a minute. This is the same party that pushed the one child policy for 35 years and is now pushing a three-child policy where party members are encouraged to have a third child because that's the most patriotic thing they can do. Wow, that's quite a change, right? And I mean, I could go on and on with a list of things, but one thing I just want to mention, decarbonization is an important goal for sure, right? But China was never committed to decarbonization as a national goal until September, 2020, when Xi Jinping went to the United Nations and said, China's gonna peak carbon by 2035 and start to reduce to net zero by 2050. So in other words, this political system, which 15 years ago we could say it's growth beyond everything, now all of a sudden we're facing a political system where Xi Jinping says not only is growth the only thing, but it's only one. It's only one element in a deep stew of policy objectives and how are we gonna achieve these policy objectives? Well, here's the thing, right? We can easily trace this proliferation of goals, but what we can't trace is a proliferation of policy instruments designed to achieve those goals. Now let me just give you one example, common prosperity. What does it mean? If common prosperity means anything, it seems to me, it means reducing the Gini coefficient and improving the distribution of household income, right? That's what common prosperity means. How do countries achieve common prosperity? Well, there's actually a pretty simple answer to this question, right? Countries achieve common prosperity by implementing progressive income tax systems, right? In the United States, wow, there's a paragon of common prosperity for you, right? No, not, right? American income distribution is much worse than income distribution in the UK or most European countries. But even in the United States, the Gini coefficient is 0.51 before tax and 0.4 after tax. That's how redistributive the tax system is. That's dramatic change in Gini coefficients for those of you who aren't nerdy enough to follow Gini coefficients, that's what they mean. In China, the household income distribution Gini coefficient is 0.48 before tax and after tax, it's 0.48. The tax system does absolutely nothing to redistribute household income. Xi Jinping brings up common prosperity and does he do anything to change the tax system and make it more progressive? No. What did he rely on for his first wave of common prosperity? Essentially compulsory charity. Alibaba is told to give 100 billion renminbi, that's 12 or $13 billion, not that much money, to fight poverty, poverty alleviation. In other words, multiplication of goals without multiplication of policy instruments to achieve these goals. Well, if that's the case, how are we gonna achieve these goals? He listened to Xi Jinping's speeches, what he says is very clear. He says, authoritative officials need to correctly balance the demands of these different policy objectives. He uses a certain word a lot, the dialectical unity. Local politicians need to understand the dialectical unity between, for example, protection of domestic industry and improving global trade. And actually, if you paid attention, the Chinese premier Li Chang, well known for repeating Xi Jinping's words, just lectured German industrialists, presumably because he was in the home of Hegel and Marx. He said, you need to understand the dialectical unity between technological strengthening and openness to trade. Quite amusing, incomprehensible, I think, if you don't understand this systemic background. More discretion to officials, kind of a prefect system, really. And it's a paradox that China today is so dynamic. They're more skilled people than ever, but the development of specialized institutions lags behind and more and more discretion is put in the hands of generalist officials, even though those generalist officials, as we'll see in a second, are perhaps in some ways more skilled than they've ever been. So let me try and bring these two ideas a little bit closer together in a way. Let's think about a state firm, a state enterprise. As I already described the fact that state enterprises are more directly run by the party secretary. But what does that mean in terms of these objectives and incentives that I'm talking about now? Well, it means that the state-owned enterprises are now no longer instructed to maximize profit. I mean, they do have profit indicators, to be fair. Absolutely, there's a success indicator that's linked to profit. But direct party rule of the state-owned enterprise also means that state-owned enterprises are increasingly given a set of diverse policy objectives that are politically determined. So for instance today, and Chinese state-owned enterprises are still big and important, right? They don't dominate the economy by any means, but they're this very substantial chunk of the economy. And so today, at the beginning of the 2000s, China entered the World Trade Organization, right? And in the accession agreement to the World Trade Organization, China says we agree that Chinese state-owned enterprises will be purely commercial entities, okay? As part of the entry agreement. And for the first decade of the 21st century, China apparently made very serious efforts to carry through on that promise. And the profitability of state-owned enterprises soared because state-owned managers were being told this is your job, right? Be a commercial entity, make profit, be efficient, move ahead, be competitive. But now it's not just that this one person, the manager, has been substituted by this other person, the party secretary, that in itself wouldn't matter that much, would it? But now state-owned enterprises are being told you have to follow the same diverse set of policy objectives that a government official has to follow. So for instance, a state-owned enterprise is now told, I'm talking about the big central government state-owned enterprises. You must have a social responsibility plan, a corporate responsibility plan, okay? That means increasingly you have to make a contribution to common prosperity. You also have to have a decarbonization plan, okay? Which means you have to have a schedule for how you're gonna reduce your carbon emissions. You also have to have a plan to show how you're contributing to strategic emerging industries, which I'm gonna talk about in a second. And in particular, the modern industrial system in China. That's a term that's probably not so familiar to most of you, but you might wanna get used to it because you're gonna be hearing a lot more about it over the next couple of years because China's gonna build a modern industrial system which means a system with resilience and protection and not dependent upon foreign technologies. So state-owned enterprises have already been told every single one of you must have a plan for how you're gonna contribute to this goal of a modern industrial system. That's a lot of things to do, right? So in other words, a state-owned enterprise, big, huge corporation, lots of money, lots of revenue, lots of employees has within 15 years gone from being told your primary goal is to be efficient and make profit, to being told your primary goal is to be a member of the national team to make profit while also decarbonizing, contributing to our technological ambitions and contributing to common prosperity. So that's a fundamental shift in the incentive environment that these people face. So let's put those two things together. Increasing isomorphism in the institutional system. So everything looks more and more the same. And increasing shift towards multiple competing incentives. Now, let me draw back a little bit into what an economist would call incentive theory. In incentive theory, we make a big distinction between high-powered incentives and low-powered incentives. High-powered incentive just means you're given a target and you have a reward that's strictly tied to the target that's assigned to you. So if I say to you, you're a head of an American corporation, your compensation is tied to your stock market value, those are high-powered incentives, right? Because that means that manager can get rich if the value of the stocks go up. And low-powered incentives are things where your income doesn't change that much if you hit different targets. But those kind of incentives are much more appropriate in, say, a bureaucracy or a government where individuals have to balance off different kinds of targets. And then when you think about it, you realize, actually, if individuals have to balance off many different kinds of objectives, they can't really have high-powered incentives. Because high-powered incentives will draw effort away from all the other objectives, right? If I tell you, well, you've got a maximized profit and you're gonna be rewarded for that, oh, but also common prosperity, you're gonna say, what's in it for me? What's the balance here? Are you rewarding me for both? Are you rewarding me only for one? How does that work, right? And so multi-objective systems everywhere in the world tend to be low-powered incentives. And now look at China. What's happening? We're moving from high-powered incentives to low-powered incentives because in the old system, power was decentralized into many different people. I mean, I'm including enterprise managers of a state firm. I'm including, of course, private businesses, including local governments, including township and village enterprises. All these different people had power, fragmented power, but with unified high-powered incentives to support economic growth. And now that's less true everywhere, right? It's less true, especially obvious in the state-owned enterprise, because, well, they clearly have to do so many different kinds of things. They're not gonna be so strongly incentivized just to make profit. And when you look at the bureaucracy, it's also true, right? Clearly, there's no tournament system at work anymore. I mean, we can see this in many ways. Sometimes we get to see the actual performance indicators that the party gives to managers and local officials, and those have been changed. They don't show the same kind of emphasis on economic growth that they used to. But we can also look at the outcomes. When you look at the Politburo today, eight out of 32 people have PhDs in science and technology. Not because they were effective in stimulating economic growth, but because they're the brains who are gonna drive the modern industrial system that Xi Jinping wants to create. It's not economic growth, it's technology. In Xi Jinping's mind, there's a technological revolution going on, and China has to be one of the leaders. So as a system, right? All this, we've moved, in other words, from a system that 15 years ago we could characterize as decentralized with high-powered incentives that are highly aligned behind economic growth to a system that's much more centralized with low-powered incentives that require decision makers to balance objectives that aren't particularly aligned with economic growth. Wow, that's a huge change, you know? And to sit back and see an economic system change that dramatically within only a decade, that's really unusual. That's something we associate with revolutions, with massive social change. But here, it's something that's been top-down. It's something Xi Jinping instituted, but it's a set of features that have now been baked into the Chinese system. It's not just personalistic power anymore. It's also the way all these institutions have been shaped and adapted. That means this is Xi Jinping's legacy. It's not just Xi Jinping. After Xi Jinping is gone, this system is still gonna be what it is right now, and it'll instigate a whole nother set of changes in institutional adaptations. Okay, so what are the implications of this? Actually, there are quite a few. So I mean, the first thing is just a kind of mindless, hey, let's pay attention to this, right? Here it is the world's biggest economy, by some measures. Certainly the world's largest country, by some measures. It's got a different kind of economic and political system in place. Let's pay attention. It's a big deal. What are some of the implications? Let me highlight two. Number one, this system is potentially highly decisive, but lacks credibility. Now I use those terms in a slightly special way. Decisiveness meaning that if a policy is adopted, it can be carried through and implemented very, very quickly. That's decisive. So that's a good thing. But credibility is also a good thing. Credibility means once you set a policy that people believe you mean it and you're gonna stick with it and it's something that they can rely on, right? That's credibility. And there's a kind of general principle in this field of, subfield of political science that says the more that power is decentralized, the more veto gates there are, the more credible policy is because it's difficult to change, right? You can only change it when there's a kind of consensus. So look at China today and you can say very clearly, China has a decisive polity that completely lacks credibility. I said this a year ago and I said, I just saw my notes to a speech I gave in April, 2022. And I said, China is asserting today that it's zero COVID policy is something to which it's absolutely committed and to which everybody must strengthen their degree of commitment. And I said, this is a false signal. Actually, it's not a credible policy commitment. I'm not, I was just lucky, right? But everybody knows what happened. At the end of November, the entire zero COVID policy collapsed overnight, right? Boom, no credibility to that policy. And then as we came out of COVID, what's happening in China today? Everybody can see that the recovery from zero COVID is too weak. And everybody can see that the private sector was traumatized by the events of the summer of 2021. And so policy leaders, head by the Premier Li Qian go around saying, hey, that's all over guys, no worries. We like private business. Private business is part of the national team. He says, Chia Joshua, what's the year in? Very strange ambivalent statement. You are part of us, right? You are our people. And guess what? Nobody believes it. And the reason nobody believes it is because no costly signals have been sent to convince private business that actually the party's attitude towards private business has gone back to what it used to be under Jiang Zemin or Zhu Rongji or somebody like that. And the result? A year, this year, private business investment in China is actually 1% below what it was exactly a year ago, which is astonishing because exactly a year ago, China was full off into zero COVID lockdowns. And a year after those lockdowns have been released, investment is actually down. What's going on here? You can only understand this through the lack of credibility of the most recent policy term. Second, what are the implications for growth and productivity improvement? They're negative, right? For a whole list of reasons. First, just the obvious, right? Well, if growth isn't the top priority of policymakers, they're not going to necessarily do things to foster growth, fine. Second, the incentive system. Growth has been de-incentivized 15 years ago. Growth was number one. Now, it's not only not number one, we're not even quite sure where it stands on the list of policy objectives. And then I'm going to argue, and this will be the last part of this talk, that there's a potential for these system changes to be made worse, as it were, or at least more anti-growth by the most recent set of policy changes that we can think of in terms of this modern industrial system. As you might have heard, China and the United States are in some kind of strategic rivalry. It's on the top of everybody's minds, in a way, in the US, but certainly in China as well. And I think also in Europe, as Europe tries to decide exactly where it stands in this sort of great power jostling, great power rivalry. But China has already decided where it stands. And what it's decided is that China should adopt science and technology, self-reliance, and self-strengthening, right? Could easily, to the time. And China has adopting a massive complex of policies that are designed to implement this kind of scientific, but also industrial transformation. You'll often hear people in China talking about something called a new-style whole-of-nation system. It's kind of a mysterious term. But it involves, among many other things, the government coordinating consortiums of actors, consortia of actors, that include research institutes, state-owned enterprises, private businesses, specifically designed to target technological vulnerabilities, which is to say areas where they look at the trade data and they say, oh, these are things that we import a lot of, high tech chips, of course, from Taiwan. High-quality semiconductor manufacturing equipment from Japan, the United States, and the Netherlands. But also certain specialty chemicals, ball bearings of certain specifications, sensors, a whole range of things, right? So in other words, this industrial, let's call it techno-industrial policy that China's been following for about a decade is right now being ratcheted up into a much more intense level because China's decided it needs to do this in order to respond to the American challenge. But I think for us, as we examine this and try to understand it, it's important that we not think of it simply as a short-run response to a technological rivalry, the so-called tech wars, right? It's not just a short-run response. It's also a part of this system change because the system change that I've been describing up until this point has been a set of systemic institutional changes imposed on what has continued to be a vibrant, dynamic, successful market economy, right? For all of my words about state-owned enterprises, the majority of decisions in the Chinese economy are made by private businesses, right? Private businesses that until very, very recently, we thought were, if anything, sort of working hand in glove, working cooperatively with the state. And so I wrote a piece about five years ago that I called the Chinese system grand steerage by which I meant, oh, I wanna call it grand because I wanna emphasize that the state's really ambitious. They really wants to achieve certain outcomes and it's really gonna spend money to do that. But I didn't wanna implicate planning that word because in a sense, five years ago, the state was doing things, but it was acting sort of like a giant venture capitalist. You know, I call it a venture capitalist state because it was trying to shape businesses into and give preference to high-tech outcomes and high-tech businesses, but without doing too much damage to the market economy and the market price system and all that, right? Because it saw that as a key advantage. Chinese policy makers still see it as a key advantage, but increasingly they think of that advantage in more strategic terms and they think of the advantage, not just in terms of having a market economy, but in terms of having the world's biggest manufacturing base, which China does have, right? Definitely does have. And therefore, even in terms of the strategic competition with the United States, China has great advantages because it's the low-cost producer of so many things. And so their idea is, let's keep this manufacturing base, but make sure we nurture it to be stronger, to be more high-tech and to be, therefore, less dependent on foreign technology, to be not dependent on the United States, not dependent on Japan, not dependent on Taiwan or Korea, not dependent on Germany or the UK. But this means that for the first time since China launched the economic reform program back in 1978, China is really trying to say, we wanna shape the development of the economy against the natural market-driven trajectory. What would the natural market-driven trajectory be? The natural trajectory would be manufacturing would start to shrink in China as it moved to a service economy, right? Every other economy in the world ever when it reached China's level GDP per capita has started to become post-industrial to a certain extent. The Chinese most recent five-year plan says, we don't want the share of manufacturing to decline abruptly. We wanna keep it strong because that's the basis of our strategic strength. They also say that consumption and investment should grow in tandem with GDP. In other words, no rebalancing. Even though the Chinese economy has the highest investment rate ever recorded in human history and has maintained that highest investment rate for 13 years, Chinese policymakers now say, we don't want to reduce that investment rate. We don't wanna rebalance. We wanna keep China moving forward as a manufacturing superpower that is increasingly a technological superpower. So obviously that could be a whole story in itself, a whole lecture in itself, but I wanna use it just to wrap up my story about system change. Because system change, the one element to it that we haven't brought up so far is the nature of information that flows to decision makers. And until very recently you can say, look, the one strength of the Chinese economy, whatever you think about different aspects of the political leadership, the one great strength was that the market-based economic system combined with the incredible entrepreneurship that is so strong in China created this enormous economic dynamism and the price system after three decades of reform was such that the domestic price system in China was pretty much the world price system. Yeah, there are lots of subsidies and things like that, a lot of advantages to favored firms, but still basically the price system was similar so that you could say, if you can make it in China, you can make it anywhere, right? Huawei showed that, TikTok showed that, lots of companies are showing that. Electric vehicles are showing that right now, right? That China had that key market-driven dynamism. But look what's happening right now, right? As the system changes, these very powerful policy makers are creating a set of institutions that the objective of which is to insulate China a little bit from the world economy. It's to decouple, they hate that word, but when you go into the Chinese language sources, they're talking about decoupling all the time and creating a set of institutions that are designed to foster high technology enterprises as well as manufacturing enterprises. You see these not only in companies producing goods, but you also see it in capital markets. If you follow the Chinese stock market, it's a bizarre story. Some of the ups and downs lately have been quite remarkable. But also one of the things happening is Chinese are now supporting a group of firms called Little Giants. These are small, technologically sophisticated private firms that are tipped by the Chinese government for listing on the Chinese stock market. So they can raise money because stock market investors see that they have support from the government. That means to a certain extent, guaranteed markets, a certain level of protection. So the price system in China is in danger of becoming something of a hot house, right? As policy makers committed to these objectives, strong manufacturing superpower, technology superpower, fostering the new generation of firms, create a systematically differentiated type of price system. You can see how that could fit together with the changes in institutions, the changes in incentives, and the changes of information to mean that China is in a sense drawing inward. Not culturally, that might be happening as well, but drawing inward in an economic system sense, in that incentives increasingly are aligned into this new world, and it's Xi Jinping's world. It's a world where China takes off in a way in a direction that's gonna be really, really difficult for the rest of us to deal with and to adapt to. And I hope I've managed to convince you that the system level part of this is a key part that China continues to evolve, it's so dynamic. Changes happen so fast, but in this case, the changes have led to a new kind of system that I think we should call for now a Xi Jinping system. Thank you. Well, thank you very much, Professor Norton, for this very thoughtful and penetrating analysis of how the system is changing in China.