The best way to understand China's political system is that it is a corrupt meritocracy.
If I were to ask you to point to another corrupt meritocracy, maybe it's even one where you and I are both located at the moment. What would you say? I think it's more complicated in this country. Corruption in China is still of an illegal form. But corruption in this country has become so legalized and institutionalized, it's hard to say that it's corrupt. Some people would be really offended by the word.
Yuan Yuan Aung is a professor of political science at the University of Michigan. She recently published a book called China's Gilded Age, the Paradox of Economic Boom and Vast Corruption. Her analysis is based on prosecutorial data, government compensation figures, news reports, and her own interviews with more than 400 Chinese bureaucrats. She's trying to answer several questions about corruption. The main one is this.
how as an economy like China has been able to grow so large and so fast with such high levels of corruption.
Economists usually point to corruption as an impediment to economic growth, and corruption in China is famously high, at least according to rankings like the one from Transparency International, a German association that collects corruption data around the world. Some scholars argue that corruption poses an existential threat to China.
And President Xi Jinping seems to agree. Since he took over in 2012, he has led a crackdown in which more than 1.5 million government officials have been disciplined with thousands sent to prison. The United States, meanwhile, ranks much lower on the Transparency International Corruption Index. But you and you and Aang says it's not so straightforward.
So my core argument is what we see in China today is basically what we would find in the US in the last century. Meaning way back in the Gilded Age. But she argues corruption didn't just evaporate in the US.
There is, I would argue, a historical pattern in the evolution of corruption and capitalism. It's not true that corruption disappeared as countries became richer. Instead, it evolved in structure and form and became more sophisticated. And China is still a newcomer in this process. If you are skeptical about American corruption, consider a few very recent headlines.
From the Wall Street Journal, 131 federal judges broke the law by hearing cases where they had a financial interest.
from the New York Times, how accounting giants craft favorable tax rules from inside government, or consider a recent academic analysis, which found that when companies spend money on lobbying and political influence, they get a far greater payoff than for the money they spend on research and development. It's enough to make you think back to when America's so-called robber barons roamed the land.
People like John D. Rockefeller and Cornelius Vanderbilt and Andrew Carnegie were known to use any means necessary to amass incomprehensibly large fortunes. This is the period that came to be called the Gilded Age, a phrase coined by the writer Mark Twain. There is another famous phrase that Twain may have invented. History doesn't repeat itself, but it rhymes.
And history today does seem to be rhyming. At least you and you and Ang think so.
We should understand the relationship between China and the US, not as a clash of civilizations, but as a clash of two gilded ages. China is undergoing the gilded age 1.0. But the US, we could say, it's the gilded age 2.0. It's a much more sophisticated financialized economy. The new tycoons are in the technology sector. The old industries are now being phased out.
Is one takeaway of your book and your scholarship generally that Americans should not feel too smug about the high level of Chinese corruption because we have our own forms of very high level corruption except it's legal and we don't call it corruption?
as someone who has lived in this country for some time, I think that many wonderful things about America, but one striking feature is the judgmentalism. And I think it has to do with a kind of narrative of America being this chosen country to be this beacon of freedom and justice around the world.
In other parts of the world, people don't think of their country. In these grand, chosen terms, this is actually quite unique to the construction of the American identity.
Over the past few months, we've been running a series of episodes on American identity. The first one was called, the US is just different, so let's stop pretending we're not. But Aung's research suggests that, at least when it comes to corruption, the US and its biggest rival may not be as different as we think. There are, of course, deep cultural, historical, and especially political differences between the US and China.
So obviously one is a democracy, the other is a single party autocracy. But some of the parallels are hard to deny. They have a similar problem of extreme inequality. They have cronyism, systemic financial risk, excessive materialism, ecological crisis, stemming from overconsumption.
Today on Freakonomics Radio, is the U.S. a democracy with more than a few Chinese characteristics? And what is corruption and what isn't it? Also, how do you measure something that's meant to be hidden? Well, these are deep questions. Fortunately, Yu Yu and Aang has most of the answers, starting right after this.
This is Freakonomics Radio, the podcast that explores the hidden side of everything with your host, Steven Dubner. You and you and Aang grew up in Singapore in what she describes as an ordinary middle-class family.
We were never wealthy, but we were never short of food and shelter. Like roughly three quarters of the Singapore population, her family was ethnically Chinese. She didn't grow up thinking she'd become a political scientist. When I was a child, of course, I didn't understand the role of governance in my life.
But Singapore's governance was, in fact, quite extraordinary. Economists like to talk about the Singapore miracle to describe how a small and poor country with no significant natural resources turned itself into a thriving place with some of the world's best health care and education systems and, yes, good governance. With, we should say, very low levels of corruption.
I remember the day when I was a six-year-old child and the train station opened up near to my home and my home family dressed up like we were going to church because it was such an event and I was so blown away. I was like, oh my gosh, this train goes underground and then it comes up again.
And of course today nobody talks about the subway system is the most boring thing. So what used to be so spectacular has become normalized and that is one attribute of development. You kind of take what you have for granted.
After high school, Ong moved to the US to attend Colorado College. She went on to get her PhD at Stanford. Having witnessed Singapore evolve from developing country to prosperous country in a relatively short time, she got interested in how that process works. And for someone with that interest, there is no more compelling case study than China.
In 1989, China's GDP was $347 billion, while the US GDP was at $5.6 trillion, so one-sixteenth the size. Since then, China's GDP has grown, on average, 9% a year, roughly four times the US growth rate.
That's how Chinese GDP now stands at nearly $15 trillion with the US in shooting distance at nearly $21 trillion.
But for a researcher like Aang, there is a puzzling paradox here. How has this runaway growth happened in a country with so much corruption? As I mentioned earlier, that's not supposed to be possible. Corruption in China is so embedded, such a part of the culture, that it has generated its own vocabulary. You've got, for example, the naked official,
The naked official is a common term in China, and it means an official who has nothing at home in China, looks very poor, but in fact has a great deal of wealth overseas. There's also what's known as elegant bribery.
Elegant bribery means forms of bribery that became more elegant and sophisticated in China. So an example is instead of giving cash to give works of art. Because art is valuable, but the value is subjective.
And so in the event that a corrupt official is arrested, he could defend himself by saying, well, it's just a useless piece of vengal or something like that. So big question, why has China's economy prospered so much despite such high levels of corruption?
The short answer is that it has to do with the type of corruption that came to dominate in the economy. Grove damaging forms of corruption were effectively contained over time, such as embezzlement, petty bribery. If you are talking about corruption in the form of extortion and embezzlement, that could never be good for any economic activity. But if you are talking about influence paddling,
Well, it might actually be really good for business. I find that when people use a word like corrupt, it can mean a variety of things. I guess the tight, legal-ish definition is an illegal act in which you're trying to get something that you shouldn't get and using the levers of power. But I think a lot of people these days, when they think about corruption, they think of something
bordering on moral corruption, which means that something could be legal or allowed, but you know it's not the right thing. I'm curious how you think about corruption generally.
What I try to do is to avoid being ideological about it. The common definition of corruption is the abuse of public power for private gain. And that definition usually excludes legal forms of influence politics. My definition would be broader than that.
I would say that whenever there is so much power that one is able to influence or dictate the rules of the games, you begin to have the potential for corruption.
And that is a gray line. In the context of countries like the United States, advanced capitalist democracies, it's really hard to pin down what are the boundaries of having excessive political influence. So, in order to avoid ideology and gray lines and to pin things down a bit more firmly, Aang developed her own system to measure corruption.
I propose a typology of four types of corruption divided along two dimensions. First, whether the corruption involves elites or non-elites. And second, whether the corruption involves theft or exchange. So this intersection creates, first of all, corruption with theft, which I divide into petty theft and grand theft.
Petty theft would be like extortion, a police officer who just stops you and rops you of $200. Grand theft would be embezzlement. Nigeria would be a classic case, billions of dollars siphoned out of a country.
And then I distinguish between two types of transactional corruption. The first is what I call speed money, which is bribes paid to low or medium level officials in order to overcome rate tape or delays or harassment.
And then I have a fourth category called access money, which is privileges paid to powerful officials, not because you want to overcome rate tape, but because you want to buy special deals from them. In order to assess the effects of these different types of corruption, Aung found it useful to equate each of them to a different class of drugs.
I use the analogy of drugs because we know that all drugs are harmful, but they harm in different ways. Petty theft and grand theft are like toxic drugs, where if you take this drug, it's definitely going to damage your health. You can no benefit from it. Well, people who use cocaine would say they get some benefit. Well, maybe I should use it like meth. I'm not a real life expert on drugs. And so... I can tell, by the way.
Speed money are like painkillers. So they help you to relieve a headache by overcoming rate tape, but they don't help you grow muscles fast. They don't help you to grow your business.
And access money are the steroids of capitalism. And steroids, we know, help you grow muscle fast, they help you perform superhuman feats, but they come with serious side effects that accumulate over time, and they only erupt in the event of a meltdown. So the side effects of steroids in terms of access money would be what?
We can actually see all of these downsides in China today. So they include extreme inequality. They include cronyism as an activity that erodes political legitimacy. And then you also have policy distortions. For example, in China, lots of money are being poured into luxury properties.
and affordable housing is being neglected. China's growth model shifted into 2000s, away from manufacturing and toward construction, debt and real estate.
And so it is in this context that you have capitalists bribing government officials to have land deals, loans, construction projects. And I think you can see where I'm going. Today, when we look at the ever grand crisis, it all makes sense. It has long been in the making.
The Evergrande Group is a massive real estate development firm with over a thousand projects across China. It's hard to overstate the degree to which real estate development has driven the economic boom in China. Real estate accounts for as much as 30% of Chinese GDP. In the US, that number is just 13%.
roughly 20% of China's housing stock sits unoccupied. Evergrande is the biggest player in all this, and they've been struggling to make their debt payments. The company reportedly owes more than $300 billion to roughly 170 banks in China and another 120 lenders around the world. A collapse of Evergrande could trigger a crisis. Some smaller developers have already defaulted and others may be on the brink.
It is definitely concerning. It will have broad and deep effects, but I would warn against doomsday predictions, which you now see a lot in the press. The reason is because I take a historical perspective. And if you read American history in the 19th century, America had five of these types of crisis, five, one every 20 years.
Of course, you don't have to go that far back to find American financial meltdowns. As far as the Evergrande crisis, Aung says, many people are calling it the Lehman Brothers moment. Aung argues that the collapse of the Lehman Brothers investment bank and the 2007-2008 financial crisis that triggered the Great Recession were fueled in part by what she calls access money.
A research paper by three economists at the International Monetary Fund showed that lobbying in the US from 2000 to 2007 was associated with riskier lending behaviors and higher delinquency rates. The study also found that firms who had lobbied the government were more likely to receive a bailout check after the crash. The researchers called their paper a fistful of dollars.
If you agree that sounds a lot like access money, you may be surprised to learn where the US lies on the Transparency International Corruption Index. It is the 25th least corrupt country out of the 180 countries that are ranked. Hong says this ranking can be misleading.
It basically obscures the fact that corruption comes in different types, you cannot mush them up and reduce them to one score. And yet that is what the Transparency International Index is, one mushed up score based on data from third party sources who run surveys of experts in countries around the world. Aang is not a fan of their methodology.
I can't remember the exact wording, but it goes something along the lines of how corrupt is ex-country. Rate on the scale of 0 to 10.
What Ang wanted was a way to measure the four different types of corruption she cared about, petty theft, grand theft, speed money, and access money, and she wanted to calculate a separate score for each. She would come to call this an unbundled corruption index, or UCI. She also wanted to improve the survey data used to generate these corruption scores, so she set about to gather the data herself.
Because she is one researcher and not a global institution, she focused on just 15 countries. These include China, India, Russia, Nigeria, and the United States.
I asked individuals who would have expertise in a particular country, including professors, journalists, business executives with more than 10 years of experience. Instead of asking people to rate corruption using an overly broad question, I described for them a vignette. So an example is so-and-so
is closely connected to a politician. And as a result, he has an abundant flow of construction projects. How common do you think this scenario is in the country that you are rating? Let's take two countries that we care about a lot, China and the United States. Talk to me about how both those countries ranked in terms of corruption on the index that you created versus the standard index of corruption.
So if we compare to the standard index, the similarity that we see is that the United States overall total corruption is much lower than in China. And that's totally expected. But what the UCI is able to add is that it unbundles this total score into four categories.
And by doing so, we can see more nuance, and we can see that, first of all, in both countries, the United States is much lower on petty theft, grand theft, and speed money than in China. But they have roughly the same amount of access money. So in China, it might be a bribe. In the US, it might more likely be lobbying or influence peddling of some sort, yes?
Yes, we can think of it this way. In China, there is no equivalent of the lobbying industry. Oh, just give them time. Maybe not because lobbying is an institutional activity where the focus is on institutions rather than individuals. And my argument is that lobbying would not evolve in China because power is so personalist.
It's about bribing a particular super powerful person. One category of what I would consider corruption that you don't discuss in your book is sometimes called technology transfers. If we're talking about the US and China, the US would call it intellectual property theft. This has been an ongoing point of contention between the two countries. I'm curious whether you would call that corruption and why did you not include it?
I wouldn't consider that as corruption because when I say corruption, I'm talking about political and bureaucratic corruption. So gains that are derived from exploiting power, technology transfer is a corporate activity, and sometimes the state might be behind that, but for the most part, it is a corporate activity.
If you were to create an index for, let's say, the largest contributory factors to the Chinese economic evolution, where do you think technology transfer or IP theft, whatever we're calling it, might stand
Right at the bottom, I know that there has been a lot of talk about technology transfer. It is true that there is IPR theft in China. It is true that in the early stages, there were imitation goods. I don't deny those facts, but studies have found that levels of IPR theft in China are not significantly higher than countries at its level of development.
Could you argue that access money corruption is on balance worth it in that it provides all sorts of public goods and knock on effects that might not otherwise be created?
You know, why do I care if the developer who's building a new school has to kick up 10% to the local party official if the kids in this area are getting a new school? Although I guess you could also argue that the 10% kickback would have been better spent on quality construction. And then when there's an earthquake, like that terrible 2008 earthquake in Sichuan that maybe thousands of kids don't die because their school buildings had such shoddy construction.
But one could make a counter argument that, you know, without this corruption, the government official is not so invested in this process. You know, so it's really hard to tell. Is that a benefit or is that a cause? And I think they're intertwined. You write about the Jack Abramoff lobbying scandal in the US. Jack Abramoff may be the most notorious and crooked lobbyist of our time.
and his famous quote that he and his co-conspirators basically could get congress to do everything they the lobbyists wanted them to do we own them every request from our office every request of our clients everything that we want they're going to do and not only that they're going to think of things we can't think of to do should we assume the same thing is still going on today in the u.s.
I don't know, I don't know, but I would recommend the work of Professor Nott Atmati at Stanford Graduate Business School. She points out that the problem in banking is particularly bad because it's exacerbated by opacity, except for a handful of super experts. Nobody really knows how derivatives work.
The public doesn't understand it. Even professors like me, unless you study this for a living, you don't really understand it. I think when a capitalist economy becomes highly financialized, extremely sophisticated, that creates the condition for no accountability because nobody understands something so technical.
If you are an American, you may be starting to feel slightly uneasy by now. You may be feeling that the US is, in its own way, irredeemably corrupt and that there's no room for anything but pessimism. Coming up after the break, you and you in Aang doesn't feel that way.
I am not one of the pessimists about America. So how does a country get off the corruption treadmill? This was all possible because of democracy. And if you want to hear the earlier episodes of our series about how the US is different from other countries, check out the Freakonomics Radio Archive on any podcast app or go to freakonomics.com slash American culture. I'm Stephen Dubner. We'll be right back.
There's not one, but three different China's since 1949, at least three. Yu and Yu and Aang is a political scientist at the University of Michigan and the author of China's Gilded Age. She has been studying China for quite some time. Her first book was called How China Escaped the Poverty Trap. What is the poverty trap?
It's the idea that an impoverished country has a hard time becoming prosperous without already having the characteristics and institutions of a prosperous country. Think about it on the individual level. How do you get a good job and enter the middle class without first having access to good education, healthcare, transportation, and so on?
While many countries cannot escape the poverty trap, China has plainly busted out. Data from the World Bank shows that since 1979, the explosive growth of the economy has lifted more than 800 million Chinese people out of poverty.
But some development scholars are reluctant to give China too much credit. After all, it's an authoritarian country. So endorsing its economic miracle could be seen as an endorsement of authoritarianism as a political system.
So that is what makes explaining China so complicated. If I were to ask you to describe the current China model, understanding that the China model changes quite rapidly, or at least has over the past four decades or so, how would you describe the China model? And I'm especially curious to know what you believe the public misunderstands about that model.
Oh my gosh, I can't believe you asked me this question because I always have to give lectures about the China model and I could talk to hours about this. I'll try to give a short answer.
I would say two things. The first misunderstanding is the assumption that there is one China model. If you look at the facts on the ground, there are multiple China models depending on where and when you look in the country. Consider the era of Mao Zedong, who founded the People's Republic of China and ran the country from 1949 until 1976.
China and the Mao was a personally dictatorship where power was concentrated in the hands of Mao along with a personality cult. And the economy was run as a centrally planned economy using top-down commands.
And we know that that period was a complete disaster. And then secondly, you have China under Deng, which is a very different China. Deng Xiaoping ran the country from 1978 to 1989.
Deng shifted the role of the central government from a dictator to a director. The reality is that it's best understood as an adaptive authoritarian government that is in fact very decentralized.
The most common misunderstanding is that China's development success is a celebration of the merits of authoritarianism and of top-down control. And it is actually not true. But one very important qualifier is that after Xi Jinping became president in 2012, China has taken an authoritarian turn.
So one way that I interpreted your data, and I'd like you to tell me if I'm right or wrong on this, is that high levels of access corruption and low levels of what you call speed corruption and petty theft makes a lot of sense for a more autocratic country and would signify a successful autocracy for at least two reasons. One is the more small corruption there is at the bottom,
the less there is for me at the top. Now, that may be a small factor, but the more important one I'm thinking is if I'm a high level official, I don't want low level officials being too greedy or corrupt. In part, because that type of corruption is quite visible.
and it will present this image of a corrupt state. If I can curtail those forms of corruption, I can help create the image of a relatively uncorrupt state, which makes it easier for someone like me to practice my higher level corruption with less scrutiny. I'm curious if that reading is at all accurate.
It is, it is exactly correct. The leaders of various cities and counties in China have a personal interest in cotailing predatory corruption because they want to attract businesses and investors. And that kind of corruption does not benefit them at all. It hurts their goals, it hurts their career. However, the ability of these local leaders to cotail
low-level predatory corruption is also premised on the ability of this local government to pay its bureaucrats.
One of the facts that I found most astonishing in your book was what you call with a bit of a wink profit sharing, this idea that roughly 70% of a mid or low level officials pay might come in non-salary form and gifts and meals and things like that. Can you talk about that? First of all, when that was and how it worked? That was from the 1990s to the early 2000s.
The way bureaucrats are paid in China is similar to developing countries elsewhere, which is that the official salary is actually very low. And in many instances, below subsistence. For example, in one county that I visited, the entry pay was less than 80 US dollars a month.
Economists call that capitulation wages, which means that you pay so little salary that the implicit expectation is that you make up for it using bribes or extortion or by stealing. I see. You want to pay real salaries so that your underlings will be satisfied enough to not worry so much about your higher level corruption.
exactly if these low-level bureaucrats are not paid enough to survive, you cannot feasibly stop them from trying to steal or extract. I was surprised to discover that, in fact, on top of the official salary, more than 75% of their actual compensation
comes from this highly variable, fringe component, things like bonuses over time, various in-kind benefits, including food baskets, free vacations, and it's systematically packed to the ability of a local government in generating revenue. That's why it's called profit sharing. It's sharing in the profits of the government.
Aung argues that this profit-sharing system is one of the reasons China was able to escape the poverty trap. While other developing countries struggle to weed out low-level corruption, the toxic drug type of corruption that limits growth, China basically incentivized away those forms of corruption, but allowed the steroid form of corruption, like access money, which tends to operate at higher levels and behind closed doors.
So you argue that a lot of Western scholars who write about China, including academic authors, have gotten their analysis at least partially wrong. So in the current book, you critique some of the literature on corruption,
In your first book, you critiqued the poverty reduction analysis of quite esteemed economists like Jeff Sachs and Derona Simoglu. Why should we be more persuaded by your analysis of China than theirs? Is there something fundamental that they are missing because they don't understand China the way you do?
professional letter describing my work, it was said that this person has the nerves to challenge luminaries in the field. I think it's meant to be a compliment, but I didn't quite see it that way. I think that is a statement about
the structural inequality in the profession, because if we live in a world where every academic is truly equal, then it doesn't matter if I have challenging sex or I'll say mock lua or any person in particular is just about the findings. I would hope that in an ideal world readers would just
look at the argument itself. And my critique is that many social scientists reduce the process of development into a mechanical outcome. Everyone wants to give kind of a short secret recipe that is like either one thing or the other.
And I wanted to tell a different story that does not dumb down the reality. Conventional social science has a fundamental assumption, which is that you can take development and break it down into discrete variables. And you can apply an intervention and get a predictable outcome. That's a very core assumption. It's an assumption about the nature of things.
And it is so fundamental that nobody talks about it. It's like assuming that water is wet. And so what I did in my work, and it is a philosophical foundation for all of my work, is that I reject this paradigm. I reject this mechanical worldview because it's artificial.
That's not how social realities function. Social realities are not like machines. They are more like forest ecosystems. They are multidimensional, constantly changing, adapting to one another. So we need to have a different set of methodological tools. You know, people were so angry at the unbundled corruption index. Why?
So I can't get the unbundled corruption index published as a journal article. It could appear in the book because the book is peer-reviewed as a whole and not in parts. But the reviewers will absolutely live it about the unbundled corruption index.
And we know that reviewers are critical, so that's very normal, but they were more than critical. They were personally angry, and they tried to throw out every reason, thinkable, to block it. So when I see that, I knew that, oh, I'm doing something that
You know, impinges on something personal to them and perhaps they have been using these conventional measures. Perhaps they have made arguments on the basis of these measures. And of course, they do not want this to be challenged.
You write in the book that, quote, datasets that are easily downloaded and plugged into regressions have shaped concepts, theories, and policies more profoundly than we'd like to admit. So that sounds like a somewhat polite way of saying that academics and then perhaps policymakers talk about the things that are based on data that's easy to find.
And if it's not so easy to find we either forget about it or pretend it doesn't exist. And to me that would describe a lot of the corruption that you're talking about. It's very hard to measure anything illicit, but especially illicit in the hands of the powerful because they have the means to prevent scrutiny.
So to me that's where you are unorthodox. It's true that it's much easier to condemn corruption among the poor. Very difficult to talk about influence politics among the rich.
It's a topic that people do not generally like to touch upon. I see this practical reality that people will pick agendas that are easy. The analogy I would use is, have you heard of the term machine-friendly crops?
So there are certain crops that are easily harvested by machine. And so farmers would choose these crops simply because they can be easily mechanized. And I think that in the knowledge industry, we sometimes or maybe often see a similar dynamic, and I would call it a publication-friendly agenda.
And so the incentives of the profession will lead people to overwhelmingly and disproportionately study certain kinds of topics in certain ways at the expense of truly important questions that frankly very few people want to touch.
I hope that doesn't get me into too much trouble. I hope it does. I hope it does. The right kind of trouble. I hope that it's the right kind of trouble. I sense you are a bit of a troublemaker. Yes.
I don't mean to. That's really not my intention. I'm not a troublemaker. I'm not a rebel. I'm not looking to offend anyone. The reason why I am pushing back against these big issues is that I don't want to regret my choice being an academic. I don't want to dedicate my life to doing this and realizing that all the time I'm just trying to please a convention or please a norm.
And I don't want to waste my life in this way. And so I realized that when I speak certain truths, it will get some people really angry with me.
You've described how Xi Jinping, who's been running China since 2012, has put the country back onto more of an authoritarian track. Do you think Xi is aware of your work? And assuming he's not, no offense, but assuming he's not, he's got a lot going on. What do you think he'd make of your analysis?
I would like to think that he would agree with my use of the term China's Gilded Age, because I think that is exactly what he is dealing with. When he calls to crack down on corruption, which leaders everywhere have done throughout history, it's something that the public likes to hear. But what's the evidence that he really means it? And B,
that when there are crackdowns on corruption in China under Xi, that they're not primarily political ploys intended to weaken the opposition.
There are many people who ask me, you know, is the anti-corruption campaign a genuine reform or is it just an instrument that she uses to eradicate his enemies? And the answer is that, well, it's a mixture of both. He has real concerns about corruption as a structural problem.
And so wanting to tackle that is necessary both to save the party as well as to save himself.
One piece of evidence that Xi Jinping really does see corruption as a structural problem is, in fact, the Evergrande debt crisis we discussed earlier. The crisis was sparked by new regulations issued by the Chinese Communist Party. On the acceptable levels of debt ratios, a company is allowed to carry. This move has been characterized by one expert as a controlled demolition deliberately triggered by the regime.
In Aung's corruption taxonomy, you might call this a crackdown on access money and a sign that runaway capitalism makes she uneasy. In the last two months, he stepped on the accelerator. And all of a sudden, everyone realized, oh my gosh, she is a real socialist. And people are shocked about that. But if you look at his signature policies, from the time he took office, he has already made very clear that he's serious about socialism.
pretend for a moment that the she that you're describing were the president of the United States. How do you think he would assess our current political economic system and what do you think he would prescribe for its betterment?
She does not like the excesses of capitalism, and he has expressed that many times in his speeches, so this is not speculation. But in China, he could use top-down methods, and that is what he has been doing. He basically gives commands, right? Like, private tutoring, not good, ban that. Video games.
Yeah, video games not good band that, you know, big tech companies, too big, stop them. And so I think if he had an exchange where he came to this country, he probably will see the similar problems and he might be disgusted at them. But I think one of the things he will soon learn is that in a democracy, you can't just order problems away.
On the other hand, the President of the United States has executive orders at his or her disposal, and you could imagine that you could do a lot to cut back on the influence of lobbyists, for instance, in a relatively short time. Do you think that's a target that he might look at? He might, but I'm not sure that he would know how to do that.
because the system in America is very different from that of China. When we think of President Biden's built-back better, his method is having to convince enough people in Congress to pass his bills to invest in public infrastructure. In China, Xi does not have to do that.
He would have built a hundred bridges in the time that we've even been talking about the infrastructure bill. Right. And he just says, you know what, rich people, you should donate and look at the amount that Alibaba and Tencent gave away the next day. It's not a matter of choice. You could never do that in America, right? Can you imagine President Biden, you know, telling the top five companies, you guys should donate and they would give away like 5% of their wealth?
He can't even get him to pay their taxes. I don't think that would be very successful. That's right. I think that's just one of the clear stock differences. I think he will be really frustrated at having his hands tied. If you look at state business relations in China, no matter how rich a businessman is, he is always subordinated to the politician.
And that is actually almost the reverse in this country. The capitalists, arguably, have more power than office holders. And so I think if she comes here, he would be really shocked by that and maladapted to this reality. What would you say are the biggest checks on US corruption, especially the ones that are not prominent in China?
We actually saw that in the progressive era in the earlier 20th century.
The progressive era marked the end of America's Gilded Age. It's first Gilded Age, that is. The general sentiment was that the US needed more regulation and less corruption to prevent a continuing cycle of robber barons and their outsized fortunes. Economists have since argued that the progressive era did succeed in making corruption riskier and more costly. So what were the tools of that era?
and open press, marketing journalism, independent prosecutors, elections definitely played a key role as well. There were electoral reforms to break up political machines, political activism, labor movements, and more. And this was all possible because of democracy.
It makes sense on the one hand that that's all possible because of democracy. But one could see certain elements of that progressive era taking root in China, whether it's whistleblowers or maybe institutional self policing. It sounds as though you are prescribing that China adopt fairly soon its own version of a progressive era. Is that the case? And if so, what would that actually look like?
I've argued Xi's mission is to end the Gilded Age and take China into its own version of the progressive era. And what distinguishes his methods from the American version is that he prefers to use top-down commands and campaigns.
But I think that commands that fire, commands can only solve the symptoms of problems, but not the roots of problems. And so if he wants to succeed, he will need to take a moderate approach. His commands are already shaking business confidence. He has this very tricky challenge of how do you maintain prosperity and deliver equality and justice at the same time?
Do you see yourself as an anti-corruption crusader, or more of an academic political scientist, coolly assessing the reality and telling us what you've learned?
Oh my gosh, nobody has ever asked me that question. I mean, in your heart of hearts, do you do this because you think it's wrong and it needs to be fixed? Or do you do it because it's interesting and you have a career where you get to research interesting things?
I do it first and foremost as a scholar, that's for sure. I also think that sometimes advocacy can get in the way of explaining things. I am much more passionate about getting people to think about whether capitalist prosperity has been as good as we think it is.
And my answer is, actually, it's a two-sided story. On the one hand, it created a great deal of wealth, a strong middle class, improved the quality of life for people like me. But on the other hand, it comes with other social problems, particular to a capitalist economy, things like extreme inequality, cronyism, climate change.
I'm curious how that view has been shaped by your living in the US the last several years. One of the insights that I got from living in America is that I came to the understanding that even when you are a so-called first world country, in fact, your problems do not end.
I know that for Americans, maybe that's like, yeah, of course, but for someone who comes from a developing country, it's a revelation because we will always thought that if you just become first, well, you've made it. You know, that's it. You graduated. Your mission is done.
And I think living in this world made me understand that even with high income, even with an advanced democracy, things can break down. There is tremendous inequality, polarization, populism. And I am not one of the pessimists about America.
despite all of the problems that I see in the United States, I can still confidently say that there is no other place in the world where I could have had the opportunities that I've had, where someone like me who is intellectually kind of weird and a misfit
I really couldn't be accepted in most places. And so I can see kind of both sides, the dark sides of capitalism in this country. At the same time, I still feel tremendously confident and hopeful about the openness that provides people with opportunity.
If Yu and Yu and Aang really is, as she puts it, intellectually weird, well, she's my kind of weird. Once again, her book is called China's Gilded Age, and she is a political scientist at the University of Michigan. Coming up next time on Freakonomics Radio, you ever wonder why so many of the world's biggest companies are American companies?
I don't mind a 90% chance of failure if the consequences of success are consequential. My first law of venture capital is that all entrepreneurs lie. It's the ones who don't know they're lying that really get you into trouble. When everything's agreed upon, they submit a deposit to your bank account.
And then you have a lot more money. Everything you always wanted to know about venture capital but didn't know who to ask. That's next time on the show. Until then, take care of yourself, and if you can, someone else too.
Freakonomics Radio is produced by Stitcher and Renbud Radio and is part of the Freakonomics Radio Network, which also includes no stupid questions, people I mostly admire, and Freakonomics MD. We can be reached at Radio at Freakonomics.com. This episode was produced by Zach Lipinski. And this episode came about thanks to the suggestion of a listener named Michelle Jarabzoff.
who'd heard Yu and Yu and Aang on Kaiser Gua's Sinica podcast. So on behalf of all of us, big thanks to Michelle and Kaiser. Our staff also includes Alison Craiglow, Greg Ripon, Trisha Bovita, Ryan Kelly, Mary Duke, Emma Terrell, Lyric Boudich, Jasmine Klinger, Eleanor Osborne, and Jacob Clemente. Our theme song is Mr. Fortune by the Hitchhikers. All the other music was composed by Luis Guerra.
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