GRACE CREEK MEDIA

"IDEAS IN ACTION"

INTERVIEW WITH GEORGE GILDER, CHARLES FREEMAN, GORDON CHANG

MEDIA ID: IDEAS IN ACTION CHINA PART 2

JIM GLASSMAN:

Welcome to Ideas in Action, a television series about ideas and their consequences. I'm Jim Glassman. This week we continue our conversation on the rise of China as an economic and military power. Many people are saying the 21st century will be known as China's, much as the 20th was called the American century. How seriously should Americans view China's ascendance as an economic and military power? And what policies should the United States government pursue to insure America remains competitive?

Joining me to explore this topic, George Gilder, founding fellow of The Discovery Institute, Charles Freeman, China scholar at The Center for Strategic and International Studies, and Gordon Chang, author of The Coming Collapse of China. The topic this week: China and the U.S., forecast for the future, part two. This is Ideas in Action. (MUSIC)

ANNOUNCER: Funding for Ideas in Action is provided by Investor's Business Daily. Every stock market cycle is led by America's never-ending stream of innovative new companies and inventions. Investor's Business Daily helps investors find these new leaders as they emerge. More information is available at investors.com.

JIM GLASSMAN: As the U.S. and Europe grapple with slow economic growth, China's economic clout is growing. China already has the world's third largest economy, and last year, became the world's leading exporter. This dramatic rise in the country's fortunes has led to a newfound confidence among the Chinese.

But internally, China faces troublesome demographic trends: more men than women, an aging population, and disputes over resources and land. All of which could affect China's economic strength in the future.

JIM GLASSMAN: Gordon Chang, you have written a book that talks about the coming collapse of China, economically, that is. Why do you believe that? GORDON CHANG: And politically, as well. China prospered in the unusually benign post-Cold War period of, you know, seemingly never-ending globalization. But since the middle of 2008, we're in a very different global environment. China's export model, which is really what their economy is about, is just particularly ill suited for current global conditions.

You know, as we saw in The Great Depression, it was the current account surplus countries that had the hardest time adjusting to deteriorating conditions, and therefore, suffered the most. And that's China. They're having a very difficult time thinking about how to reorganize and restructure their economy.

They always talk about, you know, a consumer model. But-- consumption in China as-- as a percentage of the economy, has been sliding from about 60 percent to about 30 percent today. And no country has a lower rate. And all the government is trying to do with its stimulus program over the last year or so has really been to decrease the role of consumption in China. So essentially what we have got is a country that doesn't have a political model or an economic model that is suited for current times.

JIM GLASSMAN: Charles, do you agree with that?

CHARLES FREEMAN: No, I-- I think that-- that the Chinese model, while it has many flaws, is-- is not likely to lead to its collapse economically or politically any time soon. I mean this is a-- a country which-- has shown itself remarkably-- self-sustaining. And-- and I think it's going to continue.

Yes, I agree that there are some fundamental flaws with the economic structure, and that has to change, and-- and will require some-- some deep sacrifices by a lot of people. And I think politically, as well, there are any number of challenges within the Chinese Communist party-- to sort of-- to look at their long-term hold on-- on power.

But one of the-- the interesting thing is-- is that Chinese-- the Chinese government has been extremely smart about looking down the road and figuring out, "Well, what are the challenges? What are the internal-- challenges that we face to our continued hold on power?" And they've made some adjustments. There have been some actually very interesting work. There has been some very interesting work on internal Chinese democracy and the-- they've studied long term-- one party democracies, like Japan, at least used to be, and-- and Mexico, at least used to be.

So that they've-- they are sort of planning for a shift. If nothing else, this is a country, which is moving some-- 600 million people off out of rural China into the cities. The process of urbanization alone is going to drive economic development for many years to come.

GORDON CHANG: But--

JIM GLASSMAN: George seems-- seems to disagree with something that was said. I think you were shaking your head here.

GEORGE GILDER: I-- I really agree with all of that. I don't-- I don't dis-- I mean I-- I think that--

JIM GLASSMAN: You agree with what Charles said.

GEORGE GILDER: Yeah. I mean I think-- I-- I don't think China's going to collapse. I think that-- supply creates its own demand, that-- China is-- becoming increasingly sophisticated in the panoply of products that it produces. It's-- now--

JIM GLASSMAN: But what about this point about-- about consumers? I mean-- you know, China--

(OVERTALK)

JIM GLASSMAN: --Has an export economy. Consumers are-- are really not a-- not big players in China. And isn't that going to be a problem--

(OVERTALK)

JIM GLASSMAN: --In a world in which, whether we like it or not, it seems that people are kind of-- countries are kind of pulling in their horns when it comes to trade?

GEORGE GILDER: I think it's a myth. I think that-- producing evermore varied, ingenious, valuable, cheap products for the world is-- permanently-- workable strategy. And that's essentially the strategy they've adopted.

JIM GLASSMAN: Are there things that China is doing that-- that we can learn from in the United States? I mean-- successes that China's having economically are the result of policies that maybe we ought to adopt. What-- what-- what might some of those policies be?

CHARLES FREEMAN: Well, it's an awful-- it's an awf-- awful lot easier to start a business and get it going in China than it is here. It's an awful lot easier to employ people and begin to create wealth there than here. And I-- and we've sort of forgotten, over the past 30 years, that-- that sometimes-- risk is a good thing.

JIM GLASSMAN: You know, that-- that-- that's really, I think-- would probably come as a shock to many of our viewers that it's easy to start-- easier to start a business in China than it is in the United States. You know, this is a-- a Communist country. You know, you don't have to go to the party and get some-- something signed?

CHARLES FREEMAN: Oh, you do. You do. There are-- there are chal-- I mean you have to-- the banking system is difficult. And getting the chops is-- is difficult. But by and large, you want to start a business, you want to get your office fitted up? You want to build something? You want to build a factory? It's pretty easy to do.

Unlike here, the permitting process alone will-- will drive you crazy. And-- and then you-- you go through the process of, as George says, you know, going into the pension system and all the rest. It's a lot easier to do it in China. There's a-- there's a sense that risk is a good thing, that taking risks is a good thing. Here, I think we've-- there are too many unacceptable risks. And that's a challenge.

GEORGE GILDER: And to be rich is glorious.

CHARLES FREEMAN: To be rich is glorious. (LAUGHTER)

JIM GLASSMAN: And-- and-- and-- and what-- and-- and what about education? I mean-- the-- is-- is China turning out a work force that is-- that is becoming better and better educated compared to the United States and Europe?

GORDON CHANG: Well, China's education system has improved over the 30 years of the reform era. But nonetheless, there are certain built-in limitations that China cannot pr-- progress-- forward. Largely because you got a political system that really is stultifying. You know, when you have Marxist education in not only primary schools, but all the way through universities, that tends to sort of put a damper on things. And I'm not talking--

GEORGE GILDER: We had that here.

GORDON CHANG: And-- and I'm--

GEORGE GILDER: We've--

GORDON CHANG: --Not talking just--

JIM GLASSMAN: W-- what do you mean?

GEORGE GILDER: We have Marxist education from the schools all through the universities in the United States. (LAUGHTER) So what-- what else is new?

GORDON CHANG: Not mandated by the government, not all the time. I-- I think the-- the real problem is it's not only in politics, you know, economics, other-- subjects that are considered to be sensitive, but also in the sciences. Because, you know, the Chinese government does have these theories about the origins of the Chinese people.

So if you want to talk about demography, or if you want to talk about biology, even hard sciences are affected by the political control in China. So, you know, I think that-- that education is a really serious constraint for the Chinese because of the quality of the system. I mean if it weren't, you wouldn't have all these Chinese going around the world to the United States, Europe, elsewhere, and continuing a brain drain in China.

JIM GLASSMAN: But then the-- the-- but they do go back home. And they're certainly-- whatever they learned in the United States is helping people back home.

GORDON CHANG: Some of them go home. But most of them stay. And that's still the truth.

GEORGE GILDER: If we-- if we let them stay. This is one of the-- further insanities of American policy is we educate Chinese here and then force them the-- to return home. And-- ultimately, the success of the U.S. economy has always been dependent on immigration.

We got to accept quality immigrants in order to succeed as a country or a current educational system will not cut it. All through the secondary level. We got to-- have world champion workers in the United States. And today, we are-- ejected them. And it's-- it's absolutely perverse, and it, again, puts us on a decline relative to China.

JIM GLASSMAN: What do you think, George-- we can-- the United States can learn from China as far as other kinds of policies, as far as, I don't know, fiscal policies, or just general economic policies?

GEORGE GILDER: I-- I think-- the Chinese are building 30 to 60 nuclear plants. They're using coal and-- which is a very good-- power source. They're drilling for oil. They aren't banning oil drilling. They don't imagine that suppressing existing energy contributes in any way whatsoever to producing--

JIM GLASSMAN: The--

GEORGE GILDER: --Profitable new energy or alternative energy.

JIM GLASSMAN: By the way, the Chinese are also buying up-- resources. Now-- energy resources in other countries. Is that a-- do you think that's a good idea for China to be doing? And is that a threat in any way to the United States?

GEORGE GILDER: I-- I think there's ample resources and that we should-- be exploring and exploiting-- our-- our potential resources, which are essentially unlimited in the energy-- field.

CHARLES FREEMAN: I think the Chinese-- the Chinese government, I think, has a-- a false sense of how global commodity work-- markets work.

GEORGE GILDER: Right, yeah.

CHARLES FREEMAN: And they-- they believe that that-- you know, that they can capture upstream-- production. But the-- but George is absolutely right, any new addition to the global commodity markets, whether it's from Sudan or Iran or other-- unmentionables-- frankly is good for the United States.

JIM GLASSMAN: You know, some-- some people say that-- that while the United States is putting huge amounts of resources into taking care of the elderly through Social Security, Medicare, and so forth, the Chinese are concentrating more on young people. And that is much healthier for their economic. That brings up another issue that has to do with China, which is limiting-- the number of children that a family can have. I mean ultimately, is-- isn't this going to hurt the Chinese, the one-- the one child per family policy?

GORDON CHANG: Well, it certainly will. Because within five years, the Chinese work force will level off. Within 15 to 20 years, the entire population will level off. By 2030, maybe by 2025, India, not China, will be the world's most populous nation. They have-- they'll have a-- a demographic-- scale which will be very, very disadvantageous. I don't know how they're going to support any aged people at all-- given the way that the Chinese econo-- Chinese population is aging. So essentially you've got funny demographics. You know, in China-- you basically have-- 118 males, 123 males to every 100 females. You can't maintain a society like that. And-- and essentially I think--

JIM GLASSMAN: So-- so but-- but-- but is-- is--

(OVERTALK)

JIM GLASSMAN: Isn't it likely that-- that those rules will change?

GORDON CHANG: I think Chinese demographers, if you talk to them privately, will tell you that the government's policies are really counterproductive. But-- for various institutional reasons, I think it's very difficult for the Communist Party to give up the one child rule, largely because that's a measure of control that the party exercises, especially in rural areas, where the party is already having trouble maintaining institutional loyalty.

So although I think almost everybody in Chinese society will think that the one child policy is not good for society, I think it's going to take them a very long time to change it. And by the time that they do, it'll be too late.

JIM GLASSMAN: Do you agree with that, Charles?

GEORGE GILDER: Is that right?

JIM GLASSMAN: I mean is that-- is that--

CHARLES FREEMAN: They-- they've started--

JIM GLASSMAN: --The-- is that the Achilles' Heel of--

CHARLES FREEMAN: Well, they've started to-- to-- to relax the one child policy already, recognizing that that-- where the-- the demographic shifts have-- are taking them. But it-- it's pretty interesting. I mean-- you-- you-- the-- the great beauty of the lack of Chinese democracy, there is no AARP in China that sort of funnels wealth the-- to the elderly. So they can focus more on younger people--

JIM GLASSMAN: And the--

CHARLES FREEMAN: --Promoting younger people.

JIM GLASSMAN: And the Chinese-- what is the Chinese-- system for-- for helping older people? Is-- there's nothing like Social Security or Medicare in China?

CHARLES FREEMAN: Well, the-- the iron rice bowl that used to preserve the-- the sort of-- dema-- you know, give older people-- pensions and housing and the rest of it collapsed years ago. And-- and it's a-- it's a huge challenge for China to figure out what they can do. It used to be in Chinese society older people, parents, would move in with children and grandchildren.

And-- and that has collapsed, largely as a result of the one child policy. There are too many older people to go around. They're looking at-- at models of-- of-- senior housing and the rest of it. But that-- that hasn't really taken off in any form yet.

JIM GLASSMAN: George-- a lot of people in the United States, especially politicians, talk about competing with China. It's-- that Chinese are going to get an edge in competing with us. You don't-- you don't seem to buy that-- that model. Do you think that's the right way to think about it?

GEORGE GILDER: I think-- that-- these two economies are in a-- intimately intertwined. And-- so capitalism is mainly a system of collaboration. That's what capitalists do. Capitalists want their markets to expand. They want other p-- other people to succeed. And so-- I think that China's success is American success. And America's success-- will help China.

JIM GLASSMAN: Do you think the Chinese understand that? I mean did-- did they look at it as though, "Well, we're going to-- we're going to beat those Americans?"

GEORGE GILDER: I think they're-- they will learn as-- as their capitalist system evolves. I think we're forgetting it. And that's-- that's the tragedy.

JIM GLASSMAN: Gordon?

GORDON CHANG: Well, I think that they will learn it. But the problem is they'll probably learn it too late. I mean they still have a zero sum view of trade. And-- I think essentially what you're seeing is-- right now the American and the Chinese economies are actually de-linking. And that probably will continue if the global economy doesn't pick up. And so we're dealing with a very different environment than we did after the fall of Soviet Union.

JIM GLASSMAN: De-linking in the sense that there is less trade?

GORDON CHANG: There's less trade. 2009-- China's exports to the U.S. declined by 12 and a half percent.

JIM GLASSMAN: But do you think some of the de-linking is because of what-- what George has been saying about the United States-- having these provocative policies toward China with--

GORDON CHANG: No. It-- it's--

JIM GLASSMAN: --Taiwan or-- or--

GORDON CHANG: It's all economics.

JIM GLASSMAN: --Or the Dalai Lama?

GORDON CHANG: It-- it's all economics. You know, essentially, there's a-- economic model that-- worked-- for two decades. And-- and now, you know, there's a-- really a revaluation of it because of-- of various things. But I think it's mostly economics that is sort of driving trade down. You know, the global economy is not so robust. Americans are not in a position to be the global engine of recovery for every other nation. And so I think that the Chinese-- economy is certainly suffering because of that.

JIM GLASSMAN: But-- is-- is-- are the--

GEORGE GILDER: That's--

JIM GLASSMAN: --Are the Chinese-- do you--let me put it this way. Do you think the United States should encourage China to open up more to the United States? Is that a problem?

GORDON CHANG: I think that it would be a great thing-- for the two economies to be more closely linked. But that's not the way things, in fact, are going.

JIM GLASSMAN: But is the problem that the Chinese, as many Americans believe, have shut off their markets to us? I know Charles disagrees with that. But is-- is that-- do you think--

GORDON CHANG: Yes.

JIM GLASSMAN: --That's a problem?

GORDON CHANG: Yes. I mean since the middle of 2006, you've seen the Chinese government-- take a very active stance in preventing takeovers of Chinese enterprises by American and other foreign companies. We've seen the use of the anti-monopoly law, the new law in China, against-- used only against foreigners. We've seen all sorts of export rebates being put into place recently, which are very much "beggar thy neighbor" policies.

The real problem here-- (CHUCKLE) is that-- the Chinese government doesn't think that it needs to go through the model that Deng Xiaoping thought would be good for China. And so you do see-- especially in the last two and a half, three years, a-- a very different attitude and mentality on the part of the Chinese government. And they're moving in the wrong directions.

JIM GLASSMAN: And-- and you--

CHARLES FREEMAN: But we're--

JIM GLASSMAN: You agree with that, Charles?

CHARLES FREEMAN: In part. I-- I think-- that the Chinese-- have learned well at our feet in terms of-- of-- taking some of the-- the-- protectionist-- moves that they have over the last few years. I mean Gordon's right, I mean there have been-- specific actions to deny American and other foreign investment into Chinese--

GEORGE GILDER: Media companies.

CHARLES FREEMAN: --Enterprises.

GEORGE GILDER: In media companies.

CHARLES FREEMAN: Media, but-- but fruit-- fruit juice and the rest of it.

GEORGE GILDER: Oh yeah, the fruit juice.

CHARLES FREEMAN: H-- heavy industry. But remember, this-- this got started with the United States denying, or appearing to deny, the-- Chinese investment in-- in Unocal, and continued on with the Chinese-- with a-- apparent denial or-- of-- of a Chinese investment in 3Com. So there's-- there has been precedent here. The United States has been restrictive in terms of-- controlling exports of technology to China. And there have-- there has been a lot of kind of economic nationalism here and there. Unfortunately, it's-- it's driving in-- driven us apart a little bit.

I think, by and large, though, you-- at the end of the day, the two economies are so inextricably linked that-- yes, there has been a reduction of Chinese imports to United States. That's because we're consuming 70 percent plus of our GDP. That couldn't go on. 130 s-- percent of-- of household income was debt in the United States at the high-- at the high per-- point. That has to-- had to change.

JIM GLASSMAN: George, you are-- have been at the vanguard of new media. Doesn't it bother you a little bit about-- what the Chinese have been doing with-- not just Google, but Facebook, some of the-- aggressive-- hacking, some people would call it, cyber warfare, in fact, that's coming out of China, whether it's from the government, or whether from individuals, certainly it's-- it's coming. You know, it-- it-- does-- doesn't that bother you a little bit? Don't you think United States should be pushing back against that?

GEORGE GILDER: I think-- American companies have to develop technologies that deal with this kind of threat. As it happens-- an-- an acomize study, that's the Internet company, shows that-- there-- fewer viruses and scams on-- the Chinese Internet than on the U.S. Internet. The U.S. is really the-- major source of viruses and other attacks.

I do-- do-- I-- I also don't think that this is mostly a government issue. I think that-- Google, which is one of the world's leading sources of sophistication in technology, had better figure out how to defend its own e-mail. It-- harassing China will not solve this problem. Technol-- we-- the U.S. continuation of our global lead in computer technology is the only answer.

GORDON CHANG: The problem is that China maintains the great firewall, one of the most sophisticated series of barriers. And you can't have hacking-- as-- in China without the government knowing about it. And most of this is probably funded by either the Chinese central government, the Communist Party, or The People's Liberation Army, because no other groups in society have the ability-- to fund what they've been talking about. And-- and certainly--

JIM GLASSMAN: Plus the attacks.

GORDON CHANG: The attacks. And-- and so-- the-- the cyber attacks against not only-- Google and other companies, but also foreign governments, civilian networks around the world. It's not just the United States. Unfortunately, (CHUCKLE) the-- the problem is that Chinese government won. And so I think it does require a U.S. government, and a German government, and a Japanese government solution.

JIM GLASSMAN: Char--

GEORGE GILDER: Well, what-- I mean there are two ways to solve a problem like that. Either you mobilize the technological resources to address it, or you-- attack-- the source. And if you think--

GORDON CHANG: Or both.

GEORGE GILDER: Well-- I mean I think-- that's probably not-- ultimately, we benefit from being attacked in this way. We-- we--

GORDON CHANG: We benefit from being attacked?

GEORGE GILDER: Yes. Because it exposes weaknesses and vulnerabilities in our-- our-- computer systems on which the whole economy relies.

JIM GLASSMAN: Do you agree with George-- Charles, that-- that maybe the Chinese are doing us a favor--

CHARLES FREEMAN: Favor?

JIM GLASSMAN: --By attacking us, kind of, you know, not really huge attacks, and so that we fix those, and so we become-- less vulnerable to worse things in the future?

CHARLES FREEMAN: Yeah. I-- I-- I get nervous when-- whenever we sort of say-- use the moniker "the Chinese," because-- or, "China." Because--

GEORGE GILDER: Yeah.

CHARLES FREEMAN: --It-- you know, China is a pretty chaotic place. I tend to-- disagree a little bit with Gordon that-- it's impossible to-- for-- for individual Chinese hackers or otherwise to occu-- to-- to work unimpeded. All-- all it takes is a virtual private network, which anybody in China has access to for a nominal fee. It's pretty easy to get through the firewall. It's not as extensive as all that. But--

JIM GLASSMAN: I can do--let me--let me just say that I used to be the chairman of The Broadcasting Board of Governors, which-- which runs Voice of America and so forth. And I can tell you the Chinese do-- an-- or somebody in China does an incredibly good job of keeping these signals--

CHARLES FREEMAN: Sure.

JIM GLASSMAN: --Out of China.

CHARLES FREEMAN: No, it's-- it--

JIM GLASSMAN: They're very good at it, better than anyone else in the world.

CHARLES FREEMAN: It- it-- it does require some ingenuity in order to-- to-- to access it, but-- but one can. And there are plenty of ingenious Chinese out there. I-- I should-- not to shill for Google. But-- but it-- just to-- make sure, that Google actually-- the-- its-- its Gmail system was not-- compromised by the-- the attacks that they discovered.

JIM GLASSMAN: Geor-- George's article sort of raises, I think, implicitly, the issue of whether United States should be standing up for values that are important here. They're not-- they're universal values. But they're certainly important to Americans-- including human rights-- freedom of expression and so forth, which are not-- enjoyed by-- by all the people in China. I mean how much do you think that United States should be-- should be pushing China on these issues of human rights and freedom in general, Gordon?

GORDON CHANG: I think that we should, to a certain extent. You know, China-- when you-- when you look at-- at-- at it as a country, you know, it has a political system, which is very different from ours. They're not going to listen to us when we talk about human rights and other things. But the Chinese people will. Because the Chinese people want the same things that we want.

And so therefore, I think that the United States should engage the Chinese people. Human rights dialogues tend to-- end up being pretty ritualized. But nonetheless, I think that we should continue them. They were very important in our dealings with the Soviet Union, and may have even played a crucial role. So I think that they are just one of a number of things that the United States should be doing in connection with our relations with China.

JIM GLASSMAN: George?

GEORGE GILDER: The Soviet Union was not a vital economic ally of the United States. China is a-- and Taiwan are absolutely critical-- partners of the-- of the U.S. economic system. And-- so I think provoking them and-- and-- is-- is much less effective than opening up to them. And--

JIM GLASSMAN: But you're not saying that we--

GEORGE GILDER: --Increasing trade, increasing--

JIM GLASSMAN: You're not saying that China is so--

GEORGE GILDER: --Capitalistic--

JIM GLASSMAN: --Powerful that-- becomes such a-- a power economically that we shouldn't-- we really shouldn't-- ruffle their feathers in any way by talking about human rights.

GEORGE GILDER: No, I'm not say-- I'm not saying that. But I think that what will determine human rights in-- in China is not U.S.-- governmental declarations to the Chinese government, but-- the expansion of both our economies and the increasing globalization of capitalism, which intrinsically requires emancipation of the participants in-- in this-- free market system around the world.

JIM GLASSMAN: Charles?

CHARLES FREEMAN: I-- I think it's, you know-- respect for human rights is part of our genetics as Americans. I mean it's what-- we are Americans not because we-- we-- necessarily-- are-- are from this land, necessarily. We're Americans because we subscribe to some basic principles. So I think it's-- it's really impossible for us to take-- the respect for human rights out of the-- the dialogue that we have with China.

I agree-- completely with George, though, that there are two ways of becoming effective in trying to get that message across. One is to be a village preacher, which is not particularly effective with the Chinese. And the other is to show respect for human rights generally and do real human rights. And I-- I think-- that is an important part of-- American foreign policy in China. And-- I think we're going to continue.

JIM GLASSMAN: Well, thank you all for a fascinating discussion. George, Gordon, and Charles. And thank you for joining us. For Ideas in Action, I'm Jim Glassman. We'll see you next week. (MUSIC)

ANNOUNCER: For more information, visit us at ideasinactiontv.com. Funding for Ideas in Action is provided by Investor's Business Daily. Every stock market cycle is led by America's never-ending stream of innovative new companies and inventions. Investor's Business Daily helps investors find these new leaders as they emerge. More information is available at investors.com. This program is a production of Grace Creek Media and the George W. Bush Institute, which are solely responsible for its content.

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