Fan Gang has a unique ringside seat to the rise of China in the last four decades through both his personal life and his professional career. From being sent to the countryside by Mao before he finished high school at the height of the Cultural Revolution, to working on his Ph.D. in economics at Harvard University, then to becoming a leading economist and influential policy advisor to the top Chinese leadership, his personal journey has been a microcosm of the extraordinary rise and transformation of China itself.
Being able to speak with Fan in private is like having a special window that opens to a view of the world that is deeply illuminating. To gain some of his insights on what the global economic future may look like, I caught up with him recently in Singapore for dinner in the Dolce Vita restaurant in the Mandarin Oriental Hotel. Fortuitously it turns out that Italian food is Fan’s favorite cuisine apart from Chinese food.
Fan started by telling me how he became interested in economics. Sent to the countryside by Mao in 1969 to “learn from the peasants,” he was struck by the poverty and hardship of rural China, which motivated him to learn and understand some of the most profound questions in economics: What causes the difference between poverty and prosperity? Technological advances and backwardness? Economic development and stagnation? On his own initiative, he started an intense self-education program even as he toiled daily in the fields.
By 1978, Mao was dead and the madness of the Cultural Revolution was finally over. Fan and his fellow students were allowed to return to Beijing to study in the university. His years of self-education paid off as Fan was able to go straight to university, making up for his lost years. He gained entrance to Hebei University and majored in economics, one of only a handful of students studying the subject at that time.
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In the aftermath of the Cultural Revolution, the standards of China’s post-secondary education were extremely poor. Deng Xiaoping knew how dire the situation was, and he actively sought assistance from the West, including the U.S. When Fan started his Ph.D. studies in economics in the Chinese Academy of Social Sciences, the partner institution was none other than Harvard University. From 1985 to 87, Fan found himself studying at Harvard, learning from some of the best minds in the world.
After completing his Ph.D. from Harvard, he returned to China and joined the faculty of the Chinese Academy of Social Sciences in 1988, and started immediately contributing to the policy debate and advocated opening and modernizing the economy. In a short span of time, Fan established himself as a leading economist through the economic policy papers he wrote in the academe. Three years after joining the faculty, he became the youngest full professor at the Chinese Academy of Social Sciences. This was followed by an appointment to the influential Monetary Policy Committee of the People’s Bank of China (he has since been re-appointed three times). In addition to being an increasingly valued advisor to the government, he was also sought after by foreign and domestic businesses for his insights on the Chinese economy. Leading global companies such as Barclays, Rolls Royce, ACE, and Mastercard engaged him as their advisor.
Leading multilateral institutions like the World Bank, IMF, OECD, UNDP and ADB also started to seek him out for advice and inputs. Soon, international recognition and accolades started to arrive. He was invited to teach as visiting scholar in some of the top universities in Europe and North America. He received honorary doctorate degrees from France and Canada. And he was named one of the “World’s Top 100 Public Intellectuals” in 2005 and again in 2008 by Foreign Policy and Prospects; and in 2010 was named one of “100 Top Global Thinkers” by Foreign Policy. In 2006, he was appointed President of the China Development Institute, one of the most prestigious government economics think tanks, tasked with a direct advisory role to the top leadership.
Fan’s policy work on reforming and advancing the Chinese economy is much in the mode of Deng Xiaoping’s crossing the river by feeling the stones; practical, non-doctrinaire, and open-minded. More critically, Fan does not see China’s economic reform simply as a linear progression from socialist central planning to free market as it is often portrayed. Instead, he believes that China has to work out what is appropriate for itself at each stage of its economic development. Under certain conditions, solutions to China’s economic challenges may actually require the combined strength of both the public and the private sector. Counter-intuitively, the private sector could also gain from having a strong public sector. There is no simple one size fits all formula for tackling a task as complex and massive as the modernization of China.
I asked Fan for his views on the current trade war between the U.S. and China. Characteristically, he started with the broad historical context. He reminisced about a shopping experience in Boston in the mid-80s, when he was studying at Harvard. After an exhaustive search in a big department store, he found just one single item, a hand woven wicket basket that carried the label “Made in China.” Three decades later and China had become the second-largest economy in the world, and found itself embroiled in a trade war with the number one, the U.S. It is the speed of China’s rise that is a key reason for the unpreparedness of both China and the U.S., and for that matter, the rest of the world, in managing the disruptions caused by the rise of China in the global economic order.
China today is typically seen as a major economic power, and is expected to conform to international norms that are based on Western institutions, reflecting contemporary Western values. While its economy is big in the aggregate, China is nowhere close to being a developed country. In rough terms, the U.K. reached China’s current per capita income over a century ago. At that time, the U.K. was able to make all the rules, and no one was there to impose international sanctions against it for its behavior no matter how outrageous it was by today’s standards. When the British Empire grew, its military invaded other countries, violently suppressed “native” uprisings, prised open foreign markets with the gunboats of the Royal Navy, and expanded its imperial possessions. In contrast to today, how China conducts its economic reform, how it manages its currency, how it invests overseas are constantly scrutinized and judged against norms and standards set by Western countries, even though China’s per capita GDP is still only a fraction of theirs.
Fan believes that the playing field in the global economy is stacked against today’s successful emerging markets. They are expected to conform to standards that have been created by Western countries at levels of development and income many multiples higher than the emerging markets. China, with a GDP per capita of around $10,000, is expected to behave exactly like countries with GDP per capita six to eight times higher.
Notwithstanding all of the hype about the rise of China, as far as Fan is concerned, China will continue to be a developing country for a few decades at least. Fan does not believe that China can change the global economic order unilaterally. From this point of view, Fan is firmly a multilateralist. But he believes that emerging markets can and should collectively exert their influence to ensure that they can manage their economic development in a way that is most suitable to their specific circumstances, and to serve their societies’ interests consistent with their own values. For this to happen, the developed countries of the West, who created and continue to dominate international institutions in the global economic order, will need to allow emerging markets more room to experiment and progress.
For example, Fan points out that prior to the global financial crisis, Western political leaders, scholars, and experts came to China and preached the merits of market deregulation and privatization of the state sector. After the global financial crisis, they are still preaching, but what they preach has changed. Now the same pundits are preaching the need of reducing inequality and singing the virtue of inclusive growth to China, with the same conviction and certainty as before.
As it happens, Fan agrees with many of their arguments, but he firmly believes that emerging markets need to evolve their own development pathways. The worst possible course of action is for emerging markets to adopt wholesale the standard prescriptions of market reforms and political liberalization from the West. The result is typically economic stagnation and political chaos, with the occasional financial crisis. And he points to the chronic failures in economic development in some of the Latin American countries as a consequence of such policy mistakes.
In contrast, Fan suggests that the successful rapid industrialization and economic development of East and Southeast Asia has been achieved through pragmatic policies that combine flexible market reforms with strong state control over the pace and scope of economic opening. East Asia tapped into the global market through selective liberalization, notably in labor intensive manufacturing in the early phase of their economic takeoffs. “Infant industries” were protected when it was considered necessary, and many sectors, especially in finance, remained tightly regulated for much longer. The government also played a major role in investing in public infrastructure without which the private sector would not be able to compete in the global market. Many mistakes were undoubtedly made, notably the 1997 Asian financial crisis, but East Asia was able to respond effectively and recovered. In a way, East Asia pioneered the practice of “cross the river by feeling the stones” long before Deng formulated it into one of his most famous aphorisms.
China is, of course, the most current and the largest example of the East Asian success story. But is China the last country to get on the bus of rapid industrialization and development through labor intensive and export-oriented manufacturing? Fan sees today dark clouds gathering on the horizon. Technology may be eroding the power of manufacturing in driving rapid industrialization. It could become a thing of the past as robotics and artificial intelligence become more capable and cost effective in replacing workers. This could mean the closing of this well-trodden path of rapid industrialization for developing countries, especially in Africa. At the same time, the developed countries of the West are becoming less tolerant to chronic trade deficits with emerging markets. Responding to the rise of nativist nationalism, many Western countries are trying to “tighten” the rules of the WTO to eliminate exemptions previously available to low income developing countries. Furthermore, the demand from many Western human rights NGOs that developing countries should abide by the same labor standards in the West would effectively wipe out their comparative advantages, which is equivalent to erecting trade protectionism under the guise of human rights, even if it means plunging tens of millions of workers in low income countries into unemployment.
These are all ominous developments. That is why Fan believes that emerging markets must find a way to exert their influence in the global economic order. This is not a task for China to undertake alone. But China can play an important role, especially in stepping up in the provision of public goods in international development. The Belt and Road Initiative (BRI) is one such initiative. Fan believes that in spite of some pushback the BRI remains spot on in addressing the deep infrastructure deficits in many developing countries in the vast geographic corridor stretching from Asia across the Middle East to Africa. While the BRI was initiated by China, it is now a global enterprise that is led by Asia with participating countries from Europe and Africa, giving both substance and voice to Asia’s aspiration to offer an alternative approach to the market liberalization orthodoxy of the West. In this connection, Fan hopes that China can play a leading role among emerging markets in defining and defending their interests within the multilateral global system.
Finally, Fan sees that the path of pragmatic evolution being equally applicable to political development. He is unimpressed by the kind of democracy commonly seen in developing countries. When democracy is artificially grafted onto a society still shackled with pervasive poverty, typically it is the form of democracy that is adopted, not the substance. The result is electoral democracy, amounting to nothing more than the ritual of regular elections. But, in between elections, the society suffers from dysfunctional governments, ineffective, corrupt, and predatory public institutions, poor governance, absence of law and order, and deteriorating infrastructure. Fan has seen first hand this type of electoral democracy in many developing countries where electoral democracy could jeopardize a country’s development instead of being a driver of economic growth.
Fan’s hope is that China can share its development experiences in a positive way. In spite of its popularity in some quarters, Fan does not believe that there is a “China model” that can be mechanically replicated by other developing countries. However, some meaningful lessons can be learned in China’s development success. They suggest a need for thoughtful pragmatism in market reforms, strengthening of public institutions, gradual introduction of the rule of law, and sustained investment in infrastructure, health care and education. When implemented in an open-ended and disciplined approach, guided by experimentations, it could pay rich dividends. For Fan, these lessons learned could be China’s contributions to a new global economic order that can accommodate priorities and needs of both the developed and developing countries. – Yuwa Hedrick-Wong