The Next China INTS338, INRL574, EAST338, ECON338, MGT911 Fall 2011 Monday and Wednesday: 10:30 to 11:20

Stephen S. Roach stephen.roach@yale.edu 250 Rosenkranz Hall Office hours: MW 1 to 2:30 & by appt.

Born out of necessity in the post-Cultural Revolution chaos of the late 1970s, modern China is about reforms, opening up, and transition. Notwithstanding the extraordinary accomplishments that have since ensued, both external and internal pressures suggest that the miracle of the past 32 years is not sustainable unless the Chinese economy undergoes a major structural transformation. The Next China will be driven by a daunting transition from an export- and investment-led development model to a pro-consumption growth dynamic. Lingering post-crisis aftershocks in the developed world suggest this transition will need to occur sooner rather than later. China's new model could unmask a dual identity crisis -- underscored by its need to embrace political reform and the West's long-standing misperceptions about China. Grades will be determined as follows: 30% Paper: A forward-looking assessment of A Building Block for the Next China (10 to 15 pages for undergraduates; 15 to 20 pages for graduate students) 30% Final Exam (Take-home) 20% Mid-term Exam (October 10) 10% Paper proposal (2-3 pages plus references due October 31) 10% Discussion section contribution A basic undergraduate course in macroeconomics (Econ 111b, 116a, or 116b) is the only pre-requisite for this course. NOTE: There will be no class on Wednesday, November 16; there will be a make-up session on Friday November 4. () Texts Required for Purchase (Note: Readings indicated by * are optional for undergraduates and required for graduate students.) Economy, Elizabeth, The River Runs Black (Cornell University Press 2010) Kissinger, Henry, On China (Penguin Press 2011) OECD, Economic Surveys: China 2010 (OECD February 2010) Oi, Rozelle and Zhou (eds.), Growing Pains: Tensions and Opportunity in Chinas Transformation (Asia-Pacific Research Center 2010) Roach, Stephen, The Next Asia (Wiley Paperback 2010)

I. Overview The miracle of modern China is unprecedented in the annals of economic development. But it is not without great controversy insofar as its global impact is concerned.

August 31: The China Debate: Global Impact Readings: Krugman, Taking on China Roach, Blaming China Will Not Solve Americas Problems Roach, Ten Reasons Why China is Different

II. China in Context Deeply rooted in their own histories, the three Asian giants China, Japan, and India have each gone their own way down the road of economic development. The lessons from these experiences bear critically on the challenges faced by the Next China. September 5: Lessons of Japan: Implications for China Readings: Koo, The Holy Grail of Macro Economics, Ch 1-2 *Mikuni and R. Murphy, Japans Policy Trap, Ch 1-2 Caballero, Hoshi, and Kashyap, Zombie Lending and Depressed Restructuring in Japan September 7: Lessons for India: A Chinese Wake-Up Call Readings: *Bosworth and Collins, Accounting for Growth: Comparing China and India Gua, India is Too Corrupt to Become a Superpower Roach, The Next Asia, pp 277-81, 290-94, 322-23 September 12: Political Roots and Modern Governance Readings: *Fukuyama, The Origins of Political Order, Ch 6-9, 20-21 Fukuyama, Maos Battle with Confucius for Chinas Soul Liu, The Ancient Roots of Chinese Liberalism Pei, Chinas Trapped Transition, Ch 2, (1*) Thornton, Long Time Coming: The Prospect for Democracy in China September 14: On the Brink in 1979 Readings: *Fairbank and Goldman, China: A New History, Ch 8-12, 18-21 + Epilogue Maddison, Chinese Economic Performance in the Long Run, Summary, Ch 1-2 Spence, The Search for Modern China, Ch 20-23

III. The 30-year Miracle: 1980 to 2010 For three decades, China has relied on a uniquely successful export- and investment-led development model. This recipe has morphed into a labor-saving, resource-intensive, and surplus-saving growth dynamic. Sustainability is the question and the challenge. September 19: Surplus Saving Export- and Investment-Led Growth Readings: IMF, World Economic Outlook, April 2010, Ch 4 Lardy, Integrating China into the Global Economy, Ch 1-3 September 21: Labor Saving and Resource Intensive Readings: Kynge, China Shakes the World, Ch 6-9 OECD, Economic Surveys: China 2010, Ch 6 *Park, Cai, and Du, Can China Meet Its Employment Challenges? in Oi, Rozelle, and Zhou (eds.) September 26: Stabilization Tradeoffs Inflation, Asset Prices, and the Currency Readings: McKinnon, Exchange Rates under the East Asian Dollar Standard, Introduction and Ch 5; Ch 1 and 8 are optional for undergrads(*) IV. Transition Imperatives The transitional characteristics of the Chinese economy, which have long been driven and ultimately constrained by social stability imperatives, increasingly reflect a delicate balance between internal and external pressures. Leadership is key to implementation. September 28: Balancing Internal and External Pressures Readings: Spence, The Search for Modern China, Ch 24-25 Roach and Tyson, Opportunities and Challenges in the US-China Economic Relationship October 3: The Social Stability Constraint Modern Chinas Raison dtre Readings: Minzner, Social Stability in China in Bergsten et. al., The China Balance Sheet, Ch 3 Whyte, Fair versus Unfair: How Do Chinese Citizens View Current Inequalities? in Oi, Rozelle, and Zhou (eds.) *Wu, Understanding and Interpreting Chinese Economic Reform, Ch 11 October 5: Post-Crisis Wake-Up Call Readings: Roach, A Failed Global Recovery Roach, The Next Asia, Introduction, Ch 1 and pages 169-71, 229-33 Wen, Report on the Work of the Government October 10: MID-TERM EXAM

V. The Four Uns: Unstable, Unbalanced, Uncoordinated, and Unsustainable While gratified with top-line growth results, Chinese Premier Wen Jiabao has warned repeatedly of serious problems brewing beneath the surface that ultimately could impair Chinas sustainable progress on the road to economic development. October 12: The Leadership Factor Readings: Kissinger, On China, Ch 9-12, 14-17 Thornton, Chinas Leadership Gap *Zhao, Prisoner of the State, Parts 3 and 6 October 17: Linkages and Tensions of Structural Change Readings: Lardy, China: Rebalancing Economic Growth, in Bergsten, et. al., The China Balance Sheet, Ch 1 Prasad, Rebalancing Growth in Asia Roach, The Next Asia, Ch 3 October 19: Fragmentation, Urbanization, and the Hukou Paradox Readings: Huang, Urbanization, Hukou System, and Government Land Ownership Wedman, Guilt and Punishment in Chinas War on Corruption in Oi, Rozelle, and Zhou (eds.) October 24: The Environment and Sustainability Imperatives Readings: Economy, The River Runs Black, Ch 1-4 Ortolano, Environmental Degradation as a Cost of Chinas Economic Growth in Oi, Rozelle, and Zhou (edes.) VI. A New Model With external demand likely to be constrained by lingering post-crisis aftershocks in the US and Europe and with the investment share of GDP already excessive, the shift to a new pro-consumption model is an increasingly urgent imperative for modern China. October 26: Pro-Consumption 12th Five-Year Plan Readings: He, The Basic Logic of the Proposal for the 12th Five-Year Plan *Li, Liu, Xu, and He, Prospect of Economic Growth in China from the Twelfth Five-Year Plan Period to the Year 2030 (on Classesv2 resource tab) Roach, Chinas 12th Five-Year Plan (on Classesv2 resource tab) Roach, Consumer-Led China October 31: Services and Labor-Intensive Growth (PAPER PROPOSAL DUE) Readings: Guo and NDiaye, Employment Effects of Growth Rebalancing in China

Eichengreen, China Needs a Service-Sector Revolution November 2: Rural Incomes and the Harmonious Society Readings: OECD Rural Policy Reviews, China, Ch 1-2, Ch 3 (*) *OECD, Economic Surveys: China 2010, Ch 5 Zhang, Jin, Rozelle, et. al., Rights and Rental: Are Rural Cultivated Land Policy and Management Constraining or Facilitating Chinas Modernization? in Oi, Rozelle, Zhou (eds.) November 4: Social Safety Net, Financial Repression, and Precautionary Saving (MAKE-UP CLASS) Readings: Eggleston, Challenges for Chinas Health-Care System Thirty Years into Reform, in Oi, Rozelle, and Zhou (eds.) Lardy, Financial Repression in China *OECD, Economic Surveys: China 2010, Ch 7-8 OECD, China in the 2010s: Rebalancing Growth and Strengthening Safety Nets *Shen and Williamson, Chinas New Rural Pension Scheme VII. Chinas Unique Challenges A pro-consumption model offers better balance and sustainability for the Chinese economy. But how does China actually get from Point A to Point B, and what are the biggest risks and benefits associated with this daunting transition? November 7: Capital Allocation in a Blended System Readings: Huang, Capitalism with Chinese Characteristics, Ch 1, 5(*) Walter and Howie, Red Capitalism, Ch 1-2 Zhu, et. al., Chinas Emerging Financial Markets, Overview, Ch 16 November 9: Alternative Sources of Energy Readings: Martinot, Renewable Power for China: Past, present, and future Victor and Yanosek, The Crisis in Clean Energy November 14: One-Child Policy and Chinas Demographic Challenge Readings: England, Aging China, Ch 2, 3, 5 *Maddison, Chinese Economic Performance in the Long Run, Appendix D Michelson Family Planning Enforcement in Rural China: Enduring StateSociety Conflict? in Oi, Rozelle, and Zhou (eds.) November 16: NO CLASS November 21-23: FALL RECESS

VIII. The Next China Chinas new model could unmask a dual identity crisis underscored by Chinas growing need to embrace political reform and the Wests long-standing misperceptions about China. November 28: Beyond Consumerism: The Internet, Aspirational Values, and Political Reform Readings: Gladwell, Small Change: Why the Revolution Will Not be Tweeted Oi, Political Crosscurrents in Chinas Corporate Restructuring, in Oi, Rozelle, and Zhou (eds.) Pei, Chinas Trapped Transition, Ch 2 Shirky, The Political Power of Social Media November 30: Who is China? Readings: Roach, The Next Asia, Afterword Roach, Americas China Complex Spence, The Chans Great Continent, Intro, Ch 1-2, and Ch 3-12 (*)

December 9: PAPERS DUE December 16: FINAL EXAM DUE

Reading List: Books to be purchased (); all other readings available in links on the syllabus or on the Classes V2 site resources tab. Readings indicated by * are optional for undergraduates and required for graduate students. Bergsten, C. Fred, Lardy, Nicholas, Gill, Bates and Mitchell, Derek (eds.), The China Balance Sheet (CSIS and the Peterson Institute 2007) Bosworth, Barry and Collins, Susan, Accounting for Growth: Comparing China and India, Journal of Economic Perspectives, Winter 2008 Caballero, Richard J., Hoshi, Takeo, and Kashyap, Anil K., Zombie Lending and Depressed Restructuring in Japan, American Economic Review, December 2008 Economy, Elizabeth, The River Runs Black (Cornell University Press paperback 2010) Eichengreen, Barry, China Needs a Service-Sector Revolution, Project Syndicate, June 18, 2010 England, Robert Stowe, Aging China, The Washington Papers/ 182, 2005 Fairbank, John King and Goldman, Merle, China: A New History (Harvard University Press, Enlarged edition, 1998) Fukuyama, Francis, Maos Battle with Confucius for Chinas Soul, Financial Times, July 13, 2011. ____________, The Origins of Political Order, Farrar, Strauss, and Giroux, 2011 Gladwell, Malcolm, Small Change: Why the Revolution Will Not be Tweeted, The New Yorker, October 4, 2010 Gua, Ramachandra, India is Too Corrupt to Become a Superpower, Financial Times, July 20, 2011 Guo, Kai and NDiaye, Papa, Employment Effects of Growth Rebalancing in China, IMF Working Paper 09/169. 2009 Huang, Yasheng, Capitalism with Chinese Characteristics (Cambridge University Press 2008) ____________, Urbanization, Hukou System, and Government Land Ownership, OECD Development Centre, March 2010 International Monetary Fund, World Economic Outlook, Rebalancing Growth, April 2010 Kissinger, Henry A., On China (Penguin Press, 2011) Koo, The Holy Grail of Macro Economics: Lessons from Japans Great Recession (Wiley 2009) Krugman, Paul, Taking on China, The New York Times, March 15, 2010 Kynge, James, China Shakes the World (Weidenfeld & Nicolson 2006) Lardy, Nicholas, Financial Repression in China, Peterson Institute Policy Brief, September 2008 ____________, Integrating China into the Global Economy (Brookings 2002) Li, Shantong, Liu, Yunzhong, Xu, Zhaoyuan, and He, Jianwu, Prospect of Economic Growth in China from the Twelfth Five-Year Plan Period to the Year 2030, (DRC March 2010) Liu, He, Increasing the Proportion of Middle-Income Earners and Enlarging the Domestic Market: The Basic Logic of the Proposal for the 12th Five-Year Plan, (DRC March 2011)

Liu, Junning, The Ancient Roots of Chinese Liberalism, The Wall Street Journal, July 6, 2011 McKinnon, Ronald I., Exchange Rates under the East Asian Dollar Standard: Living with Conflicted Virtue (The MIT Press 2005) Maddison, Angus, Chinese Economic Performance in the Long Run, (OECD 2007) Martinot, Eric, Renewable power for China: Past, Present, and future, Frontiers of Energy and Power Engineering in China, Vol. 3, No. 3, pp 287-284, 2010 Mikuni, Akio and Murphy, R. Taggart, Japans Policy Trap (Brookings Institution Press, 2002) OECD, Rural Policy Reviews: China (OECD 2009) ___________, Economic Surveys: China 2010 (OECD February 2010) ____________, China in the 2010s: Rebalancing Growth and Strengthening Safety Nets (OECD March 2010 in DRC compendium) Oi, Jean C., Rozelle, Scott, and Zhou, Xueguang, Growing Pains: Tensions and Opportunities in Chinas Transformation (Asia-Pacific Research Center 2010) Pei, Minxin, Chinas Trapped Transition: The Limits of Developmental Autocracy, Harvard University Press, 2006 Prasad, Eswar S., Rebalancing Growth in Asia, (Cornell University paper March 2009) Roach, Stephen, The Next Asia (Wiley paperback 2010) ____________, Chinas 12th Five-Year Plan: Strategy vs. Tactics, paper presented to the China Development Forum, March 21, 2011 ____________, Consumer-Led China, paper presented to the China Development Forum, March 22, 2010 ____________, Blaming China Will Not Solve Americas Problems, The Financial Times, March 30, 2010 ____________, A Failed Global Recovery, Project Syndicate, July 2011 ____________, Ten Reasons Why China is Different, Project Syndicate, May 2011 ____________, Americas China Complex, American Review, April 2010 ____________ and Tyson, Laura, Opportunities and Challenges in the US-China Economic Relationship, testimony before the US Senate Foreign Relations Committee, June 23, 2010 Shen, Ce and Williamson, John B., Chinas New Rural Pension Scheme: Can It be Improved? International Journal of Sociology and Social Policy, June 2010 Shirky, Clay, The Political Power of Social Media, Foreign Affairs, January/ February 2011 * Spence, Jonathan, The Chans Great Continent (WW Norton 1999) ___________, The Search for Modern China (WW Norton 2001) Thornton, John L., Chinas Leadership Gap, Foreign Affairs, Nov/ Dec 2006 ___________,Long Time Coming: The Prospects for Democracy in China, Foreign Affairs, Jan/ Feb 2008 Victor, David G. and Yanosek, Kassia, The Crisis in Clean Energy, Foreign Affairs, July/ August 2011 Walter, Carl E. and Howie, Fraser J.T., Red Capitalism: The Fragile Foundation of Chinas Extraordinary Rise (Wiley 2011) Wen, Jiabao, Report on the Work of the Government, March 5, 2011

Wu, Jinglian, Understanding and Interpreting Chinese Economic Reform (Thomson South-Western 2005) Zhao, Ziyang, Prisoner of the State (Simon & Schuster 2009) Zhu, Min, Cai, Jinqing, and Avery, Martha (eds.), Chinas Emerging Financial Markets (Wiley 2009)