Insight Interview with Mr. Laurence J. Brahm,
Author of China’s Century
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1. Insight: Mr. Brahm, thank you for speaking with the Insight section of business-in-asia.com. J. Wiley & Sons have recently published your new book China’s Century. I can see by your resume that you have written over 20 books on China. Can you tell us a little about how you came to live and work in China and what has caused you to stay and obviously invest so much of your life in the country?Answer: I am a lawyer by profession. I came to this country with an interest in the developing legal and economic system, was struck by the enormous potential for change and development, and consequently stayed. It was the best decision of my life. I am glad to have been part of the business developments which are helping China reach this potential and to witness changes spanning over two decades.
2. Insight: In your book, you follow a format that begins often with a short piece by you setting the background, then a chapter by the relevant Chinese government minister and then following articles by business leaders or academics on the subject discussed. Why did you choose this style and do you believe it achieved the results you sought in terms of fully covering the subjects?
Answer: Each section begins with a review of the reforms and changes in this sector over the past two decades pointing to the direction which is expected in the years to come. My purpose in writing this is to set the tone for each section. This opening is followed by a chapter by the minister carrying the portfolio for the section. These ministers are currently in the position of determining the policies which will be applied to this sector. Effectively I asked them to provide a blueprint or roadmap of where they feel China will develop and what it needs to do to achieve its development objectives in each sector concerned. This opening chapter is then followed by chapters by various CEOs or chairmen of multinational corporations which have invested in China and have practical experience and relevant comments concerning the reality of China’s development together with academics or media figures who can provide their own alternative perspective. The intention is to create a balanced combination of views and in turn a realistic assessment of how China will develop in the new century.
3. Insight: Your book leads off with a foreword by China’s Prime Minister Zhu Rongji and as I have noted before includes sections by government Minister’s on most key issues. Did Chinese government involvement in the book in any way cause you or the other contributors to censor or perhaps “sugar coat” their observations on the current situation in China?
Answer: There was no Chinese government involvement in the preparation of this book other than the chapter essays contributed by different ministers and the foreword from Premier Zhu. Likewise, each of the other contributors, whether a multi-national corporation CEO, academic, or media commentator each had the freedom to write their own piece. In the preparation of each chapter essay, no author was aware of what the other was writing, except me as I was coordinating the project. This was intentional to create complete independence of ideas. Many of the comments provided by business leaders provide constructive criticism of policy changes and measures which these individuals feel from their own sector expertise China will need to adopt to achieve its development goals. Likewise, many of the Chinese contributors to the book who are media commentators were especially outspoken concerning the need to further liberalize this particular sector in China. So there was no “sugar coating”. I did request contributors however, to be cool-headed and constructive in their comments so that they would be of value to both foreign as well as Chinese readers.
4. Insight: Your books central premise, as I understand it is that the 21st Century will be China’s century to assume a leading role in the World. Thinking back, I remember about ten years ago when similar claims were being made about Japan, yet today Japan languishes while much of the rest of the world continues to progress. In this case, perhaps the error many observers made was to look at Japan’s potential and not to focus on its equally large inventory of problems or challenges. Couldn’t the same arguments be made in the case of China?
Answer: First of all I think it is a broadside statement to say that “Japan languishes while the rest of the world progresses”. Such a statement could have been said of the U.S. in the early 1980s when Ezra Vogel wrote his “Japan as No. 1” at which time Japan was on the rise. Just as the U.S. underwent a restructuring of bank and credit as well as the liberalization of the banking system allowing true interstate banking, so Japan will have to undergo a restructuring of a similar nature.
China is currently undergoing a vast range of systemic restructuring programs occurring in a cross section of inter-related sectors which will have a profound impact on China’s future. They have learned from the mistakes of Japan as they have from the former Soviet Union. I am positive that these measures will address many issues, however, this restructuring program is not an end in itself. Further programs will need to be implemented as China comes into its own to avoid the languishing which has hit Japan. I think the current leadership is aware of this and the reform process here will be extensive over the next decade to say the least.
China’s leadership has without question the benefit of hindsight, that is being able to assess the successes and mistakes made in a number of transitional economies as well as Japan’s own industrial development model. China in turn is adopting its own independent model and I believe that the independence China’s own approach is critical in achieving success. A good example of this was demonstrated during the Asian financial crisis. Virtually every country in Asia which was force-fed “Washington consensus” IMF medicine has languished behind as a result. Only two countries adopted policies completely independent of the IMF’s – China and Malaysia. Both are doing well, and arguably are stronger post-Asian financial crisis, due in great part to their decision to follow their own independent monetary policies. While this fact may upset some followers of the “Washington consensus” arguments, it is worth thinking about, because it reflects reality.
5. Insight: In part one of your book, you discuss China’s blueprint for the central and western provinces and you note that China intends to follow the same policy that worked 20 years ago with developing the coastal provinces – i.e. state investment in infrastructure attracting foreign investment from Hong Kong and elsewhere. Aren’t there very real differences in the state or world production, costs, etc. that make this in many ways a very difficult “sell” and that will ultimately limit the attractiveness of China’s west as an investment location?
Answer: There are similarities and obvious differences. We need to understand that twenty years ago Hong Kong was developed and the adjoining special economic zone Shenzhen was rice fields. If there were no central government investments in infrastructure, nobody from Hong Kong would have invested in Shenzhen. Those central government investments in Shenzhen allowed internal labor to shift there and in turn Hong Kong investment crossed the border. By the 1990s the entire textile and toy sectors in Hong Kong had literally shifted production inland. Now Hong Kong is a financial and trading service sector hub, not a production center anymore. Shenzhen however, is.
The arguments are the same for coastal and internal China. China’s coastal cities are now industrialized developed centers of production with the front-liners (Beijing, Shanghai) shifting over to services already. Rural China still lags far behind in terms of everything. Yes the relationship between coastal China and the interior is the same economic relationship between the developed industrial and underdeveloped agricultural nations. China’s interior has some estimated 30,000-50,000 townships. Many lack water and electrical supply, plumbing and education facilities. The State’s current plan is through bond-issue financed spending to build the roads, provide the electricity and water, and consolidate new urban townships with higher quality standards than exist today. This massive construction program will root labor in the rural areas, provide FDR style income sources, and in turn create a new domestic consumer market for the coastal regions, whose enterprises will one-day invest there to shift production closer to the new markets. At least this is the plan. Yes, it is a bit like Shenzhen but on a much larger and far-reaching scale.
6. Insight: In your book, you note that China’s private sector is growing at a rate of 20 percent and that this represents the fastest growing aspect of China’s domestic economy. Given this very high rate of growth of the private sector and the relatively lesser growth rate of other sectors, how do you see China’s relative division of state, private and other sectors looking by say the end of the decade in 2010?
Answer: Currently the thumb-nail guide is that two thirds of the productive assets which are State held produce one third of the out-put while one third of the assets which are held by the non-state sector (private, foreign joint ventures, mixed shareholding companies, etc) account for two thirds of the out-put. This gives some indicator. The question of how much of the economy is State controlled and how much is not ten years from now may not be a critical issue for either the government or foreign investors. The “mixed economy” concept has already been put into play and ownership structural change will evolve further as more enterprises, both state and non-state are listed on the securities market as it undergoes further rationalization these next two years. The lines between the two will blur with time as the State becomes a shareholder in both sectors and the non-state sector purchases into listed state enterprises. The question is how will the capital markets develop, how will public personal savings through bond and equity placements will be channeled into productivity – both State and non-state held interests.
7. Insight: In Part II of your book you look at International Relations. Given the fact that recently China’s relationship with the U.S. has undergone a number of strains such as the dispute over the downed surveillance plane, arms sales to Taiwan, disputes over treatment of religious groups, etc., how do you see the U.S.-China relationship developing over the coming years? Are we in for a new Cold War and if not, what leads you to optimism?
Answer: The position of the Chinese leadership has been consistent through each of these incidents. My reading is that it does not want conflict with the United States, however, on the other hand it does not want the U.S. to interfere in China’s own internal matters. The question of whether a new Cold War is on the horizon should best be asked to the Bush administration, as it appears from their current actions that there is a shift away from the China policies of previous U.S. presidents.
The spy plane incident provided some interesting insight into the negotiation styles of both sides. From Jiang Zemin, Qian Qichen, to Tang Jiaxun, China’s negotiating position was constant and focused on broad moral and diplomatic principles – an apology, an explanation and measures to prevent such incidents from happening again – in other words why is the U.S. sending spy planes to China’s coast in the first place. The Bush administration jumped from broad-sided knee-jerk threats to admission that “diplomacy takes some time” while focusing its concern on the legality of its position in relationship to the death of a Chinese pilot and damages to the Chinese plane to avoid compensation responsibility. This says a lot about the outlook of both sides on a single issue and why coming to agreement can sometimes take a lot of time.
8. Insight: In your book, Robert Theelen and others make the point that Chinese capitalism is highly trust-based and family oriented. You in your preface on this section make the point that although guangxi (relations) have been a key facet of getting things done in China over the recent period but that China and particularly the government are changing. You note that guangxi, as a factor is becoming less important and that government policy, economic considerations, etc. are becoming increasingly the determining factors. I am sure this must be welcome news to many who have lived and worked in China, but isn’t till this day relationship still the key factor in succeeding in China?
Answer: Yes, by all means relationships are still the key to all business in China and this being a 5,000 year old tradition will not change very soon. However, to clarify my point you raised above, the kind of cowboy wheeling and dealing which characterized the business environment in China in the 1980s and especially the 1990s is in fact now changing. More and more multinationals have established very large operations in China and are bringing their own management systems to bear on not only their own staff but their distributors and suppliers with whom they deal. The legal system is evolving though enforcement varies widely from place to place. This will change in time. Systems are coming into line. Yes, relationships are as important as in the past, but the way they come to play has evolved.
9. Insight: In section five of your new book, you deal with the issue of government and law and you discuss the distinction between ren zhi “rule of man” and “fa zhi” and how it has effected the evolution of law in China. Could you discuss that here and map out how you feel these concepts will affect the developing legal environment in China in the years ahead?
Answer: The concepts are in conflict and always have been. Maybe they always will be to some extent. We discussed “guanxi” and relations a moment ago. Likewise authority, particularly the authority of individuals and the power associated with office goes back in the Chinese mindset 5,000 years. It can be seen in the order and structure of village life, even in family life in modern concentrated urban areas. So now we bring in western law and legal practice. Yes, everybody here knows that this is necessary to have a modern functioning society and laws and regulations are adopted constantly. But then we come down to enforcement and this is a human factor not a piece of paper. So psychology plays an important role and all of the collective unconscious of 5,000 years comes right out there on the table when you are having dinner with an official at a banquet and ask his interpretation of the law. It may differ from the view of the drafting team who worked on it at the National People’s Congress – China’s parliament – and therefore when interpreted in practice it may be over-ruled by personal discretion. Nobody challenges the authority because that is something which is intrinsic in the culture, not something which can be imported by returning overseas law students. There is a Vietnamese saying on point, “The laws of the emperor stop at the village gate.” Likewise in China the old saying, “The sky is high and the emperor far away” is often interpreted in modern parlance as “There are policies above and counter-measures below.” This is reality. It is the contradiction of the time old debate in China between Confucian types and Legalist types – that is do we have a “rule of man” or “rule of law”. Recently, Jiang Zemin talked about “rule of morals”. Maybe this is something in between, that is get your values straight first and then the rule of man and law will fall in place accordingly, and appropriately. It’s worth thinking about.
10. Insight: As a related question, in the conclusion section of your book you state that “investors cannot be unrealistic about the extent to which changes will take place. While enormous efforts have been undertaken to date in constructing a modern legal system, the enforcement of that system is still often restrained by traditional thinking, lack of education, local protectionism, and disparities in income and knowledge which are still endemic problems running throughout various levels of Chinese society.” Don’t these very problems which you further note are “significant obstacles in rural areas and interior provinces” make investment directly put at risk the government’s policy of trying to attract investment to China’s center and west?
Answer: Yes, China has gone from one single law for foreign investment in 1979 the Chinese-Foreign Equity Joint Venture Law to now having an entire plethora of legislation developed and adopted, often with great thought but in some times hastily, to address the demands of foreign investors to have more law to regulate areas previously left to administrative discretion. That does not mean that all the laws and regulations are enforced equally, with equal effect, or that all government officials at all levels understand the legislation which they are supposed to be enforcing. Difficulty in seeking easy legal redress for problems which may be complicated by a variety of disperse local interests. This gives rise to local interpretation, and sometimes abuses. This is as much of a problem for the central government policy makers as it is for foreign investors as often personal relations influenced in the enforcement of legislation can work for business as well as government and often the interests are at odds. So if you think that just because China enters WTO everything will change overnight because somebody in Geneva says so, then you are just kidding yourself when you roll your sleeves up to work on the ground level here. As much as the government wants to enforce international WTO standards evenly on a nation-wide level, just remember the old saying and re-apply it, “The sky is high and Geneva is far away.” You have to educate the guy in the street too. That will take some time. Nothing here happens overnight. But then again, when the momentum builds at a certain point things can change very fast.
What has to be understood is that legislation, business practice, government implementation of policy and social mindset are all on the move in China, not stagnant, changing often for the better, sometimes not, and never standing still.
One must be real, not over enthusiastic, and do one’s homework when engaging in business here. Everything takes time. Nothing is easy, but nearly anything is possible if you have determination here. That is what is important in doing business in China, fixing your objectives and having determination. I have seen many companies achieve what they thought was impossible when they started just by pushing forward and being consistent about it. That’s the excitement and that’s what brings more and more people here at this time despite all the negative outside press.
11. Insight: If I could turn away from China for a minute, I note from your resume that you have also played a role in counseling Vietnam and Laos on enterprise and financial reform issues. How do you see the opportunities for investment going forward in both countries and are their any areas there where you feel that either country is moving more quickly or successful than perhaps China which of course started its reform program much earlier?
Answer: Both countries keyed off of China’s reform program. This is a historic fact in the area of mainland Southeast Asia so often referred to as Indochina. This historic pattern dates back about 2,000 years, so it should not be too different with the current reforms. To be more accurate, the Vietcong borrowed from China and the Pathet Lao from the Vietcong. Likewise, the Vietnamese Doi Moi reforms followed the example of the Chinese Communist Party’s 11th and 13th Congress decisions in particular and the Lao Communist Party followed the Vietnamese reforms. I saw this clearly from the legislative reform work I was doing, one following another – it was all there in the legislation.
The key point to note is that Vietnam will develop in a manner similar to China due to factors which are similar – large educated population (over 70 million), large coastal exposure, diversified economy, strong exports, similar value systems and similar policies. Laos however, is land-locked, and has a small population (just around 3.5 million), not coastal outreach, an economy which is almost entirely agricultural and village oriented, little in the way of exports – the largest Lao export is hydo-power to Thailand. Consequently, the development of Laos will be limited by its physical conditions.
12. Insight: Lastly, I note that you have always had a wide range of interests outside law, political economy and business; everything from learning Karate where you hold a black belt ranking to the restoration of historic and ancient courtyard houses in Beijing. What issues outside of business at the current time give you the most satisfaction and are there new books or other projects that you are currently working on?
Answer: The interest which keeps my mind busy these days is the restoration work we are doing in Beijing. I have now restored several ancient courtyard houses and each one has taken considerable work and patience. I am continuing to start new restoration projects as well. I have become a Chinese traditional architect and designer by trial and practice, but not profession, through doing these projects. I believe my efforts have been instrumental in preserving at least one neighborhood in Beijing while others are being torn down. I hope this has value for future generations.
I have completed a fiction novel about China business during and throughout the 1990s. This is unpublished and I await the opportunity to find a strong fiction publisher with interest in publishing a fast-moving book which reflects the realities of China today.
I am also working on a new book which will be published by John Wiley & Sons, hopefully a year from now, covering the economic and financial reforms throughout the 1990s under Premier Zhu. I hope that this will familiarize more people outside of China with the changes and direction being taken by the leadership today in building a market economy, albeit with state guidance; and moreover a new model of economic reform, grounded in the concrete realities of this country.
About the Interviewer: Christopher W. Runckel, a former senior US diplomat who served in many counties in Asia, is a graduate of the University of Oregon and Lewis and Clark Law School. He served as Deputy General Counsel of President Gerald Ford’s Presidential Clemency Board.Until April of 1999, Mr. Runckel was Minister-Counselor of the US Embassy in Beijing, China. Mr. Runckel lived and worked in Thailand for over six years. He was the first permanently assigned U.S. diplomat to return to Vietnam after the Vietnam War. In 1997, he was awarded the U.S. Department of States highest award for service, the Distinguished Honor Award, for his contribution to improving U.S.-Vietnam relations. Mr. Runckel is one of only two non-Ambassadors to receive this award in the 200-year history of the U.S. diplomatic service.
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