Tuesday, October 13, 2009

Superfusion by Zachary Karabell: Interview

Last week, author Zachary Karabell was generous enough to take some time out of his busy schedule to discuss his new book - Superfusion: How China and America Became One Economy and Why the World's Prosperity Depends on It - with me.

Here is Mr. Karabell's bio from the back jacket of his book:
Zachary Karabell is president of River Twice Research, where he analyzes economic and political trends, and is a senior adviser for Business for Social Responsibility. He received a Ph.D. from Harvard University and was formerly chief economist and president of a New York-based asset management firm. He is the author of Parting the Desert, The Last Campaign, and Peace Be Upon You. He is a regular commentator on CNBC and a contributor to Newsweek, The Wall St. Journal, The Los Angeles Times, The New York Times, Foreign Affairs, and The Washington Post.
Below is a transcript of my discussion with Mr. Karabell:

Mark's China Blog (MCB)
: Early in Superfusion, you say we have two paths - working with China to refine and develop the system for mutual benefit or falling back to "us and them." You then say that the world of nation-states with national economies is uncertain and that 2050 won't look like 1950. Could you explain what this world you envision looks like and how we could get there?

Zachary Karabell (ZK): Imagine telling a Parisian in 1950 that, in the year 2000, decisions regarding France would be made in Brussels. Nobody back then would've believed that Europe, a collection of nation-states, would be a cohesive unit known as the European Union. My point is that America could very well be tied to China in 2050 in a way that seems unimaginable now.

MCB: About Deng's quote - "Black cat, white cat, what does it matter as long as it catches mice?" - and his ideology in general, you say, "his ability to hold such contradictory beliefs shows he is either a genius or a madman." China, for the most part, has stuck with Deng's system. Towards the end of the book, you question whether the Chinese children of today - who've grown up with a remarkably comfortable and stable life - will demand more political freedom when they are adults. How long do you see Deng's contradiction being sustainable?

ZK: It's a mistake to assume that Jeffersonian liberal democracy is the only system that can meet people's needs and that the Chinese people will demand elections. People need to feel security and in control of their lives. As long as that occurs, the specific form could look like a lot of different things. The Chinese Communist Party needs to be responsible to its citizens and, for the time being, appears to be.

MCB: Your section about data and figures reminded me a lot of one of my all-time favorite books, Moneyball, by Michael Lewis. In that book, Lewis highlights the thinkers in baseball who challenged baseball's conventional wisdom. In Superfusion, you challenge a lot of the numbers - balance of trade, the consumer price index, and productivity - that people use to interpret contemporary national economies. When it comes to understanding the world economy, what numbers do you trust?

ZK: Very few numbers give us a good picture. It's not that I distrust numbers, I don't think they're made up, it's just that I see data as being incapable of telling us a complete story. Official numbers miss capital and idea flow. They miss how businesses are run.

Consumption of raw materials is a number that I look at. Numbers on trade can tell us a lot. One needs to go beneath the newspaper headlines. Look at the numbers used to compile official statistics.

MCB: I found your section on Chinese banks really good. On my blog, I've written a lot about the massive loans given out by Chinese banks this year. You say that a lot of the concerns about such lending is misguided and that loans are simply a means for modernization from the state and that the Chinese believe repayment isn't as important as "getting things done." Is China concerned about the repayment of loans given out this year? And if the US - and the rest of the West - stays in a funk for a year or two longer, can this kind of lending be sustained?

ZK: Comparing Chinese banks to western banks is a mistake. It's not that China doesn't care about repayment. They want the loans to be repaid. But right now, China is building its infrastructure. Internal loans to build up the country are going to be productive no matter what happens.

MCB: In the book, you write, "What China did in the 90s took the states of western Europe more than a century and the US more than five decades." Obviously, the costs of China's industrial revolution are being felt in the form of unfathomable pollution. The thing that concerns me most, having Xi'an as my home base in China, is north China's lack of water. The Himalayas' glaciers are melting. The Yellow River is dying. Northern Chinese cities are being built on falling water tables. How can this dire situation be resolved?

ZK: North China has the double whammy of being the site of the communist industrial revolution under Mao as well as a site of the '90s industrial revolution.

There is a huge draw on the resources there. I can't discount the severity of the situation. Alternative energy isn't an alternative to coal in northern China. But the government seems to have a grasp for where the crisis point is. I sense urgency from the government. They are moving quickly.

One thing about an autocratic government is that when faced with a sense of urgency, they have a much greater ability to address these problems than democratic governments.

MCB: You say, "China's transtition from Maoism to the market has been met with skepticism and mistrust rather than embrace." What does this say about America and the American people?

ZK: Our skepticism and mistrust say that we are having trouble dealing with losing the status of being "on top."

MCB: When the debate about China joining the WTO was going on in '99, the US was obsessed with Lewinski. You talk about how the world missed the development of Chimerica since "nobody analyzes the global economy as a system and because nobody developed a theoretical framework to predict it." Now, after coming back to America after three and a half years in China, I'm hearing reports about China all the time on NPR (National Public Radio). I haven't fully jumped back into the US media though. Does the US know what's going on in China and with Chimerica?

ZK: Americans aren't clueless that China's become a much bigger deal. People are mostly familiar with the populist rhetoric and not much else though. The implications of Chimerica are pretty beneath the radar. Americans, by and large, don't understand the greater meaning of its relationship with China.

MCB: Your discussion of US businesses being lenient on property infractions in the hopes of cashing in on the Chinese market was very interesting. I've written on my blog several times about "shanzhai culture" and the deep and intricate networks of intellectual property infractions in China. Can this shanzhai culture be overcome?

ZK: Complaining about shanzhai has been en vogue for years now. Innovation is going to be key in overcoming the intellectual property infractions occurring in China. Companies are going to have to make it difficult for people to extract income off of the Chinese copy of the product.

MCB: You say that the big difference between China and Japan's rise is that the Chinese have a culture of consumption. If you spend time at a Chinese night club or mall, this embrace of consumption is abundantly clear. But when I lived in China and told Chinese people about buying a house with a mortgage or having a wallet full of credit cards, they usually cringed. Can Chinese consumers come to embrace the culture of credit cards and debt?

ZK: Chinese people are already embracing credit cards and using debt. In fact, not enough companies are offering Chinese people credit cards. Once the Chinese trust paying online, that will also help encourage their consumptive culture.

MCB: For a long time, China's used "poverty alleviation" as an excuse for human rights abuses. Tibetans and Uighurs are obviously getting fed up though. Are these "harmony" issues critical to China's long-term, big-picture goals?

ZK: China needs to be "harmonious enough." Security of the Chinese people matters. The Chinese government understands that keeping people happy is a balancing act. Simply suppressing those angry with the system is not a viable long-term answer.

MCB: You talk extensively about the "feel" in cities like Shanghai and the general optimism of the country. Is China the new "land of opportunity?" Does that "feel" extend to those in the countryside or to migrant workers who've gone to the big city?

ZK: Well, I don't think anyone in China would use the word "land of opportunity." Those words are uniquely American. But the simple fact that migrants are doing everything they can to get out of the countryside and to the cities shows that the "feel" does extend to the entire country.

MCB: The Chinese stock market was up 90% on the year back in August. Housing prices in many cities are at all-time highs. Is there a bubble going on right now?

ZK: It doesn't matter if there is a bubble being created right now. The government popped a bubble in Shanghai in '04. They'll blow them up and pop them as they see fit. The government isn't afraid to intervene and pop. Popping bubbles isn't going to be a derailing phenomenon.

MCB: Does Obama have a coherent China policy?

ZK: Yes, Obama has a coherent China policy. Neither Obama nor the Chinese government seems ready to confront the existence of Chimerica though. Obama is going to China in November. He should have America's top business leaders with him on that trip. Another major need between the Obama administration and the Chinese government is better interest rate coordination.

MCB: I know you're very busy right now, Mr. Karabell. Thank you for sharing your time with me.

ZK: You're very welcome.

I want to thank Mr. Karabell and his publishing company, Simon and Shuster, for arranging this interview and asking me to review Superfusion.


Anonymous said...

Another great interview Mark. Mr. Karabell's understanding of China is so deep he almost comes across as a Chinese national. He seems to easily dismiss inflated housing and stock prices as a minor concern that the CCP is in complete control of. He may be proven to be right, but the scope of economics goes quite a bit outside the umbrella of governance, even in China. Also, answers about China needing to be 'harmonious enough' sound like they are being given by an overly patriotic national.

One other thing I take issue with is this quote "the simple fact that migrants are doing everything they can to get out of the countryside and to the cities shows that the "feel" does extend to the entire country". Currently there is a mass migration of these very people going back to the farms and I feel a lot of these points and arguments would have been spot on 4 years ago, but seem a little off in today's China.

I look forward to the book, but I get the feeling its going to seem a bit overly optimistic to me.

Mark said...

I know what you're saying on all of this stuff, Hopfrog.

I could tell that Mr. Karabell was really busy when I was interviewing him and just couldn't follow up too much or get too deep with him on these questions. I would've liked to have a much deeper chat with him, but he just can't give that much time to someone like me a week before he has a major book release. (He's also much smarter than me and would've dominated me in a debate, I'm sure.)

He is very positive about China and is on board with the steps that the government there is taking. And to be honest with you, he writes very convincing arguments about his positions in Superfusion.

A couple weeks ago, I saw Karabell's name mentioned in a Newsweek article about China. He's very much in the camp that believes China's growth is real and unrelenting.

It's interesting to compare this interview with Karabell to an editorial written the other day in The Los Angeles Times. In it, the author - Ian Buruma - writes:

Because most foreign journalists, businessmen, diplomats and academics tend to meet educated, privileged Chinese like Hong, most reports from China reflect their views: that soft authoritarianism is good for China; that the Chinese masses are not ready for democracy; that to give them the right to vote would only create chaos. But the main argument for technocracy, heard not just from the Chinese elites but increasingly in Western countries too, is that it is more efficient. Once the rulers put their minds to something -- the Olympic Games, birth control, economic reform, perhaps even tackling pollution -- nothing and no one stands in the way of success.

People who like the idea of strong central government and top-down change are often attracted to the Chinese model. And so are businessmen who would much rather deal with authoritarian party officials than independent trade unions. China is often favorably compared with India, with its gross inefficiencies, dire poverty and huge problems with illiteracy, corruption and organized crime. Messy democracy, it might seem, is holding India back, while China is forging ahead with ever more impressive statistics.
There are definitely two sides to this argument about which direction China is heading. The big questions, of course, are which side (the Extrapolators or the Bubblers, as Newsweek put it) is going to be proven correct and at what cost.

As anyone who's read my blog over the past several months knows, I've been a bubbler. Mr. Karabell gives a lot of convincing arguments in his book that China isn't going to face the problems we in the West are now confronted with though. I feel like my mind was expanded by his writing.

Karabell is a genius and Superfusion is well worth reading.

Anonymous said...

The book arrived yesterday and I got through a decent chunk today. While I was not thoroughly impressed by the answers Zachary gave you in the interview, I have found myself nodding in agreement with just about everything he has said so far in the book. Paragraph after paragraph is a home run and this book is a must read for American businessman and politicians.

I got the feeling by the short answers in the interview that he was rushing through it and I doubt he would be giving those 'knee jerk' answers had he put a little more thought into the excellent questions you posed. Also, excellent blurb there from the LA times, also helps explain a lot to me about the mentality behind a lot of these rosy answers given by some China followers.

I think of myself as pro-China and very pro China and America working together, but I also like to think I am a bit more realistic than those who gloss over China's myriad of problems in favor of accentuating the positive.

A PHD from Harvard is very impressive, but I think your knowledge of China certainly gives you the cred to debate even the likes of Mr. Karabell on certain issues.

And agreed, Superfusion so far is a 10 and mind expanding.

Mark said...

I knew you'd like this book, Hopfrog. Am glad that you picked it up.

I know what you're saying on the interview. To be honest, he gave me thirty minutes and that is incredibly cool of him. He really didn't have to do that.

I suppose I could've asked fewer questions and gone more in depth with follow ups to the responses he gave me. But I had so many things that I wanted to cover with him after reading the book that I chose to ask a lot of different questions instead of going too in depth on any one topic.

I agree with you that anyone wanting a very informed and through take on contemporary China needs to read Superfusion.

Anonymous said...

Thank you for sharing. China's domestic economy is equally as important as the country's international affairs if they are to become one of the world's leading powers. Have you read Asia Chronicle News? The site contains in-depth research and news analyses on the more political side of China. Worth a read I think. www.asiachroniclenews.com

Mark said...

Thanks, Anonymous. Glad that you could appreciate the write-up. I'll check out the Asia Chronicle.

Ping Post said...

I love this read! KUDOS Mark!