Chang-Tai Hsieh
Big Brains podcst

Why the coronavirus could send China’s economy back to the ‘80s, with Chang-Tai Hsieh (Ep. 41)

A University of Chicago economist explains why the coronavirus is one of the most pivotal moments in China’s economic history.


Chang-Tai Hsieh
Big Brains podcst

Show Notes

The outbreak of the coronavirus in China is a global tragedy. While much of the attention has been on the disease itself, many global experts have been focusing on the economic side-effects. Some economists are even hinting that the effects on China’s economy could be just as disastrous in the long term as the disease itself.

You’ve probably seen plenty of stories about how this outbreak could derail China’s economy, but why exactly is that the case and what would that look like on the ground? There’s no better person to put these questions to than Prof. Chang-Tai Hsieh of the University of Chicago Booth School of Business, a faculty director of the Becker Friedman Institute in China and a visiting scholar at the Federal Reserve Banks of San Francisco, New York and Minneapolis.

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(Episode published February 25, 2020)



Tape: Growing concerns this morning about the worldwide spread of the coronavirus.

Tape: Health officials warning, we could be on the brink of a global pandemic.

Paul Rand: The outbreak of the coronavirus in China is clearly a global tragedy. As of this taping, more than 75,000 people have been infected in China and over 2,000 people have died due to the disease.

Tape: Developments surrounding the coronavirus, there are confirmed cases in nearly 30 countries and more than 2,100 people dead.

Paul Rand: The outbreak of the disease is troubling on its own and the focus has been on the health aspects, but increasingly attention is being focused by global experts on the economic side effects of the outbreak itself. Some economists are even saying that the effects on the economy could be just as bad, if not worse than the disease itself.

Tape: As the number of cases and the number of deaths from coronavirus mounts. The economic impact is also starting to become clearer.

Paul Rand: Economics can be hard enough to understand even under normal circumstances, so we wanted to speak with an expert to wrap our heads around what this disease could really mean for the second largest economy in the world.

Chang-Tai Hsieh: I mean, this could be, this could be a real turning point.

Paul Rand: Chang Tai Hsieh is a professor of economics at Chicago Booth and the faculty director of the Becker Friedman Institute of China. Hsieh has been a visiting scholar at the Federal Reserve Banks of San Francisco, New York, and Minneapolis, as well as the World Bank's development economics group and the economic planning agency in Japan, as well as the recipient of the Sun Ye-Fang award for research on the Chinese economy.

Chang-Tai Hsieh: I mean, if the local governments continue what they've been doing in the last two months, the growth is going to come to a halt. It's going to be back to China... It's going to be back to China of the 1970s.

Paul Rand: From the University of Chicago this is Big Brains, a podcast about the stories behind the pivotal research and pioneering breakthroughs that are reshaping our world. On this episode, Chang-Tai Hsieh and the economic implications of the coronavirus. I'm your host Paul Rand.

Paul Rand: Well, Chang, I wonder if you can tell us a little background on where China stood economically before this whole crisis hit.

Chang-Tai Hsieh: Let me go back further than what you want. So there's this basic fact about what's happened in the last 30 years of China. There's been tremendous economic growth. So here's the question about China's growth. Normally when we think about what you need in order to have growth, you go down your list. You need to have a system of well-enforced property rights. You need to have a system where you have a strong and independent judiciary system. You need to have a system where you have clear rules and the cost doing business is low and it is reliable. And when you look at any of these objective indicators in China, you'll find that China looks like it's among the very worst in the world. So then there's this puzzle about how can you have such incredible performance while at the same time it looks like the conditions for business is among the very worst in the world.

Chang-Tai Hsieh: Now when you go and you talk with anybody that runs a business or if you go to any, I'm going to call it a mid-sized city in China and a mid-sized city in China is a city with like three or four million people. What you find is that what has made the system work is that you have the local government is all in, in terms of making a partnership with your business and making things work that for the last 30 or so years, the central priority of almost every local government is to basically bring companies into their cities and making sure that these companies have everything that they want. So in order to make their businesses work, it's a system of special deals, right? In which you have the power of the local communist party apparatus behind you. So think about like one part of the narrative that has come out of Wuhan that is, you've probably seen the news reports about how the city building two brand new hospitals in 10 days.

Tape: This is the extraordinary sight of a new 1000 bed hospital being built from scratch in less than a week. The infrastructure propaganda, that is a symbol of China's rise, repurposed for an epidemic.

Chang-Tai Hsieh: So that did happen. And that kind of stuff happens all the time, except that what happens most of the time is that, that kind of focus and attention and ability is applied to private companies. You need a brand new factory which houses 100,000 people. It's done in the next month. I mean it's not 10 days, but it's done. So a phrase that I've heard in China, it's a marriage of the communist party and Goldman Sachs. So think of that merger.

Paul Rand: Understanding what you're explaining. Why is that important as we start thinking about how things are happening with coronavirus?

Chang-Tai Hsieh: It's clear now that the central focus of the local communist party apparatus is on getting the disease down or taking steps so that it looks like they're getting steps down.

Paul Rand: It's under control.

Chang-Tai Hsieh: No matter what the cost is. So this has a consequence of first, the kind of things that they used to be doing for businesses, which I think was really central in explaining why you've seen the kind of growth that you see out of China. They're not doing that. And on top of that, what you see is that they're actively doing things that severely hurt business. So I'll give you one story.

Chang-Tai Hsieh: One place that I know well is the city of Suzhou, China, there's a Foxconn plant there. Foxconn is this Suzhounese company that's one of the main contractors for Apple.

Chang-Tai Hsieh: What you see going on right now in this plant. Okay. Is that, that same local communist party apparatus, they're terrified of a new outbreak. So the Foxconn plant, primarily employs migrant workers that went away to their home towns. Most of them can't come back. And the ones that can come back, they have to quarantine themselves for 14 days. So that plant is shuttered. I mean it's not quite shuttered but it-

Paul Rand: Really slowed down. Yep.

Chang-Tai Hsieh: They have really slowed down and it looks like it's going to take a very long time for them to... So I think the way that you wanted to think about it is that on the one hand, if you're running a business, you really need these guys to make things work. Okay.

Paul Rand: Yep.

Chang-Tai Hsieh: And then on top of that, even if these guys are not doing anything for you now, on top of that, because of this other priority that they have, they're actively putting in obstacles in your path. You can't get your workers back. You can't open up your firm because there's a risk. I mean there's a risk or there's a perceived risk.

Paul Rand: So the government's gone from doing everything they can to help going to now arguably standing in the way.

Chang-Tai Hsieh: That's where the... I mean so

Paul Rand: The tension's coming from right now.

Chang-Tai Hsieh: That's the situation.

Paul Rand: So let's talk about this economically, because 18, 19 years ago when SARS came out that the... What was the percentage, it was that China represented what 4% of the global GDP? And now here we are up at 16-ish percent.

Chang-Tai Hsieh: Right.

Paul Rand: So what does that mean and why is that making a difference based on what's happening in China and how economically it's impacting the rest of the world?

Chang-Tai Hsieh: Well, I mean what you see now is that China is a much bigger part of the world's supply chain. That is, Apple doesn't have a whole lot of options now. It has a little bit because Foxconn has some plants at Vietnam, they have some plants in Mexico. Those two plants are running at full capacity, but they are a fraction of... And it's not just Apple, but China is now a very big part of the supply chain for cars. It's a big part of the supply chain for almost every industry in the U.S.

Paul Rand: Okay. So speaking of Apple, Apple also recently came out with earnings and actually said they're down and they started applying that they're not able to get production going. And so that's actually directly what you're referring to. Is that right?

Chang-Tai Hsieh: Yeah. That's one part of it.

Paul Rand: Even a quarter of Walmart products, 25% of Walmart products come from China. So I guess if that's... And that's probably within the realm now, if that supply chain's being interrupted, now we're starting to see with your prom dresses to your products at Walmart to everything in between, you're starting to get a sense of what this actually means for the global economy.

Chang-Tai Hsieh: Yeah, no, I mean that's one part of it. And then there's also the effect on the demand side. There's also a whole bunch of companies that depend on China for a large chunk of their sales. So a company like Apple is being hit on both fronts.

Chang-Tai Hsieh: A chunk of their sales are coming from China or another company that I think is going to take a very big hit is General Motors, a very large chunk of its profits. Not so much of its sales, but its profits come from its operations in China.

Paul Rand: The last number I saw was that sales were down 92% for the first two weeks in February.

Chang-Tai Hsieh: Right. Yeah.

Paul Rand: And so if you get into numbers like that, then you're obviously seeing some of those big parts. So let's think about how do you start figuring out, if you looked and said, listen, this is a, this is turning out to be a pretty big deal. How do you begin to quantify how big of a deal this is and how concerned people should be because of the impacts of it?

Chang-Tai Hsieh: It's really hard to tell. I mean that's not a satisfying answer because the answer, I think it all depends on what these local communist party bosses end up doing. If the disease is something that is never dealt with. So they keep on operating as if this is an all-out war.

Chang-Tai Hsieh: They're not allowing companies to open or some companies are being allowed to open, but it's like a battle. Then it really is like, let's go back to China from 30 years ago then... So it's like it would roll back what has happened in China in the last 30 years and then we go back to the world of 30 years ago. The effects are going to be huge. We've heard a lot also about the quarantine in the cities around Wuhan.

Tape: Just one day before china's massive lunar new year holiday as hundreds of millions criss-cross the country to celebrate with families, an unprecedented act.

Tape: Today the entire city of Wuhan, population 11 million and ground zero for the coronavirus epidemic, is on lockdown.

Chang-Tai Hsieh: But what is also true is that almost every single Chinese city, they have begun to do the same thing. Even if the incidence of the virus is not that big and every city is doing something similar.

Paul Rand: So this is being done by the government really because the understanding of, if we can't figure out how to slow this thing down, then it could actually becoming much worse. So the assumption is if we can control this and put these restrictions in place right now, it will hopefully shorten the duration of it. Is that kind of what the thinking is?

Chang-Tai Hsieh: That's a really good question. I mean, I guess to put it charitably, the view is that we have to do everything that we can, no matter what the cost is in order to get rid of this thing. There's a question about whether what they're doing... You could be doing a lot of things, but what you're doing could be completely ineffective. So my question is whether the quarantines is really the most effective thing to be doing that is if you're to spend a huge amount of effort and a huge amount of resources on doing something, what should that something be? I think a big part of it too, but this is just my hunch. A lot of it may also be about trying to give the impression that you're doing something...

Paul Rand: To avoid criticism.

Chang-Tai Hsieh: To avoid criticism because you could say that, if something does happen to your community, you can say, well...

Paul Rand: We did everything we could.

Chang-Tai Hsieh: We did everything we could and what happened was not our fault. We did everything that we could.

Paul Rand: So I want to see if I'm tracking with what you're saying, at least I'm getting a sense that there's questions on whether the potential cure is been worse than the disease. And is that kind of how you're looking at this and thinking, that the quarantines the government's putting in place and the ramifications of those quarantines actually have made the problem much worse than simply the disease itself?

Chang-Tai Hsieh: I would put it slightly differently. I would put it that the economic costs so far have been huge. Now, part of the economic cost has been masked by the fact that for the first two weeks people were waiting for the lunar new year holiday. So it's only been a week or so since people should have come back to work. The benefits, the benefits of their core health.

Paul Rand: Of the quarantine.

Chang-Tai Hsieh: The benefits of the measures have been questionable. We see that it's been spreading. And I guess it's really hard to answer the counterfactual of what would have happened in terms of the spreading of the disease if they hadn't put the quarantine in place. That's a really hard question to answer.

Chang-Tai Hsieh: A quarantine of this scale, A. Has never been tried. And to the best knowledge of people in the field, quarantine only work when you're talking about small groups of people, when you're talking about a group of a hundred people or a group of 200 people, but 50 million people? An analogy that I could give you is, think about sort of the way that we implicitly think about say, crime in a city.

Chang-Tai Hsieh: You could take the view that we've got to get crime down to zero, that there's got to be zero crime. Now think about what it would take in order to get there. Right?

Paul Rand: A lot of restrictions.

Chang-Tai Hsieh: You would need a ton of restrictions. You would have to enormously increase the amount of police resources.

Paul Rand: Right.

Chang-Tai Hsieh: But if you wanted to do it, you could do it. But normally we think that getting that marginal crime down...

Paul Rand: There's an acceptable level of risk.

Chang-Tai Hsieh: There's an acceptable amount of risk and then it's something that we're willing to live with. So that's sort of where I think that we should be having the discussion. What is the acceptable amount of risk in which we are doing the proper balancing of the benefits and the costs?

Paul Rand: If we think about what it means to China going forward and you've mentioned whether this actually could be pulling them back. Does it have companies take business elsewhere? Does it create pressures on the economy in China in ways that were never expected? What is it that you worry about, particularly for China as this episode continues to unfold?

Chang-Tai Hsieh: I mean, the main thing that I worry about is that the system that has made it possible for China to grow by so much is going away. That would be the part that worries me, that whether that part of it eventually comes back.

Paul Rand: Now you've mentioned with 30 years plus of growth, what would it mean to actually say that we're going to change that structure that has really brought China so far?

Chang-Tai Hsieh: Well, growth is going to come to a halt. I mean if the local governments continue what they've been doing in the last two months, the growth is going to come to a halt. It's going to be back to China... It's going to be back to China of the 1970s or it's going to be in terms of the economy, China is going to be just another standard... It's going to look like India. It's going to look like Brazil. It's going to look like Mexico in terms of how difficult it is for businesses to get things done.

Paul Rand: So I guess the question is if indeed that global, that growth in China not only stops but actually falls back pretty meaningfully, what does that mean for the government as it now stands or what could it mean?

Chang-Tai Hsieh: I mean a central part of the legitimacy of the communist party. So there's this view I would say among the average Chinese that the communist party is competent and they deliver in terms of providing access to public goods. They deliver in terms of generating growth and as long as they deliver, there are certain costs that we're willing to pay. There're costs that we're willing to pay and then...

Paul Rand: Certain freedoms to give up.

Chang Tai Hseih: There are certain freedoms that we would give up and then it's a reasonable trade off. I would say that the most... The thing that I would watch really carefully is that I suspect... I mean it's still early, that what I think is going away is this narrative of competence on the part of the party and then where that leads us, I think is unknown political territory for China.

Announcer: Big Brains is a production of the UChicago Podcast Network. If you like what you heard, please give us a review and a rating. Our show is hosted by Paul M. Rand and produced by me, Matt Hodapp. Thanks for listening.


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