Tracking Reform: Three Questions with Daniel Rosen

Daniel H. Rosen is the co-founder and head of the China practice at Rhodium Group, an independent research provider. Mr. Rosen is also an adjunct associate professor at Columbia University, where he teaches a class on the Chinese economy, and he has authored more than a dozen books and reports on aspects of China’s economic development. Mr. Rosen served as Senior Advisor for International Economic Policy at the White House National Economic Council and National Security Council from 2000 to 2001. He is a member of the Council on Foreign Relations, and serves on the Board of the National Committee on US-China Relations.

During a short visit to UCSD to share career insights and describe his work on tracking economic reform in China, Mr. Rosen sat down with China Focus for a short interview as part of our “Three Questions” series.

The interview is lightly edited for length and clarity.

Could you tell us about your work at Rhodium Group?

Rhodium Group is a private research company. Most of the work we do is economic research – on China’s economy, as well as the role of economics in global energy and climate systems. We’re trying to help people make sense out of the complex interplay between economics, politics and, nowadays, security and other domains. We give them our questions and our answers about what we think is important and what they should be thinking about in the areas that we cover.

Unlike most firms that are commercial in their nature, Rhodium produces four to six or more public policy studies every year, usually in partnership with a think tank or other non-profit organization, so we’re kind of a hybrid between a think tank and an advisory company. Pretty much everything we do on the advisory side starts with our long-cycle public policy research agenda that we then build on.

Could you briefly describe the China Dashboard?  

China Dashboard is a quarterly assessment of how China is doing in implementing its own economic policy agenda. In the beginning of Xi Jinping’s term in 2013, the Party and Xi set out a very broad reform program called the 60 Decisions, which was nothing less than a comprehensive and coherent manifesto for what China needed to do in order to double down on “reform and opening” and keep the process of economic policy maturation going. So, we use that as the starting point and then, in each of ten different policy areas, identify indicators that we think are good trackers for whether or not they’re getting the job done.

Important to us is that we’re not judging China against what we think they should be doing or what the IMF says they should do. Rather, in each of these things that we are evaluating, we are tracking it back to what Beijing itself stated was imperative to be done. Making markets decisive in allocating resources in the economy was one of the more memorable ones that was set out almost six years ago.

Rhodium Group just released a report on corporate governance in China. What do you think are greatest challenges for improving corporate governance in China’s state sector? What makes the troubled governance so persistent in this area?

Corporate governance has a long provenance in China. In 1992 and 1994, the leadership first stated very clearly that as China became more mature it would need a modern enterprise system with modern corporate governance, and that the way SOEs (state-owned enterprises) had operated in the past – basically just taking instructions from political authorities on how much to produce – was not how efficient, globally successful companies work. Globally efficient companies profit-maximize, and in the course of doing so they create tremendous efficiency at using inputs – labor, raw materials, capital, land, etc. – to figure out what’s the maximum that can be produced with those inputs or how to use less inputs to produce the same amount of stuff. All that kind of thinking was entirely new to China. While reform and opening had very much begun and a lot of progress had been made in the 1980s, the notion that independent firms should be efficient in this way was still a new idea then.

Lo-and-behold, we’re 25 years down the road from that and we still haven’t seen anything fully implemented that would look like modern advanced economy governance system in China’s SOEs. Although, they’ve made great strides. For example, 80% of group-level central SOEs now do have boards of directors, and most of those boards of directors have at least one independent director whose job, at least on paper, is to think on behalf of shareholders and maximize profits. The problem is that there are competing levels of governance in all those firms, too. Of course, the party committee is a very important one.

The party committee has traditionally looked after personnel assignments because all SOE leaders are decided by the Party. It has also looked after political campaigns that were being promulgated and promoted through the enterprises and through Chinese society as a whole. In recent years, the role of the Party and party committees has actually been elevated, not just in SOEs but in private companies too. I think internally within the party leadership the justification is that there are corruption and supervision problems and that the answer to those problems is to have a more active party presence overseeing what companies are doing. It’s definitely not clear that party committees are going to have the right skills and incentives to effect efficiency objectives at these companies. They can probably root out some amount of self-dealing and corruption, but that’s certainly not all that a board of directors is supposed to do at a company. So, we have a contest of ideas here as to whether more party control over SOEs is the answer or the problem.

It depends on what the ultimate goal is. If the ultimate goal is profit maximization – a kind of welfare maximization for the country – then some of the directions that we see right now in terms of the role of the party committees is probably going to turn out to be thought of as counterproductive. However, perhaps not everyone agrees that profit maximization is what Chinese companies are all about. If it’s not, then I guess very well, that’s OK. We have the U.S. Postal Service in the U.S. which is not profit maximizing either, but we need to be honest about that. If at the end of the day, the point of this thing isn’t about enriching the shareholders, then shareholders – whether they’re private Chinese or international investors – aren’t going to be as interested in investing in Chinese SOEs. That’s corporate governance in a nutshell.

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Mark Witzke

Mark is a Master of International Affairs student at UCSD-GPS studying international politics and economics with an emphasis on China. He graduated from Tulane University with a BA in History and Asian Studies in 2014 and then spent three years working and traveling in China. During his time abroad he taught English and studied Chinese while exploring China's growing influence outside its borders and its role in the world order.

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