The Reality of Great Power Rivalry In The 21st Century - Professor Danny Quah
Professor Danny Quah is Li Ka Shing Professor in Economics and Dean at the Lee Kuan Yew School Of Public Policy.
His research interests lie in income inequality, economic growth, and international economic relations.
His work takes an economic approach to world order - focusing on global power shift and the rise of the east, and alternative models of global power relations.
In this episode, we explore the complexities of US-China relations, challenging the idea of the Thucydides Trap and examining the dangers of zero-sum thinking and more.
Chapters:
00:00 Is The Thucydides Trap Wrong?
07:38 The Danger of Zero-Sum Thinking
08:59 Epic Fail Outcomes
13:10 Electric Vehicles in US-China Rivalry
20:38 America's Action Against Japan
23:21 Third Nations in Great Power Rivalry
31:13 America's Emergence
36:41 Ideas That Drove America
40:10 No Political Convergence
44:44 What Drives US-China Rivalry
53:16 The Problem of Inequality
01:01:12 Dean Danny's Advice For Young Professionals
Here's the transcript with corrected timestamps:
Keith 00:00:00
Is the only way to understand great power rivalry through the lens of Thucydides? Why is that wrong?
Danny Quah 00:00:08
I wouldn't say that it's wrong to so strongly identify international relations, geopolitics with Thucydides' thinking, Thucydides and other writers like John Mearsheimer, realists in general, because that's a nice consistent picture of what they think has happened in history.
But of course, with Thucydides, you get more than just "this is what they said." You get a strong view about how nations engage with one another. Thucydides is now very closely identified with some of the research that Graham Ellison at Harvard Kennedy School has done on nations going to war, on international conflict.
It is so strongly identified that that entire circle of ideas has become known as the Thucydides trap. That you have an incumbent great power, you have another rising great power, and then the tendencies for war to break out. So the historical studies, the statistical studies, the analytical reasoning, all going back to Thucydides.
But Thucydides was a prolific writer. He said many things. Among other things, he also said, "The strong do what they will. The rest of us suffer what we must." These are two quite distinct ideas, but because they all come from Thucydides, we often conflate them. We think that being sort of hard-nosed, speaking cold truths about the world means that we have to be ready for war. Speaking hard truths about the world means that the weaker nations need to know their place because the great powers do what they will.
One of the things that I've tried to do in my work is to say that these are all different ideas and we should feel free to accept some of them because they are close to truth and others we need to say, well, let's re-examine the propositions here.
So I would say that Thucydides does have a profound influence, not just from his writings over 2000 years ago, but from later writings among very serious international relations scholars. But having noted that, I think that it is time for us all to take a cold hard look about what the predictions of that line of reasoning are.
So if I may, let me give you one example. This idea about the Thucydides trap is one that says that, it's not just a historical regularity, there's a reasoning to it. That reasoning is best articulated by the writings of people like John Mearsheimer. So Mearsheimer says, nations want to advance their self-interest. Critical among those self-interests is the probability of national survival. They must not be conquered by another nation. That's a fine proposition. Everybody can buy into that.
Then he follows that up by saying, the surest way of ensuring the probability of your survival, if you're number one in the world, is to make sure that number two doesn't catch up. Now, that step is one that actually needs a lot of unpacking. Because if you really want to, and economists, I think many economists would say, recognize some of what's going on here. So I recognize that a lot of this is extremely rigorous analytical reasoning backed up by historical evidence.
But some of it is not. So what would be why? Well, that every nation seeks to advance their self-interest. All nations do that. Great powers do that. Small states do that. And economists, social scientists, all observers generally would say, good on you, more power to you. That's exactly what you should be doing. You should be taking care of your people. That's the right thing.
But then is it so obvious that the way you improve your own situation best is by trying to keep the other guy down? There's implicit in that a hidden assumption.
So I'll give you an example. Suppose that the world is going to hell, right? And the great powers can actually help the world move to a better place. What maximizes the probability of your survival? Is it to be cooperative and move the world to a greener, cooler, safer climate? Or is it to try and do the other guy down?
Now, all of a sudden, the same Mearsheimer type assumptions can lead to quite different predictions. And I think for economists, when we look at how international relations crafts this, we say there are things here we recognize. The idea that nations are self-seeking. Fine, we're good with that. The idea that nations engage with one another under either a set of rules or the absence of a set of rules, we understand that. Completely clear.
But the predictions and the conclusions that you get to, many economists would find, would raise an eyebrow, would say, this is not particularly clear to us that that conclusion you've given is inevitable.
The example I've just given you is not an unrealistic one. The world now is in a global climate crisis. We know that for the world to move to a better place, one sure way of doing that is to get the great powers to cooperate with one another on green technologies, on improving the carbon emissions in the atmosphere. That's plain, that's clear to everyone, I think.
What is the best thing that America should do? Should it be trying to keep China down so that it guarantees its number one? Or should it work with China and help move the world to a safer place?
Now, in the Mearsheimer type view, the answer is very clear - keep China down. That's how you maximize the probability of your survival. In my analysis, and I suspect yours too, Keith, we would say America can actually improve its well-being, raise the probability of the survival of itself and its people by actually being collaborative. That seems to us clear, but that's not really considered as a logical outcome in a realist view of the world.
So I suppose that the question you asked is extremely deep and interesting. It says, should we identify geopolitics, the way nations behave towards one another, the way the world is, with only a certain set of ideas in international relations theory? I would say many of those ideas are extremely valuable, but we need to recognize the limits to which they're useful, and we need to unpack their hidden assumptions.
Keith 00:07:38
What you pointed out earlier was that it is actually possible for you to create a better outcome for both. But at the same time, you pointed out the climate crisis, you can create a net-worse outcome from not just the two parties involved, but the third parties. There's another dimension to that, which is now that you live in a nuclear age as well, right? So the probability of you being the first now might not actually be there even if you win the war. In a sense, it's like a Pyrrhic victory.
Danny Quah 00:08:59
Exactly. Exactly so. And in language that I've used elsewhere and that you've also used in conversation with me, it's an epic fail. It's a Pyrrhic victory that each of us strives for. Whoever wins has spent so much resources, destroyed so much of the world that they actually end up in a position where they are worse off, even though they remain number one or they've become number one.
And so this obsession of identifying success with being number one is one that needs to be examined. It needs to be scrutinized. And in a number of IR type theories, that's not consistent with the analysis. The analysis says, Mearsheimer says, the shortest way to guarantee the probability of your survival as a nation is to be number one.
So that statement, if we just accept it at face value as an axiom that you take for your analysis, does not then allow the possibility of examining a Pyrrhic victory, an epic fail, prisoners dilemma outcome, nations caught in gridlock, all of which can be improved on by being sensible, by being sensible, not sticking to the theory, not sticking to the axioms.
Keith 00:09:41
Can you elaborate on the dynamics of what leads to an epic fail in maybe the context of the US-China rivalry?
Danny Quah 00:09:50
I think the example that you gave is a good one. A nuclear world, a world that has nuclear weapons. When I say it's a good one, I don't mean it's a happy one. It's actually a very unhappy one, but it's an example that illustrates what's at work here.
This was a situation that arose in the Cold War between the US and the Soviet Union from the 60s through the 1980s. You've got nuclear weapons. I've got nuclear weapons. We've got enough nuclear weapons to destroy our planet many times over. What should we do?
Well, if I am concerned with my own well-being, and I should be, one action I can take is to always make sure I have more nuclear weapons than you do. Symmetrically, you would think the same thing. We're then in a nuclear arms race, where what is good for each of us is to have a little bit more nuclear weapon than the other guy. But that's never ending. And the end result of that is to have many more weapons than actually we need.
So that I think of as an epic fail. We're caught in a gridlock situation where neither one of us can back away. Because when you back away, you're seen to lose. But actually, if both of us can come to an understanding where both of us stand down, we would both actually be better off in the sense that we have more resources, we can devote to improving the wellbeing of our people. We're not spending it all on nuclear weapons. The world is at the margin, a little bit safer. Everybody wins.
But it's an everybody wins outcome that's not achievable as long as I continue to look at just my self-interest. That's a situation I think of as an epic fail, or that's a situation where there might be, we might think of that as a gridlock situation.
Now, the trade war between America and China has some of the same similarities, but it's obviously not as lethal as having nuclear weapons. It's one where I'm going to raise tariffs on you. You have to retaliate because your people would then say, why are we letting the other side take advantage of us? We are a sovereign nation and we need to have our own place in the world.
So that's also a kind of an arms race. It's an arms race in trade actions. Fortunately, not as lethal as nuclear weapons, but extremely harmful for the economic well-being of both our peoples and of the world generally. So by being caught in this vicious cycle, we have exacerbated shortcomings in our thinking and we're in an epic fail outcome.
I mean, the epic fail is exactly what young people today would describe things where you can look at and say, you can do a lot better than this. It's exactly an epic fail.
Keith 00:12:10
There is a huge opportunity cost in pursuing those lines of thinking. And I think you also point out, for example, good, at least in a trade between US and China, which is electric vehicles, right? Which is that, you know, the more you trade EVs between both countries, actually the better net outcomes you'll get for both, right? Because now, you know, you have less pollution, everyone's becoming more sustainable. But by you putting tariffs instead of maybe for example, subsidizing your own industry, you're worsening the net outcome.
Danny Quah 00:13:10
Is there another way out? Could you have done something else? The EV example is one that carries many of the same features we're describing about trade war and how it's damaging for all sides. But this one has even further implications.
And the way we might think about this is as follows. For centuries, humanity has maintained its standard of living, has made people, has improved people's wellbeing through applying energy to control our environment. So we have cars that take us everywhere. We have more efficient agriculture. We have machines manufacturing, all that driven by energy. And all that's great.
Ever since the industrial revolution, humanity has been on a wonderful journey of improving the lives of the 9 billion people on this planet. Wonderful achievement. The problem with that is that a lot of the energy we've been using has been founded on technology that's burning our planet to a crisp, emitting carbon, heating up our environment. So you've got to win in terms of wellbeing, you've got to lose in terms of the environment.
The way I situate EVs, electric vehicles, in this space is that finally, we've come upon the beginnings of a technology that we can use to keep us productive, maintain our wellbeing, and it's actually green and cool. It doesn't burn the planet because there's still faults in that system. I mean, there's still lots of questions about how we manufacture that. There's still lots of improvement.
We've taken the first step to actually squaring the circle on saving our planet at the same time as maintaining our standard of life. This is a win all around. So you would think that those nations that are the frontier of making electric vehicles ought to be celebrated by humanity, everyone. Not only can we buy from them cheaper than we could otherwise, we can use this technology and keep our way of life while saving the planet. What could be better?
America, when it views how China is producing EVs raises objection. But it's raising objection not because it says, China is producing these EVs in an environmentally unsound way. It's not saying that China is using critical minerals that are polluting China's environment, both of which could be legitimate things to say and then investigate.
It says China's production is at such a rate that it's threatening our own industries. And there's a lot of truth to that. But you know what? That's the creative destruction of capitalism. That's how societies become more productive. That's how societies improve their well-being. One part becomes more productive. We encourage that. And then the part that's not so good at making that, we release those resources to go do something else.
America is right that this is a big shock. And those people need to be taken care of. Absolutely. No question. We need to figure out some way to adapt people from working in the automobiles industry that uses fossil fuels to do something else. And America could do that. America, Western Europe, they could do all of that. They ought to be doing that. That would help the transition to a greener, cooler planet while maintaining our way of life.
But America has chosen to say no. Our approach to this is that we want China not to produce so much. By China not producing so much EVs, we give a little bit of breathing space to our own EV industry. And I think that's right. But think about what that's doing to our planet. When China produces fewer EVs, we have less green technology. Humanity has less green technology available.
When America is supporting an inefficient automobile EV industry, it's making cars that are more expensive, not as nice, as good as the Chinese ones, and we have to buy that. So on many, many fronts, this action of America taking the stance that I will keep China from producing as many EVs because otherwise China is simply exploiting its overcapacity is destroying our planet and it goes against the basics of how markets are supposed to allocate resources effectively.
You introduced a very critical idea here, Keith. You said, well, America could sanctions or tariff. And that's what I meant when I said America could try and get China not to produce as much, or it could subsidize his own EV industry.
Now, at first, that seems like is it just a play on words? Isn't it still industrial policy? Isn't it still distorting the market? All of which is right. But their impacts are very different. If America subsidizes its own EVs, then we will have more EVs, both from China and the United States. The global South, which desperately needs cleaner energy, cleaner cars, better green technology, will be able to latch on to this increased production.
America wins. It keeps jobs. It has a thriving EV industry. China faces competition that will force it to become more productive. The global South win because they have greater access to green technology. There's a very easy way here to think about how policy can be adjusted to make this a win-win outcome.
Instead, we're caught in a situation where the wrong policies are being chosen and that will both make all our economies less productive, lower our wellbeing and worsen the environment all at the same time. I mean, if there's anything that's an epic fail, this has got to be it. It destroys so many good things.
And that's a simple way to get around this, which is properly celebrate when countries have put together an EV industry that's actually successful and productive and try to emulate them, which is the same kind of industrial policy that we in Asia practiced in the 1980s and 1990s. Korea, Japan, Taiwan, Singapore, all looked at what the West was doing and said, we need to adjust our industry so that we can be competitive. We subsidized them. We improved education. We did all the things that would raise our productivity so we could be competitive. That's the right thing to do. That's the right industrial policy.
Keith 00:18:02
One thing that I've come to realize is that the government here from the start till now has been very big on, to a certain extent, subsidizing, but you don't see any tariffs in a sense because we're small and we're relying on trade. But there is almost no policies in maybe restricting the supply side. When we did it here in Asia, America did not suddenly say, there's this threat from Asia. We must do something.
Danny Quah 00:20:38
So when Singapore does it or Korea does it, Singapore did it, Taiwan did it, it was acceptable. But it was not acceptable across all of Asia. When Japan did it, America became very agitated. America began a worrying narrative about Japan as number one. And America took action against Japan when it produced much more efficient, better refrigerators, cars, TV sets.
America said that, you know, this is our technology. You've taken our technology and you're better at using it. This is unfair competition. So you don't have to be a 1.5 billion people economy. You can be a hundred million people economy and America will still get agitated.
You don't have to be a communist nation or a non-democracy. You do better at trade, America will still get agitated. Japan, ever since the Second World War, has been a Western-style liberal democracy. In every security agreement that the United States has made in the Indo-Pacific region, Japan has either been a security partner or a strong supporter. Japan is by no stretch of the imagination an ideological rival or competitor.
None of this kept America from concluding that Japan was someone that you had to deal with because Japan's economic performance was so much better than America's. So yes, I'm glad that Singapore being 4 million people does not sort of at this point exercise America's imagination on whether Singapore is too overwhelming a trade partner.
Today, Singapore still runs a trade deficit against the United States. In Trump's view of the world, America is winning against Singapore because they're running a trade surplus. But trade surpluses and trade deficits are never a permanent feature. They fluctuate.
At some point in the future, Singapore will be running a trade surplus against the United States. There's going to be a question in the post-Trump United States. How will that be viewed? And you can say, well, Singapore is small. It's only four million people. It's nothing compared to 1.5 billion. And it's true that for manufacturing, Singapore could never ramp up EV production to a point where, you know, the American automobile industry feels threatened.
But the world is moving into a domain where the things that carry value and are traded are not solid things. They're not, they're soon not going to be cars. They're going to be algorithms. They're going to be ideas. They're going to be artificial intelligences. And there's no guarantee that in the future, America will look at small states like Singapore and say, hmm, that's not a threat to me. There's no guarantee at all. The economic logic of the kind of things we're talking about says there's every possibility that that could happen at some point in the future.
Keith 00:23:01
What you've described is that in a certain sense, some of the Third Nations must suffer what they must, right? So then the question for the Third Nations are, is there a way out of this trap?
Danny Quah 00:23:21
That's a really important question. The third nation language that we're using, just to be clear, it comes from an idea that if the most likely confrontations that we see in the world today are between two great powers, there's a number one and number two, they're jostling for the number one position. And then everybody else is number three on down. So they're third nations. So even large economies are third nations. And I think that's a much better language than middle powers, small states. Everybody is a third nation.
So the challenge they're raising is, third nations merely price takers in the battle for great power supremacy? Or do we have agency, our own influence? Can we affect outcomes? And you've raised the question in a very natural way from our conversation, since we're talking about what everybody else does.
But there's actually a deep set of ideas in international relations scholarship that says that third nations don't matter, all beginning from Thucydides. So there are more modern writers who say that third nations like Costa Rica or Malaysia have no place at the top table for discussing the outcomes of great power competition.
But what you and I, when we sit here in Singapore and we see things that happening in the world, we feel that third nations, if the great powers really are caught in gridlock, that's a self-perpetuating vicious cycle. They cannot by themselves get out of that. The question is, can we help? Can third nations help?
And I would suggest yes. Third nations can help because when great powers are caught in gridlock, you only need a tiny epsilon, a little bit of a nudge to move away from the great powers, move away from gridlock. They cannot themselves generate that because they're focused on each other, but we can help.
Let me give a couple of examples. TPP, the Trans-Pacific Partnership. Many of us remember most vividly that when Trump became president, the first time, the day after that, he tore up the TPP agreement for the United States. And many of us felt very disappointed that America, which had been so strongly pushing TPP, had turned its back on it. Many of us think of TPP as an American idea.
But the reality of it is that it was a Singaporean idea. It was Singapore together with Chile, Brunei and New Zealand, extremely small states who came up with the idea of a Trans-Pacific Partnership Trading Coalition that would actually be good for us.
So the lesson I take from that is that small states, by being nimble with powerful ideas, can actually affect outcomes. They create ideas, groupings, they create organizations, they create movements that make great powers jealous that those great powers are not in this. The great powers want to come into this. And by coming into this, they of course give these movements validity and credibility and authority. But what we can't forget is that it was the small states, the supposed price takers who initiated these kinds of changes. TPP is one example.
So not nuclear nonproliferation, but the International Treaty on Controlling Landmines came out of a small state, came out of a grouping of small states that then tried to get the great powers who were involved in planting landmines around the world to stop doing that. This is a wonderful idea, but the great powers are unable to stop themselves from doing it because they're caught in gridlock. If I don't do it, the other guy will do it. So small states can build these kinds of movements.
There's actually a term for it now that's showing up in some writings, is pathfinder multilateralism. Pathfinder multilateralism is when small states or groupings of small states come together to build a structure that then takes on a momentum of its own. It's a pathfinder. You don't actually need a great power to be a pathfinder. Small states can do that. But by building the momentum of this pathfinder movement, you can eventually make it so that everybody wants to be part of it.
Put that another way, small states can nudge the great powers out of gridlock through pathfinder multilateralism. Harking back to a piece of language that we were using a few minutes ago, small states should not think of themselves as just price takers. We should not think of ourselves as shrimp and we take the great powers doing what they will, and then we just try to protect ourselves as best we can. We should be proactive.
Okay, by being proactive, to be very clear, I don't mean ridiculous things like small states standing up to great powers across a battlefield. No percentage there. You do not win against great powers in prosecuting international violence, an activity that sees increasing returns to scale.
But many valuable things in international relations are not of that form. And we have lost sight of what international relations is supposed to do when we focus on only things that go bang, wars, bombs, nuclear weapons. International relations is about much more than that.
And in all of that other domain, small states have a really important role to play, coming up with ideas, creating pathways or pathfinder multilateralism, nudging the great powers out of gridlock, helping move the world to greater cooperation, not by forcing the great powers to do what they don't want to do, but by allowing themself, by allowing the great powers to do what they do want to do. And there's a lot of space for that. It takes only our imagination as small states.
Singapore has been so successful at this historically, whether it's through Tommy Koh's work on United Nations Convention on Law of the Seas, intellectual property, trade agreements, that we often, if we think of Singapore's strategy in the geopolitical landscape, simply being that of a shrimp of some kind, just protecting ourselves, we actually do not give Singapore's history in international relations sufficient importance.
Singapore has been really critical at building many of these pathways of pathfinder multilateralism. And we need to acknowledge that and we need to see how we can build on that going forwards.
Keith 00:28:33
The poison shrimp analogy, I think it's appropriate if you only use it in the context of defense and not totalize it, I suppose. And I think what you pointed out is actually maybe the ethos of what Lee Kuan Yew represented, which is that you can refuse to be a price taker. You believe that you have agency and you can do something about what you're given.
The other question that I had was about America's rise to the top because you've pointed out that right now America is like the old number one power. It acts as a hegemon. But it also emerged as the top power right after World War II, where you pointed out that they actually deviated from their isolationist stance, right? And then they rose to the top. Can you take us through the history of how they emerged as the world's leading power?
Danny Quah 00:31:13
Okay. That's a really important part of this discussion to fill in, because I think we're standing on the verge now of a change in direction of America and world order. And to understand and contextualize this potential change in direction, we need to understand where it came from.
Exactly as you say, for a long time, for a large part of its history, America was the isolationist nation. It was immensely productive in agriculture, in chemicals, in industry. It was an extremely wealthy nation, but it was out of step with the rest of the world. It outlawed slavery much later than the rest of the world in Western Europe. It did not engage with the rest of the world in a way that all of the Western European nations did. And then as you say, after the Second World War, came into its own.
That's what made it change its mind. Why did it go from being isolationist to being one where it was a benevolent hegemon? It looked out over the domain of the global economy and said, I can do good things in this and I will.
Now there is an interpretation that says America did all this to counter the challenge of the Soviet Union. The Soviet Union was vying with America for the hearts and minds of ordinary people. Because I know we don't think about it today like this, but back then, there was a genuine ideological rivalry. And Americans felt that there was actually a competitor out there, which if that competitor won, their way of life would be replaced, their way of life would be threatened. Nobody thinks that today, but that's what it was back then.
So there is an interpretation that America then in the late 1950s began to engage on trade and began to engage on the Marshall Plan for reconstructing Western Europe to actually reach out to the rest of the world and be helpful. In doing that, it did a number of things. One is it brought along the rest of the world. It made the rest of the world a bit more prosperous. And in doing that, it felt that it could show the rest of the world this was the way ahead to the future, not what the Soviet Union is doing, but open markets, liberal democracy, the things that we are doing is the way ahead for you. And so it spread across the rest of the world.
Now, at the same time that it was doing that, I think there was a happy coincidence that there was also the emergence of a body of ideas that said that was exactly the right thing to do. Even if you had to have somebody do that, even if you didn't believe in America's mission of countering the Soviet Union, that was exactly the right thing to do.
And this is a body of work that's sometimes known as hegemonic stability theory. The person most associated with that was an MIT economic historian, Charles Kindleberger, who had studied the Great Depression. And he said that what actually brought the world out of the Great Depression was the fact that there was a single large economy, the United States, that chose to spend, to refresh the banking system, refinance the economy.
So that America did that was an engine of growth for everyone else. But then in Kindleberger's reasoning, it wasn't just an engine of economic growth. It then also became a guarantor of political stability, which then had further payoff.
So Kindleberger's idea was that the world as a whole needs a consumer of last resort. When the whole world is depressed, nobody's spending anything. You need an America or the largest economy to step up and spend, consumer of last resort. But America was also lender of last resort, security officer of last resort, importer of last resort. It did all these other things. It became the guarantor for the world. It was the benevolent hegemon.
So there was a lot of coalescing of ideas and political reality that led America to its straddling the world as the successful global hegemon. And when I say that, no one at that time would have suggested that America was imperialistic, was replacing the old colonial system. America was doing all this to benefit itself, and at the same time, it benefited all the rest of us. We were all on this journey that would lead to greater prosperity for everyone.
So all of that brought the global economy through the 1950s, the last half of the 20th century, into the first decade of the 21st. And this was an era when I think three great ideas drove the world and drove America.
Keith 00:36:41
One was economic efficiency. That when you do things, you organize your economy, you're efficient, that's the best thing you can do.
Second was the idea of comparative advantage. I might be America, the world's most successful economy. I've got the most successful, most productive machines, and you are somewhere just beginning your journey of growth. Comparative advantage says, don't worry, by trading, both of us will benefit. It's win-win.
The third great idea was that of convergence, that there would be political convergence and economic convergence. And by political convergence, this was the idea that as nations grew, as they became richer, their appetite would evolve in the direction of an American-style liberal democracy, that all nations when they grow will become like America.
And this carried the global economy through seven decades of wonderful growth. In that time, the Soviet Union collapsed under its own weight. China was brought into the global trading system. Everybody benefited.
And when China came into the global trading system, it was, you know, there were still vestiges of the old Cold War mentality. There were many in America who said, China is a communist nation. How can we let them into the international trading system?
Bill Clinton, at the end of it all said, look, I know you're all worried. Many of you worry about China threatening Taiwan and its neighbors. And we should not encourage that. So how do we bring China into the international trading system? Aren't we actually encouraging it?
Many of you worry that China does not respect labor rights and human rights. We should not be rewarding it by giving it most favored nation status in international trade. Many of you worry that China might be an international proliferator. We should not empower it by allowing it to increase its prosperity.
But Clinton then said something very wise. He said, the question is not whether we in America approve or disapprove of China. The question is, what's the smartest thing for us to do? What is the win-win outcome we can generate?
The win-win outcome that we can generate is as exactly as described, America being benevolent, allowing China to come into the international trading system. All of that was a wonderful story. The forces of economic efficiency, comparative advantage, convergence, brought the world, coalesced the world. And it was a very happy story. Everyone benefited.
China brought 650 million people out of poverty through international trade and manufacturing development. All of what used to be known as the Third World became richer. Singapore benefited hugely from this international regime of peace, prosperity, stability, and economic openness. That was a system that a small state that was capable, that was smart, that was hardworking like Singapore, completely was able to leverage. This was good for everyone.
Keith 00:40:10
To be fair, of the three ideas, seems like the point on convergence wasn't the one that held out to be true. They believe, I think, to a certain extent that they believe in some form of a Kuznets curve, that as you become richer, your demand for maybe democracy will increase. But it turns out that actually economic convergence might not mean political convergence.
Danny Quah 00:40:33
From the perspective of the people who were pushing the idea of political convergence, what you just said is of course very puzzling to them because they say it should have happened. I mean, and it was Seymour Martin Lipset at Harvard University, developed this idea of democratic convergence. As countries develop, they would automatically become more democratic.
Frank Fukuyama in the late 1990s wrote The End of History, where he said that, you know, our system of liberal democracy represents the endpoint of humanity's experiments in political government. This is the thing that everybody converges towards, whether it's because it's a luxury good, as your income rises, you want more of it, or whether it's because it's just a system that's sensible, right? Everybody should converge to it.
And then the world realized that no, actually, some of the most successful countries, some of those countries have grown the fastest, been most capable of bringing their people out of poverty are showing no tendency to move in that political direction. Moreover, their people seem to be quite okay with this. Their people are not agitating for ballot box, electoral style democracy.
This is not to say that their people might not want a little bit of freedom in this direction or another. They might want more personal freedoms, might want more different ideas to approaching media and communications. But are they agitating so that they can elect a president of China? I would argue no. There's nobody in China who's agitating for that. They're agitating for other things, other kinds of rights, more power to them, but they're working within the system to try and acquire those rights. They're not arguing for the system of government that the West has evidently converged on.
Danny Quah 00:42:33
This was a big shock. How can this be? All our theories didn't seem to work out. Some of the early movers in this idea would have been more relaxed about it. Like Bill Clinton, he said, what's the smart thing for us to do? It's not whether we approve or disapprove of China's failure to converge to our system. Is it good for us to continue to engage? And I suspect that the people in the room when Clinton asked that question might have continued to say yes today.
Richard Nixon, even earlier than Bill Clinton, his argument about bringing China into the system, having America be the proactive agent in this, was not about political convergence. It was about, what he said was, our planet is too small for a billion of its most creative people to continue to live in angry isolation, to cherish their fantasies, nurture their hates, threaten their neighbors.
His argument was not about political convergence. His argument was that we're all in this together and we'll all be stronger when everybody is stronger, even if we're different. So I think we've lost some of that preference for the possibility of diversity in the later, the Lipset Fukuyama and others belief that political convergence had to occur.
But be that as it may, there seems to be a disappointment in the American system that China has not moved in that direction. But I think it would be a difficult argument to make that this is why there's US-China rivalry today. For one, America seems to be very happy to have a personality like Donald Trump be president. Donald Trump is not somebody who's pressing for liberal democracy. He's not pressing for the same kind of ideals as the earlier writers might have been.
America is happy with that. So the conflict that America has with China has to be built on something other than ideological difference, ideological conflict. So the failure of convergence is an important part of the story, but it cannot be the entire part of the story. It cannot be the entire story.
Keith 00:44:23
So what drives this rivalry between the US and China?
Danny Quah 00:44:44
I think there are vestiges of the Thucydides-Mearsheimer thinking that says that, well, we're moving into territory we're really unsure of. But if we're sure of one thing is that if we're number one, we can handle it. So we have to be number one. So that's a version of the Thucydides-Mearsheimer idea.
There are some other, ideology is not the driver, as far as I can, sort of reading the evidence say, but there is another set of issues that have not often been talked about in geopolitics. And this is simply the impact of international engagement is one that has different effects on different parts of your society. Some people describe this as, trade causes inequality. I don't think that's a very helpful description, but it gets us started on thinking about this.
So let me say one fact. If you look over the last quarter of a century of prices of things Americans buy, well, the American Consumer Price Index over the last quarter of a century has risen. It's risen 65%. So that's just inflation.
Things that America buys from Canada, one of America's largest trading partners, have also risen in price 68%, so even larger. The things that America buys from Mexico have risen in price 49%. The things that America buys from China have risen 0.5% in the last 25 years.
That is astounding for many reasons. First, it's against what everybody else has been able to achieve. So China has been able to achieve a rate of productivity growth that's been able to keep prices low. And this is when 25 years ago, China was exporting t-shirts, plastic toys to America. Today, it's exporting computers, high quality steel, aluminum, the best technologies in the world, and it's been able to keep the price index low. This is an amazing achievement.
There were obviously you would, the first thing you think is America should be thankful. That's got a trading partner that's been so productive. But now put yourself in the position of a worker in the same industry that China operates in. All of a sudden, you are only able to produce at 65% price higher than China is able to. Your industry is wiped out.
So when America says, the China shock is China stealing our jobs, shuttering our industry, turning into ghost towns, once thriving middle-class American communities. It's not wrong. But what's happening is that trade is having a differential effect on the consumers from what it's having on producers in those same industries. Other producers that use high-quality steel, they're benefiting because now they have cheap high-quality steel. But if you are a steel worker, you're out of a job.
Now, America and most Western economies, just as whether they've drunk the political convergence Kool-Aid or not, they've certainly drunk the free market Kool-Aid. That says that, well, creative destruction is happening here. Workers, you better adjust and transition to a new industry. And Americans have done very little. The American government, the American state, the American society, generally has done very little to help these workers transition over time in a way sufficient that they can continue to make a livelihood and then do something else.
I'm not saying that the unemployed steelworker needs by tomorrow to become a Python programmer, not at all. I'm saying that they need to move to something else. It will take time and along that transition path, they can't just do it themselves. This is not denying that they will be involved in self-help. But circumstances are their self-help was limited given the situation they find themselves in.
In this story, America and other economies that are competing with China do have a problem. They have a problem of trying to intermediate between the good things that happen to their customers, to their consumers, and the terrible things that happening to certain workers in some industries.
This is a problem, it's a policy problem. It needs to be solved. But if you don't solve that, what you've done is you've created a class of people that are angry. They're angry at the world. They agitate. They move in a populist direction and they lead to political, electing political leadership that speaks to them, not necessarily in a way that's cognizant of everything that's happening in society, but that speaks to them.
So it leads to special interest politics and it leads to a very dangerous kind of populism and a very harmful way of looking at the rest of the world. It's not about somebody else is more productive than you, not at all. It's that your society is more productive, but you haven't taken care of segments of it.
Now, often that's thought of as inequality, but it's not just inequality because what I've just described will be a problem, whether it's happening to people at the bottom of the income distribution or at the top. You don't take care of those industries that are being competed against, you have a political problem. This is a political problem that all nations face and their governments need to be sensitive to this, governments need to do more than just continue to mouth nostrums about free market adjustment or hard truths about people needing to self-help. You've got to help people adjust. Because if you don't, the entire fabric of your society is poisoned. That's not good for anyone.
Keith 00:49:18
So in a sense, they're misdiagnosing the problem. It's a structural unemployment challenge that we face. It's industries that are never coming back. Jobs are never coming back. That was the language that Apple computer used when it told the president, look, I am assembling my iPhones in China. That's the only place I can do it. These jobs are never coming back. That continues to be true today. And what could the government have done in terms of re-skilling them? What are the policy options that they should have actively considered?
Danny Quah 00:49:46
Once it became clear that the American steel industry, or today the American automobile industry, is not in a position where it can help itself, policymakers need to be forward-looking. They need to ask, what are the industries of the future that my people can do?
Is it artificial intelligence? Is it using information technology? Is it digitizing my economy? Is it shifting my production to green technologies, technologies that will actually help the planet, for which there's huge and rising demand. China alone won't be able to produce everything that the world needs. There's no notion of overcapacity when it comes to green technology. This is a huge growth area.
Governments need to figure out how we transition workers into these new growth industries. The service industry is another area. For a long time, policymakers around the world thought that manufacturing was how you generate jobs. Service industry can be high value added, but not many jobs there.
Well, that might have been the case for industries back then. The imperative now is can you generate jobs in service industry when you are competed against by artificial intelligence and digital apparatus, that are better at you than doing some things, but terrible compared to humans and doing other things. Those are the areas where we need to be looking for jobs.
Now, where exactly those are, I can, you I spend my time thinking about these concepts, but industry people need to step up and say, these are the concepts we can work with. And here are the areas we need to move ahead.
Keith 00:51:18
A contingent idea is the issue of inequality that you say that's often a weaving boy that's used to maybe generate sentiment, but it's not well understood. So can you help us, decompose the problem?
Danny Quah 00:53:16
So that's a really important question because in our discussion already, thus far, we have come very close to saying that when certain industries are competed away, have their competitiveness completed away, those workers have to go find something else. And it's very easy to think that that means inequality is high. So inequality is an indicator of this.
But if we think about that story that you and I were just discussing, people getting displaced in the industry can happen anywhere. It can happen in a high income part of your economy. It can happen in a low income part of your economy. If it happens in a high income part of your economy, then actually inequality is lower when your economy suffers.
Now that thinking is what leads me to say, you've said, okay, inequality should not be a whipping boy for all social ills. I agree with you. In technical language, we might say it is not a sufficient statistic for what is wrong with society. It is not the poster child for social ills because we can imagine situations where society is performing terribly, but inequality is low.
We can imagine situations where everyone's being lifted, but inequality is high. And these examples are not just hypothetical. They're actually the real world. The real world has about 150 to 200 economies, depending on how you count it. 98% of those over the last 30 years, when inequality in 98% of the situations where inequality has risen, the bottom 50% have also seen their incomes rise.
So if you think about that for a second, that means that if you really care about the weak and vulnerable, and you really want them to do well, inequality is not what you should be trying to fight. If inequality comes hand in hand with the weak and vulnerable in your society, improving their wellbeing, you should accept inequality.
If on the other hand, the world is a zero-sum game, so that inequality is high, means that your poor people are poorer, then yes, you ought to fight it. But the world is not a zero-sum game and it's shown that over and over.
There is one economy, one significant economy, where inequality has risen and the bottom 50% have fallen. That economy happens to be the United States. So the United States, this world's most powerful economy, so the light that all of us look to, for examples on how to do things, has actually done things terribly. It has allowed its economy to grow, had most of that improvement in value accrue to just the very top end of the income distribution, and not just that, but actually immiserized the bottom 50%.
Practically nowhere else in the world has that happened. China's inequality has risen tenfold, but the bottom 50% have seen incomes rise sixfold. Over the last 40 years, Singapore's inequality has risen six times. Bottom income, bottom 50% of the income distribution have seen their incomes rise threefold. So everybody has benefited from growth. Inequality is almost incidental.
But if politically someone begins to point to inequality as the problem, then it's quite natural for people to feel, inequality is the problem. But by doing that, we've actually handicapped ourselves and prevented in some cases, in many cases, our weak and vulnerable from improving their lot.
So it's not just that it's worse than it's not being, worse than it's being a whipping boy and it shouldn't be, it is a misleading indicator in so many cases.
But having said this, I can tell you what are more valuable indicators, social mobility. You need to ask, the poor people becoming better off and do they see ever expanding opportunity? That is a much more valuable indicator for how the wellbeing in society is being distributed, what future prospects are. But it's also harder to explain to people.
It's getting people to think about things in a dynamic way, saying that, okay, you're in this situation now, but the pathway ahead of you has these different prospects and you need to be exploring them. That's a lot harder than telling people the reason you're not happy is because people in the next street over are richer than you. That's a very easy story for political manipulators to tell. It's very unfortunate because it leads to all the wrong kinds of policies.
Keith 00:57:16
And usually for those people who are at the bottom rung, it's about getting access to resources and oftentimes the solution is not redistribution.
Danny Quah 00:57:24
Exactly. You put your finger on exactly this. I might say this as the problem, if you really care about the weak and vulnerable in society, is the resource adequacy. Do they have enough resources to do what they need to do? Feed themselves, clothe themselves, prepare the next generation for being better off. Resource adequacy.
Income inequality on the other hand, it's an issue of resource disparity. It's how much I have compared to how much others have. It's disparity. The real problem in societies like the United States is how do we solve the problem of resource adequacy? The bottom 50% that are becoming poorer, the people living in ghettos, the people who are not getting into universities, or if they get into universities, they end up laden with debt. People are not finding jobs. You know, that's the problem. The problem is resource adequacy, not resource disparity.
Keith 00:58:11
But there is a social element or psychosocial aspect to it, which is that you will always compare yourself to the neighbor, right? Like the guy on the bicycle will compare himself to the guy on the motorbike, to the car, to the private jet. Psychologically, humanity today, most adults are built that way. We are envious of others. So my question is, is that intrinsic to humanity?
Danny Quah 00:58:34
Or have we been trained to think this? If we go and look at small children, are small children envious in that way? Or do small children share when they play? I submit that there are studies that show that envy is something that somehow creeps into our mentalities as we grow up. It's not intrinsic to them.
It's like in America, people like to say racism. Racism is a big problem. But when you look at young children, they're not racist, especially when they become adult and they're racist. That's absolutely true. But that also says that if it's true also for envy, we need to treat the problem at its source, not take the problem as a given.
My final comment on this is like, yes, envy is a problem. But then my question is, do we want to craft our public policy around a trait like envy? If we do, we're onto a very bad journey. Our job will never be done. You will never make people happy. I think we need to solve the resource adequacy problem. That's a real challenge. That's a real problem. It's not gone away by political showmen sort of diverting our attention away to other challenges.
Keith 01:00:35
You're a dean of the Lee Kuan Yew School, so naturally you to give advice, you need to be a good advice giver. If you were to give a piece of advice to someone who's entering the working world, what would it be?
Danny Quah 01:01:12
Continue to be open to possibilities. When I was a young person, when people entered jobs, many of them entered these jobs for life. That was extremely true in Japan. That was true also in the United States, but to a lesser extreme.
The world today is one where practically no one has a job for life because jobs become obsolete. Technology changes the things that humans can do best. Be flexible for this. Constantly continue to learn and improve yourself. And look to help people around you, help them understand the world around you.
Keith 01:01:47
With that, Dean Danny, thank you for coming on.
Danny Quah 01:01:50
Thank you.