Conducted by Mike Schmidt

Richard Levin has served as president of Yale University since 1993. 

You spent some time in China over the summer. Would you tell us about it?

We were there for our fourth annual meeting of university leaders, which Yale has been running with the Ministry of Education in China. It is fascinating, the progress that Chinese universities are making toward reform of their curricula, reform of their admissions practices, and to some degree reform of their pedagogy. In the last four years the top universities have started to move from a European model of complete specialization in one subject for four years to the U.S. liberal arts model of a year or two of general education followed by a major.

It is incredible how fast they are making this turnover, and behind it is a philosophy that they need to educate their students to be more flexible and broader-gauged thinkers, so that they can be an innovative society when the competitive advantage of low-cost labor disappears. They are already anticipating what will happen in twenty-five years when they have absorbed their surplus labor, workforce wages start to rise, and they no longer have a competitive advantage in manufacturing. They realize what Japan failed to realize—that they will need to be an innovator to stay economically strong at that stage. They will have to be like the U.S. or Europe or the U.K., and they are trying to train the next generation to be broader thinkers and to be more creative. The universities have embraced this—it opens them up to more flexible thinking, and the academics are very happy with this.

You have made Yale the flagship of global universities. Many would agree with your assessment, recently articulated in Newsweek, that Yale’s activities in China and the flow of students across national borders will serve as a “powerful force for global integration, mutual understanding, and geopolitical stability.” Others might contend that to permit China to become a prominent player in the global knowledge economy is to invite its rise as an economic and military superpower. How do you respond to such assertions?

I have spent a lot of my career studying the economics of technology and the effects of knowledge on productivity growth and economic well-being, with a major emphasis on intellectual property. The major lesson I have learned is that you cannot stop the flow of knowledge. It’s going to happen anyway. A good example is our export control regime, where we have all this equipment that we can’t sell to China. Instead they just buy it from Europe. There is very little on our restricted list that the Chinese can’t get elsewhere. The truth is that if China has the will to invest in education and to build up a research infrastructure, we are not going to be able to inhibit that progress in any significant way.

I think the argument for engagement outweighs the argument for restrictiveness. The Chinese have concerns about regional security that motivate their military buildup, but they have no history of global imperialism. I think that they are sincere in wanting to coexist in a peaceful way with the United States as a major world power. That does not mean that we shouldn’t be vigilant in terms of our own military preparedness. We should be, of course. But we should not be antagonistic to their clear and deliberate efforts to reform their institutions and to conform more to the world regime. On the economic side, they’ve made very dramatic process in the last six or seven years since their decision to join the WTO. They have changed their legal system, their banking system, their financial markets—all of these things are coming into conformity with capitalist countries as a major force for integration.

In February 2000, Condoleeza Rice suggested that “trade in general can open up the Chinese economy and, ultimately, its politics, too. This view requires faith in the power of markets and economic freedom to drive political change, but it is a faith confirmed by experiences around the globe.” Yet the Chinese government seems to have maintained, even tightened, its grip on Chinese political culture. Will economic freedom beget political freedom in China?

I think it can. There is no doubt that rising incomes and a broader middle class could be expected to lead to claims for broader participation in governance and political decisions. On the other hand, China has a long history of recognizing the importance of top-down social control. Just read Jonathan Spence’s books about China’s transition from the Ming to Qing dynasties in the seventeenth century. In one of my favorites, Treason by the Book, Spence tells an amazing story about a dissident scholar. One of the interesting lessons from that book is how good the intelligence network was for the empire. With no instant communications, they had capabilities akin to those of a twentieth century intelligence agency. Because of the nature of China’s geography and the potential for the one nation coming apart, there has been a lot of focus on social control and keeping unity.

Will economic freedom lead to more political freedom? It could, but it is not an inevitability. There are other historical and cultural forces at work in China that put community above the individual. That sentiment is easily exploited by a monolithic party structure that could resist the rise of greater democracy.
That’s where engagement helps. Engagement, such as we have with the China Law Center, helping to instill a culture of the rule of law in China’s schools and courts and legislature, puts pressure on the right side of the equation.

Some might criticize Yale for engaging a regime with disdain for political, civil, and human rights. How does Yale’s engagement put “pressure on the right side of the equation”?

In two ways. The most direct and obvious way in which we are helping in the cause of protecting of the rights of individuals and, potentially, future democratization—which aren’t exactly the same thing—is through the work of the China Law Center. The Center has helped to draft some of the changes to Chinese administrative law. These changes are important enablers of China’s growing integration into the world economy. In other words, more bureaucratic regularity is demanded by international investors and by foreign companies working in China. The Center has helped to make administrative rules more regular and enforced with more consistency and to create appeals processes for administrative rulings.

Each of these moves, while serving the economic interests of international and Chinese companies, also starts to establish within China’s law and society a practice of recognizing the rights of the individual versus the state. In the last five years, we have seen a number of successful legal actions brought against the state. People have gotten redress, which would have been unthinkable a decade ago. This is a beginning. I don’t want to overemphasize it, however—people are still subject to arbitrary arrest and detention, and freedom of expression is clearly inhibited, no question about it. But the work of the China Law Center is helping to establish both the rule of law and, within that, a greater sphere of rights for the individual.

The other important contribution we are making is through our work with Chinese universities. If their aim is to encourage more creative and innovative thinking in China, one of the means to that is to begin to question the authority of received wisdom. Students should not be passive recipients of what the professor says but should rather challenge the professor and challenge each other in debate. All of this is conducive to creating individuals who are going to want greater control over their lives and destiny. I have spoken to Chinese officials on this subject and said, “If you are sincere in wanting to encourage independent thinking amongst students, it is going to have long-term political consequences.” They respond, “That’s inevitable; that’s going to happen.”

A wave of product-safety concerns over Chinese imports has developed due to the discovery of melamine in pet food, antifreeze in toothpaste, bacteria in seafood, and more. How will this affect China’s export machine?

Like all of the product-safety scandals of the last fifty years, from thalidomide to Tylenol and others, it very much depends on how it’s handled and whether people have confidence in the response. Some companies have been completely shattered by scandals like this, yet Tylenol had a situation where a product was contaminated, and it was brilliantly handled by Johnson & Johnson, the product remains viable twenty years later, and the company is strong. So how China responds is going to be critical.

China is one of the largest holders of U.S. debt, a fact many consider both a long-term economic and national security concern. What are your thoughts on this issue?

I don’t mean to sound like the perpetual optimist, but China’s holding our debt is somewhat reminiscent of the Mutually Assured Destruction doctrine of the Cold War. China has no incentive to precipitously flood the market with U.S. debt, driving up interest rates and causing a recession in the United States, because the U.S. is the major market for China’s exports. China’s holding of all these U.S.-denominated assets in a sense just strengthens the economic interdependence of the U.S. and China and in a curious way makes China unlikely to do anything massively disruptive. Now, the situation could deteriorate just as under various Cold War scenarios in which you could imagine China deciding it would hurt itself in order to hurt the U.S. more. But I don’t see that. I think they are recognizing that the situation they are in isn’t a great strategic advantage.

That is part of the reason that China is beginning to diversify its asset portfolio and, at least with its incremental reserves, trying to hold more in yen and European currency. On the other hand, this move to a government investment company, like Temasek in Singapore—to diversify out of holding government paper into holding real assets abroad—is also going to strengthen China’s economic interdependence with the world. The values of their reserve will depend on U.S. and European securities markets. These are all probably very good signs, in terms of future interdependence growing so that they have stake in the health of the U.S. economy.

In the 1990s and after, trade flourished between the United States and China. Recently, however, a protectionist backlash has taken hold in Washington. How do you respond to such protectionism?

To me, it’s astonishing that after 230 years in a free society that has benefited enormously over its history from the wisdom of Adam Smith, we don’t remember his basic lesson. Protectionism is bad for everyone but the narrow interest groups that might be protected by certain particularistic legislation. The lesson in Adam Smith and the lesson today is that free trade creates wealth on all sides. Of course, there can be losers in the opening of countries to trade, such as particular industries that face competitive imports. The remedy is not to protect the inefficient industry. The remedy is to create adjustment mechanisms to support transition of the home country’s resources, labor and capital into other uses.

We had these debates around the Corn Laws in Britain in the 1840s. We had these debates disastrously around the Smoot-Hawley Tariff Act in 1930, which had a major impact on the length and severity of the Great Depression. It’s just bad economics to talk about protection. I’m particularly disappointed that the Democratic Party is moving in this direction. Bill Clinton, whatever you might want to say about his eight years of service, was a consistent supporter of free trade and expanded its domain, and the U.S. and the world economy flourished as a consequence.

There are a couple of pieces of legislation under review now that would be deeply problematic. There is a bill that a Senate committee passed recently that could lead the way to the imposition of a countervailing duty on all the imports from a country with an undervalued currency. That’s just a ruinous recipe. It’s a very bad idea.

Is the currency manipulation real?

I think that the Chinese are clearly not letting their currency float to where it would go. I think for a number of years, until maybe two or three years ago, the current account was fairly balanced in China. Today, there is a big current account surplus. The currency should adjust in line with market forces, but you have to understand that there are reasons that the Chinese do not want to adjust it quickly. Prior to a couple of years ago, the main reason that they did not want to adjust it was the worry about the instability of their financial system. Liberalization hadn’t taken place, and the RMB is not fully convertible within China. So they were concerned that they could have bank failures and a big collapse of their internal banking system with a revaluation. Today, that is less of a risk because they have successfully infused more reserves into the banking system. They have used over a hundred billion dollars of central reserves to strengthen their major banks. They have attracted foreign capital, so three of the four big banks now have investment from major U.S. and European banks. China’s banks are in sounder condition than they were a few years ago.

The current argument against moving too fast is one of which most Americans aren’t aware. If you raise the value of the RMB, rice imports from Southeast Asia would become much cheaper. The fear is that this would destabilize the agricultural sector. Falling rice prices in RMB terms would lower agricultural incomes throughout China. You still have more than half a billion people on the farm in China. Their standard of living has not risen while so much of China has had rising standards, so there is already a tension. To see a real decrease in the standard of living in the countryside would exacerbate social tensions in China. I think that’s the main reason right now that they want the currency realignment to happen very slowly and very gradually. It’s moved eight percent or so, but it probably should move twenty-five percent.

China’s inflation rate hit a ten-year high in July, raising the possibility of further tightening measures and increasing concerns about an eventual knock-on impact on the real economy. The Financial Times has observed that high inflation rates triggered the social unrest that lead to the 1989 protests at Tiananmen Square. Is this a major concern?

The two big concerns for the future development of China and the two things that Hu Jintao is most worried about are the rising disparities in income and damage to the environment. There is concern that disparities in income will cause such social unrest that they will have to slow down economic growth. As for the environment, the Chinese are beginning to understand that it is not just the global impact of their actions that is important. The impact on health is coming home to roost. Emissions are reminiscent of what it was like on Los Angeles or Pittsburgh in the 1950s before we got serious about pollution control. They need to address these issues.

What’s in store for Yale in China?

We continue to promote a wide range of student exchanges. Many of our students are going over there to learn the language, which is very positive. Increasing numbers of students are doing work internship programs in the summer, which provides a very good introduction for a lot of our students. There are an awful lot of recent graduates working in Beijing and Shanghai, and that is encouraging as well.
Institutionally, we have strengthened our joint research programs in Beijing and Shanghai, and the connections we have developed with university leaders and through the legal structure are all thriving. One new wrinkle: at our recent gathering of university leaders, I encouraged our Chinese colleagues to think seriously about sustainability initiatives on their own campuses. Just as we think we can help to model responsible environmental behavior in the U.S., so they might be able to offer a similar model in China. I got a very enthusiastic response to this suggestion. A number of schools—Tsinghua in particular—have incorporated state-of-the-art green technology into their new buildings. Schools like Tsinghua, Shanghai Jiao Tong, and Tongji, all of which are strong in engineering or architecture, are keen on advancing this agenda throughout China. There is hope that the university sector will provide some leadership on the environmental issues in China, which is very positive.
 

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