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Five-Year Plans

We go where our vision is. —JOSEPH MURPHY

Short-Term Disease

Ask a person on the street what he or she plans to do or be in five years and the likely reaction you will receive is a blank face. The truth is that most people just don’t envision themselves, let alone make plans, that far into the future. Research has shown that many often confuse medium-term with long-term tradeoffs and have difficulty with delayed gratification. A famous study by Walter Mischel, commonly referred to as the Stanford marshmallow experiment, showed that children who were able to refrain from eating a marshmallow in front of them—knowing that they would be rewarded with two later—were more likely to succeed as adults. Unfortunately, most of the children chose to eat the marshmallow immediately, giving up the prospect of receiving more at a later time. Despite the lessons taught in fables like Aesop’s “The Ant and the Grasshopper,” impatience for immediate pleasures often gets the better of us, and procrastination of undesirable tasks is common.

Multiplied over millions of people, we can delay to act as a society until disaster comes knocking on our door. The notion of energy conservation, for example, is an idea many embrace, but few actually find the discipline to execute. As a result, the compound annual growth rate of America’s national energy consumption has been 0.4 percent from 2000 to 2009, according to the statistical energy review yearbook published by Enerdata in 2010.

Likewise, the southern economies of Europe have been facing the likelihood of sovereign default and potential expulsion from the Eurozone unless they can increase their productivity and reduce their government spending in order to balance their fiscal budgets. But even after numerous bailouts and many public demonstrations by angry citizens, these countries are still struggling to pay the price of austerity measures such as postponed retirement benefits and reduced government pay. In the view of some citizens, the costs of being part of the European Union (EU) now seem to overshadow the benefits of such membership. Reform should have taken place much sooner.

Given both the proclivity of Americans to favor short-term rewards and our current system of democracy, which records the thoughts and mandates of the voting population, the ability to meet long-term goals and objectives could be compromised. In addition, other issues naturally related to preparations for the future include problems of objectivity, judgment, and other human shortcomings. All of these, if left to the whims of an entire population, may consistently fail to put the long-term interests as a priority.

Moreover, with two- and four-year election cycles, politicians who are supposed to help craft long-term policies of the country are instead systematically forced to think about the short- and medium-term issues of staying in office and being reelected. They realize that pleasing their constituents with promises of quick fixes, like bigger tax cuts across the board, is a more effective way to win elections than vowing long-term solutions to deep, structural problems like overhauling the entire tax code.

While some studies, as reported by James Surowiecki in his book The Wisdom of Crowds, have shown that large numbers of people can usually outsmart an expert in guessing the correct answers to questions, the studies do not measure what happens in real life when most choices do not provide clear-cut right and wrong answers. Most national policies would produce outcomes that lie along a continuum of gray possibilities in which the tradeoffs and benefits of one set of policies over another would require much more advanced analysis and knowledge. And if everyone in the sample population is ignorant or has been methodically misinformed about something, it matters not if you ask 100,000 people or 10. As Nassim Taleb stated in his book The Black Swan: The Impact of the Highly Improbable, everyone in Europe used to assume all swans were white because no one had gone abroad and seen that black swans existed in another part of the world.¹

The need to think past our collective mental predisposition for short-term gains due to shortsightedness is crucial. It has been shown that instinct doesn’t work particularly well in the complexities of the modern world when people are confronted with millions of choices that are associated with millions of consequences. As Barry Schwartz pointed out in his book The Paradox of Choice: Why More Is Less, when faced with too many options, people tend to become less thoughtful and reflective of any particular decision and of the likely short- and long-range consequences.² A more systematic plan should be in place that encourages working together to make good decisions for the long term and accounts for the human temptation to succumb to short-term needs. A system of checks and balances is in order, and one with carrots and sticks would be ideal.

Back to the Future

China’s leaders have used a partial solution to address this problem of short-term thinking. Borrowing the idea from the former Soviet Union, party members through the central committee and national congresses collectively shape Five-Year Plans as part of their national goal-setting exercise for economic and social initiatives. These plans create benchmarks to evaluate the performance of the government and are intended to inform the public of the Party’s strategies for economic development, growth targets, and reforms. They are further developed, executed, and monitored by the various ministries who report back to the Party congresses when they meet every year for two weeks.

These plans receive critical input from all factions of the Communist Party, and after much deliberation, they are published for the world to see as a way to provide transparency. But unlike empty campaign promises, these plans are treated like law and taken seriously by all members of the Party. When a goal is articulated in a Five-Year Plan, chances of the nation meeting it within five years is a near certainty, though on occasion, some goals are met earlier and others may be dropped.

The Five-Year Plan in many ways is similar to a strategic plan that a U.S. corporation would create. It is a document that provides a road map and focuses the discussion and analyses of all responsible parties when real results deviate from the optimum targets. But instead of meeting shareholder demands, these proposals incorporate the values, hopes, and demands of the population so that the Party is accountable to its own citizens the way a democracy should be. Each five-year plan has thus dealt with comprehensive aspects that matter to human development: capital goods, consumer goods, agriculture, transportation, communications, health, education, and welfare. The emphasis varies, but the primary elements remain largely the same.

As an example, China’s Eleventh Five-Year plan spanning the years 2006–2010 addressed the following measurable goals:

Economic growth

1. GDP up 7.5 percent annually from 18.2 trillion yuan in 2005 to 26.1 trillion yuan in 2010

2. Per capita GDP up 6.6 percent annually from 13,985 yuan in 2005 to 19,270 yuan in 2010

Economic structure

1. Share of service industry’s value added to GDP up from 40.3 percent in 2005 to 43.3 percent in 2010

2. Share of employment in service industry up from 31.3 percent in 2005 to 35.3 percent in 2010

3. Share of research and development (R&D) spending out of total GDP up from 1.3 percent in 2005 to 2 percent in 2010

4. Urbanization rate up from 43 percent in 2005 to 47 percent in 2010

Population, resources, environment

1. Population up from less than 1.31 billion in 2005 to 1.36 billion in 2010

2. Energy consumption per unit of GDP down 20 percent in five years

3. Water consumption per unit of industrial added value down 30 percent in five years

4. Coefficient of effective use of water for irrigation up from 0.45 percent in 2005 to 0.5 percent in 2010

5. Rate of comprehensive use of solid industrial waste up from 55.8 percent in 2005 to 60 percent in 2010

6. Total acreage of cultivated land down from 122 million hectares in 2005 to 120 million in 2010

7. Total discharge of major pollutants down 10 percent in five years

8. Forest coverage up from 18.2 percent in 2005 to 20 percent in 2010

Public service, people’s life

1. Term of education per capita up from 8.5 years in 2005 to 9 years in 2010

2. Coverage of urban basic old-age pension up from 174 million people in 2005 to 223 million people in 2010

3. Coverage of the new rural cooperative medical care system up from 23.5 percent in 2005 to over 80 percent in 2010

4. New jobs created for urban residents reaching 45 million in five years

5. Number of rural laborers transferred to non-agriculture sectors reaching 45 million in five years

6. Per capita disposable income of urban residents up 5 percent annually in five years, from 10,493 yuan in 2005 to 13,390 yuan in 2010

7. Per capita net income of rural residents up 5 percent annually in five years, from 3,255 yuan in 2005 to 4,150 yuan in 2010

The Twelfth Five-Year Plan of 2011–2015, which was approved in 2011 by the National Congress, articulates the importance of addressing rising wealth inequality and championing an environment for more sustainable growth. The document proposes more equitable wealth distribution, increased domestic consumption, and improved social programs, such as providing larger safety nets for the unemployed and elderly. The plan represents China’s efforts to rebalance its economy by shifting emphasis from investment toward consumption and from urban and coastal growth toward rural and inland development. The plan also reiterates objectives articulated in the Eleventh Five-Year Plan to improve environmental protection and accelerate the process of reform, which includes transforming its metropolitan areas into international financial hubs.

These long-term plans have historically been met with derision by the West because they were associated with the Soviet system of central planning, which led to their downfall. Even during the Mao years in China, officials lied about productivity in the Communist economic system because meeting the goals of the five-year plans took top priority as a measure of progress toward a Communist utopia. Numbers were systematically fudged when production failed to meet targets set by the state. The rapid disintegration of the Soviet Union and of Mao’s Great Leap Forward convinced Westerners that democratic capitalism proved resoundingly to be the best economic and political system.

Capitalism with Chinese Characteristics

China has learned to incorporate market capitalism into the central planning process so that market forces can be used to help rather than hinder the state achieve its development goals. Rather than suppress human nature and deny the natural urge for individuals to succeed and differentiate themselves from others, the Party harnessed the power of human ambition. China created an environment that triggered human productivity to be unleashed in the short term by allowing private businesses to keep profits while the state maintained a watchful eye on the country’s long-term goals in a constant feedback loop about the overall economy and state of affairs. The leaders observe whether their policies achieve the desired effects. If not, they revise them.

The beauty of China’s system is that market forces are permitted to flourish at the corporate and retail level, but the government’s role is to make decisions independent of fleeting considerations like returns on investment. China’s leaders realize that major purchases such as infrastructure require enormous sums of capital and long payoff periods, risks that private entities rarely undertake. The government thus fills the role where markets fail to work, providing an invaluable service to society.

A recent example of China’s courage to pursue comprehensive strategies is its investments in high-speed railroads.³ As soon as the rail lines were built, China invited members of the Western press to ride them. The media duly noted that the trains were largely empty, which is precisely the reason these trains had not received private funding in the United States. Commuter traffic can be erratic, and ticket pricing could be an issue for private investors who would want a quick return on their investment. However, since the enduring sustainability of the economy—not profit and returns on investment—is the top consideration for the Chinese government, it had no problem making the outlay of billions of dollars to build the rail system. The government believes that over time, the trains will be fully utilized as the population continues to migrate to the cities that are connected by the trains.

This combination of central planning at the government level and market forces for the private sector has proven to be powerful and a bit of a competitive advantage for Chinese companies. Since the Party accepts accountability for the plan, the government has been consistently able to make significant advancements in public infrastructure, both hard and soft (hard referring to tangible items such as bridges and roads and soft referring to intangible items such as education and pension systems), as well as effect necessary course corrections. Despite historically widespread corruption at the local level, Party policy is at least predictable. With this added certainty, Chinese companies know what to expect from the government and are able to move forward with their own operations accordingly.

U.S. Government Fogginess

In contrast, there is less certainty today about what the U.S. government will do since its policies can be subject to a fickle Congress engaged more in politics than in passing legislation. Through logrolling, filibusters, and other political shenanigans, standoffs between the two parties have largely resulted in a nation of decaying infrastructure where most electrical grids and bridges have not been upgraded for almost a century.⁴ Not only are ordinary citizens denied the means to improve their everyday productivity, but even corporate officials are left in limbo because they don’t know whether to prepare for changes or not. According to a former staffer who requested anonymity, Hillary Clinton’s policy statements when she served as Senator of New York were based on short-term public opinion polls that her staffers frequently conducted as opposed to articulating any convictions of her own. So when domestic lawmakers’ rhetoric vacillates with public opinion, U.S. companies often find themselves disadvantaged vis á vis their foreign competitors, who benefit from a more stable outlook and reliable government.

A recent example of U.S. uncertainty at its best is the passage of the Financial Reform Act of 2010 (the Dodd-Frank Act). Although the document is over 2000 pages, the law does not spell out specific changes that financial services companies must make; much of the detailed rule making will be subject to the discretion of special commissions and taskforces that at the time of this writing haven’t even been funded and assigned. This continuous state of limbo causes endless confusion, wasting valuable time of executives who would prefer to engage in strategic planning over devoting their time to ensuring they meet new compliance standards.

America’s lack of long-term planning also makes it difficult for the Chinese to work with U.S. government officials. In negotiations, foreign leaders never quite know whether the treaties they negotiate will ever get passed by Congress. Bilateral or multilateral agreements such as the Kyoto Protocol to address global issues are always at risk when those representing the United States don’t have the authority to implement them or when changes in leadership can reverse hard-won gains. For foreign governments that are on the receiving end of America’s inability to make long-term commitments, the experience is nothing short of frustrating.

The closest thing to a Five-Year Plan that the United States has now is probably the U.S. federal budget. The budget process starts with the Office of Management and Budget (OMB) making economic forecasts based on various assumptions such as population growth and anticipated government revenue. Next OMB projects either surpluses or deficits and recommends allocations or ways to address gaps when the budget is not balanced. However, these funds do not have performance goals attached to them. Although accessing federal funds at times requires jumping over many hurdles of bureaucracy, which are usually designed to limit disbursements to qualified applicants, this system does not necessarily assign targets or ensure performance. It would be the equivalent of a CEO giving out money to different departments without holding any of them accountable for results that would help the company achieve its goals. If the United States wants to rein in runaway Medicaid costs for example, measurable goals, like reducing the number of unwanted teenage pregnancies, might improve the ability to get the right resources in place to achieve desirable objectives.

The sad truth is that the U.S. government used to be more proactive and forward looking. The New Deal was a great example of this. The Hoover Dam and the Golden Gate Bridge were built during the Great Depression when the nation was suffering the most. Plans for interstate highways were also drawn up then. Had the country not made such large investments in its infrastructure, the subsequent boom in the decades leading up to the 21st century probably would have never been as strong as it was, considering economic prosperity depended on goods being moved all across the nation on these highways. Through the leadership of Franklin D. Roosevelt and other individuals in that generation, America developed the political will to act beyond the short term. Was it a one-time fluke or does the United States have the ability to develop the political will to act in its long-term interests again?

Market Myopia

Unfortunately, this shortsightedness in outlook and behavior in a democratic capitalist system infects not just the government, but also private industry. The prevalence of short-term stock price movements contributes heavily to the phenomenon of making decisions based on immediate outcomes, or what some refer to as short-termism. Many public companies have officers whose compensation is tied to earnings-per-share calculations.

While this compensation scheme was initially meant to align managers with the owners or shareholders for the benefit of the company, this practice inadvertently encouraged decision making based on short-term considerations because of the rise of hedge funds, and due to day traders and other shareholders, who are all more interested in quick profits than in enduring stakes in companies. As a result, these investors developed outsized influence in the stock markets. By early 2000, CB Lee, an employee at SAC Capital, stated that his hedge fund alone contributed almost 10 percent of daily volume on the NYSE. Within a decade, high-frequency trading was so prevalent that a single stock order sent the Dow plummeting almost 1,000 points within minutes for what is now famously known as the Flash Crash of May 6, 2010. Tying performance of a company to the volatility of the stock market inevitably leads to a greater emphasis on higher quarterly earnings reports at the expense of encouraging a more consistent, abiding approach. A byproduct of such short-term focus was shorter tenures across industries for CEOs because they couldn’t meet the impossibly high standards of delivering consistent growth every single quarter without incurring some investment expenses that would hurt profits in the short run.

Maintaining the ideology that the market is always right and the voter is always right begs the question of whether the democratic capitalist system is capable of systematically incorporating anything comparable to a Five-Year Plan.

Government Band-Aids

One thought is to leave more planning to bureaucrats as opposed to elected officials and appointed officers. Indeed, plenty of officials already carry over from administration to administration within agencies, and sometimes these individuals assist lawmakers, though it is up to the lawmakers to come to them as resources. Bureaucrats who are hired by the federal government to perform specific duties should have the required knowledge and the longevity of tenure to oversee longer-term policy initiatives. So instead of the traditional method of drafting a bill in Congress, the bureaucrats would craft the necessary language of the bill, free from the influence of lobbyists who have been hired to affect the voting of politicians. This may require amending the Constitution so that a bill would be permitted to become law if both Houses fail to veto it. In other words, the process would happen in reverse: policies would become laws by default when politicians fail to cooperate.

This process would have its own set of problems—namely, too much power invested in people who are not elected. But the situation is not so different from what happens today since most legislation is written by lobbyists, who are clearly not elected. The difference would be that the politicians who are now held accountable for bills they pass would escape that responsibility, possibly incurring more serious damage if corrupt elite interests stepped in to advance their own measures. While this reverse process has already been used in some legislative situations and has advocates like the former OMB director, Peter Orszag, it could become more widespread if some U.S. policymakers and constituents become sufficiently frustrated and impatient with the current process of legal sausage making. But whether bureaucrats or lobbyists write policy, Congress still has to vote on the measures. The heart of the problem is that Congress feels more accountable to the lobbyists than to the American citizens.

Another thought is to create capital budgets separate from expense budgets so that politicians can be held accountable to long-term investments separately from the vicissitudes of short-term entitlement handouts. By separating the expense items that do not lead to future productivity, like unemployment benefits, from investments that can lead to the country’s increased productivity, such as smart electricity grids, more transparency is introduced in the government budgeting process, which can potentially lead to better allocation of government resources.

The Obama administration has advocated the idea of a U.S. bank chartered specifically to make infrastructure loans, which is not so different from the policy banks of China.⁵ Before the introduction of Western reforms, China’s banking system was dominated by four large state-owned banks that conducted all its lending based on state directives. All these banks had mandates to provide funds for government projects. While these four banks are now largely commercial entities, which are more driven to make profitable loans than before the reforms took place, the Chinese government still owns the majority of shares and can issue directives to banks to loan for specific infrastructure projects and other policies that the government deems important for the country’s development. Obama’s infrastructure bank idea would act similarly in that the bank would borrow capital from the capital markets and relend the money to higher-return infrastructure projects that would provide stable long-term cash flows. In theory, the infrastructure bank could work. In reality, the ability of the bank to redeploy capital for an acceptable return to investors would mean that long-term planning would still be hostage to those more interested in quick returns by private actors. Perhaps the only way such a bank could be guaranteed to function is to nationalize it.

The public-private partnership (PPP) programs have been widely discussed in the United States as being a possible vehicle for funding long-term projects such as infrastructure, but have acquired a stigma among some critics. The public aversion to it seems to stem largely from the fact that many associate PPP with cash-strapped governments selling the crown jewels of public infrastructure to private financial entities such as private equity firms and bankers. These financiers, like barbarians at the gate, are circling the carcass of bankrupt government coffers to acquire public assets on the cheap. Many public assets such as parking garages, libraries, and bridges do not have accurate valuations since most of them have never been put to auction and are unusual enough that one couldn’t find comparable entities to get a fair price.

The public outcry against private takeovers of public assets is not without merits. After all, when taxpayers foot the bill for something, such as a bridge, it seems unfair that due to ineffective government management, that bridge is sold to private players at a bargain price. In addition, this transaction could inflict lasting economic damage since the new private owner could charge user fees. Let’s return to the example of the bridge. If a private equity fund buys it from a local government, the fund owners could levy a toll on a bridge that used to be free to cross. The citizens would then be subject to fee hikes but would have no say over the matter because, unlike the government, the private owner doesn’t have any obligation to respond to the citizens. The net effect would be a regressive tax since the poorest citizens would be paying a much higher percentage of their income for use of these assets.

Unfortunately, most citizens do not understand that this would be the likely outcome if they don’t have transparency and fiscal long-term planning by government officials to avoid such dire situations. Many citizens, aside from voting once every four years, absolve themselves from paying much attention to what goes on in government. Perhaps we feel too removed, too busy, or too powerless to make a difference. According to the Center for Deliberative Democracy at Stanford University, not only do Americans have one of the lowest voter turnout rates, but many also don’t have basic knowledge about the workings of our government. For five years, the Intercollegiate Studies Institute has been conducting a national survey of 30,000 Americans to gauge the quality of civic education in the country. In 2011, it found that only 50 percent of Americans could name all three branches of government, just 54 percent knew that only Congress and not the president could declare war, and a whopping 49 percent answered most of the 33 questions on the test incorrectly.

Usually, when people don’t know something, it reflects the low priority assigned to it because they don’t care enough to find out. As a result, systemic waste and corruption that permeate the U.S. government at the local, state, and federal levels have drained public coffers dry. An example of this sort of misconduct is a New Jersey municipality where public officials paid salaries and pensions to employees who “worked” for a completely fictitious school.⁶ Additionally, labor unions for government workers who help elect people into office often ensure that overly generous salaries and pensions are subsequently guaranteed to its members by the elected officials as rewards for voter support at taxpayers’ expense. The New York Post reported that Jerry Speziale collects a disability tax-free pension of $58,000 from the NYPD while he works as the deputy superintendent of the Port Authority Police Department for a $198,500 salary.⁷

As a result of widespread government unscrupulousness, budget crises across the country from California to New York cannot meet their fiscal obligations and must curtail government services such as K–12 public education. Public assets are now being seriously considered for sale to wealthy private investors as a means to raise funds to pay for all the previous government commitments and entitlements. Private equity funds have raised hundreds of billions of dollars in recent years to prepare themselves for one of the biggest raids of the U.S. government’s public assets in history. According to the January 2010 issue of Power magazine, “In 2004, $4 billion were raised for global infrastructure funds; in 2005, $8 billion. Between 2006 and 2008 $90 billion were raised—$37 billion in 2008 alone.” These funds are waiting to say checkmate to the government when the U.S. public is so desperate that they have no other options left.

Some may find this scenario hard to believe, but in fact, American financiers have made this move numerous times in history, but in the backyards of other countries. In the 1980s for example, U.S. policymakers from the World Bank and the International Monetary Fund had required Latin American countries to open up their local markets to U.S. businesses. U.S. banks lent cheap money to foreign governments, and when banks raised interest rates on floating rate issues, the foreign governments couldn’t repay many of the loans at the higher rates. When these governments defaulted, the U.S. banks and other financiers demanded that the foreign governments sell public assets as repayment for the loans. As James Henry documented in his book Blood Bankers, U.S. banks legally stole Latin American assets, including pension funds, ports, and other public assets for pennies on the dollar.

Investing in America

Selling existing infrastructure to raise badly needed government revenue clearly has negative consequences for the public. Partnering with the private sector to build new infrastructure could potentially have a better outcome. The reason this second option may prove more beneficial is that the public doesn’t lose anything and stands to gain if government joins forces with the right private players to create something useful that wouldn’t otherwise exist. In this scenario, the government would do what it does best by providing the proper regulations and guarantees for public land use, and the private partners would do what they do best by channeling creativity and innovation to deliver a project that benefits everyone. An example of such collaboration could be a research and development facility for which the government would sponsor long-term clean energy research. Leading private architects could design an energy-efficient research facility utilizing proven but underfunded groundbreaking technology developed by private entrepreneurs who need a few large orders so that they can become cost competitive with existing technology that is less green. In this way, the government and private industry can join forces to give the local U.S. economies a helping hand while investing in the future at the same time.

Thus far, not many collaborations have materialized. One possible reason is that entrenched interests who do not want to see innovation erode their current streams of income have more money and power to block government from partnering with the entrepreneurial outfits that are rich with new ideas but low on lobbying power and capital.⁸ Another possible reason is that many Americans distrust large government. They fear government waste and the shortsightedness of public officials. Finally, there may not have been many compelling projects being proposed. I used the example of a research facility because building infrastructure alone does not necessarily lead to competitiveness. In Portugal and other places, significant capital has been invested in upgrading infrastructure, but these investments didn’t lead to competitive industries. Coming up with worthwhile projects would require the collaboration of many thoughtful groups, and pulling off such feats are not easy to do.

In contrast, the Chinese government systematically partners with all registered companies, and in fact actively encourages innovation and entrepreneurship by building technology parks in most of the major cities where new businesses spring up. Recognizing that entrepreneurs lack capital and time, the government acts as both venture capitalist and incubator—providing seed money to build prototypes while also supplying research facilities, room and board, and other amenities that support a distraction-free environment, such as high-quality education for their kids and supermarkets within walking distance.

Originally, the technology parks were primarily R&D centers for large foreign companies like Microsoft, but the subsequent ones that have been built were designed to replicate the support network of Silicon Valley as a way to attract and house young technology entrepreneurs from around the world. By becoming its own venture capitalist, China has been investing in the next generation of talent with an eye to commercialize the new innovations. By 2010, China had created over 150 national technology parks and technology incubators.⁹ Many of them just allow general research while some focus on specific industries and applications. The technology park in Changping, for instance, will focus on everything 3-D: 3-D technology research and development, manufacturing of high-end 3-D products, check and verification of 3-D products, 3-D medical imaging services, and 3-D international conventions and exhibitions. It will also have a 3-D international research and development central area, a 3-D international enterprise park, and even a 3-D international theme park.¹⁰

Intellectual Property Rights Is the New Black

The leaders also recognize that to successfully transition China’s economy to one that relies less on export also requires an economy that can innovate its way out of its problems. Innovation, once a weakness for China—because it lacked intellectual property protection—has been given a boost from the government. China has historically condoned copying and stealing of intellectual property because the original Communist ideology promoted communal sharing of everything, including knowledge, which was considered a public good. Since almost all private property in China was destroyed or seized for the benefit of the community during Mao’s rule, intellectual property rights (IPR) certainly had no place in the national vocabulary. But with their push to drive innovation, the Chinese leaders now realize that IPR is a crucial prerequisite for motivating people to innovate, and they have allocated more resources for IPR enforcement.¹¹

Bashing against Chinese entrepreneurs originally started with the fashion industry, software makers, and media companies blaming the Chinese for copyright infringement and intellectual property violations. As a response, the Chinese government agreed to crack down on the stealing and passed laws strictly forbidding such acts. However, enforcing them has been a challenge since the legal system is still embryonic, and private law didn’t exist prior to 1996, meaning that lawyers only recently were allowed to represent private clients and not just the state. To put the situation into context, roughly one out of every 260 Americans is a lawyer, while in China, there is only one lawyer for roughly every 8,000 citizens. So a shortage of qualified personnel in China’s judicial system still exists.¹² But since China plans to address this issue with a “talent” plan, which I will discuss later in this section, the ratio of qualified Chinese lawyers will likely catch up to America’s in the not-too-distant future.

Getting the desired effect is not without its challenges. Just as U.S. venture capitalists could demand a pound of flesh from the entrepreneurs who seek financing from them, the government officials who run the technology parks can also demand terms that border on extortion in exchange for access to technological and business resources. A sample contract would go something like this: someone with a great idea and plan receives $3 million from the Chinese technology park to prove the concept. If product development succeeds according to plan, additional funds would be needed to design further, manufacture a prototype, and bring it to market. The government would offer another $10 million in exchange for 50 percent of the company and board representation, but the entrepreneur would also have to match the funds somehow by coughing up another $10 million. Some of the traditional channels to access those funds would be through foreign direct investments and initial public offerings.

Unfortunately, the Chinese technology park model also suffers from uneven relationships, which may derail chances for success. In the case of the Chinese model, even if the entrepreneur is anointed the CEO, he or she must obey Party guidelines. A government official who seeds the company and happens to be chairman of the board could easily oust the CEO over a disagreement because the CEO has only a minority shareholding in the company that he or she created. If the relationship is good, that business manager could be blessed with contract orders from the government; but if it sours, the entrepreneur could even face the prospect of jail time. While the financial terms may not be so different from those one could get from a traditional venture capitalist, and while investors often dictate to management what to do, the difference is that a VC usually would have some technological expertise. The Chinese government officials who are put in charge, however, may not have the relevant technological expertise. But since the top leadership recognizes that this is an Achilles heel, it will likely get rectified quickly as well.

While these investments have largely focused on catching up to the West, these initiatives could someday enable China to surpass the West. Such long-term investing in entrepreneurial partnerships is starting to pay off in the form of indigenous innovations coming out of China that are beginning to compete with the best technologies coming from the United States. In some areas, such as solar panel technology, China has already outdone the United States.¹³ As a result of long-term thinking and planning, innovation rates in China are approaching U.S. levels. Patent filings have been steadily rising. In 2009, 300,000 patents were filed in China, and projections estimate that the number will increase to two million by 2015.¹⁴

Is there a way for the U.S. government to entice American private investors to partner in a win-win situation the way the Chinese have done? Perhaps. U.S. investors who have the funds claim that they might be convinced to invest in new structures rather than purchase existing ones if the U.S. government didn’t have so many bureaucratic rules. George Bilicic, director of infrastructure investments at Lazard Freres, says that private companies invest abroad in places like Chile and Argentina because regulations are less onerous. Other financiers, such as Macquarie’s executive director Nicholas Hann, assert that public-private partnerships in Canada flourish because the Canadian government has standardized the process so that the government and the private sector can work together with efficiency and transparency. Streamlining the process is certainly an easier initial step for the United States to investigate and pursue. But the bigger issue—overcoming inertia of short-termism—remains.

During the 1970s, author E.F. Schumacher had a brilliant idea that could potentially reduce the role of speculation in stock markets. He proposed that private companies could partner with government; employees would receive 50 percent ownership, and the public sector would own the other 50 percent. Such an ownership structure would give both private and public stakeholders equal say in the business, and they would share in the benefits and externalities. The idea is that two long-term stakeholders are less likely to make short-term decisions and would make for a more responsible ownership of corporate action. Ironically, his idea has in large part been adopted by the Chinese. The Chinese, perhaps like the Japanese when they adopted Dr. Deming’s ideas, embraced Schumacher’s ideas because they didn’t have established interests defending an existing capital market system.

Investment bankers, financial investors, and others whose livelihoods depend on the status quo would likely oppose Schumacher’s proposals vigorously. But while his idea may be too politically unpopular for immediate adoption by the United States, less radical measures ought to be implemented. The Committee of Economic Development (CED), a think tank based in Washington DC, issued a report in 2007 to combat short-termism. Their recommendations included the following:

• Structure incentive compensation plans so that a significant portion of the income of the CEO and other top executives is tied to the achievement of well-articulated long-term performance objectives in line with corporate strategy.

• Insist that corporate reporting be redesigned to include useful non-financial indicators of value.

• Eliminate quarterly guidance on earnings per share.

• Promote succession plans that emphasize growth of managerial talent internally.

Though the report was written up in the Financial Times as it was published, there has not been a follow-on study to research the number of companies that have adopted the recommendations (if any), the reasons for why they did or didn’t follow them, or what the outcomes were if the recommendations were indeed pursued. Such studies would require significant resources and time, commitments that have yet to be made in a short-term–oriented society.

Local Power

Still others believe that more power should be devolved to the local level to achieve longer-term objectives. Carne Ross, executive director of The Independent Diplomat and a former British foreign service officer who served in places such as Kosovo, has argued for a form of anarchy because he believes that nation-states absolve people from public responsibility for their civic lives. If every citizen were to face greater accountability for his or her actions, then more care would be devoted toward long-term planning for the public good since top priorities for most people are their immediate environments and social circles. There is some credence to this argument. The Iroquois Confederacy, which existed centuries ago, always abided by the notion that one must keep the interests of the next seven generations in mind before negotiating anything. These were tribes who felt deep responsibility to their communities and conducted their affairs accordingly. Today, we need to find a way to replicate that level of accountability and foresight in our present political system. Anarchy may be far too radical, but if there is a way to transfer more power from the federal government back to the state and local governments, that may be our greatest hope in mobilizing Americans to care about our collective future and to act on tough political problems that continually get brushed aside.

On the surface, relinquishing more power to the local level as a solution to short-termism seems to be at odds with what the Chinese have done. But contrary to Western misperceptions, China does not act as a monolithic central government but is highly decentralized. The CCP has unambiguously empowered the numerous local officials who run the many Chinese provinces to such an extent that a common joke is that businessmen must pay 1000 yuan to dine with the president, but must pay 10,000 yuan to dine with the mayor. While the national leaders set national goals and establish public standards for everyone to follow, the actual governance is extremely decentralized and carried out almost entirely by the local officials. Most American businessmen who have conducted business in China can attest to this fact. Provincial government officials hold significant power over their jurisdictions, empowering government decision making to be much quicker and more efficient than democracies such as India’s where government approval requires wading through layers of bureaucracy. Likewise, terrorist groups, such as Al Qaeda, can be extremely effective in carrying out their missions because they are decentralized networks that do not require any hierarchical approval for action.

Talent Poaching

In order to engineer a smooth transition away from an economy that relies on cheap exports to a more balanced knowledge economy, China understands that it must develop its talent pool. Without cultivating and attracting talent, China will never catch up with the United States. China may have a population of 1.4 billion people from which to draw talent, but given America’s stellar track record of absorbing immigrants from all over the world, it can rely on the expertise of 7 billion people. China is keenly aware that of the 1.62 million Chinese who traveled to the United States to study since 1978, only 497,000 of them have returned. The U.S. Energy Department supported China’s worries with a report which stated that 92 percent of the 2,139 Chinese nationals who received science and technology doctorates from U.S. universities in 2002 were still in the United States in 2007.

Thus, to address this deficit, China’s leaders have created a separate Ten-Year Plan to develop talent as a national strategy. They define talent as those who can create something new and original with their own intellectual and creative abilities. By 2007, the CCP adopted a strategic plan for the years 2010–2020, which was advanced to the Party Congress and finally approved by all the top government officials by April of 2010. This document detailed many objectives they wanted to accomplish. The six major categories that they wanted to develop were (1) political leaders, (2) business entrepreneurs, (3) technical professionals, (4) highly skilled tradesmen, (5) agrarian expertise, and (6) professional social workers. They also created a separate program to address scholars in the humanities to engage in philosophy, cultural heritage preservation, and the arts. For each of these areas, they drew up specific numerical targets. For instance, they want to increase the total talent pool from 113 million to 180 million by 2020. They also want to raise the ratio of their population who had received higher education from 9.2 percent to 20 percent. And they expressed a commitment to raise the amount invested in human capital as a percentage of GDP from 10.75 percent to 15 percent.

In specific industries, their goals to be achieved by 2020 include the following:¹⁵

• more than 5 million people working in information technology, biotechnology, equipment manufacturing, and other industries requiring highly technical skills

• more than 8 million working in the service industries of law, education, media, healthcare, public relations, and disaster prevention

• at least 3 million social workers to handle mental health, trauma victims, senior citizens, and the impoverished

• at least 3.8 million research and development professionals

• at least 100 CEOs on the Fortune 500 list

The methods for achieving these lofty goals will come in various forms. More of the government budget will be allocated toward national research and development and national education. The CCP will also actively engage in recruiting globally to fill top positions in state-owned enterprises, which have historically been occupied by government-appointed officials. Additionally, Chinese citizenship will be eliminated as a requirement for holding top positions in major state-owned enterprises. A recent example of this was recruiting the chairman of Deutsche Bank Asia, Zhang Hongli, to become vice president of ICBC, China’s largest state-owned bank. Even before the Talent Strategy was approved, the Thousand Talents Program was initiated in 2008. To attract 2,000 high-level overseas professionals to relocate and work for the Chinese government, the CCP provided generous relocation costs and guaranteed competitive salaries. By January of 2010, 1,100 had already been hired. While roughly 50 percent of these were Chinese foreign nationals, the CCP actually hired the balance from other ethnicities and nationalities, which included British and Germans.

But just as important as having an entrepreneurial spirit, the government realizes that steering the country toward a more service-oriented economy away from its recent industrial past will again entail much knowledge transfer. In recognizing the need for know-how to transition successfully, China has been actively recruiting talent from the entire globe. The Chinese government hosted numerous job fairs in New York City to recruit Mandarin-speaking talent with Wall Street experience for Chinese financial firms in insurance, brokerage, and banking. Cities such as Shanghai also invited overseas Chinese young professionals to visit multi-day receptions to network and learn about service-oriented opportunities that the government was promoting. Packages offered to top professionals often included competitive salaries, housing, relocation, and other benefits. Just as corporations poach competitive firms for strategic talent, China’s leaders have taken it to an international level, showing extreme foresight and vision for their future.

The takeaway message is that America’s leadership should at least articulate its national goals so that voters can have objective benchmarks to measure whether their politicians are delivering. Reaching worthy goals often requires careful planning. If these objectives are memorialized in writing, the public is less likely to forget them and can also see whether government officials keep their promises. Plans are not laws, but they will have institutional backing complete with personnel, budgets, and accountability.

An Industrial Talent Policy Wanted

The United States can also formulate a talent development policy not too dissimilar from China in order to address the long-term demographic challenge of an aging population coupled with the relentless pace of technological innovation and globalization of markets. Any job that can be automated will be done by computers and robots in the coming years, so the United States must begin thinking about how to reintegrate back into the workforce people whose jobs will disappear at ever-faster rates in the not-too-distant future. In the recession following the 2008 financial crisis, most of the jobs lost were in high-wage sectors, and the jobs created were on the low end of the pay scale according to the Council of Competitiveness. Furthermore, the Council cites that between the years 2008 and 2018, senior citizens will account for 90 percent of the labor growth. The United States has not addressed the issue of how it will train mature workers, let alone younger workers, whose skills have been atrophying during long periods of unemployment. Arguably, the need for mid-career training may be just as essential for America’s competitiveness as K–12 education.

Without a national policy, employers will continue to react to short-term demands for profitability and fail to develop our talent pool for the future. The U.S. Head of Deutsche Bank’s legal department, for example, explained that as a client, he was only willing to pay top dollar for the time of senior partners in Western law firms but would not subsidize the training of law firm associates coming out of law school. For low-level legal work, he was only willing to pay the hourly rates of roughly $20 an hour charged by Indians in India. Obviously, it would be hard for Americans to swallow paying $1,200 an hour to a Washington law firm for any work done there on behalf of a client. There are certainly tradeoffs in both cases. Private companies will always be driven to behave in their own short-term self-interest to meet profit targets, which will be at odds with the national goal of devoting time and resources to cultivate future generations with the necessary skills to compete in an increasingly competitive world. The U.S. leadership must find a viable solution to bridge the gap between short-term economic behavior and long-term talent development. Unless the U.S. government takes a more proactive role in closing the gap, it is likely that more and more young Americans will leave the United States to work abroad, further draining talent from the United States.¹⁶

Swimming with Sharks

Foreign companies that enter China believing it is a big market opportunity often get burned because they are wholly unprepared for the competition. In America and in Europe, large companies who have large market shares are used to executing at a much slower pace because they have already created huge barriers to entry for those who want to compete in that space. However, in China, the markets are a free-for-all. One must be prepared to swim in shark-infested waters to operate in China. The Darwinian concept of survival of the fittest is exemplified in its purest form among Chinese businesspeople, who undercut in price, poach key employees, and engage in other aggressive business behavior simply to survive. Unfortunately, the General Electrics of the world, who enjoy protections in their home markets due to their political power, cannot replicate those cushy conditions in China. These large multinationals cannot hire lobbyists to persuade Chinese politicians to grant them the same special privileges, provide American-style bailouts, or pass unfair laws to ensure that they can profit in China in the same manner that they have in the United States. Whereas large foreign multinationals have used their market positioning to buy shelf space; their financial power to buy politicians, ads, and regulators; and their political power to blackmail potential competitors, they have become bitter that Chinese companies have beaten them at their own game. The CEOs of these companies who have been spoiled for decades in their home markets with uneven playing fields that favor them are now screaming at politicians to do something. Western CEOs must realize that the best defense is to have a good offense, and the secret to a good offense is to always anticipate the future. Even Wayne Gretzky has said, “A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be.” The irony is that the future is less certain for large corporations when fresh competition is coming from everywhere, Five-Year Plans notwithstanding. With the Chinese government as a deep-pocketed financial backer with long-term goals, entrepreneurs in China may for the first time since the Industrial Revolution have a shot at changing the world. This could eventually force American corporate executives to stop listening to short-term, earnings-oriented analysts on Wall Street and re-start long-term investments in research and development for a change.

Last but not least, some will argue that long-term plans make sense for China because they have the United States as a model to emulate, but that such plans are less useful for developed countries who are pathfinders that are not trying to catch up with others. In other words, long-term plans may not speed up economic growth for advanced countries like the United States whose incremental improvements come from discovery of new frontiers and not from racing to beat a forerunner. I agree that a pathfinder must invent its future and make decisions under real uncertainty. But encouraging long-term planning and path finding aren’t mutually exclusive ideas. In fact, these two go hand in hand because path finding requires much research, and research requires advance planning and long-term budgets that are shielded from short-term considerations in order to invent the best possible future in the face of uncertainty. Growth rates in the West have been unnecessarily hamstrung by special interests blocking entrepreneurs. Short-term profits have consistently trumped longer-term investments as priorities. But rapid growth rates can reappear for pathfinders when they hit upon the next taproot invention that sets off the next explosion of exponentially increasing productivity. Just as Thomas Edison was a pathfinder in his day, we need to budget and plan for more people to perform Edison-like path-finding work.

Currently, America is not optimizing our democratic capitalist system because of our collective tendency to think and work in the short-term without comprehending the effects on the entire ecosystem. Thinking laterally and seeing beyond immediate boundaries have been further handicapped by entrenched interests who protect their turf by blocking solutions that could lead to more sustainable outcomes. As a result, balancing interests between different people across time is not functioning the way our Founding Fathers had envisioned. Although we have attempts at longer-term thinking such as the No Child Left Behind Act, we need to incorporate more of such thinking into our current system. When Goldman Sachs was still a partnership, legend has it that its employees were told to be “long-term greedy, not short-term greedy.” If the United States follows this advice, long-term greed could be interpreted as developing the conditions today for ensuring long-term health and wealth for tomorrow. Not only should we consider the long-term well-being of our own nation but of all nations since, like passengers on the Titanic, we ultimately all share the same ship called Planet Earth regardless of how rich or poor we are. The consequences of short-term behavior will catch up with all of us. So whether we tie more measurable objectives and timelines to budget line items or devolve more power to the local level so that citizens can see the tradeoffs more clearly and appreciate how their own behaviors shape those tradeoffs, we must begin acting now while we still have the luxury to think about the long term. As economist John Maynard Keynes famously said, “In the long run, we are all dead.” Let’s not wait until death is upon us before we think about changing course.