[MUSIC] Perhaps the most important institution that influences economic performance is the government. In this module, we will discuss China's government system and how it influences the economy, and we will also talk about current challenges facing China. Winston Churchill famously was quoted as saying, "It has been said that democracy is the worst form of Government except for all those other forms that have been tried from time to time". And although Churchill was not specifically referring to economic performance, many have raised the concern that an authoritarian system will not provide accountability to leadership and that in an authoritarian system, there will not be enough freedom to promote innovation and the freedom of ideas. Recently, Daron Acemaglu and James Robinson, in their book Why Nations Fail: The Origins of Power, Prosperity, and Poverty, also commented pessimistically about Chinese institutions. They said that nations fail because their extracted economic institutions to not create the incentives needed for people to save, invest, and innovate". And referring to China, they wrote, "Even if Chinese economic institutions are incomparably more inclusive today than three decades ago, the Chinese experience is an example of growth under extractive political institutions". And so they are very pessimistic of China's ability to maintain their growth momentum once they are, once they finish kind of transferring existing technologies from other countries. Now, on the other hand, Deng Xiaoping and China's leaders have always exhibited a very pragmatic attitude towards governance, most exemplified by Deng's quote, "It doesnt matter if a cat is black or white, so long as it catches mice" qand his maxim that one should seek truth from facts. In this module, we will discuss different aspects of China's governance system. We will address the governance puzzle proposed by Acemoglu and Robinson and others, how could China have grown so well despite such poor institutions? We will then focus our attention on the incentives that face local leaders in China. The rest of the module will be devoted to trying to understand the current economic challenges facing China. First we'll provide a general overview of these challenges and then we will discuss two specific challenges. One, the need to rebalance growth away from investment and towards consumption and how to deal with the rapid increase in wages in recent years, which threatens China's international competitiveness.