The NewsHour with Jim Lehrer

RAY SUAREZ: Good evening, I'm Ray Suarez. Jim Lehrer is off. On the NewsHour tonight, our summary of the news, then: The latest on the search for victims of the Asian earthquake; Paul Solman peeks behind the curtain of China's economic boom; plus, a look at the government's tough new choices there; a report on the thriving video game business, and a conversation about game theory with Nobel Prize winner Thomas Schelling.

NEWS SUMMARY

RAY SUAREZ: Heavy rains hindered rescue efforts in South Asia today as officials warned the death toll could top 35,000. Saturday's earthquake devastated northern Pakistan and the disputed Kashmir region shared with India.

Across the region, rescue workers continued digging through rubble, trying to reach survivors. At least eight people, including five children, were pulled from crushed buildings. In Pakistan-controlled Kashmir, chaos broke out as workers distributed food, water and blankets. A volunteer digging through the rubble said more aid is needed.

DANIEL SAFIR: At least teams who send food to those people, clear out the way and send food to the people and take out everybody who is injured. Nothing to worry about the dead bodies, the dead we can't get back.

RAY SUAREZ: The Pakistan military said today it has not reached hundreds of isolated villages. Thousands are believed to be trapped there. Across the border, in India, a military spokesman reported a death toll of nearly 1,500 people. We'll have more on this story right after the News Summary.

A new wave of insurgent attacks killed more than 40 people across Iraq today. Most of the victims were civilians. A suicide car bomb ripped apart a bustling market in Tal Afar, near the Syrian border; 30 Iraqis died in the blast, 45 more were wounded. U.S. and Iraqi forces launched a major offensive in that city last month; 14 other Iraqis died in separate attacks across the country.

The spike in violence has killed almost 400 Iraqis in the last 16 days. The attacks came four days before Iraqis vote on a draft constitution. Shiite and Kurdish leaders have agreed to a last minute revision in the proposed constitution. In turn some Sunni leaders promised to publicly support the document. The revision would create a parliamentary panel that could propose changes in the constitution. Otherwise that charter couldn't be amended for eight years if it is passed by voters Saturday.

Also today, a top election official announced thousands of detainees will be able to vote, including Saddam Hussein. He said "all non-convicted detainees have the right to vote, including Saddam and other former government officials."

In Basra today, the British government expressed regret over an incident last month when British forces stormed a police station to free two undercover soldiers, killing and wounding several Iraqis. Today the government agreed to pay compensation for the casualties and damage.

In Afghanistan today, suspected Taliban rebels ambushed a police convoy, killing 19 officers. It happened overnight in a southern province. The gun battle erupted after about 60 insurgents ambushed a convoy of 150 police.

There's been a resurgence of violence by the Taliban in the last six months; about 1,400 people have been killed.

In Beijing today, the Chinese Communist Party endorsed a new economic blueprint pushed by party chief Hu Jintao. The five-year plan moves away from the breakneck pace of recent economic growth.

Instead the government will emphasize more sustainable growth and improvement in social services. China's annual growth has been 9 percent or more for the last eight quarters, but there has been growing unrest with the widening income gap between rich and poor.

We'll have more on the economic and social challenges facing China later in the program. Voters in Liberia headed to the polls today, in the first free elections after more than 14 years of continuous civil war. U.N. troops stood guard as people waited peacefully for hours outside polling stations; 22 candidates are running for president. Official results aren't expected until the end of the month.

President Bush hailed recovery efforts along the Gulf Coast today. It was his eighth trip to the region since Hurricane Katrina hit. Early this morning, the president put on a hard hat and a tool belt as he visited Habitat for Humanity volunteers north of New Orleans.

Mr. Bush also visited a school in Pass Christian, Mississippi. He told reporters there he sees progress.

PRESIDENT GEORGE W. BUSH: Despite of the fact that a lot of equipment was damaged and homes destroyed and teachers without places to live this; now this school district is strong. And it's coming back. And it's a sign that out of the rubble here on the Gulf Coast of Mississippi is a rebuilding, is a spirit of rebuilding.

RAY SUAREZ: The president also rejected calls to create a comprehensive rebuilding plan for the Gulf Coast. He said Washington should not dictate reconstruction but should, instead, support plans drawn up by local officials.

In other hurricane news the U.S. Army Corps of Engineers announced today the water is out of New Orleans. At one point 80 percent of the city was underwater.

On Wall Street today: The Dow Jones Industrial Average gained 14 points to close at 10253. The NASDAQ fell 18 points to close at 2061.

That's it for the News Summary tonight, now it's on to the earthquake catastrophe, winners and losers in China, video games, and game theory takes the prize.

FOCUS SHATTERED REGION

RAY SUAREZ: In Pakistan, time is running out for rescue teams hoping to find people alive in the rubble of the devastating earthquake. We have three reports from Independent Television News beginning with an overview from Jon Snow who flew over the shattered region today. A warning: Some of the pictures are disturbing.

JON SNOW: A flight out of the capital, over the mountainous evidence of previous upheaval, the first sign of earthquake, deep scarring in the mountain sides -- new fissures, new rock falls -- and then the grim flatness of Balakot, roofs flattened, people still evident amongst the wreckage. White tents on the river's edge, a small tent encampment in a football field.

The earthquake smashed the mountain road that divides Balakot's wreckage from that of Pakistan's Kashmiri capital, Muzaffarabad, and it's here that we landed.

In the war with India, over Kashmir, this had been Pakistan's military headquarters flattened now without the aid of bombs. No amount of camouflage would ever have made any difference this time. So militarized was this area that many of the victims are military, young soldiers caught in their barracks at 8:15 on Saturday morning -- only brought out today.

Each helicopter escorted still more wounded. They are carried on anything that will bear them. Most of them were only found today -- their number but a pinprick in the number that need treating -- that treatment unutterably distressing, small children with crushing and bruising injuries treated in a clinic with no water, no antiseptic, no painkillers of any kind. This child screams as doctors feel his broken legs. (Screaming) There is little beyond human contact and care to reduce the suffering.

Outside with rain beginning to fall, the Nafta family call out to us to shelter in what remains of their house, a family of 13, all but one wall is down. The stove is alight amongst the bricks. They tell me that they are at least all alive. Their perishable possessions are stacked on the bed.

Even as I'm talking to the daughters, the rain is turning to hail. Stones the size of marbles and the road outside has become a river. Suddenly water starts to cascade through what once was the wall on to the floor. We desperately try to lift everything on to the bed -- even trying to lift the bed itself.

This family that has survived the quake is now flooded out of all that remains.

FOCUS SHATTERED REGION

RAY SUAREZ: In Pakistan, time is running out for rescue teams hoping to find people alive in the rubble of the devastating earthquake. We have three reports from Independent Television News beginning with an overview from Jon Snow who flew over the shattered region today. A warning: Some of the pictures are disturbing.

JON SNOW: A flight out of the capital, over the mountainous evidence of previous upheaval, the first sign of earthquake, deep scarring in the mountain sides -- new fissures, new rock falls -- and then the grim flatness of Balakot, roofs flattened, people still evident amongst the wreckage. White tents on the river's edge, a small tent encampment in a football field.

The earthquake smashed the mountain road that divides Balakot's wreckage from that of Pakistan's Kashmiri capital, Muzaffarabad, and it's here that we landed.

In the war with India, over Kashmir, this had been Pakistan's military headquarters flattened now without the aid of bombs. No amount of camouflage would ever have made any difference this time. So militarized was this area that many of the victims are military, young soldiers caught in their barracks at 8:15 on Saturday morning -- only brought out today.

Each helicopter escorted still more wounded. They are carried on anything that will bear them. Most of them were only found today -- their number but a pinprick in the number that need treating -- that treatment unutterably distressing, small children with crushing and bruising injuries treated in a clinic with no water, no antiseptic, no painkillers of any kind. This child screams as doctors feel his broken legs. (Screaming) There is little beyond human contact and care to reduce the suffering.

Outside with rain beginning to fall, the Nafta family call out to us to shelter in what remains of their house, a family of 13, all but one wall is down. The stove is alight amongst the bricks. They tell me that they are at least all alive. Their perishable possessions are stacked on the bed.

Even as I'm talking to the daughters, the rain is turning to hail. Stones the size of marbles and the road outside has become a river. Suddenly water starts to cascade through what once was the wall on to the floor. We desperately try to lift everything on to the bed -- even trying to lift the bed itself.

This family that has survived the quake is now flooded out of all that remains.

RAY SUAREZ: The bad weather complicated the search for survivors throughout the region. Bill Neely is in the almost totally destroyed town of Balakot.

BILL NEELY: From what's left of a town that looks like a graveyard, they are running away -- the mothers who have no children left and who have only themselves now for comfort. The generation they gave birth to is gone. But who could blame them for running away from this, a crushed little boy.

In the ruins of Balakot's schools they break through the collapsed floors. But what they bring out is a sight beyond sadness. It is a little girl, in a green dress -- all broken. She and nearly 200 other boys and girls have already been pulled out and lifted away -- their bags and books useless now and then the work begins again.

And the work has paid off. A French rescue team using cameras to probe deep down into the schools saw a face, three and a half days after he was trapped in his classroom, a scared little boy. He's about 15 feet down; now it's critical the roof doesn't collapse. Slowly, astonishingly the boy's limp body is pulled from the hole and handed to his father. No one could quite believe it. Four other children were rescued like this. Four-year-old Fraz way too bewildered to eat or drink. Out of 400 children, he is one of the very few who survived.

The conditions here for rescuing anyone are getting worse. They think there are still the bodies of 150 children in this school. The last two little girls they pulled out alive -- that was 18 hours ago. And even that seemed amazing. But the weather is getting much worse now.

The rain lashed down on the bodies of children who had not yet been claimed by their parents -- perhaps because their parents too are gone.

RAY SUAREZ: Just north of Balakot is the town hit hardest by the earthquake, Muzaffarabad. It's in the Pakistani-controlled part of Kashmir. John Irvine is there.

JOHN IRVINE: This is no picnic, for here is where the family are living and the Pepsi parasol is their only shelter. A park with its bird cage and children's playground has become a refuge for hundreds, the homeless, the grieving, and the injured. This shocked girl spent hours with friends dying around her before she was rescued from the rubble of their school.

For days all they have had is each other but at least aid is arriving. This man was distributing a private donation. Desperation can be ugly.

Large lorry loads of food, water and clothing have made it through and every handout is mobbed. This is a pretty frantic rush for food and that's understandable. Most of these people have had nothing to eat for the last three days. The army is struggling to maintain any kind of control here.

In the city center these men were trying to recover the body of a government worker. Looking on was his son. Into his third day of waiting, Anwer told me that while it was his duty to be here, he was worried about the rest of the family. So we agreed to take him to them. They live on one of the high mountains that surround Muzaffarabad. It is a difficult road, a ten mile climb. Here too death and damage was extensive. But right now these survivors are the truly forgotten people of the quake.

ANWER CHANDHARY: This is my sister. She is asking about my father.

JOHN IRVINE: Anwer then told her the dreadful news that their father was dead. As we walked on to the collapsed house, Anwer explained that when the earthquake happened he was in Islamabad. He got here as quickly as he could, only to find family members trapped in the debris.

ANWER CHANDHARY: When I reached here -- so my mother was here and my young brother was here. I bring them out I brought them out.

JOHN IRVINE: How many hours were they trapped here?

ANWER CHANDHARY: About 12 hours, you can see, about 12 hours.

JOHN IRVINE: His mother said the rescue made her feel born again. After all she's been through, he hasn't the heart to tell her she's a widow. The family are now living in terrible conditions. They have only a little corn to eat. They will have to endure this existence in all weathers.

RAY SUAREZ: Still to come on the NewsHour tonight: China rising, video games, and a Nobel Prize winner.

SERIES CHINA RISING

RAY SUAREZ: Now, our continuing series on the rise of China as a global economic power and its challenges ahead. We begin with a report on investment in China and the role of the government. The NewsHour's economics correspondent, Paul Solman of WGBH-Boston, has the story.

PAUL SOLMAN: The Chinese economic miracle. You see it in the glitz and glimmer of the big cities, the hustle and bustle of new businesses. China's economy grew a dazzling 9.5 percent last year, leading the world, as it has the entire past decade. But to MIT's Yasheng Huang, the miracle isn't how fast China is growing, but how far it still has to go.

YASHENG HUANG: If you look at the economies after the Second World War, which succeeded in catching up and overtaking the West, each single one of them is located in East Asia.

PAUL SOLMAN: Huang is talking about South Korea, Taiwan, Japan, Hong Kong, and Singapore.

YASHENG HUANG: Then there are two East Asian exceptions: North Korea and China. And this is a remarkable fact. And China today has about a per capita income of $1,000 instead of $15,000 in Korea and in Taiwan.

PAUL SOLMAN: Why? The obvious answer is Chinese communism, which, starting in 1958, led the economy's great leap backward. Free market reforms begun 20 years later are credited with reversing China's fortunes.

But critics like Huang think China hasn't yet reformed its economy in the most important way: Fostering an open market not just for goods and labor, but for investment. And that's because so many of the banks and businesses in China are still largely controlled or owned by the government, he says, a lousy recipe for success.

YASHENG HUANG: The ingredients of the right economic system are that you have an economic engine that relies mainly on private property rights geared toward supporting private companies, private entrepreneurs, and private producers. This is a fundamental difference between China and the rest of East Asia.

PAUL SOLMAN: And, says Huang, the reason why China's major banks are on the brink of insolvency, its stock market's reeling. Just look at the Shanghai Stock Exchange. It opened with great fanfare in 1989 and Chinese citizens poured in their savings, in large part because the government wouldn't let them invest anywhere else.

Sixteen years later, the Shanghai Exchange has lost half its value and looks to be in a coma. Basically deserted, it's been the worst-performing major exchange in the world for the past decade, while China was the best performing economy.

YASHENG HUANG: How come you have an economy that is growing around 8 to 9 percent churning out poor returns? That shows to me that the investment returns must have been very low, and probably even negative.

PAUL SOLMAN: The returns on the money invested in its publicly traded companies, that is. If the stock market goes up, those companies are presumably making money. If it goes down, they're presumably not. Even the so-called father of Chinese venture capital, high party official Cheng Siwei, agrees that the vast majority of Chinese companies are losers, not worth investing in.

CHENG SIWEI: I think only 30 percent of the listed companies are valuable to invest.

PAUL SOLMAN: 30 percent?

CHENG SIWEI: Yes.

PAUL SOLMAN: Could you tell us which 30 percent?

CHENG SIWEI: Oh, no. No. This is basically a secret.

PAUL SOLMAN: Now, it's not that nobody's making money in China. It's just that, with government control of both the media and investment, there's no transparency, no way to know if firms are profitable; especially state-owned firms, more interested in preserving jobs than being competitive, says Finance Professor Chun Chang.

CHUN CHANG: They are producing certain products that are not necessarily competitive to the marketplace these days. But they still have a lot of people to take care of. They have these old people, usually employed many years ago. And these people kind of depend on state enterprises.

PAUL SOLMAN: Their corporate welfare system?

CHUN CHANG: Exactly. And it's hard to lay these people off because of stability, social stability concerns.

PAUL SOLMAN: On the other hand, says the professor:

CHUN CHANG: Central government has recognized this as one of the major problems they have to overcome. The second one is the financial system.

PAUL SOLMAN: The banking system also shows how badly investment has been directed in China up to now, as our colleague Darren Gersh of the Nightly Business Report found when he looked into it in some depth.

DARREN GERSH: Even official statistics show that China's banks are technically insolvent. If economic growth falters, some fear China's banking system could collapse.

CHEN XIWEN (Translated): The main problem is that the ownership of Chinese banks is very concentrated, mainly state- owned, since China has been under a planned economy for a very long time. The internal management is relatively loose because of the lack of competition.

PAUL SOLMAN: Loose to the point of corruption. Stories of embezzlement and bribery abound, but the basic problem is that loans have not been made on the basis of what kind of return they'll bring.

YASHENG HUANG: The non-performing loans in the banking sector are very, very high.

PAUL SOLMAN: The point is: Investments by stockholders or banks are only as good as the profits they generate. If China has been misinvesting its money, that would help explain why it's lagged so far behind its East Asian neighbors, which suggests that the Chinese economy could turn out to be less miracle than mirage.

WEN TIEJUN: Most of these visitors, they come to China, they said, okay, this is an economic miracle but behind the miracle, big trouble.

PAUL SOLMAN: Wen Tiejun studies rural China, where perhaps the economy's biggest headache throbs: Some seven hundred fifty million to a billion people, depending on who's counting, most of them dirt-poor, with hard-scrabble jobs.

WOMAN (Translated): We have only two acres and my husband and I can take care of them. That's why our children want to earn more money in the city.

PAUL SOLMAN: 60 percent of Chinese peasants now earn a dollar a day or less. According to Time Magazine, most have never even brushed their teeth; only one in five hundred goes to college; and the standard of living of the poorest peasants has actually declined since 2001.

MIT's Huang blames government misinvestment.

YASHENG HUANG: This is where China failed in the 1990s. The income gains for the peasantry were extremely modest; their growth was very modest as compared with the urban income growth and at the same time the peasants are now having to pay for many things that were guaranteed to them, free of charge, in the Chinese constitution.

PAUL SOLMAN: In other words, the government, which had lifted the countryside in the 1980s, stopped investing in rural education, health care and development. Instead, it channeled investments to state-owned enterprises based in and around China's cities to grow the economy and create jobs for the migrant peasants.

YASHENG HUANG: That's why, in the 1990s, you began to see these incredibly impressive modern buildings; you see infrastructures, you see industrial parks; a lot of the financing came from the savings of the peasantry.

PAUL SOLMAN: From their savings, from higher taxes on their dwindling incomes, from forced purchases of their land.

YASHENG HUANG: These kind of land grabs have occurred across the country: Numerous instances where the peasantry was forced to be evicted from their land and the compensation level was extremely low.

PAUL SOLMAN: This may explain the 74,000 protests and riots acknowledged by the government in China last year alone, such as this riot in a village 100 miles from Beijing, over the seizure of farmland to build a power plant, which left six villagers dead. This home video was bootlegged to the Washington Post.

But land grabs are not just a rural problem. Doing a story for the University of California at Berkeley, journalism grad student Joe Mullin got a hold of this footage of a government eviction to clear the way for urban development.

The tape was shot by the evictee, Sun Danlun.

SUN DANLUN (Translated): During the Cultural Revolution it was better. They would smash things in your house but leave the property.

Now it is much worse. My house may be demolished. For my family, it is a second cultural revolution.

PAUL SOLMAN: The evicter is the local Shanghai government, which hypes futuristic condos as the replacement for old buildings in its urban planning museum, not far from Sun's former apartment.

But the economic point isn't the unfairness of it all; it's that government is making the investment decisions, without the need to show a profit. And to most economists, that raises, if you'll pardon the expression, a red flag.

YASHENG HUANG: By my reckoning, a lot of these investments in China are not justified by the returns.

PAUL SOLMAN: Yeah, but given the huge migration of people from the country to the city, 20 million a year or something like that, all those migrants, they have to live somewhere.

YASHENG HUANG: But Paul, Paul, a lot of these luxury housing is not for economic migrants, poor farmers from Gansu Province; I mean, if you go to China, a lot of these housing properties are luxurious, they are for making money.

PAUL SOLMAN: But many, says Huang, are not making money.

YASHENG HUANG: In Beijing, there's a surplus of luxury properties. In Shanghai the property values have declined by about 40 percent this year mainly on the luxury segment of the market.

PAUL SOLMAN: I mean, are the buildings going to be empty?

YASHENG HUANG: Many of them are empty now.

CHUN CHANG: A housing bubble would be a big deal. It could cause more like an international crisis.

PAUL SOLMAN: Chang says the crisis of overinvestment in housing could lead to an exodus of foreign investors.

CHUN CHANG: They go out and then that will cause a lot of problems in China, unemployment as well as other problems.

PAUL SOLMAN: So the question is: Will China's investments pay off or won't they? Most observers think it's a safe bet that China's economy will grow in the long run.

But misguided investments could leave the country with buildings as empty for years as the Shanghai Stock Market, where the technology like so much the Chinese have invested in, looks great but, upon closer inspection, can't yet be fully trusted.

RAY SUAREZ: Some of the issues raised in Paul's report were on the agenda of the Chinese Communist Party's Central Committee. The party ended a four-day meeting today, announcing it would shift economic policy away from growth for growth's sake, and toward reducing social inequities.

For more we get two views, David Lampton is director of the China studies program at John Hopkins School of Advanced International Studies and Ming Wong is associate professor of public and international affairs at George Mason University. He was born in Beijing but is now a U.S. citizen.

Well, Professor Lampton, Paul has given us another way to look at the so-called Chinese economic miracle' -- China for all its growth rates as an underperformer. What do you think?

DAVID LAMPTON: Well, first of all, I think there are two sides. And you ended your package with the conclusion that it cannot yet not fully be trusted to be on a sustainable course. I think that's true. But I think there has been some superb performance in China's economy recently that we also have to take account of.

China according to the IMF, much of its growth now isn't coming from savings, it's coming from productivity increases. Higher education levels, and so forth. China's foreign trade and foreign investment has been increasing productivity. China's foreign trade has been growing eight times as fast as world trade.

So I think there are a great many positive factors that are at work in China. But when all is said and done, China's leaders are trying to move essentially from the 19th to the 1s century, 22 percent of the world's people. Nobody's ever done it. And I think at the same time we recognize these problems that were alluded to.

It's been a remarkable achievement to have over two decades of 9 percent growth.

RAY SUAREZ: Two decades of 9 percent growth; Professor Ming, if you look just at that statistic, will it sort of take your eyes off the ways, and Paul showed us the financial sector where China really has not lived up to its billing?

MING WAN: Well, you know, as Professor Lampton has pointed out, China has made some real progress. People's living standard has risen but at the same time there are also real problems embedded in the economic model. And if you talk to anyone in China now, they fully recognize all these problems.

One major problem is the growing income gap with related corruption and have lead to a mounting social unrest which destabilizes the country. The other problem is the rapid economic expansion has put tremendous strains on the environment. And the citizens have been complaining about it.

The other related problem is -- has China's growth has depended too much on the exports which leads to trade tensions with the rest of world. Neither of this is sustainable and clearly the party the conference that ended recognized these problems.

RAY SUAREZ: Well, the Chinese Communist Party noted that while people in mostly on the east coast of China are doing very well, right -- they are in a worldwide middle class -- people in rural China are among the poorest people on earth.

Is the Communist Party equipped to do anything about that?

MING WAN: Well, since this conference, right here, they are talking about shifting the focus from rapid economic growth for growth's sake to sustainable development. They have some progress-- we don't know the details yet. We haven't seen the actual five-area plan yet. But I personally doubt whether the new policy will have the intended effect.

Part of the problem is that whatever policy the party central wants to introduce it still has to depend on the bureaucracy to implement the policy. But the problem is that the bureaucracy is part of the problem.

Particularly on a local level, these are the people who are exploiting resources from the citizens through discretionary fees or land grab as the previous piece has just shown. And more important, the central party the central government can now push local government too much because these government officials are the power base of the party rule so in a sense you can ask do you want to cut off your limbs to feed to the poor. And that's not going to happen.

RAY SUAREZ: Well, why do you think, Professor Lampton, they're even doing this, embarking on this attempt to make the rural poor richer? Do they fear that even their monopoly of power is threatened by inequalities this large?

DAVID LAMPTON: Well, I think there are several factors. First of all these are technocrats leading China. They are paying attention to social science research elsewhere in the world that show as countries get to two and three thousand dollars per-capita income average, they become increasingly unstable, rising expectations and so on. So part of this is anticipation of problems.

Secondly, social unrest is demonstrably increasing. I met with China's premier not too long ago and he said the thing that keeps him awake at night is in a sense the increasing inequalities in China and the resulting unrest. Year before last there were 58,000 reported incidents, according to the government, this year 78,000. So we're moving up the sort of disturbance scale with some rapidity. So I think they're worried about that.

Also the leaders that are now in charge of China spent many of their formative years out in some of China's poorest province -- provinces, Tibet, Gonzsu and the western part of China. So I think it is personal experience, social science research abroad, and the demonstrable increase in disturbances in China now.

RAY SUAREZ: Well, you say you have been meeting with these men. And they are mostly men. Are you optimistic about their ability to handle these social tensions and close some of these gaps between the urban rich and the rural poor?

DAVID LAMPTON: Well, I think if we talk about solving the problems these are not problems that can be solved in your lifetime, my lifetime or the lifetime of these leaders and the next leaders. The question is: Can they be managed? And I think the record of the last two plus decades of Chinese leadership is that they've been able to somehow overcome problems that each stage we wondered how they were going to be able to manage it and were they, in fact, manageable.

So I think you are not well advised to bet against the Chinese leadership. But if you look at the magnitude of the problems that they are facing, you have to, I think, end as your piece did, that the future is not for certain.

RAY SUAREZ: But a tripling of social unrest -- people like the gentleman we saw being evicted from his apartment and just sent away -- is that managing?

MING WAN: Well, people are concerned about it. Certainly the party itself very much concerned about the problem. I do not believe that the Chinese government can resolve those problems without genuine political reform and there are no signs that the government is going to do that. And what that means is that the local government officials essentially have unchecked power. And there is no independent press. There is no independent judiciary and there is nothing that can stop them from doing what they have been doing. And even the central government can now do that. So the central government may have the right policy. But since the reform began in the late 1970s, the central government has lost much of the power to the local governments. And people are really concerned about it.

RAY SUAREZ: It sounds like you are a little more pessimistic than Professor Lampton.

MING WAN: I'm, you know, I'm hopeful that at least the government has recognized the problem. I'm not optimistic about the policy solution they have proposed.

RAY SUAREZ: And what about some of these parts that don't fit with the other parts like the real underperformance of the financial sector, is that something that's just comes with experience? Or does it show a real problem in this --

DAVID LAMPTON: I think there is a real problem with the regular financial sector. But the Chinese also have a saying (speaking Chinese) -- we will think of a way to deal with this. And there is an underground banking system. And one thing that the piece didn't mention is that the private sector or at least let us say the non-state sector in the Chinese economy is bigger than the state sector. So what you have is a very high performing, relatively speaking, private and quasi private sector that is making up for many of the deficiencies in the state-owned sector.

And it's really a race to see if the private and quasi private sector can absorb all the unemployment as it is being generated in the foundering state sector.

RAY SUAREZ: Gentlemen, thank you both.

FOCUS GAMING BOOM

RAY SUAREZ: Think the video game industry is just playing around? Think again, NewsHour correspondent Jeffrey Kaye of KCET, Los Angeles reports.

JEFFREY KAYE: For sheer in your face spectacle, few events compare to the Electronics Entertainment Expo or E3. This is the video game industry's annual trade fair where the titans and wannabe titans of the business gather to unveil their latest wares: Games of speed; whimsy; and combat: Lots and lots of combat. More than an assault on the senses, E3 is a testament to the growing size and clout of the video game industry. The business last year racked up more than $7 billion in game sales. As revenues grow, so do the industry's ties to Hollywood and professional sports which are eager to turn their blockbuster movies and best athletes into lucrative games.

NEIL YOUNG: I think if you sort of measured video games in terms of their cultural impact today and sort of where they fit for the use in young adults of America, it is as valid an entertainment form as music, TV, film, you know, literature.

JEFFREY KAYE: Neil Young is the general manager of the Los Angeles studios of Electronic Arts, or EA. EA is the world's leading developer of video and computer games. Last year it took in more than $3 billion -- thanks in part to such best-selling series as Madden NFL; The Sims and Lord of the Rings.

Young credits the increased complexity and realism of video games for his industry's growth.

NEIL YOUNG: When you are building a game really what you are doing is creating a world. You're creating a universe -- one like a film where every shot is carefully orchestrated and the filmmaker really controls sort of what the audience sees from shot to shot.

In a video game, the computer game, really what we are creating is we are crossing the world. And we're giving the player the tools and the rules to be able to kind of explore that world in a way that they kind of see fit.

JEFFREY KAYE: But critics of the industry say game makers too often create virtual worlds steeped in violence and sex. 16 percent of all video and computer games sold have been rated mature by the industry for violence and or sexual consent.

The latest conflict is over the most recent version of the Grand Theft Auto series. Already controversial for its digital mayhem, critics are also complaining about hidden sex scenes that proficient gamers can unlock.

But for game makers, controversies over content are just speed bumps in a rapidly growing industry.

VOICE: What the hell is -- oh Batman.

JEFFREY KAYE: One concern is mushrooming production budgets with some video games costing more than $20 million to make.

In their search for new ideas and talent to keep the game industry growing, companies like EA are increasingly turning to the ivory tower, forming partnerships with America's colleges and universities. One of them is the University of Southern California.

ANTHONY BORQUEZ: I think USC definitely would, you know, want to be the leader in game development and game research.

JEFFREY KAYE: Anthony Borquez the director of USC's Information Technology Program started teaching video game production at the campus three years ago. He admits academic colleagues were initially skeptical.

ANTHONY BORQUEZ: I think a lot of people are mistaken that, you know, you are playing games and having a good time in the classroom. When it very much -- it's very different. It's rigorous, probably some of the hardest technology that we've taught.

JEFFREY KAYE: EA is a major patron of USC's video game program. It has donated more than $8 million to the school. Much of that money has gone to found and operate the EA game innovation lab at USC's respected school of cinema television.

At the lab, researchers are supposed to blue sky developing video game ideas away from business concerns and market pressures.

RICK NELSON: The idea will be that you can grab a whole bunch of clouds and bring them over and you will be able to start a thunderstorm.

JEFFREY KAYE: Graduate student Rick Nelson's current project is a game called "Clouds."

RICK NELSON: I think that part of our goal here is to pro prove that you can have a lot of fun, and you can create pleasant systems that people will want to engage with without a lot of violence and without a lot of, sort of the destructive qualities of modern games.

JEFFREY KAYE: EA hopes the ideas and innovations that spring from this lab might one day be turned into marketable games, ones which might appeal to women and older people who account for a small percentage of gamers.

NEIL YOUNG: That's the real opportunity, I think, for us as we go forward in the next five years is answering the question that our company was founded on which is: Can a computer game make you cry? Can it move you emotionally? Can it resonate with you like a great piece of art resonates with you? When you put down the controller you know, can you have learned something about yourself? And that is the potential, really.

JEFFREY KAYE: To develop those games the industry is investing in the next generation of storytellers, animators and software engineers.

SPOKESPERSON: What were you thinking about doing?

SPOKESPERSON: I don't know if I want to do --.

JEFFREY KAYE: EA supports a video game summer camp at USC for high-school students from across the country. At the lab the teens learn how to turn their ideas into to finished and playable games.

STUDENT: I'm trying to get Dumbledore to shoot good magic at the death eaters and the death eaters to shoot evil magic at Dumbledore.

JEFFREY KAYE: Student Denise Hong sees a career for herself as a game designer.

DENISE HONG: I've seen like so many amazing games, and I feel that I want to contribute to like the production of like a really great game some day.

JEFFREY KAYE: But increasingly video game technology is being used for far more than fun and games. At USC's Institute for Creative Technologies or ICT, academics together with experts from the U.S. military and creative talent from Hollywood have formed a collaboration to create video games with a deadly serious purpose: The training of soldiers for real world combat.

SPOKESMAN: How is the boy?

SPOKESMAN: The boy has critical injuries sir.

JEFFREY KAYE: The ICT with $145 million in U.S. Army funding is developing simulations to try to hone soldier's street level, person-to-person command skills.

SPOKESMAN: Sergeant, send two squads forward.

JEFFREY KAYE: Dell Lunceford who used to be the Pentagon's top man for interactive technologies is the ICT's chief technology officer.

DELL LUNCEFORD: Kids that grew up playing games and living in an interactive world, it's just a learning mechanism that they are much more interested in.

SPOKESMAN: This is a hostile area; get out of here now.

JEFFREY KAYE: In a warehouse space dubbed Flat World, the ICT has created a virtual combat environment. Here real life visitors make their way through a violent and battle scarred city in the Middle East -- encountering threats that range from quick triggered insurgents, to rock throwing youths.

The starring character is a virtual U.S. Army Sergeant who explains in his own words why he was created.

SPOKESMAN: What can you do for the war fighter?

SPOKESMAN: Tough, realistic training is the key to building effective teams. My job is to try to make sure that soldiers get that kind of training every time they step into the virtual training area.

DELL LUNCEFORD: It will not replace the need for the soldiers to be able to go out in the desert and practice their skill, sitting in a real tank, moving around in real dirt. That will not go away for a long long time. The days of the Holodeck -- of Star Trek -- are not here yet but as a simulationist and a little bit of a futurist I think it is only a matter of time.

JEFFREY KAYE: Whether or not ICT's work will lead to success on the battlefield is an open question. But the center has scored one clear success with gamers.

A consumer version of Full Spectrum Warrior, a game which ICT at the helped to develop as a combat training tool for the Army went on to become a critically acclaimed video game.

CONVERSATION

RAY SUAREZ: Finally tonight, and speaking of gaming, Jeffrey Brown has a conversation with a winner of the Nobel Prize in Economics.

JEFFREY BROWN: In the late 1940s, Thomas Schelling worked as a government economist negotiating international treaties as part of the Marshall Plan. The experience led him to the study of how nations and individuals negotiate all types of conflict, whether a rush-hour traffic jam, or a Cold War nuclear arms race.

Yesterday the Royal Swedish Academy awarded the Nobel Prize in economics to Thomas Schelling for his work in what's known as game theory. He shared the award with Robert Alman, a professor at the Hebrew University in Jerusalem.

Thomas Schelling is 84 and the author of numerous books exploring strategy and decision-making. He taught at Harvard for many years before coming to the University of Maryland where he is an emeritus professor.

We spoke this morning at his home in suburban Washington DC.

JEFFREY BROWN: What's a simple way of explaining to the layman what is meant by game theory?

THOMAS SCHELLING: The simplest explanation is game theory is the study of any situation in which two or more people make decisions that impinge on each other. And each individual must take into account what the other is likely to do either simultaneously or in succession.

JEFFREY BROWN: You and I might want something or be competing for something.

THOMAS SCHELLING: That's right.

JEFFREY BROWN: And we would have to take into account what each other thinks?

THOMAS SCHELLING: Well, take a simple example. We're maneuvering in a traffic jam. I have to anticipate whether you are going to try to go first or are you going to let me go first. Sometimes we signal, as if I want to go first. Sometimes we try to intimidate each other and influence each other. But if we both do the wrong thing, we're both in trouble. And there are certain outcomes we can achieve if we take into account each other's intentions, motives and alternatives.

JEFFREY BROWN: In your press conference yesterday you described yourself as a user of game theory. What did you want to use it for? What were you trying to do?

THOMAS SCHELLING: I will give you an example. I once got interested in the question: if there is some weapon that may be susceptible to an arms limitation, let's say it is an alternate weapon you either have it or you don't -- anti-ballistic missile system, bombs in orbit, gas weapons, something of that sort -- how many different ways are there that the two parties to in negotiation might rank possible outcomes?

You would say well, there are four possible outcomes. We both have the weapons. Neither has the weapons, I have it and you don't. You have it and I don't. Each has a choice between two alternatives, have it or not. There are four possible outcomes. And then the question: how many different bargaining situations are there?

Well, it turns out that there are at least 16 importantly different configurations of preferences that the two parties can have. If you show these 16 outcomes to people in a 4 x 4 matrix it becomes perfectly clear what you are talking about. You can see that here is an outcome that both prefer compared with that one. Here is an outcome that I prefer but you don't. You can find certain situations in which it makes sense to reach an agreement, certain situations in which no agreement is needed, certain situations in which if one can choose before the other, it is an advantage to go first -- other situations in which it is an advantage to go second.

All of these things are hard to think about when I try to describe them verbally but if I had a blackboard and could show you on the blackboard, I could teach you in an hour how to use elementary game theory as a kind of accounting system to keep track of all the possible choices and all the possible outcomes.

JEFFREY BROWN: You talked about how this kind of thinking can be used in a whole variety of things, climate change and trying to stop smoking. You even said it helped in disciplining children.

THOMAS SCHELLING: Oh, sure. The kind of problem or one kind of problem that game theory deals with is, how do you make a threat that is credible, believable.

JEFFREY BROWN: Whether you are a nation or a parent.

THOMAS SCHELLING: Or a parent. How do you make a promise that is believable? How do you identify compromises when you are bargaining over something that seems to be indivisible? And I think for example early in NATO the question arose: how would the United States ever persuade western European governments that it would attack Russia with nuclear weapons if the Soviets attacked Western Europe? And this was known as the credibility problem. Was it believable that the United States would go to nuclear war to save Western Europe?

And to a game theorist, that's the kind of issue that excites the search for ways to commit yourself, and the way the United States committed itself was very simple: The United States, the secretary of state went to Congress and wanted authorization to send seven American infantry divisions to Europe. And the question arose: What can seven infantry divisions do against a Soviet attack? And the answer given, really, was they can guarantee that the war can't stop there. The Americans will never allow seven divisions of young American men to be either killed or captured without raising the war to a higher level.

And therefore, those seven divisions are there to convince the French that the Russians are convinced that the United States would respond to an attack on Western Europe. Well, that doesn't require game theory but it is the kind of thing that game theorists think about.

JEFFREY BROWN: Now forgive this layman's question, but: What does all that have to do with economics?

THOMAS SCHELLING: Well, I might answer not much because most of my use of game theory has been applied to things outside economics but in economics, I will give you another example. How does a union that wants to threaten a strike make the threat believable? And if it's on strike, how does it manage to make a credible threat that we can stay on strike longer than you can stand?

JEFFREY BROWN: Let me ask you a personal question about your scholarship. What is it that drove you as an economist to venture into these big issues of the day?

THOMAS SCHELLING: Oh, in 1948 I was just finishing graduate study. And I had an opportunity to go to Washington to join the new Marshall Plan which began in April of 1948. And I continued working on foreign aid negotiations until 1953, at which time I went off to Yale University on a faculty but decided I think negotiation is the most interesting thing I've ever been involved in, and I'm going to make that my study, so that bargaining, conflict, cooperation, all led me into the studies of strategy. And eventually I got into game theory.

JEFFREY BROWN: I read that you thought that perhaps because of your age you were not going to receive a Nobel Prize.

THOMAS SCHELLING: That's right.

JEFFREY BROWN: What do you mean, your time, you thought -- had passed?

THOMAS SCHELLING: I figured that when -- when the committee began giving prizes to people in their 50s, and I was in my 80s, if they really wanted ever to give me the prize, they'd better hurry up. And I decided clearly if they were ever going to give it to me they would have given it to me already. That was my reasoning. And my wife didn't believe me when I --

JEFFREY BROWN: But you had a happy surprise.

THOMAS SCHELLING: Yeah, I had a happy surprise.

JEFFREY BROWN: All right. Thomas Schelling, thanks for talking to us. And congratulations.

THOMAS SCHELLING: Thank you for inviting me.

RECAP

RAY SUAREZ: Again, the major developments of this day: Heavy rains hindered rescue efforts in South Asia, as officials warned the death toll from Saturday's earthquake could top 35,000. And in Iraq, Shiites and Kurdish leaders have agreed to a last-minute revision in a proposed constitution. In return, some Sunni leaders will support the draft charter. The revision would create a parliamentary panel that could propose changes in the constitution. Otherwise, the charter couldn't be amended for eight years if it's passed by voters Saturday.

We'll see you on-line and again here tomorrow evening. I'm Ray Suarez. Thanks and good night.