China's Role in the 21st Century Global Economy, 1999

Beijing, China

October 25, 1999

Thank you very much Vice Dean Chen for that kind introduction, and thank you Professor He for hosting my visit here today. Let me just say that as a graduate of M.I.T. in the United States, I am very pleased to come to the M.I.T. of China. A very distinguished graduate of your university came to M.I.T., Premier Zhu, or perhaps I should say Dean Zhu, and made quite an impression when he visited M.I.T. earlier this year. Either way, it is good to hear that the great minds of Cambridge and Beijing are working together to educate the management leaders of the next generation.

What I would like to do today is to talk about a changing global economy, the ways in which it is changing, and how I as an economist, and not as a politician, see China fitting into all of that.

Yesterday, I was reminded of how different the global economy is than it used to be when I was on my way to Lanzhou to visit the Premier. In a car driving from the airport into Lanzhou, I was handed a cellular telephone and had the chance to respond to a phone call from Washington. As I looked out the window at a horse driven plow, it reminded me of the contrasts in China and it reminded me of two other things. It reminded me of my first visit to China in the summer of 1979 when someone I was traveling with wanted to make a long distance call from Shanghai to New York. And that was not possible for five days.

It also reminded me of something else, though, which shows you how fast the world changes. In 1988, in Chicago, I was in the back seat of a car, and the car had a telephone in it. I thought that that was so remarkable, that I called my wife to tell her that I was in a car with a telephone. That was just twelve years ago and it says something about how rapidly the world is changing.

I think there are three distinguishing features of the new global economy that is going to drive the twenty-first century. The first, is the revolution in technology. A cartoon in the United States showed a small child, about the age of my son, who was asked "what do you want to do when you grow up?" He responded, "I can't tell you because it has not been invented yet." And this is all too real. The largest company in the United States by market value did not exist twenty-five years ago. In this era of technology, how much you know is what counts, and not how much you can lift. Product value depends upon what knowledge is embodied in it, not how much its weighs. And the handling of information is a key determinant of national economical success.

These changes in technology and information, in turn are driving the second great change -- the spread of market forces. If you think about it, it cannot be an accident that was the same very short period in history when Soviet communism collapsed, planning ministries throughout the developing world were scaled back, China embarked on far- reaching economic reforms, and most of the large companies in the United States had to be very dramatically restructured.

If you think about it, any economic system has to do two things. It has to coordinate economic activity and it has to motivate economic activity. The Ayn Rand or Milton Friedman descriptions in your books describe an economic system where all the emphasis is on motivating economic activity. A traditional Stalinist model is an economic system where all the emphasis is on coordinating economic activity. As is usually true in life, what works best is some balance. But what we have seen in a world of these new technologies the right balance is perhaps more towards motivating economic activity and less towards coordinating economic activity, than was once the case. Increasingly, at the level of individual businesses and national economies, flexibility is winning out over rigid controls, and the capacity to respond to change is winning out over capacity to dictate it.

The third large change is that for the first time the world has a truly global economy. I am convinced that when the history of the last twenty years of the 20th century is written, the end of the Cold War will be the second story in that history. The first story will be about the appearance of emerging markets -- no where more than China places where, when added up across the world, three billion people live and where, for the first time in human history, we're seeing economic growth at rates where standards of living more than doubled within a single decade, and then do it again, and do it again, and do it again.

If these trends continue, I believe they will rank in the economic history of the last millennium only with the Industrial Revolution and with the Renaissance. For governments, this means managing in a single decade economic changes of a size that in my country took half a century. For business it means unprecedented commercial opportunities. For the world’s people it means improvements in health, in literacy, and in access to clean water that were unthinkable even two decades ago.

These three great trends: new technology, market forces, globalization, are what all our countries are going to have to contend with in the years ahead. In the United States, we have been successful in the last decade, in part, because we have contended well with these trends. We have created a business culture in which entrepreneurship is at a premium. We are one of the only countries in the world were you can raise a hundred million dollars to start a new business before you buy your first coat and tie, if you have a sufficiently good idea.

Our emphasis on entrepreneurship, along with our very open economic system that lets anyone who want to, enter any business they want, and our success in changing our government’s deficit policies so that we can win the race for capital and attract capital into our country, are an important part of why we have succeeded. And I think for China’s success to continue, it will be important for China to absorb the same lessons of the global economy.

To be sure, what China has achieved in the last twenty years is remarkable. In 1978, Deng Xiaoping dreamed (and he treated it as a dream) of doubling and redoubling China’s GDP by the year 2000. That milestone was hit a number of years early. China has risen to be the eleventh largest trading nation in the world, and 200 fewer million people in China now live in poverty – and every year, more than 450,000 fewer Chinese children die before reaching their fifth birthday than was the case just two decades ago.

These gains have come, it seems to me, from a potent and powerful recipe: freeing labor from land; tapping China’s stock of human resources; welcoming foreign capital, management, and technology into China. It helped China make up for some of the economic ground it had lost relatively earlier in this century. But catch-up, by definition, can only take an economy so far.

National problems in any country demand national solutions that respect national customs and practices – and China, it seems to me, needs to build a kind of market economy that will work for China. But it also seems to me, needs to build one that will work in today’s global economy. For one thing that today’s global market economy teaches many of us who are involved in political life, is that even when they are inconvenient, the laws of economics, like the laws of physics, cannot be repealed for the convenience of governments. China’s core economic challenges are the same as those faced by every nation: the need to build policies and institutions for a post-industrial age that allow market forces to operate, and then allow integration with the rest of the world.

That means three main elements. First, planting the seeds of a new Chinese economy. As President Jiang, Premier Zhu and others have recognized, the challenge for the next stage of China’s transition is to find policies and institutions that will fully realize the creative potential of the Chinese people and support innovation and investment over the long term, over all of China.

I think if you look at the success over the long term of the economy in my country, or the economies of Europe, or in the most recent fifty years, the economy of Japan; more than any scientific innovation, what has been important is a potent social innovation: the Rule of Law -- the basic idea that agreements can be entered into and enforced, that property rights can be respected, that independent courts can enforce rules and regulations. These measures, what one might call the intangible infrastructure of a modern market economy, are not built overnight. They are not something you can look at and see, but ultimately it is those rules that shape whether companies can be formed. Whether innovations will take place, whether savings will be channeled into productive uses.

I would suggest to you that just as in the mass based economy of the twentieth century, an effective system of transportation was crucial to a country’s economic growth; as we enter the twenty-first century’s knowledge-economy, the free flow of ideas has become a prerequisite for economic success.

The second major challenge for China, it seems to me, is allowing market forces to operate in an effective way. That means freeing the new Chinese economy from the weight of inefficient state-owned enterprises and a financial sector that expends vast amounts of resources supporting them. In China, as in other economies making a transition towards a greater role for market forces, this will require fundamental changes in the incentives facing managers of these enterprises. Fundamentally, managers will have to focus on maximizing the value of their businesses because it is that which will make their businesses most efficient.

This in turn will require financial sector reform which the Chinese government has wisely made a major priority in recent years. Promising recent steps include the reorganization of the People’s Bank of China along regional lines, to reduce local pressure on supervisors, and the creation of asset management companies to deal with non-performing loans at state commercial banks.

A third priority for China, as for all of our countries, is opening the way to a globally integrated economy. There are those in China and in most countries who debate whether the economy is strong enough to stand up to the rigors of foreign competition. Perhaps that is not the right question. In light of the global experience of the 1990’s, the right question may be whether Chinese reforms can truly succeed without foreign competition. One of the most impressive aspects of China’s reform experience so far, has been the recognition that it requires China’s access to the global economy and all the capital competition and new ideas that it can offer.

In my meeting with Premier Zhu in Lanzhou yesterday, we engaged in a valuable and candid dialogue on the importance that each of our nations attaches to China’s accession to the World Trade Organization. While both sides have real and legitimate concerns that must be addressed in any negotiation over China’s membership, we are in agreement that the best framework for trade relations with China would be the market-oriented and rules-based system of the WTO. WTO accession would constitute an integral piece of China’s effort to build on the economic progress it has made, and promote openness and reform. It would further integrate China into a dynamic world economy, contribute to confidence and the creation of a stable and efficient business environment, and spur increases in productivity as competition directs capital to its best possible use.

We in the United States see large benefits to China’s entry into the WTO. In part because it would mean sounder and surer access by U.S. manufacturers and service producers to China’s market. But equally, because by contributing to China’s prosperity through the WTO, it would strengthen China, strengthen our partnership, and strengthen the global economy. It should be very clear that reaching the "right" agreement, a commercially meaningful agreement, on fair and full terms is something that is of great importance to the United States. In that context, if the United States and China can reach a satisfactory WTO accession agreement, the administration will work hard with Congress to attain permanent normal trading relations for China. Ultimately, a World Trade Organization cannot live up to that name, or its founder’s intent, if it does not include a country that is home to one-fifth of mankind. But equally, a World Trade Organization can only live up to its founder’s intent by setting standards that ensure that nations joining the WTO have firmly committed to its basic principles: commercial reciprocity and respect for international law.

Let me conclude by saying just this. The economic principles for national success that I have described here are as difficult to implement as they are easy to state. There is a paradox in all our countries at this moment. Just as a new global economy creates more to look forward to than ever before, it also brings more uncertainty and more change to worry about than ever before. That is why the challenge of crafting economic policy in your country as in mine is one of balance. A balance between moving toward necessary objectives and maintaining stability. A balance between responding to global realities and upholding domestic traditions. And a balance between the virtues of competition as the best known motivator and driver of success, and the importance of cohesion and cooperation as sources of strength for our societies. These balances will have to be struck and calibrated every year in every country in this new global economy.

What cannot be in doubt, though, is the importance of a continued strong working relationship between the United States and China; a relationship that must be firmly grounded in mutual respect. A relationship between what before too long will be the two largest economies in the world. It is partially a matter of meetings between government officials like the meetings that have brought me here to China today. But I think, even more, that growing connected-ness is something that is a part of all our lives, whether it is your collaboration with M.I.T., the four hundred thousand Americans jobs that now depend on business with China, the hundred thousand Chinese students that have had the opportunity to study in the United States, the thousands of American teachers and students who have visited your country. How China will, as the President has said, define its greatness in the decades ahead is a question only China can answer. But it will have the kind of working relationship that it wants to have with an America that knows very well its interest in a strong, prosperous, and ever more globally integrated China.

Thank you very much.

For original copy, please visit http://www.usembassy-china.org.cn/press/release/1999/tsinghua.html