Sustaining the Pace of Development:
Bridging the Gap, Driving Privatization

Keynote Speech of
Foremer President Fidel Valdez Ramos
"The Eighth Annual CEO Forum"
10 November 2004

    INTRODUCTORY

     As in the late 19th century, China's "illimitable" market---and its infinite supply of workpeople---are once again attracting multitudes of foreign investors. Although China still has 150 million jobless workpeople, a critical mass of middle-class Chinese is beginning to earn consumer-level incomes, of some $7,000 to $10,000 individually. Hence, the sales of cars, television sets, and refrigerators are expanding by some 26% to 30% yearly. Already China is the biggest market for mobile phones. Mainland tourists are also flooding Southeast Asian destinations.

   In a word, China has become a new pole of global growth. In 2002, it became the number one export market for Taiwan, South Korea, and Japan. 

    And French president Jacques Chirac is merely the most recent in a succession of western leaders visiting Beijing in search of economic and political alliances. China's plan to build high-speed trains and nuclear reactors have attracted both France and Germany.

    On the other hand, China's embrace of free-market tools such as allowing the increase in interest rates (announced last 28 October 2004 which represents a historic shift away from "macro-control"), credit-tightening for property developers and privatization has served to cool the economy. The continued fixing of the Renminbi yuan to the USD at 8.8 to 1 is still in effect, although most experts believe that allowing some flexibility in the exchange-rate regime would be in China's best interest, given the high cost of resource misallocation during the latest round of over-investment. 

  The rise in interest rates has increased fears of a slowdown in other Asian economies and caused some anxiety over their loss of exports. It could also dampen China's huge appetite for oil. A mitigating factor for Southeast Asian countries is the forthcoming signing in November of the ASEAN+China Free Trade Agreement (FTA) that would first liberalize trade in good, and then move on to the liberalization of trade in services, facilitation of investment flows, and establishment of a dispute settlement mechanism. The tightening of intellectual property rights (IPR) controls would decrease the incidence of smuggling and the manufacture of fake pharmaceuticals from which China itself suffers.

    What do these changes in China mean for us in East Asia, especially Southeast Asia where I come from?

    East Asian economies that are complementary with China's those of Hong Kong, Taiwan, and to a lesser degree, Singapore, South Korea, and Japan---are benefiting from China's integration with the global economy.

    Given the downturn in ASEAN's traditional markets, China has emerged as an engine of growth for Southeast Asia. If current trends continue, China will soon surpass America's trade with our sub-region. But, the ASEAN countries also face competitive challenges from China on many fronts.

    The most immediate is competition in labor-intensive industry. China's labor costs are the lowest in the whole of East Asia---outside of Indonesia's.

    Already China has become the pre-eminent producer of labor-intensive manufactured goods in the world. And its consumer exports---such as clothes and motorcycles---are devastating domestic manufacturing in Indonesia and Vietnam.

    Meanwhile, ASEAN's garment industries---like those of poorer Bangladesh---are worrying over the unleashing of China's textile industry once the multi-fiber agreement and its country-quota system expire next year.

    A second front in ASEAN-China relations is the competition for capital.

    At the beginning of the 1990s, Southeast Asia was taking in 61% of all foreign direct investment (FDI) to developing economies in East Asia---while China was receiving only 18%.

    Ten years later, it is China that was gaining 61% of FDI, while ASEAN's share has dropped to a merely 17%.

    In 2002, FDI going to China (which now makes up nearly four-fifths of all the FDI coming into East Asia) surpassed that going to the United States---traditionally the number one destination for migratory capital.

    Competition between China and ASEAN for third-country markets has also become intense. The export structure of the more-developed ASEAN economies-just like China's---is built around electronics, but China is both a more efficient and lower-cost producer.

    In 1990, China had only a 2% share of American electronics imports. By 2000, its share had reached 9.7%---topping those of Singapore, Malaysia, Thailand and the Philippines.

    A fourth China-ASEAN arena is competition on the value-added chain.

    For China's competitors, the only viable long-term strategy is to move up the technology ladder-keeping always ahead of China's lower-cost manufacturing.

    If it si to compete with China---and with all comers---ASEAN must raise worker productivity and cut costs across the board. And the only way it could do so is by integrating the Southeast Asian market more effectively that it is doing now---to gain economies of scale force convergency toward regional best practices, reduce transaction costs, and create a unified market attractive to foreign investors.

    Let me now turn to the implications of China's rise for the bigger powers.

    For India, China is both a rival-power and an economic model. It is no secret that New Delhi's striving to become a nuclear power comes as much from apprehensions of China itself becoming a nuclear power. (to soothe these anxieties, Beijing recently negotiated with New Delhi their differences over Tibet and Sikkim.)Neither is it a mystery that India's recent opening of its economy is inspired by China's success in the same direction, especially after the latter's accession to the World Trade Organization (WTO).

    My view, nevertheless, is that the impacts on the world of these two great countries are likely to be complementary. While China is emerging as a manufacturing giant, India promises to become an information technology hub in the global economy.

    For Japan and the United States, the immediate effect of China's opening up has been the migration of their labor-intensive industries to the mainland-availing of China's lower labor cost. For Tokyo, the shift of Japanese production to China----both to cut costs and to access China's huge internal market---threatens (in the short term) to depress Japan's economy. Taiwan's economy is being hollowed out in the very same way.

    But sober expert voices counsel that both Japan and East Asia should engage China cooperatively in a new regional division of labor. After all, China's rise has not repealed the natural law of comparative advantage. The dominant view among Tokyo economists, it seems, is that Japan should focus on promoting its service sector---which already accounts for more than 70% of all of its employment---as its only way of overcoming the long-term stagnation of its economy.

    Even the relatively self-sufficient European Union (E.U.) is keenly interested in China's rise---and not just because of its possibilities as a trade partner. For France and Germany, China (and the East Asian economic grouping it is organizing) would be the third leg in the global balance of economic power that they seek to build---as a constraint on America's tendencies toward unilateralism and global political dominance.

    THE CHINESE CHALLENGE TO AMERICAN SUPERIORITY

    With the United States, China enjoys a hefty surplus in their two-way trade. Already, the U.S. deficit in their bilateral trade has reached $83 billion over the first seven months of 2004 alone---up 28% from the same period last year. That surplus is building up American pressure to revalue the Renminbi yuan---as well as posing threats of a new round of protectionist legislation from a populist U.S. Congress sensitive to the loss of American jobs.

    Even technological breaches of intellectual property rights (IPR) by Chinese corporations---historically unavoidable among late industrializers---have become significant issues in China-U.S. relations.

    In the background of the relations between these two economic giants is, of course, their political rivalry as powers of the first rank. Does China represent a future challenge to America's dominance of global politics?

    Of course, it does---just as every emerging great power challenges the global status quo.

    If fact, China already seems to be leveraging and exploiting its growing economic power to expand its political influence in the Asia-Pacific region and in the world.

    Consider how a long-term, multi-billion dollar deal to buy Australian ores gave President Hu Jintao equal billing with President George Bush at the Australian parliament last October.

        It seems that Beijing no longer exports a revolutionary ideology. China's goals, it appears, are primarily nationalistic---to gain space and respect in international relations, no less than to play a leading role in the global economy.

    From all indications, communist China is becoming a responsible member of the global community. It was a good neighbor to both Thailand and Indonesia during the financial crisis of 1997-1998. It has taken a modest part in the peacekeeping missions of the U.N. Security Council, and it is playing a lead role in the six-national diplomatic dialogue dealing with the nuclear-weapons issues in the Korean Peninsula.

    CHINA IN THE G-7 GROUP OF ECONOMIC POWERS

    Already China is moving---even if by fits and starts---toward an economic structure based on the rule of law, a more efficient allocation of capital and natural resources, and improved corporate governance. This movement toward modernity should be encouraged by all, and, indeed, should be enhanced by America's continued positive engagement with China.

    Certainly, Beijing leaders do not want the world's leading power and its allies to react negatively to China's rise in the same way that the world did to imperial Germany before World War I and to imperial Japan before World War II.

    China's leaders would not want their country to be seen as getting ready to challenge the global status quo. They want to avoid a confrontation that could complicate China's "peaceful rise" to sustainable development.

    I, for on, believe we can mitigate the impact of China's drive for a central role in East Asia by engaging it in a deepening and broadening network of economic, political, and security relationships----in a genuine Asia-Pacific community that would integrate both sides of the Pacific rim.

    Meanwhile, the wealthiest industrial nations themselves have begun to seek an accommodation with China as the rising economic power.

    In early October, China took part for the first time in a meeting of the "Group of Seven (G-7)". The G-7 continues to worry over China's "undervalued" Renminbi yuan which, it argues, gives China an unfair trade advantage. Since 1995, the Renminbi yuan has been pegged to the American dollar-at a ratio of roughly 8.8-1, coming from an earlier peg of about 5.5-to-1.

    America's merchandise imports are now almost twice as large as its export. Its current-account deficit is now some $600 billion yearly. And the complaints of organized labor in the U.S. about "outsourcing" have set off a spate of anti-China trade proposals in the federal congress.

     Washington wants Beijing to allow market forces to set the value of the Renminbi yuan. It proposes a one-time revaluation of the Chinese currency---by about 20%-25%---to dampen China's exports and encourage imports; to counter rising inflation; and to check the inflow of speculative foreign capital. It is observed that revaluation or appreciation of the Renminbi yuan would instantly make China the world's second biggest economy.

   In this initial effort, the G-7 failed to persuade China to revalue the Renminbi yuan. But, as a new member of the group---which, in effect, dictates international economic policy---China will have to pay closer heed to the wishes of the global economic community.

    CONCLUSION: PAX ASIA-PACIFICA TO REPLACE PAX AMERICANA

    China's transition from a centrally-planned, state sector-dominated economy to one that relies on market dynamics seems to be irreversible, outward-looking policies are being set---and national leaders are focused on their goal of making the country grow sustainably. And for this to happen, China will need a period of stability in East Asia and the Asia-Pacific region.

     If China's transformation is to take place without major mishaps, we who are China's neighbors need to draw it into regional and global networks and structures that will soften and smoothen its relatively abrupt rise to great-power status.

    Over the foreseeable future, all Asia-Pacific countries, big and small, must accept the reality of living with a larger Chinese presence. How, then, can long-term stability in the Asia-Pacific region be ensured? In my view, a shift from "Pax Americana" (or peace and security guaranteed by the power of American arms) to a "Pax Asia-Pacifica" in our region could well be the answer in which the major countries and sub-regional blocs contribute to and share in the maintenance of Asia-Pacific security and stability.

   The common geopolitical threats against all of us are international terrorism, the proliferation of nuclear weapon, the instability arising out of the long-standing Arab-Israel conflict, the protracted war in Iraq, and the weakening of the U.N. system.

    As regional neighbors and partners, we now should exploit the convergence of interests that the United States; Japan; China' India' ASEAN; Canada; a unified, nuclear weapon-free Korea; Pakistan; Australia' New Zealand' and others share in a peaceful and stable Asia-Pacific---just as the western Europeans exploited the cold war stalemate between the U.S. and the U.S.S.R. in order to consolidate and expand the European Union.

    In short, we must now move towards a new, more cooperative security umbrella that may be called "Pax Asia-Pacifica" to replace the existing "Pax Americana", which shield has been there since the end of World War II. And this should be done in the next 5 to 10 years.

    Under the "balance of terror" conditions of the cold war, Western Europe organized the economic, political, and cultural community called the European Union that has now brought its peoples from their once-endless civil wars into a modern era of "perpetual peace". Asians, too, should use the exising, but diminishing, Pax Americana umbrella to speed up the economic and political integration of the Asia-Pacific community.

    But beyond the fragile "balance of power" enforced by the American military presence, we as Asia-Pacific partners must now look to a more enduring, cooperative, burden-sharing peace that results from the "balance of mutual benefit", in which all stakeholders may equitably enjoy the fruits of development.

    China seems to see its own safety in promoting regional integration---in the development of an "East Asian community", as economic cooperation among the states of the region extends progressively towards closed cultural political and security cooperation. Meanwhile, APEC---of which the United States is a charter member---has set 2020 as its deadline date for unifying economically both the western and eastern shores of the Pacific Ocean which our peoples share.

    Thus, the ground has been laid for such a new, expanded "Pax Asia-Pacifica" security cover---in the growing network of regional organizations and multilateral arrangements that bind our separate countries together.

    Now to sum up and conclude.

    The instruments of an East Asian---and a larger Asia-Pacific---community have already been established. It will therefore be the historic task of East Asia's rising generation of political, economic, defense, and cultural leaders to make these multilateral and multisectoral institutions work for the long-term benefit of our peoples---for all of us in this part of the world. 

     Thank you and Mabuhay (best wishes)!!!