Thank you, Elliott [Ponchick].  As Elliott mentioned, there was just a major leadership transition in China, the so-called fourth generation; people in their late 50s and early 60s have completed an orderly succession to power.  For the first time, virtually an entire generation of older leaders resigned, retired voluntarily to make room for their new cohorts.  These people are primarily technocratic in their training, they are mostly engineers, they are well educated, they are not a particularly cosmopolitan group, they have not studied abroad or lived abroad very much. 

The next generation after them includes many, many people who have foreign experience, but this generation is mainly what I would call market technocrats.  They're very practical people, they have a great deal of experience in the transition between the planned economy and the market economy.  How well they're going to do, maintaining stability in the face of a number of problems that I'm going to talk about tonight, remains to be seen.

It's really too early to tell whether they're going to turn out to be reformers or conservatives or moderates.  I suspect they are going to continue on the path charted first by Deng Xiaoping and later continued and consolidated by Jiang Zemin, the path of continued market reform, opening to the outside world and the desire to pursue collective cooperative relations with the United States.  I don't see any signs that those major policies will change.  Beyond that, it's really hard to say because, just as our society is undergoing change and some troubles and problems, so too, is Chinese society.  What I want to talk about tonight are the changes that China has undergone in the last 20 years and what those changes portend, perhaps, for the future.  I don't have a crystal ball, but at least we can narrow down, I think, the probabilities of the future to a reasonable number of options. 

Since Deng Xiaoping initiated the reform of the Chinese economic system 23 years ago in 1979 there have been three major transformations that have occurred in China.  The first is what I would call market transformation, the marketization of China's Stalinist command economy.  It was no mean feat to take an economy that was stagnating, uncompetitive, ossified, unproductive and inefficient and in a matter of just two decades to turn it into an engine of growth that is the envy of all of Asia, if not the rest of the world.  What was done were a few very simple but profound things, up until Deng Xiaoping’s leadership the Chinese economy was driven from the top – it was top-down, centrally planned – everything down to the last widget had to be allocated by the center.  Product mix was planned, prices were planned, inputs were planned, labor costs were planned and promotions were planned.  Every thing was in lock-step according to plan, and there was a lifetime of guaranteed employment for both workers and officials.  This was not geared toward producing the most initiative or innovation in the system.  Everyone was in lock-step. Yesterday was pretty much a guide to today, and tomorrow will be pretty much like today and yesterday. There was really no incentive to change things. 

Now, what happened when they introduced the principle of market competition was that they introduced profit as a criteria of success.  That had never been criteria before.  All sales receipts had been turned over to the center, no profits were retained, so it didn't matter how much money you made or lost.  If you lost money you would get your budget back from the central government the next year anyway.  Consumer demand did not drive production.  Beijing determined that there would be 5 million pairs of black boots produced in a given year and that's how many boots would be produced.  Like it or not, that's all that was available, and if consumers didn't like it, which oftentimes they didn't, the surplus product was piled up in warehouses unsold.  It would still count as industrial output and the Chinese could claim that they had maybe double-digit industrial growth every year, producing goods that most people didn't want.  So they could keep up the fiction of a dynamic economy when in fact there was a great deal of dissatisfaction and a lack of articulation between supply and demand.  What happened under Deng Xiaoping was consumer demand began driving the economy.  Consumers began to have choices and they began to register their choices in the market place, which is what capitalism is all about. Although the "C" word was not used in the 80s and 90s and it's only barely beginning to be used today.

Consumers weren't sovereign but they did have expanded realms of choice in the market place.  That was one major change. Another was the opening of markets, not just for products, but for labor, housing and education.  Over the past two decades all of these things have been marketized.  Private housing is now the rule rather than the exception in cities like Shanghai and Beijing. I'm told that in the city of Shanghai 70 percent of the legal residents of the city, and this doesn't include the so-called "floating population" on the margins of the city, but 70 percent of the registered occupants of Shanghai own their own dwellings now.  That's a remarkable increase in just five to ten years.  Before that there was nothing in the nature of private housing. 

Labor markets have now opened.  In the past where you worked was decided by the state.  There was no labor market.  A labor bureau would assign school graduates to a job maybe in a nearby province, maybe in some far-away province.  If couples were married, there was absolutely no guarantee that they'd both be sent to the same place to work.  Many families were split for decades under that system and there was no fighting that system since there was no alternative labor market.  You went where you were assigned or you did without any income.  Side-by-side with this system of labor allocation was the so-called unit ownership system, under which the work unit that you were assigned to controlled your life. It controlled your housing, health care, cultural life, it controlled whether you had a baby or not. Quotas were assigned to enterprises for births every year and you had to fit within the plan or you couldn't have a baby. If you did have a baby out of the plan you were punished severely for it or often forced to have an abortion.  Those kind of harsh policies are no longer the rule in China today.

So the system of the work unit, the work place, providing housing, health, education and welfare, has now changed and there is a private housing market. There is also a private health care market; health care has been privatized.  This has been good for some, not so good for others.  As in any country, those below the line of affluence and middle class income are having a tough time meeting health care costs and educational costs.  This is one of the growing pains of China's society as they move from the plan to the market.

Similarly, the household registration system, which used to control the movement of population in China, is now opened wide.  In the past, about 1949 or shortly thereafter, if you lived in a rural area as — three-quarters or two-thirds of the Chinese population did — you were registered to live there and you could not leave.  You could not go to the city because if you went to the city, you would not be eligible for any kind of support or sustenance-- not housing, not schooling for your kids, health care, welfare, nothing.  So that kept the rural population in place.  That system has gradually eroded under the reforms and now over 100 million rural residents have emigrated to cities in search of work, particularly in the modern sectors of the eastern seaboard where a lot of joint ventures and foreign direct investment have created millions of jobs.  So there has been a much greater population movement, and today Chinese people enjoy greater personal freedom, private freedom, no matter where they live, work, go to school than has ever been true before.  So there is a great deal of personal freedom and there is a new middle class beginning to grow in China -- perhaps 15 percent of the population.  It's hard to tell and depends on how you measure it.  There are now 200 million cell phones in China.  That's a scary number.

The second major set of developments that has changed China in the last 20 years has been a change in the way society is administered.  It used to be, as I've said, administered from the top down.  Now, authority and fiscal responsibility have been decentralized from Beijing down to the provinces and even lower to counties and municipalities.  It used to be that all profits from all enterprises were remitted to the center.  Now, in order to encourage entrepreneurial activity in the local areas, the regime has decentralized what they call "residual property rights," that is, the right to retain profits. Once you have paid your taxes to the state you can then retain the profits and use them at your discretion, basically to supplement your budget.  Now, that's the good news.  The bad news is that Beijing has cut off the flow of budgetary support so that increasingly local-level governments — provincial county, municipal governments — have to support themselves. They have to think of ways, productive ways, of increasing revenues within their jurisdictions.  So this has stimulated a great deal of economic activity locally.  They have had to innovate to survive, and if they don't innovate very quickly they find themselves deprived of funds, unlike the old days when the government would keep subsidizing them no matter how badly they performed.  So this has created an incentive, which has generated a great deal of entrepreneurial energy at the local level in China.

The third great innovation and set of changes that has occurred in China is the result of globalization.  There has been an opening of China since 1979, under which foreign investment has not just been accepted but welcomed.  This is a major change from the past when Mao ordained that China should be self-sufficient economically, disdaining any kind of dependency on the outside world.  Now, foreign direct investment has increased to the point where China just this year will surpass the United States as the largest single focus recipient of direct foreign investment.  At the same time, joint ventures have expanded-- that is, ventures involving foreign partners of Chinese firms, particularly along the eastern seaboard in special economic zones and open cities up and down the east coast of China.  This has provided another engine for economic growth, stimulating these growth rates that you hear about of 10-15 percent at some points in the last two decades.  On the whole, over the last 50 years the net growth rate has been about 10-11 percent.  This is an astonishing record of economic growth. 

Information has also flowed more freely than ever before within China and across China's borders as a result of globalization.  China now has, at last estimate, 59 million Internet users, up from 22 million a year ago, up from 9 million the year before that.  This is an extraordinary explosion of Internet use.  If any of you have been to China lately and have bothered to go find an Internet café you will know what's going on there.  They are flooded with young men who are out there playing computer games, flight simulator and various violent games that would be very familiar to American teenagers here.  It's interesting that when the Internet first made its appearance in China people thought, "Ha, ha, this will finally break down the law of totalitarianism, China will suddenly have a democratic impulse."  Well, that's not exactly what has happened.  Mainly what's happened is that people in China use the Internet for the same things people here use it for – they chat, they send e-mails, they download pornography and they play computer games.  So, the Internet has not brought the kind of political revolution that some people were expecting.  It has, however, brought some kind of cultural headaches in its wake, just as it has here. 

The latest interdependence in culture in China, again brought about by this revolution in globalization, is the great television following that has been built around the Chinese superstar, Yao Ming, who is now playing basketball in Houston.  Last week when Houston played the L.A. Lakers, 175 million Chinese watched that basketball game.  What an extraordinary phenomena — 175 million people!  And not so long ago the MBA star, Michael Jordan, outpolled Jiang Zemin as the most admired person in the world.  So, you can't tell me that globalization hasn't made an impact in China.  Now, all of these are extraordinary developments to have taken place in just two decades.  Remember, we're talking about a very narrow window, a very short period of time, and in part because of the very speed of this process there have been transitional costs, growing pains, dislocations, that have occurred as a result of this full-throttle economic development. 

On the economic front, the rapid pace of change in China has produced, along with 9 or 10 percent growth rates, a rash of near-term economic distortions and dislocations.  While it is certainly true that the genie of market-based entrepreneurialship has been unleashed from its long-captive jar, it appears that this very benign and productive market genie has been accompanied by what might be called its "evil twin" — the genie coefficient.  I don't know how many of you are economists, but the genie coefficient is an index that measures the ratio of income between the top 20 percent of a society's income earners and the bottom 20 percent. China; which 20 years ago had one of the lowest genie coefficients in the world, and was one of the most egalitarian countries in the world, now has one of the highest genie coefficients in the world.  The income gap between the winners and the losers has been growing steadily in China to the point where it has posed some serious problems of income and equality, anger, and resentment — what they call “red-eye” disease in China.  The differentials are clear, for example, between the east coast which is the most highly modernized, commercialized, and developed part of China, largely because of its proximity to Hong Kong, China, and the Pacific Ocean where trade has blossomed; and the far western provinces of China, which are impacted in rural, agricultural and not very productive.  The income gap there has risen between east and west, also between rural and urban areas of China, among farmers, workers and middle classes in urban cities.  These are serious problems that need to be addressed.

With the closure and consolidation of thousands of state-owned enterprises — remember, marketization has meant the threat of loss and the threat of failure. Under the old socialist economy nobody could fail, and so winners weren't rewarded and losers weren’t punished.  Now, under the new market system, enterprises that fail to keep up with the times, that fail to improve their productivity and efficiency, will be sold off, closed, merged, or privatized. A guaranteed job was a hallmark of the old regime. They would place you in a job even if they didn't have sufficient work for you to do, so there was massive over-employment in urban state-owned enterprises.  As a result of the market reforms, particularly in the last five to seven years, between 35 and 45 million Chinese workers have been made redundant and have been laid off, furloughed, or retired. Most of them have not had the advantage of a stable and predictable social safety net.  They have, it is true, been given severance pay by their former work units, usually in the amount of six months at full or almost full pay.  But in many cases, the severance funds and the pensions that have supposedly been owed to older workers who retired, have been cannibalized by their failing enterprises and have been used. They have not been available to pay the workers, and consequently there have been a lot of unhappy workers demonstrating their unhappiness throughout China. In 2001 alone, there were some 30,000 labor disturbances throughout the country.  So this is a serious transitional problem that China is having.  How do you deal with an economy in transition from what they call the "Iron Rice Bowl," where everyone is guaranteed a job, to a market-driven economy where only the fittest survive? The problems of making that transition are quite clear.

Another transitional problem that has been caused by the high speed of the economic transition is a flourishing of corruption and economic crime in China.  In the mid-1980s, from 1983 to 1987, the number of reported corruption cases averaged about 30,000 a year.  A decade later, in the mid-1990s, the corresponding annual average was over 170,000 cases. That is an increase of over 5 times — 500 percent over the 1980s average.  Particularly alarming was the rise in incidents of so-called "major corruption cases," that is, crimes involving more than 2000 Yuan; that's about $260.  The percentage of these major cases rose from just eight percent in 1987 to over 44 percent of all reported cases a decade later.  So the crimes are not only becoming more frequent, but are becoming larger in magnitude. 

From 1984 to 2001, over a 17-year period, the average amount of money involved in reported cases of corruption rose from 4,000 Yuan, that's about $500-$600, to 112,000 Yuan.  So, there is a major increase in the average size of the amount of money corrupted.  There have been frequent campaigns to root out corruption.  These campaigns have netted some very high-level figures, including the former mayor of Beijing and at least one provincial governor, and they were treated rather harshly when they were caught, but this is just the tip of the iceberg--the iceberg remains a very serious problem.  You may remember back in 1989 when students demonstrated in Tieneman Square. Although the ostensible reason for their demonstrations was lack of democracy and human rights in China the real underlying unhappiness, the fuel that fed the anger of the whole urban population — not just the students — was official profiteering and corruption. That was the major grievance.  And so the regime needs to get a handle on that problem if they are to have a happy future.

And finally, if all of these problems, these economic problems weren't bad enough, since the late 1990s the spread of HIV-AIDS in China has reached epidemic proportions, at least in some Chinese provinces, first, in Yunnan province in the south where it was associated with illegal drug smuggling from Burma and the Golden Triangle in Southeast Asia.Then later in Henan, where over 600,000 people have been infected as a result of tainted blood which was cooled recklessly and then given back to the people.  It's been estimated by UN AIDS organizations that the number of people infected in China today is about 1 million, with the infection rate rising by 17 percent in the first half of 2001. It was also predicted that unless dramatically more effective response mechanisms are put into place soon, at least 10 million Chinese will acquire the HIV virus by the end of the decade.  This is a massive problem that is only now emerging and only now are the Chinese authorities beginning to take it seriously.  For some time they slipped it under the rug and didn't want to deal with it, regarding it as a foreigners’ disease.  Well, it's not a foreigners’ disease any more, and the Chinese government is now beginning to take appropriate steps. 

This very wide array of pressing socio-economic problems would be difficult enough to deal with — it's certainly enough to cause any new leaders to be concerned — but there are some serious political problems as well.  There have been gross abuses of communist party power over the past decades. Despite the personal increase in freedom that I mentioned earlier on, and freedom over education, housing, welfare, jobs, etc., most citizens enjoy an autonomy of person that they have never enjoyed before.  Still, the Party stayed in China and remains an over-centralized, authoritarian anachronism, and I say that knowing that there are representatives of the Chinese government in the audience tonight.  Top Party leaders are unaccountable in China to all but a small handful of their equally unaccountable comrades.  The national legislature lacks any autonomous power to legislate.  Courts at each level, far from being independent, are beholden to local governments for their very salaries and the buildings in which trials are held.  Transparency in party and governmental affairs and administration is quite minimal.  Major print and broadcast media, while certainly livelier and more diverse in content than ever before, remain subject to state censorship and control.  Freedom of worship is limited to five officially sponsored religions and all signs of organized dissent are routinely met with suppression: witness the following Falun Gong. The lack of significant political reforms over the last two decades is made more painful and apparent by contrasting it with the enormous gains that have been made in economic reform.  What you have is a growing disparity between the economic system and the political system, and that growing disparity is one of the reasons why attorneys are having so much trouble solving some of those problems that I mentioned.  They're much harder to solve when you don't have a government that is transparent, accountable and responsible, and where you don't have a rule of law that can be counted upon to administer impartial justice. 

Some years ago, one of my favorite economists, Charles Lindblom, wrote a textbook called Politics and Markets in which, in a very quick and brilliant metaphor he captured the difference between democratic capitalism as way of administering a society and Stalinist socialism or socialist Leninism.  The difference, he said, was apparent if you likened a system of political economy to a hand — to working an opposable thumb and four fingers.  The brilliance of the Leninist political system is that it can develop a lot of power with its thumb.  It can press, and press hard, and it can force change on society with a strong opposable thumb.  The weakness of that same system was in the fingers.  The fingers were not very sensitive, they couldn't sense what was going on in the environment and they could not respond.  They couldn't send the feedback into the brain where it could then translate that into policies that are appropriate.  So it was all thumbs and very little in the way of fingers.  More force than sensitivity in the Leninist system.  

A market democracy, by contrast, had a very weak thumb, very hard to push, to get anything done.  You can't change things overnight the way the Chinese have changed things in the last 20 years.  But it's got very sensitive fingers that can sense what's going on in the environment and can respond.  Indeed, that's what Adam Smith called the "invisible hand of the market place."  It's all of those fingers out there, decentralized and disbursed, sensing what's going on and responding in a non-directed, non-centralized way.  In other words, Leninist systems excel in mechanisms of force, while market democracies excel in mechanisms of feedback.

Now, one can argue that force was needed to change China.  That in order to reform China effectively you had to generate that central force and a democratic system would have been inappropriate. A good example of why that is at least partially relevant is, I just came back from three weeks in India and it's very interesting.  India has a democratic system that is the envy of many countries in the developing world.  The problem with India is that they haven't been able to generate much economic growth because if they want an omelet they're going to have to break some eggs and they haven't been able to break the eggs.  There's too much popular protest and feedback.  The Chinese were able, for example, to shut down inefficient state-owned enterprises, [leaving] 35-45 million unemployed.  That couldn't be done in the United States, for that matter.  It would be too politically suicidal for anyone who is responsible to the people to throw that many people out of work in that short a time without a social security system in place.  So it's interesting.  Many of the Indian intellectuals I talk to rue the fact that they, yes, have this lovely democracy, but they're falling further behind China in economic development.  So it's six of one, half a dozen of the other.  It's a two-edged sword.  You can envy the Chinese system for their economic growth and envy the Indian system for their democracy, but it's hard to find a combination of the two that works. 

Now, that being said, what would work for China?  If full-blown Indian-style or American-style, European-style democracy is not particularly suitable for China, given the magnitude of its transitional problems, what might work?  I would argue, as a political scientist, as sort of a rule of thumb that politics is the art of the possible, or at least the art of the plausible.  So we have to start thinking about what China might do in the way of reform that wouldn't risk all the stability and the unity that has enabled them to get as far as they have and as fast as they have.  I would say that what they need is a substantial shift in the direction of what has been called "soft authoritarianism."  Leninism is, of course, very hard authoritarianism.  This would involve, among other things, relaxing present restrictions on unofficial religious and social organizations.  It was outrageous that the Falun Gong should be called an evil cult.  For the most part, Falun Gong practitioners were quite ordinary people just looking for a way to stay healthy in an uncertain economy.  Sure, there were some crazy leaders, but every religion, every offshoot of every major cult religion, has crazy leaders, but they aren't necessarily national dangers and all their followers need not be rounded up and arrested.  I think they need to relax present restrictions on religious and social organizations; they need to enlarge the scope of political and intellectual tolerance. They need to legitimize, and I think this is the probably the single key problem they face. They need to legitimize the existence of pluralistic political interests and interest groups and they need to strengthen the autonomy and efficacy of the mass media, organs of public opinion, and various existing consultative and supervisory organs, such as the National People's Congress, the Chinese People's Political Consultative Conference and the eight existing political parties have been disparaged, because they are so tightly controlled by the Chinese Communist Party.  They need to loosen up, in other words.

Now, why did I say that the legitimization of pluralistic interests and interest groups is the key?  Because that's the key to developing sensitive fingers.  The acknowledgment that different people doing different things in different parts of the society have different interests, occupationally, politically, ideologically, different attitudes, different beliefs, different interests and different preferences.  The legitimization of those differences is the first step toward a more tolerant and pluralistic society and that is one thing that the Chinese do not have today. 

They do say that, "Yes, society is made up of lots of different interests," but they claim that the Communist Party will represent all of those interests so they don't need their own organizations.  They don't need independent labor unions because the Chinese Communist Party's sponsored labor union knows what's bothering the workers and will take care of them.  They don't need an independent student organization because the officially sponsored Federation of Students knows what the students want and will take care of them.  That is a very archaic way of looking at things, and it will have to change. 

It will change.  I guarantee you it will change.  I just hope it changes smoothly and gradually rather than suddenly and violently.  It changed in Taiwan.  Taiwan has undergone a three-decade democratic evolution away from hard authoritativism, away from a Leninist political system, and they did it by legitimating alternative interests in society.  Thus far the Chinese Communist Party has been afraid to legitimate those interests.  They came close to doing it in 1987 at the time of the 13^th Party Congress when the then-General Party Secretary introduced a really remarkable program for political reform. At that time what he said was, and here's a quote from him, “different groups of people have different interests and views.  They need opportunities to express their ideas.”  That is the first time that any top party leader ever claimed that it was OK for different people to have different interests. 

Some of you may recall, back in the Cultural Revolution in the 60s what Mao said was that it was necessary to establish the public interest and destroy all private interests. The only legitimate interest was the state interest, which was identical to the public interest. Twenty years ago, if you asked any child in China, "What do you want to do when you grow up?" you would expect the child to say a fireman, athlete, cowboy, whatever.  No, there was only one answer that you would be given in China: "Whatever the state wants me to be," because the state had the only legitimate interest.  Well, that attitude is changing, but it hasn't changed enough to the point where different occupations, demographic groups, political and social interests can have their own representation.  That needs to happen and it needs to happen soon.  I'm afraid that without that happening peacefully and slowly, the build up of pressure may be so great that the fire next time may not be quenchable. 

This is not to say that the Chinese state, the Chinese party state, is in any danger of collapse. I do not believe that it is.  I am not one of those like Gordon Chang who wrote the recent book, The Coming Collapse of China, who believes that the system is going to implode, a la the Soviet Union in 1991.  The big difference between China now and the Soviet Union in 1991 is two decades of economic reform.  The Chinese system has produced well enough for enough people that they have a vested interest in the survival of the system. So you're not going to see a kind of bank run or panic or overthrowing of the Chinese system.  But there are these growing pockets of disfunctionality — corruption, unemployment, a big income gap polarization and HIV-AIDS.  All of these things are putting enormous stress on the Chinese system and they're going to have to deal with it more proactively than they have in the past.  Inertia has been the rule of reaction in the past.  Well, things have been OK so far, so let's just keep going the way they are.  Indeed, if you take a look at the new leadership in the fourth generation that just took over two months ago, the 16^th Party Congress looks pretty much the same as the old guys.  They're younger, but they certainly don't seem to be endowed with any major innovative political ideas.  We'll have to wait and see.  My own sense is that the times make the leadership.  Think back to Gorbachev.  Who would have predicted that Gorbachev would have been the reformer that he turned out to be? Or, if you want a closer example, more relevant to China, think about Chiang Ching-Kao’s son, who before he died in 1988 opened up the Taiwanese political system to democracy.  He did it in a very short time. Or if you want to move just a little bit northeast, how about Chun Doo-Kwan in South Korea?  Up until 1987 South Korea was a military dictatorship.  Within a year it had become a civilian democracy.  So leadership can make a difference under stress conditions.

So the question is: will this group of leaders have the courage, foresight & forethought to be able to change the system?  To be able to use the thumb power that they still have to introduce reforms that will enable China to gain greater sensitivity in its fingers, and thereby gain a greater probability of success in overall socio-economic and political development in the 21^st century?

 Thank you all very much.