The Outlook

Friday, January 30, 2004

I am honored and humbled to speak at a lecture named for Mike Oksenberg. He was a very special person. His research efforts were deep. He collected material in a hands-on manner as well as in more traditional methods of scholarship. He was an activist as well as a scholar. Mike’s trademark was simultaneously analytic and constructive, always with an eye on the future. His work was centered on Asia, especially China, so my comments will follow his areas of interest.



Somehow when we in the United States say the word “Asia,” there is almost an unspoken assumption that the similarities among the countries are great. But when you look at the demographics, you see that nothing could be further from the truth. For example, you can classify countries into different categories using such key factors as fertility, percentage of those in the population aged 65 or older, projected change in the working-age population, and the growth or decline in the proportion of workers per dependent.

The variations are stunning. I will give you a sample, just the tip of the iceberg of what we may call comparative demographics. Japan, South Korea, Singapore, and Hong Kong are all “old.” The working-age population in Japan is already declining and, in the others, decline will likely set in by the end of the next decade or so. By that time, the number of workers per dependent will be declining.

Then there are the middle-aged countries; China, Vietnam, and Indonesia are in this category. Fertility in these countries is approaching or has already fallen below the rate needed to maintain their populations. The huge bow wave will keep the working-age population growing in China for the next 20 years and in Vietnam and Indonesia until around 2040.

Then there are countries where fertility rates have fallen but are still above replacement levels. Here we find Malaysia, India, and the Philippines. The working-age populations in these countries will continue to grow rapidly, not leveling off until the middle of the century. Just to remind you of scale, India’s working-age population is likely to increase by almost 50 percent over the next 25 years, by 300 million people to a total of around 920 million. These staggering numbers show what an immense need for jobs India faces. The numbers also show the awesome potential for economic growth as India gets its economic act together and extends the reach of its already formidable education system. In countries such as Bangladesh, Pakistan, and Afghanistan, the populations are simply out of control, meaning that many young people are without a job or the prospect of one. Areas like this are extremely difficult to govern, and the potential for conflict is high (the same is true of the Middle East).

Maybe it is stretching matters to say that demography is destiny, but demography does condition the atmosphere, create key problems for governance, and affect economic growth and potential military capability. And older societies have a different outlook on life than younger ones.

The numbers above—partly an observation of what already exists and partly a projection on reasonable assumptions—are drawn from the United Nations 2002 medium-variant forecast. Fertility and longevity may change or epidemics may exceed the capacities of world health resources; at a minimum, however, these projections state the problems that lie ahead.



One aspect of the global economy that particularly affects the United States and most countries in the Asia-Pacific region is the large—sometimes very large—U.S. negative balance of trade and balance of payments. We import more goods and services than we export, and we are a large net importer of capital. The deficit in our balance of payments for the year 2003 is estimated to approach $500 billion—a number larger than the GDP of most countries. This outsize figure reflects the fact that our economy is expanding well, especially as contrasted with the European and Japanese economies.

Many, though not all, countries in the Asia-Pacific region export capital and sustain their economies by exporting more than they import. In addition, we now see more trade within the Asia-Pacific countries, a healthy trend that is destined to continue. China’s present huge imbalance of trade with the United States is, in considerable part, the result of the movement of manufacturing and value-added activities from other countries in Asia to China in response to low labor costs. In a sense, some of their export surplus has been shifted to China. Looking at the situation as a whole, the United States and the Asia-Pacific region are interdependent.

Another way to put this is that the United States invests more than its citizens and its government save. Therefore we must import savings from abroad to finance U.S. investment. Since our environment for investment is attractive from a risk and return standpoint, savings from abroad have flowed to the United States. The counterpart of this imbalance is inevitably an imbalance of trade.

Most countries in the Asia-Pacific region are well known for their high rate of savings. Since their rate of investment is not as high as their savings rate, their savings wind up looking for inviting opportunities abroad. The counterpart of the mismatch of savings and investment is a need to export more goods and services than they import in order to keep their economies growing. Japan has been and today still is the most obvious example.

At some point down the road—maybe 5 years, maybe 10, maybe sooner—the United States will once again see private savings rising and governments operating with budgets that are in balance. Perhaps savings will rise to the point where we can finance our own investments or even more. Adjustments may also come in the form of a diminution of the willingness of others to send savings to the United States, which would then be reflected in rising U.S. interest rates and a stress on exchange rates. In any case, when such an adjustment happens, countries that have been counting on an export surplus to keep their economies growing will need to shift their strategies. They may very well find that their export-oriented industries, conditioned as they must be to compete on the world market, are much better developed than the domestic side of their economies. So they and we in the United States have work to do.



The Asia-Pacific region has prospered in the post–World War II period in considerable part because of the unusually peacful scene. The United States played the leading role here, including our efforts in the Korean War and Vietnam. (Oh yes, there were positive aspects to the American effort in Vietnam from the Asian point of view.) In any case, the security blanket provided by the United States created an environment conducive to economic development. Now, particularly with the strength of China, let alone Japan and South Korea and other countries, that burden is shifting. But the peace is also being challenged. Undoubtedly the most destabilizing development would be the spread of nuclear weapons, and here we must turn to the tension on the Korean Peninsula, so closely associated with North Korea’s nuclear ambitions.

North Korea has demonstrated its ability to fire a ballistic missile across Japan and no doubt can extend the range of such a missile, particularly if close accuracy is not an issue. I find it hard to believe that Japan would stand still for a North Korea with a nuclear warhead on a ballistic missile. No one can doubt that Japan can produce a nuclear arsenal very quickly. So can Taiwan. I can only assume that such developments would be China’s worst nightmare. So China, as well as the other countries in the region, has a huge stake in seeing that North Korea does not reach that point. Time is short; North Korea is already there or is certainly close. China also has immense leverage with North Korea, whatever the warmth or coolness of friendship may be between the governments. Thus, the emergence of five-power talks organized by China is a welcome development. So is the recent deployment of Chinese troops on its border with North Korea. But where can the talks go?

An additional reality is that North Korea’s economy is bankrupt and that millions of its people have starved. Those in charge maintain their authority through repression and brutality. Were they inclined to agree with China to end their nuclear program, no one would accept such an agreement without an extensive inspection regime, hardly compatible with repressive governance. North Korea has called on the United States to agree not to invade it. Perhaps the president could be persuaded to convey to North Korea what he has already said in a public letter to the president of China: that the United States has no intention of invading North Korea. Even if North Korea were to agree under these circumstances to a rigorously inspected destruction of its nuclear capability, however, the problem would remain. North Korea is inherently unstable, and the contrast with the relative wealth and growth in South Korea is compelling.

I believe we must prepare another agenda. Every South Korean leader talks of his dream of unification. Isn’t it time to bring that dream closer to reality? Plenty of problems await such a development, some of them difficult, but they are the kind of problems that can be solved. But where does that leave the North Korean regime? Can Kim Jong Il become a Korean Deng Xiaoping? More than Chinese mystique would be called for. Of all the problems in the Asia-Pacific region today, the most troublesome to my mind is the problem of security and the threats on the Korean Peninsula. As with many issues, the solution is obvious but the process of bringing that solution about is difficult. We must be analytic and constructive and think about the future.



In looking at the Freedom House classification of openness and democracy, you see a full range in the Asia-Pacific region. That was not always the case. At one of the G-7 summit meetings in the mid-1980s, French president Mitterrand gave the meeting an uncomfortable moment, declaring the discussions to be pointless and useless and saying that he did not plan to attend any further meetings. Some heads of government rushed to reassure him, which is what he wanted. Japanese prime minister Nakasone responded differently. He said, President Mitterrand, here you are in France, surrounded by democracies. You interact with each other constantly. Now look at Japan. We have to go all the way to Australia to find a sister democracy. So these meetings are important to the people of Japan, since they give us a feeling of a peer group and all the reinforcement that brings.

Great changes have taken place since then in the Asia-Pacific region. In addition to those countries that have become democracies, almost all have become more responsive to the concerns of their citizens. The information age and the Internet are powerful influences here. Against that background, let me talk briefly about China.

I remember vividly a conversation I had with Deng Xiaoping in July 1988 during my last visit to China as secretary of state. You will remember that, at the time, Gorbachev’s reforms in the Soviet Union were prominent in people’s minds. Glasnost and perestroika had become household words. I asked the Chinese leader what he thought of Gorbachev’s reforms. He scoffed, He’s got it backward. He’s loosened up the political system but he doesn’t have a clue about the economy. The result is chaos. So I said, What about you in China? How do you see your own evolution? He replied, I started the other way around, with economics, with farms, and with small businesses where opening up worked, so now I have demands for more of what succeeds and we have the two openings—within China and to the world outside. Our economy is growing; the policy is succeeding. What about the political side? I asked. You still control everything from Beijing. That will come later, but we’ll do it the same way, he said. More openness will come to the communities and the cities, and changes in governance will come from the bottom up just as with the economy.

In the light of what has happened in the last decade or so, Deng’s projections are impressive. I told this story to Chinese president (then vice president) Hu Jintao a couple of years ago when he was in San Francisco and asked him what his view was. He said he agreed with Deng Xiaoping (well, who in the Chinese leadership would disagree with Deng Xiaoping?).

Deng’s projection is sure to develop real challenges to governance in China. We can see the pressure of the information age on the central governing authorities. The SARS problem was badly handled and the immediate reaction drove a change in policy. The recent effort in Hong Kong to pass new internal security legislation resulted in half a million people protesting more than six and a half hours in brutal heat. The Hong Kong authorities (and who doubts that they consulted with Beijing?) backed off. I have heard people in authority in Hong Kong discuss this matter, and they say they have learned that they must consult and they must listen. In the light of my dinner conversation with him, I was fascinated to read new President Hu Jintao’s October 1 statement:

We must enrich the forms of democracy, make democratic procedures complete, expand citizens’ orderly political participation, and ensure that the people can exercise democratic elections, democratic decision-making, democratic administration and democratic scrutiny.

Cynics may scoff, but words matter, particularly when spoken by a head of government. How will the pressures for openness and responsiveness at higher levels be handled? The road ahead will not be smooth. Moisés Naím, the editor of Foreign Policy magazine, has argued that

China will almost certainly have an accident within 10 years that will slow its economic growth and destabilize its politics. Less certain is the nature of such an accident. Most likely it will be a hybrid—a crisis that starts as a financial accident and turns into a political maelstrom as the social aftershocks spread.

Although there is no precedent for a peaceful transition of power from one generation to the next that we see developing in China today, I wouldn’t sell short the ability of the people there to handle it in a reasonable way. Of course, we will all watch as this fascinating process unfolds. In doing so, we would do well to remember the advice of the late China scholar Michel Oksenberg:

We should be patient. Above all, human rights will be best advanced through institutional development: the development of the rule of law in China, the strengthening of Chinese parliamentary systems, the introduction of elections at lower levels. All these developments are now under way in China. We should work constructively with the Chinese. We should not preach at them.

Mike has given us wise advice over many years.