FROM THE OFFICE OF PUBLIC AFFAIRS

Thank you, Vice-Dean Chen, for that kind introduction and Professor He for hosting my visit today. Let me say first how delighted I am, as a graduate of MIT, to come to the MIT of China. A very distinguished Qinghua graduate - Premier Zhu or perhaps here I should say Dean Zhu - probably put it the other way round when he visited MIT earlier this year. But either way, it is good to hear that the great minds of Beijing and Cambridge have been working together to educate leaders at your school of management for a market-driven future.

China's transition to an open market economy is unique. But China is not alone. The transformation that has been taking place here during the last two decades of this century has echoes around the world. Powerful forces are creating a new global economy for the 21^st century: one that holds enormous opportunities for improving the lives of the world's people, but that also poses new challenges and risks.

Today I would like to reflect on these global trends, and their implications for China. I do so as someone who is a specialist in economics, not politics - as someone who recognizes that the long-term interests of both of our countries are well served through China's economic development.

Many elements are building this new global economy. But three key trends are at its center.

A recent cartoon in an American magazine depicted a small boy telling his friend that what he wanted to be when he grew up had not yet been invented. That captures some of the spirit of this new era. Modern advances in information technology, transportation, and communications are taking us to a post-industrial age, with profound implications for economies and societies.

In this new era:

• Brains matter more than brawn - how much you know matters more than how much you can lift.

• Innovation matters more than mass production - a product's value is measured not in pounds or kilos, but by the weight of ideas that went into making it.

• And information matters most of all - how easily it can travel through the economy and how well it is used.

These technological changes, in turn, have helped to propel the second major development: the erosion of government economic controls and the spread of market forces.

It cannot be an accident that Soviet-style communism, planning ministries throughout the developing world, and large corporations run by command and control all ran into brick walls in the same decade and had to be restructured. Economic success means striking the right balance between, on the one hand, the central coordination of activity, and on the other, the motivation of individual talent and ideas. Shunning either of these entirely is never right. But new technologies have helped shift the balance between the two.

Increasingly, the balance of economic advantage has tilted firmly in favor of systems in which economic power and opportunities are more decentralized - and the skills and ideas of the individual are given greater weight. 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 the capacity to dictate it.

These two trends come together in the third and perhaps most spectacular aspect of the new global economy: one in which goods, capital, and information flow freely across the globe to the places where they will be most effective in spurring growth. Creating an environment where there is competition for capital is today a key to economic success - more than was ever the case in the past.

When history books are written 200 years from now about the last two decades of the 20th century, I am convinced that the end of the Cold War will be the second story. The first story will be about the appearance of emerging markets - about economies where more than three billion people live moving toward the market and seeing rapid growth in incomes. For the first time in human history, living standards for huge populations have quadrupled or more in a single generation.

This record of growth in emerging markets is an achievement, I would argue, whose importance in economic history can best be compared to the Industrial Revolution. For business, this means commercial opportunity on a huge scale. For governments it means managing in a single decade economic changes that might once have taken half a century. For the world's people - it is driving improvements in health, literacy, and nutrition that were unthinkable even two decades ago.

These lessons - the importance of technology, the centrality of market forces, the need for global integration, and the focus on flexibility in response to change - will be crucial components of economic success in the 21^st century. Our own success in the United States in recent years has been predicated on just these factors: a culture that encourages entrepreneurship and technology; an economic environment that lets the market dictate outcomes; continuing market reforms that allow capital to find its most efficient use; and dramatic changes in our fiscal balance that have led to budget surpluses and reallocated trillions of dollars for private investment that otherwise would have been invested in the sterile asset of government paper. These lessons are also applicable to China's economy as it prepares to enter the next century.

What China has achieved in 20 years of economic reform is truly remarkable:

• In 1978 Deng Xiaoping dreamed of doubling and redoubling China's GDP by 2000 - China passed that milestone earlier this decade, and has since exceeded it.

• China has risen to become the 11^th largest trading nation in the world.

• Most important, 200 million fewer 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 20 years ago.

These gains have come from a potent recipe: freeing labor from the land; tapping China's vast stock of human resources; and welcoming foreign capital, management, and technology into China. These policies have helped China quickly make up some of the economic ground it had lost relative to other economies earlier in this century. But catch-up, by definition, can only take an economy so far - and increasingly China seems to be coming up against diminishing returns.

National problems demand national solutions that respect national customs and practices: to overcome the enormous obstacles in its path, China needs to continue building a market economy that will work for China. But it also needs to build one that will succeed in today's global economy. And the laws of economics, like the laws of physics, cannot be repealed.

In that sense, China's core economic challenges are the same ones that every economy faces at the dawn of a new millennium: the need to build policies and institutions for a post-industrial age; the need to allow market forces to operate more freely; and the need to unleash the benefits of integration with the global economy for business and people.

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 finally realize the full creative potential of the Chinese people, and will support innovation and investment over the long term - and over all of China:

• That means building the right intangible infrastructure for a modern market economy: including the rule of law, fair tax laws and enforcement; high levels of transparency; private ownership and free land markets; intellectual and physical property rights; independent courts that enforce laws and contracts; securities markets that deter fraud and protect investor rights; and social spending targeted to those really in need.

• That means support for institutions that can help bridge the gap between good ideas, on the one hand, and good products and services, on the other - the kind of gap that Qinghua's School of Economics and Management is working to fill.

• And most of all, perhaps, it means recognizing the enormous value of not merely an open market for products and services - but an open market in ideas.

Just as in the mass-based economy of the 20^th century an effective system of transport was critical to a country's growth, as we enter the 21^st century the free flow of ideas has become a prerequisite for economic success.

The second major challenge is to free this new economy from the weight of inefficient state-owned enterprises and a financial sector that expends vast amounts of resources supporting them.

What this will require, in China no less than in other transition economies, will be a fundamental change in the incentives facing managers of these enterprises. In the end, businesses will succeed when they face hard budget constraints on their activities - not the costly prop of continued state support.

Recognizing the seriousness of the problem, the Chinese government has made financial sector reform a high priority in recent years, and begun that challenging process. Promising recent steps include the reorganization of the People's Bank of China along regional lines to reduce local political pressure on supervisors, and the creation of asset management companies to deal with non-performing loans at state commercial banks.

There has been considerable debate in recent months about whether the Chinese reform process is strong enough to withstand the effects of further opening China to the rigors of foreign competition. In light of global experiences in the 1990s, the more relevant question may be whether Chinese reforms can truly succeed without it.

One of the most impressive qualities of the leaders who have shaped China's economic reform process has been their recognition that a market transition can be powerfully supported by - indeed, will not be fully achieved without - opening China to the global economy, and all the capital, competition and new ideas that it can offer. In my meeting with Premier Zhu yesterday in Lanzhou, we engaged in a valuable and candid dialogue on the importance that each of our nations attach 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 ultimately believe that the best framework for our 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. This step would further integrate China into the dynamic world economy, contribute to a more stable and efficient business environment, and spur productivity gains as competition directs capital to its best available use.

The potential gains for America of an enhanced trading relationship with the world's most populous nation are also enormous - not only because it would provide sounder and surer access by U.S. manufacturers and service providers to China's markets, but also because by contributing to China's prosperity through the WTO, it would at the same time enhance the prosperity of the entire global economy.

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 fully live up to the founders' intent if it does not include a country that is home to one-fifth of mankind. But it can do so only by setting standards that ensure that nations joining the WTO have firmly committed to its basic principles: commercial reciprocity and respect for international law.

The economic principles for national success that I have described today are as difficult to implement as they are easy to state. In any country, there is a paradox in this moment: just as a new global economy creates more opportunity than ever before, it also brings more uncertainty. The challenge of crafting economic policy in these circumstances is one of balance:

• A balance between moving toward necessary objectives and maintaining stability along the way;

• A balance between responding to international global realities and upholding domestic traditions;

• And a balance between the virtues of competition as a motivator and driver of success and the importance of cohesion and cooperation as a source of strength for our societies.

Successfully striking these balances is a challenge for every country.

There is little doubt that continuing the important working relationship between the United States and China - a relationship that must be firmly grounded in mutual respect - will be critical to the shape and prosperity of the 21st century global economy. And yet, we should never forget that the ties that bind two economies together reach well beyond official meetings, like the one that has brought me to China today. The growing connectedness of our two countries also shines through on a business-to-business level - and the rising number of exchanges that take place person-to-person.

You have felt that growing connectedness firsthand in your collaboration with MIT. But you are not the only ones:

• An estimated 400,000 American jobs now depend on the business their companies do in China - in the past decade alone, our exports have quadrupled. And foreign direct investment has left American firms with $6.3 billion invested directly in China's economic success.

• Today, more than 100,000 Chinese students and scholars have had the opportunity to study in the United States. Thousands of American teachers and students have had the chance to come to China - and across China, Americans are also working with local governments, universities and citizens' groups on projects such as teaching poor rural women to read and hooking up schools to the Internet.

How China will define its greatness in the decades to come is a question only China can answer. But by working with China as it reforms and by expanding our areas of cooperation we know that we can advance shared Chinese and American interests and values. Thank you.