One Man's View of the World

by Lee Kuan Yew

I think in China social mobility is still there. It’s not a stratified society in this sense. If you take Britain, which I happen to know well, every generation produces a top of the crop and the top rises and they marry each other and they stratify at the top. And their children, because of both genes and educational opportunities, stay at the top. China will take a long time to reach that situation. Singapore is in danger of reaching that situation sooner than expected because of our rapid educational advances. So people are rising very fast, taxi drivers’ children go up to university, boys marry girls, both from hawker backgrounds or taxi driver backgrounds and when they marry, they stay on top, and then the genes plus the educational opportunities that they give their children create that stratified class. It happens with every society. Then finally, there’ll be enough dissatisfaction, the ground will say, “All right, let’s reshuffle the pack of cards.” That’s how the communist revolution took place. Kuomintang got overthrown. Now a communist elite has emerged. But well, we have not reached that position yet.

They are no longer communists in the strict sense of the word, but pragmatists who are determined to forge a rich, developed and technologically advanced country.

Each of the four preceding paramount leaders has left his own unique imprint. For Mao Zedong, it was perpetual revolutions. For Deng Xiaoping, it was reforming and opening up. For Jiang Zemin, it was consolidation and development. And for Hu Jintao, it was harmonious society – in particular, reducing the gap between the rich and the poor. What legacy will Xi leave?

Mao was a great man who got China back on its feet. In 1949, after 200 years of turmoil in his country, he stood on Tiananmen and declared that the “Chinese people have stood up”. As a revolutionary, Mao was second to none. He was a master of guerilla warfare and with deft military moves, defeated the Nationalists and unified the nation.

Fortunately for China, Deng Xiaoping reversed the course of the nation. He came to Singapore in 1978, after Bangkok and Kuala Lumpur. He wanted us to get together and block the Vietnamese from attacking Cambodia and, if they did attack Cambodia, to thwart them. I think that journey was an eye-opener for him.

He had congratulated me over dinner and when I asked what for, he said: “You’ve got a beautiful city, a garden city.” I thanked him but added: “Whatever we have done, you can do better because we are the descendants of the landless peasants of south China.

In Singapore, Deng saw how a small island without natural resources was able to create a good life for its people by bringing in foreign investments, management, technical skills. He returned to China persuaded that he needed to open up its economy to the world. It was a seminal moment in China’s history, a key turning point, and the country has not looked back since.

Deng deserves most of the credit for putting China on a different trajectory. When he wanted to open up, many Old Guard leaders were opposed to it. But he was a strong-willed character. He brushed them aside and went ahead and did it. Without him, the turnaround would not have happened so fast, because he was the only one with the Long March credentials to override the doubters. A physically small man, but a giant of a leader – Deng is undoubtedly the most impressive international leader I have ever met.

At the heart of the matter is whether or not one believes China’s repeated guarantees that it seeks nothing more than a peaceful rise and that it will never become a hegemon. There are two views. One, that the Chinese will quietly become strong and quietly increase their influence, without acting like a bully. The other, that they’ll flex their muscles and try to browbeat everyone. I think they will choose the former, but grow their muscles at the same time.

Deng Xiaoping was convinced that it was wise for China to maintain a low profile as it gradually became stronger.

They are also mindful of the need to avoid the paths that Japan and Germany took. The rise of Germany and Japan resulted in a competition in Europe and Asia respectively for power, influence and resources that led to two terrible wars in the 20th century, and ultimately ended their rise. If China gets involved in a war, it risks internal disturbance, clashes and disorder, and it may go down again – perhaps for a long time. So, for the Chinese, the rational calculation would be, “We’ve waited so long for this opportunity to catch up with the developed world. Why be in a hurry and jeopardise our gradual rise?”

When the China-Asean free trade zone was proposed by Zhu Rongji, the former Chinese premier, a decade ago, Asean governments were astounded because we thought China was hesitant to open up its economy further through bilateral and regional FTAs. It was a strategic move on the part of the Chinese to develop strong economic ties with Asean so that Asean can see China’s growth as an opportunity and not as a threat. I told the US trade representative then that if there was no US-Asean FTA within 10 to 20 years, Asean’s economy will increasingly integrate with the China market, and the US will become a secondary market to us.

Militarily, the Americans are still far ahead in the game. China’s defence budget, while experiencing double-digit growth every year, continues to trail the US defence budget by a factor of six to one – and this is reflected in the superior military technology of the Americans. Eventually, the Chinese will want to become as strong a military power as the US. This will take them many decades.

In time, I see the Chinese striving to keep their eastern seaboard free from American spying. At the moment, Americans are able to come as close as 12 miles from the Chinese coast and look in. Now, just imagine the reverse. If the Chinese navy and airforce – its aircraft carriers – were to come that close to the American coast, the Americans would find it intolerable. They would never allow it. So you can imagine how the Chinese feel.

Some scholars predict, based on historical precedent, that as one great power rises and the existing superpower sees its dominance threatened, military conflict between the two is very likely, if not unavoidable. In the case of China and the US, I do not agree with them.

It is not in the interest of either power to face off on the battlefield. Both countries have nuclear arsenals, so they know there is a potential for extremely disastrous consequences. Furthermore, unlike how it was with US-Soviet relations, there is at present no bitter, irreconcilable ideological conflict between the Americans and a China that has enthusiastically embraced the free market.

The biggest crisis that can arise between the two is over Taiwan. But I don’t see America ever going to war with the Chinese to keep Taiwan independent. It doesn’t pay. You can fight and win the first round. But are the Americans prepared to fight, and fight, and fight again? Are they eventually prepared to pay the price that China is willing to pay over Taiwan?

The Taiwanese will realise that over time, if they have not already done so. Ma Ying-jeou has more than half acknowledged it with his slogan, Bu tong, bu du, bu wu. No reunification, no independence, no use of force.

Xi Jinping is taking over the top job in China at a time when China is at its strongest in the last two centuries or so. Is he going to be more assertive? A: I don’t think that will make him feel elated and therefore cause him to throw his weight around. He’s a thoughtful man and he knows it’s not in China’s interest. So my impression of him is, he will continue Deng Xiaoping’s policy of keeping your light under your bushel, or tao guang yang hui.

Are they less rigid in their thinking? You wrote in your memoirs about how, in the early days, Chinese officials tended to stick to the script and were very stilted in their responses. A: No, no, they have loosened up. That was a period when the regime was very controlled in the centre and anybody who speaks his mind may speak it wrongly and get himself into trouble. Now they’ll talk quite freely to you.

Well, I told Xi Jinping that in another few years, he will not be coming to Singapore to learn from us. We will be going to China to learn from them. He, of course, protested. He said, no, no, it’s our systems that he’s interested in. By that he meant they did not have the kind of framework which the British system provided us. We’ve built institutions that can support a leader, a weak leader, without it breaking down. But not for long of course.

The future of Taiwan is not determined by the wishes of the people of Taiwan. It is determined by the reality of the power equation between Taiwan and China and whether the Americans are prepared to intervene in the situation.

Q: How much influence does China still have over North Korea? A: The survival of North Korea depends heavily on China. From time to time North Koreans were almost starving because of the way they run the economy, and China gave them food and succour.

Q: Is it in the interest of China to encourage North Korea to open up its economy as Deng Xiaoping did to China? A: Well, they took Kim Jong-il around to Shanghai and so on to show him how he could improve his economy without losing control, but nothing came out of it.

A few years ago, a Chinese leader in his 70s asked me, “Do you believe our position on peaceful rise?” I answered, “I do – but with one caveat. Your generation has been through the anti-Japanese war, the Civil War, the Great Leap Forward, the Cultural Revolution, the Gang of Four, and now the Open Door policy. You know there are numerous pitfalls, and that for China to go up the escalator without mishap, you need stability internally, and peace externally.

There is nothing inexorable about the rise of any country. China’s economic growth can continue over the next few decades if nothing happens to derail it. But there are a number of serious domestic challenges that will take the Chinese government considerable energy, time and resources to tackle. If any of these spin out of control, there could be deep economic recession or severe social unrest. Even if stability is maintained, there could be limiting factors. Why, for instance, wasn’t the iPhone invented in China? Intellectual property laws and the enterprise system are not at present providing sufficient incentives to liberate all the creative power that we know clearly from history that the Chinese people possess. But I am optimistic that there is sufficient will and competence within the present Chinese leadership to deal with these domestic challenges sensibly. Over the three and a half decades of gai ge kai fang, or reform and opening up, China has proven capable of reflecting on misguided policies and reining them in before they caused bigger problems.

Mayors were at one time judged by how much their cities had grown, regardless of whether it was sustainable. So instead of focusing on projects that added value in the long term, they simply concentrated on boosting GDP figures. As a result, they ignored the environment, ignored long-term planning. But they are correcting this too.

Moving forward, one possible source of serious tensions is the growing wealth gap between the coastal provinces and the inland provinces and, to a certain extent, within cities. The coastal cities are growing at least one-third faster than the inland cities, and starting from a much higher base. They attract more investments, create better jobs and provide a better standard of living for their residents. And the gap is widening.

Of course, some disparity in growth is bound to exist in a country as vast as China. I do not believe the western provinces can ever be as prosperous and advanced as the coastal and riverine provinces. Take the United States. The East Coast and the West Coast are more populous and prosperous than the inland, with the exception of Chicago. But Chicago has the St Lawrence River and the Great Lakes, so ships can sail in. The geographic advantages of being near the sea cannot be fully overcome. In China, fu...

The Chinese have a hukou or household registration system. It’s like the Japanese koseki system – you cannot transfer your residence from A to B without permission. And if you do, in the new place of residence, you will not have the right of access to health services, housing, schooling for children, and so on. It has not stopped migration.

Rural workers have moved to cities all the same, doing the heavy and dirty work around the cities, without benefit of basic social services for themselves or their children. It’s an untenable position. They know it. But if they allow free migration, the cities will all be swarmed. So they are trying to find solutions.

The reserves of manpower in the western provinces will carry China forward at a growth rate of about 7, 8, 9 per cent for 15, 20 years. After that, increases will depend on productivity – how they educate their people to produce more in the same number of hours. In other words, how you train them and equip them with different skills and working instruments – whether in universities, polytechnics or technical institutes.

An even more pressing issue China faces is what to do with its state-owned enterprises that are less efficient. Here, China faces a fundamental problem of personal motivation. They are trying to get officials to be more like private entrepreneurs. That will not work because, unless you are holding on to 20 per cent of the shares, and you live with the fear that the stock market could crash on you, you won’t wake up and do something about it. Your salary goes on. Whether the business goes up or goes down, you just get your salary. But when you have your own wealth involved, your whole livelihood, all your stocks in a company, you worry about it 24 hours a day.

Poor people still behave like poor people even when they are getting rich. You just want to accumulate more wealth and have more savings because you have been poor for so long, you’re afraid you might become poor again. You will start to spend only when you become confident and believe that this prosperity is here to stay and that it’s silly to be crimping your lifestyle. They must come to that stage for their economic growth to be sustainable. They do not have the luxury of time. It is a transition they have to make within one or two decades.

Q: We’ve seen China’s dramatic transformation since the late 1970s. Can you sketch for us what in your view are the main factors that account for this incredible transformation of China’s economy? A: Well first, I think it’s related to Deng Xiaoping changing their policies. It was a reclusive China isolated from the world. He came to Singapore, watched how without a hinterland we were prospering with external trade and investment. He opened up Special Economic Zones, they prospered, more economic zones, they prospered. And Zhu Rongji brought China into the WTO and the whole country is now part of a free investment area and as long as there are cheap, skilled labour and manpower, professional manpower, they will be a very attractive, low-cost export base. Meanwhile, they are also increasing their consumption as they get more affluent.

Q: So, in a sense, is it a repetition of the Asia tiger story? South Korea opened up, Hong Kong opened up, Singapore opened up. A: No, the scale is so vast and different. The four tigers could be put into one province in China! It’s a huge scale and the consequences of that economy opening up will impact the whole world’s economy in 20, 30, 40 years. I mean, look, the euro is in trouble. Wen Jiabao visits Europe, Angela Merkel comes to Beijing to return the visit because Wen Jiabao has $3.2 trillion worth of reserves. That’s how the economic equation has changed. I do not see them frittering away the $3.2 trillion. They might buy some euro bonds on the cheap as an investment, not as a giveaway. It’s in their interest that Europe does not collapse or the exports to Europe will be hurt but it’s not in their interest to give things away for free.

Q: But China has not been averse to learning from the West. After all, Marxism came from the West. A: No, no, no, that’s a different problem altogether, and I don’t think they believe in Marxism anyway. That was a period when they followed the Soviet Union. That was a theological allegiance. When they speak of democracy, for example, they don’t mean what America means by democracy, what Britain means or what we mean. I mean the fundamental rule, the real test of democracy is: Can you change governments by the vote? That’s all. They have studied us, how did we stay in power? We have the vote. And when we lost one segment, we have to prepare for the next round where we either lose more seats or we hold our own or regain those seats.

Q: The hukou system has been the subject of intense debate in China for some time, with many calling for it to be abolished. Do you see the Chinese government changing their policy on hukou, maybe not overnight, but gradually allowing more movement, more flexibility in urban migration? A: They may, but that means they will impose on the cities, the city authorities, the burden of taking in these people. Unless they’re given more revenue, how do they carry the cost?

Q: A recent World Bank report warned that the Chinese economy is headed for a dramatic slowdown unless it makes fundamental changes to its economy. And it highlighted the need to privatise state-owned enterprises. A: It is the less efficient method. The motivation of the managers in state-owned enterprises is not the same. They get directives: Try harder, be more efficient. But whether you’re efficient or not you still get your salary. The change comes about when you are the owner of the property. That’s your total wealth at stake and you’ll stay 24 hours out of 24 on the job. Are they prepared to do that? In Russia they privatised and the oligarchs just took over huge chunks of the economy. Some of them ran them efficiently after that because it was their property.

Q: Supposing the inefficiencies of the state-owned enterprise system caught up with them and the economy slowed down as a result, would that be sufficient reason for them to make the change? A: I cannot say. If the slowdown is severe, they’ll have to think of a way to motivate the managers or to replace them with more commercially minded ones and give them a stake. How do they do that? Giving it to their friends and their party comrades? How does that ensure that they are people with the right attributes to run the company? If there are small and medium enterprises which they allow to grow and entrepreneurs emerge, then these small and medium enterprises could later on take over these state enterprises because they are really people who have come up on their own. They’re savvy and know how to work with market forces.

When they come back they are slotted into their proper place, which is in the middle levels, and by the time they get to the top, they’ve already been absorbed by the system and they will act like their superiors have done. That’s their problem. I mean if they allowed middle management to go to America and come back and take over and run a different system, then I think it’s possible, but that means giving up power, which I don’t see them doing. It just goes against the grain. What will they do after that?

A: Convertibility, I see them as possibly aiming for. But convertibility does not mean a fair exchange rate. You can convert and undervalue your currency to increase your exports. They will let it go up but gradually. They will always want the advantage of lower cost exports. It’s an export-driven economy and not an economy driven by domestic consumption as in the US, and the US wants them to convert to that system. I think eventually they will be forced to convert to that system but then you must have a change in the mentality of your middle and lower-middle classes. You must encourage them to consume and not simply save. I’m quite convinced that in the end domestic consumption is their only ultimate source of sustainable growth. But for that to happen, you must also redistribute growth, because those in the inland provinces don’t have the spending power. You must have all boats rising.

America is a society that attracts people and retains them. They have been taking in the best talent from Asia. Look at the number of Indians in their banks and universities – Vikram Pandit, for instance, the former CEO of Citibank. Some Singaporeans are choosing to stay in the US after studying there. That is why I am in favour of sending students on scholarships to Britain instead, because I am sure they will come back. In the UK, you do not stay behind because you are not welcome. And because the economy is less dynamic, there are fewer jobs for you.

If you want the competitiveness that America currently has, you cannot avoid creating a considerable gap between the top and the bottom, and the development of an underclass. If you choose instead the welfare state, as Europe did after the Second World War, you naturally become less dynamic.

The British used to make great discoveries – steam engines, textile machines and electric motors. They won many Nobel Prizes for science. But very few of their discoveries were developed into commercially successful ventures. Why is that so? Long years of empire over two centuries shaped a society in which old wealth and landed gentry were held in high esteem. The nouveau riche was regarded with disdain. Bright young students aspired to become lawyers, doctors and professionals – people who would be admired for their intellect and the use of brains rather than hard work and the use of hands.

Rhetoric aside, Americans fundamentally believe that tomorrow will be a sunny day. That explains their propensity to spend, borrow, and spend some more. The Chinese and the Japanese, on the other hand, always believe there may be an earthquake or some other disaster around the corner, so they feel the need to put something by. I admire the optimism in American society: their can-do approach to life, their belief that every problem can be solved if resources are brought to bear on it and that everything can be broken up, analysed and redefined. But I probably would not want to live in America permanently. If I had to be a refugee, like the former South Vietnamese prime minister, Cao Ky, who went to California, I would probably choose Britain, which I consider a less stressful society.

The fundamental problem with the euro is that you cannot have monetary integration without fiscal integration – especially in a region with spending and thrift habits as diverse as those of Germany and Greece. The incongruity would break the system down eventually. For this reason, the euro was destined to flounder, with its demise written into its DNA.

I am not convinced, therefore, that the euro can be saved, at least not in its present form, with all 17 countries remaining in the fold. From the inception of the euro project, clear-eyed and well-respected economists, including the likes of Harvard Professor Martin Feldstein, had been sounding alarm bells about its inherent paradoxes. The British did not join because they did not see it working. They were not convinced about the benefits and were fully cognisant of the dangers. However, the governments which joined the eurozone in 1999, as well as the populations that elected them, while eager to move on the single currency, were not prepared to accept fiscal integration because of the loss of sovereignty that it obviously implied. In the end, their choice to go ahead with the euro anyway reflected a misplaced belief that Europe was somehow special enough to overcome the contradictions. It was a political decision.

In the United States, one currency can work for 50 states because you have one Federal Reserve and one Treasurer. When one state runs into economic hardship, it receives generous transfers from the centre in the form of social spending on individuals living in that state and government projects.

The other extreme works too, of course – that is, Europe under a pre-euro system, with each country having its own finance minister and managing its own currency. Under that system, when one country experiences a slowdown, it can roll out remedial monetary policies because it is free from the shackles of a common currency. These include expanding the supply of money – what the Americans call “quantitative easing” – and devaluing the currency to make the country’s exports more attractive. But these were tools that the eurozone countries gave up as a result of their entry into a common monetary community. They did so, furthermore, without ensuring that there would be budgetary transfers similar in type and magnitude to those that depressed states in the United States receive.