THE COMING CAPITALIST REVERSAL
BY GEORGE GILDER
The East Is Green
Management guru Peter Drucker’s great insight is: “Don’t solve problems.” When you solve problems, you end up feeding your failures, starving your strengths, and achieving costly mediocrity. In the end, problem-solvers tend to fail in a global competitive economy, where winners pursue opportunities.
The Republican victories this November mark a turning point for both the party and the nation. The issue is whether the United States is going to be paralyzed by a politics of solving problems—prescription drugs, accounting foibles, antitrust champerty, green technophobias, income gaps, and digital divides—or whether it embraces a politics of opportunity.
Today, the United States is no longer the spearhead of world capitalist growth and supply-side economics. The global capitalist economy is undergoing an epochal inversion, with Europe and the United States sinking into an overregulated, technophobic, bureaucratic slough, while the former Communist world is embracing the low-tax, deregulatory regime last espoused by President Ronald Reagan. Usurping the Reagan mantle and capitalist vanguard are the former Soviet Union—with its 13 percent national flat tax—and the People’s Republic of China, with zero marginal tax rates on agricultural output, a zero capital-gains tax, an engineering-dominated educational system, and coastal “free zones” with their entrepreneurial culture of riotous growth and creativity.
I just returned from a week in China, my first visit since 1988. I was addressing a Forbes CEO conference in Hong Kong, now part of China under the new model of “one nation, many systems.” Washington regards China as a problem—in fact it is the greatest opportunity in the history of capitalism. Washington deems Jiang Zemin and the rest of China’s leaders to be dangerous Communists. Through our misbegotten export controls, the U.S. government attempts to prevent Chinese companies from purchasing microchip lithography gear that can resolve a line smaller than 0.25 microns. But the United States already depends on China’s manufacturing prowess for thousands of crucial goods. And within two years, China will command more advanced, more diverse microchip manufacturing capabilities than we do.
I believe that Jiang—now settling into a back seat as a newer set of Chinese technocrats takes command—is the single greatest capitalist leader of the late twentieth century. Way back in 1985, when the one-time electrical engineer became minister of electronics, he was smart enough to consult Caltech professor and regnant genius Carver Mead. Under Mead’s guidance, Jiang—that rarest of politicians today, a trained engineer—focused China on what we call the telecosm: the weave of industries that exploits the powers of the microchip and electromagnetic spectrum for computing and communications. He also adopted the most aggressive supply-side program in the world economy. Beginning with farms that were not producing their quotas, he established what is essentially a zero marginal tax rate for incremental agricultural production: anything above quota, farmers could keep for themselves or sell for a profit. To any supply-sider aware of the global evidence that lower tax rates yield higher revenues, the response was predictable: within three years Chinese farm production tripled and created the foundations for an economic miracle.
Unleashed by newly created free zones along the coast—where surplus farmers quickly found new employment—China’s miracle was entirely capitalist. China still supports a huge state-run sector that comprises close to 70 percent of measured output. According to government data, just 514 state-run companies command 60 percent of industrial assets and half of all profits. But the number of registered private businesses soared from 90,000 in 1998 to 2.3 million in 2001. All the growth and all the opportunity are emerging from the free zones.
In doing so, China reversed the problem-solving dynamic that paralyzed post-Soviet Russia. The former Soviets initially tried to deregulate centrally, from the inside out, opening up the whole economy at once—thus arousing maximum resistance by all the entrenched, established forces. China’s free zones reversed that: people wanted to move into them, pursuing emancipation and prosperity. The result has been the fastest, most technologically inventive industrial transformation in history. Launching low-taxed free zones, focusing education on electronic engineering, Jiang’s program has evoked growth so explosive as to be unbelievable if it were not visible to the naked eye.
And yet this is regarded to be a problem in Washington, where the threat to old ally Taiwan is considered particularly menacing. Indeed, Jiang has had to deal with the crippling burden of China’s Communist apparatus and the People’s Liberation Army. He has had to confront memories of Taiwan’s humiliation of China—this little island just offshore that out-produced the mainland. I talked with Morris Chang at the Forbes conference in Hong Kong—Morris used to be vice president of Texas Instruments, and he moved to Taiwan to establish the Taiwan Semiconductor Manufacturing Corporation. TSMC has become the world’s largest and most advanced “foundry”—independent semiconductor fabrication facility—fulfilling Carver Mead’s prediction decades ago that the industry would end up with design and manufacturing in separate spheres. The leading business figure in technology in Taiwan, Chang wants to invest nearly a billion dollars in silicon fabs on the mainland. His chief problem is the United States, which has restrictions on selling the latest-generation chip-manufacturing gear to China—as if somehow Chinese prosperity is a threat rather than an immense and thrilling opportunity for the world. If Morris Chang is willing to embrace mainland China, maybe the various Morrises in Washington should be ready as well.
In 1988 when I visited China for the Cato Institute, my theme was that the greatest untapped resource in the world economy was not uranium or natural gas or gold or platinum—it was the Chinese people. Expanding on Mao’s famous dictum, I said: “Let a billion flowers bloom.” That’s what is happening in China today.
At a time when much of the U.S. electronics and optical industry is mired in depression, China offers the best hope for the U.S. economy. China is already the world’s fastest-growing market for semiconductors. Newly minted companies are pouring millions into gear for metropolitan optical networks. Its cell phone market is already bigger than America’s. Single-handedly—if that is the word for a country of 1.3 billion people—China can save the telecosm.
With our increasing webs of obsolete regulation, litigation, and bureaucracy, American capitalism has often needed a bailout from Asian challengers. Over the last five years, South Korea did its part by proving the superiority of Qualcomm’s made-in-America CDMA wireless telephony, at a time when AT&T, Bell South, and Cingular—with the U.S. State Department’s active encouragement—were busily selling out to the European standard, GSM. Led by Samsung, South Korean carriers demonstrated CDMA’s inherent superiority and reversed the tide.
In China, similar demonstrations are underway, not only by China Unicom—the CDMA carrier in China—but also by Chinese companies making routers and switches such as Huawei and ZTE, and by companies in optics. Conceived by Jiang when he was electronics minister and spearheaded by scores of thousands of Chinese technologists educated over the past two decades in American universities and companies, this technological insurgence is a great opportunity and challenge for the United States.
What is our response? One part, of course, is regulation—try to slow down this Communist monster with export controls. Another, to gut our own technology economy, by forcing Chinese students at U.S. technology universities to return home, and by maintaining a fifty-state maze of communications laws, taxes, and price controls that paralyzes our nascently networked economy. Even in the Bush administration, the Justice Department sees telecom as an arena fraught with monopoly perils.
But there is absolutely no possibility that U.S. regulation can stop the advance of Chinese electronics technology. America will soon be more dependent on Chinese technology than China will depend on the United States. And meanwhile the vain attempt to stop the unstoppable will wreak devastation in the very communications and optical technologies in which the United States has long led the world.
In fact, such challenges are not unusual in our history, and the United States has thrived in the face of every one of them. Chinese institutions now graduate some ten times as many engineers as we do. But during the ’60s and ’70s, the Soviet Union also created many scientists and engineers—three times as many as we did—and there were many dolorous predictions of the future of the United States in the face of the challenge of the Soviet Union.
In the mid-’80s, Japan constituted a similar challenge. We all remember the prophecies that we would be flipping hamburgers and processing laundry for the Japanese wafer fab workers. Even Peter Drucker, who almost never says anything wrong, declared that making memory chips in the United States was like growing pineapples in North Dakota. Many companies took his word to heart.
But the United States responded with entrepreneurial creativity. We changed the rules of the game and compensated for the educational failures of American students by attracting immigrants. While our own elites studied pettifoggery and environmental catastrophe theory, we allowed foreign countries to supply the engineering talent needed by Silicon Valley’s entrepreneurs. We also moved to a revolution in chip design, which Carver Mead largely conceived. We changed the field of engagement and provided a cornucopia of new inventions that erupted as the Internet and personal computer revolutions. Those two great themes have carried the U.S. economy forward.
To thrive in this new world of the capitalist inversion, the United States will have to change the rules of the game again. This means learning how to educate our own children in math and science. It means unleashing the broadband economy now paralyzed by regulation and litigation. It means recognizing that no tax rates over 20 percent collect any net revenues, and lowering our tax rates to the levels imposed by our competitors. It means that George W. Bush has to adopt the supply-side inspiration of Ronald Reagan. We must change the rules of the game again, or the great capitalist inversion means a twenty-first-century world economy of overwhelming power—and overwhelmingly made in places willing to throw off their chains from the past and seize opportunity now. |
