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Cooperation Between Capital-Rich and Labor-Rich Countries, Part 1

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Thank you very much, Mr. Ambassador, for that kind introduction. Ed Crane, Luis Pazos, all of the people who have made this event possible, it is a pleasure to be here.

The atmosphere and the climate in which I am here are very different than they were the only other time I was in Mexico City, which was about 13 years ago. At that time, the people who were sponsoring my appearance here decided that I needed a 24-hour police guard, because I was at that time the object of a great deal of calumny, all because of what my colleague Al Harberger had done. He was the chief guide helping an extraordinarily able group of Chilean economists resolve their country’s economic problems, but I got much of the blame. At any rate, it is in a very different spirit that I am here.

I appreciate very much what the Ambassador said, but I am not sure he would want to repeat it after what I am going to say, because I was reminded by his comments of what happened to me a year and a half ago in Poland. The United States Information Agency arranged for me to give a talk at a prestigious club in Warsaw, and they were a little upset when I announced my topic: “Why the United States Is Not the Right Model for Poland.” And that could also be my topic tonight. The United States during its first 150 years or so, yes, but the United States of the past 50 or 75 years, no; because the United States of the past 50 or 75 years has been a country which has been moving away from its fundamental principles of freedom, of private markets, of an open society, and moving increasingly toward a society in which government controls resources, decides what people should do, and tries to run our society.

In recent years, we have had two major changes that have altered the entire environment. One of those is very familiar; it’s the one that everyone talks about: it’s the collapse of communism, the fall of the Berlin Wall, the idea that maybe after all it is not really true — as some textbook writers were saying only a few years ago — that collectivist societies have the great advantage of being able to use all their manpower. They did use it all, but for what?

The second major change is less recognized, and yet fundamentally more important, although the two are closely connected. The second major change is that technical and political changes have vastly expanded the possibilities of cooperation between the developed countries of the world and the underdeveloped countries of the world. The political collapse of communism has made available for participation in multinational production of commodities and services a billion people in China and three or four hundred million in Russia and Eastern Europe. In addition, technical changes, improvements in communications and transportation, especially the introduction of fax, have made it possible for a company located anywhere to coordinate resources located anywhere to produce a product to be sold anywhere. Latin America provides a supply of labor available in a way that has not been available before, so all together worldwide there has been an enormous increase in the availability of labor and in the possibility of cooperation between capital-rich and labor-rich countries.

Many of the problems that people worry about today are an indirect result of that major change in circumstances. It’s a very basic change that has the potential of improving the lot of mankind throughout the world.

I have a few down-to-earth examples of what I’m talking about. The other night I talked to a Chinese-American friend of mine in San Francisco, who is an active entrepreneur. He has recently been engaging in joint ventures in China. He pointed out that he had a great advantage over his fellow entrepreneurs in the U.S. who could not read or write Chinese. In order to communicate rapidly with their associates in China, they have to call them on the telephone or send telexes or faxes, and they can only do that effectively with Chinese who are fluent in English. By contrast, he can write something in Chinese characters and send it by fax, and his associates in China can do the same in replying. As a result, he can choose his associates from a much larger labor pool than is available to those competitors who are restricted to the small fraction of Chinese who speak and write English. Another example: there are banks in New York that send their records every night by satellite to Ireland, where they are processed and sent back by satellite the next morning. A friend of mine in Australia is involved in lease arrangements. There are complex computer programs for calculating the right terms that he does not have direct access to in Australia. He sends his data by satellite to California and gets back the computed results the next day.

This is the new world. The challenge that faces this new world is two-fold: first, the political challenge of insuring personal and civil freedom in former communist countries, and in many non-communist countries that have nonetheless been centrally controlled and have denied human rights and human freedom; second, the economic challenge, to enable the capital-rich and the labor-rich countries to engage in mutually advantageous cooperation under these new circumstances.

As it happens, the basic requisite for both challenges has already been outlined to you by Ed Crane and Luis Pazos: to establish secure private property rights in the bulk of economic resources and, as a corollary, free private markets. You don’t have secure private property unless you are free to buy or sell your property to whomever you wish at whatever terms are mutually agreeable. We talk about market arrangements, market policies. Every country has a market. A market means only a place where people get together and engage in deals. There is a market in Russia today, and there was a market during its darkest days. There is a market in Latin American countries that do not have anything approaching a free economy. The crucial thing is the kind of market. Is it a free, private market?

I come back to my initial comments about why I believe that the United States today is not an appropriate model for Mexico or other low-income countries. We are proud of the collapse of communism, but what has it done for us? What has happened in Europe with the collapse of the Berlin Wall? By now everybody agrees with two propositions. Proposition one: “Socialism is a failure.” Proposition two: “Capitalism is a success.” To judge from what goes on in Washington, the conclusion that has been drawn is: “Therefore, the U.S. needs more socialism.” You can’t get there from here, but, if we look at the reaction in Washington, the collapse of the Berlin Wall fostered a sense of complacency. We must be doing everything right since they want to imitate us. There have been no summits in Washington about how you should cut down the size of government now that experience has so dramatically demonstrated the inefficiency of government. There have been no summits about how you privatize governmental activities. You have seen summits about how to raise taxes, about spending more of the taxpayers’ money, about how to impose more controls on the people. That is the sense in which I say, take as your model the U.S. in its first 150 years. We can afford our nonsense now because we had so long a period during which to build a base. You can’t.

The most discouraging thing to me is the failure in my own country and in other advanced countries to recognize what is happening. Instead of moving to encourage cooperation between the capital-rich and the labor-rich countries, we unfortunately are moving in a protectionist direction. There are exceptions, particularly the proposed free-trade agreement between Canada, Mexico, and the United States. We must do everything we can to encourage them.

The most encouraging sign is the extent to which low-income countries around the world have learnt the right lesson, have learnt the lesson that what they need to do is to privatize, privatize, privatize. In Latin America, examples are what Mexico has been doing in the past few years, what Chile has done over the past 12 or 15 years, and what Argentina is said to be doing, though I don’t know enough about Argentina to know in detail what they are doing.

In the Orient, the Four Tigers have set the pace, with others following. Most surprising of all is that China is today probably the country that is developing most rapidly through private free enterprise. It is not doing so under that name. There is no government official who would tell you that they are fostering free private markets. However, they made the basic step 15 years ago by introducing the concept of “personal responsibility” in agriculture, and they set something going that is not stopping. In the first five years after China went from collective labor brigades in agriculture to personal responsibility, agricultural output doubled. That meant a lot of people who were no longer necessary on the farms, so small industries grew up in these local communities. Then Hong Kong got into the picture. I have been told that in Guangdong, a province in the south of China next to Hong Kong, output has been going up at 10 to 15 percent per year. My Chinese friend in San Francisco tells me that the same thing is occurring not only in the South but in all the provinces. State-owned enterprises are stagnating and have had little if any success in introducing privatization. Growth is coming in agricultural areas, in small enterprises, and in joint ventures.

That is also the potential for the rest of the underdeveloped world. In Eastern Europe, the former communist countries are seeking to privatize, to promote free markets. Their prospects are uncertain and nobody can be very sure what will happen for a very simple reason: the nomenclature, the people who were in positions of power under the communist governments understandably are not willing to give up their positions of power, and they are doing everything they can to prevent rapid movement toward a free market. Nonetheless, I believe that the basic forces are very strong and are working in that directifson.

The most discouraging sign, to repeat, is the failure of the capital-rich countries to learn the right lesson from recent events. They all preach capitalism and practice socialism.

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    Milton Friedman was born in 1912 in New York City and was graduated from Rutgers University before taking an M.A. at the University of Chicago and a Ph.D. at Columbia University. Professor Friedman taught for many years at the University of Chicago, where he was the Paul Snowden Russell Distinguished Service Professor of Economics. He has taught at the universities of Minnesota, Wisconsin, and Columbia and lectured at universities throughout the world, from Cambridge to Tokyo. In 1976 he became a senior research fellow at the Hoover Institution at Stanford University. That year, Professor Friedman was awarded the Nobel Memorial Prize in Economic Science. Among his best-known books are "Capitalism and Freedom", "Monetarist Economics", and (with Rose Friedman) "Free to Choose" and "Tyranny of the Status Quo".