Technology Day 1998 - "Creating Wealth: Knowledge, Skills, Capital, Resources"

[MUSIC PLAYING]

BILL HECHT: Could I ask you to please take your seats for this Saturday morning class? Now to those of you who are young men and young women-- that's defined by the way by my standard which is you're younger than I am-- many of you don't remember the great pleasure that MIT invested on all of us who are my age and older, which was Saturday morning class.

Typically, these were laboratory classes. They were hard to get to, they were harder to be in, and they were usually impossible to perform. In fact, frequently, one got a whole new sense of appreciation for men like Michaelson and Morley who produced experiments which were totally irreproducible. I'm convinced they threw out all the data except the one that fit their theory. But, of course, their theory was correct, so it doesn't make any difference, as they say.

My name, for those of you who don't know me is Bill Hecht. I'm a member of the class of 1961. I was a Sloan fellow in 1976. And 18 years ago, I took this job for five years and somehow or other have lost the capacity to count or enjoy myself a great deal. I'm executive vice president of the association and your senior employee. It's my great pleasure to welcome you all back to technology day this year.

I usually don't start with an apology, but as many of you know who were here yesterday, we had this visitor who seemed to cause untoward and unconscionable distress among many people-- largely by causing traffic jams on every major and minor artery in Cambridge-- closing an airport here or there, having helicopters land on Briggs Field, and giving a major address at commencement.

The most distressing thing, to me at least-- and, as you all know, I am an MIT loyalist-- was looking at the evening news while I was shaving to go to dinner with a class last night and recognizing that some rock promoter named Don Henley got more press coverage than his MIT commencement speech. But, oh, well. I guess that's more a comment on the media than it is on substance.

It's my great pleasure this morning to kick off this program. I think we have a great one, as we always do. And it's always a special treat to introduce my good friend Chuck Vest. Chuck came to us from the University of Michigan following, by the way, in the tradition of another MIT president, Jerry Wiesner, who came from the University of Michigan.

And Chuck has become very much a part of MIT. And those of you who were at Pop's on Thursday night know that we made his wife an honorary alumna following Chuck. So we now have a first family, both of whom are honorary alumni and alumnae-- Chuck Vest.

CHUCK VEST: Thank you, Bill, and good morning everyone. On behalf of the students, faculty, and staff of the Massachusetts Institute of Technology, I'm absolutely delighted to welcome you back to Cambridge and to welcome MIT back to some semblance of reasonable calm and normalcy after yesterday's commencement exercises.

I know that many of you were not able to be in Killian Court, but I opened my part of the program by telling the assembled graduates and families that last week, a faculty member had said to me that she really thought I was a model president. And I was very proud and pleased and sort of floating on top of the ground until I went home and looked in the dictionary and discovered that a model is a small replica of the real thing.

And we had the real thing with us yesterday-- together with a very distinguished scientist and graduate of our joint health science and technology program with Harvard-- Dr. David Ho. I'm told that it's good to tell inside stories about the President of the United States while I have my chance. So I'll tell you what he wanted to share with our students yesterday.

We had an opportunity for Mr. Clinton to spend about 20 or 25 minutes together with Paul and Priscilla Gray, Alex and Brett D'Arbeloff, Becky and myself, and about 14 of our undergraduate student leaders-- all of whom admitted to me later that they were so awed by the presence of the President of the United States they forgot most of the questions they had planned to ask.

But he opened by telling us that he had recently visited a grade school and that a very, very young person there-- a first grader or so-- after everybody had asked lots of things looked at him very seriously and said, are you the real president of the United States? And he said, yes, I am. And the toddler looked at him and said, then why aren't you dead?

As many of you know, this was the first time that we've had a sitting US president address an MIT graduating class. And although our staff carried off the entire event with their usual great skill and aplomb, I must tell you, we were absolutely astonished by the logistical complexity of this undertaking.

As they sometimes say on television ads-- do not try this at home. In fact, I'd recommend that we not try it again for another 10 years or so. As I told the class of '58 last night, the statistics of this undertaking were astounding. We had 300 police officers on campus yesterday. We had a commencement speaker arrive with motorcade consisting of 40-- 4-0 vehicles. And we had snipers on the roof, buildings shut down, and unfortunately, as you know, a lot of traffic congestion.

But one of the things I was really proud of and also pleased to note that a lot of the TV channels picked up, at least yesterday morning, was this typical MIT approach of creating a big group of MIT ambassadors, which were literally a hundred or so of our very dedicated and devoted staff, some of whom are from the Association of Alumni and Alumnae who just simply wandered the crowds, keeping everybody happy, answering questions, solving problems as they rose. And it's those touches that I think make this such a magnificent institution to be a part of.

So I therefore want to take this opportunity to thank the entire community-- and, as I said, including many in this room-- for helping us really put our best foot forward on a day when the whole world was watching-- as indeed it was. The address was run at least once last night on C-SPAN, as well as being broadcast live on the internet.

In one sense, however, I would suppose you could argue that the entire world is always keeping an eye on MIT. Our institution's reputation for excellence in academics and research is exceeded only by our graduates' reputation for innovative entrepreneurship.

The world looks to MIT and its graduates for the ideas and the technologies that enrich our lives and drive our global economy. Whether the topic is the digital transformation of society, or the complex interplay of human activity with the global climate, ocean, and other natural systems, or the amazing growth of biomedical knowledge, or the breakthrough developments and chemistries and material science, or the latest discoveries on the frontiers of physics and astronomy-- you will never find MIT very far from the absolute center of the action.

The world looks to us and to our graduates for innovative leadership in many dimensions. For nearly one and a half centuries, we have done our best to provide just that. The topic for today's discussion is a natural extension of the way the world looks at MIT.

The Institute is seen, and rightfully so, as pragmatic, productive, and energetic as a university. A university that engages directly in the world of commerce, industry, and public policy. The MIT ethos recognizes and, indeed, celebrates the value of entrepreneurism.

Nothing could be more fitting than that we invite our alumni and alumnae to join us today in a discussion entitled Creating Wealth, Knowledge, Skills, Capital, Resources.

We're going to spend the day talking about just how value and wealth are created through the development of new knowledge, through prudent investment in education and training, through the development of skills and expertise needed to bring new products, services, and technologies into the marketplace and into society.

Before we go too far down that road of entrepreneurism, however, we should take a moment to reflect on the fact that the value of an institution like MIT certainly cannot be measured solely-- and definitely not primarily-- in terms of its impact on society's financial bottom line

Our impact on the economy is one of the qualities that distinguishes us among our peers but we should be very clear to ourselves and to the communities we serve that this is only one of the roles which shape our activities and define our reputation.

In recent years, technology day has explored the role of MIT in World War II, the arts at MIT, the oceans as a new frontier, and even the role of technology in athletics and entertainment. MIT is proud of the impact of its graduates and of our faculty on the world in many dimensions. What we do to fuel a vigorous economy is the means to the end of higher quality of life and health throughout the world.

As we begin our discussions, then, let us recall that the best way to celebrate entrepreneurism at MIT is to see it in the larger context-- the Institute's deep and abiding commitment to fundamental inquiry and scholarly discourse-- to the creation and to the sharing of knowledge. That is the real secret that underlies our entrepreneurial success.

When we talk about wealth and MIT, we are talking not simply about economic or monetary abundance. We're also talking about the beauty and inherent worth of the quest for knowledge. We're talking about the transforming power of ideas and insights which enrich our intellectual lives, expand our lifespans, preserve the goodness of our natural environment, help us to understand the mysteries of our own behavioral and social problems, and light our path forward in the great adventure of human existence.

This is at the core of what we do and why we do it. Some of life's greatest rewards come not when we seek profit, but when we seek understanding, knowledge, and wisdom. Along the way, however, we often find that these discoveries have the power to transform our economy and our fortunes as well.

All this was, in fact, forecast by William Barton Rogers, our founder, when he conceived of his original plan for MIT-- a kind of educational institution that emphasized-- and I'm quoting Rogers-- "the value of science and its great modern applications to the practical arts of life, to human comfort and health, and to social wealth and power."

That is what we are here to discuss this morning. So let's get on with it. To address this broader concept of wealth and value, we've assembled an exceptionally engaging group of speakers to lead off this morning's panel. I'm going to introduce all of them now and then ask each to simply come up and speak in turn. And then, as I will indicate in a moment, we will open up for questions and answers.

Our first distinguished speaker will be Dr. Tony K. Tan-- the Deputy Prime Minister and Minister of Defense of Singapore. Dr. Tan holds honor-- excuse me-- holds an honors degree in physics from the University of Singapore, a 1964 SM degree from MIT, and a PhD in applied mathematics from the University of Adelaide.

He first won election to Singapore's parliament in 1979 and was appointed as minister of education in 1980. After serving in several ministerial posts throughout the 1980s, he moved back to the private sector where he served as chairman and CEO of the Overseas Chinese Banking Corporation. Dr. Tan returned to government service in 1995.

Dr. Tan will be followed by Judith C. Lewent-- senior vice president and Chief Financial Officer of Merck and Company. Judy Lewent came to MIT as a graduate student at the Sloan School following her graduation from Goucher College with a BS in economics. Equipped with an SM degree in management in 1972, she went forth to conquer the business world where her financial and managerial skills led her into a series of senior positions in the international pharmaceuticals industry.

She has held her current position at Merck since 1992. Judy is also a member of the board of directors of Motorola and of Quaker Oats. In addition, she serves as a trustee of the Rockefeller family trust and, to our good fortune, as a member of the MIT Corporation and its executive committee. And she also chairs the corporation's visiting committee for the MIT Sloan School of Management.

Now Judy is a tough act to follow, but Professor David H. Marks will try. In fact, like myself, Dave will try anything if it's for the betterment of MIT. Dave is the crafts professor of civil and environmental engineering here at the Institute, and I suspect has more than a few students in today's audience.

A member of the MIT faculty since 1969, professor Marks founded the Institute's program for environmental education and research in 1992. His pioneering initiative has since evolved into the internationally renowned center for environmental initiatives. As that center's director, professor Marks plays a leading role in the continuing worldwide effort to bring interdisciplinary cooperation, education, and research to the challenge of environmental analysis, planning, and policymaking. Few modern scientific missions are more important than that.

Finally, we will round out the opening remarks with comments from Lester C. Thurow, who currently holds the Jerome and Dorothy Lemelson professorship of management and economics and, of course, as the former dean of the Sloan School.

Lester Thurow graduated from Williams College in 1960, took his MA degree at Oxford's Balliol College as a Rhodes scholar, and earned a PhD in economics at Harvard in 1964. He has been an honorary alumnus of MIT since 1991.

Lester served on the President's Council of Economic Advisers during the administration of Lyndon Johnson. He came to MIT in 1968 and has gone on to achieve a global reputation as a prolific and respected scholar, commentator, author, and teacher.

Professor Thurow is an expert in entrepreneurism. And, believe me, he practices what he preaches. Taken together, these four speakers embody the strength and diversity of the richness of the MIT experience and I therefore should not keep them from you any longer. Dr. Tan.

TONY K. TAN: President Vest, ladies and gentlemen. I woukd first like to thank President Vest and the Technology Day committee for inviting me to speak to you this beautiful morning. Indeed, since leaving MIT some 34 years ago in 1964, I have not known the weather in Cambridge to be so beautiful as today.

The topic of my speech this morning is creating national wealth from the perspective of my country, Singapore. My speech will be in three parts-- I will first describe briefly how Singapore developed from a small fishing village to the modern metropolis that it is today. I will then speak on the current situation in the Southeast Asian region. And then I'll conclude with some remarks on how Singapore sees the way ahead.

But let me begin with the year 1865 when MIT opened classes in Boston with an enrollment of 15 students, bringing to realization William Barton Rogers' years of work to organize an institution of higher learning which would be devoted to scientific and technical training.

In that same year-- 1865-- the island of Singapore, which is roughly the size of the city of Chicago, was already in its 46th year as a British trading settlement at the southern tip of the Straits of Malacca. Could I have slide one, please? This is what Singapore looked like at the time.

By some accounts when sir Stanford Raffles first landed in Singapore in the year 1819 and acquired the tiny island for the British East India company, the population of the island numbered about 150 living in a few shabby huts and dependent on fishing for their livelihood.

But in the months and years to come, the news about the establishment of the free port of Singapore would attract many traders and adventurers to our shores in search of profit and a new life. Slide two.

When the news of Singapore reached the southern parts of China, Chinese traders who had previously traveled to places such as Malacca, Brunei, and Manila found it safer and more profitable to visit Singapore instead. Chinese junks brought with them goods and large numbers of immigrants. The news of a trading center in Singapore also reached the Indian subcontinent, and Indian traders and immigrants soon came to the island in large numbers. Slide three.

So at a time when MIT first started holding classes across the Charles River in Boston, on the other side of the world, Singapore was starting to flourish as an important trading post in the East for the British empire.

In 1916, MIT moved to its present campus here in Cambridge. And about the same time, Singapore, which is still a British colony, continued to grow as an important trading port. But Singapore's success was not without problems.

The British had encouraged immigration, but did not pay enough attention to the basic welfare needs of a rapidly growing population. As you can see, immigrants faced poverty and bad living conditions. Then came war in 1942 to 1945. And Japanese occupation of Singapore during World War II demonstrate the inability of the British forces to protect the people of the colonies.

And, understandably, the return of British rule after the war met with demands for independence. And in time, these demands became too strong for the British to resist. That's the proclamation of independence in Singapore in 1965.

A union of Singapore with independent Malaysia in the early 1960s-- from '63 to '65-- proved to be brief and unhappy. And after a few years as part of Malaysia, Singapore left the federation and became an independent, sovereign state in 1965 under the shadow of racial rights, unemployment, poverty, and ethnic strife.

It is not surprising that many commentators confidently predicted, at a time of separation in 1965, that Singapore, in view of its lack of natural resources, could not survive as an independent state. But the island weathered the difficult years after separation, established its own national identity, and became a thriving metropolis.

Today, Singaporeans enjoy the second-highest standard of living in Asia after Japan and Singapore is an integral part of the world's trading and economic system. How this was achieved and how Singapore created national wealth from inauspicious beginnings is the focus of the next part of my speech.

When Singapore became independent in 1965, the British left the island with a relatively well-developed legal system, a functioning civil service, and a good port. Together with a strategic geographical location, these assets led to the commerce and trading sector becoming the pillar of growth for Singapore at that time.

But dependence of the Singapore economy on trade had its limitations. A rapidly growing population increased pressure on the capacity of the Singapore economy to meet their needs. Unemployment was common. The physical infrastructure of the island was inadequate and under tremendous stress.

Housing was poor. Slums were abundant. And this was only 34 years ago. Slide 10. Poverty plagued the majority of the island's population. the. Absence of a domestic market or hinterland because of the separation from Malaysia compounded the economic problems that Singapore faced in those early years of our nationhood.

But worse, there were signs that the inter-port trade on which Singapore, then depended to earn a living was stagnating. New ways of leveraging on the inter-port trade to create new economic growth had to be found.

The withdrawal of British forces from Singapore in 1968-- three years after Singapore gained independence-- was not only a major economic blow to Singapore, but also created a security vacuum for the island. Consequently, the first tasks of the newly independent government in Singapore was to build a defense capability base or national service because of our small population which could secure the sovereignty and territorial integrity of the new nation.

On the economic side, the withdrawal of British forces and the closure of British bases cost Singapore one-fifth of its GDP. So newly-independent Singapore had to quickly overcome the major problem of unemployment.

The way the Singapore government went about this was to aggressively build infrastructure. We had a massive public housing program in order to house Singaporeans. We built roads, bridges, ports, airports, telecommunication facilities, and all of these proceeded at great haste.

And at the same time, a unique tripartite partnership between employers, trade unions, and the government was established which allowed Singapore to mobilize its domestic labor resources quickly and effectively. Next slide.

The government also placed great emphasis on education and training, because we were an island with a small population. We provided places in school for every child of school-going age. We created technical colleges to impart the technical expertise required by the newly-established companies in Singapore.

We also established universities. This is the Nanyang Technological University which was established in 1980 and which MIT has been very much involved. And these universities were created to ensure that bright Singaporeans could attain the highest academic qualification.

Fortunately, all this happened at a time when the world was experiencing rapid expansion in trade. World trade grew at more than 8% per annum between 1963 and 1973 compared to 5% per annum in the preceding 10 years. Increasing numbers of investors from industrialized countries were seeking low cost production bases overseas to supply the world market. As world trade boomed, Singapore rode the boom and was able to revitalize its economy.

I'll go on to the next phase now, which lasted from about 1965, from the time Singapore became independent, to the early 1980s. When Singapore became independent, many countries in the developing world looked upon Western, multinational corporations-- or MNCs-- as unwelcome remnants of a previous imperialist era.

But Singapore, which was desperate to create jobs for a growing population, actively and deliberately courted MNCs, attracting them to locate operations in the new industrial estates which had quickly been established.

An economic development board was set up which adopted a multifaceted approach to investment promotion involving coordinated industrial policy, identification of new business opportunities, manpower development, and active industry development. The aim of the Singapore government was to create a liberal and investor-friendly investment regime which would allow MNCs freedom and corporate ownership in the repatriation of profits.

Ultimately, our aim was to create, within Singapore, first world operating and living conditions-- but essentially at third world costs. And our success in attracting MNCs was a key to Singapore's rapid growth as a manufacturing center for export-oriented industry.

This shows the GDP growth. Consequently, Singapore's real GDP growth rates averaged a phenomenal 13% per annum in the years from 1966 to 1973. With the success of industrialisation, Singapore not only achieved full employment by the 1980s, but was importing increasing numbers of foreign workers to ease a growing labor shortage.

Rising wages and inflation became concerns for Singapore's economic competitors. We had to, again, restructure our economy. But this time, consciously moving away from labor-intensive activities towards capital-intensive industries that favored high wage, high value-added jobs.

While Korea and Taiwan were aggressively targeting technological development to their own indigenous companies, Singapore continued with the MNC partnership strategy-- encouraging multinational companies to evolve from a predominantly manufacturing role to one that encompasses product development and design responsibilities. The growth of seaport, airport, telecommunications, financial, and tourist services strengthened Singapore's economy.

This is a pie chart of our economy last year with manufacturing accounting for 23% of our GDP-- the highest would be in financial and business services-- 29%, transport and communication 10%, commerce 18%-- which is a significant change, because this sector would have been the major sector when Singapore became independent. And other sectors, 12%.

And so by 1997, the Singapore economy had become a multifaceted economy, which has standed us in good stead when the economic crisis hit the region last year.

By the late 1980s, Singapore had joined the ranks of the newly industrialized economies and had built up a diversified economy where trade was supplemented by manufacturing, transport and communications, banking and finance, and tourism. Can I have the next two slides, please? This is a picture of our central business district today in Singapore. That's our new MRT line which was built a few years ago.

The success of Singapore's ability to create national wealth and to improve the standard of living of its people in the 33 years since our independence in '65 can be seen by comparing some social indicators from the 1960s to the present time.

These are some of the social indicators-- let me take the first one, which is life expectancy. Life expectancy increased from 67 years in 1965 to 77 years by 1997. Home ownership in 1965 when it became independent, only 29% of Singaporeans owned their own homes. And by 1995, the ratio had increased to 91%.

This shows the number of telephone lines-- so put in a different way, the number of telephone lines increased from 17 persons sharing one line in 1965 to just two persons sharing one line in 1997.

35 years ago, less than half of all Singapore households would order television sets. Today, there is at least one television set in every home. Infant mortality dropped from a high 20 per 1,000 births in 1965 to a low 3.3 per 1,000 births today.

And finally, university education-- in 1965 only 3% of every cohort entered university in Singapore. And by 1996, this has increased to 22%. What I've described so far is what has happened to Singapore up to now. I think what is more important is what will happen in Singapore from now on. And to answer this question, we have to look at the present situation not only in Singapore, but also in the Southeast Asian region.

Much has been said and written about the causes of the economic and financial crisis in Southeast Asia and East Asia. We started with the devaluation of the Thai currency-- the Thai baht-- in July 1997.

Within a period of one year, enormous wealth has been wiped out from the countries in Southeast Asia and the extent of devastation in the Southeast Asian economies can be seen from the movements in the Southeast Asian currencies and stock markets-- could I have chart one, please?

This shows the drop in the currencies-- the worst hit, of course, has been the Indonesian rupiah, which has dropped to about 23% of its value compared to July '97 within the course of one year. The others would be the Thai baht, the Malaysian ringgit, and Korean yuan. Singapore itself has depreciated by about 15% since July 1997, but we have been relatively unaffected compared with our neighbors.

In addition to the currencies, the falls in the regional stock markets were just as severe and, in some cases, even more. Can I have chart two? Since 1st of July, 1997, the stock indices in the regional stock markets in Southeast Asia have fallen by between 30% to 60%. This shows a drop in the stock markets in our part of the world.

If you combine the stock markets together with the fall of currencies in terms of US dollars, the falls have been in the order of 80% to 90%. And I'm told that today the market capitalization of a single large American company like IBM or Microsoft would be more than the combined stock market capitalization of Singapore, Malaysia, Thailand, and Korea-- which is an indication of how much wealth has been wiped out from the region in the space of one year.

The severity and the protected nature of the Asian crisis caught everyone by surprise. After all, East Asian countries had good macroeconomic fundamentals. We had high GDP growth, low inflation, and high savings. But it turned out that good macroeconomic fundamentals alone were not enough.

For example, high savings alone were not enough. These high savings had to be intermediated efficiently by sound domestic banking systems. And, in general, East Asia institutions have not kept up with the rapid pace of growth in their economies in the last few years.

One example is that Southeast Asian banking systems were not equipped to handle the large inflows of capital into their economies in the 1990s. Could I have chart three?

This shows the net private capital inflows into Asia and into the developing countries. The top line shows the total net capital inflows of all developing countries. And this is the one that shows a flow of capital to Asia.

In the six years between 1992 to 1996, the flow of capital from industrial countries-- such as the United States-- to emerging markets increased five times from $40 billion US in 1992 to $200 billion US in 1996. And developing Asia absorbed almost half of all net private capital flows into developing countries in 1994 to 1996. And when confidence ebbed, East Asia saw large outflows of capital within a very short time.

The end of the economic crisis in Southeast Asia and the restoration of economic growth can only come about with the establishment of properly regulated and well-supervised banking and financial systems. This will take considerable time and effort to achieve.

But if the governments in the region have the necessary will and determination and are assisted by multi-national agencies such as the IMF and the World Bank, I am confident that the regional economies can return to the path of sustainable growth within a period of three to five years.

In the meantime, the main worry is Indonesia, which has seen violent turmoil in recent months. It is a great relief that a smooth, peaceful political transition has taken place in Indonesia with President Habibie taking over from President Suharto. And we, of course, hope that political and social stability can be quickly restored in Indonesia so that economic progress will be possible.

With Indonesia occupying such a large and important role in Southeast Asia, a prosperous and stable Indonesia will be beneficial for the whole region. Let me now focus my remarks on Singapore.

Although Singapore has largely escaped the economic storms which have affected Southeast Asia, we have not been totally unaffected. Our commerce and financial services sectors have been more severely affected by the regional downturn. Tourism and tourism-related industries, for example, have been hit by the plunge in tourism rivals as tourists from the ASEAN countries and the newly-industrialized economies account for about half of our total visitor arrivals.

Growth in our exports has also moderated due partly to weaker regional demand. However, the impact of the crisis on Singapore has been cushioned by the strength of the US and European economies. For example, based on 1996 data, more than half of Singapore's electronic exports go to the US and the European Union. Today, Singapore is the largest manufacturer of disk drives.

And the bulk of Singapore's foreign direct investments also come from developed countries such as the United States, Japan, and Europe-- and most of our manufacturing products are exported to the OECD markets. We will continue to strengthen our civil and business institutions in Singapore and make sure that resources flow into productive areas.

For example, Singapore took steps in May 1996 to prevent the type of asset bubbles-- particularly in property prices-- which has added to the problems of our neighbors. This shows the property prices and the measures taken by the government in 1996 in order to slow down the growth, which has shown a gentle downturn, but not a collapse. This has happened in Indonesia, Malaysia, and in Thailand.

So, as a result, asset prices in Singapore have not taken a large fall which would otherwise have had a devastating effect on the Singapore economy. The exposure of Singapore's companies and banks to the region-- although not negligible-- have also not been large enough to be destabilizing for the Singapore economy.

So let me sum up by saying that in spite of the regional economic crisis, Singapore's macroeconomic fundamentals and institutions remain sound. Singapore has large foreign reserves, positive current account and fiscal surpluses, and no external debt. We also have a sound banking sector and strong institutions and a stable government.

To prepare for the longer term and to guard against a slowdown in business, Singapore has to watch its business costs carefully to ensure that we remain competitive. At the same time, we are enhancing our capabilities and accelerating the building of good physical infrastructure. When the countries in the region resume their growth, as they will one day, Singapore is well-positioned to continue its traditional role as the gateway to the regional southeast Asian countries.

Although the strategy of developing Singapore as a multifaceted manufacturing and services hub has been successful, this does not mean that Singapore can afford to rest on its laurels. I believe that it was Andy Grove of Intel, which made the remark that only the paranoid survive.

And the truth is that we have to take cognisance of fundamental changes in the world's economy, particularly for a small country like Singapore, and adjust our economic strategy from time to time in order to continue our growth and progress. So I'll conclude my speech now by describing how Singapore sees the way ahead.

We believe that in the 21st century, the world will be dominated by knowledge industries with technology and information processing spurring growth. I think that President Clinton referred to this in his commencement speech yesterday.

And for Singapore to further progress, we must transform our economy to a knowledge-based economy which stresses skill and creative people as a main pillar of growth for the economy. This means that a good education and training system covering not only the pre-employment stage in schools and universities, but also the in employment stage in companies-- as well as the ability to acquire, process, and create new knowledge-- will be a country's key competitive advantage.

In the years to come, Singapore's economic growth will come from our ability to leverage on our human capital and to enhance the skills of our people. To develop a knowledge-based economy in Singapore, we are undertaking three initiatives.

First, we are revamping our school curriculum, taking steps to enhance thinking skills and innovation in our schools under the slogan, thinking schools, learning nation. Our aim is to promote a learning culture within Singapore. And at a tertiary level in our universities, we are revamping the curriculum in order to enhance broadening of outlook and skills as recommended by an international academic advisory panel which met in Singapore in August last year. Indeed, Robert Brown is a very valuable member of the panel.

We have also taken advantage of our links. We've established universities overseas to review our curriculum. The MIT School of Engineering, for example, is finalizing a yearlong review of education curriculum in the universities in Singapore, which will result in large changes.

The second initiative is that we are formulating a strategy for lifelong learning so that people who are doing work will continue to be trained. For a person to remain employable throughout his working life in the 21st century, he or she will need to change his or her career several times. And this means that people must be prepared to learn new skills throughout their lives.

The Singapore Ministry of Manpower and the Ministry of Education are implementing a national strategy to ensure such lifelong learning and to encourage our workers to continue to upgrade themselves continuously.

Third, we will continue to liberalize our economy and open our markets-- including the markets in services like finance and tele-communications and encourage a more entrepreneurial spirit in Singapore. In the years to come, we see economic growth in Singapore coming not only from large companies, but also increasingly from small, nimble companies which can spot emerging trends and react more quickly than large organizations.

To foster entrepreneurial activity, we are making changes in the structure of our economy, like taxation and regulation. And these have to be implemented expeditiously but without lessening the prudence and efficiency which have made Singapore attractive to investors both domestically and worldwide.

Finally, crucial to Singapore's success in the coming years will be a welcoming attitude to foreign talent who can supplement Singapore's indigenous talent pool and help to enhance our competitiveness and further strengthen our economy.

Like the United States, Singapore is ultimately a country which has been built by immigrants who come in search of a better life. And so long as we open our doors to able people who want to live and work in our country, so long will Singapore continue to thrive and prosper.

Ladies and gentlemen, during last three decades, Singapore has grown from a poor, underdeveloped country with high unemployment and a per capita GDP of less than US $500 to become a nation city-state of three million people with full employment and a per capita income of US $18,000 last year.

From the start, we had come to a simple and clear realization that Singapore is a small, fragile nation with almost no natural resources. It had to plug itself firmly to the global economic network to survive. And we owe a special debt to the United States for your leadership in resisting protectionism, championing free trade, and keeping international markets open.

Fortunately, years of heeding the discipline of the markets have prepared us to handle the present uncertainties in the region calmly and deliberately. The creation of wealth is an ongoing process which requires constant attention, effort, and development.

The present economic crisis, which is sweeping East Asia, shows how easy it is for prosperity-- which has been built on unstable foundations-- to crumble to dust. Vision, hard work, entrepreneurial skills, and sound leadership have been responsible for Singapore's success. And these are the same qualities which have made MIT the leading university in the world today in science and technology. Thank you and I wish all of you a happy and enjoyable day.

JUDITH C. LEWENT: Good morning. Let me echo the sentiments expressed already about how pleased I am to be part of this very distinguished panel. And, clearly, to be honored to be part of a very exciting alumni weekend. Clearly the topic at hand here in terms of building wealth is equally relevant and important.

And I just want to express before I get into the core of my comments the extra significance to me personally of MIT and the clear and strong links that MIT has to another institution which means an awful lot to me, and that is Merck. And in thinking about that, I think I could capture that in a very brief way.

To echo what Chuck reminded us about-- which is the founding mission of MIT-- and that rests on the linkage of the practical application of research to industry. And when I think about that and I think about Merck, I would say it's epitomized by the 138 graduates of MIT who participate at Merck predominantly in our research laboratories and in our manufacturing enterprise. And also the great pride and great expectations that we carry at the inception of a five year, $15 million research collaboration that we have instituted between Merck and MIT.

But now, let's get down to the topic and talk specifically about building national wealth through investment and innovation. And I'll start with the premise that pharmaceuticals, compared to many other industries, is actually not a capital-intensive business, yet it does take significant investment in financial and physical capital to get our job done.

Actually at Merck, if you add up what we have on our books today in property, plant, and equipment, it totals about $12 billion. But our industry's wealth is created primarily through intellectual capital. And here, we are ahead of the curve. And you'll hear in my comments an echoing of the presentation that just preceded.

Because in today's information age, financial and physical capital no longer are the key assets. The only strategic imperative is knowledge. And for this reason alone, the knowledge-based pharmaceutical industry serves as an excellent case study in building wealth.

Our success is a function of let's try three P's-- people, patents, and patients. They are the keys to how we build wealth through investment and innovation. People-- our employees-- drive our ability to leverage knowledge effectively. Patents are the pharmaceutical industry's mechanism for protecting and promoting discovery. And our relationship with our patients-- the real benefactors of our innovation-- is what ultimately builds social and economic wealth.

Given these insights, what are the factors that have propelled the US pharmaceutical industry to be a global leader? And how can other US knowledge-based industries use these same factors to strengthen the national economy? Let's begin with investment.

The US pharmaceutical industry leads all other industries in research and development investment. US industry in general overall invests less than 4% of sales in R&D. In contrast, America's research-based pharmaceutical companies will spend more than 19% of sales-- or $20 billion dollars-- on R&D in this year alone, which also represents a tripling of the amount spent only 10 years ago.

Now what may seem counterintuitive at first glance is that the industry's sustained this high level of investment despite the inherently risky nature of our R&D process. To cite one example, only one in about 5,000 compounds screened in our research labs becomes a prescription medicine.

From discovery, to lab testing, to animal testing, to human testing, to regulatory approval takes about $400 million on average and 12 to 15 years. And with all of that, only three out of 10 marketed prescription medicines actually recoup the cost of this investment.

So many skeptics are right to ask, why bother? Actually, the odds are better in Vegas. And, as a matter of fact-- returning to my economic roots-- there exists a concept in the world of economics that's called gamblers ruin. And, simply stated, what it means is that as long as you get an adequate return, you can stay at the table despite the fact you're playing with high stakes. But the catch is that you better understand the risks or you may lose everything.

And herein lies the paradox of pharmaceutical R&D. The way to deal with high risks is to invest more. Now, ironically with all of this, people only see the big payoff from a breakthrough drug, but they aren't there in our labs as I have been when compounds fail. And they don't witness the many products that actually fail commercially.

It's actually sort of like assuming that all movies are box office successes like Jurassic Park-- and for those of you who have any memory of a great failure, that none of them are Waterworld. But in both cases, people miss the investment paradox.

Now let's move on to innovation. Maybe the best way to shape this discussion is, again, to pose two questions. First, on a micro level-- what conditions have to exist for an individual pharmaceutical company to be successful as an innovator? And then on a macro level-- what conditions enable industry overall to contribute to economic growth through innovation?

Again, with our MIT heritage, I want to cite Dr. Rebecca Henderson, who shed light on these macro level issues by asking the following-- is it enough to invest large amounts of money in R&D and assume innovation simply will follow? Her answer was, no. Innovation needs to be managed.

Those companies that remain innovative over time first keep connected to the scientific community, second, allocate scarce resources effectively and third, manage organizational design appropriately. So let's look a little closer.

First-- keeping connected to the scientific community is critical because innovative pharmaceuticals require more than industry can do alone. Without an historic research partnership with government and academia, our US pharmaceutical industry would not be nearly as productive as it is today.

At Merck, we pride ourselves in having strong, in-house research capabilities, but that doesn't preclude us from having our scientists go outside to publish in scientific journals, attend conferences, and collaborate with scientists and leading universities-- as I indicated earlier. And it's through this peer review that scientific knowledge advances. One term that we use to refer to this is external R&D spillover.

Now turning to allocating scarce resources effectively. This, too, is critical, because the road to drug discovery and development is costly, it's long, and it's stochastic. At Merck, we are currently spending a record $1.9 billion in R&D-- 1998.

But to Dr. Henderson's point, it's not just the amount of research investment that maximizes innovation, it's how effectively we allocate those R&D resources that create a critical competitive advantage. So our strategy is specific, focused, concentrating on diseases with large patient populations. And then we want novel products that are potent, well tolerated, convenient to use, and with clinical results that are meaningful to physicians and patients.

And finally, managing organizational design appropriately is also critical to managing innovation. Here professor Henderson found that organizations typically choose to organize by function or to organize by project. Organizing by function ensures that the specialized knowledge necessary for long-term innovation is preserved, while organizing by project encourages rich communication across functions.

Observation-- the most successful pharmaceutical companies are never satisfied with one approach. These companies benefited from internal R&D spillover that resulted from a communication across both function and product lines.

So ideally, the individual pharmaceutical company must do three things to succeed-- keep connected to the scientific community, allocate scarce resources effectively, and manage organization design appropriately. And let's not forget-- these hold true for the success of other knowledge-based industries as well.

Now let's turn to the macro level. Here, we believe there are five enabling conditions for pharmaceutical innovation-- preserving the US free market, continuing support of basic research by the federal government, protecting intellectual property at home and abroad, streamlining our regulatory system, and creating a global business environment conducive to innovation.

The first enabling condition for innovation is to maintain a free market in the United States. A free market is clearly important to all industries because that is what attracts investment and rewards innovation. And for a high-risk industry like pharmaceuticals, a free market is critical.