Fortune Favors the Bold

Lester C. Thurow

• Publisher: HarperCollins e-books
• Year: 2009
• ISBN:
  9780061743986
• Topic: Economía
• Subtopic: Economía internacional

Bestselling author and renowned economist Lester Thurow argues forcefully that globalization is not a done deal and we must seize the moment now if we are to create a new global economy in which all can prosper.

In this new book, Thurow examines the newly–forming global economy, with a special focus on the role of the US and the dangers to our own national well–being. He examines such questions as: What's at stake for us in the global economy? Why is it important that the system be equitable and that other countries prosper along with us? What should our goals as a nation be – long term and short term? What are the tough choices that need to be made in our relationship with other countries and world regulatory bodies? What role should we be playing globally? What are the political, economic, social choices / tradeoffs we will have to confront?

Thurow contends that the huge and growing US trade deficit poses grave dangers to the value of the dollar and is putting our own economy in jeopardy.

As the world economy leaps national boundaries, its hallmark seems to be a rising instability and a growing inequality between the first and third worlds. Financial crises in the third world come ever more frequently and seem to be ever more severe. The first world economies seem to be in ever more frantic boom and bust cycles. Globalization causes riots throughout the world and is one factor in the rise of terrorism against the West.

Thurow shows how some nations, including Ireland and China, have embraced the concept of globalization and placed themselves into a position to prosper with growing and productive national economies. He contrasts their positive actions with Japan, whose leaders have allowed the nation to drift into stagnation and have destroyed its prosperity.

He argues that this is the time to choose globalization or be left behind, the time to "build a global economy that eliminates the defects, " and he provides plenty of ideas for corporations, governments, economists, and citizens to act upon.

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A Global Economic
Tower of Babel

Globalization is much like the biblical Tower of Babel. The construction of a global economy has begun. Some are for it! Some are against it. Neither group knows exactly what “it” is.

This economic Tower of Babel is being built without a set of construction plans. The necessary architectural drawings aren’t even in the process of being drafted. Governments aren’t thinking about the appropriate designs, since the tower is being privately built. National governments would, in fact, rather not think about globalization because it diminishes their role and their powers to control economic events. The actual builders, private firms that are moving their economic activities around the world, don’t think about the design and construction of the global economy since each is small relative to what is being built. For those who are true believers in the efficiency of private markets, there is no need to think about the institutions and rules of globalization. Whatever is necessary will simply evolve in the marketplace without private thought or government action. Markets will automatically set the necessary construction standards!

As in the biblical Tower of Babel those involved in constructing the global economy are speaking many different languages. Globalization means many different things to many different people. Arguments for and against it are often self-contradictory. Perhaps these different languages and the associated disputes will stop a global economy from being built—just as they stopped the biblical tower design to go to heaven from being built. If so, is that a good thing or a bad thing? Have we prevented ourselves from getting to an economic heaven? Or have we prevented ourselves from over-reaching, trying to play God, and ending up in what will surely be an economic hell?

Anxieties are high. The violent antiglobalization demonstrations that have occurred at both public (WTO, IMF, World Bank, Seattle, Goteborg, Bologna) and private (Davos) global meetings in the last few years have delivered that message. Although the number of actual demonstrators is few, I suspect that if every newspaper in the world tomorrow were to have the headline “Globalization Ends,” far more than half of humanity would feel relieved. In global public opinion surveys less than 20 percent of the population thinks the world is doing well.¹

What do the protestors dislike? What would they like to see happen? Beneath the noise and babble what is their real message? What are they trying to tell us about globalization? They predict disaster! But which of the predicted disasters are possible and which are impossible? For those that are possible, what are the real causes?

Real disasters are almost never caused by a single factor alone. Investigators start with a jumble of possible causes that have to be sorted out to find the sequence of individual causes that together produced a particular disaster. The same procedure has to be followed when trying to understand the predictions of disaster by those who are against globalization. The nature of the predicted disasters and their potential causes are all jumbled together. They have to be sorted out.

In the conflicting babble generated by the construction of our global economic tower, the problem is to distinguish noise from information—truth from fiction. The investigator begins by trying to separate out what is true and false in the different arguments. Only when truth has been separated from fiction is it possible to add up the pluses and the minuses to determine whether we should accept or reject globalization.

But there is a third choice. The third choice is to build a global economy that eliminates some of the minuses that have been found. Even if the initial summation indicates the benefits far exceed the minuses, the minuses can be further reduced. The global economy will partially evolve in response to foreseen and unforeseen uncontrollable forces, but in the end it is a human, not geological, construction and can be built to different specifications. Globalization can be shaped.

But to do so it is necessary to understand the dynamics of globalization so the forces of globalization can be used to change the course of globalization. There are actions to be taken that can enhance the positive effects of globalization and minimize its negative effects. These possibilities are outlined and discussed near the end of the book, since an in-depth understanding of the full range of the forces of globalization is necessary to evaluate the various possibilities. What seem like disconnected problems are often connected problems.

In separating the facts from the fiction in all the babble about globalization, it is important to understand that the economic Tower of Babel looks different depending upon where you stand. The rich and successful at the top of the tower see something quite different than do the poor just starting to climb the stairs at the bottom. Those standing far away, outside of the global economy, see a tower with very different contours than what are seen by those working inside the tower. Not surprisingly, the economically, militarily, and politically large and powerful fear the construction of the tower much less than do those who are small and weak.

It is not that one of these perspectives is right and the others are wrong. Each focuses on different elements of the tower. All reflect some aspects of the truth. No one can have all these perspectives simultaneously because no one can see the entire tower or the entire truth. That is why those who are rich and successful, large and powerful, and inside the building of the tower have to listen to the views of those who are poor, unsuccessful, small, powerless, and outside of the global economy. The first group cannot see what the second group sees, but the first group can listen to what the second group has to say.

This warning applies to no one more than Americans—the richest, most successful, largest, and most powerful players and the ultimate insiders in the construction of the global economy. In terms of military and economic power no nation has ever loomed larger in human history. Imperial Rome dominated a large region around the Mediterranean Sea. America dominates the globe. American views will be central in the shaping of globalization, but the structure of globalization is also one of the factors that will limit the arbitrary use of America’s enormous power vis-à-vis the rest of the world. An America playing in a global economy is very different and much better from the perspective of the rest of the world than an America engaging in a contest for one-country bilateral national economic dominance. An America trading with the rest of the world, investing in the rest of the world, transferring technology to the rest of the world, and educating many from the rest of the world is far better for both those inside and outside of America than is an America that retreats into its traditional isolation.

This imbalance of economic and military power between the United States and the rest of the world has arisen because of decisions made in Japan and Europe.² Japan simply does not play the geopolitical military game. Kosovo is not its concern. It looks only at Asia and even there lets the United States deal with China and North Korea. The European Union has a population big enough and the economic resources large enough to create a modern military force equal to that of the United States. Yet with the end of the Cold War and any immediate military threat to itself, it has decided not to spend its economic resources on military activities. It is inwardly focused on the peaceful effort of building an integrated Europe. Large military budgets are seen as irrelevant to the success or failure of European integration because if there are military problems in Yugoslavia, the United States will be there. What happens in North Korea is of little interest to Europe and there is no willingness to be engaged in dealing with North Korea, since Europe is confident that America will keep such dangers under control and out of its neighborhood. America outspends the rest of NATO militarily by more than a 2 to 1 ratio. What looks sensible if one is heavily armed looks very different if one is only lightly armed.

Although sympathetic to those who died, the rest of the world did not experience 9/11 as a direct attack. Three thousand people died and 50,000 could easily have died as America’s two largest buildings, in some ways the symbols of America itself, came crashing down. And if the truth be told, right under that layer of sympathy many of those in Europe and elsewhere felt that America had it coming. It was too arrogant, too big, too much of a bully, gave too much support to Israel, and needed to be taught a lesson. They hoped that the attack on the World Trade Center would make America a little more humble and a little more cautious.

This hope flows from a fundamental misreading of the American character. When attacked, Americans get aggressive. They strike back. The 9/11 attack simply changed American attitudes. Defense spending rose sharply, and attitudes about using military power changed even more sharply. One pays for a large modern army only if one intends to use it. The rest of the world has yet to recognize these realities. What happened in the Iraqi war merely underlines these vastly altered American attitudes.

The rest of the world cannot stop America from doing anything it really wants to do or force America to do anything it does not want to do. But the rest of the world can create an environment where it makes sense for Americans to work together with them to solve mutually recognized problems—Saddam Hussein in the case of Iraq. The French overplayed their hand in the UN Security Council. They could not stop the United States from invading Iraq, but had they been willing to support a firm deadline for military action if Iraq failed to totally disarm, they could have given inspections and the United Nations a chance to work. But they seemed to be more interested in controlling U.S. military power than in eliminating dangers in Iraq. They predictably failed in the effort to control American military power and in the process made it more difficult, if anything, for the rest of the world to control American military power in the future. In similar situations in the future the United Nations is not likely to be consulted.

There is a central political message to be learned. America cannot be controlled, but it can be engaged. Building a global economy is one way to engage America. And to some extent the rest of the world should see globalization in that light. For the rest of the world, understanding American views on globalization is central to being able to shape globalization in ways comfortable to themselves.

Because of their unique perspective, Americans fear globalization less than anyone else, and as a consequence they think about it less than anyone else. When Americans do think about globalization, they think of the global economy as an enlarged version of the American economy. They do so partly because this is precisely what much of the rest of the world says they fear about globalization.

Yet globalization is, in fact, changing America faster than any other society. Nowhere is production moving offshore more rapidly. Nowhere are more people’s jobs being displaced by the rearrangements of global supply chains. No one’s culture is changing more rapidly. Yet Americans hardly notice what is happening because their belief that the global economy will simply be an enlarged American economy is so strongly held. Specific political cries of economic pain are heard (the steel industry gets tariff protection), but there are no politically powerful general objections to the construction of a global economy that will in the end, in fact, ingest the American economy.

The global economy will not be an enlarged copy of the old pre-existing American economy. It will be something quite different. As a result, Americans have as much at stake in how the global economy is built as anyone else. It will change them as much as it will change anyone else. At the same time no one will have more influence than America as to how globalization is shaped.

Global Output

Before we can understand the different perspectives on globalization or how globalization can engage America, we must begin our investigations of the merits and demerits of globalization with a broad picture of the existing global economic landscape. How much output, or Gross Domestic Product (GDP), does the world produce and where is it located? In the past the global GDP was a statistical term without much organic meaning.^* Few knew or cared what it was. Real economic activity occurred at the level of the nation-state. But increasingly a new global perspective is replacing\ our old national perspectives. The reasons are simple: Technology and economics are pushing us out of our old national economies and into a new global economy.

As with a pair of binoculars, the viewer has to look through two lenses to get a clear view. Using the first lens the viewer converts the GDP of each country in the world into dollars using market exchange rates. When added together the world produced $31,000 billion ($31 trillion) worth of output in 2000 at the start of the third millennium. Seventy-three percent of all these goods and services were produced in what might be called the core wealthy industrial countries. The United States accounted for 32 percent of the world’s GDP, the European Union 25 percent, and Japan 16 percent. What might be called the peripheral wealthy industrial countries—developed countries such as Canada, Norway, Switzerland, Australia, and New Zealand and semideveloped countries such as Taiwan, South Korea, Singapore, and Israel where per capita incomes are above the level found in the poorest country within the European Union (Greece)—produced another 6 percent of world output. This leaves the developing world producing 21 percent of the world’s total output. Even this percentage includes some oil-rich countries such as Kuwait or Brunei, but it is probably right to leave them in the developing world since they are rich but not developed.

To sum up, approximately 1 billion people in the developed world produce roughly 80 percent of the globe’s output and 5 billion people in the developing world produced the remaining 20 percent.

Using the second lens in our economic binoculars, the viewer can aggregate the world’s GDP using what economists call purchasing power parity (PPP) indexes to convert the output of different countries into a common measure of global output. Instead of using market exchange rates to convert national GDPs into a common currency, this method looks at the basket of goods and services purchased in any country and asks how many dollars would be required to buy that same basket of goods and services in America. Using PPP conversion indexes puts the world’s GDP at $44 trillion in 2000. The world’s PPP output of goods and services is bigger than the world’s currency value output of goods and services, since the average internal purchasing prices of local goods and services in most developing countries are lower than those found for the same goods and services in the United States.

On a PPP measure of global output the core industrial countries produce 51 percent of world output—the United States 23 percent, the European Union 20 percent, and Japan 8 percent. The peripheral industrial countries produce another 5 percent of world output, and the developing world the remaining 44 percent. As measured using PPP, the developing world more than doubles in size. Instead of an 80–20 split there is a rough 55–45 split between the developed and the developing world.

Country rankings change substantially depending upon which measure is used. The two techniques for measuring the world’s output give radically different results in Asia. Japan loses the most when shifting from currency values to PPP values and China gains the most. This happens because Japan’s internal prices are far above those found in the United States, and China’s internal prices are far below those found in the United States. As measured using currency values, Japan is four times as large as China (16% of world GDP versus 4%). As measured using PPP, China is 50 percent bigger than Japan (12% versus 8%).

Elsewhere there are also dramatic changes in relative size. As measured using currency values, China and Latin America are both about 4 percent of world GDP; as measured using PPP, China (12 %) is twice as big as Latin America (6 %). China’s internal price levels are simply much lower than those found in Latin America, so when one corrects for purchasing power China gains a lot more output than Latin America.

It is not that one measure is right and the other is wrong. To see our economic world clearly, both lenses of the binoculars need to be used. Both measures of global output are correct. If one is looking at the size of potential markets for foreign goods and services (international purchasing power), financial might, global economic clout, or how much purchasing power the average tourist from a particular country has when going abroad, currency values give the right measure of economic output. If one is trying to determine welfare differences among individuals, families, or nations, PPP measures are the right indices to use.

Using PPP measures, the per capita income of the European Union is about 25 percent below that of the United States. Member states range from being 30 percent richer (Luxembourg) to being 47 percent poorer (Greece). In 2000 Japan’s per capita GDP, using exchange rate conversions, is 17 percent above that of the United States whereas its PPP per capita GDP is 24 percent below that of the United States. China’s $850 per capita income in currency terms rises to $3,700 in PPP terms. This latter number is the right number to use when making welfare comparisons with America’s $36,868 per capita GDP in 2000.

How Big?

The geographical definition of any economy is given by the area across which business firms maximize profit—that is, they search to find the cheapest places to produce and they search to find the most profitable places to sell their goods and services. Supply chain management best illustrates the forces at work. What should be outsourced? What should remain in-house? Where in the world should either be made? Increasingly, answers to these questions dictate global operations. Supply chains for making components now encircle the world. Sales can be managed in any number of countries.

In this process some geographic areas are found to be cost effective and profitable for production and sales, some are profitable for one but not the other, and some areas are found wanting on both dimensions. They are simply not good places to do business and are left out of the global economy as private businesses deploy their activities.

As businesses scan the world to find the most profitable places to sell and produce, national economies are slowly dissolving to be replaced by a global economy. It is this reality that makes the world GDP and not national GDPs the relevant numbers to think about. It is this search criterion and not any specific economic measure—sales or profits earned abroad, world exports relative to world GDP (12% in 2000), or the size of foreign investments—that determines the existence of a global econom...