Issue #10, Fall 2008

The Next Globalization

The biggest challenge of globalization isn’t trade. It’s reining in health care and energy costs—and preparing American workers and business to compete.

It’s a safe bet that every economic policy adviser in Washington has some version of the following fantasy. The president-elect calls and asks you, confidentially, to explain the current state of the American economy. Leave all political considerations at the door, he says, or leave them to me. Just tell me: What works, and what doesn’t?

In my version, I tell him that the answer to both questions is globalization–and unless he understands why, his economic record won’t be much better than George W. Bush’s. I tell him that globalization, and America’s responses to it, have helped drive not only the extraordinary economic progress of China and other developing nations but rapid productivity gains in the United States as well and, until very recently, healthy growth and low inflation. But there’s bad news, too. Globalization is also implicated in the historic slowdown in U.S. job creation, the flat incomes of most American working families, and the recent roller-coaster prices of many assets and commodities, from housing to oil.

Globalization on the scale required to produce those large effects is a fairly recent development. In 1990, 18.5 percent of everything produced in the world was exported across a border; last year, those levels reached 31.6 percent, or 70 percent greater than the economic output of all of Asia and 21 percent larger than America’s GDP. There has never been another time when trade has expanded so much and achieved the dimensions that can affect the conditions and paths of virtually every economy. There is nothing the next President can do to turn back or divert these developments. Nor should he, even if he could, want to turn America away from a process that has helped propel the most rapid modernization ever seen in many developing countries, the fastest global growth of any five or ten-year period on record, and, here in the United States, the largest productivity gains in 40 years.

While the sheer dimensions of these developments would hold any President’s attention, he would be dangerously mistaken to think of this as traditional trade, writ very large. The full nature of globalization has become apparent in perhaps only the last 10 years, and the next president needs first to understand precisely how it works. This is not just a matter of U.S. companies outsourcing jobs to foreign subsidiaries or native firms in low-wage countries. Rather, the salient political factor of contemporary globalization is that it has become so pervasive as to affect every aspect of the economy, even seemingly unrelated elements like health care and energy costs.

As a result, improving most Americans’ futures will mean responding to the new demands that globalization makes well outside the traditional concerns of trade. What will determine whether the next President presides over better economic times will be the depth of his political commitment to rein in fast-rising health care costs, make Americans work and live more energy efficiently, see to it that every worker who wants to can work well with computers and the Internet, and help new businesses get started and survive. This agenda will be harder to carry off than election-year favorites like taxing foreign profits, restricting offshore outsourcing, and slapping duties on foreign producers who dump their goods on U.S. markets at below cost. But globalization is creating a new world that demands new responses. If American policymakers understand its forces, they can harness them to advance the central economic mission of progressive politics, higher living standards for all.

Old and New Globalization

For centuries, trade was mainly a matter of large companies in Europe–and, later, America–buying commodities and other resources in Asia, Africa, and Latin America, bringing them home to use in their own manufacturing, and then selling the finished goods at home or to consumers and businesses in other developed countries. That pattern was established through colonization and persisted well into the postwar period, when it was reorganized through the General Agreement on Tariffs and Trade (GATT) and the Bretton Woods pact on fixed exchange rates for currencies.

In the 1970s, these arrangements began to give way to the forces that would bring on modern globalization, beginning with the floating exchange rates that replaced Bretton Woods and a threefold increase in the price of oil by OPEC. Companies, especially American ones, began to look hard for places where everything except oil would be cheaper, and soon they were contracting to produce slag steel, footwear, apparel, and other basic goods in places like Korea, Taiwan, and Brazil. At the same time, Germany, Japan, France, Italy, and others had finally rebuilt their own manufacturing capacities to U.S. standards–much of it financed through U.S. foreign direct investment. These two developments hit American manufacturing workers hard that decade, costing more than two million jobs.

Most American political debates and policy prescriptions are stuck in that period, with globalization understood as something operating purely at the institutional and corporate level, and on balance a drain on American workers (as in the debates over offshore outsourcing). Whether the charge is “hollowing out of U.S. manufacturing” (Pat Buchanan) or “encouraging companies to leave the country” (Senator Sherrod Brown), it usually depends on a traditional view of trade dominated by low-priced imports of basic goods. But the world has moved on. As Western companies began moving basic steel and garment plants to Asia and Latin America, many of these developing countries were investing furiously to upgrade their infrastructures beyond a basic production capacity. The Asian Tigers were first, producing the so-called miracles in Taiwan and Korea. By the 1980s, they and others were creating business environments and skilled workers in large numbers that could do more than mine ore, smelt metals, sew clothes, and grow rice–and they also began generating incomes that could buy the electronics, automobiles, and pharmaceuticals that advanced economies produced.

With wage and other costs still rising fast in America and Europe, by the 1990s large Western companies figured out that they could shift trillions of dollars, pounds, and yen into new subsidiaries or joint ventures, especially across Asia, to take advantage of the developing world’s skills and infrastructure upgrades. At the same time, technological advances created radical new opportunities to deconstruct the manufacture of complex products into dozens or hundreds of discrete parts. Together, these developments made it possible, for the first time, for Western companies to turn their manufacturing businesses into networks, with each part produced wherever in the world it could be done most efficiently, then brought together and assembled somewhere else, and finally distributed and sold in both advanced and developing markets. These developments have become the hallmarks of modern globalization: the far-flung distribution of production, the transfer of entire modern business organizations to developing countries, and the integration of their economies into the markets for the products.

These developments, however, would not have produced modern globalization as we now know it, with all of its implications for the next president’s agenda, but for equally far-reaching political changes. Most obviously, the collapse of the Soviet Union vastly extended the reach of globalization by spelling the end of a world divided into two great, virtually exclusive economic blocs. Equally portentous, the epochal collapse of socialist economics left market capitalism as the only economic model left standing, one which even China would soon move towards. Finally, the Clinton Administration drove an international process to establish the World Trade Organization (WTO) and then used it to nudge and guide developing nations to adopt the U.S. version of the model.

From its beginning, the WTO has had much more far-reaching ambitions than the GATT it replaced. Instead of just negotiating more cuts in trade tariffs and quotas, it laid down new, market-friendly rules for reorganizing developing economies: To become part of global capitalism, China, India, Brazil, and all the rest had to roll back most of their domestic restrictions and subsidies, sector by sector, and open themselves to foreign direct investment, foreign competition, and much greater domestic competition. As country after country has adopted these rules in some form, the transfers of advanced business organizations have accelerated, complete with their technologies, managers, ways of conducting business, and networks for financing, marketing and distributing what they produce–and not only to Asia’s two largest countries but to nearly a dozen other economies with low-wage skilled workers on Western Europe’s doorstep and many of the Latin countries in America’s backyard.

The Double-Edged Sword

For all its tumult, globalization has been fundamentally good for the U.S. economy. The country has grown faster and racked up larger productivity gains over the last decade than other large advanced nations. Much of this can be traced to U.S. companies wholeheartedly casting their lots with globalization: Last year, 44 percent of U.S. exports went to developing markets and 50 percent of U.S. imports came from developing countries, while 28 percent of all U.S. foreign direct investment is now located in the developing world. By contrast, Europe’s big-three economies–Britain, France, and Germany–lag far behind, with only 16 percent of their exports, 20 percent of their imports, and just 9 percent of their foreign direct investment involving developing nations. America’s much greater economic engagement in the world’s fastest-growing and lowest-cost countries exposes U.S. companies to greater and more varied competitive pressures that make them more efficient and innovative, and which in turn has supported the country’s stronger growth and productivity gains.

America’s leading position in globalization is evident in other ways. As the world’s sole superpower, the United States finds itself the guarantor of the sea and air lanes that carry most of the world’s oil and burgeoning trade. America is also the leading practitioner of the market-based arrangements that now dominate most countries, as well as the source of the reserve currency that most central banks need to stave off potential financial crises.

Beyond that, for some time the United States has been the main source of the new technologies and organizational innovations now driving productivity gains in other advanced countries and propelling modernization in many developing nations. Important innovations come from scores of countries; yet, Germany, France, Britain, Japan, and China have not produced counterparts to trail-blazers like Microsoft, Google, Wal-Mart, and Amazon, which reconfigured aspects of the global economic landscape. And with an economy three times larger than Japan’s, four times that of China or Germany, and five times that of France or Britain, Americans are the world’s consumers of last resort. U.S. imports–some $2.2 trillion in 2007–help sustain jobs and profits in scores of countries, where many businesses and workers now identify their economic interests with the United States.

Even so, globalization also poses the most daunting challenges any president has faced since the Great Depression, particularly as it begins to unravel the American social mission of broad upward mobility. As China and a score of other developing nations become production-and-assembly platforms for much of the world’s manufacturing, that sector has declined precipitously in the United States. Now, America’s critical contribution in the global economy is the development and application of new ideas, including not only new technologies, materials, products and processes, but also new ways of financing, marketing, and distributing goods and services, and new ways of organizing a business and managing a workplace.

The “idea-based economy” has been a popular metaphor for decades, but globalization and its critical technologies are making it a hard reality. Federal Reserve data show that for the first time ever, American businesses since 1995 have invested less in new physical assets than in intangible things–principally patents and copyrights, databases, brands, organization, training, and so on. These intangibles now give the American economy most of its actual value. In 1984, the book value of the 150 largest U.S. companies–what their physical assets could be sold for on the open market–was equal to 75 percent of their market capitalization. By 2005, the book value of America’s 150 largest firms was equal to just 36 percent of their market value. In other words, roughly two-thirds of the value of large U.S. companies now lies in intangible assets.

In such a world, the only Americans who will get ahead in the coming decades will be those who can work effectively with the ideas that create value and wealth, in workplaces dense with the technologies that organize, transmit and communicate those ideas. Yet, by one recent estimate, nearly half of Americans cannot handle basic computer and Internet-based systems. The results are evident in patterns of growing inequality. Over the last five years, the American economy generated income increases totaling nearly $2 trillion (adjusted for inflation). Yet, real wages are lower today than five years ago for the 75 percent of Americans who work at what statisticians call “non-supervisory” jobs–basically, everybody but professionals and managers. The other 20 to 25 percent who have claimed all of the economy’s income increases–and especially the top 5 percent–have jobs organized around the use of those intangible assets or own the companies that develop and use those intangibles.

The next president has to make computer- and Internet-related skills universally available, because decent-paying jobs that do not require these capacities are becoming increasingly rare. The good news is that it won’t be hard to do. In 1996, I urged the White House to support a new initiative to give grants to community colleges to keep their computer labs open and staffed in the evenings and on weekends, for any adult to walk in and receive computer and Internet training for free. It wouldn’t even cost very much–perhaps $150 million a year today–because the facilities, equipment, and instructors are already in place. The Clinton Administration took a pass, though Tony Blair’s government in the UK adopted it on small scale a few years later. Senator Barack Obama recently endorsed this approach; if he’s elected, the challenge will be to make it a priority enacted on a national scale and expand its scope. The 2009 version could use the community college system to offer any worker advanced as well as basic computer and Internet training. And to close the IT gap between poor children and those from more affluent families, the next president could provide funding to purchase an inexpensive laptop for every sixth grader in America, an approach now promoted by two Washington-based organizations, One Economy and NDN. Finally, an idea-based economy demands universal access to high-speed Internet service, much as two generations ago the government created programs to provide universal telephone service.

Issue #10, Fall 2008
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A note about spelling:

1. "To reign" is to rule.

2. "To rein in" is to bring under control.

I believe that Mr. Shapiro meant to use the spelling that reflects the second meaning when he wrote, "It's reigning (sic) in health and energy costs . . .;" the sentence should read, therefore, "It's reining in health care and energy costs . . . ."

Now I'll get back to reading the article!

Sep 15, 2008, 7:50 AM

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