Challenging American Leadership: Impact of National Quality on Risk of Losing Leadership (Topics in Safety, Risk, Reliability and Quality)

CHALLENGING AMERICAN LEADERSHIP

TOPICS IN SAFETY, RISK, RELIABILITY AND QUALITY VOLUME 10

Editor Adrian.V. Gheorghe Swiss Federal Institute of Technology, Zürich, Switzerland Editorial Advisory Board P. Sander, Technical University of Eindhoven, The Netherlands D.C. Barrie, Lakehead University, Ontario, Canada R. Leitch, Royal Military College of Science (Cranfield), Shriverham, U.K. Aims and Scope. Fundamental questions which are being asked these days of all products, processes and services with ever increasing frequency are: What is the risk? How safe is it? How reliable is it? How good is the quality? How much does it cost? This is particularly true as the government, industry, public, customers and society become increasingly informed and articulate. In practice none of the three topics can be considered in isolation as they all interact and interrelate in very complex and subtle ways and require a range of disciplines for their description and application; they encompass the social, engineering and physical sciences and quantitative disciplines including mathematics, probability theory and statistics. The major objective of the series is to provide a series of authoritative texts suitable for academic taught courses, reference purposes, post graduate and other research and practitioners generally working or strongly associated with areas such as: Safety Assessment and Management Emergency Planning Risk Management Reliability Analysis and Assessment Vulnerability Assessment and Management Quality Assurance and Management Special emphasis is placed on texts with regard to readability, relevance, clarity, applicability, rigour and generally sound quantitative content.

The titles published in this series are listed at the end of this volume.

Challenging American Leadership Impact of National Quality on Risk of Losing Leadership Ernst Gabriel Frankel Massachusetts Institute of Technology, Cambridge, Massachusetts, USA

A C.I.P. Catalogue record for this book is available from the Library of Congress.

ISBN-10 ISBN-13 ISBN-10 ISBN-13

1-4020-4892-0 (HB) 978-1-4020-4892-0 (HB) 1-4020-4907-2 (e-book) 978-1-4020-4907-1 (e-book)

Published by Springer, P.O. Box 17, 3300 AA Dordrecht, The Netherlands. www.springer.com

Printed on acid-free paper

All Rights Reserved © 2006 Springer No part of this work may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, microfilming, recording or otherwise, without written permission from the Publisher, with the exception of any material supplied specifically for the purpose of being entered and executed on a computer system, for exclusive use by the purchaser of the work. Printed in the Netherlands.

This book is dedicated to my oldest brother, Wolfgang Zeew Frankel, who has been an example for me and others with creativity, steadfastness, and character throughout his life.

CONTENTS

List of Figures

xi

List of Tables

xiii

Acknowledgements

xv

Preamble: The 20th Century Stage for American Leadership

1

Introduction The Need for an Economic Policy America’s Condition The Meaning of Economics Understanding Economics American Democracy is not for Everyone The Country of the Lonely

7 8 10 10 11 14 15

1. America’s Economic Environment Industrial and Technological Policies Factors of Economic Growth Politics and Economy Strategic Management of the Economy Managed Economics of Markets, Services, and Trade The U.S. Standard of Living The Impact of Human Behavior on Economic Systems American Performance and Productivity Capital and Labor Costs U.S. Immigration Energy or Fuel Use America’s Economic and Trade Dominance – Is it Real? The U.S. as an Exporter Foreign Trade Imbalance or Outsourcing The U.S.-Asian Dilemma Imposing our Principles on Others Economic Inequities in the U.S. Job Market Maintaining Economic Leadership Securities Markets The American Consumer Wealth and Value Creation

19 20 21 22 23 25 25 28 29 32 34 35 39 42 44 45 47 49 50 52 53 54

vii

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2. American Industrial Developments The Problem of U.S. Underinvestment Investment in Technology Development Technology as an Economic Driving Force Working in American Industry Interpersonal Relations, Work Place Productivity, and Economic Impact The U.S. Pension Debacle Technology Ownership Management of Technological Changes Management Structures and Incentives U.S. Corporate Pay Worker Morale and Work Ethics Productivity in America Quality Management Quality Control in Purchasing Contradictions of Competitive Bidding and Procurement The Decision-Based Industrial Organization (DBO) Institutional Support for Industrial Development America as a Service Economy The Demise of the American Middle Class Inequity in American Society Economics of Disability in America Political Correctness and Organized Labor The Customer and the Cost of Doing Business in America American Economic Prospects The U.S. as A Post-Industrial Society An Environment for Economic Success 3. American Social and Economic Developments Tax Burdens and Economic Incentives Effectiveness and Cost of Government Regulation Government Budget-Making and Budgetary Needs Government Spending The National Debt Problem The Entitlement Morass A Welfare System which Discourages Work and Encourages Fraud The Scourge of the Unemployed Unemployment and Unemployment Benefits The Business of Government Government Failure Improving Productivity by Downsizing Welfare, Workfare, and Unemployment Economic and Social Impact of Longevity

55 56 57 59 62 63 64 65 65 67 70 72 73 75 76 77 78 79 79 81 82 83 84 85 85 86 87 89 90 91 92 93 95 98 98 99 100 100 102 103 103 104

CONTENTS

The Twentieth Century Revolution in Technology and Social Structure The Most Important Global Problem Discouraging Job Growth Misplaced Agricultural Support Nuclear Waste Peril and Future Economic Costs Renewable Energy Use Developments Impact and Future Role of the Internet Stick Built Housing American Income Distribution Environmental Protection Quagmire The American Worker American Education Law Enforcement Costs Immigration and the Future of America Economic Prospects and Challenges

ix 105 106 108 109 110 111 113 115 116 117 120 121 123 126 126

4. Claims to World Leadership The New America America’s Business and Financial Leadership America’s Identity Crisis Fostering Food Adequacy and Supply American Moral and Spiritual Leadership Financial Management The Making of Leaders American Contradictions and Hypocrisy Sovereignty and Human Rights American Strengths and Weaknesses

129 130 133 135 137 137 138 139 141 142 143

5. Managing American Leadership Impact of Technological Change Ethnic Integration The War on Terror Deficits and Public Debt America’s Leadership in Innovation America’s Health Care Leadership The Right to Leadership Democracy in Action Advancing Democracy American Strengths and Weaknesses

147 148 149 150 151 152 152 153 154 155 157

6. The Future of World Leadership Challenging American Leadership Growing Asian Dominance Asian Road to Economic Success

159 159 161 170

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America’s Mistaken Self-Perception America’s Economic Challenges Impact of Globalization and Outsourcing on Economic Leadership Factors Determining Leadership America’s Leadership Role The Electronic Challenges to the American Service Economy American Creativity and its Role in Perpetuating Leadership The New Brain Drain and Reaction Repositioning America in the Public Eye Can Europe Again Become a World Leader? America’s Changing Image

178 182 185 187 188 190 191 192 194 195 197

7. Leading into the Future Managing Risks India’s Emerging Economy and Leadership Potential China’s Rebirth and Thrust Towards Global Economic Power Leadership Challenges Problems in Maintaining American Leadership Leadership Quality

201 202 206 210 215 219 229

8. Towards a Better, Fairer Globalized World What the World Needs Can America Deliver? Who Will Lead in Future

231 237 242 246

Bibliography

249

References

251

Index

253

LIST OF FIGURES

1. 2. 3. 4. 5.

National Strategic Planning The U.S. Economy Merchandise Trade Balance The Widening Gap in the United States American Income Distribution

xi

24 40 43 50 117

LIST OF TABLES

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19.

Industrial Labor Costs of Major Industrial Countries Distribution of the U.S. Workforce U.S. Service Economy Discount Rates Labor Costs U.S. Legal Immigrants Average Annual Growth Rate in Real GNP Industrial Prices – 1991 Carbon Emissions as a percentage of World Trade Manufacturing Hours Worked U.S. Corporate Research Funding Trends of Salaries and Compensation of CEOs of U.S. Companies Average Salary and Bonus Labor Productivity Index Increase in U.S. National Debt Sector Expenditures Total Defense Spending Budget FY1993 Nations’ Public Debt Major Country’s GDP Measured in PPP Terms in Trillions of $ for 2003

xiii

31 31 32 33 34 34 37 37 38 62 66 69 70 75 94 95 95 151 164

ACKNOWLEDGEMENTS

I would like to thank Dr. Frank Davidson, Professor Theodore Postol, and Professor Lester Thurow for many illuminating discussions which led to the identification of the challenges world leadership face. I am immensely grateful to my assistant, Ms. Sheila McNary, for her great help and for keeping me organized. Finally, the work would not have been possible without the nurturing love of my wife, Inna Frankel.

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THE 20TH CENTURY STAGE FOR AMERICAN LEADERSHIP

The 20th century was the most successful ever for mankind notwithstanding two World Wars, huge political upheavals, the dismantling of colonialism, the failure of Communist and other socio-economic experiments, and the quintupling of the world’s population. Absolute poverty has decreased from affecting 70% to 30% of the world’s population, life expectancy more than doubled on average, living standards have been vastly bettered, and both public safety and health have been greatly improved. We started this century with a divided world. Enslaved colonial countries, a divided Europe, an Asia highly isolated or controlled by outside powers. Africa had been divided among the European powers, and even South and Central America, though newly independent, were largely ruled by despots. The U.S. was basically an agrarian country, which had not yet exploded onto the world scene as a major player. Canada and Australia were part of the British Empire and were used to provide raw materials and food from their vast territories. The British ruled the seas and thereby international trade, which amounted to a bare 8% of the world’s gross product. There were few public services and technology only started to emerge from the confines of the industrial revolution of the 19th century, which was driven by coal-fired steam power. Electricity was only sparsely used and Marconi sent his first trans-Atlantic radio message in 1901. Orville and Wilbur Wright successfully flew the first powered aircraft in 1904. Gasoline and diesel engines were starting to be used in automobiles; yet locomotives continued to be steam driven. Per capita electric power consumption was less than one percent of today’s and most electricity was generated by coal-fired steam power plants. Wired telephones became common in rich, urban areas, but urban private transportation continued to be a mix of horse-driven carriages and gasoline-driven automobiles. Public transportation was provided by electric trams and gasoline-engine-driven buses. Many ships were driven by coal-fired steam engines, though sail power remained an important source of propulsion until about 1910. Petroleum was not really of 1

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any importance and it provided a paltry 3% of energy fuel. Inter-urban transport was largely by rail and every larger coastal city had a port, which served mainly its immediate surroundings. Home heating was by coal or wood and air conditioning was not yet in use except for a few experimental applications. Even though some manufacture was concentrated in areas which had comparative advantages such as cheap hydropower, access to raw materials or abundant labor, most manufacture was on a comparatively small scale to meet local needs. The same applied to most agricultural production, which provided mainly locally grown food to the local markets. Few agricultural goods were transported over large distances, except for special produce only producible in certain climatic zones such as tropical fruits, coffee, tea, jute, and so on. As a result, few agricultural products were processed. Most economic activities were on a small local scale. Ships were individually owned and operated and few, except for passenger ships, provided a regular fleet service. Most transport investment and operations were private, as were most other supplies. Early in this century the need for public distribution networks for electric power, telephone, water, gas, sewer, and similar conduits, brought local or regional government into play which assumed the investment and distribution or operation of the supply systems, and later quite often also built or acquired the basic suppliers, the power plants, telephone switchboards, water pumping, and so forth. It was only in 1915 that Alexander G. Bell in New York transmitted the first telephone messages to Dr. Thomas Watson in San Francisco. Yet, the beginning of this century was an age of great discovery. In 1915 Einstein espoused his General Theory of Relativity, and in 1909 the plastic age began with the discovery of Bakelite. Just a few years earlier work had begun on the Panama Canal and the first railroad tunnel was built under the Hudson River. Amundsen reached the South Pole in 1911 and Edwin P. Hubbell discovered a distance indicating variable star in the Andromeda nebula, a major astronomical discovery. Insulin was discovered and insecticides were used for the first time in 1924. Television was first transmitted in 1925, but it took another 12 years before it became commercially useful. Flight started to become commercially attractive over comparatively short distances by plane and longer distances by lighter-than-air craft or Zeppelins. In 1927 Charles A. Lindbergh flew his monoplane non-stop from New York to Paris in 33.5 hours, and the 15 millionth Model T Ford had been produced. Ford had revolutionized the manufacturing industry by developing in line, mass production of a standard product, the Model T. His example was soon followed not only by other carmakers but also in other industries. This resulted not only in a drastic reduction in the cost of manufactured goods, but it also radically changed the work place and the work environment. In 1931 the first long distance submarine, the Nautilus, navigated under the Arctic Ocean. This was also the age when huge new bridges, tunnels, and dams were built. It was also a time of intense research into the nature of fundamental atomic particles. Oil by this time had become an important fuel and the first long distance oil pipelines were built in the U.S. and in the Middle East. Refineries

THE 20TH CENTURY STAGE FOR AMERICAN LEADERSHIP

3

started to spring up in the major oil consuming countries of Europe and America and oil provided over 25% of the fuel used by society. In 1936 the Hoover Dam on the Colorado River in Nevada, the world’s largest dam creating the world’s largest reservoir, Lake Mead, was completed. The Zeppelin started to compete with ocean liners for trans-Atlantic passenger traffic. Passenger liners grew to over 50,000-ton displacement and 800 ft. in length, with a capacity of over 2000 passengers. In freight transport the first specialized liquid bulk tankers and dry bulk coal carriers entered service. In 1937 Frank Whittle built the first jet engine, but was ridiculed, and the engine only entered service at the end of World War II, too late to make a difference. It was just before the outbreak of World War II that Joliot-Curie demonstrated the possibility of generating huge amounts of energy by splitting the atom. The same year Igor Sikorsky constructed the first helicopter. In 1941 the Manhattan Project, a true macro engineering project of intense atomic research, was started. In 1942 Henry J. Kaiser developed techniques for the mass production of ships of 10,000 tons, called Liberty Ships, in just 30 days, a process which had required 12–18 months to complete before. At the same time penicillin was first successfully used in the treatment of chronic diseases. This was also the era for use of large hospitals and health care complexes. In 1945 the atomic age started with the detonation of the first atomic bomb on July 16 in New Mexico. The first pilotless rocket missile was flown in 1946, the year a weapons grade atomic bomb was detonated at the Bikini atolls. Supersonic speed in flight was first achieved in 1947, the year the transistor was invented which really opened the electronic age. In 1948 antibiotics were first developed for effective use. Although radar was a secret weapon developed by the Allies during the War, its first commercial application was in Liverpool in 1948. The first transcontinental jet flights were accomplished in 1949, the year the first guided missile was launched that flew 250 miles. In 1954 the first electric power was produced from atomic energy in Arvon, Idaho. In 1956 trans-Atlantic cable telephone service was first inaugurated. Sputnik (3000 lbs.) was launched in 1958, the year the U.S. nuclear submarine “Nautilus” passed under the ice cap at the North Pole. In 1959 the first U.S. nuclear powered merchant vessel, the USNS “Savannah” was launched. While the first 60 years of this century were a time of discovery and scientific breakthroughs, during the last 40 years man became increasingly concerned with innovation and technology development or application. Though scientific discovery and search for knowledge continued, more emphasis was given to the solution of problems. This was largely due to the increasing demand of the rapidly growing population of newly independent developing countries for access to technology as well as the demand of people in developed countries for improvements in the quality of life. The world’s population had more than doubled since the beginning of the century and would more than double again before its end. This then was the world in which America stretched its wings and emerged from a sleepy, largely agricultural backwater into a world power, which after two devastating World Wars started largely in Europe, assumed the responsibility of

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leading the world towards a more sane peaceful future. Learning from the mistakes of peacemaking after World War I when Germany was defeated, America was magnanimous and offered the Marshal Plan to the vanquished Germans and others after World War II. But the Cold War resulting from the emergence of the USSR as a super power as well as replacement of dormant colonialism by various types of dictatorships throughout many former colonial regions of Africa, Middle East, South Asia, and South/Central America, had a devastating effect on the world at large. Many of the hopes and pious commitments made after World War II were ignored and replaced by an increasingly divided and dissatisfied world with rampant differences in living standards, personal freedom, and prospects for the future. This is the stage, on which America has and is trying to exert leadership under increasing challenges to its approach and values. This book evaluates America’s economy, socio-political developments, social structure, institutions, and values in terms of their impact on America’s position as a world leader. We consider the challenges to American leadership both from within and without, and provide projections for the future of American leadership in a more global world, yet one increasingly challenged by political, religious, and cultural discord. These not only impact on attempts to make this a more equitable and peaceful world, but also on efforts designed to assure greater access to freedom, education, health care, justice, and economic opportunities. While some dire predictions of the Club of Rome report of a population explosion and resulting inability of this globe to sustain its population has been proven wrong, there are now new ominous developments that challenge global advances towards a more prosperous, just or equitable and peaceful future. American leadership, which contributed so much towards the many advances, particularly during the second half of the twentieth century, is now being challenged and will be forced to respond. America will have to learn from the rest of the world to be able to lead it and itself. As noted by John Fitzgerald Kennedy: “Leadership and Learnership are indispensable to one another” America assumed global leadership as a result of its economic eminence, technological prowess, and strategic power. It was successful in undermining Soviet influence abroad and its power within until the Soviet empire collapsed, released many of the affiliated states and retrenched as a less powerful Russia within its ethnic boundaries. Many of the former Soviet states have since become serious economic powers in their own right, particularly those which control large reserves of oil and gas. America, as the sole remaining superpower, with unrivalled military capability and reach assumed the role of global leader in economic, political, and strategic or military terms. It not only intervened in Yugoslavia or Bosnia and later Kosovo, but took an increasingly active role in the Middle East and Africa, both as an arbitrator and impartial intervener, as well as a supporter and policeman. After the terrorist attack of 11 September 2001, it became increasingly proactive and after invading Afghanistan and toppling its extremist Taliban regime, invaded

THE 20TH CENTURY STAGE FOR AMERICAN LEADERSHIP

5

Iraq on the unproven assumption that that country was developing weapons of mass destruction and may use them or make them available to enemies of the West. This costly war seems to have no end. Even 2 years after conquering the country, massive insurgency persists. America is facing increasing economic competition from China, which replaced Japan, as the second largest economy in the world. With more than twice the economic growth rate of the U.S. and for that matter most other Western countries, China can be expected to challenge the U.S. for global economic leadership before the middle of the 21st century. India is also emerging from its long slumber and is rapidly developing into a modern economy. It too can be expected to challenge major Western countries and become the third largest economy in the world by the middle of this century. At the same time, America is facing increasingly difficult challenges that may threaten its global leadership. Militarily it may soon overextend itself with commitments not just in Iraq and Afghanistan, but also other parts of the Middle East as well as in Europe, Africa, and Asia. While its modern military prowess gives it great flexibility, its manpower capabilities seem to be overextended. At the same time, the beginning of the 21st century has exposed new weaknesses. There is an increasing number of Americans who live in poverty (37 million in 2004), and the educational levels of Americans have decline significantly. In fact, young adult (25–35 year old) Americans on average attain only 9th place in education and knowledge among the world’s developed nations. An even greater potential threat to continued leadership is America’s apparent inability to deal effectively with catastrophes posed by hurricanes such as Katrina and other disasters, in a timely and responsive manner. It is becoming increasingly clear that America has difficulty in dealing with crises of all sorts. It is hard to say if this is the result of an overextended bureaucracy and inefficient executive structure, lack of broad understanding of issues and implications by its leaders or simply lack of leadership skills and organization. Yet leadership is the hallmark of pre-eminence. It requires knowledge, skill, determination, willingness and power to act, as well as ability to manage. The Katrina disaster and other recent catastrophes in the U.S. have shown a lack of effective organization, planning, coordination, and leadership, not just in providing timely aid but also in recognizing the magnitude of the disasters or crises and response requirements. The security threats faced today make this particularly dangerous as future disasters resulting from nuclear or biological attacks could pose much greater hazardous dangers and consequent challenges. America is a wide open society with a complex social, economic, and political structure developed over centuries. Its values are often conflicting and its ability to cope often questionable. Its global leadership will soon be challenged by new powers such as China, with a rigid and well-structured government leadership, a well educated and motivated populace, and unbridled ambitions. It also has overwhelming human and material resources that America may not be able to match in the long run. This then is the situation faced by America in 2005. Its response

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may not only affect its future and future role, but also that of the so-called Western World. Other nations, particularly China, are poised to replace America as the world leader, not through military but economic power. Their increasingly viable global penetration in trade, technology, education, and social programs is now a concern for the future of America’s leadership. It seems that America is now losing much of the support it had gathered over a long time and at great cost. To maintain leadership, nations, like companies and individuals, must learn to manage risk and assure quality in all their diverse activities. They must be nimble in their approach, hold fast to basic values and principles, and yet move with ever-changing conditions and requirements. The challenges of this globalized world are now under attack by an increasingly difficult natural environment, damaged by human greed and folly, which for too long ignored the impact of their actions on the environment. People try to advance their condition by use of technologies whose impacts are increasingly difficult to manage and contain. Health hazards as a consequence now often emerge in new and often epidemic forms. All of this requires much greater risk awareness, and effective quality management. Leadership, which in the past was mainly claimed and associated with size and power, will in future be more and more assigned to nations who prove an ability to manage quality and risk in their activities. Terrorism and related security threats pose increasing challenges on the local, regional, national or even global scale. But, as noted, threats by nature are also more frequent and destructive. These in addition to health or biological threats pose increasing risks to people or mankind at large. The quality of management of risk has, as a result, become a most important condition for leadership, not just at a personal and corporate but also at the national level. Nations, no matter how powerful, and the world at large increasingly find themselves under attack by natural disasters, terrorism, and other unpredictable as well as uncontrollable events. These today quite often challenge the capabilities and resources of even the most powerful leading nation. Yet these are foremost tests of the quality of leadership and the ability to manage under conditions of uncertainty, imposed by external and unpredictable forces or events. The qualities of American leadership in all important aspects are discussed in this book and its ability to lead and manage domestic and world affairs and truly guide the world towards a better future under conditions of increasing risks are being evaluated. This at a time when there are serious questions about the quality of American education, institutions, as well as social services. America is both admired and reviled. It is respected and detested. In fact, the world is not just divided in its opinion about America, but individuals all over appear to have mixed feelings about it; this largely as a result of a lack of consistency as well as principle in many of its actions. But leaders, to be respected, must present clear visions, adherence to accepted and respected standards, effective quality in their leadership, and firm, effective management under conditions of uncertainty. Otherwise, their leadership is at risk.

INTRODUCTION

Economists in general – and American economists in particular – have developed a mainstream economic theory based on sophisticated mathematical and scientific principles. However, the public perception of economics in America is more that of an art, practiced by a large community of learned, but often disagreeing practitioners who argue the relevance of assumptions and spend much time defending their analysis, results, and projections from charges of lack of realism and of inaccuracy in explaining the actual behavior of the economy. Modern economic theory conceals much of economic reality and also makes often unproven and unjustified assumptions regarding the economic behavior of man and society. It appears that much of today’s economic theory is fostered by accepted political attitudes and assumed standards of responsible moral behavior and that economic realities are often buried, ignored or actually concealed in economic analysis. The result is that economic models are often more concerned with the use of an accepted theory and related assumptions than with the discovery of the truth underlying many of our economic issues and problems, this particularly now when terrorism and other developments re-introduce uncertainties and risks not experienced for a long time. The important roles of the consumer and his attitude, of productivity and worker attitude, of waste and corruption, of inefficiency in government, industry, and society, of politics and political stability, of terrorism and its effects on public attitude and how all these factors impact economic developments are either ignored or indefinitely deferred; this because they require painful decisions to be made or positions to be taken. Such decisions may conflict with political posture, moral values, and perceived social or national interests. It is becoming increasingly evident that waste, corruption, misuse of resources and inefficiency, lack of education, technological backwardness, incompetent management, lack of security, and political factors have a much greater effect on economic performance and development than do the more traditional and readily quantifiable economic factors usually used. In fact, the above factors can easily be shown to dominate and more readily explain economic performance 7

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INTRODUCTION

and development than does the use of more traditional factors; for example, they certainly have greater value in explaining economic developments in our inner cities or other local developments. Many modern economies, particularly those of the U.S., are greatly distorted not only because they have largely become service economies and consider services of all types productive output but because they consume more than they produce, and as a result build up huge monetary and resource deficits; they increasingly lose touch with reality. We assume that deficits can build up indefinitely and that we will never have to face the need for restitution or repayment. The world’s economy may approach a zero sum game in the long run and, though quite robust over the short run, can only absorb limited imbalances over sustained periods of time. The same applies to our consumption of resources and the lack of effective recycling which causes only a small part of resources consumed to be effectively used. Most importantly, economists assume rational economic behavior by men and their governments, something that hardly ever exists.

THE NEED FOR AN ECONOMIC POLICY There is a long-standing view in the U.S. that government should not be involved in setting economic or industrial policy, and that economic and industrial developments are best left to the market place. It is argued that government should concentrate on national defense and social policy which, in turn, is expressed in terms of education, health, welfare, law enforcement, infrastructure, and other service programs. Yet government expenditures account for nearly onequarter of the gross national product and over 70% of these are non-defense expenditures. It is interesting that under the Clinton Administration the role of government in economic policymaking was being seriously re-considered and questioned. While many government service programs may be justified, the effectiveness of their delivery is often subject to question. More importantly, government involvement in health care, law enforcement, and education has led these institutions, plus the other service and government sectors in the U.S. economy, to grow to the current staggering level where they constitute more than 60% of the GNP and consume over 60% of total employment. This figure is nearly double that of the economic participation of the institutional, service, and government sectors in other major industrial countries such as Germany and Japan. Furthermore the service and institutional sectors, in particular health care, law enforcement, and education are growing at an appreciably faster rate than the economy in general. Manufacturing - which provided 50% of all jobs in 1950 - has shrunk to a present level of less than 18%. Farming - which offered 12% of the jobs in 1950 - is now down to just over 3%. In other words, less than 3% of our total population produces all our domestically produced food and generates healthy agricultural exports on top of it.

INTRODUCTION

9

Concentration on service industries and institutions has been defined by government leaders and some economists as the path to a post-industrial economy and a logical step for the U.S. which – less than one hundred years ago – moved from an agricultural to an industrial economy. However, there are serious questions as to whether a government-driven service economy can assure sustainable economic growth for the U.S. Service jobs are mostly low paying and often low skilled. The exceptions are top professionals employed in the service industry such as in health care, law, and educational institutions who often draw obscenely large salaries. Lawyers normally make 10–20 times their secretary’s pay. Similar differentials are found among doctors and nurses, hotel managers and hotel workers, university presidents and faculty, as well as others. While top managers in manufacturing also often draw obscene salaries in the U.S., the overall distribution of income and skill here is much more uniform than in the service and particularly institutional sectors. Emphasis on a service economy would therefore lead to even greater income distortions than we experience now and would continue to decimate the U.S. middle class. In fact, recent studies show that a continuation of the current policy that encourages continued growth of the service sector would make the U.S. a two-class society. In turn this could destroy our cherished democratic system which is tenuously dependent, controlled, and fostered by a strong middle class. The very foundations and principles on which America is built appear to be eroding now. All our major institutions, from government and health care to education and law enforcement, have been discredited in recent years as being inefficient and unresponsive to society. The U.S. public has lost faith in the ability of these traditional institutions to serve its needs and, in fact, often questions whether their focus is on the needs of the public or their self-interest. In economic terms, these developments have led to tremendous waste, which if not stopped, could drown this unique country and its society. True, we are far from the condition in which the other former superpower - the USSR and now Russia finds itself now; nevertheless, our symptoms are disturbing and must be addressed if we are to preserve this great democracy, this great society, and all it stands for. In this book we review America’s condition and its causes and then try to develop and compare potential solutions to its problems. We have become a much more individualistic, selfish, self-centered, and, to some extent, corrupt society than we were in the past – or one we admit to. Now consideration of the interests and needs of the community are more often than not submerged under personal greed and short-sighted selfishness at all levels of American society, and even government. The individual and his rights are assumed and have always been considered supreme in our society. This is as it should be. But most individuals in America now ignore the other side of this covenant that gives us these rights in return for our loyalty and contribution to as well as participation in society. Many now renege on any responsibility for society’s interests on which these rights depend. This is not as it should be; yet it appears to now permeate all levels of our social structure and institutions.

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We need a new approach, a rebirth of idealism, responsibility, concern for society and our fellow men, and a focus which advances individual progress and rights – but not to the exclusion of public or community interests. We must learn to advance our self-interest without impacting on or hurting society’s interests. We must recognize that as Americans our fate, prosperity, and security are linked to that of American society as a whole. AMERICA’S CONDITION In the last 50 years America’s economic condition has improved. Real personal income, adjusted for inflation, has increased substantially, as have job opportunities, the percentage of high school and college graduates, and the percentage of scientists, engineers, doctors, and lawyers. The number of square feet of housing per capita has increased by nearly 80%, as has the quality of housing. The health of the average person is significantly better and life expectancy has increased by nearly 20%. All of this was made possible by constant annual growth of productivity of 2.5% between 1947 and 1973 and large public investments in infrastructure and institutions that benefit society. However since 1973, the annual growth in productivity as well as in investments in infrastructure and institutions have declined from these levels. Productivity growth has slowed to a scant 1% per year, and median income growth has often fallen below the rate of inflation in recent years. While the U.S. is still the world’s largest economy and most powerful and productive nation, others are gaining both in productivity and quality of life. Much of this relative decline is the result of our failure to maintain the required investment in productive assets, education and job training, infrastructure and services. We have among the world’s lowest savings rates and, except for some of our universities, have a dismal educational system. We invest too little in job training and discourage savings by taxing interest on savings. With an increasing proportion of our economy in the service sector, our middle class is declining as more people find themselves among the working affluent or working poor. With manufacturing and skilled service jobs either being phased out or replaced by machines, more and more Americans find themselves either among the low or high wage earners. As we will note, we must redevelop and foster our middle class lest we destroy the very fabric of Americanism. THE MEANING OF ECONOMICS Economists as well as the public-at-large have struggled for three centuries to define economics. While early economists perceived it to be a philosophy and an organized skill, which is used in the study of human behavior and the interaction of people and their activities, economists who followed, gravitated toward the study of monetary exchange and material well-being or the role of financial transactions in explaining human behavior. It is curious to note, though, that the founder of ‘modern’ economics, Adam Smith, was

INTRODUCTION

11

concerned with broader issues and observed human behavior principally as an economic factor. In fact, in The Wealth of Nations published in 1776, he viewed human interaction as a principal force affecting development of human well being. Yet later economists became increasingly oriented toward monetary or financial performance and ignored the economics of human behavior. One reason advanced to explain this is that as economics developed into an increasingly complex theory, economists moved more into abstraction to explain human and societal behavior as it affects the well-being of mankind as a whole and groups of people or their particular activities and enterprises in particular. Thus economics has become an increasingly abstract science which tries to explain developments, not in terms of people’s behavior and the interaction of various resource applications, but largely in terms of monetary transactions. Modern economics makes no value judgment that can be expressed in financial terms or converted into the economic equivalent of monetary terms. The approach is not necessarily amoral; it is concerned mainly with understanding what has happened and why people, societies, nations or mankind have behaved in certain ways which caused some measurable result. Unfortunately this preoccupation with explaining past behavior and its resulting development, though useful in the past, is decreasingly so now as it becomes more and more difficult to forecast even the near-term future from the past. Technology, human behavior, and man’s organizations are now changing so rapidly that the past is becoming less and less relevant in projecting the future. The foundation of modern economics is the study of the behavior of the individual who is assumed to behave rationally and to aim at improving his lot. In other words, economists assume that man behaves rationally, is materialistic, and tries to satisfy his desires. However, this is usually not the case. Social, political, religious, and sometimes criminal interests affect man’s behavior more and more. Furthermore it is assumed that all men react the same to economic stimuli and that their behavior is always economically rational. This has probably never been true and is certainly not so today. Rationality in general has been largely overtaken by greed, political interest, and various personal motives that are sometimes not economic interests at all nor can they be explained in economic terms. Similarly, recent developments indicate the increasing role of spiritual and religious or faithbased rationales in driving peoples’ behavior. Quite often value judgments are not based on financial or economic gain at all, but on power, revenge, pride, religious fervor or personal interest. In other words, the definition of economics is quite different today from the basic concepts used in the past or used in economic theory which may become, as a result, less relevant in explaining developments. UNDERSTANDING ECONOMICS Economists too often tend to think like cultist priests whose arcane powers claim to be able to explain the past and predict the future. They seldom agree among themselves on the explanation, forecast or prescription. In fact, they spend an

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INTRODUCTION

inordinate amount of time talking to each other to achieve, if not a consensus, at least some degree of mutual acceptance of their projections; yet their projections often prove ultimately wrong, irrelevant or have been overtaken by real developments by the time a consensus is reached, if ever. It is important for economists to communicate not just the results, however controversial, but also the process of economic discovery and analysis in order to enable users of economics to understand the conclusions. This is important to convince the public that economics is a rational and well-rounded method of analysis of human behavior and interpretation of the resulting developments and that it also assures meaningful feedback as well as effective use of the recommendations. To be useful, economics must permit learning from the past and the development of more effective planning for the future. This should be combined with a full recognition that environments and conditions continuously change. Similarly, it must give weight to factors that cannot readily be expressed in monetary terms as they may be equally, if not more, important. In the end, people are generally more affected by ideas than by monetary gain. Economists often talk down to people as if they themselves are the keepers of the Holy Grail, forgetting that most people have a keen, often profound, theoretically sound perception of what counts. They are the ultimate judges and will decide the future no matter what the economists say. The influence of economists has declined in recent years, not because of faulty interpretation or forecasts, even though most are made as qualified projections, but because economists have proven incapable of interpreting economic findings in human and societal terms – terms the average person understands and can associate with. They have lost stature because they could not descend from their ivory tower to the arena of reality where what you predict is actually experienced and where reality not only catches up with you but rules! It is not by chance that few economists, including those working for financial institutions, are financially successful. Economics should not be considered a science or even an art, but a method that explains the well being of man realistically and in a rational form. To be useful, it should show how man can improve his condition and at the same time leave a better world than he found. The principal function of economics is to develop, guide, and assist decision-making, and as such present the reasons for development. It must not be an abstract method used to explain complex, often unrealistic or contrived situations and interactions, but a simple tool to aid the understanding of the use of resources, such as capital, labor, material, technology, and social relationships, in the production of values for mankind. Economics must address real issues and consider the common good and how best to advance it. More specifically, economics must become an effective tool for policymaking at all levels, and not primarily a tool to correct or respond to economic developments which must be corrected. In other words, it should be used proactively and not reactively. It should prevent policy mistakes and not be used primarily as a tool to explain and excuse and possibly correct them. Proactive use of economics must not be limited to correcting undesirable, expected or impending developments such as inflation. Economic analysis should be used as a real and meaningful policy

INTRODUCTION

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tool aimed at achieving long-term objectives. American economists, like others, have fallen prey to the weaknesses described and, as a result, have not been as effective as they might have been in guiding American economic development. In this book, we discuss the current use of economics in the U.S. and project its use as a policy-making tool where economics serves as a means to consider the broader aspects of society and its needs, and as a tool for the development of sound policy, defined in terms of implementable strategies. Economics must provide explanations for the behavior of individuals and nations, in a way that helps individuals and nations to recognize and react to both threats and opportunities. It should explain behavior in a way that reflects human weaknesses, frailties, character failings, ambitions and concerns, and not that of idealistic and rational man that is the exception and not the rule. Rapid technological change demands that we become more responsive to society’s needs lest we are driven towards conditions in which rationality and technology determine everything. It is unfortunate that economists have ready answers to explain the past and often even agree in part what is required to succeed in the future. Yet, they never get involved in how things are to be done or how their explanation or theoretical proposals are to be transformed into policy or action. They are great thinkers and poor doers. As a result, few economic predictions really guide economic policy or decision making. In part, this may be due to economists’ lack of familiarity with the practical or real world, but often also with their lack of confidence in their own explanations or predictions. Very few economists put their money where their mouth is, and even fewer ever become rich. Until economists learn to not only explain the past, post factum, and predict the future by projecting what might happen or should be done, without committing themselves to how, when, and where things ought to be done, their influence will continue to remain peripheral. It is sad in a way that some of our greatest economic thinkers had so little influence on our economy and economic policy. True, the government bureaucracy, financial institutions, and international organizations employ many competent economists in influential positions. Yet if we truly consider how policies are formulated and decisions made, we usually find that the economists exerted little influence on the process. The World Bank, as one example, employs some of the world’s most renowned economists and puts them in leading positions. Yet when large-scale lending decisions must be made, the learned economic theories devised play little if any role in these decisions. In fact, they are mostly used to perform post factum analysis to show if the theory would have worked. The President’s Council of Economic Advisors appears to play a similar role, and serves primarily to explain decisions made by the Treasury, Department of Commerce, or the Federal Reserve after the fact. Recent exceptions were Federal Reserve Chairman Greenspan, an economist, and former Treasury Secretary Rubin, a Wall Street banker, who managed to set and control American economic prosperity and growth through small adjustments in economic policy. Throughout recent history, these were among few of

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INTRODUCTION

the exceptions. This is unfortunate, as a more proactive participation of economists would probably assure greater economic and even stock market stability.

AMERICAN DEMOCRACY IS NOT FOR EVERYONE The major cause of recent failures of American foreign policy has been the assumption that our American or Western concepts of democracy and free market economy are so superior to any other political, social, and economic system that everyone should want to adopt them and thrive towards their introduction. Our conviction is largely based on our own successful experience and the assumption that if we were able to make it work, and work it did in America and to some extent in Europe, then it must be possible if not outright desirable to make it work everywhere else. No consideration or for that matter concern was given to the basic requirements for such an experiment. It worked in America because people wanted it to work, and were willing to sacrifice anything for economic and social freedom. They had experienced freedom and were willing to die for it. They appreciated not only physical but also intellectual and economic freedoms as well as freedom of expression and communication. To appreciate such freedoms required an educational and intellectual base and a willingness to assume responsibility for one self, including the responsibility of job and physical production. However, there are many in our society who only want to enjoy the benefits of American economic freedom and democracy without personally contributing to it and its maintenance. Poor countries as well as our own poor or disadvantaged want to catch up and enjoy the fruits of prosperity even if it means trampling on some economic freedoms and social norms. They are more concerned with economic advancement than social righteousness; more interested in doing well than in doing good. However, they are not alone. Many well-to-do and educated similarly disdain the need for form and structure in a free economic society and seek not only short cuts but also ways to undercut and undermine its very purposes. It is easy to understand the attempt and frequent success of the poor to crash the rules of free economic capitalism. It is more reprehensible when people who attained financial and social success through the freedoms our free market capitalism provides, turn around to trample on its rules and tenets so as to further their interests. Free market economic and democratic systems assume that their citizens are adequately educated, positively motivated, and understand their responsibilities as well as their rights. Opportunities which permit each individual to perform and advance to the best of his abilities and efforts go hand in hand, and in fact depend on the maintenance of all our rights and freedoms. Yet many in America do not or cannot exert their rights and take advantage of opportunities because of actual or perceived barriers, interference by individuals or institutions or personal inadequacies which are often the result of cultural, ethnic or geographic constraints.

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15

Although we have made progress towards personal equality and opportunity, only a small proportion of blacks and other disadvantaged minorities have actually emerged from their social and economic ghettoes. There are a few successful blacks, but the proportion of poor blacks, single parent black families, and blacks who do not complete a high school education remain abysmally high. We have thrown large amounts of money at this problem only to grow a large new bureaucracy, without actually attacking the roots of this problem. A completely new approach is needed if we are not only to resolve this problem of inequity, but also assure that our society does not break up into two increasingly disparate parts. The growth of the Internet and modern information/communications technology has made our world into a truly global village. This in parallel with increased commercial and financial globalization and falling travel and communications barriers make it a fertile ground for questioning of the equity of our system for the large number of people who are shut out and do not participate in or benefit from our economic and technological advancements.

THE COUNTRY OF THE LONELY In few countries do people have so many rights as individuals yet are so lonely as in America. Individual freedom and rights to privacy combined with a tremendous drive towards economic success have developed a lonely people. Few Americans have really good friends with whom they share some of their most private concerns or problems, to whom they admit their weaknesses and rely on in time of need. Similarly, few are really intimate with both their family or close friends. True, they share formal occasions such as holidays, birthdays, and similar events, but few are close enough to their families to trust them with their failures, faults, defeats or even successes. We Americans like to show off even if there is little to show and hide or cover up things that could happen to anyone. We are a lonely people who live largely within ourselves. We trust psychiatrists with our innermost secrets but not our closest family or friends. We think that by paying someone to listen we will have better, more objective advice. The opposite is often true. Loneliness makes an important contribution to the American economy. It drives life style, spending patterns, social structures, work environment, and most importantly performance of individuals. It also affects peoples’ attitudes and their behavior, particularly in the work place. There is no other country in which issues such as sexual harassment, political correctness, individual freedom including freedom of information permeate the work and social environment as much as in the U.S. These issues are usually ill defined and Americans have tried for decades to define applicable standards. The fact is that such standards are difficult if not impossible to define as they depend on circumstances. Yet U.S. media have for long assumed the right to define standards of social behavior by reporting on every interesting occurrence not just in fact but by use of moral judgement. This not only takes away the public rights for open discussions and judgement, but also introduces

16

INTRODUCTION

an unwanted and dangerous third party evaluation that may have little to do with the actual cause and event. The influence of the media extends from the moral to the economic aspects of American life. Americans are probably influenced more by their media than anyone else. The media, particularly now through the Internet, not only affects but also really influences the social and economic behavior of the average American. This is dangerous as the media and Internet are neither representative nor do they necessarily reflect the interests of the public. The media only represent their own narrow interests and no others. Although the media and Internet have opened a huge new flow of and access to information, the indirect costs paid for this may be exorbitant and often the damage caused by misuse of information or actual fraud in its use may be excessive. We currently pass through a time when dreams and hopes drive investment decisions more than ever before. Internet companies who represent nothing more than a basic on-line marketing concept, without revenues and huge losses, which are not nor will ever be profitable in their own business, but are expected to be able to sell advertising to their huge numbers of visitors, now attract large investments and often achieve market capitalization in excess of highly profitable large companies producing real goods or services. Although this appears illogical, there are respectable economists who insist that this is economically justified. Only the future will tell if this is just a temporary bubble or a new era of technology and marketing. In this book, we will concentrate on the future of America as a leader, its economy, and the role economics will play not just in guiding what needs to be done, but how, when, and where economic decisions must be made to assure our continued prosperity and growth towards hopefully an increasingly just environment of income distribution. America, as the sole superpower at the beginning of the 21st century has been trying to convert the rest of the world to its values, concepts, and interpretation of democracy and freedoms. Yet there are many questions about America as a leader and its ability to inspire and show the way towards a more equitable, peaceful, and better world. A world in which all have and can take advantage of opportunities, a world free of fear which is secure, and permits free expression and movement. A world governed by the people and for the people. These are all principles America espouses. The question though is can it lead the world towards these concepts, which are largely utopian and are only partially or imperfectly practiced in America itself. Americans are an impatient people who want it all: boundless freedom, endless supply of cheap energy, food, and other goods, large dwellings and freedom of expression, movement, and economic activity. We want a clean environment but are not willing to reduce consumption of pollutants. We want cheap gasoline, but will not allow new refineries to be built in our backyards. We want freedom of movement and access to information, but are increasingly putting barriers in place, ostensibly to keep bad people and information out. We have a wide-open financial system which has few barriers to transactions but which is being corrupted by misuse, fraud, and dishonesty. Obscene remuneration, particularly in U.S. investment banking, has become an outrage, with

INTRODUCTION

17

dishonest so-called analysts and investment bankers earning 100 times the average income of working Americans. Americans want it all, independent of the massive inconsistencies in our economic and social systems. We cannot have a clean environment and reduce air pollution if so many Americans insist on driving huge SUVs as commuting vehicles. We cannot expect clerks and workers to be honest in their work if they read daily about huge thefts and corruption among executives who often get away with a slap on their wrist, while workers are jailed for a long time for minor offenses. We cannot be an example for the world without being an example for ourselves first. America is now facing its greatest challenge, both from within and from outside. It must show that its lofty ideals are truly the principles guiding it in everyday life, in its dealings with others, in the way it governs itself and projects itself onto the international scene. It has a huge responsibility as the principal global power and must guide by example in all the different aspects of modern life and government. It does not have to be perfect in all aspects but must show a firm commitment to its principles and true efforts in moving towards its ideals. There are many areas where America needs major improvements such as in education, which after many years of often forced integration is still discriminating against blacks and other minorities. The criminal justice system similarly exhibits major inequities, particularly in punishment. Access to effective health care is far from universal, with some segments of society and regions ill served or without protection. Similarly, when it comes to foreign policy, we often forgo our principles for parochial or short-term advantages. To lead the world, America will have to truly become an example based on the ideas, ideals, and principles we espouse without compromise. The challenge to American leadership is mounting, as many in the world question American commitment to its principles and ideals, and as a result qualification for world leadership. Leadership requires example, not just words and slogans but real action based on these principles and ideals. Shameful prisoner abuses in Iraq, unconscionable or obscene executive pay, various scandals in the health care industry, corrupt schemes at Enron, WorldCom, Tyco, and other major U.S. corporations, all caused major loss of faith in the American political, economic, and justice systems, not just by many Americans but around the world. While it is true that once crimes are discovered, the American people and their institutions will move to correct such ills, it usually takes an inordinately long time before such correction occurs and the guilty are punished. Punishment furthermore seldom fits such monumental crimes. This is one reason why America has lost credibility as a leader. Leaders, to be effective, must unscrupulously commit to their principles and not allow political or economic convenience or benefits to distort their actions. There are many examples where principles were compromised which obviously affected credibility. This is of particular concern as America is moving towards a largely service-oriented economy, which not only outsources much manufacturing but increasingly also service jobs and functions, as it makes America more vulnerable than at any other time.

CHAPTER 1

AMERICA’S ECONOMIC ENVIRONMENT

American economists not only identified but developed the use of input-output analysis and regional, sectorial and enterprise planning. Input-output tables are being maintained by different levels of government and are supported by input-output analysis at the regional, state, and national levels. However few enterprises or firms in the U.S., small or large, make use of these important methods of economic analysis, projection, and planning. In fact, few U.S. enterprises or even industrial or economic sectors use such tools to develop their policies and resulting strategies and plans. This is curious because an increasing number of enterprises, even in developing countries such as China, have begun to use these tools to plan investment requirements, marketing and pricing strategies, sources of production factors, or inputs and more. This shortcoming is particularly unfortunate in the U.S. where nearly 70% of the industrial and 46% of the total output of the economy is produced by less than 200 major firms. The reason is in part the preoccupation of U.S. management with short-term performance and lack of concern for truly strategic issues. These issues could be highlighted by trends identified in input/output analysis that could determine strategic opportunities and threats. In particular, needs for technological change could be derived by cross-impact analysis, a method based on input/output analysis in which opportunities and threats from changes in technology, competition, political developments, and more are included in determining future developments. But this is seldom done as it is of only strategic value and in general our planning concentrates on near term horizons both at the federal level and in companies or businesses. The economic expansion in the U.S. which started with the recession in March 1991 and continued unabated until the 2001 recession is only now in 2005 reviving its growth. That economic expansion was the longest since the 1960s. Business cycles in the U.S. seem to get longer, largely because of the post-industrial switch to more service activities, greater social safety nets, less in system inventory investments, greater banking insurance, new technology, and most importantly globalization. Another and probably even more important factor is the effective response 19

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of the Federal Reserve which only very gradually lowered interest rates to sustain a very gradual growth. The surprising thing was that the Asian’ crisis of 1997–99 hardly affected American prosperity and growth, as external shocks usually do. With apparent resistance by the U.S. economy to these traditional causes for a disruption of growth, the sole factors, which could curtail continued growth is a financial imbalance. The U.S. has again a negative savings rate, as people remain confident of continued growth and low unemployment. They therefore shop excessively and take advantage of cheap credit. In fact, the consumer has become the major driving force in sustaining economic expansion. At the same time, the stock market continued an historic advance, particularly in high technology shares in the 1990s. People felt well off and worry free. They did not perceive the potential for a financial crisis and major decline in equity values and employment. While this would force the Federal Reserve to raise interest rates in the past, which in turn would reduce growth further or actually result in negative growth, the Federal Reserve continued to lower rates five times in the first six months of 2001 to stem the potential of recession. Globalization, technological advance, and a shift to less cyclical service industries all helped, but prosperity may not last, particularly if major global players renege on their commitments to free trade, political harmony, open markets, free currency systems, and more. INDUSTRIAL AND TECHNOLOGICAL POLICIES Commercial product and process technology is ahead of defense technology in many areas and is usually developed by multiple use research, development, and innovation. On the other hand, most military R&D is highly focused which makes it difficult to identify either potential commercial uses or effective opportunities for transfer. Non-military government-funded R&D, on the other hand, is poorly organized, unfocused, and often addresses irrelevant issues. As a result, it is incapable of assisting U.S. technology development to greater industrial and economic competitiveness. The U.S. lacks both national industrial and technology policies which would at least establish priorities; yet many in the U.S. oppose such government policymaking as a potential infringement on their freedom of action, while at the same time relying on government economic help for much of the research support. This contradiction is becoming more obvious and in many cases self-defeating. We rely on government for subsidies or discriminating regulation to assist non-competitive industries, while demanding that government and thereby society not set priorities or standards. Unfortunately we can no longer afford this contradictory approach. Industrial and technological policy development at the federal government level has been advocated by forward-looking leaders of industry and academics for many years. One problem is the perception that the federal government should or may not intervene in the free interaction of market forces or in the operation of the

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market economy. This is an obviously fallacious consideration at a time of blatant government involvement in environmental, human safety, as well as in some foreign trade regulation. It is actually more a matter of politics and the traditional interplay of economic, political, and societal lobbies with legislators which assures consideration of special interests which in turn prevent the introduction of a clear industrial and technological policy. We similarly face the problem of inadequate or non-existing technology transfer between government and private industry. With over 65% of U.S. research funded and/or performed by government or government-supported agencies, private industry in the U.S. actually has smaller research exposure than those in most industrialized countries. FACTORS OF ECONOMIC GROWTH Economic growth depends on and is achieved by the interplay and effective use of factors of economic performance, such as • available physical and human resources, • economies of scale, • productivity and quality improvements, • technological progress or • a combination of the above. While economies of scale depend on increases in factors of production, such as investment, and an increase in resources depends on investment, discovery, and demographic factors – all of which cause an increase in the factors of production – technological progress is often independent of the level of the factors available and has been recognized as a principal vehicle for economic growth of nations, particularly those without adequate resources. Recent studies have shown that technological progress reduces costs or increases productivity more rapidly than economies of scale or productivity improvements resulting from changes in factors of production. For many years, the U.S. has attempted to sustain economic growth largely by the use of economies of scale, while Japan, for example, has used technological progress as the principal driving economic force. The results have been rapid growth in Japan and lackluster growth in the U.S. during the period from 1965 to 1990 when much of the technology used in Japan’s economic growth was developed. This has obviously been reversed in more recent years when the U.S. economy was mainly technology driven. Japan concentrated on technology applications by improvements of products and processes, while the U.S. spent most of its research efforts on basic research then. There is nothing wrong with the emphasis on basic research as long as adequate resources are devoted to bringing basic research results into applications as improvements in or new processes and products which can be rapidly brought to use in the market place. We considered research largely an ivory tower that should concentrate on generating knowledge not applications and uses. Other studies show that quality and productivity improvements go hand in hand and are also affected by technological progress. In other words, economic growth is no longer simply dependent

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on the traditional factors nor is it simply a function of effective use of economic factors. To an ever-larger degree it depends on the effective use of a combination of larger factors such as technology, information management, and human enterprise. Another issue was that so much of U.S. research and development is performed by government or is government supported. This research has an abysmal record in terms of technology transfer and commercialization which is slow, inefficient or simply does not take place. This, independent of the fact that Congress legislated commercialization of government-supported and particular non-critical defenserelated research. Yet this was found to be more difficult than expected as many researchers were concerned with potential liability issues, and hesitated or refused to participate in the commercialization of federally funded research results. POLITICS AND ECONOMY Politicians are generally not concerned with narrow problem solving, and more importantly not with long-term progress, but with their own short-term agenda which usually comprises issues that advance their personal interests, supports their re-election, and covers their tails. As a result, they often advance economic policies that have a short-run impact, very much like a traditional manager in a U.S. corporation. Similarly, legislation proposed and enacted is highly likely to be narrowly focused and designed to benefit politicians themselves and maybe their constituents and supporters, but not the nation, the public at large or the world. Too often their principal concern is reelection, which for Congress occurs every two years. Congressmen begin to work on their reelection the day they are elected, and they vote economic policy accordingly. Today this approach is self-defeating and can only lead to economic and political decline. It affects our ability to deal with national and international problems, at a time when the world is ruled more and more by global market considerations and interests. Similarly, strategic interests have moved from political and military associations towards market orientations. In other words, political progress on both the domestic and international levels depends increasingly on economic progress or economic success. Unfortunately, few of our politicians know much about economics or what makes the economy succeed. As a result, they will more often than not choose the politically convenient and expedient approach instead of the economically sound one to solve economic problems. This is also true when it comes to socioeconomic problems, such as the financing of welfare, education, and health care, as well as in the development of an industrial policy. In other words, politics in the U.S. seldom addresses long- or even medium-term problems, instead concentrating on short-term issues which affect voters and thereby the next election. Radical policy changes designed to correct long-term problems are seldom enacted and often remain unresolved, particularly when, as with our present economic problems, a radical long-term change is required to reduce the staggering budget and balance of payment deficits, and to begin to pay off the unprecedented

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public debt of more than $6 trillion. Today servicing our public debt is one of the major budgetary costs of the federal government. In fact, it consumes over 15% of our annual government expenditures at the federal level alone. Even though many in Congress and government claim that they are concerned with the health of the U.S. economy and its long-term growth, their votes, policies, and actions often contradict these claims. We need more economically responsible legislation and government and more socially responsive economic development. This may take more courage than most of our legislators and government leaders are willing to exert. However, the future well being and leadership of this country may be at stake as economic health, growth, and leadership becomes the single most important issue for us in our global village. Effective growth is more and more driven by trade, and trade is driven by the effective use of technology, use of human and physical resources, and most importantly management of change. STRATEGIC MANAGEMENT OF THE ECONOMY Planning for the future requires knowledge of where we are and a strategy for where we are going. This strategy should be based on objectives and goals and incorporate policies for the attainment of these goals. It requires an understanding of the resources available or which can be marshaled to implement the strategy. A strategy also requires management designed to translate a plan into tactics that will implement its objectives. In other words, strategic management is based on the audit and analysis of conditions, an evaluation of threats and opportunities, an identification of resources including strengths and weaknesses, and an evaluation of objectives and policies designed to meet expected goals. The U.S. economy, much like that of U.S. firms and individuals, must be subjected to strategic management procedures based on continuously updated plans if it is to meet expectations. The basic requirements for planning, formulation, and implementation of strategic management on a national scale can be represented diagrammatically as shown in Figure 1. While strategic management assumes a long-term time horizon, continuous or periodic updating is required to assure its validity. In other words, our strategic plans are continuously rolled over. The most difficult problem is usually establishing strategic objectives. While in business, strategic objectives often include profitability, market share, costs, and competitive advantage, national strategic objectives are quite different. They may include economic growth, income redistribution, technological advance, defense security, political influence, and various quality-of-life goals. The functional policies that constitute the strategy or that are designed to achieve its objectives must be consistent. To implement policies or converge on the objectives of the strategy, various tools or resources are available, such as: • financial controls or means • trading controls or means • resource controls or means • technology development

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OBJECTIVES AND GOALS

AUDIT

EXPECTATIONS

STRATEGIC PLAN IMPLEMENTATION

CONDITION ANALYSIS

THREATS AND OPPORTUNITIES

RESOURCES

STRENGTHS AND WEAKNESSES

POLICIES

STRATEGY FORMULATION

STRATEGIC PLANNING

TACTICAL ALTERNATIVE

Figure 1. National Strategic Planning

• distribution • international relations • labor laws • government regulations • subsidies and support payments • taxes • licenses A government’s economic strategy should embody the fundamental character and vision of the nation. It should incorporate the defined policies as well as the existing conditions. It should thereby include the effects of and ameliorating steps to counter threats and the approaches that allow the nation to take advantage of and benefit from opportunities. An economic strategy is formulated to permit identification of tactical alternatives which, in turn, establish the preferred strategic plan whose implementation is designed to achieve the defined objectives. Strategic management is a process that must be continuously updated to remain valid as it affects the economy by its own actions, while the economy is simultaneously changed by external or exogenous developments. Similarly threats and opportunities are dynamic and subject to both marginal and radical change. Strategic management of the national economy is more essential today than ever before because our environment as well as technology changes continuously as do the economic factors which contribute to economic growth and well being. The age of stable, long-term economic policies has passed, as has the age of stable long-term economic relationships. Therefore it is necessary to continuously audit economic conditions and adjust economic strategy and resulting policy so as to respond effectively to ever changing threats and opportunities.

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MANAGED ECONOMICS OF MARKETS, SERVICES, AND TRADE John Maynard Keynes [Ref. 1] advocated keeping the economy at nearly full employment by using selective budget deficits as needed to increase output and thereby jobs. This approach was used quite effectively in the 1960–1965 period, but has been largely discredited in more recent years. Keynesian economics called for simultaneous tax increases and cost reductions, as needed, but even though tried as national policy for some time in some countries it never actually achieved the Utopia of full employment as expected. It brought with it both economic and political problems which were not easily resolved. The results eventually discredited the Keynesian approach and ultimately led to supply side economics, an adventure that a succession of Republican administrations attempted to use as a radical variation on economic policy. While this created jobs and great economic prosperity over a period of time, it resulted in the ironic price of historically unprecedented and cumulative budget deficits which over a ten-year period increased public debt nearly ten fold in recent decades. The evolving school of economic thought since 1992 favors intervention in or management of the market, trade, and most importantly services such as health care and education. This approach contradicts basic concepts of a free market economy and may encourage establishment of bureaucracies that could more than offset any cost savings that managed trade or services could achieve. It probably contributed to the loss of both houses by the Democrats to the Republicans in 1994. Since then, both the government and Congress have compromised on many issues, particularly health care and education. THE U.S. STANDARD OF LIVING The standard of living in the U.S. has led that of all other nations for many years, but the gap is rapidly closing with the erosion of our educational standards, lack of effective savings, and personal incomes, which now trail those of several other countries. According to the Bureau of the Census, median family income increased by 3.3% and 3.2% per year, respectively, in the 1950–1959 and 1960–1969 periods, well ahead of inflation and the cost-of-living. Yet in the periods 1970–1979 and 1980–1989, family incomes rose by a paltry 0.7% and 0.6% per year, respectively, rates which lagged well behind inflation and cost of living increases. During the decade 1990–1999, things improved somewhat only to fall back to a paltry increase of family income in the early years of the 21st century. In fact, on average, U.S. families have lost over 30% of our relative standard of living advantage since 1970, and are now marginally ahead of many European countries. Similarly, Japan is rapidly gaining on us in terms of a comparative standard of living. It is interesting to note that while in the 1950–1969 period the average growth of U.S. family income was just slightly behind the growth of GDP, this correlation broke down after 1970, and although the GDP continued to grow at an average rate

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of 2.7% during the period 1970–1989, the growth of the average family income in the U.S. dropped to 0.6–0.7% for that period, a trend which was only slightly improved upon during the recent decade of prosperity. There is concern that even though the American GDP is expected to continue to grow at a marginal rate in the first decade of the new century, the real growth of average family income may well become negative and real average family income actually drop, unless the rate of unemployment is not only maintained at a low level of less than 5%, but also real wages are raised. One reason for this possibility is the continuous lag in the growth of U.S. productivity as living standards grow only as fast as output in the long run. Yet productivity has only grown at an average of 1% per year since 1970 [Ref. 2]. While our average productivity in most areas is still among the highest in the world, we are rapidly losing our productivity advantage in many areas. Another issue, and one which affects productivity and thereby living standards, is the drop in national savings from a healthy 15% in the fifties to only 12% in 1990 and much less now. Similarly, U.S. investment in plants and equipment remained stubbornly between 7.5% and 9.8% of GDP between 1950 and 1990 which is less than half the amount invested by our industrial competitors. In fact, it has actually dropped by more than 2% per annum since then. Of particular concern is the fact that family incomes in the traditional economically leading states on the northeast and west coasts have not only lagged behind the growth experienced in other parts of the U.S. in recent years, but are now actually dropping in absolute terms. U.S. productivity has maintained a small albeit increasing growth rate. Yet notwithstanding productivity gains by individual workers, firms or at the national level, additional indirect costs for health care, product liability, insurance, government regulation, and other compliance and administrative costs have more than negated the effects of most productivity gains. As a result, wages, the percentage of workers employed, and therefore standard of living have all declined or at best remained constant in recent years. These additional costs which have grown at two to three times that of the GNP and U.S. industrial productivity are forcing U.S. firms to tighten their belts, hire fewer workers or let workers go to maintain affordable payroll costs, a trend which was rapidly accelerating as the prospects of recession loomed in 2001. These bleak developments are forcing U.S. firms to reduce the labor cost components in manufacturing in both relative and absolute terms, notwithstanding low unemployment and an otherwise healthy economy. Wages and therefore family incomes are increasingly challenged by peripheral or indirect employee expenses such as health care, retirement, and vacation expenses. Employee benefits, particularly those designed to provide social support services are often incapable of improving worker efficiency as workers take them for granted. Employers consider worker costs, not wages, as their costs in an increasingly competitive marketplace. Many indirect wage costs increase at rates well above the rate of inflation while benefits provided under these programs are often reduced.

AMERICA’S ECONOMIC ENVIRONMENT

27

This requires wage earners to use part of the family income, often after-tax income, to pay for services and benefits they no longer receive. The growth in family income is therefore no longer an effective measure of improvement in the standard of living. In fact, as much as 7% of an average family income in 1999 was spent on services or benefits previously covered by employer or government programs, and this percentage is growing. Considering recent developments, health care coverage of employees, particularly retirees have been drastically reduced, particularly by major corporations. It is expected that the average U.S. wage earner will have to spend an increasing amount of his take home pay to simply maintain the level of services, including health care that he used to get for free. Similarly, an increasing percentage of the cost of insurance for continued coverage after retirement is being born by workers themselves. These costs to family income are conservatively estimated to increase now at a rate of 1.6–2.4% of average family income per year, unless radical changes in health care and related costs are introduced. This erosion will negate any growth in family income and will assure a decline in the standard of living of the average American. While we continue to claim the world’s highest living standard, these ominous signs indicate that we are rapidly losing our advantage. Even if we consider average after-tax income, the U.S. is still ahead of most countries because of our lower income and consumption taxes. However, things are changing rapidly, and tax burdens may soon erode the current small after-tax advantage of U.S. wage earners. The total cost of health care in the U.S. is not only burdened by overstaffed hospitals, overpaid doctors, and excessive investment in expensive, often highly underutilized diagnostic equipment, but also by the high cost of an inefficient insurance system, inefficient government bureaucracy, and an over-zealous legal establishment which considers health care an easily mined lode of riches, where mining is completely risk-free. Although the Clinton administration proposed a $41 billion cost reduction in hospital, doctors, and related costs, such a saving in Medicare/Medicaid costs will probably simply be added as a new cost to non-Medicare/Medicaid patients, mostly wage earners. (Total proposed cuts in Medicare/Medicaid were $62.6 billion.) Not really addressed is the plight of over 36 million uninsured Americans, 80% of whom work for small businesses or for themselves, who cannot afford insurance and often receive only rudimentary medical care. As the average age of America’s population increases, these problems will increase and have a significant impact on America’s standard of living, particularly as the same people often do not have retirement or pension benefits beyond social security. While U.S. living standards are still among the highest in the world in terms of real GDP per capita (using purchasing power exchange rates), they are not far ahead of those of Canada and Switzerland. Using similar standards, Japan and Germany were over 30% behind in 1990, with France, Britain, and Italy lagging even further, but the gaps are closing rapidly. The U.S., Canadian, Japanese, German, French,

28

CHAPTER 1

and Italian GDP/capita in 1990 were $21.1, $20.8, $15.8, $14.8, $14.2, and $13.6, in thousands respectively. Since then, the gap has narrowed appreciably with the U.S. only about 18% ahead in GDP per capita terms. Not only is the gap closing, but using purchasing power exchange rates, U.S. living standards will probably be lower than those of several European and East/South East Asian countries within a few years, and can be expected to fall even further behind if relative growth rates do not improve.

THE IMPACT OF HUMAN BEHAVIOR ON ECONOMIC SYSTEMS Economic principles are designed to explain the impact of human behavior on the economy. Prior to Keynes’ demand side economic theory, unemployment and slack economic behavior were fought by changing market prices and wages. Keynes suggested that the cause of insufficient employment was simply insufficient demand and that increasing demand, by government deficit spending, if necessary, would raise employment and income levels. Many now believe that this action may in fact stymie or retard economic growth. This belief has led to the development of concepts of supply side economics that advocate increased output to generate demand and ultimately greater government tax income while reducing tax rates. The United States was founded by men dedicated to political and moral principles believed to be universally applicable which included the concept of ethical standards and moral behavior incompatible with the single-minded pursuit of self-centered egotism and self-interest. These principles require that common interests prevail over more narrow or individual interests, particularly narrow profit or other personal gains. Unfortunately these latter motives appear to rule the actions not only of lowly elements of our society who care nothing about society as a whole, but also of professionals – administrators and politicians, including political leaders who owe all to our system of government but repay it by exploiting it for their own gain, without regard for the impact on our society as we know it, so loftily conceived. It is only in the last ten years that economists have begun to analyze the economics of human behavior in terms of the incentives required to get people to do things. Gary Becker [Ref. 3] recently developed a theory to explain what makes people behave morally, selfishly, ethically or criminally. He explains motives for such behavior as social discrimination and drug abuse. Fighting prejudice and designing public policy in the public interest have been driven by political interests and power. Even social policy – such as family support – should be founded on the economics of human behavior. According to Becker, parents try to maximize their well being and will produce the number of children needed for that economic and social purpose. More children may provide more help, income, social welfare, and even pleasure, and people will usually try to control their families with their own welfare in mind. The same

AMERICA’S ECONOMIC ENVIRONMENT

29

motives apply to society at large which, to function effectively, must establish incentives and disincentives to encourage people to behave in a manner that increases the public, interests, and not just their personal interests. While theoretical economists, and particularly development economists, have included societal costs and benefits in their economic evaluations, little of these concepts has ever played a role in the development of national economic policy, particularly in highly industrialized countries that have been driven largely by financial or capital market behavior and by trends in macroeconomic factors such as employment, per-capita income, balance of payments, and government budget requirements. AMERICAN PERFORMANCE AND PRODUCTIVITY As the U.S. moves toward becoming largely a service economy, output and performance by individual groups and companies are taking a back seat to dealmaking. Effective dealmaking has become a major criterion for the evaluation of performance and the principal measure of success in recent years. This after the U.S. led the world into the post-industrial revolution over the last eighty years. American productivity grew by an average of only 0.7% annually between 1973 and 1991. Output was largely increased not by improvements in labor productivity, but by increases in capacity and employment. Now that productivity is finally starting to improve as well, in some cases by respectable margins (3.5% in 1992 and by about 2.0% per year between 1993 and 2000 and now growing by over 3% again), we are faced with an excess in capacity. Ironically, this imbalance is causing unemployment of the lower wage earners and improves mean income at the same time. The situation will take time to change, as companies start to reap the benefits of higher productivity and fewer workers combined with outsourcing of mainly low skill work. Fewer workers means lower overhead cost per unit of output, as overhead costs are a function of the number of workers and are independent of worker output. Companies will therefore stop reducing workforces only when productivity and lower workforce cost benefits allow them to increase their market, which in turn may require some new hiring if, sales volume starts to outpace productivity improvements. While many U.S. industrial firms have experienced significant productivity improvements and, as a result, greater competitiveness, the same is not true for American health care, educational, and legal institutions. Also, while U.S. industrial output has increased, as has U.S. manufacturing goods export, few new manufacturing jobs have been generated. During the period 1992–1993 (first quarter) only 100,000 new manufacturing jobs were generated, compared to 600,000 professional, 400,000 management, 340,000 service, and 260,000 new sales and marketing jobs. This period saw declines of 400,000 clerical and support staff jobs and of 100,000 technical jobs mostly displaced by computer and office technology. In other words, employees with inadequate skills and education are being replaced by technology and by employees with technological skills. An interesting phenomenon is the

30

CHAPTER 1

increase in employment in the entertainment, health care, educational, software, and consulting sectors. While the average increase in employment during the period 1987–1992 was a paltry 2.3%, movie production gained 28%, health care 17.1%, software services 17.1%, cable TV 13.1%, management consulting 11.4%, and education 7.2%. It is interesting to note that only education, entertainment, service, and software industries achieved an above-average increase in growth and consequent employment during this period. This is a logical development during time of prosperity and rapidly increasing productivity in manufacturing, agriculture, and other productive industries, yet productivity gains in these sectors fall well below the 2% achieved during the 1960s. U.S. employers spend over $30 billion per year for training and education, with nearly 70% of that spent on upper level, college-educated employees. Similarly, 90% of all training and education expenses are spent by one-half of one percent of American firms. As a result, the technical skills of the U.S. workforce do not improve overall, but only in isolated sectors of the economy. Considering average take home wages (excluding benefit and social costs), U.S. manufacturing workers were the world’s best paid, with $13.92/hour in 1988, but West German and Canadian workers follow close behind with $13.80/hour and $12.51/hour respectively. As German wages were rising at twice the U.S. annual rate of 3.85%, they surpassed U.S. wages in 1990 and in 1992 were about 7.8% higher. The wages in 1991 in Italy, France, and Britain averaged $11.8/hour, $11.5/hour, and $10.0/hour, respectively. Japan’s wage rate growth is slowing. Japanese manufacturing wages, which in 1988 averaged $8.9/hour, rose to only $9.6/hour by 1991. Similarly, as noted before, American workers must now pay out of their wages for many services which were once covered by employers and which their counterparts enjoy as a non-wage expense. On the other hand, U.S. direct and indirect tax rates are on average well below those in Europe where governments often cover more social services. It is noted that at the same time U.S. productivity – as measured in output growth by manufacturing workers – approached that of Germany at 3.75%/year in 1992, while Japan’s continued at a rate of over 9%/year largely as a result of large-scale introduction of automation. While the U.S. is still the most productive manufacturing economy, its rate of productivity growth falls well below that achieved by Japan, Italy, Britain, France, and West Germany when measured in terms of cumulative productivity improvement since 1977. Similarly, the GDP output per U.S. industrial worker, while still slightly ahead of that of other industrial countries with $41,281/worker-year in 1992, barely exceeded that of Canada with $39,261/worker-year, with only slightly lower figures for France, Italy, Germany, and Japan. Since then, the GDP output per U.S. worker has continued to lead, but only by a small margin. The above listed countries benefit from larger worker productivity growth which will result in worker output surpassing that of U.S. workers if U.S. productivity growth and the U.S. dollar remain at their current level in relation to those of the other industrialized countries.

31

AMERICA’S ECONOMIC ENVIRONMENT Table 1. Industrial Labor Costs of Major Industrial Countries - $/Hour

1988 1992

Germany

USA

France

Japan

Britain

2303 2867

2309 2406

1915 2297

1824 2097

13.39 16.61

U.S. industrial labor costs are not very different now from those of major developed nations and are lower than those of some (Table 1). At the same time, the distribution of the U.S. workforce has experienced a radical reversal, with over 54% of the employed now working for government, in services or finance and only 18.4% in manufacturing (Table 2). During the first half of this century, U.S. industry led the world in the introduction and use of laborsaving devices, largely by the invention and application of automation in manufacturing, agriculture, textiles, and food processing. It has fallen seriously behind in recent years. Although many of the advances in robotics automation and artificial intelligence originated here, the U.S. has been slow to adopt such technology and only started a serious move toward large-scale robotic plants during the last 10–20 years, largely driven by electronic communications equipment and component manufacture. U.S. robotic manufacturers posted a 21.5% increase in new orders in 1992 and delivered 5,261 robots valued at $495.9 million – the highest figure since 1986. The trend has continued and the United States now (2004) uses approximately 86,000 robots (Chrysler alone used 3,000 by 1992). Yet Japan installed that many every year and by 1999 had over 650,000 in use, a competitive edge that will increasingly affect U.S. trade, particularly in manufacturing. Unless the U.S. increases its use of robots in manufacturing soon, other industrial countries will surpass U.S. manufacturing labor productivity. The rate of introduction of automated equipment in U.S. manufacturing has accelerated in the last decade but still lags behind Japan and Germany.

Table 2. Distribution of the U.S. Workforce (December 1992) Industry Transportation Construction Manufacturing Trade Services Finance Federal Government State/Local Government Other TOTAL

Employees (Millions)

% of Total

3.51 4.59 18.46 25.33 28.32 6.68 2.97 15.41 3.05

3.21 4.25 17.04 23.39 26.15 6.17 2.74 14.23 2.82

108.33

100.00

32

CHAPTER 1 Table 3. U.S. Service Economy (1991 – in monetary terms) Health Services Law Enforcement and Legal Services Education Financial Recreation Transportation Postal Government Administration Total in 1991 Dollars

$762 billion 720 billion 440 billion 460 billion 400 billion 410 billion 10 billion 300 billion $2,740 billion

Source: U.S. Budget – Congressional Budget Office Statistics, 1992/93.

Today services are the most important source of new jobs. Yet in service industries, the single most rapidly growing economic sector, not just in developed but also developing countries, productivity growth lags far behind that in manufacturing. The service sector in the U.S. now accounts for over 70% of all private employment and for nearly 48% of total worldwide (2000) employment. In manufacturing the use of total quality management has shown to greatly improve productivity, but service industries have made little effort to improve their service quality to improve their productivity. The worst performing service industries in the OECD countries are financial and business services, with an average annual rise in worker productivity between 1973 and 1999 of 1.0% in the U.S., 1.9% in West Germany, and 1.7% in Japan. The wholesale and retail trade industries achieved average productivity increases of 0.6%, 1.7%, and 3.5% respectively during the same period. Overall, service industries in OECD countries achieved productivity increases of only 20% during that period. The situation has not improved appreciably notwithstanding massive investments in information management and communication technology. At the same time, service industries are expanding rapidly and their major sectors, including government except for the military, accounted for nearly half the total GNP of the U.S. as shown in Table 3 for 1992/93. Since then, their contribution to total GNP of the U.S. has increased from 48% to 60.8% of GNP (2000). By year 2020, the service sector is expected to account for well over 76% of the total U.S. economy. Productivity of the service sector varies much more widely than in manufacturing and agriculture and is significantly lower in relative and absolute terms. More than 60% of the service sector will be devoted to institutional services such as education, health care, and law enforcement. CAPITAL AND LABOR COSTS The cost of capital in the U.S., which exceeded that of its major competitors (Germany and Japan) in the 1980s, has since 1991 dropped below that of most European countries, a trend continuing to 2004 when U.S. and Japanese rates

AMERICA’S ECONOMIC ENVIRONMENT

33

Table 4. Discount Rates

1988 1989 1990 1991 1992

U.S.

Germany

Japan

6.2 7.0 6.6 5.5 3.5

2.8 4.0 6.0 6.5 8.0

2.9 3.0 4.2 5.8 4.0

reached historic lows. Discount rates for these countries, as reported by the Federal Reserve, the Bundesbank, and the Bank of Japan during the period 1988–1992, were as shown in Table 4. During the eighties the U.S. was definitely a high-capital, high-labor-cost country, but conditions have changed and America has become a country with low interest rates and higher labor skills. The main problem in the U.S. was really a lack of adequate credit. The failure of so many banks and the resulting stringent credit requirements made it difficult to raise capital. Banks also found it increasingly difficult to attract deposits at the low rate of interest offered to depositors, particularly as interest earned is taxable under both federal and state law, reducing the effective return to depositors to about 60% of the interest earned. American banks in general also maintain a wider gap between interest charged and interest paid on deposits than banks in other industrialized countries. The costs of raising capital from other sources, such as the stock market, are significantly lower in the U.S. The long slide of foreign markets, particularly in Japan, has made it exceedingly difficult and increasingly expensive to raise money this way. Similarly, bonds provide capital at much lower costs in the U.S. The lower cost of capital has allowed U.S. industry a greater parity with its principal competitors by providing opportunities for lower-cost capital and more level labor rates. As shown in Table 5, U.S. costs of labor, including all benefits, were well below those of most Western European industrial nations in 1992, although still 50% above those of Japan. These numbers exclude profit sharing or bonus costs, which in Japan often add 30–50% to the cost of labor. The conditions shown in Table 5 continued and exhibited the same hourly labor wages plus benefits relationships until 2004, with an average increase of 50% during the 12 year period. At the same time, the rate of growth of labor cost in the U.S. was not only the lowest among industrial nations, but was only one-quarter of the average increase in labor cost in the major industrial nations during the period 1985–92. At the present rate of labor cost escalations, which remained nearly constant until 1996 and only increased by an annual rate of 2.9% since, U.S. labor costs are among the lowest of the major industrial nations now in 2005. At the same time the productivity of the U.S. industrial worker continues to lead that of workers in other industrialized countries, yet the productivity lead of U.S. workers is declining rapidly. Worker productivity in Italy, France, Germany, and Japan is expected to

34

CHAPTER 1 Table 5. Labor Costs (1992)

Germany Sweden Netherlands Italy Canada France USA Japan U.K. Korea

Average Hourly Labor Wages Plus Benefits

% Increase Since 1985

$21.80 $21.00 $17.90 $16.20 $15.80 $15.15 $15.00 $9.80 $11.40 $4.20

125 117 108 121 48 103 14 97 101 206

Source: Bureau of Labor Statistics, AFL-CIO.

surpass that of the U.S. workers within a few years if the comparative rate-ofproductivity gains are maintained. U.S. IMMIGRATION According to the U.S. Immigration and Naturalization Service, legal immigration to the U.S. during the decade 1981–1990 was 7,338,062. Statistics, as shown in Table 6, indicate a rapid increase in Asian immigration. The number of non-legal immigrants is unknown, but is estimated to significantly exceed that of legal immigrants, with a majority of non-legal immigrants or about 70% originating in Mexico, Central America, South America, and the Caribbean. Since 1989 the number of both legal and illegal immigrants from the former Soviet Union and Eastern Europe has also grown rapidly. It is estimated that in the period 1990–91 alone there were over 350,000 legal immigrants from these countries, about equal to the number of immigrants during the 1981–90 period. This number Table 6. U.S. Legal Immigrants (1981–1990) Origin

Total Immigration

Number

Mexico Canada Central America South America Caribbean Asia Europe Oceania Others Total

22.6% 2.1% 6.4% 6.3% 11.9% 37.3% 10.4% 0.6% 0.1% 100.0%

1,658,402 154,099 469,635 462,298 873,229 2,737,097 763,158 44,028 7,338 7,338,062

AMERICA’S ECONOMIC ENVIRONMENT

35

has grown substantially since then. Total immigration from Eastern Europe and the former Soviet Union between 1990 and 1999 is now estimated to exceed one million. These new waves of immigrants had a profound effect on the U.S. labor market. They permitted revival of much of the garment industry, which often used illegal and underpaid immigrant labor and has sustained the economies of certain sectors of U.S. agriculture, particularly in Florida and California where illegal or uncertified immigrants often serve as the major source of agricultural labor, particularly in meeting the needs of seasonal employment. Today most immigrants come to the U.S. for economic not political or religious reasons. ENERGY OR FUEL USE There has long been a debate about energy taxes, and the Clinton administration had advocated a modest energy tax of 3–8 percent to be phased in over a threeyear period. This tax was expected to raise about $22 billion in revenues over the 1993 to 1997 period, a rather small increase when considered against the then projected cumulative budget deficit over the same period. Energy use, especially of automobile fuels, imposes major environmental and socio-economic costs for which future generations will have to pay. In addition we are burdening them with an increasing national debt and penalizing the economy with larger balance-of-payment deficits. We are the only OECD country which does not impose a large fuel tax to discourage wasteful use of fuel, particularly in transportation, so as to encourage reduction in fuel imports, increased use of alternative less-polluting fuels, greater use of mass or public transportation, or to provide incentives for the development of more efficient or renewable energy sources for the propulsion of transport and other liquid-fuel users. While some drivers are starting to use hybrid and other fuel efficient cars, government policy, particularly at the federal level, does little if anything to encourage use of low fuel consumption and polluting cars. In fact, the ownership of monstrous so-called Sport Utility Vehicles or SUVs, most of which get as little as 12–15 mpg, is encouraged by special tax and dealer incentives even now at a time when there is a severe shortage of U.S. refining capacity, very high level and costs of imports, and increasing reduction in air quality, particularly in the major urban areas. Few SUVs are bought for rural or rough country road transport, for which they are designed. Most serve as commuting vehicles for soccer moms. The automobile industry which attains a much higher profit margin in the sale of SUVs than ordinary automobiles is pushing this policy, which is on all accounts against the public interest. No new refineries are planned in America at this time, which means that the U.S. will have to import an ever-larger amount of refined products, mainly gasoline. The public in general objects to new refinery construction and few politicians are willing to make the need for new refineries an issue. In other words, Americans want the cake and eat it too. They want cheap fuel and a clean environment without

36

CHAPTER 1

refineries in their backyards. Some states have made feeble efforts of encouraging use of fuel efficient cars, but their numbers are small and the incentives provided are often of little value. At the same time, neither the federal government nor the states are willing to increase fuel taxes significantly. In fact, the U.S. has among the lowest fuel and particularly gasoline taxes in the world. The new energy bill discussed by Congress in 2004 is largely a farce, as it neither addresses fuel use efficiency or supply in a meaningful way. In practically all other developed countries, these taxes increase the cost of fuel by 70–120% and thereby provide real incentives for change. We, on the other hand, proposed to increase the price of oil by only about 18%, using a BTU tax. Similarly coal would be burdened by a tax of only about $5.60/ton, a 26% increase, independent of the cleanliness of the coal, while gas would be taxed at about 13%. The increased cost to consumers would obviously be less, as noted before, as many other costs (including local taxes) are added before the retail sale of the fuel. As a result, the price of gasoline would have increased a paltry 5% or 7–8 cents/gallon, with a 3–4% increase in the cost of electricity. This did not happen, but the price of fuel increased anyway by 1999 as crude oil and natural gas prices skyrocketed through the concerted effort of the petroleum/gas-producing monopolies. Major gasoline price shock was experienced in May 2004 when the average cost of gasoline at the pumps in the U.S. climbed above two dollars nationwide and later in August 2004 when the price of crude oil reached nearly $50 per barrel in the international market. In the aftermath of Hurricane Katrina, the retail cost of gasoline climbed to over $3.20/gal in 2005. The proposed energy tax would do little to reduce consumption, oil imports or air pollution, and may in fact achieve the opposite in some cases, without providing meaningful additions to tax revenues. As an example, oil imports may fall by less than 4% if at all according to the Congressional Budget Office. Similarly, the impact on air pollution would be insignificant and may be negative as people switch to lower-quality fuels. Notwithstanding the opposition of some industrial and public interest groups to even these more than modest increases in fuel taxes, the impact on energy costs of these tax increases would be less than those caused by: 1. frequent changes in rates of exchange of the value of the dollar; 2. changes in the demand/supply balance of fuels; 3. supply and resulting price distortions; 4. changes in state and local taxes; and 5. political changes and unrest or conflicts in the world. The growth of GNP usually causes significantly larger changes in fuel and energy consumption than would the marginal BTU tax the Clinton administration proposed or the energy bills proposed later. Similarly, maintaining low energy taxes does not help the growth of real GNP, as shown in Table 7. The former Office of Technology Assessment of the U.S. Congress reported in a Report Brief dated April 1993 that the proposed energy tax would be levied at the rate of $0.599 per million BTU for petroleum products and at $0.257 per million BTU for most other fuels (assessed rates are shown in Table 8). Energy materials

37

AMERICA’S ECONOMIC ENVIRONMENT Table 7. Average Annual Growth Rate in Real GNP 1960–1969 1970–1979 1980–1989 1990–1992 1993–2004

41% 28% 24% 06% 29%

Source: U.S. Department of Commerce.

Table 8. Industrial Prices (including taxes) 1991 Clinton tax

United States

Japan

Germany

France

United Kingdom

Canada

394

419

226

84

72

$/gallon $/gallon

Natural Gas

27

263

1104

523

Light Fuel Oil

08

70

102

102

Heavy Fuel Oil

09

30

86

49

41

44

37

566

3351

6329

16549

9184

6982

5492

49

136

88

54

71

39

Steam Coal Electricity

.3–.4

NA

$/mct

$/ton ö4/kWh

NA = not available. Mct = 1,000 cubic feet. Kwh = kilowatt hour. Coal prices for Canada are for 1989. Source: International Energy Agency, Energy Prices and Taxes, Third Quarter, 1992.

used as individual feedstock would be exempted from the tax. The tax would be phased in over three years and would be indexed to inflation beginning in the fourth year. The actual price increases caused by these taxes would depend on their energy supply-and-demand effects in addition to their assessed rates. On average, U.S. industry pays lower energy prices than do its major foreign competitors, except in the case of natural gas and electricity in Canada (see Table 8). The proposed energy taxes would not raise U.S. industrial energy prices above those of most other highly industrialized countries and would maintain them at a fraction of the prices of our major industrial competitors. At the same time that the rate of growth of real GNP during the period of 1990–92 (Table 7) continued to plunge to its lowest level since WWII, the degree of inequality as measured by the distribution of income has grown more and more and is now over 0.40 in terms of the “Gini” ratio, an accepted method for the analysis of income inequality. This unacceptably high growth is more than three times that of Japan. Similarly worldwide energy use expressed in equivalent tons of oil used per unit of GNP has declined from nearly 0.9 tons/$1,000 GNP in 1920 to only about 0.3 tons/$1,000 GNP in 1985, 0.27 tons/$1000 GNP in 1995, and 0.22

38

CHAPTER 1 Table 9. Carbon Emissions as a percentage of World Trade (1995) U.S. Russia/USSR China Brazil Japan East/West Germany Indonesia U.K.

178% 144& 78% 56% 36% 40% 25% 22%

India Columbia Poland Mexico Canada France Italy Remainder

21% 20% 16% 16% 16% 15% 13% 482%

tons/$1000 GNP in 1999. France and Japan had been able to reduce their energy consumption to just over 0.21 tons/$1,000 GNP by 1995, while the U.S. continued its inefficient oil use and consumed over 0.45 tons/$1,000 GNP in 1995 or well over twice that of other major OECD countries. As a result, the U.S. continues to emit an inordinate amount of carbon air pollution as shown in Table 9. This wasteful energy consumption can also be expressed in tons of oil equivalent per capita energy consumption. Goldenberg [Ref. 4] computed U.S. consumption as 7.1 tons/year/capita or more than twice that of other OECD countries such as Italy, Japan, France, England, and Germany and 7 times that of Brazil, 15 times that of China, and a whopping 38 times that of India and sub-Saharan Africa. It is not surprising that we are charged with not only being wasteful but also being the major air polluter in the world. The U.S. with a population of less than 4.79% of the world total emits over 3 times as much carbon per capita as the world average emission. Similarly, with the exception of the period from 1977 to 1982, the use of U.S. (residential/commercial) building energy (quads/year primary) has continued to increase at an annual rate of 0.4 quads/year since 1970 and is now equal to over 30 quads/year, with an equivalent energy cost of about $170 billion on energy used in U.S. residential and commercial buildings. This annual increase of about 1.35%, while in line with net population increase and just slightly below the increase in residential and commercial building space inventory, shows that little if any improvements are experienced in building energy efficiency. Materials and technologies are available which could reduce or at least maintain U.S. building energy costs level and there is a potential to actually reduce building energy consumption from a projected growth to 41.1 quads/year in 2015 to only 28.0 quads/year or a savings of 14 quads or one third of the projected level if currently available technology is used in 1. additional insulation 2. compact energy efficient light bulbs 3. efficient gas furnaces 4. efficient room and central air conditioners 5. water and pipe insulation 6. improved burners 7. duct tightness and insulation 8. electronic ballast for commercial lighting 9. computerized energy building control systems

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While many of these technologies are more expensive, the typical payback period at current fuel costs varies from as little as one year for water heater insulation to 4–7 years for efficient furnaces or boilers. With increasing fuel costs (or a declining value of the dollar) payback periods may become even shorter. Furthermore, federal or local government incentives may reduce payback periods even further. Most importantly, we can reduce our expected building energy costs in year 2015 from about $240 billion in 1990 terms to less than $160 billion with appropriate building energy efficiency levels. The same applies to transport, commercial, agricultural, and industrial energy consumption. While successful efforts have been made to improve industrial and transport air and water emission standards, energy conservation is largely perfunctory. It is unfortunate that the world’s leading economy is not leading the world in conservation, energy use efficiency, and environmental protection. There is a need for real action, meaningful incentives, and drastic measures to lead the world towards a cleaner, sustainable environment.

AMERICA’S ECONOMIC AND TRADE DOMINANCE – IS IT REAL? Throughout most of the last century the U.S. has been the world’s largest and most productive economy in both absolute and relative terms. Its total gross product still surpasses that of its nearest competitors by a factor of four; and even the European Union continues to lag behind the 1995 U.S. GNP of over $6.42 trillion and the 2002 U.S. GNP of $9.86 trillion. (Figure 2). On a per-capita basis, however, the picture is different. Several industrial countries are now ahead of the U.S. in personal income and per-capita GNP, which reached $35,040 in 2002. Their relative advantage is growing because of greater productivity growth rates notwithstanding the fact that U.S. labor productivity is still the highest in the world – but only barely so. There is also the potential that China may displace the U.S. as the world’s largest economy in absolute terms within 15–20 years. China’s population is nearly 4.6 times that of the U.S., and its economic rate of growth was in recent years 8–12% or 4 times that of the U.S. on average. If China is able to maintain this growth rate, then its GNP would grow to over 8.0 trillion in 1995 terms by the period 2015–2020, surpassing that of the U.S. Japan responded in 1996 to U.S. demands to stimulate its economy by announcing a plan worth more than $100 billion in infrastructure investment. This follows an $80 billion stimulus package just nine months earlier. It is curious to note that Washington considered this amount to be insufficient, notwithstanding the fact that it is several times the size of the stimulus program proposed by the Clinton administration for the U.S. at the time. While Japan certainly did not always behave as a fair trading partner in a Western sense in recent years, and does not show economic and political leadership corresponding to its importance in a global sense in world trade and the world economy, their approach to international trade has been consistently different from ours or from that of Western Europe. It has largely focused on narrow national objectives.

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8

7

GNP Capital Consumption

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NNP

5

4

3

2

1

1960

1970

YEARS

1980

1990

Figure 2. The U.S. Economy

While many U.S. and European firms have been quite successful in expanding trade with Japan, others have been woefully unsuccessful and the U.S. government seems to have been frustrated by the Japanese perception of open trade. At the same time, it is increasingly obvious that the world and we need Japan and the other Asian economies, and that these nations, which comprise more than half the world’s population and about one-third of the world’s total product, play an increasingly important role in the world economy. The economies of Singapore, Korea, Taiwan, Hong Kong, Thailand, and China have since 1984 grown at an average rate of 2–3 times that of the OECD nations and 3–4 times the rate of the U.S. and Europe. If this rate is maintained, these countries, plus Japan, will account for over 42% of the world economy by 2020. China’s GNP is expected to equal that of Japan by the end of 2008, and should outgrow that of the U.S. only ten to fifteen years later, unless the U.S. economy achieved economic growth rates of more than the measly 2–3% per year of recent times. It is of the utmost importance to insure that this newly powerful Chinese economy and its economically important Oriental neighbors remain cooperative members of

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the world’s trading system. Japan has moved closer to China and Southeast Asia in recent years, and has made major investments in these countries. In fact, these investments are now nearly equal to those made by Japan in Europe. There is a real danger that the East and Southeast Asian countries might form strategic blocks to rival the North American trading block or the European Union. There is an equal threat that they could develop an Oriental block to counter the two Western trading blocks combined. Japanese trade is following its investment, rapidly tilting toward East and Southeast Asia. Its exports to Southeast Asia alone grew from 23% to 31% of Japan’s total between 1987 and 1991 to 35% by 1999 and nearly 40% by 2004. If exports to China are added, then nearly 48% of Japan’s exports went to Asian countries in 1999. It is estimated that more than 50% of Japanese trade was intra-Asia in 2003. In many ways China offers an ideal market for Japan. It has a large, increasingly affluent population, important coal and other resources, a vast labor pool, and a culture similar to their own. In fact, business and social customs are similar in these countries and quite different from those in the West. Therefore, it is not surprising that expatriate Chinese, even Taiwanese, Japanese, and Koreans, seem able to pick and choose some of the most attractive business deals with China, even in areas where Western firms once held traditional advantages. At the same time, these Asian countries absorb nearly 29% of American exports and were the source of nearly 50% of U.S. imports in 2004. Therefore, we cannot ignore the region and must find ways to do business under new conditions, in a different environment, in which legal niceties account for less than personal contacts and trust. Oriental trading terms are often determined not by hard-nosed negotiation in which one emerges as the winner and the other the loser, but where all win and continue to win as part of a long-term relationship based on trust. Considering Asia as a whole, growth has been quite uneven. The total Asian population was 2.854 billion in 1994, over 50% of the world’s total, with an average per capita GNP of US$1,624. But this figure is misleading, as 2.538 billion Asians or 88.93% lived in low-income countries, with an average per capita GNP of only US$365. They accounted for only 19.98% of Asia’s total GNP of 4,635 billion. Asia’s middle-income nations, with a population of 184 million, had a per capita GNP of US$2,200 in 1994, while high-income countries, with a population of 132.3 million, had a per capita GNP of US$24,495. Therefore they contributed 8.79% and 71.23% respectively to Asia’s GNP. These huge discrepancies provided both opportunities for expanded markets and threats of political upheaval. Asia is fortunate in that it has ample land areas, and even with its large population, maintains a reasonable population density in most areas. Total average population density in Asia was only 135.7 per square Km in 1995. The high-income countries of Asia comprise less than 5% of the population, occupy 1.8% of the land area, and produce 71% of the total GNP. Because of the large discrepancy in income and large population, economic growth, growth with more equity in Asia, is a difficult problem. For example, the GNP of Asia would have to increase by 40% if the per capita income of low-income Asian countries were

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to be raised to, say US$1,200; a level now considered a low-income objective. In turn, this would require world GNP to grow by over 6%. In other words, Asia, and particularly South Asia, has a long way to go to catch up with Western Europe and North America, but it is making tremendous headway particularly by emphasizing foreign trade as a growth locomotive, something Americans have not yet caught on.

THE U.S. AS AN EXPORTER Exports play a much smaller role in the U.S. than in other countries. Major U.S. competitors, for example Germany and Japan, had export trades in 1991 of 28% and 13.5% of GNP respectively versus the dismally low U.S. export value of under 7.5% of GNP. The picture looks even worse when considering newly industrialized countries such as South Korea, Taiwan, and Singapore which achieved export volumes of 27%, 34%, and 40% of GNP, respectively, in 1994. Although the U.S. has remained the world’s largest trader, its imports and exports continue to lag those of its major trading partners in terms of percentage of GNP and in fact are actually declining in the beginning years of the twenty-first century. U.S. manufacturers often consider foreign markets as difficult and requiring longterm development and commitment as well as local know-how and presence. They often feel that their existing technology may not be appropriate and do not want to invest in the effort required to adapt it to meet export requirements. Although U.S. exports have boomed in relative terms, in the early 1990s, this was due in large part to the low value of the dollar, which made U.S. goods cheap to foreign importers in hard currency countries. This was a temporary phenomenon that was reversed in part due to the high value of the dollar in 1998–2000, only to see it reverse again during the period 2001–2004 when the dollar again depreciated against major currencies. In the long run, the U.S. must undergo a radical change to participate in world markets, particularly markets of manufactured goods. The U.S. government must become much more supportive of U.S. export trade by providing effective links, contacts, and other aids. Small government programs, such as the U.S. Trade and Development Program, are well meant but are insignificant in size and disjointed in their operations. U.S. foreign delegations should and could do much more to assist U.S. export trade, and the U.S. government will have to streamline and expand its export loan guarantee and other similar programs. Most importantly, U.S. industry must learn to think globally. For too long we have considered the U.S. to be the dominant market for U.S. industry and discounted the need to look for other marketing opportunities. This is no longer true, particularly as foreign companies have seriously penetrated U.S. domestic markets and reduced market opportunities for U.S. industry in our own country. While in Japan over 60% of the 500 largest companies export at least 20% of their output, more than half the U.S. exports are generated by less than 100 U.S. companies. This means that 15% of all U.S. companies produced 85% of total U.S. exports (1996).

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Similarly, U.S. exporters usually concentrate on very narrow, often single-country markets. Only 3% of U.S. exporting companies export to more than five overseas markets. Though we talk about the importance of export growth, the fact is that exports grew by 2%, 6%, 10%, and 15.8% per year for the years 1985 to 1988, but the growth rate has since declined, and was only 11.8%, 7.5%, 5.6%, and 4.1% for the years from 1989 to 1992, respectively. It has since regained greater rates of growth, particularly in 2003 and 2004 when the U.S. dollar declined in value against most currencies. U.S. merchandise trade (Figure 3) was nearly balanced between 1960 and 1975, but has since experienced increasing deficits, which were only partially offset by invisible exports. In fact, the U.S. trade deficits were reaching historic levels of over $500 billion in 2003, deficits which may be exceeded in 2004. Since World War II, the U.S. has led the rest of the nations in world trade and, although foreign trade amounted to a comparatively small percentage of the U.S. GNP, it represented as much as 38% of total world trade in 1970. This situation has radically changed since 1970. Although the U.S. trades a growing portion of its total output, its percentage of world trade has declined precipitously. For example, the U.S. share of total world exports fell between 1980 and 1988 from over 15% to 12%, equal to the value of exports of Germany and only slightly ahead of those of Japan. Other industrial countries such as France, U.K., Italy, and Canada accounted for 4.5–6.0% of world export trade. By 2003 it regained some volume but this may be temporary and largely due to the low value of the dollar. Overall, the countries listed above along with Japan, Germany, and the U.S., accounted for over 55% of total world export trade in 1988. By 1991 this figure grew to over 61.2% and by 2003 to nearly 68%. Adding exports of smaller

Figure 3. Merchandise Trade Balance Source: U.S. Department of Commerce, Bureau of Economic Analysis, Business Conditions Digest, September 2000.

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industrial countries such as Korea, Taiwan, Belgium, Netherlands, Spain, Singapore, Switzerland, and Austria, each of which accounts for 1.2–2.3% of total world exports, industrial countries worldwide contributed over 76% of world export trade by 2003. According to GATT, the overall volume of the world’s merchandise trade increased by 4.5% in 1992, a sharp 50% increase over the growth rate of 1991. The overall value of trade climbed by 5.5%, reaching US$3.7 trillion, while trade in services (transport, telecommunications, banking, insurance, etc.) reached $960 billion in 1992, for a total value of world trade of $4.66 trillion or about 22.4% of the world’s gross product. The world’s fastest growing economy is now China that has achieved an export growth of 18% in 1992, and 26% in 2003. While U.S. trade is growing, its position as world leader is now challenged by the European community, Japan, and even China, particularly with the dollar maintaining its low value. While U.S. foreign trade has historically comprised a smaller percentage of GNP than that of other major trading nations, as noted before, the fact that the American GNP constituted such a large proportion of world GNP assured its dominance in world trade. The U.S. GNP has consistently fallen as a percentage of world GNP and, although U.S. foreign trade has steadily grown in both real and absolute terms, this growth was usually smaller than that of world GNP and of world international trade. In other words, while the U.S. is still the world’s largest trader, its participation in and influence on world trade is continuously declining. China is now expected to become not only the world’s largest economy but also its dominant trader before year 2025. FOREIGN TRADE IMBALANCE OR OUTSOURCING Foreign trade disputes have become major American foreign policy issues in recent years. U.S. trades with Japan, Taiwan, and more recently China, have experienced major negative balances and we always blame our trading partners for these trade deficits. True, some of these countries do not play fair and impose direct or indirect barriers to American exports, but the major cause is really the fact that more and more American companies are outsourcing the manufacture of their products or at least components required for their products. In the period from 1965 to 1980, most American electronics and small appliance producers moved their manufacturing to Japan, then later to Taiwan, Korea, Malaysia, and the Philippines, and in the most recent past to China and India. The same occurred in automobile production and textiles, as well as in garment manufacture. In fact, this outsourcing by American firms accounted for 16–26% of the value of our imports from 1980 to 1995, and is estimated to have exceeded 36% in 2003. In other words, had U.S. manufacturers maintained their domestic productivity and product quality, and educated their customers to prefer domestically produced goods, America would have experienced positive balances of payments in its foreign trade throughout this period. Therefore, most if not all our imbalance of trade

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is the result of the decision of American manufacturers to produce abroad. In some cases, this is done by simply outsourcing to suppliers abroad. This was the primary approach used initially by American electronic, appliance, and apparel manufacturers in 1970–1990. Since then, more and more American manufacturers have established their own plants abroad, either themselves or as joint ventures. In any case, the import of their own American brand name goods into the U.S. counts as an outflow of trade costs, even though the profits actually accrue to the American manufacturer who may or may not repatriate such profits. This situation is amplified by the export of investment capital to establish plants abroad. Few trade statistics properly account for this phenomenon or make adjustment in the foreign trade statistics. This trend can be expected to continue as industry and trade become increasingly global, and outsourcing more popular. New approaches may have to be developed to properly account for the effects of exports and imports of outsourced production. The first question is obviously whether ownership of manufacturing matters. Does it matter if a consumer buys a U.S. or foreign brand American-made product or for that matter a U.S. or foreign brand, foreign made product? In any case, adjustments could be made for imported and domestic content, such as parts, etc., but even such adjustments do not fully account for the resulting economic and trade impacts.

THE U.S.-ASIAN DILEMMA While the U.S. recognizes the growing importance of Pacific Rim economies and trade, it is still largely focused on Western, meaning basically European, approaches to trade. In 1996 Japan represented about two-thirds of the Asian economy. While this ratio had been growing until recently, it has stabilized and in fact declined since 1998. At the same time, the relative position of American companies in Asia has been weakened, and their ability to partake in the economic growth of Asia is actually declining. This picture is made even more acute by the rapid emergence of China as an economic power. Although China’s annual per capita income is still low, estimated to be somewhere between US$1600–2300 (2004), the sheer size of the country with its estimated population of over 1.2 billion makes it a formidable economy which is even now estimated to have a GNP of US$1.8 billion. Assuming an annual growth rate of 9–12%, China will overtake Japan as the world’s second largest economy in less than 5 years and the U.S. in about 15 years. By the end of 2005, the combined economies of East Asia (Japan, Korea, China, Taiwan, and Southeast Asia) were estimated to have surpassed the economy of the U.S. By 2005 China and Japan are each expected to represent about 36% of the total Asian economy. Similarly the East Asian countries commonly referred to as the Orient will account for 50% of world trade by 2010 and will in fact surpass U.S. foreign trade in value by the year 2006. Therefore, it is increasingly important for the U.S. to direct more of its trade toward Asia if it is to maintain a significant role in world

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trade at large and take advantage of the rapid growth of the Asian, and particularly East and Southeast Asian, economies. Such a strategy may require a major change in American attitude and policy toward its trading partners. It may also require different approaches and methods of doing business. Oriental culture is deeply rooted and, unlike ours and that of South America, is not founded on European heritage nor was it ever deeply affected by European ways as were the former colonial countries of Africa, South Asia, South America, and Southeast Asia. East Asian Oriental countries are unique in that they have been only peripherally affected by European or Western ways, concepts, ideas, morals, and religion. They have always maintained their own cultural, moral, and religious base. Religion and moral values are much more closely intertwined in the Orient than in the West, and one implies the other in most Oriental societies. Interpersonal relations, heritage, and family ties have a very different meaning, and education plays a much greater role than in most of the Western societies. Similarly, interpersonal trust is taken very seriously in the East and forms the basis not only for social but business relations. Reputation and name are valuable assets and must be earned by long-term proof of reliability and trustworthiness. As a result, business as well as social relations are more permanent and require little if any outside or third party, particularly legal, involvement. Oriental societies have little need for lawyers or arbitrators of any kind, and the obligations of the parties in any relation or undertaking are traditionally developed on an equitable basis, something we would describe as a win-win relationship. The result is that relationships last, and parties to agreements and undertakings are cooperative and assume that the success of the overall undertaking is their success. Therefore, suppliers usually consider themselves part of the principal manufacturer’s undertaking. These close relationships continue to the sub-contractor and worker levels. Profit sharing is employed at all levels to assure the maintenance of long-term mutual benefits. American firms, accustomed to competitive and usually adversarial relationships, often have difficulty adjusting to and working in such a different environment. In the Orient, cooperation and mutual benefit are the important driving forces in any relationship. To succeed in this environment, American business practices as well as American government policies may have to change. American business must learn to work cooperatively, with long-term objectives. Similarly, government similarly will have to develop a cooperative and supportive approach and policies. In addition to adjusting our approach to business practices when dealing with the East, the U.S. government – and Americans at large – cannot assume that Oriental values are the same as ours in terms of human rights, interpersonal relations, political freedoms, economic laissez faire, individual expression or cultural and religious liberties. The historic and cultural developments were distinctly different in the Orient and affected the relative importance and values of many factors. For example, in the Orient, freedom of expression is considered less relevant than freedom from fear and deprivation. On the other hand, we in the U.S. are more immediately concerned

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with intellectual and political freedoms than with personal safety and economic security. We are outraged when Singaporean courts convict a 6-foot tall, 18-year-old to caning as punishment for vandalism, but we do little to prevent teenagers from carrying and using guns in American schools. We suffer from and abhor crime, but are unwilling to effectively punish the guilty, preferring so-called rehabilitation even if it does not work. We are unwilling to introduce radical deterrents to crime. Drug abuse and drug-trade-induced crime is now at the root of much of America’s lawlessness. However, most of our so-called solutions aim at stopping the influx of drugs into the country instead of reducing or eliminating illegal drug use in America. In other words, we often try to solve our problems by enforcement outside our borders instead of attacking them from within. We are fighting drug imports but do little to reeducate our society and provide meaningful disincentives for drug use in the U.S. Similarly we try to reduce the import of cheap handguns but not their ready availability and access in the U.S. Yet, we know well that as long as there is a demand and money to satisfy it, some one will always be there to meet or satisfy it.

IMPOSING OUR PRINCIPLES ON OTHERS Attempting to impose our ideals, principles, and values on others makes sense only if we abide by them ourselves and if they are consistent with the historic, cultural, economic, and political environment in which we want to impose them. It would be ludicrous to try to impose ideals that we ourselves do not use or believe in or our own national concepts that do not apply outside the U.S.A. Conditioning trade with China on human rights is not effective when our definition of human rights is historically strange to that country and when our own human rights record is less than perfect. We must first understand foreign culture, history, and value systems before we try to impose our norms, which are often measured in a way that makes little sense in another environment. Britain’s elite schools used caning until recently without being criticized. Many in the U.S. accepted it as simply a queer British practice used in building character in the British upper class. However, when it is applied to an American teenager who vandalized property in an Oriental country, it is considered cruel. If the same teenager were enrolled in an elite British school, his parents would necessarily consider caning an effective part of his education. We similarly condone hazing in our universities or even more cruel rites of entry in some of our military schools. To be effective in our relations and trade with the Orient, we must understand the fundamental differences in cultural, social, political, and other values. We cannot simply impose ours on these much older and, in many respects culturally more advanced, societies. This is particularly clear when the Western world, including America, is increasingly guilty of hypocrisy in applying their standards to others, as evidenced in Bosnia and other places around the world, in terms of security. Our

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way may be good and good for us, but it certainly is not the only way. We must learn to understand and accept those of other people. The world gains by its diversity. We are similarly hypocritical as shown before in imposing our newly found standards of environmental consciousness or pollution standards on others even when we were and are the world’s premier polluter and others contributed little if anything to the deterioration of the global environment. At the same time, we make no determined effort at limiting our consumption of energy and other materials that produce pollution and environmentally dangerous waste products. Oriental societies have adopted much of the basic capitalist and democratic principles of the West and have tailored them to their environment and culture. They have come a long way and both they and we have reaped many benefits in the process. However, they will remain Asians with traditions and morals unique to their ancient culture. Political freedom, including freedom of expression, in Japan and even China, has greatly advanced, and authoritarianism is less and less imposed. But their freedoms will never be the same as in the West, particularly in the U.S. Oriental culture values the rights of society above those of the individual, independent of the political environment or system. Group consensus and not individual order is the preferred approach to Oriental decision-making. The tide of economic change and new opportunities, even for lone entrepreneurs, may eventually change the system. In the meantime, we must respect the differences and not judge others by our own parochial standards. I may be free to criticize my government as well as my boss, and pay only with loss of opportunity to work for the government or loss of my job – I will not be imprisoned. On the other hand, I am not free to walk our city streets without threat of physical danger or to transact some business without being ripped off, fall prey to some scam or otherwise suffer. Lack of these freedoms makes some of our individual rights meaningless. Human rights have many dimensions that are interpreted differently by different people. Who are we to assume the right to interpret the meaning of human rights to the rest of the world? Maybe we are the most perfect union, but until we are able truly to live by the tenets of our Constitution, I believe that we should work on improving ourselves before preaching to others. It is difficult to explain to others that we in America object to caning as punishment when we cannot walk our streets without fear of attack and when half of all murders in the U.S. are committed by convicted murderers on parole. It is difficult even to explain our concept of economic freedom when white collar crime abounds, for example when our savings and loan banking industry collapsed as a result of gross greed and corruption. Many of our mutual funds engage in fraudulent transactions and investment bankers, advisors, and brokers engage in unsavory practices with impunity. Our political freedom of expression is less than effective political freedom, when much of our legislation is influenced more by power cliques and lobbyists than by the voiced sense of the electorate. True, we should support human rights, but let us not be too doctrinaire as long as our own house needs improvements and cleaning.

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Asia, particularly the Orient, is destined to become an economic powerhouse. Right now we are wavering. On one hand, we recognize that the future is largely based on the countries of the Pacific Rim. On the other hand, we are continuing our old traditional relationship with Europe, with the maintenance of a Western alliance and attempt to strengthen our bargaining position with our own North American Free Trade Alliance. But Europe is looking eastward and will eventually encompass all of Eastern Europe in its economic life. America may then find itself waffling between two giant economic powerhouses, in the unaccustomed position of a smaller player among two giant economic groupings. We need an effective economic and trading policy that establishes our future role, and a meaningful strategy to this end. As noted by McGeorge Bundy in a 1992 interview, “The first concern of Americans who care about the success of foreign policy in 1992 must be with strengthening our own economy and civil society. In addressing our international role, I must emphasize right at the start that we cannot play it well if we have continuing failures at home”. This is as true today as then. We must have the courage to set our own house in order in social and economic terms if we want to continue to claim leadership. Leadership is not a right but must continuously be earned. ECONOMIC INEQUITIES IN THE U.S. JOB MARKET While large wage differences are a fact of life in a complex technological society, these are more pronounced in the U.S. than in other industrialized countries. In the long run this not only affects U.S. worker moral but also U.S. trade competitiveness and incentives. In France and Germany, the wages of the lowest paid have risen significantly in recent years relative to average earnings. On the other hand, in America real wages for the bottom earners have fallen in relation to average earnings since 1980. This may be due in part to declining union membership and power, but some claim that our post-industrial society in which high-paying manufacturing jobs are replaced by low-paying service jobs may be to blame. In the U.S. the top 10% of earners now earn on average 5.8 times as much as the bottom 10%. This compares with a differential of 2.5 in Germany and 2.7 in Japan. Figure 4 shows the widening gap between the real wages of the top and bottom 10% of wage earners in the U.S. As the supply growth of highly trained workers has slowed in the U.S., we must expect this differential to continue. This is explained in part by the lack of discipline and more concern with differentials which in some cases, such as executive salaries or income in the U.S. are approaching absurd or obscene levels. CEO’s incomes are now commonly 20–100 times those of professional employees in their company. These imbalances are a serious economic issue, which may haunt future development as we move into an even more advanced technological society and could ultimately eliminate our middle class altogether. To prevent this, labor unions and professional associations may have to reinvent themselves and form a new type of middle-class union whose aim would not be restricted to wages, working conditions, job security, health care, and retirement

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Figure 4. The Widening Gap in the United States

benefits, but which would include continued education, job and social status, professional role, and labor/worker management cooperation. Worker’s compensation in the U.S. has grown less in the last 15 years than in any OECD country. While it grew in the U.S. from an average hourly compensation of $12.81 in 1985 to $17.42 in 1996 and $26.30 in 2003, Germany and Japan experienced raises from $8.92 to $29.20 and $34.20, as well as $6.48 to $20.48 and $25.00, respectively. Canada’s and Britain’s raises though were less spectacular. Low labor cost countries such as Hong Kong and Korea experienced even more explosive increases in labor compensation. Low inflation was a major factor, but another was probably the increasing percentage of service jobs. In manufacturing where the U.S. only experienced a 30% increase in hourly compensation during that period, Germany had an increase of over 190%. In the decade of 1985–1996 the U.S. experienced restrained wage inflation which greatly contributed to the improvement in U.S. trade competitiveness as well as very low rates of inflation. Similarly, the decline in the value of the dollar during that period and again in 2001–2004 improved America’s export position. The situation may change in future with increases in the value of the dollar. MAINTAINING ECONOMIC LEADERSHIP Important economic issues now extend from the availability of decent jobs for Americans, the productivity of our industry, and the effectiveness of our government and institutions, to our technological prowess and trade competitiveness. We appear

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to feel that in addition to these issues we have an obligation to lead the world and correct its ills. We lead the war in Afghanistan and Iraq to correct aggression. We took the lead in Somalia and were leading the peacekeeping efforts in Bosnia, Kosovo, Macedonia, and more. All probably just issues. Yet while these actions perpetuate the image of America as a leader in world politics and security, it is not always evident that they advance America’s economic position and leadership nor necessarily its political and moral influence and prestige. They may in fact cause the reverse, not only in fiscal terms but also by diverting our attention from many of our domestic problems. We have done and are continuing to do more than our share in world politics and peace keeping. Yet we must more clearly pronounce a policy of American interests which provide a proper balance of American political, moral, and economic leadership, a policy that assures our ability to maintain our values and continuous improvements in the quality of life for all Americans. We will not achieve this if we continue to allow the U.S. economy to degenerate into a pure service, institution, and government economy, wholly dependent on others for real goods. To maintain U.S. leadership, we must be economically strong. Yet, our economy is increasingly being drained by ineffective and wasteful government and institutions. Unless this trend is reversed, the U.S. may not only lose its economic, but also moral and political, leadership. America is now the undisputed economic and military leader of the world, but it lacks an international outlook in its strategic, economic, and social policies. In other words, it is perceived as a leader because of the size of its economy and strength of its military, but many in the world at large accept its leadership more as an accepted fact than an earned position. Though American culture often provides the spark for new developments in art, music, dress or even culinary habits, these are usually accepted more by the young who want change than by other cultures because of their leadership or superiority. American culture, visual, art, music, as well as literature have all made significant contributions. In science and technology, America stands supreme, not just because its citizens won nearly half of all the Nobel Prizes and were responsible for many of the important technological advances during this century, but because Americans make science and technology work and develop new and highly original uses or applications. Yet somehow with all these accomplishments America has earned the envy, but not really the respect, of the rest of the world. Americans are an enigma to many outsiders. They are unassuming, yet often at the same time conceited. They are approachable but not very social. They consider themselves largely isolated but always find themselves in the thick of things. Americans stress individuality instead of community that is the emphasis in most east and south East Asian nations. America’s religious landscape is forever changing and on the move. We look for spiritualism but our lack of religious and cultural roots, combined with our lack of trust in both public institutions as well as family, makes this difficult. We want to be connected without assuming obligations. We want

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to increase our humanness without giving of ourselves. We prefer impersonal and short-term relationships to deep and long-standing commitments. The U.S. labor force is very flexible which is a major advantage at a time of rapid technological and structural change. World trade has grown from $7.05 trillion in 1990 to $11.0 trillion in 1996 to $12.9 trillion in 2000 and over $14.3 trillion in 2003. U.S. foreign trade which reached $607 billion in exports and $732 billion in imports in 1996, while still the world’s largest, fell to 11.2% of the world total in 2003 versus 16.3% in 1990 and over 23.2% in 1975. It has since regained some of this loss. The U.S. economy has an unsurpassed vitality and has dealt successfully with the challenge introduced not only by rapid technological advances but also societal change and industrial developments. Capital markets now control most U.S. economic developments and financial entrepreneurism has become the major driving force of the U.S. economy. It has resulted in many mergers and acquisitions and, although many claim rightfully that such transactions use scarce capital without creating new values or opportunities, there is evidence that the resulting economies of scale, transformations, and streamlining often improve performance. The main concern should really be with their effects on competition on one hand and small entrepreneurial entries that have traditionally driven American industrial and technological advances as well as economic growth and job creation. A majority of successful small capitalization entrepreneurial enterprises are bought up by large corporations within their first ten years of operation, some for the value of their products or processes and others to reduce or eliminate potential product or process competition. In the latter case, the acquiring corporation will often suppress technological developments, something which is not in society’s interest. It also potentially affects U.S. economic leadership in the long run. The U.S. is the world leader largely because it is the most innovative nation which provides its inventors and entrepreneurs with the economic, social, and regulatory freedom to advance, develop, and market their ideas. The new financial market domination may stymie these freewheeling developments and thereby ultimately affect American economic leadership. SECURITIES MARKETS The U.S. Stock Exchange is affected by inflation more than by any other factors. Since World War II, the U.S. has experienced low inflation from 1948 to 1965 and then again from 1982 to now. In each of these two periods, stock prices increased significantly. Similarly, during the interim period of 1966 to 1982, when oil prices escalated and large defense as well as other government expenses drove up inflation, stock prices barely held their own. The inflationary period was fueled by the Vietnam period with its 60% increase in defense spending in 1969 alone followed by the Arab oil embargo in 1972. U.S. inflation reached 14% by 1980 and was only deflated again towards the end of the decade by new moves towards commercialization, technological competition,

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deregulation, and privatization which continue until today not only in the U.S. but has now encompassed the whole globe. The American securities markets prospered between 1990 and 1999 in the longest market rise since the big crash. Although there have been a few corrections, none was more than 10–20% which in relative terms is rather small and too little to result in large-scale flight from the markets. In fact, inflow of capital both by individual and institutional investors, as well as by mutual funds has continued to grow without abatement. Inflows into mutual funds reached near peak levels at the end of 1998, a trend which continued during the first half of 1999. Since then, the market has experienced a correction and a decline until 2003 and is only now in 2004 beginning to climb again. A major impetus for the market’s growth in volume and value terms was the introduction of large numbers of internal stock initial public offerings particularly in 1998. The public’s fascination with the potential revolution in communications, marketing, and information management offered by this technology caused obscene valuations of Internet stocks, most of which had no profits and some even no revenues when they went public. The public’s irrational interest in a stake of the Internet’s future potential caused huge fluctuations in the stock market. U.S. private savings, at the same time, continue their decline from an average of 8.7% during 1947–1973 to 4.9% for 1986–1990 and well below that in recent years (Alice Riflin, Reviving the American Dream). Similarly, net domestic investment has declined from 7% of national income in 1947–1973 to only 4.7% between 1980 and 1990 and even less today in 2005. There is now a large flow from other traditional investments into the stock market. A major source of new stock investment funds are from home mortgages or home equity loans. Many people are refinancing their homes, with new lower and attractive interest rates. Home mortgage refinancing has increased available investment funds significantly. THE AMERICAN CONSUMER America is a consumer society. Savings rates are low and as people Americans have always been optimistic. Things will get better or even better than now. Americans live for today and have confidence that the future will take care of itself. Consumer spending now accounts for about two-thirds of our GNP and there are no signs of the slowing down of consumer spending. At the same time, consumer credit, excluding mortgage debts, is at an all time high in both relative and absolute terms. It remained nearly constant at $770 billion between 1990 and 1993 but has since surged to reach $1300 billion by the end of 1998 and over $1650 billion at the end of 2003. If we add mortgage debt of about $5000 billion, we find the Americans sustained a debt burden of $6650 billion or about $26,000 per person or nearly $64,000 per working American in 2003. In other words, the average working American owes the equivalent of 2.1 times annual income before taxes and about 2.5 times after tax income. At the same time or as a result of this, personal bankruptcy filings are

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at an all time high and there are an increasing number of defaults on loans. While interest rates are now comparatively low, the actual cost of lending continues to increase. WEALTH AND VALUE CREATION Much of America’s economy is no longer based on the traditional concept of wealth or value creation but on economic churning. Here merging, acquiring, reorganizing or spinning off of economic enterprises becomes the objective. In some cases, real cost savings or improvements in productivity are achieved, but in the majority of instances added value is only increased to owners and managers not the economy, consumers or society at large. Unfortunately, this new type of “wealth creation” is being copied and used by many developing and newly market-oriented countries as well. They consider it a short cut to economic growth and prosperity. It usually does not create new wealth or products that people or the markets want and will buy; it just puts a new name on an old coat. Yet this is the approach used by an increasing segment of our economy and copied by those of others. The Internet stock bubble of recent years is similarly such an example, and a dangerous precedent. The Internet bust of year 2000 reduced the wealth of many newly rich, but also reduced the confidence of many investors in the market. Based often on fanciful business plans, with little if any profit or even revenue potentials, such investments were touted as the new economy’s great opportunities which were based on new business models. Few had any meaningful foundations and much wealth was drained from the economy in the search for unrealistic or fraudulent grails. Even in the new economy, value creation still requires traditional concepts. Products must be desirable and add value to buyers and markets must be accessible and realizable. Some people can be fooled some of the time, but all people will never be fooled all the time, as some new economy gurus expected. The value of this type of economy is hard to determine. The U.S. has consistent negative balances of payment and more and more U.S. government debt is owned by foreigners. We have major companies whose capitalization is many times their revenue that have marginal if any profits and whose real assets are worth very little. Our valuations seem to be way out of line by any traditional measure. It has become very difficult to assess the real value of companies as today most of it is based on prospects and break up value is largely ignored. The value of on-line business such as EBay, an on-line auction house, is as a result hard to determine; yet the market uses future prospects as a main guide for its determination. This may be useful over the short run but is certainly questionable in the long run when technological change and new approaches to business may make the EBay model obsolete. The issue is that an increasing percentage of the value of the U.S. economy is built on such valuation, which may collapse without warning. The economic leadership of America is therefore built on rather fragile foundations, which may crumble with little notice.

CHAPTER 2

AMERICAN INDUSTRIAL DEVELOPMENTS

American industry has recently grown at a much slower rate than that of other industrial countries. According to statistics published by the Federal Reserve Board and the Commerce Department, annual growth rates of U.S. industrial capacity fell from 3.5% in 1981 to 2% in 1987 and dropped to 1.5% in 1993, a trend which continues to today (2004). At the same time, capacity utilization is gradually creeping up, and after languishing at the 78–80% level in 1991/92 it grew in 1996 to the 82.5% level and after growing to 84% has settled at just under 80% in 2004. Similarly, industrial production is slowly increasing and the inventory-sales ratio (month end business inventories to monthly business sales) is declining, and reached 1.46 during the first quarter of 1993, the lowest level in some time. This level has remained nearly constant until 1999 when it started a decline, which was only reversed in 2004. The slow increase in capacity is due to lack of industrial investor confidence and a desire to make better use of existing capacity. It is also an indication that American industry does not recognize the urgent need for renewal and improvement or modernization in industrial capacity. Although industry maintains its technological position, low investment and renewal of capacity may ultimately affect its productivity and technological competitiveness. Americans have been trained to be individual profit or gain and consumption maximizers. Consumption is assumed to provide business opportunities, as does the increase in demand for goods and services. Savings – though encouraged – have never been given important moral, economic, or social emphasis in the national image. Capital was expected to grow largely through investments from abroad by foreigners eager to participate in the opportunities offered by the American economy. But this trend is being reversed as other, often better, investment opportunities develop in countries such as China. Domestic productive investments in the U.S. have recently fallen well below the industrialized world average of only 10.1% of GNP. On the other hand, total U.S. investments are significantly higher, but more than half, as mentioned before, 55

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are usually placed into asset churning and other non-productive areas such as company mergers or sell-offs. This diverts important sources of investment funds, as well as adversely affecting the productivity and competitiveness of the merged or acquired companies. Mergers and acquisitions are often and unfortunately driven by considerations of short-term capital gain from such restructuring rather than by expected improvements in performance of the new or reorganized entity and resulting long-term profits.

THE PROBLEM OF U.S. UNDERINVESTMENT Among the most important economic problems of the U.S. is the critical shortage in savings and investment. In both, the U.S. ranks at the bottom of the major industrial nations and well behind many developing nations as well, at least in relative terms. Over the last 25 years, the U.S. has never invested as much as Japan as a percentage of GNP. In 1991, for example, Japan invested $5,320/per-capita versus $2,177/per-capita in the U.S. Even the meager savings in the U.S. economy were largely absorbed by government deficits, with their insatiable appetite for public debt financing. This trend continues until now (2004). Private savings in the U.S. now amount to a paltry 2.5% of GNP, which is not even adequate to continue to underwrite the financing of new public debts. As a result, the U.S. must import or attract investments from abroad – to finance not only productive assets but also government deficits. In expenditures by private industry on plant and equipment, the U.S., as noted earlier, ranks also near the bottom of the other industrialized countries, and well below the average spent by private industry in the Group of Seven. This low expenditure is a problem that will haunt U.S. industrial growth and economic development for a long time, as American industrial infrastructure grows more antiquated and becomes technologically obsolete. The need for a higher level of investment is driven by the rapid advances in both product and process technology. In addition to underinvestment in plant and equipment, we suffer greatly under the gross underinvestment in and often outright neglect, of public and private infrastructure. Both must be maintained in order to improve American productivity and reverse the decline in the purchasing power of Americans. Gains in productivity depend on investment, and real wages cannot increase unless we raise productivity. This vicious circle is a fundamental law of economics. Another issue is underinvestment in commercially useful research and development. Here the U.S. lags far behind most major industrialized countries, in part because nearly half of our research scientists and engineers work for the federal government, and many corporations invest less in research on the ill-founded assumption that federal government research will satisfy their needs. It therefore comes as no surprise that academic research until quite recently was funded largely by government.

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Finally, there is a need for substantially more investment in training and education, where again industry underinvests on the assumption that government should and will take care of it. INVESTMENT IN TECHNOLOGY DEVELOPMENT While European and Japanese companies invest largely in long-term R&D, which is not expected to pay off for many years but provides a solid technological base for the company, U.S. companies by and large invest mainly in short-term R&D leading to direct process and product development and expect a quick return on their investments. Although technological change is rapid, and it often takes just a few years for a new more advanced technology to emerge, technological trends are difficult to predict and the financial results from investment in R&D cannot be effectively projected. Risks in technology development have increased, but so have opportunities for breakthrough. A problem in many U.S. companies is that management is strictly accountable to no one as boards are often proposed by management. Similarly, shareholders often tend to be preoccupied more with shortterm profits than long-term prospects and performance. R&D introduces uncertainty, and long-term benefits are seldom credited to those in management who made the decisions, either because they are no longer there, or because credit is claimed by someone else. Contrary to popular opinion, however, long-term growth and technological advance are not necessarily incompatible with short-term returns. In the U.S., ownership of corporations is often widely distributed among individuals, and shareholder owners usually know little about the company. They are assumed to be interested mainly in short-term performance, which will yield improved earnings and higher share values. In Germany, Japan, and many other countries, corporations are owned to a large extent by banks, trading companies, or even other firms. This form of crossownership often prevents hostile takeovers, emphasizes use of long-term over shortrun corporate or management objectives, and reduces the volatility of share prices, as most larger shareholders are in it for the long-run and are not interested in short-term variations in share prices. While in the U.S. some institutions, such as pension funds and insurance companies, are major corporate shareholders, they are usually passive ones. Furthermore, U.S. securities laws strictly limit the influence or even ownership of major shareholders, in particular financial institutions. This opens company ownership to all kinds of manipulation and takeovers which, particularly in recent years, have caused major corporate restructuring, ownership manipulation and dilution of corporate control. Most importantly, U.S. stock ownership has in many cases now become a gamble instead of a long-term investment. It is evident that restrictive ownership policies that followed the financial scandals early in this century are now counter-incentive and breed exactly what they were supposed to prevent, which is short-term stock manipulations occurring instead of long-term investment. Germany and Japan, on the other hand, encourage large stockholding

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by financial and other institutions and facilitate their active involvement in company policy. Intercompany ownership, with one company owning major shares of other companies and vice-versa is common in Japan, Germany, and other countries. It assures stability and cooperation, and encourages effective relationships. Most importantly it stimulates long-term developments and growth. Further, it assures the election of independent directors, not just directors who act as pawns of the top management by whom they have been chosen. Most directors in U.S. companies are neither shareholder (owner) representatives nor shareholders themselves. Their interests or concerns are seldom those of the shareholders or owners. In other words, in many companies the real owners are not on the board or effectively represented by the board. The current method of board elections largely result in boards that are wholly beholden to the management, particularly to the CEO’s of U.S. companies. As mentioned earlier, many CEO and senior management salaries and compensation are disproportionately large and bear little if any relation to company performance. Directors are usually coddled by CEO’s and top management, making sure that their directors are loyal to them and not the company or its owners, meaning shareholders. Some concerned CEO’s, such as Dr. G. Hatsopoulos of Thermo Electron Inc., have suggested that both management and board members should have significant stake (shareholdings) in the company in order to qualify. Changes in top management and boards of U.S. companies are urgently required to assure greater emphasis on the long-term performance of a company. The increasing impact of rapidly changing technology requires greater investment in technology development, even when benefits from such investment may not show up for years and when they do show up may not be directly associated with a particular decision or decision-maker. We urgently need top management and boards who are concerned with the success of the company, and not particularly with their own success within a company. This may not occur, however, unless shareholders act as real owners and require real time accounting by management and boards. Unless radical changes in owner-management relations are introduced, the long-term competitiveness of U.S. Industry may be in real jeopardy. Investment in technology development must concentrate more on technology innovation, development for use, and application, and not largely on basic science and technology invention and development such as usually achieved by R&D in the U.S. As mentioned, investment in technology development must cover the whole range, from initial technology invention or discovery to improvements or innovations in products and processes, areas that make the technology truly useful, producible, applicable, and marketable. Investment in technology must therefore focus on the customer and market, and not on technological prestige. Researchers as well as managers must learn to understand and interpret the potentials of new product and process technology, and know how to transform embryonic technology developments into desirable, marketable products and processes. Only if we learn both technology invention

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(R&D) and technology innovation well and are able to do this as a continuous integrated process, will we be able to maintain our leading position in basic science and technology invention or development and also to maintain and improve our industrial competitiveness in the production of new product and process technology.

TECHNOLOGY AS AN ECONOMIC DRIVING FORCE After centuries during which large resource-rich countries dominated the world economy and financial centers gravitated towards them, technology and knowledge have now become the most important economic magnets. Knowledge usually thrives best under conditions of economic, political, and intellectual freedom. Yet if left to itself, knowledge generation may become narrowly focused, intellectually and/or economically self-serving, and as a result may cause knowledge monopolies and “ivory towers” which do not attempt to diffuse and apply the knowledge. It is for these reasons that it is wise for government to assist technology development and encourage it, its use and its transfer. Some guidance is often advisable in the development of a consensus designed to help the setting of priorities for research agendas. Such technology priority setting does not necessarily imply a rigid government policy that identifies narrow areas of technology on which to concentrate. Instead, it could serve as an outline for industrial and economic policymaking which concentrates on setting objectives based on comparative strengths, needs, and opportunities, yet makes no technology choices. The problem is that we often have different governmental and industrial priorities. This is usually a result of differences in objectives. For an economy to work well and for technology to become a real economic and industrial driving force, these differences must be reconciled, otherwise much effort is wasted and the required focus is lost. Both must recognize that advances in technology are today the principal forces driving economic growth on a national as well as company or corporate level. Economists such as Robert Solow [Ref. 5] demonstrated more than 40 years ago that technology is a most important factor in advancing economic growth. Technological advance – contrary to popular and often political opinion – actually fosters generation of new and better jobs, as well as improved living standards. However, the role of government, industry, and educational institutions in setting technological goals and in developing technology policy has not yet been established. Instead, we advance technology and thereby national and world economic progress by trial and error, and assume that technology will develop and serve us in some mystical way. Scientific advances more often than not remain academic exercises; as an example, fewer than 2% of all patents granted in the U.S. have in recent years led to meaningful technological or scientific developments of products or services of use to society, and many scientific discoveries are never used.

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America is unique among nations in that it is a country without a well-defined national, cultural, and religious history. In fact, it is built on the concept of a melting pot in which the interaction of people with diverse backgrounds fosters collaboration and association for advance. Because we are not constrained by rigid cultural and historic ideas, we were better equipped to develop and use science and technology for the introduction of new products and services, and thereby to develop new industries and other economic activities which became the envy of the world and the principal source of U.S. economic power, a power that in turn formed the foundation of our strategic and military power. In the last sixty years, however, and in fact since the massive defense-science projects of World War II, the U.S. science and technology base has increasingly been oriented towards and engaged in the development of technology for the defense industry. By 1990, more than 60% of all U.S. scientists and engineers worked for the U.S. government (largely in defense-related jobs) or for defense contractors, a number that has remained constant until now (2004). Even a substantial proportion of scientists and engineers at U.S. universities were until recently largely engaged in defense-oriented research and development. The need for defense-related R&D has declined in recent years – a trend that is expected to continue. Yet, although the U.S. Congress has passed legislation requiring effective transfer of technology from government laboratories to U.S. industry, this is not happening because of 1. lack of incentives and recognition for technology transfer, 2. inadequate legal guidelines and protection, 3. inability of defense researchers to evaluate their technology in commercial terms, 4. rigid secrecy and bureaucratic barriers, 6. lack of technology ownership specification, 7. ineffective technology transfer mechanisms, 8. organizational constraints, 9. competitive barriers, and 10. lack of plans for the effective retraining of defense scientists and engineers. There appears to be a lack of national technology leadership and direction in government, industry, and academia. Although the U.S. is still the most prolific producer of scientific breakthroughs, particularly in basic science, we increasingly lose in the battle for technology development, innovation, and use, particularly in bringing inventions and innovations to the market place. We are mired in prolonged delays in transforming scientific breakthroughs into technological advances and applications. The reasons are manifold, but can be summarized as the ineffectiveness of the management of technology, the lack of technology planning, and the lack of a national and industry technology policy which provides clear guidelines and resources for technological advance. It is clear that we are paying dearly for these omissions, and unless we change and institute an effective technology policy we will continue to lose economic advantage, in both relative and absolute terms.

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The responsibility for such a policy rests primarily on the government, but includes industry and academia. We must recognize that the increased worldwide industrial and economic competition in which we find ourselves, and our greater dependence on world trade for economic growth, require us to consider our technological status in terms of world and not only national technological leadership. This situation in turn introduces the need for much closer collaboration among universities, industries, and government, and an effective streamlining of the technology development process, from scientific breakthroughs to technology application. New types of integrative organizations must be formed which insure an effective and smooth flow from scientific discovery to technology development, innovative product development, and the processes for its manufacture, effective integration of user or customer needs, and consideration of both the world marketplace requirements and customer feedback for continuous technology quality improvement. We can no longer afford the fragmentation of U.S. scientific research and technology development, manufacture, and marketing, if we are to win the economic battles which lie ahead and which we must win in order to retain our way of life and hopefully improve our standard of living and that of our environment. Yet, to succeed in this, we must change the way government, industry, and academics interact. We must reduce or remove the adversarial relationships that so often mar effective collaboration, particularly in setting mutually and nationally advantageous agendas. What we need is a technology policy that prescribes priorities and recommends resource allocations. We can no longer afford to be the world’s policeman. Neither can we afford to be the scientific laboratory for the world-at-large and produce the bulk of all basic scientific discoveries and thereby Nobel laureates, while losing out on product and process development technology and thereby on the economic competitiveness front. Our scientific and technological prowess must be harnessed to solve the large number of real problems of concern to society and our economy as well as for taking advantage of meaningful technology application opportunities. This redirection may require a new structure for U.S. research and education, one that recognizes longterm opportunities. Technology policy setting is needed at the federal, state, local, and industry level. We must develop technology road maps and choose technological developments which make sense and which benefit us. “Science for science’s sake” is nice, and academically attractive, but when carried too far may miss the point and certainly will miss major economic opportunities. We always thought that we were so big that choices did not have to be made. The present reality is that we cannot afford not to make choices and set priorities. The setting of a technology development policy is essential now when we need clear directives to proceed in this new century as technological leaders and not merely as the premier scientific discoverers.

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WORKING IN AMERICAN INDUSTRY Labor-management relations in America are generally adversarial, and labor loyalty to the employer and vice-versa is largely illusionary. Forty percent of all U.S. workers are on average less than two years in their jobs. In Germany and Japan the percentage of workers who are less than two years in a job is only 9% and 17%, respectively. These differences become even more dramatic when we consider longer periods on the job. For example, fewer than 26% of U.S. workers are in their job more than ten years, while 66% of Japanese workers work for the same employer ten years or more. According to the U.S. Bureau of Labor statistics, American manufacturing workers work more hours per-year on average than do their European counterparts, and are second only to Japanese and Korean workers in the number of hours worked (Table 10). Yet there is a question if they work as effectively; in other words, is their work is as effectively organized. All European countries work substantially fewer hours, yet in some, such as Germany, they achieve equal or better outputs per worker. American workers spend more time traveling to and from work, as a larger percentage of them live in suburbs and areas remote from their work place. On average American workers spend nearly one hour and ten minutes getting to and from work. In addition, they also spend more time preparing for work, coffee breaks, and at-work socializing. In other words, there is less concentration on the work itself, and as a result, hours worked productively is actually 10–20% lower than hours/year spent at work as listed above. This puts the U.S. in line with actual hours worked in most European countries but far behind those worked in the major Far Eastern countries. An increasingly important issue in U.S. industry is continuous education and retraining of the work force, something which is ingrained in many Far Eastern countries but as yet not common in U.S. plants where workers are considered less permanent.

Table 10. Manufacturing Hours Worked Country

Hours/Year Worked Exclusive of Vacations and Holidays

Japan U.S. Canada U.K. Norway France Denmark Germany Sweden

2,076 1,923 1,835 1,818 1,619 1,605 1,581 1,560 1,488

Source: U.S. Bureau of Labor Statistics (2000).

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INTERPERSONAL RELATIONS, WORK PLACE PRODUCTIVITY, AND ECONOMIC IMPACT Interpersonal relations in the U.S. are more informal than in most countries. We call each other by our first names, a custom that transcends all peer groups. It is quite common to call not only your co-workers or students by their first name, but also your teachers and superiors. Similarly, teachers and superiors take it for granted that they can call anyone reporting to them by their first name. On the surface, this seems a fine idea, based on democratic principles and mutual respect and confidence. On closer examination, however, this informality appears to be a smoke screen that covers radical differences such as huge differences in rewards as well as major contrasts in status and power. Furthermore, these informalities have not helped to improve the relationship between labor and management, students and teachers, patients and doctors, nor any of the many other important relationships that abound in our nation. In fact, it appears that adversity between these groups is stronger in the U.S. than in most countries and that informality, instead of smoothing and furthering cooperation, actually reduces mutual respect and encourages confrontation. There are many reasons for this conclusion, but informality combined with inequity in remuneration and working conditions is often a spark, which readily ignites inherent dissatisfaction. While it signals accessibility and equality, on one hand, it actually serves as a smokescreen that disorients the average worker. Informality quite often breeds contempt, particularly when used to cover up misuse of power and position. It also affects the effectiveness of organization and management or decision making structures. Layoffs by major U.S. corporations usually occur to react to changing market conditions and as a result of changing technology. Yet they are usually described as a move to improve competitiveness. They may in fact have the opposite effect. Such layoffs are often a frantic effort to cut costs. Instead, a planned approach and changes in operations and management to address the basic problems in the way these businesses are run probably would provide greater and longer-lasting improvements in performance. With consumer spending rising and improving revenues, it is often easier and longer lasting to increase markets and product range than cutting costs. This also improves economics of scale. Layoffs often include highly technical employees who represent huge investments in knowledge and experience; improvements in performance or costs are not necessarily achieved simply by massive layoffs. On the contrary, this approach adversely affects the morale of not only those let go but also the morale and loyalty of important management staff as well as the remaining workforce. It is also disturbing interpersonal relations within the corporation and affect customer perceptions. Unlike corporations in Europe, Japan, and other Pacific Rim Countries, U.S. corporations have traditionally encouraged turnover among workers as well as among management. The average stay for managers and other professionals with

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a company is only half that of their European counterparts, and is an even smaller fraction of the average time managers and technical personnel stay with a company in the Orient where employment is still quite often a mutual contract for lifetime employment. Notwithstanding these traditional differences, the recent radical layoffs by U.S. corporations have affected an already tenuous relationship between management personnel and corporations, an effect that may be expected to have lasting repercussions. While some companies have reduced staff largely by attrition, others have used more radical means that put all management, technical personnel, and workers at risk of losing their jobs. This in turn affects performance. Few companies announce formal strategies for cost reductions, a move which, though painful, would give employees notice of impending layoffs, and also relieve the anxiety for those it intends to retain. Yet this is seldom done. It would be beneficial if U.S. companies would develop cost reduction and layoff strategies well ahead of need and keep these strategies up to date as well as transparent. Such an approach would not only immensely improve employee attitude, but also assure more effective and cost efficient cost reduction performance. THE U.S. PENSION DEBACLE More and more corporations, large and small, have underfunded pension plans; and as a result they are either reducing pension benefits of their retirees or, if they declare bankruptcy as many do under a credit crunch, have the Government Benefit Pension Guarantee Corporation (BPGC) – and thereby the taxpayer – pick up the tab. The BPGC is now billions of dollars in the red and is expected to require billions more to live up to its obligations. It is widely expected that underfunded pensions will cost the U.S. taxpayer billions per year, and the total losses over the next ten years are expected to approach taxpayer costs of the Savings and Loan bank disaster more than a decade ago. The curious thing is that corporations that underfunded, lapsed in funding or even borrowed money from their pension funds did so perfectly legally. The law permits companies to borrow moneys from their pension funds, and to reassign it to other purposes without rigid commitments for repayment or placing of real collateral. Some of the nation’s largest and wealthiest corporations, which often pay their executives increasingly large salaries and other benefits, have recently been found to have underfunded their pension obligations. While some, for example GM and IBM, are trying to correct this situation by huge write-offs, a very large number of U.S. corporations are still behind in fully funding their pension programs. This will haunt us for a long time and may have a multiplying effect and even amplify the impacts of the 2001 recession. Furthermore, these deficits come on top of the huge federal and in many cases state deficits that will take a long time to correct. A major danger is that foreign investors who for years invested heavily in U.S. Treasury and similar securities may start to invest elsewhere and even withdraw some of their investments.

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TECHNOLOGY OWNERSHIP While there is little doubt that America has been and still is the most inventive society, there is serious concern about its ability to translate this inventiveness into technological advance and economic growth. Patent protection has long been the major incentive for invention, and the number of patents is often used as a measure of a country’s inventiveness. Yet many inventors, particularly corporate inventors, question both the value and effectiveness of the patenting process at a time of rapid technological change. Patents, while providing some protection, require disclosure of technological details and claims. Such disclosure publicizes information on how to circumvent the patent’s protection by inventing around it or by introducing new claims not previously entered. While the U.S. is still a leader in the number of patents filed, Japanese corporations far outstrip U.S. companies in the number of patents filed in the U.S. In fact, the first three U.S. patents filed in 1992 were by Japanese companies (Canon, Hitachi, and Toshiba), and among the 25 companies filing the most U.S. patents, only ten were U.S. companies. In fact, nearly half of all patents filed in the U.S. that year are owned by foreign companies [Ref. 6]. U.S. companies often do not file for patent protection for strategic or commercial reasons, a trend which is fortunately being reversed, and the share of U.S. patents awarded to U.S. companies is increasing albeit slowly. This reversal may be in part the result of a change in the attitude of the U.S. Patent and Trademark Office, which is now moving toward a more uniform worldwide patenting approach, encouraged by the recently formed United Nations Agency for Intellectual Property Rights and similar developments. MANAGEMENT OF TECHNOLOGICAL CHANGES “Nearly all significant scientific and technological developments are based on breaks with tradition, with the old ways of thinking and with old paradigms”, as quoted by Thomas Kuhn [Ref. 7]. Breakthroughs do not come from the mainstream of accepted ideas, but from the eccentric peripheries. As a result, new technology is not normally the result of marginal improvement in existing technology, but of unorthodox thinking and approach. Inventors and scientific/technological innovators therefore face opposition of the scientific establishment as well as of traditionalists in society in general. Dramatic examples abound. Trained engineers and scientists, who are vested in the status quo, often fail to recognize new scientific or technological solutions to problems of interest to them, unless the solution method or technology proposed falls within their narrow field of expertise. The management of technological change requires effective choice, timing, and rate of introduction of the new technology. This in turn requires open access to information on new technology and an ability to interpret, use, and predict the

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development of new technology. To be effective, technology development must be a continuous process from scientific discovery to application. In the U.S., most research is performed at academic, government or other specialized laboratories, which have no relation to or understanding of the use of technology as a product or process of commercial use. We do not usually consider real or potential applications nor implications in terms of economic, social, and environmental impact. As a result, a significant number of American scientific discoveries are first put in use elsewhere in the world, particularly in Japan and other Far Eastern countries. Unless we become more use and application oriented in our research, this trend is bound to continue with potentially devastating economic effect for the U.S. With federally funded research on the decline, particularly in universities and commercial research laboratories, foreign firms are now tapping potential sources of research and technology development in the U.S. Japanese firms, for example, own over 150 U.S. research facilities and spent $1.2 billion on basic research in the U.S. in 1990, over $2.0 billion in 1996, and even more in 2003. Foreign firms accounted for over 17% of all corporate funded research in the U.S. in 1990, as shown in Table 11. This percentage is growing as foreign firms find R&D in the U.S. to be cheaper as well as more productive than similar research elsewhere, including in their home country, because of the following: 1. a broad and well-developed research base in the U.S.; 2. greater availability of research scientists and engineers; 3. a large amount of federally funded basic science research results on which to build; 4. well equipped research laboratories often financed by agencies of the U.S. government; and, 5. openness and accessibility of U.S. research, at universities, but also recently at federal research laboratories who attempt to transfer or commercialize federallyfunded research. These labs often find that foreign-funded, U.S.-based research organizations quickly recognize the commercial potential of research results. While some claim that the increased foreign presence in U.S. research is only a reflection of the growth of foreign business activity here, including manufacture of goods for the U.S. market, others claim that foreign firms do not make their research results available, nor do they necessarily use them for commercial purposes in the U.S. market. Their primary objective is seen to be to enhance their competitive advantage worldwide and in particular in competition with U.S. firms. Table 11. U.S. Corporate Research Funding ($ Billion)

1987 1990 % Change

Total Sample

Percentage of Foreign Firms Operating in the U.S.

Percentage of Firms that are Foreign Owned

561 642 +140%

65 113 +737%

115 176%

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It is evident, that at this time of rapid technological change, that improving products and processes in marginal steps is no longer good enough to maintain market share and sustain profits. Technological progress must be based on new discoveries and radically changed technology to assure continued growth, and this requires continuous involvement in basic research, not just for image building but for survival in a demanding and competitive world market-place. The major issues in U.S. technology development that must be considered are as follows: • technical progress usually results from systematic endeavor; • to model the sequential process linking R&D productivity, the economic concept of “production function” is used; • research (funding) knowledge of problem orientation is necessary; • innovation is an invention which has been developed to include users’ needs; and • the effects of elasticity of demand on rate of innovation is very pronounced in the U.S. It is for these reasons that we need more effective cooperation between the government and industry as well as intra-and inter-industry collaboration in technology development and application, with the outdated anti-trust concerns still often voiced when such cooperation is sought. This notwithstanding the fact that such intra- and inter-industry collaboration is common and encouraged in many other countries, particularly in Japan, China, and other Far Eastern countries, with the government serving as the coordinator and often also risk taker in industrial research and technology development. MANAGEMENT STRUCTURES AND INCENTIVES In the last 100 years, since the advent of the large U.S. corporation, the path to economic and social success as an employee was to go into management. Management originally dealt mainly with the control of people, and through people the operations of the company. The greater the number of people reporting to a manager, directly or in the pyramid below those people, the more rewarded was the manager. Managers need not have been expert in the functions or even the business of the company, and in fact the concept of the generalist manager took hold and was lauded as a secret of American industrial success. Such managers could manage anything, often moving up the management ladder by changing jobs or companies in completely unrelated businesses. This is in a way still a practice today: the CEO of Big Blue (IBM) was chosen from RJR Nabisco, a food and tobacco-manufacturing firm. Managers in fact have for many years been selected from beyond the ranks of professionals or those experienced in the business of the company. They have come from accounting, legal services, finance, and marketing, on the assumption that such backgrounds provided a broad ability and a capability to control the profits and short-term prospects of the company. Few American industrial companies have been managed by technologists, or even by experts in production or manufacturing, and similarly few service companies were managed by experts in the service field, be it

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transportation, hotels, or even information services. Only about 5% of top managers and 2% of CEOs of major U.S. manufacturing firms are engineers, technologists or production experts. As a result, U.S. companies in general have built up huge white collar management hierarchies, which are self-perpetuating and are usually quite remote from the business of their own company. They too often know little about the products produced and even less about the processes used in their production, as they deal primarily in numbers and concepts. Their plans are paper studies and longerterm aspects, and resulting prospects were seldom considered. When hit with lower sales or profits, management’s response has typically been to reduce production costs by reducing the work force while leaving the management hierarchy intact. In fact even remuneration and reward of management were typically not affected by any downturn in company performance. Management was assumed to be “the company” while the productive or service part of the company was considered a dispensable and adjustable appendix to be manipulated in response to changing conditions. In recent years, however, many leading American corporations have come to recognize that this management approach and structure is not only very expensive but also counter-incentive. With companies losing trained professionals and production workers every time they outreached or made other changes, the cost of replacing the talent became an extraordinary expense. Corporations similarly have come to recognize that radical changes in white collar management structure are required, particularly as productivity on the shop floor increased at many times the rate of improvements in management productivity both in absolute terms and as a function of investment in new production and office technology. In fact while U.S. productivity on the shop floor increased by an annual average of nearly 3.6% between 1980 and 1989, and again by nearly 4.4% between 1990 and 1999, management productivity barely advanced at all, leaving industry with a dismal total productivity improvement of under 2% and 2.8% per year, although the industry spent more on office automation, management, information, communications and related management technology than on new production process technology. Similar dismal results are visible in the U.S. service industry. More recently American industry learned that investments in management support technology may provide prestige but little productivity improvement if not accompanied by radical changes in management organizational structures and culture. Most important, the traditional status and rewards based, not on the importance of the decision-making responsibility, but on the rank in the hierarchy and the number of people reporting to a manager, is an ineffective and often counterincentive management method. In fact this outmoded management style often encouraged intervention or addition of unnecessary staff to maintain (or build) an empire. For this reason white-collar management ranks have been much more difficult to reduce than blue-collar production workers have. As a result many companies are

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now endorsing the rule that the importance of a job is not a function of the number of people managed, but the importance of the decisions made. The effect of technology as well as management systems on the need for people is being reevaluated. In many cases technology can effectively replace people but will only do so if such replacement does not affect the importance and status of the job. Because of this many companies are now developing career and compensation schemes based on the importance of the job, not on the level of the job in the management hierarchy. In other words, people’s status depends on what they know and what they do and not on their level in a management hierarchy. For some companies this has led to dual or multiple career paths, one for traditional managers and others for professionals. This procedure has been found quite effective as it assures greater corporate retention of professional knowledge and improves the morale of the professionals in addition to enhancements in corporate performances. It permits creation of effective career paths for professionals who do not aspire to traditional management careers. The trends of increase in salaries and compensation paid by U.S. corporations are summarized in Table 12. These trends continue until now (2004) with increases in CEO and senior management compensation usually growing at twice the rate of employee compensation. Most of the new career paths are offered to professionals such as engineers, scientists, information systems experts, and others. Their income is now often comparable to that of managers with the same experience though their advancement is not as well defined and often much slower. The principal advantages of this new approach are an increase in retained knowledge, improvements in the morale of professionals, lower turnover of professionals, and reduction in the size of management.

Table 12. Trends of Salaries and Compensation of CEOs of U.S. Companies (Increase %/Year)

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992

Salaried Employee Comp.

CEO Comp.

CPI

Corp.

73 60 62 58 54 50 50 50 49 49

128 140 62 136 140 139 79 62 45 81

32 43 38 21 34 41 48 50 43 30

200 170 –108 88 202 228 – 48 –79 –150 +170

Source: William M. Mercer, Inc., Wall Street Journal, April 9, 1992.

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U.S. CORPORATE PAY Since 1960, when the average pay of a chief executive of a major U.S. corporation (sales $100 million plus) was about twenty times that of a professional engineer and forty times that of a teacher, remuneration of American executives and particularly CEOs has reached outrageous levels. By 1992 average CEO salaries, stock options, stock, and bonuses had grown to 74 times the average pay of engineers (see Table 13) and from forty times to 157 times the average worker’s pay during the same period. As if this were not enough, other perks and so-called “long-term compensation”, often in the form of tax-advantaged options or pension benefits have reached astronomical levels. By 2003 the average compensation of a CEO of a Fortune 500 company had reached over $5 million, while that of the average worker had leveled off and actually declined in real terms. Total compensation of the twenty highest salaried chief executives of American corporations, according to Business Week (April 26, 1993), was between $11 and $127 million and $23–249 million in 2003. It is interesting to note that these executives did not lead the twenty largest or most profitable corporations, and in fact included companies which were rather small, not very profitable or even loss making. Another interesting issue is that three out of the seven most compensated CEOs headed health care companies that received significant revenues from governmentfunded programs. Few of the companies who compensated their CEOs so lavishly performed well for their shareholders, and many of the most rewarded CEOs actually caused significant losses. There appears to be little correlation between CEO pay and performance. The traditional incentives provided for management performance, such as stock options, have become either useless or counter-incentive or have simply become an added opportunity for greedy executives to line their pockets at shareholders expense.

Table 13. Average Salary and Bonus 1960

1970

1980

1992

Chief Executive Officers

190,383 100%

548,787 100%

624,696 100%

3,842,247 100%

Engineer

9,828 5.1%

14,695 2.67%

28,486 4.5%

58,240 1.51%

Teacher

4,995 2.6%

8,626 1,57%

15,970 2.56%

34,098 0.89%

Worker

4,665 2.45%

6,933 1.26%

15,008 2.40%

24,411 0.635%

Data: Bureau of Labor Statistics, National Education Association, Business Week, April 26, 1993.

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It is interesting to compare U.S. executive pay with that given CEOs of major Japanese corporations. Salaries of the highest compensated Japanese CEOs vary between $660,000 and $6,306,000, with an average total pay per CEO of about $262,000, or about 6.84% of the average pay of a U.S. executive of a major corporation in 1999. During the same time period, average pay of engineers, teachers, and workers in Japan was about 12–16% below that of their counterparts in the U.S. In other words, the ratio of worker to CEO pay in Japan was about 1 to 12, meaning that a U.S. executive was paid on average 15.5 times as much as his Japanese counterpart. Cash compensation of CEOs rose in 1992 at the fastest pace in five years. Cash compensation had increased since 1983 at an average annual rate of over 10%, or more than twice the pay of salaried employees in general. As a result, the gap in direct cash compensation between U.S. CEOs and salaried employees nearly doubled in a decade. The pay of senior executives such as vice presidents in terms of salaries and bonuses increased by 8.1% in 1992, and has since continued to increase well ahead of inflation, as well as the rate of salary increases by staff and workers. The median salary and bonus package was $1,095,000 in a sample of 350 of the largest U.S. firms. These are the largest increases since 1988. The widening of the gap between executive and worker or staff pay which reached a multiple of nearly 26.7 in 1992 continued to widen to reach 29 in 1999. In other words, the average executive in these large firms makes 29 times as much as the firm’s average employee (worker, engineer, administrator, etc.). With profit from exercise of stock options included, the median in 1999 was $2.1 million. The pay of salaried staff increased by only 4.9% in 1992 versus 5.2% in 1991 and continued to increase since by a modest 4.21% or barely ahead of the rate of inflation. Bonuses, now often paid in the form of stock options, are tied to profit and stock value performance, as shareholders become more critical of executive rewards which are unrelated to company performance. While this makes sense from the shareholder’s point of view, it may encourage short-term performance boosting at the expense of long-term profit and market expansion. New requirements by the Securities and Exchange Commission (SEC) demand that companies disclose all executive compensation, including incentive plans, bonuses, deferred compensation, and perks such as memberships and non-cash services for executives. The new SEC rules also require disclosure of the value of non-exercised stock options and compare the value of the company’s stock over a five-year period against both a broad market index and that of a peer group. The new disclosure rules were introduced in response to public, shareholder, and worker outcries that executive compensation is not only obscene, but that it bears no relation to performance nor to the relative contribution of recipients to the profitability and share price of the company. While staff and workers are routinely asked by corporations for sacrifices during lean times, either in terms of salary freeze or cuts and temporary or complete layoff, executives have historically isolated themselves from any sacrifice during

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such times. Both the public and shareholders are becoming increasingly frustrated with such self-serving behavior and are starting to demand more equity and accountability. WORKER MORALE AND WORK ETHICS Restoration of American competitiveness can no longer be based solely on technological advantage, the size of the U.S. economy, the educational level in the U.S., the strength of the U.S. financial institutions and markets, and similar arguments, but must rely increasingly on improvement in work ethics, worker-management relationships, worker motivation, equity and fairness in the work place, and moral values of both workers and management. The American worker gets fewer holidays than most European workers do; in theory working more hours per year, but in reality real productive work hours are fewer. As noted before, the average American worker spends significantly more time preparing for work and in non-work related activities in the work place than do his European and Japanese counterparts. Part of the problem is lack of effective organization of the work place. Few U.S. plants prepare material and tools at each workstation prior to the beginning of a shift. In fact, U.S. workers must usually assemble their own materials and tools. Similarly, there is little teamwork or peer cooperation on the job. Worker-management relations are increasingly adversarial. Few American firms offer workers meaningful incentives such as profit sharing, bonuses, or even some type of recognition that enhances a worker’s status. In many companies work ethic is lax, and in some outright negative. Some American corporations have taken determined and often successful steps to reverse this trend which developed over the last 40 years. Still American manufacturing firms in many cases remain noncompetitive, though American wages and labor costs are the same or lower than those in the same industry of other major industrialized nations. While American worker productivity on a per person level is often more than comparable with that of workers of our major competitors, the differences in overall worker productivity are often the result of • less effective work place management, • less worker management cooperation, • lower or non-existent worker incentives, and above all, • lower morale and work ethic. All of these impediments are obviously mutually reinforcing and decrease the quality and effectiveness of output, which in turn again makes many American firms non-competitive in a global environment. U.S. automakers turned much of this around after finding a large share of their most lucrative domestic market taken over by imports and cars manufactured in the U.S. by their foreign competitors. It took the U.S. automobile industry much time and soul searching to recognize that the old ways of running industrial plants, with low worker morale, under-investment in people, and lack of worker-management cooperation, did not

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work. Other industrial sectors in the U.S. have joined this bandwagon, but much remains to be done. The decline in union membership and influence, largely the result of the change in work content and organization, must be replaced by something that gives workers a sense of belonging, contribution, and pride. People need recognition in order to do their best. American workers can show as high a working morale, job ethics, and quality of output performance as workers anywhere if given their due including a meaningful feeling of belonging, of being part of the team, of being recognized for themselves and their contribution, as well as given appropriate material rewards. PRODUCTIVITY IN AMERICA A recent study by McKinsey [Ref. 8] actually finds American workers to be more productive than their Japanese and German counterparts at the worker level, notwithstanding the public perception that American productivity is slipping and has fallen well behind that of these major industrialized countries. The comparative decline in U.S. productivity is often similarly blamed for many of our economic and social ills, such as unemployment, homelessness, and crime. In the nine major industries studied (automobiles, auto parts, metalworking, steel, computers, consumer electronics, soaps and detergents, beer, and foods), Germany was found to achieve only 83% and Japan 79% of the productivity of the U.S. These findings contradict those of other influential economists, such as Lester Thurow and Laura D’Andrea Tyson, who claim that German and Japanese manufacturers have overtaken their U.S. counterparts in productivity in many major industrial sectors such as electronics, steel, automobiles, auto parts, metalworking, and computers. Both sides of the argument are partially correct. Both agree, for example, that productivity in terms of output per hour worked in 1990 was higher in Japan than in the U.S. in the automobile, auto parts, metalworking, steel, and consumer electronics industries, and lower in computers, soap and detergents, beer, and food industries. Productivity in Germany was equal to or lower than that in America for all these industries, though in some only marginally so. However, the size of the industries in which Japan and Germany excels or are about equal in productivity to its U.S. counterparts constitute a very much larger proportion of the GNP of these nations. Similarly, industrial employment in the U.S. in McKinsey’s nine industries constitutes a much smaller proportion of total employment in the U.S. than in these two industrial countries. In fact, this proportion in the U.S. is only 40% of that in Japan (where these industries account for nearly 30% of employees) and 55% in Germany. A second distorting factor is that the number of administrative and support personnel per production worker is significantly larger in the U.S. than in either of these other countries, which accounts for the differences in aggregate productivity and productivity achieved at the worker level. For nearly twenty years now, we have considered low worker productivity to be a major problem for U.S. manufacturing. As a result, labor costs were reduced,

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automatic processes installed, and workers retrained, to increase the annual value of worker output. These measures indeed improved output, from about $55,500/blue collar production worker in manufacturing in 1975 to over $100,000 in 1991 and over $120,000 in 1999. During this same period, management or administrative productivity usually associated with overhead in terms of dollars of manufacturing GDP per white-collar worker increased only from $125,000 to $151,578. Also during these periods, office automation, communications, and related investment and operating costs grew in U.S. manufacturing industries from less than 0.1% to over 0.34% of manufacturing GDP. In other words, while a blue-collar productivity growth reached 220% over this twenty-five-year period (a compound productivity growth of about 5%), white collar or overhead productivity barely grew notwithstanding massive investment in new technologies. Manufacturing overhead in the U.S. remained nearly constant at 26.2%, while Japanese and Western European overheads are estimated to be respectively 16.8% and 33.4% lower than the U.S. overhead costs. Although on average U.S. manufacturing worker productivity is still even with or ahead of that of other major industrial countries in 1999 (see Table 14), overall manufacturing productivity lags behind that of our major competitors, not because our production workers do not improve their productivity as quickly as their counterparts in competitor nations but because the overhead gap keeps growing. Much has been said about the fact that U.S. productivity, while not increasing as rapidly as that of other industrial countries, is so far ahead that there is little to worry about. In other words, we are at such a high niveaux of productivity that the difference in productivity growth is inconsequential. While this was true ten years ago, it has certainly changed, particularly with respect to Japan and Germany. When considering all industrial workers, which includes support and other workers and not just the blue collar production workers, the U.S. now lags behind both Japan and Germany in industrial worker productivity as measured by output in dollars per year. As early as forty years ago, many students of American civilization voiced concern with the growing mediocrity among American students. In a 1959 speech at Douglas College in New Brunswick, New Jersey, for example, renowned journalist Max Lerner noted that “we should be less concerned about the missile gap than the intelligence gap, less worried about the missile rate than the intelligence rate”. Lerner might have added that we should be more concerned about poor worker education and training. Less than 10% of American production workers understand the basic statistical concepts necessary for the implementation of quality control or management. Ten percent of American production workers are virtually functionally illiterate. This is due not only to the failure of our school systems, but is also the result of inadequacies in on-the-job training, skill enhancement, and worker education. American corporations in general spend significantly less in percentage as well as absolute terms on worker training and education than do their competitors in Japan and Germany, though we spend much more on management training.

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Productivity per worker Productivity per man-hour Productivity per worker in agricultural sector Productivity per worker in mining sector Productivity per worker in manufacturing Productivity per man-hour in manufacturing Productivity per worker in utilities sector Productivity per worker in construction Productivity per worker in wholesale/retail Productivity per worker in transportation sector

Germany

France

U.K.

ER

PPP

ER

PPP

ER

PPP

ER

PPP

95

141

93

108

95

120

68

105

109

162

119

139

116

146

NA

NA

212

313

95

111

153

194

123

189

102

151

27

32

48

60

125

193

80

118

77

90

80

101

52

81

88

130

103

120

105

132

58

46

68

45

53

35

44

23

35

68

100

73

84

67

85

62

95

129

190

107

125

153

193

81

109

93

138

83

97

75

95

62

96

90

NOTES: ER=exchange rate (productivity converted at current exchange rates). PPP=Purchasing Power Parity (productivity converted at PPP). Productivity index for Japan based in ER and PPP=100. For example, an index of 162 for the U.S. means that U.S. is 62 percent more productivity than Japan on PPP basis. Source: Boston Consulting Group, Department of Labor.

QUALITY MANAGEMENT The production stage is the traditional place for quality control activities. There are both structured and unstructured methods for quality control. Structured methods include Statistical Process Control (SPC), also known as Statistical Quality Control (SQC), Quality Control Circles (QCC), and employee suggestion schemes. Unstructured methods include the concept that the next workstation is the customer. Generally, quality control in production includes the following activities: • training and educating workers • improving product quality

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• eliminating excess quality • process analysis and process improvement • checking interactions among processes • correcting process abnormalities and preventing recurrence • improving equipment safety and maintenance • improving work standards • improving process control standards • rectifying equipment or process capacity shortcomings • designing and fabricating production aids It is during the production stage that management expects the most quality control activities, but it is also at the production level that quality control is most difficult to implement and maintain, particularly if proper attention to quality management was not given in the planning and design phases. The following are some causes of this difficulty: • low education of production work force • union rules • workers’ attitudes • misunderstanding of meaning of quality control • linking quality control to quality assurance responsibility • unwilling to find fault with fellow workers • expecting immediate benefits and monetary incentives • simultaneous emphasis on quality, cost, quantity, and delivery • performance measurement in quantity • no feedback of quality problems • lack of top management participation • lack of top management support • data collection difficulties Workers are most likely to draw their lines when it comes to work responsibilities. This is mostly due to the fact that management has educated the work force on a clear distinction of work responsibilities and assembly line mentality. Well, the first thing to do is to change this “assembly-line mentality” to “the next person on the line is your customer” concept. I strongly advocate this change in attitude of the work force before introduction of any structured quality control program. In fact, to succeed, quality management must ensure not just involvement but integration of planning, design, and production as well as marketing in setting standards and procedures of product and process quality management. QUALITY CONTROL IN PURCHASING In most manufacturing, as much as half of a product’s costs is attributable to materials, parts and resources that are purchased from outside the organization. Defective materials and parts lead to additional cost. Even if the supplier does not charge for replacement, production is disrupted and deliveries delayed or extra costs incurred to meet delivery deadlines. It is thus correct to say that it is as

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important to assure quality management in purchasing as in manufacturing for quality control. This is particularly important now when so much is outsourced, often in remote foreign locations. Quality control responsibilities in purchasing include: • insuring quality suppliers and subcontractors • selecting suppliers and subcontractors for quality • communicating quality requirements to suppliers and subcontractors • relaying instructions and providing assistance to suppliers in the introduction and use of quality management and standards • acting as liaison between internal departments and suppliers to assure consistency of standards • inspecting materials and parts received using agreed standards and procedures • reducing inventory costs by assuring quality tests before acceptance • processing orders • supervising delivery deadlines that may include complex logistic or supply line deadline controls To assure quality control of procured materials and parts, suppliers must be made an integral part of the manufacturing enterprise or family. While this is being achieved in Japan and Germany as well as by some U.S. manufacturers now, it is often difficult to implement because of American perceptions and traditions that interpret anti-trust and competitive supply to extend to the lowest level of the supplier pyramid. This sometimes makes it difficult to impose quality standards as well as to induce quality incentives. Standards include physical dimensions and material properties, as well as conditions and time of supply or delivery. Most importantly, introduction and use of high standards requires long-term relationships, commitments between manufacturers and suppliers, and recognition of mutual interdependence. This in turn must be exhibited in trust and mutual support. Increased outsourcing now introduces great interdependencies that in turn demand confidence and trust among the partners in the supply chain. Yet this will usually pay off by assuring cooperative and mutually beneficial relationships.

CONTRADICTIONS OF COMPETITIVE BIDDING AND PROCUREMENT One principle imbedded in the American free enterprise system, and fairly rigidly enforced by some sectors of industry and most segments of government, is that procurement or purchasing must be wide open to all and subject to free competitive bidding and subsequent procurement. While this principle is fair in theory, it has over the years led to an inefficient system which bears little, if any, resemblance to the idealistic concept of fairness and equity envisioned by its developers the forefathers of our nation. The reason it does not work is that it assumes an ideal world where fairness in procurement is accompanied by equal access to pre-bid information and knowledge (by personal

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contact, lack of rigging, open and uniform bidding, procurement rules, propriety of supplied information, lack of ability to influence the selection process, known and readily verifiable selection criteria, and more). Requests for bids, proposals, and the actual bidding and procurement process have not only become highly skewed and often unfair, but are also extremely expensive and time consuming. As a result the process is often captured by the same few, and the results are quite frequently predetermined. Notwithstanding the fact that all of this has been known for some time, we continue to go through this farce, at immeasurable cost to our government or taxpayer as well as to U.S. industry. This is done largely for political reasons, but its principal driving force appears to be the vested interest of the parties involved who have fine-tuned it to their advantage and see no reason for change. While giving an image of broad fairness and efficiency in procurement, the system provides tremendous, often unearned profits to the few The process furthermore impedes selection of the most advanced technology or solution, and thereby often forces acceptance of obsolete or no longer needed solutions by its built-in inertia. It also forces an artificial gap between supplier and procurer that reduces opportunities for cooperation and advancement.

THE DECISION-BASED INDUSTRIAL ORGANIZATION (DBO) The principal function of management is to make effective, timely decisions. For this purpose, management forms organizations with each level in the organizational structure responsible for certain decisions. We usually give titles to the decision-makers in such an organizational structure and call them managers of their respective decision domain. The problem is that such titles are often conferred and respective organizational structures introduced without first insuring that all information required for the decisions of such managers is actually available. In fact, few if any decision makers in a typical hierarchical line organization have access to the information required to permit effective decision making in a timely manner. As a result, many decisions are made on the basis of inadequate information, deferred, or simply ignored for lack of adequate or timely availability of the necessary information. Most American industrial firms maintain strict hierarchical or line organizational and management structures, an approach made largely obsolete by the information revolution. Current information technology not only makes it possible to reduce the number of levels in a management hierarchy, but also actually makes it preferable to delegate decision making to the lowest level at which complete information needed for the decision is available. The result is a flattening of the organizational structures into an efficient decision-based organization that many forward-looking companies now introduce with much success. Decision-based management is the logical approach to management in this information age where everyone can get ready access to all information.

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INSTITUTIONAL SUPPORT FOR INDUSTRIAL DEVELOPMENT While America is still the economic locomotive and leader of the world, it is on the verge of losing some of its leadership in productivity, and possibly also in technology development, unless changes occur in government-industry and labormanagement relationships, as well as in the basic organizational methods used by American industry. Similarly, government will have to become more supportive. American industry must reorganize into efficient decision-based structures in which decisions are delegated to the lowest competent level, introduce more worker training and incentives, assure that rewards at all levels are based on performance, involve everyone in planning, integrate the latest technology into effective products and process development in a timely manner, and make sure that government and management as well as labor work cooperatively towards maintaining U.S. global economic competitiveness. Another issue of concern is often the lack of institutional support for industrial and economic revitalization. American educational institutions must focus more on the real needs of American industry. A very small percentage of graduates from American universities are really trained to fill jobs required by industry. Similarly our legal and health care institutions are not doing enough to advance industrial and economic competitiveness or growth, but instead concentrate on their narrow, internally focused concern with little consideration for the impact on U.S. industrial and economic effectiveness. In fact, our legal and regulatory systems are not supportive but adversarially oriented toward industry and economic development in general and often prevent U.S. industry and economy from achieving its potentials by unnecessary legal actions or regulations. Our educational institutions by and large make little effort in learning the real needs of industry and often adjust their programs accordingly only belatedly if at all. Industrial and preventative health care is similarly given little priority and resources. All this must change if we are to remain the world’s industrial and economic leader. Our major institutions must become responsive and service or customer oriented and not largely self-righteous institutions with their own agenda. AMERICA AS A SERVICE ECONOMY Post-industrialism is often interpreted as economic activity imbedded in service rather than in manufacturing or industrial activities. By this definition America is rapidly becoming a post-industrial economy or society. At the present rate of expansion of our institutions, government, and service industries, this trend will lead to the demise of our productive sectors, such as manufacturing, and agriculture within the next quarter-century. Well over 78% of all U.S. employees now work for institutions, government, and service industries, and this number is expected to exceed 84% by 2005. Economies must create wealth if they are to sustain themselves and to grow. Many question the

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ability of institutions, government, and the service sector to create sufficient wealth in the long run if at all. Some in fact claim that services, to a large extent, simply churn assets and values without actually creating new wealth. Others contend that services such as transport can add wealth by moving assets from a place of low asset value to places of higher asset value. This claim is often also made by practitioners of mergers and acquisitions who simply move assets among owners. While manufacturing adds value to input materials and creates real goods through the use of labor, knowledge, and technology, the identification of wealth creation in services is much more difficult, and sometimes even impossible. Many are now concerned that manufacturing and agricultural production may be unable to attract sufficient numbers of people in developed countries to be sustained as viable economic sectors capable of rewarding its workers appropriately. Rewards in the service industry, particularly by institutions, are usually much higher because they are not tied to output, in terms of either volume or value. One difficult issue that industrialized nations face today is how to assure comparable rewards for employees in jobs generating real value or wealth and those of employees in non-value generating jobs. While it is easy to determine the value added by a farmer, production worker, or design engineer, the value added by a lawyer, clerk, nurse, doctor, bureaucrat or even teacher is not so easily defined or measured. So long as law, health care, and education remained focused on contributing directly to the ability of society to produce real value by keeping workers educated, on the job, and safe, some value could be assigned to these services, but this is no longer true. As mergers and acquisitions usually produce simply churning of assets without adding to the total value, many of our legal, health, and educational services also have lost their primary focus and simply cause churning without adding value. As an example, a large number of class action suits are not designed to improve management but to enrich lawyers. While some may challenge product or service quality deficiencies, many deal with financial and asset allocation or control issues which generally do not enhance productivity. Similarly, few actually result in a meaningful compensation for losses of shareholders, users or other injured. By and large, class actions are a boondoggle for trial lawyers who obtain the bulk of any damages assigned by the courts. As a result, this approach does little to improve economic efficiency and in fact actually burdens the system with additional unproductive costs. Similarly a large percentage of health care services take the form of unnecessary treatments and tests. In fact, American health care has devoted too little attention to prevention and concentrated largely on treatment. In turn treatment has become more and more high-tech. As a result, America is probably the best country in which to find oneself in need of high-tech medical treatments, such as MRI, CAT scan or organ transplants, but the worst place among developed countries in which to get a run-of-the-mill illness such as a sore back, severe cold or infection. There are no doctors’ home visits, and to get immediate attention by a physician or in a hospital emergency room is nearly impossible. The way the American health care

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system is run now contributes significantly to lost working days. Compared to the preventative medicine and home care practiced in other industrialized countries, American health care is not only significantly more expensive, but also severely affects the productive output of the nation, both by tying up an inordinate number of people in health care provision and administration, and by tying down productive workers waiting for services. Similarly education wastes productive capacity by inducing students to continue education past high school who are neither equipped to benefit from nor are necessarily qualified for higher education. Instead of learning a marketable skill, they spend an additional 2–4 years in what can be best described as remedial high school education, while neither improving their skills nor employability. In fact many of these over-educated, under-skilled students end up in a life of dissatisfaction and lack of fulfillment such as a liberal arts degree holder working as a secretary or receptionist. The loss in people years, skill learning and productive output is significant and estimated to cost approximately 2% of the entire U.S. GDP. Additionally there is the obvious waste in the costs to educational institutions. Universities spent unnecessary billions to educate unqualified students who could otherwise make a productive contribution to the American economy during the years they spend in college doing something they are capable to do. The ratio of administrative and support staff to teaching and instructional staff in American educational institutions has more than doubled in the last 25 years, notwithstanding large-scale investments in “labor saving” technology, such as computers, which should have reduced administrative costs. The reasons are usually over-management and fund-raising which has become a major, if not dominant, activity of U.S. universities. THE DEMISE OF THE AMERICAN MIDDLE CLASS America’s economic strength and political stability have been largely due to its substantial middle class which was the personification of the American way of life, of opportunity, and of personal freedom. In our more than two centuries of existence as an independent nation, the middle class has grown to comprise the bulk of Americans, a sector that has enjoyed a good life. We have supported a two-party system, with both parties advocating essential middle-class values though with some differences in the emphasis on the role of government. The anti-party, anti-government movements initiated by the American middle class in the last twenty years has culminated in the Perot and Nader third party developments and more recently in the Republican take-over of Congress. The increasing internal discords in both the Republican and Democratic parties similarly makes it difficult to distinguish between the right of the Democrats and the left of the Republicans. A proportion of the American middle class is now opting out of or at least questioning the traditional two-party system. This defection is the result of an increasing trend by the parties and the three branches of government to de-emphasize support of the large American middle class and instead increase their support of the economic extremes – the poor and the rich.

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The boundary between poor and middle class in America was previously blurred, and even low-paid workers considered themselves middle class. No more. The poor are distinct, not because their income level has been reduced in relation to the middle class, but because many of them no longer aspire to become middle class. There are fewer and fewer working poor and more and more publicly supported poor now. Many of these are better off than people at the lower range of the socalled working middle class. To be poor and publicly supported has not only been institutionalized, but has attracted hordes of new members because it provides a high degree of social and income security. Its guaranteed income, health care, low cost housing, and other benefits far outweigh the advantages of a low wage and a low middle-class existence. As a result of this trend, the traditional American middle class is being decimated as more and more low-wage middle-class workers find it attractive to join the publicly supported poor. At the other extreme, managers at the upper level of the middle class desert as a result of a radical transformation of the American economy – an economy once based on manufacturing and similar productive activities to one of growing financial, service, and institutional organizations. Unlike manufacturing, agriculture, etc., these new economies reward their professionals and managers with huge, often ludicrously high incomes, which in turn disqualify them from membership in the American middle class. The overall result of this shift is a disillusionment of the remaining American middle class that leads them to take a diminishing interest in politics and social issues. In turn, politics is more and more driven by the economic and social extremes of American society, a dangerous trend that threatens the principles of Americanism as we know it – the Americanism which has for long been the guiding light and goal for people worldwide. INEQUITY IN AMERICAN SOCIETY Although Americans respect financial success, they increasingly expect remuneration to be linked to performance and not just position. It may be necessary to reduce the exaggerated inequities in compensation in order to stifle social discontent. As noted in 1992 the average corporate CEO of the major 500 U.S. corporations was paid $3,842,247, the average engineer $58,240, teacher $34,098, and worker $24,411. The twenty highest paid CEOs in the U.S. had compensation of $11.2 to $127 million. This trend continues and while CEO incomes increased by another 58%, that of employees and workers increased only by 34% during the period 1992 to 1999. In only select cases was senior executive compensation related in any way to performance, and many CEOs of companies with dismal records received substantial pay and benefit increases while their companies lost money, laid off workers, and asked remaining employees to forego salary increases. There is a general perception of “immorality in the board room”, an attitude that cares for neither the shareholder or for the staff or workers. The perception sometimes includes the lack of caring for or interest in the customer or community

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as well. While the scandal of unearned compensation permeates mainly senior executive ranks of industry, it increasingly includes senior executives of service companies such as banking and retailing as well as institutions in education, health care, and law or legal services. Annual compensation increases of executives (including bonuses) were 13.9% in 1988 and 1989. They fell to 8.1% in 1992 and continued at that rate to 2003. These rates were substantially higher than the average 4.6% increase in gross pay of white collar and 4.0% blue-collar workers during the same periods. Remuneration of executives has grown at a pace two to three times that of white-collar workers, and at an even higher rate than that of blue-collar workers in the same industries. The greatest disparity in the growth rate of remuneration has been in service and institutional organizations, including not-for-profit institutions and organizations.

ECONOMICS OF DISABILITY IN AMERICA It is not too long since disability was defined as a physical and mental condition which prevented a person from performing normally to his or her ability and which could be defined as a medical predicament. Medical here meant a condition which had a medically definable cause and effect, such as a muscular condition preventing certain movements or mental condition which rendered a person incapable of performing certain tasks such as schizophrenia. In recent years the Americans with Disability Act (ADA) has been used to protect, subsidize or give unearned benefits to people simply on the basis of incompetence, laziness or lack of intelligence or motivation. The press is full of examples of people who claimed to have learning disabilities for example and demand special conditions to compensate them for this disability. While there are real medical conditions which may affect learning or memory, increasingly lack of competence, ability or simply commitment to hard work involved in learning is used to receive special consideration under the Americans with Disabilities Act. A case reported by John Lee [Ref. 9] in U.S. News and World Report dated October 5, 1998 about a young woman, Marilyn Bartlett, is an example. Here a federal judge ruled that because she was less able to perform than other aspiring lawyers because of her learning disability that impaired her reading she had the right to help. She was given special terms and ultimately on her sixth try in the Bar examination passed after being given double time to take the exam. There are obviously people with different abilities but it is irrational to lower the Bar to the lowest ability in each case. People do not all have the same competence and some excel at things that others cannot perform well. The problem is that there is really no way to determine if a learning disability is a true medical condition or is the result of a lack of commitment, stupidity, low intelligence, laziness, disinterest or fake. Allowing anyone to demand special considerations in tests, admissions, and professions will not only lower standards but would ultimately undermine the very foundations of our society and civilization. These examples are being misused

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now with droves of students and others demanding special considerations without medical or scientific proof of their condition. American high school students are already performing worse than students in any developed and many developing nations in both verbal or English, mathematics, and science scores. If we let these scores decline even further, we will end up as a society with a minority of real performers who run our increasingly techno-economy and a horde of semi-imbeciles who cannot effectively function and will ultimately just hang on and become a burden to society. The cost of this in economic terms would be devastating, as a significant part of society would perform below par, yet demand equal payment with those who carry a full load. We may in fact have to support an increasing number of unemployable who are not sick or actually disabled. They are just lazy, incompetent, and maybe not too bright. They may also come from non-supportive backgrounds. The solution is not to stretch the standards to encompass such imbeciles and give them a free ride, but to provide better and earlier education, longer school hours and years, better teacher’s qualifications, incentives, and teaching hours, and finally real motives for parents to be involved. Ultimately, people should be given opportunities commensurate with their abilities, interests, and commitments. We have today the most successful and thriving economy driven largely by our technological inventiveness, but the proportion of Americans contributing to it is declining. This not only because of the increase in the percentage of retirees but now increasingly because of the large increase in Americans who insist on getting a free ride under the guise of disability. While there are obviously many who are truly disabled and must be helped, the curious thing is that truly disabled usually do their utmost to contribute and prove their worth to society in whatever form. I am talking of those able but unwilling to serve and who hide behind the curtain of ill-defined disability. POLITICAL CORRECTNESS AND ORGANIZED LABOR There is no question that labor had and has to organize to be able to negotiate with employers on the basis of equal strength. Similarly, it is generally accepted that labor must not only negotiate for and regulate employees for terms of working and economic conditions of employment which assure safe, clean, and comfortable work places as well as wages, health care, and other benefits which assure reasonable living conditions and economic opportunities. Today though union involvement is still concerned with wages or employment conditions of workers, emphasis is increasingly on political union interests that are often of little or no consequence to the union membership represented. In fact, labor unions have become primarily pawns of their leadership in advancing various agendas. Similarly unions, through pension funds often managed by the unions on behalf of their membership, have become major players in the financial markets which give their leadership great new powers which it wields with considerable effectiveness.

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Even though union membership is at an all time low, unions continue to exert outstanding political and economic power, largely because of their financial prowess. They have also staked out politically correct positions and are playing Republican and Democratic lawmakers against each other without clear-cut political commitments to either side.

THE CUSTOMER AND THE COST OF DOING BUSINESS IN AMERICA With all the hype on TV and other media of the importance of customers to American business and how business is going out of its way to improve customer relations, I at least find that I waste more time than ever doing business in America. Automated, computerized answering systems are designed to minimize service staff time and cost, independent of the time wasted by customers. In most cases, customers are required to wade through layers of menus and wait inordinate amounts of time in order to save a company 5–10 seconds of service staff time. Similarly, medical doctors, plumbers, telephone repairmen, and others require their patients or customers to be ready at the appointed time at the risk of a penalty or loss of appointment. Yet on average the same doctor or service person will usually let the patients or customers wait longer than the time required for the service. Doctors do not perform home visits even in cases of severe illness, even when transport time spent and exertion in an ambulance could make the illness worse, because home visits waste the doctors’ time commuting. In other words, the doctors’ time is more valuable or important than the patients’ well being. Courier or other delivery services refuse to give a specific time, such as early morning, but requires customers to wait all day or at least half a day for delivery or pick up, all for the convenience of the business and not the customer. While the Internet, fax, and E-mail are supposed to facilitate commerce, the reality is that they reduce the cost of doing business but do not necessarily save customers’ time or money. In fact, notwithstanding the hype of business that the customer is king and customer relations their primary concern, customer service and satisfaction is at an all time low.

AMERICAN ECONOMIC PROSPECTS In the last few years the U.S. economy has regained momentum, particularly in the manufacturing industry which, though the smallest of the major economic sectors, now serves as the locomotive pulling the U.S. out of its recession. It has reestablished leadership by improving both its absolute and relative industrial productivity, which in terms of 1990 labor productivity was 17% ahead of Japan and 21% ahead of Germany. Growth in U.S. manufacturing labor productivity has continued unabated, though the gap has narrowed. Yet capital investment in manufacturing in the U.S. lags behind that in Japan and Germany that partially

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negates the advantages in labor productivity as much of it is spent on laborsaving automation. Even in traditional heavy industries, such as steel, the U.S. has been able to improve labor productivity to above the level of Japanese and European producers. At the same time the U.S. economy continues its steady growth at 2–3% of GDP and experiences low inflation. Even its exports have grown to 14.5% of the world’s merchandise exports. All of this is an indication that the U.S. regained economic world leadership, largely as a result of the determined efforts by American industry to become leaner, meaner, and more effective. But this leadership, as noted before, it fleeting and may not be maintained unless the U.S. introduces some radical changes. U.S. industry has learned to seize technological opportunities without delay and to make painful and timely decisions and changes. But this is only part of the story. Our huge trade and budget deficits continue and the percentage of domestic product consumed by our institutions escalates without bound and at a rate which could negate all the economic advances achieved by American industry and technology development. We must reign in institutional growth and improve institutional effectiveness, lest our otherwise bright economic prospects be dimmed or extinguished. We must bring our institutions back to basics, to serve the public and not mainly their own needs, and to do so efficiently. America will be able to achieve its objectives and lead the world in moral and strategic terms only if it is economically strong. Economic strength requires a productive society that adds significant wealth and does not simply churn assets among institutions and service organizations. What is at stake is no less than America’s world leadership and future. THE U.S. AS A POST-INDUSTRIAL SOCIETY The new communication technology age, with its tremendous influence on human lifestyle, relations, and intra-societal behavior is now commonly termed the age of the post-industrial society. No longer do industrial and economic prowess alone determine the state of advancement of a nation or society. Knowledge and use of communication technology may in future years be an equally or even more important indicator of economic and societal power, yet there are many other factors which influence societal behavior and man’s ambitions and which determine emergence into the post-industrial society. Among them are increasing longevity, environmental management, and mobility as distinct from communications and transportation. The post-industrial society is in need of radical changes in societal and institutional structures. Most of our major institutions were formed to respond to the law enforcement, health care, and educational demands of the industrial society. These demands were perceived to require large institutions to provide the services and needs of a hierarchical industrial society under rapid transformation. The role of government is now rapidly diminishing as the traditional functions of government – which in even the most market-oriented democratic nations have included control

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of communications, transportation, health care, and education – are being deregulated and privatized. Institutional roles will continue to change as control of traditional institutional and government functions are transferred from institutional, government, and political control to society and the marketplace. In parallel, new management methods need to be developed which de-emphasize bigness and short-term institutional performance and emphasize satisfaction of society’s needs. Post-industrial societies will be service oriented, and many services are becoming tradeable commodities. Some of today’s national economies already survive and even grow based on the provision of services. The Republic of Singapore, for example, an island nation with virtually no physical resources, a population of about four million, and little land area, thrives as a service economy. Its economic growth rate has consistently been in the double digits, and its per-capita income has grown from that of a mid-level developing country to the ranks of the most prosperous industrialized nations in the short span of 35 years. This was achieved largely by providing services of transshipment, banking, communications, factoring, transport, processing, information, storage, engineering, and education, mainly to the resource-rich surrounding countries. Most of these services were sold and not consumed, though. By comparison the U.S. has grown into a post-industrial service economy which consumes most of its own financial, educational, health care, legal, communications, and other services. In fact, the percentage of our exported services is a pittance. We run our service industry – comprised mainly of our large financial, retail, legal, educational, and health care institutions – like a restaurant that serves only family members and select friends. Such a restaurant would not stay in business for long, particularly in a broad global economic environment.

AN ENVIRONMENT FOR ECONOMIC SUCCESS The relative decline of America in manufacturing and other industrial activities, economic sectors in which we reigned supreme, is often blamed on our industrial laxity: lack of discipline in the work place, labor-management adversity, ineffective and slow technology application or transfer from the invention to the application stage, over-regulation and more. The most important barriers, however, to improvement in manufacturing and industrial productivity and performance and to the development of advanced projects, are institutional, or are barriers created by the ineffectiveness of our institutions. Industrial and economic success depends above all on the following four premises: 1. a healthy financial environment; ready access to financing and efficient financial mechanisms or products. To accomplish this, government must reduce the budget deficit, take measures that increase savings rates, and eliminate major barriers to free financial transactions.

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2. effective educational institutions that prepare students to meet professional needs and not just train people in narrowly focused areas which are in vogue, but do not necessarily prepare students for today’s work place. 3. law enforcement that assures safety and fairness, rewards honest contributors to the economy, and penalizes those who steal from or corrupt the system or the social environment, 4. health care institutions whose primary concerns are prevention of illness and the maintenance of health, not with revenues gained from treating illness. Not only are we a nation of hypochondriacs, but our medical establishment has induced much of this attitude in an effort to promote public expenditure for and dependence on health care providers. The inefficiency of and lack of focus on the real needs of America’s financial, educational, legal, and medical institutions does more to reduce American competitiveness than all other factors combined. It is important to recognize that our problems are essentially of our own making. They are not the result of unfair competition from abroad nor of lack of access to foreign markets (though some unfairness does exist), but of our lack of resolve to clean our own house and reestablish the values that first made this country great. America was the industrial leader of the world for a long time, a leadership which is slipping away with the change over of the U.S. economy to a postindustrial service-oriented economy. Leadership in this new environment will only be maintained if we take a global view of services.

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The most important tasks of government today are to encourage economic, cultural, and social growth, generate jobs, improve the standard of living, ensure health care as well as personal safety, protect personal freedom and the nation’s security, and safeguard the environment. Similarly, government has a duty to establish confidence, to restore hope, and to instill pride by Americans as individuals and as a nation. The problems faced by America today are not due to the failure of its economy or to any decline in the abilities of its people; it is largely the result of the inability of government to lead and to inspire. Government, notwithstanding high-sounding pronouncements and policy discussions, has at heart primarily the interest of those who constitute government in its various branches not those of the American people in general. The American people are willing to make the sacrifices required to put the nation back on course and advance its prospects. They are willing to serve and even give their lives in essential service to the nation. It is our government and leaders who are unwilling to bite the bullet and make the hard decisions. The reasons are simply that, unlike Americans in general, government – or at least Congress and the Executive Branch – are not willing to make sacrifices or to take chances, particularly risks of defeat at the polls. In order for American government to work, to be responsive to the needs of America, its economy, and its people, it will have to be reengineered. Reengineering is a new management concept that suggests that in many cases it is necessary to start all over and introduce new thinking, new approaches, and new organization in order to improve efficiency or performance. The reinvention process requires creativity, not just replacing one method of management with another, albeit more efficient and automated. The very possibilities introduced by new information technology allow new creative uses of information not before available which, in turn, affect how, when, and how fast efficient decisions are made, and management can function. 89

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At present most government work is organized very inefficiently. The inefficiencies of government bureaucracies are in fact an American cliché. Organizations, particularly in government and public institutions, are seldom based on decision requirements and the related information-flow. As a result, a decision which should take only, say, 60 minutes of evaluation may take weeks or months because information flow or management in such organizations is disjointed and uncoordinated with decision requirements, and unstructured as an effective decision support. Recent discoveries of the inefficiencies of the American intelligence services are just one example of a general condition. Government, like corporations, must be reengineered or better yet reinvented so that decisions can be made in an effective, timely, and decisive manner, and truly address problems identified.

TAX BURDENS AND ECONOMIC INCENTIVES Although Americans have a comparatively low tax burden when compared with those of other industrialized countries, U.S. taxes have increased consistently since 1950, and now comprise 32.1% of GNP, compared with 24.9% forty years ago. While federal taxes, including user fees, have increased from approximately 17.8% to 20.4% of GNP, state and local taxes increased from 7.1% to 11.7% of GNP during the same period. In other words, while federal taxes have increased by 14.6% in relation to GNP, state and local taxes escalated by a whooping 64.8% or over 4 times as fast during these years. At the same time public services have declined in quality despite the claim that more services are now provided to the public. Most importantly, the services supplied by government have radically changed. Law enforcement, education, health care, and direct entitlement programs such as welfare, unemployment, and food stamps now account for over 85% of the non-defense expenditure of federal and state government. Little is spent on infrastructure, infrastructure maintenance, or capital assets or on improvements in social systems. The U.S. tax system has stymied capital expenditures by private industry on plant and equipment. The U.S. spent on average less than half the percentage of GDP on plant and equipment as the other Summit 7 members and only about 20% that of Japan, in the twenty-eight years between 1971–1999. Translated into cumulative plant and equipment investment, even considering the difference in GDP, the total investment in the U.S. between 1971 and 1999 was only 31.2% that of Japan. Furthermore, most of that investment was not in high technology processes, but in buildings and heavy equipment replacement. It is noteworthy that most other industrialized countries recognized the declining economic life of plant and equipment resulting from more rapid technological changes and, as a result, began to accelerate their investments in new plants and equipment. U.S. investment since 1980, on the other hand, has remained virtually constant in terms of percentage of GDP.

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EFFECTIVENESS AND COST OF GOVERNMENT REGULATION Government in the U.S. operates under a dilemma of effective balance between laissez faire, free enterprise, and a regulated environment where the sole purpose of regulation is to protect the individual and society while not interfering with the free economics of the marketplace. While this principle may be admirable, government regulation has in many cases assumed a role of its own, often losing sight of its larger purpose. As a result, it is often ineffective in performing its function, and more importantly an economic counterincentive. The last category includes cases where the government spends more on regulating some economic factor than its whole value. A case in point is a study for the Independent Bankers Association of America by Grant Thornton [Ref. 10] of 200 community banks, which revealed a cost of $3.2 billion annually to comply with thirteen specific regulations. Total estimated annual expenditures of U.S. banks in complying with regulations are $11 billion. Bank regulators probably spend large additional funds to check compliance. Many of these regulations have little or no impact on banks, and like many other regulations should be reviewed periodically as to their relevance or effectiveness. In an increasingly dynamic social, technological, and economic environment, the need for regulation changes all the time. Yet we appear to assume that regulation, once justified and introduced, should serve indefinitely. The problem is largely with the build-up of special interests and a government bureaucracy that together assure that regulations stay in place long after their justification has evaporated. The legal profession, which appears to be the major beneficiary of regulation, is obviously the most vocal in advocating retention of regulations long beyond their justification. Some of our regulations cover technology, procedures, or organizations and services no longer in use or which were used only temporarily as long as 100 years ago. Not only does this cause a huge bureaucracy in Washington and elsewhere (a total of more than 100,000 federal employees work for regulatory agencies), but as noted in the example above, the direct expense of unnecessary regulations is estimated to cost the U.S. economy many hundreds of billions of dollars. In many cases the indirect costs to the economy in lost business or trade are undoubtedly even higher. In recent years government environmental and social regulations have become increasingly burdensome, not just in economic but also social terms. Though many of these regulations are based on just social goals, such as equality of sexes in the work place, elimination of sexual harassment, pollution prevention, work safety, and more, most have become horrendously complex, cumbersome to implement, and are often counter-productive, bureaucratic procedures. In the end they often lose sight of their basic objectives and become simply rules without objectives. For example, five federal departments (Transport, Defense, Commerce, Agriculture, and the EPA) have regulatory functions in U.S. coastal waters. As their rules are

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not coordinated and often conflicting, huge amounts of money and long periods of time are wasted in offshore or coastal development projects. GOVERNMENT BUDGET-MAKING AND BUDGETARY NEEDS We hear a lot about reductions in government spending. Yet, in reality, Congressional budget-makers as well as the Administration usually imply by reduction in spending a reduction or elimination in the growth of spending. In fact, we are told to believe that continued spending at the same level or increasing it only at the rate of inflation is the same as cost saving. Part of this perception by lawmakers is the tradition that government agencies receive funding from Congress, not on the basis of what they need effectively to fulfill their functions, but on the basis of what they spent in the past and propose to spend in the near-term future. Few programs, once started, are ever terminated, and few expenditures, once justified, are ever eliminated even if radically changed conditions no longer justify their need. This is true not only in defense programs, where as the only remaining superpower we no longer need high technology space and similar systems expenditures; but also in education, health, social services, energy, transportation, law enforcement and other areas, where radical changes have dispensed with the need for many existing programs. Most importantly, the role of the vast and separate government research laboratories that employ more than half the nation’s scientists and engineers must be reevaluated. Although recent attempts have been made to give these laboratories a more commercial orientation, investigations have shown that the laboratories are neither equipped nor have incentives for commercializing their work or findings. Also, attempts to transform these laboratories into purely commercial operations have failed for various reasons. Not only do these laboratories now pose an increasing budgetary burden, but they also deprive U.S. industry of urgently needed scientific and technical talent and capability. As we will discuss later, the largest element of government spending is now entitlements, which have become a virtual “Bill of Budget Rights” and not a “Budget to Meet Essential Needs”. Entitlement fraud is now so commonplace that it has become politically hazardous to address the issue without offending a large segment of voters. Health care and criminal justice are similarly budget items that spiral irreversibly upwards and are politically untouchable. Yet, if we are ever to balance the federal budget and halt the risk of eventual national bankruptcy when government income is inadequate to service the national debt, we must gather the courage and resolve to address these problems and eliminate fraud and waste without cutting the meat and muscle out of our nation’s economic and societal needs. I make these comments notwithstanding the recent (2001) tax cut and return of some of the expected surpluses to the U.S. tax payers. While politically attractive, our potential slide into recession in 2001 is bound to affect government tax revenues and may even result in crossing out any 2001 fiscal year surpluses. Projected

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surpluses did not materialize, and federal budget deficits grew to record heights by 2004. This trend may continue and severely impede U.S. government’s ability to meet all its domestic and foreign obligations. GOVERNMENT SPENDING With over 52% of federal spending or about 14.2% of GNP now going for entitlements, it is useful to note what this money is spent on, particularly as the average growth of GDP per person continues to decline. Federal spending, which now exceeds 27% of GNP, is growing at a rate faster than the rate of inflation and GNP growth combined. Today federal spending for defense is down to less than 18% of all federal expenditures. International programs consume a bare 1%, and all remaining domestic programs combined, such as agriculture, commerce, transport, and interior, consume only 16%. The two fastest-growing areas of federal expenditure are entitlements and interest on the national debt that in 1999 required 52% and 13% of all federal spending, respectively and which continue to grow. According to the Congressional Budget Office, non-means-tested programs consume the bulk of the budget with: 1993 Social Security Medicare Federal Retirement and Disability Unemployment Compensation Other

21% 10% 5% 2% 3%

Means-tested programs, on the other hand, consume only 13% of federal spending, such as Medicaid Food Stamps Supplemental Security Income Family Support Other

6% 2% 2% 1% 2%

In other words, cutting or tightening means-tested programs is not going to do much to reduce federal spending. While it is true that the percentage of federal spending on entitlements has remained virtually unchanged since 1975 as a percentage of the U.S. economy, health care costs have grown significantly. While it appears therefore that entitlements are just keeping pace with the growth in the economy, we must remember that the economy does not really keep pace with itself. The growing budget and trade deficits have required not only enormous federal borrowing, but also sale of large amounts of U.S. assets to cover federal revenue and balance of payments shortfalls. In other words, we borrow increasingly more and more to pay for federal expenditures (the federal debt was $5 trillion before 1998 and is expected to exceed $6.7 trillion by the end of 2004) and sell off American property to foreigners. Much of the earnings from assets sold to foreigners are exported.

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Expenditures by the government continue to grow at a rate in excess of that of the GNP, and the proportion of entitlement spending is escalating at an increasing rate, having grown from 49% of all government expenditures in 1992 (including Social Security) to 52% in 1993 and 54.2% in 1999. Similarly, interest costs are increasing at a rate of about 10% per year and now constitute over 13% of all government spending. In fact, defense, domestic programs, and foreign aid which together represented significantly more than half of all government costs only a decade ago, are now down to only about one-third of government spending. Social Security is not just a trust fund, but a social contract, and while it takes in more than it spends now, it is viewed by government today as just another revenue and entitlement, a dangerous perception, particularly considering that its spending is expected to start to exceed its income shortly. Various budget proposals suggest that the retirement age should be raised to 70 to increase the number of contributors per beneficiary and to raise the ratio of contributions to benefit payments. Without such a change, the number of contributors per beneficiary did drop from 16 in 1950 and 3 in 1992 to only 2 in year 2004. In 1993, 41 million beneficiaries, receiving an average annual benefit of $7,646, were paid an aggregate sum of nearly $313 billion, or over 20% of all government expenditures. Yet Social Security contributions are expected to top this by 2–3%. An increase in the retirement age to 70 in 1993, for example, would have increased Social Security income by as much as $22 billion, while Social Security benefit costs would have declined by over $64 billion, making Social Security a tempting target for deficit cutters. Considering the rate of increase in the national debt in the Reagan years (Table 15), and more recently in the 2000–2004 period, only radical changes in the health care, legal, or law enforcement and educational systems, with changes in retirement benefits, and some value added or consumption taxes, could eliminate the budget deficit by year 2008, thus achieving a budget surplus which could start to reduce the crippling federal debt. Expenses for large federal sectors, for example health and defense have reversed their demands on public expenditure in terms of the percentage of GNP spent by government on the sector (see Tables 16 and 17). Similar large reversals are occurring in many entitlement programs. U.S. direct allocations for defense in the 1993 budget were $278 billion, but according to information collected by the Center for Defense Information from CDI, Table 15. Increase in U.S. National Debt 1980–1984 1984–1988 1988–1992 1991–1996 1980–1996 ∗

Estimated.

$654 billion $1,040 billion $1,462 billion $1,479 billion∗ $4,635 billion

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Table 16. Sector Expenditures (Percent of Gross National Product)

Health Defense

1945

1955

1965

1975

1985

1995

4.0 30.0

4.5 12.0

5.9 8.0

7.9 5.5

10.5 6.5

15.0 3.0

∗

∗ Estimate. Source: Congressional Budget Office, 1995.

Table 17. Total Defense Spending Budget FY 1993 Department of Defense Department of Energy (nuclear weapons)

$278 billion $13 billion

Total Direct National Defense Military Share of Interest in Debt Veterans Military Air Military, NASA, Coast Guard, etc.

$291 billion $79 billion $34 billion $7 billion $5 billion

Total

$416 billion

Source: CDI, DOD, CEP. Table prepared by the Center for Defense Information.

DOD, and CEP documents, actually reached $416 billion if we add $13 billion for nuclear weapons cost in the DOE budget, $79 billion for the military share of the national debt, $34 billion for veterans’ costs, $7 billion for military aid, and $5 billion for military NASA, Coast Guard, and similar defense expenditures. The defense budget or expenditures mushroomed during the Iraq war 2003/04 to an unsustainable level. THE NATIONAL DEBT PROBLEM Our national debt is rapidly overtaking the U.S. GNP. The figure was barely 28% of GNP in 1982, and has since grown to over 70%. The budget surpluses expected in 1999 and the next few years could have reversed this trend if Congress would have agreed to use much of it for debt reduction. Unfortunately the Bush administration and Congress decided in 2001 to use most of it for tax cuts. In subsequent years 2002–2004 budget deficits increased to historic levels. In the past budget balancing efforts by the government did not aim at eliminating, but only reducing, the budget deficit. More recently continued rapid and sustained growth of the U.S. economy had resulted in larger than expected tax revenues that not only reduced the expected deficits but also started to build up budget surpluses in recent years. This was expected to continue for several years, but the 2001 revision, combined with reduced tax income and tax returns, as well as the September 11th attack and subsequent wars in Afghanistan and Iraq caused a reversal in the budget results and a large budget deficit.

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Until recently, budget and trade surpluses of our major trading partners and the relatively high U.S. interest rates caused major parts of our debt to be financed from abroad. However the decline in prosperity of Western Europe and Japan, together with the newly low U.S. interest rates have largely dried up these sources of U.S. debt financing. Well-meaning actions, for example the Gramm-Rudman Act designed to reduce the federal budget deficit to zero, all contain escape clauses that exempt their implementation during times of recession or grave economic problems, such as the crisis introduced by the S&L bank failures. We now face a critical situation in which demands are increasing while our ability to bring solutions is on the decrease. Our social costs are rising, foreign financing of U.S. debt and investment needs is drying up, demands have increased for U.S. involvement in solving the world’s security and economic problems, and our ability to cure even our own problems is diminishing. Even with interest rates now in 2004 at a long-term low, interest on the national debt consumed over 16% of our federal budget in 1999 and is expected to grow to 18% by 2005. Lower interest rates may permit the government to exchange highcoupon-rate federal bonds for lower-interest securities. Yet, other debt problems loom on the horizon. Third World debt for example, standing today at over $1.6 trillion, continues to climb, and is experiencing more and more defaults. While some Third World countries, such as Mexico, have made admirable progress in reducing or stabilizing their debt by a combination of restructuring, debt-equity swaps, and privatization or sell-off of government assets, the majority of Third World debtor nations are sinking deeper into debt, particularly countries such as Argentina, Brazil, and much of Africa. Although the World Bank, IMF, and other international finance institutions, together with national OECD governments, pump money into Third World countries, a large and increasing percentage of this funding is used to repay existing debt and does not enhance production nor decrease dependence on outside economic help, particularly in sub-Saharan Africa and South Asia. We are now approaching a time when most new funding will be used to pay for current consumption (import financing) and outstanding debt financing. This condition will invariably lead to massive defaults, as new funding is unable to keep pace with debt servicing and current consumption financing. Because the U.S. is the world’s largest direct and indirect creditor through government or government-guaranteed loans, U.S. shares in international funding agency financing, and private/commercial lending, we would be hurt more than any other country by these defaults. Further, private U.S. banks are exposed to developed country debt to the tune of approximately $300 billion. Overall, a massive default by developing countries, which may well occur before long, could cost the U.S. government a loss approaching the size of the S&L bank default. This potentiality is further exacerbated by the exposure of U.S. private investors, as well as pension funds and insurance companies, which invested heavily in bond issues of the former Soviet Union, now Russia, and other former Communist countries.

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Such debt never has been and probably never will be repaid. Therefore, even if the federal government were to manage to cut costs and increase tax revenues, and as a result achieve a lowering of budget deficits, the national debt will continue to grow. As refinancing becomes more and more difficult, it will force interest rates up and its ratings decline. The national debt, with less foreign investment, would absorb much of American savings, leaving little for investment in productive assets. As a result, U.S. capital equipment investments, particularly in manufacturing and transportation, may fall to dangerous levels, notwithstanding the fact that the cost of capital is now at a twenty-year low. This trend will be difficult to reverse in the short term. Banks are unnecessarily cautious in their lending, a policy which has resulted from strict government controls, increased risk aversion of lenders, and the unnecessarily wide gap between interest rates charged and the cost of funds. This gap is, percentagewise wider than at any time in recent years, with CD rates offered for example as low as 50% of thirty-year fixed mortgage rates and 70% of the prime rate (2001). Bankers are concerned with the country’s low savings rate which, according to U.S. Department of Commerce figures, declined from 18% in the 1970s, to 15% in the 1980s, and is now at less than 12%. Business investment in the U.S. is now less than 8% of GNP and has actually declined slightly since the late 1980s. Debt has become an integral part of American life. We were taught as individuals and as a nation that debt is good for the economy and that the Keynesian theory works on a personal as well as national scale. Deficit spending will generate greater opportunities, income, and growth, for individuals and for the nation. Such an everrising spiral will assure that there are always enough resources for growth. It is supposed to result in a continuously self-adjusting system. We assume that we cannot be held responsible for future generations, as they will have similar opportunities to ride up the debt spiral. This philosophy, supported by many economists – at least in the past – has been the principal driving force towards our current predicament. We now find that the benefits of debt have their limits. The federal debt fluctuated around a quarter of a trillion dollars from the end of World War II to about 1965. It then took another ten years to reach about half a trillion dollars in 1975. It doubled to just under one trillion dollars in the next six years or by 1981, and then began a rapid increase to about $2 trillion in 1986, $3 trillion in 1989, and nearly $4 trillion in 1992. At the end of 1993, the deficit exceeded $4.5 trillion and by 1999 about $5.2 trillion. The Clinton deficit reduction plan was proposed not to reduce our federal debt, but simply to decrease the rate of growth of the budget deficit. It resulted in the federal debt of nearly $4.9 trillion in 1995 which grew to over $5.0 trillion by 1998. The cost of borrowing by the federal government is projected to average 6%, and the resulting annual debt servicing costs is estimated to exceed $320 billion by 1999 or over 4% of GNP and about a quarter of the federal budget – nearly equal to defense costs.

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THE ENTITLEMENT MORASS Entitlements – from Social Security to health care, education, welfare, and more – now account for over 50% of total government expenditure, and have jumped to this level from less than 30% in 1968. They grew to over 65% by year 2003, and are expected to reach 70% by year 2009 unless radical changes are introduced. At the same time, federal expenditures are expected to increase by 50% over the next ten years or at nearly twice the forecasted rate of growth of the GNP. By the year 2010, the federal government will spend nearly 86% of its outflow on entitlements and debt service, and its budget will grow from just over 22% to over 28% of GNP. Entitlements are not only a drain on the Federal Budget and are starting to dominate it, but worse, have become a root cause for low moral, lower output, and to some degree for political decay. The number and also the percentage of people wholly dependent on entitlements have increased independent of the state of the U.S. economy. Welfare and similar entitlement programs have become a way of life for a segment of the population, and a major disincentive for education and employment. In fact, welfare and lack of education feed on each other, as recipients shun improving their skills for fear of losing welfare and other entitlement benefits. As a certain percentage of entitlements is given to able-bodied working age people, the cost of loss of working output of these people as mentioned before must be added to the cost of the entitlements to the U.S. economy. The percentage of working-age able-bodied people on long-term or permanent entitlements, such as welfare or child support, is now over 3%. This number must be added to the number of unemployed, as welfare recipients are not counted as unemployed, which in fact they are. The entitlement morass will be controlled only when meaningful incentives and limitations are introduced. These measures may include allowing recipients to earn some money without reduction of their welfare income, until their outside income significantly exceeds their welfare income, and even then welfare income should be withdrawn only gradually and proportionally, so that the working recipient always makes significantly more than the non-working recipient. Another possible measure is time limitation, which should stipulate the maximum time an able-bodied recipient can be on welfare. Finally, all able-bodied welfare and unemployment benefit recipients should be required to work or perform some public service, to compensate the public for the welfare or unemployment costs, but more importantly, to insure that the recipient maintains his skills, morale, and working attitude. A WELFARE SYSTEM WHICH DISCOURAGES WORK AND ENCOURAGES FRAUD The greatest albatross on the neck of the U.S. economy is its welfare system. While it costs less than the health care and law enforcement or legal systems and about as much as our educational system, its economic impacts are out of proportion to its costs. Let’s take a closer look at this very expensive system.

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It not only encourages huge numbers of potentially productive people not to work and contribute to their own and the nation’s well being, but it also fosters crime and encourages fraud. It contributes to the breakup of family structures by making it more profitable for men and women to live officially apart. If all able-bodied welfare recipients were required to work on whatever job is available and that they are capable of performing, direct welfare costs would probably plummet by nearly 50% and many low-skill jobs that now go begging or serve as magnets for illegal immigrants would be productively filled by Americans. At the same time, opportunities for illegal immigrants would decline, and as a result also their numbers, which in turn would further reduce welfare costs, as many illegal immigrants ultimately qualify for or are offered some welfare or other support. A related issue is that of education of the poor and their training for meaningful jobs. Welfare is virtually never contingent on work or training, even when the recipient is healthy, working age, and able. The number of vocational schools and other skill training facilities in the U.S. is woefully small, as are welfare-related skill training, on-the-job training facilities, and education towards some profession. Although it is recognized that schooling is cheaper than long-term welfare or jailing, our welfare system lacks any organized focus towards training and education. THE SCOURGE OF THE UNEMPLOYED Unemployment in America is no longer simply an economic phenomenon or a condition arising from downturns in prosperity of the nation. Unemployment has become a permanent condition for segments of American society and in too many cases a life objective or career. It is no longer just the single mother without skills who finds that child support can provide a larger, more reliable source of income than a low-skill job, and as a result chooses single motherhood as a career. The same applies to various unemployment benefit programs that have become largely self-defeating, as they are no longer temporary means of support for people who have lost a job but expect to return to employment. These programs are being used as long-term support systems for the chronically unemployed or assumed unemployable. There is a growing class of non-working, able-bodied people in the U.S. who are not included in the unemployment statistics. In the past it included mainly the old, infirm, and underage, but today it is a burgeoning group of people of working age, neither physically nor mentally handicapped, who become part of the publicly supported unemployed. These problems are increasing the cost of the system itself. There is also the added economic cost of lost output, negative impact on work incentives, inability to fill low-skill jobs which, left open, tend to attract illegal immigrants. Public support systems which provide handouts to work-capable persons without requiring some service or value in return undermine the foundations of a democratic, market-oriented society. In theory, individuals should be rewarded for their contributions and not solely because they are a member of the society, so long as they

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are capable of contributing. Handouts are demeaning and demoralizing, and their imposition contradicts the basic philosophy of democratic capitalism. UNEMPLOYMENT AND UNEMPLOYMENT BENEFITS Following the example of some European countries, the U.S. has sweetened unemployment benefits, particularly for long-term unemployed, under the erroneous assumption that this will provide relief to people temporarily laid off by economic dislocations and changes in demand labor. This move is also expected to assist industry’s adjustment to new conditions. The problem is that long-term unemployment, which in the past included a very small fraction of unemployed, has increased appreciably in recent years. The question arises as to whether improved benefits for the long-term unemployed make long-term or permanent unemployment an attractive enough proposition, particularly for those whose ratio of unemployment benefits to previous pay exceeds 50%. European Union countries which generally offer longer unemployment benefits have found that higher and longer duration of benefits cause higher long-term unemployment. In other words, long-term unemployment benefits create the longterm or permanent unemployed. Unemployment is also furthered by restrictions on firing. The harder it is for an employer to fire a worker for cause and the greater the cost of firing, the less employers are inclined to hire new workers. In the past, employers in the U.S. could terminate employees at will, with proper notice and compensation, just as employees were free to leave or quit employment. Employers now quite often must justify any firing and are penalized severely for dismissal, even for causes such as incompetence or lack of adequate performance. In addition, employers assume burdens such as health insurance, unemployment contributions, accident insurance, vacation pay, sick leave, maternity leave, family leave, and more. These burdens have grown at a rate well in excess of inflation and now average 34.9% of the (before tax) wage bill in U.S. industry. Larger and high visibility employers spend as much as 46.7% of the (before tax) wage bill on these benefits. This figure is about 60% higher than benefit costs of typical Japanese corporations and 30% higher than that of German and French corporations, though the latter offer significantly longer vacations and Japanese corporations usually offer profit-sharing or bonuses. Much of this is the result of the inefficiency of U.S. health care and other services. THE BUSINESS OF GOVERNMENT The government has long considered itself a regulator, arbitrator, supplier of services, and general manager of the nation. It assumes the responsibility for adjusting inequities and attempts to redistribute wealth however obtained. It owns huge assets held in trust for the nation, but considered largely by government bureaucrats to be assets reserved for the use and purposes of the government. Although

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we assume we have a government of, for, and by the people, it is often painfully obvious that government does not always consider the people its customers or its business to serve the people using the nation’s resources. The problem, to a large extent, is one of accountability. Checks and balances have been built into our system of government by the constitution, but it is evident that these no longer suffice in assuring satisfaction of the people’s interest nor guarantee the elimination of fraud or mismanagement in government. Government should be run more like a business which is open to scrutiny, accountable for its actions, and oriented towards providing quality services to its customers, the public, with efficiency and concern for the well-being, security, safety, and social and moral well-being of the nation. Government behaves as if it is accountable only at election time, and that people vote mainly with short-term topical interests in mind. Legislators and for that matter the administration usually make promises at election time they neither can nor intend to keep. Most government decisions are, as a result, short-term. For example, government now tampers with the tax laws so frequently that it is virtually impossible for individuals or corporations to develop long-term strategies. Yet long-term strategies are essential for sustained economic growth. As a result, American business, and people in general, are short-term optimizers. They prefer to look a few quarters ahead and generally do not save or build up significant reserves for the future. This lack of savings in turn negatively impacts investment and economic growth. Taxing interest on savings for example is a counter incentive for the build up of investment capital, this particularly as savings are usually made with after tax money. This and other laws really discourage citizens from fully contributing to our economy. The problem is in part caused by the uncertainties in the federal and other budgets as well as by actual expenditures. It is clear that government agencies do not maintain effective cost controls and probably do not even know their costs. As a result, budget deficits are often unpredictable and as they occur are usually financed by government debt on an as needed approach. It appears that government should be required to maintain the same accounting standards as business, to maintain real-time accounts, and to publish balance sheets periodically. Recent press accounts report that the IRS does not abide by the standards of accounting it requires of American business and individuals. Similarly, many government agencies do not follow their own regulations or standards. Government can maintain the respect and cooperation of people and business only if it demonstrates leadership in applying its own rules and standards. It is equally important that the government keep the promises made to the electorate, particularly in the absence of established policy. Much-needed economic and social stability can be attained only with longer-term policy and maintenance of election promises and commitments. Unfortunately the people, the electorate, take a back seat soon after the election. Legislators and government too often become responsive to special interest groups, particularly those representing the American institutions of health care, education, and law enforcement or criminal justice as

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discussed in Chapter 1. These institutions consume an inordinate share of our GNP and national wealth, and more and more control government decision-making. On the issue of anti-trust, for example, we permit and in fact encourage collusion of competitors in economic sectors such as manufacture of cigarettes, machines, and electronics in forming and sustaining lobbying groups who try to affect government and legislative policy towards their interests. Yet these same companies are not permitted to collude in research and technology development. This skewed interpretation of anti-trust principles certainly slows U.S. technological advance and inhibits the long-term competitiveness of U.S. industry. Today we are part of a global marketplace, and are not mainly a domestic market. Anti-trust laws must be interpreted differently in a global market environment. Others, such as the Japanese, for example, consider industry cooperation in major new technology development essential and the government through MITI often serves as a coordinator. They are less concerned with the domestic anti-trust issue than with global competitiveness. Domestic competitiveness is maintained as each company develops products based on the new technology independently. This is just one example where U.S. government/industry relationships are not mutually supportive. Growing competition among all types of industries has produced a competitive global business environment in which business and national frontiers become less significant. In other words, competition is no longer confined to narrow economic or business sectors or geographical regions, but is now global in scope and often crosses traditional sectoral limits. This change is due largely to rapid technological change that often offers opportunities for the use of technology in unrelated sectors, such as the use of laser technology originally developed for measurement and instrumentation in areas such as communications and printing. These changes in business environment have had a profound impact on the management of manufacturing and service organizations as well as business in general. GOVERNMENT FAILURE The government has failed to provide both economic and moral leadership for the nation by its inability to establish meaningful economic and social policies and by its inability or unwillingness to stay the course. In most cases, Washington responds only to crisis and advances short-term or temporary solutions. The present lack of clear economic guidelines and strategic policies is doing great damage to America’s world leadership and competitiveness. Inappropriate interpretation and use of anti-trust and anti-cooperative laws, and the inability of government to rapidly and effectively redirect defense research into commercial technology development where appropriate without affecting security, are hampering U.S. industrial effectiveness and development. At the same time, U.S. industry is required to cover growing social burdens in an increasingly more permissive social environment. This combination of ineffective economic and social government leadership and

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the inability of government to develop long-term economic strategies introduces a major threat to America’s continued economic world leadership. In addition, unlike other governments, the U.S. administration is often seen as adversarial instead of supportive of business and industry. There appears to be basic mistrust of private industry that often causes unnecessary regulation as well as other constraints, which in turn shackle U.S. industry in global competition. Radical changes are required in government/business relations as well as in government involvement in social programs. The government needs to develop and continually update policy to provide effective guidance and leadership to the nation’s business, industry, and people in general. IMPROVING PRODUCTIVITY BY DOWNSIZING There is a question whether downsizing and reengineering really enhance productivity and thereby corporate and national recovery. In the service sector, and particularly the institutional service sector such as education, health care, and law enforcement, investments in restructuring, mergers, computers, and other technology have failed to improve productivity. True, there have been some increases in labor productivity, but at the cost of increased use of capital. Total productivity in the service sector has, as a result, remained constant or has actually fallen. We have reduced the labor input in some cases, but that is all. Downsizing in other words has become a double-edged sword. It increases capital use and squeezes out labor, with a misleading increase in labor productivity. Yet, total productivity may not really benefit unless capital productivity increases are greater than added capital costs. Labor productivity in the US has been rising at 2.2% per year since 1990 or more than double the rate in the previous 20 years. Yet, this was achieved by large increases in investment per worker and large reductions in labor. Similarly, capital or investment has assumed a new meaning. It no longer simply implies capital investments or investments in physical productive assets, but increasingly implies investment in knowledge. Today’s revenues of the software industry are larger than those of the computer hardware manufacturers. As former Federal Reserve Chairman Greenspan pointed out recently, the earning powers of companies like Microsoft, Oracle, Computer Associates, and others, is mainly dependent on their intellectual capital, the investment made in knowledge. Traditional economic performance measures, such as GDP, GNP or productivity, may miss the contribution to the value of output made by the application of knowledge, innovation, and technological change. WELFARE, WORKFARE, AND UNEMPLOYMENT America has the world’s largest welfare system which provides a safety net under those not in the workforce or otherwise handicapped or disadvantaged. In some sectors of American society, whole generations continue to subsist on welfare. Though many attempts have been made to transfer people from welfare to the

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workforce using workfare, training, and various other approaches, the problem has actually increased and labor market prospects for poor, low wage earners have actually declined with the increased use of advanced technology. There are many arguments concerning the benefits and costs of workfare as well as various training programs. The question is really – do such expenditures pay off even if not right away? The answer is usually complex and increasingly wrapped into socio-political arguments. High social security and other employment taxes usually cause an increase in unemployment. So do various constraints on work rules by unions and conditions by employers who increasingly substitute machines and programs for workers. Other factors causing loss of employment are high minimum wages, unreasonable benefits, and unfettered union power, particularly in setting the work place environment. There is no question that labor benefits from organization and that well trained, well rewarded, and well treated labor performs more effectively and more productively. In the end, such labor will also add proportionately much more value per unit of output or per total value for a unit of output and thereby actually provide a larger return per unit of expenditure for labor. But this is not always the case. Attempts to solve unemployment or low employment problems by shortening work weeks or days or by job generating work rules have always failed as they added costs the employer could not afford. They ultimately resulted in an increase and no decrease in unemployment. America had historically a freer labor market than most European countries and therefore lower unemployment rates. Unfortunately labor politics is playing an increasingly important role and if not recognized may become a significant factor in reducing our near total or full employment by forcing employers to reduce workers. But well paid union leaders have no incentives to back off. They do not lose their jobs nor do they have to accept lower wages or less desirable jobs. ECONOMIC AND SOCIAL IMPACT OF LONGEVITY Life expectancy has grown steadily in the last 50 years and now exceeds 77 years for men and 79 years for women in many developed countries, including the USA, which is slightly below those numbers. As a result, the percentage of people above age 65 has grown rapidly as has the ratio of retired people to working people. In fact, if this trend continues there will only be 3–4 working to each retired person by 2020. Under such conditions, normal retirement benefits will be difficult to maintain. In the U.S. retirement age once compulsory in most jobs at age 60, later 62 and 65 has now been pushed to 70 and is not really compulsory in many cases anymore. At the same time, the increase in time required for education or job training has increased significantly. In 1960, the average starting age for job seekers was under 20, but this has since grown to over 23.5, with the vast majority of American youth attending 2- and 4-year colleges and about 22% continuing in graduate study. The average leaving age from a 4-year college is 22.7 years. As a result, the increase

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in retirement age has hardly extended the number of working years of the average American. This particularly if time-off for retraining and on-the-job training is considered as well. At the same time, per capita costs of education and training have increased significantly in absolute and relative terms, a trend that is expected to continue. The increased costs to society of longer educational and retirement periods cannot be borne by a declining percentage of working people. Overall, the ratio of working people to non-working people (young and not working, non-working working age, and retired) is converging on 2–3 in most developed countries and was equal to 2.6 in the USA in 2002. There is a tremendous economic value in many people of retirement age (65–70) who are healthy, have accumulated huge amounts of experience and knowledge, and are willing to continue to work. Unfortunately, most of our laws discourage continuation of work after retirement age. In fact, in many cases people suffer outright discrimination if they dare go beyond the rules or norms. The loss of this to the economy and society is hard to estimate, but can safely be assumed to be large. Not only would it reduce the cost of retirement benefits and increase tax revenues, but it would also add significantly to the gross national product. In fact, allowing people to continue work without penalty could greatly reduce the cost of Social Security, add to the Social Security fund, in addition to the tax and national income benefit. Another important benefit is the use of experience and accumulated knowledge, which the older worker brings to the job. Today the average American spends 17 1/2 years in school, university, and professional training before starting work and another 2 1/2 years on average retraining for a total of 20 years out of a total of 59 years from age 6 to 65. In other words, we work 2 years for every year of schooling and training, which is a rather low return that will only get worse with the need for more and more retraining as technology changes more and more rapidly. Extending working life by 5–10 years by making retirement voluntary after age 65 would become a popular alternative to our more rigid current system. Some may also prefer to retire earlier, when still young enough to enjoy what they retire for and then return to work. Few people are really happy with retirement, particularly if physically and mentally able because they cannot afford to do everything they enjoy all the time for all those years and if mentally and physically unable because they cannot do the things they retired for at all. As a result, many retirees yearn to return to their old life after a few years of retirement but by then their old life is gone. THE TWENTIETH CENTURY REVOLUTION IN TECHNOLOGY AND SOCIAL STRUCTURE The twentieth century was not only the period when we experienced two world wars, each time involving the majority of the world’s population, but also a period of unparalleled social, environmental, and technological progress. Colonialism and other forms of bondage by nations or individuals practically vanished; absolute

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poverty was reduced from 70% to 30% of the world’s population, and per capita food production doubled notwithstanding a quadrupling of the number of people on the earth. The increase in population was fostered by increases in life expectancy that nearly doubled worldwide. This in turn was due to a large extent to vast improvements in health care, preventative medicine, and advances in medical technology. The most important development of this century though was probably globalization that took comparative advantage of the traditional economic forces that encourage production and trade to the limit. We truly made a global village of the world not just in terms of communications but also finance, transport, energy, water supply, education, health care, and production. Person-to-person contacts have improved and thereby improved understanding of the world. Few people traveled beyond their abode one hundred years ago. Today nearly 10% of the world’s population visit foreign countries every year and over 30% have access to international radio or television. All of this obviously has advanced globalization. Companies in telecommunications, finance, energy, water, supply, transport, and manufacture are increasingly merging into multi-national and often global entities to better serve mankind in their respective activities. We are now on the way toward a true globalized world economy. These trends are aimed at achieving greater efficiency and performance as well as better accessibility by developing countries to modern services and technologies. These trends have not been uniformly sustained though, as many fear the effects of globalization on national sovereignty, particularly in developing countries. Most developed countries have or are now forming trading blocs or other large economic units that will further accelerate globalization. Developing countries though may find themselves left out and unable to attain economies of scale necessary for effective competition. Globalization has encouraged larger projects and macro engineering is ever more relevant today when big is considered beautiful and effective. In some cases, macro-engineering projects can solve problems, particularly in transport, energy, water supply, and communications. Much of this was driven by rapidly advancing technology such as computers, satellite communication, high-speed trains, and more. THE MOST IMPORTANT GLOBAL PROBLEM The dawn of the next millennium calls attention to the key problem of mankind, the huge and growing imbalance in wealth and standard of living among peoples of the world. This is not the result of unbalanced resources or lack of access to the world’s wealth, but a much more fundamental problem that cannot be resolved just by changing borders or by mass migration. Many of the poorest countries of the world in South Asia, Africa or South America are well endowed with natural resources. What many of them lack is education, discipline, the rule of law, technology, and a unifying history as well as an integrated culture. They have been ruled by foreign invaders, colonial powers or domestic despots for much of their history. These rulers

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had no respect for cultural borders or historic affiliations. As a result, borders do not define ethnic or cultural boundaries nor do they indicate language or religious frontiers. They are artificial lines drawn by conquerors or dictators. The countries in Europe have joined in an economic union which is designed to increasingly diminish the effect of borders, by allowing all citizens of the EU to live and work wherever they desire, travel and trade without hindrances or duties, and otherwise become essentially citizens of a united Europe with its own European passport. North America, the U.S., and Canada are also moving toward a more liberal North American trading area which includes Mexico and may in future include other Central or South American countries. All this while developing countries in South East Europe, Africa, and South Asia continue their border conflicts as well as ethnic thrives. There are many nations today who share a common language, culture, and history that are not given the right to self-determination, independence, and control of their national territories. The Kurds and Armenians in the Middle East number 25 and 8 million, respectively but only a small minority of Armenians live in independent Armenia, a former USSR republic. There are similar problems in Southern and Western Sudan, Yugoslavia, Zaire, India, Indonesia, Myanmar, Nigeria, and several countries of South and Central America where ethnic people, often a majority in their land or part of the country, are suppressed and prevented from assuming their right to self-determination and self-rule. In many of these countries these people are also culturally suppressed and prevented from using their language, religion or cultural expression. In some parts of the world such as Russia or Yugoslavia, ethnic pressure has resulted in the formation of new national states, which in most cases have become independent nations. But more needs to be done to correct the injustices of arbitrary borders, and rulers imposed for political or strategic reasons without concern for the rights of the indigenous population. The majority of recent conflicts have this as their root cause and until this problem is resolved, there is little hope for peace in the world. Peace cannot be maintained without justice, and all proclamations of human rights are hollow as long as these most fundamental rights are not given. It is curious that borders arbitrarily drawn by politicians or the military become sacrosanct and untouchable – as if god given. It is important to reconsider the borders of the world and make them just. They should represent the facts on the ground and not the arbitrary agreements of rulers or the bounty of conflict. America, built on the voluntary association of many ethnically and culturally different people, does not understand that what works in America cannot possibly work elsewhere – that there are irrational or failed states that must be redesigned if permanent peace is to be attained. We have the liberal view that pluralism is good for any society and that it builds tolerance and cooperation that ultimately results in social and economic prosperity. This concept, however, is not based on historic evidence which shows that pluralism only works when all involved are equally oppressed and desire new beginnings.

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DISCOURAGING JOB GROWTH Portland, Oregon sometime ago imposed a $1,000 per job “growth impact fee” on Intel if it creates too many jobs. This is a new approach to social phenomena. Job growth has been one of the major ambitions of cities and states, not only to reduce unemployment or underemployment with the associated social and economic costs, but also to broaden and increase the tax base. Jobs were assumed to add to local, regional, and national growth, as value created by jobs was in most cases a multiple of the cost of the job. Direct and indirect taxes on new jobs were in general far in excess of the cost of added physical and social infrastructure costs. The Portland action therefore questions not only accepted economic and social policy but also development strategy. For long, policy makers assumed that the cost of unemployment compensation and related costs were less than the costs of employment or job generation. Portland seems to claim that this is not so and that other factors must be considered, such as the sprawl of suburbs which provide affordable housing for new job takers, while the city or location of the job providers assumes new costs of congestion, as well as direct and indirect services. Some cities address this problem by taxing jobs or job takers but the problem is much broader. As noted, all want the benefits of economic growth for themselves as individuals and seldom consider the impact of these benefits on society. Yet, ultimately, we will reach a point when continued prosperity-driven individual consumption of public goods and services will collide with society’s ability to grow goods and services without seriously affecting individual rights and freedoms. We increasingly leave our cities and use them only as concentrated areas of business, entertainment, production, and services. But there is a limit to what cities can do or provide, and in many cases we are reaching the limit. Cities are urban concentrations designed to meet the varied economic, social, and cultural interests not only of their inhabitants but also of those who just work or visit there. Cities derive much of their tax revenues from real estate taxes and as more and more of the city’s users live and pay real estate taxes elsewhere, cities find it increasingly difficult to meet the growing demands of absentee resident users of city infrastructure. Portland’s job fee is probably only the first of many new approaches designed to make city users pay for the services that cities provide. The economic impact of demographic relocation and particularly the huge growth of bedroom communities surrounding city centers have caused a lack of balance in commercial and residential use. This increasingly affects city budgets. Cities have become the employment generators but more and more lose shopping, housing, and often even entertainment activities. They are often ghost towns after dark. Yet they are called upon to provide the services of full activity urban centers without the tax base to pay for them. New imaginative methods of taxation will have to be developed to assure a more equitable burden sharing. The situation is expected to become worse as Internet electronic commerce assumes a larger role and more and more commercial activities are transacted from suburban homes. This would seriously reduce the role of cities as commercial and administrative centers.

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MISPLACED AGRICULTURAL SUPPORT American agricultural policies are supposed to assure a stable, low cost supply of food and to support farm incomes. These objectives are obviously mutually interdependent. Yet, notwithstanding huge government expenditures for price support and other agricultural programs, food prices vary substantially and many farmers are forced off the fields because they cannot subsist on the income from farming. Government price supports do not simply stabilize, but also raise prices of many foods. In a way it is curious that although productivity gains had led to a gradual but consistent decline in world food prices, prices to the consumer should come down as well over time but they do not, particularly in the U.S. It is generally assumed that governments have the duty to assure ready availability of food and water at affordable prices and also a moral duty to help feed starving people in other countries. The policies adopted to assure this and achieve market stability at the same time seem to be ineffective. It is generally agreed by agricultural economists that the cost of protection is high and continues to grow. In fact, Anderson and Tyers [Ref. 11] conducted a study in which they compared the costs of production of the world’s food under extrapolated protection conditions with the costs in a completely liberalized simulated market. They found that farm protection cost each non-farming household about $1400/year in 1990 and about $1800/year in 2000. The total cost of farm supports worldwide in 1990 was $260 billion. They also made the startling discovery that an average American family could have bought its own cow with the money it contributed to American dairy farmers during the decade 1980–1990, a trend that continues to today. Similarly 37% of farm support is actually wasted because of food grown in the wrong place or because it spoils before it reaches consumers. As farm support in the US is linked to production or output, large often-rich farmers usually collect a windfall. In fact, only about 10% of farm subsidies actually reach poor, needy farmers. In addition, the costs of administering farm support adds billions in charges to taxpayers worldwide, much of it to U.S. taxpayers. The findings conclude that without subsidies world prices would be about 20% higher, but this added cost is substantially less than the direct and administrative cost of subsidies. Furthermore, a liberalized market can be expected to be much more efficient both in terms of production and distribution. It would also be much more responsive to changing demands. Regarding the supply of food aid to poor countries, the present system of subsidies with large-scale overproduction and often dislocation of production often provides excess food for ready transfer to developing countries or famine victims. But there are many more efficient ways to assure availability of food aid which are both more economical and introduce meaningful incentives. An important issue is that most of the foods identified as contributing to obesity are subsidized and therefore sold at prices attractive to consumers. In other words, American government farm

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subsidies contribute to our health crisis represented by the obesity epidemic in America. Obesity contributes to major diseases and is probably the major problem of the 21st century. The U.S. leads the world in obesity and by lifestyle example provides a negative leadership model.

NUCLEAR WASTE PERIL AND FUTURE ECONOMIC COSTS As the first nation to explode a nuclear bomb and operate a nuclear power plant, we continue to be faced with the long-term problem of nuclear waste disposal. We have preached the gospel on the ills of nuclear weapons and nuclear power and in fact stopped building nuclear power plants many years ago. Yet the nuclear waste peril continues to haunt us. Nuclear power plant operators, the Department of Energy, and the Department of Defense have used temporary disposal methods for years, most of which were really nothing more than shielded holding sites. Other nations, such as Japan and France, among the largest users of nuclear power generators have developed somewhat more sophisticated disposal methods which we obviously criticized because, though better than what we did, were not safe, long-term solutions. Now come the revelations that we plan to store huge amounts of nuclear waste in a mine in the Yucca Mountains northwest of Las Vegas. The obvious question is the long-term safety and environmental impacts of this massive project. The plan is to dig a network of tunnels starting in year 2010 that will be loaded with cladded nuclear disposal containers. Each container will hold 21–44 fuel assemblies and radiation-shielded trains will move these casks into tubular tunnel sidings. These tunnel sidings will be reinforced with concrete linings. The array of tunnels will be ventilated by two huge air-circulation systems with movable airlocks. Automated mobile radiation leak detection equipment will monitor all the stored casks for leaks. The network of tunnels is planned to be loaded with the most radioactive waste from about 100 nuclear reactors that supply about 20% of the nation’s electric power. After all the nuclear waste is placed in the underground mine it will be closed. But as every 1000 megawatt reactor generates about 33 tons of nuclear waste per year, accumulations of nuclear waste grow at the rate of about 3300 tons per year. There are some concerns that leaks could occur over time as a result of • seepage • container fracture • internal chemical reactions • heat generation, expansion, and cracks • external chemical reactions • tremors The chances of failure and radiation exposure are extremely small. However there are serious concerns that surface (soil, crop, water table, air, and dust) pollution could occur.

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The economic costs of safe nuclear waste disposal of all the accumulated waste in the U.S. alone is estimated to be $50–100 billion, assuming no further nuclear reactors are built and existing reactors are decommissioned when they reach their design life of 25–30 years. Otherwise the costs could escalate to a multiple of these estimates. In addition we have other nuclear and highly toxic waste from weapons and various process plants. At this time all the disposal methods envision temporary and then semi-permanent storage, both of which are not only expensive but pose many unknown hazards. Over 20 years since construction of the last U.S. nuclear power reactor, nuclear power generation is again under consideration. This change in policy is not driven by breakthroughs in nuclear waste treatment or disposal technology, but by the increasing concern with greenhouse effects of fossil fuel power plants and the increasingly high cost of fossil fuels. Many new power plants in the U.S. are now fueled by natural gas and though much cleaner than coal or petroleum still produce significant greenhouse (carbon dioxide) pollution. Furthermore the price of natural gas has escalated even more than petroleum. There is an urgent need to design more effective nuclear plants in terms of investment as well as operating efficiencies. Yet the most important drive must be towards safer and more effective nuclear waste disposal technology. As mentioned earlier, the amount of global nuclear waste is growing rapidly and continued use of “temporary” storage facilities, however well shielded and protected, is simply unacceptable. Ways must now be found to process and reprocess nuclear waste without adding to the global nuclear weapons pile and also to reuse spent nuclear fuel for long term low level power or at least heat generation. At the same time strict international spent fuel inventory controls and inventory condition monitoring must be instituted to assure uniform global maintenance standards. In fact, it would be desirable to make the International Atomic Energy Commission not only responsible for the maintenance of the global spent fuel inventory and its repositories, but also for the development of nuclear waste reprocessing and disposal technology. This would be financed by annual payments by nuclear waste generators, primarily nuclear reactor operators, research laboratories, and military organizations worldwide. RENEWABLE ENERGY USE DEVELOPMENTS Although renewable energy technologies such as wind, hydroelectric, water current power generators, ocean thermal columns, ocean wave, solar, and other resources are well developed and many advancements in these technologies originate in the U.S., comparatively little use of these alternative energy sources is made in America. In part this is probably due to the comparatively low cost of fossil fuels in the U.S., particularly petroleum products. At the same time the impact of the greenhouse effects on global climate, water supply, radiation exposure, and storms is becoming more and more evident. Radical changes in the global environment are now predictable unless damaging greenhouse effects can be reduced, eliminated,

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and hopefully ultimately reversed. The increasing cost of fossil fuels will make alternative energy sources more and more attractive. It is currently projected by the International Energy Agency (July 2001) that fossil fuel and particularly global petroleum fuel consumption growth rates will decline to just 1–2% by 2005. It is also estimated that consumption will level off by 2010 and from then on actually decline. By year 2010 world consumption will reach about 84 million barrels/day (up from 76 million bbls/day in 2001). This will be reduced to just over 65 million barrels/day by year 2025 and 50 million barrels/day by year 2035, at which time petroleum fuels will supply less than half the worlds’ energy needs. It is projected that petroleum will contribute less than 30% of world energy needs by 2050 and become a very minor contributor before the end of the 21st century. In other words, the age of the petroleum fuel that started just before World War II will essentially come to an end. This trend driven largely by alternative energy conversion technology developments will make the U.S. independent of petroleum imports from non-NAFTA countries by 2025–2035 and altogether by 2035–2045. The time table for petroleum import independence could be advanced by another 5–10 years if petroleum exporting countries become even more demanding and increase the price per barrel of crude to $70 per bbl by 2006 and more thereafter. This would accelerate investment in oil production outside OPEC. Considering the total cost of the use of alternative energy production, including the costs of technological developments in wind, ocean/river current, hydro, nuclear, and solar power, show that delivered electric power costs including all depreciation, maintenance, transmission, and other costs will equal those of petroleum/gas fueled power plants by 2005 if crude petroleum and corresponding LNG costs are equal to $40–45 per barrel in 1999 dollars by then. In other words, we are getting very close to equivalence in costs. If we were to add the environmental costs or the cost (penalty) for pollution, such cost equivalency could occur even sooner. Thereafter alternative energy developments should take over rapidly as the combination of economic, environmental, and political advantages drive the introduction of these new technologies. Though initially alternative fuel or energy technologies will be used primarily in electric power generation, rapid advances in alternative power sources in both private and public transportation, communication, and agriculture are expected to result in the replacement of fossil fuel energy by alternative means soon thereafter. Another major bonus will be effective use of waste energy (low temperature heat, etc.). The result will not only be a much needed improvement in the U.S. air and water quality environment, but also major improvements in the U.S. balance of payment and personal health. Greater use of renewable energy will have a major impact on the American way of life, while improving our quality of life. It will reduce our health care costs and improve standards of living while assuring better income distribution. Personal transport and other services will become more convenient and affordable, while public transport, education, health care, and other services will become more accessible and ultimately completely free.

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IMPACT AND FUTURE ROLE OF THE INTERNET Computing and telecommunications technology have had an impressive effect on economic growth, particularly in the U.S. and other developed countries. The impact has been sustained over nearly 30 years now by facilitating scientific research, engineering design, computer-aided and integrated manufacturing, data base management, management information systems, and all kinds of transactions. The impact of technological change and technology-driven improvements on productivity were recognized nearly 50 years ago, but for many years contributed only in a slow discontinuous fashion. Even though computers have become common tools of management and commercial transactions, their impact on society at large was slow. The recent (1992–2000) sustained and unprecedented U.S. economic boom must therefore be explained by a new technological revolution – not the introduction of new technology but by new methods of linking, networking, and use of computer and information technology. The Internet has tied together millions of computers worldwide into a universal network of communication, commercial, data and information exchange, transaction and trading channels. It has, as a result, improved the productivity and efficiency of nearly everything from delivery of educational, health care, and financial services, access to huge continuously updated data banks, entertainment from visual to audio transmittal, data, verbal and video communications, to all kinds of commercial, trading, financial, and auction transactions. As a result, the world of manufacturing, commerce and transactions has changed radically. Companies are saving billions of dollars in information management, distribution, sales, service, delivery, and more. We are only at the beginning of this revolution that may change not only the way we transact or do business but also how we deliver all kinds of services. The Internet is the culmination of computer, switching, storing, and delivery technology evolution, which finally permitted effective use of electronics. The Internet has spawned development of a whole new world of electronic devices that finally permit us to make full use of computing, storing, and communications technology. In recent years, the majority of all capital investments of corporations in banking, manufacturing or services have been in information technology. Similarly, according to a report by the U.S. Department of Commerce [Ref. 12], information technology advances contributed more than one-third of the growth of the U.S. economy in the period 1995–2003. Airlines have been able to reduce their costs of booking and ticketing by a third using electronic ticketing. Similarly large and small companies alike save millions in reducing telephone and other customer support costs using the Internet. Electronic mail has reduced not just mailing but also paper, typing, and handling costs. Automated markets connect buyers and suppliers and distribution and transport providers as well as sellers to consumers. The Internet has made just-in-time (JIT) delivery a feasible reality, cutting inventory and obsolescence costs. There have been large improvements in efficiency

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in securities and financial transactions by getting close interactions between buyers and sellers. Airlines, theaters, hotels, and other service providers are now able to attract buyers to their unused capacity by offering temporary lower costs or an auction-type sale of surplus capacity. Because such Internet transactions are in real time, they are able to control the sales. Education and health service providers are now able to deliver advice and services directly by interactive tele-medicine and distant or tele-educational programs. All of this not only improves transactional and delivery efficiency, but also the timelines and relevance of information or service delivery. It permits more personal service delivery. We are only scratching the surface of the Internet’s potential. It will in the near future radically change the way we do business, provide services, and obtain information. It will allow people to transact much more without transporting or moving themselves or goods and supplies. Our world will become one in which we can transact or perform most things right from our home, including work, buying, selling, entertainment, education, and even socializing. In a way, it may be a frightening future with less inter-human contact and direct communications; yet a world which provides each of us wherever and however capable with equal access to opportunities. Shopping malls may become exhibition centers as people only look at but do not purchase merchandise there. Universities may become centers for the development of courses, curricula, and presentation, but not communities of students and teachers, and hospitals may provide much of their diagnostic help via the Internet. Banks and stock exchanges are already far advanced towards becoming electronic market places, and it is highly likely that others will follow quickly. Modern telephone connections are increasingly being replaced by high speed, high capacity cable and satellite services with constant Internet connections. Similarly, future Internet developments will not only include message waiting, but also multiple parallel message receiving and dispatching. Buffers will allow large volume messages to be temporarily stored for instant release when passages are cleared. Instead of the annoying multi-level computer menus which waste callers’ or customers’ time to reduce supply or service provider costs, Internet services will instantly connect customers to a multi-level service provider which answers most, if not all, questions, is continuously updated, and can perform practically all transactions without a human operator. Instead of multi-level menus, single level vast array menus will instantly recognize customers’ requirements and respond in an organized logical manner from identification of need, supply-demand match, and transactional details to closure, confirmation, and delivery. This will not only speed up transactions but also significantly reduce administrative marketing, processing, and delivery costs. It will not only reduce inventory holding costs of physical goods and materials but also those of service providers. Similarly money transfer delay costs will be eliminated by nearly instant electronic transfers. Also information or data search, assembly, evaluation, test, and delivery will not only be nearly instantaneous but will allow many multi-level data bases to be evaluated simultaneously to extract the required information.

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The shop fronts, administrative offices, classrooms, and even engineering design, legal, and medical consulting offices of the future will not be physical spaces as they are now, filled with people who inefficiently perform various functions, but the services they supply will all be delivered instantly by the Internet with most functions performed automatically without any or at least real time human participation. We will have access to all these services, consultations, and information at any place and at any time. The impact on economic productivity is hard to project. Not only will we be able to reduce or eliminate nearly all inventory losses and assure real just-in-time delivery of goods and services and have access to any information or advice required at any time and place, but we will be able to assure a nearly perfect match of supply and demand, high capacity utilization, and just-in-time technological change which eliminates obsolescence. STICK BUILT HOUSING When I first arrived in Los Angeles some 30 years ago, I rented an apartment in a duplex home in Santa Monica, California, a nice neighborhood of singleand double-family houses and small apartment buildings. It all looked very trim and solid. I was fascinated though to observe the construction of a new multilevel apartment building. Two-by-four inch lumber sticks at one-foot pitch made up eight-by-eight foot structural frames that were erected on a poured concrete foundation. These frames in turn supported a framed floor deck for the next floor and so on. In other words, a multi-level residential building was nailed together from sticks. Interior and exterior panels of gypsum, plywood or some composite materials provided the surfacing. The spaces between the sticks in each frame were usually filled with insulation and wiring, piping and ventilation ducts were similarly installed in these spaces. As such flimsy structures went up, I could not help but wonder how a grand piano would be supported on an upper floor or how such a structure would resist an automobile or similar vehicle impact. This type of construction is used in the vast majority of residential homes in America. Notwithstanding high labor costs, most houses even when identical are nailed together stick by stick or prefabricated panel by panel. There is very little steel or concrete construction used in U.S. residential housing. While construction materials are or used to be cheap, the cost of labor in American housing construction consumes a much higher percentage than elsewhere in the world. More importantly though is the strength of such housing. Wind storms, hurricanes, earthquakes, fire storms, and other natural disasters to which many parts of the U.S. are prone destroy an inordinately large number of dwellings, many of which would survive such natural furies if they were built more solidly. Similarly, residential home fires are many times those experienced in other countries where masonry construction is more popular. A steel and concrete house has a substantially higher probability of survival in a storm, fire or earthquake and damage, if any would be much less. The construction

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costs of such houses would be comparable if not cheaper and their maintenance costs much lower. Conservative estimates of annual damage costs caused by natural disasters to residential housing in America are between $20b and $40b. A similar amount is spent on home maintenance. It is estimated that more than 65% of these costs could be saved if different methods of construction were used. Historically the methods of construction were based on availability of local materials and abundant local labor, wood, and carpenters that were readily available in most parts of America. Yet today, when most building materials are transported over long distances and construction labor is no longer abundant and cheap nor is there a need for provision of local employment in most areas, this approach to residential housing construction appears outmoded and uneconomic in most parts of this country. If brick, concrete or steel were more extensively used, the potential savings in new housing costs could ultimately exceed $30 billion per year, excluding the huge costs in loss of human life, injuries, and temporary shelter. It may also make residential housing more affordable and maintainable. Other advantages could be savings in heating and cooling costs, surface coating and maintenance costs, and even personal security. It is curious that while U.S. construction of buildings for commercial purposes is efficient and uses long-life materials, much of the residential housing industry is largely stuck in the past. AMERICAN INCOME DISTRIBUTION American income distribution was distorted by the extended prosperity between 1990–1999 with the gap between poor and rich widening and the middle class contracting. While median annual family income in America has increased gradually (in constant 1994 dollars) between 1969 and 1989, it not only has leveled off now but also experienced an actual decline in subsequent years 1990–1999 as seen in Figure 5. The rate of increase of the 90th percentile was much greater and only recently leveled off, while the lowest 20th percentile was essentially flat and in fact started a gradual decline in 1979. The results show a growing income disparity that indicates a widening gap both between the 80th percentile and a median income family as well as between the median and 20th percentile family. The ratio between the 80th and 20th percentile has grown from 2.75 in 1969 to over 3.68 in 1994 and 4.27 in 2003, this notwithstanding more extensive and more generous social programs. This trend is of increasing concern because it affects the middle class, the backbone of our free market economy. From a country where practically everyone considered him/her self to be a member of the middle class, we now note distinct clustering of low, middle, and high income people. It is true that the 2th to 80th percentile gap is growing and was in 1998 over $54,000 which is nearly 1.4 times the median family income in the U.S., a historic high. The long economic growth America was experiencing until 2000 continued to expand this trend, but the recession in 2001 is expected to have caused an actual contraction of the middle class. An important phenomena is the newly

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Terms defined: Median income - half of a group earns less than the median income, half earns more. Average income the sum of all incomes divided by the number of families. 80% of all families earn less than the 80th percentile; 20% of all families earn less than the 20th percentile. Notes: Most measures of income dipped from 1989 to 1994 because of a 1990–91 recession in the U.S. economy. In 1969, census tracts 3839.02 and 3939.01 were one tract. Source: Center for Labor Management Studies at Northeastern University analysis of US Census Bureau figures. Figure 5. American Income Distribution

rich young tycoons. Young people who became rich at a very young age through their involvement in high tech, often Internet start ups, as investment bankers or analysts or simply entrepreneurs. As a result, there is now a whole new young upperclass which made its money not by accumulation or rewards during a long career but nearly instantly during their early years by advancing an idea, involvement in a successful start up or role in a high leverage or bonus earning financial position. The interesting part of this phenomenon is that many of these young newly rich made their fortunes not as a result of a successful venture but quite often a spectacular but exciting failure. Particularly Internet start-ups often attracted huge amounts of venture and investor capital, even when they did not offer solid business plans or revenue/profit potentials. The sheer excitement of the ideas quite often gave them access to otherwise cautious markets. The result is a rather radical change in the wealth distribution. Where previously earned versus inherited wealth could largely be correlated with age and experience, such factors play a declining role now. The reverse unfortunately can also be recognized among the poor where now an increasing percentage of poor are among the elderly. This trend may be accelerated if proposals to retard the retirement age to 68 or even 70 years, particularly for the receipt of Social Security benefits, is enacted, this obviously to assure the continued viability of the Social Security System under conditions of greater longevity and a lower number of contributors for each benefit recipient. With our low savings rate, many retirees have few other resources and must subsist on Social Security benefits alone. The system was never set up for this purpose, but this reality is now catching up and may cause large social dislocations and an increasingly poor elderly population. ENVIRONMENTAL PROTECTION QUAGMIRE Americans are very much concerned with the quality of the environment and demand clean air and water. At the same time, we somehow take such conditions for granted and are usually unwilling to make any sacrifices or even slight

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changes in our lifestyle to help assure the quality of our environment. We consume over one-quarter of the fossil fuel burned on earth, though we are only about 5% of the world’s population. We recycle very little and do it largely ineffectively. We consume on average four times the material resources (steel, aluminum, paper, etc.) per capita than the world average. We waste huge amounts of food and other renewables without considering the unfulfilled needs of others. At the same time, we are not even trying to contain our unreasonable consumption by taxation or even changes in lifestyle. In fact, the growth of our gasoline consumption, as on example, has actually accelerated with increased popularity of SUVs that consume twice as much gasoline as the traditional family cars they usually replace. Though we are the world’s largest polluters, we, at the same time, have one of the most complex environmental protection systems which involve government at the federal, state, and local levels. There are numerous federal, state, and local agencies supposedly charged with the protection of the environment which have actually developed into often opposing and inconsistent bureaucracies more concerned with the environmental laws and permitting processes than the actual protection or improvement of the environment. For example, coastal management issues such as say dredging or deepening a navigational channel for a U.S. port involves at the federal level • U.S. Army Corps of Engineers • U.S. Coast Guard (Department of Homeland Security) • U.S. Department of Agriculture (Fish and Wildlife) • U.S. Department of Commerce (Marine Fisheries) • Environmental Protection Agency • U.S. Department of the Interior and possibly others. At the state level we usually have • Environmental Protection Agency • Coastal Zone Management Administration • State Fisheries Department • State Economic Development Department • others Furthermore, there are usually numerous local agencies, interest groups, community organizations, and others that are involved in ruling on or permitting of environmentally sensitive projects. The problem is lack of standards, coordination and consistency in the requirements of all the agencies even among say federal agencies. As a result, it is practically impossible to meet the requirements of one agency without infringing on those of another. The time and money spent on the environmental approval process has sky-rocketed and now constitutes a major financial and schedule obstacle to many economically and environmentally desirable projects. In many, project time and money spent on bureaucratic documentation exceeds that spent on surveys, engineering, and design. For example, the preliminary Environmental Impact Statements (EIS) proposed for a recent port project for both federal and local EPAs, which only reported known facts and did

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not involve any surveys, investigations or analysis, cost in excess of a million dollars each and consisted of 1200 pages of largely repetitive or readily available information. Instead of spending money on environmental improvements or remediation, more and more is spent to feed an increasingly bureaucratic, self-serving process that contributes little if anything to the maintenance or improvement of the environment. In fact, our environmental protection establishments have become completely unwieldy and lack not only focus on their primary mission but are often incapable of making effective environmental cost-benefit trade offs. As a result, many projects with major and often overwhelming environmental benefits are rejected because of minor and often inconsequential environmental costs. Not only is there a lack of rational evaluation, but the approval process has become mired in bureaucratic procedures and inter-agency turf assertions. As a result, costs and time delays resulting from environmental assessments or approval processes today often outweigh the cost and time required for technical, engineering, and construction or procurement. This quite often not only reduces or eliminates the environmental, economic, and social benefits of projects but also causes built-in obsolescence. There is no question that America causes more air and water pollution per capita than any other country in the world and that our pollution laws, particularly relating to air pollution, are extremely lax. Furthermore, low gasoline and other fuel costs encourage extravagant and wasteful use. Use of SUVs for example for basic often-single person personal or commuting travel is a ludicrous example of waste. The same applies to domestic energy use such as heating and for home appliances. We overheat and undercool poorly insulated homes and office buildings, this again largely because energy costs are so low as to make insulation economically unattractive. Greenhouse emissions are only a part of our environmental malaise. We discharge more pollutants into our streams, lakes, and coastal waters than any one else on a per capita basis. Similarly we recycle less plastics, paper, aluminum, etc. than most industrialized countries. At the same time, we continue our vocal attack on other countries and criticize their lack of environmental enforcement. The time has come for us to look in the mirror and clean up our own house not by passing new environmental laws and enlarging an already ridiculously large, varied, and conflicting environmental permitting and regulating bureaucracy at both the federal and state level, but by providing real and meaningful economic incentives and leadership in environmental protection. Alternative renewable energy sources are on our doorstep and efficient and economically attractive recycling is feasible for most materials. To assure use though may require some changes in organization, lifestyle, and priorities. It is the government’s duty to provide the lead and incentives for its citizens. It must become a leader and not just barricade itself behind bureaucratic rules and regulations.

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THE AMERICAN WORKER Americans work more hours per year than workers in any other industrialized country do. According to the International Labor Organization (ILO), a United Nations agency headquartered in Geneva, American workers averaged 1966 hours in 1997 compared to Japan Australia Spain U.K. France Germany Sweden Norway

1889 1866 1809 1731 1656 1560 1552 1399

hours hours hours hours hours hours hours hours

In other words, the average Norwegian worker worked only 71% as many hours as his/her American counterpart. While working hours have increased in America by nearly 12 hours/year every year since 1985, the number of working hours in almost every other industrialized country decreased during the same period. At the same time, recruiting costs in America average 13% of the annual salary of employees, which is somewhat higher than that in other countries. This is largely due to larger worker turnaround. Americans outproduce workers in other industrialized countries by an average of $10,000/year not only because of more working hours but also because of larger hourly productivity. Notwithstanding this higher output per worker or because of it, more and better paying jobs are being created in an ever-escalating spiral. Worker productivity growth has outstripped increases in worker costs in recent years and therefore contained any inflationary pressures. At the same time, some countries such as France are trying to increase job generation by curtailing the work week to 35 hours/worker, a rather short-sighted approach which can only increase inflationary pressures and reduce worker productivity. The U.S. at the same time has not only been able to maintain a low 4.1–5.0% rate of unemployment (1994–2001), but at the same time annually admit and absorb large numbers of legal and illegal immigrants which are estimated to have averaged 0.3–0.5% of the U.S. population and about 1% of its workforce. The brave new high technology world was expected to generate huge new demands for labor notwithstanding the fact that much of the new technology is labor saving. The reasoning was that it would bring many more demands than job replacements. At the same time, many, particularly labor leaders, opposed new technology introduction claiming that it would take jobs away. The U.S. Bureau of Labor statistics now projects 151 million jobs for 2006, with only 141 million employed or job seekers. In other words, they predict a 7% labor shortfall (2000). While most of these will be in skilled, high technology jobs, many basic service and manufacturing jobs will also be generated and go begging. More and more people will work at home, use work flexible hours, work several jobs or work as independents. The fast moving changes in technology are going to radically change the traditional work place as well as the traditional employment or work relationships. Unlike the

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dire predictions of a few years ago that downsizing, outsourcing, and technological change, the principal responses to re-engineering, will result in large layoffs and unemployment, the opposite actually occurred. For every job lost in downsizing, nearly two jobs were created by outsourcing and new job or work creation. This trend is expected to continue notwithstanding short-term employment downsizing in 2001, particularly by high technology firms. In fact, even with large-scale layoffs in 2001, the percentage of unemployed remains near historic lows. The composition of jobs in the future will be distinctly different not only in job content and skill requirements but also in job organization and performance. More and more jobs will be stand-alone jobs which can be performed anytime and anywhere. This not only because of ready IT access and multi-modal real time communications, but also because workers at all levels will be delegated more and more, if not all, the responsibilities and decision making powers related to their job. Another issue is that workers will continually be encouraged to upgrade their skills and knowledge. Long-long education, in other words, will not be largely reserved for professionals or professional workers but offered to all workers. This way the whole economy will be able to maintain its technological competence. AMERICAN EDUCATION American schools are becoming the major drag on the American economy. High school students’ competence continues to drop in relation to achievements of students in Germany, France, Japan, and many other industrialized or even developing countries, particularly in math and science. There are many reasons for this, but one basic reason is that American students go to school on average only 180 days per year, much less than students in Japan (243), Germany (240), Denmark (200), and many other countries. In 1994, a U.S. Federal Commission found that high school students in Japan, France, and Germany received on average twice as many hours of teaching in core subjects such as math, science, and language as U.S. students. Some American schools recognize this deficiency and are extending the school year, but the number is small. There are serious questions if lengthening the school year would be enough to close the achievement gap. There may be a need to improve teacher qualifications, change school curriculum, develop better student and teacher incentives and develop a different school environment. There is also the issue of costs of extending the school year and improving learning. While a longer school year would make better use of existing infrastructure, it may add some salary, air conditioning, etc. costs. Also many claim that it would interfere with the American tradition of long family summers. On the other hand, fewer American families do take long summer ‘family’ vacations, this partly because fewer Americans are working under traditional working contracts. The number of people working at home has doubled every 10 years since 1970 and is now over 5 million or about 4% of the work force. Most of these people work as independents and do not take long vacations. More important though is

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the fact that in an increasing high technology economy, there are fewer who work traditional 5-day a week 9–5 jobs, as most technology jobs are performed on a very flexible schedule. Also students, particularly high school students, no longer take part in long family vacations. They often have their own schedules which in many cases involves not just summer jobs but also various entrepreneurial activities in programming, the Internet, and more. The increasing technological gap between American teenagers and their parents has a definite impact on joint or family leisure time and particularly family vacation activities. Fewer American teenagers spend their summer vacations with their parents or family, but instead devote their time to friends, cyberspace, and related activities. Although American primary and high school students are mostly computer and Internet literate and in fact often excel in programming and computer skills, school curricula as well as delivery systems take scant advantage of the resulting opportunities for better teaching, subject, and knowledge delivery. In fact teachers in America in general do not share classroom experience. They do not consider teaching as an evolving and ever renewing craft but as something “once learned, always known” gift. They keep their teaching methods to themselves and usually do not visit or learn from each other, and in fact jealously guard the privacy of their teaching. Teachers keep to themselves or to their “classroom” and do not share a larger joint or team room. This is unfortunate in the Internet age. Unlike medical doctors and many other professionals, teachers do not regularly upgrade their skills or knowledge. They may participate in discussions or seminars on teaching methods, but seldom in basic knowledge-enhancing programs. This is particularly dangerous at a time when rapidly changing technology and knowledge base often makes much of their prior knowledge obsolete, this not only in mathematics and science but also biology and even social sciences. Their computer skills are often inferior to those of their own students who, as a result, are better equipped to surf the Web and extract information. This in turn puts teachers at a distinct disadvantage in their classroom. More money, better and more teachers, and rebuilding or repairing of our schools is not going to improve education standards or learning, particularly of the children of our poor. School meals and support with clothing are not going to eradicate poverty and improve the dismal environment in which children of our poor or otherwise disadvantaged find themselves. What is needed is a radical structural change in the basic American system of primary and secondary education in the method of delivery and the relation between the educational and social system, in other words the American family. It requires more discipline, less bureaucracy, greater teacher involvement in the life of their pupils, and complete elimination of schools as local political power plays. It requires real involvement of parents, of the family, and of the social environment. It is well established that American students do not achieve the educational levels of those in other industrialized countries or even poorer developing countries. Their reading, mathematics, and science skills are usually well below those achieved

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by their equals in Europe and East Asia. Poor children certainly need a change in their environment which usually includes no books or even newspapers, no discussions or even social interactions with adults or serious conversation with anyone, even peers. Their environment is often limited to a very narrow selfdefeating community. They have neither challenges nor incentives. But children of American middle or upper class families are by and large not much better prepared and similarly often suffer under lack of an intelligent and supportive family environment. They do not suffer under physical neglect but often receive little intellectual stimulus, encouragement or incentives. Their role models are more often than not financial or economic success stories not intellectual achievements. Their time will be mainly spent in using the latest technology which most often offers little intellectual challenge. Even computers have become more a good than a tool for educational and intellectual advancement. It is more a game than a challenge. There is a growing need for a radical change in the American educational system and particularly in its schools. Not only do we need more uniform standards and content nationwide, but methods of grading and advancing students must also be made more uniform. We can no longer afford to advance failing students ‘so as not to injure their self esteem’. To me this argument should be rephrased to ‘not identify incompetent teachers’. Many of our universities now provide remedial high-school education during their freshman year, wasting at least a year’s worth of their students’ time and money. We have a bright generation of young Americans who benefit greatly from access to computers and the Internet, but are often left unchallenged by their school programs and teachers. We spend more than any other nation for basic education ($5,950 per student average nationwide, 1999) without delivering world class education to our children. The fault is not only with the system as described above but also with the budgeting priorities of our school systems. Expenses for prestige sports (football, etc.) nearly always receive priority over basic educational expenses. In fact, less than half the operating budget of most school districts goes for education related expenses such as teachers, teaching materials, libraries/books, and related costs. This must be changed if future America is to be able to maintain its economic and standard of living growth. Equally important is the need to prepare our young for the great changes in lifestyle, working, and commerce in the future America in which the promises of our advancing technology bear fruit.

LAW ENFORCEMENT COSTS We now spend more than one trillion dollars a year or about 13% of GDP on law enforcement and related public safety services, yet neither our streets nor our homes are by and large safe. In fact, while crime used to be largely committed in our cities, now suburbs and rural communities are as prone to suffer crime as urban areas

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Many of the crimes in the U.S. are drug related. Nearly forty years since starting our war against drug trafficking we are further from eradicating this curse than ever before. We fight the drug war abroad, primarily in South and Central America, but much of the drug trade now originates in Afghanistan, Burma, and Central Asian countries. Nearly half of those in U.S. jails are incarcerated on drug-related charges. It is estimated that U.S. costs of fighting drug crimes as well as the cost of incarceration of drug criminals costs the U.S. hundreds of billions of dollars a year. In other words, we probably spend more on fighting drug crimes than the total value of the U.S. drug trade. Surely there must be different ways to help eradicate this plague. Radical solutions such as adopted by Singapore which enforces capital punishment for drug traders may not be acceptable, but we do need greater disincentives for drug trader than currently enforced. Punitive damage awards have become a major direct and indirect cost to the American economy. Not only have cases and resulting awards spiraled out of control and caused a huge cost to American businesses, households, individuals, and ultimately society, but the direct costs of protection, prevention, and insurance as well as the indirect costs of loss of time in responding to claims as well as investigative and other costs are spiraling up at an even higher rate. The reasons are that it is not sufficient to respond to damage claims, but it is now necessary also to rebuild image, pacify interest groups, and re-establish media support. Punitive damage awards usually go far beyond reasonable compensation for real or imagined damages today. In even more cases, they go well beyond the call of justice. A large proportion of damage claims are not initiated by the real or imagined “victim” but by trial lawyers, many of whom now specialize in damage claims. It is increasingly common to have punitive damages awarded for proven inadvertent accidents where fault of any sort could not be proven. In today’s regulatory environment which imposes criminal penalties on contravention, much of punitive damage litigation does not improve safety, correct wrongs or compensate for actual direct and indirect damages, but offers lawyers and complaintants opportunities to milk the system which usually means our communities and our economy. Most punitive awards bear no relationship to damages nor do trial lawyers’ fees to fair compensation for work done. Defendants in such cases do not have the basic protection that even criminals enjoy. A preponderance of evidence and not evidence beyond reasonable doubt is required and there is no presumption of innocence until proven otherwise. There are no rules or guides to the jury regarding appropriate levels of punitive awards nor a maximum level. The result is usually an award level proportional to the depth of the pockets of a chosen, not necessarily most guilty, defendant. There are no limits on attorney contingency fees and class action suits against wealthy defendants have therefore become popular. The result is often that the major if not only beneficiaries are the plaintiff’s attorneys. This had led to huge numbers of frivolous claims. Losers are not required to pay even the legal costs of the defendant and attorneys have therefore little to lose in filing such claims.

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In a class action suit brought on behalf of some flight attendant who claimed illness resulting from second-hand smoke, defendants settled for $300 million for second-hand smoke research and $49 million for the plaintiff’s attorneys, with the plaintiffs receiving nothing. The problem though has many more far-reaching implications. It stymies research, delays the marketing of new technology and products, removes important and useful product, processes or services from the market, adds significant costs for insurance, etc., and in general delays progress. At the same time, there is little if any evidence that it improves safety and the well being of society. As matters now stand, every misfortune or even perceived or made-up damage is cause for a law suit. The result is that torts extract money from the economy to benefit mainly a small group of lawyers who contribute nothing to society. There are many other distortions of our law enforcement system, which hurt the economy without significantly, if at all, improving public safety and well being. Among these is our parole system, which is not only lenient but in many cases subverts the intent of the law. More than 70% of those incarcerated for violent crimes are repeat offenders. Their release, usually on parole, not only endangers public safety but greatly increases the costs of law enforcement. We need a system where a sentence is a sentence unless misuse of judgment is proven. Similarly, minor crimes such as drug use and others which did not endanger public safety should be punished using economic penalties, not incarceration. These can be effectively enforced to the benefit of society. Law enforcement and security go hand in hand. Security though has more dimensions and requires different approaches. It has become a serious issue affecting all levels of society and all locations. Assuring security is much more complex than law enforcement as the perpetrators have much more complex agendas, use different and often highly lethal weapons or methods, and are irrational in their exposure. In fact suicide has become an important weapon of terrorism. Weapons of mass destruction are often sought by extremists among them and have on occasion been used in terrorist acts. U.S. law enforcement is woefully inadequate to deal with terrorism in an effective way and is quite ineffective in dealing with drug crimes. The U.S. law enforcement system is highly fragmented in the intelligence, enforcement, and jurisdictional or legal areas. It is amazing that each is handled by a whole array of federal and local intelligence agencies, law enforcement organizations, and court systems that cooperate rather loosely if at all. In fact, there are many instances where turf battles prevented effective pursuit of major crimes, drug smuggling, and even terrorist acts. This is a major issue at a time when terrorism has become a most dangerous threat, particularly after the September 11, 2001 attack on the World Trade Center and the Pentagon. The Patriot Act and the establishment of the Homeland Security Department resolve some of the issues of intelligence and law enforcement coordination, but the major gaps persist. In fact, this new department has so far failed to effectively coordinate most intelligence and law enforcement functions.

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IMMIGRATION AND THE FUTURE OF AMERICA America is a country of immigrants. Less than one percent of its population are descendants of indigenous people. It has thrived as a melting pot of people from many countries, with different languages, religions, cultures, skills, and preferences. It achieved success by providing freedom and opportunity for all willing to work for their prosperity and the common good of the Union. This trend is continuing and America is admitting more immigrants than ever. It also absorbs an increasing number of illegal immigrants or temporary workers who overstayed their visit time. But there is now a change that may affect the long-term development of America. While immigrants in the past were driven to U.S. shores not only by desire to improve their economic conditions but also by a search for political and religious freedom, as well as a desire to escape restrictive or oppressive environments, todays’ immigrants are predominantly pure economic refugees. This narrow objective affects their willingness to adopt the culture and values as well as language of their new home country. In fact many, particularly Latin immigrants, insist not only on retaining their culture and language but also demand that the Spanish language and culture be used in schools, business, and government in the U.S. While America always encouraged cultural, religious, and linguistic diversity, and various immigrant groups have maintained their identities in special urban sections, they were all united in accepting the basic American English culture and the values built up by more than two centuries of applying our universal constitution. This is now under attack and we may be moving from a multi-cultural, multi-religious, open society to one that provides special linguistic, religious, and cultural concessions to various groups. Such Balkanization of America may seriously impact on the unity and purpose of the United States as envisioned by our founders. But it also may affect the spirit of cooperation, freedom, tolerance, and understanding that is so uniquely American. ECONOMIC PROSPECTS AND CHALLENGES America has all the opportunities and resources for a prosperous future. It is the unchallenged economic leader of the world and dominates world trade. Its currency is the staple of exchange and its markets dominate world markets. It is the technological leader which sets technological standards in computing, information technology, communications, pharmaceuticals, diagnostics, armaments, and more. It has a highly productive workforce and ample domestic resources. Most importantly, it is the world financial center with a GNP which is nearly one third of the world’s total product. Yet with all of these, America may face major economic challenges in the next few decades. These will largely be brought by the demands of a completely new economic world driven by radical changes introduced by new technology, a world of electronic delivery of government, health care, educational, financial, commercial, and other service information; a world in which personal face-to-face and paper transactions will be largely replaced by electronic paperless transactions.

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In this world America, as the technology leader, will have many new prospects, yet also confront many new challenges; not the least of which will be the challenge of transforming a multi-cultural society from an open, free, and mobile environment into a brave new world of equal access but technologically-driven impersonal networks. New concepts of technological democracy will have to be invented which recognize the individual as the ultimate arbitrator, but also recognize that interpersonal relations and communications will be highly affected by new technologically supported decision management systems in which the individual is the arbitrator but not the implementer. New technology will not only affect how our government and institutions work and interact with the public in the future, but also how business is done, goods and services are produced and distributed, and most importantly how our society operates. Social and interpersonal interactions will be quite different in both form and substance. This may affect the structure of society down to the family level. The way people communicate has already changed quite radically. In future, it may also influence our approach to the expression of compassion, love, gratitude, disagreement, objection, and hate. New technology not only offers new venues for the expression of feelings, but also how to communicate feelings. All of this may affect societal developments. At the same time, this new world in which America is the undisputed military leader with global powers and military technology second to none poses a serious danger of strategic overreach where America not only becomes the world’s policeman and peacemaker but also the adjudicator and thereby imposes its rules and values on others.

CHAPTER 4

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The technological revolution, which has engulfed the world since World War II, has brought radical changes to the way we design, manufacture, transport, communicate, trade, and deliver services. It has also affected international relations and changed our concepts of a post- industrial economy. Yet with all its successes it has failed to make often meaningful contributions to improvements to social interrelations, social welfare, universal health care, international and intra-national relations, poverty remediation, global literacy, income redistribution, and most importantly global peace. The reasons appear to be that technological change was largely introduced without any consideration for the associated requirements for change in social structure, interpersonal relations, institutions, and political systems. In fact, technology simply marched forward, leaving much of society well behind. Changes in work content and the workplace environment to be successful require meaningful changes in social systems, education, and interpersonal behavior. It is therefore not surprising that so many imaginative electronic and Internet businesses and other new technology- based ventures failed abysmally. They only considered the technical and sometimes also the commercial side and benefits, ignoring the social, societal, and human implications or the need for a change in social and human behavior and values, to make the new ventures succeed. The result was a short lived infatuation which introduced new ways to trade or purchase services, toys (e-toys), groceries (Web Van), books (Amazon.com), automobiles (Autobytel.com), and more. Many of these Business-to-Consumer (B to C) electronic businesses have gone out of business or are in severe decline after just a few years. Some like eBay, an electronic auction business, were original and unique enough to attract sufficient business and thrive. Wireless communications, computers, personal digital assistants, digital photography, laser video and sound reproduction, internet, among others are all technologies which attracted wide public use in little time, this not only because of the novelty of the technology but its convenience and range of uses. People in general considered these as conveniences which made their everyday life simpler and offered them many new personal and economic opportunities. Many in developed 129

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countries recognized their commercial value. So while these technologies rapidly penetrated business as well as society, it was only those, which were organized as effective businesses and which make full use of the new technologies succeeded. Individuals or society were, as noted, interested in technology to improve upon traditional ways of doing things and for more effective interpersonal communications or transactions. While at first B-to-B electronic commerce was perceived to have a better chance of success than B-to-C electronic commerce, this soon changed and a growing percentage of retail business is now done electronically. The new technology not only affects how we are performing but more basically what we are performing. In other words, unlike other periods in human development, it is not only designed to improve productivity and basic communication processes but questions the way we do things and communicate. As a result, it forces us to reevaluate or eliminate many of our business, production, operational, and social processes. Similarly, in services it not only tries to better their delivery but also often offers radical simplification and efficient improvements in their competence and delivery. It today affects all aspects of our economy and is now beginning to influence the structure of government, business, institutions, and even family. Much of this as a result of the reversal of insight which has long been associated with experience and seniority, but is now more prevalent in people with technical courage, curiosity, and entrepreneurship. The potential effects of these developments on the future of America and the rest of the world are profound. While in the past 100 years and particularly the past 50 years, America has been able to lead the technological revolution and introduce as well as use new technology without any radical changes in its social, government, institutional, and economic structure, this may not be possible in future. In fact we may have to reinvent the structure of our society and institutions for this brave new world. The problem is not so much how to achieve structural change per se, but how to achieve such a change in a way that retains our values. This at a time when America is becoming more culturally diverse, while fighting increased economic disparity as well as external challenges and worldwide terrorism. THE NEW AMERICA New technology, after first invading productive processes in manufacturing and agriculture during the Industrial Revolution, 200 years ago, and later services such as transportation, communication, health care, and entertainment, is now penetrating our personal lives. While this trend is driven by peoples’ desire for more convenience, higher living standards, and greater security, we only gradually learn to adjust to the implicit requirements for change in our personal lives imposed by the new technologies. Ease of access may be linked to the need for instant decisions or commitments as well as real time gratification. Consider for example electronic ticketing by the Internet where a double click may commit a person to a large amount of money and a schedule, the person had little time to consider. The same applies even more to electronic stock market trading which again can be executed

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at the click of a mouse. The Internet has introduced access to huge amounts of information and new ways to execute transactions from purchase of goods and services to auctions of goods and services, registration and filing of documents, and more. All this from the convenience of ones home, office or even a cell phone or personal digital assistant on the road. Electronic transactions are transforming our personal lives and the way business is done. Though business-to-consumer electronic commerce did not live up to its original and highly exaggerated expectations, business-to-business electronic commerce, which developed more slowly and more deliberately, appears to truly catch on and to revolutionize business transactions. The reasons are that trust and confidence based on extensive knowledge of the other party is much greater in B-to-B commerce. Businessmen usually know whom they do business with and have effective controls in place. They also often know the material, product or service they want to acquire or the buyer’s reputation, creditworthiness, and business practices. This does not usually apply to business-to-consumer transactions. In addition, consumers often unfamiliar with the goods or services they want to acquire really want to see, touch or try first before committing to a purchase. This applies to groceries where highly touted e-commerce firms such as Webvan went out of business with huge losses as well as e-toys, and many more. Another reason is obviously that shopping, particularly in America, is for many people not just an acquisition process but a social event and entertainment. Shops and shopping malls are attractive destinations, which offer more than just shopping opportunities. They are visual promenades, people watching venues, enticing eating opportunities, locations for gathering new ideas, meeting or making new friends, showing off, and as mentioned just to be entertained. Going shopping is an event not a transaction for most Americans. This is the reason that electronic consumer shopping only caught on over a limited range of transactions in goods and services which are well defined, subject to major price changes, are national or global, and are served by reliable sellers or businesses. Airline tickets, books, hotel rooms, and similar are typical examples. We are rapidly entering an electronic world where transactions can all be done from the convenience of one’s home, office or even on the road. Not just purchases or sales, but money transfers, bill payments, date and information transfer or acquisition, distant learning, medical diagnosis, teleconferencing, board meetings, legal services, project management, and more will in future all benefit from use of the Internet. Simultaneous voice, data and information transmission provides exciting real time global transactional capabilities, which will affect the way we communicate, learn, make decisions, manage, and plan. The technology is not only here but increasingly capable and affordable. As a result, it is truly infiltrating all types of activities and even more importantly the way we interact and do our business. It also affects interpersonal relations in all kinds of ways and may ultimately have a major impact on both social and business organizations. It allows more work to be done in isolation or even at home, eliminating much of the social contact that office and even manufacturing work generates. As a result, there is both

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more and less interaction. On one hand people at all levels are more accessible, yet interactions are less personal and exclude much of the physical interpersonal chemistry or psychology. While this could be interpreted as a leveling of the playing field, unimpeded by organization or hierarchical rigor, it may result in loss of the give-and-take that physical contacts among people encourage. Similarly, work is now often becoming less personal. Interpersonal relations play a declining role as more work is done in physical isolation and more information transfers as well as general communications are done electronically. This is not only true of work which can now be done at home or remotely such as bookings, inventory, traffic, and routing control, financial transactions and even medical or technical diagnostics but also of various production, testing, and assembly functions so typical in manufacturing. Work is also more routine now and less satisfying for many people involved in monotone or simple, often repetitive, tasks, while at the other extreme people are challenged continuously to improve, innovate, and advance knowledge and technology. We now as a result have two classes of workers, without much of a working middle level, the unchallenged routine task worker and the challenged worker. The main drawback is an increasing barrier between the lower and upper classes or types of workers, with one essentially stuck in a narrow band of opportunities for live interactions, while the others often have unlimited opportunities to advance. Much of this is the result of a two tier American educational system. Many young Americans barely achieve high school levels of education and even then quite often lack effective reading, basic mathematical and other skills necessary for success in modern society. Others again often attend some of the world’s best institutions of higher learning and attain knowledge and skills that allow them to move American technology, medicine, and science as well as culture and productivity to the highest levels. This increasing educational, cultural, and skill gap is leading to a broad and widening economic divide and social abyss for many. This has serious implications. Among these is the inadequacy of U.S. security and intelligence services. Airport security personnel, as an example, are largely drawn not from among the well educated, trained, and alert, but largely from among the unskilled, often unmotivated with very basic education who are given crash courses on how to inspect or check people and luggage. The inspection stations are usually inefficient and overmanned. This compared to say security at airports in some other countries manned by a very small number of highly trained, motivated security professionals, often with training and degrees in psychology, intelligence, and security technology. The result is both greater efficiency and reliability of the security process. The problem caused by the increasing educational, motivational, and competence gap among Americans has far reaching implications, which go beyond increasing economic and social gaps of American society. It affects America’s standing and ability to live up to its goals. It also affects its role as a world leader. The atrocities committed by American soldiers and civilian contractors in the Abu Ghraib prison near Baghdad in 2003 are just one example of the increasing gap between the values

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and resulting actions or behavior of some Americans. This gap among the newly diverse Americans probably presents the greatest challenge to American leadership. The American Constitution and American institutions have for long been examples for the civilized world. They provided scope and guidance for a balanced, democratic society established for the good of its people, a system of real participatory government with equal opportunities for all, at least in theory. The mainstay of American society has for long been the middle class. This three class society where class was largely determined by economic status is being replaced by a society of educated or skilled and uneducated and/or unskilled people. Some among the first are extravagantly highly rewarded classes of people which include managers and professionals, largely in finance. For many this new environment imposes ceilings that prevent them from advancing which are more severe than any previously experienced. It also represents a new America that is increasingly segmented or segregated into two distinct groups with little in common and very different values. It is hard for this America to lead the world as it itself has difficulty defining its values beyond slogans and the original Constitution which is quite often imperfectly interpreted and implemented. This new America is different from the one represented by our Constitution, laws, and socio-economic values. It is also different from the image America did and is still trying to present to the world at large: the image of a benign superpower with no ambition to rule or exploit others, ever ready to assist those in need and to expand the virtues of democracy, human dignity, and freedom. In many ways America has become more self-centered and in some ways less compassionate, more concerned with its own than the world’s interests, its own than the world’s security. This greatly affects America’s ability to lead and the world’s acceptance of America as its leader. Its role has greatly changed since the Marshall Plan when America was generally accepted as the most powerful, yet benevolent leader of the world. AMERICA’S BUSINESS AND FINANCIAL LEADERSHIP America is today the unchallenged financial leader of the world. More financial trades are transacted in the U.S. than in the rest of the world combined, this not only because of the size of its economy which constitutes more than a quarter of that of the whole world, but also because America has a trading economy and mentality. More people invest in equities and fixed income securities as well as other financial instruments than anyplace else. U.S.-financed markets, as a result, also have a higher value throughput than those of the rest of the world. America had a number of regulatory and watchdog agencies at the federal and state level which were supposed to assure honesty, fairness, and order in the financial markets and in financial transactions in general. Notwithstanding their existence, there were a large number of incidents that rocked U.S. financial markets, investor confidence, and even the U.S. economy. The Enron, World.com, and other similar affairs that involved outright corruption as well as theft, were more

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recently followed by mutual fund scandals, as well as examples of major lack of fiduciary responsibility by some of the country’s largest investment banks, brokerages, insurance firms, and accounting firms. These developments not only cost the public hundreds of billions of dollars, but also undermined both U.S. public as well as international confidence in the U.S. system of checks and balances. This particularly as it required state Attorney Generals, such as Spitzer of New York, to intervene in what was traditionally a federal oversight and regulatory function. In addition the continued misuse of investors’ funds to pay obscene remuneration to executives without any reference to their or their company’s performance illuminates the serious ills of the U.S. financial industry. This is extremely dangerous at a time when the U.S. is not only becoming a largely service-oriented economy, but also the financial center of the world. The increasing lack of confidence domestically in the U.S. financial system could easily proliferate worldwide and result in large-scale withdrawal of foreign investments, which not only stem the huge U.S. trade deficits, but also help finance U.S. budget deficits. One question in the public’s minds is: should white collar criminals be punished the same way as blue collar criminals? In other words, do we treat an executive, analyst or broker who steals or misuses funds or damages shareholders and citizens financially the same as say a thief or burglar stealing a similar amount or causing the same degree of damage. In the past white collar crime was not punished nearly as severely and white collar criminals often got off with a slap on the wrist. The reasons were often that the corporate or white collar criminal had no prior conviction and may never be given an opportunity to repeat the crime. Often the argument also used was that he was a promising candidate for rehabilitation. But there are serious questions if these arguments really hold water. At the same time, losses or damages caused by white-collar crimes are usually much wider and have greater impacts. Many fraud sentences in America however great the damage caused to the public are adjudicated by plea bargaining, a most controversial element of the U.S. justice system, by which defendants negotiate a shorter jail or less severe financial sentence for their right to an open trial. The justice system likes this approach as it saves money and time. Yet the approach may result in miscarriage of justice where criminals lie and prosecutors use the plea bargaining advantage to play suspects against each other. The result is often gross injustice that permits major corporate or white-collar criminals to get off lightly. The problem with the American legal system is that fraud is not a capital offense and most corporate criminals can afford good legal representation. As a result, white collar criminals usually get off with little punishment and the public suffers the consequences, such as loss of capital, investment, pension benefits, and jobs. Major listed public companies in some cases had to revise earnings and/or revenues which were inflated to beef up share prices and show executives in a positive light. In turn these executives were rewarded by their often personally selected boards of directors and the remuneration committee with exorbitant salaries, expense accounts, shares of the company, and other benefits. These scams have become quite widespread in America and include many well-known companies

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such as RiteAid, a pharmacy chain, AHOLD, an international supermarket chain, and many more which stated huge fictitious earnings. In Italy Parmalat, a huge dairy and retail chain, collapsed completely as a result of such fraud. It is only in recent years that white collar criminals started to be severely punished. For years, at least the public was under the impression that such criminals spent just a few years in country club like detention to reemerge and reengage in their fraudulent practices. In America finally sentences now more often fit the severity of the crime. Executives at Dynegy, for example, a Texas energy firm, received a 24-year jail sentence for their part in inflating Dynegy’s cash flow by $300m in 2001. Similarly, former executives of Enron, if convicted, may spend the rest of their lives in prison. The 2002 Sarbanes-Oxley Act increases significantly penalties for white collar fraud. The problem was often the definition or perception of fraud, which is obviously different from theft, yet the damage to society may be significantly greater. Similarly, it was often difficult to measure the consequences or damages caused by fraud. Fraudulent criminals sometimes receive little if any direct financial benefit from their fraudulent action, though losses to others and the public may be very large. In other countries such as Germany, England, and France, for example, the maximum sentences for fraud vary from 6 to 10 years, as financial loss is not taken into account in determining the severity of the punishment. Well-publicized fraud cases in the U.S. have greatly undermined global trust in the U.S. financial system and may ultimately affect American leadership in the world financial system. AMERICA’S IDENTITY CRISIS Huntington [Ref. 13] in his most recent book claims that America remains essentially Anglo-Protestant and resists change. In particular, he asserts, probably with justification, that the country would have turned out radically different had early settlers been Spanish, Italian or Irish Catholics. As a result, he is concerned with the massive influx of Mexican and other Latin immigrants who now constitute the largest minority in America and are in fact a majority in many, particularly Southwestern states. The contention is that American secularism, tolerance, religions, and other freedoms which are all part of the strict separation of church and state would not have been embodied in the U.S. Constitution, government, and legal structures had early settlers come from a different background. Yet things are not the same today and the distinct American approach to secularism and civil freedoms has survived large waves of non-Protestant immigrants from throughout the world who usually choose to make America their home, precisely because it embodied all these freedoms. The fear that the very large Latin immigration may change the character of America is largely based on the fact that unlike other immigrants many Latins not only remain bilingual for many generations, but also demand bilingual instruction in school. They furthermore quite often fail in or at least make a lesser effort at trying to integrate into the wider American society. They maintain greater affinity to their traditions and cultures than most other immigrants who usually attempt to

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become true Americans as soon as possible. Huntington may be right in his fear that Latin influence will increasingly turn America into a bilingual, bicultural, and thereby divided nation. While English or at least American English is no longer the mother tongue of the majority of Americans, it has been accepted as a unifying means of communication, an effective cultural base, and a force for the effective integration of all Americans into a coherent nation of many backgrounds but with one set of civil, cultural, political, and economic freedoms and values. English, today, is the universal language of communication and trade, and its use has little or no political or even cultural connotation. Its use is an easy and effective way to gain access to global knowledge and trade. I therefore found it curious that the University of Puerto Rico, for example, in introducing courses in logistics, international finance, and communications in preparation to making the island into a logistics hub insisted that these subjects be taught in Spanish. I only won my argument when I pointed out that the same courses were taught in English at China’s largest universities because the Chinese were not as pragmatic and interested in results and not idle dogma. Yet notwithstanding a general acceptance of a secular doctrine and the basic Anglo-Protestant heritage that made America such a successful melting pot and a land of opportunity for all who sought it, the country is facing the potential of major changes. These largely as a result of massive Latin immigration and infiltration which together with the high Latin birth rate may account for some one quarter of the American population by 2040. According to Huntington, out of 135 million Mexicans about 35 million are currently living in the U.S. as legal or illegal residents. In a way this is a recapture by Mexico of lands lost to the U.S. about 160 years ago. Out of 23 million legal immigrants to the United States between 1965 and 2000, the majority came from Latin America. The Southwestern USA is today already largely Latin and will increasingly be so. In contrast with its traditional role of a melting pot in which immigrants Americanize within one or two generations and thrived to become like other Americans, assuming its language, culture, and values, these immigrants want to maintain their own culture and are often unwilling to accept American nationalism and values. This separation of economic and cultural loyalties bodes potential problems for the traditional structure of Americanism. Not just its Anglo-Protestant roots, its secular political and social systems, but also its role as an exemplary integrating forum in which peoples from different economic and religious backgrounds with diverse customs, social values, and cultures learned to live together and build a society with common values. Much of this trend is due to the imbalance of U.S. immigration that is now so heavily Hispanic. But the problem is deeper in that it is also a reflection of historic injustices inflicted by the Yankees on Latins in Mexico, the Caribbean, and even parts of South America that for long had been considered U.S. protectorates, after the ousting of Spain from the American continent. As a result, America’s identity is no longer firm. Throughout its history America has fought to establish its true identity, only to have it challenged repeatedly by the Civil War, racial and other equal rights, as well as religious challenges, but in most cases the issues

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were resolved and the secular, egalitarian identity of America as a society was reestablished. Today’s challenges are different because they are not only driven by internal developments but also by globalization and an ever more inclusive world in which it is increasingly difficult to maintain unique national identities. FOSTERING FOOD ADEQUACY AND SUPPLY The major economic activity in which most developing countries thrive and which provides employment for much of their population is agriculture to feed themselves and for trade to earn export revenues for essential imports. After WWII devastation, agricultural subsidies were introduced to provide the incentives in Europe, North America, and Japan to deal with severe global and also local food shortages. But the situation has radically changed since then. America and Europe are now producing huge agricultural surpluses that are extremely profitable to their farmers who obtain unconscionably large subsidies to produce that surplus. The main effect of these subsidies is now the prevention of developing countries’ ability to compete in the world markets in the one economic activity where they have a natural advantage and opportunity to compete in the international agricultural product trade. But this is prevented by the irrational subsidies provided to American, European, and Japanese farmers. There is no meaningful explanation why the U.S. for example spends over $3 billion a year to subsidize U.S. cotton production by domestic cotton growers, a sum that by the way is about equal to the value of their output at international trade prices. Europe spends a similar amount subsidizing European sugar beet exports in addition to butter, milk, and other subsidies. Japan subsidizes its rice farmers to the tune of over 500% of the cost of rice in developing countries. Altogether developed countries spend an estimated $28 billion/year subsidizing their farmers, which not only eliminates major foreign markets for developing country farmers, but also often undermines their local markets when subsidized produce is dumped there. This double whammy is estimated to cost developing country farmers nearly $50 billion per year equivalent to the employment opportunity for nearly 100 million farmers in these poor countries. So while America preaches developing countries free market economics and democracy it undermines their ability to trade fairly, sustain their economies, and provide meaningful employment, all of which are necessary for functioning democracies. AMERICAN MORAL AND SPIRITUAL LEADERSHIP America prides itself to be a moral leader and example of human freedoms. Its Constitution is probably one of the most liberal and human documents over written and has become an example for other democracies. The separation of powers among three branches of government (executive, legislative, and judicial) assures effective checks and balances. It has served America well since independence 229 years

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ago and very few amendments were required to adjust it to meet changing needs. Yet notwithstanding the superb guidelines provided by the Constitution, America has experienced its share of injustices, fraud, judicial failures, and less than moral developments, which contribute to its loss of moral authority. Black citizens, though given equal rights under the Constitution, suffered humiliating discrimination until quite recently. The American civil war fought largely because of the differences in attitude on slavery and did not really resolve the issues after the North won. Though slavery was outlawed, discrimination continued both in the North and the South, and exists even now though usually in a subtle way. The Patriots Act diminished some personal freedoms and individual rights; the Iraq war and prisoner abuse eroded basic concepts of American moral standards, fraud and theft in financial institutions undermined confidence in the reliability and fairness of the U.S. market systems and the corrupt environment in some corporate suites has affected public confidence in American business. There is an increasing concern with the way America deals with moral issues at home and abroad. As the sole surviving superpower, it is judged by the world today by its example in moral and spiritual issues. By the way it responds to wrongdoings at home as well as abroad. By the methods used to correct ills and assure fairness. America is today perceived as a bumbling giant in many parts of the world as a huge economic and military power which lacks the will to stand behind and enforce its own principles and values. This is a dangerous situation and a condition, which may foster global unrest. The world’s people need leadership and guidance, particularly now when technology has converted the globe into a truly global village with ready access to information everywhere. FINANCIAL MANAGEMENT The Federal Reserve Bank and its Chairman use the federal funds rate to control and fine tune the American and indirectly the world economy. Monetary policy has in fact become the principal tool of economic management. We do not control prices of raw materials, finished goods, food or other consumables and only control the cost of labor by setting minimum standards. The cost of borrowing is directly affected by the federal funds rate, as are bond prices and very indirectly stock prices – though many, particularly Internet stock prices, seem to be immune from rational linkages and just grow merrily or speculatively. It is interesting to note how the Federal Reserve’s singular involvement in setting federal funds rates is able to control and stabilize a whole economy which consists of many disparate markets, only some of which are directly affected by the funds’ rate. It is a sign of the changes in the role of monetary policy and the effects of economic globalization. The free flow of huge amounts of funds between different countries every day and the large global investments without borders have made it difficult to talk about or even consider national economies. So much of most economies are now owned by foreign nationals, corporations or governments, and this wealth can readily be

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withdrawn, changed or augmented. In fact, the U.S. economy depends to a large extent on foreign investments which in turn are affected by the security, opportunity, and return on investment offered. With Japanese government bonds or similar securities offering near zero rates of interest, U.S. federal bonds are very attractive to Japanese who are traditionally great savers, this particularly when the dollar increases in value against the Yen. The initial decline in the Euro and various European currencies had brought similar inflows of investments from Europe to the U.S. Yet the inflow continued albeit at a slower rate when the dollar declined against the major currencies in recent years. The federal funds rate that indirectly affects U.S. and foreign bond rates therefore influences fund flows that in turn affect the economies of the major countries. The only exceptions are usually poor developing countries and countries which are economically as well as politically unstable or at risk. These countries often do not exercise responsible economic policies, do not permit free cross border flow of funds, restrict investments and ownership, have limited personal freedoms, and often maintain restrictive as well as deficient or ineffective banking systems. Many of these countries are deeply indebted and may be unable or unwilling to repay their debts. This introduces a new problem to global economic and fiscal management. In fact, it divided the world into those countries which abide by and work within the framework of accepted economic and financial norms and those who do not. There is now a third category of countries such as Russia and other emerging capital market economies that are taking a rather hypocritical approach to fiscal management and accept some accepted norms while ignoring others. This has a profound effect on the global financial systems that are based on accepted standards of behavior, regulation, and adjudication, without political considerations. This makes it difficult for the world financial systems to assure equity and fairness. THE MAKING OF LEADERS There are people who take care of relatives, friends or even strangers; who take them in and care for them full time. There are others who visit or invite such people very occasionally. There are people who support others in all respects all the time and others who bring an occasional gift. People and history remember only the second type. Not the ones who gave their time, their life, and their full support, but the ones who illuminated the lives of the needy for rare isolated moments. We do not remember who took care of us full time and suffered with us through our problems, but only those who very occasionally brightened our lives with brief highlights, with fun, entertainment or gifts. We do not recognize those who give their life, compassion, and wealth to us, who sustain us, but only those who entertain us and make us feel good. Throughout my life, I always belonged to the first type, to the givers, and not the entertainers, to the ones who took care and were there when needed and not the

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ones who came and went with a flash, the ones who were devoted and concerned and not the ones who presented a short lived but beautiful bouquet and became famous and leaders. Society has become entertainment and only those who make splashes really count. Not the country doctor who sacrifices his or her life to help a remote community of thousands stay well with home visits and little economic reward, but the famous surgeon who managed to succeed in extending the life of one patient for a little with a complex transplant, after possibly numerous failures that may have abbreviated the lives of many others; the lawyer who obtained obscene awards in a class action, and not the attorney who represents hundreds of indigents who would lack access to justice without him. The same applies to politics, academia, and even the arts today. In management too it is not the constant achievers but those who have an often singular and chance success who become the stars. Similarly in investment banking it is the analyst who once made a correct prediction and not those who consistently project correct trends. They may never repeat it, but their reputations and fortunes are made. Even in business in today’s high-speed technology age, it is the splashy IPO and not the great invention which brings fame and fortune. Life has really become entertainment and our reward and recognition system has been turned upside down. How long can this last? How long can we build on myth and not reality, on splashes instead of real achievement? This is a question only history can answer. But this trend has a pronounced effect on people and society at large. It is not sustained achievements, long-term commitments, and selfless sacrifices that count and are appreciated, but the splashy, often self-serving, actions usually performed in the limelight. Leadership is increasingly not earned but achieved by planned, largely focused activities performed with proper public, well-advertised exposure. It is no longer the results but the perceptions that count. Many may argue that this is a planned mirage but the public usually buys in and accepts the one time or short-time star as a leader, yet is profoundly disappointed when his subsequent leads do not work out. The damages done by misplaced or chance leadership are becoming increasingly severe. Misplaced leadership is now found not only in politics but also in economics, finance, science, medicine, social services, education, law, and intelligence. In all these fields chance successes or discoveries are increasingly accepted as true leadership that serve to identify successful trends. This is a dangerous condition as singular successes seldom form a basis for a trend of future needs, developments or discoveries and solutions. Leadership in any field cannot be based on chance events, however successful, but must be earned by a sustained trend of successes. In many fields of human endeavor America has shown such a sustained trend of successes. This particularly in science, medicine, and technology, but there are others where American leadership has failed to provide any form of sustained success; this particularly in social and behavioral areas, interpersonal relations, basic education, universal health care, and poverty eradication, among others.

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As one of the wealthiest nations and only superpower on earth, we have failed to provide equitable conditions and access to common goods and services to many of our own citizens. We allow highly and inappropriately skewed systems of remuneration where executives may earn 1000 times what an average employee makes. We are superb in treating highly complex health problems but cannot effectively provide basic care. We offer the world’s best higher education but cannot effectively educate our youth in basic skills of reading, writing, mathematics, and science. As a result, our leadership is highly focused and narrow in its application, something that makes our leadership often hollow and difficult to sustain. To lead, the meaning of leadership must be understood in terms of the values it conveys, the freedoms and democratic principles it truly represents, and the institutions it develops. It must truly represent the things people of the world value. It is not sufficient to lead by example of lifestyle, use of technology and economic developments, but by example of how to live up to our basic principles, goals, and objectives. It must be a true beacon for the poor, oppressed, disillusioned, and hopeless, an example of a truly human democracy, living under a really representative government with limited powers and organized with effective balance of power. It must show that it has a government of laws and not men, laws that are never perfect and must therefore be adjusted to truly represent the changing needs of people and the society they represent.

AMERICAN CONTRADICTIONS AND HYPOCRISY The dividing line between contradiction and hypocrisy was blurred with every new step towards exploring the Clinton-Lewinsky affair. There was a real question if this could be called an affair as it appears to be more an infatuation of a sex-crazed young woman for a powerful, middle-aged, sex-starved man who, like most men, had a need to prove his manliness. He may have allowed her to perform oral sex; yet, all advances were apparently initiated by her. He did not go further nor did he ever take advantage of her or his position. She was the aggressor and admitted to it. Yes, he should have maintained self-control and forced her out of his office. He should not have responded to her advances with signs of appreciation, be they minor gifts or offers of help in finding a job. I just wonder how the average red-blooded American, married, middle-aged male would have responded in a similar situation. He is bombarded daily by sex through the media. Sexual deviations, taboo not too long ago, are now not only accepted by society but are encouraged and many in society show them off with pride. We have the world’s highest percentage of teenage and out-of-wedlock pregnancies as well as single family children. Homosexuality and U.S. entertainment and the media are preoccupied with sex and it appears that the major reason that they have become so preoccupied with the Clinton affair is not that the President lied, but that it was an interesting sex story. Sex sells; lies do not.

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Everybody lies some time, and the definition of what constitutes a lie is subject to many interpretations. Lies can be untruths, half-truths, distorted truths or misrepresentations. But then again we face the problem of what is or was the truth. We are a land of contradiction. We feast on sex, crime, and scandal and consider these the main ingredients of our entertainment. Most of our idols are famous because of their presentation of or involvement in such activities. Most of our past presidents and many of our current legislators had sexual affairs and either hid them or lied about them. We claim to be Puritan church-going individuals; yet divorce is up, as is crime, drug addiction, and child pornography. At the same time, the sanctity of marriage has become a mockery with no fault divorce laws that make it easy for any partner to call it off at anytime. Yet social offenders are often criminalized, while many real criminals go free or are treated with kid gloves or even considered victims of society. It is high time that we get our priorities in order again and punish those who truly hurt society instead of those who are caught doing something that does not hurt anyone and does not even fall outside the norms of behavior we preach but do not adhere to. Let us be frank. A large proportion of adult Americans have or have had extramarital affairs and lied about them sometime or all the time. If lying about such affairs, even non-intercourse sexual encounters, becomes a criminal or impeachable offense, then we had better transform much of our residential housing in America into prisons so as to be able to hold the offenders. I also feel that all lawmakers who are guilty of the same behavior, including members of judicial committees, should disqualify themselves from any voting on such issues. This would probably reduce the number of those eligible to vote to a minority. As a frequent traveler abroad, I find that we have become the laughing stock of the world, which considers us outright hypocrites. Martha Stewart was convicted of lying about a stock deal of minor magnitude that hurt no one, not even other stock-holders. At the same time, major financial thefts or misappropriations often go unpunished. Our health services could save as much as 30–40% of their costs, significantly improve the quality and accessibility of health care if no fault type of insurance was introduced that would still assure hurt individuals the right to proper compensation for damages without the horrendous legal fees and related expenses. In fact, the legal costs of our health care system have continued to go up even though advancing health care technology is reducing potential error rates. SOVEREIGNTY AND HUMAN RIGHTS For thousands of years, since the concepts of states and sovereignty evolved, the treatment of individuals residing in and citizens of countries or states was assumed to be the sole prerogative and responsibility of the government and/or rulers of each state. As a result, treatment of and conditions for residents in different countries differ widely, with some being treated largely as servants in certain countries, independent of their contribution. Countries like Sudan, Somalia, and others in Africa and the Middle East assume that sovereign power permits the use

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and treatment of residents as vassals of the rulers. Similarly only some residents, independent of their birthplace and heritage, are given the right of citizenship. In Kuwait, for example, people such as Bedouins or Palestinians who resided in the country for generations are not allowed the right to citizenship and, as a result, have few rights and even fewer civil protections. Today we increasingly recognize that sovereignty implies responsibility towards the residents of states, their well being, protection, and civil freedoms; yet only a few of the member countries of the UN, including members who are signatories of various international human rights agreements, actually provide these rights to all their populations. The hypocrisy of many signatories is often shameful when large groups of their own residents or even citizens are prevented from exercising basic human rights that have become universally accepted standards. The conditions of women in many Moslem, African, and South Asian countries are a travesty of norms of accepted treatment. America must become more consistent in fighting abuses of human rights in line with its consistent approach in its war on terror. Assurance of human rights is an essential focus of the fight against terror. Without it, it becomes hollow. Yet America has been rather inconsistent in its condemnation of human rights abuses and its response to severe contraventions against the Helsinki and other international conventions. America must lead in the fight for human rights to earn global acceptance as a world leader. Leadership requires example lest it be interpreted as bullying. AMERICAN STRENGTHS AND WEAKNESSES America became the world’s preeminent power largely by default. With a history of reluctant involvement in global affairs, periods of isolationism, and often belated entry into world conflicts, the U.S. did not exhibit a long-term leadership role. In fact its entry into many of the conflicts during the last century was triggered more by reaction to direct or indirect threats than by its leadership in world affairs. America has probably the most democratic constitution and by virtue of its “Declaration of Independence” should have been among the first to outlaw slavery and assure universal liberties for all. But much of this original idealism was soon buried under considerations of practicality, economic viability, and socio/political demands. As a result, America evolved into a true democracy for all rather reluctantly and only over a long time. Even now, early in the 21st century, America is still a divided country as recent Presidential election results clearly indicate. While the densely populated Northeast and West Coast are largely liberal and concerned with environmental and social issues, the rest of the country is economically and socially conservative, more inward looking, nationalistic, and religious. This pronounced trend towards Republicanism largely supported by “Born Again Christians” and the “socially responsible” has given conservatives important new powers. Though not isolationist in a traditional sense, this America is more prone

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to respond to its concerns and advance its interests. In other words, America has become decidedly more nationalistic. While this trend was largely triggered by the terrorist attack on the World Trade Center in New York on September 11th of 2001, it was already set in motion by the election of a Republican administration and legislature in year 2000. America is taking its undisputed economic and military power as a license to correct the world’s ills. This while maintaining an open yet more nationalistic domestic environment. Increasingly decisions are made on the basis of assumed national as well as global threats. Threat-based analysis now often forms the rationale for both domestic and international decisions. This has put America into a new light on the international stage. Since World War II when it was known for its concerns for the underdog, threatened, and disadvantaged to be protected, the Marshal Plan generosity towards allies and vanquished foe alike and it defense of the East Pacific nations and Europe during the subsequent Cold War with the Soviet Union, America gained a reputation of an open-handed, protective ally. It had the trust and confidence of the Free World and was the leader in international organizations as well as in the support of the disadvantaged. It is still an open, generous society but now under the threat of terrorism more defensive, nationalistic, and as mentioned before inward looking. At the same time major changes are occurring in the social and economic structure of the country. America has largely become a post-industrial service economy in which health care, education, and law enforcement, the most rapidly growing sectors of the economy, constituted nearly 44% of GDP in 2003. These sectors are expected to grow to over 50% of GDP by 2008. At the same time, productive sectors, like manufacturing, agriculture, and transportation are growing at a much smaller pace or not at all. America still leads in research and technology developments but much of the implementation of research or technology development results is now performed abroad. The result is an increased independence on manufactured goods imports and financing of the large balance of trade deficits from abroad. In fact, the bulk of the U.S. public debt of about $6 trillion is owned by foreigners. Servicing this growing debt adds to the balance of payment deficits. In other words, America has become not only increasingly dependent on imports but also on foreign financing. Its strengths are its scientific and technological prowess, the effectiveness of its institutions, the quality of its higher education and high technology, health care, its openness, and freedoms which permeate all aspects of life, its agricultural and manufacturing productivity, the originality and inventiveness of its people and its caring generosity. But there are also great weaknesses that may affect its future role and effectiveness. Among these are a new and disturbing discord among major sections of American society, widening gaps between rich and poor with a resulting decline of the middle class, greater potential differences, faltering and inefficient health care, educational and law enforcement systems that cost several times the money spent on these services in other advanced developed countries and a decline in global trust and resulting respect.

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America can only continue to lead in the world long term if it regains the trust and respect of people and nations everywhere. It similarly will have to change its economy to become less dependent on foreign imports (particularly fuel) and financing. It cannot afford the short- and long-run dependence on essential energy supplies from potentially hostile sources or the financing of its debt by its major competitors.

CHAPTER 5

MANAGING AMERICAN LEADERSHIP

The right to leadership by individuals or nations must be earned to be effective. Earning trust for leadership must be by standing for principles that represent universally, morally, and ethically accepted standards of behavior. These include fairness as well as effective methods for their application. Leaders must show their commitment by example and have a sense of what they stand for. Leadership is all about people and for people. The well being of people and progress of mankind should be the ultimate goal of leadership. Globalization now offers opportunities not hitherto available. America emerged as a world leader after World War II and for many years since shared world leadership with the Soviet Union. It is only after the demise of the USSR that America assumed the role of undisputed economic and military world leader. However this leadership may be challenged not only by increasingly potent China which, while retaining its communist centrally controlled government, emerged as an increasingly important economic power. It managed to combine central government control with a largely free market economy, something the Soviet Union failed to achieve. It has been able to grow its economy at double-digit rates for more than a decade. As a result, it may, if this trend continues, challenge American world economic leadership within 20–30 years. At the same time, trends towards the formation of economic unions or associations are accelerating. The European Union (EU), for example, is expanding to include much of Eastern Europe. With a total population exceeding 600 million, the new EU may challenge America’s economic leadership even sooner. Recent trends in Russia and various developing countries show that centralization of economic and management power delays modern economic growth and effective introduction of new technology. This applies equally at the state as well as at the corporate or company level. Centralization of power reduces both competition and incentives that in turn slow technological innovation. Similarly, widely granted monopoly rights usually lead to inefficiencies in operations, manufacturing, and services. These lessons, while supported by experience and recent history, are not universally accepted even in countries that pride themselves to be democratic free market economies. This largely 147

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because globalization has fostered not only political but also economic unification. As a result, we experience increasing mergers of both small and large companies which often form mega commercial entities that, while not monopolies in the traditional sense, do control major aspects in their markets. These developments may impede economic growth and technological advance and thereby ultimately leadership, particularly by America. IMPACT OF TECHNOLOGICAL CHANGE All around the world technology companies are facing new challenges. While the problems are now largely concentrated in the telecommunications, information, and computer sectors, other so-called high technology sectors suffer as well. It has become obvious that the economic revolution that high technology was to foster was exaggerated. Combined with recent scandals in corporate America, the bursting of the highly touted Internet bubble and unrealistic expectations of the impact of high technology on the economy may force us to reevaluate the direction of the American and world economy. Lucent, Nortel, WorldCom, and a host of other companies in these fields not only lost most of their capitalization but were forced to let many of their staff go and are today a faint shadow of their past. So soon after the bursting of the Internet bubble, we now witness a disintegration of the high technology bubble and no self-delusion can change this fact. Today the industry is only half the size of just a few years ago, and few expect it to regain its former size and glory near term. High technology will continue to advance but only if it serves larger markets than telecommunications, information, and computers for the narrow purposes of the service sector, largely ignoring manufacturing and other productive sectors. This was mainly a response to the conversion of the U.S. economy into a service economy, where three institutional sectors – education, health care, and law enforcement – account for nearly 50% of the U.S. economy (growing by 5%/year (see Ref. [14])). But there is a limit to the size of the service sector, particularly in a large economy such as that of the U.S. which now substantially depends on manufactured goods from abroad. The American economy is now trying to reach a more healthy balance by improving competitiveness in manufacturing, mining transportation equipment, materials handling, energy conversion, construction, and more sectors where we have largely fallen behind. All of these could benefit by a marriage with high technology. America can again become a leader in these fields and at the same time expand the uses and usefulness of high technology in computing, IT, and communications by effective integration of the more traditional engineering fields with high technology. But this will not happen if we continue to ignore and in fact discard traditional fields of engineering. The opportunity is now to become a leader in the integration of old and new technology and ensure that high technology makes an effective contribution in all the productive sectors of the American and world economy.

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Manufacturing, transportation, materials handling, agriculture, energy generation and conversion, mining, and other productive sectors could all greatly benefit from an infusion of high technology, but this will only be achieved effectively if these areas are given the attention they deserve in engineering education. The U.S. is far behind in many of these areas and this largely because of our single-minded concentration on what we call high technology. However, efficient, environmentally clean, and sustainable energy conversion, as one example of an area in which we lag far behind other countries, can be greatly advanced by marriage with advanced information, computing, and communications technology. We must resurrect our capability in and concern with these more mundane areas of engineering to be able to advance the productive sectors of our economy. Not only will this assure a more balanced approach to engineering education but also a more effective supply of competent engineers and researchers in areas of concern to our economic and environmental well being. At the same time America’s productivity continues to grow respectably and with the highest proportion of adults in the workforce among industrialized countries, it is able to maintain its economic leadership for now. Yet its economic power may be in danger as a result of excessive dependence on foreign imports of both products and capital. At the same time, America continues to export many, particularly low skill, jobs.

ETHNIC INTEGRATION America has a long history of ethnic integration and cordial relations. It is a country of immigrants and served as a refuge for people, particularly Europeans who were discriminated against in their homelands. Over 34 million European immigrants entered the U.S. between 1820 and 1924. Most assimilated quickly and adopted American culture. They mostly desired to shed their old identities and affiliations and became Americans. This trend continued until the second half of the 20th century when the flow of immigrants changed to largely Latin and East Asian people. Today (2005) nearly 25% of Mexicans (35 million out of 135 million) live in the U.S. legally or illegally. This trend and the high Hispanic birth rate per woman (3.0 Hispanic, 2.1 African American, 1.8 non-Hispanic white) assures continued growth of the Hispanic population in the U.S. through both immigration and demographics. This by itself may just be a change in direction were it not for the cultural and linguistic nationalism of many Latin or Hispanic residents of the U.S. They demand and often succeed in obtaining separate education and bilingual administration and services. Many as mentioned before also consider this to be a trend towards “reconquista” or reconquering of the 50% of Mexico that was ceded to the U.S. during the border wars of 1833–48, such as Texas, California, Nevada, Arizona, Utah, and New Mexico. The result is a radical change in the American culture that historically thrived on integration and co-existence with loyalties solely

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to the new American homeland. The U.S. has always been a country of immigrants and not a diaspora of cultural and ethnic groups. Some writers, such as Huntington [Ref. 13] are concerned that the U.S. might resemble typical South American countries within 20–30 years and lose both its immigrant/refugee as well as its secular status. It may also change from a country with an open tolerance towards religion and social behavior into one governed largely by Catholic/Protestant Christian beliefs. This may affect the reality and perception of American freedoms as well as individual rights, individualism, work ethics, freedom of expression and behavior, and access to opportunities. These developments may have a profound effect on American leadership. Cultural diversity and acceptance of cultural, ethnic, and religious differences have long been fostered and sustained the American melting pot. It has made America not only productive and strong but also acceptable as a global arbiter. THE WAR ON TERROR The rise of conflict and terrorism though has forced America into the position of policeman and arbiter, a role that is never popular and often results in grave misunderstandings. While traditional U.S. ethnic ties should be an advantage, they can also be interpreted as a bullying pulpit that provides America with an opportunity of interfering in other people’s affairs. American intervention is as a result quite often objected to even if it is done without self-interest or ulterior motive. In recent years the U.S. has responded to external threats to maintain its leadership, national unity, and international cooperation or at least acceptance. The war on terror of the U.S. has two major enemies as pointed out by the 9/11 Commission in its report. There is Al Qaeda, a global network of terrorists without any particular national identification and the radical ideological movements in the Islamic world. In addition there are numerous other fringe groups all over the world who use terror as a means to advance their interests that may include America, but more often than not are really elsewhere or more general. There are many anti-Western or anti-Christian-Judeo groups with social, religious, and economic grievances that use violence as a strategy. There are others more focused on purely economic or racial grievances who use violence to advance their interests. Unrest or genocide in Darfur, Somalia, Rwanda, Burundi, Democratic Republic of Congo are all examples of horrendous crimes committed to advance social, racial, and economic interests. America has been fighting terror since 9/11 with dedication but without an effective strategy. This was not only evident from the unexpected upheavals in Iraq after the U.S. led defeat of the dictatorship of Saddam Hussein and the earlier ousting of the horrendous Taliban rule in Afghanistan but also by the lack of international support of these costly campaigns. In particular, neighboring countries such as Iran, Turkey, and Saudi Arabia that were all directly or indirectly and repeatedly threatened by Iraq failed to support the action. While many of the world’s nations pay lip service to the war on terror and the threat

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terror poses, few are willing to commit themselves openly to this war. Many are trying to protect their home turf against terrorist attack, but most do little in preventing access to their lands by potential terrorists. Europe in particular is vulnerable with easy access both from the south and the east and in general wide open, largely uncontrolled intra-European Union borders. As a result, any potential terrorist who infiltrates one country has usually free range in most of Europe.

DEFICITS AND PUBLIC DEBT Large public debt and budget deficits constrain ability for social spending that may reduce the size and cost of government. Socially conscious democracies tend to spend more than they can afford not only to fund their own programs but also to constrain any successor government. They therefore try to push through and fund their own program or agenda, particularly in the years leading up to the next election. This both advances their own political goals as well as imposes policy on any succeeding government. The problem is now becoming acute as entitlement spending is becoming such a dominant factor in the U.S. government’s budget. While the U.S. is not unique in deficit spending and in fact lags behind many other developed nations in the magnitude of its public debt (Table 18), there are two issues that make it hazardous: first is the size of the U.S. economy and, as a result the size of its public debt that is nearly equal to the combined public debt of all other nations while the second is the fact that much of it is financed by investments from abroad and not by domestic savings. In other words, America’s economy and economic stability depends much more on global confidence.

Table 18. Nations’ Public Debt (as a % of GDB 2003) Japan Italy Belgium France Germany USA Netherlands Sweden Britain

15462 10667 10200 6920 6390 6243 5540 5280 514

USA’s current national debt (12/31/03) was $7.34 trillion. Source: Economic Intelligence Unit, Boston Globe, August 29, 2004.

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AMERICA’S LEADERSHIP IN INNOVATION One of America’s strengths is its ability and willingness to innovate. Not only are many American companies structured or organized to permit workers at all levels to suggest or even introduce product or process innovations. However the informality and openness of personal relationships in many American companies and organizations not only encourage, but facilitate innovation by anyone. While innovation in America thrives in science and technology and Americans are particularly adept at effectively putting advances into practice and use, Americans are often social conservatives unwilling to change individual behavior even when such change is desirable or even necessary to respond to a new technological environment requirement. In other words, Americans are often found to be technological innovators and social or behavioral conservatives. This must change to assure not only more effective use of new advances in science and technology but also assure more success by America in leading mankind toward a better and more advanced and satisfying future. AMERICA’S HEALTH CARE LEADERSHIP America spends over 16% of GDP for health care, nearly twice the percentage of other developed nations; yet its life expectancy is lower. America also spends more on medical pharmaceutical and diagnostic equipment research than the rest of the world. America leads in medical procedure and diagnostic technology and has developed some of the most advanced medical breakthroughs. However it is among a few industrialized countries without universal health care. It provides some of the most advanced medical technology; yet access to it is often hampered by arcane processes and legal impediments. America has been slow in reacting to epidemics and the spread of communicable diseases both at home and abroad and has over 30 million (12%) of its population without health care insurance. Continued advance of HIV/AIDS infection in both developed and developing countries is threatening not only world health but progress in development. It not only imposes a tremendous human and economic cost on many countries but also affects political progress, particularly in Africa. For some time America’s reaction was defensive. It is only in recent years that more aggressive and effective approaches were finally adopted. America has been fighting a war on drugs for decades without success. The fight was mainly aimed at the supply side, the producers, refiners, smugglers, importers, and distributors, with very little effort expended on reducing demand or fighting users. This is contrary to the much more successful strategy adopted by some other countries that put equal emphasis on reducing demand and supply by punishing both users and suppliers. There is an urgent need to radically reduce demand that not only affects people’s health but also fosters criminal activity, imposes huge economic costs for drugs, medical services, law enforcement, and lost productivity. To lead, America will have to show more effective approaches in dealing both with medical and drug problems. This not only to improve conditions at home but

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also to show other less fortunate people a road to effective health care. The costs of health care must be reduced and access to health care must be improved and ultimately made universal. This will not only benefit the population but ultimately the American economy. THE RIGHT TO LEADERSHIP The greatest challenge for America is the reclamation of peace in the world and a move towards cooperation and understanding among all people. America must retain its leadership for all the right reasons. Not because of its size, its economic dominance or its military strength but because of its high moral standards, compassion, willingness to share, to help, and most importantly to serve as an example of a free people, governed by true democratic principles. There is no right to leadership or to domination of other people. Leadership must be earned and freely accepted by those led. America must be a much more proactive leader not in terms of economic and military strength but as a developer and proponent of human values and values for humans. Its most important leadership contribution has to be the betterment of mankind and its conditions. This means helping and sharing. America is a nation of competent, hard working people living in a bountiful country ruled by a government under a most liberal and democratic constitution. Yet as all people it has many faults. To be accepted as a leader and earn the right to leadership it must gain or regain the trust of the peoples of the world. Trust is the key to acceptance of leadership at the global or personal level. America has lost much of the trust built up over decades by supporting often immoral, unrepresentative governments, engaging in sometimes unjust wars, and occasionally disappointing committed allies. America is a mirror of mankind, a mixing bowl of people from all over the world, many of whom found refuge from oppression and who became a nation of nations. Yet at the same time it displaced the indigenous Indian population and disenfranchised them. It is a country grown out of controversy into controversy, yet into a people of the world for the world, a country that has shown how people from everywhere can form a union with unity of purpose, that can represent the soul of man everywhere, and provide hope for the future by example. America can be a leader and help mankind regain confidence in itself and peace among its nations. For over 60 years America has claimed a world leadership role. First as the savior of Europe from Nazi domination during World War II and later as a protector of Western Europe and East Asia against potential Soviet incursion. It also served as the economic locomotive since World War II, helping global economic growth and world trade expansion. Since the fall of Soviet domination and the emergence of Russia as an aspiring market economy, the U.S. has become the main supporter of its transition. America led the pacification of the former Yugoslavia as it broke into separate ethnic states, assisted in the political and economic integration of Eastern Europe into Europe, and provided continued strategic cover for nations in East Asia and Western Europe.

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Notwithstanding all these pro-active moves, America has lost much of its traditional support among its natural allies. In recent years America has acted often without consulting its allies or the world of nations at large. It has often made unilateral decisions, some of which could be interpreted as self-serving and not in the common interest. While decisions may have been truly based on faith in the righteousness of the action, lack of consideration of the interests of others and the reality of the situation made the U.S.A. unpopular with a resulting loss in American credibility. Leaders must lead by example and show their concern for the common interests in addition to their own. To be followed, leaders must be respected and even loved. DEMOCRACY IN ACTION Democracy as a system for selecting a government by universal voting proposed by the Athenians about twenty five hundred years ago was resurrected in modern times only in the last two centuries. Until then equality was rare and most countries were ruled by kings, dictators, military despots or religious dignitaries. They assumed their rule by hereditary power or by divine right that was not to be questioned. Even when America became the first modern democracy, voting was largely restricted by property ownership, color, and race. Most of Europe and Asia continued to be ruled by monarchs until the end of World War I and much of the southern hemisphere of South America and Africa gained independence from colonialism only in the 19th and 20th centuries. Yet many of the former colonies did not immediately introduce democracy or for that matter representative government but exchanged colonial rule for dictatorial rule. Suffrage was slow and the right to vote, if at all permitted, was often restricted. Even today only 117 countries or about 62% of the independent states are considered electoral democracies according to Freedom House, but even among those many do not really have truly representative voting. In some there are restrictions on access, such as voting qualifications, age, sex, literacy, and other tests. Similarly, there are often other deterrents applied to limit access to voting such as number of voting places, distance to voting places, registration, mechanics of voting, and more. It is disturbing that even in the most open democracies that supposedly put few if any restrictions on voting, the percentage of eligible voters who actually vote in national elections for the leader of the country or for members of a parliament or congress is often quite small. It is particularly disturbing that the average number of eligible voters voting in federal elections in the U.S. over the period 1990–2002 was only 49% for President and 47% for Congress. Similarly the U.S. has a shamefully dismal small number of 14% of female representatives, though female eligible voters outnumber males. By comparison, many newer democracies show a much larger voter participation as well as larger female representation at both the national and local levels. While it is generally agreed that a democratic system of government is the best system to assure personal freedom, freedom of expression, movement, and individual rights,

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many countries lack a history of good transparent government, equal rights, and effective legal systems that are essential to assure free elections and choice of a truly representative government. Similarly free access to media and other channels of communications is essential as well as effective voter instruction. There are many so-called democracies which hold elections that are seriously faulted. This not only gives non-representative results but also discourages eligible voters from participating, leaving in many cases only the diehard supporters of the government in power to vote. Results such as a 98% vote for an incumbent are usually suspicious. The U.S. has a reasonably fair and transparent voting system but various real or imagined claims of voter disfranchisement appear to discourage a significant percentage of eligible voters from participating. This is sad, particularly at a time when the U.S. as a world leader has as its main objective the spread of democracy and human freedom. Something must be done to improve this situation and thereby show the rest of the world and particularly people in countries that do not experience democratic freedoms that democracy works and everyone counts and can influence the choice and programs of government. America must really become a beacon of democracy in action, an even more participatory democracy where everyone’s vote truly counts. It must become an example of freedom where everyone can pursue his dreams and desires without hindrance. We are nearly there but like all human constructs ours needs adjustments to put it right. The introduction of democracy must be planned. It does not just happen, particularly in countries which never experienced it, such as Moslem countries. Democratization though must also consider that opponents of democratic principles, such as Moslem Fundamentalists, may use the very principles of democracy to gain control and reverse the process by ‘democratically’ installing fundamentalist regimes that introduce laws restricting human freedoms of expression, movement, and rights of women. ADVANCING DEMOCRACY America has been a long-term supporter of Arab development, not just in the oil producing countries of the Middle East but also other Arab and Moslem countries throughout the world. In fact the U.S. has sent food and economic aid to Somalia, interceded in Bosnia and Kosovo to halt murder of Moslems and discrimination, freed Kuwait from Iraqi invasion and domination, helped Egypt, Jordan, and the Palestinians economically, and has distanced itself from Israel. America has helped North African Arab states politically and restrained or prevented intervention when Christians and other minorities were attacked in the Sudan, Lebanon, and other countries. It has steadfastly supported the Saudi and other regimes that shelter or encourage restrictive fundamentalists in the hope that they will gradually become more democratic and assure greater public participation, individual freedom, governmental transparency, and individual rights. All to no avail. Notwithstanding pious statements by many leaders, the situation, particularly

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in the Persian Gulf Moslem countries, has not improved, hatred of non-Moslems, particularly western Judeo-Christians continues to be fanned, and Arab media, largely government controlled, continue their venomous tirades. America has spent hundreds of billions of dollars and thousands of lives in this effort to no avail. There is a serious question if the approach used makes sense, as most if not all the regimes in question are non-representative and maintain their support and power by blaming all local shortcomings on the West, particularly the U.S. For example, the severe youth unemployment largely the result of lack of investment of oil revenues in local productive assets is blamed on the West and the hatred of those disadvantaged is channeled towards the West. This cannot continue and these largely non-representative regimes must be made to face reality. The close interdependence of clerics and governments makes this a difficult problem but one that must be addressed if the chasm between Moslems (mainly Arab Moslems) and the rest of the world is to be bridged. The hatred of largely unemployed Moslem youth has been diverted by clerics towards the West, which is blamed for their situation of hopelessness. In other words, clerics have become the protectors of these regimes that in turn pay off and protect the clerical establishments. Any move towards secularism that represents not just the West but democracy is anathema to them and is vehemently opposed. The Bush administration’s objective of democratizing the Middle East, starting with Iraq, is in my opinion doomed to failure. It cannot succeed until greater economic and social equity is established in the region, and governments are more transparent, accountable, and representative. Similarly, these countries must learn to reinvest their oil revenues in local productive and employment generating assets, and separate church and state toward a more secular society. The demise of the Soviet Union and the resulting freeing of newly independent states formerly part of the Soviet Union had generated great hope for democratization of Russia and its affiliated states. But the road has been rocky. While officially embracing a free market model, it has been quite different with the State interfering in the free market on numerous occasions, particularly in the media and energy sectors. The Yukos affair that captured the headlines throughout 2004 though is only the latest and possibly largest of such state interferences. Yet these developments throw a deep shadow over the long-term commitment of Russia towards democracy and a free market economy. The situation is quite different in China, which maintains central Communist government control with a distinct open market strategy which permits private, including foreign ownership, free exchange markets, and comparatively little government interference in the private economy, particularly in manufacturing, telecommunication, and transportation. This while using government resources for large-scale energy, infrastructure and service sector developments, particularly in the interior. As a result, China has become an example of successful economic development and a society that is gradually achieving increased freedoms and democratic rights. While these are now mainly at the local level, it appears that China is slowly moving towards a general approach of greater transparency, representative

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government, and accountability. While, for some time, this may be far from the Western concept of democracy, it appears to be a gradual move in the direction taking due account of both the recent strict Maoist community experience and the long-term cultural history of China, with its Confucian foundation.

AMERICAN STRENGTHS AND WEAKNESSES America attained the height of global respect after World War II when it showed selfless concern for its allies, the vanquished, its potential opponents such as the Soviet Union, the oppressed people in various colonies, and the poor or disadvantaged of the world. Its concerns knew no boundaries of politics, type of government, religion, ethnicity, culture or economic system. It shared its wealth, compassion and goodwill, and tried to unify the world under a common banner of human values and respect for people everywhere. The reemergence of the rift between Communist and capitalist nations’ ideology and world development goals, the Korean and later Vietnam wars and the increasing competition between the East and the West fueled by the emergence of ever more dangerous weapons developed into a global rift or a two world environment. It actually was a three world environment where the poor developing countries of Africa, South Asia, and to a lesser degree South America became unsuspecting pawns in a power play that used them, without providing them with much needed real development aid. America put increasing emphasis on science and technology developments and, although initially lagging the Soviet Union in space and other technologies, soon caught up and became the undisputed technological leader in the nineteen seventies. Its economy continued to grow and became dominant in size and in world trade. America’s main strength lay in its ability to make people succeed by providing them with the freedom and access to resources needed. America proved to be a country of promises, mostly kept, though sometimes not. It developed a highly productive work force and an economic flexibility that allowed it to respond effectively to changes in technology, demand, and other conditions. It was as a result effective in adapting to the new environment of a post-industrial society in which services played an increasingly important role. The demise of the Soviet Union and emergence of the Russian Federation that had shed some of the former member countries of the Soviet Union, established the U.S. as the single dominant economic and military power in the world. This new position has provided both new challenges and opportunities for America, which has responded to them with mixed success. This not only because of the novelty of the situation in which America found itself but also its lack of global strategy in politics, economics, trade, the environment, and sociology or human relations. On one hand, the U.S. was ideally suited for this new role as the only country that truly represents a successful melting pot of peoples from throughout the world. At the same time it found that it was traditionally an inward looking society, with little global political involvement.

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America was a minor, reluctant colonial power and much of its colonial involvement occurred more by chance than by design. Its participation in international conflicts was more reactive than pro-active and isolationism was for long a major force in American politics. This has now changed and America finds itself in the unaccustomed role of global arbiter, protector, and economic power, a position for which its political system was ill prepared. This largely because of the complexity and diversity of American society, its open yet highly diffused or disorganized political system, and its traditional inward outlook.

CHAPTER 6

THE FUTURE OF WORLD LEADERSHIP

America has led the world since the demise of the Soviet Union yet for America to maintain this leadership role it must refocus its values and purposes, establish achievable objectives as well as come up with clear directions that advance the common good. It is essential for America to regain the confidence of both governments and peoples throughout the world. One cannot lead without the confidence of the led and America has lost much of that confidence in recent years. As a result it was increasingly forced to act unilaterally, often without the support or even consent of major segments of the world community. In a globalized world a large consensus is essential for major strategic decisions to succeed. This applies to economic, social, and political, as well as security issues. America decided to go it alone or with a minority of the world in some major security and also economic developments, an approach that reduced global support for its leadership and in some cases encouraged opposition to it. Leadership can only be maintained by example that represents common values, principles, and beliefs. A leader or leading nation must motivate, inspire, and provide a vision that people and other nations can use and follow. A leader must convince followers that his leadership will be a move toward positive change and that it represents a mind set of true goals. Most importantly a leading nation must be a model of positive planning and achievements as well as show universal concern. The future of the world depends on the effectiveness of today’s leadership. Rapid technological and other developments such as the AIDS epidemics, Africa’s persistent famines and poverty, Islamic fundamentalism, rapid environmental degradation, widespread terrorism, national and international conflicts, including suppression of minorities, a proliferation of civil wars all require resolution that only a respected, powerful, forceful, committed, and focused world leader can supply. CHALLENGING AMERICAN LEADERSHIP American leadership is being challenged now not only because of unpopular American strategic decisions such as the Iraq war and various trade and other 159

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policies, but also because of the inconsistency of American leadership, its lack of broader considerations, particularly those of its allies. America considers itself the center of the world. In baseball we have the World Series in which the winner of the two American leagues battle for the world trophy, although only U.S. teams participate. The same applies to other sports events in which only American teams battle for a world cup. America has become used to leading the world. The dollar has for long been the world standard currency and many global organizations such as the World Bank are led by Americans or are located in and largely funded by America. Many Americans consider themselves lucky to live in the “best” country in the world, though they work more hours per year than people in most other countries, have fewer holidays, lack universal health care, have a crime rate higher than most developed countries, and have a shorter life expectancy than most West European and East Asian countries. Americans are really the most diverse people in terms of heritage, culture or religion. Their forefathers or they themselves come from every corner of the world and practice any one of the world’s religions. They live in a rich land that allowed them to prosper, express themselves freely, worship as they choose, and that limits the role of government. The foundation of all of this rich freedom and feeling of well being is the American “Declaration of Independence” whose primary claim is that each person has the right to freedom, freedom of expression, happiness, worship, and movement. Americans have always felt more lucky than most and have often expressed their feelings by sharing their wealth with others, even when far away, such as in and after World Wars I and II, Korea, Bosnia, et al. Sometimes such generosity was interpreted not as aid but as interference in domestic affairs; other times as attempts to dominate others politically or economically. They similarly have come to the aid of democratic countries when attacked such as in World Wars I and II and the Gulf War or when a particular people were suppressed or even murdered for their ethnicity, religion or culture, such as in Bosnia, Somalia, Afghanistan, and other countries. Americans pride themselves in being the protector of human freedoms worldwide but some of their recent actions have been interpreted as imperialistic or at least self-serving. Americans consider themselves the embodiment of human freedoms, but many judge some of America’s actions as restricting self-determination. Although concerned with the quality of the global environment, America is the only major holdout from ratifying the Kyoto Protocol which even Russia, the other major polluter, has ratified. Many consider America’s positions and actions hypocritical and without conviction. They want America to lead and lead by example, an example that embodies all the lofty principles America stands for and expounds. But they often fail to find consistency in principle and action. In fact, many are suspicious of an emergence of American imperialism that uses the threat of terrorism to advance American political and economic interests. America’s “liberation” of countries such as Bosnia, Kosovo, Afghanistan, and Iraq is by some even considered an occupation

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with an ultimate objective of American dominance. All of this makes America vulnerable and opens the question of its leadership. Suspicions of moves towards imperialistic goals and global dominance by America are increasingly voiced not just by historic and political opponents but also by traditional allies. A major reason for these developments is that America not only ignored its allies but also the Great New Powers, particularly in Asia in the war on terrorism and in Iraq. Finally, there is the issue of American illusions of superiority as others see it. America claims to have the best health care and educational systems, yet lags many other countries in the overall quality and delivery of health care and educational services. Our legal and law enforcement systems are complex and often skewed to serve special interests, particularly in health care delivery and damage recovery. American gun laws are completely out of line with those of most countries, and the country has among the highest violent crime rates of any developed and even developing countries. American elections are among the most archaic in democratic nations with hanging chads, voter disenfranchisement, and other questionable practices. This when the simple use of the Social Security identification number, residence, and nationality proof (birth or nationalization certificate) could provide an easily managed and fool proof voter qualification. As the world leader America must do better and provide an example that truly represents its principles in fact and not just in words. GROWING ASIAN DOMINANCE Asia, with more than half the world’s population, is leading a global boom, with China’s and India’s economies growing at unprecedented rates. China in particular has led the world economy, with its GDP growing at more than 10% per year for some years now. It contributed about one third of the world’s growth in real output, measured in purchasing power parity in 2003. This was nearly as high as its contribution in 2002 when it reached nearly 40%, a historic high for any one nation. But China’s contributions during 2000–2003 to increases in global imports (32%), fixed investments (60%), and oil consumption (32.5%) were similarly impressive. True, historic low interest rates in America and other developed nations not only prevented a deeper recession in the first few years of the 21st century but also reduced the risk of deflation. The result was increased consumer demand that may decline as American and other countries’ interest rates are raised to more normal levels or about 4–5% in response to rising inflationary pressures. At the same time, crude oil prices started to increase to unheard of levels of $55/barrel in the fall of 2004 as a result of increased demand largely by China, India, etc. This together with increasing costs of borrowing may clip consumer spending and thereby reduce the growth rate of international trade. China increased its cost of borrowing in October 2004 to slow down its economy and assure a soft landing of its overheating economy. Yet notwithstanding this temporary braking of China’s economy, all indications are that China and other East Asian countries plus India will resume their economic growth.

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Considering China’s economic, trade, industrial and technological developments during the last 20 years and particularly its phenomenal growth rate since 1991, it is certain that it will reshape the international economic and trading environment, a development that must be considered in planning for the future. China, Japan, and India, as well as many Southeast Asian countries, are proud old civilizations with long established customs, ethics, and legal systems. They are also thrifty and save more than most Westerners. As a result, the biggest contribution towards financing the U.S. debt or deficit are the Asians. The economic boom in Asia is currently slowing down slightly in China (2004), yet Japan seems to have reemerged from its economic stagnation and India is growing into a truly advancing economy in both financial and technological terms. In fact, Asia is overall gaining in science and technology, both in terms of practitioners as well as in research and discoveries. India for example graduates more engineers per year than all of Europe and the U.S. combined. The economic growth of Asia, and particularly East Asia, is expected to continue at higher rates than those achieved by Europe and America for at least another 30 years. As a result, we must expect China, which is the world’s 3rd or 4th largest economy now, to graduate to become the 2nd largest by 2020 or before and overtake the U.S. by 2030. China’s GDP is today (2005) over 13.8% of world output at purchasing power parity (PPP), second only to America in PPP terms. It is also the world’s 3rd largest exporter. As noted before, it attracts more foreign direct investment than any other nation, this not only to take advantage of low labor costs and highly motivated labor but also of the huge potential domestic market. In fact, China has become the dominant importer in East Asia and is responsible for much of the manufactured goods export growth of Japan and other Asian countries as well as the large increase in imports of oil, mineral, and other raw materials. China’s economic reforms based on gradual changes in the interest rate and slowing of lending or available credit is apparently working in reducing the rate of economic growth in 2004 and thereby will assure a safe landing of its overheated economy. China has achieved a faster rate of economic growth than any western country ever did and can be expected to become the world’s biggest trader by 2015 and overtake America as the largest economy on the globe 10–15 years later. China’s economic growth appears well managed and under control. It is rapidly creating wealth while maintaining a relatively open economy that offers huge opportunities for foreign direct investments and consumer markets. Foreign manufacturers are clamoring to export to or produce in China to meet this mushrooming demand that has exploded with the large increase in disposable income of huge numbers of people living in the coastal areas of China. But this is just the beginning because the interior of China with 2–3 times the population of the coastal areas is only just starting to be involved in the economic reemergence of China. China is now emphasizing not only the development of the interior, particularly the Yangtze upriver region, but also of transport access to this region that in the past was largely served by inadequate river transport that isolated

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it from rapid or efficient connections to major export markets. A new highway from the area west of Wuhan to Myanmar (Burma) and the potential of a new Chinese-built port in Myanmar on the Bay of Bengal (Indian Ocean) would provide China with an efficient back door to markets in Europe and the east coast of the US. China has a huge reservoir of able, hardworking, underemployed labor that can be put to work in the Chinese interior. While many in the West and particularly in America criticize the investment by Western firms in China as outsourcing, it must be remembered that in the longer run it is designed to create wealth in China and a resulting potentially huge market for the very products these investments are designed to manufacture. With 20% of the world’s population, wealth creation, and growing consumer demand will establish a most important new market that will not only absorb much of what the Chinese factories produce but also imports from other countries. The great fear that outsourcing jobs to countries like China and India is undermining the American economy and generating unemployment is really misplaced. While it is true that many basic manufacturing and service jobs, including programming, software development, telephone answering, telemarketing, order processing, and others have moved overseas, there are corresponding benefits such as lower costs and inflation and new market developments. In addition there is an increased demand for new technology that will be largely generated by the huge research organizations of the West. It is interesting to note that most technological and scientific breakthroughs were and are generated in the West, a trend that will not only continue but accelerate. At the same time we must recognize the West produces many fewer engineers than China, Japan, and India combined, but does generate many more post-graduate scientists and engineers. In other words, it generates a large cadre of researchers and technology developers. In fact, the number of scientists and engineers working in research and technology development in the West and even America alone far outnumber those in the Asian countries and will for some time to come. Similarly the amount of money or even percentage of GDP spent on research and development in America is larger than that spent in the rest of the world and many times that spent in Asia. As a result, advances in science and technology will probably continue to emanate mainly from the U.S. and the West in general. This provides an opportunity for these countries to benefit from the introduction of new technology and services that permit capture of the high paying jobs that are the essential domain of high and new technology developments. There is therefore an excellent opportunity for America to advance more of its workforce towards more sophisticated, knowledge and skill demanding jobs that by their nature command higher pay. Things are certainly changing and although China was the world’s largest economy for much of human history it lost its place as an economic, science, and technological leader about 150 years ago, when anarchy, foreign invasion, and infighting not only reduced its economic prowess but also resulted in economic isolation. Voltaire is reputed to have noted that “China has great potential and

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always will” but this was before China opened up to the world over 20 years ago. Napoleon on the other hand was reported to have suggested “let China sleep for when she awakes she will shake the world”, a prediction that is now becoming reality. China is rapidly catching up not only economically but also in terms of science, technology, medicine, and management. In fact, in some areas China has advanced at phenomenal speed. This largely as a result of its willingness to learn, unabashedly acquire or transfer, and spend inordinate efforts and resources on education, technology, and knowledge transfer, and research. In many areas China has already caught up while in others it is rapidly closing the gap. By keeping costs down China has been able to contain inflation yet sustain high liquidity. Excesses are invested in real assets and foreign, largely fixed, interest instruments. China’s growth is not as often claimed mainly achieved only by massive use of cheap labor to out produce others and attract investments in manufacturing and services. Among developing countries there are many with lower labor costs. Yet it is China that attracts the bulk of foreign investments and export markets. China provides a business and investor-friendly environment with few non-tariff barriers. It encourages trade and welcomes foreign expertise; there are many obstacles to continued economic growth, however, such as an archaic banking system and a central government bureaucracy. According to the IMF, given China continues its structural reform and reform or privatization of state-owned enterprises, it should be able to achieve a 7–8% growth rate in GDP terms and though still far behind the USA in GDP terms in 2020 would actually overtake America in PPP terms. As seen in Table 19 that shows a comparison of economic output in GDP measured in PPP terms, China was already far ahead of all nations except the USA in 2003. The size of China’s economy is usually undervalued because it maintains low labor cost and consumer prices. As a result and because China pegs its currency to the dollar at an artificially low rate, China’s GDP accounts for a much smaller percentage of world output, in fact only about 4%, a much smaller player in the world economy. Table 19. Major Country’s GDP Measured in PPP Terms in Trillions of $ for 2003

USA China Japan India Germany France UK Italy Brazil Russia

GDP in PPP

Per Capita GDP in PPP

1105 608 354 294 212 168 166 158 150 148

37 800 4 900 27 570 2 700 27 350 26 350 26 950 26 750 8 020 9 000

Source: IMF and U.S. Bureau of Economic Analysis.

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China’s economic growth rate has been larger than that of its East Asian neighbors. Its growth in world trade has been even more phenomenal. As a result, it is bound to become a major if not the major player in the world economy. Although there are other large emerging economies such as India, Brazil, and Russia, in addition to Asean and Korea, China’s size dwarfs their contribution. China and India together account for 38% of the world’s population and over $9 trillion of GDP in PPP terms nearly equal that of the US $11 trillion. Yet their rate of economic growth is over twice that of the U.S. and they as a result should overtake the U.S. economy in PPP terms within 5 years or by about 2010. Both China and India are potential economic powerhouses, each with its own advantages. China has a great educational system, widespread literacy, and a hardworking population. But its population has an average age about 6 years older than that of India, which continues to grow relatively younger. India also has better free market institutions in finance and law as well as a more transparent system with little corruption. China consumes more basic materials such as steel, coal, and cement than any other country. Even in oil consumption it now (2005) has become the world’s second largest oil importer, though with a total oil consumption of only 6% of total world demand, its per capita energy and particularly oil demands are still very low. Yet China’s increasing consumption of basic materials will continue as China builds its transport, telecommunications, energy, housing, education, and health care infrastructure which, while quite advanced on the Pacific coast, does not yet extend inland and so far only serves about a quarter of its population. At the same time living standards are improving particularly in the eastern areas with automobile ownership growing by 20–30% per year. Similarly electric power consumption in that area is also growing by about 20% per year as home appliances, computers, and other devices become popular. Today we essentially have two Chinas – the increasingly developed Pacific coastal area with about 25% of the population, and the rest; the average per capita income of the first is more than twice that of the rest, a situation that cannot be sustained. Because of this recognition, the government of the People’ Republic is now putting major emphasis on the development of the interior by massive investments in infrastructure and services. It is also providing major incentives for foreign direct investment in these areas, particularly for manufacturing. China is also developing gateways to the interior for raw material supplies such as pipelines to central Asia and the Caspian Sea region for oil and gas. Construction of a 620-mile oil pipeline from east Kazakhstan to the Xingjian region was started in mid 2004. China’s economy that experienced a limited slow down in the middle of 2004 when the government increased interest rates that obviously affected only borrowing from public banks but not private institutions or individuals. It started to expand again in the fall of 2004, reaching a rate of growth of 9.5% during the first nine months of 2004 which may lead to a record-shattering 12% annual growth for all of 2004. At this compound rate, as noted before, its economy would nearly double in six years.

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China is already the world’s largest producer of TVs with TCL-Thomson China plants the largest single TV manufacturer. China is expected to produce nearly 19% of the world newbuildings of ships by 2005 and similarly become the largest steel and textile producer. Even in automobile, telecommunications, and computing equipment manufacture China will be among the top producers in the world within a few years. It benefits from a cheap, inexhaustible and trainable labor supply, a supportive government, improving infrastructure, and a very large potential or rapidly developing domestic market. Its huge positive trade balances, particularly with the U.S. ($120bn in 2004) permit it to not only build up huge foreign exchange reserves, but also invest in domestic projects or abroad. China’s clothing exports alone are expected to grow to $124bn/year by 2008 or to about half the world total. China’s economic growth at an average rate in excess of 9% for nearly 25 years now has been largely the result of its success in exporting. But China has simultaneously succeeded in advancing living standards, though primarily in the coastal areas. In the past, growth albeit at a lower rate has been achieved throughout the land. The trend is evident. China’s Pearl River Delta in Guandong Province, the mainland backwater of Hong Kong had become the principal export manufacturing area but increasing labor shortage and costs are driving new economic developments north and west, largely towards the Yangtze basin. Initially Shanghai, Nanjing, and Suzhu/Wuzi attracted massive new investments but more recently investments and economic developments have been moving westward, a trend that the imminent completion of the huge Three Gorges Power and Flood Control Project will only accelerate. Cheaper, abundant, non-polluting electric power and huge numbers of new workers will become available and provide a foundation for large-scale industrial development. This move that extends both the Pearl River as well as the Yangtze River delta economic power westwards will establish an industrial zone in China with a population in excess of 500 million and a domestic product of $700 billion. The expanded Chinese economic powerhouse will in future provide large new markets for manufactured goods, both imports and local products. However for now Chinese exports of manufactured goods are sky-rocketing from $50bn in 1990 to over $400bn in 2003. China’s trade is facilitated by the pegging of the Yuan to the U.S. dollar (at about 8.3 Yuan per U.S. dollar in 2004). The falling value of the dollar and thereby the Yuan has made it easier for China to compete in world markets and increase market share. Even the slight rise in interest rates by China’s central bank had little effect on slowing the Chinese economy and trade. Other Asian economies also effectively link their currencies to the U.S. dollar. As these are both China’s major competitors in the U.S. markets as well as its principal trading partners, China may continue this policy. America’s trade with Asia accounts for practically all its trade deficits in recent years. These deficits continue to grow and even a yet weaker dollar may not stem these developments, particularly if China maintains its Yuan dollar peg. As a result the U.S. will be increasingly indebted to Asian nations, particularly Japan and China followed to a lesser extent by south and Southeast Asian countries. This

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puts Asia into a dominant global economic position as financier of America, the world economic and military leader. China, in particular, as noted, is trying to slow down rates of economic growth by controlling credit, inflation, and investments, yet moving towards a more marketoriented economy. Some have suggested that China is contributing to global deflation by depressing the price of its exports, particularly of manufactured goods. At the same time China’s large and growing demand for raw materials is driving up world prices of iron ore, petroleum, natural gas, and other commodities contributing to global inflation. These two countervailing pressures are not really unique to China, as other large, newly emerging developing countries like India have also greatly increased their demands for imports of raw materials. These two pressures do seem to balance with deflationary trends generated by lower manufactured goods and services, outweighing the inflationary pressures of increased commodity demands. China doubled its foreign exchange reserves to nearly $500bn in the two-year period of 2002 to 2004, with much of it invested in U.S. government securities. But the declining value of the dollar may make this increasingly less attractive, which could even further accelerate the dollar’s decline. This is a dilemma. China among other major exporters to the U.S. is largely financing America’s current account deficits. However the declining dollar may reduce its interest in these investments which would further the decline of the dollar. For the time being it appears to be in the mutual interest to maintain the status quo with China, Japan, and other Asian exporters to the U.S. investing their surplus in America and thereby maintain the ability of the U.S. to continue its global trade with huge account imbalances. China is continuing its gradual and often hesitant transition from a centrally planned to a market economy, with its stop and go or sometimes even retreating actions. The country still has a dominant central bureaucracy but is increasingly allowing local economic decision making. The problem is that with a rapidly growing private sector and private versus government-controlled bank lending or investment, the central government is gradually loosening its firm grip in controlling the economy. China’s economic growth will continue to be based on exports and foreign direct investment in profitable ventures in China. China is sometimes blamed for taking manufacturing jobs from other developing countries, thereby perpetuating or even accelerating long-term un- or underemployment there. This is only partially true as China at the same time has vastly increased raw material imports and thereby price. As most raw materials come from developing countries, their export revenues and employment in raw material production is escalating, this in general more than makes up for the loss of employment in basic manufacturing. India, the other major emerging Asian economy, started much later but though growing at a slower rate still achieved a growth rate of more than twice that of western economies. As a result, it is rapidly becoming another important Asian economy that by virtue of its size may become a major global player within 10

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years. India has the major advantage of a free democratic and political system of government, and effective legal system and transparency in most of its business practices. It suffers under remnants of Maoist’ confrontations (Naxalites). These are influential in many parts of the country and particularly in the northeast of India. It also suffers from a large, imbedded and inefficient bureaucracy. It is a huge country with major social problems, an archaic administration, and yet a highly educated modern youth among the urban population. India’s other major obstacles to economic growth are its lack of modern transport, electricity, and communications infrastructure. This in addition to the huge debilitating bureaucracy at all levels of government and local administration. Much of the infrastructure dates from British colonial times and has neither been updated nor properly maintained. Yet while the government recognizes these problems, persistent budget deficits of about 10% of GDP of all government expenditure, make it difficult to correct these deficiencies. Yet without it, the economic growth of India will be severely hampered. At the same time India’s foreign exchange reserves have grown from about $35bn in 2000 to well over $115bn in 2004 (Source: Economics Intelligence Unit). India’s exports as noted have similarly grown significantly in recent years, a trend expected to escalate further. India has been particularly effective in exporting services; recognizing that it cannot compete with China in massive manufacturing for exports that requires huge foreign investments, it has encouraged development of and succeeded in attracting large-scale service exports in communications, banking, software developments, accounting, booking services, and more. India has the advantage of an open democratic market economy, but suffers from an outlawed but still practiced caste system as well as restrictive labor laws that make it hard to fire workers, even for cause. It still has reservations for public sector jobs and school or college admissions that are designed to assure access by previously discriminated lower caste members. At the same time, these reservation schemes have adverse effects on productivity and discourage both foreign and local private investments. Trade between the two Asian mega states of China and India has grown significantly in recent years, and reached $4bn in each direction in 2004. At this time their economies seem to complement each other, but India expects to emulate China’s success in manufacturing to provide jobs for its huge pool of under-educated workers who do not quality for service jobs. This may not be easy because Indian labor is less disciplined, skilled, and organized. Yet notwithstanding their difficulties the two Asia mega states will become major global players within the next 10–20 years, with China moving into second place in the global economy in 2020 or earlier and probably surpassing America 10 years later, to become the world’s premier economic power. India may take much longer to achieve real economic status though it too is expected to surpass Japan and the individual European economies in total product by 2050 or before. These developments that will firmly anchor the center of the world economy in East Asia and later all of Asia will have consequences of historic proportions.

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For nearly a millennium Europe and the West and later North America have been the economic and strategic centers of the world, this notwithstanding the fact that Asia and particularly China have had a longer history of civilization. It is interesting to contemplate the prospects of the return of the pendulum of economic power to Asia after such a long time. It is similarly important to ponder the implications of these prospective developments, particularly when considering the impact of the radically different cultural and even moral values of many Asian people on the world largely influenced by dominant Asian economic power that without doubt will demand a very different global leadership. In fact, the apparently inevitable emergence of Asia as the economic leader of the world will require the West, consisting largely of Europe and America, to reevaluate not only their conditions but also their role in global leadership. The West has experienced declining competitiveness, not just in manufacturing but more recently also in services. Some of this is due to Western complacency as well as overconfidence in its long-term inherited leadership role. Since Western Europe’s rise to economic prominence by the early 18th century that later became dominance, followed by America’s emergence as an economic power at the beginning of the 20th century, the West has taken its economic leadership for granted. As the major technology developer the West used technology to advance its product and process developments, followed by communication and transport systems advance. It integrated its leading role in engineering and science, into advances in product and process technology that gave it an unassailable advantage. This in turn was used to advance living standards that could climb on the ladder of productivity improvements. This trend though is unraveling now as particularly Asian countries catch up in engineering skills and often even surpass Western standards. Japan accomplished this over the second half of the 20th century, followed by South Korea and now China, followed by India which both graduate by far more engineers and scientists than the entire West combined. In fact India graduates 5 times as many engineers as America every year as does China, and the quality of their engineering graduates is improving. In fact, in some areas such as civil engineering, it may even be superior. Since 1970 over 600,000 Chinese went abroad to study and only 200,000 returned; however, the percentage of returning students is increasing and now the majority of Chinese student’s, mainly graduate students, return after completion of their studies plus a few years of practice. The returnees not only bring back engineering and/or scientific knowledge but in many cases valuable business experience. The same is happening with Indians, though at a slower pace. One reason for the reversal of the past brain drain is the gradual closing of the salary gap. While in 1990 a graduate engineer in America would make 100 times as much as in China and 60 times as much as in India, by 2004 the gap has closed to a multiple of four. Lower living, property, and service costs quite often permitted returnees to actually attain a higher living standard in China and India under these conditions. Wage inflation in China and India continues at 15–17% for highly educated and skilled professionals, a multiple of the improvements such people could expect in

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the West. This combined with the attraction of a familiar culture, comfortable and less demanding lifestyle, and often better career or business opportunities, make a return very attractive. China’s and India’s rise to greater economic prowess and potential leadership is no longer a question but just a matter of time. With a growth rate three times and twice that of the Western countries, including Japan, China and India respectively will inevitably become the leading economies within a few decades. China still faces the problem of controlling inflation, reforming its banking system, eliminating rural poverty, improving its infrastructure, and cleaning up of its rivers, air, and environment in general. India faces even more formidable obstacles such as a morbid bureaucracy and an archaic social system in addition to the problems that China faces. Yet both have embraced economic growth as the main objective and are moving rapidly in that direction. While China needs to develop greater confidence in its own competence, India needs an infusion of greater discipline. Both benefit from deference to learning, though Confucianism in China combines it with deference to authority. The future trend though is clear. Asia, led by the two super-nations, will assume increasing dominance in the world, led largely by economic prowess and not political or military dominance. ASIAN ROAD TO ECONOMIC SUCCESS Asia’s emergence as the global economic powerhouse started by Japan 50 years ago and followed by South East Asia and South Korea, is now exploding with the rapid growth of China followed by India, the two most populous countries in the world. China’s economic awakening, barely 25 years ago, slumbered along for the first decade, when the newly opened Communist state tried to develop an effective strategy for its reentry into the global economy. Since then its focus on economic growth, increasingly open markets, attracting large-scale foreign direct investments, technology transfer, and improving transparency has made China the preferred partner for some of the most important industrial leaders, service providers, and financial institutions of the world. China has managed to provide attractive investment and manufacturing as well as trading opportunities. At the same time, it has devoted huge resources to build up its own infrastructure, social services, and institutions, though not always in an equitable manner. Large discrepancies in income, living standards, and employment opportunities persist between the rich eastern coastal regions in the interior, though major changes are taking place now. For example, Chongqing, China’s largest city and the former capital of the Nationalist Government on the upper reaches of the Yangtze in Szechuan Province, is undergoing a building boom that puts even the massive rebuilding of Shanghai in the early 1990s to shame. Investments in large hydroelectric, road, rail, telecommunication, ports, schools, and other infrastructure projects consume a larger percentage of GDP than in any other major country in the world. Over the past 20 years China’s real GDP has averaged a 9.5% growth per year versus India’s 5.7% and that of OECD countries

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of 2.6%. In other words, its economy has grown at 3.65 times the rate of the major industrialized countries and about 3.2 times the rate of growth of the U.S. China, unlike Russia, has maintained a strategy aimed at economic development with comparatively little emphasis on strategic and particularly military prowess. Even the occasional threats levied at Taiwan appear to be more politically motivated than strategic objectives. In fact, China recognizes and takes full advantage of Taiwan’s thriving economy. It encourages large-scale investment by Taiwanese as well as indirect trade with Taiwan via Hong Kong. Taiwanese are among, if not the top, investors in China and many Taiwanese ventures operate in Mainland China. By spending a comparatively small percentage of GDP on the military and strategic developments, China has been able to concentrate on domestic economic and social development. Although it is an active participant in selected developments, particularly in Africa and other regions that do or may provide raw material and other product sources, China has largely refrained from becoming politically or strategically involved in the various trouble areas in the world. Much of the growth of China’s manufacturing and to a lesser extent service industries and resulting exports to major importing countries such as the U.S. and in Europe is often claimed to have been at the expense of U.S./European manufacturers as well as both emerging and poorer developing countries. America’s trade deficit with China has grown to over $124bn in 2003, but China’s trade with Japan and South Korea is nearly balanced and it has a negative trade balance with most developing country trading partners even those who lost manufacturing to China. The emerging economies such as South Korea, Taiwan, and countries in South East Asia have moved up the value or technology chain and now produce higher technology goods or components, many of which are exported to China for assembly and re-export or local consumption. Similarly, poorer countries often become raw material, food or simple goods suppliers to China. Another important consideration is that much of the increase in exports by China has been generated by the relocation of foreign multi-nationals or their subsidiaries to China. These firms, while initially relocating to take advantage of lower labor costs and large pools of competent workers, are really interested, in the longer run, to capture shares in the rapidly developing domestic market in China, which is expected to exceed that of the U.S. for consumer goods within 10–20 years. In other words, China is not really competing with other developing or emerging countries for jobs, but is encouraging a shift in paradigm and in a way consistent with David Ricardo’s conclusions that economies will ultimately gravitate towards their comparative advantage, which by its nature is usually temporary as it encourages greater competitiveness, higher income, more consumption, and ultimately another economic shift. Such developments are evident in Japan, South Korea, Taiwan, and other emerging Asian countries, which have been able to follow the shift and adjust their economies and trade, particularly with China, to maintain an effective trading balance. In fact, most of these countries as well as developing countries in Africa and South Asia usually have a net surplus trading balance with China. China’s trade with developing countries has grown by nearly $60 billion between 2000 and 2004,

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a trend that is expected to continue as China’s appetite for raw material and food imports grows unabatedly. At the same time China is advancing its infrastructure, both in size and coverage, as well as quality at an unprecedented rate. China completed more large or macro infrastructure projects and invested more in their development since 1994 than the rest of the world combined. It also completed most of these projects in record time and on budget. The Three Gorges Dam project, a multi-purpose hydroelectric project of unrivaled size that also serves to improve navigation, irrigation, and flood control of the Yangtze River and its tributaries while generating enough electricity to permit the shut down of about 30 polluting old coal-burning power plants, the diversion of fresh water from Yangtze tributaries to supply water to the waterstarved north around Beijing and the regions of the advancing Gobi Desert, are just a few of the additional benefits of this mammoth project whose final stage is expected to be completed before 2010. There are many other macro projects underway or recently completed. The development of the formerly blighted south shore of the Huangpu River flowing through Shanghai, the Pudong area formerly occupied by coal piers and piles as well as all kinds of low level activities has been converted into a most modern financial and business center, connected to the traditional north shore of the city by several new high level bridges and a tunnel. The new Pudong Airport which is replacing the old Shanghai airport in the north of the city is served by the world’s most modern and efficient Maglev (magnetic Levitated) train system. In fact, it was the only really working Maglev system in 2004. Shanghai has one of the most modern transport systems and its transport, power, communication, health care, and educational systems were all rebuilt in a period of 10 years or less, making Shanghai an example of what can be done in transforming a decrepit megacity into a true global metropolis. This is just one of many such projects that China has developed since 1990. As a dominant trading nation, China recognized early that it must have efficient, well managed ports, equipped with the latest technology and capable of serving the largest ships in world trade. Notwithstanding its long history of state control, China moved quickly after 1990 to privatize its ports and today has a larger percentage of major ports run and often owned by private, usually foreign investors/operators than most countries in the world. This strategy not only assured China of rapid inflow of port investments and technology but also of introduction of the most efficient port management and marketing. China often used innovative approaches to assure rapid and efficient growth in say port or other redevelopment. To reduce the problem of large traditional overmanning of ports for example, it used the fact that port workers were normally housed in estates right in the port or in waterfront buildings. As part of port privatization, workers were, in many instances, given ownership of their apartments that were then sold to a developer for $20–50,000, a sum big enough for workers to acquire newly-built apartments on the outskirts of the port city near new industrial plants and attractive employment. Most port workers took advantage of

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these opportunities that allowed port employment to be significantly reduced as required by the new private operator. Similarly, the redundant, archaic, and often run down port facilities and now abandoned workers’ quarters were razed and the waterfront land sold or leased to developers for large-scale commercial real estate development. The revenues obtained more than covered the capital needs of the local government for its share in the redevelopment costs of the port, and furthermore established important new real estate tax revenue streams. Port privatization in China was usually a private/government partnership, with the government providing the land and various civil improvements for a minority share ownership of the modernized port or terminal. This approach has served China well by assuring it of one of the most efficient and capable port sectors in the world. China’s economic policy has been and is radically different from that used by Japan and later South Korea, which shunned foreign investment in their development and protected local firms. China by comparison invited foreign investments and trade from the start of its economic opening to the world at large. In 2003 alone over $54bn of foreign direct investments were made in China, a sum larger than all foreign investments in Japan since World War II. Yet at the same time China, unlike Japan and South Korea, maintained large-scale state ownership in essential industrial sectors as well as in major banks and financial institutions. China’s foreign trade which reached $851bn in 2003 was actually fairly balanced with a major surplus in trade with the U.S., Hong Kong, the Netherlands, and some other industrialized countries, and major trade deficits with Japan, South Korea, Taiwan, Germany, Malaysia, as well as Russia and many resource-rich developing countries. The first set is primarily countries that supply China with high-tech components and equipment, while the others are largely resource suppliers to China. China’s Foreign Trade (2003) Rank

Country

Import from

Export to

Net

1 2 3 4 5 6 7 8 9 10

U.S. Japan Hong Kong South Korea Taiwan Germany Malaysia Singapore Russia Netherlands

339 741 111 431 494 243 104 105 97 19

926 594 763 201 90 174 62 89 60 135

1265 1335 874 632 584 417 201 194 157 154

Total Other Grand total

2720

3093

5813 2697 8510

China produces and consumes more steel than the U.S. and Japan combined, and though it produces already (2004) over 220 m tons/year, it imports another 60 m

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tons/year to keep up with the large demand imposed mainly by its infrastructure, housing, and industrial sectors. China is expected to become the second largest world market by 2015, surpassing both Japan and even the European Union. At the same time it is rapidly advancing its technological capability IT spending in China, for example will net $418bn per year in 2008, twice the amount spent in 2004. IT spending in China grows now three times as fast as in the U.S. and five times the average world growth rate. Shanghai alone already produces 40% of the world’s semiconductors, and China will soon manufacture over half the total world output. China’s economic policy was set by Deng in the 1980s when he declared that “socialism must prove itself through markets and prosperity”. In other words, economic growth and well being was to be the driving force. Since then China’s government has put emphasis on economic growth using all the tools that capitalism had developed over 200 years to achieve its goals of economic prosperity with largescale employment and modern infrastructure. China has developed an interesting economy, with a capitalist base and a benign socialist superstructure. Wealth creation both in public and private has become an objective and not a social negative. In fact, the policy encourages consumerism, private ownership, as well as private participation in the stock market in which both public as well as private company stock is traded. As a result, as noted, China’s economy has mushroomed and its GDP is now larger than that of Russia, Brazil, and India combined. Its economy is also much more integrated into the world’s economy and markets than that of Russia and India. It is a fairly open economy. China exports 6 times as much as India. In fact the annual increase in the value of China’s foreign trade in 2003 was larger than the whole of India’s foreign trade in that year. One reason for this is the fact that unlike India, which by 2005 will still maintain average tariffs of 30%, China will have reduced its foreign import tariff to only 9%. China is well integrated into the global supply chain and with the large presence of foreign companies is China is able to market its products much more effectively. Foreign direct investments in China dwarf those in India and were over 13 times larger in 2004. While China is currently concentrating on labor-intensive activities, particularly in the interior, it did not ignore technology development and transfer so as to assure a gradual entry into more lucrative higher-paying activities. In fact, China, while spending much less on research than developed nations on a per capita basis, achieves a much greater return on its R&D investment. This largely because it encourages and pays for large-scale technology transfer to more rapidly close the technology gap, and benefits from returning Chinese scientists who were educated and got their experience abroad. It also concentrates more on applied versus basic research and on technology development more than basic science. Investment in research and technology in China is led by the public sector, but private enterprises including foreign companies working in China increasingly perform research and technology development there. One result of China’s entry into the world economy, its aggressive growth policy and rapid employment generation is the large-scale increase in labor effectively employed. The ratio of labor to capital

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used to generate global economy output has as a result increased, which in turn has raised the world return on capital employed. This, as a result, makes investment in economic activities more attractive and will continue to generate investment in productive assets. Combined with worldwide, low-interest rates at the beginning of the 21st century, this can be expected to fuel continued investment not only in manufacturing and resource production but also infrastructure and housing. China has truly become a global economic powerhouse. By emphasizing economic growth and social development in a free and open market with large-scale private ownership, gradual transfer of state enterprises, encouragement of foreign investment and ownership, quality education, and research with less concern with military, strategic, and political power and influence, China has carved out a unique position in the world. While it maintains a sizeable military and weapons capability, nuclear prowess and even developed basic space technology, its priority has been and is to become a major economic power and to raise its peoples’ living standards, this by becoming a full and vibrant participant and eventually leader in the world economy in which China is destined to be the most dominant player. India is, after many false starts, finally starting to emerge as an economic power, particularly as noted in services, communication and computing, where the large numbers of well-trained English-speaking professional provide it with a major advantage. India’s problem though, for some years to come, will be its huge and highly entrenched inefficient bureaucracy, the huge number of disenfranchised and often illiterate lower class or caste people, its failure to maintain and develop its infrastructure, and finally the burden of a large military and weapons program, largely in place to counter and/or prevent threats by its neighbor, Pakistan. These factors will continue to delay India’s emergence as a truly world-class economic power. Still India’s principal development problem is the low quality of its infrastructure. Comparatively little has been invested in transport, communications, energy, and social infrastructure. Furthermore, India is burdened by a huge and largely ineffective bureaucracy that causes major obstacles and delays in required advances. White collar or service outsourcing to India has really taken off and now employs several hundred thousands of people. While initially concentrating on call services, credit card, and other financial transactions including customer service, it later included software development and programming, as well as technology development for foreign/US designers, including preparation of product design for manufacture in the US, Singapore (Flextronics or Solection) or elsewhere. White collar outsourcing is simpler and is unaffected by lack of effective transport/logistic infrastructure. India will soon be the world’s most populous country with a projected population of 1.6 billion by 2050, compared to China’s 1.4 billion at that time. India, which uses English as its main language, will give a major boost to the more universal use of the language, not just in business and commerce but also as a major means of communication. Notwithstanding India’s recent emergence as a new economic tiger with a 5% plus growth rate and rapid

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population growth, it will not match or overtake China as Asia’s premier economic power in the foreseeable future and probably not during the 21st century. China’s population growth has been slowed to a trickle as a result of the onechild policy but even with the potential introduction of a 2-child policy by 2010, China’s population should peak at about the same time and then stay level as life expectancy continues to increase though more and more gradually. The proportion of older people 65+ will continue to grow more rapidly while the percentage of working age population 18–65 will decline and the ratio of working to 65 year plus will decrease from 6 in 2004 to 2 in 2040. For America China has been a strategic partner, competitor and economic opponent for a long time. It will continue to concentrate on capacity building versus technology development. Many Chinese companies fail not because of poor products or high costs but because of bad organization, business strategy, and organization. These are often the result of political and regulatory barriers that prevent otherwise sound companies from achieving a quality status. Japan’s trade with China continues to escalate and in 2004 exceeded that with America for the first time. China has become an increasingly important outsourcing base for Japanese companies. While initially Japanese companies only used China for simple component manufacture and other labor-intensive production activities, it is increasingly moving whole manufacturing to China, this not only to reduce the cost of its products but also to stake a claim in the rapidly growing Chinese market. In 2004 China’s plus Hong Kong’s trade with Japan accounted for more than a fifth of Japan’s total foreign trade, compared to 18.6% for trade with the U.S. Interestingly though Japan’s trade with China is balanced and in fact Japan has a small trade surplus with China, compared with the huge trade deficit that the U.S. experiences in its trade with China. Japan though continuing a rather stagnant economic growth is still able to attain an overall trade surplus, led largely by expansion of exports such as automobiles, steel, and high-end consumer electronics. Japan has been moving more and more sophisticated production to China while using its leading process technology to maintain control over design and manufacturing management. Much of the Japanese exports to China were really parts of products that were ultimately sold in the U.S. and Europe and thereby contributed to both Japanese and Chinese export competitiveness and market share. China exerts a deflationary influence on the world economy and is carrying an increasing weight in international finance. It has introduced brakes on credit to assure the soft landing of its overheating economy and is trying to reduce its rate of economic growth from 9-5 in 2004 to 7%. It similarly is trying to reduce the rate of growth of investment from an unsustainable rate of 35%, much of it contributed by foreign direct investment. Yet China under pressure to float its currency recognizes that it must clean up its banking system first for it to succeed. China, unlike Japan and Korea, is still concerned with the support of strong, particularly multi-national companies, particularly companies that may foster politically independent private sector development. As a result, while supporting a free market approach in general, the Chinese government gives preferred access to

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capital, technology, and markets to state firms. Yet foreign, mainly multi-national, companies have grown much faster and they now control much of the manufactured exports. They also have usually superior technology and management. These work in parallel with a few very large, private Chinese companies. Chinese companies often concentrate on labor intensive activities and short-term profits. In fact China has averaged a $12bn trade deficit in electronics, components, and complex machinery (China Ministry of Commerce). Its manufacturing is usually low value added assembly, while the government R&D concentrates on big bang space and other projects. As a result, foreign firms control nearly all intellectual property in China. China is exerting growing influence in Africa where it started to replace Western companies and interests, particularly in the development of natural resources such as minerals and oil in countries like Sudan, Zimbabwe, and others which were penalized by Western governments for their treatment of minorities or destructive, often illegal, policies or programs. China is active in constructing transport, communication, and other infrastructure in Africa, with few if any strings attached. It also shares the views of many African leaders that human rights abuses are issues that foreign governments should not use to punish countries and that such are internal matters. In other words, “that human rights stand above sovereignty” as noted by He Wenping, Director of the African Studies Section of the Chinese Academy of Social Sciences, as reported by Paul Mooney in the Yale Global Online. China is today on the offensive, not just in growing its economy but in growing its economic influence abroad. While China in the recent past concentrated mainly on building up its domestic economy, employment, and infrastructure, it now uses its huge dollar hoard and growing purchasing powers to corner energy and other resources in the world in competition with the world’s major economic powers. China is encouraging its corporations now not only to expand in China but to expand abroad. China thereby is not only trying to secure its supply of energy, minerals, food, and other resources, but also to assume a more proactive role in the global market place. It also recognizes that it must now emerge from a largely cheap laborbased manufacturing economy into one which can develop and utilize home-grown technology and advance its product and process developments through domesticallygenerated innovation. Chinese companies with access to easy credit increasingly expand their penetration of global markets, including both resource supplies such as iron ore, oil, and others, as well as in the delivery of increasingly more sophisticated products. China is particularly active in Africa and Latin America, resource-rich regions of the world that have been largely ignored or at least not emphasized by the West, both as resource suppliers and export markets. China is quietly increasing not only its economic relations but also its influence in these countries and China has offered to improve Latin American infrastructure. There is a question of what role the under-valued Yuan plays in these developments but China’s huge surpluses, particularly with America and Europe, certainly

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give it a tremendous bargaining advantage. Actually the trade weighed exchange rate of the Chinese Yuan changed little between 1996 and 2004, this largely due to the fact that the value added in China to Chinese exports, particularly to America, is actually comparatively small and estimated at no more than 25%. One problem is obviously that China with its increasingly dominant economy has not been invited to become a member of the G7. Such membership would have increased China’s interest in making world trade work towards a more smooth and orderly operation of the world economy. As an outsider who is neither consulted nor involved in G7 policy discussions, China obviously pursues its own economic strategy with little consideration for its broader implications. China is domestically trying to control the flow of money and investments. While effective in regulating bank lending, private money flows are not controlled. China is making new efforts to emerge from a labor-intensive economy as Chinese companies continue to solve problems by simply throwing low-cost labor at it. Efficiency and productivity are largely eluding them as emphasis is mainly on making things cheaper, not better or by use of more advanced technology. By and large, few Chinese companies invest in long-term technological developments. By comparison, U.S. companies emphasize breakthrough innovation; Japanese, advanced processes; Korea, marginal product and process improvements; and, Chinese companies emphasize mainly costs in producing things. In many areas such as consumer hardware, ships and others, China has now captured a significant share of global output. For example, in shipbuilding, an industry in which China was a net importer even when not active in international shipping as little as 10 years ago, as noted before, China has emerged as a major power and is expected to produce as much as 25% of the world’s ship building output by 2010. AMERICA’S MISTAKEN SELF-PERCEPTION Americans think of themselves as free people, living in a society where everyone has equal opportunities, and where people are judged as well as attain prospects on the basis of their ability. Family and heredity and other connections as well as physical power or ability are assumed to play little or no role in people’s advancement. Attainment of position and wealth is supposed to be largely the result of ability, hard work, and commitment. This is the picture Americans paint of themselves and like to express when explaining America, the land of unhindered opportunity, to others. Americans feel that they truly represent a people’s revolution or revolt against feudalism, dictatorships, and unfair, debilitating class preference. A people with equal rights for all and a chance for everyone to attain success based on ability alone. This idealistic concept is imbedded in the American psyche, public opinion, and government pronouncements. Yet there are serious questions about America’s commitment to true meritocracy. Not only have there been and are there questions on equal treatment of and opportunities for women, blacks, and various minorities, but there are serious visible and invisible barriers imposed on both career and social

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advancement for many. Inequality of income is greater today than at any other time in American history. Salaries of high earners are often obscene and bare no relation to their contribution or value of service. The average income of the top 1% of earners is now nearly 200 times that of the bottom 20% and over 50 times the income of the average America. In this America is unique, particularly among Western democratic countries, none of which comes even close to such an earnings gap. In parallel with the earnings gap are growing educational, opportunity, and status gaps that affect the structure of American society. America’s Senate has largely become a club of the privileged, and an increasing number of political representatives are members of the selfperpetuating elite. As a result, political power is more and more concentrated in the hands of a comparatively small power group. Both, the Democratic and Republican parties essentially play by the same rules, though each has its own power base of supporters. These quite often represent groups that ideologically have little concern with the political principles supposedly advanced by the party they support. It is difficult for example to rationalize the close affiliation of the “Trial Lawyers” with the Democratic Party, the party of the working man and supposed supporters of liberal and social values. Both major parties have their elites who hold a tight grip on power. In parallel with the political lock, social mobility in America, as noted, has declined, and fewer people advance socio-economically in their lifetime. America, as a result, is today less a country of opportunity than one of status quo, this at a time when other countries, often with a more traditional socio-political system, seem to offer greater opportunities for socio-economic mobility. New information and computing technology now offer many, particularly the technologically competent young, new opportunities to leap frog social and economic boundaries. Some recent research, however, shows that social mobility in America has declined since 1970. In general the perception that America offers greater social mobility than other Western industrialized countries seems to be questionable now. In fact, Scandinavian countries as well as Germany and Canada appear to offer greater opportunities for advancement for ordinary people. Americans pride themselves on living in a classless society that offers unique opportunities for (upward) mobility, both professionally and socially. In reality though there is a distinct class system with the membership in the ruling class defined by heritage, education, and social circles affecting upward opportunity in most cases. The long vaunted equality of opportunity is becoming less and less prevalent. A recent study by Thomas Hearth, an economist at the American University in Washington, studied a random sample of 6,273 American families and found that social mobility has significantly slowed in recent years, this in combination with a rapidly increasing income gap, which as noted before often results in absurdly large salaries, bonuses, and fringe benefits. This has affected the American notion of a land of the free with equal opportunities for all to largely become a hollow refrain. Americans today save very little and most save less than ever before as a percentage of their income. In part this is due to the ill-founded

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perception that rising home values will take care of future financial needs. With the world’s highest percentage of home ownership, Americans put their trust in the equity of their homes. In the U.S. the ratio of house prices to monthly income has risen from about 100 between 1975 and 2000 to over 125 at the end of 2004. At the same time household savings as a percentage of disposable income that was about 10% in 1980–85 has now declined to only 2% in 2004; while in Europe for example it continues at about 10%. In other words Americans rely largely on the equity in their home, a value that could very quickly drop without notice, with no savings cushion to soften the blow. Yet Americans feel wealthier than most and this largely because in their view consumption signifies or determines wealth and consequent standard of living. Americans spend more on health care and education per capita than anyone else and therefore assume that their health care and educational systems are superior, and that they obtain the best of both. In reality, more money does not mean better schools or hospitals or care. The reason is that there is a lot of waste, lack of accountability, unnecessary or frivolous expenditure and defensive teaching or health care that causes tremendous waste. With local control, politics and local interests also interfere. New York, for example, with a 1.1m student body, $13b school budget or $11,820/student in 2004 has not been able to uplift its educational quality that is still well below developed country average. U.S. health expenditures as a percentage of GDP grew to over 16.8% or $1.8 trillion in 2004, a little higher than expended for education. (This includes both public and private expenditures.) At the same time, other developed countries such as the UK, Spain, Italy, and others spend about half as much as a percentage of their GDP yet achieve the same or higher life expectancy. There simply is a lot of waste in the U.S. healthcare and in educational systems. Defensive health care and education alone increase cost significantly. By 2013 health care costs are expected to grow to $3.4 trillion or to nearly 18% of GDP. Their growth rate is and has been significantly higher than the rate of inflation as has been the increase in the cost of education. Dr. David Himmelstein of the Harvard Medical School estimated that a single government-run system could save $325b in administrative costs, including those of private insurers who charge 20% off the top. America prides itself in being the leading secular democracy, yet so-called faith-based values have become a major political issue for both the American people and their leaders. This notwithstanding the universal agreement for the separation of church and state and acceptance of a tolerant secular society rules by a representative government under a constitution that advocates secularism. Actually the American government is not really representative. One may argue that the head of the Executive Branch, the President, should be the choice of the majority of the people; presidents have been elected without a popular majority as a result of the quirks represented by the so-called Electoral College. Similarly the U.S. senate that gives equal representation (2 Senators) to each state

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in the Union, independent of its size or population (which varies from less than half a million to well over 50 million) invariably reduces representative government. America claims to be a model of democracy that other nations should emulate to achieve the benefits of a successful and free people with the unique opportunities that only true democracy can provide. During the 2004 Presidential elections, the turnout was nearly 60%, which was impressive considering that throughout the previous three elections turnout barely reached 50%. In American elections on the federal as well as state or local level usually less than 50% and often as few as 30% of eligible voters participate. As a result, American government and legislative representation is not really representative. Universal suffrage is now largely the rule in the world, but it was only in 1965 when universal voting rights were extended to all black adults in the U.S. In some countries, particularly in the Arab Peninsula and much of Africa, it is only in the last few years that women were given voting rights, though in many of these countries severe restrictions continue. Returning to the U.S., the problem is not the right to vote but getting people to vote. America claims to be an exemplary democracy with a government by the people and for the people, but the percent of the population voting for the national leader or President and for national representatives or Congress is an abysmal average of 49% and 47% respectively, among the lowest in the world. This is way lower than in new democracies such as Belarus, Croatia, Kazakhstan, and others which consistently achieve a better than 75% voter participation. Similarly, the percent of women elected to legislatures in the U.S. is only 14% which compares to nearly 40% in Scandinavian countries, and even higher percentages in some African and South Asian countries. Also most Western European countries have a significantly higher voter turnout and female representation. Data from 140 countries which held democratic elections between 1945 and 1998 the U.S. came in at 114th in participation and No. 1 in costs. As the claimant of the world’s democratic leader, the U.S. is not really very representative in the exercise of democratic rights and responsibilities of its citizenry. Much of this may, at least in part, be due to the increase in negativism in advertising and campaigning. By international standards, American campaigning is really nasty. One may also argue that the government of the U.S. it not really representative in a statistical representation or gender sense. The number of female voters usually exceeds that of male voters, but as noted, female representation is far from equal. America really should reexamine its own exercise of democracy and assure democratic principles at home before selling or enforcing democracy abroad. This is particularly important now when America, as the sole superpower, acts not only as the world’s policeman but also as the arbitrator of political correctness. Democracy is foremost a set of individual rights such as the freedoms imbedded in the U.S. Constitution translated into principles to assure these rights. Cultural, historic, ethnic, social, and environmental factors will always affect the way democratic principles are applied. There is no one-size-fits-all democratic formula nor can typical Western-style democratic institutions necessarily be transferred

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successfully into different environments. Democracy must be accepted as rights and principles not as sets of pre-conceived methods and organizations. The West in general and America in particular have often tried to supplant or even impose their interpretation of democracy. This is probably the biggest mistake of recent years and a major reason for continued global unrest, particularly in nations, regions or among peoples who compare Western attempts at democratization with colonialism of earlier times. At the same time America is considered the big laboratory of democracy where all kinds of electioneering approaches are first developed and tried. It is interesting to note that the large increase in voter participation in the 2004 Presidential election was largely due to the return to grass roots electioneering. AMERICA’S ECONOMIC CHALLENGES The American economy faces severe challenges with its huge foreign exchange deficits and a miniscule domestic savings rate, which make it dangerously dependent on foreign investment inflows, particularly to finance government borrowing needs. Much of this investment now comes from East Asia. America’s economy is increasingly dependent on foreign trade, which exceeded $2.26 trillion or 23% of its GDP in 2004. By November 2004, U.S. imports of $1.3 trillion exceeded exports of $745 billion by nearly $585 billion, a number expected to reach $625 billion for all of 2004. America’s foreign trade is highly imbalanced with most trading partners (January–November 2004). The huge and increasing U.S. current account deficit largely imposed by the trade deficits in the world’s largest economy, while practically all other major economies experience current account surpluses, causes a huge increase in U.S. foreign debt. This cannot continue indefinitely as ultimately the costs of servicing this mounting debt will introduce huge added foreign transfers which will make U.S. economic growth non-sustainable.

Canada Mexico U.K. Euro Zone Gulf States China Japan

U.S. Imports

U.S. Exports

Trade Deficit

$2351b $1432b $421b $1909b $308b $1792b $1183b

$1717b $1016b $329b $1156b $104b $315b $499b

$634b $416b $92b $753b $204b $1477b $684b

Source: Economy.com.

For the time being, U.S. productivity improvements and attractive economic growth continues to make U.S. investments, particularly in government bonds,

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attractive. But this can come to a screeching halt if the dollar continues to decline in value and the U.S. does not correct its large budget deficits, which compound the effects of the current account deficits, starts to support the dollar, and slows down its drunken expenditure avalanche. At the same time world trade, which becomes over-dependent on the large U.S. trade deficits, will have to correct the imbalances by buying more American goods and services. Otherwise the dollar will continue its precipitous decline, trade imbalances will mushroom, and the global economy move towards a dangerous precipice. Global trade, the locomotive of economic growth, now estimated to be nearly worth $9 trillion (2005) per year, did support unprecedented global progress and improved prosperity. But the imbalance, with some countries like the U.S. consuming way above their means, while others are simply hoarding their export earnings and investing them mainly in U.S. Treasuries, is a formula leading to ultimate disaster. With a current account deficit of 5.7% of GDP in 2004 and increasing, and a budget deficit in excess of 3.7% of GDP in 2004, the U.S. is moving toward a dire economic future. At the same time America appears overly complacent now in early 2005. Over the last 5 years (1999–2004), the U.S. current account deficit grew from $240b to over $630b, and the trend continues upward with the war in Iraq, restructuring of the U.S. Social Security system, new educational and social program initiatives, all demanding additional funding that, at least in the short run, will make it difficult to reduce the deficit. The Social Security system faces a short fall of about $12.7 trillion over the next 25 years unless radical changes in the rules are introduced such as a later retirement age, adjusted to changing life expectancy, and/or some kind of need adjustment; neither of which are popular, although in reality people do retire later anyway. Possible Social Security system reforms suggested are Private Early Retirement Accounts with a percentage of contribution put into private investments that would supposedly earn a higher return and furthermore remain under personal control of the contributor and heirs. Monthly Social Security benefits would remain the same, but the age at which people would start to receive them would be increased gradually and ultimately to 72 years. The U.S. has staked much of its future on services and to a large extent discouraged the manufacturing sector, which continues to decline. This is a dangerous strategy for the world’s largest economy as it makes it excessively dependent on the rest of the world. Another issue is that services unlike manufacturing are very mobile and require less time to install and less money to establish. Similarly, service technology is usually readily accessible and people can be quickly trained in its use. As a result, America may find itself under increasing economic pressure as others learn to perform services better and cheaper. America’s principal advantage is its innovativeness in science, technology, methodology, and ultimately services. America must hone these traditional traits and assure a growing cadre of free thinking, educated, and technologically advanced

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innovators who are able to reinvent services, techniques, and processes as well as design new products and processes that are better, cheaper, and more competent. Freewheeling innovation has always been the strength of America. It has allowed America to become a global economic, technological, and strategic leader whose inventions guided the world into the 21st century. Research and technology development at all levels of endeavor will have to become the cornerstone of American economic activities. U.S. debt now requires 6% of GDP to be serviced and absorbs about 80% of the world’s savings to finance. Most of the U.S. public debt is financed by foreigners, mainly foreign governments that want to prevent radical devaluation of the U.S. dollar. At the same time, service industry surpluses are going down. The U.S. taxpayer covers 61% of America’s high health care costs, as well as most of the astronomical costs of education and law enforcement that together now consume well over 50% of the American GDP. In fact, if this trend continues the U.S. will soon be a self-serving economy consisting largely of three sectors: health care, education, and law enforcement. It is quite difficult to see how such an economy could sustain itself serving only its own service needs while producing little of anything else, except what its people invent. There is obviously a limit to such a self-serving economy, particularly one with huge current account and budget deficits as the U.S. has experienced for some time now. While the reduction in the value of the dollar reduces U.S. current account deficits, by making American goods and services more competitive abroad, such devaluation does reduce the attractiveness of U.S. dollar denominated securities. Since 2002 the dollar has declined 33% against the Euro in just over two years. This unprecedented slide introduced an unprecedented loss of faith. Technology drove the U.S. stock market in the 1990s; yet in the new millennium China has become the growth engine and is expected to attract investments from throughout the world for at least another decade or up to 2015. The U.S. does and will continue to lead the world in advanced research and technology development, but increasingly China will take the lead in process technology and applications development such as robotics and control methods, just as Japan and Korea did after reaching economic and technological maturity, this largely the result of concentration on research and development of technology with a shorter term payoff unlike basic science research. All these new East Asian economic powers starting with Japan, followed by Korea, Taiwan, and South East Asia, which are being overtaken by China, will constitute a huge economic base that will make East Asia and thereby the Pacific basin the economic heartland of the 21st century, replacing the long established economic domination of the Atlantic economic alliance of America and Western Europe. To maintain its leadership, America has to develop an inclusive agenda, one that accommodates the wishes and concerns of all its global partners. America must engage all its global allies as partners, and not attempt to lead only on the basis of its current superior economic and military power. Otherwise it may soon find itself disengaged.

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IMPACT OF GLOBALIZATION AND OUTSOURCING ON ECONOMIC LEADERSHIP Globalization and outsourcing have made the world a truly global village. While increasingly open borders, reduced tariffs, and lower IT and transport costs have played an important role in outsourcing which is growing at more than twice the rate of the global economy, outsourcing of both hard and soft wares is still small. It reached a global value of about $1.4 trillion in 2003, which though a large number was dwarfed by global expenditure for sales, general and administrative, as well as distribution costs of $19 trillion. While white-collar outsourcing is simpler, only 8% of white-collar work performed in the G7 countries is outsourced. As usable Internet bandwidths are expanded, more white-collar work will probably be outsourced. In theory about 50% of all white-collar work could be outsourced. Hard or manufacturing outsourcing depends not only on differential labor costs and technical competence but also on transport or logistics costs. Transport costs have declined greatly in the last 20 years. Air freight has leveled off at about 60% of the costs of 1985, while rail has declined by more than 50% and barge or inland water transport costs have declined even more. Much of this obviously depends on developments in fuel costs, one factor that affects particularly airfreight costs. Much more radical cost reductions have been experienced in telecommunication costs, which before long will be equally inexpensive worldwide, as even high-priced telecom service countries move toward efficient mass markets. In parallel, financial institutions have expanded their activities and are increasingly investing in or leaning to outsourcing activities both on a large or mini scale. This trend allows many developing countries to become players in the outsourcing or globalized world. While in countries such as China, government banks, foreign companies, and foreign direct investment provided the capital for the build up of manufacturing and other facilities, and in India foreign and domestic IT and service companies such as banks, consultancies, and more provided the capital for the establishment of outsourcing service facilities, other developing countries such as Bangladesh with a more primitive infrastructure and social base had to rely on alternative financing methods to provide employment opportunities through outsourcing. Micro-credit, a concept started by Grameen Bank of Bangladesh about 25 years ago and which extends micro-loans largely to women to encourage micro, often single person home business promotion, has proven a great development success. Since its beginning, this concept has assisted millions of women in Asia to become independent and prime supporters of their families. Internationally Mercy Corps is advancing the idea and now works with funding agencies in many Asian countries from Mongolia and Kazakhstan to South Asia to advance more business development. In many countries the success of the approach at the micro-level has encouraged advancement towards larger financing operations from micro to mini-loan facilities that permit borrowers to

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finance small businesses employing a few dozen. As a result, we now have hundreds of new, often women managed and owned, businesses in manufacturing, services, construction, and more. The lean repayment records of micro-loan credit facilities has been excellent, a fact that permits continued extensions of easy credit. To remain an economic leader America must continuously reinvent itself. At the same time, as one example, Americans have lost much of their ability to effectively plan, design, and build large-scale or macro projects, an area in which they ruled supreme for a long period of time. This is largely because they have lost their nimbleness of identifying macro project opportunities, have become rather staid and bureaucratic or traditional in their approach, and have lost much of their project organizing skills. Global demand for macro projects is growing rapidly as developing countries are trying to bring their infrastructure to global standards; but this often demands very responsive planning and implementation capabilities, characteristics U.S. firms, largely used to American standards and approaches, seriously lack. As a result, few macro projects in Asia, particularly in China, have been won by American firms. Globalization has affected America probably more than most other industrialized countries, since it led the world in post-industrializing or in the move towards a service economy. As a result, a larger percentage of jobs are probably outsourced by American companies than by those of other industrialized countries. While, according to a study by Cornell University and the University of Massachusetts, mainly manufacturing jobs moved abroad with 202,000 in 2001 and 309,000 in 2004, non-manufacturing jobs, primarily tele-service and software development jobs are rapidly catching up with 2000 only outsourced in 2001 growing to 97,000 in 2004. Outsourced service jobs primarily to India are expected to dominate U.S. outsourced jobs by 2006. While outsourcing is usually assumed to cause a loss of American jobs, multi-nationals who increase employment abroad also increase supervisory or technical employment in the U.S. For example (according to the Institute for International Economics), computer/mathematics jobs in the U.S. grew from 2.78m in 2002 to over 3.08m in 2004, while architecture and engineering jobs grew from 2.4m to 2.53m during the same period. This suggests a need to plan and design more effective outsourcing by identifying who does what best and in a most cost-effective manner. While shipping costs of manufacturers have declined more slowly than the IT costs of providers of remote services, savings in inventory holding costs by use of global shipping with massive manufacturing outsourcing centers serving multiple markets connected by efficient real IT systems make the approach very attractive. Increasingly alternative strategies of large-scale automation versus outsourcing are evaluated in light of potent technical changes on product design and demand as well as on process developments and use. It is important more than ever to make products more affordable by lowering costs, reducing delivery schedules, improving use and usability, and designing their effective marketing

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FACTORS DETERMINING LEADERSHIP Seldom in history has the world chosen and accepted a global leader. There were periods when some countries or people dominated parts of the world such as Europe, the Middle East, North Africa or East Asia. The Egyptians, Greeks, Persians, Macedonians, Romans, and others dominated major regions but their rule was usually the result of physical conquest and resulting dominance for a limited time. The world really consisted of several worlds on different continents with little contact between them. It is only now with the world a global village connected by efficient transport, communication, trade, and social links that global leadership can and is being claimed. The U.S., after the breakup of the Soviet Union, remains the single largest economy and powerful military in the world. That by default makes it the global leader. However leadership really means more than domination. It requires an understanding of the issues, a commitment towards a better world, compassion for the down-trodden or out of luck, an understanding of the needs of others, a moral commitment towards the well being of people, their feelings and interests, a show of unselfish help to others, a mind set towards doing good and being good with the good of people, states, and the world utmost in mind. Leadership must be honorable and make both leader and led proud. Good leadership does not tolerate arrogance and suppression or domination of others. It must be accepted voluntarily. Leaders have spirit and soul and use it to convince those led of the path proposed or chosen. They are honest and true to their calling and their responsibility for others. Leaders must serve as examples. As such, they must be among the first to accept and adopt principles. They must show love and compassion for others, particularly those less well endowed or competent and refrain from selfish concentration on their own well being and interests. Leadership is not a right but an achievement reached by voluntary acceptance by others of the examples and goals presented. Leadership is a responsibility and has many dimensions. There is leadership in particular sectors such as science, technology, finance, medicine, social services, education, and more that is achieved by sustained superior accomplishments in those areas of human endeavor. Such leadership does not depend on size or power of a people or nation, and can be attained by small groups or nations. Such leadership serves as an example and goal for others. Global leadership, on the other hand, assumes and in fact requires not only superior performance in many areas of performance, but also size and power to support, assist, and lead the world towards peace, growth, and economic as well as social development. Global leadership must be accepted voluntarily, to be effective, and lead towards universal betterment in all its dimensions, even though it may on occasion also require a leader’s involvement in conflicts or disputes, when the leader should largely serve as arbiter and not enforcer unless enforcement is required to assure the common good, desired by most if not all.

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Leaders must stand up for their beliefs and convince others of their righteousness without coercion. Their decision must be based on their beliefs and the correctness of their actions in terms of contribution to the common good. AMERICA’S LEADERSHIP ROLE America has attained its world leadership role through the power of its economy, its technological leadership, and its military prowess. The world both respects and fears America’s power. It respects American willingness to step in when policing is required and when serious injustices are committed such as in Bosnia and Kosovo, where America took the lead in opposing genocidal moves by Serbia, though the problem was located in Central Europe and should logically have been addressed and possibly resolved by countries of the European Union. America stepped into conflicts repeatedly since World War II and has since the demise of the Soviet Union become the undisputed arbiter of conflicts in the world. Increasingly, while the world looks to the U.S. for everything in terms of protection, aid and conflict resolution, it is simultaneously considered by some a crude leader, with little understanding or compassion for the underlying issues and concerns. The Atlantic Alliance, for long the mainstay of Western power, has suffered from its discord on action in Iraq, from a weak dollar that hurts Europe, and the declining strategic and economic importance of Europe and the Atlantic basin. Europe is no longer the center of U.S. interest. The Pacific basin and Asia, particularly East Asia, has become the center of American concerns. With China’s economy expected to double in size in the next ten years or by 2015, more than half of the world’s gross product will then be produced in Asia, and China’s trade surplus with the U.S. alone will account for more than 10% of its total economic output. America’s attention and interest will therefore be increasingly devoted towards Asia and away from Europe. Low U.S. interest rates and large U.S. budget deficits in the early years of the 3rd millennium have helped China in the short term by fueling U.S. consumption while allowing American investors make large investments in China. China is increasingly expanding its trades and is more and more consolidating trade agreements with potential, and often new, sources of strategic resources such as oil, gas, and minerals. As a result, China is becoming a growing trading partner with resource-rich countries in Africa and Latin America, as well as the Central Asian republics and Russia. Russia, which until a few years ago was expected to become a major oil and gas supplier to Europe and the U.S., is instead now turning towards China, Japan and India. There is a trend by major nations in Asia to diversify their trades from narrow dependence on the U.S. and Europe. At the same time Russia and Japan are cooperating to counter Chinese expansion. China’s economy has become a global manufacturing giant. Manufacturing is the major sector in the Chinese economy, while the service sector accounted for a paltry 32% in 2004. This compared to industrialized economies of the G7 and other nations, including emerging economies such

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as India, whose service sectors all account for more than 50% of their economies now. This makes China unique and establishes it as the manufacturing locomotive of the world. In many ways it replicates what America represented during and after World War II, when it served as the world’s workshop or industrial center supplying much of its manufactured goods demand. It is interesting to note how quickly America changed from a country where over 63% of people worked in production (manufacturing and agriculture) to one where over 70% work in services. While in part this may be due to technological changes, such as automation, scale, and process improvements, much of it is also due to a change in priorities, life style, and mind set. China is today gradually becoming a counterbalancing power to the U.S., a role the Soviet Union played barely 20 years ago. Only China serves the role in economic and not military or strategic terms. In the long run, in this globalized world, economic power will probably determine world leadership and America may well lose it to China within a few decades unless it gets its economy in order. As noted, America’s current account and budget deficits have grown at an unsustainable rate. While some Americans claim that even now America’ public debt to GNP ratio is still below that of other G7 countries, the sheer size of the debt, the planned extensions of the U.S. tax cut, the lack of savings by the American public, the under-investment in social security, and many pension plans that may require huge potential future public funding bailouts to meet their obligations, as well as the lack of discipline by legislatures in public spending, although all pose a huge burden on America’s economy. This in turn may affect America’s future ability to lead the world and serve as a major or principal economic and security arbiter. It may not be able to afford large economic and military interventions much longer, particularly if major creditors to the U.S., such as China, choose to invest less in America. America is really too stretched out in all respects. The budget deficit is now growing at a rate of $4 billion per week in real terms, without considering longterm factors. Foreign central banks may not be willing to finance America’s trade deficits much longer, particularly if the U.S. dollar continues its slide. For the time being foreign governments and particularly China may continue this strategy to push its exports. But this is more attractive for China with its currency, the Yuan, pecked to the dollar. Other countries such as the EU do not have this benefit as their currencies float freely. America’s trading partners may at some time in the not too distant future call in their chips, repatriate or reallocate their investments, revalue their currencies, and change their trading strategies. This could hurt America not just economically, but also affect America’s ability to sustain its foreign activities as well as business abroad. U.S. domestic social costs, such as health care, education, and law enforcement have been growing at nearly twice the rate of domestic inflation and assume an ever larger percentage of the GDP. They may soon reach an unsustainable level, as at the same time, payoffs in better health care, education, and lower crime

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rates do not materialize. In other words, increased social spending did not and does not provide an effective return. As noted by former Secretary of the Treasury Robert E. Rubin in an article in Newsweek (December 2004) “the federal government (Congressional Budget Office) projected surplus of $5.6 trillion over a 10-year period starting in 2001 has now degenerated into a $5.0–5.5 trillion deficit over the same period, as estimated by various independent analysts”. For the U.S. to maintain its global leadership will require greater fiscal discipline, such as reduced spending, more rational tax policies, and greater involvement of the world-at-large in global peacekeeping and development activities. Economic reality may catch up with America sooner than some in government imagine and it may hit without warning. America may then be taken by surprise, with the financial reality hitting it hard when others start to lose faith in its leadership and start to withdraw their chips. The U.S. dollar has been falling incessantly since the 2004 Presidential elections, largely due to long-term irresponsible financial management that permitted increasingly large trade and current account deficits by the U.S. This combined with comparatively low U.S. interest rates makes investment in U.S. treasuries increasingly less attractive, a threat that may result not only in a decline of investment by foreigners and their governments in the U.S., but actual withdrawal of the trillions of dollars already invested in U.S. government bonds and other U.S. fixed income securities. This would cause a huge drain and depletion of U.S. reserves and other holdings. Unfortunately, U.S. budget, trade, and current account deficits will continue at least until 2008 and possibly even until much later, by which time the combination of a declining value of the U.S. dollar, increased U.S. indebtedness to foreigners, and U.S. dependence on more and more expensive oil and gas may lead to a declining ability by America to lead the world economy and force it to curtail many expensive leadership activities. THE ELECTRONIC CHALLENGES TO THE AMERICAN SERVICE ECONOMY Telemedicine, remote or Internet education, online shopping and ticket booking, and now computerized legal research, conflict evaluation, and in future arbitration or even adjudication are rapidly replacing humans in personal interface in services, particularly in America. While these developments are largely driven by costs as well as a desire to reduce the time required for resolution of issues, analysis or decision making, they increasingly help to replace people in services. In America where well over 70% of the working population is engaged in services, this may have a huge effect on the economy. In fact, as increased automation and scale in productive sectors such as manufacturing and agriculture displaced workers the service sectors started to blossom, and absorbed much of the surplus labor, albeit often in less demanding and less well paid jobs.

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Now, with electronic and communication technology increasingly infiltrating service industries, these jobs are in danger and there is little relief on the horizon. There are really no other sectors in the economy that could absorb redundant service sector employees. America is particularly vulnerable in this respect not only because of the size of its service economy but also because of the high cost of its labor and often lack of education and other skills that could be readily transferred. These developments pose a huge challenge to America not just in economic but also in social and political terms. As a country with huge current account and trade deficits, large foreign debts, with a population that barely does any saving and social support systems such as the Social Security, Medicare, and Medicaid all in potential fiscal trouble, the country faces a very difficult future. This at a time when many private pension systems are underfunded and America assumed huge foreign and domestic obligations.

AMERICAN CREATIVITY AND ITS ROLE IN PERPETUATING LEADERSHIP America is unique among nations as a platform for human creativity. Its freedom, multi-national, cultural and ethnic population, and economic as well as physical challenges have developed an environment that fosters experimentation, discovery, and new uses. Americans are forever trying to change, improve, and tinker with the status quo, with the way things are and the way things are done. They are never satisfied with the current way, be it of government, business, social relations, manufacturing, growing plants, and more. Americans want and live for change. They are forever searching for novel ways in everything. This makes for a restless and inventive society that takes nothing for granted. Americans are also more willing than most to take risks, be it with new types of music, visual art, theatre, transportation, organization, materials, and in effect just about everything. They find new ways to use old concepts, materials, and operations and will often invent new approaches to the solution of old problems. Some are unique; others may just be the result of looking at an old problem in a different way. Creativity is an inherent factor in American culture. It has its own personality and is both affected by its surroundings and affects its surroundings. It affects everyday life much more than in most other societies; this largely because Americans, by and large, are never satisfied. They are always looking for change, and they take nothing for granted. Americans are creative in both small and big ways. They are always questioning the how, why, and when of about everything they confront. They are a nation that expects and lives for change. Many claim that in this new globalized technological world, knowledge and not the traditional economic factors, such as capital, labor, and material, determine economic growth and power. This may be true and was recognized nearly 50 years ago when Robert Solow showed that technological change must be included in economic performance valuation to properly account for economic change. But the

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role of knowledge goes beyond technological change and has many other implications. Knowledge has many dimensions and is acquired in many different ways. Outsourcing is now entering a new stage. Instead of moving from one low labor cost country to another as labor costs and availabilities change, there is now a trend towards simply importing additional labor from low labor cost countries. Ireland and more recently Dubai, for example, both of which have seen their domestic labor availability shrink and costs increase in line with labor scarcity, are now importing labor, including skilled labor from Eastern Europe and Malaysia, Bangladesh, Pakistan or India respectively. THE NEW BRAIN DRAIN AND REACTION At an age of continuing learning, knowledge and experience are accumulated or built up throughout a person’s life. Not only as people’s knowledge enhanced by the use of a changing technology in an ever changing environment, but people continue to learn from their experience, their successes, and their failures. Much of this is difficult to convey in a classroom environment, as much of it is multifunctional and multi-dimensional systems knowledge that depends on the timing, environment, and conditions prevailing when a decision had to be made, and the resulting outcome. Such knowledge cannot readily be taught in a focused subject classroom-type environment. This knowledge usually resides in older, experienced professionals and managers who have gone through many of the complex situations expected to be faced again in the future. Yet many employers and particularly the government ignore that knowledge or wisdom and are trying to get rid of older employees to cut costs, as these are usually more expensive than younger workers. This strategy often backfires as old lessons have to be relearned or mistakes are repeated. Most senior professionals and managers prefer not to retire or at least stop working altogether, but prefer instead to phase out gradually and at least remain involved part-time as advisors, trouble shooters, consultants or simply sounding boards. Wise companies recognize the fallacy of this most serious brain drain caused by radical shut out of older professionals and managers on reaching a certain age. Similarly excluding older people from advancement in their career path is often counterincentive not only by depriving a company of their experience and knowledge, but also by undermining the confidence of the whole body of employees in their advancement opportunities. Continuous learning has introduced a completely new valuation of people and the increasing complexity of decision requirements now demands not just specific and up-to-date knowledge but an ability to integrate knowledge, experience, and understanding of situations as well as interdependent complex systems in the making of effective, timely decisions that lead to success. At a time when learning is a life-long experience and most jobs require continuous updating of knowledge, the traditional concepts of retirement make little sense. While there are still many who rely on their early skill or knowledge acquisition, most people continue learning; this particularly through the use of the Internet which

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is no longer largely a communications tool but a boundless source of knowledge and information. The Internet initially used primarily by technologically savvy young people is increasingly becoming a universal source for knowledge acquisition and training. As a result, older people are reentering the knowledge world, and are increasingly participating in the latest developments. This combined with their experience-tuned judgment capability increasingly makes older people effective workers and managers. Combined with increased life expectation and improved health will make it attractive to continue use of people who in the past would have been retired or at least not hired. Low birth rates and unsustainable demands on retirement or pension systems increasingly encourage continued employment of older people, many of whom prefer an active professional life to one of often contentless leisure. A brain drain is also caused by the increasingly strict interpretations of socalled U.S. security requirements and subsequent imposition of barriers to entry of foreign nationals. This is affecting both the number of academically-qualified foreign candidates seeking admission to U.S. research institutions and institutions of higher learning, and the quality of those admitted. While there are no reliable statistics on the number of qualified graduate students and researchers who were either not admitted, given entry visas or chose to abort their plans to go to the U.S. and went elsewhere instead, the numbers appear to be significant. Of equal, if not more importance, is that as a consequence, the quality of foreign graduate students and researchers at American institutions appears not only to have declined, but their commitments seem to be less focused as well. Greater numbers of highly-qualified candidates now appear to prefer committing to institutions in other countries, which are not only more hospitable in their admission strategies and procedures, but also are more open and generous in terms of their research support. Stem cell research is a typical example where institutions in foreign countries are now doing advanced research that often leapfrogs U.S. work. Similarly, the level of research support in which the U.S. has dominated for so long is becoming more equal in many areas of science and technology – with accessibility and size of support often better in other countries, where political correctness plays at most only a minor role in the awarding of research funding. In the past, foreign graduate students provided a significant base of highlyqualified researchers, and often led important advances in science and technology. Many of them chose to remain in this country after completion of their academic research, providing important new blood to universities, research institutions, and industry. However now, as a result of the new U.S. security requirements, more of those admitted are sponsored by their respective government and their commitment to the interests of our country is greatly diminished. Indeed, their sponsorship is often based on explicit understandings or commitments for them to return to their native countries and transfer U.S.-developed technology or research advances. It is hard to understand why these foreign-government-sponsored candidates pose a lesser security risk.

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This new environment affects not only competition within technologies, but also the ability of U.S. institutions to advance in their research. The new restrictions result in a lower number and quality of foreign academic graduate admissions and the progress of American university research, and inhibit the effective transfer and use of research results to U.S. industry and, consequently, economic advances. REPOSITIONING AMERICA IN THE PUBLIC EYE There is not only concern about rising anti-Americanism abroad, particularly among Moslems and disadvantaged people in Africa or Asia, but increasingly also people in what were considered Western countries such as France, Spain, Germany, and other West and Central European countries have a negative view of American policies as well as often American values and even culture. This notwithstanding the fact that American music, art, lifestyle, and technology are not only used but are copied nearly worldwide, including by people in countries vehemently opposed to anything American. At the same time, the American government and people are concerned with getting the world at large both to understand America’s real objectives and its values. The many attempts to re-brand America have failed, largely because they were introduced much like a public relations, advertising or marketing campaign, often designed for a typical American public. This is not only a wrong approach but also appears shallow and as talking down to people. In most recent campaigns of America branding, the country’s image abroad was very general and looked at American policy, investments, trade, and other issues from an American point of view, with little if any consideration for the different sets of values used by most people in other nations. One cannot buy being liked or even sympathy, particularly when the American example is often shallow. As one example, America prides itself to be an example of democracy, yet most congressional and state elections are really not representative at all, and in many cases the outcomes are not only predictable but virtually guaranteed by the district lines that are frequently redrawn to assure perpetuity of these outcomes. As a result, many electoral districts in America are drawn like jigsaw puzzles to assure a responsive electorate. This, and other examples of the American electoral process, often negate the conception of America as an ideal example of democracy in action. While America’s public esteem was largely formed in response to its post World War II role, the world is now a completely different place. America intervened in World War I to help the Western European allies and Russia defeat the German government and Hapsburg Empire onslaught. Yet in the years after the war, the European powers regained their global influence and colonial domination. America retreated to its traditional regional role, notwithstanding its leadership at Versailles. When America intervened in World War II and after being attacked by Japan went on the offensive in the Pacific, particularly in East and South East Asia, and led the allies in Europe and Asia to victory, it assumed a very different role. It became proactive not only in rebuilding Europe but also in helping the development

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of a new world order in which colonialism would vanish and all people would be free to determine their own conditions and future. This led to a global involvement by America that continues until now. America assumed a new role not only of economic leader but also of arbiter and protector. This role was challenged by the Soviet Union, which had played a dominant role in defeating the axis powers in Europe and built up a huge military and weapons capability, in addition to a large political following, particularly in newly independent countries which had emerged from colonial rule. This challenge, mainly in technological and military terms, played a major role in determining the international or global political environment, affiliation, and consequent commitments. The world truly became divided between East or Communist and West or capitalist free market approaches to social, economic and political issues. After the death of Stalin and later Mao, changes in both the Soviet Union and China started to affect their internal structure and later international relations and behavior in profound yet different ways. In Russia communist doctrine was gradually discarded and state enterprises largely privatized by giving workers ownership rights that most misused and sold for a pittance to smart oligarchs who soon dominated significant former state assets, particularly in the industrial, communications, media, and energy sectors. CAN EUROPE AGAIN BECOME A WORLD LEADER? Europe led global development for several centuries; yet since World War I and more importantly World War II it has lost much of its military and economic clout, mainly to America. Although Europe served for many centuries as the cradle of development, one may rightfully argue that the Chinese and others also contributed significantly to world civilization and particularly basic sciences, and technology. Similarly, the Arabs made great strides in both science and literature during the period of 700–1200 AD, following the Greeks over 1000 years earlier. But there is no doubt that industrialization, as well as the cradle of modern science and technology, was chiefly fostered in Western and Central Europe. European and particularly Western European nations from Britain, Holland, Belgium, and France to Germany, Italy, Spain, and Portugal all used these advances to expand their territorial and economic reaches. They established colonies throughout the world and for several centuries built empires that greatly enhanced their reach, as well as economic and strategic powers. In parallel, the Habsburg empire extended its rule over Eastern Europe and the Balkans, while Russia absorbed many bordering peoples in both Europe and Asia. Yet World War II caused a radical change that ultimately resulted in freedom for most colonized peoples in Africa and South as well as Southeast Asia, to be followed much later by the split up of the Soviet Union into Russia and many newly independent former affiliated states. The Spanish and Portuguese colonies established in the 16th and 17th centuries in Central and South America had all gained independence about a century earlier,

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and were protected later by America’s Monroe Doctrine. Britain, though no longer a colonial power, continues till now to maintain a Commonwealth relationship with the major countries of its former empire, which gives it both political and economic advantages, though these ties have become less dominant in recent years. The European Union recently expanded into east and southeast Europe and now comprises most countries of Central and Western Europe and an increasing number of Eastern European countries. It is now the world’s biggest market, exporter, and foreign investor. It also has a high savings rate. It is the world’s third most populous entity and has some of the world’s foremost scientific and educational institutions, a rich cultural life, and vibrant political institutions. All of this should mark Europe a world leader. Yet at the same time, Europe and particularly the countries of the European Union have a very low and often not sustaining birth rate, high unemployment, high taxes, a very regulated labor market, and a very weak military capability. They were unable to lead in containing the atrocities and upheavals after the breakup of the former Yugoslavia, a country in the center of Europe, and relied largely on outside pressure and intervention largely by the U.S. to guide the release of Eastern Europe from the Communist grip. While Europe should be able to lead the world, it really lacks the unified strength and common support to assume such a task. It is still torn apart by former, often conflicting, national interests and priorities that often lead to acrimonious conflicts. In other words, the European Union is far from being a unified entity; this, in part, due to a continued focus on national interests, the lack of a unifying constitution, and an introvert legacy. At the same time, Europe still considers itself most enlightened and advanced, and therefore destined to be a moral and cultural, if not military and economic leader, of the world. Europe faces many problems, most of all the political and social integration of Europe that may be much harder than economic integration. It involves more than just eliminating customs borders and allowing freedom of movement and economic activity throughout the European Union. Unlike the United States, the European Union is an amalgam of nations and not just people. Each nation continues to maintain its cultural and linguistic identity and usually retains a unique legal, social, and political system. In fact, unlike states in the U.S., member states in the European Union, each proudly maintains its unique political, legal, and administrative system. This diversity, while culturally interesting, prevents Europe as represented by the European Union from formulating and displaying a leadership strategy and, as a result, convince the rest of the world of its ability to guide it. European countries have repeatedly called for economic reform with little response in the past, but now (2005) the continents’ nations seem to finally respond. The driving force seems to be the persistent lag of about 30% in income per person compared to America. While average worker productivity in France is a bit higher than that in America, most of European worker productivity lags behind. Similarly, the proportion of people gainfully employed is far behind that of America; this not only because of a comparatively high unemployment rate but also because the percentage of working women and people above 65 years of age who continue to

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work is much smaller. Some of this is due to the generous unemployment benefits, pension and early retirement schemes, together with quite lax disability rules, that make gainful work for low skill, young women in general as well as older people unattractive. Unlike America, most European countries do not allow deferment of pension benefits. In essence, all of this results not only in a much lower per capita output but also an implicit added tax rate. These two factors in turn are probably the dominant reasons why the European countries continue to lag America economically notwithstanding the strong Euro. To gain greater stature and leadership in economic terms, Europe may have to radically change its socio-economic strategies. Only this, combined with a willingness to take on a larger role in maintaining world peace and in the global political arena would allow Europe to challenge America for world leadership. Yet, there are some countries in Europe, such as Ireland, Sweden, and Finland that are among the world’s most competitive economies. Europe suffers under a declining birth rate and overall population. Although the unification process of Europe is now nearly 50 years old, there is really a lack of enthusiasm among people of many member nations. In fact, the EUs new constitution or constitutional treaty seems to have a hard time getting popular support. Until Europe really becomes united and advances its economy, military prowess, and willingness to play a leading role in resolving real and potential conflicts throughout the world, it cannot really claim global leadership.

AMERICA’S CHANGING IMAGE America’s image has undergone radical changes in recent years. Near universal global admiration for this country of immigrants, which devised a constitution, government, and way of life that became the model and envy of much of the world for long, is now being replaced by doubts, mistrust, and quite often disagreement or outright opposition, this not only because of American foreign policy but also its lack of consistent adherence to its most basic values. America is recognized as the undisputed leader in technology development and use, though the latter is often spotty or less effective than practiced elsewhere. The reasons for the lack of more general and effective applications of technology are probably the large discrepancies or gaps in skills, education, and living standards among Americans. These hinder more universal and effective training in the use of technology. As a result, technology invented and often first used in America is quite often further developed elsewhere and used abroad to greater advantage. While this may in part be due to political interference, diverse cultural backgrounds, and ethical concerns, it does put America into a position where it often has to reimport the fruits of its own inventions. This is not only caused by copying by foreigners but also a result of new applications or other uses than originally perceived in America. Similarly, on the basic American technology, improvements are often introduced.

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This is unfortunate because, for a long time, Americans were known for innovation in its broadest sense. They were perceived as a people who forever found not only new ways to use existing technology but invented technology for purposes no one else knew existed or could be satisfied by technology. America continues its scientific and technology forays and new breakthroughs into discovery, but is no longer considered the cradle of innovation. In part, this may be due to a decline in emphasis on quality and consequent reliability in many hardware as well as service products and their applications. Another issue is that America has become the world’s leading debtor. It is addicted to unbridled consumption of everything from food, clothing, electronics, and automobiles to services of all kinds. Americans use, eat, and demand more and are willing to pay for it with their own or more often other people’s money. As a result, they save little if anything. In fact, American saving rates are not only approaching zero but have now (2005) become negative. In this era of rampant globalization when much of America’s debt is owed to foreigners, there is an urgent need for the U.S. government, the Federal Reserve, and legislative leaders to be equipped with a good understanding of the world at large, particularly international financial policy. They should have diplomatic skills and be knowledgeable about foreign cultures, economies, procedures, and legal approaches or rules. America as the world’s largest debtor must increasingly deal with international financial policy; yet many of its policy makers know little about the rest of the world (U.S. saving rate in 2005 was -2% versus the average European of 8%, and Japanese of 10% of GDP). With a 6% of GDP trade deficit (over $582 billion est. 2005), a budget deficit which is expected to reach 3.5% of GDP in 2005 (a swing from a projected 2.4% surplus), the American economy is looked upon with both suspicion and trepidation. Many people feel that America will have to put its economic house in order to maintain global economic leadership or lose the confidence of the rest of the world. Indeed there is growing concern about America’s ability to sustain its economic growth with the world economy already running at near full capacity. It is now in 2005 driving towards a potential inflation and increases in financing costs that would become a major added burden for the U.S. in servicing its huge foreign debt or potentially risk unserviceable recalls. The large inflows of foreign capital have encouraged Americans to save less or nothing. They also helped keep American’s interest rates low. Large American consumption sucks in imports while low foreign consumption reduces American exports. While America is still the world’s largest economy, its economy has fallen from 50% of global GNP in 1946 to just 25% or less in 2005 and is still falling. One reason for this is the growth of its service sector and decline in productive output in manufacturing and agriculture. Its service sector is increasingly dominated by health care, education, and law enforcement sectors, which now account for close to 48% of GNP and growing; yet do not provide effective economic outputs. In other words, about half of the U.S. economy is engaged in such self-serving activities.

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Similarly, more and more of the other service activities are being outsourced to India and elsewhere without a compensatory creation of manufacturing or other activities. Self-serving service sector costs, such as health care, furthermore are growing at an unsustainable rate and since 2000 at 4–5 times the rate of inflation. Health care now costs on average $6–8,000 per worker year or more than twice the amount spent by other OECD countries. For America to get its economic house in order, waste in education, health care, and law enforcement must be eliminated and strict discipline be introduced to assure control of both service quality and costs. Most importantly, people themselves must become part of the decision making process. To outsiders Americans are becoming intolerably self-indulgent. They consume over 25% of all fossil fuel used in the world (5 times the world average) and complain bitterly about the recent increase in the price of oil and gas, while resisting efforts to curtail their consumption as well as protect the environment. Little if any effort is made to conserve not just energy but anything. Americans generate 5 times the amount of solid waste by weight as other industrialized such as Japan and Europe. Food portions served in American restaurants are usually much too large. This together with the American’s love for junk food and eating on the run contribute greatly to obesity, which in turn puts huge added demands on health care. Much of the lawlessness in America is being solved by incarceration, often without right to parole. Thereby opportunities for rehabilitation are greatly reduced. With 2–3 million in jail in mid 2005, America’s prison population is the highest in the world and 25% above that of any other country. A most disturbing fact is the high proportion of young among incarcerated offenders. In other words, crime is being contained by attempts to remove criminals, with little effort to address the underlying problems. The image of America has taken a definite turn for the worse. It is no longer the universal example of a successful modern democratic society. Admiration is spotty and often conditioned. Transparency is still largely in place and often permits discovery of political and financial misdeeds or outright corruption. But the image of America is increasingly tarnished by revelations of public or private misdeeds as well as lack of adherence to announced principles. From a macro economic point of view, the U.S. deficits contribute great amounts of money to the global economy and thereby drive global economic growth. A belt tightening in America would reduce imports and impact on employment in Japan and Europe and to a lesser extent China, unless these countries can get their consumers to increase their outlays. However, Europe and Japan, with an increasingly older population, may not be able to increase consumer spending. China, with an estimated 2005 trade surplus with America exceeding $150b is buying up huge amounts of U.S. Treasury bills which in turn finance American deficits and reduce the need for China to revalue its currency. There is also the loss of American prestige largely resulting from the war in Iraq which continues to encourage growth of anti-Americanism or at least resentment toward America. Not only are many people in Muslim countries negatively inclined

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towards America, but people in much of Europe, Africa, and East Asia also have an increasingly low opinion of the U.S. The reasons now include not only America’s politics, trade policies, and military adventures, but also the perception of the decline in American education, its social system, and general behavior. These are just a few of the issues affecting America’s global image, an image that becomes more and more murky as easily accessible communications and free media coverage extol the many ills of America. The American century, as a result, is giving way to a new global century with major implications. America’s image has suffered in recent years not only because of failings in its social service, huge foreign debt, and foreign policy, but also the perception of a general decline in moral standards. Its dependence on foreign borrowings, continued consumer overindulgence and military involvements, often discouraged by much of the rest of the world, have greatly diminished the esteem in which America used to be held. America has become a knowledge economy, yet has left major segments of its population behind, often with little hope of ever catching up. America, the place known for unlimited opportunities, a country with the largest middle class, and in fact where everyone considered himself middle class, now represents a country of increasing extremes to the observer; a growing number of poor and super rich; large numbers of people without hope, and others with obscene incomes and wealth. America is rapidly losing its image of an example to be followed and to aim for. It is still making a difference, but the difference is not always perceived as positive. America’s failure to effectively react to the Hurricane Katrina disaster and in preparing for flu outbreaks and a potential avian flu pandemic are considered examples of lack of leadership ability. It is difficult to choose particular focused examples of blame for America’s declining image, but it is clear that it no longer commands universal trust and confidence as a global leader. Leadership starts at home and must be proven there before claiming wider influence. Yet the American public is today probably less confident in its own government and its leadership ability than at any time since independence. There are many other examples that contribute to a decline in America’s image and prestige. Some like corruption in business or government, religious intolerance and more were probably always present, but are now more visible and often more credible than before. As a result, there is a serious decline in the global esteem, prestige, and trust that had been the hallmark of America’s image for most of the last century.

CHAPTER 7

LEADING INTO THE FUTURE

The new brave world of the 21st century is subjected to a myriad of continually changing technological advances that are making it an ever smaller village. This poses new leadership challenges and risks. Leadership no longer implies dominating economic intellectual, moral or even military power, but deep involvement in all of these as well as unique abilities to develop and use new technological and scientific advances. But this is not all, because in our shrinking global village, leaders must be able to look beyond narrow national objectives, assure global justice and peace, and be understanding and compassionate, particularly with the lot of the disadvantaged everywhere. They must lead with humanity, be devoted to accepted principles, and generous particularly towards those less endowed and with fewer opportunities. To lead now implies also to serve the led to improve their conditions and to achieve a common good. Leaders must adapt and improve upon universal values and not just try to change others in their image. They may get others to buy into their ideas and ideals and inspire them. Their vision must not just be for their own, but the broader good, and consider success of others’ important goals as well. Leadership must be earned. It does not come naturally but should be based on moral values, proven ability to manage and inspire, respect for others, concern for the environment and clear goals. Risks today are more diverse, pervasive, and dangerous. Social unrests, religious strife, economic conflicts, and natural disasters are on the rise. These increasingly lead to major damage and loss of life. Two large natural disasters in 2005 alone – the Indian Ocean tsunami and the large 7.6 scale earthquake in Pakistan – killed nearly a quarter of a million people. Large concentrations of hurricanes in the Gulf of Mexico that year caused also extensive loss of life and hundreds of billions of dollars worth of damage. In all, these both preparedness and response management were less than effective, largely because of lack of planning, quality relief management, and determined focused leadership. Similarly, few were and are able or willing to truly project and assess the prevailing and potential risks and adequately prepare for them. Most leaders use a comparatively short time horizon and assess risks over too short a time period. 201

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Future leaders must be willing and able to use broader and longer vision in assessing risks and responsive needs to counter potential impacts in a more effective and fair manner. Leadership must be compassionate, gain and retain the respect and confidence of the people, and challenge them to perform to their full potential. In future, leaders must learn to guide towards tomorrow, without ignoring today as well as time past. Ethics in leadership, largely lost in recent years, must be regained and helping people everywhere to achieve their goals must become a leader’s driving force. To lead into the future in this globalized village of a world requires compassionate understanding of and concern for the needs of world’s humanity and its environment. Although America was a leader in the development of regional as well as global decision making forums, it has in more recent years started trends toward unilateral decision making. This invariably leads to discord and lack of trust, which ultimately causes loss of leadership.

MANAGING RISKS Leaders face ever changing risks, yet must act decisively under conditions of uncertainty. Risks can be defined as the products of the uncertainty of a consequence or damage occurring as a result of some action, behavior, happening or operation. Risks, as a result, may be the result of human decisions imposed internally or externally by acts of God or physical failure. Risk, as a consequence, is a measure of likelihood and importance and the outcome is evaluated according to each and the results combined by taking the product of all likelihoods or probabilities. Risks also include uncertainty of market, price, competition, costs, liability, productivity, financing, exchange rates, technological change, political development, taxation, regulation, and payment, in addition to physical, human error, and acts of God. It is usually difficult to deal with uncertainty as it is conceptually disturbing to consider or plan for an unknown uncertainty. Yet uncertainty and resulting risks are facts of life and must be confronted so as to succeed in any human activity or venture. It is often desirable to divide risk into • Identifiable risks that can be resolved or eliminated • Identifiable risks that need resolution and where an effective problem solution may be available though as yet not identified • Revealed risks not properly identified for which a resolution could be developed • Revealed risks for which there are little changes of developing methods for risk resolution • Residual unknown risks that should be expected but cannot be planned for nor can be identified Resolution of risks may sometimes be possible but will ordinarily not exist. In considering approaches to the management of risk we must recognize that the preference for risky alternatives are affected by the • Preference or aversion to consequences of risks • Attitude towards risk taking

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These differ widely between public leaders and individuals. Risk preference or aversion must be expressed as a multi-dimensional function that judges preferences or aversion to risk in terms of both the relative utility of the outcome or consequences and the attitudinal factors influencing the decision makers’ behavior. In profiling risk, types and components of risk must be identified and types defined as preventable and non-preventable. Similarly interdependence of risks must be established where it exists. We should also divide risks into catastrophic (external or internal) risks and non-catastrophic risks, all of which can be preventable, repetitive or occasional. On a global scale, risks can be divided as those imposed by nature, nations or men. Most importantly, risk absorption ability and willingness must be established and if possible qualified and quantified. In other words, we must at all times know the magnitude and type of risk we can take and its potential costs and implications, including subjective implications. In today’s world, risks are more complex than ever before and include in addition to risk of an act of God, operational and political risks, inflation, corruption, legislative risks, and all kinds of legal risks including costs, competition, enforceability, transferability, exchange rate change risks, and more. There are sometimes methods whereby risks can be ameliorated. Risk management should aim at value creation or cost reduction. Risk management requires continuously updated identification of risks, their causes, initiating events, interdependence, event sequences, and consequences. Causal and consequential risk assessment benefits from a formal risk mode and effects analysis. Here after identifying the occurrence of sequences of events that generate risks that ultimately cause faults or damages starts with the identification of top risk events and the factors contributing to these events and the analysis of the potential causes leading to these events. Risks can be common cause or independent. Risk assessment is often broken down into risk determination that consists of risk identification and risk estimation, and risk evaluation that in turn consists of risk aversion or consequence analysis and risk acceptance or attitude analysis. In risk determination, it is important to identify new risks, changes in risks, and risk parameters and then determine the expected occurrence and magnitude of consequences of risks. In risk evaluation we determine degrees of possible risk reduction and avoidance, establish risk aversion and acceptance references, and evaluate the impacts of risks. It is important to assure also that risk of small impact be included as these may have high probability though low cost per event. In other words, it is suggested not to assume a threshold hypothesis, which is often done, but which hides important consequences of risk. Among the most important qualities of leadership at the corporate, strategic or national level are the recognition and management of risks. Leaders must have superior abilities in identifying risks and uncertainties, and the experience as well as foresight to come up with effective actions designed to deal with or ameliorate the effects of risks, be they opportunities or dangers.

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People are usually not rational in their approach to risk taking as discovered in the ground breaking study by Daniel Kahneman and Amos Tversky, who investigated the curious approaches humans take to decision making under risks. Few apparently really try to evaluate probabilities in their decisions subject to risk, but instead use experience, emotion, and generally bias or opinion to guide their decisions. Their findings were further explained by more recent discoveries that decisions seem to be affected by joint effects of the computing and reactive parts of the human brain, with the latter usually winning out in the end, even if the rational part initially convinces otherwise. National leaders often take risks on behalf of their constituents that they would not take if only their own interests were involved. In fact, the way many leaders at various levels in government or business assess and manage risks is quite different from the way individuals deal with it. While individuals usually consider consequences as direct and try to realistically value the impact of the outcome and the associated uncertainty in terms of their risk’s aversiveness as well as the utility of the outcome, public leaders are more concerned with short term impacts of outcomes on their political ambitions and plans. Yet, while this approach may have been rational or even acceptable in a divided world, where such decisions only affected one or a small group of people pr nations, it is not acceptable in our globalized world where decisions by world leaders potentially affect the future of the whole world and thereby mankind at large. The management of risk by world leaders now requires global consultation and consent, however difficult and time consuming. Unilateral actions not only have the potential of seeding malcontent, but also often aggravate a problem and increase the risk. This is true in strategic decisions such as going to war in Iraq without wide support or effective outcome planning, which lead into a quagmire without meaningful assistance by much of the world’s nations. The risks of this venture were never fully identified and plans for extraditing America and its allies never fully developed. Similar unknown risks exist in America’s uncontrolled indebtedness. Recent U.S. economic growth was largely fostered by cheap foreign money, but there is the risk that a point of waning confidence is reached when such money will be recalled. This risk may be unpredictable but the outcomes could be effectively projected in risk terms and remedial actions planned for such an eventuality. However, leaders in the U.S. seem to ignore these potential developments. America faces many other risks in areas such as energy supply, health care, crime and law enforcement, basic education, political focus, and more. In all of these there appears to be a lack of effective risk identification, assessment, and management. To lead one must plan and define direction and identity risks. However, America is devoting too little effort in managing identified and identifiable risks to come up with a well considered, minimum risk direction that can truly serve it in developing itself and in maintaining leadership in the world. Risk management at the national level can gain effective benefits from the study of the range of virtual realities developed to cover all possible happenings and outcomes, and their ranges of probable occurrences than used in simulation as

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inputs into computer games to evaluate the range of potential outcomes and their associated probabilities and consequences. Cause and effect and fault tree analysis are related techniques of use in effective risk management not just in operations and financial or project management but also in the management of national and international risks. Large deviations of outcomes are usually signs of inherent risk and should be signs of uncontrollable danger. This is equally true in cases of narrow conflict as in global happenings. If possible outcomes cannot be narrowed to a very limited range then the risks may not be justified by the assumed potential rewards. This is particularly true in decisions made by or for nations, which involve economic or military conflict. National leadership often justifies actions by identifying threats or opportunities and sometimes even both, and propose strategies or actions to deal with them. However, in many cases, the risks and consequences of the actions remain obscure, misunderstood, misinterpreted or even ignored. In fact, it appears that the more global or far reaching the decisions, the less understood are their consequences. Even worse is the fact that fewer are subjected to formal risk assessment and analysis. As a result, major conflicts and intervention often result in quagmires, this not only in terms of non-decisive outcomes but worse by a failure to remember or understand the basic objectives or goals of the original decision to intervene. We, and particularly our leaders, must learn to be more rational in our decision making and assure not only a continued focus on the original rationale and goal, but also make certain that risks are properly evaluated and their costs and benefits if any understood and accepted. Similarly, any decision or action must be supported by a completion or disengagement strategy that provides effective plans for discontinuing the action with minimum cost and maximum benefit, if conditions or outcomes require a revaluation of the action or disengagement from the activities. Leaders must not only lead into battle but also into peace. In fact, leadership into peace is the more important objective and requires much more planning and commitment of resources and willpower. However, America with all its superior technology and resources has become a reckless adventurer in the global arena, advancing into major confrontations without plans for disengagements or resolutions based on possible alternative outcomes or developments. This not only drained America’s resources and public support and resolve, but also reduced much of the global confidence in America as a world leader. Leaders must have plans that go beyond winning or success, and must be able to show commitment to accepted principles. They must be able to mobilize people worldwide by their example. In the end, the future of global leadership by America in this new 21st century will be shaped by the way it defines itself and its role in the world. World leadership will depend less and less on military prowess and power but on moral, economic, and technological leadership abilities. It is interesting to note that China and to a lesser degree India, the two emerging global economies and powers, put little emphasis on military strength and show little if any ambitions to control or even influence neighboring peoples or nations. They

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concentrate on their own development and the advancement of their economies, technological development, and political effectiveness. This approach permits them to effectively manage and assure greater control of development risks. China in particular has made a point of not getting involved in other countries’ affairs and has kept a hands-off policy towards its neighbors. Even relations with India, with which China had a long term border conflict, are good now and the two countries are increasingly mutually supportive. Both of these super nations are showing an understanding of the need for noninterference and global harmony to advance economically and socially in all respects and have shunned major involvements in conflicts. This gives them not only an opportunity to concentrate on their own development but also to lead the world at large.

INDIA’S EMERGING ECONOMY AND LEADERSHIP POTENTIAL India’s emergence from colonialism has been accompanied by many pitfalls and successes. It was able to retain most of the trimmings and workings of a Westernstyle democracy, with a fair and transparent judicial system, while at the same time continuing to suffer and even tolerate many of the social injustices such as the traditional caste system as well as large-scale illiteracy and discrimination that committed a majority of the urban as well as the rural population to abject poverty and often even starvation. At the same time, class and income differences continued to expand with dire effects on the declining middle class. These trends resulted in sluggish development of India with a rapidly growing population and an economy that grew at a very small rate for much of the time since independence. Much of this was due to an inbred, often archaic political system in which leaders by and large gave preference to personal and political interests ignoring national and particularly social needs. Although the caste system was outlawed decades ago, it is still practiced today and opportunities for low caste people in education and work are still severely restricted. The development and economic growth of India has been seriously hurt by this social stigma, discord, and lack of access to social services by a large percentage of the population. Narrow minded political decisions continued until quite recently leading to encouragement of the development of two economies, one for the educated, usually higher caste and often well-to-do and the other for the rest. India has the world’s largest underclass. The problem is that their status is not just a result of lack of education and poverty, but birth. After decades of economic and political neglect by its own leaders, India is now finally awakening to its own potentials. It graduates many more engineers, scientists, programmers, doctors, and lawyers than the U.S. and Europe combined. Furthermore their mathematical and science and other skills are usually superior to those graduating from Western universities. Schools and universities in India are much more demanding and their graduates expect to have to perform at much

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higher standards. They are used to and accept longer working hours and more challenging tasks. During the last ten years, India emerged as a new global economic power. While initially India’s economic growth was fueled only by outsourced information, computing, and other services, India is now rapidly improving and increasing its manufacturing capability and the effectiveness of its logistic sectors. In parallel India has improved and increased its basic material output in areas such as mining as well as oil and gas production, refining as well as in material processing. It doubled its refinery capacity between 2003 and 2005 and greatly increased the output and range of products generated by Indian petrochemical and fertilizer plants. Exports of refined petroleum products for example have grown rapidly in recent years, while imports of clean products have fallen by more than 70% since 2000, making India now a new petroleum product exporter. India is expected to continue to increase its global refined product exports and increasingly become an important player in world oil product trade. Domestic consumption of raw materials and energy are also growing rapidly in line with the industrialization of the country. Most of these developments were financed domestically, but recent successes have attracted an avalanche of foreign direct investments. While in the mid 1990s when India started to wake up to the challenges of globalization, there was a popular perception that international call centers and other basic outsourced services are the answer to poverty and deprivation in India, recent history shows that much broader changes were required. The endemic limits on advancement, corruption in business and government, the distinct class system with its firmly imbedded social barriers, all needed to be dismantled so as to allow India to truly achieve its potentials. During the period 2005–2010, as many as 3 million American and probably an equal number of European and Japanese jobs will be outsourced to India. But it is not that numbers still small compared to those outsourced to China which matter but the type of job. New jobs will increasingly be technological. While outsourcing to China involves mainly manufacturing, in India it more and more involves programming, design, engineering, scientific research, and other intellectual developments. American economic partnership with India involves growing technological cooperation that is facilitated by the relaxation of U.S. technology controls, collaboration in space research, and sale of commercial nuclear reactors. India has become one of the worlds most successful IT and software developers with revenues of over $100 billion in this sector in 2004 alone or nearly 15% of its Gross National Product. Outsourcing driven by globalization has finally offered India an opportunity to emerge from its endemic cycle of social stagnation and rampant poverty, much of this driven by domestic and foreign direct investment that has grown at many times the rate of economic growth and foreign trade. Yet while outsourcing and the resulting rapid expansion of the export service industry, located mainly in large yet comparatively isolated locations such as Hyderabad and even more Bangalore has contributed greatly to India’s gross

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national product and balance of payments, it affected locally mainly the educated lower middle class, and had little impact on social development in general. The more recent investments in and growth of manufacturing can be expected to effect India’s population to a much greater extent, not only by offering more jobs and jobs distributed over much larger geographical areas, but also by providing new opportunities to the less or uneducated and low income people among the population. Large-scale manufacturing also provides more stable and integrative economic opportunities by not just generating narrowly defined job opportunities but by establishing large supply networks to feed the new manufacturing industries with materials, parts, as well as services. Each new manufacturing job can usually be expected to generate a multiple of new supplier jobs from new to expanded supplier networks. As a result, both the social and economic development impact of these new initiatives can be expected to be much more beneficial to India’s development into a world class economic power. Recent reapproachment between India and Pakistan and the potential for the resolution of the long festering Kashmir dispute also bodes well for the emergence of India into a world leader in economic, cultural, political, and strategic terms. The main problem to overcome though is and will remain the huge social and economic gaps, the lack of a dominant middle class, absence of effective social safety nets, and large-scale illiteracy. These may take much longer to overcome than the time required to build up effective economic sectors. India though continues to suffer under a complex of persecution by much of the Western world and particularly the U.S., this notwithstanding a serious reproachment of the two countries in recent years, resulting in a closer and warmer relationship. America’s support of Pakistan though largely driven by the needs for support in its anti-terrorism operations in Afghanistan is often perceived as an anti-India bias and lack of support of its Kashmir claims, yet at the same time India continues its advance towards effective globalization of its economy, industrial modernization, and revitalization of its agriculture, education, and health care services. The major drag on development though continues to be state or public ownership and control of much of the basic infrastructure, particularly land transportation and communications. These are usually ill maintained and badly operated. Although many state enterprises have recently been privatized in India, government continues to maintain crucial direct or indirect lockholds on major economic activities. It also employs archaic, bureaucratic rules, and an often widely outdated legal and enforcement system. The most important factor though hindering India’s emergence into a modern economy as mentioned before is the continued prevalence of caste discrimination which though outlawed many years ago is still widely practiced. India has made tremendous progress in many areas, particularly in the quality of education, in the development of a thriving and largely transparent financial and banking system, in industrial development, and in the privatization of many important sectors of its economy such as ports, aviation, shipping, road transport, education and health care, as well as telecommunications; yet it faces huge

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challenges and their associated risks such as dealing with millions of newly displaced or redundant workers, many of whom are difficult to retrain because of illiteracy or other predicaments. But progress is being made and India has regained the confidence of the international financial community which considers it now a safe and challenging investment opportunity. As the economy grows, India will be building a thriving middle class, something that had been lacking. Only a large growing and influential middle class can guarantee social progress, democratic processes, and ultimately elimination of the chance of a reversal of a move towards a more egalitarian economically thriving democracy. Recent developments though pose inherent risks. The most important are probably those that challenge tradition and traditional patterns of behavior and life. Much of these are based on cultural backgrounds and religious beliefs that are difficult to rationalize in socio-economic terms; yet at the same time India must correct large demographic and economic discrepancies. Its life expectancy is 10 years lower than China’s, and 35% of Indians (2003) live on less than a dollar a day. Its foreign trade is less than 1% of the world’s total or only 25% that of China. Similarly, its working age population is only 55% that of China. Its average per capita income is similarly less than half that of China on a per capita purchasing power basis. With an average age of 26 years and a population growth of 1.6% per year, India is expected to overtake China’s population before 2035. This population explosion can make or break India’s economic future. On one hand, it gives India a much larger working age population, yet unless its young are educated and trained in modern skills in greater numbers the population increase will only be a drag on continued economic growth and development. The solution must lie in a vast expansion of social services, particularly education; not just primary, secondary, and university education, but education or re-education and training of adults including skill training. Only thus can the large functionally illiterate older working age segment of the population be integrated into the socioeconomic mainstream. There is the risk of both political as well as cultural or religious objection and obstruction to such efforts. But they must be implemented nevertheless if India is to maintain the momentum and grow into a truly thriving modern economy. India’s population grew to over 1.1 billion in 2005, and with rising exports its economy is expected to grow by over 8.1% that year. But China continues to expand its relative growth rates in GDP and per capita income. While their economies were about equal in size 20 years ago, and based predominantly on agriculture, China’s economy is now twice as large as India’s and the gap is growing. China’s average per capita income is now also twice that of India. Foreign direct investment in China is over 12 times as much as is attracted by India. Some maintain that the reasons can be found in a democracy gone amok; a democracy more concerned with process than results, more with rules than solutions. Many in India believe that as long as all the paperwork is done, a project is completed. Theory rules and practice is shunned. Economic policy in India was

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in the past largely a theoretical exercise with few suggestions of practical or even implementable solutions. Its most striking impediments to economic growth today are lack of adequate transport infrastructure as noted by Chandler [Ref. 15] (124,000 miles of roads in India versus 870,000 miles in China), lack of human capital development, growth of the urban population (29% India versus 40% China when both were about equal at 22% in 1982), slow rate of privatization, and continued large-scale public or state enterprise developments, and the resulting slower growth in GDP per capita ($520 in India versus $1150 in China by 2005). Other problems are an old-fashioned, overmanned bureaucracy that impedes decision making, delays, clearance of goods, licenses, and other permits, expensive and often unreliable services such as electric power and water supply (electricity costs twice as much as in China), and labor laws that are highly inflexible and counterincentive, as they neither effectively protect labor now develop job skills and opportunities. While Indian manufacturing has grown and been modernized, it continues to constitute a declining percentage of GDP (16% in India versus 43% in China in 2004), while China’s continues to grow. Yet with all these comparative disadvantages, India has a great potential for economic leadership as a result of its great superiority in educated manpower, a fair judicial and transparent financial system, and a capable populace ready to explode onto economic opportunity. Similarly, as noted, its effective transparent legal system conveys confidence to investors and customers alike, which should give India an advantage in international transactions of all sorts. Yet much of these advantages are squandered by an inefficient, cumbersome, and often corrupt bureaucracy. Its future as a world leader is also hindered by a complex, inconsistent, and opaque political system, which few outsiders really understand. CHINA’S REBIRTH AND THRUST TOWARDS GLOBAL ECONOMIC POWER China, the world’s most populous country with over 1.3 billion people or over 20% of the world’s total, is advancing technically, economically, and socially at break neck speed. It is also changing its political priorities and cultural emphasis, increasingly adopting capitalist free markets as well as western styles and customs. The Chinese government is considering a more open political, social, and economic system, and in many areas is slowly loosening old constraints to move China towards a more open global nation. It is expanding its infrastructure rapidly and will soon surpass the U.S. in the lengths of its highways and railway systems, its communications network, and users as well as in other infrastructure sectors. It graduates more engineers than America and Europe combined, and is expanding its electric power output at break neck speed. Since 1980 China has grown into an economic powerhouse, with determination, political flexibility, and greater social awareness. Confucianism, although tampered

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by communism and more recently capitalism, is China’s main social driving force. With its tradition on discipline, learning, hard work, and devotion to elders, it provides the basic incentives for China’s development. With a population now approaching 1.3 billion and an average economic growth rate of 9% since that time, China has now become the world’s third largest economy. Its economic output is expected to again triple between now (2005) and 2020, overtake that of Japan by 2015, and that of the U.S. by 2035 or before. Since 1980 China has moved 360 million people out of poverty, mainly by absorbing them into urban environments and quadrupled the average income of its population. At the same time, it does suffer under increased income discrepancies, with poverty still rampant in much of the interior. China’s development strategy appears to be firmly anchored on achieving its political objectives by economic – not military – means. It appears to be succeeding in this. Since 1990 China’s exports to the U.S. grew by 1600% versus U.S. exports to China, which grew by a paltry 415% during the same period. As a result, China has built up a huge positive trade balance with America, which it uses largely for buying U.S. treasury bills. In this way, it allows America to keep borrowing or importing and spending, while preventing a U.S. recession, which would affect American imports from China. According to the London Financial Times (9/16/05), China will become the world’s biggest exporter by 2010, surpassing U.S., Germany’s, and Japan’s exports. While all of this is happening, income disparities as noted continue to widen and are now slightly greater than in the U.S. and much wider than in most European countries. The major differences are incomes among the coastal urban and interior rural populations. China’s economic success is the result of the hard work of its large population, combined with a respect for knowledge, learning, and discipline. This in parallel with an emphasis on the development of infrastructure, international trade, and technological progress provides a formula for economic growth. Yet many of its factories and institutions, particularly current or former state enterprises and banks, still suffer under lack of effective governance and transparency of transactions. China, as the 2nd largest energy consumer and also petroleum importer, is becoming increasingly influential in the global energy markets. It has also become a vital player in world and particularly Asian commodity markets. China maintains a generally open market or trade and investment strategy which attracts an increasingly large number of partners, such as Brazil, Australia, South/South East Asia, and Africa. For all of them China has become indispensable and an effective counter balance to overdue dependency on trade with the U.S. All of this is happening under conditions of gradual and paced economic relaxation in China, with a slow opening of domestic markets, foreign ownership of banks, slow release of the Yuan to dollar peg, and other gradual relaxations. China is wedded to a cautious foreign policy, which emphasizes non-confrontational relations, even on subjects such as Taiwan, South East Asia, Korea, and certain areas of international trade where China’s interests are very important. China is building its sphere of political, economic, and strategic influence by cautious, yet

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determined steps, and by developing long-term relationships with strategic partners in these spheres. It assumes as pointed out by Brzezinski [Ref. 16] that Japan’s influence will decline, and China will dominate East Asia both strategically as well as economically before long. China is becoming a more global entity and is assuming international approaches, systems, and positions. While some like Mearsheimer [Ref. 17] feel that China’s neighbors will join with America in attempts to contain China’s power, others think that China will not attempt or even find it in its interest to push the U.S. out of Asia and become the dominant military and economic power on the continent. While this may be historically the right path for China, the reality of globalization and the self-interest of China in becoming an economic leader may result in a different strategy. With the economic resources to lift its huge 1.3 billion strong population out of poverty and make Asia the most populous continent on earth with more than half the world’s population, China may aim at making Asia the center of global social, economic, scientific, and technological development, and the world’s leader. China does not need to push America out of Asia. Its economic infiltration and ultimate take over of the continent will be effective in itself and negate the need for military, strategic or even political domination. In turn American influence will wane. The only question is the role of India on the continent, its development and affiliations. Will India try to compete with China, complement its Asia growth strategy or join forces with America to oppose China’s expansion? As noted, China’s economic expansion started in 1980. It has continued nearly unabated for 25 years now and though a slowdown in economic growth was projected and even recommended to prevent over-heating of its economy, its growth continues nearly unabated. As pointed out by Wolf [Ref. 18], both Japan’s and Korea’s per capita GDP actually grew faster between 1950 and 1973 and between 1962 and 1990, respectively. This though may not be a reasonable comparison, considering both the situation of the respective countries and their relative sizes. Even Taiwan outpaced mainland China’s rate of economic development. Obviously all of these comparisons are not reasonable. China, a nation of 1.3 billion or about 20% of mankind, a population more than twice as large as Europe’s started from not only a lower economic base, but also a very complex political, ethnic, linguistic, and cultural base. A mainly agrarian society using a largely failed communist economic structure, China confronted not only economic, but also social and political problems. While ethnically fairly homogeneous, it is really a very culturally diverse society. Its main advantages are fairly high literacy and Confucian types of discipline and work ethics. Chinese are usually entrepreneurial and willing to take risks. At the same time, past political developments and the continued pervasive political system prevent many of them to outer business opportunities at full speed. Although China’s economic growth has been and is impressive, this more so from a macro point of view than in terms of per capital GDP income. Its per capita GDP grew from 5% of that of the U.S. in 1980 to 7% of that of the U.S. now

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in 2005. Other developing countries, particularly in East Asia, such as Japan and Korea, advanced much faster in relative terms. China had many advantages in addition to its hardworking, intelligent, and cheap labor force, such as a huge rate of investment, unprecedented in as large an economy as China’s. At purchasing power parity (PPP), China’s per capita GDP is only as high today as Korea’s was 20 years ago. A major problem faced by China as mentioned is the large number of decrepit, inefficient state enterprises, which continue a huge drain on the economy. These and others account for an abnormally large number of bad loans, which in turn result in the less than optimal application of some of the large investments in China by both foreign direct as well as domestic investors. Another problem is the large discrepancy in the rate of development in the coastal or Eastern regions versus the interior where more than three-quarters of the population live. Not only have the coastal regions and particularly its cities grown in size and economic activity but much of the investments in infrastructure were concentrated there. Development of the interior is now largely hampered by the lack of effective access and poor services, which makes it difficult to advance opportunities in that region. Yet China will have to advance living standards and employment in the hinterland to assure a fairer balance of living standards. One of China’s most important initiatives of recent years was to assure safe, effective, and long-term access to major raw materials, such as petroleum, iron ore, and so on. To assure such supplies, China has gone a long way in establishing friendly relations and making economic, political, and strategic commitments to potential or existing sources of supply. In all of these activities, China has recently gone out of its way to assure partners and competitors alike of its peaceful and reasonable approach. There is though increasing concern that Chinese cheap manufacturing muscle undermines the opportunities of poor cheap labor countries, to compete in the international market place for manufactured goods, particularly textiles and other consumer products in which China now dominates world markets as pointed out by Tellis [Ref. 19]. At the same time, China has become a major importer of basic commodities, many of which are produced in poorer countries though their production is usually not labor intensive. As a result, China’s increasing economic power imposes both beneficial as well as negative impacts on poorer countries. It is a superb example of how an open market approach and effective use of investment can really help develop economic activity and employment, while a major and growing importer of raw materials from poor countries it also helps developing country economies. In general though, its competition with the same countries for labor-intensive manufactured goods exports is negative. Here its low labor costs and well organized manufacturing activities present an inordinately difficult competition, particularly for smaller, less organized and disciplined poor countries. China, with 20% of the world’s population, has a GDP of 14.3% of the world’s total product (per capital GDP $4700 in PPP terms); yet it now consumes 33% of the world’s steel, 50% of the world’s cement, 25% of the world’s copper, and 20%

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of the world’s aluminum. In other words, it is an increasing user of raw materials, out of proportion to the size of its economy or population. At the same time China, as mentioned before, is now the second largest importer and user of petroleum. As a result, it helps push up the prices of many raw materials. While China has captured much of the manufactured goods export markets to the developed world, often replacing poor developing countries, some of China’s neighbors partake in that boom by exporting parts and components for assembly in China, and export to the U.S. and Europe. At the same time, China’s agricultural sector continues to thrive, with little if any subsidy or other market distortion. It is actually quite noteworthy that China’s agriculture was and is able to meet much of the food needs of its huge population with little if any market distortion such as subsidies. It is only recently that China has started to clean and open up its banking sector. The government spent nearly $283b since 1998 just to clean up bad loans and other deficiencies to make the industry more acceptable at home and abroad. With over $1.2 trillion in household savings along, it is extremely attractive. In response, foreign banks have started to come on board and invested over $14b in purchasing small minority shares (less than 10%) of Chinese banks during the first 9 months of 2005. There are many issues which are considered as destabilizing for China, such as large and growing income differences, lack of effective support of farming and traditional enterprises, as well as all the various infrastructure projects, particularly the large ones, such as the “Three Gorges Dam” which caused major dislocation of people as well as economic, social, and cultural activities. Yet it must also be recognized that many of these provide much greater economic and social benefits than the costs they impose. The Three Gorges Dam, for example, is expected to not only replace 30 dirty coal-fired power plants and reduce the cost of power, but also prevent the large-scale annual flooding of the low lands, improve irrigation, and make the Yangtze River the central transport artery for 300 million Chinese living along its banks, navigable by 10,000 dwt or larger vessels year round. In fact, after completion of the dam, such large vessels should be able to navigate all the way to Chongqing and further up river. Furthermore, the new river domain will permit the diversion of 10–20% of the rivers’ tributary flows to the fresh water starved north and along the Gobi Desert. It may even supply the Beijing area with water. In other words, this mammoth project has multiple benefits, which will affect the lives of hundreds of millions and not just the 1.2–2.0 million people negatively affected through relocation, loss of habitat and/or traditional jobs. In other words, this and other development projects introduce much greater benefits than costs, and positively affect many more people than those who are penalized by them. China’s most difficult problem is to develop its interior, an area that has long been disjointed from the coastal region. Traditionally land transport such as road and rail served south to north transport, while east-west communications were largely provided by water transport using the three large river systems, the Yellow, Yangtze, and Western rivers and their tributaries. This not only because interior populations were largely concentrated around the river basins, but also because river transport

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was cheap and there were only a few major river crossings or bridges available. Therefore, north-south transport arteries were concentrated along the coast, half way up river or in the inland regions. For example, there is only one Yangtze River crossing for road and rail transport at Nanjing, about 200 miles up river. The next one is about 140 miles further up river at Wuhan. This lack of efficient land transport to the interior convinced China to explore an alternative gateway. A divided highway was built from Chongqing, China’s largest city and manufacturing center, to Kunming and from there to Mandalay in Myanmar, formerly known as Burma. It appears that the goal is to build a bridge over the Iriwadi River and from there to a Burmese port on the Bay of Bengal, about 250 miles south of Chittagong in Bangladesh. This would provide China with a back door and an easy access to its interior. It would also reduce the distance from the interior to the ocean, and the distance from China’s interior to Western Europe and the U.S. East Coast by 40% and 34%, respectively. China’s major emphasis is now on the development of its interior and thereby a closing of the income differentials with the coastal region. The development of China’s interior is largely driven by a need to reduce large-scale migration of rural labor, more than 100 million since 1995. Another 250–300 million would be expected to migrate to the eastern coastal areas during 2005–2025, unless major economic advances are achieved in the interior. The migration problem is particularly severe as there are no effective social safety networks installed in either the interior or newly affluent coastal areas. China, at this time, has no welfare system or unemployment benefits, and its pension schemes are meager at best. At the same time, its educational and health care systems do a reasonable job in providing basic education and medical services. As a result, life expectancy in China is comparable to that in many developed countries, as pointed out by Pei [Ref. 20]. Income differentials, both rural and urban, continue to be great between the industrialized coastal and interior regions. On average, rural and urban per capita income in the non-industrialized areas is less than half that earned in the coastal developed areas. The provinces of Guangdong, Shanghai, Jiangsu, and Beijing all have income levels of 2–3 times the nation’s average. The Chinese economic policies emphasize now a four-pronged approach; continued growth of exports, economic development of the interior and other underdeveloped regions, technological advancement, and social development. The country is well on the way of progressing in all of these objectives. LEADERSHIP CHALLENGES The example of China’s and India’s recent developments and their rapid and focused economic advances offer many lessons for America and other Western countries. China, in particular, has acted with single-minded concentration on economic growth and consequent social development as a by-product. It has focused on this with a unique combination of economic freedoms and communist governance.

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It allowed other interests to be put on the back burner or be simply ignored. Its contention that Taiwan is an integral and non-separable part of China, for example, did not prevent it from encouraging massive Taiwanese investments, transfer of know-how, and capitalist practices into the mainland. It provided adequate security and assurance of property rights as well as profit and capital repatriation rights to convince Taiwanese of the attractiveness of such ventures. China’s approach was focused on economic growth in a most single-minded manner. It also encouraged the development of its neighbors and made Japan, its former foe, its major trading partner and principal source of advanced technology. It now serves as a major outsource center for Japanese services and manufacturing industries, and is cooperating with its various neighbors in many economic projects, without threat or domination. As a result, China has established itself as an economic leader in Asia, and is now extending its influence throughput the developing world in Asia, Africa, and the Americas. China’s and Japan’s economies are now more interdependent than ever before. Their economic relationship surpasses that between America and Japan, which used to be the most important in the world. While politically China and Japan still consider each other with suspicion, and China continues to remind Japan of its World War II atrocities, the economic bonds between the two countries is growing and feeding upon itself. As their economies complement each other, each is benefiting from a closer relationship. Japan provides technology, markets, advanced manufactured goods, and production equipment, while China provides cheap manufacturing and assembly for Japanese companies and consumer goods for Japan. Unlike the U.S., Japan has been able to maintain a positive balance of payments with China. Both countries benefit greatly from their mutual economic dependency, and rely on each other for their development. Their economic relationships are very important already and are too big to allow historic and political discords to affect their continued growth. China and Japan, as a consequence, enjoy a love-hate relationship based on mutual dependence for development, yet have a historic mistrust and dislike for each other. This focus by China on Japan and its quest for a more global role, represent a major new development. At the same time, economic ties between China and Korea are also growing. The combined economic strengths of China, Japan, and Korea or East Asia have become a formidable challenge to both America and NAFTA or the European Union, not only because of its size and technological prowess but also its vastly greater rate of economic growth, the size of its export volumes, and the huge and growing domestic markets. In fact, East Asia is emerging as a new economic colossus, dwarfing all others. It has twice the population of Europe and three times that of North America, and its combined GDP is expected to overtake that of both within 10–15 years. In parallel, India, as noted, is finally emerging as an economic power. It has not only developed large new service sectors, varying from outsourced telephone, reservation, and other information services, to software development, hardware design,

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biotechnology, pharmaceuticals, as well as large-scale industrial development in steel making, refining, petrochemicals, automobile manufacturing, household goods, and more from its traditional concentrations on agriculture, textiles, and small manufacturing. While India has a population expected to exceed that of China by 2020, it lags behind China in many ways. It attracts currently only about one-tenth the foreign direct investment of China, its manufacturing as a percentage of GDP is only 15% versus 43% in China, and its GDP per capita is less than half that of China ($590 versus $1280 in 2005). Its urban population is also much less than that of China (29% versus 40% in 2005). As noted before, the main drag on India’s development is the lack of effective existing infrastructure as well as government investment in new infrastructure. Here again China is spending nearly 10 times as much as India on infrastructure improvements ($2.5 billion/year versus $25.8 billion per year in 2005). India has the advantage of a democratic political and transparent legal and financial system, yet its bureaucracy is excessive and inefficient, its literacy rate quite low and outlawed, yet widely practiced, class (or caste) discrimination continues to disenfranchise a large section of the population. As a result, India’s economic development has lagged and will continue to lag that of China for the foreseeable future. The main challenge to American economic leadership will therefore come from East Asia, initially from the block of East Asian nations and later from China itself. China will not only assert its economic power but also become a major economic power broker. Its advances in the world energy, food, information technology, manufacturing and service sectors as well as its great progress in the physical and life sciences assures China an important role in the global economy. As a major importer of fuels, minerals, and food grains, it has become an important player in the commodity markets. In fact, it is expected to surpass the U.S. in terms of total volumes in commodity trading. China’s energy companies are already unsettling international energy markets as they corner oil and gas reserves. China has learned the principles of international trade and finance well notwithstanding the deficiencies in its domestic banking system. It has made important inroads into important commodity and particularly fuel or energy supply markets and used political tensions between major existing or potential suppliers and the U.S. or the West in general to its advantage. It has established major stakes in the Sudan and various other African as well as Central Asian countries, some of which were not particularly popular in the U.S. and other Western countries. By providing financial, combined with political, support, it has gained important strategic footholds in these countries, which assures China of reliable commodity supplies. China usually combines such commercial relations with various support activities, such as providing poor developing countries, particularly in Africa, with development assistance in infrastructure building, education, and other social activities. As a result, it has gained wide political, diplomatic, and commercial support.

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India, on the other hand, is still largely captive to its traditional trading partners. As a member of the British Commonwealth, it continues to be influenced by preferential rules of this loose affiliation of independent nations, all former members of the British Empire. India’s foreign trade has developed much more slowly and its economic as well as political relations have remained largely confined to its traditional trading and strategic partners. As a result, India is not expected to emerge as a global leader soon, and unlike China will not be able to claim an important role in global economic and strategic developments for some time to come. China is very slowly responding to demands for more open governance and political reform, while at the same time increasing its military collaboration with Russia which is its largest supplier of military hardware. Globalization, which has shown unexpected resilience, will continue its march and incorporate an ever larger range of activities. Driving forces of globalization such as information technology and particularly the role of the Internet, lower or zero barriers to trade, logistic efficiencies and others will tend to encourage greater trade and thereby improvements in economic growth and development. China has become the largest beneficiary of globalization and will continue to push for its expansion to further enhance its global role. While America and the other Western countries have tried to counter the growth of trade by China, India, Brazil, and other developing countries by direct or indirect barriers, these actions have usually back fired. China and the other new developing economies are simply the big new players of the globalized world which are encouraged and supported. This new world of more effective trade, more open borders, and freer flow of investments, ideas, technology, and people offers many new opportunities for greater equity and peoples, as well as higher standards of living. America and Europe cannot counter these new challenges to their economic dominance by shutting themselves in. Instead they must become better at the game of globalization they themselves invented and used for long to their advantage. This means even greater efforts in assuring advances in science and technology, new product and breakthrough systems, and other imaginative developments. But to achieve this will require a change in the approach to education and social development, which assures greater competence levels by a much larger percentage of the population. These goals cannot be achieved unless a much larger number of people in these Western countries attain high levels of education, skill, and ambitions aimed at advancing the overall level of scientific and technological achievements. The West which built its prosperity and leadership on the base of the industrial revolution and subsequent technical advances is starting to woefully fall behind the newly developing countries in the number of scientists and engineers trained, and the research and technology development generated. Unless this trend can be reversed, traditional technical and consequent economic leadership by the West and particularly America may soon be lost.

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PROBLEMS IN MAINTAINING AMERICAN LEADERSHIP There are many issues that threaten America’s claim to world leadership, most of which are self-inflicted, and the result of lack of self control. They are also caused by America’s narrow view of the world and its preoccupation with internal interests. The Western lead towards globalization, which started with outsourcing of manufacturing and later of services, has now permitted many developing countries to emerge economically and challenge America and its Western partners in some economic sectors. Designed initially to reduce costs of manufacturing and services and thereby assure lower prices and higher living standards in the West it actually benefited many developing countries more by raising their income levels, employment, and technology. At the same time, many of them were able to use their newly found opportunities to improve social conditions and competitiveness. The West, and America in particular, did not recognize the speed of emergence of these new economic leaders. America and the West, while benefiting economically from globalization, failed to adequately address some of their inherent as well as other social and societal problems such as income distribution, immigration, drug addiction, unemployment, education, health care, and law enforcement. They also quite often got involved or were drawn into political or military conflicts. Most Americans are traditionally trained for middle level jobs, neither specialized nor unskilled. With jobs for lower middle class becoming scarce, and with an inadequate number of highly trained people, America is now loosing its technological edge. Similarly, military, economic, political, and social commitments often stretch or even exhausted its capabilities. As a result, many domestic improvements required to maintain and advance economic competitiveness and living standards were compromised, as was the ability to effectively respond to the growing economic challenges from East and South Asia, among others. Most of the problems faced by the West and particularly by America are of their own making or the result of political conveniences; yet they impact on their ability to lead the world. Leadership requires example, and many developments do not represent effective examples. America now faces the need of having to resort to a radical overhaul of its educational, health care, and legal system or face continued loss of competitiveness and ultimately economic leadership. In some areas, such as immigration, America, a country of immigrants build by immigrants, faces the dilemma of being overrun by millions of illegal immigrants every year, most of whom are untrained or otherwise unable to fill needs for the growing number of technical jobs. The problem is not only one of porous borders, as nearly 40% of illegal immigrants actually entered America legally, but did not depart again as required by their visas. At the same time, highly trained immigrants to the U.S. are subject to strict quotas even though they contribute greatly to the economy and often create jobs. In Western Europe the trend was to replace a declining population by immigration, mainly from Moslem countries. These immigrants usually had large families and

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became a major burden for the social system. These problems, recent unrests by immigrant youth in France, and concerns that some immigrants may post security problems have caused many Western European countries to reconsider their immigration and naturalization policies. The second half of the 20th century in particular was a period of large and increasing population transfer by immigration, of people from Africa, Eastern Europe, and South Asia to Western Europe, and from Central and South America as well as Eastern Europe and Asia to the United States. Immigration policy has become a major political and economic issue, particularly in the European Union and North America. While the issue was mainly economic earlier, it is now increasingly considered a demographic, cultural or ethnic, social, political and even religious issue. Earlier most immigrated to escape persecution or economic despair. They left countries that offered no freedoms and little employment and immigrated to countries that welcomed them and were able to use their skills. Their ambition was to assimilate and become an integral part of their new home country. This situation has changed radically, particularly in Western Europe with more and more immigrants entering not to assimilate and become truly contributing residents, but take advantage of social benefits without accepting any responsibility or commitment in their new home. The argument often raised that many countries in Europe need immigration to maintain a demographic balance, assumes that immigrants will be integrated and become full performing citizens who accept the responsibilities, culture, language, and laws of their new home country and become fully performing and contributing citizens. This unfortunately is usually not the case and many immigrants simply act as recipients of social benefits established by hard work and denial of generations of people in the host country. Many host countries particularly in Europe were recently forced to scale down social programs and benefits because they could no longer afford the drain by the immigrant population that absorbed an ever larger portion of the social budgets. Another issue is loyalty. Though many countries require an oath of loyalty as part of the award of citizenship, this procedure is meaningless to many Muslims for whom only an oath on the Koran is considered a real commitment. As a result, prospective Muslim citizens should be required to swear loyalty to their new homeland on the Koran. Immigrants should be given contingent or provisional residence permits and later citizenship which can and should be revoked if within a specified period of time the able bodied immigrant is unwilling or unable to integrate into the host society by virtue of language, custom, service, and behavior. Unless an immigrant is willing and makes an effort to adopt the culture and norms of behavior of his/her host country of choice he or she should, in my opinion, not qualify for citizenship. Citizenship should be a mark of acceptance of a country’s values, norms, and culture and not just of its economic benefits. Immigration cannot and should not serve as a means of wealth transfer where people who achieved high standards of living by self-denial and discipline are expected to share or give

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up the resulting hard-earned benefits to people who do not accept denial such as a limit on number of children by devoting limited social resources increasingly to prolifically reproducing new immigrants. America, a country of immigrants with nearly a quarter of its citizens foreign born, now faces the situation where the number of illegal immigrants vastly outnumbers that of legal immigrants. While many of these are low skilled workers seeking employment in agriculture and other simple jobs, an increasing number enter largely to take advantage of social programs and opportunities for illicit activities in finance, goods smuggling, trading of people, and others. The resulting costs are not just economic but also moral, ethical, and social. Similarly, there are serious political ramifications as people blame their own lack of opportunity, high taxation as well as increased lawlessness on the lack of enforcement of American immigration laws. The prevailing large-scale and unbridled immigration into North America and the European Union may make an indelible mark on those societies in future by changing their political, social, economic, and most importantly democratic character. Something will have to be done even obviously consistent with the basic concepts of individual rights and freedoms of the American Constitution. Immigrants may in future be required to accept and adopt fundamental norms and customs as well as show their respect for the underlying principles on which a society or nation is based to qualify for permanent residence as well as subsequent citizenship. This may sound cruel but will in the long run be recognized to be not only in the interest of the host country but also the immigrants. In global terms, large-scale immigration has generally contributed to the economies of host countries and often affected their technical and economic growth. At the same time, a large number of graduate students in American universities, particularly in science and technology, are now foreigners (largely East and South Asians) who unlike in earlier times expect to return and make a career in their home countries and not stay in America. This constitutes efficient technology and knowledge transfer and has been a major contributor to the phenomenal technical advances of China, for example, America, and for that matter Europe, must develop means of attracting more of their own citizens to commit to higher education. They must produce more citizen scientists, engineers, medical, and other highly skilled professionals if they are to be able to maintain their living standards and economic leadership positions. However, to achieve this may require a complete overhaul of the American educational system, from primary school to higher education as well as reconsideration of salaries and reward systems. Standards of achievement by American students, particularly in mathematics and science, are on average well below those of not just other Western countries but even many developing countries such as China and India. Similarly, while a large percentage of American students go on to college, the vast majority graduate in liberal arts and similar subjects with only a small percentage choosing medicine, science, and engineering. Many of those also chose to work in finance after graduation where remuneration is much higher. America

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graduates only 10% as many engineers as countries such as China and India, and the quality of their professional education is in many cases as high as or higher than that in American universities. Similarly, America lags woefully behind East Asian and other countries in skill training and continuing education, within or without companies. As a result, many American workers cannot acquire the skills needed in increasingly more technically or knowledge demanding jobs such as in IT, communications, manufacturing, health care, and more. They simply lack the basic education, analytical and communication or expression skills. The trouble is that this trend permeates whole generations of some ethnic groups in America and has to a large extent become a cultural trend. This in turn impacts worker quality under conditions of rapidly changing and advancing design, production, and product technology. At the same time, America spends more than double the amount per capita for education and training than any other country. There is an urgent need for a reevaluation of the whole education sector in America. Although American productivity has led the world for many years, there is increasing evidence that large segments of American workers fall woefully behind in the value of their output. This is not only the result of an increasing gap in educational and skill competence, as mentioned before, but more importantly between training of low skilled Americans and workers in other parts of the world. There are few developed countries and even developing countries where the educational and skill gaps are as large as in the U.S. While America claims a high literacy rate, for example, the fact of life is that large segments of the population are really only seemingly literate, and are in reality functionally illiterate. This is not only true among minority Americans who often lacked the opportunity or incentive to get educated, but also among Americans of European descent. As a result, even simple manufacturing and service jobs are being emigrated abroad where better skilled and educated labor is often available at a fraction of the cost. While outsourcing of such jobs used to be driven primarily by lower labor costs, it now quite often is the result of skill differentials. In many lower labor cost countries such as Korea, China, and even India, large numbers of workers are not only well trained but are often better skilled than their American counterparts. This is largely due to the fact that these workers are usually younger and receive modern training in the professions, while an increasing number of American workers find themselves with outdated skills, work rules, and knowledge required to perform a superior job. America is facing a serious skill gap but our educational system does not respond to their demand effectively. We need millions of health care, manufacturing, IT, and engineering workers now and cannot find enough adequately trained people to fill these huge numbers of vacancies, this as much as lower costs abroad are feeding the outsourcing boom of American industry. There is an urgent need for more skill and other training throughout a worker’s career, which assures up-to-date knowledge of continuously updated technology used. However, most continuing education in America is organized haphazardly

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and in many cases American workers are not required nor encouraged to update or upgrade their skills and knowledge periodically, something which is often the rule in foreign countries. American workers have traditionally benefited from better, more modern facilities and equipment, which together with better management and organization permitted maintenance of high labor productivity. But this may not be true much longer as major emerging economies such as Taiwan, Malaysia, Thailand, Korea, Philippines, India, China, and others modernize their manufacturing and service facilities and equipment. This together with usually better educated trained workers whose skill and knowledge is periodically being updated is rapidly eliminating or even reversing the productivity gap. All of these developments seriously affect America’s position as the world leader and introduce challenges to its preeminent position. Many American industries are simply no longer globally competitive. Another issue of concern and a potential dilemma in maintaining American world leadership are America’s addictions. Americans are the world’s supreme consumers. They acquire and discard. They own, not mainly to use but to have. This applies to consumables as well as things others may consider longer term use items. Americans purchase clothing usually for the short run and on an impulse and not to cherish and keep. This also applies to so-called long-term goods, such as household items, appliances, and electronics. Even automobiles are scrapped much sooner than in most other countries. Consumerism in America plays out in many other ways. It is as prevalent in services as it is in goods. Americans eat on the go and often use entertainment not as events but as a way to pass time. Few will dress especially to go to a festive dinner, concert or theatre performance. Entertainment is enjoyable time consumption, nothing more. This goods and service consumerism has become the backbone of the American economy. Before World War II, production in manufacturing and agriculture sustained America and made it the world’s economic powerhouse. During the second half of the 20th century its role changed decisively into a trading, service, and consumer economy. Consumption by Americans has become addictive in many ways. Food, considered precious in many parts of the world, is largely wasted in America, not just because it is abundant and cheap but because it is not considered culturally and ethically valuable. Americans eat largely for sustenance, not enjoyment. They eat often on the go and few make meals social occasions within the family or with friends, except during holidays. Only in business are meals considered important events. Living opposite a primary school, I was always astounded at the huge amounts of food thrown out every day. It seemed as if more food was thrown out than actually consumed. Similarly, weekly garbage discarded at curb sides was always full of near new or hardly used or at least usable items of clothing, furniture or else. Consumption is really an American national addiction which few resist. At first, I assumed that it applied only to the well-to-do and the impatient young, but I learned better. It is a part of a national character, approaching an addiction. Consumerism of goods and services has its own reasons. Not to meet real needs but to simply

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be an American, a person who does not have to save and who lives in the land of plenty. A land that provides all, more and better than any other, and where waste does not matter. Consumerism is the main contributor to America’s horrendous trade deficit, particularly with China, not wage differential as many claim. Japan’s wage costs are comparable to those in the U.S., yet Japan has a positive balance of trade with China because its citizens are frugal and not addicted to consumer waste. American’s generate many times the solid and liquid waste of people in other countries, even those living in equally affluent societies. When it comes to air and water pollution, we are not only the champions of the world but contribute many times the world average. Americans are addicted to waste and pollute and somehow assume it to be our right, not just because we can afford it, but because we live in the greatest and most powerful economy. Waste itself has in a way become addictive and children do not learn not to waste, unlike children in many other countries who are taught to clean their plates and think of the starving children in poor countries. But addiction to consumption and resulting waste and pollution is only one of the battles America has to fight. America is by far the largest consumer of addictive drugs and has been unsuccessful in stemming their inflow, local production, and ultimately use. The war on drugs has been fought mainly abroad, with America trying to get drug producing or transiting countries to stem the flow. In other words, America is trying to reduce or eliminate their supply. Yet it does little to lower demand. In fact, penalties for drug use, possession, and even trading in America are ineffective. Drug users usually get nothing more than a slap on the wrist, and possessors or even traders receive sentences that are lower than those in practically any other country in the world. The results are continued skyrocketing prices for many drugs and their ready availability to anyone in America able and willing to pay. Addicts who cannot pay resort to crime to feed their addiction. America has lost its so-called war on drugs by its unwillingness to address the demand side. This war cannot be won by trying to force other governments to crack down on drug production or transit, militarily or otherwise. As long as there is demand and huge profit potentials, supply will materialize and reach the market. Curtailment of drug demand in America may not require gargantuan measures such as the death penalty for drug possession, a practice adopted by some South East Asian countries with success, but much more severe civil and criminal penalties than available now must be imposed on drug users and particularly traders and their intermediaries. Only by forcefully cracking down on demand will drug use and the associated crimes be reduced in America. In general, Americans have an inflated sense of entitlement. They want to be able to consume unreasonable amounts of everything and particularly energy (6 times the world per capita average), while objecting to oil, gas, nuclear, and even solar and wind energy production in their own neighborhood. They did not permit a single refinery, never mind nuclear power plant to be built in the U.S. for about 30

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years now, and complain bitterly about the lack of gasoline supply and the cost of fuel and electric power. Many Americans want a beachfront home but few are willing to pay for proper protection against the elements. Most family homes are built of sticks and plywood because it is cheap, looks nice, and can readily be changed. Yet these houses are fire hazards, lack security, and are blown apart by even mild storms. When that happens, Americans expect the government to step in and help in the reconstruction. We want ready access to shopping, entertainment, schools, hospitals, communication, and administrative centers, but object to roads, railway tracks, electric power, telephone lines, and other necessary infrastructure near our homes. We build on marshes, wetlands, earthquake faults, eroding beaches, and even in ravines, expecting government to protect us and bail us out if things go wrong. Americans expect to get what they want, where they want it, and how they want it, expecting others to help or bail them out from adverse consequences. Although there are zoning and other laws, few really prevent potentially hazardous waterfront and other risky developments, such as home building on clear cut mountain slopes. Americans want a minimum of government restriction and a maximum of government help to feed their consumerism habits. Yet they also want a clean, healthy environment, low costs, and ready access to everything. Americans generally expect legal recourse to be available to them whenever they feel damaged, inconvenienced or otherwise penalized. The legal system in America consumes many times the percentage of the national economy than in any other country of the world, though one could not really claim that the country benefits from greater law-abidedness, safety, security or responsiveness to individual needs. Litigiousness by Americans encouraged by a mercenary trial lawyer industry faces few bounds and is largely responsible for the high cost of health care and other services. The American legal and judiciary establishment consumes 15% of GNP itself and is probably responsible for 20–30% of the 15% of GNP that health care consumes in America. Many of these addictions contribute little if anything to living standards and even more importantly to the quality of life. American’s consume a lot, but enjoyment is often fleeting. Much of the consumerism is more a cultural habit than a conscious or intelligent choice for the attainment of greater satisfaction. Much of it is fueled more by a desire to confirm than real need or pleasure. The social and educational system is partly responsible for not encouraging and appreciating more individualism. While group activities are laudable, can be rewarding, and can help build character, social and other skills, group pressures towards consumption uniformity are counterincentive. Consumption, in other words, has truly become an addiction for many Americans, which provided huge incentives for economic growth, while at the same time undermining the fabric of American society. Consumption has become a status symbol and an ambition, often without any underlying satisfaction or need. As a result, Americans do not save and somehow assume that the future will always take care of itself.

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This phenomenon permeates private, corporate and government decisions. Not only do many individuals have inadequate resources to cater for their future needs, but corporations and government often leave many future obligations unfunded. These in combination with America’s huge foreign and domestic public debts present very difficult strategic challenges to the U.S. economy. As noted before, there is a growing problem of rapid decline in productive activities in the American economy, particularly in manufacturing. The increasing loss of a manufacturing base not only deprives America of high level employment opportunities and thereby a thriving middle class, but also of support and incentives for technological innovation. Manufacturing following agriculture has historically provided the back bone of the American economy and the incentives for technology development, and innovation. While the growth of the American service sectors may be an appropriate economic development, most of these service sectors provide for the needs of Americans, in other words are purely domestic services. Among these are education, health care and law enforcement. As noted, America has some of the world’s best hospitals and medical facilities, but spends more than twice as much per capita or as a percentage of its GDP (15.2% in 2005) for health care. Yet health care insurance does not cover as many as 40 million Americans, and many others are only partially covered. Similarly, law enforcement consumes an inordinately large percentage of the GDP. In 2005, over $1.6 trillion or about 15% of GDP were expended on it, without any measurable improvements in public safety or crime prevention, this in addition to the costs of homeland security which imposes large additional costs without measurable improvements in security. In total, education, health care, law enforcement, and homeland security, all domestic services, are expected to reach costs in excess of half of the American GDP in 2006. The problem is that these services in America, while providing for the well being of its citizens, currently add little to the economic growth and competitiveness of America in an increasing globalized world. They may also affect America’s continued ability to lead the world economy as well as its ability to serve the world as the premier technology developer and military power, as shown by the tremendous budgetary strain imposed by the Iraq war and the recent natural disasters such as Hurricane Katrina. In fact, both of these pose the question if America is really able to effectively deal with major foreign challenges and domestic disasters. America needs major improvements in its educational system just to keep pace with the new foreign competition in technology and science. Katrina was a great test for America. It showed up utter chaos at both the federal and state levels in responding to a mammoth disaster. A combination of federal negligence, incompetent planning, and untimely provision of often inadequate aid was further exacerbated by blame games, heavy handed bureaucracy, probable political as well as racial discrimination, and most importantly real incompetence by many of the people responsible for emergency management.

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America has become highly politicized with increasing partisanship at all levels of government. American government usually works better when its three branches have different or independent political affiliations. When the executive and legislative branches are fully beholden to one political view, they may furthermore try to use opportunities to fill vacancies in the judiciary, the third branch of the government with like-minded judges as well, wholly negating the premise of the founders in devising a three branch government ruled by the requirements of the country’s Constitution. This condition is being reached now. It contributes greatly to the gradual breakdown of not only the independence of the three branches of government but also true representation of the people, among which the combination of minorities have always been a majority. The result is a more divisive decision making environment and a decline in the true representation of the public’s or the people’s interests. America is more divided today than at any time in recent history. This not only because of the apparent quagmire in which it finds itself in the Iraq War today in 2005, but also for lack of any real action plan to complete this mission and lead the world. This and the dismal failure of the American government at all, but primarily the federal level, to effectively deal with the Hurricane Katrina disaster in an effective and timely manner results in the assignment of a failing grade to America in strategic and action management. The Katrina episode showed a real lack of leadership, inadequate communication and cooperation and blame game politics. One hundred days after the disaster only 103 disaster loans to business and 1400 to home owners out of hundreds of thousands of qualified applicants had been considered. There were also serious allegations that race played a role in the lack of government and particularly the Federal Emergency Management Administration response to this calamity. Katrina really showed the major deficiencies in America’s ability to cope with large-scale accidents, independent of the large and often stored or pre-positioned resources. Lack of organization, cooperation, and simply basic planning and management skills as well as commitments appear to be major factors causing these deficiencies. At the same time these experiences raise serious doubts of America’s credibility as a global leader. Many Katrina victims waited and waited for help and shelter. Thousands apparently died from lack of help and not the direct effects of the storm. Bodies were still being found in houses that were simply bypassed, ignored or otherwise not considered. Similarly many sick and elderly in hospitals and old age homes were simply abandoned to die. Other problems that affect the credibility of American leadership are driven by things such as excessive executive pay in industry and finance which, while legal, seriously undermines the concept of reward for performance or earned income. Also the newly popular dismantling of corporate pension and health care systems or obligations are serious indictments of American corporate leadership. These actions are often facilitated by the use of Chapter 11 bankruptcy provisions and used as management tools. They often fill the pockets of lawyers, vulture investors and

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executives. Chapter 11 bankruptcy laws were reformed on October 17, 2005 at a huge cost to shareholders, workers, and customers. Chief executive pay by the 1000 largest U.S. corporations averaged $5.7 million per year in 2005 or over 150 times that of an average employee working for them, this usually independent of performance. In fact executives have resisted any linkage of pay, bonuses, and other benefits to performance. Bonuses, particularly in the financial sector, have similarly become unreasonably large. These trends are obviously again at the expense of shareholders, customers, and employees. America spends more that twice as much per person on education, health care, and law enforcement than any other country. With nearly 50% of GDP spent on these services, we are in effect wasting nearly 25% or a quarter of our GDP by spending so much more on these services than other advanced countries. While our elite universities and schools or our pre-eminent hospitals may be better and some are among the best in the world, the average quality of education, health care, as well as public safety is probably well below that of other advanced industrialized countries. Even more importantly, America’s education, health care, and legal systems are less accessible to the average citizen than those in other advanced countries, where government and/or central organizations provide coverage and accessibility to all. America’s largely private system provides many opportunities for legal, insurance, consulting, and other interests to intervene and add significant costs without the addition of measurable or for that matter any benefits. In fact these interventions usually reduce accessibility and quality without improvements in quality of service. Marketing has become a huge and essentially non-productive industry in America. It is estimated to account for over 10% of GDP and includes not just the advertising of products but increasingly also of services. These include educational, health care, and legal services, as well as marketing of all kinds of activities people did not even know they could or should possibly want. There is a lot of false advertising and misleading marketing, which often undermine public confidence and interests. The media and particularly the Internet play an increasingly important role in this. All of these developments and resulting conditions show a trend towards decadence in America somewhat reminiscent of the Roman Empire before its fall from leadership. America is slowly but surely losing respect. While still admired for its achievements in science, engineering, medicine and other intellectual activities as well as in entrepreneurship, it has lost much of the world’s confidence as a global mediator and economic leader and is perceived by many as a dictatorial diplomat. Like Rome which soon after reaching the pinnacle of power and respect became a morass of infighting cliques, self indulgence, mis-organization, and social discord, America seems to be sliding into mismanagement and social self-satisfaction without base. As a result, America is gradually losing both the confidence and respect of many people, including some of the most important leaders in the world, this also for lack of or inefficient communication and consultation with others. Leaders must suggest and discuss as well as consult with others affected by their proposals and

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not just inform them of a decision or action. This has not been done or done only in a perfunctory manner in recent years, thereby aggravating friend and foe alike. LEADERSHIP QUALITY America is recognized as preeminent in science and technology, as well as economic and military power. The question though is if these factors qualify it to lead global policy and development in the world. Global leadership not only requires a dominant position in these important areas but a firm and moral base, creativity, credibility, persuasiveness, and effective communicating ability. A world leader must foremost want to organize people and nations to do the right thing, the moral thing, and the things that advance human and the world’s interests for the long run. They should not be driven by short-term or temporary interests, no matter how attractive or rewarding, but keep the overall and long-term development impacts always in mind. Throughout history leaders have emerged and vanished. Some achieved leadership status by virtue of their personality and achievement, while others did so by power, greed, shrewdness or popular support. It is interesting to note the different ways rulers came to power throughout history all over the world. Those who establish hereditary rights to rule often emerged from nowhere but were later anointed by religious, power group or popular acclaim to their exalted leadership position as emperors, kings or other aristocratic figures. Few actually exemplified leadership characteristics and in fact many would later be deemed absolute failures as leaders. The same applies to groups of people or nations claiming leadership. Today widely available and open real time communications require leaders and leading nations to respond effectively to issues as they occur to retain credibility. They similarly must be open in their relations and information exchange. Information should be inclusive and comprehensive and not be used to try to hide or circumvent facts to attain public relations advantages. Leaders must be committed to basic human rights of their own people, all people under their direct or indirect control, as well as others. This includes freedom of expression, religion, and movement without hindrance. Leaders in essence have a contract with their people and leading nations with all other nations to guide, help and protect them. In today’s environment we need more people oriented leadership with emphasis on human rights and human development. It is unfortunate that people or social development does not receive greater attention, both in many developed as well as developing countries. Leaders often do not recognize that it is their people who constitute the most valuable resource. Human development with emphasis on education, health care, legal protection and safety, as well as freedom of expression, business activity, movement, and enterprise are the only sure way of attaining prosperity, economic growth, respect, and security. To achieve this, leaders must be mature, well adjusted, and people oriented. They must build on their people’s strength. Leaders must learn to understand their people and their needs, as well as the needs of the world or mankind in general. They must be good listeners and demand as well as accept criticism. Leaders should be

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visible and have the courage and integrity to accept blame and stand behind their own views and decisions. This includes admission for mistakes, giving credit to others, and effective response to changing conditions. Comments and actions by leaders should be constructive and aimed at saying and doing the right thing without fear of making mistakes. Most importantly, leaders and leading nations must know how to manage change and do it decisively, even at the risk of making mistakes. Mistakes can often be averted by focusing on essentials and using common sense. Conflicts sometimes develop but should only be continued when inevitable. There are few reasons for the use of force or even war, and neither should be started unless truly unavoidable. The most important qualities of leadership are patience, compassion, understanding, and learning. Leaders never cease to learn and such lessons or ideas bring greater understanding and better decision making in the public interest. Leaders must be uniters and not dividers, and independent of prevailing political factors. Ultimately even politics rewards the leader who is more concerned with the general good than narrow parochial interests. American political leaders have lost many of the qualities of good leadership and have in recent years become increasingly narrowly interested in short-term political advantages in their decision making. This has caused loss of confidence and alienation by many previously stout supporters and allies within America and around the world. Somehow America has become more insular in its decision making while the world is becoming a more globalized village. The World Trade Center terror attack was a wake up call for greater global unity towards combating world poverty, assuring human rights, improving the environment, and combating terrorism as well as other extremist action, but America confiscated the issue and made it its own, and the basis of largely unilateral actions. This is not an example of world leadership and has hurt America’s standing.

CHAPTER 8

TOWARDS A BETTER, FAIRER GLOBALIZED WORLD

The beginning of the 21st century has been violent. Terrorism became a global scourge and war erupted in Iraq and Afghanistan, among others. Major storms, tsunamis, and hurricanes devastated large areas of Asia, Africa, and America, with huge loss of life and property. America maintained its leadership by projecting its military power, particularly in the Middle East. At the same time, America’s current account deficits continued to grow, while its domestic savings rates declined to near zero. Its tax revenues as a percentage of GDP fell to an historic low since 1950, while the projected Social Security imbalance to 2080 increased to $3.7 trillion or over one third of 2005 GDP. Medicare and health care costs in general continued to soar in line with increasing education and law enforcement costs. Major developing countries such as China became major creditors to America and are in fact financing its increasing debt. The major developing countries in Asia are advancing economically though their social developments generally lag, particularly in South Asia. Most disturbing though is the continued decline in living standards and freedoms in Africa, while Eastern Europe advanced most rapidly into thriving economies with many countries qualifying for EU membership. The world is marching forward, and over two and a half billion people in China, India, and South East Asia, or one half of mankind, are advancing rapidly out of poverty into modern life. These people are entering the main stream of the global economy. They are adding over 2.8 billion new consumers, and at the same time contribute mightily to global economic output. The economic march of Asia is unstoppable now. In 2005 China restated its GDP by adding 20% and continued its growth rate of nearly 10%. After over 10 years of nearly double digit growth rates, its economy seems to achieve a soft landing onto a 7–9% growth rate. India is now following in step and has a similarly accelerating economy with a rapidly growing lower middle class. Continental Asia (without Japan and Indonesia), with nearly 50% of the world’s population, had a combined gross economic output of less than 5% of the world’s growth, just 10 years ago. It more than doubled that output by 2005 and is expected to again double it by 2015 to over 20%, and to over 30% 231

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or more by 2025. In line with this growth comes the consumption of raw materials which has more than doubled in the same 10-year period. While there are still major differences in living standards with significant numbers of people left far behind in both China and India, they are making great efforts to close these gaps. In China the gaps are largely geographic with interior regions being left behind, while in India the gap is greater for reasons of geography as well as social, educational, and traditional caste discrimination. India’s illiteracy is still wide spread, while it is nearly extinct in China. Although India is a Western-style democracy with a transparent legal system, it is China which attracted the bulk of foreign investment. This largely because even as a communist country, China is perceived as having greater potential, a better, more educated, skilled, and motivated work force, less corruption, and better law enforcement. Most importantly, the Chinese government is encouraging free market developments and provides significant incentives. China also supports scientific and technological development to transition from old type industrial concepts, using a socialist approach with distinct Chinese characteristics. Although China built up its military in recent years, its strategic approach appears to be largely defensive. China is consciously working on being part of the developing global system without subverting it or imposing its own preferences or standards. It is gradually moving towards increasing human freedoms and rights, which in some sense are still governed by a central communist government. Conditions though are changing. It has a policy of export led economic growth and seems to follow a mercantilist approach, this while supporting the emergence of Chinese nationalism as a positive so as to consolidate unity of the country through people power. China’s major concerns are assurance of material resource and particularly energy supply to support continued economic growth. It has acquired major interests in oil, gas, and mineral resources in Africa, South America, Asia, and Australia. At the same time, China controlled its population growth quite well at about 1.1–1.3% which means that its real per capita income has on average been growing at a rate of 6–8% per annum since 1995. It invested largely in the development of natural resources in new areas such as Sudan, West Africa, Central Asia, Brazil, and others, where major Western developers were not very active, thereby preventing direct competition. India, on the other hand, continues to be handicapped by a comparatively large population growth which negates much of the recent economic growth of the nation in per capita income terms. As a result, improvements in average standard of living in India have been marginal notwithstanding the large recent increases in economic growth. India, as mentioned before, is expected to actually overtake China in terms of population within 20 years or sooner, yet will continue to increasingly lag behind China in GDP and even more in per capita GDP terms. At the same time, India is also emerging as a global player in world trade and developments of energy and minerals, a trend expected to accelerate with the renewed industrialization of the country.

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The economic growth of China and India, following the phenomenal industrial developments of Japan, South Korea, and more recently South East Asia, will make Asia the economic center of the 21st century, with average income levels in Asia growing at several times those of the rest of the world. In fact, China will become the dominant world economy, overtaking the U.S. within 25–35 years or sooner. Asia’s emergence as the new economic and probably technological center of the world will have major global ramifications for a variety of reasons. Asian history, social customs, and culture are distinctly different from those of Europe. Its histories are older and cultures much more deeply engrained. It experienced a very different development. Asia is the birthplace of several major and many minor religions or faiths; yet the role of religion in the everyday life of people in Asia is quite different from that imposed by Judeo-Christian customs. Most of the religions of South and East Asia for example assume much more personal versus communal relationships and commitments. Also religion, faith, individual behavior, philosophy, and personal responsibilities are more closely intertwined. In East Asia in particular Confucianism continues to affect human behavior, interpersonal and family relations, ethics, as well as respect for the environment. In other words, it is a more proactive faith and moral guide that influences human behavior, unlike the reactive atonement in Judaism and Christianity. The economic emergence and growth of China and India plus that of their Asian neighbors will profoundly affect future global developments, not just in economic and trading terms but also in the way political, social, trade, intellectual and economic relations are maintained. China and other East Asian nations make their major priority the improvement of living standards. They all have comparatively small defense budgets. In fact the U.S. defense budget is bigger than that of all of East Asia, India, and non-U.S. NATO nations combined. China has tried to resolve all of its border and other conflicts peacefully and diplomatically. It has in recent years used political and economic coercion in place of military action quite successfully, and resolved foreign conflicts peacefully by using its enormous economic clout and large market potential to expand its influence. It also keeps political issues and economic dealings strictly apart. This is evident from its close economic relations with Japan and even Taiwan, while maintaining an adversary political relationship with both. Politically Japan is still considered a war criminal that ravaged China during the second World War, yet Japan offers attractive technology, transfers, and investments to China which are strongly supported by the Chinese government. Similarly, Taiwan, as noted before, is considered a break away province, yet investments from Taiwan and trade between China and Taiwan are vigorously encouraged. This is because the Chinese government is uniquely focused on economic growth, modernization, and social development. In recent years economic development has moved inland and now some of the largest industrial, infrastructure, and service developments are located in the interior, particularly along the upper reaches of the Yangtze River, the most densely populated area of China.

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Central planning in China is largely driven by capitalist ideas and market forces. The country is open to foreign investors and the government tries to accommodate foreign developers who increasingly are not primarily interested in investing in outsourcing activities for export from China, but in establishing facilities or services to meet an increasingly capable and demanding Chinese market, of a very rapidly growing middle class and business community. China has been a fast learner. In the 1980–90 transition period to an open market oriented economy, projects were usually managed centrally by people with little local knowledge, requirements or project management skills. This has changed radically. For example, by the mid 1990s the modernization of Shanghai under the then Major Chu Rhonji, who later became Prime Minister of China, became an example of efficient and effective urban modernization by world standards. In a matter of 5 years a new commercial city was built opposite the traditional bund on land previously occupied by coal depots, swamps, and pig farms. A new system of ring and arterial roadways as well as new mass transit systems was constructed, and a brand new airport built on the southern shore of the Huangpu River. This was later connected to the new financial city center by the world’s first levitated high-speed rail system. In parallel new bridges and tunnels were constructed to connect the old and new city centers, the port was relocated down river to deeper water, and new multi-lane highways built to connect the city to the north, south and west. The speed and effectiveness of design and construction of all of these projects was amazing. Such projects had never been accomplished anywhere in such a short time. Similarly, the architecture was exemplary and the engineering highly advanced. Just north of Shanghai, a huge free industrial township (one of many others) was established in Suzhou. It attracted many of the world’s premier industrial firms who invested billions in major manufacturing facilities. The local governments cooperated in establishing training, health care, and housing facilities to accommodate the needs of tens of thousands of workers required. Again, all of this was done in a few years. The point is that China is not only committed to rapid development, industrialization, and modernization, but has the will and capability to accomplish it. Another example is obviously the often criticized “Three Gorges Dam”, which as noted before will revolutionize the development of the Yangtze River interior. It is probably the largest project ever undertaken in the world, yet it has advanced on schedule and budget and is expected to be completed by 2010 when the last phase of this ($68 billion) project is finished. The first two phases both came in on time and budget, a rarity for such large civil engineering projects. Not only will this project generate large amounts of renewable power, control floods, improve irrigation, and permit large vessels to travel year round all the way up to Chouquing on the upper Yangtze River, but it will also permit diversion of badly needed water to the arid north of China. In parallel, China is now upgrading the interior physical and service infrastructure with new roads, communications, power, education, and health care systems in areas which lagged behind during the last 20 years. China has been an exemplary

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student of modern capitalism and has adopted most of its positive aspects while retaining a Chinese version of communist central control over economic and social development. This approach has served the country well and allowed its economy to grow without the economic upheavals and distortions experienced by Russia or the former Soviet Union. It has effectively used people power as its major resource. It had few lapses in its economic advance and is now ready to assume a greater role in both the global economy and world affairs. As a new world leader, China can be expected to use a different approach to assume a different role from that of previous leaders such as the European nations, America, and the Soviet Union. It has used its economic power, huge domestic market, and large material import demands as major negotiating ploys. In its search for reliable energy supplies to meet a 7% increase in energy consumption per year, China is engaged in Iran, Sudan, Central Asia, as well as South America and Asian Russia while building up its domestic renewable energy conversion capacity in nuclear and hydroelectric power plant developments. China, with a military budget of $20b (2005) versus America’s $362b, is not competing with the U.S. militarily but economically. Its strategy is to gain economic influence and use it to build alliances. It also challenges the U.S. and the West in intellectual or technical prowess and is investing heavily in education and research. China is using diplomacy and economic or trade incentives to expand both its power and influence, recognizing that soft power is much more effective to achieve its goal of enhancing its world position. This not only not to offend America and Europe but also put to rest concerns by its Asian neighbors such as India, Japan, Russia, and the South East Asian countries. It has succeeded very well in convincing the world and particularly its neighbors that it is not using its might to advance China’s interests or oppress other people. It does not try to coerce others to adopt its system of government and tries hard to be a good world citizen who shows respect for others. China is trying to show leadership by example and has succeeded in developing near universal appreciation of its approach. As a result, nations of different political orientation and diverse economic conditions all maintain cordial relations. China uses this situation to establish long-term economic and supply relationships, often in competition with America and other Western nations. It is also attempting to leapfrog in the sciences by overcoming decades of neglect of fundamental research by now mobilizing well-trained scientists to marshal resources for scientific breakthroughs. China’s approach is subtly undermining Western influence in many parts of the world. It is being recognized as a potential alternative economic as well as strategic leader by many and is using this new position well. In a way the West and America are increasingly handicapped by their wide open and transparent democratic systems. It restricts their freedom of action and puts them at a distinct disadvantage in their decision making and response capability. Their governments change frequently and are beholding to an unpredictable electorate. They often cannot act fast enough in response to an emergency or an opportunity, and they

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are always accountable to a judiciary and their people. They are often beholding to outdated principles and are also subject to many voluntary and prescribed constraints. They similarly are not free to take unduly large risks, even when supported by their people. They must seek the consent of a multitude of institutions designed to assure checks and balances before engaging in such actions. This is a major disadvantage as it may take too long for an action to be effective. Countries such as China do not suffer such disadvantages. China has taken full advantage of its unique situation and has as a result made major inroads into Western economic and political interests worldwide. After years of shaky developments with uncertain rules for public and private financial institutions, the Chinese financial system appears to finally become more mature and in many respects improved from its traditional inept and often corrupt ways. In recent years Chinese financial assets have been growing at 14.5% or twice as fast as the world average and 50% faster than the Chinese economy. In China, bank financing dominates, to an uncommon degree with equity markets and private financing assuming a subordinate role. China’s economic growth has increased domestic demands for life comfort goods such as appliances, cars, and more, as its per capita GDP has grown from $1700 in 1990 to $4800 in 2005. It is expected to reach $10,000 in PPP terms by 2015 nearly double that expected in India. Building a socially stable society appears to be a priority for the Chinese government. The growth of the Indian economy is more distorted than that of China in terms of social equity. China emphasizes investment in growth, ignoring the need for parallel investment in social and health services. Such an unbalanced economic and social growth pattern may undermine long-term political and social stability. For example, the mass failures of stateowned enterprises that resulted in unpaid wages and pensions have caused growing social unrest. India produces several times the number of professionals than China, this particularly in areas such as finance, medicine, logistics, law, and education. In other words, while producing about the same number of engineers and skilled manufacturing workers, it lags far behind India in the number of service industry professionals trained and available. As a result, India has been able to rapidly grow its service sector that takes both less time as well as capital to develop. It is difficult to predict how emphasis on these different economic sectors will work out in the long run. However, in parallel, India continues to suffer under gross social inequities. Both countries have placed major emphasis on economic growth which while successful has resulted in large segments of their respective population to be left behind. Recent turbulence and social unrest in other countries, particularly in Africa where continued poverty, starvation, and mass murders often fostered by global terrorism and large-scale unrest by Moslems throughout the world, raises the question of what has gone wrong. The world overall is more prosperous and technically advanced than ever before and we should be able to solve its problems effectively. Unlike the dire predictions of the Club of Rome, there is really no global shortage of food,

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water or energy or for that matter anything else. Some resources may be in the wrong place or be too expensive, but they are available. The problem is really one of access, distribution, and willingness to share. Even Africa, with the largest percentage of arid areas among all the continents, actually has adequate water resources and in fact more fresh water per capita or per hectare of land than most other continents. The problem is lack of effective water management, allocation, distribution, and delivery. The same applies to food, fuel/energy, and in services such as education and health care. What is most urgently needed is an action plan on how to more effectively and efficiently manage and deliver resources and services to those in need. We require effective leadership which recognizes the world’s true needs and is able and willing to manage the development and delivery of resources and services to satisfy those needs. WHAT THE WORLD NEEDS Natural disasters such as the Christmas Day tsunami in 2004, the Katrina and other major hurricanes in the U.S. Gulf Coast in 2005, the large earthquake that hit Pakistan in 2005, and others killed hundreds of thousands of people and caused tens of billions worth of damage recently. These unprecedented catastrophes emphasized our exposure to ever greater uncontrollable events that modern science could neither effectively predict nor prevent. In all of these there were few if any warnings and disaster preparation was either inadequate or absent. Experts and laymen disagreed on the causes for these disasters, but it is evident that their frequency as well as magnitudes was larger than predicted. There are many who blame pollution and the greenhouse effect and the resulting change in the global weather system for these developments, while others maintain that these are simply cyclical occurrences. Independent of the cause of these natural upheavals, there was a definite lack of emergency preparedness and response. The delivery of aid in the aftermath of the tsunami, which affected 5–6 nations bordering the Indian Ocean, was comparatively effective and timely, particularly considering the remoteness of most of the affected areas and the magnitude of the disaster. At the same time, the emergency response to the hurricanes that hit the U.S. Gulf Coast and the earthquakes that devastated Northern Pakistan in the fall of 2005 was not only inadequate but also disorganized and mismanaged notwithstanding the availability of vast resources and commitments. There are no reasonable explanations for these failures and blame must be replaced by national and/or international global disaster response plans designed to assure not only availability but also well coordinated aid delivery. We similarly need more effective warning, evacuation, and protection systems to assure proper evacuation of exposed populations in disaster zones. There is an urgent need to design and impose the use of wind and water surge proof housing and structures. All of the above mentioned catastrophes showed clearly that properly designed and built concrete structures will usually remain standing, while

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wooden stick and plywood or other flimsy structures would collapse or otherwise be devastated. The world urgently needs global disaster prediction and warning as well as response management and delivery systems that not only make real time information and alerts universally available but also assure central worldwide coordination of relief, aid, and reconstruction assistance. We have the science and technology to predict most natural disasters as well as effective communication and warning systems to deliver forecasts and warnings. The costs of installing and operating such systems would be a fraction of the cost of physical damage that could be prevented, independent of the savings of large numbers of lives. Similarly, relief management must be established as a single global organization such as a World Emergency Response Agency with full powers to requisition, assign, and deliver relief where and when required, using the most strategically located competent resources. Relief is not as effective as it can be if it is assigned on a parochial basis. Disaster relief must not allow competition for political benefit, but should be done only with humanitarian and compassionate objectives in mind. Therefore, as noted, an independent, qualified, well organized global disaster prediction, warning, evacuation, and relief agencies with power and resources to step in anywhere in the world are urgently required. Such an agency would be responsible for running and/or coordinating all seismic and other monitoring, warning, alert systems, as well as the planning, emergency resource pre-positioning, and management of evacuation. It would similarly be responsible for coordinating the damage assessment, fundraising, reconstruction planning and implementation and, most importantly, the care and rehabilitation of injured and displaced people. The main objective of this approach would be to assure the effective, timely, and efficient response to major catastrophes. The idea is to marshal all resources under one head and assure good management and coordination of emergency response activities. The shameful failure in disaster response before, during, and after the hurricanes that hit the U.S. Gulf Coast and the earthquake in Pakistan in the fall of 2005 as well as the somewhat better response to the Indian Ocean tsunami in 2004 show that we must use a different approach. We cannot rely on disparate uncoordinated local or central government departments plus large numbers of private aid organizations to operate without effective coordination and management. The amount of resources wasted in overhead, overlapping activities, inappropriate uses of resources, and simple mismanagement are estimated to far outweigh those productively employed. Furthermore, these recent examples show that lack of effective response planning management and coordination result in often devastating damage, social system breakdown, interference, loss of life, and loss of trust or confidence by those who need help most urgently, and are to receive assistance. Emergency response must be centrally planned, managed, and coordinated if the largely unnecessary loss of life, property, and economic activity experienced by these recent disasters are to be prevented.

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Such a World Emergency Management Agency or Organization (WEMO) should not be a large bureaucracy or supranational all-powerful agency, but very much like International Air Traffic Control or the World Health Organization (WHO), a global resource management, coordination, and assignment body with powers to both direct as well as mobilize resources. However, it must be provided with powers which permit it to requisition and control required resources, including material, equipment, and manpower, as well as the means for transport. The recruiting and assignment of manpower under these circumstances to such an emergency management agency would be the responsibility of such a World Emergency Management Organization headed by an international council such as the UN Security Council. Our interconnected globalized world has put its major emphasis and priorities on technological advances and uses. At the same time, social development has lagged, and we suffer continued and actually growing conflicts among people, both within countries or regions as well as between nations and cultures. Our technological and scientific advances unfortunately were not paralleled by similar progress in inter social, cultural, and religious relations. In fact today we face greater differences and conflicts, particularly among the three Abramic monotheistic faiths than ever before. It may well be that if we cannot resolve the differences between Muslim and Judeo-Christian faiths and cultures now, the result may make the Crusades seem like a cakewalk. It is incomprehensible that believers in faiths which are essentially founded on the same basis, have the same heritage, and even customs would explode into such a venomous discord and violent confrontation; this particularly as they all share a common background and many traditions. The common foundations of all monotheism are the belief in one, all powerful and compassionate god. All preach peace and joy of humanity and discourage conflict. Their moral demands are uniquely similar or mostly the same. The world is definitely richer because of the multitude of religious thought and custom. This diversity, often the result of differences in environment, culture, and living conditions, had a positive impact on mankind and the world at large. The main competition among religions should be in doing good, to explore and live visions of compassion and not in trying to degrade other faiths, this particularly as there are no fundamental conflicts among these religions and all share not only their background, customs, and vision, but also basic morals. Religion should be a personal choice and not partisan. Most importantly it should be a lifetime commitment to peace. It is interesting to note that most Moslems fight and are willing to give their lives for their faith but not necessarily for their country. This is particularly true in Arab countries, most of which share not just common ethnicity and language, but also culture. Many of these countries are really political divisions or the result of colonial boundaries without any unique or particular cultural, linguistic or even ethnic characteristics usually associated with nationality. They mostly represent fiefdoms which came into being over time without the typical trappings associated with uniqueness of nationality elsewhere. The result is greater loyalty to the larger religious affiliation than to the often artificial national boundaries. With such divided

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loyalties, faith loyalty is usually dominating and national interests often take a back seat in people’s commitments. These issues must be resolved to achieve peace and harmony not only in the Middle East but globally. There is an urgent need for more interface teaching and interface governments and the education of people in the real meaning of monotheism and the unity of religion. The collision between Islam and Judeo-Christianity fostered largely by extremists among Moslem clerics must be fought and defeated at the butt to prevent continued escalation and growing animosity. The success of reproachment among the Abramaic faiths and their adherents will also have a major impact on the future of world leadership. East Asia has been largely immune from these confrontations, an additional factor advancing their potential leadership role not only in economic but also social, spiritual, and moral terms. As noted, a major reason for this is the fact that faith is much more personal than communal as in Abrahamic faith societies. Eastern religions play a very different role in people’s lives and encourage greater closeness to the earth, the celebration of nature, and the environment. They are usually more frugal and concerned with long-term hereditary impacts. We can learn a lot from interfaith studies as no one has a monopoly of the truth or a most fundamental understanding or interpretation of god. Interface education would show that the difference between all religions is really small and a matter of interpretation and not substance. All believe in the same all powerful but merciful god and yearn for peace and prosperity. Religious leaders will have to recognize that faith is a universal human characteristic even for people who have no formal religion and that all religions essentially strive for the same time. Religions should be unifiers not dividers of mankind and encourage people to work together and contribute to the overall good. This must be taught as part of a new approach to universal education. In this vain, there is a most urgent need to assure worldwide educational opportunities and standards, a world where the rights to education and health care are a given and where educational standards are moving towards a global norm as part of the universal rights of man. Narrowly defined religions and nationalistic doctrines do not constitute education. Education must equip people with life skills, the ability to judge right from wrong, and knowledge that enhances life content. We should really work towards organizing education to move us towards equality of educational opportunities worldwide. This may be achieved by setting educational standards at least for primary education in terms of subjects and levels of achievement and then establish the means and support that will allow it to be accomplished globally within a reasonable time, say 25 years. This step alone would do more to eradicate poverty and move people towards greater equality and peace than other development programs. It would probably also eliminate major differences in mutual understanding, increase trust, and improve economic and social opportunity worldwide. While a supranational or global education authority would not be acceptable and may be considered an infringement on sovereign rights, a World Education

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Organization (WEO) or World Education Council (WEC) which would set standards and direct or assign resources to move towards those standards where needed would certainly be possible. In the health field the WHO has many of these responsibilities though at this time little control over the assignment of resources, something that is also urgently needed. The United Nations and its affiliated agencies has limited responsibilities in health care, education, security, and economic development. Some of these agencies have been quite effective, while others suffered under infighting, lack of management, political interference, and waste. We need a new or revised agenda for them, as most are still directed by a charter and rules established for the post World War II and post colonial eras. We face very different problems now and the four overriding global issues – security, economic development, education, and health care – must be addressed quite differently, this particularly in an increasingly globalized world consisting of a small number of growing economic groupings or unions and large nations such as the USA and its immediate neighbors, the European Union, China, the Association of South East Asian Nations, and India. These alone comprise about two thirds of the world population and account for over 86% of its economic output. If we add Japan, Pakistan, Brazil, Bangladesh, and Russia to this group, it would now account for 79% of the world’s people and 94% of its gross product. It is increasingly evident that a better proportional representation is necessary in dealing with major world problems, and that the old model of the United Nations, the World Bank, and other such institutions must be brought up to date to deal with the very different problems of the new globalized world. The world needs have become global as the issues posed by the four dominating concerns know no borders. Terrorism has eliminated any consideration of conflict boundaries. Similarly, viruses and other health problems are easily transmitted across borders. Globalization has erased most of the economic frontiers and with it the boundaries in the use and application of skills. Similarly, modern communications and the Internet have opened worldwide learning opportunities, yet with all these developments, the world is still highly segregated. It needs leadership in all the areas of need, leadership that can guide and unite and not divide. The world must recognize that the needs of man are material, spiritual, social, and intellectual. We have made great strides in establishing the means of production and delivery of physical materials, shelter and services to many people, yet seriously lack in the delivery of educational, health care, and spiritual services. We similarly failed in establishing means for effective social relationships and understanding among man. The universal rights of man go well beyond adequate shelter, nourishment, and freedom of movement and expression. In fact, these rights can neither be achieved nor guaranteed without access to meaningful education, health care, and economic opportunity, all in a safe environment.

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Great strides are being made in advancing living standards, particularly in some Asian countries but Africa and particularly sub-Saharan Africa is lagging far behind. Lester Thurow noted in his book “Fortune Favors the Bold”, that “Africa was substantially wealthier per capita than Asia in the mid 1960s”, soon after most of the continent gained independence. Today Africa is poorer than it was then, with 66% of the world’s very poor in Africa (versus 11% in the mid 1960s). During the same period, Asia’s percentage of the world’s very poor decreased from 76% to 1.5% in a stark reversal of fortune. Africa, by and large, is a continent of hopelessness, with little future as it now stands. We may need a complete reevaluation and redesign of the methods of delivery of aid or assistance to Africa. The current approaches in which we work primarily through existing, largely non-representative governments did not and does not work in many cases. We need new delivery methods which may have to be imposed if existing institutions fail in cooperating effectively in providing the necessary assistance. The world cannot stand by and allow the continued slide into poverty, starvation, lack of security, education, and health care particularly in Africa. It is interesting to note that China has assumed an important role in several African countries. While Chinese interests were initially driven by opportunities to tap into underdeveloped resources such as oil and minerals in Africa, it has more recently become active in large-scale infrastructure developments in countries such as Angola. China provided a $2 billion line of credit and dispatched Chinese workers to help rebuild roads, railways, housing, schools, and more. They are also active in development projects elsewhere in Africa. Today more than a quarter of China’s oil imports originate in Africa and the percentage is growing. China’s limited success is a good example of what can be done. Such approaches should be used to help develop a more comprehensive global means towards aid to Africa, not just as an edge to gain access to Africa’s resources but to truly bring hope and opportunity to its people. The international community must do more than introduce half-hearted measures to improve the security and well being of down trodden people in Zaire, Sudan, Bosnia, and elsewhere. There is a need for a more empowered international approach or body which can step in and correct grievous wrongs in security, health, education, and provision of basic human shelter and sustenance. The old concepts of inviolability of sovereign rights should not be an excuse for lack of action by the international community where indisputable wrongs have been committed, such as the recent developments in Dafur (Sudan) for example. Such wrongs must be dealt with outside any political and economic considerations. But to accomplish this may require completely reorganized international bodies. The UN will have to change and assume broader responsibilities if it is not to become as irrelevant as its predecessor the League of Nations. CAN AMERICA DELIVER? The beginning of the 21st century has brought major challenges to America’s global leadership, this not only because the world has changed and has truly become a global techno-village with easy communication, travel, and lifestyle, but

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also because greater closeness, facility of movement, large-scale immigration, and other people transfer has brought many economic, social, cultural, and religious differences to the surface. America as the world’s most successful and determined melting pot, a country truly built by and for immigrants from all over the world, has established a unique Western-style multi-ethnic culture, while at the same time developing its own rather controversial concepts of a world where American approaches and ideas dominate, including its perception of democracy, people’s rights, and individual freedoms. At the same time, America, as noted earlier in this book, has developed many cultural attributes and habits which, while interesting, are not readily accepted by the rest of the world as standards to be adopted or aimed for. This includes also America’s type of leadership not just as the world’s largest economy but also as its policeman, cultural guide, and moral preacher. There are many who consider American cultural and moral leadership a myth and its economic dominance largely artificial. While still the largest economy in the world, America is also the world’s largest debtor who could suffer the rug from being pulled out from under its feet making the country non-creditworthy. American cultural dominance as another example is largely a myth as many of its leaders or stars in film, theatre, music, and even literature are or were foreign born or actual foreigners residing in its midst. American cultural dominance, as another example, is largely a myth as many of its leaders or stars in film, theatre, music, and even literature are or were foreign born or actual foreigners residing in its midst. America is a true melting pot, one which did not emerge from a mixture of resident people as many other nations but which continues to melt, with immigrants remaining a larger percentage of its population than in any other country. Its character and culture as a result is continuously changing. Many believe, for example, that it will become increasingly Latin and lose its more traditional Anglo-Saxon cultural and East European character mixed with a large African continent. At the same time, globalization which grew as an economic opportunity is increasingly being refocused in cultural as well as religious and ethnic terms that are often opposed to the free-wheeling, open and sometimes prejudicial assumptions that American leadership use. While the world is economically more united than ever before and global markets have brought people closer together, social, cultural, religious and political differences have actually grown. America has assumed and maintained a leadership role since World War II based on unchallenged superiority of its economy, military strength, and technology. Its selfless actions after the last World War were admired for their compassion and generosity, but it has since lost much of this support largely because of its interventions first in Vietnam and more recently in Afghanistan and Iraq, this largely for lack of consultations with others and sometimes in actual opposition to international opinions or resolutions. Since the dissolution of the Soviet Union that left America as the sole super power, America has assumed an increasingly arrogant posture in its international

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dealings. These sometimes led to unilateral actions that many in the world opposed even when agreeing to such actions in principle. Considering America’s domestic performance, the U.S. Department of Homeland Security, responsible for emergency management, appears to be a ship without a rudder that lacks stability, purpose, and direction. It is wasting huge amounts of resources without measurable success in either improving homeland security or emergency response. The world is looking for leadership to respond to the increasing numbers and magnitude of natural disasters as well as mounting security problems. While America responded effectively to global calamities in the past, recent developments have raised serious concerns about its ability to take responsibility for global safety. Leadership today must be more responsive and give people confidence to be accepted. They must make a difference and not only respond but also be expert in predicting and/or preventing damage or disasters. Developments such as the failure to adequately respond to disasters at home during and after the massive hurricanes of 2005, have seriously damaged America’s reputation and credibility at home and abroad. The sight of bodies discovered four months after the event, of hundreds of thousands of people whose homes had been devastated, who were left without effective shelter or recovery aid, and an incompetent administrative system more interested in political infighting and bureaucratic warfare than assisting people in distress has left a bad mark on the country’s reputation. At the same time, some institutions such as the U.S. Coast Guard after the Gulf hurricanes and the U.S. military first responders after the Indian Ocean tsunami and the Pakistan earthquake of 2005 performed in an exemplary fashion. While most of the traditional services in the U.S. defense establishment and other departments are well organized, the new Department of Homeland Security appears to lack leadership as well as competence. It is overmanned, over-budgeted, and mismanaged. In fact, instead of improving security and emergency management at a time of great exposure to terrorism and natural disasters, this new organization appears to have made things worse. Instead of focusing government response capability, it seems to have diffused it by fostering a huge largely ineffective bureaucracy. When it comes to fighting terrorism, the principal function of this new department performance is lack luster. The army of transport security personnel employed at airports and other facilities are largely inadequately trained, unmotivated, and lack the proper mentality required for modern security management. On a recent domestic flight for example, I was pulled aside and asked to practically strip. As a older, grey-haired person waiting in a line of muscular young men of different color, I innocently asked the inspector why I was pulled out of the line. I simply wondered what was suspicious about me and I was most surprised when told that I was strip searched because I was number ten. Several similar occurrences showed the basic failure of the system in not recognizing that security is not achieved

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by routine operations. It requires sophistication, not just mechanical checks but real psychological evaluation. America seems to be far behind other nations here. Others approach security by more effective use of modern technology such as fingerprint or eye pupil recognition, psychological inquiries, and more, which improve the effectiveness of such systems while reducing both the public waiting time and inconvenience as well as total cost of the system. The approach to airport or transport security seems to be more like that of an employment agency for difficult-to-place personnel than that of a modern security agency. America faces many problems. Its administration of the Afghanistan and Iraqi wars lacked effective planning, particularly of needs after the campaigns to ouster the Taliban and Saddam Hussein were won. It should have been evident that just getting rid of these discredited rulers would not end the conflicts nor assure establishment of a so-called democratic regime. Democracy was and is an unknown concept for the people of these countries. Furthermore, people must feel safe and have ready access to services, food, shelter, and work before they will seriously consider political issues. True elections in both countries attracted significant participation, but the outcomes were quite dubious and may make it difficult to establish a secular, truly representative government which has popular support. There is a history in these countries of long-time tribal and ethnic loyalties and local and regional conflicts. Many people there have not only long memories but also a culture of vengeance in addition to religious fanaticism. Under such conditions, concepts of installing a Western-style democracy by removing dictatorial regimes is simple minded. We deal with old established customs, historic vendettas, religious hatreds, and cultural differences, all of which would have to be reconciled before there is a reasonable chance at forming a truly popular government in these countries. There is a major difference in approach between Western and Oriental resolution of conflicts, problems, and differences. The Western and American approach is to use force and establish a new order while the Oriental approach relies largely on incentives which move warring functions closer together and towards a permanent resolution of their conflicts, this in terms that represent true value to the previously antagonistic parties. Leaders must know how to deal with conflict decisively and effectively. They must represent moral values that surpass narrow cultural as well as religious concepts of morality, and be willing and able to adjudicate conflicts fairly. In other words, they must make a difference and be really needed. But to be needed requires confidence that a leader has the ability and management skills to deal with all the changes and problems that may occur in an effective and timely manner. Recent developments in America previously described as well as others which occurred recently unfortunately show a lack of American resolve and even ability to tackle really difficult problems. Most importantly, there appears to be a lack of misunderstanding of the rest of the world. Somehow Americans, and particularly many of its leaders, assume that everyone wants to be and live like people

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in America. Americans in general know little about and show less interest in other people’s cultures, religions, and way of life. But not all people and in effect few people want to be led to the promised land of America. Most are quite content with their way of life and where they are. The world today is in the midst of radical social, economic, and most importantly technical change. A leader must most importantly be an agent of change and know where he is going. He must truly make a difference in people’s lives. He must lead by example, but an example that is universally accepted, not imposed. Unfortunately America’s approach to and performance in recent global issues such as the Afghanistan and Iraqi wars as well as the response to the 2005 natural disasters was less than expected and needed for success. Similarly, America has refused to lead the world towards a cleaner, safer, and less pollutant environment by refusing to be a party to the Kyoto protocol and other environmental treatise. It is one of a handful of countries that allows the bearing of fire arms by ordinary citizens and fails to crack down forcefully on drug use. America represents a rather mixed bag of examples and performances. Most importantly, it lacks real convictions and principles by which to lead, which in turn affects the confidence of the rest of the world in its leadership. In other words, people want to know more clearly where they are going or where they are being led. They want to understand the banner under which they are being led and the goals to be achieved by the march. They also need to be given greater clarity of the objectives to be achieved and how fairly the spoils of the march will be divided.

WHO WILL LEAD IN FUTURE The world faces very different and new challenges in the 21st century and will need a new kind of leadership; one that is not only based on economic and military superiority and Western concepts of democracy, but more on the needs for global peace, human well being, fairness, and opportunity. Globalization has brought a group of new power players onto the world stage. China, India, Brazil, and Russia all have not only huge potential but also exert increasing influence on their neighbors as well as the world economy. China and India by virtue of the size of their population and their current and potential output, while Brazil and Russia both have huge resources and the potential for continental leadership. President Putin has reversed many developments that established the freewheeling Russian economy of the 1990s, where many of its resources and other major state assets were acquired by a few individuals or oligards. Although Russia dissolved the Soviet Union and allowed most of its constituent states to part and become independent countries, it is reasserting its influence on many of them by economic, strategic or political means, all apparently to reestablish Russia as a world power in economic as well as strategic terms.

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In future, we will therefore have a world where the USA, EU, China, Russia, India, and Brazil will exert major influence with Japan and South East Asia supporting one or another of these major players. With nearly 80% of the world population and the bulk of its economic output, this group will lead the world. While America with nearly 30% of the world’s gross economic output in 2005 had been able to exert its leadership, this percentage contribution to the world’s output is bound to decline as the new macro players exert themselves, continue to grow their economies, and expand their political and strategic influence. There is very little America can do to reverse this trend. Its economy is highly concentrated in domestic services such as health care, education, and law enforcement or public security where costs increase at rates well above the rate of inflation. As a result, they will continue to constitute an ever larger percentage of the Gross Domestic Product, leaving less and less to activities which can be traded and/or sold in the world markets. The heavy burden of pension and health care costs also greatly affect U.S. industrial and service sector competitiveness. This is most evident in mature industries such as in automobile and machinery manufacturing that have not only become less competitive internationally but also lost market share at home, with giants such as General Motors even fighting for sheer survival now. Similarly, America’s increasing dependence on imported fuel increases its negative balance of payment and thereby its foreign indebtedness to risky levels. At the same time, America continues to assume large foreign obligations, some for security and others for political and economic reasons. But its own economy may in future be unable to support many of these ventures without greatly increasing its foreign debt and resulting exposure. There is also an ever present risk of less of confidence by creditors in the U.S. currency and government credit worthiness. While Japan’s economy is rebounding smartly after a decade long stagnation, the economies of the aforementioned new macro players are not only growing at a much higher rate than America’s, but are also successfully expanding their claims to raw material resources on one hand and export markets on the other. China in particular is quietly building up an international presence not only in consumer markets but also in global oil, gas, and mineral production sources. Most recently, it expanded its foreign presence in world logistics by investing in foreign ports, shipping, aviation, and inland distribution terminals, while quietly extending its economic reach throughout the world. India lags behind China in most of these, but is increasingly active in higher level service activities, manufacturing, and more recently refining. Most South Asian countries have joined in a free trade zone and may combine it with the already successful Association of South East Asian Nations group to form the world’s largest trade association, with nearly one third of the world’s population. In Russia, on the other hand, the government recently started to reacquire or reassert control over large private enterprises which used to be state owned. This reversal of policy has slowed the rate of growth of foreign investments in Russia, particularly in the media, oil and gas, and other resource sectors. Russia has similarly tried to reassert its interests in the newly independent, formerly associated states

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of the Soviet Union. This then is the new world of the twenty first century, a world in which the vast majority of people live in macro states or unions. America will have to learn to accommodate this new environment in which it is not dominant beyond approach but where it will be one of several major economic and possibly also strategic powers. The expanded European Union, China, and India will certainly all become global economic leaders and challenge America in many ways. But Brazil and even a reemerged and reconstituted Russia may also assert themselves alone or in association with neighboring states. The global environment will, as a result, be very different from that experienced in the last 20 years since the breakup of the Soviet Union. Competition for resources will accelerate and the new macro economies will lay out political stakes of influence which can be expected to further expand their economic power. The major unknown and potential powder keg is the future of the Islamic revolution, of the rise of Moslem extremism, and its opposition to secularism and globalization which feed the roots of the new economic world. America’s future role will be largely affected by its ability to sustain its creativity in science, technology, and services and in the translation of these developments and breakthroughs into economic opportunities as well as service and lifestyle improvements. Most of the new macro economic players mentioned, and particularly China, do not aspire to become the world’s policemen. This may require America to continue this role for some time, but it would be wise to demand a more equitable sharing of this burden to be able to concentrate more on advancing its own domestic interests.

BIBLIOGRAPHY

Kennedy, Paul. “Preparing for the 21st Century”, New York, Random House, 1992. Mancur, Olson. “The Rise and Decline of Nations”, New Haven, CT, Yale University Press, 1982. Calleo, David. “The Imperious Economy”, Cambridge, MA, Harvard University, 1982. Simmons, P. J. and Oudraat, Chantal de Jonge, Editors. “Managing Global Issues”, Washington, DC, Carnegie Endowment for International Peace, 2001. Friedman, Thomas L. “The Lexus and the Olive Tree”, New York, Farrar, Strauss & Giroux, 1999. Chayes, Abraham and Chayes, Antonia Handler. “The New Sovereignty: Compliance with International Regulatory Agreements”, Cambridge, MA, Harvard University Press, 1995. Aggarwal, Vidod K., Editor. “Institutional Designs for a Complex World: Bargaining, Linkages and Nesting”, Ithaca, NY, Cornell University Press, 1998. Stiglitz, Joseph E. “Globalization and Its Discontents”, W. W. Norton & Co., New York, 2003.

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[1] Keynes, John Maynard, “On Selective Budget Deficits”. [2] U.S. industrial productivity, while on average still slightly ahead of that of other industrialized nations, is losing its advantage even though U.S. productivity is growing smartly in some sectors (e.g., aircraft and certain electronic and automobile manufacture). Productivity growth averaged only 1%/year since 1970. [3] Becker, Gary, “On Parents Maximizing their Well-being”. [4] Goldenberg, J., “How to Stop Global Warming”, Technology Review, MIT. [5] Solow, Robert, Massachusetts Institute of Technology. [6] “The Global Patent Race Picks Up Speed”, Science and Technology, Business Week, August 9, 1993. [7] Kuhn, Thomas, “The Structure of Scientific Revolution”. [8] McKinsey & Associates, “Study of American Workers”. [9] Leo, John, “Disability”, U.S. News and World Report, October 5, 1998. [10] Thornton, Grant, “Costs of Compliance”, study by the Independent Bankers Association of America of Community Banks, 2002. [11] Anderson and Tyers, “Agricultural Economics”. [12] “U.S. Productivity Gains”, U.S. Department of Commerce, June 1999. [13] Hungtington, Samuel P., “Who are We? The Challenge to America’s National Identity”, Simon & Schuster, New York, 2004. [14] Frankel, E., “America’s Institutional Dilemma”, Vantage Press, New York, 1999. [15] Chandler, Clay, “India’s Bumpy Ride”, Fortune, October 31, 2005. [16] Brzezinski, Zbigniew, “Clash of Titans – Make Money Not War”, Foreign Policy, January/February 2005. [17] Mearsheimer, John J., “Better to be Godzilla than Bambi”, Foreign Policy, January/February 2005. [18] Wolf, Martin, “Why is China’s Growing So Slowly?”, Foreign Policy, January/February 2005. [19] Tellis, Ashley J., “A Grand Chessboard”, Foreign Policy, January/February 2005. [20] Pei, Minxin, “Dangerous Denials”, Foreign Policy, January/February 2005.

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Abu Ghraib Prison, 132 Afghanistan, 4, 5, 51, 95, 124, 150, 160, 208, 231, 243, 245, 246 Agency for Intellectual Property Rights, UN, 65 Agricultural subsidies, 137 AHOLD, 135 AIDS/HIV, 152, 159 Al Qaeda, 150 American Constitution, 221 Americans with Disabilities Act, 83 Amundsen, 2 Anglo-Protestant roots, 136 Arab, 52, 155, 156, 181, 195, 239 Arab oil embargo, 52 Armenians, 107 Asia, 1, 4, 5 East/South East, 28, 51, 211 South, 4, 96, 107, 143, 157, 185, 219, 231, 247 Athenians, 154 Austria, 44 Bank of Japan, 33 Bankruptcy, 53, 64, 92, 227, 228 Bartlett, Marilyn, 83 Becker, Gary, 28 Belgium, 44, 195 Bell, Alexander G., 2 Bikini atolls, 3 Bonds, U.S. Treasury, 64, 96, 199, 211, 216 Bosnia, 4, 155, 160, 188, 242 Brazil, 38, 96, 165, 174, 211, 218, 232, 241, 246, 247, 248 Britain, 27, 30, 47, 195, 196 Brzezinski, Zbigniew, 212 BTU tax, 36 Bundesbank, 33 Bundy, McGeorge, 49 Bureau of Labor Statistics, U.S., 62, 120 Bureau of Labor, U.S., 62, 120 Bureau of the Census, 25 Burma, 124, 163, 215 Bush administration, 95, 156 Business-to-Consumer (B to C), 129, 131 California, 35, 115, 149 Canada, 1, 43, 107, 179

CAT scan, 80 Center for Defense Information, 94 Century, Twentieth, 105–106 Certificate of Deposit, CD, 97 Chandler, Clay, 210 Chief Executive Officer, CEO, 58, 69–71, 82 China, 5, 39, 41, 44, 45, 156–157, 161–178, 188–189, 210–215, 233–236 Chrysler, 31 Clinton administration, 8, 27, 35, 36, 39 Club of Rome, 8, 27, 35, 36, 39 Commerce Department, U.S., 55 Congress, 22–25, 92, 95 Congress, U.S., 36, 60 Congressmen, 22 Congressional Budget Office, 32, 36, 95 Constitution, U.S., 135, 181 Council of Economic Advisors (Presidents), 13 Current account deficit, 167, 182, 183, 184, 190, 231 Darfur, 150 Debt, 95–97 public, 151 Decision-based management, 78 Decision-based organizations, 78, 79 Democratic Party, 179 Department of Commerce, 13, 97, 113, 118 Department of Defense, 110 Department of Energy, 110 Department of Homeland Security, 244 EBay, 54, 129 Economic analysis, 7, 12, 19 discovery, 12 findings, 12 prediction, 13 stimuli, 11 Einstein, Albert, 2 Enron, 17, 133, 135 Environmental Impact Statements (EIS), 118 Environmental Protection Administration, EPA, 91, 118

253

254 Europe Eastern, 34, 35, 49, 147, 153, 192, 195, 220, 231 European, 1, 25, 32, 46, 62, 72, 100, 168, 196–197 European community, 44 European producers, 86 Union, 39, 41, 100, 147, 151, 174 West European, 160 Farming, 8 Fault tree analysis, 205 Federal Reserve, 13, 20, 33, 55, 103, 138, 198 Greenspan, Alan (Chairman), 13, 103 Financial Times, 211 Florida, 35 Ford, Henry, 2 France, 27, 30, 37, 75, 121 GATT, 44 Germany, 4, 27, 31, 32, 37, 43, 49, 50, 62, 73, 85, 121 West, 30, 32 Globalization, 185–186 Gobi Desert, 172, 214 Goldenberg, J., 38 Government Benefit Pension Guarantee Corporation (BPGC), 64 Greenspan, Alan, 13, 103 Grameen Bank, 185 Gross Domestic Product, GDP, 25–26, 164, 180, 182, 184, 247 Gulf War, 160

INDEX Initial public offering, IPO, 53 Input-output analysis, 19 International Atomic Energy Commission, 111 International Labor Organization, ILO, 120 Internet, 113–115 Iran, 150, 235 Iraq, 5, 51, 138, 150, 246 prisoner abuses, 17, 138 Italy, 27, 30, 33, 38, 43, 135, 151, 164, 195 Japan, 5, 21, 30–31, 39–40, 62, 65, 66, 71, 73, 121, 137, 170, 173–174, 241 Kahneman, Daniel, 204 Kaiser, Henry J., 3 Katrina (Hurricane), 5, 36, 200, 226, 227, 237 Kennedy, John Fitzgerald, 4 Keynes, John Maynard, 25, 28, 97 Korea, 44, 165, 170, 178, 184, 213, 216, 223 Kosovo, 4, 51, 155, 160, 188 Kuhn, Thomas, 65 Kurds, 107 Kyoto Protocol, 160, 246 Latin immigration, 135, 136 Lee, John, 83 Lerner, Max, 74 Liberty Ships, 3 Lindbergh, Charles A., 2 Lucent, 148

Hatsopoulos, George, 58 Health care, 6, 13, 115 Hearth, Thomas, 179 Hierarchical organizations, 78, 86, 132 society, 86 HIV/AIDS, 152 Holy Grail, 12 Home equity loans, 53 mortgages, 53 Hoover Dam, 3 Hubbell, Edwin P., 2 Huntington, Samuel P., 135, 136, 150

Macedonia, 51, 187 McKinsey, 73 Manhattan Project, 3 Manufacturing, 62, 74, 215, 216, 222, 226 Marshal Plan, 4, 144 Mearsheimer, John J., 212 Medicaid, 27, 191 Medicare, 27, 191, 231 Mexico, 3, 34, 107, 136, 149, 201 MITI, Japan, 102 Mooney, Paul, 177 MRI, 80 Myanmar, 107, 163, 215

IBM, 64, 67 Immigration, 34–35, 126 Immigration and Naturalization Service, 34 Independent Bankers Association of America, 91 India, 206–210, 232–233, 236 Industrial revolution, 1, 130, 218 post-industrial revolution, 29

Nader, Ralph, 81 Nautilus, 2, 3 Netherlands, 44, 173 Nobel prizes, 61 Nortel, 148 North American Free Trade Alliance, NAFTA, 112, 216

255

INDEX NATO, North Atlantic Treaty Organization, 233 Nuclear waste, 110–111 Office of Technology Assessment, 36 OECD, Organization for Economic Cooperation and Development, 32, 35, 38, 40, 50, 96, 170, 199 OPEC, Organization of Petroleum Exporting Countries, 112 Oriental, 46, 48 Culture, 46 Pacific Rim countries, 63 Pakistan, 175, 192, 201, 208, 237, 238, 241, 244 Parmalat, 135 Patent and Trademark Office, U.S., 65 Patents, 59, 65 Patriot Act, 125 Perot, Ross, 81 Portland (Oregon), 108 Process Control (Statistical), SPC, 75 Public debt, 23, 25, 56, 144, 151, 184, 189 Pudong Airport, 172 Purchasing Power Parity (PPP), 162, 213 Quality Control (statistical), SQC, 75, 162 Quality Control Circles (QCC), 75 Reengineering, 89, 103 Republican Party, 25 administration, 25, 144 Research and development, R&D, 22, 56, 60, 163, 184 Ricardo, David, 171 Riflin, Alice, 53 Risk, 6, 57, 191, 202–206 Risk management, 203, 204, 205 RJR Nabisco, 67 Rubin, Robert, 13, 190 Russia, 9, 96, 107, 147, 153, 156, 174, 235, 241, 248 Sarbanes-Oxley Act, 135 Savings and Loan, S&L, 48, 64 Securities and Exchange Commission, SEC, 71 Singapore, 40, 42, 44, 87, 124, 175 Smith, Adam, 10 Social Security, 94, 105, 161, 183 Solow, Robert, 59, 191 Somalia, 51, 142, 150, 155 South America, 34, 46, 106, 136, 150, 154, 157, 232 Soviet Union, 34–35, 96, 147, 157, 195, 235 Spain, 44, 136, 180, 194, 195

Sport Utility Vehicles, SUV, 17, 35, 118, 119 Sputnik, 3 Stewart, Martha, 142 Stock Exchange, U.S., 52 Strategic management, 23–24 Sudan, 107, 142, 155, 177, 217, 232, 235, 242 Suzhou, 234 Switzerland, 27, 44 Taiwan, 41, 44, 171 Taliban, 4, 150, 245 Technology, 20–21, 57–61, 65–66, 105–106, 148–149 Tellis, Ashley J., 213 Thornton, Grant, 91 Three Gorges project, 166, 172, 214, 234 Thurow, Lester, 73, 242 Trade and Development Program, U.S., 42 Treasury, 13, 64, 190, 211 Rubin, Secretary, 13, 190 Tsunami, 201, 231, 237, 238, 244 Tversky, Amos, 204 Tyco, 17 Tyson, D’Andrea, 73 U.S. News and World Report, 83 Union, Labor, 49, 84 Utopia, 16, 25 Vietnam, 52, 157, 243 Wall Street, 13, 69 Waste, solid, 199 Watson, Thomas, 2 Web, 122, 129, 131 Whittle, Frank, 3 World Bank, 13, 96, 160, 241 WorldCom, 17, 148 World Emergency Management Organization, 239 World trade, 38, 44, 125, 157, 172, 232 World Trade Center, 125, 144, 230 World War II, 43, 60, 97, 112, 147, 153, 173, 189, 194 Wright, Orville and Wilbur, 1 Yangtze River, 166, 172, 214, 215, 233, 234 Yellow River, 214 Yucca Mountains, 110 Yugoslavia, 4, 107, 153, 196 Zaire, 107, 242 Zimbabwe, 177