Futurecast: How Superpowers, Populations, and Globalization Will Change the Way You Live and Work

HOW S U P E R P O W E R S , POPULATIONS, AND GLOBALIZATION WILL C H A N G E T H E WAY YOU LIVE A N D WORK

ROBERT J.SHAPIRO

ISBN 0-312-35242-5

$ 2 6 . 9 5 / $ 2 9 . 9 5 Can.

WHAT WILL LIFE BE LIKE IN A M E R I C A , E U R O P E , J A P A N , OR C H I N A IN T H E Y E A R 2 0 2 0 ? As our lives are increasingly interconnected, the answer to that question depends on the fate of nations. In Futurecast, Robert Shapiro, former U.S. under secretary of commerce, tells us what our world will look like in the year 2020. Though that year seems close at hand, Shapiro foresees monumental changes caused by three forces—globalization, aging societies, and the rise of America as a sole superpower. What jobs will there be for you and your children? What will happen to your health care? How safe will you be? The answers will depend, even more than today, on where you live. • Even as China expands its military and its economy, America will be the world's sole superpower for at least the next generation and continue to lead efforts to preserve global security and stability. • The United States and China will be the world's two indispensable economies, dominating the course of globalization. • Globalization will continue to shift most heavy manu­ facturing and millions of high-end service jobs from advanced countries like the United States to China, India, Indonesia, Mexico, Romania, Turkey, and other developing nations. • Europe's major nations and Japan will face the prospect of genuine economic decline and critical problems in their retirement pension systems, moving further toward the periphery of global economic and geopolitical power. • Every major country—the United States, Europe, Japan, and China—will face critical problems with their health-care systems, and the entire world will face a crisis over energy and climate change. If one adds the wild card of possible catastrophic terrorist attacks to this mix, the period between now and 2020 (continued on back flap)

(continued from front flap)

will be as challenging as any in modern times. Taking these deep global developments into account when planning for the future is a necessity. Robert Shapiro's clear-eyed Futurecastislhe

knowledge portfolio you need

to prepare for the years to come.

ROBERT J . SHAPIRO

is cofounder

and chairman of Sonecon, LLC, a private firm that advises U.S. and foreign businesses, governments, and nonprofit organizations. He served as under secretary of commerce from 1998 to 2001. He also was the cofounder and vice president of the Progressive Policy Institute, Bill Clinton's principal economic advisor during the 1992 campaign, a senior economic advisor to AI Gore and John Kerry in their campaigns, the legislative director for Sen. Daniel Patrick Moynihan, an associate editor of U.S. News & World Report, and an economics columnist for Slate. He holds a Ph.D. from Harvard University and lives in Washington, D.C.

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"A new world economy is emerging before our very eyes. Robert Shapiro not only understands the breadth and depth of these enormous changes but also is able to communicate them in a way that is clear, powerful, and readily understandable. This is a brilliantly written book and a compelling analysis that provides extremely valuable insights into the enormous and historic transitions now under way, changes that will profoundly affect the world's major economies for decades to come." — ROBERT HORMATS, vice chairman of Goldman Sachs International "In America today, we are sorely in need of the big ideas that will elevate our electoral and legislative processes above the level of fund-raising and high-stakes lobbying. In Futurecast, Robert Shapiro creates the fertile ground from which these big ideas will spring by accurately predicting how all our lives will be changed, in the near future, by aging populations, globalization, and the rise and fall of the superpowers. This book is a must-read as we head into this first half of the twenty-first century." — A L FROM, CEO of the Democratic Leadership Council "Robert Shapiro understands the world and all of its complexity, from the rise and fall of nations to the problem of aging populations. No one is better equipped to tell us where we're headed in the not-so-distant future." — ROLF EKEUS, high commissioner on National Minorities (UN), former executive chairman of the United Nations Special Commission on Iraq, and former Swedish ambassador to the United States "In 1992 Rob Shapiro's analysis of the big changes in globalization became the intellectual framework for the Clinton campaign and presidency. In Futurecast Rob returns to the subject and has written a book that is likely to do in 2008 what he did once before: offer the economic framework for the president and the nation. This book is a must-read for anyone trying to make sense of how the global economy is changing in the early part of the twentyfirst century." — S I M O N ROSENBERG, chairman of the New Democrat Network

ISBN-13: 978-0-312-35242-4 ISBN-10: 0-312-35242-5

FUTURECAST

FUTURECAST HOW SUPERPOWERS, POPULATIONS, AND GLOBALIZATION WILL CHANGE THE WAY YOU LIVE AND WORK

ROBERT J. SHAPIRO

ST. MARTIN'S PRESS flfl NEW YORK

F U T U R E C A S T . Copyright © 2008 by Robert J . Shapiro. All rights reserved. Printed in the United States of America. N o part of this book may be used or reproduced in any manner whatsoever without written permission except in the case of brief quotations embodied in critical articles or reviews. For information, address St. Martin's Press, 1 7 5 Fifth Avenue, New York, N . Y 1 0 0 1 0 . www.stmartins.com Library of Congress Cataloging-in-Publication Data Shapiro, Robert J . Futurecast : how superpowers, populations, and globalization will change the way you live and work / Robert J . Shapiro, p.

cm.

Includes index. ISBN-13: 978-0-312-35242-4 ISBN-10: 0-312-35242-5 1. Economic history—21st century. HC59.3.S525

2. World politics—21st century.

I. Title.

2008

330.9—dc22 2007040720 First Edition: April 2008 10

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Fpr my parents and teachers

CONTENTS ACKNOWLEDGMENTS

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CHAPTER ONE The Global Blueprint 1 CHAPTER TWO The Demographic Earthquake

41

CHAPTER THREE The Primacy of Globalization 79 CHAPTER FOUR The Two Poles of Globalization: China and the United States 127 CHAPTER FIVE The New Economics of Decline for Europe and Japan 175 CHAPTER SIX The New Geopolitics of the Sole Superpower: The Players 215 CHAPTER SEVEN The Coming Crises in Health Care, Energy, and the Global Environment 247 CHAPTER EIGHT History's Wild Cards: Catastrophic Terrorism and Technological Breakthroughs 285 NOTES 323 INDEX 344 vii

ACKNOWLEDGMENTS This book began in a moment of humility and private discomfort several years ago. I was on a panel in Washington, speaking about various economic and political challenges facing the United States, when I realized that I was saying much the same things about the American and global economies that I had said a decade or more earlier. I couldn't deny or ignore that much had changed and that all the changes required serious rethinking. I listened to the others on that panel and on more panels in succeeding months, and I realized that most of the views offered by other policy analysts and policy makers also hadn't changed for more than a decade. So I set out to reconsider what I knew and believed by reconsidering the factors and forces that determine the basic economic and political conditions in my own country and in the world's other major societies. What began as an exercise in rethinking turned into a genuine re­ education. The aging of every major society in the world, which was fully in place in the early 1990s, was now actually at hand. The globalization we all saw emerging in the early 1990s had been transfigured into something vastly more powerful and momentous by the fall of communism and the unprece­ dented modernization of China. And the world's geopolitics had changed most of all, with the end of the Soviet Union and the communist bloc, and the rise of the world's first sole superpower with no near peer in more than a thou­ sand years. No one but this author is in any way responsible for what this book holds to be the significance of these developments for the world's major countries. But the analysis and the book itself would not have happened at all without the help, support, and encouragement of many generous and smart people. My friend Ivan Kronenfeld goaded me to write the book from the beginning and provided consistently insightful advice every week for three years. My agent and friend, Frank Weimann, convinced me that the answers to the questions I asked myself had the makings of a book, and he convinced ix

ACKNOWLEDGMENTS

X

St. Martin's Press of the same. My editor at St. Martin's, Michael Flamini, has been preternaturally patient and helpful, and no one would be reading this book but for his efforts. My

many friends and colleagues helped me in ways most of them are not

aware of. Kurt Almquist, Amy Armitage, Antonia Axson-Johnson, Frank Arnold, Tim Barnicle, Evan Bayh, Eric Bergloff, Alan Blinder, Andrei Cherny, Bill Clinton, Hillary Clinton, Peter Harter, Kevin Hassett, Robert Hormats, Vicky Johnson, Elaine Kamarck, Greg Mertz, David Miliband, Gary Mathias, Shelby Perkins, Justin Peterson, Jonathan Powell, Mark Penn, Nam Pham, Sigrid Rausing, and David Rothkopft all provided valuable in­ sights in offhand conversations in meetings, over dinner, or even late at night. I want to especially acknowledge Paul Stockton, of Stanford University, who understands geopolitics as well as anyone in the world, and Al From, of the Democratic Leadership Council, and Simon Rosenberg, of N D N , who under­ stand American politics better than anyone else in Washington. And two people very special to me, Bonnie Anthony and Annie Maccoby, deserve spe­ cial mention for encouraging me when I was tempted to give it all up and for bringing me back to reality when I wanted to take another year or two to fin­ ish. My sister Betty and brother Alan always indulged me as I went on much too long about whatever subject I was dealing with at the time. Figuring out what is actually happening in worldwide demographics, globalization, and geopolitics required enormous research, and a legion of tal­ ented young people helped me figure it out. First among equals is Giwon Jeong, now at the Institute for International Economics, who did superlative research on Asia. I also learned enormously from the research on Europe's economies by Timo Behr from the School for Advanced International Studies. My

thanks also to Georgina Voss, at the University of Sussex, and Greg

Tenentes, of the U.S.

Bureau of Economic Analysis, for their research on tech­

nology. Meaghan Casey, now at Kinsinger McClarty Associates, and Giannis Doulimis, at George Washington University, helped me understand terror­ ism. I also want to thank David Datelle for his extensive and intensive re­ search on health care. Finally, thanks to Josie Weefus and Amber Leggett for their love through­ out the process.

CHAPTER ONE

THE GLOBAL BLUEPRINT

E N O R M O U S C H A N G E S H A P P E N to most people over any ten- or

fifteen-year

period. Y o u r brain and body, wants and desires, circumstances and prospects, all change as you g r o w from a five-year-old to a y o u n g adult of twenty, from a new husband or wife of twenty-five to early m i d d l e age, and from a

fifty-year-

old at the height of your career to a grandparent of sixty-five. Societies usually change less than most individuals over fifteen-year periods. M o s t societies have m u c h longer lifetimes, t o o — a l t h o u g h occasionally a great event like a war or an exceptional b o o m can shake u p a nation's conditions and prospects in short order. Broader and more powerful forces, beyond the control of any country or its leaders, can shift the course of d e v e l o p m e n t of the entire w o r l d . Such d e v e l o p m e n t s — s o m e new force changes the w a y people approach fam­ ily

life, new technologies arise that change fundamental

factors in all

economies, or a g l o b a l empire f a l l s — u s u a l l y happen once in m a n y centuries. W e live in a period w h e n three such tectonic developments are all unfolding at the same time. Three great, g l o b a l forces are currently reshaping our near future. T h e first is an extraordinary g l o b a l d e m o g r a p h i c shift. O v e r the last half-century, every advanced society and most d e v e l o p i n g countries have experienced a baby boom followed by a baby bust. T h e p l a g u e k i l l e d one-quarter of Europe's population in the thirteenth century, and the w o r l d wars of the

twentieth

century decimated the y o u n g male population of several countries. B u t what's happening today—across most of the w o r l d , the greatest a g i n g of national

I

2

FUTURECAST

populations ever seen, along w i t h the smallest relative numbers of w o r k i n g age people on record—is w i t h o u t historical precedent. It w i l l have large ef­ fects on both how fast different countries g r o w and the basic capacity of g o v e r n m e n t s to meet the needs of tens of millions of newly elderly people. T h e second great force is globalization, principally, the rapid advance of h u g e l y c o m p l e x , w o r l d w i d e networks of money, resources, production, and consumer needs. T h e r e have been several previous periods in w h i c h world c o m m e r c e and communications suddenly expanded—especially in the era of exploration in the seventeenth century, and the spread of the telegraph and electricity in the late nineteenth century. T h e current phase is more farreaching, w i t h new information technologies affecting more societies more quickly. It's also more comprehensive, w i t h 1 5 1 countries agreeing to the World Trade Organization's general rules that open each of them to foreign investment and to m u c h greater foreign and domestic competition. W h e t h e r most people in E u r o p e , J a p a n , or A m e r i c a thrive or merely g e t by w i l l depend on how and whether their g o v e r n m e n t s and societies find a w a y to prosper under these r u l e s — a n d to compete w i t h C h i n a and India's

unprecedented

combinations of advanced technologies and h u g e numbers of l o w - w a g e , skilled workers. T h e third great historic development is the fall of the Soviet Union, its E u ­ ropean e m p i r e , and its political ideology. E m p i r e s and ideologies have fallen m a n y times before, but not since the t i m e of R o m e has such an event left one g l o b a l m i l i t a r y and economic superpower w i t h no near peer. A n d the rise of R o m e didn't coincide w i t h a period of w o r l d - c h a n g i n g economic globaliza­ tion. N o r w a s the fall of past empires accompanied by other seismic geopo­ litical changes of the sort w e see t o d a y — n a m e l y , the rapid makeover of the world's b i g g e s t country from socialism to a supercharged form of capitalism, and a shift of the center of g l o b a l politics from the A t l a n t i c nations to the Pa­ cific r i m . In place of the cold w a r and everything it demanded of most coun­ tries, the geopolitics of the next fifteen years w i l l be driven by a combination of all of these extraordinary developments. T h e s e developments and their combinations and interactions w i l l have profound effects on the course of every major society and the daily lives of their peoples, and no nation or person can opt out of the consequences. Strictly s p e a k i n g , they w i l l not determine anyone's precise future. Wars and new alliances, booms and recessions, social progress and terrible domestic conflicts w i l l come to pass in the next fifteen years, and each one will arise from countless decisions and events no one can k n o w today. B u t whatever the near future holds precisely for all of us, it w i l l unfold in a world where these three great forces shape its outset and outcome.

THE GLOBAL BLUEPRINT

3

T h e powerful effects of these forces come from their depth and breadth. T h e family-planning decisions of billions of people over more than t w o g e n ­ erations have gradually shifted the demographics of most nations and p r o ­ duced the unprecedented a g i n g of their populations. T h e roots of m o d e r n globalization, and the reason it's not g o i n g away, are similarly elemental. Globalization as w e k n o w it today comes out of the responses of tens of thou­ sands of businesses to the new availability of low-cost skilled labor abroad, the g r o w i n g capacity of developing nations to attract foreign capital and technology, breakthroughs in manufacturing that have enabled producers to break u p and distribute the parts of their production process across plants in different countries, and the spread of information technologies to m a n a g e and coordinate global networks. A n d America's position as the world's sole super­ power has come from not only the epochal collapse of the Soviet U n i o n but also sustained decisions over a half century by A m e r i c a to spend w h a t e v e r it takes to be stronger than other nations, and by J a p a n and Europe's major powers to depend on the U n i t e d States for security. T h e deep sources of these developments g i v e t h e m enormous m o m e n t u m as w e l l as power. Over time, every nation has little choice but to respond in some w a y to the pressures created by these historic forces. T h e y can affect the w a y these forces influence their societies through policies that change the behavior of large numbers of their people or companies. B u t such changes take t i m e to p u t in place and more t i m e to affect such deep d e v e l o p m e n t s — i n our j u d g m e n t , a g o o d ten to fifteen years. T h i s potential for change l i m i t s our foresight to roughly the period between now and 2 0 2 0 . O v e r that span, for e x a m p l e , nothing can change the d e m o g r a p h i c d y ­ namics p r o d u c i n g the current a g i n g of all major societies and its i m p a c t on a country's savings and g r o w t h rates and the sustainability of pension and health-care systems. J a p a n or the major countries of E u r o p e could ease re­ strictions on i m m i g r a t i o n to expand their b a b y - b u s t labor forces and t r i m their state pension and health-care o b l i g a t i o n s . If such changes were to c o m e about—and there's little s i g n of any of this t o d a y — t h e early economic and social effects m i g h t be felt in about a decade. Similarly, France, G e r m a n y , or J a p a n could today undertake the difficult economic reforms necessary to m a k e themselves more successful players in g l o b a l i z a t i o n — a t least France now talks about i t — b u t it w o u l d take at least ten years to see an i m p a c t on their g r o w t h rates and the incomes and p r o d u c t i v i t y of their people. China's and America's strengths in the new g l o b a l economy also could unravel over time if, for e x a m p l e , C h i n a were to confront serious social unrest that s l o w e d its modernization or, even less likely, if A m e r i c a turned i n w a r d e c o n o m i c a l ­ ly. T h e key roles the t w o countries play in g l o b a l i z a t i o n , however, are v e r y

FUTURECAST

4

u n l i k e l y to change m a t e r i a l l y in a decade's t i m e . In geopolitics, it's conceiv­ able that C h i n a or the E u r o p e a n U n i o n could permanently double or triple their m i l i t a r y investments, starting today. It's u n l i k e l y because it w o u l d slow China's modernization and redouble the pressures on Europe's socialsafety-net systems. Y e t if they did so, it w o u l d take a generation of such invest­ ments to build the capacity to successfully challenge American superpower on even a regional basis. L o o k i n g further ahead over the next one or t w o generations,

profound

changes are certain to unfold in m a n y societies. W e cannot k n o w what life will be like in A m e r i c a , E u r o p e , J a p a n , or C h i n a in 2 0 3 5 or 2 0 5 0 . B u t the aging of national populations, the opportunities and pitfalls of economic globalization, and the consequences of a geopolitics organized around a sole superpower are forces sufficiently entrenched and far-reaching to provide a unique blueprint of their likely course over the next ten to fifteen years.

THE EARTHQUAKE OF DEMOGRAPHIC CHANGE An

historic a g i n g process is t a k i n g place in virtually every society today.

Across the g l o b e , the average age of the population in almost every nation is rising. T h i s k i n d of change has occasionally happened in the past to one or a few

countries at a t i m e , w h e n a w a r or epidemic has w i p e d out part of a

y o u n g e r generation. G e r m a n y and France each lost about 1 0 percent of their y o u n g m a l e populations in W o r l d W a r I — m o r e than 3 m i l l i o n between t h e m — a n d the Spanish flu of 1 9 1 8 — 1 9 1 9 claimed 3 0 m i l l i o n lives, the ma­ jority ages fifteen to thirty-five, from more than ten countries. T h i s time, for the first t i m e in recorded history, almost every country in the world is experi­ encing an unusually large generation followed by an unusually small one. B o t h the causes and the economic results, however, differ a m o n g countries. In Western E u r o p e , A m e r i c a , and most of the world's advanced countries, the initial baby b o o m came out of decisions by tens of millions of couples to defer m a r r y i n g or h a v i n g children d u r i n g the Depression and the Second W o r l d W a r — a n d once prosperity and peace returned, they choose to have m a n y more children than their parents did. T h e same outcome was unfolding at r o u g h l y the same t i m e in dozens of less-developed societies, but from dif­ ferent sources: T h e r e , tens of millions of y o u n g couples discovered that many more of their children were s u r v i v i n g than in the past, principally because of large i m p r o v e m e n t s in basic health and sanitary conditions. A second factor also e m e r g e d across A s i a , E u r o p e , and N o r t h A m e r i c a : M e d i c a l advances were increasing life spans, especially at the other end of life. F r o m i 9 6 0 to 2 0 0 0 ,

THE GLOBAL BLUEPRINT

5

the life expectancy at birth of A m e r i c a n s , J a p a n e s e , and Europeans increased by seven to thirteen years; and reached eighty-three to eighty-five for those sixty-five or older. O v e r the same period, the life expectancy of the Chinese at birth nearly doubled, from thirty-six to seventy years. Finally, a separate series of factors b r o u g h t these baby booms to screeching halts in the following generation, w h e n e x p a n d i n g economic o p p o r t u n i t i e s — especially for w o m e n — b e t t e r infant care, and inexpensive contraceptives led baby boom w o m e n around the w o r l d to choose to have m a n y fewer children than their mothers. P u t together all of these forces, and the neat order of g e n ­ eration succeeding generation—the stable age structure that most countries had since the early 1 8 0 0 s — c h a n g e d radically across the w o r l d . W h a t w o u l d happen to your family if, following a few decades of g r o w i n g paychecks earned by you and your mate, all at once one of you could no longer w o r k full-time and a relative w i t h no resources had to m o v e in? To b e g i n w i t h , it's a family crisis, and unless y o u have a plan to somehow raise y o u r income, the material conditions of your family's life w o u l d deteriorate fairly quickly. F a m i l y meals w o u l d become more basic and vacations less frequent. T h e cars you drive w o u l d g r o w older and break d o w n more often. Y o u w o u l d have to live w i t h more stress and your general health m i g h t w e l l worsen. T h e time and energy you w o u l d have to help out at church or y o u r children's school could slowly disappear. U l t i m a t e l y , such a crisis breaks u p marriages and, almost always, children suffer both at h o m e and at school. T h e results are m u c h the same for a c o u n t r y — w h e n the n u m b e r of w o r k i n g - a g e people w h o produce everything from food and pharmaceuticals to education and supersonic bombers, falls, just as the n u m b e r of people w h o need and expect a lot of help from g o v e r n m e n t rises. O v e r t i m e , the quality of national life m a y deteriorate, too. W i t h fewer people p r o d u c i n g wealth and more older people needing income support and medical treatment, taxes rise and investment slows. Lower investment rates mean that over time, most peo­ ple's paychecks w i l l g r o w more s l o w l y — o r stop g r o w i n g altogether—even as their taxes increase. D e m o g r a p h i c shifts are v e r y powerful forces, but their u l t i m a t e o u t ­ comes are not predestined. S t a r t i n g w i t h T h o m a s M a l t h u s ' s famous essay in 1 7 9 8 , people have w o r r i e d that the a g i n g of a generational b u l g e l i k e the one so m a n y countries are e x p e r i e n c i n g today w i l l b a d l y strain a country's resources and drive d o w n its economy, often l o n g before the b a b y boomers reach m i d d l e age. M a l t h u s is not m u c h read today for his p r e d i c t i o n s , b u t his dark scenarios retain a hold on m a n y people's i m a g i n a t i o n s . A s recently as the 1 9 7 0 s , the U . S . N a t i o n a l A c a d e m y of Sciences and the U n i t e d N a ­ tions both w a r n e d that sharp increases in p o p u l a t i o n around the w o r l d

FUTURECAST

6

w o u l d leave m o s t p e o p l e worse off. A presidential c o m m i s s i o n of academics and p u b l i c officials, chaired b y J o h n D . R o c k f e l l e r I I I , pronounced that "we have c o n c l u d e d that no substantial benefits w o u l d result from continued g r o w t h of the nation's p o p u l a t i o n , " and zero p o p u l a t i o n g r o w t h " w o u l d ' b u y t i m e ' b y s l o w i n g the pace at w h i c h g r o w t h - r e l a t e d p r o b l e m s accumu­ 1

l a t e . " L i k e M a l t h u s , they o v e r l o o k e d the p o w e r of new technologies to cre­ ate n e w resources and g e t m o r e out of those w e h a v e , they underestimated the w e a l t h that c o u l d be g e n e r t e d b y better-educating all those additional p e o p l e , and they d i d n ' t understand h o w w e l l some economies and societies can adjust to c h a n g i n g conditions. A family, like a nation c a u g h t between less income and greater expenses, has alternatives, none of t h e m w h o l l y appealing. O n e of the parents can g o back to school and learn a new set of skills that pays more. T h e family could take in a w o r k i n g - a g e cousin in similar straits and pool their incomes. T h e n there are options no one likes to consider, such as asking an a g i n g relative to cut back on his medications. A nation, like a family, has alternatives, too, even if their responses are shaped by other factors. In the United States, the society learned new skills: G o v e r n m e n t spending and the ambitions of entre­ preneurs and scientists p r o m o t e d the development of computers and software that u l t i m a t e l y raised U . S . productivity, so that even a smaller number of w o r k i n g A m e r i c a n s could produce more. C h i n a w e n t further along the same k i n d of path. T h e r e , a new generation of leaders not bound by the 1 9 4 8 revo­ lution, or M a o Z e d o n g ' s perverse ideology, opened their backward economy to advanced western technology and business methods. T h e United States, C h i n a , the East A s i a n countries, and later m u c h of Central E u r o p e also dereg­ ulated scores of industries and opened themselves u p to foreign producers. T h e s e changes u l t i m a t e l y cost A m e r i c a about one-third of its manufactur­ ing jobs, as they d i d in E u r o p e and J a p a n . O n e difference was that Europe and J a p a n generally held on to most of their regulation; w h i l e in A m e r i c a deregu­ lation b r o u g h t on more intense competition, p r o d u c i n g economic pressures that created a lot more jobs of other kinds. A n o t h e r difference was that as the boomer generation a g e d , the U n i t e d States opened its borders to more i m m i ­ grants that s u p p l e m e n t e d its workforce, w h i l e most other advanced countries kept their borders closed. T h e rapid changes in C h i n a and Southeast Asia also cost m a n y tens of millions of people their traditional livelihoods, while other factors opened u p economic opportunities in m u c h of A s i a . Once falling in­ fant mortality rates b r o u g h t d o w n the average n u m b e r of births by women across m u c h of A s i a , millions more A s i a n w o m e n went out to work. In some countries, the r i g h t policies helped turn their generational bulges into w h a t p u n d i t s called economic miracles. A l l the investments in education

7

THE GLOBAL BLUEPRINT

and health care across East A s i a in the 1 9 5 0 s and 1 9 6 0 s helped m a k e their b u m p e r crop of boomers healthier and more p r o d u c t i v e ; and by the 1 9 7 0 s and 1 9 8 0 s , those societies had the world's fastest-growing economies. T h e baby boom came a little later to Ireland than to East A s i a or most of E u r o p e . Since the early 1 9 9 0 s , the "Celtic T i g e r " has been Europe's fastest g r o w i n g e c o n o m y — h u g e tax and regulatory concessions for foreign I T companies ex­ plains m u c h of it, but economists figure that the b u l g e of better-educated Irish boomers entering the workforce in the 1 9 8 0 s and 1 9 9 0 s has accounted for two-fifths of that achievement. W h i l e small-nation powerhouses l i k e K o ­ rea and Ireland have created economies that can help support their d e m o ­ graphic bulges as the boomers retire, countries that have taken less advantage of the new demographic conditions find themselves in real trouble. M u c h of Latin A m e r i c a ignored their o w n boomer bulges or approached t h e m as a burden. A l m o s t t w o generations of m i l i t a r y dictatorships neglected mass ed­ ucation and the policies that m i g h t produce sensible modernization, leaving a legacy of slow g r o w t h and volatile politics for their more democratic succes­ sors, w h o now face rapid expansions in their labor forces from late-coming baby booms. J a p a n , G e r m a n y , and France invested in educating

their

boomers in the 1 9 6 0 s and 1 9 7 0 s . T h e i r resistance to the demands of g l o b a l ­ ization in the 1 9 8 0 s and 1 9 9 0 s , however, has cost t h e m a generation of p o ­ tentially very large, demographically driven dividends and left t h e m no cushion w h e n their boomers hit retirement age over the next fifteen years. These changes, and the varied responses of different societies, are sending shock waves through the economies and daily life of every region and country. In J a p a n and across most of E u r o p e , the baby bust is b e g i n n i n g to shrink their labor forces; and unless robotics produces a new cyber-labor force, that factor alone will drive down savings, investment, and overall economic g r o w t h over the next fifteen years. In most other major nations, the n u m b e r of new workers w i l l continue to expand, but more slowly than before, p r o d u c i n g some of the same effects in m i l d e r form. B e t w e e n now and 2 0 2 0 , for e x a m p l e , America's baby bust w i l l be largely cushioned b y the effects of t w o genera­ tions of h i g h i m m i g r a t i o n . Across C h i n a , most of South and Southeast A s i a , and perhaps I n d i a — a l l a m o n g the fastest-aging countries in the w o r l d — g r e a t strides in health care and burgeoning market economies w i l l enable more people to w o r k both longer and more productively, containing m a n y of the national costs of their baby busts. W h e t h e r a country's labor force expands or contracts in coming years w i l l also have h u g e social effects as its boomers g r o w older. T h e elderly populations in all of these countries w i l l expand by 3 5 to 6 0 percent over the next fifteen years, forcing governments nearly everywhere to expand their p u b l i c spending and raise t a x e s — o r run h u g e deficits—to pay

FUTURECAST

8

for basic medical care and retirement. W h e r e a shrinking taxpayer base and slow g r o w t h drives d o w n national wealth, these demands w i l l likely polarize the p u b l i c debate and u l t i m a t e l y produce intense and nasty political conflicts.

A NEW ECONOMIC LANDSCAPE Large and deep changes in the w a y the world's major economies operate is a second historic force shaping everyone's near future. For the past thirty years, trade and investment between countries has expanded twice as fast as the to­ tal g r o w t h and investment of all individual countries, creating a new global landscape. B y 2 0 2 0 , most of w h a t Europeans, A m e r i c a n s , and Asians drive, use, operate, and c o n s u m e — t h e vast majority of manufacturing and many business and personal s e r v i c e s — w i l l be m a d e or p r o v i d e d in factories and of­ fice complexes of fast-developing, lower-wage countries—not just China, but also places such as B a n g l a d e s h , M a l a y s i a , Indonesia, M e x i c o , Brazil, Poland, R o m a n i a , Tunisia, and G h a n a . Today, R e n a u l t , D a e w o o , and DaimlerChrysler all produce cars in R o m a n i a . In the same small country, Vodafone and Q u a l c o m m manufacture electronics, H e w l e t t - P a c k a r d and I B M produce computer parts, and Procter & G a m b l e , C o l g a t e , and C o c a - C o l a produce their brands there as w e l l . G o o d y e a r tires, Procter & G a m b l e soaps and toiletries, and C o c a - C o l a that A m e r i c a n s and Europeans use and consume m a y have come from M o r o c c o ; w h i l e Pioneer Foods' S t a r K i s t tuna, K a i s e r and A l c o a alu­ m i n u m , and C o c a - C o l a are all also p r o d u c e d today in G h a n a . P u n d i t s and politicians first b e g a n t a l k i n g about globalization in the 1 9 9 0 s ; but in its current form, g l o b a l i z a t i o n really began in the 1 9 7 0 s , when it m o r p h e d out of the centuries-old d y n a m i c s of international trade. One reason for the c h a n g e was the unilateral decision by the U n i t e d States in 1971

to end the r e g i m e of fixed exchange rates established after World War

I I . For the first t i m e , western companies could exchange the profits they earned abroad for their currencies at m a r k e t exchange rates that shifted little by little, day to day. J u s t as i m p o r t a n t , O P E C tripled the price of oil at r o u g h l y the same t i m e . E v e r y large c o m p a n y scrambled to cut other costs and b e g a n l o o k i n g m o r e closely at the most successful d e v e l o p i n g countries, w h e r e e v e r y t h i n g but energy was a lot cheaper than in the West. O n the heels of these changes, foreign investments shot u p . U . S . and Japanese com­ panies e x p a n d e d their foreign operations and business relationships in the d e v e l o p i n g w o r l d , especially in A s i a , where the d e m o g r a p h i c shifts and local i m p r o v e m e n t s in health and education were creating a large, relatively skilled yet l o w - w a g e labor force. B y the end of the 1 9 7 0 s , western multinationals

THE GLOBAL BLUEPRINT

9

were transferring technologies and b u i l d i n g plants across East A s i a . T h e U n i t e d States, E u r o p e , and J a p a n began losing manufacturing jobs, and the miracle of the " A s i a n T i g e r " economies took off. E v e n then, there was still no real g l o b a l economy to speak of. M o s t eco­ nomic relations between countries occurred w i t h i n the t w o great geopolitical blocs, and almost never between them. T h e first, reasonably d u b b e d the "free world," took in non-socialist, developing countries of A s i a , Latin A m e r i c a , and southern Africa, nations that exported c o m m o d i t i e s like oil, minerals, and food—principally to the advanced economies of E u r o p e , J a p a n , and the United States, w h i c h also exported more sophisticated finished g o o d s m a i n l y to each other. T h e second bloc comprised the Soviet U n i o n , Eastern E u r o p e , China, India, and C u b a , and involved similar patterns of trade. T h e t w o blocs faced each other in the long cold war, and for fifty years had little to do w i t h each other economically. These separate political and economic blocs suddenly dissolved in the 1 9 9 0 s , changing the basic shape of international economy. First, the Soviet Union collapsed in 1 9 8 9 , ending the separate, socialist economic bloc. For the first time, companies in A m e r i c a , E u r o p e , and J a p a n g a i n e d access to the huge labor forces and resources of C h i n a and, to a m u c h lesser extent, India, which themselves had been busily educating a slice of their o w n d e m o g r a p h i c bulges. T h e pool of potential workers available in some w a y to western c o m ­ panies expanded by hundreds of millions of people in less than a d e c a d e — a n event unprecedented in economic h i s t o r y — a l l ready to w o r k for a fraction of the wages earned in the West, or even in the A s i a n T i g e r s or Latin A m e r i c a . T h e hitch was that, in 1 9 9 0 , most of those l o w - w a g e , skilled workers worked in state-owned monopolies that couldn't produce m u c h of anything that Westerners w o u l d buy. B u t w i t h the spectacular failure of c o m m u n i s m in its founding place, market economics became the only national or g l o b a l eco­ nomic strategy left standing. S o , in the early 1 9 9 0 s , the world's leading m a r ­ ket economies, headed by the U n i t e d States, led the g l o b a l negotiations to establish the new World Trade Organization ( W T O ) . Technically, the W T O simply replaced the old General A g r e e m e n t on Tariffs and Trade ( G A T T ) that countries had used for fifty years to negotiate cuts in tariffs and quotas. F r o m its b e g i n n i n g , the W T O has had more far-reaching ambitions, w i t h an oper­ ating creed that channeled the beliefs of A m e r i c a and its president, B i l l C l i n ­ ton, in the benefits and inevitability of g l o b a l investment, g l o b a l technology transfers, and g l o b a l markets for everything. O n January 1 , 1 9 9 5 , seventy-four countries joined up, including every advanced economy and scores of developing nations from Brazil and K o r e a to Bangladesh and K e n y a . W i t h most of the world's significant economies on

FUTURECAST

10

board, the W T O began negotiating and w r i t i n g the rules that every country w o u l d have to follow to be part of g l o b a l capitalism, covering most major as­ pects of a country's economic life. Countries have to agree to gradually roll back national laws and regulations that restrict foreign imports, sector by sec­ tor, from furniture and semiconductors to g o v e r n m e n t procurement

and

telecommunications. T h e y also have to agree to revise barriers that g o across sectors, such as restrictions on foreign ownership or domestic competition. T h e b o t t o m line is that countries that want to be part of globalization, W T O style, have to roll back subsidies and protections they've used for decades or centuries to support their o w n domestic industries. D e v e l o p i n g countries like C h i n a and India have faced the b i g g e s t shocks: T h e y ' v e had to j u n k their state monopolies and, sector by sector, open them­ selves u p to western investment, joint ventures w i t h western companies, and their own domestic competition. O f those t w o , China has carried through more extensively and deeply than India, and become a powerhouse in ways that In­ dia p r o b a b l y won't m a t c h for more than a generation. Still, as these t w o huge countries, along w i t h scores of smaller ones, generally opened their economies to markets, the l i g h t n i n g spread of new information technologies intensified the pace of change b y g i v i n g A m e r i c a n , European, and Japanese businesses m u c h more capacity to shift their m o n e y and operations across continents and cultures, and keep track of their suppliers, subcontractors, and customers across the d e v e l o p i n g w o r l d . T h e combination of these factors turbocharged the action in two different ways. It increased the ability of m a n y developing countries to attract the capi­ tal to build modern factories and assemble modern business organizations. It also increased the ability of western companies to transplant their technologies and ways of doing business. Early western investors in China, such as I B M and the global water valve maker, Watts Water Technologies, didn't make much profits from their initial joint ventures of the 1 9 9 0 s — l a b o r was cheap but un­ reliable, transport was primitive, government officials chose their suppliers from their cronies, and the Chinese business practices of the time clashed with their modern methods. Gradually, each side learned what the other needed— and not only in China, but also across much of the rest of A s i a and much of Eastern and Central Europe. B y the year 2 0 0 0 , for the first time in history, com­ panies w i t h state-of-the-art technologies and business methods operated legally and efficiently in countries w i t h virtually unlimited numbers of reasonably skilled workers ready to w o r k for a small fraction of the average global wage. W i t h every major nation in the w o r l d on board, the new g l o b a l economic terrain w i l l help shape the path and fate of every one of them. B y 2 0 2 0 , major

THE GLOBAL BLUEPRINT

II

heavy manufacturing w i l l substantially disappear in the advanced economies, and the production of most autos and steel, appliances and e l e c t r o n i c s — regardless of their western brand n a m e s — w i l l shift forever to the d e v e l o p i n g world. H e a v y goods that are expensive to ship w i l l be m a d e in d e v e l o p i n g economies close to advanced-nation markets. For instance, C h i n a and Indone­ sia w i l l produce heavy goods for the J a p a n e s e m a r k e t , T u r k e y and R o m a n i a for the European market, and Latin A m e r i c a for the A m e r i c a n market. G l o b a l producers of w o r l d w i d e c o m m o d i t i e s w i l l always k e e p a production foothold in their major Western markets, so A m e r i c a n , E u r o p e a n , and J a p a n e s e auto and computer plants w i l l not disappear entirely from the their o w n and each other's countries. Nevertheless, by 2 0 2 0 , most current A m e r i c a n , E u r o p e a n , and Japanese jobs in industries that compete directly w i t h C h i n a and other modernizing, l o w - w a g e countries w i l l be g o n e . If there's any doubt about the p o w e r of these changes to destroy jobs, con­ sider that the U n i t e d States lost more manufacturing jobs in the three years from 2 0 0 1 to 2 0 0 4 — s o m e 2.8 m i l l i o n of t h e m — t h a n d u r i n g the " R u s t B e l t " deindustrialization years, from the late 1 9 7 0 s to the early 1 9 9 0 s . A n d , during the recent years of strong A m e r i c a n g r o w t h from 2 0 0 3 to 2 0 0 5 , elec­ tronics and electrical e q u i p m e n t makers, auto and transportation

equipment

producers, and industrial and c o m p u t e r e q u i p m e n t manufacturers closed more than six hundred U . S . plants. A m e r i c a n or European politicians and their parties cannot turn back these forces, whatever they p r o m i s e , and b r i n g back tire or b i g machinery manufacturing to Toledo or L i v e r p o o l . A t best, they can affect how their countries respond to those forces. B e t w e e n now and 2 0 2 0 , globalization w i l l perform m u c h the same eco­ nomic alchemy on m a n y services. T h e foundations already exist in the exten­ sive networks of business and financial relationships e x t e n d i n g today from Chicago, N e w Y o r k , Frankfurt, and L o n d o n to S h a n g h a i , Taipei, B a n g a l o r e , and Budapest. T h e important new element is c o n t i n u i n g advances in software development that enable companies to break u p a c o m p l e x service, such as a research-and-development project, into its constituent parts—just w h a t hap­ pened in m a n u f a c t u r i n g — a n d distribute the parts to companies anywhere that can deal w i t h t h e m cheaply and efficiently. In a few areas, this process is already well advanced, including service centers, and software p r o g r a m m i n g itself, as well as some areas of research and development. In certain areas of business, financial, and health-care services, p r o g r a m s allow people w i t h fairly basic skills to carry out pretty sophisticated tasks. Software now incorporates most of the technical operations associated w i t h preparing tax returns, financial statements and b o o k k e e p i n g , and conducting m e d i c a l tests.

FUTURECAST

12

Before the end of this decade, these programs w i l l cover w i d e areas of inven­ tory control, m e d i c a l diagnostics, engineering, and legal analysis. T h e only barrier to shifting these tasks across borders is language, so the outsourcing of business services from the U n i t e d States has so far focused initially on India, w h i l e G e r m a n , French, and Italian companies look to Central Europe. L o o k i n g out over the next fifteen years, the globalization of services could w e l l have even broader effects than the previous globalization of manufactur­ i n g . For consumers and businesses, globalization w i l l drive d o w n the price of m a n y basic personal and business services, just as surely as it drove down the price of television sets, automobiles, D V D s , and computers. T h e economic implications are far-reaching. Services not only m a k e u p two-thirds or more of every advanced economy, compared to manufacturing's average share of about one-fifth. In addition, the w o r l d w i d e market for services is poised to take off: Incomes w i l l almost certainly rise sharply across China, India, and m u c h of the d e v e l o p i n g w o r l d over the next fifteen years; and as economists have long observed, w h e n people earn more, they spend a larger share of their incomes on services. W i t h software p r o g r a m m i n g leading this w a v e , this development also could boost p r o d u c t i v i t y in m a n y advanced economies. After all, America's rapid g r o w t h and rising incomes in the 1 9 9 0 s were fueled by the spread of information technologies. T h e k e y to w h y they spread so rapidly was their falling p r i c e s — o n c e the production of most computers, storage devices, and transmission modes had shifted to l o w - w a g e A s i a n operations. S i m i l a r sav­ ings haven't happened yet in software and most information services because they're still p r o d u c e d m a i n l y b y h i g h l y paid workers on the East and West coasts of the U n i t e d States, in Ireland, S w e d e n , Finland, and G e r m a n y — a n d recently, in a few cities in India. J u s t w a i t a few years. O v e r the next decade or sooner, m a n y of those jobs w i l l shift. T h e g o o d news for A m e r i c a n s — a n d to a lesser degree, for Europe­ ans and the J a p a n e s e — i s that the price of new software w i l l fall; and that could have powerful economic effects. T h e falling prices of computers spread information technologies across most Western economies, but some compa­ nies and sectors have l a g g e d behind, especially in health care and education. F a l l i n g software prices w i l l m a k e the technologies more cost-effective for the laggards. Since health care and education in particular are such huge parts of every advanced nation, the p r o d u c t i v i t y gains, as they catch u p technologi­ cally w i t h finance and manufacturing, w i l l produce b i g payoffs for both busi­ nesses and consumers. It could also i m p r o v e the quality of people's health care b y a l l o w i n g m u c h greater sharing of medical information between primary physicians and specialists. J o h n D r i s c o l l , a senior executive at M e d c o , the

13

THE GLOBAL BLUEPRINT

nation's largest mail-order distributor of pharmaceuticals, describes the need for more information sharing this w a y : "For really sick people, their p r i m a r y physician knows the most about t h e m but does the least, w h i l e some special­ ist knows m u c h less and has to do m u c h m o r e . "

2

If the initial spread of computerization is any g u i d e , the race to become more productive among hospitals, colleges and training institutes, and tens of thou­ sands of small service companies w i l l also increase competition, forcing every­ body once again to rethink the w a y they do business. A t least, that's likely to unfold wherever regulation doesn't smother competition. There, everything from medical clinics and dry cleaners to fast-food and landscaping services w i l l create new services and provide their old ones at lower cost. A n d just as in m a n ­ ufacturing, it will also cost millions of people their current jobs. Based on how the globalization of manufacturing has already changed the world, the globalization of services could have pervasive effects—like the butterfly that ultimately sparks a hurricane a half-world away. In a g e n u i n e l y global economy like the one unfolding today, w h e n as h u g e a country as C h i n a modernizes its export industries, it produces new pressures on jobs and wages across the w o r l d . In the 1 9 9 0 s , for e x a m p l e , C h i n a relaxed restrictions on domestic competition and foreign investment in apparel and

furniture

manufacturing, as well as in scores of other sectors. A s these changes q u i c k l y made China's apparel and furniture makers more efficient, their K o r e a n and Thai rivals faced tougher competition. S o m e figured out h o w to survive and compete and others didn't; and on the m a r g i n , investment and expertise in K o r e a and T h a i l a n d shifted into other industries, such as electronics and medical equipment. W i t h more capital and expertise, the best K o r e a n and Thai electronics and equipment makers developed new products and became more efficient themselves, intensifying the competition for their G e r m a n and A m e r i c a n competitors. In the last decade, this process has happened over and over again, across scores of countries and manufacturing industries, leaving almost everyone, everywhere, facing more intense competition. O v e r the next decade, this same process w i l l extend to scores of service industries. T h e hitch is what happens to jobs and w a g e s w h e n competition heats up: Companies find it harder to raise their prices, even w h e n their health-care or energy costs increase, so they turn to jobs and w a g e s to cut their overall costs. That's precisely what's been happening in the U n i t e d States and m u c h of E u ­ rope for the last five years. T h e i r economies have been g r o w i n g reasonably well. D e s p i t e the g r o w t h , the U n i t e d States and E u r o p e have seen more than a half-decade of stagnating or falling incomes and slow or stalled job creation. A s globalization spreads across services over the next decade or so, these forces w i l l intensify. For advanced countries like A m e r i c a and most of E u r o p e , tens

14

FUTURECAST

of millions of people w i t h o u t specialized, nonobsolete skills w i l l no longer be able to depend on economic g r o w t h guaranteeing t h e m w e l l - p a y i n g jobs. Countries facing these pressures, like individuals, have choices. T h e y can size u p the new g l o b a l e n v i r o n m e n t and try to adapt to it. In taking essen­ tially that course, the U n i t e d States and E n g l a n d largely part company w i t h G e r m a n y , France, J a p a n , Italy, and others. In m a n y ways, m u c h of Europe has been in an extended state of denial. T h e depths of that denial seemed evident in France in 2 0 0 6 , w h e n y o u n g people violently rioted over a modest govern­ m e n t proposal to let companies dismiss workers in their first t w o years on the job, s i m p l y w h e n it w o u l d m a k e economic sense to do so. In M a y 2 0 0 7 , N i c h o l a s Sarkozy ran and w o n the race for French president on a platform of market-friendly economic reforms. M u c h like Japan's reform-minded prime minister J u n i c h i r o K o i z u m i , Sarkozy hasn't been able to deliver on many promises, at least not in his first six months in office. B u t for the first time, France has a president w h o p u b l i c l y acknowledges that globalization requires serious changes in the w a y European governments approach their economies. O n e reason w h y m a n y European countries seem indifferent to the real terms of globalization m a y be that m o s t of them still trade almost entirely a m o n g themselves or w i t h A m e r i c a and J a p a n , w h i l e a m u c h larger share of U . S . and B r i t i s h trade involves developing markets. W h e t h e r it's a vestige from their colonial periods or just force of habit, m a n y European businesses seem to t h i n k of the rest of the w o r l d as dusty outposts barely worthy of their trading attention. T h e same holds true in g l o b a l investment. In 2 0 0 4 , barely 7 percent of the foreign stocks o w n e d by Europeans—just 3 percent for G e r m a n y — w e r e in companies in developing countries, compared to almost 2 3 percent of the foreign stocks held by A m e r i c a n s and 2 0 percent of those o w n e d b y Britons. T h e contrast is especially stark for investing in China, al­ t h o u g h J a p a n rather than B r i t a i n joins A m e r i c a here in taking the plunge: G e r m a n investment in C h i n a is barely one-fifth the U . S . or Japanese level; and France, Italy, and E n g l a n d lag even farther behind. T h i s record of conti­ nental Europeans suggests a form of financial cognitive dissonance, since e m e r g i n g markets outperform Europe's o w n markets. W h e r e a country trades and invests matters, because it's the main w a y that companies and societies learn how to be part of another country's economic life. A l l of that U . S . and J a p a n e s e trade and investment w i t h C h i n a is build­ ing u p the k n o w l e d g e , relationships, and networks of suppliers, distributors, and managers that w i l l m a k e A m e r i c a n and J a p a n e s e companies integral parts of China's economy in 2 0 2 0 . A n d by competing so actively in the world's fastest-growing and fastest-changing market, U . S . and Japanese companies are being forced to stay on their toes by developing new products, services,

15

THE GLOBAL BLUEPRINT

and ways of doing business. U l t i m a t e l y , the results w i l l shape their o w n d o ­ mestic economies as w e l l , because businesses fully e n g a g e d in markets like C h i n a w i l l raise the productivity and profits of their operations not only in China, but everywhere else. Unless the large European nations change their attitudes and long-entrenched trade and investment patterns, in 2 0 2 0 most of them w i l l be left fighting over their o w n shrinking domestic markets. B y then, advanced economies w i l l have to concentrate not on basic m a n u ­ facturing or services, but on c o m i n g u p w i t h new g o o d s and services for workers elsewhere to churn out; r u n n i n g the g l o b a l operations that coordi­ nate w o r l d w i d e production networks and oversee their

financing,

marketing,

and distribution; and producing more customized local g o o d s and personal services, especially in areas like education and m e d i c a l care. P r o m o t i n g this innovation w i l l be a p r o b l e m for m u c h of E u r o p e and J a p a n . T h e r e , a l o n g ­ standing distrust of the freewheeling competition that drives innovation w i l l be heightened by the slow g r o w t h and h i g h taxes associated w i t h their shrink­ ing labor forces and g r o w i n g numbers of elderly. T h e outlook is better for a handful of niche advanced e c o n o m i e s — p r i n c i p a l l y Ireland, S w e d e n , and Finland—that have demonstrated singular capacities for c o m i n g u p w i t h new, world-class technologies. England is often thought to be more disposed to deregulation and innova­ tion than France or Germany, and Margaret Thatcher and Tony Blair both talked a good g a m e . A lot of it is still just talk. In 1 9 9 9 , Blair's chief of staff asked me (I was then United States Under Secretary of C o m m e r c e for E c o ­ nomic Affairs) to brief the prime minister's economic advisers on how A m e r i c a used new technologies to rack up large productivity gains. In a sunny confer­ ence room at 1 0 D o w n i n g Street lined w i t h g i l d e d portraits, I laid out how the power of competition, especially from y o u n g companies, had both driven the development of cutting-edge I T and m o v e d other businesses to change the w a y they did business to make g o o d use of the new I T Blair's policy wonks and p o ­ litical operatives asked probing questions; but w h e n w e were done, they agreed that the kind of competition that forces companies to change was still distaste­ ful to many Britons. T w o years later, the Blairites were back asking for concrete recommendations on how the prime minister could break Britain's cycle of low productivity growth. I advised them that the single most powerful thing they could do w o u l d be to relax the worst bureaucratic and regulatory barriers to starting new businesses. Once again, I listened to the most powerful people in British politics rue the distate of many of their countrymen and government for the bare-knuckled competition that globalization requires. T h e outlook for the U n i t e d States is m o r e b u l l i s h . D r a w i n g on the world's largest and most variegated network for research and development, A m e r i c a n

FUTURECAST

16

companies should continue to produce more cutting-edge technologies and services than companies anywhere else. Already, U . S . businesses invest nearly as m u c h in ideas as they do in plants, equipment, and land. E q u a l l y important, A m e r i c a n s accept harsher competition—and swallow the greater inequality and job insecurity that comes w i t h i t — t h a n most Europeans or Japanese have ever tolerated. These differences should continue to push A m e r i c a n businesses to raise their productivity faster than businesses in most other advanced coun­ tries. T h a t advantage, in turn, should also continue to make the United States a strong m a g n e t for foreign investment. A decade from now, A m e r i c a w i l l still be the world's largest and most technologically advanced economy, and the one w i t h the greatest impact on everyone else. B u t nothing w i l l stop globalization from destroying job security for m i l ­ lions of A m e r i c a n s , along w i t h their E u r o p e a n and J a p a n e s e counterparts. m

F r o m 1 9 9 7 to 2 0 0 3 , o r e than 5 m i l l i o n A m e r i c a n s lost their jobs and were 3

never recalled in e x t e n d e d , mass layoffs. In 2 0 0 3 , large layoffs of this k i n d hit places l i k e Fresno and Salinas, California, and C h i c a g o , in industries from food processing and m a c h i n e r y manufacture to c o m p u t e r makers and a d m i n i s t r a t i v e services. R e l a t i v e l y free domestic markets, more innovation and m o r e new businesses w i l l produce more alternatives for millions of laidoff service and manufacturing workers in the U n i t e d States. B u t the transi­ tion is almost a l w a y s brutal on the workers and their families, and their next jobs usually p a y a lot less. It w i l l be especially agonizing for millions of older workers w h o m a y also lose some of their private pensions, along w i t h their dignity. U n l i k e normal bouts of u n e m p l o y m e n t in the t i m e before globaliza­ tion seized everyone's prospects, they w i l l find it m u c h harder to land a com­ parable job or "retrain" for a g o o d , new one. Politicians w h o w i l l tell them that the technology and g l o b a l i z a t i o n u p r o o t i n g their lives can somehow be stopped by a new l a w or g o v e r n m e n t p r o g r a m w i l l earn their well-justified anger. C h i n a is the other major economy w e l l positioned to take g o o d advantage of globalization. Its potentially h u g e domestic market and l o w - w a g e , skilled workforce w i l l continue to attract investment and technology transfers from every advanced nation. A s the only major country likely to match the United States in freewheeling market capitalism (and economic inequality), China should be able to use that investment, technology, and skilled labor to estab­ lish itself b y 2 0 2 0 as one of the world's t w o indispensable economies. A s w e w i l l see, in C h i n a as w e l l , this progress involves large burdens for hundreds of millions of families forced to g i v e u p their farms or jobs w i t h state-owned en­ terprises. A n d under current Chinese law, there's no u n e m p l o y m e n t compen­ sation to help cushion the blow, or health-care and pension coverage for most

THE GLOBAL BLUEPRINT

17

of them. N o r is C h i n a unique in this r e s p e c t — i f India hopes to modernize w i t h anything like the breadth and speed of C h i n a , it also w i l l have to dis­ place hundreds of millions of Indian farm workers stuck today in one of the world's least productive agricultural sectors. T h e great difference is that rural Chinese have little choice but to pack u p and g o to urban areas where they m i g h t find new jobs (at least y o u n g Chinese can d o that), w h i l e rural Indians have political outlets to slow d o w n or even stop the w h o l e process. For

all the sparkling modernism of Shanghai, B e i j i n g , and G u a n g z h o u , the

country's stunning, two-decade-long record of overall g r o w t h , and the enthu­ siasm of m a n y western commentators, China's economic ascendancy over the next decade is not secure. M o s t Chinese today are still poorer than most other Asians, Latin Americans, and some sub-Saharan Africans; and their country still lacks most of the basic institutions and arrangements that comprise the economic and social infrastructure of a well-functioning m o d e r n economy. T h e financial system is p r i m i t i v e , w i t h no real central b a n k i n g , m o r t g a g e fi­ nance, or corporate bond markets; property rights, contracts, and bankruptcy laws are all haphazard; basic infrastructure outside the major coastal cities is generally obsolete or c r u m b l i n g ; and energy generation and transmission in much of the country is spotty. E v e n the great manufacturing capacities of the Chinese economy are, in one important sense or another, still largely foreign transplants. T h e w o r l d witnessed the extent to w h i c h China's native m a n u ­ facturers lag behind the transplants—and Chinese regulators lag their coun­ terparts almost everywhere else—in 2 0 0 6 and 2 0 0 7 , when American, European, and Latin American authorities found deadly contaminants or defects in Chinese exports of seafood, children's clothing and toys, dog and cat food, toothpaste, v i t a m i n s , and c o u g h s y r u p s . W h e t h e r in 2 0 2 0 C h i n a is a g l o b a l e c o n o m i c power in its o w n right, or a poor country w i t h an uncertain future, k n o w n for hosting many of the manufacturing operations of every western g l o b a l c o m ­ pany, is a serious and open question. T h e answer w i l l depend to a large extent on whether it can do in ten or fifteen years w h a t took every other modern econ­ omy and society the better part of a century, and p u l l it off w i t h o u t sacrificing the rapid economic g r o w t h on w h i c h China's leaders believe their country's social and political stability depend.

GEOPOLITICS WITHOOT COMMUNISM T h e third historic force shaping the next fifteen years is the radical rearrange­ ment of geopolitics, ushered in by the fall of the Soviet U n i o n . It is hard to overestimate the extent to w h i c h this one event is transforming the w o r l d .

FUTURECAST

18

For starters, it enabled C h i n a to fully break w i t h socialist economics and cre­ ate the conditions for both its l i g h t n i n g economic progress and, in time, new m i l i t a r y prowess. T h e Soviet demise and China's rise also are shifting the focus of w o r l d affairs to A s i a , m a r g i n a l i z i n g Europe's role in g l o b a l security. In place of the cold w a r competition that always threatened to turn hot, the geopolitics of the near future w i l l be denned and ordered by two new conditions. For the first t i m e in m o r e than 1 , 5 0 0 years—since the days when R o m e ruled most of the w o r l d — t h e r e is a g l o b a l m i l i t a r y and economic su­ perpower w i t h no near peer. W i t h the world's largest economy and markets, and w i t h m i l i t a r y s p e n d i n g nearly equal to the rest of the w o r l d combined, the U n i t e d States w e n t to w a r in Iraq over the objections of close allies w i t h ­ out affecting its m i l i t a r y and economic preeminence. E v e n if that war is ulti­ m a t e l y lost, A m e r i c a could d o it again and not d i m i n i s h its military and economic dominance. T h e ascendance of a sole superpower w i t h no peer has also changed the pat­ tern of conflicts in w o r l d politics, or at least those that matter. For the first t i m e in m a n y centuries, international conflicts of consequence mainly involve differences not between powerful countries, but between those connected to each other through global networks of trade, money, and information, and those left largely outside or unconnected. O n e signpost of this new landscape is the record of foreign m i l i t a r y fighting over the fifteen years or so since the Soviet U n i o n fell. V i r t u a l l y every foreign military operation has been initiated by the U n i t e d States, and almost every one has involved A m e r i c a n military in­ v o l v e m e n t in countries still outside the orbit of globalization—in the C a r i b ­ bean r i m (Haiti), sub-Saharan Africa (Somalia and Sierra Leone), the Balkans ( K o s o v o and Bosnia), the M i d d l e East (Iraq and K u w a i t ) , Central Asia (Af­ ghanistan), and Southwest A s i a . T h e partial exceptions involve disputes over territory between countries outside the global economic system, but where the U n i t e d States was not involved directly—principally Iraq's invasion of K u w a i t and incursions on their neighbors by sub-Saharan African countries. A n o t h e r signpost of the new geopolitics is the rise of new institutions to m a n a g e the economic problems that surface a m o n g countries inside the orbit of globalization—especially the W o r l d Trade Organization ( W T O ) , the World Intellectual Property Organization ( W I P O ) , the European Union ( E U ) , the Asia-Pacific E c o n o m i c Cooperation organization ( A P E C ) , and the renewed role of the International Monetary F u n d ( I M F ) in helping countries manage stresses triggered by g l o b a l flows of goods, services, and money. M u c h of a g r o w i n g opposition to globalization itself is directed at these organizations, perhaps s i m p l y because they have proper names, real addresses, and annual meetings at w h i c h to protest. S o m e of this opposition, like recent attacks on

THE GLOBAL BLUEPRINT

19

traditional intellectual property rights, is fueled by Brazil, A r g e n t i n a , India, and a few other developing nations' governments that want to legalize forms of modern-day piracy and counterfeiting so they can produce (and export) generic versions of the innovations c o m i n g out of developed countries. T h e W T O also is deeply suspect in m a n y places, and especially a m o n g t w o groups. First are many traditionalists in developing countries w h o see the western products and business organizations imported through globalization as an as­ sault on their values and cultural traditions—and often on their o w n political power inside their countries. T h e W T O also attracts antagonists in E u r o p e and the United States, including those w h o nearly broke u p the group's 1 9 9 9 annual meeting in Seattle, Washington. M a n y of t h e m are ideological orphans from the sudden death of global socialism w h o , now bereft of a real alternative, rail passionately against the injustices of globalized capitalism. Another indicator of w h a t geopolitics looks like in the age of globalization and a sole superpower is the rise of Islamic terrorism. W i t h the U n i t e d States the world's only great military power, the source of international violence has shifted from nations to a borderless m o v e m e n t . T h i s transnational m o v e m e n t is centered almost entirely outside the orbit of globalization, justifying its mission and its violence by rejecting everything globalization represents and promises. Islamist terrorists are certainly no allies of the W T O ' s secular antag­ onists or W I P O ' s critics in the large developing nations. B u t they try to c l a i m a c o m m o n cause w i t h religious traditionalists in M u s l i m countries, w h o s e tacit allegiance and sometimes concrete support Islamic terrorists need, for at least reasons of credibility. One big question all of this raises is whether or not the networks and insti­ tutions of globalization have ended military competition and conflicts a m o n g the major nations. T h e y probably have for a w h i l e — s o long as the U n i t e d States remains a superpower without a near peer and ready to preside over the system. Countries outside the orbit of globalization, most notably N o r t h K o ­ rea and Iran, could find themselves in open conflict w i t h the U n i t e d States and some of its allies. B u t great-power conflicts are very unlikely. T h e next in line after the United States, China, is at least t w o generations away from becoming America's military and economic near peer on a g l o b a l scale, despite its fastrising military spending. Still, by 2 0 2 0 , C h i n a m a y achieve that status in its own region. Europe and the Western hemisphere w i l l remain beyond China's military reach for a very long time; but w i t h i n a decade, C h i n a could be joust­ ing with A m e r i c a for influence in N o r t h , South, and Southeast A s i a , including J a p a n and K o r e a — a n d perhaps footholds in the M i d d l e East as well. E v e n so, the flow of hundreds of billions of dollars in g o o d s , services, in­ vestment, and ideas between the Chinese and A m e r i c a n economies—as w e l l

20

FUTURECAST

as between most other economies and C h i n a , and most other economies and the U n i t e d S t a t e s — w i l l m i g h t i l y discourage armed conflicts between them. B u t that flow won't prevent dangerous confrontations from occurring be­ tween their a l l i e s — m o s t conspicuously and perilously, Pakistan and India. H i s t o r y teaches the perils of believing that globalization can guarantee peace. D u r i n g the mid-to-late eighteenth century and again in the late nine­ teenth and early twentieth centuries, international commerce, investment, and communications all intensified as m u c h as in our o w n time, or nearly so. T h e first period of globalization saw vast expansions in ocean trade, the first w o r l d - s p a n n i n g businesses and the spread of steam power, along w i t h the heyday of the French and Spanish g l o b a l empires. E v e n in y o u n g A m e r i c a , J o h n J a y wrote in The Federalist Papers about how those advances opened up trade w i t h the world's most distant countries: "In the trade to C h i n a and In­ dia, w e interfere w i t h more than one nation, inasmuch as it enables us to par­ take in advantages they had in a manner monopolized, and as w e thereby s u p p l y ourselves w i t h c o m m o d i t i e s w h i c h w e used to purchase from t h e m . "

4

T h e second great period for globalization b r o u g h t electrification, the tele­ g r a p h and telephone, multinational investment combines, and the crest of the B r i t i s h and G e r m a n g l o b a l empires. In both instances, all that globaliza­ tion d i d not stop the world's major commercial and trading powers from w a g i n g terrible wars on each other—once there was more than one country w i t h the capacity to do so w i t h hope of success. E v e r y day of the next fifteen years and beyond, U . S . and Chinese m i l i t a r y planners w i l l contemplate the lesson of history that even deep economic relationships do not preclude wars between the parties, once they're each other's near peers in military power. E v e n w i t h no direct m i l i t a r y conflict between C h i n a and the United States over the next decade or s o — a s there were none between the United States and the U S S R from the C u b a n missile crisis of 1 9 6 2 to the downfall of the Soviet U n i o n m o r e than a quarter-century later—the A m e r i c a n - S i n o c o m p e t i t i o n w i l l be a powerful force shaping g l o b a l politics. L o n g before 2 0 2 0 , the U n i t e d States and C h i n a w i l l have to m a n a g e a fierce competition over energy resources. T h e y w i l l almost certainly have to w o r k together to contain regional tensions and terrorism in a w o r l d in w h i c h nuclear prolifer­ ation has long a g o failed, as they have recently w i t h N o r t h K o r e a — t h o u g h as y e t , they haven't found c o m m o n g r o u n d over the M i d d l e East, including Iraq and Iran. A m e r i c a and C h i n a also w i l l p r o b a b l y w o r k together and w i t h other major countries to head off threats to the g l o b a l Internet architecture. T o the extent it serves their purposes, the U n i t e d States and China, acting together, also w i l l provide some order to g l o b a l economic affairs. For e x a m ­ p l e , if the t w o countries can agree on the future scope of intellectual property

21

THE GLOBAL BLUEPRINT

rights, the rest of the developing w o r l d w i l l almost certainly g o along. Such an agreement w i l l be crucial to both economies, since most of the value of the industrial equipment, laptops, and other sophisticated g o o d s that C h i n a p r o ­ duces (or merely assembles) comes from ideas developed in the W e s t , w h i l e the value of those ideas forms the core strength of the western economies. E q u a l l y important, the trading and financial relationships between A m e r i c a and C h i n a hold a key to a potential crisis for g l o b a l g r o w t h . Since globaliza­ tion took off in the late 1 9 9 0 s , U . S . imports, now t o p p i n g $ 2 trillion a year, have helped keep m u c h of the rest of the w o r l d g r o w i n g — w i t h C h i n a and a few other countries financing America's h u g e trade deficits by loaning or sell­ ing hundreds of billions of dollars in excess savings to the U n i t e d States. U n ­ less these h u g e imbalances are reduced, they w i l l eventually produce a run on the dollar that w i l l stall out economies around the w o r l d . A m e r i c a and C h i n a w i l l have to politically m a n a g e that transition t o g e t h e r — b o t h countries w i l l have to agree to realign their currencies w h i l e A m e r i c a raises its national sav­ ings and C h i n a increases its national consumption. In all these matters, the geopolitical marginalization of Europe seems all but certain. Europe has steadily cut its defense capacities and commitments, and the slow economic g r o w t h that lies ahead w i l l probably mean even deeper cuts. On top of that, both Europe and J a p a n are likely to be preoccupied politically with the fierce domestic conflicts certain to erupt w h e n that slow g r o w t h col­ lides with the tax hikes and spending cuts required to keep their pension and health-care systems g o i n g . It may be hard to imagine today, when m u c h of E u ­ rope disdains America's power and dislikes its president, but these develop­ ments could strengthen the Atlantic alliance. H o w e v e r m u c h some European intellectuals complain about it, a strong Atlantic alliance w i l l be the only w a y to preserve a European voice in global politics. A n d , if Europe's choice is A m e r ­ ica or China, it w o u l d be a step too far for Europe to ally itself w i t h the world's fastest-rising authoritarian nation against the world's leading democracy. China's g r o w i n g military and economic power w i l l make the same choice more uncomfortable for J a p a n , but no less inevitable. R u s s i a w i l l have different options, given its long border w i t h China and the absence of a shared d e m o ­ cratic heritage. In many respects, Russia w i l l find itself in the position C h i n a occupied at the height of the C o l d W a r — w i t h a foot in both camps, trying to turn that position to its advantage. B u t the weakness of the Russian economy and military, compounded by its mounting demographic crisis, also w i l l m a k e the once-mighty superpower a minor player in most conflicts. Russia is losing population at an unprecedented rate for a fairly developed country—as m u c h as one million souls a year—and by 2 0 2 0 , Russia's population w i l l be 5 0 million 5

less than N i g e r i a or Bangladesh and barely more than M e x i c o . Moreover, w i t h

22

FUTURECAST

death rates a m o n g y o u n g Russian men rising to more than three times U . S . levels, experts at the R a n d Corporation believe that by 2 0 1 5

or sooner, Russia

w i l l have difficulties marshalling the soldiers and police required to merely pa­ trol its borders and maintain internal order.

6

T h r o u g h o u t all of these developments, the basic line in the global sand will still divide those e n g a g e d in globalization and those outside its orbit. W h i l e some form of U . S . - S i n o competition w i l l be a basic fact of geopolitical life in 2 0 2 0 , no nations w i l l have more at stake than A m e r i c a and C h i n a in defending globalization against attackers from the outside and its doubters inside.

THE DIMMING PROSPECTS FOR EQUALITY T h e s e three historic forces w i l l help shape everyday life over the next decade, both directly and t h r o u g h a n u m b e r of social conditions w h i c h follow from h o w they w i l l interact. First, demographics and globalization w i l l intensify economic inequality almost everywhere. C h i n a and the U n i t e d States, global­ ization's t w o p r i n c i p a l drivers, already are the world's t w o most unequal major societies. It's no accident. W h e r e v e r globalization and its technologies take hold, the return on investment rises and makes the rich richer while more intense domestic and international competition holds d o w n most w o r k ­ ers'

w a g e gains even w h e n their p r o d u c t i v i t y increases. T h a t doesn't even

count the economic shock and sorrow of millions of workers in advanced countries w h o w i l l lose their jobs and, in the current technology-driven com­ petitive environment, eventually settle for lower-paying ones. G r o w i n g inequality is also part of another d y n a m i c tied to the information technologies that are turbocharging globalization: Ideas are replacing physi­ cal assets as the m a i n source of wealth and g r o w t h . T h e idea-based economy is no longer an a p p r o x i m a t i o n or metaphor, but a hard reality. A m e r i c a n corpo­ rations now invest as m u c h in "intangibles," principally intellectual property, as they do in plant, e q u i p m e n t , offices, factories, and real estate. Twenty years ago,

the market value of the physical assets of the top 1 5 0 U . S . public

c o m p a n i e s — t h e i r "book value"—accounted for 7 5 percent of the total value of their stocks. A firm was r o u g h l y w o r t h nearly what its factories, offices, e q u i p m e n t , real estate, and so on could be sold for. B y 2 0 0 4 ,

t

n

e

book value

of the top 1 5 0 corporations accounted for just 3 6 percent of the total value of their shares. Today, nearly two-thirds of the value of a large company comes from i n t a n g i b l e s — w h a t it knows and the ideas and relationships that it owns: its patents and c o p y r i g h t s , databases and branding, organizational arrange­ ments and the training or h u m a n capital to use these ideas.

THE GLOBAL BLUEPRINT

23

T h e ideas themselves float in the economic ether, their value sometimes protected by hard-coated patent and copyright laws. E v e r y o n e encounters these ideas through the technologies and business methods that e m b o d y t h e m and generate the productivity and profits that g i v e an idea-based economy its buoyancy. T h e g o o d news is that new ideas tend to generate more of the same, so the number and power of the new information and Internet technologies, new nano- and biotechnologies, and new business strategies, has no certain limits even for the near future. A n d once a new idea proves itself in the mar­ ketplace, anyone, anywhere in the w o r l d can use i t — t h o u g h sometimes they have to pay to do so. T h e painful downside is that w i t h more economic wealth and incomes tied so directly to all the new (and older) ideas, it w i l l become a lot harder for anybody w h o has spent most of his or her life in the old economy to earn a middle-class l i v i n g and support a family. Already, average workers in the United States and the best-performing European economies have seen their real wages stagnate or decline for five years, despite healthy productivity gains in most of these countries, w i t h only professionals, managers, and in­ vestors enjoying rising l i v i n g standards in almost every advanced nation. As sure as death and taxes, these developments w i l l intensify inequality in every major country. N e a r l y everywhere around the w o r l d , the m a r k e t forces unleashed by globalization and technology are b i d d i n g u p the value of the skills of the top 2 0 percent or so w h o w o r k adeptly w i t h ideas, and d r i v i n g d o w n the value of the w o r k that many other people do. It's already here: T h e last six years of economic expansion have seen the smallest job gains and w a g e increases for most people of any expansion in more than fifty y e a r s — a n d the largest gains for both h i g h l y educated workers and the w e a l t h y people w i t h claims on the rising return on invested capital. O n top of these changes, a g i n g societies also tend to become more unequal, because elderly people as a g r o u p have smaller incomes than w o r k i n g people. So,

as the numbers of elderly A m e r i c a n s , Europeans, and Japanese increase

over the next ten to fifteen years and beyond, the share of these societies l i v i n g on relatively small incomes w i l l rise. A n d that w i l l be no comfort for everyone else—not only because globalization and an idea-based economy tend to hold down the incomes of many of the nonelderly, but also because everyone's taxes will g o up to support the pensions and health care for all those retirees.

THE PERFECT STORM IN HEALTH CARE T h e near future holds other troubling prospects, because demographics and globalization also have set every advanced country on a course that could

24

FUTURECAST

gradually degrade medical care for most people. Three factors are converging to produce a health-care version of a perfect storm. N o t only will the number of elderly people inescapably rise by 3 5 to 5 0 percent in every advanced coun­ try between now and 2 0 2 0 , but in addition, medical advances—all of them expensive—are turning more life-threatening illnesses into chronic conditions and allowing people w i t h terminal conditions to survive for additional months or years. O n top of that, g o v e r n m e n t programs in every advanced nation guar­ antee that every older person can and w i l l demand every new treatment. These cost pressures aren't l i m i t e d to the elderly. For example, overall cancer rates and the costs of treating each case have both been increasing. Dr. A l a n Lotvin, w h o heads M | C C o m m u n i c a t i o n s , a leading provider of continuing education for physicians, estimates that, while five years ago patients w i t h colon cancer were typically treated w i t h t w o drugs that cost about $ 5 0 0 and on average lived about eight months, today they receive chemotherapy and live on aver­ age for thirteen to twenty months, at a cost of $ 3 0 0 , 0 0 0 to $ 5 0 0 , 0 0 0 .

7

G l o b a l i z a t i o n itself is e x p a n d i n g the number of costly new medical ad­ vances year after year. For the first t i m e , there is a potential global market for any new biotech and pharmaceutical product, costing hundreds or thousands of dollars for a course of treatment, and every new piece of medical equipment selling for tens or hundreds of thousands of dollars. T h i s enormous expansion in the market for health-care technology is c h a n g i n g the economics of re­ search and development, creating a reasonable risk for firms to spend a billion dollars or more to develop a new product. A n d since the key to p r o m o t i n g innovation is intellectual property protections that grant the developers m o ­ nopoly prices for their inventions, the prices for successful new medical prod­ ucts stay h i g h for m a n y years. T h e fallout from this perfect storm in health-care costs, especially w i t h rapid a g i n g , w o u l d be easier to m a n a g e if the numbers of w o r k i n g people p a y i n g the taxes to finance it were not also falling across most of Europe and J a p a n , or s l o w i n g d o w n in the U n i t e d States. A s a result, soaring medical costs w i l l almost certainly produce political storms in most advanced coun­ tries. T h e ensuing political conflicts won't be l i m i t e d to government pro­ g r a m s for elderly, because the same forces w i l l continue to drive up the cost of everyone else's care. W h a t to do about it could be the central political issue of the next decade. U n l i k e b u d g e t deficits or educational performance, the crisis of health-care costs confounds the usual approaches to political compromise. W i t h demo­ graphics alone e x p a n d i n g the elderly's v o t i n g clout steadily, what political party is g o i n g to cut back on their care—especially w h e n their lives may rest on it? It m a y be easier to t r i m access for everyone else, if only because their

25

THE GLOBAL BLUEPRINT

treatment is less routinely a matter of life or death. B u t that doesn't mean that w o r k i n g families in E u r o p e , J a p a n , or the U n i t e d States w i l l tolerate p o l i t i ­ cians w h o want to raise their taxes to pay for the medical treatment of others, especially when they're on the losing end of g r o w i n g inequality and their o w n health care is contracting. U n l i k e the demographic shifts and economic globalization that underpin this p r o b l e m , there is little certainty about how precisely it w i l l play out. If innovation

responds

to market

pressures—something

many

economists

d o u b t — w e could see the development of much-lower-cost technologies. T h e more likely path is higher out-of-pocket p a y m e n t s , tax reforms that i n d i ­ rectly dedicate more taxes to health care and leave less for everything else, i m ­ plicit rationing through longer waits to treat anything but

life-threatening

conditions, weaker patent rights that slow the pace of medical advance, and a quiet shift to lower-tech treatments. T h e only certainty is that in every coun­ try the p r o b l e m w i l l fuel u g l y political conflicts.

THE BATTLES OVER ENERGY AND THE GLOBAL CLIMATE M u c h like health care, both energy markets and the g l o b a l climate are head­ ing for a long-term crunch. For nearly a generation, w o r l d d e m a n d for oil has consistently g r o w n faster than the world's capacity to produce it. O v e r the next ten to fifteen years, this g a p w i l l w i d e n . R a p i d industrialization and fastg r o w i n g auto ownership in C h i n a , India, and other large, developing nations w i l l be the m a i n sources of this g r o w i n g d e m a n d . W i t h i n a decade, these na­ tions, none w i t h significant oil reserves of their o w n , w i l l have the most energy-intensive economies in the w o r l d . One near certain consequence w i l l be m u c h higher energy prices on a per­ manent basis, even as various hybrid or other alternative engines bury the con­ ventional gas-combustion automobile. E u r o p e and J a p a n w i l l be less affected than the rest of A s i a or the United States, thanks to h i g h oil and gas taxes that have forced up their energy efficiency. B u t w i t h more than half of global energy needs being met by the world's most politically unstable regimes in the M i d ­ dle East, Central Asia, and Africa, no policy w i l l protect anybody from the energy shocks and accompanying recessions almost certain to occur over the next fifteen years. T h e successful application of technology and investment over the next fif­ teen years could make these challenges m u c h more manageable. T h e w o r l d may

face shortages of cheap light oil, but it is not energy poor. Canada, R u s s i a ,

and Venezuela have heavy-oil reserves larger than all of the world's conventional

26

FUTURECAST

light-oil reserves. R u s s i a and the M i d d l e East also have enormous reserves of natural gas; and comparably h u g e coal reserves lie in China, India, the United States, South Africa, and Russia. G o v e r n m e n t s and corporations could de­ velop, produce, and transfer the investment, technologies, and infrastructure required to meet any global energy demand for the next fifteen years and well b e y o n d — i f they can find the trillions of dollars required to develop ways to re­ duce the viscosity and contaminants in heavy oil, liquefy natural gas in large quantities and transport it across the w o r l d , tap deep-ocean oil deposits, store and manage nuclear waste, and decarbonize coal w i t h supercritical boilers and gasification. T h e alternative is an 8 0 percent expansion in Persian G u l f oil pro­ duction by 2 0 2 0 — a n d those m u c h higher prices. T h e truth is, energy prices w i l l continue to rise under any scenario. M u c h as the scientific debate over the risk of climate change is effectively settled, economists agree that h i g h e r prices for carbon-based energy w i l l be required to shift businesses and consumers to alternative fuels and technologies. A s en­ ergy prices rise, other alternatives w i l l become economically practical and popular. It's impossible to k n o w w h i c h innovations w i l l matter until they ac­ tually do, but m a n y experts in this area today are betting on t w o new sources, g i v e n the r i g h t technological breakthroughs. O n e leading alternative to fossil fuels is h y d r o g e n fuel cells, w h i c h could be adapted for automobiles, laptop batteries, and h o m e heating and cooling. For larger energy users such as office b u i l d i n g s and industrial plants, the smart money is betting that advances in nanotechnology-based solar energy w i l l be able to generate steam to run tur­ bines and electrical current across g r i d s . T h e onset of g r a v e g l o b a l environmental problems could provide more i m ­ petus for these investments, especially by governments. T h e political consen­ sus about the onset and effects of g l o b a l w a r m i n g w i l l almost certainly g r o w and deepen in c o m i n g years, t r i g g e r i n g serious political debates everywhere. B u t w i t h the t i m i n g of global w a r m i n g still uncertain, no one can say whether it w i l l take ten years or t w o generations to see the climate changes that ulti­ mately w i l l m a k e alternative energy a universal choice—whatever it costs. A more certain development is that the m i s m a t c h of energy supply and de­ m a n d w i l l expose the most g l a r i n g anomaly in globalization and geopolitics, namely the g r o w i n g importance of the world's most unstable and econom­ ically insular region, the M i d d l e East, to the g r o w t h and stability of the world's major countries. C h i n a and the rest of A s i a are already twice as dependent on the Persian G u l f as E u r o p e or the U n i t e d States. B y 2 0 2 0 , A s i a w i l l i m p o r t 7 5 percent of its oil, 8 0 percent of it likely from the M i d d l e East. Y e t the autocratic g o v e r n m e n t s of the Persian G u l f oil states, facing treacher­ ous challenges from Islamist fundamentalists,

consistently resist foreign

THE GLOBAL BLUEPRINT

27

investment and domestic competition. T h e region most crucial to g l o b a l g r o w t h has isolated itself from the forces transforming the rest of the w o r l d . T h i s anomaly w i l l m a k e the w o r l d a more dangerous place over the next fifteen years. M o s t obvious is the prospect that the H o u s e of Saud could come crashing d o w n or that one or more of its G u l f neighbors could face their o w n religious-based insurgencies. E v e n if the w o r l d beats the odds and the G u l f ' s royalist autocracies remain stable, energy w i l l be a g r o w i n g sore point be­ tween A m e r i c a and almost everybody else. W i t h the U n i t e d States p l a y i n g the heavy's role in M i d d l e Eastern p u b l i c opinion, it w o u l d be only natural for

B e i j i n g , B o n n , D e l h i , and other w o r l d capitals to m a n a g e their relations

w i t h oil states as independent of A m e r i c a as they can. E a r l y signs are evident already in the extensive network of l o n g - t e r m contracts and alliances that C h i n a is b u i l d i n g w i t h Iran, R u s s i a , N i g e r i a , Venezuela, and other b i g oil ex­ porters. W i t h i n a decade, these deals and alliances w i l l draw C h i n a into the geopolitics of not only southern A s i a , but also the M i d d l e E a s t , R u s s i a , and parts of Central A s i a . Yet,

even w i t h America's o n g o i n g misadventure and failures in Iraq, the

basic arithmetic of globalization and energy w i l l intensify U . S . i n v o l v e m e n t in the M i d d l e East. For its o w n interests, the U n i t e d States w i l l have to d o its best to ensure that A s i a can meet its energy needs and contain energy costs for itself and other major economies. I f creating and m a n a g i n g g l o b a l , coopera­ tive arrangements

for energy proves to be beyond A m e r i c a ' s d i p l o m a t i c

capacity—as seems l i k e l y — t h e U n i t e d States w i l l still have to keep the oil p u m p i n g by somehow maintaining political stability across the M i d d l e East. Day

to day and year to year, the U . S . N a v y — t h e world's only "blue-water

fleet"—will provide m a r i t i m e security for oil shipments across the Indian, Pacific, and A t l a n t i c oceans. A n d as the world's foremost platform for techno­ logical development, the U n i t e d States w i l l also have to c o m m i t h u g e re­ sources to developing some of those alternative energy sources.

TWO WILD CARDS There are t w o other large developments out there that w i l l affect the course of nations and most people's lives over the next fifteen years. B u t they're not structural forces w i t h implications that can be reasonably predicted, and their likelihood remains fairly small. T h e first of these w i l d cards is terrorism and the g r o w i n g political p o w e r of Islamic fundamentalism. It is usual, but dan­ gerous and w r o n g , to conflate these t w o developments. It's true that m a n y terrorists in our t i m e are Islamic; and most Islamic fundamentalists, along

FUTURECAST

28

w i t h terrorists g r o u p s , reject the political, cultural, and economic values asso­ ciated w i t h globalization and its leading promoter, the U n i t e d States. B u t most fundamentalist M u s l i m s are not terrorists in any sense—and some of the world's most violent and well-organized terrorist g r o u p s , such as H a m a s and H e z b o l l a h , are not fundamentalist. Moreover, m a n y of the major terrorist actions of the last decade have not involved Islamic causes at all, from T i m o ­ thy M c V e i g h ' s assault in O k l a h o m a C i t y and the A u m S h i n r i k y o cult's sarin attack on T o k y o s u b w a y riders, to the N o v e m b e r 1 7 attacks in Greece and the B a s q u e separatist attacks in Spain. M o s t Islamic terror groups in the M i d d l e East and A s i a have domestic agendas w h i c h , but for the small likelihood of their destabilizing or destroying Israel, should have little direct impact on life in Europe, J a p a n , or the United States over the next fifteen years. T h e s e groups most resemble the terrorists w h o d o g g e d the peace and d e v e l o p m e n t of N o r t h e r n Ireland and C o l o m b i a in the recent past, w i t h no significant effects on geopolitics or the economies of most advanced countries. A l Q a e d a and its imitators, comprising a few thou­ sand followers and fighters, are different, because their agenda is explicitly g l o b a l and their tactics are a i m e d at the U n i t e d States, its major allies, and the oil p r o d u c i n g countries. Nevertheless, the record shows that terrorists actually change a country's course of development only w h e n their violence is both protracted and pervasive inside that country. A singular, localized attack such as 9 / 1 1 had no effect on America's macroeconomy or

international

power. A nuclear or v i r u l e n t biological attack is probably the only w a y that A l Qaeda or others like it could inflict the pervasive and protracted shock and losses that actually could change the course of a large society like the United States, J a p a n , Germany, or Great Britain. T h e likelihood of that is wholly spec­ ulative and fairly r e m o t e — b u t it's real, especially g i v e n how little has been done to strictly control loose nuclear material around the w o r l d , especially in the former Soviet U n i o n . D o n C l a r k , w h o led the F B I investigation of the 1 9 9 3 W o r l d Trade Center attack, notes that the danger of this could rise sharply if A l Q a e d a once again secured a state's support—for t h r o u g h a fundamentalist takeover of P a k i s t a n .

example,

8

Islamist fundamentalism represents a different w i l d card for the next ten to fifteen years. It has neither the ambition nor the capacity to derail globalization or the course of geopolitics. O n e possible scenario that keeps geostrategists awake, however, is a fundamentalist takeover of Pakistan. T h a t event could en­ able A l Qaeda terrorism to use fundamentalism to secure at least temporary state protection and access to nuclear weapons. A n d nuclear terrorism is a w i l d card unlike any other—a potentially civilization-changing event that would alter the life and liberties of every advanced society.

THE GLOBAL BLUEPRINT

29

One other easily i m a g i n e d scenario that w o u l d affect v i r t u a l l y everyone is a fundamentalist takeover of Saudi A r a b i a . T h e w o r l d and its major powers survived Iran's takeover by fundamentalists; but the oil price shock w h i c h fol­ lowed bred an inflation that affected everyone. T h e developed nations are much more energy-efficient today than they were in the late 1 9 7 0 s . B u t Saudi A r a b i a is a m u c h b i g g e r player than Iran w a s , and globalization is vastly in­ creasing g l o b a l energy consumption. A n extended interruption or large cut in Saudi oil exports anytime in the next decade w o u l d play havoc w i t h g r o w t h and prosperity around the w o r l d . Perhaps most important, it could w e a k e n social stability in C h i n a , based today on its leadership's bet that they can maintain their monopoly on state p o w e r by p r o d u c i n g endless h i g h g r o w t h . Y e t even such an event w o u l d not derail globalization, as the Iranian e x a m p l e also suggests that a fundamentalist g o v e r n m e n t in R i y a d h w o u l d see its w a y to restoring oil supplies in fairly short order. Technological advance is the other w i l d card that could affect the course of our near future, the positive yin to the frightening yang of terrorism. There is no question that information technologies in 2 0 1 5 and 2 0 2 0 w i l l perform tasks that can hardly be imagined today, and countries that promote their spread w i l l be richer and stronger for it. Medical advances w i l l end the suffering and costs of some diseases and injuries, and nanotechnology could both change the w a y countless products are made and lead to thousands of new products. T h e social, economic, and political changes of the next ten to fifteen years also w i l l affect the course of this technological progress. T h e d e m o g r a p h i c shifts are already focusing more R & D on health care for older people and on productivity enhancements for the s l o w - g r o w i n g numbers of w o r k i n g peo­ ple. Globalization w i l l transmit these advances across borders, societies, and cultures w i t h greater speed and intensity than even seen d u r i n g the c o m p u t ­ erization waves of the 1 9 8 0 s and 1 9 9 0 s . A n d A m e r i c a ' s status as the lone su­ perpower w i t h no near peer m a y mean that relatively less of all R & D w i l l focus on m i l i t a r y technologies than, for e x a m p l e , d u r i n g the space and missile races in the 1 9 6 0 s and 1 9 7 0 s . Technology is a frustrating w i l d card, because its precise trajectory can­ not be more than g u e s s e d at. A n u m b e r of l e a d i n g nanoscientists, i n c l u d i n g Paul A l i v i s a t o s at B e r k e l e y and S u m i o I i j i m a , from J a p a n ' s N a t i o n a l I n s t i ­ tute of A d v a n c e d Science and T e c h n o l o g y ( A l i v i s t o s pioneered nanoscale semiconductor crystals and I i j i m a d e v e l o p e d the first carbon nanotubes) see potential near-term breakthroughs in nanotechnology that w o u l d mean m u c h cheaper, abundant, and cleaner energy. B u t ten years a g o , others p r e d i c t e d the same results from b r e a k t h r o u g h s in other fields that never happened. A n d m a n y p r o m i n e n t scientists focused on d e c i p h e r i n g the h u m a n g e n o m e ,

FUTURECAST

30

such as W i l l i a m H a s e l t i n e , and Susan Greenfield from Oxford University, see

cures for such diseases as cystic fibrosis, and H u n t i n g t o n ' s and Parkinson's

diseases, in the next decade, from g e n e t i c screening, stem cell advances, and w i d e use of "neurochips" (genetically altered, or selected cells on integrated circuits that are i m p l a n t e d in people's bodies). B u t t w e n t y years ago some of their predecessors expected to find a cure for cancer w i t h i n a decade. N o one can chart even the next five years of technological progress w i t h any confi­ dence, and it is b e y o n d anyone's foresight or i m a g i n a t i o n to figure out how scientific advances are l i k e l y to affect countries and the g l o b a l economy. A s a w i l d card, the l i k e l i h o o d of i m p o r t a n t and e c o n o m y - s h a k i n g technological advances seems pretty c e r t a i n — e v e n as their particular character and i m p l i ­ cations remain u n k n o w n .

THE CONVERGENCE OF DEMOGRAPHICS, GLOBALIZATION, AND GEOPOLITICS Everyone's daily life w i l l be most affected not by each of these separate forces but by their c o m b i n a t i o n s — a n d their combinations w i l l m a k e it harder for g o v e r n m e n t s to m a n a g e their separate implications. Start w i t h demograph­ ics.

E v e r y year from now to 2 0 2 0 , the n u m b e r of elderly Europeans receiving

p u b l i c pensions and health care w i l l increase by nearly 3 percent a year, as the n u m b e r of w o r k i n g - a g e Europeans falls by about 1 percent a year. J a p a n is c a u g h t in an even tighter d e m o g r a p h i c vise. T h e s e demographic changes are overtaking m a n y countries so q u i c k l y and sharply that by 2 0 2 0 , the number of elderly in both J a p a n and E u r o p e w i l l equal more than half the number of their w o r k i n g - a g e people. A n d the problems this poses are not g o i n g away: Across E u r o p e and J a p a n , the n u m b e r of children and adolescents w h o w i l l become the w o r k i n g , t a x - p a y i n g adults of 2 0 2 5 and 2 0 3 5 is falling even faster than the n u m b e r of w o r k i n g - a g e people. As

these d e m o g r a p h i c shifts collide w i t h the pressures of globalization,

J a p a n and m u c h of E u r o p e w i l l face a vicious circle that w i l l gradually but steadily degrade the lives of m a n y of their citizens. Unless their economic paths unexpectedly change, they cannot avoid years of slow g r o w t h and mea­ ger

p r o d u c t i v i t y gains that w i l l preclude any incremental efforts to ease their

burdens b y g r o w i n g their economies. Instead, the natural course is that the slice of their societies' incomes and wealth that w i l l be claimed for public pensions and health-care services w i l l increase, forcing u p taxes and slowing investment, w h i c h in turn w i l l d a m p e n their g r o w t h even more. T h e O E C D sees France's economy g r o w i n g by barely 1 . 5 percent a year by 2 0 2 0 , and that assumes that the next decade of globalization w i l l exact no greater costs on

THE GLOBAL BLUEPRINT

31

French competitiveness and e m p l o y m e n t than today. W i t h the same caveat, Germany's leading forecaster sees g r o w t h of just over i percent a year b y 2 0 2 0 , by w h i c h time p u b l i c pensions and health care w i l l consume 1 8 per­ cent of G e r m a n G D P . T h a t share of G D P is equal to 8 0 percent of the share claimed today by the entire U . S . federal g o v e r n m e n t . Accelerating globalization could m a k e these challenges even more terrible for millions of Europeans and Japanese. T h e steady shift of manufacturing and service jobs to the fast-growing developing countries w i l l leave advanced countries w i t h only t w o real options: R a i s e p r o d u c t i v i t y for the nontradable services they still have, and develop new industries by b e c o m i n g an innova­ tion powerhouse. B o t h require resources and changes that today seem beyond the normal social and political capacity of J a p a n and most of E u r o p e . Leaps in productivity require a w i l l i n g n e s s to change the w a y businesses operate, so they can take advantage of new technologies, as w e l l as h i g h savings and investment. Investing in technology isn't the p r o b l e m : In the 1 9 9 0 s , E u r o p e and J a p a n invested about as m u c h as A m e r i c a in I T advances, although con­ sistently a year or t w o later. B u t they achieved little p r o d u c t i v i t y g a i n s , be­ cause that w o u l d have involved large-scale firings, job reassignments and job redefinitions that their cultures and strong unions won't accept. H i g h saving and investment also w i l l be a p r o b l e m for E u r o p e and J a p a n . T h e i r slow g r o w t h and rising taxes w i l l pinch most people's incomes and savings, their government spending and deficits w i l l likely rise, and the n u m b e r of workers in the age g r o u p w h e n people save the most, those in their late thirties to early fifties, w i l l slowly decline. A n economic and political culture that drives innovation also seems out of reach for most of E u r o p e and J a p a n , because it depends on laws and atti­ tudes that directly support entrepreneurism. Layers of subsidies, regulations, and informal networks continue to protect every established business in J a p a n and most of E u r o p e today, as they have for decades, and creating a new business is still almost an anomaly. I n E n g l a n d , new storefronts are rejected because they sully the experience of a green space a half-mile away. In France, a new worker, however skilled she is, cannot earn more than half of w h a t an average w o r k e r makes and then can't be let g o for eighteen m o n t h s . Europe's capital markets have long been organized to finance g o v e r n m e n t

deficits

rather than new business ventures. T h e preference for the old and established suffuses entire cultures. W h i l e A m e r i c a n s a d m i r e B i l l G a t e s , S a m W a l t o n , and other rags-to-riches entrepreneurs, Japanese and Europeans are more likely to revere the families that founded industrial combines generations ago, from the Schlumbergers of G e r m a n y and the A g n e l l i s of Italy to the Hitachis of J a p a n and the A x i s o n - J o h n s o n s in S w e d e n .

32

FUTURECAST N o r are there signs of real change. Less than a half-decade a g o , France's an­

swer to rising u n e m p l o y m e n t was not to deregulate or encourage new busi­ nesses that m i g h t create more jobs, but to lower the mandatory

retirement

age b y five y e a r s — t h i n k of w h a t that w i l l do to long-term pension costs— and institute a thirty-five-hour w o r k w e e k that leaves the French w o r k i n g 1 4 percent fewer hours than the average for other advanced countries. Another French reform passed in 1 9 9 7 to mandate some form of private saving met w i t h such resistance that it was never i m p l e m e n t e d and was finally repealed in 2 0 0 2 . N i c o l a s Sarkozy's election to France's presidency in 2 0 0 7 could pro­ duce real reforms, but they haven't appeared yet. Similarly, in Germany, lowskilled y o u n g people lose so m a n y p u b l i c benefits if they take a job, that their posttax incomes are h i g h e r w h e n they stay u n e m p l o y e d . G e r m a n y also re­ cently passed new laws barring G e r m a n companies from laying off any w o r k e r w i t h o u t "personal cause," and those causes don't include plans to reor­ ganize a workforce after u p g r a d i n g their technologies. O n this course, France, G e r m a n y , and others w i l l find themselves losing even greater g r o u n d to globalization just as their demographic shifts hit their b u d g e t s w i t h full force. To finance the pensions and health care that elderly Europeans and J a p a n e s e expect, they w i l l have to cut those benefits. If that's not politically p o s s i b l e — a n d where has it been s o ? — t h e y w i l l have to raise taxes. W i t h a shrinking workforce and an average tax bite across Europe that's already 4 5 percent, w h o w i l l pay those higher taxes? T h e last alternative is h i g h e r g o v e r n m e n t deficits year after year, w h i c h w i l l squeeze business in­ vestment and weaken their currencies, p r o d u c i n g even more drag on the pro­ d u c t i v i t y and g r o w t h that u l t i m a t e l y finances everything. T h e next decade w i l l find the welfare states of democratic socialism unable to honor their basic social contracts w i t h tens of tens of millions of Europe­ ans, m u c h as c o m m u n i s m could not keep its economic promises to its sub­ jects in the 1 9 7 0 s and 1 9 8 0 s . T h i s is a formula for serious political conflict and polarization, and one of the worst possible social and political environ­ ments for the drastic deregulation that E u r o p e and J a p a n w i l l need to g r o w in an era of globalization. It's already b e g u n in virulent backlashes against M u s ­ l i m i m m i g r a n t s in m a n y European countries, as w e l l as riots and demonstra­ tions in France and G e r m a n y protesting m i n i m a l steps to loosen regulations and t r i m benefits. It w i l l require the political talents of W i n s t o n C h u r c h i l l and the persua­ sive skills of R o n a l d R e a g a n to convince European and J a p a n e s e voters that their interest lies in accepting fewer benefits and less economic security from their g o v e r n m e n t s . A n d the expansion of the European Union, encompassing tens of millions of lower-wage Eastern and Central European workers w h o

33

THE GLOBAL BLUEPRINT

w i l l be able to m o v e wherever they choose w i t h i n the E U , w i l l only deepen the crisis. These kinds of social emergencies sometimes b r i n g forth a great leader, and one could emerge in one or t w o c o u n t r i e s — b u t

not in m o s t

places. After more than a half-century of social and political stability across Europe and J a p a n , these pressures could produce a new era of more extreme politics on both the left and right. If the challenge for E u r o p e and J a p a n was merely d e m o g r a p h i c , they could try to protect their industries and artificially stimulate g r o w t h w i t h o u t w o r ­ rying about how foreign investors and producers w o u l d respond. If the chal­ lenge involved just the pressures of globalization, they could cut taxes and shift resources to education and investment w i t h o u t w o r r y i n g so m u c h about pension and health-care costs. It's the convergence of these t w o powerful and largely unalterable forces that is creating consequences that democratic g o v ­ ernments find so difficult to m a n a g e . Unless most of E u r o p e and J a p a n can convince their people to accept changes that they w i l l certainly consider rad­ ical, by 2 0 2 0 they w i l l find themselves in a period of real decline. In both places, there w i l l be pockets of economic success. I n d i v i d u a l c o m ­ panies w i t h g o o d leadership can avoid the pressures that g r i p a society through its investment strategies, and by p i c k i n g u p and m o v i n g operations to places where taxes and everything else are less expensive. N o advanced country has been more resistant to deregulation and change than J a p a n , espe­ cially w h e n it m i g h t affect its s p r a w l i n g service sector—the least p r o d u c t i v e in the advanced w o r l d . B u t Japan's leading export c o m p a n i e s — S o n y , Toyota, and others—long ago accepted the facts of g l o b a l competition. W h i l e m a n y large Japanese companies have foundered, they m a n a g e to come u p w i t h new products and operating strategies year after y e a r — w h i l e also m o v i n g m u c h of their production to C h i n a and other l o w e r - w a g e A s i a n countries. O n a larger scale, Ireland, S w e d e n , and F i n l a n d have developed approaches that have created successful niche economies: Generate the g r o w t h that can keep a small society prosperous by d e v e l o p i n g a few world-class technologies in great g l o b a l demand or a few world-class companies p r o d u c i n g g l o b a l c o m m o d i t y products. S w e d e n slashed corporate taxes and drew on a national dedication to engineering to produce a handful of world-class c o m p a n i e s — Erikson, Tetra Laval, and I K E A — s e r v i c i n g the w o r l d w i t h cellular technol­ ogy, cheap p a c k a g i n g , and prefabricated furniture.

In F i n l a n d , N o k i a , a

company that used to m a k e rubber boots, turned itself into the world's lead­ ing cell phone producer at a t i m e w h e n e x p l o d i n g d e m a n d for the product could carry a tiny economy. A n d in just fifteen years, the C e l t i c T i g e r w e n t from the E U ' s s l o w e s t - g r o w i n g and poorest m e m b e r to the top of the E u r o p e ­ an heap by c o m b i n i n g every policy that m i g h t help attract foreign investment

FUTURECAST

34

and entrepreneurs to m a k e that h a p p e n — c u t t i n g

taxes and overall govern­

m e n t spending (including p u b l i c pensions and the payroll taxes that support t h e m ) , e x p a n d i n g spending on education and training, abolishing most re­ strictions on h i r i n g , firing, and foreign investment, and more. Ireland had the special g o o d fortune to do all of this just as globalization took off and U . S . , B r i t i s h , and European tech companies were looking actively for new places to expand. Latvia, Slovenia, and even Spain and Poland send policy experts and busi­ ness leaders to D u b l i n to help figure out h o w they m i g h t import the Irish miracle to their o w n countries—but

not the E U ' s m u c h larger and much

richer countries: G e r m a n y , France, and Italy all could use a m i r a c l e — especially as, w h a t w o r k s in a small country or a single sector may not be able to m o v e large and h i g h l y differentiated economies s t r u g g l i n g w i t h the com­ bination of a g i n g populations and globalization. In its absence, they need to m a n a g e the political w i l l to reform their taxes, regulations, and public pen­ sions in major w a y s . A s it is, the social contract that these countries can no longer afford, they also seem unable to fix. In most respects, globalization, demography, and their combination find C h i n a and the U n i t e d States in stronger positions than Europe or J a p a n . W h i l e the numbers of elderly people w i l l increase faster in both A m e r i c a and C h i n a than in E u r o p e or J a p a n over the next fifteen years, the number of w o r k i n g - a g e A m e r i c a n s and Chinese also w i l l grow. It w i l l m a k e all the dif­ ference in the w o r l d . In 2 0 2 0 , elderly A m e r i c a n s , necessarily contributing lit­ tle to productivity, w i l l still n u m b e r less than 2 8 percent of those w o r k i n g , and elderly Chinese w i l l equal less than 2 0 percent of China's workers. C o m ­ pare that to E u r o p e and J a p a n , where the elderly w i l l equal more than 5 0 per­ cent of their workers. Moreover, America's social security system provides m u c h smaller benefits than most other advanced nations (with the notable ex­ ceptions of the U n i t e d K i n g d o m and Ireland), and the vast majority of C h i ­ nese receive no p u b l i c retirement

or health-care

services at all. These

differences m a y m a k e European societies more just and equal, and certainly more generous. B u t the A m e r i c a n and Chinese approaches can sustain them­ selves over the next generation, w h i l e J a p a n and Europe's systems cannot. Today, C h i n a and the U n i t e d States are the world's most profoundly prag­ m a t i c major societies. B o t h largely accept the w o r l d for what it is, even if America's ambitions in the w o r l d and China's domestic strategies sometimes exceed their capacities. J a p a n and m u c h of E u r o p e cling to old commitments and hopes that globalization and their own demographics w i l l no longer let t h e m realize, w h i c h deeply impedes their ability to change. If they cannot m a n a g e to do so in the next decade, the w o r l d as it is w i l l inexorably erode

THE GLOBAL BLUEPRINT

35

their economic w e l l - b e i n g , political influence, and m a n y of their cherished social values. Crucially and critically, C h i n a and the U n i t e d States should occupy t w o poles of successful accommodation to the pressures of globalization for at least the next decade. C h i n a w i l l have hundreds of millions of relatively skilled lower-wage workers p r o d u c i n g the g o o d s the entire w o r l d wants, w i t h technologies and business methods i m p o r t e d t h r o u g h the greatest flood of foreign direct investment in history. T h e U n i t e d States w i l l have m a n y m i l ­ lions more h i g h - w a g e workers and managers involved in the extensive busi­ ness networks of globalization than there w i l l be in E u r o p e or J a p a n . A m e r i c a also w i l l have millions more h i g h l y skilled workers, managers and scientists producing new products and services that the w o r l d w i l l also w a n t , propelled by new businesses and the world's b i g g e s t scientific and h i g h e r education establishment. Finally, America's more deregulated system should m a k e its companies more open to adopting new waves of technology and business methods, whether from the next-generation Internet, nanotechnologies, or entirely new areas k n o w n today only to scientists and engineers. China's economic ascendancy w i l l be built not just on its hundreds of m i l ­ lions of l o w - w a g e workers using western technologies, but on w h a t is ar­ g u a b l y the most s i n g l e - m i n d e d modernization p r o g r a m the w o r l d has ever seen. M u c h of it w o u l d be u n i m a g i n a b l e but for the collapse of the Soviet Union, although it began a decade before M i k h a i l Gorbachev, w h e n a succes­ sion of sclerotic Soviet leaders c l u n g fast to the utterly failed and corrupt forms of state planning developed in the 1 9 5 0 s and 1 9 6 0 s . M o s t westerners didn't notice through the cold war's fog, but in the late 1 9 7 0 s and early 1 9 8 0 s , D e n g X i a o p i n g was discarding socialist p u r i t y for the demands of economic modernization. It began w i t h a trial run in agriculture, a sensible course for a backward developing country w i t h h u g e natural resources, and the experiment taught China's next generation of leaders a great deal about how to manage the m u c h larger transitions that awaited them. W i t h a series of ruthless dictates, D e n g relaxed decades of state controls on the prices and distribution of grains, and in the process forced hundreds of millions of farm­ ers thousands of miles from B e i j i n g to shift out of land-intensive crops. F a r m productivity went u p , and the first food surpluses C h i n a had seen in centuries drove d o w n prices, leaving tens of millions of Chinese farmers destitute. A t the same time, D e n g repealed Mao's bar on private enterprises in villages and towns, and some of the millions of out-of-work farmers, along w i t h local lead­ ers, created tens of thousands of small businesses that began s u p p l y i n g China's state-owned enterprises. In less than a decade, C h i n a shifted countless millions of agricultural workers to other sectors—a m o v e that took t w o generations

36

FUTURECAST

in E u r o p e and A m e r i c a — a n d by the late 1 9 8 0 s , the village and town busi­ nesses were the single largest sector of China's G D P and job g r o w t h . A n even b i g g e r leap came w i t h the final collapse of the U S S R . Over the 1 9 9 0 s , C h i n a threw overboard the ideological inhibitions that had thwarted Soviet economic and social progress for t w o generations. T h e Chinese leader­ ship turned its back on Lenin's a x i o m that the quality of a society is propor­ tional to the size of its state sector, and started w i t h h o l d i n g public money and loans for state-owned industries d e e m e d less than essential to the nation. T h i s process was so rigorous and far reaching that C h i n a today has a smaller official p u b l i c sector than any nation in Europe, and one barely larger than the United States or J a p a n . T h e y even quietly jettisoned the ideological primacy of w o r k ­ ers, w r i t i n g a new party platform that m a d e the development of production and culture the top priority, and one that w o u l d be realized in the interest not of the proletariat, but of the masses. E v e n as some European intellectuals still c l u n g to socialist axioms from the 1 9 3 0 s , J i a n g Z e m i n signaled that a new generation of entrepreneurs, the h u m a n heart of capitalism, w o u l d be brought into the bosom of the Party and its p r o g r a m for modernization. W h e r e the Russians sold their state enterprises to their managers for largely worthless shares and its natural resources to a handful of oligarchs for short-term g o v ­ ernment loans, China's leaders gradually and relentlessly have unwound much of their state enterprises and allowed hundreds of thousands of y o u n g Chinese to b u i l d new businesses to take their place. B y the late 1 9 9 0 s , the C o m m u ­ nist Party of C h i n a was no longer Lenin's party or Mao's. It v o w e d explicitly to encourage private enterprise. T h e leadership backed u p its words w i t h a rapid succession of additional reforms d e s i g n e d to tap into a central strength of private markets—the ca­ pacity to m o v e resources of every k i n d a m o n g companies and across sectors and borders. T h e y j u n k e d the hukuo, the national geographic registry that re­ stricted internal m i g r a t i o n from v i l l a g e to town or city. J u s t as important, they opened China's economy to foreign trade and investment, so China's new entrepreneurs could create alliances w i t h foreign companies eager to transfer their capital and technology. In d o i n g so, they undercut the small town and v i l l a g e enterprises that a decade earlier had formed the first front of modern Chinese capitalism. B y the m i d - 1 9 9 0 s , their markets had deteriorated sharply, overtaken first by foreign-funded businesses and then by domestic Chinese companies. B y 2 0 0 5 , nearly fifty thousand Chinese companies had foreign part­ ners w h o had invested more than $ 1 2 5 billion in their joint ventures, includ­ ing nearly $ 9 0 billion in manufacturing. T h e m a i n western criticism of this l i g h t n i n g modernization, the absence of political freedom of v i r t u a l l y any k i n d , has so far been one of its secret

37

THE GLOBAL BLUEPRINT

strengths. U n l i k e most of E u r o p e , where unions, farmers, and old-line indus­ tries hold fast to regulations and restrictions that preserve a status quo i l l suited

for globalization, China's politics provides no channels for any

resistance to the massive changes shaking its society. T h e real test of that ap­ proach could come in the next ten or fifteen years. T h e changes that are m a k ­ ing C h i n a an economic p o w e r have happened, so far, m a i n l y in its Pacific coastal cities and regions. M u c h like A m e r i c a in the first half of the nine­ teenth century, China's h u g e physical expanse had kept the revolutionary changes shaking their country hundreds or thousands of miles away from most of the people. Over the next decade or so, those changes w i l l come closer to h o m e for hundreds of millions of Chinese. In that short t i m e , C h i n a w i l l have to b u i l d or create the c o m p l e x financial and social institutions that the advanced coun­ tries of the West took a half-century or longer to p u t in place. Today, C h i n a has no modern private b a n k i n g , insurance, or m o r t g a g e finance systems to speak of. Its financial system consists largely of a n u m b e r of h u g e state banks that are conduits for channeling the small savings of hundreds of millions of Chinese into loans to fund the state's remaining enterprises. A s those enter­ prises disappear, their m a n y hundreds of billions of dollars of bad loans w i l l have to be written off. A n d like manufacturing before it, Chinese finance w i l l import modernization. Unless there's an economic crisis—say, $ i 5 0 - p e r barrel o i l — f o r e i g n investment w i l l take the sting out of the inevitable insol­ vency of some of the h u g e state-owned banks. B y 2 0 1 0 , under

current

timetables, C h i n a w i l l open itself to the Western and A s i a n b a n k i n g con­ glomerates that run finance throughout the developed w o r l d . It's already be­ g u n w i t h joint ventures, to be followed soon by a m i x of h o m e - g r o w n and foreign-owned banks and insurance companies. T h e real challenge w i l l be p o ­ litical: Saying no once and for all to more loans for the failing state enterprises that still employ m a n y tens of millions of Chinese. T h e same pattern is p l a y i n g out in infrastructure. O v e r the next decade, China will build more new h i g h w a y s , bridges, optical cable systems, airports, high-speed rail, subways, and water and waste treatment plants than the United States and Europe combined. T h e leadership fully expects Western c o m ­ panies to eagerly p i c k u p the bill for most of the telecom and

transportation

construction—and they probably w i l l . B y 2 0 0 5 , there already were almost six hundred major transportation and telecommunication projects w i t h foreign partners w h o had invested over $ 6 billion. For its more p u b l i c forms of infra­ structure, C h i n a w i l l have to raise m a n y hundreds of billions of dollars from a fast-growing tax base. C h i n a needs modern roads, transit systems, airports, and treatment plants

38

FUTURECAST

not only to m a k e its economy efficient in the basic ways that advanced soci­ eties take for granted, but also to create a more integrated national economy out of its tens of thousands of towns and cities. H u g e economic disparities be­ tween people on the coast and the rest of the country are already apparent to most Chinese. I f that g a p worsens, it could promote the k i n d of popular social demands that C h i n a has never dealt w i t h successfully. For a leadership com­ m i t t e d to d e n y i n g political rights, m o d e r n infrastructure is their w a y of ex­ tending a realistic p r o m i s e of prosperity to tens of thousands of smaller cities and towns in the central and western regions, and taking some of the steam out of w h a t could become explosive resentments. In the same decade, C h i n a also w i l l have to b u i l d a social welfare system that can p r o v i d e some form of retirement security, health care, and unem­ p l o y m e n t compensation. T h e s e systems can also help bind hundreds of m i l ­ lions of ordinary Chinese m e n and w o m e n , dislocated and disoriented by the waves of radical changes e m a n a t i n g from B e i j i n g , to the state directing those changes. In t i m e — n o t m u c h t i m e , j u d g i n g by the r e c o r d — C h i n a w i l l i m ­ port the services of western consulting firms and governments to help estab­ lish those systems. In 2 0 0 5 , more than 4 , 5 0 0 foreign joint-venture projects in social services and health care were already underway, w i t h more than $ 8 billion in foreign investment. Moreover, for nearly a decade C h i n a has invited western officials to visit and tutor t h e m about these systems. I k n o w this firsthand. In 1 9 9 9 , w h e n I was U n d e r Secretary of C o m m e r c e for E c o n o m i c Affairs, I was i n v i t e d to B e i j i n g along w i t h J a n e t Yellen, then chair of President Clinton's C o u n c i l of E c o n o m i c A d v i s o r s , and R o g e r Fergu­ son, the vice chairman of the Federal Reserve. W e spent three days shuttling from one g r a y g o v e r n m e n t b u i l d i n g to another, talking about different ways g o v e r n m e n t s can support people w h e n they g r o w old or lose their jobs. B e ­ hind the official Chinese rhetoric of "market-based socialism," one after another official asked m a n y of the basic questions of western p u b l i c adminis­ tration and finance. W h a t do y o u do about pensions for people w h o can't or w o n ' t w o r k ? H o w can y o u pay for all of it w i t h o u t stunting g r o w t h ? W h a t role can local g o v e r n m e n t s play? T h e m e e t i n g s culminated w i t h an audience w i t h the p r i m e minister in a great, g i l d e d hall in the w a l l e d compound where China's leadership lives and w o r k s , on the shore of a private lake in the m i d ­ dle of B e i j i n g . A s the most senior v i s i t i n g official, Dr. Yellen sat on a raised platform w i t h the p r i m e minister, w h i l e the rest of us sat in chairs arranged by rank. W h i l e y o u n g w o m e n in long silk dresses served tea, the p r i m e m i n ­ ister spoke of the tasks of economic modernization w i t h o u t a m u r m u r about socialism. In t r y i n g to accomplish all this, C h i n a has t w o incalculable advantages.

THE GLOBAL BLUEPRINT

39

First, here, too, globalization is w o r k i n g in China's favor. W h e n E n g l a n d , Germany, France, and the U n i t e d States took on similar challenges, they each largely started from scratch. E i t h e r the task had never been a t t e m p t e d before, or they thought they had little to learn from those w h o had already done it. C h i n a is modernizing itself in a t i m e of far-flung w o r l d w i d e business net­ works and elaborate g l o b a l g o v e r n m e n t a l relationships. O v e r the next fifteen years, C h i n a w i l l choose the best of the West's multinational corporations to build and initially manage its new m o d e r n systems, w h i l e its o w n domestic companies become their suppliers and eventually their competitors. C h i n a has another i n e s t i m a b l e a d v a n t a g e . U n l i k e m o s t d e m o c r a t i c soci­ eties, China has not only political leaders utterly c o m m i t t e d to radical change, but a unique consensus to carry it out by a l m o s t e v e r y o n e w h o c o u l d affect its success. T h i s goes w e l l b e y o n d the absence of the o p p o s i t i o n parties and private interest g r o u p s that usually s t y m i e large changes e v e r y w h e r e else. In t a k i n g on the enormous tasks i n v o l v e d in its l i g h t n i n g - f a s t m o d e r n i z a ­ tion, C h i n a so far has evidenced extraordinary u n i t y of purpose and d i s c i ­ pline, and an astonishing absence of hesitation, b a c k e d b y the p o w e r and apparatus of the Party. In 2 0 2 0 , the United States w i l l still be the world's sole m i l i t a r y super­ power, w i t h no g l o b a l near peer. B u t globalization w i l l also support China's geopolitical ascendancy. N o t only is it generating the resources for C h i n a to build a modern m i l i t a r y alongside a m o d e r n economy, it also is extending China's influence into the economies of every other major market-based coun­ try. T h e political circles of those countries w i l l always attend respectfully to those w h o can affect their economies. C h i n a w i l l have another t r u m p card to play in geopolitics over the next fif­ teen years: A single superpower w i t h no near peer makes e v e r y b o d y else ner­ vous. F r o m Paris and M o s c o w to D e l h i and T o k y o , whenever their interests are implicated by a conflict or p r o b l e m somewhere else, it w i l l raise the ques­ tion of what Washington will do and how they m i g h t influence it. O n l y rarely w i l l any country acting alone be able to pressure the U n i t e d States in m e a n ­ ingful ways. B u t w i t h America's and China's deepening i n v o l v e m e n t in each other's economic development, a c o m m o n position by E u r o p e and C h i n a , or Russia and China, or J a p a n and C h i n a , w i l l m a k e W a s h i n g t o n at least listen. T h i s all suggests that the central geopolitical development of the next fifteen years w i l l be the e v o l v i n g character of the U . S . - S i n o relationship. W h i l e Europe, J a p a n , and R u s s i a all w i l l try to influence it as problems d i c ­ tate, the U n i t e d States w i l l always be on the lookout for either cooperation w i t h or containment of China's rising power, in m a n a g i n g such inevitable global issues as the world's g r o w i n g dependence on oil from the world's most

40

FUTURECAST

unstable region, the threat of nuclear terrorism, and the financial crises that are still part of the D N A of g l o b a l capital markets. A t times, the United States w i l l almost certainly treat C h i n a as a threat, an attitude evident in the fast-growing numbers of U . S . m i l i t a r y installations on the soil of many of China's neighbors. A s America's rival or its partner, China's g r o w i n g wealth and p o w e r w i l l exact the greatest price that a sole superpower can p a y — i t s a c k n o w l e d g e m e n t of China's influence and desires, at least across Asia. There's no w a y to opt out of this future. N o country has the freedom to de­ cide that they just don't like w h a t its demographics, globalization, and the new shape of geopolitics hold for them. O p t i n g out w i l l be no more of an op­ tion this t i m e than it was in the t i m e of mass industrialization and the rise of a militarist G e r m a n y . A s in that period, every country w i l l eventually figure out h o w it w i l l adapt to these forces. N o t h i n g on the horizon can substan­ tially alter or offset the fundamental forces poised to slow upward m o b i l i t y for hundreds of millions of people across E u r o p e , J a p a n , and even the United States. N o decision or event in the next fifteen years can undo the fastg r o w i n g pool of educated labor in the world's large, fast-developing coun­ tries, a r m e d w i t h the capital and technologies of the g l o b a l companies of A m e r i c a , E u r o p e and J a p a n . A n d over the same period, only the most ex­ treme and historic events could unravel the m i l i t a r y and economic super­ p o w e r of the U n i t e d States and the ascendancy of Chinese wealth and influence.

CHAPTER TWO

THE DEMOGRAPHIC EARTHQUAKE

THE BIG PICTURE FOR

A S L O N G as nearly anyone today can remember, most advanced economies

have g r o w n sufficiently to enable most of their people to steadily improve their lot in life. In recent decades, the government of every advanced country also has credibly promised its people that when they retire, their basic living standard won't decline dramatically. In both cases, basic demographics have played a key role, steadily expanding the workforce that creates wealth and pays the taxes that support others in retirement. Y e t these demographics have been changing in ways which over the next ten to fifteen years w i l l significantly affect the liv­ ing standards and retirement security of hundreds of millions of people. For

hundreds of years, in v i r t u a l l y every country, each generation was

only m o d e s t l y larger or smaller in size than the ones that came r i g h t before and after it. U n t i l the second half of the t w e n t i e t h century, history records only a handful of cases in w h i c h extraordinary e v e n t s — a terrible p l a g u e or war,

or a large w a v e of i m m i g r a n t s — a f f e c t e d the relative size of one genera­

tion in a meaningful way, and then only in one or t w o countries. Since the B l a c k D e a t h 6 5 0 years a g o , there were no instances of numerous societies dealing w i t h a significantly smaller generation at the same t i m e . A n d there were no recorded instances at all of countries on every continent suddenly producing, in sequence, "boomer" and "bust" generations significantly larger and smaller than the ones preceding t h e m .

41

42

FUTURECAST M o d e m g o v e r n m e n t s and societies naturally approach m a n y of their basic

responsibilities w i t h this enduring pattern in m i n d . C o m m u n i t i e s build schools and roads to last for decades, confident that there w i l l be children to fill t h e m and cars to ride on t h e m t w e n t y and forty years from now. Every m o d e r n country also has assumed r o u g h l y stable population g r o w t h in fash­ ioning its basic approaches for p r o m o t i n g jobs and g r o w t h and providing social insurance. T h i s pattern has been broken on a historically unprecedented scale over the last t w o generations. First, for a variety of reasons in different societies, a boomer generation m u c h larger and longer l i v i n g than the one that produced it has appeared in country after country, followed by a baby bust generation significantly smaller, not only than the one that produced it but also, in terms of birthrates, smaller than any other in centuries. T h e s e boom and bust g e n ­ erations have arisen serially, v i r t u a l l y everywhere in the w o r l d except subSaharan Africa and parts of the M i d d l e East. T h e s e great d e m o g r a p h i c changes w i l l help shape the economic and social development of every nation over the next ten to fifteen years. A s baby busters age into full adulthood, their reduced numbers w i l l slow the g r o w t h of their nations' labor forces or even cause some of them to contract. A l m o s t inevitably, this w i l l reduce their nations' saving and investment rates and, w i t h them, their capacity to g r o w economically. A s the boomers age into retirement over the same years, their disproportionate numbers w i l l strain government fi­ nances around the w o r l d , producing wrenching political debates and divisions over raising taxes on financially strapped w o r k i n g families, cutting basic pen­ sion and health-care benefits for tens of millions of elderly people, and much more. B e h i n d the dry population data, these demographic waves w i l l vitally affect the comfort and security of most people's lives. T h e s e unchangeable developments w i l l especially affect people in J a p a n and m u c h of E u r o p e , because their baby bust generations are so small that their labor forces w i l l b e g i n to shrink, year after year. In g o o d times, their economies w i l l be able to expand by perhaps i to 2 percent a year, leaving tens of m i l l i o n s of w o r k i n g families w i t h little prospect of i m p r o v i n g their lot. T h e social and political effects m a y be just as great. O p t i m i s m and broad p u b l i c support for consensus politics typically occur in places w i t h g r o w i n g economies. In m a n y countries in E u r o p e , those critical social attitudes could slowly leach away, leaving the disappointment and anger evident recently a m o n g economically marginalized ethnic minorities in France, D e n m a r k , and G e r m a n y . A n d w h e n these economies sputter into recession from t i m e to t i m e , as economies always do, the crosscurrents of globalization could drive d o w n the incomes of the majority of their people w i t h a power not seen since

THE DEMOGRAPHIC EARTHQUAKE

43

the early postwar years. O v e r the next ten to fifteen years, millions of average families in Lyons, M u n i c h , Turin, Osaka, and a hundred other places, w i l l likely find they can no longer afford the normal comforts of middle-class life. Millions of their children m a y question or reject their parents' values of hard w o r k and p l a y i n g by the rules, even more than m a n y y o u n g people do as a matter of course. If history is any g u i d e , these economic strains w i l l also increase the incidence of broken m a r r i a g e s , depression, c r i m e , and a host of other personal and social p r o b l e m s — a n d there w i l l be little that anyone can do to materially change their circumstances. T h e political and social stresses w i l l be particularly severe in Italy, G e r ­ many, France, and other countries that w i l l have to s t r u g g l e w i t h the soaring costs of their boomers retiring into the world's most generous p u b l i c pension systems. T h e options for their leaders w i l l come d o w n to raising taxes on strapped and discontented w o r k i n g baby busters, disappointing h u g e n u m ­ bers of elderly boomers by cutting their benefits, or t r y i n g to protect their p o ­ litical careers by borrowing tens of billions of euros and tens of trillions of y e n — a n d further hamstringing their country's economic g r o w t h . S o m e E u r o ­ pean countries w i l l escape the worst of it. Ireland w i l l avoid most of these problems and stresses, based on the country's strong i m m i g r a t i o n , relatively high birthrates through its baby bust, comparatively small public pension benefits, and Europe's best-performing economy. T h e dissatisfaction of Britons also should be less severe than what awaits G e r m a n s , Italians, and French. N o t only are Britain's demographics a little less skewed, but the legacy of deep cuts in state pensions put in place a generation ago w i l l reduce the financing and political problems of its boomers' retirement. B u t those deep cuts in pension payments w i l l cause their own problems, because as British retirement bene­ fits slowly contract over the next ten to fifteen years, British leaders w i l l have to either raise taxes and public debt to sweeten t h e m — t h e likely course—or consign millions of elderly Britons to retire in poverty. America's demographic challenges w i l l be less dire than those facing most other advanced countries. America's relatively h i g h birthrates p r o d u c e d a larger baby boom than those seen in E u r o p e and J a p a n ; but a less severe subse­ quent decline in birthrates and strong i m m i g r a t i o n also produced a relatively larger baby bust. N e w i m m i g r a n t s account for more than half of the g r o w t h of the U . S . labor force since 1 9 9 0 ; and a m o n g all the major advanced coun­ tries, only the U . S . labor force w i l l continue to g r o w at decent rates over the next ten to fifteen years. T h e political strains from the boomers' retirement w i l l also be less severe in the U n i t e d States, because there are more w o r k i n g age

people to pay for the pensions and because America's elderly c l a i m

smaller public pensions than most European seniors. Serious p r o b l e m s for the

44

FUTURECAST

U.S.

social security system w i l l eventually emerge, but not for a decade or

more after 2 0 2 0 . A s w e w i l l see later, the area where demographics is likely to disrupt U . S . prosperity and politics in c o m i n g years is health care for its el­ derly. In the d e v e l o p i n g w o r l d , the outlook is most favorable for workers in the East A s i a n T i g e r s , where broad economic reforms and investments in educa­ tion enabled their b o o m generations to b u i l d the richest economies their peo­ ple

have ever k n o w n . B y contrast, across m u c h of Latin A m e r i c a the boomer

b u l g e s could produce profound economic and political strains, because their g o v e r n m e n t s largely failed to reform their economies in ways that could cre­ ate jobs for their b u m p e r generations and neglected the educational invest­ ments that could have m a d e their boomer cohorts into productive assets. China's population is a g i n g faster than any other in the w o r l d , including a baby bust w i t h the sharpest fall in birthrates anywhere; but some unique fea­ tures still produce a largely rosy outlook. W e l l before 2 0 2 0 , a boomer gener­ ation larger than the c o m b i n e d populations of the U n i t e d States and Europe, and the most extensive and relentless modernization p r o g r a m ever seen, w i l l m a k e China's economy the second-largest in the w o r l d . Moreover, much of the i m p a c t of China's severe baby bust should be offset by the country's h u g e p r o d u c t i v i t y leaps, as its economic reforms m o v e hundreds of millions of peo­ ple

from eighteenth-century agriculture to twenty-first-century industry and

c o m m e r c e . Unless China's social and political cohesion begins to unravel, its extraordinary economic progress w i l l take m u c h of the economic sting out of its p l u m m e t i n g birthrates. B u t China's demographics waves could still pro­ duce considerable social and political stresses. T h e leadership's decision to un­ ravel most p u b l i c pension and health-care guarantees in the 1 9 8 0 s and 1 9 9 0 s to help finance modernization w i l l g i v e rise to t w o great, open questions for the next generation of leaders—namely, w i l l China's boomers accept impov­ erished retirements as their country g r o w s richer, or w i l l the country's busters accept slower g r o w t h to finance the gradual restoration of pensions and health care for their parents and grandparents? W i t h the prospect of nearly 1 7 0

mil­

lion elderly Chinese by 2 0 2 0 — l a r g e r than the current populations of all but four c o u n t r i e s — C h i n a c o u l d be forced to r e b u i l d some semblance of those social supports or face social unrest.

THE DEMOGRAPHIC WAVES IN DIFFERENT COUNTRIES U n t i l the early eighteenth century, the world's population had g r o w n slowly but steadily for hundreds of years. It took the three centuries from 1 5 0 0 to

THE DEMOGRAPHIC EARTHQUAKE

45

1 8 0 0 for the global population to double. B u t starting in the early 1 8 0 0 s , population g r o w t h accelerated, especially in the industrializing countries; and the n u m b e r of people on the planet increased by more than 7 5 percent in one hundred years. In the typical pattern, societies that had been organized around large families and short life spans began to change as i m p r o v e m e n t s in sanitation and p u b l i c health enabled more children to survive their infancies and childhoods, and enabled more adults to live longer. F a c i n g longer lives, more people began to demand education so they could earn more and save for large purchases, even possibly for retirement. Starting in E u r o p e and U n i t e d States, this pattern became an essential part of the transition to m o d e r n i t y almost everywhere. B y the early twentieth century, life expectancy had risen sharply in the West; but because the changes took several generations to un­ fold, it didn't initially produce a boomer generation. In the second half of the twentieth century, other developments p i l e d on to produce those boomer generations not only in the West, but in most coun­ tries. In the industrialized nations, birthrates rose sharply in the early postWorld W a r I I period, in part an echo of a m i n o r baby b o o m that had followed World W a r I and the 1 9 1 8 — 1 9 1 9 g l o b a l influenza e p i d e m i c , and in part a re­ sult of decisions by millions of couples to delay starting their families d u r i n g the Great Depression and W o r l d W a r I I . Across m u c h of the d e v e l o p i n g world, birthrates didn't rise after the Second W o r l d W a r ; but like the W e s t in the 1 8 0 0 s , advances in sanitation and p u b l i c health sharply reduced death rates for infants and children. B u t in contrast to nineteenth-century E u r o p e and A m e r i c a , where gradual i m p r o v e m e n t s in sewage systems and p u b l i c health produced gradual increases in population, m a n y d e v e l o p i n g nations in the second half of the twentieth century replicated m o d e r n European and A m e r i c a n sanitation and health systems in a decade or less, p r o d u c i n g large and abrupt increases in the size of their first and second p o s t w a r generations. For one hundred and fifty years before the late-twentieth-century baby boom, Western scientists and social critics worried about w h a t w o u l d happen to a country if its population suddenly g r e w rapidly. F r o m w h a t w e now know, most of them g o t it w r o n g . B e g i n n i n g w i t h the g l o o m - s a y i n g T h o m a s Malthus in the late eighteenth century, the pessimists

figured

that fast-

expanding populations w o u l d send most places into d o w n w a r d spirals, as all the new bodies to feed, clothe, and keep w a r m c o n s u m e d its resources or forced everyone to abandon their professions and produce those necessities. T h i s dark v i e w hugely underestimated the i n g e n u i t y of people in most soci­ eties, especially their ability to figure out new w a y s to expand harvests, fuel supplies, and most everything else their country m i g h t n e e d — o r in a g l o b a l age, their ability to adapt successful strategies from other places. It w o u l d be

46

FUTURECAST

unnecessary to mention the M a l t h u s i a n v i e w today, but for the fact that as recently as the 1 9 7 0 s , the U n i t e d N a t i o n s Population C o u n c i l , the U . S . N a ­ tional A c a d e m y of Sciences, and blue ribbon commissions in Europe and A m e r i c a solemnly predicted that baby booms w o u l d drastically slow g r o w t h almost everywhere. A n opposite and m u c h sunnier v i e w was first offered by N o b e l Laureate S i ­ m o n K u z n e t s and D a n i s h economist Ester B o s e r u p : A n expanding popula­ tion naturally leads to progress and g r o w t h , not only because pressures on resources focus ingenious engineers and scientists on the p r o b l e m , but even more because a larger population means more smart and motivated people generally; and because larger societies can take advantage of more economies of scale. T h i s v i e w didn't turn out to be w r o n g — i t just doesn't always hap­ pen. B a b y booms hit most of L a t i n A m e r i c a in the 1 9 6 0 s and 1 9 7 0 s , w h i c h by this t h i n k i n g should have b r o u g h t economic booms there in the late 1 9 8 0 s and 1 9 9 0 s . In fact, L a t i n A m e r i c a n economies contracted by almost 1 percent a year t h r o u g h the 1 9 8 0 s and g r e w just 1 . 6 percent a year in the 1 9 9 0 s . It takes more than a larger n u m b e r of smart people to deal w i t h the demands of a fast-growing p o p u l a t i o n — t h e y have to become w e l l educated and trained, e v e r y b o d y has to have decent health care, and a country's leaders have to support the changes that can relieve the problems. T h e v i e w that makes the most sense of what has actually happened is that a country w i t h a fast-growing population can progress and g r o w if it takes par­ ticular steps to help m a k e it so. A s the n u m b e r of y o u n g people increases, for example, social investments in health and education, and a little later, job opportunities, too, have to increase at least as much. Families, businesses, and g o v e r n m e n t have to save more of what they earn or collect in taxes, so they can pay for more teachers, schools, hospitals, clinics, and doctors. T h e country has to continue to save more as its large generations become old enough to work, so it can finance the p u b l i c investments in roads and telecommunications, and the business investments in technologies, factories, and office buildings that all those new workers w i l l need to become productive. In countries that favor markets like the U n i t e d States, or to a lesser degree much of Europe, tax poli­ cies changed to encourage the higher savings needed to expand private invest­ ment. In places more skeptical of markets, including most of A s i a in the 1 9 6 0 s and 1 9 7 0 s , w h e n their baby boomers entered their workforces, m u c h of the in­ vestment came in large g o v e r n m e n t subsidies enhanced by industrial policies. In a b i g w o r l d w i t h countless national differences, some countries are al­ w a y s ahead of others in d e v e l o p i n g the technologies and business methods that can help turn a baby b o o m into widespread prosperity. Since most coun­ tries n o w share access to each other, the rest can try to g e t the companies that

THE DEMOGRAPHIC EARTHQUAKE own

47

the technologies and the people w h o k n o w how to use t h e m to invest and

locate there—one of the core d y n a m i c s of m o d e r n globalization. I f a d e v e l o p ­ ing society has educated its boomers, it can offer foreign companies large numbers of skilled workers w i l l i n g to w o r k for relatively l o w w a g e s . It not only has to allow those foreign companies to invest there; it also must protect their property and ideas and create a stable economic and political environ­ ment that reduces the risk that the investments w i l l disappear in a revolu­ tion, hyperinflation, or deadly e p i d e m i c . W h e r e all that has h a p p e n e d — m o s t notably E a s t A s i a since the 1 9 7 0 s — baby booms helped produce economic booms. W h e r e it didn't c o m e to pass—across m u c h of Latin A m e r i c a , parts of Eastern and Central E u r o p e , the Soviet Union, and most of A f r i c a — b u m p e r generations have b r o u g h t on the economic slowdowns or worse that Malthusians expected. W h e r e it didn't happen at first and then d i d — m o s t notably in C h i n a and I n d i a — l o n g peri­ ods of economic stagnation have been followed b y great spurts of g r o w t h . W h e n baby booms arrived in the world's more advanced countries, they al­ ready had the basic social provisions that could turn their b u m p e r genera­ tions into national economic assets. In J a p a n , G e r m a n y , France, and the other major European societies, i m p r o v e m e n t s in education and health care were part of the rebuilding process that followed the Second W o r l d War, and to­ gether w i t h the m a t u r i n g of their o w n boomer generations into the w o r k ­ force, these reforms played a part in their "economic miracles" in the 1 9 6 0 s and 1 9 7 0 s . T h e U n i t e d States also played a singular role as a tacit sponsor of boomer-generation prosperity in both other advanced economies and m a n y developing nations. W h i l e E u r o p e was r e b u i l d i n g itself, A m e r i c a developed new technologies and business methods that helped jump-start m u c h of both that rebuilding and the East A s i a n miracles. In the 1 9 7 0 s and 1 9 8 0 s , J a p a n and G e r m a n y also became sources of g r o w t h - e n h a n c i n g technologies and business methods for the rest of the w o r l d — u n t i l the 1 9 9 0 s , w h e n J a p a n ' s d o g g e d industrial policies and G e r m a n y ' s l u m b e r i n g welfare state c a u g h t u p w i t h them. B y then, A m e r i c a n companies and financial institutions were a g ­ gressively expanding their foreign direct and financial investments, m a k i n g the United States the leading foreign agent of the recent turbocharged indus­ trialization of C h i n a , K o r e a , and others. In other ways as w e l l , A m e r i c a has been the world's indispensable econ­ omy

throughout the d e m o g r a p h i c w a v e s of the last half-century. Successful

developing economies w i t h b u l g i n g baby b o o m s t y p i c a l l y have p r o d i g i o u s saving rates that can fund the additional p u b l i c education, p u b l i c health, and native businesses they need to m a k e real progress. T h e flip side of h i g h national saving is l o w national c o n s u m p t i o n , so all those workers in A s i a and

48

FUTURECAST

e v e r y w h e r e else have had to sell their g o o d s to s o m e b o d y else. F r o m the 1 9 5 0 s , the U n i t e d States p r o g r e s s i v e l y and sometimes unilaterally opened itself to foreign i m p o r t s , p r o v i d i n g the consumers that m a n y other countries needed to k e e p their i n v e s t m e n t - l e d economies g r o w i n g . A s it actually hap­ p e n e d , A m e r i c a opened itself to foreign imports not because its economists believe in it, b u t because U . S . presidents from T r u m a n to Carter offered to p r o v i d e a rich foreign m a r k e t to any country that w o u l d a l i g n itself w i t h the U n i t e d States in the cold war. For nearly forty years, this geopolitical trade p o l i c y largely isolated the Soviet bloc and its allies India, C h i n a , C u b a , and N o r t h K o r e a from the w e a l t h and technological advances of the West, deny­ i n g t h e m critical resources for their b o o m generations. W h i l e m a n y thinkers have pondered the impact of a fast-growing popula­ tion, far fewer t h o u g h t m u c h about w h y birthrates m i g h t suddenly slow down s h a r p l y — u n t i l it began to happen around the world. It turns out that many of the same factors that drove u p the size of the first post—World W a r I I genera­ tion drove d o w n the size of the second and third. A s infant and childhood mortality rates fell in the developing nations of A s i a and the Soviet Union, tens of millions of couples realized they could achieve the family size they w a n t e d by having fewer children—and birthrates began to fall. In 1 9 5 0 , a typical T h a i or K o r e a n w o m a n had six children; today, the average number is t w o . D e c e n t sanitation and p u b l i c health care not only reduced infant and childhood disease and death, they also extended the average life span of adults. In A s i a , life expectancy rose from forty-three years in 1 9 5 0 to seventy-two years today. In Western E u r o p e , J a p a n , and the United States, where those basic improvements were ancient history, new medical technologies, income gains, and lifestyle changes also reduced death rates in m i d d l e age and early re­ tirement years. F r o m i 9 6 0 to 2 0 0 0 , life expectancy m o v e d up seven years in the U n i t e d States, nine years in France, and thirteen years in J a p a n ; and much of those increases came from the longer lives of those aged fifty and older. N o r is this process over. A s pediatrics and childhood immunizations developed fully in the first t w o decades of the baby b o o m — b r i n g i n g down childhood m o r t a l i t y — t h e boomers' retirement years could see breakthroughs in geron­ tology, as w e l l as in the conquest of a n u m b e r of adult diseases. M a n y scientists believe that w i t h i n the next twenty years, current research lines in biotechnol­ o g y and genomics w i l l lengthen average life spans by another decade. L o n g e r life spans have contributed to the s l o w d o w n in birth rates. A s most people became accustomed to the likelihood of l i v i n g into old age, their eco­ n o m i c t i m e horizons lengthened. F a c i n g a longer future, people around the w o r l d increased their saving and spending on education—and higher savings and more education, along w i t h technological progress, promoted greater

49

THE DEMOGRAPHIC EARTHQUAKE

business investment. T h e end result was greater economic opportunities, es­ pecially for m u c h of the world's w o m e n to w o r k outside their homes. F r o m 1950

to 2 0 0 0 , the share of adult A m e r i c a n w o m e n w o r k i n g j u m p e d from 3 7

to 7 7 percent; and the increases in the n u m b e r of w o m e n w o r k i n g in E u r o p e ­ an countries were nearly comparable. W h e n w o m e n have jobs to g o to they tend to have fewer children—especially w h e n inexpensive birth control is also available. T h e first practical oral contraceptive was developed in the 1 9 5 0 s by Dr. G r e g o r y Pincus; and by the 1 9 7 0 s , birth control p i l l s , I U D s , and early term abortions all were w i d e l y available and used across E u r o p e and the United States. A n d w i t h concerns in the 1 9 7 0 s about the "limits to g r o w t h " in the absence of population controls, the U n i t e d N a t i o n s spread the gospel and technologies of family p l a n n i n g to m u c h of the rest of the w o r l d . J u s t as the baby boom w a v e m o v e d from East A s i a and J a p a n to Western Europe and the U n i t e d States, and then to C h i n a , Latin A m e r i c a , and Eastern and Central E u r o p e , the subsequent baby busts followed the same path. T o ­ day,

the decline in birthrates is w e l l underway in C h i n a , South Central A s i a ,

and Latin A m e r i c a , followed more recently by India and B a n g l a d e s h . N o r t h Africa and the M i d d l e East achieved longer life spans more recently, and if the rest of the world's experience is a decent g u i d e , their birthrates w i l l b e g i n to fall by the end of this decade. Two

places stand apart from these historic d e m o g r a p h i c shifts. A m o d e r n

baby boom has never developed in sub-Saharan Africa, because i m p r o v e m e n t s in basic health conditions and education haven't happened on a w i d e scale, and famines, wars, and epidemics of A I D S and other deadly diseases continue to keep life expectancy short. T h e other special case is R u s s i a . T h e Soviet Union had a fairly typical postwar baby b o o m , followed b y a normal baby bust in the 1 9 7 0 s and early 1 9 8 0 s . A brief increase in birthrates followed in the late 1 9 8 0 s , but the birthrate p l u m m e t e d again, b y half, in the 1 9 9 0 s . In the last decade, the Russian population has fallen by 3 m i l l i o n and is ex­ 1

pected to fall by another 3 m i l l i o n in the next d e c a d e . Moreover, life e x ­ pectancy a m o n g R u s s i a n m e n began to decline in the 1 9 6 0 s , reaching just fifty-nine years by 2 0 0 3 , lower than m a l e life expectancy in countries such as E g y p t , G u a t e m a l a , and V i e t n a m . T h e s e trends accelerated in the 1 9 9 0 s , in­ cluding sharp increases in infant and childhood death rates, as p u b l i c health spending p l u m m e t e d to the levels of the world's poorest countries: B y 2 0 0 3 , per capita spending on health in R u s s i a was just 3 percent of per capital 2

health spending in the U n i t e d States. T h e combination of l o w birthrates and rising death rates has made R u s s i a the first instance in m o d e r n times of a d e ­ veloped country where life expectancy and total population are both falling sharply.

50

FUTURECAST W h i l e this boom-and-bust pattern is evident nearly w o r l d w i d e , many

countries have special conditions and attitudes that create notable variations in the intensity of their d e m o g r a p h i c waves. T h o s e variations w i l l have large consequences for the fates of societies over the next ten to fifteen years. First, t h r o u g h both baby b o o m and baby bust, A m e r i c a n s have produced comparatively more children than most Europeans or Japanese. T h r o u g h o u t the b o o m decades of the 1 9 5 0 s and 1 9 6 0 s , A m e r i c a n birthrates were almost 5 0 percent h i g h e r than the S w e d e s , r o u g h l y 3 0 percent higher than Britons or G e r m a n s , some 2 0 percent h i g h e r than the French or Italians, and 1 6 per­ cent h i g h e r than the J a p a n e s e . In the bust years of the 1 9 7 0 s and 1 9 8 0 s , birthrates fell nearly as m u c h in A m e r i c a as across E u r o p e — b u t from its m u c h h i g h e r b o o m rates. (Sweden is an exception to this pattern,

starting

w i t h Europe's lowest birthrates d u r i n g the b o o m and then declining less dur­ i n g its baby bust.) T h e result is that A m e r i c a n birthrates during the baby bust years were still 4 0 percent h i g h e r than the G e r m a n s , nearly 2 5 percent h i g h e r than the Italians or Swedes, 1 5 percent higher than the British, and 6 to 7 percent h i g h e r than the French or J a p a n e s e . O n top of consistently h i g h e r birthrates, the U n i t e d States also has consistently permitted

much

greater i m m i g r a t i o n . I n recent years, the net m i g r a t i o n rate to A m e r i c a has been almost ten times h i g h e r than J a p a n , four times h i g h e r than France, dou­ ble that of Italy and B r i t a i n , and 5 0 percent h i g h e r than Germany. B e y o n d the numbers, i m m i g r a t i o n has had m u c h different effects in E u ­ rope than in the U n i t e d States. A significant share of America's recent i m m i ­ grants are people from quite far a w a y — n e a r l y one-third come from A s i a or E u r o p e — a n d they often b r i n g h i g h levels of education and training. T h e other two-thirds c o m e from n e i g h b o r i n g countries, m a i n l y M e x i c o and C e n ­ tral A m e r i c a , and generally fill low-level jobs in agriculture, hotels, restau­ rants, and personal services that m a n y A m e r i c a n s disdain. B y contrast, nearly 9 0 percent of i m m i g r a n t s in E u r o p e come from E u r o p e , m a n y from Islamic countries, and compete for jobs that less-educated y o u n g Europeans are happy to take for all the benefits and guarantees they provide. Across Europe, i m m i g r a t i o n is a deeply passionate issue m i x e d u p w i t h religion and fears of t e r r o r i s m , and its actual n u m b e r s contribute little to most European economies. I m m i g r a t i o n is certainly controversial in the United States, too, but the question for most A m e r i c a n s is how best to integrate the millions of foreign-born people l i v i n g here n o w — n o t how best to send them back to where they came from. T h e next generation w i l l not bail out the baby busters in J a p a n and E u ­ rope, because their l o w birthrates already have entered a second generation. In some cases, birthrates are still declining, reducing the numbers of future

51

THE DEMOGRAPHIC EARTHQUAKE

mothers as w e l l as future children. A t current trends, the U n i t e d N a t i o n s projects that Western E u r o p e w i l l have some 2 m i l l i o n fewer children under age fourteen in 2 0 2 0 than in 2 0 0 5 — a 7 percent decline. T h e r e are differences among these nations, but the bottom line is similar. France and the U n i t e d K i n g d o m are expected to have 3 to 4 percent fewer children in 2 0 2 0 than in 2 0 0 5 , w h i l e the n u m b e r of G e r m a n and J a p a n e s e children w i l l s l u m p by about 9 percent. T h e worst case is Italy, where the n u m b e r of children w i l l fall by more than 1 m i l l i o n , or over 1 2 percent, between now and 2 0 2 0 . A n exception to this second-generation pattern is S w e d e n , w h i c h should have roughly the same n u m b e r of children in 2 0 2 0 as today. The

United States, however, remains unusually fecund. H e r e , the baby

bust has b e g u n to g i v e w a y to an echo of the baby b o o m , due in large part to the h i g h birthrates of millions of

first-generation

i m m i g r a n t s . In 2 0 2 0 ,

A m e r i c a should have some 5 m i l l i o n more children than it does today, an in­ crease of more than 8 percent. B u t it is Ireland that stands out most a m o n g the advanced countries. Irish birthrates d u r i n g the baby b o o m years nearly equaled America's, and then declined m u c h less in the 1 9 7 0 s and 1 9 8 0 s . Moreover, Ireland has attracted i m m i g r a n t s in recent years at a rate 4 0 per­ cent greater than even the U n i t e d States. M a n y are Irish-born, returning now that the country's per capita income is 1 2 percent h i g h e r than France or G e r ­ many and 2 3 percent higher than the E U average. M a n y others are educated Americans or Britons, m o v i n g there to w o r k for foreign companies or start their own businesses. P u t it all together, and Ireland's strong i m m i g r a t i o n and birthrates are projected to produce almost 1 2 percent more children in 2 0 2 0 than today. C h i n a represents

a national

extenuation

of m a n y of these

patterns.

N o w h e r e was the baby boom larger than in C h i n a , because nowhere else was the shift more sudden from a b a c k w a r d country of large families w i t h h i g h infant and childhood death rates to a m o d e r n i z i n g nation w i t h decent sanita­ tion, public health care, and the fast-rising life expectancy and childhood sur­ vival rates that accompany them. T h r o u g h the 1 9 5 0 s and 1 9 6 0 s , as C h i n a brought basic medical care and sanitation to its agricultural c o m m u n e s and fast-growing cities, its birthrate remained p r e m o d e r n — m o r e than double those of the United States and E u r o p e d u r i n g their baby booms. T h e result was

a Chinese boomer generation born from the m i d - 1 9 5 0 s to the m i d - 1 9 7 0 s

that was more than twice the size, relative to total population, of any ad­ vanced country. Moreover, nowhere else did childbearing fall more sharply than in China. Birthrates began to drop in the late 1 9 7 0 s and 1 9 8 0 s in the pattern typical of societies once parents recognize that they can achieve the family size they want

52

FUTURECAST

w i t h fewer births. China's birthrate fell initially by half, to the rates of the U . S . baby boom of the 1 9 5 0 s and 1 9 6 0 s . B y the 1 9 9 0 s , C h i n a achieved genuine baby-bust rates, as the economic and social reforms following the Cultural R e v o l u t i o n and Mao's death brought wide-scale education for w o m e n , w i d e ­ spread birth control, and new job prospects for w o m e n unimaginable a decade earlier. W i t h all these factors in play, official policies penalizing Chinese w o m e n for having more than one child probably played a less central role than is usually assumed in the West, since it largely reinforced the choices that tens of millions of Chinese families were m a k i n g already. B y the last half-decade of the twentieth century, China's birthrate fell below that of the United States and Ireland; and today the fertility rate of Chinese w o m e n (the average num­ ber of children born to a w o m a n over her lifetime) is 1 . 7 . That's lower than A m e r i c a , J a p a n , and most of Europe; and in B e i j i n g and Shanghai, the fertility rate is barely 1 . 0 . T h e decline in Chinese births is so sharp that according to U N projections, the country is expected to have 5 5 million fewer children in 2 0 2 0 than in 2 0 0 5 , or a decline of more than 1 3 percent. C h i n a also has undergone far-reaching changes at the other end of the age s p e c t r u m . Since 1 9 7 0 , life expectancy has shot u p from forty-one years to s e v e n t y - t w o years, so it's now just six years less than the U n i t e d States and e i g h t years less than E u r o p e . In fact, C h i n a w i l l age faster over the next fif­ teen years, and b e y o n d , than any other country in the w o r l d . H o w e v e r , these h u g e d e m o g r a p h i c changes w i l l l i k e l y have different effects on China's eco­ n o m i c and political p a t h — l a r g e l y more positive ones—than they w o u l d in a m o r e advanced country. China's double-sized baby b o o m so far has well suited the country's turbocharged modernization policies, p r o v i d i n g tens of m i l l i o n s of reasonably s k i l l e d workers for tens of thousands of new domestic and f o r e i g n - o w n e d enterprises. A s C h i n a becomes a fully industrialized na­ tion w i t h m o d e r n agriculture over the next ten to fifteen years, its baby bust should be sufficient to meet the m o r e s l o w - g r o w i n g labor needs of a more m a t u r e economy. To avert the d a u n t i n g social and economic problems that w o u l d a c c o m p a n y such seismic d e m o g r a p h i c shifts in an advanced country, however, C h i n a w i l l need the continued forbearance of hundreds of millions of C h i n e s e . B y 2 0 2 0 , C h i n a w i l l have almost 1 7 0 m i l l i o n elderly p e o p l e — nearly 7 0 percent more than t o d a y — a n d every year from now until then, 1 0 to 2 0 m i l l i o n C h i n e s e boomers and busters w i l l lose their jobs to the forces of economic modernization. Y e t , no more than 2 0 percent of Chinese today are e l i g i b l e for p u b l i c pensions or health care, and u n e m p l o y m e n t

benefits

are u n k n o w n . To m a n a g e the d e m o g r a p h i c waves that w i l l wash over C h i n a for the next ten to fifteen years and w e l l b e y o n d , China's leaders w i l l have to phase in these social supports at a rate just fast enough to preserve the

THE DEMOGRAPHIC EARTHQUAKE

53

regime's popular support, b u t g r a d u a l l y e n o u g h to m a i n t a i n their invest­ ments to modernize the economy.

THE PRICE OF THE BABY BUSTS: THE END OF STRONG GROWTH IN EUROPE AND JAPAN N o t h i n g that any g o v e r n m e n t could do over the next ten to fifteen years w i l l materially affect these numbers or their effects on people's lives. T h e eco­ nomic c r u x of the d e m o g r a p h i c issue, especially for a d v a n c e d countries, is how fast their workforces w i l l e x p a n d — o r whether they w i l l g r o w at all. In normal times, most nations' labor forces expand steadily by around i percent a year, so every year there are more people w o r k i n g to produce the country's goods and services. T h e demographic shifts of this period change that basic factor, boosting g r o w t h rates as boomers take jobs in the economy, and lower­ ing the rate w h e n baby busters replace the boomers. A country can squander the potential extra g r o w t h from a fast-expanding labor force by failing to educate its new workers or to provide the conditions and incentives that can raise their average productivity. W h e n a country's labor force is contracting, its economy operates under a serious disadvantage; and greater investments in education, training, and the technologies and business methods that can raise productivity become virtually the only w a y to sustain sound g r o w t h . Focusing on this central fact, it becomes clear that J a p a n ' s position be­ tween now and 2 0 2 0 is the most dire: B y 2 0 2 0 , J a p a n w i l l have almost 9 m i l ­ lion fewer people ages twenty to sixty than it does today, a contraction of nearly 1 percent a year in the n u m b e r of people available to generate most of their nation's wealth. T h e only cushion is that older J a p a n e s e are more prone to keep w o r k i n g for a few years past age sixty than older people in other ad­ vanced countries. Since how fast a country g r o w s is basically the product of how many new workers it adds and how fast the p r o d u c t i v i t y of its workers increases, normal productivity increases of 1 . 5 to 2 . 5 percent a year over the next decade w i l l leave J a p a n perpetually skirting the edge of recession. In fact, productivity g r o w t h in J a p a n hovered around 1 percent a year t h r o u g h the 1 9 9 0 s , although it has accelerated in the last few years. J a p a n isn't alone in facing this predicament. T h e n u m b e r of Italians of w o r k i n g age w i l l fall by 9 percent between now and 2 0 2 0 , w h i l e the size of the potential labor forces of G e r m a n y and France w i l l decline by nearly 4 to 5 percent. T h e outlook for S w e d e n and B r i t a i n is a little better: T h e S w e d i s h la­ bor force w i l l stagnate over the next decade or so, w h i l e Britain's pool of p o ­ tential workers w i l l edge u p on average by about one-quarter of 1 percent a year over the next twelve years. A silver l i n i n g for G e r m a n y , France, and Italy

54

FUTURECAST

is that their persistent h i g h jobless rates should come d o w n in the next de­ cade as busters replace boomers at the center of their workforces. B u t even w i t h lower u n e m p l o y m e n t , slower g r o w t h w i l l mean less economic progress for average families across m u c h of E u r o p e over the next ten to fifteen years. O n e reason for this unhappy prospect, and one tied directly to demo­ graphic changes, is that w o r k i n g - a g e people account for most of every coun­ try's personal saving; and how m u c h a nation saves affects the

financial

resources the country has to invest. There's nothing obscure about how aging affects saving and investment—it's s i m p l y that people's saving behavior is tied closely to what's happening in the rest of their lives. Y o u n g e r people spend more than they earn, setting u p their households and starting their families, and retired people spend d o w n w h a t they saved in order to maintain their health and lifestyles, w h i l e earning little or nothing new (beyond their state pensions). In every country, people in their p r i m e earning years from their midthirties to their midfifties do most of their society's personal saving. O v e r the next fifteen years, w i t h tens of millions of Europeans and J a p a ­ nese a g i n g from those p r i m e earning years into retirement, and fewer younger people m o v i n g into their prime-earning years, their nations w i l l have fewer resources to expand their wealth. J a p a n already demonstrates what these de­ m o g r a p h i c waves can do to a country's savings rate: F r o m 1 9 7 5 to 2 0 0 5 , as the n u m b e r of elderly J a p a n e s e began to increase sharply and w h i l e the n u m ­ ber of J a p a n e s e in their p r i m e earning years slowed and then began to fall, the country's savings rate p l u m m e t e d from 2 5 percent to less than 5 percent— and a recent study by M c K i n s e y and C o m p a n y projects that it w i l l hit zero by 3

2 0 2 0 or soon thereafter. To be sure, demographics are not the only reason for the virtual collapse of J a p a n e s e private savings. W i t h the d a w n of contempo­ rary globalization, J a p a n e s e economic policies that w o r k e d for decades be­ came dysfunctional and finally destructive, p u m p i n g up and then puncturing financial bubbles in real estate and stocks; and the inept g o v e r n m e n t policies that followed b r o u g h t J a p a n e s e g r o w t h to a virtual standstill for more than a decade starting in the early 1 9 9 0 s . O n e result was a persistent, m i l d deflation that drove d o w n h o w m u c h people could earn from s a v i n g s — s o they saved even less. S t i l l , the basic d e m o g r a p h i c changes not only account directly for at least half of the decline in J a p a n e s e savings, they also contribute to the coun­ try's l o w g r o w t h rates—so that J a p a n e s e families w h o want to maintain their lifestyle—and w h o d o e s n ' t ? — h a v e less left over to save. B e t w e e n now and 2 0 2 0 , personal savings rates w i l l fall in most countries, as the share of their populations comprised of older people rises while the share in their thirties and forties falls. Unless there are more sustained pro­ d u c t i v i t y b r e a k t h r o u g h s — a s only A m e r i c a , Ireland, and a few other countries

THE DEMOGRAPHIC EARTHQUAKE

55

have seen in the last ten to fifteen y e a r s — l o w e r rates of personal savings w i l l cut sharply into the wealth that average families w i l l be able to accumulate. In J a p a n , where the median age w i l l hit fifty by 2 0 2 0 , and where increases in household wealth depend m a i n l y on private savings, experts expect average household wealth to actually decline. In G e r m a n y , France, and Italy, the as­ sets of most households w i l l merely stall. In m a n y of the world's richest coun­ tries, the lives of most people w i l l stop g e t t i n g better, and m a n y could find themselves closer to poverty than they ever i m a g i n e d they m i g h t be. For

a nation, a normal a g i n g pattern in w h i c h the n u m b e r of people enter­

ing the workforce and m o v i n g into their p r i m e earning and saving years increases a little faster than the n u m b e r of people leaving the workforce and m o v i n g into their low-savings retirement years, is akin to p i c k i n g u p a pair of kings in poker. It's not enough to w i n , but it keeps a country in the economic g a m e . To w i n a b i g pot, a society needs to draw additional g o o d cards—for example, a vibrant scientific establishment that develops great new technolo­ gies, an entrepreneurial

culture that encourages people to commercialize

those technologies, and a financial sector that channels resources to p r o m i s i n g entrepreneurs. A country w i t h all that can m a k e u p for low personal savings by attracting the savings from other societies—as the U n i t e d States has in this period. O r a country could have thousands of businesses p r o d u c i n g g o o d s and services that everyone in the w o r l d w a n t s — a s do A m e r i c a and I r e l a n d — generating h i g h profits that also can p r o v i d e financial resources to offset l o w personal savings. W i t h either of these conditions, a nation can stay in the g a m e even w i t h bad d e m o g r a p h i c s — a n d if its demographics are decent, it has a real shot at c l a i m i n g a b i g pot. That's one reason w h y the U n i t e d States could g r o w so m u c h richer over the last twenty years, even as its personal savings rate fell sharply (and not just for demographic reasons). O v e r the past generation, the financial wealth of an average A m e r i c a n household g r e w nearly 4 percent a year, even as p r i ­ vate savings rates fell, m a i n l y through the sharply rising value of the stocks and savings accounts they purchased w i t h their fairly m e a g e r annual savings. Yet,

even w i t h better demographic and g r o w t h prospects than most other ad­

vanced countries, the a g i n g of A m e r i c a over the next t w e n t y years could still cut by half the rate at w h i c h an average family increases its assets. E v e n in the United States, continuing to do what it has been doing won't be enough to keep large economic gains g r o w i n g for most p e o p l e — t h a t w o u l d take another leap in technological progress that could lift p r o d u c t i v i t y again on a long-term basis. Over the next ten to fifteen years, G e r m a n y , France, or J a p a n could d o what the United States did over the last generation. A n y of t h e m could offset

56

FUTURECAST

some of the economic drag created by their rapid a g i n g by becoming hot­ houses for innovation and by positioning their businesses to be global leaders. A s w e w i l l see later, d o i n g so could involve changes so deep and far reaching that they m i g h t no longer recognize t h e m s e l v e s — a n d changes that seem well b e y o n d the current reformist capacities of their political parties. A n d the rapid a g i n g of their populations w i l l m a k e it harder still for politicians to sell difficult reforms, as their retiring boomers c l a i m more of their nations' re­ sources for pensions and health care. In recent years, a n u m b e r of countries have tried to soften the impact of their d e m o g r a p h i c crunch in other w a y s — f o r e x a m p l e , by trying to convince more of their older people to keep on w o r k i n g . W i t h no popular demand to w o r k longer, this approach has turned out to be w e l l beyond the political ca­ pacity of g o v e r n m e n t s everywhere in E u r o p e . T h e i r older people don't w o r k not only because they generally don't want to, but also because in most cases their state pensions are so generous that they don't have t o — a n d their politi­ cians aren't in the business of cutting those benefits so sharply that seniors w o u l d have to keep w o r k i n g . For instance, G e r m a n y has tried to keep more of its older workers on the job; but e m p l o y i n g jobless y o u n g people has higher political priority, espe­ cially since older people aren't s c r a m b l i n g to w o r k w h i l e y o u n g people are. So, w h i l e B e r l i n offers G e r m a n companies a special subsidy to keep people over age fifty-five w o r k i n g at least part-time, the p r o g r a m also requires that the companies hire jobless y o u n g people to m a k e up the difference between the oldsters' part-time w o r k and full-time. In an economy w i t h structural un­ e m p l o y m e n t of more than 1 0 percent, the t w o provisions cancel each other out. A few years back, the G e r m a n g o v e r n m e n t tried a different tack by cut­ ting back the n u m b e r of months it w i l l provide u n e m p l o y m e n t benefits. B u t then it lost its nerve and added a two-year supplemental benefit that most people can c l a i m . T h e g o v e r n m e n t also tried reducing the normal cuts in in­ come subsidies and free health-care benefits for lower-wage people w h o g o to w o r k , but d i d it so c l u m s i l y that it created an incentive to w o r k only partt i m e in order to keep more of their benefits. In the end, none of these policies could overcome the laws that allow G e r m a n s to w o r k half-time from age fifty-five

on w i t h o u t reducing their state pensions, and w h i c h encourage older

wives to stay at h o m e by heavily taxing second earners and p r o v i d i n g free health coverage to spouses only if they don't w o r k . T h e end result of all these policies, along w i t h most people's preference for w o r k i n g less, is that nearly 6 0 percent of G e r m a n s ages fifty-five to sixty-four do not w o r k at all. T h e sharp baby busts create an economic bind from w h i c h most of Europe and J a p a n cannot escape for at least a generation, unless they're w i l l i n g to

THE DEMOGRAPHIC EARTHQUAKE

57

accept larger and more difficult changes that could help create a lot more at­ tractive jobs and m a k e u n e m p l o y m e n t , p a r t - t i m e w o r k , and early retirement less appealing. So far, the French, G e r m a n s , and Italians have been u n w i l l i n g to do anything of the k i n d . T h e y ' r e all p r o u d of the economic security their social welfare systems p r o v i d e — a n d w h y shouldn't they b e ? — b u t most p e o ­ ple w h o can count on generous g o v e r n m e n t support w h e n they're out of w o r k lose the urgency to find new jobs. S o , w h i l e u n e m p l o y m e n t p a y m e n t s in the United States last six m o n t h s — a n d no months at all in C h i n a — E u r o p e a n s who

lose their jobs collect benefits for eighteen to twenty-four months, and

their benefits are a lot more generous than A m e r i c a n s can claim. N o E u r o p e ­ an or Japanese p r i m e minister has been prepared to m a k e the lives of its j o b ­ less people significantly less secure. It's hard to blame elected leaders for l a c k i n g the conviction to reform this part of their welfare states. Politicians rarely ask voters to m a k e sacrifices—at least when they're not fighting a major w a r — u n l e s s they can plausibly p r o m ­ ise that the sacrifice w i l l help m a k e the same voters better off in fairly short order. Here, that w o u l d mean not only m a k i n g u n e m p l o y m e n t or early re­ tirement harder to bear, but also undertaking even more difficult and farreaching changes that m i g h t encourage E u r o p e a n and J a p a n e s e businesses to create new, w e l l - p a y i n g jobs for the people forced to g i v e u p some of their generous supports. A n d they can't promise that w i t h o u t deconstructing m u c h of the social and economic arrangements that their societies have built u p over the last half century. Instead, as their labor forces and saving rates decline, E u r o p e and J a p a n seem set on handicapping their future prosperity w i t h ostensible acts of social kindness. A s w e w i l l see later, c o m p l e x systems of regulations and trade bar­ riers in J a p a n and E u r o p e create nearly as m u c h artificial economic security for

those w h o have jobs as the g o v e r n m e n t provides to those w i t h o u t them.

The

price of all the regulations and barriers is less competition, so European

and Japanese businesses feel less pressure to come u p w i t h new products and more efficient ways of conducting their business—and, directly and indi­ rectly, that's what drives modern economies to create new jobs. In many cases, the regulations directly undermine innovation and job cre­ ation, which could soften the economic consequences of their demographics. In France and Italy, a business that wants to reorganize or change the w a y it oper­ ates cannot legally reassign a worker without "cause"—and taking advantage of new technologies to become more efficient is not sufficient reason. T h i s creates a dogged form of job security for those w h o have j o b s — b u t it also discourages businesses from creating new jobs. A n d it makes little economic sense in an open world in which French and Italian companies compete in their own markets

58

FUTURECAST

and around the world w i t h A m e r i c a n and Asian rivals that can hire, fire, and reassign at w i l l . Such regulations are slowly draining the competitiveness of thousands of European businesses—and that's not all of it. T h e cradle-to-grave economic security treasured by Europeans costs tens of billions of euros, most of it financed through payroll taxes much higher than those that American and Asian companies live w i t h . E v e n when a company wants to take steps that w o u l d generate new jobs, the taxes on new workers discourage it. G e r m a n payroll taxes account for 2 5 percent of labor costs, in Italy they make up 3 2 per­ cent of labor costs, and in France that level is 3 8 percent. Even in J a p a n , payroll taxes account for over 2 1 percent of labor costs. O n l y in the United States and Britain, at about 1 4 percent and 1 7 percent respectively, are payroll taxes only a modest barrier to creating jobs. It's no accident that for t w o decades A m e r i c a n businesses have created jobs at three, four, or even ten times the rate of the major economies of Europe and J a p a n . It's also not serendipity that u n e m p l o y m e n t in E u r o p e has been about twice U . S . levels for just as l o n g , or that new businesses are created there at m u c h lower rates than in the U n i t e d States. It's a direct consequence of E u r o ­ pean social contracts that p r o m i s e d solid security—and delivered it at tolera­ ble economic c o s t s — w h e n baby boomers made u p their workforces and foreign markets and foreign rivals were m u c h less important. W i t h globaliza­ tion and much-less-favorable demographics, the European social project is suffocating the p r o s p e r i t y — a n d eventually the social a l l e g i a n c e — o f those it's d e s i g n e d to protect. O v e r the next ten to fifteen years, the baby busts of E u ­ rope and J a p a n w i l l m a k e the economic burdens of their social welfare sys­ tems irreconcilable w i t h healthy economic g r o w t h . T h e outlook is m u c h more positive in C h i n a , despite demographic changes that d w a r f those of the world's more advanced economies. China's huge baby b o o m — t w i c e the relative size of any advanced nation's—so far has w e l l suited the country's w i d e - r a n g i n g modernization programs, p r o v i d i n g tens of millions of workers for the tens of thousands of new domestic and foreigno w n e d businesses. A s the Chinese economy matures over the next ten to fif­ teen years, its baby bust generation should be sufficient to meet the more s l o w - g r o w i n g labor needs of an industrialized society. On

the

birthrates

crucial q u e s t i o n

of h o w long C h i n a has before its falling

b e g i n to eat a w a y at the size of its w o r k i n g - a g e population,

C h i n a falls in b e t w e e n A m e r i c a (and Ireland) and the rest of the advanced w o r l d . T h e p l u m m e t i n g fertility rates that p r o d u c e d China's seismic baby bust c a m e about a decade or t w o later than in the W e s t . China's labor force w i l l g r o w b y nearly 9 0 m i l l i o n b e t w e e n now and 2 0 1 5 , w h e n the effects of its l o w fertility rates b e g i n to appear, and w i l l b e g i n to contract only

59

THE DEMOGRAPHIC EARTHQUAKE

around 2 0 2 0 . L o o k i n g further ahead, there's no t u r n a r o u n d in s i g h t : O v e r the next fifteen years, the n u m b e r of C h i n e s e children is projected to d e ­ cline by 7 percent and at an accelerating pace. China has another t r u m p card to help it weather its d e m o g r a p h i c waves. Even when its labor force begins to shrink, China's development agenda and unique place in the g l o b a l economy should protect its ability to generate wealth and income for some time. T h e shift of tens of millions of China's workers from agriculture and the old state-owned enterprises w i l l produce labor surpluses w e l l beyond 2 0 2 0 . These surpluses m a y be so great that they could lead to, in the words of one of China's leading economists, H u A n g a n g , 4

"an u n e m p l o y m e n t war, w i t h people fighting for jobs that don't e x i s t . " T h a t competition for jobs w i l l also keep Chinese w a g e s from rising as rapidly as the country's production for a long time. A n d the r e e m p l o y m e n t of tens of millions of Chinese in private businesses, armed w i t h western

production

technologies, should continue to drive u p the country's p r o d u c t i v i t y and growth. China's d e m o g r a p h i c c h a l l e n g e over the next ten to fifteen years w i l l be more political than economic. Today, only a s m a l l fraction of China's h u n ­ dreds of m i l l i o n s of dislocated w o r k e r s and elderly p e o p l e are e l i g i b l e for any government benefits or supports. Successfully m a n a g i n g the stresses that accompany such vast d e m o g r a p h i c shifts w i l l require their c o n t i n u e d for­ bearance, even as they w a t c h m a n y of their c o u n t r y m e n g r o w steadily m o r e prosperous.

THE PRICE OF BABY BOOMS: THE FINANCING CRISIS FACING GOVERNMENT PENSIONS These demographic waves w i l l create political p r o b l e m s in advanced coun­ tries that g o beyond people's predictable reactions to disappointing g r o w t h . As baby boomers begin to retire by the m i l l i o n s , the politics in m a n y coun­ tries w i l l be shaped by acrimonious debates over the terms and solvency of state pension systems. Political battles are almost inevitable in m a n y places, because the relatively smaller cohorts of baby busters w i l l have to come u p w i t h most of the trillions of dollars, euros, and yen required to keep benefits coming for the fast-rising numbers of retiring boomers. T h e most direct w a y to grasp this d i l e m m a is to face u p to h o w m a n y potential workers each country w i l l have over the next ten to fifteen years, compared to how m a n y elderly people they w i l l have to help support. E v e n today, Germany, Italy, and J a p a n look demographically a lot like Florida (without all the sunshine), where millions of A m e r i c a n s retire. A l l three of

FUTURECAST

60

these countries already have just a little over t w o people ages twenty to sixty for every one person over age sixty. S w e d e n , France, and Britain are in a little better shape w i t h between t w o and one-quarter

and t w o and

one-half

w o r k i n g - a g e m e n and w o m e n for every older S w e d e , French, or British per­ son. T h e s e numbers are worse than those from m a n y official sources, because the analyses produced regularly by the European U n i o n and by the Japanese and European g o v e r n m e n t s define " w o r k i n g age" as fifteen to sixty-five, even t h o u g h relatively few people in advanced countries enter the workforce before age t w e n t y or continue w o r k i n g m u c h after age sixty. B y including teenagers and y o u n g e r seniors in the workforce and excluding y o u n g e r retirees from the ranks of the elderly, they can c l a i m that the seismic demographic changes shaking their societies somehow won't require hard policy changes—until they actually do. T h e retirement systems of a few countries don't face terribly difficult prob­ lems, at least in the near future. Ireland sits at the top of the demographic heap in this regard, w i t h nearly four w o r k i n g - a g e Irish today for every Irish person age sixty and over. T h e crunch is also less severe in the U n i t e d States, w i t h about three and one-third workers today for every older person. T h e fact that w o r k i n g - a g e people still dominate the A m e r i c a n and Irish populations is one of the reasons w h y U . S . g r o w t h over the last decade has been double or more than that of J a p a n and most of E u r o p e , and w h y Ireland has g r o w n even faster than the U n i t e d States. Y e t e v e r y w h e r e , the rapid a g i n g of the population already has driven m a ­ jor changes in retirement p r o g r a m s . In the last fifty years, as the number of A m e r i c a n s of w o r k i n g age relative to the n u m b e r of elderly fell from more than 1 6 to i to 3 . 3 to 1 , the payroll tax rate that finances U . S . retirement benefits increased more than fourfold. T h e taxes that finance most other coun­ tries' state p e n s i o n s — v a l u e - a d d e d taxes (VATs) and often a piece of income taxes, as w e l l as payroll t a x e s — h a v e risen as m u c h as or more than in A m e r ­ ica. M a n y A m e r i c a n s g r u m b l e today about p a y i n g 1 2 . 4 percent of their pay­ checks to finance other people's social security, but they g e t off lightly: T h e cut from the paychecks of Italians is almost 3 3 percent, the French pay more than 2 4 percent of their w a g e s , and the S w e d e s , Britons, and G e r m a n s pay be­ t w e e n 1 9 and 2 2 percent of their paychecks. O n e result is that most w o r k i n g people in every advanced country now pay more taxes to finance the benefits for their elderly compatriots (including their health care) than they do in di­ rect income taxes. W i t h such h i g h payroll taxes already in place, it w i l l be very difficult to raise t h e m even more as boomers actually retire. A p a r t from J a p a n , the b i g

THE DEMOGRAPHIC EARTHQUAKE

61

payroll tax hikes occurred m a i n l y from the m i d - 1 9 5 0 s to the m i d - 1 9 8 0 s . Since then, the popular tax revolt that began in A m e r i c a in the late 1 9 7 0 s spread to other advanced countries. A s u n e m p l o y m e n t rose and g r o w t h slowed in much of Europe in the 1 9 8 0 s and 1 9 9 0 s , resistance to higher taxes increased. Now,

whether the total tax burden of p a y r o l l , income, and value-added taxes

is 3 5 , 4 0 , or 5 0 percent, people almost everywhere have said, E n o u g h . A m e r ­ ican, European, and J a p a n e s e economists have long debated the level at w h i c h taxes begin to stifle business's willingness to invest, people's readiness to w o r k longer, and their economies' capacity to g r o w at healthy rates. T h e answer de­ pends on m a n y national factors—factors that include the tax burden, but are far from l i m i t e d to that. W h a t e v e r the economics, there's little question that over the next ten to fifteen years, as the number of older people collecting p u b ­ lic pensions (and health-care benefits) rises faster than the n u m b e r of w o r k i n g people, political leaders that want to stay in p o w e r w i l l find it difficult to raise taxes m u c h more. T h i s resistance w i l l create thorny political p r o b l e m s across E u r o p e , J a p a n , and the U n i t e d States, as the numbers worsen and their consequences become difficult to manage. B y 2 0 2 0 there w i l l be fewer than one and one-half J a p a ­ nese ages twenty to sixty for every compatriot over age sixty, and just over 1 . 6 w o r k i n g - a g e Italians for every elderly person there. T h e numbers look g r i m as well for G e r m a n y , France, and S w e d e n , w i t h between 1 . 8 and 1 . 9 people of w o r k i n g age for every elderly person in 2 0 2 0 . T h e A n g l o - S a x o n countries have a little more breathing space. In 2 0 2 0 , B r i t a i n w i l l have about 2 . 1 p o ­ tential workers for every elderly person, and there should still be almost 2 . 4 Americans of w o r k i n g age for every senior. Ireland w i l l remain the major out­ lier a m o n g the more advanced nations, w i t h about 2 . 9 potential workers for every retiree in 2 0 2 0 . There's virtually nothing any g o v e r n m e n t can do between now and then that could materially change how m a n y older people it w i l l have to help sup­ port and how many w o r k i n g - a g e people it w i l l have to pay for it. Unless coun­ tries figure out how to make their economies g r o w a lot faster, the policy options flowing from their hard demographics w i l l not be of the w i n - w i n sort that politicians look for. Instead, nearly every advanced nation w i l l have to trade off changes that w i l l either m a k e the retirement of most of their boomers a little more nasty and brutish than they expect today, somehow raise taxes on w o r k i n g p e o p l e — i n c l u d i n g m a n y whose incomes w i l l be stagnating or falling—or run large, permanent budget deficits that w i l l undermine

future

growth. W h i l e the choices w i l l be essentially the same everywhere, the urgency and severity of the p r o b l e m w i l l also depend on the particular features of each

62

FUTURECAST

country's state pension system. T h e French, G e r m a n , and Italian systems are so generous today, it's certain that they cannot be maintained through even the first decade of their boomer generation's retirement. In this respect, the E n g l i s h and Irish systems look more sustainable, m a i n l y because they provide m u c h smaller benefits that, on their present path, w i l l consign large numbers of their boomers to retire into near poverty. O n this matter, the United States and J a p a n fall in between, w i t h p u b l i c retirement systems m u c h less generous than the continental Europeans, but more so than the British or Irish. T h e simplest w a y to g a u g e the generosity of a country's retirement pro­ g r a m is b y what's called the "replacement rate," w h i c h measures a person's m o n t h l y retirement benefits against his or her average, m o n t h l y income over his or her entire w o r k i n g life. Actuaries in different countries calculate these rates in a n u m b e r of w a y s , but the most useful is the "net replacement rate." T h a t tells y o u how m u c h a person's m o n t h l y benefits, after he or she has paid any taxes o w e d on it, w i l l replace his or her average m o n t h l y

preretirement

take-home pay, again after taxes. T h i s is the best measure of both how well off retiring boomers around the w o r l d can expect to be in another decade and the financing

burden each country w i l l face at that time.

It should be clear to everyone but a politician that once boomers begin to retire, the benefits now p r o m i s e d across most of continental Europe w i l l be s i m p l y too large to survive the collision of sharply rising numbers of retirees and the falling numbers of workers able to pay for them. Italians face the worst crisis, w i t h a system that after taxes replaces almost 9 0 percent of an average Italian's lifetime p r e r e t i r e m e n t t a k e - h o m e m o n t h l y w a g e s . T h e G e r m a n s , French, and Swedes are a little less generous, promising monthly benefits that after taxes equal between 68 percent and 7 2 percent of an average worker's preretirement, m o n t h l y take-home pay. T h i s makes no sense, unless you're caught in a t i m e w a r p from the 1 9 6 0 s , and still believe that the baby boom and unusually fast g r o w t h of that t i m e w i l l g o on forever. A more secure sense of reality is evident outside continental Europe. T h e after-tax replacement rate for an average J a p a n e s e is 5 9 percent, and in the United States and Britain, it's roughly 50 percent—although

benefits levels in B r i t a i n and J a p a n are set

to decline. Finally, Ireland provides the smallest p u b l i c pensions of the g r o u p , replacing just 3 7 percent of an Irish person's average preretirement, lifetime m o n t h l y take-home pay. O n e safety valve that could let some of the steam out of this crunch w o u l d be greater w i l l i n g n e s s a m o n g people age sixty and older to keep w o r k i n g , along w i t h jobs to e m p l o y them. Once again, the differences across countries w i l l m a k e the boomers' retirement more difficult to m a n a g e in most of E u ­ rope than in the U n i t e d States or J a p a n . Unsurprisingly, people w h o receive

63

THE DEMOGRAPHIC EARTHQUAKE

retirement checks that pay a g o o d portion of w h a t they m a d e w o r k i n g are not likely to stay on the job. In Italy, less than 4 0 percent of those ages fifty-five to fifty-nine are still w o r k i n g , compared to 8 1 percent of Swedes, 7 6 percent of Japanese, 6 9 percent of A m e r i c a n s , and between 6 0 and 6 5 percent of even the French and G e r m a n s of the same age. B y their early sixties, however, m o r e than 8 0 percent of not only Italians, but also G e r m a n s and French no longer w o r k — c o m p a r e d to about half of Swedes, J a p a n e s e , and A m e r i c a n s the same age.

B y ages sixty-five to sixty-nine, the p r o b l e m of the continental E u r o p e ­

ans is stark: O n l y between 3 and 6 percent of G e r m a n s , Italians, and French people are still w o r k i n g , compared to r o u g h l y one-quarter of A m e r i c a n s and Britons and more than 3 7 percent of J a p a n e s e — a l l w i t h much-less-generous retirement benefits. It's unsurprising that this p r o b l e m is most severe in E u ­ rope, because governments g r a p p l i n g w i t h h i g h structural

unemployment

are unlikely to take meaningful steps to keep their oldest workers in jobs that m i g h t g o to younger, jobless people. It should be easier to pare back a g o v e r n m e n t retirement system w h e n large numbers of its beneficiaries also hold private pensions. B u t here, too, when people expect to receive g o v e r n m e n t benefits equal to a g o o d portion of what they earned w o r k i n g , they have little reason to b u i l d u p private retire­ ment savings. French, G e r m a n , and Italian families save at h i g h e r rates than A m e r i c a n , Britons, or J a p a n e s e , but not for retirement. T h e total assets of all private pensions in G e r m a n y and Italy are equal to about just 1 8 to 2 2 percent of their G D P , respectively—one-fourth the level of B r i t a i n and A m e r i c a — a n d in France, private pensions equal just 7 percent of the coun­ try's G D P . E v e n for the 2 0 to 2 5 percent of Europeans w i t h a private pension, it's not large enough to finance more than a year or so of t a k i n g it e a s y — averaging about $ 2 5 , 0 0 0 for every G e r m a n w i t h a pension, $ 3 0 , 0 0 0 for an Italian w i t h one, barely $ 1 0 , 0 0 0 for every French person h o l d i n g a p e n s i o n — and zero for everyone else. T h e reasonable path w h e n the crunch hits these countries in a few years w o u l d be to cut back their generous benefits—and the longer they p u t off cuts, the more drastic they w o u l d have to be to keep their systems solvent. B u t w i t h most Europeans saving little for their o w n retirements, the most persuasive politicians won't be able to convince m a n y people that the reforms their systems need won't leave t h e m worse off. N o w h e r e are private pensions universal or even nearly so. In the United States and Britain, where public pensions are relatively modest, private pension and retirement accounts hold assets almost as large as each nation's total gross national product. B u t even there, only one-third to one-half of all w o r k i n g and retired people have t h e m — a n d they're almost entirely from the better-off half. The

large pool of private retirement saving in Britain and A m e r i c a will help

64

FUTURECAST

shape the debate when the t w o countries decide to make changes to keep their systems afloat, but it's not enough to produce easy answers. T h e most obvious change w o u l d be cuts in benefits for higher-income people w i t h the private re­ sources to help cushion the impact. B u t since almost everywhere, older people and more affluent people vote in greater numbers than everyone else, even that change w i l l be politically treacherous. Major pension reforms can be done, as Margaret Thatcher demonstrated in the 1 9 8 0 s . U n d e r her plan, Britain's p u b l i c pension now provides a barebones p a y m e n t that's not intended to replace a significant share of anyone's preretirement earnings. To fill the g a p , B r i t i s h workers also pay into supple­ mentary personal pensions m a n a g e d by their employers, financial institu­ tions, or the g o v e r n m e n t itself, and receive tax benefits for contributions to additional private pensions. T h i s approach of pairing a small public payment and a small personal pension w i t h tax benefits to encourage more private re­ tirement savings has become an A n g l o - S a x o n m o d e l ; and over the same pe­ riod, the U n i t e d States, Ireland, and Australia all expanded tax incentives for private retirement accounts. E v e n this approach cannot sidestep a country's underlying demographics. T o b e g i n , it can't really relieve the financing crunch, since tax benefits for pri­ vate pensions cost B r i t a i n nearly half as m u c h as its basic public pension pay­ ments, and similar tax breaks in A m e r i c a , Ireland, and Australia cost the equivalent of 6 0 percent or more of their annual spending on public pensions. Moreover, the E n g l i s h approach is g r a d u a l l y creating the least-supportive p u b l i c pension system in the advanced w o r l d . B y 2 0 2 0 , an average British re­ tiree w i l l collect m o n t h l y checks from the basic benefit and mandatory per­ sonal pension that w i l l replace barely one-third of his or her average lifetime m o n t h l y earnings. To avoid relegating millions of E n g l i s h seniors to poverty, a future B r i t i s h g o v e r n m e n t w i l l p r o b a b l y have to increase the state pension. T h a t certainly wasn't part of the T h a t c h e r plan. She was convinced, largely by conservative A m e r i c a n economists, that the prospect of meager public pensions w o u l d drive Britons to b u i l d u p fat private savings to m a k e u p the difference. B u t everywhere, most people tend to be m y o p i c about saving for anything far off, since most people's drive to live as w e l l as they can afford is more power­ ful than the discipline required to cut back in order to live better decades later. Today, only about one-third of B r i t i s h people pay into private pension plans. W i t h private pension assets equal to about 8 0 percent of Britain's G D P , that third should be in reasonably g o o d shape for retirement. B u t the other two-thirds of B r i t i s h retirees w i l l be left w i t h little more than their nearpoverty-level p u b l i c checks. In the end, the B r i t i s h reforms have traded the direct financing crisis now

65

THE DEMOGRAPHIC EARTHQUAKE

facing other European societies for a l o o m i n g social crisis of c o n s i g n i n g m o s t British boomers to nearly impoverished retirements. W i t h that social crisis still a g o o d decade off, most B r i t i s h politicians have embraced the same p o l i ­ tics of denial as their continental colleagues. In the 2 0 0 5 elections, the Labour and Conservative parties both offered m a r g i n a l public-pension proposals of little practical consequence. O n l y the small Liberal D e m o c r a t i c Party called for

serious steps, including larger benefits and mandatory participation in

private pensions. Perhaps the Liberal D e m o c r a t s chanced it, because they knew they'd never have to actually finance the benefit increases or face the o p ­ position of E n g l i s h business to mandatory private plans. In any case, very soon it w i l l be too late for most B r i t i s h boomers to b u i l d u p large e n o u g h p r i ­ vate pensions to avoid hard times in retirement. T h e outlook for change is still better in B r i t a i n than in the rest of E u r o p e , because it's always easier politically to expand benefits than to cut

them.

W i t h Thatcher's reforms failing slowly, p u b l i c pressure to sweeten the B r i t i s h state pension p a y m e n t w i l l likely become irresistible over the next decade. Even if British workers have to swallow higher taxes or large deficits to fi­ nance it, millions of grateful elderly and near-elderly voters should take the political sting out of the changes. T h e U K also has additional leeway to re­ lieve some of the political stress, because compared to most of E u r o p e , its economy is in better shape for the long run. W i t h g r o w t h a little stronger and unemployment consistently lower than in France, G e r m a n y , or Italy, B r i t a i n w i l l have relatively more workers earning w a g e s to finance h i g h e r benefits, and those workers' wages should rise faster and generate relatively more rev­ enues for those higher payments. In the end, future G e r m a n , French, and Italian politicians w i l l not be able to escape the basic facts that their elderly comprise a larger slice of their p o p ­ ulations and have been promised p u b l i c pensions that are relatively m u c h larger than Americans or Britons. B y 2 0 2 0 , the European U n i o n estimates that public pension benefits w i l l c l a i m 1 5 percent of the G D P s of France and Italy, and 1 2 . 6

percent of Germany's. For a sense of how implausible that bur­

den w i l l be to sustain, it's equivalent to the U n i t e d States earmarking t w o thirds to three-fourths

of its entire current federal b u d g e t to

retirement

benefits. A n d the E U projections understate the economic cost of these p r o ­ g r a m s , since its estimates rely on overly optimistic assumptions about h o w fast Europe's major economies w i l l g r o w over the next 1 0 to 1 5 years. Lady Thatcher sidestepped the political trap that awaits most European leaders by shifting course long before its effects actually cut into anyone's liv­ ing standard. B y delaying change until their o w n boomers are about to retire, future G e r m a n , French, and Italian prime ministers w i l l have to reduce benefits

66

FUTURECAST

in ways that q u i c k l y cut into the pensions of millions of voters, raise taxes on their s h r i n k i n g workforces, or, as seems most likely, undermine their nations' prospects for g r o w t h w i t h large, permanent b u d g e t deficits. T h e s e prospects have all of the essential ingredients for a nasty political conflict. In democracies where leaders are accountable to the voters w h o bear the costs of their decisions, most politicians w i l l find it virtually impossible to deny large numbers of people w h a t they expect and need to maintain their lifestyles. T h a t basic fact of democratic politics makes not only sharp benefit cuts but also large tax increases unlikely, at least until their pension systems actually face bankruptcy. T a x collectors in G e r m a n y , France, and Italy already claim between 3 8 percent and 4 5 percent of their countrys' G D P s . W i t h poor Europeans p a y i n g m u c h smaller shares than that—along w i t h the elderly themselves, w h o don't pay payroll taxes—these countries' working-class and middle-class voters already pay out about half of what they earn in taxes. European politicians and the experts w h o advise t h e m have understood these p r o b l e m s for years and recognized that the sooner they enact their re­ forms and the taxes to finance them, the smaller the annual pain w o u l d be. Y e t , nearly every t i m e they've g i n g e r l y proposed even modest changes, popu­ lar resistance has turned t h e m back. In G e r m a n y in 2 0 0 1 , for example, when it appeared that soon there w o u l d n ' t be enough marks c o m i n g in to pay for the checks g o i n g out, the g o v e r n m e n t enacted modest and gradual reductions in the rate of increase in pension spending and the payroll taxes that finance it. W i t h i n t w o years, w h e n w e a k economic g r o w t h threatened another sol­ vency crisis, they borrowed from the future by reducing the system's legally mandated reserves. G e r m a n businesses complained so m u c h about their pay­ ments for workers' private pensions that the g o v e r n m e n t cut them back, too. B e r l i n d i d raise the m i n i m u m age of early retirement—but

only for those

c i t i n g u n e m p l o y m e n t as their reason—and then appointed another special c o m m i s s i o n to propose other reforms. It's still u n k n o w n whether any of the original changes w i l l ever take full effect; and even if they do, they w i l l make only a small difference in the system's l o n g - t e r m prospects. France, too, has debated these issues for twenty years and produced t w o rounds of m a r g i n a l reforms, in 1 9 9 3 and 2 0 0 3 . T h e 1 9 9 3 changes raised the statutory retirement age and adjusted how m u c h pensions rise year to y e a r — but not e n o u g h to meaningfully affect either the flood of early retirements or the system's h i g h replacement rate. T h e 2 0 0 3 reforms were targeted to early retirees, especially civil servants, and could modestly increase the n u m ­ ber of m i d d l e - a g e French workers available to help finance the retirement of their e l d e r s — b u t again, not enough to m a k e m u c h difference. W i t h the w i n d o w now closing on small and gradual changes that w o u l d

THE DEMOGRAPHIC EARTHQUAKE

67

have large effects by 2 0 1 5 or 2 0 2 0 , w h a t leader w i l l be able to p u l l off more painful reforms? M o d e r n politics can be r o u g h , and those w i l l i n g to endure it are usually those driven to achieve and hold on to p o w e r at almost any per­ sonal cost. A politician w h o tried to cut benefits or raise taxes enough to solve this p r o b l e m not only w o u l d likely face a q u i c k and painful end to his or her political life, he or she also w o u l d k n o w that the sacrifice could be m e a n i n g ­ less, since a successor m i g h t w e l l be elected on promises to reverse course. A n extraordinary charismatic leader can p u l l off changes that ordinary politicians find unimaginable. T h a t m a y happen somewhere between now and 2 0 2 0 — but not in most places. A s the crunch comes closer, the choices could come d o w n to a prospect of masses of elderly people, or masses of w o r k i n g people, protesting in B e r l i n , Paris, and R o m e . To be sure, p u b l i c pension reform has been a hot topic around the w o r l d for

more than a decade, and some thirty countries have m a n a g e d to enact

some form of mandatory private retirement saving. B u t these reforms have happened m a i n l y in places where g o v e r n m e n t s don't have to deal w i t h the legacy costs of a long-standing, p a y - a s - y o u - g o national s y s t e m — i n d e v e l o p ­ ing countries in A s i a and Latin A m e r i c a , the new republics carved out of the old Soviet Union, and the Soviets' former Eastern and Central European client states. For e x a m p l e , B o l i v i a , the D o m i n i c a n R e p u b l i c , E l Salvador, along w i t h Kazakistan, have followed Chile's m o d e l of a system based almost en­ tirely on private saving accounts. B u l g a r i a , Estonia, H u n g a r y , Poland, C o s t a R i c a , and others have opted for mandatory accounts on top of s m a l l , pay-asyou-go basic state benefits. A r g e n t i n a , C o l o m b i a , Peru, and U r u g u a y let peo­ ple choose between mandatory savings and small state pensions. A m o n g the advanced economies, Australia, H o n g K o n g , S w e d e n , and D e n m a r k have all added mandatory occupational pensions or universal private accounts on top of their traditional state systems. These approaches w o r k particularly w e l l for developing countries because they can help build up domestic capital pools, especially in places like Latin A m e r i c a , where capital flight is a c o m m o n p r o b l e m . T h e y also can provide business for a country's large financial institutions and a political role for na­ tional employers and unions. B u t in the advanced countries w i t h universal, pay-as-you-go systems in place, replacing any significant part of the basic public pension w i t h mandatory private accounts won't be a realistic option between now and 2 0 2 0 . Across E u r o p e and J a p a n , g o v e r n m e n t s face large, looming shortfalls just to cover future benefits, and such reforms w o u l d d i ­ vert billions of euros and trillions of yen from that task, just as millions of new retirees claim their p r o m i s e d benefits. Especially across E u r o p e , future leaders are m o s t l i k e l y to choose the

68

FUTURECAST

alternative that democratic governments usually favor when the cost of popu­ lar programs collides powerfully and painfully w i t h people's willingness to pay a lot more or receive a lot less: T h e y w i l l create the credit and cash they need and then borrow it. W a r has been the usual occasion for this strategy, seen cur­ rently in the w a y the U n i t e d States finances its Iraqi engagement. A s an occa­ sion for large deficits, w a r at least has the saving grace of normally lasting only a few years. T h e demographic pressures these countries face, however, w i l l per­ sist for probably t w o generations and w i l l only intensify w i t h time. G l o b a l i z a t i o n v i r t u a l l y guarantees that if European governments choose this course, ordinary Europeans w i l l pay a large economic price. If govern­ m e n t self-financing is the continuing response, year after year, Germany, France, and I t a l y — a l o n g w i t h S w e d e n , Spain, and others—could face year af­ ter year of h i g h e r inflation, so that ordinary people pay for the borrowing t h r o u g h h i g h e r prices that force t h e m to consume less. E v e n if globalization's intense c o m p e t i t i v e pressures d a m p e n this inflation, private investment w i l l slow, as m u c h of Europe's national savings g o to finance their public pensions. A s that happens, economic g r o w t h and people's incomes w i l l slow even more. Eventually, g l o b a l investors w i l l see real returns in Europe decline, and they w i l l b e g i n to desert the euro. Large continuing deficits also could seriously strain the fabric of the E u r o p e a n U n i o n , d i m m i n g the prospects of a transE u r o p e a n capital m a r k e t that could help its large economies become more successful players in the g l o b a l economy. It's almost inevitable that over the next decade or so, the politics of these issues w i l l turn very nasty. E u r o p e has a long tradition of divisive politics and u n h a p p y experience w i t h extreme popular m o v e m e n t s . A t a m i n i m u m , slow g r o w t h , h i g h taxes, and pressures on pension systems w i l l force some govern­ ments to cut social services—and if recent experience is any guide, those whose services are cut w i l l take their grievances to the streets. Some w i l l blame i m ­ m i g r a n t s , others w i l l b l a m e the generation of their parents or their children. Political outcomes are impossible to predict; but the social, economic, and political conditions for a revival of far-left and far-right politics w i l l be there. Ireland is the one place in E u r o p e l i k e l y to avoid these problems. M o s t i m p o r t a n t , Ireland has resisted a large welfare state and avoided m o r t g a g i n g its economic future to p r o g r a m s for its elderly. A n d at the least-regulated and fastest-growing economy in Europe, the Celtic T i g e r has actually finessed its d e m o g r a p h i c shifts b y sustaining h i g h e r birthrates and attracting large n u m b e r s of educated i m m i g r a n t s — t e n s of thousands of foreign professionals along w i t h even more Irish-born, returning to take part in the C e l t i c boom. O n c e d i s m i s s e d by m a n y Europeans as an economic basket case and social curiosity, Ireland has become a new m o d e l for European development. So far,

69

THE DEMOGRAPHIC EARTHQUAKE

the new B a l t i c and B a l k a n countries have shown considerable interest. I f French, G e r m a n , and Italian elites could see Ireland as a salutary e x a m p l e , they m i g h t avoid some of the painful times that now await their societies. Halfway across the world lies J a p a n , w i t h essentially the opposite condi­ tions of Ireland. W i t h the world's most senior-heavy population and

the

worst-performing advanced economy in recent times, the pension crisis has come to a head earlier in J a p a n than anywhere else. A n d unlike G e r m a n y , France, Italy, and others, J a p a n has been w i l l i n g to cut benefits and raise taxes to keep its pension system afloat. Nevertheless, those changes won't be enough to avoid another crisis in the next ten to fifteen years. Certain distinctive features of Japanese culture and politics p r o b a b l y m a d e it easier to face u p to its pension problems in the 1 9 9 0 s , w h e n the country's fast-deteriorating demographics and years of little economic g r o w t h took their toll on the system's finances. For one t h i n g , J a p a n e s e seniors are less d e ­ pendent on state benefits than the elderly in E u r o p e or A m e r i c a . R e l a t i v e l y more workers in J a p a n have private pensions than anywhere else, a legacy from the halcyon 1 9 7 0 s and 1 9 8 0 s , w h e n the country's large corporations p r o ­ vided comprehensive benefits. Japanese society's attitudes towards old age also allow seniors there to depend less on state pensions, because most Japanese work well into their sixties—nearly a decade longer than most continental Europeans—and most adult Japanese still provide regular support to their el­ derly parents. J a p a n also doesn't have E u r o p e or America's long history of steadily rising benefits, w h i c h in other countries has created a sense of entitlement about fu­ ture benefits and a popular expectation of their untouchability. W h i l e W a s h ­ ington mailed out the first U . S . Social Security checks more than sixty-five years ago, and most European countries began m u c h earlier than that, J a p a n didn't establish broad state pensions until the 1 9 7 0 s . Moreover, significant numbers of Japanese are indifferent to the promises and p r o b l e m s of the sys­ tem, because even today it isn't truly universal. T h e J a p a n e s e p u b l i c pension system has t w o basic p a r t s — a meager, flat benefit for everyone and supple­ mentary benefits based on each person's w a g e s — w h i c h together provide re­ tiring Japanese fairly small benefits. B u t about 1 0 percent of J a p a n e s e are left out entirely, because they w o r k for very small businesses e x e m p t from the system, and another 2 0 percent or so m a n a g e to avoid p a y i n g their full pre­ miums. Japanese politics also are very different from w h a t Europeans and A m e r i ­ cans are accustomed to, in ways that can m a k e difficult changes easier to ac­ complish. For as long as J a p a n has had democratic g o v e r n m e n t , one party, the LDP,

has dominated its politics—even in recent years, as the country's economy

70

FUTURECAST

stagnated year after year. J a p a n e s e voters' patience w i t h the L D P ' s extraordi­ nary economic m i s m a n a g e m e n t w o u l d be u n i m a g i n a b l e in Europe or the U n i t e d States; and this pattern of one-party g o v e r n m e n t and popular defer­ ence to its decisions m a y help explain how P r i m e M i n i s t e r J u n i c h i r o K o i z u m i could cut back pension benefits and raise payroll taxes, w h i l e equally talented Western politicians, from B i l l C l i n t o n and G e o r g e W

B u s h to Gerhard

Schroeder and J a c q u e s C h i r a c , could not. So, barely a generation after J a p a n created its modern p u b l i c pension sys­ t e m , w h e n benefits began to g r o w at an unsustainable pace and the system's revenues slowed dramatically, K o i z u m i could g o where no other democracy since Britain's T h a t c h e r has ventured: In 2 0 0 4 , the p r i m e minister persuaded J a p a n ' s D i e t to raise the payroll tax rate by more than one-third over the next ten years, from 1 3 . 6 to 1 8 . 3 percent, and to cut basic benefits by 2 0 percent, based on a set of automatic adjustments tied to demographics and future increases in w h a t is already the world's longest life expectancy. E v e n these strong measures w i l l not stave off the storm poised to hit J a p a n ' s retirees over the next decade. J a p a n e s e demographics w i l l assault the system's financing between now and 2 0 2 0 , as the country's labor force con­ tracts by nearly 1 2 percent w h i l e its elderly increase by nearly 3 0 percent. T h o s e changes w i l l leave barely 1 . 4 J a p a n e s e w o r k i n g and p a y i n g taxes to fi­ nance the p u b l i c pension for each elderly person. E v e n w i t h the recent re­ forms, the system w i l l not be able to meet its annual obligations. Moreover, the national advantages that have insulated m a n y elderly J a p a ­ nese from financial straits are s h o w i n g serious wear. Large Japanese employers s t r u g g l i n g w i t h globalization are cutting back private pensions. Japan's ac­ celerated a g i n g and anemic g r o w t h also have hollowed out the society's onceenvied private savings rate, slowly eroding the personal resources of many retirees and their families. Since the m i d - 1 9 8 0 s , Japanese households w i t h retirees—nonsavers a l l — h a v e actually outnumbered those in their prime sav­ ings years, and that g a p w i l l w i d e n substantially over the next ten to fifteen years. A n d after more than a decade of rock-bottom interest rates, those p r i m e - a g e savers are p u t t i n g away m u c h less than their parents did. W h e n the current crop of elderly were thirty-five years old, they saved more than one-quarter of their incomes; today's thirty-five-year-olds save less than 5 per­ cent of their i n c o m e s — a n d hold a lot more debt. In every w a y that matters, the financial outlook for retiring Japanese w i l l almost certainly deteriorate. In the 1 9 7 0 s and 1 9 8 0 s , the g l o r y decades for J a p a n ' s economy, the financial assets of the average Japanese family g r e w by more than 5 percent a year. M u c h of that was p u t aside for retirement. Those days are gone: T h e last fifteen years of low saving rates and average returns of

THE DEMOGRAPHIC EARTHQUAKE

71

i percent or less on people's investments have actually driven d o w n the value of a typical Japanese family's financial assets. T h e s e trends could worsen over the next decade; and if that happens, the wealth of average J a p a n e s e house­ holds w i l l keep on declining. T h e consequence w i l l be falling l i v i n g stan­ dards for Japanese seniors over the next ten to fifteen years, as their assets decline in value w h i l e their adult children have less to share. So, w i t h i n the next decade, even as the private resources of the J a p a n e s e el­ derly shrink, J a p a n e s e politicians w i l l once again have to either cut their ben­ efits or raise taxes on strapped w o r k i n g families. Y e t , u n l i k e G e r m a n y , France, or Italy, some future Japanese p r i m e minister m a y w e l l be able to p u l l it off politically. E v e n if the L D P finally loses its hold on power, the extraordinary forbearance of Japanese voters m a y allow whoever runs Japan's g o v e r n m e n t to impose more sacrifice, w i t h o u t suffering the incendiary debates and social protests awaiting most western countries. Over the same decade, China's political challenge around its retirement system w i l l be entirely different from w h a t E u r o p e and J a p a n f a c e — b u t in its own

way, equally daunting. China's p r o b l e m doesn't really b e g i n w i t h its

d e m o g r a p h i c s — e v e n though its elderly population w i l l g r o w faster than J a p a n or anywhere in Europe. F r o m 2 0 0 5 to 2 0 2 0 , the n u m b e r of Chinese age sixty-five or older w i l l increase by nearly 1 0 0 m i l l i o n , or about 6 5 p e r c e n t — more than Europe and J a p a n , whose elderly populations w i l l rise 5 7 percent and 3 0 percent, respectively. B u t the baby b o o m and baby bust came later to C h i n a than to the West; so even as the country's labor force begins to contract by 2 0 2 0 , its w o r k i n g - a g e population w i l l still d w a r f its seniors. I n that year, China's 1 6 7 m i l l i o n elderly w i l l equal less than 2 0 percent of its w o r k i n g - a g e people—compared to Europe and J a p a n , where the numbers of seniors have been g r o w i n g for generations and by 2 0 2 0 w i l l equal almost 5 0 percent of their countries' potential workers. W h a t sets C h i n a apart is that, unlike every western society, it doesn't p r o ­ vide any semblance of universal retirement security. For the t w e n t y years from the m i d - 1 9 6 0 s to the early 1 9 8 0 s , the country's vast state-owned enter­ prises and agricultural communes did offer a r u d i m e n t a r y safety net for most people, including retirement supports and health care. D u r i n g that period, the benefits were a pittance and relatively few Chinese l i v e d long e n o u g h to claim them, but even that largely disappeared w h e n , just as the country's life expectancy soared, the new economic p r o g r a m unraveled the c o m m u n e s and many state enterprises. N o r did China's leaders hesitate to do so: T h e changes were deliberate and an integral part of their modernization strategy, freeing up resources for more pressing economic projects. Since then, the leadership has g i v e n some attention to eventually rebuilding

72

FUTURECAST

w h a t it had torn d o w n — b u t always in ways that m i g h t help support their economic p r o g r a m . T h e first step came in 1 9 9 1 w h e n the State Council is­ sued a " R e s o l u t i o n on R e f o r m i n g the Pension S y s t e m . " T h e 1 9 9 1 changes ostensibly were designed to g r a d u a l l y create a m i x e d system of basic state benefits and private accounts, but its central purpose was to encourage indi­ vidual accounts that state banks could tap to help bail out the remaining stateo w n e d enterprises. T h e w a y it actually w o r k e d was that local governments assumed responsibility for the benefit payments to retirees from local state enterprises, and used the funds from the individual accounts to help finance them. In 1 9 9 7 , the People's Congress a c k n o w l e d g e d the failure of the 1 9 9 1 re­ forms and established a new system of pension c o v e r a g e — b u t only for those w h o advance the government's economic plans. T h e only Chinese eligible for the new state pension benefits are college students, soldiers, and those w o r k ­ ing in large cities for the g o v e r n m e n t , private businesses, or the remaining state-owned enterprises. B y d e s i g n , this system covers about half of urban workers and one-quarter of all Chinese; in practice, its coverage is even more l i m i t e d . Tens of millions of private-sector workers outside the large cities are left to their o w n resources. T h o s e city workers e l i g i b l e to receive benefits must pay such h i g h t a x e s — 2 4 percent of an e l i g i b l e person's paycheck, or twice the cut taken out of A m e r i c a n paychecks by social security—that tens of millions evade them. T h e only consistent contributors thus far—including even the m i l i t a r y — a r e those w o r k i n g for foreign-owned or joint venture companies, because the g o v e r n m e n t withholds business permits from foreign businesses that don't deliver full participation. A l l told, experts estimate that the new system actually covers only about 6 percent of all Chinese w o r k i n g in private businesses. For the hundreds of m i l l i o n s of Chinese l i v i n g in the countryside, the 1 9 9 7 reforms created a v o l u n t a r y pension plan that costs the equivalent of 2 5 cents a m o n t h and promises benefits that are equally meager. E v e n that contribution is too m u c h for typical rural Chinese l i v i n g on barely subsis­ tence incomes, and just over 1 0 percent of those e l i g i b l e have signed on. N o r are private pensions any help, w i t h just 1 percent of the population e n r o l l e d — m a i n l y those w o r k i n g for foreign-owned companies. In its current incarna­ tion, China's retirement security p r o g r a m not only fails to cover most Chinese, it's not even financially sustainable at its current scale. Since the p r o g r a m de­ pends on p a y - a s - y o u - g o taxes that are w i d e l y evaded, the cost of p r o v i d i n g benefits for those w h o w o r k e d in the state-owned enterprises that still exist already exceeds its contributions. For the near future and some years beyond, most Chinese w h o live into old

73

THE DEMOGRAPHIC EARTHQUAKE age

w i l l have to rely on themselves and their families for support, m u c h as

Europeans and Americans did in the nineteenth century. Today, nearly t w o thirds of Chinese sixty-five years or older live w i t h their c h i l d r e n — a n d 8 0 percent of those over age eighty. B u t attitudes a m o n g y o u n g e r Chinese are changing. W i t h jobs in large cities p a y i n g three times as m u c h as those in ru­ ral areas, tens of millions of y o u n g Chinese have left the countryside and left their parents behind. S o m e three-quarters of the income of those over age seventy-five still comes from their c h i l d r e n — b u t

for retired Chinese ages

sixty to sixty-five, the share already has fallen to just one-third. A n d w i t h birthrates slipping below those in A m e r i c a and m u c h of E u r o p e , China's boomers w i l l have far fewer children to support t h e m w h e n they b e g i n to retire ten to fifteen years from now. In the last few years, China's g o v e r n m e n t has e x p e r i m e n t e d w i t h a few p i ­ lot programs designed to persuade people to p u t aside more of their p r o d i ­ gious savings for retirement—and let the state off the hook. In 2 0 0 3 , B e i j i n g unveiled a p r o g r a m for personal retirement accounts in L i a o n i n g province, a region of 4 0 m i l l i o n people in northeast C h i n a that's h o m e to the M a n c h u dynasty's version of the Forbidden City. T h e p r o g r a m offers substantial subsi­ dies to entice people to participate, tax deductions for businesses that con­ tribute, and stricter efforts to discourage evasion. T h e p r o g r a m thus far has achieved a participation rate of 2 8 percent—better than the state system but still a long w a y from broad-based coverage. W i t h a life expectancy rivaling the West and the world's fastest-aging p o p ­ ulation, the financial cost of p r o v i d i n g China's seniors a sufficient benefit to stave off poverty cannot be easily reconciled w i t h the demands of moderniza­ tion. B y 2 0 2 0 , such a basic benefit w o u l d cost B e i j i n g 1 0 percent or more of the country's G D P . Such huge sums w o u l d have to come out of basic eco­ nomic projects on w h i c h the state's stability could depend, i n c l u d i n g its m a s ­ sive drives to educate hundreds

of millions of people, b u i l d a m o d e r n

military, and construct every manner of m o d e r n infrastructure—roads,

high­

ways and bridges, airports and seaports, and sanitation and communications systems—across a geographic expanse the size of the U n i t e d States. Even if China's leaders determined to provide for the elderly in any w a y like other major countries, the g o v e r n m e n t today lacks the basic means of col­ lecting the business and e m p l o y m e n t data it w o u l d need to apply and enforce job-based taxes, at least outside the large cities. C r e a t i n g a g o v e r n m e n t - r u n universal retirement system in C h i n a today w o u l d be a k i n to creating Social Security in 1 8 7 0 s A m e r i c a or in Britain in the 1 8 2 0 s . N o t even C h i n a could accomplish that today or in the near future. N o t h i n g stands still, and especially in C h i n a . O v e r the next ten to

fifteen

74

FUTURECAST

years, C h i n a w i l l m a k e m o r e a t t e m p t s to establish new supports for their elderly. B y 2 0 2 0 , China's 1 6 7 m i l l i o n elderly, most of them poor and w i t h little savings, w i l l live in a prospering society that w i l l raise everyone's expec­ tation of escaping poverty. In this area as in others, China's leaders w i l l con­ tinue to seek advice from western experts, private and official. To protect the resources needed to continue m o d e r n i z i n g the economy and the military, they w i l l likely experiment w i t h schemes that can channel the h i g h savings of younger Chinese to earmarked private retirement accounts. T h e most appropri­ ate m o d e l could be the Taiwan retirement system; and while Beijing may find it distasteful to adopt arrangements invented in Taipei, the steward of a great state, in Machiavelli's w o r d s , "must have a m i n d ready to turn in any direc­ tion as Fortune's w i n d s and the variability of the affair require." C r e a t i n g a pension system that depends on private retirement savings w i l l still require difficult changes. For decades, Chinese have held their savings in a handful of h u g e state-owned banks, w h i c h channeled those savings into loans for the country's inefficient and often insolvent state-owned companies. T o ensure a range of investment vehicles that could attract savers, C h i n a w i l l need a m o d e r n b a n k i n g and financial service industry to take the place of its state-owned banks. T h a t project is doable, since C i t i g r o u p , Deutsche B a n k , the U F J - M i t s u b i s h i G r o u p , and other g l o b a l financial service giants are eager to fill the v o i d . B u t if the goal is to enable hundreds of millions of Chinese to b u i l d u p the means to support themselves in their old age, C h i n a w i l l have to stop using its people's savings to maintain its remaining state-controlled "vital industries," such as steel, aircraft, and ship b u i l d i n g . W i t h o u t that sup­ port, however, the remaining state-owned monopolies could fail quickly, cre­ ating a serious p r o b l e m of dealing w i t h tens of millions more workers w h o w o u l d lose their jobs. A s everywhere else, C h i n a u l t i m a t e l y cannot escape its demographics. T h e r e aren't enough years between now and 2 0 2 0 for the 1 6 7 m i l l i o n seniors over age 6 5 — 2 4 4 m i l l i o n over age 6 0 — t h a t C h i n a w i l l have by then to build u p m u c h security in a system that depends on their o w n savings. Based on their recent record, China's leaders w i l l likely prefer to leave most elderly Chinese to fend for themselves. I f that's the course they choose, the retirement of China's boomers could create political problems that could dwarf what awaits G e r m a n y , France, and Italy. In recent years, millions of Chinese have been w i l l i n g to take their grievances to the streets. China's top police official, M i n i s t e r of P u b l i c Security Z h o u Y o n g k a n g , has a c k n o w l e d g e d publicly that in 2 0 0 4 , more than 3 . 7 m i l l i o n people took part in some 7 4 , 0 0 0 large public protests on various topics. A leading Chinese expert, Sun L i p i n g of Tsinghua University, figures the actual incidence of civil unrest is much greater: She

75

THE DEMOGRAPHIC EARTHQUAKE

estimates that protests i n v o l v i n g at least one h u n d r e d people occur 1 2 0 to 250

times each day in Chinese cities and 9 0 to 1 6 0 times a day in China's

villages. E v e n those estimates are p r o b a b l y conservative, since local officials often try to black out any news of protests in their jurisdictions. W h a t actually unfolds in C h i n a over the next ten to fifteen years w i l l also depend on w h o wins the next t w o succession struggles. There hasn't been real dissension about the country's steadily widening embrace of market-based arrangements since the early 1 9 9 0 s . Beneath that consensus, what westerners would call the conservatives have come out on top the last t w o times—those w h o see rapid economic and military modernization, and as little political free­ dom as possible, as the keys to China's future. B u t the leadership has included a few

liberals, or at least what Americans m i g h t call a Chinese version of compas­

sionate conservatives, most notably Premier Wen J i b a o . Wen and his followers favor a little more emphasis on social projects, including retirement security and unemployment supports, and even a little leeway for ordinary Chinese to express themselves politically. For a number of reasons, no new leadership corps is g o i n g to slow d o w n China's military expansion and

modernization—not

given the power of the People's A r m y in that leadership and not w h i l e the K o ­ rean peninsula remains a tinderbox and the U . S . military maintains its huge presence in Asia. If the liberals come to power in 2 0 1 2 ,

they m i g h t finesse the

pension p r o b l e m — o r their social and political reforms could end u p aggravat­ ing public unrest by slowing d o w n the rapid economic gains that hundreds of millions of Chinese now expect. If the conservatives hold on, they m i g h t finesse it, too, by generating enough g r o w t h to satisfy most C h i n e s e — o r face even wider unrest if a global energy or financial m e l t d o w n stalls Chinese g r o w t h , with little or no public supports to soften the blow. Finally, there's the U n i t e d States. D e s p i t e alarms raised regularly by some A m e r i c a n politicians, in every w a y that matters the outlook for the U . S . so­ cial security system is m u c h more manageable, economically and politically, than what awaits national pension systems almost anywhere else. C o m p a r e d to Europe and J a p a n , America's demographics are more favorable (with the exception of Ireland), its p r o m i s e d pension payments are smaller (with the exception of B r i t a i n and Ireland), its older p e o p l e retire a little

later

(with the exception of Japan), U . S . prospects for the g r o w t h and w a g e gains that finance pension payments are stronger (with the exception, again, of Ireland), and its life expectancy is a few years shorter. G i v e n the r i g h t encouragement, tendentious number crunchers have calculated h u g e shortfalls some seventyfive or more years out, carefully passing over their o w n unavoidable ignorance of countless intervening developments that can h u g e l y affect such projec­ tions. Focusing on the probabilities closer at hand, U . S . payroll tax revenues

76

FUTURECAST

should be more than enough to cover annual benefit payments until at least 2 0 1 8 or so; and in 2 0 2 0 , the system's cash flow shortfall should be less than $ 6 3 billion, in an economy projected to top $ 2 5 trillion. E v e n by 2 0 3 0 , the cash flow deficit should still be in the range of just 1 percent of America's G D P in that y e a r — a n d that doesn't include the pension system's income from interest on its trust fund assets. A d d that in, and payroll tax revenues plus interest should cover benefits for another quarter-century. P r o v i d i n g and financing these p a y m e n t s also should cramp normal eco­ n o m i c activity m u c h less in the U n i t e d States than in other advanced coun­ tries, because the U . S . system is relatively so m u c h smaller. Social security benefits c l a i m about 4 . 2 percent of America's annual economic output today, and that's expected to rise to 5 . 3 percent by 2 0 2 0 . E x c e p t in Britain, where basic pension benefits now g r o w less than the economy year by year, the p u b ­ lic pension systems in other advanced countries take t w o to three times as m u c h out of their national investment pools and budgets. B y 2 0 2 0 , payments w i l l range from 1 1 percent of the G D P of Sweden and 1 2 to 1 3 percent of G D P in G e r m a n y and J a p a n , to 1 5 percent in France and Italy. O n the rev­ enue side, the burden of financing the benefits also cuts m u c h less deeply into the investment and hiring plans of A m e r i c a n businesses than their European and J a p a n e s e counterparts. Today, the taxes that finance state pension benefits a m o u n t to 1 4 . 2 percent of the labor costs of U . S . - b a s e d companies, compared to 1 7 percent in B r i t a i n , m o r e than 2 1 percent in J a p a n , nearly 2 5 percent in G e r m a n y , 3 2 percent in Italy, and a w h o p p i n g 3 8 percent in France. W i t h m u c h more r u n n i n g room, the A m e r i c a n p u b l i c pension system will produce m u c h less divisive political fights than those almost certain to erupt in E u r o p e , since they won't have to involve painful benefit reductions or broad new taxes. K e n n e t h A p f e l , w h o headed the U . S . Social Security A d m i n i s t r a ­ tion in the late 1 9 9 0 s , recalls President C l i n t o n exploring a bipartisan com­ p r o m i s e in secret m e e t i n g s w i t h B i l l T h o m a s , then chair of the House c o m m i t t e e w i t h jurisdiction over p u b l i c pensions, and in p u b l i c forums w i t h p r o m i n e n t conservative R e p u b l i c a n s such as then Senator R i c k S a n t o r u m .

5

Bipartisanship dissolved in the impeachment battle of 1 9 9 7 - 1 9 9 8 , and Pres­ ident Bush's efforts in 2 0 0 3 centered on a strictly conservative approach that failed to attract any D e m o c r a t i c support. B u t a return to a less-partisan, more centrist approach to Social Security reform w i l l have a real chance of success. E v e n if A m e r i c a n s decided to eliminate any projected shortfall for the life­ t i m e of anyone old e n o u g h to w o r k t o d a y — a development both unlikely and unnecessary—almost any meaningful p a c k a g e of reforms could take care of it. A m e r i c a n social security could "balance its books" for the long term by paring the benefits of the 1 0 percent richest seniors, tweaking annual cost-of-living

THE DEMOGRAPHIC EARTHQUAKE

77

adjustments to reflect the average expenses of elderly people, and raising the ceiling on the wages subject to payroll taxes to 9 0 percent of earnings instead of 8 5 percent, as it did in the 1 9 8 0 s . W h i l e older Americans can expect to receive the p u b l i c pensions they're now promised until they die, the U n i t e d States w i l l not g e t a free pass. M e d ­ ical care is m u c h more expensive in A m e r i c a than anywhere else in the w o r l d ; and as w e w i l l see later, colossal financing p r o b l e m s w i l l almost certainly erode p u b l i c l y financed care for A m e r i c a n seniors over the next fifteen years. Moreover, for many years the U n i t e d States has used payroll tax revenues col­ lected for social security to help fund the rest of g o v e r n m e n t . A s retiring boomers claim those excess revenues, U . S . presidents and congresses w i l l have to cut other programs or raise other t a x e s — w i t h all the political unpleasant­ ness that w i l l entail. L o o k i n g beyond 2 0 2 0 , those pressures w i l l intensify as the social security system demands repayment of all the surplus revenues it w i l l have lent to the U . S . Treasury for almost t w o generations. So,

w h i l e J a p a n and most of E u r o p e face p i t c h e d p o l i t i c a l battles over

c u t t i n g pensions, raising p a y r o l l taxes, or r u n n i n g e c o n o m i c a l l y d e s t r u c t i v e deficits just to keep their pension systems afloat, the U n i t e d States cannot avoid painful debates over cutting other p r o g r a m s , raising other taxes, or running economically draining deficits. Still, there are enough differences to expect that the political firestorms facing Europeans w i l l be brush fires in the United States. For one, it's more palatable politically to cut back a n u m b e r of smaller programs w i t h l i m i t e d beneficiaries, than to slash the p r o m i s e d p a y ­ ments for huge numbers of vulnerable elderly people or raise the payroll taxes of every w o r k i n g person. A n d if it comes to more deficits, America's relatively stronger economy should m a k e foreign investors more w i l l i n g to

finance

them than in Europe of J a p a n . It also m a y be easier for future politicians to raise taxes in A m e r i c a , where the government (at all levels) claims one-third of the nation's income, c o m ­ pared to E u r o p e where states already take 4 0 to 5 0 percent of that income. But

taxes w i l l be a major battle in the U n i t e d States of the near future, be­

cause the increases necessary to finance health care over the next ten to fifteen years w i l l be substantial. E l d e r l y A m e r i c a n s also face w h a t w i l l be a nasty sur­ prise for many of them: M o r e than 4 0 percent of A m e r i c a n s have substantial private retirement savings, nearly all of it saved on a tax-free basis. A s boomers begin to draw d o w n their retirement saving over the next decade or so, they w i l l discover that everything they take out w i l l be subject to income taxes. T h i s w i l l likely become its o w n heated political issue over the next decade, as millions of new A m e r i c a n retirees call on elected officials to stop taxing the money they need to live on.

78

FUTURECAST In one w a y or another, the unique d e m o g r a p h i c shifts of this period will

shape m u c h of the next decade's domestic politics in every major country. It could hardly be otherwise, g i v e n the real impact these shifts w i l l have around the w o r l d on everyone's l i v e s — o n how m u c h national economies and family incomes w i l l g r o w , h o w h i g h people's taxes could g o , and how comfortable or d e p r i v e d their retirements w i l l be. H o w w e l l leaders and governments in A m e r i c a , E u r o p e , J a p a n , and C h i n a ultimately respond to these shifts—how successfully they respond to new pressures on their labor forces, saving and investment rates, and p u b l i c pension p r o g r a m s , and how effectively they can muster a political consensus for r e f o r m s — w i l l be a critical test of the quality of their democracies (or in China's case, an autocracy) over the next decade.

CHAPTER THREE

THE PRIMACY OF GLOBALIZATION

M O S T P E O P L E W H O T A L K or w r i t e about globalization use it as shorthand to convey that whatever the subject—jobs, inflation, p o p culture, or almost anything else these d a y s — a new and m u c h larger context now affects it. It's imprecise but not really off-base. T h e landscape and context of the w o r k most people do, the incomes they earn, how they invest and spend their money, and the goods and services they use all have become larger and different in ways that matter. N e a r l y one-third of everything produced in the w o r l d is now traded from country to country. In little more than a decade's t i m e , the g l o b a l labor force—the n u m b e r of workers involved in some w a y w i t h g l o b a l production and consumption, directly or indirectly—has soared by 5 0 0 m i l l i o n to 7 5 0 million. Unprecedented transfers of investment, technologies, and business k n o w - h o w from the world's most advanced economies to scores of d e v e l o p i n g countries have unleashed the most rapid modernization in h i s t o r y — m o v i n g hundreds of millions of people around the w o r l d from poverty to basic c o m ­ fort or better. W i t h i n countries and between t h e m , m i l l i o n s of workers are m o v i n g to take advantage of new opportunities. Trillions of dollars in capital move easily across borders, b r i n g i n g d o w n the trend lines of g l o b a l interest rates. A n d a new intensity in competition is h o l d i n g d o w n inflation in most countries, despite the strong g r o w t h of rapid modernization and the l o w in­ terest rates from g l o b a l capital. Each of these features of globalization carries a new and

79

sometimes

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FUTURECAST

unexpected price. T h e late entry and rapid rise of C h i n a (and to a m u c h lesser extent, India) as a major manufacturer of the world's goods is squeezing out less efficient producers in scores of smaller developing countries like Thailand and M e x i c o . In advanced economies like the U n i t e d States and Germany, manufacturing of all but the most sophisticated or customized goods is on its w a y to b e c o m i n g niche activities. T h e m i g r a t i o n of millions of workers across borders is p r o d u c i n g political stresses and conflicts, especially in Europe, where influxes of M u s l i m workers from N o r t h Africa and the near M i d d l e East have t r i g g e r e d social unrest in France and G e r m a n y and waves of social intolerance in countries like D e n m a r k and the Netherlands. T h e globalization of so m u c h production and consumption is also chang­ ing the character of large corporations. T h e easy and cheap availability of g l o b a l capital and labor have m a d e various forms of intellectual capital the most i m p o r t a n t and scarce resources for g l o b a l companies, w i d e n i n g the g a p between the incomes of the most h i g h l y skilled people and everyone else. B y some measures, the top-fifty or so g l o b a l companies have become b i g g e r than most countries; and the complexities of their operations across scores of na­ tional markets have m a d e political capital and skills almost as important as intellectual capital. It's p a y i n g off: T h e needs of the g l o b a l megacompanies increasingly influence national policies around the w o r l d . In the traditional spheres of labor and capital, globalization also has spurred more offshore outsourcing of jobs to developing countries. W h i l e this k i n d of outsourcing has so far actually cost few A m e r i c a n s , Europeans, or J a p a n e s e their jobs, it's entering a new phase in w h i c h the piecemeal out­ sourcing of service tasks could cost millions of service workers in advanced countries their current livelihoods. T h e new intensity of g l o b a l competition is slowly and largely indirectly eating away at job creation and w a g e increases across the U n i t e d States, E u r o p e , and J a p a n . A s to the new w o r l d of global capital markets, w h i l e they're d a m p e n i n g inflation and interest rates, those pressures have found new outlets in country after country through boomand-bust bubbles in stocks and housing. A n d m u c h as C h i n a is the 8 0 0 p o u n d panda in g l o b a l production, the U n i t e d States uses global capital markets to maintain its place as the world's 2 , 0 0 0 - p o u n d customer. To fi­ nance the c o n s u m p t i o n that helps keep m u c h of the rest of the world g r o w ­ i n g , A m e r i c a now borrows hundreds of billions of dollars every year from foreign savers, perhaps straining g l o b a l capital and currency markets to nearly a breaking point. M o d e r n globalization is too pervasive and powerful already for any country to choose the parts that favor it and then w a l l itself off from those it doesn't care for. It is the largest economic development of our lifetimes and, like it or

THE PRIMACY OF GLOBALIZATION

81

not, its astonishingly c o m p l e x and interconnected facets w i l l shape the path and life of every society for the next decade and w e l l beyond.

THE NEW GLOBALIZATION OF PRODUCTION AND CONSUMPTION Changes in size and dimensions are easy to see. O v e r the last fifteen years, China, India, the countries of Eastern E u r o p e and the old Soviet U n i o n , and much of Latin A m e r i c a have steadily opened their economies to more foreign investment and greater domestic and foreign competition. These changes took a world comprised of several economic blocs that had little to d o w i t h each other economically—the basic arrangements of the previous h a l f - c e n t u r y — and turned t h e m into a genuine g l o b a l economy. T h e data speaks for itself: O v e r the last fifteen years, the share of every­ thing produced in the w o r l d that's traded across national borders has in­ creased steadily from about 1 8 percent in 1 9 9 0 to just under 3 0 percent today. B y 2 0 0 5 , more than one hundred and eighty national economies traded more than $ 1 2 trillion w o r t h of goods and services, out of a $ 4 2 trillion world G D P . These are the highest levels and largest increases ever recorded. In the U n i t e d States alone, imports reached $ 2 . 2 trillion in 2 0 0 6 — m o r e than the G D P that year of all but five other countries in the w o r l d . For

millennia, people have b o u g h t foreign-made things because they

couldn't make t h e m for themselves or people in those other countries could make them for m u c h less. M u c h of w h a t w e trade today involves the clothes, food, furniture, and the like, or basic c o m m o d i t i e s like energy and metals, that countries have b o u g h t from each other for centuries. T h e cotton and al­ monds that Americans b u y today from Indian producers, or the e q u i p m e n t that G e r m a n s and Italians buy from companies in C h i n a , are not very differ­ ent from the garments and tools that ancient G r e e k s b r o u g h t back from E g y p t , the precious metals and stones that East Africans traded w i t h people in India and C h i n a in the M i d d l e A g e s , or the chairs and chests that A m e r i ­ can colonists made for the d r a w i n g rooms of eighteenth-century Paris and London. Today's levels of g l o b a l trade are also not w h o l l y unprecedented. Trade a m o n g the economies of E u r o p e , plus the U n i t e d States, in the late nineteenth and early twentieth centuries accounted for 2 0 to 2 5 percent of their combined G D P — b u t then fell sharply over the next three decades of world wars and depression. For

all the similarities, g l o b a l exchanges today also are different from the

2 , 5 0 0 years of international trade that preceded it. M u c h of the difference lies not in where things are made, but in how they are made. It's no longer a matter

82

FUTURECAST

m a i n l y of people in one country selling or b u y i n g finished goods or raw ma­ terials from people in other countries, or even companies in one nation oper­ ating plants and outlets in other nations. T h e companies that make up the core of every advanced economy today, and m a n y developing ones—the busi­ nesses most people w o r k for, directly or i n d i r e c t l y — n o w operate through g l o b a l networks that exist outside and beyond the borders and laws of any country. T h e s e networks and systems are built on technologies developed in the late t w e n t i e t h and early twenty-first century, w h i c h now enable corpora­ tions to break u p the production of v i r t u a l l y everything from furniture and clothing to pharmaceuticals and computers into dozens or hundreds of dis­ crete parts, parcel t h e m out to facilities in dozens of different countries, and then assemble and distribute t h e m to scores of different markets. T h e com­ p u t e r and W e b - b a s e d systems that track, transfer, amass, and analyze infor­ m a t i o n about all of these far-flung activities m a k e it possible for corporations to m a n a g e and coordinate these g l o b a l operations. B u t the revolutionary ele­ m e n t is the deconstruction of the production process itself, not the w a y com­ panies deal w i t h the information that flows from it. A l l these economic changes also rest on the seismic political shifts of the late 1 9 8 0 s and 1 9 9 0 s , w h e n c o m m u n i s m collapsed, China's leaders opted for a g r a d u a l , market-based modernization strategy, and the U n i t e d States w i t h the other advanced economies created the W o r l d Trade Organization ( W T O ) . A l m o s t everywhere in the w o r l d , the sudden and stunning end of the Soviet U n i o n and its empire left only the A m e r i c a n and European models for eco­ n o m i c prosperity and political stability. T h e A s i a n financial crisis of 1 9 9 7 1 9 9 8 reinforced the message b y discrediting extensive state industrial poli­ cies even in market-based economies. B y the late 1 9 9 0 s , from Central and Eastern E u r o p e to E a s t A s i a and Latin A m e r i c a , public debate centered more and more on just how broadly and deeply free markets and deregulation should reach. T h e W T O , shaped largely by the U n i t e d States, provided the answers. V i r t u a l l y every developing country in the world accepted the W T O ' s rules and b e g a n to open their state-owned or state-directed economies to domestic markets and m u c h greater foreign investment and ownership. For the first t i m e , A m e r i c a n , European, and J a p a n e s e companies that long d o m i ­ nated g l o b a l business could m o v e sophisticated technologies and operations to dozens of countries, large and s m a l l , whose role in the international econ­ o m y had consisted for centuries of m a i n l y p r o v i d i n g basic commodities. These shifts have now created a series of new, world-changing developments. T h e first and greatest impact has been felt in some of the poorest and largest places on the planet, w h i c h went from economic outsiders to global players. In C h i n a the number of people w o r k i n g in modern factories and offices has

THE PRIMACY OF GLOBALIZATION

83

exploded, raising average manufacturing wages there by more than twofold 1

in a decade's t i m e . Since those wages are still m u c h lower than most other places—in 2 0 0 4 , an average manufacturing worker earned seventy cents an hour in China and 4 0 cents an hour in India, compared to $ 2 . 3 0 in M e x i c o and $ 2 1 . 0 0 in the United States—the addition of several hundred million Chinese and Indian workers to the global labor force has produced new pressures on the jobs and incomes of people thousands of miles from the industrial centers out­ side Shanghai or D e l h i . Workers and companies in countries like Mexico and Malaysia—and not A m e r i c a or Europe—feel the most pressure, because they're the ones now competing directly w i t h Chinese and Indian producers. T h i s is one of the reasons why, for the last ten years, incomes have been rising t w o to three times faster in China, and one and a half to t w o times faster in India, than almost anywhere else.

2

In economic d e v e l o p m e n t , one g o o d t h i n g often leads to another. So the emergence of far-flung p r o d u c t i o n systems c o m p r i s e d of thousands of oper­ ations in m a n y d e v e l o p i n g countries has accelerated the d e v e l o p m e n t of transportation and c o m m u n i c a t i o n s s y s t e m s — i n societies that a decade ear­ lier depended on dirt roads, carts, and i r r e g u l a r m a i l s e r v i c e — t o m o v e p e o ­ ple, parts, g o o d s , and the data about t h e m across regions and scores of nations. C h i n a has been b u i l d i n g 5 0 , 0 0 0 k i l o m e t e r s of n e w roads a year, in­ c l u d i n g 5 , 0 0 0 kilometers of s u p e r h i g h w a y s to handle the c o m i n g avalanche 3

of private a u t o m o b i l e s . Similarly, in early 2 0 0 6 , m o b i l e p h o n e users passed 4 0 0 m i l l i o n in C h i n a and 9 0 m i l l i o n in I n d i a , w i t h n e w cell p h o n e s u b ­ scriptions g r o w i n g by 6 0 0 , 0 0 0 per m o n t h in C h i n a and 5 0 0 , 0 0 0 a m o n t h in I n d i a .

4

T h e rapid spread of sophisticated production operations in poor develop­ ing countries has other w o r l d - c h a n g i n g effects. T h e new opportunities to at­ tract lucrative foreign operations to societies, large and small, that had long existed on the margins of the advanced w o r l d helped convince leaders from China and India, to M e x i c o and B a n g l a d e s h , to g e t more serious about m o d ­ ernizing themselves—especially by u p g r a d i n g education and p u b l i c health systems to provide the workers that western businesses w o u l d need and the ba­ sic amenities that foreign managers expect. In H u n g a r y , M e x i c o , and G u y a n a , for example, public spending on education d o u b l e d in the 1 9 9 0 s , and it rose 5

at least 5 0 percent in T h a i l a n d and B a n g l a d e s h . In a d e v e l o p i n g - w o r l d ver­ sion of supply-side economics, these i m p r o v e m e n t s increase the transfers of new foreign technologies, operations, and capital, w h i c h in turn generate more revenues for governments to extend those i m p r o v e m e n t s . T h e g l o b a l ­ ization of the production process by the world's large corporations is d r i v i n g the modernization of m a n y poor societies around the w o r l d .

84

FUTURECAST Globalization's w o r l d - c h a n g i n g effects are most clear in those countries—

C h i n a , T a i w a n , the Czech R e p u b l i c , and some others—that have both opened themselves to foreign investment and domestic competition, and upgraded their transportation, c o m m u n i c a t i o n , education, and p u b l i c health systems. In one sense—one c o m m o n l y cited b y politicians from E g y p t and Venezuela to M a l a y s i a — o n e hundred or so h u g e A m e r i c a n , European, and Japanese cor­ porations have i m p o s e d these changes to serve their desire for wealth and the needs of another several thousand, large and midsize companies that depend on them. I f the thirst for riches is the same as every company's need to earn a c o m p e t i t i v e return, the characterization is true. H o w e v e r , the greatest benefi­ ciaries are the workers (and their families) in those countries w i t h the educa­ tion and skills to hold d o w n jobs in the m o d e r n businesses, foreign-owned and domestic, that are transforming their economies. In the last ten to fifteen years, more of the world's people have m o v e d from poverty to basic comfort and from basic comfort to a middle-class life than in any other comparable period in recorded history. G o n g J i e is a thirty-five-year-old w o m a n w h o arrived a half decade ago in the northern city of J i n z h o u w i t h a y o u n g daughter and little else. It took a few years, b u t she found w o r k t a p p i n g into the h u m a n globalization—tutoring

transfers

in

A m e r i c a n s stationed there in Chinese. Today, she

earns e n o u g h to support her daughter in relative comfort and her aging 6

mother back h o m e in the p r o v i n c e s . E v e n further from Shanghai or Beijing is the world's fastest-growing and fastest-modernizing city, C h o n g q i n g on the Y a n g t z e R i v e r in western C h i n a . A t the bottom are once destitute farmers like Y u L e b o , w h o can now support his family as a "bangbang" porter carry­ 7

ing g o o d s u p the steep hills of the mountain city. Further up the ladder are people like L i Z h i g u a n , w h o started as the son of a poor farmer, left the coun­ tryside for basic factory w o r k near C h o n g q i n g , and now earns a decent l i v i n g cleaning w i n d o w s of the city's new office towers. Finally, there are nine thou­ sand new workers, m a n y of t h e m migrants from rural villages, w o r k i n g in the new Lifan Sedan auto factory founded by a sixty-eight-year-old entrepreneur n a m e d Y i n M i n g s h a n . Y i n spent m u c h of Mao's reign on a state w o r k farm and set u p his first business, a small motorcycle repair shop, in 1 9 9 2 . He's b u i l d i n g Lifan Sedan into a major domestic auto producer by b u y i n g foreign factories. Tp create the C h o n g q i n g facility, for e x a m p l e , Y i n bought a B M W factory in B r a z i l , broke it d o w n , shipped it back, and reassembled it in the C h o n g q i n g E c o n o m i c Z o n e . So far, these stories and hundreds of millions like t h e m are the single most important and powerful effect of globalization T o be sure, these leaps in p r o g r e s s are far from u n i v e r s a l . M o s t Africans r e m a i n b e y o n d the reach of all the e c o n o m i c p r o g r e s s , especially in the

THE PRIMACY OF GLOBALIZATION

85

sub-Saharan countries. Closer to m a n y people's experience, m u c h of L a t i n A m e r i c a has remained largely on the sidelines of globalization. W h i l e C h i n a has g r o w n for t w o decades at supercharged rates of 8 to 1 0 percent a year and the economies of Southeast A s i a expanded 5 to 7 percent a year for the same time, the G D P of Latin A m e r i c a has g r o w n less than 2 percent a year. There's nothing in globalization that in some subtle w a y favors A s i a n s . In fact, for both historic and geographical reasons, Latin A m e r i c a is a more natural place than A s i a for foreign operations by A m e r i c a n and European businesses. T h e difference lies m a i n l y in politics, not economics. Foreign investors and for­ eign companies could hardly fail to notice the regular bent of Latin A m e r i c a n leaders for policies that led to hyperinflations, sovereign debt defaults, and the periodic appropriation of foreign assets, or policies that t i g h t l y restricted foreign ownership and encouraged widespread piracy of foreign patents and copyrights, and that left most of their potential workers w i t h few marketable skills. E c o n o m i c instability has hit A s i a n countries, too, most notably in the 1 9 9 7 - 1 9 9 8 currency crises. B u t K o r e a , T h a i l a n d , T a i w a n , and the rest of the region emerged from their crises w i t h reforms that increased the marketbased arrangements favored by foreign investors and foreign businesses; and by 2 0 0 0 , C h i n a and India had followed and even surpassed their e x a m p l e . W h e r e m o d e r n globalization takes hold, it often assumes a d y n a m i c q u a l ­ ity that wasn't evident the last t i m e international trade e x p a n d e d sharply. I n the period of globalization in the late nineteenth and early t w e n t i e t h cen­ turies, A m e r i c a n and European international companies used cheap labor in developing countries m a i n l y to export their resources back to A m e r i c a or Europe where they were used to p r o d u c e g o o d s for their o w n markets and those of other industrialized countries. T h i s t i m e , developing countries whose economies stagnated for generations have seen year after year of g r o w t h and income gains of 5 percent, 7 percent, or even 1 0 percent. T h i s isn't happen­ ing s i m p l y because U . S . , European, and J a p a n e s e g l o b a l companies have es­ tablished more foreign subsidiaries. T h i s time, the actual production is taking place, piece by piece, in hundreds of places across the d e v e l o p i n g w o r l d . O n top of that, tens of thousands of native entrepreneurs have set u p their o w n businesses both to p r o v i d e g o o d s and services to the companies p r o d u c i n g the pieces for large Western corporations and to satisfy the b u r g e o n i n g , new domestic markets created by the income gains that their p r o d u c t i o n helps drive. T h e emergence of new small-business classes in countries such as T h a i l a n d and Taiwan, and later C h i n a , India, and M e x i c o , is as m u c h a part of g l o b a l ­ ization as the w o r l d w i d e networks of C i t i g r o u p and Siemens. T h e i r emer­ gence and g r o w t h also creates a powerful new political constituency

in

86

FUTURECAST

developing countries that sees its future aligned w i t h modern globalization. M u c h like small-business owners in A m e r i c a , Britain, or France, they resist any return to the old ways of government-sanctioned monopolies and hostil­ ity to foreign investment and foreign businesses. Instead, they press for freer markets and m o r e g o v e r n m e n t spending for education, infrastructure,

and

p u b l i c health. T h e g r o w t h of small and m e d i u m - s i z e businesses in many ma­ jor developing c o u n t r i e s — m o r e than the economic and political power of the U n i t e d S t a t e s — w i l l m a k e globalization a permanent feature of most people's future. Latin A m e r i c a is a g o o d example of how this works in some places and not in others. A m o n g the larger Latin countries, Mexico and Brazil have accepted the market-based terms of globalization more extensively and enthusiastically than Venezuela and Argentina. T h e centrist Vincente Fox's 2 0 0 0 defeat of Mexico's Institutional Revolutionary Party ( P R I ) , which had held power for more than seven decades, followed in 2 0 0 6 by the election of the business-oriented Felipe Calderon and his conservative National Action Party ( P A N ) — a l o n g with the reelection of the fiscally disciplined Lula government in Brazil—represent the first t i m e that p o p u l a r l y elected centrist or even conservative g o v e r n m e n t s have come to power and successfully retained office in major Latin American countries. A r g e n t i n a and Venezuela have accepted fewer of the requirements of globalization, their small-business classes are smaller, and their politics are more traditionally populist, conventionally left w i n g and anti-American. This may

be a pattern that could apply eventually to Europe, where countries such

as France and Italy, that resist the deregulatory demands of globalization and encounter serious economic problem for both those and demographic reasons, develop their o w n versions of populist, antiglobalization politics.

GLOBALIZATION AND THE NEW, IDEA-BASED MEGACORPORATION T h e d e v e l o p m e n t of lucrative new markets in fast-growing developing coun­ tries also is c h a n g i n g the character of g l o b a l corporations. For the first time in economic history, there are g e n u i n e g l o b a l markets for both the production and the consumption of everything from cell phones and pharmaceuticals to machine tools and information services. T h i s new aspect of globalization vastly enlarges and complicates the business of business, and it's produced a new k i n d of g l o b a l company. T h e most obvious change is just h o w b i g large corporations have now become. T h e vast expansion of potential markets and the ability of firms to serve h u g e and c o m p l e x w o r l d markets have produced a new class of

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THE PRIMACY OF GLOBALIZATION

megacorporations. In 2 0 0 6 , 6 0 countries had a national i n c o m e or G D P of $50

billion or m o r e — 1 2 1 g l o b a l companies had revenues at least as g r e a t ,

including 3 0 companies w i t h revenues e x c e e d i n g $ 1 0 0 b i l l i o n .

8

A t the

top, the c o m b i n e d revenues of the world's top-ten c o r p o r a t i o n s — W a l M a r t , E x x o n M o b i l , R o y a l D u t c h Shell, B r i t i s h P e t r o l e u m , G e n e r a l M o t o r s , T o y ­ ota, Chevron, D a i m l e r C h r y s l e r , C o n o c o P h i l l i p s , and T o t a l — c a m e to $ 2 , 4 3 6 billion in 2 0 0 6 . T h a t was more than the national i n c o m e of all but four na­ tions (the U n i t e d States, J a p a n , G e r m a n y , and C h i n a ) . In A m e r i c a alone, the c o m b i n e d 2 0 0 6 revenues of the top-ten U . S . corporations, $ 1 , 9 8 4 b i l l i o n , were greater than the G D P of all but six countries. N o matter these rev­ enues, corporations do not have the p o w e r of countries. B u t m o s t of those h u g e revenues are p a i d out to workers and g o v e r n m e n t s and other businesses for

countless g o o d s and services. S o , w h e n the revenues are h u g e and the

country is fairly s m a l l , that a l i g n m e n t i n e v i t a b l y creates political and social power. Unsurprisingly, most megacorporations come from the most advanced economies. Seventy-one of the world's hundred-largest corporations are from the U n i t e d States, J a p a n , G e r m a n y , France, and B r i t a i n . For a variety of rea­ sons, British and French corporations, and to a lesser degree A m e r i c a ' s , are overrepresented among the top hundred, relative to the size of their economies. Yet

even A m e r i c a n , B r i t i s h , and French companies dominate only a handful

of global sectors. U . S . companies, for e x a m p l e , are strongest in pharmaceuti­ cals, w i t h about half of all the world's large d r u g companies, and software w i t h all four of the world's b i g four. U . S . c o m p u t e r makers also share d o m i ­ nation of that g l o b a l market w i t h J a p a n e s e firms. E u r o p e a n and J a p a n e s e companies account for most of the world's major auto makers, and E u r o p e a n firms dominate the world's telecommunications giants. Globalization changes w h a t it means for a c o m p a n y to be an A m e r i c a n , French, Swiss, or Chinese enterprise, but not in the ways that m a n y people believe. A decade ago, the p u n d i t politician R o b e r t R e i c h attracted popular attention by pronouncing that the sharp increase in foreign investment and foreign operations by multinational companies divorced their decision m a k ­ ing and allegiance from the interests of their headquarter countries and their workers, all to enrich a small n u m b e r of g l o b a l shareholders. It's a seductive and easy-to-grasp formulation, but it is off the m a r k . A s w e w i l l see, more than 7 0 percent of the people e m p l o y e d by U . S . g l o b a l megacompanies live and w o r k not in outposts in E u r o p e or developing nations but in the U n i t e d States; and the shares of home-based workers in European and J a p a n e s e multinationals are higher. R e i c h also didn't g e t the shareholder issue right. Some of the profits from foreign operations certainly g o to shareholders—but

88

FUTURECAST

again, for U . S . multinationals, about 4 0 percent of the profits distributed to all of their shareholders, A m e r i c a n and foreign, g o to pension funds and re­ tirement accounts held by ordinary A m e r i c a n s . W e also w i l l see presently that globalization shifts the strategic focus of large companies in ways that reinforce the A m e r i c a n or European character of large corporations headquartered there. O n e important reason w h y E x x o n M o b i l doesn't d e c a m p to B a h r a i n or Lichtenstein, and w h y the British phar­ maceutical g i a n t A s t r a - Z e n e c a hasn't m o v e d to India or Poland, is that g l o b ­ alization has shifted their critical strategic focus from securing cheap capital and labor to the more central task of developing and i m p l e m e n t i n g new, eco­ nomically powerful ideas. T h e data show that large companies today invest and care most about their "intangible" assets, including not only the intellec­ tual property e m b o d i e d in newly developed products and processes, but also their b r a n d i n g , databases, and new ways of operating and organizing them­ selves, and training and using the h i g h l y skilled employees w h o w o r k w i t h these intangibles. It's the intangibles, and not the location of less than 3 0 per­ cent of their workers, that makes a c o m p a n y A m e r i c a n or European; and al­ most e v e r y t h i n g associated w i t h those intangibles happens in the countries that these companies call home. Stated more concretely, the executives, managers, and other critical person­ nel w h o develop and use the i n t a n g i b l e assets of large A m e r i c a n , European, and J a p a n e s e companies, as w e l l as their shareholders, are still very predomi­ nantly A m e r i c a n , European, or J a p a n e s e , respectively—as are most of the re­ lationships for the critical d e v e l o p m e n t , financing, m a r k e t i n g , distribution, accounting, and legal functions of a g l o b a l company. E v e n h u g e companies founded in small countries, w i t h most of their production and sales distrib­ uted across other countries, hold on to their original national character. TetraLaval, the S w e d i s h p a c k a g i n g g i a n t , does most of its business in markets outside S w e d e n . It's privately o w n e d by the R a u s i n g family, w h o now live in E n g l a n d , w h i c h does not tax gifts and inheritances w i t h i n h u g e l y wealthy foreign families. Y e t in every w a y that matters, Tetra-Laval remains S w e d i s h — it's run out of S w e d e n , and the central engineering, m a r k e t i n g , and distribu­ tion operations that determine its success remain distinctively Swedish. A n d when t w o global businesses from different countries merge, the stronger com­ pany becomes d o m i n a n t — D a i m l e r C h r y s l e r , after all, was not called ChryslerDaimler. T h e more subtle ways in w h i c h globalization does m a k e megacorporations less "national" in character m a i n l y involve an increasing cosmopolitanism in tastes, business methods, and standards. A g l o b a l company like I K E A or W a l - M a r t has to w o r k w i t h the conditions and consumer preferences of

89

THE PRIMACY OF GLOBALIZATION

dozens of distinct national markets. T h e y not only b r i n g products, services, management approaches, and expertise developed in Scandinavia and A m e r ­ ica

to all those other countries, they also b r i n g back the lessons and some­

times new products developed in the other places they operate. A m e r i c a n companies learned just-in-time inventory practices from observing the w a y that their Japanese rivals operated in both J a p a n and the U n i t e d States. M c D o n a l d ' s , the leading g l o b a l fast-food brand (though the

company

earns more profits from the u n d e r l y i n g real estate), operates more than half of its restaurants outside the U n i t e d States, i n c l u d i n g more than seven hundred 9

outlets in more than one hundred Chinese c i t i e s . M u c h of foreign menus came from the A m e r i c a n operations, w i t h lots of singular dishes based on local specialties—the M c C a l a b r e s a in Brazil (a garlic sausage patty seasoned w i t h vinaigrette), beer in G e r m a n y , w i l d strawberry and vanilla p i e in S w e ­ den, the S h o g u n B u r g e r in H o n g K o n g (a p o r k bun w i t h cabbage and teriyaki sauce—without the cabbage, it's also the Samurai Pork B u r g e r in T h a i l a n d ) , the M c K o f t a meatball sandwich in Pakistan, and red bean sherbet served in Korea. B u t the M c L o b s t e r rolls on m a n y N e w E n g l a n d M c D o n a l d ' s menus were first developed in Canada, and the deli sandwiches started in the U . K . Perhaps sometime soon, M c D o n a l d ' s in Los A n g e l e s w i l l offer h o m e delivery like the outlets in E g y p t , Turkey, and m u c h of Southeast A s i a , or M c D o n a l d ' s in the southwest and northwestern U n i t e d States w i l l adopt the " M c C a f e " coffee-and-dessert operation seen first in the Australian branches and now popular across the company's Latin A m e r i c a outlets. T h e same internationalization often extends to other aspects of business. U.S.,

European, and Japanese manufacturers aren't as safety and pollution

conscious in their Indian or M e x i c a n operations as they are at home; but they're more so than the native companies because economies of scale dictate that they use m u c h the same e q u i p m e n t and operating methods everywhere. And

it can w o r k the other w a y w h e n a d e v e l o p i n g country's standards are

stricter than those in a g l o b a l company's h o m e country. China's fuel-efficiency standards for cars and trucks are higher than those in A m e r i c a ; and if G e n e r a l Motors or Ford plan to compete successfully in w h a t w i l l soon be one of the world's largest auto and truck markets, they w i l l develop more energyefficient technologies and vehicles that w i l l m a k e their w a y back to the American market. Sweden is not the only small country w h i c h , despite its small domestic market, has produced some of the world's largest companies. T h e other stand­ outs in Europe are the Netherlands, w i t h 1 4 of the world's 5 0 0 largest firms, in banking, oil and gas, insurance, aerospace, and electronics; and Switzerland w i t h 1 1 , including five world-class financial service or b a n k i n g firms and t w o

90

FUTURECAST

global drug makers.

10

C a n a d a is also h o m e to 1 6 of the world's 5 0 0 largest

companies, spanning finance, insurance, metals, aerospace, and auto parts. Perhaps most s t r i k i n g , 1 4 of the world's 5 0 0 largest companies are from a de­ v e l o p i n g c o u n t r y — S o u t h K o r e a , where smart g o v e r n m e n t policies helped create the g l o b a l auto m a k e r H y u n d a i and a vibrant electronics sector led by S a m s u n g and L G Electronics. O v e r the next t w o decades, K o r e a is on track to duplicate J a p a n ' s singular achievement in the twentieth century, as the only nation in the w o r l d that's m o v e d from being a low-income to a high-income country. Other d e v e l o p i n g nations, even the largest ones, are still represented only m o d e s t l y on the list, w i t h just 5 6 — o r barely 1 1 percent of the top 5 0 0 com­ panies. T h e i m p e d i m e n t to this k i n d of success is not access to capital or tech­ nology, w h i c h they have in abundance, but shortages of the entrepreneurs and experienced managers that could b u i l d and operate exceedingly complex and innovative g l o b a l organizations. C o m p a n i e s like Toyota, I K E A , or E x x o n M o b i l that span g l o b a l markets have to create, operate, and manage not only h u g e , international networks of plants and offices using workers and materi­ als from scores of developing and advanced countries, but they also must m a n a g e distribution and m a r k e t i n g systems to reach customers in scores of countries w i t h v a r y i n g needs and tastes. A n d these markets don't stand still, but shift and change all the t i m e , g r a d u a l l y or sometimes suddenly. So, for all its wealth and g r o w t h , only 2 4 Chinese companies are a m o n g the top 5 0 0 — not far ahead of C a n a d a or the tiny N e t h e r l a n d s — a n d they all principally serve China's large domestic market. Similarly, India accounts for just 6 out of 5 0 0 , fewer than Spain or Australia; and o n c e - m i g h t y R u s s i a has only 4 — fewer than little B e l g i u m and S w e d e n , and tied w i t h Brazil. T h e shortages of entrepreneurs and world-class managers in most develop­ ing countries often reflect g o v e r n m e n t policies that throw up innumerable obstacles to both entrepreneurs w h o w a n t to start their o w n businesses and existing companies that w a n t to expand and challenge large, old-line native firms often controlled by the country's most influential families. W h a t South K o r e a achieved is w i t h i n the reach of any developing country, g i v e n several decades of p u r s u i n g the policies to actively promote it. N o country exemplifies more starkly than R u s s i a the costs that globaliza­ tion can impose on an economy and its people if its g o v e r n m e n t d o g g e d l y pursues policies that drive away foreign investors and expertise. In the early 1 9 9 0 s , R u s s i a took enormous steps to introduce markets, privatizing almost everything and decontrolling most prices. B u t in every other way, it created one of the world's most distorted playing fields for market competition, one that systematically favored the newly privatized old state companies, all dismally

91

THE PRIMACY OF GLOBALIZATION

inefficient, and penalized new companies, domestic and foreign. T h e old en­ terprises received such extensive special subsidies and tax breaks, g o v e r n m e n t contracts, and debt forgiveness that new companies couldn't compete. For­ eign companies backed away: In recent years, just 6 percent of all business in­ vestment in R u s s i a is foreign, compared to 4 2 percent in P o l a n d .

11

T h e result

is that the productivity of R u s s i a n core industries, and the nation's total out­ put, collapsed. R u s s i a is the world's second-largest oil exporter, but it gets little benefit from it because the p r o d u c t i v i t y of its oil sector is just 3 0 per­ cent that of A m e r i c a n oil c o m p a n i e s .

12

P r o d u c t i v i t y in b i g R u s s i a n steel,

w h i c h once rivaled U . S . steel makers, fell to 2 8 percent of U.S. 4 0 percent of Brazilian l e v e l s .

13

levels—and

Similarly, R u s s i a n p r o d u c t i v i t y in housing

construction is just 1 0 percent of U.S.

levels and two-thirds less than B r a z i l ­

ian levels, largely because the privatized state banks don't offer m o r t g a g e fi­ nancing. So 9 0 percent of new single-family houses are built in the most inefficient w a y i m a g i n a b l e — b y the homeowners themselves, brick by brick, after they collect the hundred or so permits they need to take on the job. R u s ­ sia has become one of the world's m i n o r or dispensable economies: Its 2 0 0 6 GDP

of $ 9 8 7 billion was barely 7 . 5 percent of America's economy, about 4 2

percent of Britain's G D P , smaller than Spain or Brazil, and just 1 0 percent larger than South K o r e a . Globalization is also c h a n g i n g the character and basic needs of m o d e r n corporations, and everyone w h o works for t h e m w i l l feel the effects. For cen­ turies, large national and international companies used their heft to g e t sweet deals on their most basic resources, capital and labor. B u t m o d e r n g l o b a l i z a ­ tion makes labor and capital easily and relatively cheaply available to g l o b a l companies. So their basic business strategies no longer focus on securing those resources; instead, the truly scarce and critical resources for most g l o b a l businesses today are the intellectual and political c a p i t a l — t h e

intellectual

capital of their patents, brands, distinctive business methods, and the k n o w l ­ edge and relationships of their professionals and managers; and the political capital of favorable regulation, tax treatment and g o v e r n m e n t subsidies, and the connections and influence in their h o m e countries and major markets re­ quired to secure them. T h e "idea-based" economy has been a metaphor for years. Globalization has made it a concrete reality. Since the m i d - 1 9 9 0 s , for example, U . S . companies have invested as much in i n t a n g i b l e s — m a i n l y the intellectual property of patents and trademarks, but also databases, branding, organizational changes, and the training or human capital to use these ideas—as in all physical assets, from equipment to land and buildings. T h i s shift to intangible assets of course coincides with the rapid progress and spread of computer, software, and Internet

92

FUTURECAST

technologies, w h i c h play large roles in the development and application of the products and processes that w i n patents and trademarks, the databases and branding, and even organizational changes and high-level training. T h e shift is also evident in the w a y investors value public companies. A s noted earlier, twenty years ago, the market value of the physical assets of the top 1 5 0 U . S . p u b l i c companies—their "book value"—accounted for 7 5 percent of the total value of their stocks. A firm was roughly worth nearly what its plant, equip­ m e n t , and real estate could be sold for. B y 2 0 0 4 , the book value of the top 1 5 0 corporations accounted for just 3 6 percent of the total value of their shares.

14

Today, nearly two-thirds of the value of a large company comes from what it knows and the ideas and relationships that it owns. C r e a t i n g and a p p l y i n g valuable new ideas, especially those built on the best old ones, has always been the most important factor determining how m u c h economic progress a country and its people m a k e . Since the pioneering w o r k of N o b e l laureate R o b e r t Solow in the late 1 9 5 0 s , economists of every school and stripe have recognized that the development and application of economic innovations has more impact on how fast a country g r o w s and the incomes of its people rises, than how m u c h capital they invest or even how m u c h they i m p r o v e their education and skills. For example, 3 0 to 4 0 percent of all the gains in wealth and p r o d u c t i v i t y made by the U n i t e d States during the t w e n t i e t h century can be traced to innovation in its various forms—not only the development of new products and technologies, but new materials and processes, new ways of financing, m a r k e t i n g , and distributing

things,

and new ways of organizing and m a n a g i n g a business. A l l the increases in the U . S . capital stock account for just 1 0 to 1 5 percent of that progress, while i m p r o v e m e n t s in the education and skills of A m e r i c a n workers explain 2 0 to 2 5 percent. J u d g i n g by how m u c h businesses now invest in ideas and how much in­ vestors now value t h e m , the economic role of innovation is still expanding. For a n u m b e r of reasons, the central economic innovation of our period, infor­ mation technologies, affects every aspect of the economic lives of most people on the planet in unusually powerful ways. To b e g i n , compared to previous s w e e p i n g innovations such as electrification, information technologies con­ tinue to advance at very rapid rates w h i l e their prices continue to decline at equally and unusually fast rates. T h e rapidly falling price of computing power, storage and transmission, and most recently software, has become an impor­ tant feature of globalization itself, because it makes it possible for the innova­ tions to spread q u i c k l y across not only the world's advanced countries, but almost everywhere else as w e l l . It's not surprising that elaborate information systems should pervade finance or manufacturing in the world's richest and

THE PRIMACY OF GLOBALIZATION

93

most highly developed countries. W h a t ' s unique is that the same systems have so quickly become part of not only every corner restaurant and repair shop in small-town A m e r i c a and Europe, but also most large and medium-size businesses in places like China, India, E g y p t , and Peru. In 2 0 0 6 , an estimated 103

million Latin Americans were online; and in the world's least-developed

region, sub-Saharan Africa, nearly 9 0 m i l l i o n people had m o b i l e phones and more than 2 2 m i l l i o n were o n l i n e . For

15

the first time, globalization and information technologies g i v e c o m p a ­

nies virtually everywhere in the w o r l d real access to ideas and innovations generated not only a few miles away but also several continents away. For de­ veloping countries, the ability to host, buy, rent, borrow, or steal the most productive technologies and business methods of companies from more ad­ vanced economies has opened the door to lightning-fast progress. For all its cheap labor and land, C h i n a w o u l d look a lot more l i k e rural R u s s i a today if China's resources weren't being c o m b i n e d w i t h the intellectual property of A m e r i c a n , European, and J a p a n e s e companies. To keep their progress g o i n g over the next ten to fifteen years, C h i n a and other fast-developing countries w i l l have to k e e p on attracting and absorbing the new ideas being developed today and in the near future by western c o m ­ panies. To do that, they w i l l have to accept the strategic b o t t o m line of m o d ­ ern business. To begin, China, India, Brazil, and others w i l l g r u d g i n g l y adopt A m e r i c a n and European intellectual property protections. T h e y ' r e not there yet:

M u c h of the Chinese g o v e r n m e n t and People's A r m y has long run on p i ­

rated versions of W i n d o w s , w h i l e the Chinese automaker C h e r y produces clones of G M cars; and India, Brazil, A r g e n t i n a , and others look the other w a y as local businesses m a k e and sell millions of doses of counterfeit western d r u g s and tens of millions of pirated D V D s and C D s . E v e n harder, those developing nations that are most determined to keep their progress g o i n g w i l l gradually let g o of most remaining restrictions on foreign investment by western c o m ­ panies, along w i t h layers of traditional regulation, especially about w h o m a company can hire and fire and where it locates its operations. In these respects at least, China, India, and m u c h of Eastern E u r o p e in 2 0 2 0 w i l l look a lot like A m e r i c a , at least from the vantage point of corporate headquarters in London, Tokyo, and N e w Y o r k . In the end, globalization offers countries like C h i n a , India, the Czech R e ­ public, and Brazil no other real option. T h e i r governments k n o w — o r w i l l soon recognize—that the rapid economic progress on w h i c h m u c h of their o w n legitimacy now depends requires constant infusions of new western technolo­ gies, investment, and expertise. T h e global businesses that provide it similarly know that their o w n rapid g r o w t h equally depends on their ability to c l a i m

94

FUTURECAST

their share of the value of the goods and services produced w i t h their ideas in the world's successful low-cost economies. G l o b a l businesses won't always g e t their w a y in developing nations. West­ ern companies cohabiting w i t h rapidly c h a n g i n g developing societies have to find ways to respect and accommodate local traditions and laws. T h i s has p r o v e d quite difficult and sometimes impossible in Islamic countries, where western methods and managers are sometimes unable to operate under Shira l a w — o n e of several reasons w h y most strictly Islamic states have not m o v e d past the fringes of globalization. B u t m u c h of the non-Islamic developing w o r l d is adapting q u i c k l y to m a n y western tastes and manners, from western w o r k hours, teamwork, and I P rights, to jeans and rock and roll. A n d when the issues are b i g e n o u g h — e s p e c i a l l y w h e n they could affect the entire w o r l d — e v e n the megacorporations' strategic bottom lines w i l l g i v e way. In perhaps the very near future, a deadly, g l o b a l avian flu pandemic could q u i c k l y t r u m p the intellectual property rights of large pharmaceutical com­ panies, and the prospect of w o r l d w i d e climate change could force b i g oil, b i g steel, and b i g autos to revise their carefully laid investment plans in large de­ v e l o p i n g countries. Businesses that operate in so m a n y different ways in so m a n y countries need political capital and political facility, almost as m u c h as they need intel­ lectual capital. Megacorporations, especially as a g r o u p , exert real political as w e l l as economic clout. It's not s i m p l y a matter of a particular politician or party caving to the demands of W a l - M a r t or Total, the French petrochemical g i a n t — t h o u g h that certainly happens. A n d no single foreign business is in­ dispensable to the life of any country or the stability of any government. B u t no country or g o v e r n m e n t — a t least none but the most autocratic or populist— can afford to create conditions that w o u l d be inhospitable to the world's largest companies. A s a g r o u p , h u g e companies operating in numerous coun­ tries have certain c o m m o n needs, from basic health care and training for their workers, and capital markets that a g g r e g a t e large tranches of capital for easy access, to standardized g l o b a l t e l e c o m m u n i c a t i o n s and l o w taxes on their profits. T h e upshot is that across m o s t a d v a n c e d and d e v e l o p i n g nations, across societies that see t h e m s e l v e s as traditionalist, p r o g r e s s i v e , or social­ ist, a r o u g h l y c o m m o n approach to the g o v e r n m e n t ' s role in economic life is a r i s i n g out of g l o b a l i z a t i o n . A c r o s s societies w i t h little else in c o m m o n p o l i t i c a l l y or culturally, d e r e g u l a t i o n and t r a i n i n g p r o g r a m s have gathered s t r e n g t h , health-care coverage and educational access are b e c o m i n g broader, t e l e c o m m u n i c a t i o n s and other t e c h n o l o g i c a l standards have largely become g l o b a l , and, especially in d e v e l o p i n g countries, corporate taxes are generally falling.

THE PRIMACY OF GLOBALIZATION In a c o m m o n l y quoted passage from The Communist Manifesto,

95 M a r x and

Engels wrote, " T h e need of a constantly e x p a n d i n g m a r k e t for its products chases the bourgeoisie over the w h o l e surface of the g l o b e . It m u s t nestle everywhere, settle everywhere, establish connections everywhere. . . . It c o m ­ pels all nations, on pain of extinction, to adopt the bourgeois m o d e of p r o ­ duction." A m o n g all their overheated rhetoric and plain errors—not the least their dismal failure to anticipate how the process w o u l d lift hundreds of m i l ­ lions of people out of p o v e r t y — M a r x and E n g e l s g o t that r i g h t long before modern globalization.

T h e ability of a m e g a c o m p a n y like Pfizer or N o k i a to use its g l o b a l systems to develop, produce, and market products on a w o r l d w i d e scale depends on its capacity to successfully navigate countless legal requirements, health and safety regulations, tax and labor laws, and m u c h more, across scores of na­ tional markets. In places like C h i n a , India, R u s s i a , and A r g e n t i n a — w h e r e it's hard to do business at all w i t h o u t the cooperation of innumerable local and national bureaucrats, and where the legal system can't be relied on to hand d o w n consistent r u l i n g s — n e t w o r k s of political connections are especially i m ­ portant. A n d in their o w n countries as w e l l as their foreign markets, the megacorporations' ability to compete successfully w i t h rivals across m u c h of the world also often depends on their skill in extracting special tax and spending subsidies. T h e shift to intellectual and political capital as the central assets of large companies is also c h a n g i n g the m i x of industries that dominate g l o b a l b i g business. In 2 0 0 5 , 3 9 percent of the world's 1 5 0 largest corporations were in financial services and health care—sectors that e m p l o y large numbers of p r o ­ fessionals and managers w h o create value t h r o u g h their k n o w l e d g e and inter­ actions, and are subject to extensive g o v e r n m e n t regulation and oversight. That's more than three times the 1 2 percent share of the 1 5 0 b i g g e s t c o m p a ­ nies just twenty-one years earlier, in 1 9 8 4 . E v e n in manufacturing, the n u m ­ ber of professionals and managers has been rising sharply. F r o m 1 9 8 4 to 2 0 0 5 , the share of General Electric employees in professional or managerial positions more than doubled, from 2 5 percent to over 5 0 percent, even as the total number of G E employees contracted. Corporations like G E are chang­ ing in this w a y because it makes business sense in an idea-based g l o b a l e c o n o m y — o v e r the same period, the inflation-adjusted, net income per e m ­ ployee at G E soared from $ 1 3 , 0 0 0 to $ 5 4 , 0 0 0 . There's no w a y of k n o w i n g w h i c h companies w i l l be g l o b a l market leaders in 2 0 1 0 ,

2015,

or 2 0 2 0 ; but w e can reasonably conjecture about w h i c h sectors

96

FUTURECAST

are l i k e l y to be relatively more or less profitable or important over the next ten to fifteen years. A m o n g the major players in the g l o b a l economy today, the outlook m a y be most bearish for the b i g oil companies. For more than a half-century, the world's large oil and gas companies have been powerful movers in their national and g l o b a l economies; and today, six of the world's top ten companies and eleven of the top fifty are in the oil and gas business. O v e r the next ten to fifteen years, however, the sector w i l l face increasing g o v ­ e r n m e n t regulation from climate change, more intense competition from al­ ternative energy sources driven b y climate change and h i g h energy prices, and new political constraints, as the s t r u g g l e over energy sources becomes a criti­ cal part of most countries' national security policies and a source of regular tension a m o n g t h e m . L i k e l y winners over the next ten to fifteen years include the world's b i g pharmaceutical, biotech, and new g e n o m i c companies. B u r g e o n i n g numbers of elderly people almost e v e r y w h e r e w i l l increase d e m a n d for their products, financing

crises in m a n y national health-care systems w i l l m a k e more of

their products the low-cost treatment alternatives and, for the biotech sec­ tor, rising incomes in m a n y less-developed nations w i l l increase d e m a n d for g e n e t i c a l l y modified foods. Y u r i Verlinsky, w h o directs the R e p r o d u c t i v e G e n e t i c s I n s t i t u t e in C h i c a g o , sees cures for children w i t h l e u k e m i a and ane­ m i a w i t h i n ten years u s i n g stem cell lines from their parents' e m b r y o s ; and N o r m a n B o r l a u g , w h o pioneered genetically modified crops for Latin A m e r ­ ica, expects g e n e t i c a l l y enhanced w h e a t strains to vastly increase its produc­ tion in I n d i a soon. It should also be b o o m times for g l o b a l auto makers that can best adapt to the energy and e n v i r o n m e n t a l constraints of the next de­ cade, as f a s t - g r o w i n g incomes and vast r o a d - b u i l d i n g p r o g r a m s in C h i n a , I n d i a , B a n g l a d e s h , and other large d e v e l o p i n g nations drive u p the demand for cars. C h i n a alone forecasts that its national fleet w i l l soar from 2 5 m i l l i o n cars today to 1 4 0 m i l l i o n b y 2 0 2 0 .

1 6

T h e next decade also looks bullish for

g l o b a l information technology and telecommunications companies. A s the prices for computers and Internet access have steadily declined and their uses have steadily e x p a n d e d , every advanced country has seen these technologies spread from large corporations and affluent early adopters to the smallest businesses and almost everyone else. O v e r the next decade, the same process w i l l almost surely repeat itself across m u c h of the d e v e l o p i n g w o r l d , starting already w i t h cell phones and the $ 1 7 6 laptop w i t h open-source codes re­ cently u n v e i l e d by the M I T m e d i a lab. A s these technologies reach across most of the w o r l d , they w i l l almost cer­ tainly further accelerate the integration of national markets and global net­ w o r k s in almost every industry. A t a m i n i m u m , they should produce strong,

THE PRIMACY OF GLOBALIZATION

97

sustained productivity gains in m a n y places, w h i c h should mean h i g h e r prof­ its and perhaps faster-rising incomes in countries that take best advantage of them. M o r e h i g h l y integrated national and g l o b a l industries could also force all but the largest companies to become more specialized, increasing the pres­ sures on workers to develop even more specialized skills. A n d m u c h like Cisco Systems, most megacorporations could slowly w i t h d r a w from the busi­ ness of directly p r o d u c i n g anything at all and focus instead on d e s i g n i n g , m a n a g i n g , adjusting, and enforcing the g l o b a l networks of other companies that w i l l do the development, production, m a r k e t i n g , sales, and distribution of the goods and services—from automobiles or clothing to I T or financial services—that the p u b l i c w i l l k n o w t h e m for. There m a y well be natural limits to just how large megacorporations can grow, and still remain profitable. G l o b a l markets are already u n i m a g i n a b l y large and complex. For a single c o m p a n y like Toyota or W a l - M a r t , g l o b a l net­ works of developers, producers, suppliers, and distributors are i n v o l v e d to provide a large range of products and services for customers in scores of dif­ ferent national markets. C a r r y i n g out those activities requires layer upon layer of m i d d l e - and upper-level managers t r y i n g to c o m m u n i c a t e and coor­ dinate w i t h each other as w e l l those w o r k i n g for them. In one recent survey of large companies, more than half of executives said they spend as m u c h as t w o days a w e e k on unproductive e-mails, v o i c e m a i l s , and m e e t i n g s . E v e n w i t h the most sophisticated information and telecommunications systems, billions of details can s w a m p the strategic plans of the best-run companies. Already, a n u m b e r of megacompanies have tried to m a k e their lives s i m ­ pler (and more profitable) by d i v e s t i n g themselves of various sidelines and noncritical operations. C i t i g r o u p , for e x a m p l e , sold its life insurance s u b ­ sidiary to MetLife and its transportation-financing line to G e n e r a l Electric, so it could focus on the h i g h e r profits it earns from b a n k i n g . D e l l C o m p u t e r is one possible model for the near future, especially for manufacturers. D e l l made itself the world's most profitable c o m p u t e r m a k e r (measured per e m ­ ployee) by focusing on one t h i n g — p r o v i d i n g customized products using r i g ­ orously standardized processes carried out b y subcontractors, and a v o i d i n g the temptation of expanding into higher-end products or t a k i n g on related lines of business such as systems consulting.

WORKERS IN A GLOBAL ECONOMY: THE SPECTER OF OUTSOURCING As globalization shifts the strategic focus of large businesses from labor and capital to ideas and politics, the implications for everyone w h o works for a living

98

FUTURECAST

are enormous. L o w unemployment rates and healthy income gains for most workers in the 1 9 6 0 s and 1 9 7 0 s were unmistakable signs that labor in those days was generally a scarce resource in the United States, Europe, and J a p a n — just as the h i g h unemployment and stagnating incomes in most developing na­ tions in those years were reliable evidence that labor was anything but scarce. A n d since it takes real sacrifice and resources for workers to move from country to country, the labor surpluses in developing countries couldn't relieve the tight labor markets in the advanced economies. Modern globalization burrows under those geographical barriers. Chinese, Czech, or Mexican workers can join the potential labor pool of European, Japanese, and American employers by simply m o v i n g to the industrial and business centers of their own countries, where those employers have set up their foreign operations. W i t h fast-rising wages to draw them to those areas and new transportation networks to get them there, these internal migrations have already helped create megacities of 1 0 , 1 5 , or 2 0 m i l l i o n p e o p l e in M e x i c o , B r a z i l , I n d i a , C h i n a , Indonesia, B a n g l a d e s h , E g y p t , Argentina, South K o r e a , and Russia. Facing them across oceans or con­ tinents are tens of millions of w o r k i n g people in every advanced country, wor­ ried that waves of offshore outsourcing over the next decade will cost them their jobs. T h e y have g o o d reason to worry, even though direct outsourcing to work­ ers in developing countries is unlikely to touch most of them. There's no doubt that the g l o b a l labor pool suddenly became m u c h larger. R i c h a r d F r e e m a n , a H a r v a r d University economist, calculates that globaliza­ tion has effectively d o u b l e d the size of the world's connected workforce: In 2 0 0 0 , C h i n a , India, and the countries of the former Soviet Union and its Eastern European empire had r o u g h l y 1 . 5 billion workers a m o n g them, or about the same n u m b e r of workers as all the advanced countries, Latin A m e r ­ ica, N o r t h Africa, and Southeast and South A s i a . Professor Freeman's arith­ m e t i c is correct, t h o u g h his conclusion seems exaggerated. W h i l e China, India, and the rest have joined the g l o b a l economic system, hundreds of m i l ­ lions of their subsistence farmers and v i l l a g e workers are still isolated from the w o r l d of trade, foreign investment, and outsourcing. Nevertheless, in barely a decade, globalization has p r o b a b l y expanded the effective global la­ bor p o o l — p e o p l e w h o take part directly or indirectly in producing or pro­ v i d i n g things that are sold in other countries or that compete w i t h goods and services produced in other c o u n t r i e s — b y at least one-third and perhaps as m u c h as 5 0 percent. T h a t comes to an increase of 5 0 0 to 7 5 0 m i l l i o n workers. A c c o r d i n g to some politicians and pundits, this could mean that hundreds of millions of A m e r i c a n s , Europeans, and Japanese w i l l lose their jobs to C h i ­ nese, Indians, Central Europeans, and Brazilians over the next ten or twenty years. In the 2 0 0 4 U . S . presidential c a m p a i g n , J o h n K e r r y — w h o knows

THE PRIMACY OF GLOBALIZATION

99

better—called outsourcing businesses "Benedict A r n o l d corporations"; and a usually reasonable writer for The Wall Street Journal you

w r o t e in m i d - 2 0 0 5 , "if

can describe a job precisely or w r i t e rules for d o i n g it, it's u n l i k e l y to sur­

vive. Either w e ' l l p r o g r a m a computer to do it, or w e ' l l teach a foreigner to do it."

17

Theoretically, outsourcing to developing countries could affect any job

that doesn't involve direct physical contact w i t h either customers or a c o m ­ pany's other domestic employees. T h e practice of offshore outsourcing and its potential for the near future, however, are both more complicated than that and m u c h more l i m i t e d . Outsourcing itself is a normal and fairly pervasive feature of advanced, d i ­ versified economies, and it has certainly increased greatly as corporations have become larger and more complex. B u t almost all outsourcing happens inside a country, w h e n a C i t i g r o u p , M i t s u b i s h i , or any of thousands of m u c h smaller companies take something it used to do itself—its payroll systems or routine legal services, call centers or I T s e r v i c i n g — a n d b e g i n b u y i n g it from another company. A survey of four thousand companies in the Northeast, most of them w i t h less than one hundred or five hundred employees, found that 8 3 percent outsourced a w i d e range of activities to other A m e r i c a n c o m p a n i e s .

18

More than half use other companies to m a n a g e their retirement or health ben­ efits, 3 0 percent outsource training, and nearly 2 0 percent their call centers and I T services. In I T services, companies such as C I B E R set u p centers in lower-cost locations in the U n i t e d States, i n c l u d i n g O k l a h o m a C i t y and Tampa, that provide remote I T services for East and West coast companies. And

it's not l i m i t e d to A m e r i c a and other advanced economies: Eastern Soft­

ware Systems handles not only the routine maintenance of I T systems for medium-size Indian companies, but also hiring for domestic I T b u s i n e s s e s .

19

By one g o o d estimate, this k i n d of domestic outsourcing accounts for more than 87 percent of the overall phenomenon, and has little to d o w i t h g l o b a l ­ ization.

20

Three other kinds of outsourcing do involve workers in other countries and are part of globalization. O n e form that has g o n e on for a long t i m e involves multinationals creating foreign subsidiaries to produce parts or entire p r o d ­ ucts, or provide or manage certain services as part of their g l o b a l networks. American companies do more of this kind of outsourcing, by far, than European or Japanese companies, m a i n l y because labor laws in J a p a n and most of E u ­ rope make it m u c h harder for companies to fire a n y b o d y at home. Moreover, a fair share of those jobs involve services: S o m e 4 0 percent of all U . S . imports of services—some $ 1 2 5 billion w o r t h in 2 0 0 5 — o c c u r between a U . S . parent company and its foreign subsidiaries and affiliates. In areas of business that are very IT-intensive and involve advanced skills, it's even higher—some 6 0 percent

100

FUTURECAST

of all imports of financial services and 7 0 percent of all imports of business and professional services. Y e t this still involves a small share of jobs. T h e U . S . Bureau of Labor Sta­ tistics figures that offshore outsourcing cost about 1 3 , 0 0 0 Americans their jobs in 2 0 0 3 and another 5 2 , 0 0 0 in 2 0 0 5 . In 2 0 0 4 , after decades of gradual outsourcing of this k i n d , U . S . multinationals had almost 3 0 million people on their w o r l d w i d e payrolls, of w h i c h 8.3 m i l l i o n or about 2 8 percent were employed abroad.

21

B u t foreign multinationals also e m p l o y e d about 5 . 1 m i l ­

lion workers in A m e r i c a , so A m e r i c a n firms outsourced 3 . 2 m i l l i o n more jobs abroad than other countries outsourced to the U n i t e d States. In recent years, for example, m a n y of Europe's leading pharmaceutical companies have shifted m u c h of their R & D to the U n i t e d States, to tap into a m a r k e t that is both the world's largest and the only major one w i t h largely unregulated prices. T h e 3 . 2 m i l l i o n difference equals about 2 percent of all A m e r i c a n jobs. A n d those numbers have barely increased in recent years. T h e n u m b e r of foreign workers e m p l o y e d in the foreign subsidiaries of U . S . companies increased by about 1 0 0 , 0 0 0 in 2 0 0 4 , following a decline of about 6 0 , 0 0 0 in 2 0 0 3 . If every one of those 1 0 0 , 0 0 0 jobs outsourced in 2 0 0 4 cost an A m e r i c a n his or her job, the job losses came to less than one-tenth of 1 percent of all A m e r i c a n jobs that year. Offshore outsourcing cost a lot more A m e r i c a n jobs than that in the past. T h e U n i t e d States lost 2 . 3 m i l l i o n manufacturing jobs from 1 9 7 9 to 1 9 9 3 , d u r i n g the so-called period of deindustrialization, and a fair share of them w e n t to M e x i c o , T a i w a n , and other developing countries. A s globalization took off, the U n i t e d States lost even more manufacturing j o b s — 2 . 7 million jobs from just 2 0 0 1 to 2 0 0 4 . B u t over those years, the number of people e m ­ p l o y e d by the subsidiaries of U . S . companies in developing nations didn't in­ crease at all. M i l l i o n s of A m e r i c a n , European, and Japanese

manufacturing

workers have been losing their jobs because they're either being replaced by technology or outsourced to other businesses in their o w n countries. That's not the end of it, because globalization is g i v i n g rise to a new and distinctive form of offshore outsourcing. For the first time, A m e r i c a n and E u ­ ropean firms (Japanese firms do this m u c h less) have begun to outsource cer­ tain s e r v i c e s — c a l l center operations, software development, a piece of their R & D — n o t to their o w n foreign subsidiaries, but to separate firms in places like India, Ireland, Israel and, inevitably, China. T h i s new kind of offshore outsourcing w i l l g r o w more important over the next ten to fifteen years and pose a genuine threat to millions of workers in advanced countries.

101

THE PRIMACY OF GLOBALIZATION

It is certain that some h i g h l y skilled A m e r i c a n s and Europeans e m p l o y e d by large multinationals are losing their service jobs to other firms in other coun­ tries. B u t low wages are not d r i v i n g this development, because most of this offshore outsourcing involves jobs m o v i n g from one advanced country to an­ other. T h e leading country for offshore outsourcing today, as a share of its la­ bor force, is not India or C h i n a but Ireland, w h i c h redid its tax and regulatory regimes especially to induce B r i t i s h , European, and A m e r i c a n software c o m ­ panies to set up shop there. A n d Israeli companies, m a n y of t h e m spinoffs from Israeli military developers, now perform a lot of R & D for A m e r i c a n and European firms. U n l i k e manufacturing, service outsourcing doesn't happen s i m p l y because a developing country modernizes itself, at least not yet. India has become a center for some forms of software and I T service outsourcing, after a decade of c o m m i t t i n g significant resources to educating y o u n g Indians in a few major urban areas. E v e n so, foreign firms cost only an estimated 1 0 0 , 0 0 0 A m e r i c a n software and I T service jobs from 1 9 8 3 to 2 0 0 3 .

2 2

A n d the U n i t e d States and

Great Britain totally dominate the realm of offshore outsourcing of h i g h l y skilled service jobs to developing countries. U . S . g l o b a l corporations alone account for more than half of all offshore outsourcing of engineering jobs, for example, w i t h British firms accounting for another 1 6 p e r c e n t .

23

In continen­

tal Europe and J a p a n it's still very difficult to shift jobs to other countries. A l l of E u r o p e outside Britain accounts for 1 6 percent of all engineering jobs out­ sourced offshore, and Japan's g l o b a l companies are responsible for just 2 per­ cent.

W h a t about the great push of recent years in C h i n a and India to educate hun­ dreds of thousands of their younger boomers to be business analysts and m a n ­ agers, doctors and accountants? These investments w i l l produce a new corps of skilled professionals there eager to w o r k for a fraction of what their A m e r i c a n or European counterparts earn. B u t most of t h e m won't end up taking the jobs of Americans or Europeans. Instead, most w i l l be snapped u p by domestic busi­ nesses or provide their professional services to western companies selling into the fast-growing Chinese and Indian markets. Moreover, despite the push to educate and train millions of y o u n g Chinese and Indians as service profes­ sionals, it's very hard to significantly expand a developing country's system of higher education in a few years, especially to provide the skills required by most sophisticated western companies. In m a n y places in the developing world, shortages of skilled service workers have appeared already. Moreover, the experts at M c K i n s e y calculate that w i t h i n four years, g i v e n current trends,

102

FUTURECAST

there won't be enough workers skilled in I T and engineering-based services in C h i n a , India, and the Philippines to meet the needs of just the American and British operating there t o d a y .

24

In theory, migration could ease some of the

shortages—but for a long time, those and other developing nations have been even more resistant to foreign i m m i g r a t i o n than places like France and G e r ­ many. A g a i n in theory, this k i n d of outsourcing could spread to countries that g e t little of the business today, especially as wages rise in C h i n a and India. In the five years from 1 9 9 8 to 2 0 0 3 for e x a m p l e , wages of I T managers in India more than doubled. B y 2 0 1 5 , shortages of engineers and software and finan­ cial professionals in C h i n a and India should drive their wages to the levels of countries like M e x i c o and Brazil; and in places like the Czech R e p u b l i c and Poland, those wages w i l l probably reach the levels of Portugal and even Spain. If g o v e r n m e n t s in places l i k e M a l a y s i a , N i g e r i a , P e r u , and M o r o c c o were to start u p g r a d i n g their t r a i n i n g and educational efforts n o w — i n c l u d i n g intensive l a n g u a g e training in E n g l i s h , French, G e r m a n , or J a p a n e s e — t h e y could become small new centers for offshore outsourcing of h i g h l y skilled jobs. Still, the M c K i n s e y analysts figure that over the next thirty years, less than 5 percent of U . S . service jobs w i l l be outsourced to other c o u n t r i e s .

25

That

w o u l d mean a loss of 2 2 5 , 0 0 0 service positions per year in an economy today w i t h more than 1 0 8 m i l l i o n private-sector service jobs. In some cases, A m e r i c a n s — a s w e l l as Europeans and Japanese—effectively outsource medical services by p i c k i n g themselves up and g o i n g to a foreign source. T h i s practice is no longer m a i n l y the very wealthy searching for the best cosmetic surgeon in Switzerland. M o r e typically today, it's seniors cross­ ing to M e x i c o or C a n a d a for expensive dental w o r k not covered by Medicare, A m e r i c a n s g o i n g to the M i d d l e East and A s i a for transplants, or middle-class J a p a n e s e c o m i n g to the U n i t e d States for in vitro fertilization treatments. T h e r e are no data on precise v o l u m e , but the d e m a n d is sufficient to support private services to "accredit" foreign hospitals for medical tourists, such as J o i n t C o m m i s s i o n International, Inc., that certifies eighty medical facilities in A s i a , E u r o p e , and the M i d d l e East (and sells consulting services to foreign facilities on h o w to g e t accredited). A n n L o m b a r d i , an A t l a n t a travel agent, discovered she could save $ 4 , 0 0 0 by g o i n g to G e r m a n y for an outpatient pro­ cedure for a cataract—and w h e n she returned, she set u p European M e d i c a l Tourist, Inc., in N o r t h Carolina, to arrange similar savings for Americans w i l l i n g to g o to G e r m a n y , B e l g i u m , and France for treatment. Similar ser­ vices have a considerable history in B r i t a i n , where a n u m b e r of firms market

THE PRIMACY OF GLOBALIZATION

103

surgical procedures in France, H u n g a r y , M a l t a , India, Latvia, and elsewhere to Britons w h o want to avoid long waits at the N a t i o n a l H e a l t h Service and the high prices for private treatment in B r i t a i n .

26

Some Americans businesses t r y i n g to cut health-care costs are l o o k i n g in the same d i r e c t i o n .

27

For e x a m p l e , B l u e R i d g e Paper Products in N o r t h C a r ­

olina, w h i c h self-insures, offers its workers a share of the saving from sending them to N e w D e l h i for surgery; and a Florida health-care manager, U n i t e d G r o u p Programs, includes a T h a i hospital as a preferred provider. Moreover, several Fortune 5 0 0 companies have recently investigated the possibility of large-scale contracting w i t h foreign hospitals. Moreover, globalization is not standing still; and over the next ten to fif­ teen years, western service workers w i l l be hit b y an entirely new form of off­ shore outsourcing. T h e future of offshore outsourcing lies in piecemeal tasks, in which workers in C h i n a , India, M e x i c o (and perhaps M a l a y s i a , N i g e r i a , Peru, and Morocco) handle discrete parts of m u c h larger and c o m p l e x ser­ vices, such as reading an X - r a y , r u n n i n g a tax p r o g r a m , or analyzing a set of business data, networked t h r o u g h g l o b a l information systems. A few years from now, w h e n there are shortages of Chinese, Indians, and M e x i c a n s w i t h western-style degrees in engineering, computer science, and business a d m i n ­ istration, those countries w i l l be able to train m i l l i o n s of their y o u n g people to carry out discrete subsets of those jobs. Moreover, the western customers for piecemeal outsourcing w i l l p r o b a b l y reach w e l l beyond the relative hand­ ful of huge g l o b a l corporations that dominate it today. O v e r the next decade, thousands of midsize and large A m e r i c a and European hospitals, accountan­ cies, and financial institutions w i l l find it possible and practical to network through their information systems w i t h workers trained in sets of discrete skills, from almost anywhere. Piecemeal outsourcing began a w h i l e ago w i t h data processing and call centers, but it proceeded more slowly than the outsourcing of manufacturing jobs in the 1 9 7 0 s and 1 9 8 0 s . O n e of the m a i n reasons was l a n g u a g e barriers, because most of the service tasks that have shifted to lower-wage countries involve communicating some k i n d of standard information. A n d that usually requires that the outsourcer and outsourcee (or its customers) speak the same language. That's w h y General Electric, A m e r i c a n E x p r e s s , B r i t i s h A i r l i n e s , and Microsoft set u p offshore data processing and call centers not in C h i n a or Brazil, but I n d i a — a l o n g w i t h the U . S . and B r i t i s h subsidiaries of European and Japanese companies. G i v e n America's f a s t - g r o w i n g Spanish-speaking market, M e x i c o has become another favorite place for the call centers of U . S . companies and the American subsidiaries of European and Japanese businesses.

104

FUTURECAST

For the same reason, companies such as Siemens, Lufthansa, and the French electronic g i a n t T h o m s o n , along w i t h European subsidiaries of dozens of U . S . companies, have set u p call centers in the Czech R e p u b l i c . T h e new p u s h to piecemeal outsourcing of service tasks, however, rests on recent advances in software, and w i l l reach far beyond call centers and data processing. T h r o u g h the 1 9 8 0 s and 1 9 9 0 s , w h i l e c o m p u t i n g power, trans­ mission, and storage progressed by almost constant leaps, software develop­ m e n t l a g g e d behind. T h i s began to change in the late 1 9 9 0 s , when software advances enabled companies to separate a program's design from its imple­ mentation in c o m p u t e r c o d e .

28

In tech-talk, software p r o g r a m m i n g became

"modularized." W i t h o u t this advance, the p r o g r a m m i n g centers in Bangalore and H y d e r a b a d w o u l d hardly exist today, regardless of the wages that Indian p r o g r a m m e r s w i l l g l a d l y accept. Moreover, since about the year 2 0 0 0 , break­ throughs in financial, accounting, medical, and engineering software have en­ abled companies for the first t i m e to take apart other, very complicated tasks, such as the c o m p l e x analyses required to value a company for a possible takeover or the tax liability of a g l o b a l c o m p a n y under a range of scenarios. W i t h these new software, a company can d i v v y out the pieces of large service jobs to any n u m b e r of professional staffs, connected through Internet net­ w o r k s , and then assemble the results in one place. O v e r the next decade, this software-driven piecemeal outsourcing could cost the jobs of an estimated eight to ten m i l l i o n service workers in advanced countries. T h e first stage won't destroy m a n y jobs in the United States, E u ­ rope, or J a p a n . A s the software technology advances, thousands of large and midsize Western businesses w i l l be able to outsource parts of their services, and they'll start w i t h other companies in the same city or their own country. In this, as in other forms of outsourcing, A m e r i c a n businesses w i l l likely lead, if only because this k i n d of outsourcing reduces their health insurance and pension costs. B y 2 0 1 0 or sooner, A m e r i c a n and British global companies will likely be­ g i n to outsource service tasks on a piecemeal basis to the developing countries where they're already w e l l established. T h e third and major stage should come a few years later. In India, M e x i c o , China, and other developing countries, thousands of native entrepreneurs w i l l set u p firms to handle the piecemeal service outsourcing of the megacorporations. Once they're in place, Web-based m i d d l e m e n companies w i l l be able to m a k e the same service and savings avail­ able to the thousands of A m e r i c a n and British companies already adept in piecemeal outsourcing in their own countries. B y 2 0 1 5 and beyond, when J a p a n and m u c h of continental Europe face baby bust labor shortages, many businesses there, too, w i l l probably join in.

THE PRIMACY OF GLOBALIZATION

105

C o m p l e x manufacturing w e n t through a similar process t w e n t y and thirty years ago. B u t the economic dislocations and other changes w i l l be m u c h greater this time, because the d e m a n d and opportunities for piecemeal out­ sourcing w i l l be much larger in services than they ever were in manufacturing. W h i l e manufacturing makes u p about 2 0 percent of every advanced economy, services account for three times as m u c h ; and every business, whether in m a n ­ ufacturing or services, uses enormous quantities of services. A n d A m e r i c a n s spend more on medical care and personal services than on housing and f o o d — both of w h i c h also include large quantities of services. Moreover, interna­ tional demand for services w i l l inevitably g r o w over the next ten and fifteen years as developing nations follow the same pattern. A s countries develop and people's incomes increase, w i t h o u t exception they spend larger shares of those rising incomes on services rather than things. A s it is, g l o b a l trade in services has g r o w n twice as fast as global trade in g o o d s for the last fifteen years. W i t h piecemeal outsourcing of services, this is almost certain to expand. T h e silver lining for the advanced countries is that the rapid development of C h i n a , I n ­ dia, and Central E u r o p e w i l l also increase their need for h i g h - e n d business and professional services; and there, the U n i t e d States and E u r o p e w i l l hold the t r u m p cards for the foreseeable future.

W h i l e piecemeal service outsourcing is likely to cost several m i l l i o n A m e r i ­ cans their jobs in the next decade, the software advances that m a k e it possible could have other and perhaps more powerful effects that have little to d o w i t h globalization. In at least the U n i t e d States, the impressive p r o d u c t i v i t y gains racked up by firms in manufacturing, finance, retail and other sectors have come substantially from the w a y they've used new information technologies. IT has spread as far and fast as it has across the A m e r i c a n economy because technological advances, cheap foreign production, and competition all dra­ matically reduced the real price of I T hardware. T h e s e same d y n a m i c s now appear to be taking hold in software. O v e r the next five to ten years, as software becomes more powerful and versatile, foreign software production expands, and (perhaps)

competition

increases, the real price of software should fall sharply, too. T h e inevitable result is that businesses of every sort w i l l become even m o r e I T intensive, es­ pecially in sectors such as health, education, and personal services, w h i c h so far have adapted I T more slowly and reluctantly than manufacturing, finance, and r e t a i l .

29

I f the spread of I T hardware is a reliable g u i d e , this could p r o ­

duce even greater p r o d u c t i v i t y gains over the next decade than w e saw in the last one. A n d that should mean higher profits, larger incomes, and ultimately

106

FUTURECAST

m o r e j o b s — a t least for people w i t h the education and skills required to w o r k w i t h the technologies. Software advances w i l l certainly spread q u i c k l y across the world's ad­ vanced countries. B u t as w e w i l l see, J a p a n and m u c h of E u r o p e m a y not reap as m a n y economic benefits as the U n i t e d States and a few European coun­ tries. For more than a decade, businesses in E u r o p e and J a p a n have invested in I T as eagerly as A m e r i c a n companies, yet they've reaped m u c h smaller p r o d u c t i v i t y benefits for their money. For all their p o w e r and potential, in­ formation technologies don't m a k e any economic difference at all unless companies also change the w a y they operate to take g o o d advantage of them. In J a p a n and across m u c h of E u r o p e , countless laws and regulations create thousands of s m a l l obstacles and additional costs to precisely the kinds of c h a n g e s — r e l o c a t i n g facilities, firing or even reassigning workers w i t h o u t the appropriate experience and skills, shifting hours of operation, and m u c h m o r e — r e q u i r e d to w r i n g h i g h e r p r o d u c t i v i t y and profits out of I T invest­ ments.

HOW GLOBALIZATION REALLY AFFECTS JOBS AND WAGES IN ADVANCED COUNTRIES G l o b a l i z a t i o n has another nasty surprise for w o r k i n g people in A m e r i c a , E u ­ rope, and J a p a n . It begins w i t h the most basic d y n a m i c of modern globaliza­ tion, the waves of technology, investment, and expertise that have come to C h i n a , and to a lesser extent India, from companies in A m e r i c a , Europe, and J a p a n . Across m u c h of the w o r l d , the labels of everything people use are silent testimony to the results. Chinese and Indian companies now produce some sophisticated standard g o o d s , from laptops and semiconductors to video g a m e s . T h e y also still m a k e thousands

of less-sophisticated things that

they've been p r o d u c i n g for decades, from steel and concrete to furniture and t o y s — a n d thanks to all the transfers from companies in more economically advanced places, they're p r o d u c i n g t h e m in m u c h greater quantities, and of m u c h h i g h e r quality. Workers in advanced countries haven't made toys, steel, and concrete in great quantities for a long t i m e ; and before C h i n a and globalization, most of those jobs had g o n e to M e x i c o , Brazil, Taiwan, and K o r e a decades ago. U . S . , European, and J a p a n e s e companies continue to produce most of the world's most advanced g o o d s ; and once again, m a n y of the jobs producing the parts that g o into those g o o d s also had shifted to developing countries some time a g o — t o the Asian Tigers, and as their wages and other costs steadily increased,

107

THE PRIMACY OF GLOBALIZATION

to countries like M e x i c o , T h a i l a n d , and Malaysia. T h i s makes a critical differ­ ence today, because the thousands of jobs now lost every year to C h i n a and I n ­ dia are mainly c o m i n g not from A m e r i c a , E u r o p e , or J a p a n , but from M e x i c o , Thailand, Malaysia, and other countries like it. It couldn't be otherwise. T h e International L a b o r O r g a n i z a t i o n and U . S . B u r e a u of L a b o r Statistics report that an a v e r a g e m a n u f a c t u r i n g w o r k e r earns $ 2 3 . 6 5 per hour in the U n i t e d States, $ 2 4 . 6 3 in France, and $ 2 1 . 7 6 in J a p a n , compared to $ 6 . 3 8 in Taiwan, $ 1 3 . 5 6 in K o r e a , and $ 2 . 6 3 in M e x i c o .

3 0

M a n u f a c t u r i n g workers earn about 7 0 cents in C h i n a and 4 0 cents an hour in India. C h i n e s e and I n d i a n w o r k e r s e m p l o y e d in the m o d e r n facilities set u p by foreign companies earn m o r e — a s they d o in K o r e a , M e x i c o , and T h a i l a n d . B u t the b i g labor-cost differences of o p e r a t i n g in C h i n a and I n ­ dia, c o m p a r e d to T a i w a n and M e x i c o , are the m a i n reason w h y C h i n a is n o w c l a i m i n g hundreds of thousands of jobs e v e r y year from other d e v e l o p i n g countries. The W o r l d B a n k reports that China's merchandise exports soared almost 1 , 3 0 0 percent in the last fourteen years, shooting u p from $ 6 8 billion in 1 9 9 0 to $ 8 3 7 billion in 2 0 0 5 . A n d they're still g r o w i n g by 2 0 to 2 5 percent a year. A t those levels, China's exports s w a m p those of its manufacturing ri­ vals in other developing countries—they're almost two-thirds more than all the rest of East A s i a , including four times that of Malaysia, five times that of Thailand, and e i g h t times that of Indonesia. Chinese exports are also more than twice those of M e x i c o , more than five times those of B r a z i l , and 3 0 per­ cent greater than all of Latin A m e r i c a and the C a r i b b e a n nations. Size alone matters a lot here. Chinese companies, both domestic and foreign-owned, armed w i t h technologies and business methods comparable to or better than those used by producers in scores of other developing coun­ tries, can now produce m u c h of w h a t their rivals in T h a i l a n d , M e x i c o , or Malaysia have been e x p o r t i n g — i n m u c h greater quantities and at lower cost. China's modernization and globalization are p r o d u c i n g waves of new c o m p e t ­ itive pressures for scores of industries in dozens of other developing economies. The g o o d news for t h e m is that the f a s t - g r o w i n g d e m a n d for skilled Chinese labor is p u s h i n g u p Chinese wages. F r o m 1 9 9 7 to 2 0 0 3 ,

r e a

l manufacturing

wages in C h i n a doubled, compared to increases of about 3 0 percent in most other places in A s i a (and 1 0 percent or less in most advanced c o u n t r i e s ) .

31

The downside is that it w i l l take years before Chinese w a g e s catch u p w i t h those in T h a i l a n d and M e x i c o , m u c h less K o r e a and T a i w a n . In the mean­ time, Chinese businesses are squeezing their companies out of m a n y indus­ tries and markets.

108

FUTURECAST T h e businesses and workers in those countries feel the squeeze most di­

rectly, but it doesn't end there. G l o b a l capital markets transmit some of the c o m p e t i t i v e pressures from industry to industry and country to country, until they reach businesses and workers across the U n i t e d States, Europe, and Japan. Here's h o w it happens. Z h e j i a n g Linhai G u o h a i F o r g i n g C o . , L t d . , a C h i ­ nese manufacturer of forged metal parts, expands its production of automo­ bile and motorcycle parts, at prices that undercut producers in M e x i c o and T h a i l a n d , w h i l e D o n g g u a n S u n p o w e r Enterprise, L t d . , a large producer of hotel furniture, and the Chinese subsidiary of Perry Ellis International, ramp u p their operations and undercut rival producers in M a l a y s i a and E g y p t . A s customers in M u n i c h , Seattle, and Seoul learn about it, some of the less pro­ ductive makers of metal parts, hotel furniture, and apparel in Mexico, Thailand, Malaysia, and E g y p t are squeezed out of business—and on the margin, capital and expertise in those countries shifts from those industries. It migrates ei­ ther d o w n the value scale to agriculture or other commodities, or up the scale to, say, basic electronics or more sophisticated equipment. In either case, the infusion of capital and expertise makes those industries in M e x i c o , Thailand, M a l a y s i a , or E g y p t a little more competitive. W h e n the resources shift d o w n the value chain, the result squeezes producers in poorer countries. W h e n it shifts u p to more advanced products, the additional capital and expertise for M e x i c a n and T h a i electronics manufacturers

or Malaysian and E g y p t i a n

e q u i p m e n t makers puts new pressures on rival producers in those industries in, say, K o r e a and Brazil. T h i s process repeats itself; and on the margin, capi­ tal and expertise shifts in those economies as w e l l , often up the value chain again to, say, L C D makers in K o r e a and auto producers in Brazil. T h i s time, the new c o m p e t i t i v e pressures m a y b e g i n to squeeze L C D producers in G e r ­ m a n y and auto makers in the U n i t e d States. China's manufacturing sector is so b i g and diversified that fast-growing exports are intensifying competition across scores of industries in scores of countries, u l t i m a t e l y ratcheting

u p competitive pressures everywhere in

the w o r l d that's connected t h r o u g h g l o b a l capital markets and trade. O n bal­ ance, this d y n a m i c is accelerating modernization in m a n y other developing economies. B u t once these c o m p e t i t i v e pressures reach A m e r i c a n , European, and J a p a n e s e businesses, they have a v e r y different effect.

W h e n the c o m p e t i t i v e pressures that begin in C h i n a and are

transmitted

from country to country finally reach A m e r i c a , E u r o p e , and J a p a n , they have the same i m p a c t as increased competition has w i t h i n any advanced economy:

109

THE PRIMACY OF GLOBALIZATION

T h e competition makes it harder for companies to raise their prices. For the last several years, thousands of companies in the U n i t e d States, E u r o p e , and J a p a n have found that they have, using the economist's term for it, less "pric­ ing leverage." A n d what happens in companies w i t h little p r i c i n g leverage when their costs g o up? In the U n i t e d States, for e x a m p l e , health insurance costs of business have risen by about 9 0 percent since 2 0 0 1 ,

their energy costs

have more than doubled, and pension costs for m a n y of t h e m have g o n e u p sharply as well. W h e n a firm's costs increase and competitive pressures pre­ vent it from raising its prices enough to cover those increases, it finds other costs to cut. In recent years, most of t h e m have turned to jobs and w a g e s . One more worldwide factor intensifies the squeeze on companies and their workers, even though it's one that the companies ultimately welcome: T h e global supply of capital has expanded less in the last decade than the global supply of labor, w i t h the result that the returns on capital that global investors look for have risen. These overarching factors, again all arising from current globalization, mean that financial markets expect companies to earn greater profits—the profits of U.S.

companies have broken all records—so companies

can't use all those profits to protect their workers' wages or jobs without driving down their stock price, and w i t h it their investment levels and future profits. T h i s squeeze on the ability of companies to raise their prices w h e n their costs increase is rapidly changing t w o basic d y n a m i c s in advanced economies. First, it changes the relationship between h o w fast an economy g r o w s and how many jobs it creates. T h e U n i t e d States provides the clearest e x a m p l e . Here, the squeeze from globalization is measurably w e a k e n i n g the vaunted A m e r i c a n job-creating machine. T h e first evidence came in the 2 0 0 1 reces­ sion, w h e n job losses relative to the actual decline in economic g r o w t h were six

times greater than in previous postwar recessions. It didn't stop there:

Once the U . S . recovery took hold, it took four years to g e t back to prerecession job levels, compared to eighteen months in the previous recovery. F i v e years into the current A m e r i c a n expansion, job creation was still r u n n i n g at half the rate of the preceding expansion. D e s p i t e this unprecedented slow­ down in U . S . job creation, the official u n e m p l o y m e n t rate has remained l o w — b u t only because the number of w o r k i n g - a g e A m e r i c a n s l o o k i n g for jobs has declined even as the economy has g r o w n . In much the same way, globalization is w e a k e n i n g the long-standing con­ nection between increases in the p r o d u c t i v i t y of workers and the w a g e s they earn. Since 2 0 0 1 , labor p r o d u c t i v i t y in the U n i t e d States has g r o w n on aver­ age

by more than 3 percent a year. That's the best U . S . performance in de­

cades. Y e t , for the first t i m e on record, the average real w a g e s of A m e r i c a n workers declined through five years of strong p r o d u c t i v i t y g r o w t h . E v e n

110

FUTURECAST

counting the value of the employer-paid health insurance and pension contri­ butions whose costs have g o n e u p so m u c h , the average A m e r i c a n worker's to­ tal compensation has increased little despite the five years of strong economic g r o w t h and p r o d u c t i v i t y gains. A n d y Stern, the reform-minded leader of the Service E m p l o y e e s International U n i o n , recently put it this w a y :

T h e challenge in A m e r i c a is not to stop globalization. T h e real question is how, in the long term, can the jobs that remain in A m e r i c a become decent-paying jobs . . . If w e don't find [the an­ swer}, then A l a n Greenspan is going to be proved right—the gap between the rich and the rest of the population is g r o w i n g so wide and so fast that it's going to threaten democratic capitalism.

32

N o r are these effects l i m i t e d to the U n i t e d States. Across most of Europe and J a p a n , job creation has been w e a k even by their standards, and wages there have declined or stagnated. "Globalization is a reality, but one w i t h the ability to mutate into a monster," according to President Horst K o h l e r of Germany, w h o holds a P h . D . in economics. "For this reason, w e have to "constrain it w i t h carefully considered rules of g o v e r n a n c e . "

33

T h e s e new pressures on jobs

and w a g e s w i l l g r o w stronger in c o m i n g years. T h e competitive pressures e m ­ anating from C h i n a are not g o i n g away. China's exports should continue to g r o w by leaps until at least the next g l o b a l recession—which w i l l also cost jobs and reduce w a g e s in A m e r i c a , E u r o p e , and J a p a n . A s China's lightning economic development continues to p u s h u p wages and other costs there in c o m i n g years, it should ease some of the initial pressures on rivals in other de­ v e l o p i n g countries. B u t India's large and fast-developing manufacturing sec­ tor, w i t h w a g e s today that are still a fraction of China's levels, may take its place in this new g l o b a l process. A m e r i c a , E u r o p e , and J a p a n cannot escape this hidden cost of globaliza­ tion; instead they'll have to o u t r u n it. T h e y ' l l have to figure out how to re­ lieve some of the cost pressures on their businesses. W e saw earlier how hard it w i l l be to reduce the costs of pensions, especially as tens of millions of west­ ern baby boomers b e g i n to retire in the next five to ten years. A s w e w i l l see a little later, containing rising costs in health care and energy w i l l prove just as difficult, in both practical and political terms. It won't matter much for the top 2 0 percent or so of each country's people, the professionals and managers whose advanced education and experience g i v e t h e m something valuable to bargain w i t h in g l o b a l markets. Ironically, it also m a y not matter much for the b o t t o m 2 0 percent or so of workers, whose physical labor is much less subject to g l o b a l pressures and w h o , in the U n i t e d States at least, often don't

THE PRIMACY OF GLOBALIZATION

III

receive private health insurance or pensions anyway. B u t if g o v e r n m e n t s and businesses in A m e r i c a , E u r o p e , and J a p a n don't meet this p r o b l e m head-on, the great m i d d l e classes in these countries could face stagnating incomes or worse for the next generation.

THE MONEY THAT MAKES THE WORLD GO ROUND: THE GLOBALIZATION OF CAPITAL Intellectual and political capital may be the critical, scarce resources for most large corporations, but m u c h of the current stage of globalization is still about money. T h e same m i g h t have been said of m o n e y and finance in other periods of economic development, but not in the same way. A s capital markets have gone truly global, the sheer v o l u m e and variety of financial assets

flowing

through the world's economies dwarf that in any previous time. T h e v o l u m e of capital m o v i n g around the w o r l d , coupled w i t h the price-squeezing effects of competition under globalization, have driven d o w n g l o b a l interest rates and created the conditions for modern boom-and-bust cycles in housing and stock markets in the advanced countries. Finally, modern globalization has substan­ tially reversed the traditional direction of these flows, w i t h hundreds of b i l ­ lions of dollars g o i n g from developing nations to the world's most advanced country. A l l of these features make the current operations of global capital markets a critical leading edge of modern globalization. For

most people, countries, and now the w o r l d as a w h o l e , the most i m ­

portant feature of money is how m u c h of it there is. T h e w o r l d is awash in fast-growing stocks of financial assets—money. For some t i m e , g l o b a l capital has been g r o w i n g faster than w o r l d G D P , faster than g l o b a l trade, and faster than w o r l d w i d e s a v i n g s .

34

A fair estimate of the g l o b a l capital pool today is

more than $ 1 5 0 trillion, more than three times w o r l d G D P and more than three times its size less than fifteen years a g o .

3 5

B y 2 0 1 0 it w i l l reach $ 2 0 0

trillion and almost certainly double again b y 2 0 2 0 to more than $ 4 0 0 tril­ lion. Moreover, the rate at w h i c h dollars, yen, and euros m o v e from one coun­ try to another (and often one currency to another) is accelerating even faster than their quantities, tripling in just the last ten years and reaching m o r e than $ 5 trillion a year in 2 0 0 6 . T h e fact that g l o b a l financial assets are g r o w i n g faster than g l o b a l G D P is meaningful. Since these assets are claims on the future, this rapid g r o w t h s i g ­ nals that, overall, the world's rich people and rich businesses that hold most of them are bullish about the future—certainly more so than in 1 9 8 0 , w h e n the world's financial assets were g r o w i n g m u c h more slowly and totaled just

112

FUTURECAST

i o percent more than w o r l d G D P . B u t that o p t i m i s m doesn't apply to every country. W i t h 4 percent of w o r l d G D P , Latin A m e r i c a holds just 2 percent of the world's financial assets, because L a t i n A m e r i c a n s as w e l l as foreigners are largely uninterested in investing there. M u c h of Latin A m e r i c a remains off the track of globalization. T h e historic size of both the g l o b a l capital pool and capital flows from country to country u l t i m a t e l y reflect the unprecedented prosperity of much of the d e v e l o p i n g w o r l d , along w i t h the revolution in information technolo­ gies. A f t e r the last fifteen years of massive transfers of western investment, technologies, and expertise to m a n y countries that had largely stagnated for decades or c e n t u r i e s — C h i n a , India, Malaysia, and M e x i c o , for instance— their businesses and people are amassing enormous amounts of new savings and wealth. Moreover, modern finance exchanges much of this wealth for cor­ porate bonds, bank deposits, stocks, and other kinds of financial assets— economists call this process "securitization"—so that m u c h of this new prosperity ends u p in local or national capital pools. Information technologies play a special role in m o v i n g these local and na­ tional pools of financial assets into the g l o b a l capital system, because most of these financial assets now exist in the form of the bytes created, stored, and transmitted by those technologies. A n d no sector has more thoroughly g l o b ­ alized itself than b a n k i n g and

finance—Citigroup

has operations in ninety

countries, for e x a m p l e , and the London b a n k i n g g i a n t H S B C does business in seventy-six different nations. T h e s e technologies allow t h e m to not only link up and m a n a g e their g l o b a l operations, but also turn physical wealth into se­ curities and financial deposits that, unlike paper or g o l d , can m o v e from ac­ count to account and country to country in a nanosecond, w i t h no shipping costs. S o , w h i l e there m a y be relatively limited numbers of businesses in Chile or I n d o n e s i a — o r even C h i n a — t h a t can profitably use all the capital they cre­ ate and save, firms and w e a l t h y people in Santiago and J a k a r t a can easily and seamlessly invest their profits and savings in companies in Shanghai and San J o s e , or lend it to the g o v e r n m e n t of the U n i t e d States. T h i s w h o l e , c o m p l i ­ cated process ends up b r i n g i n g m u c h more of the real wealth created through globalization into the monetary or financial base of scores of nations, which g i v e s rise to yet more credit or money. C h i n a , India, and a few other developing nations m a y be great beneficiaries of the globalization of capital, but most of the world's financial assets are still held in western financial institutions. T h e United States, Europe, and J a p a n dominate this sphere even more than they dominate G D P , w i t h more than 80 percent of w o r l d w i d e financial assets held in their institutions. W h e r e assets are held is different from w h o owns them. W i t h about 2 7 percent of world

113

THE PRIMACY OF GLOBALIZATION GDP,

A m e r i c a holds 3 7 percent of the world's financial assets—some $ 4 4

trillion—but non-Americans hold 1 2 percent of U.S. U.S.

corporate bonds, and 4 4 percent of U.S.

equities, 2 5 percent of

g o v e r n m e n t securities. I n J u l y

2 0 0 7 , the Chinese government held $ 4 0 8 billion in U . S . Treasury securities, and $ 6 1 1

billion were held in J a p a n . Together, they account for more than 2 0

percent of the U . S . federal debt held outside A m e r i c a ' s federal, state, and l o ­ cal

governments. It's a w i n d o w into how bullish g l o b a l investors are about

the prospects of the U n i t e d States. T h e currencies that dominate g l o b a l capital markets testify to the same j u d g m e n t , and to America's general preeminence in the g l o b a l economy. I n 2 0 0 4 , 4 5 percent of all g l o b a l equity trades and 4 3 percent of bond trades were conducted in dollars—and since dollars are the currency for b u y i n g and selling U . S . stocks and bonds, these proportions tell us whose stocks and bonds are being traded through g l o b a l markets. T h e y also s u g g e s t how bear­ ish global investors have been about E u r o p e and J a p a n : O n l y 1 5 percent of global equity trades in 2 0 0 4 were conducted in euros and 9 percent in y e n , even though the E u r o economies are almost as large as the U n i t e d States and Japan's economy is one-third the size of America's. Britain's prospects look a little better to global investors, w i t h about 8 percent of w o r l d equity trades conducted in pounds in 2 0 0 4 . T h e sources of the g r o w t h of these assets in different countries p r o v i d e an­ other w i n d o w into what drives different economies. A m e r i c a is the center of global business life, and the g r o w t h of U . S . financial assets comes m a i n l y from corporate equities, fueled by I P O s and the h i g h price—to-earning ratios of A m e r i c a n stock markets. In J a p a n , where equity markets only recently came back from years of decline or stagnation, g o v e r n m e n t debt fuels the g r o w t h of that nation's financial assets. E u r o p e , still s t r u g g l i n g to figure out how to stimulate private business w h i l e preserving unsustainable welfare sys­ tems, derives most of its new financial assets from the privatization of g o v ­ ernment enterprises and, again, government debt. A n d in China, where equity and bond markets are still largely undeveloped, its fast-rising financial assets come mainly from personal savings held in bank accounts as a hedge against illness and retirement in a society w i t h o u t broad-based health insurance or public pensions. America's financial system w i l l still dominate in 2 0 2 0 , t h o u g h less than today. A l a n Greenspan recently told a c o m m i t t e e of U.S.

senators that today

and for as long he can i m a g i n e , "people find U . S . Treasury securities the safest in the w o r l d . "

36

U . S . g o v e r n m e n t securities w i l l likely still be the world's

safest financial assets, and A m e r i c a n stocks and bonds w i l l likely continue to attract more foreign investors than those anywhere else. Business writers

114

FUTURECAST

s o m e t i m e s attribute this to U . S . "political stability," w h i c h is m a i n l y a e u p h e m i s m for America's conservative economic culture. W h e t h e r American politics leans left or right, businesses almost always have a freer hand than in most other advanced economies. O v e r the last seventy-five years, there are almost no counterparts in the U n i t e d States to the nationalized industries in E u r o p e — m a n y recently p r i v a t i z e d — m u c h less to the state-owned enterprises in C h i n a . For as long as anyone can remember, A m e r i c a n s have admired busi­ ness more than Europeans or A s i a n s , even trusting it w i t h p r o v i d i n g such p u b l i c goods as health care and pension coverage. Moreover, w h i l e European and J a p a n e s e economic arrangements have long tended to focus on preserving w e a l t h , A m e r i c a n s have concentrated more on b u i l d i n g it. T h e s e cultural dis­ positions lead to certain real differences that tend to produce higher returns on investment in the U n i t e d States, most notably the m u c h lower legal and regulatory hurdles for A m e r i c a n entrepreneurs. In a global economy, the in­ novation (and jobs) created by y o u n g businesses produce enormous wealth that q u i c k l y becomes financial assets that investors want. A n d perhaps most important for g l o b a l investors over the next decade or so, business taxes are al­ most certain to remain lower in the U n i t e d States than in J a p a n or most of E u ­ rope, because the public burden of America's social commitments (apart from health care) w i l l g r o w more slowly there than in J a p a n or most of Europe. T h e b i g g e s t change for the w o r l d of capital in the near future w i l l be the g r o w i n g importance of China's financial markets and assets and the relative decline of J a p a n ' s . Today, C h i n a holds about $ 5 trillion in financial assets, or less than one-third those of J a p a n , one-seventh those of Europe, and oneninth those of the U n i t e d States. B u t China's financial assets are g r o w i n g faster than those anywhere else except the U n i t e d States. M o s t of the g r o w t h is in the deposits of Chinese savers in the country's state-owned "banks." T o ­ day, China's state-owned banks are still m a i n l y pass-through institutions that channel their depositors' savings into credit for local governments and often insolvent state-owned enterprises. In short, they have little in c o m m o n with European or A m e r i c a n banks that create credit for private businesses and con­ sumers based on reasonably objective criteria. M o r e broadly, C h i n a still lacks most of the independent p u b l i c and private institutions and rules that c o m ­ prise a m o d e r n financial market, and that turn a nation's g r o w i n g wealth into paper (or bytes) that can be traded around the w o r l d . M o s t of the domestic businesses listed on China's y o u n g stock m a r k e t s — t h e

"red c h i p s " — g o t

there not by m e e t i n g capital standards and p r o v i d i n g transparent

financials,

but by political favor. N o r are the brokers that carry out stock trades in C h i n a bound by the rules that create confidence in western exchanges. Perhaps most important for g l o b a l capital markets, C h i n a still lacks a convertible currency.

THE PRIMACY OF GLOBALIZATION All

115

that w i l l almost certainly change over the next decade, t h o u g h g r a d ­

ually and very painfully. A l r e a d y , m o r e than one h u n d r e d western banks maintain branches in C h i n a , principally to serve foreign-owned businesses. However, recently C h i n a has allowed C i t i g r o u p , Société G é n é r a l e , and B a n k of A m e r i c a to purchase stakes in state banks, and they w i l l b r i n g m o d e r n banking practices w i t h them. T h e challenge for C h i n a in a l l o w i n g a m o d e r n banking system to take hold is that, without the credit from state-owned banks, most remaining state-owned enterprises w i l l be b a n k r u p t in fairly short or­ der, throwing millions of Chinese out of w o r k . Similarly, C h i n a has taken a few

small steps to bring the r e m e m b i a little more in line w i t h other curren­

cies. T h e challenge here is reconciling a truly convertible currency w i t h B e i ­ jing's basic strategy of d r i v i n g g r o w t h t h r o u g h cheap exports. W h e n foreign investors k n o w they can take home their profits in their o w n currencies, they'll rush into the world's fastest g r o w i n g e c o n o m y — a n d that rush w i l l drive up the value of the r e m e m b i and increase the prices of Chinese exports everywhere else in the w o r l d . T h e result could be the ruin of thousands of Chinese companies and, again, millions of Chinese thrown out of work. T h e only w a y C h i n a can maintain strong g r o w t h w h i l e its exports falter is to be­ come a more consumption-based economy, like other major countries. A n d that will require that the Chinese government restore some semblance of broad health-care and pension coverage; because until that happens, most Chinese w i l l still prefer to save rather than consume. China's economic modernization has largely been a story of shocks exe­ cuted carefully and ruthlessly. It w i l l take the Chinese g o v e r n m e n t at least another decade to create a modern financial s y s t e m — s t i l l a small fraction of the time it took E u r o p e and A m e r i c a to b u i l d theirs. If they carry it off, b y 2 0 2 0 C h i n a could have the world's second-largest stock of financial assets and the world's second-most-important financial market. W h e t h e r or not C h i n a can m a k e this leap, g l o b a l capital and its flows w i l l still double or triple again over the next ten to fifteen years. D i r e c t l y or indi­ rectly, these markets w i l l finance tens of millions of new industrial and c o m ­ mercial jobs in developing countries, transforming the lives and prospects of hundreds of millions of people. T h e effects for people l i v i n g and w o r k i n g in the advanced countries, however, are more subtle and m i x e d . Most fundamentally, the h u g e increases in the sheer size of the g l o b a l cap­ ital pool mean that, for nations as for corporations, capital is no longer scarce. One hugely important consequence is that interest rates have been histori­ cally low since globalization took off. A c c o r d i n g to the I M F , since 2 0 0 0 the world's eight largest advanced economies all recorded lower real l o n g - t e r m interest rates than in any comparable period of the last forty-five years, in

116

FUTURECAST

both absolute terms and relative to how fast those countries grew. E v e n coun­ tries w i t h d i s m a l national savings rates and h i g h levels of foreign borrowing, most notably the U n i t e d States and B r i t a i n , have maintained these low inter­ est rates. T h e only precedent for this is the last period of accelerating g l o b a l ­ ization, from the m i d - 1 8 9 0 s to W o r l d W a r I , w h e n interest rates were also unusually l o w relative to g r o w t h .

3 7

A second, h u g e l y i m p o r t a n t consequence is that g l o b a l capital markets are b e c o m i n g m o r e powerful than central banks. In recent years, the U . S . Federal R e s e r v e and the E u r o p e a n Central B a n k both discovered that their decisions to raise short-term interest rates had little effect on the long-term rates that drive most b o r r o w i n g and, u l t i m a t e l y economic activity. F r o m J u n e 2 0 0 4 to J u n e 2 0 0 6 , for e x a m p l e , the Federal R e s e r v e raised short-term rates from 1 . 2 5 percent to 5 . 2 5 percent in seventeen separate steps. Y e t the rate for A A A corporate bonds was about 6 percent in both J u n e 2 0 0 4 and J u n e 2 0 0 6 , and a conventional m o r t g a g e cost just four-tenths of 1 percent m o r e in J u n e 2 0 0 6 than in J u n e 2 0 0 4 . In both cases, the l o n g - t e r m rates ac­ tually fell t h r o u g h the first year of the Fed's " t i g h t e n i n g " cycle, and then slowly returned to r o u g h l y their o r i g i n a l levels w h e n the F e d policy change began. I n this instance at least, the financial markets have just been smarter about g l o b a l i z a t i o n than central bankers. A c c o r d i n g to the traditional rules of central b a n k i n g , w h e n capital, credit, and consumption all g r o w as q u i c k l y as they have r e c e n t l y — a n d are l i k e l y to do in future years—fast-rising infla­ tion usually follows. B u t globalization is c h a n g i n g those rules. Since g l o b a l ­ ization took off in the m i d - 1 9 9 0 s , inflation has decelerated sharply almost e v e r y w h e r e in the w o r l d . I n the a d v a n c e d countries, inflation s l o w e d to just 2 to 3 percent a year from 1 9 9 5 to 2 0 0 5 . S i m i l a r l y , price levels in A s i a (out­ side J a p a n , w h e r e deflation was the rule in those years) rose about 3 to 6 per­ cent a year, or half the rate of the previous decade. Price increases also fell b y h a l f in L a t i n A m e r i c a , w h i c h has enjoyed relatively m i l d inflation (for t h e m ) of 1 0 to 2 0 percent a y e a r .

38

A senior m e m b e r of the B a n k of E n ­

g l a n d , D r . D e a n n e J u l i u s , took this w i d e v i e w and c o n c l u d e d , "Intensified international c o m p e t i t i o n — w h a t some call g l o b a l i z a t i o n — a n d the spread of n e w technologies m a y be t h o u g h t of as the current drivers . . . towards the old n o r m of l o w g l o b a l i n f l a t i o n . "

39

T h e I M F is still g e n e r a l l y skeptical

about h o w deeply g l o b a l i z a t i o n is d a m p e n i n g inflation—it's part of the I M F ' s business, after all, to m o n i t o r inflationary forces in developing coun­ tries, and n o b o d y likes to a c k n o w l e d g e that part of its mission has become less i m p o r t a n t . Y e t even the I M F says now that, "globalization has undoubt­ e d l y p r o v i d e d some break on i n f l a t i o n . "

40

THE PRIMACY OF GLOBALIZATION

117

T h e intensification of competition that makes it harder for businesses to increase their prices, even w h e n their costs g o u p , isn't the only reason infla­ tion is now rising more slowly. N e a r l y as important, all the flows of western capital, technologies, and expertise have m a d e large economies l i k e C h i n a , India, and M e x i c o m u c h more productive, d a m p e n i n g inflation there and cre­ ating floods of cheap exports that also lessen the inflation in E u r o p e , J a p a n , and A m e r i c a . Finally, the A s i a n financial crisis of 1 9 9 7 - 1 9 9 8 — i t s e l f a p h e ­ nomenon of globalization—has taught governments in most developing coun­ tries that choosing economic policies that risk more inflation can carry a v e r y large price. Globalization won't end inflation. M o s t notably, price shocks in energy and other important commodities still drive u p prices around the w o r l d . B u t g i v e n the underlying trend of lower interest rates and lower inflation, the people in most advanced and fast-growing developing nations w i l l be able to borrow and consume more over the next ten to fifteen years than they can probably i m a g i n e today. A 2 0 0 5 survey of 1 , 6 5 6 top business executives b y The

Economist estimated that w o r l d w i d e consumption spending w i l l increase

60 percent faster than w o r l d w i d e G D P , rising from around $ 2 7 trillion a year today to $ 6 2 trillion in 2 0 2 0 . T h e clothing, electronics, and personal services that affluent Americans and Europeans enjoy today w i l l be available to both almost everyone there, and to hundreds of millions of households in the rest of the w o r l d . C o n s u m p t i o n w i l l especially soar in f a s t - g r o w i n g d e v e l o p ­ ing countries. B y 2 0 2 0 , C h i n a w i l l be the world's second-biggest consumer market, w i t h as m a n y privately o w n e d passenger cars than A m e r i c a in 1 9 8 0 — a n estimated 1 3 0 m i l l i o n v e h i c l e s — a n d total consumer spending in India w i l l match France. A l l that credit also w i l l be available at l o w interest rates to businesses around the w o r l d , but business investment w i l l concen­ trate itself where the prospective returns are most p r o m i s i n g . T h e countries best situated to take advantage of globalization w i l l attract most of it, w h i c h is w h y the executives in The Economist survey see m u c h stronger business g r o w t h between 2 0 0 5 and 2 0 2 0 in the U n i t e d States, C h i n a , and India than in most of Europe or Latin A m e r i c a . In economic life, everything comes at a cost. A l l that l i q u i d i t y sloshing around the world is p r o d u c i n g a new and painful d o w n s i d e in the emergence of new asset bubbles that eventually burst. In the last decade, housing prices in most advanced countries rose faster than d u r i n g any comparable period since World W a r I I . F r o m 1 9 9 7 to 2 0 0 5 , housing prices marched u p 6 9 per­ cent in Italy and 7 3 percent in the U n i t e d States, 8 4 percent in France and 87 percent in Sweden, 1 1 4 percent in Australia, 1 4 5 percent in Spain, 1 5 4 per­ cent in Britain, and 1 9 2 percent in I r e l a n d .

41

(The only exceptions have been

118

FUTURECAST

the t w o weakest major economies, J a p a n and G e r m a n y . ) B y 2 0 0 6 , the hous­ i n g bubbles in the most overheated markets, such as Australia and Britain, were b e g i n n i n g to burst or at least leak. In 2 0 0 7 , America's bull market in housing also s t u m b l e d . J a p a n offers a g r i m example of what the near future may

hold for homeowners in some countries: H o u s i n g prices soared there

in the 1 9 8 0 s ; and w h e n the b u b b l e burst in the 1 9 9 0 s , average prices fell 4 0 percent. T h e s e asset bubbles are not l i m i t e d to housing. F r o m 1 9 9 7 to 2 0 0 4 , stock markets around the w o r l d rose and fell more sharply than during any compa­ rable period since W o r l d W a r I I — u p or d o w n by an average of more than 1 6 percent a year in B r i t a i n , 1 8 percent a year in Austria, 2 0 percent a year in the U n i t e d States, and 2 4 to 2 7 percent a year in France, Italy, and G e r m a n y .

42

T h i s volatility was even greater in e m e r g i n g markets such as R u s s i a and Turkey, where stock prices have risen or fallen by an average of 81 percent and 92

percent a year respectively, since the late 1 9 9 0 s . Globalization w i l l also

change stock markets themselves, and in ways that could further increase their volatility. W i t h cross-border capital flows likely to top $ 1 0 trillion a year w i t h i n five years, the need for the traditional "specialists"—selected bro­ kerages that intervene w h e n buyers disappear in the N e w Y o r k Stock E x ­ change and a few other major m a r k e t s — w i l l melt away. Nations m a y still retain their o w n national stock and bond markets, but the m i g h t y N e w Y o r k and L o n d o n exchanges w i l l be indistinguishable from the N A S D A Q and the major continental European and A s i a n markets. L i s t i n g standards w i l l be in­ ternationalized, and almost all trades everywhere w i l l be handled through fiber-connected computer networks m a t c h i n g buyers and sellers around the world. W i t h the globalization of capital flows almost certain to accelerate, and in­ flation (apart form energy prices) likely to remain moderate,

boom-and-bust

markets w i l l become more c o m m o n . T h e shrewd and the lucky w i l l g e t rich, w h i l e the best advice for most stockowners and homeowners is to do your best to g e t t h r o u g h the d o w n times.

HOW GLOBAL CAPITAL CAN LOSE ITS BALANCE G l o b a l capital markets have certain i m p l i c i t rules, and nobody likes to play by the rules all the time. C h i n a invites foreign investment but won't allow its for­ eign investors to convert their Chinese profits to their own currencies. B u t the largest transgressor is the world's most indispensable economy, the United States. Since the turn of this century, the United States has been consuming

THE PRIMACY OF GLOBALIZATION

119

trillions of dollars a year in foreign imports, supporting g r o w t h or booms in countries around the world. To pay for those imports and support its o w n in­ vestments, A m e r i c a has used g l o b a l capital markets, year after year, to borrow most of the world's excess savings. I f those markets finally apply their o w n rules to the United States, the current g l o b a l b o o m w i l l become a g l o b a l bust. E v e n A m e r i c a can't break the rules all by itself. For more than a half d e ­ cade now, the U n i t e d States has sustained its strong g r o w t h b y saving little and a l l o w i n g Americans to consume m u c h more than they p r o d u c e — s o m e $ 6 0 0 billion to $ 8 0 0 billion m o r e — t h r o u g h imports. It's not hard to g e t Americans or anyone else to consume beyond their m e a n s — l a r g e b u d g e t deficits, low interest rates, easy credit, and arrangements that have allowed tens of millions of homeowners to cash in more than $ 3 trillion in housing bubble equity have done the trick. A n d every year since 2 0 0 1 , A m e r i c a n s have spent between 4 and 5 percent more than they earn, w h i l e their g o v e r n ­ ment has spent 2 to 4 percent more than it takes in. W i t h A m e r i c a intent on boosting consumption in an economy five times China's size and larger than J a p a n , G e r m a n y , the U K , and France c o m b i n e d , m u c h of the d e m a n d for E u ­ ropean, Chinese, and other A s i a n exports now comes from the U n i t e d States. For

their part, A s i a , most of E u r o p e , and the oil e x p o r t i n g countries maintain

their o w n g r o w t h and jobs by c o n s u m i n g m u c h less than they produce and exporting the rest, m a i n l y to A m e r i c a . The

hitch is, how can the U n i t e d States, w i t h a d i s m a l l y l o w national sav­

ings rate, pay for all its consumption and b u d g e t deficits, plus the investment needs of its g r o w i n g businesses? T h e funds are out there in the w o r l d — m o s t other advanced nations along w i t h C h i n a and the oil e x p o r t i n g countries have been consuming so m u c h less than they produce, that they're saving at levels far

beyond their o w n economies' investment needs. T h e answer thus far is

that A m e r i c a has used g l o b a l capital markets, year after year, to sell U . S . g o v ­ ernment securities, stocks, bonds, and real estate to everyone else, to pay for imports and help fund its deficits and the capital needs of its businesses. G l o b a l capital markets are m a n a g i n g a u n i q u e and shaky symbiosis a m o n g the world's major economies. These arrangements are rewriting the relationships between rich, not so rich, and poor nations. For decades, capital m o v e d from the rich countries to developing markets, where opportunities for fast g r o w t h and h i g h returns are usually most abundant. N o w e m e r g i n g countries and the oil e x p o r t i n g na­ tions are financing two-thirds of the world's richest nation's capital shortfall, w i t h other advanced countries m a k i n g u p the rest. T h e s e arrangements also are materially c h a n g i n g w h o owns A m e r i c a . B y the end of 2 0 0 6 , Americans owned $ 1 5 . 1

non-

trillion in U . S . assets, equal to 2 0 to 2 5 percent of

120

FUTURECAST

the value of all physical and

financial

assets in the A m e r i c a n e c o n o m y .

43

Moreover, all those foreign owners can take h o m e the interest, dividends, cap­ ital g a i n s , and rents that their U . S . assets generate every year. Since A m e r i ­ cans o w n about $ 1 2 . 5 trillion in foreign assets, the annual return on the $ 2 . 6 trillion difference—about $ 1 4 0 b i l l i o n — i s w h a t it costs Americans each year to be such large debtors to the rest of the w o r l d . That's equivalent to the cost of p r o v i d i n g medical insurance to every uninsured A m e r i c a n . N o household or corporation could indefinitely finance its consumption and shortfalls by selling off more and more pieces of itself, and neither can a nation. A s it is, the large foreign financial institutions and central banks that dominate g l o b a l capital markets now have h u g e stakes in U . S . securities and other dollar assets; and like all g o o d investors, they k n o w that it's just com­ m o n sense to diversify their holdings. To begin, their trillions of dollars in U . S . assets has left t h e m hostage to any downturn in America's economy. T h e y also k n o w that history is full of examples of countries w i t h fast-rising foreign debt reducing their liabilities by p u m p i n g up their money supply and letting their inflation rates rise. I f the U n i t e d States were to start printing lots of money, it w o u l d reduce the value of the dollar and so erode the value of the U . S . holdings of foreign investors in their o w n currencies. I f the world's m e g a c o n s u m e r and megaborrower were any country but the U n i t e d States, foreign central banks and global investors w o u l d have stopped their h u g e lending and investing there long ago. B u t U . S . assets are still g e n ­ erally more desirable than those of other countries, because the political and economic prospects of the world's sole political and economic superpower are still, on balance, better than those of almost anywhere else. T h e U . S . dollar is also still the world's reserve currency, so foreign central banks have been w i l l ­ ing to hold enormous amounts of U . S . Treasury securities as insurance against a future crisis of confidence that could threaten their o w n currencies. E v e n so, the w i l l i n g n e s s of C h i n a and other e m e r g i n g economies to finance m u c h of the U . S . current account deficit costs them a great deal of money every year. To start, U . S . Treasury securities produce relatively little income. In M a r c h 2 0 0 6 , Lawrence S u m m e r s , then president of Harvard University, told the R e s e r v e B a n k of India that if it invested India's excess reserves in relatively safe private financial assets, it could generate returns greater than India spends on health care—and the current excess dollar reserves of China, T a i w a n , T h a i l a n d , R u s s i a , and even M a l a y s i a and A l g e r i a are relatively larger than India's. A l l told, if America's various national financiers used their excess savings to finance more national infrastructure, or even just invested them in a diversified portfolio of g l o b a l securities, their return w o u l d be hundreds of billions of dollars higher a y e a r — a s m u c h as all g l o b a l foreign aid.

THE PRIMACY OF GLOBALIZATION

121

These imbalances w i l l not g o on indefinitely because, ultimately, they make no economic sense for everyone i n v o l v e d . T h e crisis could start in a v a ­ riety of ways: A t some point, foreign private i n v e s t o r s — w h o stopped expand­ ing their U . S . dollar holdings in 2 0 0 4 — w i l l b e g i n selling some of them; and even higher purchases by the major foreign central banks won't be enough. O r China's economy could s i m p l y slow d o w n , cutting into its excess savings. O r domestic investment in J a p a n and Asia's e m e r g i n g economies could fi­ nally recover, cutting their excess savings. O r oil prices could fall, d r i v i n g d o w n M i d d l e Eastern savings. O r perhaps the U n i t e d States could t r i g g e r the crisis on its own, by letting its frustration w i t h h u g e trade deficits turn A m e r i c a more protectionist. Even if none of these scenarios comes to pass, globalization has created a trap door under the U . S . and w o r l d economies. N e x t m o n t h , next year, or later, one or more foreign central banks w i l l b e g i n to g e t cold feet about sink­ ing more of their wealth in U . S . assets. W h e n one shifts course, others w i l l follow to cut their losses; and g l o b a l capital markets w i l l extract a swift and large cost for all the years of A m e r i c a n overspending and undersaving. W i t h ­ out infusions of $ 5 0 billion to $ 7 0 billion every m o n t h in foreign funds, the meager U . S . savings won't be enough to fund its deficits and normal business investment. T h e only option for the U . S . Treasury and A m e r i c a n businesses looking for capital w i l l be to offer higher returns to placate the anxieties of foreign investors. W h e n you borrow money, h i g h e r returns take the form of higher interest rates, and a sharp rise in interest rates required to slow d o w n this k i n d of crisis w o u l d also sharply slow d o w n the U . S . economy and send U.S.

stock and bond prices into a swoon. In a time of globalization, that crisis won't end there. A s the downturn

drives down U . S . stock and bond markets, foreign investors w i l l join the selloff and a vicious cycle w i l l begin. In the worst case—one that m a n y other countries have gone t h r o u g h — e v e r y b o d y gets cold feet at once and d u m p s U.S.

stocks and bonds en masse. A m e r i c a n markets p l u m m e t along w i t h the

dollar; U . S . interest rates soar to attract buyers for the government's continu­ ing debt, and the A m e r i c a n economy stalls out. If this happens, everybody w i l l lose a lot of money, because a recession w i l l cut into America's demand for for­ eign imports. A s European and A s i a n exports to the U n i t e d States fall back, g r o w t h will slow sharply across the world. T h i s is not a fantastic scenario. S o m e t h i n g m u c h like it began to unfold in 2 0 0 4 , when private foreign investors largely stopped b u y i n g more U . S . stocks and bonds. W i t h less d e m a n d for dollars, g l o b a l capital markets began to w o r k their w i l l : T h e dollar fell against the euro, European exports to the United States slowed d o w n , g r o w t h and job creation declined in m u c h of

122

FUTURECAST

E u r o p e , and U . S . interest rates began to rise. T h e crisis faded when the C h i ­ nese, J a p a n e s e , and Saudi g o v e r n m e n t s decided to b u c k the markets. C h i n a and J a p a n were determined to keep their currencies relatively cheap, so they could continue to depend on exports for their domestic g r o w t h ; and the Saudis joined in because most oil sales are denominated in dollars. T h e three g o v e r n m e n t s entered the capital markets and used their o w n reserves to buy tens of billions of dollars, w h i c h they p r o m p t l y converted mainly to U . S . g o v e r n m e n t securities. In a real crisis, they won't have enough remembi, yen, and rials to turn the tide. A s it is, the globalization of capital has not only left the economies of China, J a p a n , and m u c h of E u r o p e hostage to U . S . consumer demand, it also has made the U n i t e d States hostage politically to the investment decisions of foreign governments. Everyone knows how m u c h damage a foreign govern­ ment could inflict on the U n i t e d States by s i m p l y selling off U . S . assets, and that k n o w l e d g e has already conferred new political power on America's big foreign funders. If the risk of C h i n a w i t h h o l d i n g its purchases of U . S . assets didn't hang over America's head, perhaps the A m e r i c a n administration would press B e i j i n g about its wholesale violations of U . S . software copyrights and pharmaceutical patents. In at least one recent U.S.-Japanese trade dispute, these concerns apparently did affect U . S . policy. T h e story goes that in 2 0 0 5 , President B u s h called Prime M i n i s t e r K o i z u m i to press h i m about Japanese import of U . S . beef. T h a t afternoon, the Japanese finance minister told the press that the B a n k of J a p a n should consider "rebalancing" its foreign currency holdings, and the next day, U . S . trade negotiators quietly shelved their com­ plaints about beef. A s it happens during the Suez crisis a half century earlier, w h e n Britain and France depended on U . S . purchases of pound and franc as­ sets, President Eisenhower had used the same threat to force their hands on support for Israel. T h e power that America's major financers could wield over it today could prove especially troubling in the M i d d l e East, where high crude oil prices have already swollen the dollar holdings of Saudi A r a b i a and other large oil exporters. A s the Saudis' dollar holdings expand and U . S . borrowing increases, their potential influence over U . S . policy there inevitably w i l l rise. W i t h or w i t h o u t a dollar crisis, however, this w i l l probably be the last of the great g l o b a l capital imbalances. G l o b a l capital flows are g r o w i n g even faster than the U . S . current account deficit and g l o b a l savings, so by 2 0 1 5 or earlier, even the U n i t e d States and its funders w i l l not have the resources to hold off the discipline of g l o b a l capital markets. In a decade or sooner, the A m e r i c a n dollar w i l l m o v e u p and d o w n m u c h like other currencies, subject to painful d e v a l u a t i o n i f U . S . administrations k e e p on r u n n i n g large b u d ­ g e t deficits and U . S . consumers k e e p on s p e n d i n g more than they earn and

THE PRIMACY OF GLOBALIZATION

123

produce. Since devaluations w i l l increase prices for foreign imports in the United States, U . S . inflation and interest rates could trend a little higher, de­ spite all the forces keeping t h e m d o w n . W i t h g o v e r n m e n t spending certain to rise w i t h the retirement of A m e r i c a n boomers, g l o b a l capital markets w i l l probably force the U n i t e d States to raise national savings, and perhaps by d o ­ ing what seems politically unthinkable today, raise taxes. A t least that should be possible in A m e r i c a , w h e r e — i n sharp contrast to m u c h of E u r o p e — t a x e s are still sufficiently low that raising t h e m a bit shouldn't d a m a g e the econ­ o m y or t r i g g e r a popular revolt. T h e p o w e r of global capital markets w i l l present difficult choices for other countries as well. If Americans end u p c o n s u m i n g less of w h a t the rest of the world produces for export, C h i n a , E u r o p e , and J a p a n w i l l have to rely more on their own consumption to keep their jobs and incomes g r o w i n g . T h a t ad­ justment won't be easy anywhere. C h i n a w i l l have the great advantage of fastg r o w i n g i n c o m e s — b u t convincing hundreds of millions of Chinese to spend rather than save more of their g r o w i n g incomes w i l l , again, require major ex­ pansions in health-care and pension coverage. In J a p a n and m u c h of E u r o p e , where dismal demographics and intense g l o b a l competition are already p r o ­ ducing stagnating incomes, it m a y prove just as difficult to convince people to consume more. C u t t i n g taxes won't be an option, g i v e n the enormous fi­ nancing burdens that their pension and health-care systems face. In fact, these pressures w i l l likely force some of those countries to cut benefits and, in a real crisis, perhaps even raise taxes. In either case, it w i l l leave millions of E u r o p e ­ ans and Japanese w i t h even less to spend than today. As global capital markets force Americans to consume fewer European and Japanese exports, their real choice m a y come d o w n to either enduring years of economic stagnation or trying to slowly boost incomes by rolling back decades of cherished labor market restrictions and industry regulations. Here, it mainly comes down to politics, especially a country's willingness to j u m p off a cliff of big political changes. B y all the recent evidence in this regard, another long period of hard times is the m o s t l i k e l y o u t c o m e for J a p a n , w h e r e p e o p l e stuck w i t h the L D P t h r o u g h m o r e than a decade of e c o n o m i c stagnation, rather than shake up the most inefficient service sector in the advanced w o r l d by reforming regulations that protect thousands of mom-and-pop and m e d i u m size businesses. B y most recent evidence, m a n y of the smaller countries in Europe—Sweden, Finland, Switzerland, Spain, and perhaps a few m o r e — c o u l d well g o down a big-reform route w i t h more c o m m i t m e n t than the major countries. A n d Ireland just has to keep on doing what it's doing now. B u t Italy seems almost destined for real economic decline in the near future, g i v e n the scale of its problems and its fragmented politics. G e r m a n y and France

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periodically take small steps to reform themselves and then usually lose their political nerve w h e n powerful businesses, unions, or public opinion objects. It w i l l take an extraordinarily talented new leader—perhaps Nicolas S a r k o z y — plus a real shake-up in their political parties to make a real difference there. W i t h o u t that, tens of millions of G e r m a n and French people are also likely headed for a slow-motion decline. A m o n g Europe's large countries, only Britain has shown a recent tolerance or taste for b i g changes. Britain's political parties, like America's, have shown a modern tendency to reinvent themselves— Thatcher's Conservatives and Blair's Labourites, like Reagan's Republicans and Clinton's Democrats, faced u p to some of the reality facing their countries and unraveled a number of cherished regulations and outdated social programs. T h e w o r k Britain has done, especially in its once-nationalized sectors and p u b ­ lic pensions, should be enough for the E n g l i s h to m u d d l e through more suc­ cessfully than their continental counterparts. B u t a return to real prosperity w i l l take another Thatcher or B l a i r w i l l i n g to lead Britons to shake up their way

of life even more.

THE OUTLOOK FOR GLOBALIZATION G l o b a l i z a t i o n encompasses powerful forces, but its development is not uni­ versal and, even where it's taken a strong hold, its progress is far from uni­ form. M a r k e t s m a y be g l o b a l or nearly so; but the w o r l d is still organized around sovereign nations w i t h the authority and power to set many of the terms of those markets, both w i t h i n and across their o w n borders. A s w e w i l l see,

countries large and small sometimes can resist the market forces at the

heart of globalization w i t h considerable success, although usually at consider­ able cost to themselves. S o m e popular resistance to globalization seems quite reasonable, because it intensifies market forces, and those markets may pro­ v i d e v e r y little reward for the majority of workers w i t h few or even average skills and abilities. Since the d e m o g r a p h i c changes sweeping the world also produce new economic pressures for most of those workers, popular resistance to at least the outcomes of globalization w i l l likely intensify in m a n y places. In the U n i t e d States, E u r o p e , and J a p a n — a s w e l l as places like K o r e a , T h a i ­ land, B r a z i l , and M e x i c o — g o v e r n m e n t s m a y revive protectionism for sectors like autos, electronics, and agriculture, at least for a time. A n o t h e r wrenching financial calamity, perhaps triggered by a dollar crisis, could bring back stricter g o v e r n m e n t controls on foreign investment and capital flows, again at least for

a t i m e . A n d m o u n t i n g j o b losses from piecemeal service outsourcing

could convince g o v e r n m e n t s in m a n y advanced countries to slap new taxes

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THE PRIMACY OF GLOBALIZATION and

r e g u l a t i o n s on c o m p a n i e s t h a t i m p o r t t h e i r s e r v i c e s , e v e n w h e n t h e y d o

so t h r o u g h the W o r l d W i d e W e b . S t i l l , the consequences o f g l o b a l i z a t i o n also i n c l u d e so m u c h n e w w e a l t h for so m a n y p e o p l e a n d countries t h a t its b a s i c h o l d on at least the near f u t u r e is secure. O n c e before, p o w e r f u l p o l i t i c a l a n d e c o n o m i c forces c a m e t o g e t h e r a n d tore d o w n the i n s t i t u t i o n s o f a p r e v i o u s p e r i o d o f g l o b a l i z a t i o n , t h r o u g h t h e t w o w o r l d w a r s a n d w o r l d w i d e depression o f t h e last c e n t u r y . A reprise o f t h a t p e r i o d in o u r o w n t i m e is v e r y unlikely, at least for the n e x t f e w d e c a d e s . D e ­ spite the o p t i m i s m o f its m o s t a r d e n t defenders, g l o b a l i z a t i o n c a n n o t b a n i s h conflict a n d w a r f r o m o u r near future. B u t t h e rise o f t h e U n i t e d S t a t e s as a sole m i l i t a r y s u p e r p o w e r w i t h no near peer, a l o n g w i t h the p o l i t i c a l c o m m i t m e n t of m o s t nations to m a r k e t - b a s e d a r r a n g e m e n t s , s h o u l d p r e v e n t a c o n t i n e n t a l or w o r l d w i d e conflict i n v o l v i n g m a j o r p l a y e r s in t h e g l o b a l e c o n o m y . T h e w o r l d also has g o n e m o r e t h a n s i x t y years w i t h o u t a g l o b a l d e p r e s s i o n , a l t h o u g h r e ­ cessions have a n d w i l l a l w a y s d e v e l o p p e r i o d i c a l l y . G l o b a l i z a t i o n c a n m o d e r a t e or

intensify a n o r m a l recession, d e p e n d i n g on c o n d i t i o n s at the t i m e ; a n d c e r ­

tain e l e m e n t s o f g l o b a l i z a t i o n can t r a n s m i t recessionary forces f r o m c o u n t r y to country. B u t w h e n stock a n d b o n d m a r k e t s p l u m m e t today, g o v e r n m e n t s u s u ­ ally k n o w e n o u g h to take steps t h a t can t u r n t h e m a r o u n d , at least w h e r e t h e real e c o n o m y is o t h e r w i s e s o u n d a n d s t r o n g . A n d in c o u n t r i e s p r e p a r e d for t h e c o m m i t m e n t — h a p p i l y , the m a j o r i t y t o d a y — g l o b a l i z a t i o n u l t i m a t e l y m a k e s their real e c o n o m i e s s t r o n g e r a n d sounder. S o g l o b a l i z a t i o n m a k e s a n o t h e r w o r l d w i d e depression even m o r e r e m o t e . The

largest threats to g l o b a l i z a t i o n a n d its core p r o m i s e o f social a n d e c o ­

n o m i c p r o g r e s s lie in the w i l d cards s t a l k i n g t h e w o r l d today, a f e w f r i g h t e n ­ i n g possibilities t h a t c o u l d p o s s i b l y arise o u t s i d e t h e r e a l m o f g l o b a l i z a t i o n , w i t h d e e p l y d i s r u p t i v e w o r l d w i d e effects. N u c l e a r t e r r o r i s m , e s p e c i a l l y in the U n i t e d States or C h i n a , c o u l d s h u t d o w n m u c h o f g l o b a l t r a d e a n d i n v e s t m e n t for

a t i m e a n d roll b a c k p o l i t i c a l a n d e c o n o m i c f r e e d o m s for a m u c h l o n g e r

t i m e . T h e U . S . N a t i o n a l I n t e l l i g e n c e C o u n c i l ' s o u t l o o k for 2 0 2 0 w a r n s t h a t "terrorist attacks t h a t k i l l e d tens or h u n d r e d s o f t h o u s a n d s in several U . S . cities or in E u r o p e " c o u l d lead to d r a c o n i a n g o v e r n m e n t c o n t r o l s "on t h e of capital, g o o d s , p e o p l e a n d t e c h n o l o g y t h a t stalled e c o n o m i c g r o w t h . "

4 4

flow Sim­

ilarly, the p o l i t i c a l d i s i n t e g r a t i o n o f S a u d i A r a b i a , especially at the h a n d s o f radical I s l a m i s t s , or o f C h i n a , w o u l d send t h e g l o b a l e c o n o m y i n t o an e x t e n d e d d o w n s p i n . S o m i g h t a d e a d l y g l o b a l p a n d e m i c on the scale o f t h e

1918-1919

S p a n i s h influenza p a n d e m i c t h a t s t o p p e d m u c h o f g l o b a l t r a d e a n d t r a v e l for m a n y m o n t h s or a f e w y e a r s .

4 5

T h a n k f u l l y , these p r o s p e c t s r e m a i n r e m o t e .

M o r e o v e r , other e q u a l l y u n p r e d i c t a b l e w i l d c a r d s — f o r e x a m p l e , the d e v e l o p ­ m e n t o f new, clean, a n d i n e x p e n s i v e e n e r g y t e c h n o l o g i e s — c o u l d

accelerate

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a n d d e e p e n g l o b a l i z a t i o n . E i t h e r w a y , unless w e assume the utterly u n p r e ­ d i c t a b l e , the d e e p trends in g l o b a l m a r k e t s , g l o b a l politics a n d g l o b a l technolo­ g i e s s h o u l d k e e p the basic process o f g l o b a l i z a t i o n on track for at last another generation.

CHAPTER FOUR

THE TWO POLES OF GLOBALIZATION: CHINA AND THE UNITED STATES

THE

SINGULAR S T R E N G T H S OF T H E U.S. and Chinese economies,

com­

b i n e d w i t h their sheer size, w i l l set m u c h o f t h e course o f g l o b a l i z a t i o n for t h e n e x t ten t o fifteen years, a n d w i t h t h a t t h e e c o n o m i c p a t h o f m a n y o t h e r countries. N o w a n d for the n e x t g e n e r a t i o n , g l o b a l i z a t i o n w i l l h a v e an eastern and

w e s t e r n p o l e , a k i n to the earth's N o r t h a n d S o u t h p o l e s . T h e eastern p o l e

is u n e q u i v o c a l l y C h i n a : t h e w o r l d ' s l e a d i n g p l a t f o r m for m a n u f a c t u r i n g , t h e world's largest source of personal s a v i n g s u s e d in g l o b a l c a p i t a l m a r k e t s , a n d , w i t h i n a f e w years, t h e w o r l d ' s s e c o n d - l a r g e s t m a r k e t for e v e r y t h i n g p r o d u c e d nearly e v e r y w h e r e . A m e r i c a ' s p o s i t i o n as globalization's w e s t e r n p o l e is e q u a l l y secure for at least t h e n e x t d e c a d e . T h e U n i t e d S t a t e s is a n d w i l l c o n t i n u e t o be the w o r l d ' s largest source o f n e w p r o d u c t s , e s p e c i a l l y those e m p l o y i n g a n d p r o d u c e d b y a d v a n c e d t e c h n o l o g i e s . I t w i l l also b e t h e l e a d i n g source o f t h e a d v a n c e d business a n d financial services t i e d t o these t e c h n o l o g i e s a n d w h i c h e v e r y o n e needs to e n g a g e in t h e g l o b a l e c o n o m y . T h e U . S . w i l l r e m a i n t h e center o f w o r l d c a p i t a l m a r k e t s , a n d t h e s i n g l e l a r g e s t b u y e r o f e v e r y t h i n g p r o d u c e d d o m e s t i c a l l y in C h i n a a n d m o s t o t h e r p l a c e s . G l o b a l i z a t i o n w i l l shape the p a t h s o f these t w o h u g e e c o n o m i e s as m u c h or m o r e t h a n t h e y w i l l affect its course. F o r i n s t a n c e , unless s o m e unforeseen i n ­ ternational conflict seriously d i s r u p t s w o r l d w i d e t r a d e a n d i n v e s t m e n t , t h a t trade a n d i n v e s t m e n t w i l l c o n t i n u e t o g r o w m u c h faster t h a n w o r l d w i d e o u t p u t — a s t h e y h a v e for the last t w o d e c a d e s . T h e s e t w o c o u n t r i e s w i l l d o m ­ inate m u c h o f t h a t t r a d e a n d i n v e s t m e n t . A l r e a d y , C h i n a p a s s e d J a p a n in

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FUTURECAST

128

2 0 0 5 as t h e w o r l d ' s s e c o n d - l a r g e s t m a n u f a c t u r e r . W i t h a n o t h e r d e c a d e o f s t r o n g f o r e i g n a n d d o m e s t i c i n v e s t m e n t in C h i n a — a n d , if they're l u c k y , a n ­ o t h e r d e c a d e o f social s t a b i l i t y — i t s share o f w o r l d w i d e m a n u f a c t u r i n g w i l l t o p t h e U n i t e d S t a t e s . A t a first g l a n c e , the U . S . - C h i n a p a i r i n g m a y s e e m to closely resemble the p a i r i n g of G r e a t Britain and the U n i t e d States from 1 8 8 0 t o 1 9 0 0 , w h e n A m e r i c a ' s share o f g l o b a l m a n u f a c t u r i n g rose f r o m less than 1 5 p e r c e n t to a l m o s t 2 4 p e r c e n t a n d B r i t a i n ' s fell f r o m n e a r l y 2 3 p e r c e n t to 1 8 . 5 p e r c e n t . B u t C h i n a ' s rise d o e s n o t p r e s a g e A m e r i c a ' s d e c l i n e . F o r one, C h i n a ' s e x p a n d i n g share o f w o r l d w i d e p r o d u c t i o n w i l l c o m e m a i n l y f r o m o t h e r d e v e l o p i n g n a t i o n s . F o r its p a r t , A m e r i c a ' s share o f g l o b a l p r o d u c t i o n has b e e n r e m a r k a b l y s t a b l e for m o r e t h a n a c e n t u r y — n e a r l y 2 3 p e r c e n t in 2 0 0 3 , c o m p a r e d t o j u s t u n d e r 2 4 p e r c e n t a c e n t u r y e a r l i e r — e v e n as s u b s t a n ­ tial shares o f it h a v e m o v e d offshore. M o r e o v e r , its shares o f b o t h h i g h - t e c h m a n u f a c t u r i n g a n d a d v a n c e d s e r v i c e s , b o t h in g r o w i n g g l o b a l d e m a n d , have b e e n r i s i n g steadily. T h e r e ' s a n o t h e r critical difference b e t w e e n A m e r i c a ' s rise o v e r a c e n t u r y a g o a n d C h i n a ' s in this p e r i o d . W h i l e A m e r i c a n industries in the late nineteenth c e n t u r y d e v e l o p e d b e h i n d h i g h p r o t e c t i o n i s t w a l l s a n d so w e r e a l m o s t entirely h o m e g r o w n , C h i n a t o d a y o w e s a b o u t h a l f o f its share of g l o b a l m a n u f a c t u r i n g t o f o r e i g n rather t h a n n a t i v e c o m p a n i e s , i n c l u d i n g m o s t of its h i g h - e n d a n d h i g h - t e c h n o l o g y p r o d u c t i o n . C h i n a ' s d o m e s t i c p r o d u c e r s m o s t l y serve its o w n d o m e s t i c m a r k e t ; a n d w i t h s o m e e x c e p t i o n s , the n a t i v e C h i n e s e c o m p a n i e s c o m p e t i n g successfully t o d a y for c o n s u m e r s in other countries p r o d u c e food, a p p a r e l , t o y s , a n d o t h e r r e l a t i v e l y l o w - v a l u e - a d d e d g o o d s . B y all a c c o u n t s , y o u n g C h i n e s e m a n a g e r s a n d M B A s are q u i c k l y l e a r n i n g the best practices of t h e w e s t e r n c o m p a n i e s n o w o p e r a t i n g in their c o u n t r y ; a n d t h e y surely w i l l a d a p t t h e m to the n e x t g e n e r a t i o n o f n a t i v e businesses. W i t h another d e c a d e o f p r a c t i c e a n d i n v e s t m e n t , C h i n e s e a u t o , electronics, a n d m a c h i n e r y p r o d u c e r s m a y be c o m p e t i t i v e in w o r l d m a r k e t s w i t h w e s t e r n c o m p a n i e s also p r o d u c i n g in C h i n a or in o t h e r l o w - w a g e , d e v e l o p i n g c o u n t r i e s . C h e r y A u t o m o t i v e is al­ r e a d y p r o d u c i n g m o d e l s t h a t r e s e m b l e G M - D a e w o o cars e n o u g h to m o v e the a u t o g i a n t t o sue for p a t e n t i n f r i n g e m e n t , a n d has i n t r o d u c e d u n i t s selling for as l i t t l e as $ 2 , 0 0 0 in t h e M i d d l e E a s t . C h e r y p l a n s to offer other m o d e l s to the U n i t e d S t a t e s — G e o r g e S o r o s has b e e n a l e a d i n g i n v e s t o r in C h e r y ' s U . S . d i s t r i b u t o r — b u t w h e t h e r C h e r y autos can m a k e it in the U . S . , E u r o p e a n , or J a p a n e s e m a r k e t s is still u n k n o w n . I n d u s t r y insiders say that C h e r y ' s p l a n s to enter t h e U . S . m a r k e t in 2 0 0 8 w e r e p u t off w h e n crash tests repeatedly d e c a p ­ itated the d u m m y drivers. W h a t e v e r the o u t c o m e for C h e r y , it is all b u t certain t h a t b y 2 0 2 0 an even g r e a t e r share o f the world's n o n - C h i n e s e manufacturers w i l l b e p r o d u c i n g there, a n d C h i n a ' s o w n d o m e s t i c p r o d u c e r s w i l l successfully

THE TWO POLES OF GLOBALIZATION: CHINA AND THE UNITED STATES

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c h a l l e n g e t h e m for m u c h of the d o m e s t i c m a r k e t . R e g a r d l e s s o f h o w l o n g it w i l l take for n a t i v e C h i n e s e c o m p a n i e s p r o d u c i n g h i g h - v a l u e p r o d u c t s to b e b r o a d l y c o m p e t i t i v e in a d v a n c e d c o u n t r i e s , C h i n a ' s p o s i t i o n a l r e a d y as t h e n u m b e r - o n e or n u m b e r - t w o t r a d i n g p a r t n e r w i t h m o s t a d v a n c e d a n d d e v e l o p ­ i n g nations w i l l be m o r e solid in 2 0 1 0 a n d 2 0 2 0 , a n d a g r e a t e r share o f its e x ­ ports w i l l c o m e f r o m its o w n d o m e s t i c c o m p a n i e s . E v e n so, the d e m a n d s o f g l o b a l i z a t i o n in o t h e r areas s h o u l d t e m p e r C h i n a ' s e c o n o m i c ascendancy. F o r e x a m p l e , C h i n a ' s c u r r e n t financial a r r a n g e m e n t s are hopelessly o u t d a t e d for even a m u c h s m a l l e r a n d s i m p l e r e c o n o m y . T h e c o u n ­ try's v a u n t e d personal s a v i n g s all flow i n t o s t a t e - o w n e d b a n k s — t h e r e ' s v i r t u ­ ally n o w h e r e else to b a n k t h e m — a n d flow o u t q u i c k l y as loans t o t h e state's o w n r e m a i n i n g , w i l d l y inefficient e n t e r p r i s e s t h a t e m p l o y tens o f m i l l i o n s o f C h i n e s e . T h i s p r i m i t i v e a r r a n g e m e n t h a r d l y c o n s t i t u t e s a real

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t e m a n d p l a y s no real role in t h e c o u n t r y ' s m o d e r n i z a t i o n . I n s t e a d , m o s t i n ­ v e s t m e n t has c o m e t h r o u g h f o r e i g n transfers a n d t r a n s p l a n t s . T h i s s y s t e m c a n n o t g o on m u c h l o n g e r i f C h i n a i n t e n d s t o create m o d e r n d o m e s t i c c o m ­ panies t h a t can h e l p d r i v e its g r o w t h a n d f u r t h e r d e v e l o p m e n t . A c c o m p l i s h ­ ing that w i l l require a w o r k i n g

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system that can channel private

C h i n e s e f u n d s to t h e m o s t p r o m i s i n g C h i n e s e p r o s p e c t s . C h i n a ' s leaders w i l l h a v e little c h o i c e o v e r the n e x t d e c a d e b u t t o w i n d d o w n t h e

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b a n k s a n d let w e s t e r n financial i n s t i t u t i o n s t a k e firm h o l d . I n e s c a p a b l y , t h i s w i l l m e a n m u c h less financial s u p p o r t for its s t a t e - o w n e d e n t e r p r i s e s a n d t h e tens o f m i l l i o n s o f C h i n e s e e m p l o y e d b y t h e m . As

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tens o f m i l l i o n s of C h i n e s e o v e r the n e x t d e c a d e , its leaders also are l i k e l y t o face p o p u l a r d e m a n d s for b r o a d - b a s e d o l d - a g e p e n s i o n s a n d h e a l t h care. F o r the l e a d e r s h i p , t h a t c o u l d m e a n c h o o s i n g b e t w e e n a p r o s p e c t o f r i s i n g social u n r e s t — a l r e a d y a serious p r o b l e m — o r s h i f t i n g

tens o f b i l l i o n s o f d o l l a r s

f r o m future e c o n o m i c d e v e l o p m e n t t o n e w r e t i r e m e n t a n d h e a l t h i n s u r a n c e s y s t e m s . F u r t h e r , a n d p e r h a p s m o s t i m p o r t a n t for e v e r y o n e o u t s i d e

China,

g l o b a l i z a t i o n also w i l l force C h i n a to b e m u c h m o r e e n g a g e d p o l i t i c a l l y w i t h the c o u n t r i e s t h a t w i l l b e its i m p o r t a n t m a r k e t s or sources o f resources or i n ­ v e s t m e n t , e s p e c i a l l y in A s i a , the M i d d l e E a s t , a n d t h e U n i t e d S t a t e s . T h i s i n ­ tensified e n g a g e m e n t c o u l d for t h e first t i m e l i m i t s o m e o f t h e leadership's f r e e d o m o f a c t i o n in sensitive m a t t e r s s u c h as i n t e l l e c t u a l p r o p e r t y r i g h t s a n d state preferences for n a t i v e C h i n e s e c o m p a n i e s , a n d p r o d u c e t e n s i o n s w i t h t h e U n i t e d S t a t e s , its m o s t i m p o r t a n t investor, t r a d i n g p a r t n e r , a n d b o r r o w e r . G l o b a l i z a t i o n w i l l also affect A m e r i c a ' s e c o n o m i c a n d p o l i t i c a l c o u r s e o v e r the n e x t ten to fifteen years. Its c o m p l e x forces a l r e a d y are d a m p e n i n g t h e U.S.

e c o n o m y ' s v a u n t e d c a p a c i t y to create n e w j o b s a n d d e l i v e r h i g h e r w a g e s ,

130

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e s p e c i a l l y for w o r k e r s in t h e c e n t e r o f the e c o n o m y . G l o b a l i z a t i o n also has s t i m u l a t e d A m e r i c a ' s h i g h - t e c h n o l o g y i n d u s t r i e s b y v a s t l y e x p a n d i n g their potential m a r k e t s , and the c o n t i n u i n g development and spread of n e w tech­ n o l o g i e s w i l l h e i g h t e n the strains o n j o b c r e a t i o n a n d w a g e increases for tens o f m i l l i o n s o f o r d i n a r y A m e r i c a n w o r k e r s . T h e s e t e c h n o l o g i e s h a v e been p a r ­ ticularly

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t a s k s — s e c r e t a r i e s , i n v e n t o r y c o n t r o l l e r s , b a n k tellers, a n d m a n y others in the c e n t e r o f t h e e c o n o m y — a n d s t u d i e s n o w s h o w t h a t for the last fifteen years, t h o s e k i n d s o f j o b s h a v e g r o w n m u c h m o r e s l o w l y in g o o d t i m e s a n d d i s a p ­ p e a r e d m u c h faster in b a d t i m e s t h a n others. I n t h i s , A m e r i c a is not alone. E v e r y other large, advanced economy

is e x p e r i e n c i n g

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m o t i o n shifts a n d s h o c k s for t h e i r w o r k e r s . A s w e w i l l see later, m o s t E u r o p e ­ a n g o v e r n m e n t s are r e s p o n d i n g n o t b y t h i n k i n g t h r o u g h the causes, b u t b y p r o v i d i n g a d d i t i o n a l p u b l i c benefits to c u s h i o n t h e i m p a c t . B u t the l o o m i n g d e m o g r a p h i c p r o b l e m s in m o s t a d v a n c e d societies w i l l u n r a v e l this s t r a t e g y w i t h i n the next decade, even if the pressures b u i l d i n g from globalization and t e c h n o l o g y w e r e s o m e h o w t o ease. T h e b u r d e n o f p a y i n g for e v e n g r e a t e r b e n ­ efits for jobless p e o p l e , w h i l e p e n s i o n a n d h e a l t h care costs for the g r o w i n g n u m b e r s o f e l d e r l y are r i s i n g q u i c k l y a n d l a b o r forces in m a n y countries slowly contract, will prove unsustainable. T h e U n i t e d S t a t e s w i l l b e b e t t e r p o s i t i o n e d to deal w i t h these pressures b e c a u s e its c u r r e n t p e n s i o n a n d jobless benefits p r o v i d e m u c h less s e c u r i t y a n d its d e m o g r a p h i c s w i l l b e m o r e f a v o r a b l e for at least t h e n e x t g e n e r a t i o n . B u t g l o b a l i z a t i o n is a g g r a v a t i n g A m e r i c a ' s e c o n o m i c i n e q u a l i t i e s , w h i c h are h a r s h e r t o b e g i n w i t h t h a n t h o s e in E u r o p e a n d J a p a n . I n e q u a l i t y in itself has never been the political

flashpoint

for A m e r i c a n s t h a t it often has been for

E u r o p e a n s . A m e r i c a n v o t e r s rarely o b j e c t t o t h e r i c h g e t t i n g richer, b u t the 2 0 0 6 c o n g r e s s i o n a l e l e c t i o n s s h o w e d t h a t t h e y w i l l not q u i e t l y tolerate their o w n i n c o m e s s t a g n a t i n g y e a r after year. I f A m e r i c a ' s t w o p o l i t i c a l parties fail t o a d d r e s s t h e forces h o l d i n g d o w n m o s t people's w a g e g a i n s — t h e p a u c i t y o f real o p p o r t u n i t i e s for m o s t w o r k e r s t o t r a i n t h e m s e l v e s for n e w t e c h n o l o g i e s , for e x a m p l e , a n d t h e cost p r e s s u r e s o n businesses f r o m r i s i n g h e a l t h insurance a n d e n e r g y costs-—these forces c o u l d p r o d u c e a n e w a p o l i t i c a l a g e n d a focused o n e c o n o m i c security. T h a t a g e n d a w o u l d l i k e l y i n c l u d e m e a s u r e s s u c h as w a g e insurance and trade protections, w h i c h ultimately w i l l reduce some of A m e r i c a ' s c u r r e n t a d v a n t a g e s in g l o b a l i z a t i o n . O v e r the n e x t d e c a d e , A m e r i c a w i l l face several p r o b l e m s t h a t w i l l w e i g h o n its e c o n o m i c p r o g r e s s . I t is v i r t u a l l y i n e v i t a b l e t h a t pressures f r o m g l o b a l ­ ization w i l l c o n t i n u e to u n r a v e l A m e r i c a ' s c u r r e n t s y s t e m of j o b - b a s e d m e d i c a l i n s u r a n c e , u n t i l t h e n u m b e r o f u n i n s u r e d w o r k i n g p e o p l e reaches a p o l i t i c a l

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131

tipping point and produces a full-blown political battle over universal health care. M u c h o f these cost pressures c o m e f r o m the relentlessly i n c r e a s i n g a v a i l ­ a b i l i t y o f n e w m e d i c a l t e c h n o l o g i e s t h a t are e v e r m o r e e x p e n s i v e t o d e v e l o p and

use, e s p e c i a l l y w i t h m a n y m o r e p e o p l e t u r n i n g t h e a g e t h a t m a k e s t h e m

a v i d , e v e n f r a n t i c , c o n s u m e r s o f h i g h - t e c h h e a l t h care. W h a t e v e r p l a n a n d cost-cutting measures A m e r i c a n politicians adopt to ultimately achieve uni­ versal care, it w i l l be h i g h l y e x p e n s i v e ; w h i c h m e a n s it w i l l a l m o s t c e r t a i n l y i n v o l v e s u b s t a n t i a l t a x increases t h a t w i l l also s l o w A m e r i c a n g r o w t h . U . S . c o m p a n i e s also are less e n e r g y - e f f i c i e n t t h a n t h e i r c o u n t e r p a r t s in E u r o p e a n d J a p a n , b e c a u s e A m e r i c a ' s l o w e r e n e r g y taxes m a k e e n e r g y m u c h less e x p e n s i v e there. E v e r y year o f s t r o n g g r o w t h in C h i n a , I n d i a , C e n t r a l E u r o p e , a n d o t h e r d e v e l o p i n g nations w i l l p u t u p w a r d p r e s s u r e s o n oil p r i c e s , e x e r t i n g a c o m ­ p e t i t i v e d r a g on A m e r i c a n c o m p a n i e s in t h e i r d o m e s t i c o p e r a t i o n s . F i n a l l y , A m e r i c a ' s r o c k - b o t t o m s a v i n g s rates a n d c o n s e q u e n t d e p e n d e n c e o n f o r e i g n c a p i t a l c o u l d p r o d u c e the d o l l a r crisis d e s c r i b e d earlier, w h i c h w o u l d stall t h e A m e r i c a n e c o n o m y for a t i m e , a n d w i t h it g r o w t h in m u c h o f t h e rest o f t h e world. W i t h all these p r o b l e m s , a n d i n e v i t a b l y m o r e , t h e U n i t e d S t a t e s still has p o w e r f u l e c o n o m i c a d v a n t a g e s t h a t s h o u l d solidify its p r e e m i n e n c e a m o n g advanced economies

for the n e x t ten to fifteen

years. U n l i k e E u r o p e a n d

J a p a n , A m e r i c a ' s l a b o r force w i l l c o n t i n u e t o e x p a n d , m a i n l y b e c a u s e it a t ­ tracts a n d a c c e p t s m i l l i o n s m o r e w o r k e r s f r o m o t h e r c o u n t r i e s . T h e A m e r i c a n w o r k f o r c e , alone a m o n g the l a r g e , a d v a n c e d c o u n t r i e s , is i t s e l f i n c r e a s i n g l y globalized, now including millions of h i g h l y skilled and educated workers b o r n in E u r o p e a n d A s i a . S e r g e y B r i n , o n e o f G o o g l e ' s t w o c o f o u n d e r s , w h o was

born in M o s c o w a n d e m i g r a t e d to t h e U n i t e d S t a t e s w i t h his p a r e n t s in

1979,

is o n l y one o f the t h o u s a n d s o f s p e c t a c u l a r l y successful A m e r i c a n t e c h ­

n o l o g y entrepreneurs b o r n s o m e w h e r e else. M o r e o v e r , as C h i n a ' s r i s i n g p r e e m ­ inence in m o s t areas o f basic m a n u f a c t u r i n g leaves m o r e a d v a n c e d e c o n o m i e s m o r e d e p e n d e n t on their businesses' c a p a c i t y to i n n o v a t e a n d t h e i r w o r k e r s ' ability to operate effectively in t e c h n o l o g i c a l l y a d v a n c e d w o r k p l a c e s , A m e r i c a ' s e d g e in these areas is l i k e l y to b e c o m e e v e n g r e a t e r . O n e reason is t h a t d e s p i t e the countless s t u d i e s d o c u m e n t i n g t h e real deficiencies o f A m e r i c a n e d u c a ­ tion, a l a r g e r share of A m e r i c a n s are c o l l e g e e d u c a t e d ; a n d U . S . w o r k e r s o n a v e r a g e h a v e c o m p l e t e d t w o to t h r e e m o r e years o f s c h o o l i n g t h a n t h e a v e r a g e E u r o p e a n or J a p a n e s e w o r k e r . For

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these a n d o t h e r reasons, A m e r i c a n w o r k e r s a n d businesses c o n s i s t e n t l y

rack u p h i g h e r p r o d u c t i v i t y g a i n s a n d business r e t u r n s , o n a v e r a g e , t h a n E u ­ ropean or J a p a n e s e w o r k e r s a n d businesses. T h o s e a d v a n t a g e s h a v e m a d e t h e U n i t e d S t a t e s a m a g n e t for g l o b a l c a p i t a l , a n d there's no reason y e t e v i d e n t

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132

to e x p e c t these a d v a n t a g e s t o d i m i n i s h in t h e n e x t d e c a d e . A m e r i c a ' s t r a d i n g p a t t e r n s also are m u c h m o r e g l o b a l t h a n o t h e r a d v a n c e d e c o n o m i e s , i m p o r t ­ i n g and e x p o r t i n g to and from developing nations m u c h more intensively t h a n t h e m a j o r c o u n t r i e s o f E u r o p e . U . S . c o r p o r a t i o n s , as a g r o u p , also d i r e c t m o r e o f t h e i r f o r e i g n i n v e s t m e n t s to d e v e l o p i n g n a t i o n s , e s p e c i a l l y C h i n a , w h i l e G e r m a n , F r e n c h , I t a l i a n , a n d B r i t i s h m u l t i n a t i o n a l s c o n t i n u e to invest m a i n l y in o t h e r a d v a n c e d e c o n o m i e s . L a r g e U . S . c o r p o r a t i o n s , on a v e r a g e , also are m o r e t h o r o u g h l y d i g i t a l t h a n l a r g e businesses in E u r o p e a n d J a p a n , so t h e i r g l o b a l n e t w o r k s are m o r e h i g h l y d e v e l o p e d a n d efficient. F i n a l l y , A m e r i c a ' s p o l i t i c a l c o n d i t i o n s p r o d u c e o t h e r a d v a n t a g e s in g l o b a l ­ i z a t i o n t h a t s e e m secure for t h e foreseeable f u t u r e . A s s u m i n g t h a t the w i d e ­ s p r e a d h o s t i l i t y in E u r o p e a n d m u c h o f A s i a to the B u s h a d m i n i s t r a t i o n ' s f o r e i g n p o l i c i e s recedes w i t h t h e e l e c t i o n o f his successor in 2 0 0 8 , the U n i t e d S t a t e s w i l l b e a b l e to use its u n r i v a l l e d s u p e r p o w e r status to e x t r a c t special c o n s i d e r a t i o n for U . S . c o m p a n i e s a n d t h e i r p a r t i c u l a r interests in m a n y for­ e i g n m a r k e t s . E v e n i f p r e s s u r e s o n U . S . j o b s a n d w a g e s p r o d u c e a l e f t w a r d tilt in A m e r i c a n d o m e s t i c p o l i t i c s , t h e U n i t e d S t a t e s w i l l c o n t i n u e to t a k e a m o r e conservative approach than m o s t other advanced countries, especially regard­ i n g r e g u l a t i o n a n d t a x e s . T h e n e a r l y u n e s c a p a b l e e c o n o m i c result is that A m e r i c a ' s e c o n o m y w i l l c o n t i n u e to b e m o r e efficient. T h e s e differences h a v e m a d e E u r o p e a n societies m o r e e q u a l a n d socially c o m p a s s i o n a t e , a n d w i l l c o n t i n u e to d o so; b u t t h e y also w i l l m a k e t h e A m e r i c a n e c o n o m y relatively e v e n s t r o n g e r t h a n today.

CHINA C h i n a is t h e s i n g u l a r i l l u s t r a t i o n o f h o w , in t h e space of a s i n g l e g e n e r a t i o n , g l o b a l i z a t i o n c a n h e l p m a k e an e c o n o m i c a l l y b a c k w a r d c o u n t r y a g e n u i n e e c o n o m i c p o w e r h o u s e . W h a t it a p p a r e n t l y r e q u i r e s , a p a r t f r o m a m p l e h u m a n and

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resources, is a s u s t a i n e d n a t i o n a l c o m m i t m e n t to r e d o itself to

a c c o m m o d a t e t h e d e m a n d s o f g l o b a l i z a t i o n , a l o n g w i t h an a u t h o r i t a r i a n p o ­ l i t i c a l s y s t e m w i l l i n g t o inflict e n o r m o u s h a r d s h i p on m u c h o f the p o p u l a t i o n in t h e t r a n s i t i o n . C h i n a is a l r e a d y an e c o n o m i c p o w e r h o u s e , b u t not y e t a g e n u i n e e c o n o m i c p o w e r . T h e i m p a c t o f g l o b a l i z a t i o n as e m b r a c e d b y C h i n a ' s l e a d e r s h i p is c l e a r l y e v i d e n t in its s t u n n i n g g r o w t h . O v e r the last

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y e a r s , C h i n a ' s e c o n o m y m o r e t h a n t r i p l e d in size ( a n d that's a d j u s t e d for infla­ 2

t i o n ) , g r o w i n g in j u s t t h e last five years b y m o r e t h a n 5 5 p e r c e n t . O v e r the n e x t t e n t o fifteen y e a r s , its e c o n o m y w i l l g r o w m u c h b i g g e r , as w i l l its i m ­ p a c t o n t h e w o r l d . Y e t , in 2 0 2 0 , C h i n a w i l l still b e a d e v e l o p i n g c o u n t r y , a n d

THE TWO POLES OF GLOBALIZATION: CHINA AND THE UNITED STATES

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its radical s t r a t e g y for r a p i d d e v e l o p m e n t w i l l p r o d u c e e n o r m o u s strains t h a t c o u l d l i m i t the h e i g h t a n d e x t e n t o f its e c o n o m i c a s c e n d a n c y . J u s t t w e n t y years a g o , C h i n a w a s a m a r g i n a l p l a y e r in t h e w o r l d e c o n o m y ; today, it is t h e w o r l d ' s m o s t i m p o r t a n t d e v e l o p i n g n a t i o n . I t s e c o n o m i c a d ­ v a n t a g e s rest on the e c o n o m i c basics o f l a b o r a n d c a p i t a l . C h i n a ' s w o r k f o r c e is the world's largest, b u t its real l a b o r a d v a n t a g e lies in t h e fact t h a t its w o r k e r s are

still l o w e r - p a i d t h a n those in m o s t o t h e r d e v e l o p i n g n a t i o n s , y e t g e n e r a l l y

at

least as s k i l l e d as m o s t o f those w o r k e r s . M o r e o v e r , e v e r y year, its p e o p l e

save so m u c h of their i n c o m e s a n d its p r i v a t e b u s i n e s s e s retain so m u c h o f their e a r n i n g s — i t c o m e s to 4 0 p e r c e n t o f C h i n a ' s a n n u a l G D P — t h a t it's e n o u g h to finance v a s t p u b l i c w o r k s i m p r o v e m e n t s , s u b s i d i z e t h e r e m a i n i n g s t a t e - o w n e d enterprises, a n d l e n d A m e r i c a e n o u g h to finance its o w n e x p o r t s to the U . S . The

c a p i t a l that m a t t e r s m o s t for C h i n a ' s e x t r a o r d i n a r y e c o n o m i c p r o g r e s s

c o m e s n o t f r o m C h i n e s e savers, b u t f r o m t h e w o r l d ' s l e a d i n g w e s t e r n c o r p o r a ­ tions. J u s t a g e n e r a t i o n a g o , C h i n a h a d no use for w e s t e r n i n v e s t m e n t

or

e x p e r t i s e , a n d its e c o n o m y w a s p r o f o u n d l y b a c k w a r d . S i n c e t h e early 1 9 9 0 s , h o w e v e r , C h i n a ' s l e a d e r s h i p has s u c c e s s f u l l y u s e d t h e a t t r a c t i o n s o f its a m p l e l o w - w a g e w o r k f o r c e , g e n e r a l social d i s c i p l i n e , t h e p r o s p e c t o f a h u g e d o m e s ­ tic m a r k e t , zero d u t i e s on i m p o r t s o f a n y e q u i p m e n t , a n d n u m e r o u s spe c ial subsidies a n d t a x b r e a k s to a t t r a c t s o m e $ 8 5 0 b i l l i o n in d i r e c t f o r e i g n i n v e s t ­ m e n t , m o s t l y in m o d e r n m a n u f a c t u r i n g o p e r a t i o n s . O n l y A m e r i c a a n d t h e U n i t e d K i n g d o m c o n t a i n m o r e d i r e c t f o r e i g n i n v e s t m e n t today, a n d t h e y ' v e b e e n a c c u m u l a t i n g it o v e r t h e last c e n t u r y . I n j u s t t h e y e a r s f r o m 2 0 0 2

to

2 0 0 5 , C h i n a ( w i t h H o n g K o n g ) a t t r a c t e d a l m o s t $ 3 3 3 b i l l i o n in n e w d i r e c t f o r e i g n i n v e s t m e n t s — a s m u c h as the U n i t e d S t a t e s in t h o s e y e a r s a n d m o r e than G e r m a n y , France, and J a p a n c o m b i n e d .

3

Starting from

nearly

zero

t w e n t y years a g o , f o r e i g n firms t o d a y a c c o u n t for a b o u t t h e s a m e share o f m a n u f a c t u r i n g in C h i n a as in t h e E u r o p e a n U n i o n , a n d m o r e t h a n in t h e U n i t e d S t a t e s . T h a t ' s h o w a l m o s t o v e r n i g h t C h i n a has b e c o m e o n e o f t h e w o r l d ' s largest p r o d u c t i o n a n d a s s e m b l y p l a t f o r m s . All any

that a d v a n c e d , d i r e c t i n v e s t m e n t has e n a b l e d C h i n a to g r o w faster t h a n

other c o u n t r y in t h e w o r l d e v e r y y e a r for t w o d e c a d e s r u n n i n g ; a n d its a n ­

nual o u t p u t is n o w l a r g e r t h a n e v e r y o t h e r c o u n t r y e x c e p t t h e U n i t e d S t a t e s , J a p a n , and G e r m a n y . W i t h i n a few years, China's G D P w i l l top G e r m a n y ' s , too, a n d w e l l before the e n d o f t h e n e x t d e c a d e , J a p a n ' s as w e l l . F r o m a l m o s t n o w h e r e , C h i n a also has b e c o m e a g r e a t t r a d i n g n a t i o n . T w e n t y y e a r s a g o its factories p r o d u c e d a l m o s t n o t h i n g t h a t a n y o n e else in t h e w o r l d w o u l d b u y ; today, c o m p a n i e s in C h i n a sell a b r o a d so m u c h o f w h a t t h e y p r o d u c e there t h a t C h i n a is n o w the w o r l d ' s t h i r d - l a r g e s t e x p o r t i n g c o u n t r y , b e h i n d o n l y

134

FUTURECAST

A m e r i c a a n d G e r m a n y a n d a h e a d o f J a p a n . T h e n u m b e r s tell the story: T w e n t y y e a r s a g o , C h i n a e x p o r t e d less t h a n $ 3 5 b i l l i o n , m a i n l y in basic g o o d s a n d c o m m o d i t i e s t o N o r t h K o r e a a n d t h e S o v i e t U n i o n . B y 2 0 0 6 , C h i n a ' s ex­ p o r t s to v i r t u a l l y e v e r y c o u n t r y in t h e w o r l d t o t a l e d m o r e t h a n $ 9 8 1 b i l l i o n , g r e a t e r t h a n t h e e n t i r e e c o n o m i e s o f all b u t eleven o t h e r c o u n t r i e s .

4

L i k e t h e U n i t e d S t a t e s a n d l i k e n o o t h e r p l a c e , C h i n a has b e c o m e a c o u n t r y t h a t m a t t e r s for e v e r y o t h e r s i g n i f i c a n t e c o n o m y in the w o r l d . Its g l o b a l eco­ nomic

i m p o r t a n c e rests o n its sheer size a n d r a p i d g r o w t h , t r a n s m i t t e d

t h r o u g h its e x p o r t s , c a p i t a l , a n d t h e f o r e i g n i n v e s t m e n t it attracts. A c r o s s m u c h o f A s i a , t h e C h i n e s e e c o n o m y is c l e a r l y w h a t m a t t e r s m o s t — i n m a n y w a y s it's m o r e i m p o r t a n t e c o n o m i c a l l y t h a n t h e U n i t e d S t a t e s . T w o - t h i r d s of all f o r e i g n d i r e c t i n v e s t m e n t t o C h i n a c o m e s f r o m T a i w a n , J a p a n , K o r e a , a n d H o n g K o n g ; a n d C h i n a ' s i m p o r t s f r o m those c o u n t r i e s , p r i n c i p a l l y p a r t s for p r o d u c t s a s s e m b l e d a n d finished in C h i n a , are the l a r g e s t factor d r i v i n g their o w n exports. S c a n t h e w o r l d , a n d C h i n a is n o w a k e y t r a d i n g p a r t n e r n e a r l y e v e r y ­ w h e r e . I t is J a p a n ' s n u m b e r - o n e t r a d i n g p a r t n e r , a n d o n t h e o t h e r side o f the w o r l d , t h e s e c o n d - l a r g e s t t r a d i n g p a r t n e r for t h e E u r o p e a n U n i o n , C a n a d a , and M e x i c o , b e h i n d only the U n i t e d States. A m e r i c a , too, imports more from C h i n a than from any other country except neighboring Canada, and e x p o r t s m o r e t o C h i n a t h a n to all b u t t h r e e o t h e r c o u n t r i e s . D e s p i t e its t r a d i n g p r o w e s s , C h i n a is n o t h i n g l i k e t h e e c o n o m i e s of its t r a d i n g p a r t n e r s , i n c l u d i n g m o s t o t h e r l a r g e d e v e l o p i n g c o u n t r i e s . Its econ­ o m y is c e r t a i n l y v e r y l a r g e , p r o d u c i n g a l m o s t $ 2 . 7 trillion in g o o d s a n d ser­ v i c e s in 2 0 0 6 . B u t w i t h a p o p u l a t i o n o f m o r e t h a n 1 . 3 b i l l i o n , its p e o p l e are still v e r y p o o r : Its c u r r e n t p e r c a p i t a n a t i o n a l i n c o m e , m e a s u r e d in dollars at c u r r e n t e x c h a n g e rates, r a n k s n o t n u m b e r 1 0 or e v e n n u m b e r 5 0 in the w o r l d , b u t 1 2 8 t h , b e h i n d c o u n t r i e s s u c h as S w a z i l a n d , E l S a l v a d o r , a n d T o n g a .

5

Mea­

s u r e d in w h a t e c o n o m i s t s call " p u r c h a s i n g - p o w e r parity," w h i c h a d j u s t s the i n c o m e in each c o u n t r y for its cost o f l i v i n g , C h i n a ' s p e r c a p i t a national in­ c o m e still r a n k s 1 0 7 t h in t h e w o r l d , b e h i n d s u c h n a t i o n s as N a m i b i a , B e l i z e , a n d t h e U k r a i n e . A n d w i t h t h e a v e r a g e C h i n e s e f a m i l y s a v i n g m o r e than 3 0 p e r c e n t o f its p a l t r y i n c o m e , t h e q u a l i t y o f life o f m o s t C h i n e s e is even lower. M o s t o f C h i n a ' s p e o p l e are p r o b a b l y a l i t t l e b e t t e r off t h a n t h e y w e r e a d e c a d e a g o ; a n d b e h i n d t h e a v e r a g e s , tens o f m i l l i o n s o f t h e m l i v e w e l l b y the c u r r e n t standards of m a n y d e v e l o p i n g nations. Several million Chinese households, p r i n c i p a l l y h e a d e d b y s k i l l e d w o r k e r s in coastal cities on or near the Pacific O c e a n , l i v e a C h i n e s e v e r s i o n o f a m i d d l e - c l a s s life. B u t t h e y c o n s t i t u t e less t h a n 1 p e r c e n t o f all C h i n e s e . M o r e t h a n h a l f of t h e i r c o u n t r y m e n a n d w o m e n l i v e in d e s p e r a t e p o v e r t y in t h e v a s t r u r a l p r o v i n c e s o f central a n d w e s t e r n

THE TWO POLES OF GLOBALIZATION: CHINA AND THE UNITED STATES

135

C h i n a , on t h e l o s i n g side o f t h e s t a r k e s t e c o n o m i c i n e q u a l i t y o f a n y l a r g e c o u n t r y in the w o r l d . B e h i n d these p r o f o u n d i n e q u a l i t i e s lies C h i n a ' s u n i q u e a p p r o a c h t o m o d ­ ernization. N o society c a n d o e v e r y t h i n g at o n c e . B u t C h i n a is a d a p t i n g to g l o b a l i z a t i o n in v e r y c a r e f u l l y selective w a y s t h a t n o t o n l y w i l l l e a v e m o s t o f its p e o p l e p o o r for a l o n g t i m e t o c o m e , b u t also are c r e a t i n g t e r r i b l e e c o ­ n o m i c stresses a n d a n o m a l i e s t h a t w i l l p r o d u c e l a r g e p r o b l e m s o v e r t h e n e x t d e c a d e . H o w l o n g w i l l C h i n a ' s f a m i l i e s s u p p o r t an i n d u s t r i a l m o d e r n i z a t i o n p r o g r a m t h a t u n r a v e l e d t h e i r free h e a l t h care t o h e l p p a y for i t ? A n d h o w w i l l C h i n a ' s leaders p r o m o t e t h e c r e a t i o n o f t h o u s a n d s o f c o m p e t i t i v e n a t i v e c o m ­ p a n i e s , so l o n g as all d o m e s t i c b u s i n e s s c r e d i t c o m e s f r o m t h e n e t w o r k o f s t a t e - o w n e d b a n k s c o m m i t t e d t o k e e p i n g afloat h u n d r e d s o f inefficient s t a t e o w n e d enterprises? In jor

s h a r p c o n t r a s t to t h e p a t h o f e c o n o m i c d e v e l o p m e n t in e v e r y o t h e r m a ­

c o u n t r y , C h i n a ' s e c o n o m i c success rests o n g l o b a l i z a t i o n itself. T h e U n i t e d

S t a t e s , J a p a n , the c o u n t r i e s o f E u r o p e , a n d t h e A s i a n T i g e r s all b u i l t t h e i r e c o n o m i e s the o n l y w a y t h e y c o u l d , l a r g e l y o n t h e i r o w n a n d o v e r m a n y d e ­ cades. T h r o u g h the n i n e t e e n t h a n d m u c h o f t h e t w e n t i e t h c e n t u r i e s , e v e n while countries were trading h u g e v o l u m e s of g o o d s and c o m m o d i t i e s , m o s t i n v e s t m e n t a n d n e w t e c h n o l o g i e s s t a y e d p u t in t h e c o u n t r i e s a n d i n d u s t r i e s that created t h e m , often w a l l e d off f r o m f o r e i g n c o m p e t i t i o n b y h i g h tariffs. It took d e c a d e s for A m e r i c a , G e r m a n y , J a p a n , or K o r e a to figure o u t w h a t i n ­ dustries a n d business lines w o u l d t h r i v e best t h e r e , g i v e n each c o u n t r y ' s p a r ­ t i c u l a r natural a n d h u m a n resources, h a b i t s , n o r m s , a n d l a w s . B y trial a n d error on a v a s t s c a l e — w h i c h is t h e u s u a l w a y t h a t m a r k e t s w o r k — e a c h s o c i ­ e t y g r a d u a l l y p u t t o g e t h e r its o w n set o f p o l i t i c a l a n d social a r r a n g e m e n t s to h e l p it b u i l d u p the c a p i t a l t h a t businesses n e e d e d for i n v e s t m e n t , the e d u c a ­ tional s y s t e m s p e o p l e n e e d to b e p r o d u c t i v e in t h o s e b u s i n e s s e s , a n d t h e p u b ­ lic g o o d s a society needs to k e e p it all g o i n g , f r o m roads a n d

sanitation

s y s t e m s to l e g a l r i g h t s a n d l a w e n f o r c e m e n t . E v e r y w h e r e , all o f t h i s t o o k a l o n g t i m e , even c e n t u r i e s in s o m e cases, b e c a u s e n o o n e k n e w h o w to e m b e d the r e q u i r e m e n t s o f a m o d e r n e c o n o m y in t h e i r s o c i e t y u n t i l t h e y

figured

it

out. A n d the lessons a n d n a t i o n a l w e a l t h c r e a t e d b y t h i s p r o c e s s a n d p r o g r e s s spread s l o w l y across the sectors o f t h e i r e c o n o m i e s a n d the classes o f t h e i r p e o ­ p l e s , so t h a t e v e r y w h e r e b u t C h i n a , m o d e r n i z a t i o n p r o c e e d e d t h r o u g h t h e g r a d u a l rise of m i d d l e - c l a s s societies. C h i n a alone o w e s its s t u n n i n g g r o w t h a n d p r o g r e s s n o t t o t h i s n o r m a l , s l o w process o f e c o n o m i c d e v e l o p m e n t , b u t t o a series o f s e i s m i c p o l i t i c a l d e ­ cisions. I n this r e s p e c t , C h i n a ' s g r e a t e s t a d v a n t a g e s are n o t s t r i c t l y e c o n o m i c , but

p o l i t i c a l . T h e c o u n t r y ' s t i g h t c i r c l e o f leaders m a i n t a i n s a m o n o p o l y o n

FUTURECAST

136

p o w e r , p o l i c y m a k i n g , a n d p o p u l a r a l l e g i a n c e that's u n i m a g i n a b l e in other l a r g e d e v e l o p i n g c o u n t r i e s , s u c h as I n d i a or B r a z i l . Its u n i q u e b r a n d o f p o p u ­ l a r l y b a s e d a u t h o r i t a r i a n i s m p r o v i d e s t h e p o l i t i c a l c a p a c i t y a n d social d i s c i ­ p l i n e , u n i q u e a m o n g l a r g e n a t i o n s , t o press f o r w a r d w i t h

modernization

r e g a r d l e s s o f t h e w r e n c h i n g d i s l o c a t i o n s it causes for h u n d r e d s o f m i l l i o n s of o r d i n a r y p e o p l e a n d w h a t in freer c o u n t r i e s w o u l d c o n s t i t u t e p o w e r f u l inter­ est g r o u p s . T h e d e c i s i v e first s t e p c a m e in 1 9 7 8 at the T h i r d P l e n a r y Session o f the People's E l e v e n t h C e n t r a l C o m m i t t e e in B e i j i n g . C h i n a h a d been at bitter o d d s for a d e c a d e w i t h t h e Soviet's d o m i n a t i o n o f t h e w o r l d c o m m u n i s t b l o c a n d h a d itself j u s t e m e r g e d f r o m t h e chaos o f the C u l t u r a l R e v o l u t i o n . W i t h a n e w détente w i t h the U n i t e d States t a k i n g hold, D e n g X i a o p i n g announced a n e w era o f e c o n o m i c r e f o r m s , b e g i n n i n g w i t h e a s i n g p r i c e c o n t r o l s on g r a i n s a n d a l l o w i n g rural C h i n e s e to start s m a l l businesses. A l e a d i n g J a p a n e s e h i s ­ t o r i a n o f m o d e r n C h i n a , R y o s e i K o k u b u n , w r i t e s t h a t f r o m t h a t m o m e n t for­ w a r d , every m o v e towards western m a r k e t mechanisms was part of a political s t r a t e g y b y C h i n a ' s leaders. T h e g o a l w a s to m a i n t a i n the p o w e r and l e g i t i m a c y o f the C o m m u n i s t P a r t y o f C h i n a as its leaders d i s t a n c e d themselves f r o m the p a l p a b l e failures o f b o t h M a o i s m a n d t h e S o v i e t - l e d c o m m u n i s t m o v e m e n t , b y d r i v i n g e c o n o m i c g r o w t h a n d t h e n a t i o n a l p o w e r it w o u l d confer. F r o m its start, China's tentative e m b r a c e of capitalism w a s fundamentally a political choice. E v e r y i m p o r t a n t d e v e l o p m e n t in C h i n a ' s m o d e r n i z a t i o n f o l l o w s this p a t ­ tern. T h o s e first steps d i d n ' t c o m e a b o u t b e c a u s e C h i n e s e a g r i c u l t u r e w a s e v o l v i n g n a t u r a l l y f r o m l a n d - i n t e n s i v e to m o r e c a p i t a l - i n t e n s i v e f a r m i n g , or b e c a u s e a b u d d i n g e n t r e p r e n e u r i a l m i d d l e class w a s f o r m i n g in the h i n t e r ­ l a n d s . T h e y w e r e d e c i s i o n s m a d e at t h e t o p , to force u p a g r i c u l t u r a l p r o d u c ­ t i v i t y a n d d r i v e tens o f m i l l i o n s o f p e o p l e f r o m t h e l a n d a n d i n t o s m a l l e n t e r p r i s e s t h a t c o u l d h e l p s u p p l y C h i n a ' s s t a t e - o w n e d enterprises. W i t h a se­ ries o f decrees i s s u e d f r o m t h e l e a d e r s h i p c o m p o u n d near the F o r b i d d e n C i t y , C h i n a ' s leaders b a n k r u p t e d s o m e o n e h u n d r e d m i l l i o n s u b s i s t e n c e farmers a n d , in less t h a n a d e c a d e , s h i f t e d tens o f m i l l i o n s o f t h e m to other, m o r e p r o ­ d u c t i v e p a r t s o f t h e e c o n o m y . I n e v e r y o t h e r c o u n t r y , a s i m i l a r process p r o ­ c e e d e d t h r o u g h t h e n o r m a l d y n a m i c s o f e c o n o m i c d e v e l o p m e n t a n d took generations. T h e c o l l a p s e o f t h e U S S R a d e c a d e later u n l e a s h e d a series of even m o r e r a d i c a l p o l i t i c a l e d i c t s t h a t h a v e t r a n s f i g u r e d t h e core of C h i n a ' s e c o n o m y a n d left t h e n a m e o f t h e r u l i n g p a r t y t h e o n l y t h i n g still t r u l y c o m m u n i s t in the c o u n t r y . T o create a n e w d o m e s t i c m a r k e t s p a c e for p r i v a t e businesses, J i a n g Z e m i n b e g a n w i t h h o l d i n g c a p i t a l f r o m m a n y o f t h e less p o l i t i c a l l y i m p o r t a n t

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137

s t a t e - o w n e d i n d u s t r i e s , f r o m a p p a r e l a n d f u r n i t u r e to t o y s a n d a p p l i a n c e s . E v e n m o r e r e v o l u t i o n a r y for C h i n a , t h e l e a d e r s h i p o p e n e d t h o s e i n d u s t r i e s t o foreign trade a n d i n v e s t m e n t , a n d u n l e a s h e d a n e w w o r k f o r c e for t h e m b y a l l o w i n g o r d i n a r y C h i n e s e for the first t i m e to m o v e f r o m t h e i r v i l l a g e s t o larger t o w n s a n d cities. B y t h e force o f these d e c r e e s — a n d b y h o l d i n g o u t t h e p r o s p e c t to w e s t e r n m u l t i n a t i o n a l s o f g e t t i n g in o n the g r o u n d floor o f w h a t m i g h t soon b e one of the w o r l d ' s l a r g e s t m a r k e t s — C h i n a d i d n ' t s i m p l y m a k e itself an irresistible lure for f o r e i g n c o m p a n i e s . I t s leaders m a i n t a i n e d c o n t r o l over the p r o c e s s b y i n i t i a l l y r e q u i r i n g t h a t all transfers o f w e s t e r n t e c h n o l o ­ g i e s a n d expertise o c c u r t h r o u g h j o i n t v e n t u r e s , f o r c i n g t h e w o r l d ' s r i c h e s t and

m o s t s o p h i s t i c a t e d c o m p a n i e s to b e c o m e t r a i n i n g g r o u n d s for t h e n e x t

generation of Chinese managers and entrepreneurs. That's another stage that takes g e n e r a t i o n s w h e n it h a p p e n s t h r o u g h t h e n o r m a l d y n a m i c s o f e c o n o m i c development. T h i s s t r a t e g y a n d its results are u n i m a g i n a b l e a p a r t f r o m m o d e r n g l o b a l ­ ization. C h i n a ' s p r o d i g i o u s p r o g r e s s is b e i n g a c h i e v e d a l m o s t e n t i r e l y t h r o u g h the c a p i t a l , t e c h n o l o g i e s , a n d b u s i n e s s e x p e r t i s e t r a n s p l a n t e d f r o m A m e r i c a , E u r o p e , a n d m u c h o f the rest o f A s i a . A s a r e s u l t , a l m o s t e v e r y t h i n g m o d e r n and

a d v a n c e d in C h i n a t o d a y is e i t h e r f o r e i g n - o w n e d or b a s e d on f o r e i g n

m o d e l s . T h e nation's p r o d i g i o u s g r o w t h c o m e s f r o m d e p l o y i n g a slice o f its labor force to enterprises o w n e d a n d r u n b y t h e l e a d i n g c o r p o r a t i o n s o f t h e United States, E u r o p e , J a p a n , T a i w a n , Korea, and a few other more advanced d e v e l o p i n g c o u n t r i e s — o r g a n d o n o r s for C h i n a ' s e c o n o m y — a n d a l l o w i n g a n ­ other slice to start their o w n m o d e r n businesses m o d e l e d o n those foreign c o m ­ panies or m o r e b a c k w a r d ones t h a t are m o r e t r a d i t i o n a l l y C h i n e s e . T h r o u g h it all, the v a s t m a j o r i t y o f its p e o p l e still e k e o u t i m p o v e r i s h e d l i v e s in b a c k ­ w a r d f o r m s of a g r i c u l t u r e or h a n d - t o - m o u t h s m a l l businesses. C h i n a ' s e c o n o m i c p r o g r e s s , s e l e c t i v e a n d d e p e n d e n t o n others as it is, r e ­ m a i n s its o w n p o l i t i c a l a c h i e v e m e n t . M o r e t h a n a n y o t h e r l a r g e d e v e l o p i n g nation, its leaders t o o k t h e d e c i s i o n s a n d risks e n t a i l e d in o p e n i n g t h e i r soci­ e t y to m a s s i v e f o r e i g n transfers a n d o f f e r i n g u p tens o f m i l l i o n s o f l o w - w a g e w o r k e r s a n d a h u g e p o t e n t i a l m a r k e t . B u t t h o s e risks are l a r g e a n d real, b e ­ cause the leadership's s t r a t e g y has c r e a t e d a m a n u f a c t u r i n g sector a n d l a r g e cities t h a t are m u c h m o r e d e v e l o p e d t h a n t h e rest o f t h e c o u n t r y a n d its o t h e r social a n d e c o n o m i c a r r a n g e m e n t s . I n effect, p a r t o f C h i n e s e s o c i e t y has d e ­ v e l o p e d far ahead o f the rest o f i t , c r e a t i n g d i s p a r i t i e s a n d a n o m a l i e s t h a t a l ­ m o s t a n y w h e r e else c o u l d tear a p a r t a c o u n t r y . U n l e s s C h i n a ' s leaders a d d r e s s these disparities a n d w o r k t o resolve the a n o m a l i e s o v e r t h e n e x t d e c a d e , t h e y w i l l threaten C h i n a ' s c o n t i n u e d g r o w t h a n d d e v e l o p m e n t , a n d p e r h a p s its p r i z e d e c o n o m i c a n d social d i s c i p l i n e .

138

FUTURECAST T h e c e n t r a l d i s p a r i t y in C h i n a ' s m o d e r n i z a t i o n is the h u g e g a p b e t w e e n

t h e g r e a t m a n u f a c t u r i n g c a p a c i t y t h a t m a k e s it an e c o n o m i c p o w e r h o u s e , a n d t h e rest o f C h i n a ' s b a c k w a r d a g r i c u l t u r a l e c o n o m y a n d society. W i t h so m u c h of

its

growth

and

progress

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on

transplants

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advanced

e c o n o m i e s , m o s t o f w h a t m a k e s C h i n a m o d e r n exists in a k i n d of e c o n o m i c v a c u u m w i t h o u t t h e s t r o n g , n a t u r a l ties t o e v e r y t h i n g else t h a t h e l p m a i n t a i n i n t r i c a t e f o r m s o f e c o n o m i c b a l a n c e — w h a t e c o n o m i s t s call "equilibria." T h i s n o t o n l y leaves C h i n a ' s m a n u f a c t u r i n g p o w e r h o u s e h o s t a g e to f o r e i g n p r o d u c ­ ers w h o s o m e d a y c o u l d m o v e o n t o I n d i a a n d B a n g l a d e s h ; m o r e broadly, this v a s t d i s p a r i t y m a k e s it m u c h h a r d e r for C h i n a to d e v e l o p the k i n d o f inte­ g r a t e d n a t i o n a l e c o n o m y t h a t l a r g e c o u n t r i e s n e e d to m a i n t a i n their g r o w t h and development. I n e c o n o m i e s t h a t d e v e l o p n o r m a l l y , as t h e m a n u f a c t u r i n g sector g r o w s m o r e a d v a n c e d , all t h e o t h e r p a r t s o f t h e e c o n o m y t h a t m a n u f a c t u r e r s d e p e n d o n — w o r k e r s and m a n a g e r s , companies that provide the materials and build t h e p a r t s , d i s t r i b u t o r s a n d f i n a n c e r s — g r o w m o r e s o p h i s t i c a t e d a l o n g w i t h it, e s p e c i a l l y in response to each other's r e q u i r e m e n t s . Societies like the U n i t e d S t a t e s or G e r m a n y t h a t d e v e l o p e d t h e i r core i n d u s t r i e s m o r e n a t u r a l l y a n d s l o w l y also d e v e l o p a s e c o n d tier o f c o m p a n i e s t h a t m a k e the p a r t s a n d p r o ­ v i d e t h e services for t h o s e m a n u f a c t u r e r s , a n d a t h i r d tier o f businesses that p r o d u c e p r o d u c t s a n d services for the w o r k e r s e a r n i n g r i s i n g i n c o m e s in all t h r e e tiers. I n C h i n a , w h e r e t h e m a n u f a c t u r i n g t r a n s p l a n t s are a d v a n c e d b u t e v e r y ­ t h i n g else is d e c a d e s b e h i n d , t h e g a p s b e t w e e n t h e first tier a n d the rest are as g r e a t as t h e differences

in e c o n o m i c

development

between Japan

and

N a m i b i a or I t a l y a n d H a i t i . F o r i n s t a n c e , m o s t o f the s o p h i s t i c a t e d p a r t s used in C h i n a ' s a d v a n c e d m a n u f a c t u r i n g p l a n t s are still p r o d u c e d o u t s i d e C h i n a , p r i n c i p a l l y in o t h e r A s i a n e c o n o m i e s . C h i n a ' s o w n c o m p a n i e s a n d w o r k e r s are m o v i n g u p t h e v a l u e c h a i n e v e r y year, b u t t h e y ' r e still a l o n g w a y f r o m the s o p h i s t i c a t i o n o f K o r e a or T a i w a n , m u c h less A m e r i c a or G e r m a n y . I B M faced s o m e o f the p r o b l e m s p r o d u c e d b y these g a p s in its early years in C h i n a . A r v i n d e r S u r d h a r , w h o h e a d e d u p I B M ' s first C h i n e s e joint v e n t u r e t o p r o d u c e P C s in t h e e a r l y 1 9 9 0 s , has r e c a l l e d , " W h e n w e o p e n e d u p those first s h i p m e n t s f r o m C h i n a , there w a s m o r e d u s t in the b o x e s t h a n a n y t h i n g else." M o s t o f t h e u n i t s w e r e d a m a g e d in transit o v e r C h i n a ' s r u t t e d roads a n d a n t i q u a t e d rail s y s t e m s , in t h e i r r o u g h u n l o a d i n g a n d r e l o a d i n g b y b o r d e r a g e n t s as t h e b o x e s m o v e d f r o m o n e p r o v i n c e t o another, a n d f r o m s i t t i n g for w e e k s in h u m i d c o n t a i n e r s in c r o w d e d p o r t s w a i t i n g t o be s h i p p e d o v e r s e a s .

6

T h o s e k i n d s o f p r o b l e m s still p l a g u e m o d e r n c o m p a n i e s in C h i n a . F o r e x a m ­ p l e , w h e n Pacific C y c l e m o v e d the last o f its b i c y c l e m a n u f a c t u r i n g to C h i n a

THE TWO POLES OF GLOBALIZATION: CHINA AND THE UNITED STATES

139

f r o m M e x i c o a n d the U n i t e d S t a t e s in 2 0 0 0 , it f o u n d t h a t its n e w j o i n t p a r t ­ ner cou ld n' t use C y c l e ' s central t r a c k i n g s y s t e m s . Pacific C y c l e

eventually

b o u g h t o u t its C h i n e s e p a r t n e r s a n d y e t still f o u n d in 2 0 0 5 t h a t t h e lead t i m e to p r o d u c e o n e o f its c u s t o m b i c y c l e s in C h i n a w a s 2 7 0 d a y s , c o m p a r e d t o 6 0 d a y s w h e n t h e y h a d b e e n m a d e in A m e r i c a or M e x i c o .

7

M o s t native Chinese m a n u f a c t u r i n g remains distinctly

underdeveloped

even today. D a v i d H a l e is p r e s i d e n t o f I n t e r n a t i o n a l S m a r t S o u r c i n g , an A m e r i c a n firm t h a t locates C h i n e s e m a n u f a c t u r e r s for m e d i u m - s i z e A m e r i c a n p r o d u c e r s of p l a s t i c , m e t a l , a n d e l e c t r o n i c p r o d u c t s . H e w o r k s w i t h s i x t y - t w o C h i n e s e c o m p a n i e s , b u t h e h a d to i n v e s t i g a t e m o r e t h a n s i x h u n d r e d p r o d u c ­ ers to locate 1 0 p e r c e n t t h a t c o u l d d o a c c e p t a b l e w o r k . " W e say, 'no deal' t o 9 0 p e r c e n t o f t h e m , because t h e y don't h a v e t h e e q u i p m e n t , e n o u g h k n o w l ­ 8

e d g e o f the p r o c e s s , or q u a l i t y c o n t r o l s t o m e e t o u r b a s i c s t a n d a r d s . " S i n c e most managers and directors of C h i n e s e companies g e t their jobs t h r o u g h p o ­ litical c o n n e c t i o n s , n o r m a l e c o n o m i c i n c e n t i v e s to i m p r o v e t h e i r t e c h n o l o g i e s a n d business m e t h o d s are b l u n t e d . A

l a r g e r p r o b l e m is the d i s m a l l y inefficient

performance of China's re­

m a i n i n g s t a t e - o w n e d e n t e r p r i s e s , w h i c h still d o m i n a t e m a j o r i n d u s t r i e s s u c h as a u t o s , c h e m i c a l s , a n d m e t a l s . T h e i r t e c h n o l o g i e s a n d b u s i n e s s

methods

g e n e r a l l y are as o u t d a t e d as the l a r g e S o v i e t enterprises in the e a r l y 1 9 9 0 s , w i t h m o s t s t u c k in a r u t o f s h o d d y p r o d u c t i o n , l a r g e a n n u a l losses, a n d r e g u ­ lar

loans f r o m state b a n k s to p a y t h e i r s u p p l i e r s a n d w o r k e r s . T h e y h a v e l i t t l e

spare capital or o r g a n i z a t i o n a l c a p a c i t i e s t o i m p r o v e or i n n o v a t e a n d feel n o c o m p e t i t i v e pressures to d e v e l o p t h e m . I f C h i n a ' s m a n u f a c t u r i n g se c tor h a d e v o l v e d m o r e n a t u r a l l y a n d n o r m a l l y , these l a r g e i n s o l v e n t enterprises w o u l d h a v e failed, a n d t h e i r resources w o u l d h a v e s h i f t e d t o p r i v a t e firms t h a t c o u l d m a k e b e t t e r use o f t h e m . T h a t ' s n o t p o s s i b l e in C h i n a , b e c a u s e t h e r e are n o m o d e r n b a n k r u p t c y l a w s for the o r d e r l y l i q u i d a t i o n o f a c o m p a n y ' s assets, or

m o d e r n financial a r r a n g e m e n t s t o l e n d f u n d s t o p r o m i s i n g p r i v a t e e n t e r ­

prises. I n s t e a d , the s t a t e - o w n e d b a n k s k e e p t h e m o n o p o l y c o m p a n i e s afloat, or

the state s i m p l y closes t h e m d o w n , f o r c i n g t h e b a n k s to w r i t e off d e c a d e s

of b a d loans t h a t d r a i n t h e w o r k i n g c a p i t a l d e r i v e d f r o m t h e d e p o s i t s o f o r d i ­ nary Chinese. A n o t h e r g r e a t d i s p a r i t y has e m e r g e d b e t w e e n w h a t m o s t C h i n e s e p e o p l e a n d businesses can use or afford a n d m o s t o f w h a t t h e c o u n t r y ' s a d v a n c e d m a n u f a c t u r i n g operations p r o d u c e . T h e result is that C h i n a has to e x p o r t nearly h a l f of w h a t the core of its e c o n o m y p r o d u c e s . T h i s a n o m a l y m a k e s C h i n a ' s development

strategy h i g h l y vulnerable to the g l o b a l business cycle. T h e

w o r l d has m a n a g e d to a v o i d a serious recession for m o r e t h a n a d e c a d e — t h e s a m e p e r i o d in w h i c h C h i n a has b e c o m e a w o r l d - s c a l e e c o n o m y — b u t it can't

140

FUTURECAST

a v o i d it indefinitely. N o r d o e s C h i n a s e e m p r e p a r e d for w h a t lies ahead. A l e a d i n g C h i n e s e e c o n o m i c c o m m e n t a t o r , L a u N a i - k e u n g , sees a p o l i t i c a l u p ­ side for C h i n a f r o m a n y g l o b a l recession t h a t starts in A m e r i c a : "To us, the g o o d n e w s is t h a t w h e n t h e c o u n t r y [ U n i t e d S t a t e s ] is in d e e p t r o u b l e , the U . S . w i l l n o t h a v e t h e e n e r g y to p i c k o n C h i n a . . . . T h i s w i l l p r o v i d e a . . . p e r i o d o f s t r a t e g i c o p p o r t u n i t y ' for t h e c o u n t r y t o [focus entirely o n eco­ n o m i c p r o g r e s s a n d ] pass t h r o u g h a t u r b u l e n t zone [ w h e n ] p e r c a p i t a i n c o m e is b e t w e e n U . S . $ i , o o o - $ 3 , o o o . "

9

Professor L a u is w h i s t l i n g in t h e d a r k . W h e n t h e n e x t g l o b a l

recession

c o m e s , C h i n e s e g r o w t h w i l l b e h i t v e r y h a r d , because t h e t w o l y n c h p i n s of its modernization strategy, exports and foreign investment, w i l l both

decline

sharply. I f C h i n a ' s g r o w t h stalls a n d i n c o m e s d e c l i n e for a t i m e , the real q u e s ­ t i o n is w h e t h e r t h e d o m e s t i c " t u r b u l e n t zone" t h a t L a u m e n t i o n s w i l l b e c o m e t h e n i g h t m a r e scenario for C h i n a ' s leaders, w i t h d e m a n d s across the c o u n t r y for t h e p e r s o n a l a n d p o l i t i c a l f r e e d o m s t h a t c a m e t o a h e a d in T i a n a n m e n S q u a r e . T h e leadership's r u l e w i l l p r o b a b l y w e a t h e r a l m o s t a n y d e m o n s t r a ­ t i o n s a n d d i s s e n t t h a t a g l o b a l recession m i g h t t r i g g e r ; b u t if their p r e d e c e s ­ sors' response in 1 9 8 9 is a g u i d e , t h e u p s h o t w i l l i n c l u d e t i g h t e r p o l i t i c a l c o n t r o l s t h a t c o u l d s l o w or stall t h e n e x t stages o f e c o n o m i c liberalization. B u i l d i n g a world-class m a n u f a c t u r i n g platform that produces

things

t h a t m o s t o f C h i n a ' s b u s i n e s s e s a n d p e o p l e c a n n e i t h e r use n o r afford is c r e ­ a t i n g a n o t h e r p i t f a l l for s t a b l e e c o n o m i c p r o g r e s s , s i n c e C h i n a has to use its h i g h s a v i n g s t o finance a g o o d p a r t o f t h e f o r e i g n d e m a n d for its o w n e x ­ p o r t s , especially to the indispensable

A m e r i c a n market. O n this matter,

China's L a u echoes the w a r n i n g s of m a n y western economists:

"The U . S .

e c o n o m y is d e p e n d e n t o n t h e c e n t r a l b a n k s o f J a p a n , C h i n a a n d o t h e r n a ­ t i o n s t o i n v e s t in U . S . T r e a s u r i e s a n d k e e p A m e r i c a n i n t e r e s t rates d o w n . T h e l o w rates k e e p A m e r i c a n c o n s u m e r s s n a p p i n g u p i m p o r t e d g o o d s . A n y e c o n o m i s t w o r t h h i s salt k n o w s t h a t t h i s s i t u a t i o n is u n s u s t a i n a b l e . "

10

Vir­

tually every salty economist expects that global capital markets eventually w i l l force t h e U n i t e d S t a t e s t o r e d u c e its h u g e t r a d e a n d c u r r e n t a c c o u n t i m b a l a n c e , even b y s i m p l y d r i v i n g d o w n the dollar. W h e n that happens, t h o s e c a p i t a l m a r k e t s w i l l also d r i v e u p t h e r e l a t i v e v a l u e o f C h i n a ' s c u r r e n c y , m a k i n g its e x p o r t s less c o m p e t i t i v e e v e r y w h e r e . F o r a c o u n t r y t h a t e x p o r t s h a l f o f w h a t it p r o d u c e s , c u r r e n c y shifts t h a t raise t h e p r i c e o f its e x p o r t s in all o f its m a r k e t s , a n d e s p e c i a l l y in its l a r g e s t o n e , w i l l b e v e r y serious b u s i ­ ness. F o r e i g n i n v e s t m e n t c o u l d s l o w d r a m a t i c a l l y , y o u n g n a t i v e b u s i n e s s e s c o u l d g o u n d e r , a n d u n e m p l o y m e n t w o u l d soar. E v e n w i t h o u t a f u l l - b l o w n recession, these d e v e l o p m e n t s w i l l slow China's g r o w t h and p r o b a b l y the n e x t s t a g e s o f its m o d e r n i z a t i o n .

141

THE TWO POLES OF GLOBALIZATION: CHINA AND THE UNITED STATES The

w e a k d o m e s t i c c o n s u m e r s p e n d i n g t h a t m a k e s C h i n a ' s g r o w t h so d e ­

p e n d e n t on e x p o r t s reflects the e x c e p t i o n a l l y h i g h s a v i n g s rates o f a v e r a g e C h i n e s e h o u s e h o l d s , a n d those s a v i n g s rates in t u r n m a i n l y reflect C h i n a ' s u n i q u e status as the w o r l d ' s o n l y m a j o r e c o n o m y in w h i c h t h e v a s t m a j o r i t y o f p e o p l e h a v e no g u a r a n t e e d h e a l t h - c a r e or p e n s i o n c o v e r a g e . T h i s a n o m a l y , created d e l i b e r a t e l y b y t h e leadership's d e c i s i o n s t o u n r a v e l t h e o l d safety net a r r a n g e m e n t s tied to the f a r m c o l l e c t i v e s a n d s t a t e - o w n e d e n t e r p r i s e s , c o u l d i m p i n g e seriously on t h e i r entire m o d e r n i z a t i o n strategy. I n a s o c i e t y w h e r e life e x p e c t a n c y n o w tops seventy, e v e r y o n e e x p e c t s t o g e t s i c k s o m e t i m e a n d to g r o w old; a n d since t h e g o v e r n m e n t w o n ' t h e l p o u t w i t h either, m o s t p e o ­ p l e p u t aside w h a t t h e y can. C h i n a is not t h e o n l y c o u n t r y t h a t p r o v i d e s l i t t l e m e d i c a l or o l d a g e c o v e r a g e . B u t a m o n g c o u n t r i e s w i t h l i t t l e or no safety n e t , C h i n a alone has a c o n s t a n t l y e x p a n d i n g m o d e r n m a n u f a c t u r i n g sector t h a t p r o d u c e s g o o d s w h i c h m o s t o f its p e o p l e c a n n o t b u y b e c a u s e t h e y ' r e p o o r a n d h a v e no m e d i c a l or o l d - a g e c o v e r a g e . So

l o n g as C h i n a ' s leadership refuses to e x t e n d these basic social benefits to

m o r e o f their p e o p l e , m o s t w i l l c o n t i n u e t o save a g o o d p a r t o f w h a t t h e y earn rather than c o n s u m e w h a t their c o u n t r y p r o d u c e s . M o r e o v e r , m o s t o f those personal s a v i n g s are held in those state b a n k s t h a t l e n d t h e m to t h e c o u n t r y ' s h u n d r e d s o f inefficient a n d often t e c h n i c a l l y i n s o l v e n t s t a t e - o w n e d businesses. So e x t e n d i n g basic social benefits t o l a r g e n u m b e r s o f C h i n e s e w i l l not o n l y i n ­ v o l v e s h i f t i n g h u n d r e d s of billions o f dollars f r o m p u b l i c w o r k s , t h u s s l o w i n g m o d e r n i z a t i o n , it also w i l l force m a n y o f those s t a t e - o w n e d enterprises to g o belly u p , t h r o w i n g m i l l i o n s o f C h i n e s e w o r k e r s o u t o f w o r k . H e r e , too, a d e e p a n o m a l y in C h i n a ' s m o d e r n i z a t i o n p a t h c o u l d p r o v i d e the seeds o f p o p u l a r u n ­ rest s o m e t i m e in the n e x t d e c a d e or so, f r o m an a r m y o f n e w l y jobless C h i n e s e p o t e n t i a l l y joined b y m i l l i o n s o f other d e s p e r a t e l y p o o r p e o p l e w h o see a s m a l l slice of their fellow citizens g r o w c o m f o r t a b l e in s o m e o f t h e w o r l d ' s m o s t a d ­ v a n c e d cities. S u c h a c h a i n o f events is sufficiently w o r r i s o m e t h a t C h i n e s e of­ ficials

occasionally speak a b o u t it p u b l i c l y . T h e f o r m e r d i r e c t o r o f t h e S t a t e

C o u n c i l ' s D e v e l o p m e n t R e s e a r c h C o u n c i l , W u J i n g l i a n , w a r n e d r e c e n t l y of the "possibility o f an e c o n o m i c a n d social crisis," as "income g a p s a m o n g t h e people a n d b e t w e e n u r b a n a n d rural d w e l l e r s h a v e g r o w n to s u c h a d a n g e r o u s d e g r e e that t h e y m i g h t cause social i n s t a b i l i t y . "

11

T h o s e concerns are r o o t e d in

real events: T h e C u l t u r a l R e v o l u t i o n , w i t h its c h a o t i c y e t u n i q u e l y m a n a g e d forms o f m o b v i o l e n c e , m u s t be a v i v i d m e m o r y for m o s t C h i n e s e a d u l t s , a n d especially the leadership. A n d m u c h m o r e recently, C h i n a ' s t o p p o l i c e official, Z h o u Y o n g k a n g , a d m i t t e d that e v e n in the m i d s t o f the g r e a t e s t b o o m

in

China's history, m o r e t h a n 7 4 , 0 0 0 protests i n v o l v i n g a l m o s t 4 m i l l i o n p e o p l e occurred in 2 0 0 4 — a n d that a l m o s t c e r t a i n l y i n v o l v e s a large u n d e r c o u n t .

1 2

142

FUTURECAST O n e sensible c o u r s e for C h i n a o v e r t h e n e x t d e c a d e w o u l d be to b e g i n to

close t h e g a p b e t w e e n its f o r e i g n - o w n e d or f o r e i g n - b a s e d m a n u f a c t u r i n g sec­ t o r a n d t h e rest o f t h e e c o n o m y . B u t C h i n a ' s o t h e r e c o n o m i c a n d social a r r a n g e m e n t s are so u n d e r d e v e l o p e d t h a t it w i l l be difficult to p u l l it off. C h i n a has p l e n t y o f a m b i t i o u s p e o p l e e a g e r to start t h e i r o w n businesses, for e x a m p l e , b u t n o m o d e r n b a n k i n g s y s t e m to p r o v i d e t h e m financing. A n in­ t e r b a n k m a r k e t t h a t c o u l d transfer f u n d s t o w h e r e they're n e e d e d doesn't ex­ ist, its c o r p o r a t e b o n d m a r k e t s are f r a g m e n t e d a n d s h o r t o f f u n d s , I P O s are h i g h l y r e s t r i c t e d , a n d m o s t o f t h e f u n d s h e l d b y t h e b i g state b a n k s are d e d i ­ c a t e d to t h e i n s o l v e n t s t a t e - o w n e d e n t e r p r i s e s . T h a t ' s w h y d e s p i t e C h i n a ' s sta­ t u s as t h e w o r l d ' s h i g h e s t d o m e s t i c saver, the O E C D reports t h a t a p e r p e t u a l c r e d i t c r u n c h c o n t i n u e s t o stifle its s m a l l - a n d m e d i u m - s i z e business s e c t o r . E v e n as t h e w o r l d ' s l a r g e s t m u l t i n a t i o n a l s

c a r r y o u t c o m p l e x deals

13

in

C h i n a ' s h y p e r m o d e r n cities a n d i n d u s t r i a l d e v e l o p m e n t areas, other h u g e g a p s in t h e b a s i c e l e m e n t s o f m o d e r n c o m m e r c i a l life f u r t h e r h o l d b a c k the n o r m a l d e v e l o p m e n t o f n a t i v e businesses. W i t h m o d e r n i n t e l l e c t u a l p r o p e r t y r i g h t s r o u t i n e l y v i o l a t e d or i g n o r e d — g o v e r n m e n t d e p a r t m e n t s in B e i j i n g and

most

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r e c e n t l y — o n l y t h e m o s t w e l l - c o n n e c t e d n a t i v e c o m p a n i e s i n v e s t in t e c h n o l ­ o g y d e v e l o p m e n t . L a x i n t e l l e c t u a l p r o p e r t y p r o t e c t i o n s even d e t e r foreign c o m p a n i e s s u c h as N i n t e n d o f r o m t r a n s f e r r i n g c u t t i n g - e d g e operations a n d t e c h n o l o g i e s to C h i n a , s i n c e t h e y a s s u m e t h a t t h e i r m o s t v a l u a b l e p a t e n t s a n d c o p y r i g h t s w i l l be q u i c k l y r i p p e d off. E v e n m o r e b a s i c , C h i n a ' s l e g a l s y s t e m still a p p l i e s different r i g h t s a n d different r u l e s to p r i v a t e , c o l l e c t i v e , a n d s t a t e - o w n e d f o r m s o f p r o p e r t y , a n d e v e r y j u d i c i a l r u l i n g is p o l i t i c a l l y correct. T h e s e a n t i q u a t e d d i s t i n c t i o n s m a k e it h a r d e r for n a t i v e p r i v a t e c o m p a n i e s to p l a n a n d o p e r a t e in a n o r m a l b u s i n e s s fashion. N o r does C h i n a yet have m a n y of the other m o d e r n arrangements and f o r m s o f i n f r a s t r u c t u r e t h a t c o m e t o g e t h e r to create g e n u i n e n a t i o n a l m a r ­ k e t s . A t least t h u s far, t h e leadership's s t r a t e g y o f u s i n g p r o g r e s s in the P a ­ cific coastal m e t r o p o l i t a n areas t o c a t a l y z e d e v e l o p m e n t in t h e v a s t interior has l a r g e l y f a i l e d . W i t h o u t a m o d e r n financial s y s t e m , c a p i t a l c a n n o t m o v e e a s i l y or often e n o u g h f r o m p r o v i n c e t o p r o v i n c e ; a n d that's o n l y a s m a l l p a r t o f t h e p r o b l e m . B e c a u s e C h i n a ' s i n t e r i o r h i g h w a y a n d rail s y s t e m s are o u t of d a t e a n d o u t o f s h a p e , b a s i c m a t e r i a l s , p a r t s , a n d finished g o o d s all m o v e s l o w l y f r o m p l a c e t o p l a c e a n d often are d a m a g e d a l o n g t h e w a y . E v e n w h e n g o o d s can m o v e u n d a m a g e d , h u n d r e d s of cities and dozens of provinces b l o c k t h e t r a n s i t o f g o o d s f r o m o t h e r p r o v i n c e s in o r d e r to p r o t e c t t h e i r na­ t i v e c o m p a n i e s . F u r t h e r , w h i l e t e n s o f m i l l i o n s o f y o u n g C h i n e s e h a v e left t h e i r r u r a l h o m e s for t h e c i t i e s , C h i n a is still a l o n g w a y f r o m d e v e l o p i n g a

THE TWO POLES OF GLOBALIZATION: CHINA AND THE UNITED STATES

143

national l a b o r m a r k e t . A p a r t f r o m t h e y o u n g a n d a m b i t i o u s , e v e r y o n e else is tied to t h e i r l a n d b y t r a d i t i o n a l r u r a l l a n d t e n u r e r u l e s t h a t d i c t a t e t h a t a n y ­ one w h o leaves a r u r a l residence for a n e x t e n d e d t i m e loses his l a n d use r i g h t s — a n d for m o s t r u r a l C h i n e s e , t h o s e r i g h t s are t h e b e s t i n s u r a n c e for their o l d a g e . C h i n a can't k e e p u p w i t h its o w n p r o g r e s s in other v e r y d a m a g i n g w a y s . F o r e x a m p l e , the c o u n t r y is n o w r e n o w n for t h e world's w o r s t air a n d w a t e r p o l l u ­ tion, w i t h m o r e than 6 0 0 m i l l i o n C h i n e s e d r i n k i n g c o n t a m i n a t e d w a t e r on a d a i l y basis a n d acid rain c o v e r i n g at least o n e - t h i r d o f the c o u n t r y .

1 4

A t current

rates and t h a n k s to w e a k r e g u l a t i o n s , these c o n d i t i o n s w i l l w o r s e n signifi­ cantly. Z h a n g L i j u n , the n u m b e r - t w o official at C h i n a ' s state e n v i r o n m e n t a l p r o t e c t i o n agency, recently r e p o r t e d t h a t u n d e r c u r r e n t g r o w t h p a t h s , C h i n a ' s p o l l u t i o n "will increase b y four to five t i m e s " b e t w e e n n o w a n d 2 0 2 0 .

1 5

That

c o u l d cost h u n d r e d s o f thousands o f lives a n d m a k e significant p a r t s o f t h e c o u n t r y u n l i v a b l e . E v e n today, the W o r l d B a n k e s t i m a t e s t h a t p o l l u t i o n costs China's e c o n o m y m o r e than $ 5 0 b i l l i o n a year in health costs, t i m e lost f r o m w o r k , a n d d a m a g e to crops, f a r m l a n d , a n d i n f r a s t r u c t u r e — t h a t ' s equal to s o m e 8 p e r c e n t o f the country's G D P . A n d c l e a n i n g u p C h i n a ' s e n v i r o n m e n t w i l l not be s i m p l y a m a t t e r of s e t t i n g strict n e w s t a n d a r d s a n d e n f o r c i n g t h e m , as a d v a n c e d countries do. W h e r e such a d i r e c t a p p r o a c h is p o s s i b l e , C h i n a ' s lead­ ers have already d o n e it. N o t w i t h s t a n d i n g the c h o k i n g traffic g r i d l o c k s in B e i ­ j i n g a n d S h a n g h a i , for e x a m p l e , C h i n a ' s c u r r e n t a u t o f u e l - e f f i c i e n c y s t a n d a r d s are

the equal o f E u r o p e a n d stricter than A m e r i c a ' s . B u t m o s t o f C h i n a ' s serious

p o l l u t i o n is l i n k e d closely to the m o d e r n i z a t i o n p r o g r a m , c o m i n g as it does f r o m the state's o w n energy-inefficient

heavy industrial plants, the rapid

g r o w t h of dozens o f cities that h a v e d r a w n tens o f m i l l i o n s o f rural y o u n g p e o ­ p l e , the country's reliance on its m o s t p l e n t i f u l a n d i n e x p e n s i v e e n e r g y source, soft coal, a n d the intense use o f fertilizers that has m a d e C h i n a self-sufficient in food for the first t i m e in its history. A p p l y i n g m o d e r n air a n d w a t e r q u a l i t y standards to the sources o f C h i n a ' s w o r l d - c l a s s e n v i r o n m e n t a l p r o b l e m s w o u l d set b a c k m u c h o f its basic d e v e l o p m e n t strategy. The and

c h a s m in C h i n e s e d e v e l o p m e n t b e t w e e n its m a n u f a c t u r i n g p r o w e s s

e v e r y t h i n g else in the e c o n o m y w a s p l a i n to c o n s u m e r s a r o u n d t h e w o r l d

in 2 0 0 7 , w h e n one after another, reports s u r f a c e d o f C h i n e s e e x p o r t s f o u n d to be d a n g e r o u s or deadly. C h i n e s e eel a n d s h r i m p i m p o r t e d i n t o t h e U n i t e d States w e r e t a i n t e d b y b a n n e d v e t e r i n a r y c h e m i c a l s , children's c l o t h e s w e r e soaked in f o r m a l d e h y d e nine h u n d r e d t i m e s h i g h e r t h a n safe levels, i m p o r t e d C h i n e s e toys w e r e d e c o r a t e d w i t h h a z a r d o u s l e a d - b a s e d p a i n t , d o g a n d c a t food sent to C a n a d a a n d A m e r i c a w e r e c o n t a m i n a t e d b y a p o t e n t i a l l y d e a d l y c h e m i c a l called m e l a m i n e , C h i n e s e t o o t h p a s t e e x p o r t s w e r e t a i n t e d w i t h a

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p o i s o n o u s c o m p o u n d f o u n d in antifreeze a n d , finally, C h i n e s e - m a d e c o u g h s y r u p c o n t a i n i n g a t o x i c s o l v e n t k i l l e d m o r e t h a n three h u n d r e d P a n a m a n i ­ ans. W h i l e C h i n a ' s u n i q u e , g l o b a l i z a t i o n - b a s e d a p p r o a c h to d e v e l o p m e n t has e n a b l e d it to g o f r o m b e i n g a m i n o r e x p o r t i n g n a t i o n to t h e n u m b e r - t h r e e e x ­ p o r t e r in t h e w o r l d in less t h a n t w o d e c a d e s , its r e g u l a t o r y a n d e n f o r c e m e n t c a p a c i t i e s are still p r i m i t i v e . C h i n a has no e q u i v a l e n t o f a w e s t e r n c o n s u m e r p r o d u c t - s a f e t y a g e n c y . N o r d o e s B e i j i n g y e t h a v e the a d m i n i s t r a t i v e resources t o create a c e n t r a l f o o d a n d d r u g r e g u l a t o r y s y s t e m — i n this c r i t i c a l area, six a g e n c i e s share o v e r l a p p i n g a n d often c o n f l i c t i n g a u t h o r i t y , a n d none has the s y s t e m s or m a n p o w e r t o enforce a n y t h i n g . T h e g a p b e t w e e n C h i n a ' s m a n u f a c t u r i n g c a p a c i t y a n d its a b i l i t y to ensure t h e q u a l i t y a n d safety o f w h a t it p r o d u c e s c o u l d p o s e serious p r o b l e m s for C h i n a ' s e c o n o m y in t h e n e x t f e w years. F o r e x a m p l e , the c o u n t r y a l r e a d y p r o ­ d u c e s a s u b s t a n t i a l share o f t h e w o r l d ' s g e n e r i c d r u g s , i n c l u d i n g b y s o m e estimates a majority of the world's penicillin, aspirin, and over-the-counter v i t a m i n s . R e c e n t l y , E U r e g u l a t o r s f o u n d a lethal b a c t e r i u m t h a t can cause m e n i n g i t i s in infants in C h i n e s e - p r o d u c e d v i t a m i n A , a n d A m e r i c a n a u t h o r ­ ities h a v e f o u n d traces o f a r s e n i c , l e a d , a n d i r o n in p r o d u c t s c o n t a i n i n g v i t a ­ m i n C f r o m C h i n a . B e f o r e C h i n a ' s c a p a c i t y for r e g u l a t i o n c a t c h e s u p w i t h its c a p a c i t y t o m a n u f a c t u r e g o o d s t h a t n e e d r e g u l a t i o n , t a i n t e d a n d unsafe d r u g s and other p r o d u c t s from C h i n a w i l l kill A m e r i c a n s and Europeans. T h a t c o u l d w e l l m a k e " M a d e in C h i n a " a s h u n n e d b r a n d t h r o u g h o u t the a d v a n c e d world. H o w C h i n a deals w i t h its p r o f o u n d e c o n o m i c anomalies a n d pitfalls over the n e x t ten to fifteen years w i l l d e p e n d largely on h o w m u c h c h a n g e its t i g h t l y h e l d l e a d e r s h i p w i l l a c c e p t or tolerate, b e y o n d the c u r r e n t f a s t - f o r w a r d p a t h for m a n u f a c t u r i n g . T h e f u t u r e c o u r s e o f C h i n a ' s e c o n o m i c d e v e l o p m e n t , like its b e g i n n i n g s , w i l l d e p e n d m o s t l y o n p o l i t i c s . I n a f u n d a m e n t a l respect, these p r o b l e m s f o l l o w d i r e c t l y f r o m C h i n a ' s sin­ g u l a r a p p r o a c h t o p o w e r a n d policy. C o n t e m p o r a r y C h i n e s e p o l i t i c s has none o f the g i v e - a n d - t a k e or c o m p e t i t i o n a m o n g p a r t i e s , b r a n c h e s of g o v e r n m e n t , a n d interest g r o u p s t h a t a l m o s t e v e r y w h e r e else force p o l i c y m a k e r s to take a c ­ c o u n t o f h o w t h e i r decisions affect businesses a n d o r d i n a r y p e o p l e . T h e U n i t e d S t a t e s g o v e r n m e n t c a n n o t o p e n p a r t s o f its A l a s k a n w i l d e r n e s s for oil d r i l l i n g w i t h o u t h u n d r e d s o f c o m p r o m i s e s a n d a c c o m m o d a t i o n s a m o n g the d e p a r t ­ m e n t s o f its e x e c u t i v e b r a n c h , b e t w e e n t h e W h i t e H o u s e a n d C o n g r e s s , a m o n g factions w i t h i n the R e p u b l i c a n a n d D e m o c r a t i c p a r t i e s o f C o n g r e s s as w e l l as b e t w e e n t h e m , b e t w e e n d o z e n s o f e n v i r o n m e n t a l a n d business g r o u p s , and t h e n b e t w e e n t h e m a n d the t w o p a r t i e s — a t w h i c h p o i n t i n d e p e n d e n t j u d g e s h a v e t h e i r say, too. A l l o f this w r a n g l i n g a n d p o s i t i o n i n g is also c o v e r e d b y the

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m e d i a , so the A m e r i c a n p u b l i c f o r m s its o w n v i e w s t h a t pollsters m e a s u r e a n d r e p o r t — s h i f t i n g or s o l i d i f y i n g t h e p o s i t i o n s a n d n e g o t i a t i o n s o f e v e r y o n e i n ­ v o l v e d in the a d m i n i s t r a t i o n , C o n g r e s s , a n d b e y o n d . T h e p r o c e s s is m u c h t h e s a m e in E u r o p e a n c o u n t r i e s , w h e r e even t h o u g h p a r l i a m e n t a r y s y s t e m s g e n e r ­ ally ensure that the e x e c u t i v e a n d l e g i s l a t u r e m o v e t o g e t h e r , p a r l i a m e n t a r y majorities often are c o m p r i s e d o f m u l t i p l e p a r t i e s a n d factions w i t h i n p a r t i e s . In

the e n d , the result is the same: E c o n o m i c decisions in d e m o c r a c i e s a l m o s t

a l w a y s take a l o n g t i m e , a n d t h e final results are u s u a l l y fractional m e a s u r e s . The

benefit o f a l l o w i n g e v e r y g r o u p a n d i n d i v i d u a l w i t h e v e n a l i t t l e p o w e r or

influence to w e i g h in is t h a t m o s t decisions o f c o n s e q u e n c e t a k e s o m e a c c o u n t of the c a p a c i t y of the country's m a j o r g r o u p s a n d businesses to l i v e w i t h t h e c o n s e q u e n c e s — o r at least w i t h those t h a t c a n be k n o w n . T h a t ' s not h o w p o l i t i c s w o r k s in C h i n a , w h e r e t h e n i n e m e n o f t h e P o l i t ­ b u r o S t a n d i n g C o m m i t t e e m a k e all k e y n a t i o n a l d e c i s i o n s o n a l o n g w i t h social p o l i c y , f o r e i g n affairs, defense,

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e d u c a t i o n , a n d national c u l t u r a l p o l i c y . N o o t h e r i n d i v i d u a l s , g r o u p s , or i n ­ s t i t u t i o n s can o v e r r u l e , c o n t r a d i c t , or m o d i f y t h o s e d e c i s i o n s . T h o s e n i n e m e n are

not a l w a y s o f one m i n d in t h e i r d e c i s i o n s a b o u t t h e p a t h o f m o d e r n i z a t i o n .

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t h a t clearly p o r t r a y the v i e w s o f s o m e o f t h e m a j o r p l a y e r s o n t h e S t a n d i n g C o m m i t t e e . F o u r of the nine m e m b e r s c o u n t m o s t in e c o n o m i c Hu

decisions:

J i n t a o , the t o p m a n a n d p a r t y g e n e r a l secretary; W e n J i a b a o , t h e p r e m i e r ;

Z e n g Q i n g h o n g , t h e h e a d o f the p a r t y secretariat; a n d L u o G a n , t h e s e c u r i t y chief. A l l b u t W e n a p p e a r c o m m i t t e d t o p r o m o t i n g m o r e f o r e i g n transfers to d r i v e the n e x t decade's t e c h n o l o g i c a l p r o g r e s s , a n d e x p a n d i n g e x p o r t s , as t h e best w a y s to ensure r a p i d d o m e s t i c g r o w t h a n d increase C h i n a ' s g l o b a l influ­ ence. T h e y ' r e also d e t e r m i n e d to a v o i d w h a t is u n i v e r s a l l y seen in C h i n a as the " R u s s i a n t r a p " o f q u i c k l y p r i v a t i z i n g t h e s t a t e - o w n e d e n t e r p r i s e s . I f t h i s t h i n k i n g holds t h r o u g h t h e n e x t s u c c e s s i o n — a n d t h e S t a n d i n g C o m m i t t e e chooses its o w n s u c c e s s o r s — t h e stresses a n d c o n t r a d i c t i o n s in C h i n a ' s c u r r e n t d e v e l o p m e n t w i l l a l m o s t c e r t a i n l y w o r s e n o v e r t h e n e x t t e n years. A m o n g C h i n a ' s senior l e a d e r s , o n l y W e n f a v o r s a d i f f e r e n t s t r a t e g y . W i t h a f e w y o u n g e r officials in t h e n e x t l o w e r l e v e l o f t h e l e a d e r s h i p , W e n s e e m s convinced that measures to reduce the country's harsh and g r o w i n g inequal­ ities can lay a basis for m o r e s u s t a i n a b l e , c o n s u m e r - l e d e c o n o m i c g r o w t h . S o he has a r g u e d for s h i f t i n g resources f r o m i n d u s t r i a l a n d h i g h - t e c h m e n t s to i n f r a s t r u c t u r e a n d a g r i c u l t u r a l m o d e r n i z a t i o n , a n d

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m i n i m u m i n c o m e s a n d m o r e p e n s i o n a n d h e a l t h - c a r e c o v e r a g e r u n b y local g o v e r n m e n t s . T h e m o r e c o n s e r v a t i v e leaders t h u s far h a v e r e j e c t e d s u c h b a s i c c h a n g e s , b u t t h e y h a v e m a d e s o m e concessions to W e n a n d his allies. I n 2 0 0 5 ,

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for e x a m p l e , H u a n n o u n c e d his v e r s i o n o f a " N e w D e a l " t h a t i n c l u d e s tax c u t s for f a r m e r s , m o r e i n f r a s t r u c t u r e p r o j e c t s for w e s t e r n a n d i n l a n d p r o v i n c e s , a f e w p r o v i n c i a l p i l o t p r o g r a m s in o l d a g e p e n s i o n s a n d h e a l t h care, a n d a m a s s i v e p r o j e c t to t r a n s f o r m t h e i n l a n d c i t y o f C h o n g q i n g i n t o the n e x t Shanghai. T h i s d e b a t e a m o n g C h i n a ' s c u r r e n t leaders, l i k e those o f their predecessors, q u e s t i o n s n o t t h e g o a l o f b u i l d i n g a m o d e r n , w e s t e r n - s t y l e e c o n o m y as q u i c k l y as p o s s i b l e , b u t o n l y t h e p o l i t i c a l l y safest w a y to d o so. W h e t h e r it takes five years or t w e n t y to d i s m a n t l e m o s t o f t h e r e m a i n i n g s t a t e - o w n e d enterprises, t o b r i n g C h i n a ' s f a r m sector i n t o at least t h e early t w e n t i e t h c e n t u r y , a n d to create m o d e r n a r r a n g e m e n t s for b a n k r u p t c y , p r o p e r t y r i g h t s , a n d p a t e n t a n d c o p y r i g h t p r o t e c t i o n ; a n d w h e t h e r C h i n a establishes a m o d e r n financial s y s ­ t e m a n d b r o a d e r o l d - a g e a n d h e a l t h - c a r e c o v e r a g e in this g e n e r a t i o n or the n e x t one, there is n o d i s s e n t a m o n g C h i n a ' s leaders a b o u t o p e n i n g the econ­ o m y to m o r e f o r e i g n c o m p e t i t i o n . A n d t h a t is t h e essential e l e m e n t t h a t w i l l d r i v e C h i n e s e e x p o r t s a n d c o m p e t i t i v e n e s s a n d m a k e C h i n a an i n c r e a s i n g l y p o w e r f u l force for e v e r y o t h e r e c o n o m y t o r e c k o n w i t h b e t w e e n n o w a n d

2020. A n y w h e r e b u t C h i n a , t h e p r o f o u n d s h o r t c o m i n g s a n d p i t f a l l s b o u n d u p in its p o l i t i c a l l y d i r e c t e d a n d e c o n o m i c a l l y a n o m a l o u s s t r a t e g y w o u l d v i r t u a l l y e n s u r e a p a t h o f m e r e l y m o d e s t g r o w t h for at least a n o t h e r g e n e r a t i o n . B u t C h i n a is n o t l i k e a n y w h e r e else. Its sheer size p r o v i d e s the w o r l d ' s largest s u p ­ p l y o f l o w - w a g e w o r k e r s . T h e e x c e p t i o n a l s a v i n g h a b i t s o f its p e o p l e a n d its t u r b o c h a r g e d i n d u s t r i a l g r o w t h s h o u l d c o n t i n u e to create the financial re­ s o u r c e s t o t a k e o n , at o n c e , t h o u s a n d s o f n e w i n f r a s t r u c t u r e p r o j e c t s , g r a d u a l a g r i c u l t u r a l m o d e r n i z a t i o n , a n d t h e carefully m e a s u r e d shift f r o m s t a t e - o w n e d i n d u s t r i e s to p r i v a t e ones. I t s u n i q u e p o l i t i c a l s y s t e m a n d

single-minded

l e a d e r s h i p m a k e r a p i d , s o c i e t y - w i d e c h a n g e s p o s s i b l e , regardless of the p r o b ­ l e m s a n d p a i n t h e y cause m i l l i o n s o f t h e i r p e o p l e . A n d those c h a n g e s h a v e b r o u g h t sufficient p r o s p e r i t y or its p r o s p e c t for e n o u g h C h i n e s e to m a i n t a i n p o p u l a r a l l e g i a n c e a n d social d i s c i p l i n e , at least so far. W i t h all these i n d u c e ­ m e n t s , a l m o s t e v e r y m a j o r g l o b a l c o r p o r a t i o n has b e e n , a n d w i l l c o n t i n u e to b e , i n t e n t o n d o i n g w h a t e v e r it takes to g e t r i c h in C h i n a . T h e n e x t t e n t o fifteen y e a r s w i l l l i k e l y b e a p e r i o d o f b o t h m a j o r e c o n o m i c a n d social p r o g r e s s for C h i n a , a n d w r e n c h i n g e c o n o m i c a n d social t u r m o i l . Its m a n u f a c t u r i n g p r o w e s s w i l l c o n t i n u e t o e x p a n d . I n 2 0 0 4 , 7 5 p e r c e n t o f the w o r l d ' s t o y s , 5 8 p e r c e n t o f its c l o t h i n g , a n d 2 9 p e r c e n t o f its m o b i l e p h o n e s w e r e m a d e in C h i n a .

1 6

B y 2 0 2 0 , tens o f m i l l i o n s o f p e o p l e in other countries

w i l l d r i v e C h i n e s e - m a d e c a r s , o p e r a t e C h i n e s e - p r o d u c e d m a c h i n e s , a n d use c o m p u t e r s a n d e l e c t r o n i c s m a d e in C h i n a . C h i n a ' s m a n u f a c t u r i n g p r o w e s s

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w i l l c o n t i n u e to eclipse e v e r y o t h e r d e v e l o p i n g n a t i o n , f o r c i n g t h e m to e i t h e r m o d e r n i z e in specialized areas or slide b a c k w a r d . A n d t h e d i r e c t a n d i n d i r e c t effects o f C h i n a ' s e x p a n d i n g c o m p e t i t i v e n e s s in m a n u f a c t u r i n g w i l l c o n t i n u e to reverberate across the w o r l d ' s e c o n o m i e s , u l t i m a t e l y r e a c h i n g t h e a d v a n c e d economies of E u r o p e , J a p a n , and the U n i t e d States, w h e r e they w i l l continue to d a m p e n j o b creation a n d w a g e g a i n s . All

these a c h i e v e m e n t s w i l l not h o l l o w o u t the world's a d v a n c e d e c o n o m i e s .

O v e r the n e x t d e c a d e a n d b e y o n d , A m e r i c a n , E u r o p e a n , a n d J a p a n e s e c o r p o ­ rations w i l l c o n t i n u e to p r o d u c e s o p h i s t i c a t e d g o o d s a n d services t h a t w i l l still be b e y o n d the c a p a c i t y o f C h i n a ' s n a t i v e c o m p a n i e s . T h e e x p a n s i o n o f d o m e s t i c C h i n e s e d e m a n d o v e r t h e s a m e p e r i o d , p r i n c i p a l l y f r o m t h e fastg r o w i n g n u m b e r s o f s k i l l e d u r b a n w o r k e r s at t h e t o p o f its e c o n o m i c h e a p , w i l l m a k e C h i n a an i n d i s p e n s a b l e m a r k e t for w e s t e r n businesses. A n d w h e n it comes

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a s u r v e y o f six h u n d r e d C h i n e s e m i l l i o n a i r e s , a n d f o u n d t h a t t h e i r f a v o r i t e cars are R o l l s - R o y c e , M e r c e d e s - B e n z , a n d B M W s , t h e i r p r e f e r r e d b r a n d s in w a t c h e s are C a r t i e r a n d R o l e x , a n d t h e y

favor C h i v a s R e g a l and

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P e r i g n o n w h e n t h e y d r i n k , C h r i s t i e s for a u c t i o n s , a n d H S B C for t h e i r p e r ­ sonal w e a l t h m a n a g e m e n t .

1 7

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s o m e 2 to 3 m i l l i o n , c o u n t i n g e v e r y o n e e a r n i n g as m u c h as $ 1 2 , 5 0 0 a y e a r — t a k i n g i n t o a c c o u n t C h i n a ' s cost o f l i v i n g , that's e q u i v a l e n t t o an A m e r i c a n household income of about $ 3 5 , 0 0 0 .

1 8

B y 2 0 2 0 , those u r b a n middle-class

households c o u l d n u m b e r 3 0 to 4 5 m i l l i o n . B y t h e n , t h e y w i l l c o n s t i t u t e one o f the w o r l d ' s g r e a t c o n s u m e r m a r k e t s , w i t h s p e n d i n g p o w e r close t o all J a p a ­ nese households today. G i v e n C h i n a ' s d e m o g r a p h i c s , m o s t o f t h e m w i l l b e relatively y o u n g , w h i c h m a y m a k e t h e m b i g s p e n d e r s . I n a n o t h e r decade's t i m e , C h i n a ' s m a r k e t w i l l b e as i m p o r t a n t t o t h e U n i t e d S t a t e s a n d E u r o p e as the A m e r i c a n m a r k e t is t o d a y to E u r o p e a n d C h i n a . U n d e r the c u r r e n t p r o g r a m , all t h a t w o n ' t b e e n o u g h t o e n a b l e C h i n a to m a i n t a i n its l o n g record o f 9 p e r c e n t a n n u a l g r o w t h o v e r t h e n e x t d e c a d e . T o this p o i n t , C h i n a has a c h i e v e d its s t u p e n d o u s g r o w t h a n d g r e a t l e a p f o r w a r d by

m o b i l i z i n g d o m e s t i c l a b o r a n d f o r e i g n i n v e s t m e n t in m a n u f a c t u r i n g . B u t

this s t r a t e g y has failed t o d e v e l o p its o w n w a y s o f r a i s i n g p r o d u c t i v i t y e v e n in m a n u f a c t u r i n g , a n d has left m o s t o t h e r p a r t s o f t h e e c o n o m y u n d e r d e v e l o p e d a n d w i t h o u t the l e g a l a n d e c o n o m i c m e c h a n i s m s t o d e v e l o p q u i c k l y o n t h e i r o w n . A s the e c o n o m i s t P a u l K r u g m a n has p o i n t e d o u t , this a p p r o a c h m a k e s slower g r o w t h almost inescapable, even apart from the inevitable shocks from a g l o b a l recession or the p o s s i b l e s h o c k s f r o m serious p o l i t i c a l u n r e s t . A

leadership p r o g r a m t h a t uses r a p i d g r o w t h as an essential f o u n d a t i o n for

FUTURECAST

148 its o w n

legitimacy and popular allegiance could

find

those

foundations

s h a k e n w h e n g r o w t h falters. E v e r y year, the p r o g r a m d e s t r o y s the l i v e l i h o o d s of

millions

of

rural

Chinese

and

millions

of

workers

in

state-owned

b u s i n e s s e s — a n d o n t o p o f t h a t , m i l l i o n s o f y o u n g C h i n e s e reach w o r k i n g a g e e v e r y year. O n e e x p e r t r e c e n t l y ran t h e n u m b e r s a n d f o u n d t h a t o v e r the n e x t d e c a d e , " C h i n a needs to create 3 0 0 m i l l i o n n e w jobs . . . to a b s o r b or re­ e m p l o y t h o s e w h o lost t h e i r j o b s in the a g r i c u l t u r a l sector or f o r m e r stateo w n e d e n t e r p r i s e s a n d p r o v i d e w o r k for t h e n e w m e m b e r s of the labor force."

19

T u r b o c h a r g e d g r o w t h is t h e o n l y w a y to d o t h a t , a n d the c u r r e n t

p r o g r a m w i l l n o t p r o d u c e it indefinitely. C h i n a ' s g r e a t e s t c h a l l e n g e s o v e r the next decade, therefore, are likely to be political. T h e C u l t u r a l R e v o l u t i o n s a w m a s s political action that w a s often harsh a n d c r u e l . M o r e t h a n three decades later, p o p u l a r demonstrations of at least a f e w h u n d r e d p e o p l e o c c u r b y the h u n d r e d s e v e r y w e e k across C h i n a . T h e p o l i t i c a l d i s i n t e g r a t i o n o f C h i n a is v e r y unlikely. B u t serious political upheavals over the n e x t d e c a d e are a real p o s s i b i l i t y . W h e t h e r s u c h p o l i t i c a l s h o c k s w i l l p r o d u c e a m o r e liberal political s y s t e m to a c c o m p a n y China's liberalized e c o n o m i c a r r a n g e m e n t s , or, as s e e m s m o r e likely, e v e n m o r e a u t h o r i t a r i a n p o l i t i c s t h a t s l o w s the n e x t stage o f C h i n e s e m o d e r n i z a t i o n , w e cannot know. But

the w o r l d w i l l a l m o s t c e r t a i n l y w a t c h it unfold b e t w e e n n o w and 2 0 2 0 .

THE UNITED STATES A m e r i c a ' s s t a t u s as t h e o t h e r i n d i s p e n s a b l e c o u n t r y in g l o b a l i z a t i o n is as secure as C h i n a ' s . M o s t f u n d a m e n t a l l y , t h e U n i t e d S t a t e s t o d a y is the m o s t t h o r o u g h l y a n d d e e p l y g l o b a l i z e d o f all t h e w o r l d ' s a d v a n c e d e c o n o m i e s . Y e t t h i s p o s i t i o n also represents a m a j o r b r e a k w i t h at least a c e n t u r y o f A m e r i c a n a t t i t u d e s a n d p r a c t i c e s . F r o m t h e early years o f t h e t w e n t i e t h c e n t u r y to its last t w o d e c a d e s , A m e r i c a w a s s i n g u l a r l y self-sufficient e c o n o m i c a l l y . W h i l e E u r o p e ' s e c o n o m i e s w e r e t o o s m a l l t o p r o d u c e e v e r y t h i n g each n e e d e d , a n d t h e i r p r o x i m i t y t o each o t h e r a l l o w e d t h e m t o t r a d e a m o n g t h e m s e l v e s easily and

r e l a t i v e l y i n e x p e n s i v e l y , t h e U n i t e d S t a t e s faced oceans s e p a r a t i n g it f r o m

m o s t o t h e r m a r k e t s , a n d i n s t e a d d e v e l o p e d its o w n v a s t , national m a r k e t across its states a n d r e g i o n s . F o r n e a r l y a c e n t u r y , A m e r i c a sustained its place as

t h e w o r l d ' s l a r g e s t e c o n o m y b y l a r g e l y u s i n g its o w n n a t u r a l resources a n d

its o w n t e c h n o l o g i c a l a n d h u m a n c a p a c i t i e s t o p r o d u c e just a b o u t a n y t h i n g its businesses a n d p e o p l e n e e d e d or w a n t e d . T h r o u g h the 1 9 6 0 s , for e x a m p l e , all

U . S . t r a d e — t h e total o f t h e nation's i m p o r t s p l u s its e x p o r t s — e q u a l e d

j u s t 1 0 p e r c e n t o f its G D P .

2 0

I n t h e s a m e years, t h e v a l u e o f e v e r y t h i n g t r a d e d

THE TWO POLES OF GLOBALIZATION: CHINA AND THE UNITED STATES by and

149

F r e n c h or I t a l i a n firms e q u a l e d 2 8 p e r c e n t o f t h e G D P o f t h o s e c o u n t r i e s , in G r e a t B r i t a i n the figure w a s 4 2 p e r c e n t . One

reason w h y the U n i t e d S t a t e s c o u l d b e less e n g a g e d in i n t e r n a t i o n a l

trade t h a n o t h e r a d v a n c e d c o u n t r i e s is t h a t A m e r i c a n s w e r e ( a n d are) r i c h e r and

consume more. In the 1 9 6 0 s , their per capita i n c o m e w a s 4 0 to 5 0 per­

cent h i g h e r t h a n the a v e r a g e for E u r o p e a n s in t h e m a j o r c o u n t r i e s , so t h e y c o u l d g e n e r a t e sufficient d e m a n d at h o m e to k e e p m o s t o f t h e m e m p l o y e d .

2 1

M o s t E u r o p e a n s w e r e n ' t so f o r t u n a t e . T h e i r r e l a t i v e l y l o w i n c o m e s — a n d t h e h i g h e r taxes t h e y p a i d ( a n d still d o ) to finance t h e i r m o r e g e n e r o u s g o v e r n ­ m e n t s u p p o r t s — l e f t too l i t t l e d o m e s t i c d e m a n d t o s u p p o r t j o b s for e v e r y o n e . T h e n as now, their g o v e r n m e n t s h a v e h a d t o r e l y o n e x p o r t s t o t a p d e m a n d f r o m other p l a c e s , p r i n c i p a l l y the U n i t e d S t a t e s , t o k e e p w o r k e r s e m p l o y e d . The

other reason w h y E u r o p e has h a d t o d e p e n d m o r e o n t r a d e t h a n A m e r i c a

is m o r e e x t e n s i v e g o v e r n m e n t r e g u l a t i o n , often t i e d t o p r o m o t i n g e x p o r t s f r o m a h a n d f u l o f "strategic" sectors, w h i c h has m a d e its e c o n o m i e s

both

m o r e specialized a n d less p r o d u c t i v e . E u r o p e , and eventually J a p a n (and C h i n a ) , too, found the U n i t e d States a w i l l i n g p a r t n e r in t h e i r e x p o r t s t r a t e g i e s . F r o m t h e e a r l y c o l d w a r , a s u c c e s ­ sion o f U . S . a d m i n i s t r a t i o n s s a w access to A m e r i c a ' s e c o n o m y as a p r i m e g e o p o l i t i c a l asset a n d , m u c h l i k e B r i t a i n in t h e m i d - n i n e t e e n t h c e n t u r y , of­ fered to u n i l a t e r a l l y c u t tariffs for c o u n t r i e s t h a t a l l i e d w i t h t h e U n i t e d S t a t e s a g a i n s t the S o v i e t s . T h i s o p e n - d o o r p o l i c y m a d e classical e c o n o m i c

sense,

even if t h a t w a s n ' t m u c h in the m i n d s o f its p o l i t i c a l sponsors. A m e r i c a n c o n ­ s u m e r s e n j o y e d a w i d e r r a n g e o f g o o d s at l o w e r p r i c e s t h a n t h e y w o u l d h a v e b e h i n d the p r o t e c t i o n i s t w a l l s t h a t p r e v a i l e d in E u r o p e a n d J a p a n for d e c a d e s more, and A m e r i c a n companies could concentrate on b e c o m i n g

dominant

p r o d u c e r s o f t h e h i g h e r - e n d g o o d s still o u t o f reach o f E u r o p e a n d J a p a n ' s recovering economies. T o d a y , A m e r i c a is still o n l y h a l f as d e p e n d e n t o n f o r e i g n t r a d e as m o s t other a d v a n c e d c o u n t r i e s . I n 2 0 0 6 , i m p o r t s a n d e x p o r t s e q u a l e d n e a r l y 2 8 p e r c e n t o f the G D P o f t h e U n i t e d S t a t e s , or h a l f t h e 5 6 p e r c e n t share for t h e major European nations.

2 2

E v e n so, the U n i t e d S t a t e s is t h e w o r l d ' s m o s t g l o b a l e c o n o m y a n d , c o m ­ p a r e d to G e r m a n y , F r a n c e , B r i t a i n , or J a p a n , m u c h b e t t e r p o s i t i o n e d for t h e n e x t ten to fifteen years. T h i s j u d g m e n t differs s h a r p l y f r o m w h a t m i g h t b e called the " C h i c k e n L i t t l e " v i e w o f A m e r i c a ' s p l a c e in g l o b a l t r a d e , w h i c h sees the U n i t e d S t a t e s as f u n d a m e n t a l l y w e a k in t r a d e a n d h e a d i n g i n t o d e c l i n e . T h i s v i e w is f u n d a m e n t a l l y w r o n g , a n d insofar as U . S . officials b u y i n t o i t , their responses c o u l d w e a k e n the c o u n t r y ' s e c o n o m i c p r o s p e c t . C o n s i d e r t h e f o l l o w i n g e c o n o m i c c o n t r a s t , one o f t h e m o s t s t r i k i n g a n d i m p o r t a n t in t h e

150

FUTURECAST

w o r l d t o d a y : I n 2 0 0 4 , m o r e t h a n 4 4 p e r c e n t o f all U . S . e x p o r t s w e n t to the developing nations d r i v i n g m u c h of the world's g r o w t h and integration, and those same nations p r o v i d e d m o r e than 5 0 percent of U . S . i m p o r t s .

2 3

B y con­

trast, t h e n a t i o n s in t h e E U - 1 5 still h o l d m o s t o f the rest o f the w o r l d at arm's l e n g t h , s e l l i n g less t h a n 1 5 p e r c e n t o f t h e i r e x p o r t s to d e v e l o p i n g m a r k e t s and b u y i n g just about 2 0 percent of their imports from developing nations.

24

I n s t e a d , a l m o s t t h r e e - f o u r t h s o f E U e x p o r t s g o to o t h e r E U c o u n t r i e s , a n d m o r e than t w o - t h i r d s of E U imports c o m e from other E U countries. T h e U n i t e d S t a t e s i m p o r t s a n d e x p o r t s less t h a n E u r o p e as a share of G D P , n o t o n l y b e c a u s e it doesn't h a v e t o , b u t also b e c a u s e its businesses h a v e m o r e e x t e n s i v e n e t w o r k s o f f o r e i g n s u b s i d i a r i e s a n d affiliates to p r o d u c e a n d sell in f o r e i g n m a r k e t s . T h e h u g e U . S . t r a d e deficit poses

financial

risks for the

A m e r i c a n ( a n d g l o b a l ) e c o n o m y — b u t it c o m e s f r o m the b u r g e o n i n g d e m a n d o f A m e r i c a n c o n s u m e r s , n o t f r o m t h e s o - c a l l e d f a l t e r i n g c o m p e t i t i v e n e s s that w o r r i e s c o m m e n t a t o r s w h o don't c o n s u l t t h e d a t a . N o m a j o r c o u n t r y w i l l do well economically over the next decade w i t h o u t a solid e c o n o m i c p r e s e n c e in t h e w o r l d ' s f a s t e s t - g r o w i n g a n d

developing

countries. Underneath America's more extended global network of imports a n d e x p o r t s , U . S . c o m p a n i e s also h a v e a m u c h l a r g e r p r e s e n c e in those nations a n d t h e i r e c o n o m i e s . F r o m 1 9 9 5 t o 2 0 0 3 , a b o u t 2 8 p e r c e n t o f all f o r e i g n d i ­ rect i n v e s t m e n t f r o m t h e U n i t e d S t a t e s w e n t to d e v e l o p i n g n a t i o n s — n e a r l y d o u b l e t h e d e v e l o p i n g - n a t i o n share o f t h e f o r e i g n i n v e s t m e n t s c o m i n g o u t of G e r m a n y , a l m o s t t h r e e t i m e s t h e share o f f o r e i g n i n v e s t m e n t c o m i n g f r o m F r a n c e , a n d f o u r t i m e s t h e share f l o w i n g o u t o f B r i t a i n .

2 5

A m o n g the a d ­

v a n c e d e c o n o m i e s , o n l y J a p a n focuses its f o r e i g n i n v e s t m e n t on d e v e l o p i n g m a r k e t s as m u c h as t h e U n i t e d S t a t e s . T h i s difference e x t e n d s to C h i n a , t h e d e v e l o p i n g n a t i o n t h a t w i l l be p i v ­ otal for e v e r y a d v a n c e d e c o n o m y in c o m i n g years. I n 2 0 0 3 (the m o s t recent i n t e r n a t i o n a l d a t a ) , C h i n a h e l d m o r e t h a n 3 p e r c e n t o f all U . S . f o r e i g n d i r e c t i n v e s t m e n t s a r o u n d t h e w o r l d a n d m o r e t h a n 1 1 p e r c e n t o f U . S . d i r e c t in­ v e s t m e n t s in all d e v e l o p i n g c o u n t r i e s .

2 6

T h a t m a y n o t y e t be a h u g e a m o u n t ,

b u t it's t e n t o t w e n t y t i m e s m o r e t h a n t h e d i r e c t i n v e s t m e n t s in C h i n a f r o m a n y E u r o p e a n c o u n t r y , a n d it's b e e n i n c r e a s i n g q u i c k l y . E v e n m e a s u r e d as a share o f t h e i r f o r e i g n d i r e c t i n v e s t m e n t s , A m e r i c a n c o m p a n i e s c o m m i t t w o to four t i m e s as m u c h to t h e C h i n e s e m a r k e t as d o G e r m a n , F r e n c h , or B r i t i s h c o m p a n i e s . A s C h i n a ' s e c o n o m y a n d those o f o t h e r f a s t - d e v e l o p i n g

nations

e x p a n d a n d m a t u r e o v e r t h e n e x t d e c a d e , the w e s t e r n c o m p a n i e s w i t h the l a r g e s t a n d firmest f o o t h o l d s t h e r e w i l l be in the s t r o n g e s t p o s i t i o n s to t a p t h o s e g r o w i n g m a r k e t s a n d benefit f r o m t h e i r p r o g r e s s . G i v e n A m e r i c a ' s m o d e s t t r a d i n g p o s i t i o n j u s t f o r t y years a g o , its c u r r e n t

THE TWO POLES OF GLOBALIZATION: CHINA AND THE UNITED STATES

ISI

full e m b r a c e of g l o b a l i z a t i o n is r e m a r k a b l e . I t a p p e a r s t h a t A m e r i c a ' s l a r g e c o m p a n i e s s i m p l y h a v e a d a p t e d m o r e s u c c e s s f u l l y t o t h e c h a n g e s in g l o b a l e c o n o m i c c o n d i t i o n s . F o r e x a m p l e , in t h e 1 9 7 0 s , w h e n e n e r g y p r i c e s a b r u p t l y soared a n d U . S . p r o d u c t i v i t y s l o w e d , m a n y A m e r i c a n m a n a g e r s b e g a n t o l o o k to A s i a a n d L a t i n A m e r i c a for n e w m a r k e t s a n d w a y s t o c u t o t h e r costs. W h e n m a n y o f those m a r k e t s b e g a n to d e v e l o p a n d g r o w q u i c k l y in t h e 1 9 8 0 s a n d 1 9 9 0 s , m a n y m o r e A m e r i c a n c o m p a n i e s b e g a n to a p p r o a c h t h e m as p l a c e s w h e r e t h e y c o u l d not o n l y p r o d u c e t h e i r p r o d u c t s m o r e c h e a p l y b u t also sell w h a t t h e y m a d e there. E u r o p e ' s m a j o r e c o n o m i e s a n d l a r g e c o r p o r a t i o n s e x p e ­ rienced the s a m e c h a n g e s , a n d t h e y s t a r t e d o u t m o r e e x p e r i e n c e d in i n t e r n a ­ tional trade a n d m o r e f a m i l i a r w i t h d e v e l o p i n g c o u n t r y m a r k e t s , y e t t h e y ' v e r e m a i n e d m u c h less e n g a g e d in t h e w o r l d ' s f a s t e s t - g r o w i n g a n d d e v e l o p i n g places. T h e r e are m a n y w a y s to u n d e r s t a n d w h y t h i s is h a p p e n i n g . A m e r i c a n s m a y be m o r e c o m f o r t a b l e o p e r a t i n g g l o b a l l y , b e c a u s e t h e c o u n t r y ' s p o p u l a t i o n a n d c u l t u r e are m o r e g l o b a l l y d i v e r s e a n d , at least in recent y e a r s , g e n e r a l l y d e a l m o r e c a l m l y t h a n m a n y E u r o p e a n c o u n t r i e s w i t h i n c r e a s i n g racial a n d e t h n i c diversity. U . S . c o m p a n i e s also p r o b a b l y h a v e less choice a b o u t a d a p t i n g q u i c k l y a n d t h o r o u g h l y , since A m e r i c a ' s r e l a t i v e l y w e a k r e g u l a t i o n a n d t r a d e p r o t e c ­ tions m a k e c o m p e t i t i o n

m o r e intense. A m e r i c a n c o m p a n i e s c e r t a i n l y face

f e w e r barriers to a d a p t i n g to n e w c o n d i t i o n s , b e c a u s e t h e y don't h a v e to deal w i t h the k i n d s o f r e g u l a t i o n s a n d l a w s in F r a n c e or G e r m a n y t h a t r e s t r i c t a firm's a b i l i t y to r e o r g a n i z e itself a n d fire or r e a s s i g n w o r k e r s as t h e y chose. Or

perhaps U . S . corporations are s i m p l y f o l l o w i n g the g e n e r a l p a t h o f U . S .

mil­

itary a n d g e o p o l i t i c a l p o w e r . W h a t e v e r t h e precise e x p l a n a t i o n s , the A m e r i c a n e c o n o m y has b e e n c h a n g i n g in w a y s t h a t create real a n d g r o w i n g a d v a n t a g e s for

a p e r i o d o f g l o b a l i z a t i o n . T h a t ' s f o r t u n a t e for t h e U n i t e d S t a t e s , b e c a u s e

no p r o g r a m or politician's p r o m i s e s w i l l s t o p or e v e n s i g n i f i c a n t l y s l o w g l o b ­ alization. Who,

precisely, benefits f r o m these a d v a n t a g e s is a c o m p l e x m a t t e r . A m e r ­

ica's g l o b a l corporations clearly benefit, j u d g i n g b y t h e i r record profits in r e ­ cent years. T h e s e h i g h corporate profits also h e l p shareholders; w h o in this case e x t e n d to nearly h a l f o f all A m e r i c a n s , p r i n c i p a l l y because m o r e t h a n 4 0 percent o f U . S . stocks are h el d b y p e n s i o n p l a n s a n d personal r e t i r e m e n t a c ­ counts.

27

A m e r i c a n w o r k e r s h a v e r a c k e d u p i m p r e s s i v e p r o d u c t i v i t y g a i n s in

the same y e a r s — m o r e so t h a n m o s t E u r o p e a n s or J a p a n e s e — y e t , as w e h a v e noted, those g a i n s aren't t r a n s l a t i n g i n t o significant w a g e g r o w t h for m a n y o f t h e m . It's not m u c h consolation for s t a g n a n t w a g e s , b u t all the c h e a p U . S . i m ­ ports f r o m d e v e l o p i n g countries h e l p m o s t A m e r i c a n s b y s t r e t c h i n g

their

w a g e s further. L o w - p r i c e d i m p o r t s are an i m p o r t a n t reason w h y a c c o r d i n g to

FUTURECAST

152

several studies, s h o p p i n g at l a r g e d i s c o u n t e r s s u c h as W a l - M a r t saves average c o n s u m e r s several h u n d r e d dollars a y e a r .

2 8

M o r e o v e r , the current p r o b l e m s

w i t h w a g e s c o m e n o t f r o m g l o b a l i z a t i o n p e r se, b u t m a i n l y f r o m the collision o f the c o m p e t i t i v e pressures it p r o m o t e s a n d fast-rising health-care a n d e n e r g y costs, a l o n g w i t h r i s i n g returns on c a p i t a l — a n d these p r o b l e m s are as acute in E u r o p e a n d J a p a n , w h i c h haven't a d a p t e d to g l o b a l i z a t i o n nearly as w e l l . O t h e r m e a s u r e s also p o i n t to t h e u n d e r l y i n g s t r e n g t h o f the A m e r i c a n e c o n o m y , c o m p a r e d to t h e w o r l d ' s o t h e r l a r g e , a d v a n c e d e c o n o m i e s . E m p l o y ­ i n g e v e r y o n e w h o w a n t s t o w o r k is a t r a d i t i o n a l test o f an e c o n o m y ' s health a n d s t r e n g t h ; a n d e v e n w i t h t h e n e w p r o b l e m s e m e r g i n g in j o b creation in t h e U n i t e d S t a t e s , this r e m a i n s one o f its s t r o n g suits. O v e r the last d e c a d e , t h e a v e r a g e share o f t h e U . S . l a b o r force l o o k i n g for w o r k b u t u n a b l e to find it, a b o u t 5 p e r c e n t , has b e e n a b o u t one-fifth l o w e r t h a n in B r i t a i n , two-fifths l o w e r t h a n in G e r m a n y , a n d h a l f t h e share in F r a n c e a n d I t a l y . has c o n s i s t e n t l y

lower unemployment

2 9

Only Japan

than the U n i t e d States. A n d when

A m e r i c a n s lose t h e i r j o b s , t h e y u s u a l l y find n e w ones m u c h faster. O v e r the last ten y e a r s , a b o u t 8 0 p e r c e n t o f u n e m p l o y e d A m e r i c a n s f o u n d n e w jobs w i t h i n six m o n t h s , c o m p a r e d to 6 5 p e r c e n t o f o u t - o f - w o r k S w e d e s , 6 0 p e r ­ c e n t o f jobless B r i t o n s , j u s t 5 0 p e r c e n t o f jobless J a p a n e s e a n d I r i s h , a n d only a b o u t o n e - t h i r d o f u n e m p l o y e d G e r m a n s a n d F r e n c h . A m e r i c a n s w i t h jobs also w o r k m o r e h o u r s in a y e a r t h a n t h e p e o p l e in o t h e r a d v a n c e d countries ( e x c e p t J a p a n ) — 1 0 p e r c e n t m o r e t h a n B r i t i s h w o r k e r s , 1 5 p e r c e n t m o r e than t h e I t a l i a n s a n d I r i s h , a n d 2 5 p e r c e n t m o r e t h a n the G e r m a n s a n d F r e n c h . S h o r t e r h o u r s m a y s e e m a p p e a l i n g , b u t t h e difference is one o f the reasons w h y m o s t E u r o p e a n s earn less a n d t h e i r e c o n o m i e s p r o d u c e less p e r capita. I n t h e s e t i m e s , a c o u n t r y ' s a b i l i t y to d e v e l o p a n d use a d v a n c e d i n f o r m a ­ t i o n t e c h n o l o g i e s is n e a r l y as i m p o r t a n t for its e c o n o m i c h e a l t h as its c a p a c ­ i t y t o k e e p p e o p l e e m p l o y e d . T h i s , t o o , is a n area o f c o m p a r a t i v e A m e r i c a n s t r e n g t h . O v e r t h e last d e c a d e , a n u m b e r o f n a t i o n s h a v e s u c c e s s f u l l y m a d e c o m p u t e r s a n d t h e I n t e r n e t i n t e g r a l p a r t s o f t h e w a y t h e y c o n d u c t their b u s i n e s s a n d p e r s o n a l l i v e s . Y e t , w i t h t h e e x c e p t i o n o f t h e U n i t e d S t a t e s , all o f t h e m are s m a l l c o u n t r i e s — S w e d e n , F i n l a n d , D e n m a r k , S i n g a p o r e , H o n g K o n g , S o u t h K o r e a , B e r m u d a , a n d A u s t r a l i a — t h a t d e l i b e r a t e l y set a b o u t t o d o t h a t . D e s p i t e A m e r i c a ' s v a s t size, d e e p e c o n o m i c i n e q u a l i t i e s , an e c o n ­ o m y w i t h t h o u s a n d s o f s u b s e c t o r s , a s t u p e f y i n g v a r i e t y o f businesses o f e v e r y s o r t , a n d n o n a t i o n a l p o l i c y t o s u p p o r t t h e s p r e a d o f these t e c h n o l o g i e s ,

in

2 0 0 4 i t h a d m o r e t h a n s e v e n t y - s i x P C s for e v e r y h u n d r e d i n h a b i t a n t s , a n d 6 3 p e r c e n t o f its p o p u l a t i o n u s e d t h e I n t e r n e t .

3 0

N o other large, diverse

e c o n o m y c a m e close. J a p a n h a d n e a r l y as m a n y P C s p e r h u n d r e d p e o p l e , b u t o n l y 5 0 p e r c e n t o f t h e m w e r e o n l i n e , w h i l e B r i t o n s w e r e o n l i n e at nearly

THE TWO POLES OF GLOBALIZATION: CHINA AND THE UNITEB STATES

153

the s a m e u b i q u i t y as A m e r i c a n s , b u t P C s w e r e m u c h less c o m m o n . B y b o t h m e a s u r e s , G e r m a n y , F r a n c e , a n d I t a l y all trail E n g l a n d a n d J a p a n , m u c h less the U n i t e d S t a t e s . E u r o p e a n d J a p a n are c a t c h i n g u p in these areas, b u t t w e n t y years o f l a g ­ g i n g b e h i n d p o i n t s to i m p o r t a n t differences t h a t s u g g e s t t h a t A m e r i c a ' s p r e ­ e m i n e n c e a m o n g a d v a n c e d e c o n o m i e s p r o b a b l y w i l l e x p a n d f u r t h e r o v e r the next ten to fifteen years. P a r t of A m e r i c a ' s c o n t i n u i n g e d g e here reflects w h a t s o m e e c o n o m i s t s call a " c o m p o u n d ,

first-mover

a d v a n t a g e , " or t h e

benefits

that c o m e f r o m d e v e l o p i n g m a n y n e w t e c h n o l o g i e s first. A m e r i c a ' s research n e t w o r k s , entrepreneurial c u l t u r e , a n d business e n v i r o n m e n t don't create an a d v a n t a g e for p r o d u c i n g s o m e i m p o r t a n t g l o b a l p r o d u c t s — J a p a n , for e x a m ­ p l e , is the world's s t r o n g e s t a u t o p r o d u c e r — b u t t h e y are p a r t i c u l a r l y c o n ­ d u c i v e for d e v e l o p i n g a n d s p r e a d i n g n e w t e c h n o l o g i e s . T h e early t e c h n o l o g i c a l leadership of A m e r i c a n inventors a n d I T c o m p a n i e s created reservoirs o f critical k n o w l e d g e a n d business processes, as w e l l as n e t w o r k s o f i m p o r t a n t relation­ ships, that e x t e n d e d these early leads t o m o s t o f the industries'

subsegments

and m a r k e t niches. S o A m e r i c a n i n v e n t o r s a n d c o m p a n i e s c a m e u p w i t h n o t o n l y m o s t of the initial r o u n d s o f I T a n d I n t e r n e t i n n o v a t i o n , b u t also m u c h o f the s u b s e q u e n t g e n e r a t i o n s , because the U n i t e d S t a t e s has m o r e o f the i n t e l ­ lectual, c u l t u r a l , a n d organizational c a p i t a l to d o so cheaply. S o m e o f these d e v e l o p m e n t s w e r e p r o b a b l y h a p p e n s t a n c e ( e c o n o m i s t s call that "path dependence"). T h e A m e r i c a n s w h o first d e v e l o p e d m o s t o f these t e c h n o l o g i e s w e r e n o s m a r t e r t h a n t h e i r c o u n t e r p a r t s in E n g l a n d , G e r m a n y , J a p a n , a n d I n d i a — b u t w h e n I B M w e n t l o o k i n g for s o m e o n e t o d e v e l o p a n e w PC

o p e r a t i n g s y s t e m in t h e 1 9 8 0 s , all t h e c l e v e r y o u n g E u r o p e a n s a n d A s i a n s

in the field w e r e an ocean a w a y f r o m t h e i n f o r m a l n e t w o r k s s p r e a d i n g t h e w o r d . T o d a y , e v e r y o n e in I T d e v e l o p m e n t , w h e r e v e r t h e y are, can learn a b o u t such o p p o r t u n i t i e s t h r o u g h the I n t e r n e t . B u t t h e j o b o p p o r t u n i t i e s a n d p o ­ tential r e w a r d s are still u s u a l l y g r e a t e r in t h e U n i t e d S t a t e s b e c a u s e its I T sec­ tor is m u c h b i g g e r — a n d its taxes o n a b i g p a y d a y are g e n e r a l l y l o w e r . T h o s e attractions also h e l p e x p l a i n w h y o n e - t h i r d o f all U . S . d o c t o r a l d e g r e e s in t h e sciences a n d three-fifths o f those in e n g i n e e r i n g are a w a r d e d to f o r e i g n or f o r e i g n - b o r n s t u d e n t s , w h y nearly h a l f o f all professionals w i t h P h D s w o r k i n g at the U . S . N a t i o n a l I n s t i t u t e s o f H e a l t h also are f o r e i g n b o r n ,

3 1

w h y an esti­

m a t e d 4 0 p e r c e n t o f S i l i c o n V a l l e y s t a r t u p s in t h e 1 9 9 0 s w e r e f o u n d e d b y I n ­ d i a n i n v e n t o r - e n t r e p r e n e u r s , a n d w h y tens o f t h o u s a n d s o f b u d d i n g E u r o p e a n a n d A s i a n t e c h n o l o g i s t s n o w w o r k in t h e U n i t e d S t a t e s . D e v e l o p e r s in E u r o p e a n d A s i a w i l l a c h i e v e b r e a k t h r o u g h s in c o m i n g y e a r s t h a t w i l l startle e v e r y ­ one; b u t A m e r i c a ' s overall lead in I T i n n o v a t i o n is also q u i t e secure. T h e s e A m e r i c a n a d v a n t a g e s are n o t

restricted

to

IT. Social

scientists

FUTURECAST

154

u s u a l l y a n a l y z e a c o u n t r y ' s R & D i n v e s t m e n t s b y h o w m u c h o f its G D P is d e ­ v o t e d t o it. B u t in t h e race t o lead g l o b a l i n n o v a t i o n , w h a t m a t t e r s is h o w m u c h is i n v e s t e d p e r i o d , a n d h o w w e l l a c o u n t r y ' s e c o n o m y c o m m e r c i a l i z e s w h a t c o m e s o u t o f it. H e r e , t h e U n i t e d S t a t e s also appears t o h a v e b r o a d a d ­ v a n t a g e s . I n 2 0 0 3 , for e x a m p l e , t h e U . S . s p e n t nearly $ 3 0 0 b i l l i o n on R & D , c o m p a r e d to $ 2 1 0 b i l l i o n b y all o f E u r o p e , b a r e l y $ 1 0 0 b i l l i o n b y J a p a n , a n d less t h a n $ 8 0 b i l l i o n b y C h i n a — a n d t h e g a p in 2 0 0 3 w a s larger t h a n it h a d b e e n in 1 9 9 0 or 1 9 9 5 .

3 2

T h a t ' s one o f the reasons w h y U . S . inventors a n d c o m ­

p a n i e s h a v e early leads in m a n y p r o m i s i n g areas o f b i o t e c h n o l o g y a n d n a n o ­ technology,

including genetically modified

food

(which most European

g o v e r n m e n t s a t a v i s t i c a l l y resist), p e r s o n a l i z e d m e d i c i n e s , filtration s y s t e m s for h i g h l y p o l l u t e d w a t e r , a n d a d v a n c e s in solar e n e r g y t e c h n o l o g i e s .

Amer­

ica's early leads in these areas m a y not u l t i m a t e l y m a t t e r , since no one can say w h i c h o f these or o t h e r e m e r g i n g t e c h n o l o g i e s w i l l h a v e f a r - r e a c h i n g eco­ n o m i c v a l u e a n d effects. B u t i f a n y o f t h e m s t r i k e g o l d , it's m o r e l i k e l y to h a p p e n in t h e U n i t e d S t a t e s , w i t h so m u c h m o r e a n n u a l R & D , so m a n y m o r e o f t h e research u n i v e r s i t i e s a n d y o u n g c o m p a n i e s t h a t c o m e u p w i t h t e c h n o l o g y b r e a k t h r o u g h s , a n d p r i v a t e e q u i t y investors r e a d y to p l a c e m o r e t h a n $ 2 0 b i l l i o n a y e a r in l o n g - s h o t bets on infant t e c h n o l o g i e s .

33

I f t h e U n i t e d S t a t e s is s u c h a p o w e r h o u s e in a d v a n c e d t e c h n o l o g i e s , w h y does it r u n l a r g e t r a d e deficits in these areas? D o e s it m e a n t h a t , as one p u b ­ lic c o m m e n t e r on these m a t t e r s , C l y d e P r e s t o w i t z , w a r n e d recently, " A m e r i c a 34

is w e l l on its w a y to s u r r e n d e r i n g ( t e c h n o l o g i c a l ) l e a d e r s h i p " ? H e a n d others c o n c l u d e t h a t in o r d e r to stay c o m p e t i t i v e in a d v a n c e d t e c h n o l o g i e s , A m e r i c a n e e d s a n e w i n d u s t r i a l p o l i c y t h a t w i l l p r o v i d e m o r e g o v e r n m e n t s u p p o r t to p r o d u c e a n d c o n s u m e those t e c h n o l o g i e s . B u t the d a t a s h o w not that the U n i t e d S t a t e s is l o s i n g its t e c h n o l o g i c a l e d g e , b u t t h a t its t e c h n o l o g y c o m p a ­ nies are f u l l y g l o b a l i z e d . T h a t b e c o m e s m o r e o b v i o u s w h e n y o u k n o w that h a l f o f t h e i m p o r t s d r i v i n g t h e h i g h - t e c h t r a d e deficit c o m e f r o m the foreign s u b s i d i a r i e s o f U . S . t e c h n o l o g y c o m p a n i e s . M o r e o v e r , the N a t i o n a l S c i e n c e F o u n d a t i o n r e p o r t s t h a t A m e r i c a n c o m p a n i e s o v e r t h e last g e n e r a t i o n h a v e a c t u a l l y a n d v a s t l y increased t h e i r w o r l d w i d e p r e e m i n e n c e in the m a n u f a c ­ t u r e o f h i g h - t e c h n o l o g y p r o d u c t s . L e s s t h a n t w e n t y years a g o , E u r o p e , J a p a n , a n d A m e r i c a each c l a i m e d a l i t t l e m o r e t h a n 2 5 p e r c e n t of the w o r l d m a r k e t share in this area; b y 2 0 0 3 , t h e U . S . share h a d reached a l m o s t 4 0 p e r c e n t , w h i l e E u r o p e fell to a b o u t 1 8 p e r c e n t , a n d J a p a n h a d just a b o u t 1 0 p e r c e n t .

35

M u c h t h e s a m e t h i n g is h a p p e n i n g in R & D , since m u c h o f the g r o w t h in those i n v e s t m e n t s in p l a c e s o u t s i d e t h e U n i t e d S t a t e s a n d E u r o p e c o m e s f r o m

THE TWO POLES OF GLOBALIZATION: CHINA AND THE UNITED STATES

155

A m e r i c a n c o m p a n i e s in those p l a c e s . I n t e l , for e x a m p l e , has a d v a n c e d r e ­ search facilities in Israel, I n d i a , a n d R u s s i a , as w e l l as C a l i f o r n i a ; a n d I B M r e ­ search labs are f o u n d in S w i t z e r l a n d , Israel, J a p a n , C h i n a , a n d I n d i a , as w e l l as N e w Y o r k a n d S a n J o s e .

3 6

M o s t serious R & D still t a k e s p l a c e in a d ­

v a n c e d c o u n t r i e s w i t h l a r g e , s o p h i s t i c a t e d research e s t a b l i s h m e n t s . T h e r a p i d g r o w t h o f research operations b y w e s t e r n m u l t i n a t i o n a l s in a f e w d e v e l o p i n g c o u n t r i e s — i n 2 0 0 5 , one-fifth o f t h e F o r t u n e 5 0 0 d i d s o m e R & D in I n d i a — so far has m a i n l y focused on a d a p t i n g e s t a b l i s h e d p r o d u c t s for f a s t - g r o w i n g local a n d r e g i o n a l m a r k e t s . The

U n i t e d S t a t e s seems l i k e l y to m a i n t a i n these leads o v e r t h e n e x t t e n to

fifteen y e a r s , a n d g l o b a l i z a t i o n w i l l increase t h e i r s i g n i f i c a n c e . F o r one, A m e r ­ ican h a r d w a r e , s o f t w a r e , a n d I n t e r n e t c o m p a n i e s w i l l h a v e a l e g u p in C h i n a a n d I n d i a as t h e y g o i n c r e a s i n g l y d i g i t a l . I n 2 0 0 4 , I n d i a h a d b a r e l y o n e P C for

e v e r y one h u n d r e d I n d i a n s a n d j u s t 3 p e r c e n t o f its p o p u l a t i o n w a s o n l i n e ,

w h i l e C h i n a h a d a b o u t four P C s for e v e r y one h u n d r e d C h i n e s e a n d j u s t a l i t ­ tle o v e r 7 p e r c e n t o f its p e o p l e u s e d t h e I n t e r n e t . B y 2 0 2 0 , C h i n a at least s h o u l d b e as d i g i t a l a n d w i r e d as m o s t E u r o p e a n c o u n t r i e s t o d a y , a n d I n d i a also w i l l m a k e s u b s t a n t i a l (if s m a l l e r ) strides. A m e r i c a n c o m p a n i e s w i l l p r o ­ v i d e m u c h o f w h a t w i l l t h e n be t h e latest g e n e r a t i o n o f these

technologies—

even if m u c h o f it is p r o d u c e d b y f o r e i g n s u b s i d i a r i e s a n d a f f i l i a t e s — a s w e l l as the I T services that w i l l a c c o m p a n y t h e i r s p r e a d . T h e s e t e c h n o l o g i e s are also p a r t o f t h e essential i n f r a s t r u c t u r e o f g l o b a l i z a ­ tion, f r o m s u p p l y - c h a i n m a n a g e m e n t to local p r o d u c t d e v e l o p m e n t a n d m a r ­ k e t i n g . A s g l o b a l p r o d u c t i o n a n d d e m a n d for a l m o s t e v e r y t h i n g c o n t i n u e to increase over the n e x t ten to fifteen y e a r s , t h e m a n u f a c t u r i n g , retail, a n d fi­ nancial service c o m p a n i e s t h a t h a v e i n t e g r a t e d I T m o r e b r o a d l y a n d s u c c e s s ­ fully i n t o t h e i r o p e r a t i o n s w i l l b e in t h e b e s t p o s i t i o n t o m e e t m u c h o f t h a t d e m a n d . A g a i n , c o m p a r e d to t h e t y p i c a l g l o b a l firm in o t h e r l a r g e , a d v a n c e d c o u n t r i e s , A m e r i c a ' s g l o b a l c o m p a n i e s for n o w h a v e a d i s t i n c t a d v a n t a g e h e r e , too. Yet

A m e r i c a ' s g r e a t e s t a d v a n t a g e in a d v a n c e d t e c h n o l o g i e s lies n o t in t h e i r

d e v e l o p m e n t a n d s p r e a d , b u t in h o w A m e r i c a n s use t h e m . D e s p i t e w h a t m o s t p e o p l e learned in i n t r o d u c t o r y e c o n o m i c s , a s u c c e s s i o n o f A m e r i c a n a n d E u ­ ropean studies h a v e f o u n d t h a t h o w m u c h a c o m p a n y or a c o u n t r y s p e n d s o n IT

m a k e s l i t t l e difference in h o w p r o d u c t i v e t h e y b e c o m e . O v e r t h e last d e ­

c a d e , E u r o p e a n businesses i n v e s t e d n e a r l y as m u c h in I T as U . S . firms, rela­ t i v e to the size o f their e c o n o m i e s . Y e t t h e p r o d u c t i v i t y o f t h e i n d u s t r i e s t h a t spent the m o s t on these t e c h n o l o g i e s i n crea s ed b y 3 t o 4 p e r c e n t a y e a r in t h e U n i t e d S t a t e s , c o m p a r e d to n o c h a n g e at all or e v e n s l i g h t d e c l i n e s in E u ­ rope.

3 7

FUTURECAST

156

O n e reason is t h a t A m e r i c a n c o m p a n i e s are m a n a g e d differently, a n d the differences s e e m to affect h o w t h e y use t e c h n o l o g y . F o r e x a m p l e , A m e r i c a n businesses m o r e often base their p a y increases a n d p r o m o t i o n s on p e r f o r m a n c e , w h i c h w i t t i n g l y or not creates p o w e r f u l i n c e n t i v e s for U . S . m a n a g e r s a n d w o r k e r s t o g e t m o r e o u t o f t h e I T t h e y ' r e p r o v i d e d . B y c o n t r a s t , large E u r o ­ p e a n a n d J a p a n e s e c o m p a n i e s still t y p i c a l l y base t h e i r e m p l o y e e s ' p a y a n d p r o m o t i o n s on t e n u r e a n d u n i o n rules. O t h e r r i g i d i t i e s in the E u r o p e a n a n d J a p a n e s e e c o n o m i e s m a k e it h a r d e r for firms there t o d e r i v e m u c h a d v a n t a g e f r o m t h e i r I T i n v e s t m e n t s . F o r e x a m p l e , t h e l a b o r l a w s a n d social c o n v e n t i o n s t h a t s h a r p l y l i m i t firms' f r e e d o m t o fire or reassign m o s t w o r k e r s often p r e ­ v e n t t h e m f r o m r e o r g a n i z i n g t h e i r d o m e s t i c operations to m a k e their I T in­ v e s t m e n t s w o r k for t h e m . S o a F r e n c h or I t a l i a n c o m p a n y can invest in a s t a t e - o f - t h e - a r t a c c o u n t i n g or an a u t o m a t e d p h o n e s y s t e m a n d find itself u n ­ a b l e t o r e a s s i g n or let g o a n y o f its c u r r e n t a c c o u n t a n t s or operators. A w o r k e r ' s e d u c a t i o n level also s e e m s to affect h o w w e l l he or she a d a p t s w h e n a c o m p a n y introduces new technologies.

Here's a surprise for m a n y

A m e r i c a n s : T h e W o r l d B a n k reports that U . S . adults average more

than

t w e l v e y e a r s o f f o r m a l e d u c a t i o n , c o m p a r e d to b a r e l y seven years for Italian a d u l t s , less t h a n nine years for a d u l t s in F r a n c e , a n d less t h a n ten years for British, Japanese, and G e r m a n s a d u l t s .

3 8

Substantially more young A m e r i ­

cans also e n r o l l in s o m e p o s t s e c o n d a r y e d u c a t i o n or t r a i n i n g — 6 9

percent,

c o m p a r e d t o b e t w e e n 4 5 a n d 5 8 p e r c e n t in t h e m a j o r E u r o p e a n countries a n d Japan. S o m e o f these differences w i l l p r o b a b l y d i m i n i s h o v e r the n e x t d e c a d e , al­ t h o u g h efforts in F r a n c e a f e w years a g o t o m o d e s t l y m o d i f y labor p r o t e c t i o n s s p a r k e d riots b y y o u n g p e o p l e d e t e r m i n e d to k e e p t h e i r j o b s e c u r i t y at a n y cost. W h i l e t h e share o f y o u n g E u r o p e a n s g o i n g on to c o l l e g e still trails the share o f y o u n g A m e r i c a n s , it rose s h a r p l y in the last

fifteen

years. It's also

i n d i s p u t a b l e t h a t m a n y l a r g e E u r o p e a n a n d J a p a n e s e c o m p a n i e s d e e p l y in­ v o l v e d in g l o b a l m a r k e t s are at least as p r o d u c t i v e as a n y A m e r i c a n firm. U . S . business

leaders c e r t a i n l y recall l e a r n i n g the basics of lean,

high-quality

m a n u f a c t u r i n g f r o m S o n y a n d T o y o t a in t h e 1 9 8 0 s a n d 1 9 9 0 s . M o r e o v e r , g l o b a l i z a t i o n is fast s p r e a d i n g t h e b e s t p r a c t i c e s o f t h e m o s t successful a n d I T - e n a b l e d A m e r i c a n c o r p o r a t i o n s . W a l - M a r t , the w o r l d ' s m o s t

profitable

a n d I T - i n t e n s i v e retailer, b o u g h t B r i t a i n ' s s e c o n d - l a r g e s t s u p e r m a r k e t c h a i n , A s d a , in 2 0 0 5 , a n d B r i t a i n ' s n u m b e r one retailer, T e s c o , p r o m p t l y a d o p t e d m u c h of the W a l - M a r t model. S t i l l , A m e r i c a n m u l t i n a t i o n a l s as a g r o u p a p p e a r to be m o r e p r o d u c t i v e a n d successful t h a n E u r o p e a n or J a p a n e s e m u l t i n a t i o n a l s .

F o r e x a m p l e , re­

searchers m e a s u r i n g the p r o d u c t i v i t y o f all k i n d s o f p l a n t s in B r i t a i n f o u n d

THE TWO POLES OF GLOBALIZATION: CHINA AND THE UNITED STATES

157

t h a t those o p e r a t e d b y U . S . m u l t i n a t i o n a l s w e r e n o t o n l y a l m o s t 4 0 p e r c e n t more productive than the average domestic British plant, b u t 1 0 percent m o r e p r o d u c t i v e t h a n t h e p l a n t s o f B r i t i s h m u l t i n a t i o n a l s in t h e i r o w n h o m e m a r k e t . T h e m o s t i m p o r t a n t factor w a s t h a t t h e U . S . m u l t i n a t i o n a l s g o t b e t ­ ter

results f r o m each d o l l a r o f I T i n v e s t m e n t . The

and

fact is, the p r o d u c t i v i t y g a p b e t w e e n t h e U n i t e d S t a t e s a n d E u r o p e

J a p a n has increased s t e a d i l y for m o r e t h a n a d e c a d e , p o i n t i n g t o A m e r ­

ica's s i n g l e m o s t i m p o r t a n t e c o n o m i c a d v a n t a g e at a t i m e for r a p i d g l o b a l i z a ­ tion: C o m p e t i t i o n is m o r e i n t e n s e i n s i d e t h e U . S . e c o n o m y , b e c a u s e there's less r e g u l a t i o n a n d p r o t e c t i o n for b o t h b u s i n e s s e s a n d w o r k e r s , e s p e c i a l l y for the service c o m p a n i e s a n d w o r k e r s t h a t d o m i n a t e a d v a n c e d e c o n o m i e s . J a p a n , and

E u r o p e ' s l a r g e c o u n t r i e s , still m a i n t a i n r e g u l a t o r y w a l l s a r o u n d m u c h

of their retail, w h o l e s a l e , financial, b u s i n e s s , a n d p e r s o n a l s e r v i c e sectors, so they're still d o m i n a t e d b y m i l l i o n s o f inefficient s m a l l c o m p a n i e s w i t h l i t t l e i n c e n t i v e to c h a n g e a l m o s t a n y t h i n g . A m e r i c a ' s m o r e b a r e - k n u c k l e d c o m p e ­ t i t i o n at a l m o s t e v e r y level o f its e c o n o m y leaves its w o r k e r s a n d c o m p a n i e s less secure, e s p e c i a l l y in a t i m e o f g a l l o p i n g g l o b a l i z a t i o n a n d t e c h n o l o g i c a l p r o g r e s s . I t also forces those t h a t w a n t t o p r o s p e r t o c h a n g e all t h e t i m e , b y u s i n g the latest t e c h n o l o g i e s a n d b u s i n e s s p r a c t i c e s t o i m p r o v e s o m e t h i n g t h e y m a k e or d o , or e v e n c o m e u p w i t h n e w p r o d u c t s , p r o c e s s e s , a n d w a y s o f d o i n g business. A n d A m e r i c a n c o m p a n i e s a n d w o r k e r s a c c u s t o m e d t o d e a l i n g w i t h these intense c o m p e t i t i v e p r e s s u r e s w i l l be b e t t e r e q u i p p e d o v e r t h e n e x t ten to fifteen years to deal w i t h t h e i n c r e a s i n g l y i n t e n s e c o m p e t i t i o n in foreign m a r k e t s c r e a t e d b y g l o b a l i z a t i o n .

WHY NOT RUSSIA OR INDIA? G l o b a l i z a t i o n w i l l s u r e l y accelerate m o d e r n i z a t i o n in scores o f c o u n t r i e s o v e r the n e x t g e n e r a t i o n . K o r e a c o u l d m a t c h J a p a n ' s s i n g u l a r a c h i e v e m e n t as t h e o n l y c o u n t r y to m o v e f r o m l o w i n c o m e t o h i g h i n c o m e f r o m 1 8 7 0 to 1 9 7 0 — and

d o it in a f e w e r years. P o l a n d a n d t h e C z e c h R e p u b l i c c o u l d m a k e as d r a ­

m a t i c p r o g r e s s as I r e l a n d d i d in the last t w e n t y years. O u r f o c u s , h o w e v e r , is on nations w h o s e e c o n o m i c i m p a c t w i l l in s o m e sense b e g l o b a l — a select c i r ­ cle of c o u n t r i e s l i m i t e d to the U n i t e d S t a t e s , t h e m a j o r E u r o p e a n e c o n o m i e s , J a p a n , and C h i n a . S o m e analysts m i g h t m a k e a case for R u s s i a a n d I n d i a . Less t h a n a g e n e r a ­ tion a g o , R u s s i a w a s the center o f a g r e a t w o r l d p o w e r v o w i n g noisily to b u r y the W e s t , w i t h a w e i g h t y (if c o v e r t l y w e a k ) e c o n o m y t h a t reached w e l l i n t o E a s t e r n a n d C e n t r a l E u r o p e , I n d i a , a n d p a r t s o f the M i d d l e E a s t . T h e r e ' s l i t t l e

158

FUTURECAST

d o u b t t h a t R u s s i a w i l l b e a force in g l o b a l p o l i t i c s o v e r the n e x t ten to fifteen years, w h i c h w e c o n s i d e r later. B u t w i t h a G D P t o d a y barely larger than M e x ­ ico a n d s m a l l e r t h a n S p a i n or B r a z i l — a n d p e r c a p i t a i n c o m e that trails such c o u n t r i e s as L i b y a , P o l a n d , a n d B o t s w a n a — R u s s i a t o d a y is a m a r g i n a l eco­ n o m i c force in the w o r l d a n d l i k e l y to r e m a i n so for m a n y years. T h e r e are cer­ t a i n l y s o m e s i g n s t h a t c o n d i t i o n s there are i m p r o v i n g . F o r the last five years, its u n e m p l o y m e n t has b e e n low, its g r o w t h has a v e r a g e d 7 p e r c e n t a year, a n d t h e r u b l e has b e e n c o n v e r t i b l e since J u l y 2 0 0 6 . O n e international e x p e r t , N i v e d i t a D a s K u n d u o f t h e I n s t i t u t e for D e f e n s e S t u d i e s a n d A n a l y s i s in N e w D e l h i , forecasts t h a t in a n o t h e r t w e n t y years, R u s s i a c o u l d be the world's eighth-biggest economy.

3 9

T h e I M F , c i t i n g l o w R u s s i a n w a g e s that c o u l d h e l p

m a k e R u s s i a n e x p o r t s m o r e c o m p e t i t i v e w o r l d w i d e , also has c o n c l u d e d that its e c o n o m y c o u l d g r o w at h e a l t h y rates for at least another d e c a d e — b u t o n l y i f M o s c o w is c o m m i t t e d to serious s t r u c t u r a l reforms. T h e I M F ' s c a v e a t reflects several c r i t i c a l w e a k n e s s e s t h a t w i l l m o s t l i k e l y c o n t i n u e to m a r g i n a l i z e R u s s i a ' s g l o b a l e c o n o m i c i m p a c t . I n a t i m e o f r a p i d g l o b a l i z a t i o n , no c o u n t r y c a n m a k e r a p i d p r o g r e s s w i t h o u t d r a w i n g on the best t e c h n o l o g i e s a n d business m e t h o d s f r o m the rest o f the w o r l d , p r i n c i p a l l y t h r o u g h f o r e i g n d i r e c t i n v e s t m e n t — a n d R u s s i a to d a t e has not e s t a b l i s h e d t h e d o m e s t i c c o n d i t i o n s t h a t a t t r a c t those transfers. T h e O E C D ( O r g a n i s a ­ t i o n for E c o n o m i c C o - o p e r a t i o n a n d D e v e l o p m e n t ) f o u n d t h a t in 2 0 0 2 , for e x a m p l e , f o r e i g n d i r e c t i n v e s t m e n t in R u s s i a a m o u n t e d to fifteen dollars p e r p e r s o n , or b a r e l y 1 3 p e r c e n t o f t h e p e r c a p i t a levels for its f o r m e r satellite, the C z e c h R e p u b l i c , a n d 7 p e r c e n t o f t h o s e for H u n g a r y .

4 0

N o r have conditions

i m p r o v e d m u c h since t h e n . T h e O E C D r e p o r t o n Russia's f u t u r e p r o s p e c t s for a t t r a c t i n g f o r e i g n transfers is s u b t i t l e d flows

" B a t t l i n g A g a i n s t the O d d s , " a n d

to all sectors e x c e p t m i n i n g still r e m a i n low, e s p e c i a l l y f o l l o w i n g the

P u t i n g o v e r n m e n t ' s seizure o f t h e Y u k o s oil e m p i r e a n d its c o n t i n u i n g i n a b i l ­ i t y to c u r b c o r r u p t i o n .

4 1

E v e r y y e a r s i n c e 2 0 0 0 , t h e flow o f d i r e c t i n v e s t m e n t

o u t o f R u s s i a has e x c e e d e d t h e flow c o m i n g in, w h i c h looks a lot l i k e the c a p ­ ital flight seen in u n p r o m i s i n g L a t i n A m e r i c a n c o u n t r i e s . A n d the m o s t so­ p h i s t i c a t e d r e c e n t a n a l y s i s o f Russia's p r o s p e c t s , p r o d u c e d b y the n e i g h b o r i n g B a n k o f F i n l a n d , c o n c l u d e s t h a t w i t h o u t l a r g e , s u s t a i n e d increases in i n v e s t ­ m e n t , b o t h d o m e s t i c a n d f o r e i g n , g r o w t h in t h e f o r m e r s u p e r p o w e r m a y soon a p p r o x i m a t e t h e rates in L a t i n A m e r i c a .

4 2

S o m e R u s s i a n planners, tacitly a c k n o w l e d g i n g their country's problems w i t h f o r e i g n i n v e s t o r s , see h i g h e n e r g y p r i c e s as the k e y to f u t u r e national g r o w t h : A c c o r d i n g to r e c e n t forecasts b y the R u s s i a n E c o n o m i c M i n i s t r y , ten m o r e

THE TWO POLES OF GLOBALIZATION: CHINA AND THE UNITED STATES

159

years o f oil p r i c e s a v e r a g i n g $ 7 5 a barrel w i l l g e n e r a t e t h e resources r e q u i r e d to s u b s t a n t i a l l y m o d e r n i z e i n f r a s t r u c t u r e a n d e x p a n d i n d u s t r i a l c a p a c i t y , es­ p e c i a l l y in t h e oil sector itself, a n d so k e e p R u s s i a n g r o w t h s t r o n g .

4 3

Yet,

o m i n o u s l y , Russia's oil sector a p p e a r s to be u n r a v e l i n g e c o n o m i c a l l y , d e s p i t e the w o r l d ' s largest reserves o u t s i d e t h e M i d d l e E a s t , C a n a d a , a n d V e n e z u e l a . Russia's oil c o m p a n i e s earn s m a l l e r profit m a r g i n s t h a n m a j o r p r o d u c e r s a l m o s t a n y w h e r e else b e c a u s e the g o v e r n m e n t k e e p s d o m e s t i c p r i c e s l o w t o s u b s i d i z e R u s s i a n f a r m e r s a n d m i l i t a r y . T h e P u t i n g o v e r n m e n t also k e e p s oil sector e m p l o y m e n t h i g h , a n d the c o m b i n a t i o n o f artificially l o w p r i c e s a n d h i g h l a b o r costs has s q u e e z e d i n v e s t m e n t a n d m o d e r n i z a t i o n t h r o u g h o u t t h e industry. D r i l l i n g n e w w e l l s a n d b u i l d i n g n e w p i p e l i n e s h a v e v i r t u a l l y s t o p p e d , the i n d u s t r y ' s r e c o v e r y t e c h n i q u e s are o u t d a t e d , a n d it still uses s t a n d a r d b i t s t h a t last one-fifth as l o n g as those u s e d in T e x a s . A n d t h e l a r g e w e s t e r n oil companies that could p r o v i d e n e w capital, technologies, and expertise largely a v o i d R u s s i a because in s u c h an u n c e r t a i n e n v i r o n m e n t t h e y ' l l o n l y

come

in as m a j o r i t y s t a k e h o l d e r s , a n d t h e p o l i t i c i a n s a n d o l i g a r c h s t h a t c o n t r o l t h e reserves w o n ' t a g r e e t o those t e r m s . Russia's l o w i n v e s t m e n t levels also u n d e r m i n e other sectors t h a t w e r e s t r o n g d u r i n g the late S o v i e t r e g i m e . I n 1 9 9 0 , R u s s i a w a s t h e w o r l d ' s n u m b e r - t w o steel p r o d u c e r , just b e h i n d J a p a n (the w h o l e S o v i e t t e r r i t o r y w a s t h e w o r l d ' s largest steel p r o d u c e r ) ; a n d the t h r e e m a j o r R u s s i a n steel c o m p l e x e s at M a g ­ n i t o g o r s k , S v e r s t a l , a n d N o v o l i p e t s k t u r n e d o u t their p r o d u c t , p r i n c i p a l l y for the R e d A r m y , n e a r l y as efficiently as A m e r i c a ' s b e s t steel c o m p a n i e s .

4 4

But

w h e n d e m a n d for steel fell p r e c i p i t o u s l y w i t h t h e e n d o f t h e S o v i e t e m p i r e , M o s c o w d i r e c t e d the m a j o r p r o d u c e r s , as w e l l as s o m e t h i r t y - t h r e e s m a l l e r and

less-efficient p l a n t s , to k e e p o p e r a t i n g e v e n as t h e i r r e v e n u e s ( a n d g o v ­

e r n m e n t s u b s i d i e s ) p l u m m e t e d . B y 1 9 9 8 , p r o d u c t i v i t y in R u s s i a ' s steel sector had

p l u m m e t e d to 2 8 p e r c e n t o f U . S . The

levels.

sharp deterioration of these m a j o r industries is critical to Russia's

e c o n o m i c prospects over the next ten to fifteen years because its u n i q u e a n d ter­ rible d e m o g r a p h i c conditions w i l l d e m a n d m u c h greater revenues a n d invest­ m e n t . Today, R u s s i a has the lowest fertility rates a n d life e x p e c t a n c y a n d the highest rates of infant a n d y o u t h m o r t a l i t y of a n y a d v a n c e d or m a j o r d e v e l o p i n g society in the w o r l d . W i t h p e r capita health-care s p e n d i n g b e l o w that o f c o u n ­ tries like P a n a m a and T u n i s i a , m o r e than h a l f of R u s s i a n children r e p o r t e d l y suf­ fer

f r o m a chronic disease; and the general health o f R u s s i a n s is w o r s e t o d a y than

that of m o s t people outside s u b - S a h a r a n A f r i c a a n d the M i d d l e E a s t .

4 5

Under

current trends, b y 2 0 2 0 , R u s s i a n life e x p e c t a n c y c o u l d fall b e l o w that in I n d i a or B a n g l a d e s h . T h e e c o n o m i c consequences o f these d e v e l o p m e n t s are sobering. E v g e n y A n d r e e v , an e x p e r t at the I n s t i t u t e o f E c o n o m i c F o r e c a s t i n g o f t h e

FUTURECAST

160

R u s s i a n A c a d e m y of Sciences, forecasts that his country's l o w fertility rates and h i g h disease a n d m o r t a l i t y rates w i l l reduce Russia's w o r k i n g - a g e population b y 1 4 to 2 5 percent over the next fifteen y e a r s .

46

N o r w i l l it end there: A n d r e e v sees

the n u m b e r o f R u s s i a n children falling b y 2 0 to 2 5 percent over the same years. Russia's f a l l i n g

fertility and h i g h

m o r t a l i t y rates p r o d u c e the

unique

anomaly of a relatively poor nation w i t h a rapidly a g i n g population.

Like

m a n y E u r o p e a n c o u n t r i e s , R u s s i a w i l l n e e d a lot m o r e r e v e n u e to s u p p o r t its g r o w i n g e l d e r l y p o p u l a t i o n j u s t w h e n t h e w o r k i n g - a g e p o p u l a t i o n t h a t has to p r o d u c e t h a t r e v e n u e is s h r i n k i n g — a n d R u s s i a w i l l face this p r o s p e c t in a m u c h p o o r e r state t h a n a n y w h e r e in E u r o p e . O n e nearly i n e v i t a b l e

conse­

q u e n c e is t h a t m i l l i o n s o f e l d e r l y R u s s i a n s w i l l retire i n t o terrible p o v e r t y o v e r t h e n e x t t e n t o fifteen y e a r s .

4 7

T h e o n l y w a y R u s s i a can a v o i d this a n d

m a t e r i a l l y i m p r o v e c o n d i t i o n s for e v e r y b o d y else w o u l d b e to s h a r p l y increase t h e p r o d u c t i v i t y o f t h e w o r k e r s it w i l l h a v e a n d the businesses that e m p l o y them. T h a t w o u l d require m u c h greater p u b l i c investment

in

education,

h e a l t h , a n d i n f r a s t r u c t u r e — t h e h e a r t o f the s t r u c t u r a l reforms u r g e d b y the I M F and others—along w i t h m u c h greater private investment by domestic and foreign companies. Y e t today, R u s s i a d e v o t e s j u s t 3 . 1 p e r c e n t o f its G D P to e d u c a t i o n , or less t h a n o n e - t h i r d t h e share t h a t a d v a n c e d e c o n o m i e s s p e n d , a n d less than I n d i a or s u c h c o u n t r i e s as K e n y a a n d the C o n g o .

4 8

Russia's c u r r e n t c o m m i t m e n t to

h e a l t h care is n o better, c l a i m i n g a s m a l l e r share o f the c o u n t r y ' s G D P at 5.4 p e r c e n t t h a n E r i t r e a , C a m b o d i a , or H o n d u r a s . A s Russia's e c o n o m i c m i n i s t r y has r e c o g n i z e d , t h e m o s t realistic source for the revenues n e e d e d to s u b s t a n ­ tially e x p a n d those investments

is e x p e n s i v e oil. Y e t e v e n that w o n ' t h e l p

m u c h u n l e s s R u s s i a ' s d e t e r i o r a t i n g oil sector t u r n s itself a r o u n d soon. H e r e , t o o , t h e o u t l o o k is u n p r o m i s i n g . P r e s i d e n t P u t i n m a d e it clear in the Y u k o s affair t h a t R u s s i a ' s oil o l i g a r c h s w i l l f o l l o w his s c r i p t or risk e v e r y t h i n g ; a n d P u t i n has s h o w n no interest in c h a n g e s t h a t m i g h t m a k e the c o m p a n i e s m o r e efficient a n d p r o f i t a b l e , e s p e c i a l l y i f it m e a n s h i g h e r p r i c e s for Russia's a r m y a n d f a r m e r s , or c e d i n g s o m e c o n t r o l to w e s t e r n oil c o m p a n i e s . N o r is his g o v e r n m e n t e v e n r e m o t e l y d i s p o s e d to t h e m o r e difficult reforms r e q u i r e d to a t t r a c t s u b s t a n t i a l f o r e i g n i n v e s t m e n t in o t h e r areas. F o r n o w a n d the fore­ seeable f u t u r e , t h e c o m b i n a t i o n o f d i s m a l d e m o g r a p h i c s a n d l o w i n v e s t m e n t w i l l cast "a l o n g s h a d o w o v e r R u s s i a n g r o w t h , " as t h e c h i e f e c o n o m i s t D e u t s c h e B a n k , N o r b e r t W a l t e r , p u t it r e c e n t l y .

for

49

C l a i m s for India's g r o w i n g e c o n o m i c p o w e r are m o r e c o m m o n , a n d w e s t e r n c o m m e n t a t o r s often p a i r it w i t h C h i n a as the w o r l d ' s t w o g r e a t , e m e r g i n g

THE TWO POLES OF GLOBALIZATION: CHINA AND THE UNITED STATES

161

e c o n o m i e s . H e r e , too, h a r d reality does n o t j u s t i f y this p a i r i n g . M e a s u r e d in dollars, India's G D P is s m a l l e r t h a n Russia's (or B r a z i l ' s ) , so these c l a i m s are u s u a l l y b a s e d o n o t h e r m e a s u r e s . O n e s u c h m e a s u r e is p u r c h a s i n g p o w e r p a r ­ ties ( P P P ) , w h i c h factors in differences in cost o f l i v i n g a n d elevates India's e c o n o m y to n u m b e r four in t h e w o r l d , b e h i n d A m e r i c a , C h i n a , a n d J a p a n . The

second m e a s u r e is India's recent success in c e r t a i n a d v a n c e d sectors, n o ­

t a b l y s o f t w a r e p r o g r a m m i n g a n d g e n e r i c p h a r m a c e u t i c a l s , w h i c h in c e r t a i n respects are c o m p e t i t i v e w i t h t h e g l o b a l leaders f r o m t h e

knowledge-based

economies of E u r o p e and A m e r i c a . Close analysis shows, however, that w h i l e I n d i a is i n d i s p u t a b l y l a r g e , a n d its s o f t w a r e a n d g e n e r i c d r u g s are s o l d a r o u n d the w o r l d , its basic c o n d i t i o n s

and development

p a t h w i l l n o t m a k e it a

g l o b a l e c o n o m i c p o w e r o v e r t h e n e x t ten t o fifteen y e a r s . India's e x t r e m e p o v e r t y is t h e first s i g n t h a t it r e m a i n s a l o n g w a y f r o m b e ­ c o m i n g an e c o n o m i c p o w e r h o u s e for t h e rest o f t h e w o r l d . Its p e r c a p i t a i n ­ c o m e , a d j u s t e d for each c o u n t r y ' s cost o f l i v i n g , r a n k s n u m b e r 1 1 8 in the w o r l d , behind countries like N i c a r a g u a , A r m e n i a , Ecuador, and G u y a n a , and 5 3 p e r c e n t l o w e r t h a n C h i n a . M o r e t e l l i n g for a c o u n t r y w i t h g l o b a l e c o ­ n o m i c a m b i t i o n s , I n d i a has one o f t h e w o r l d ' s l o w e s t ratios o f t r a d e t o G D P . F r o m 2 0 0 0 to 2 0 0 3 , I n d i a a c c o u n t e d for b a r e l y s e v e n - t e n t h s o f 1 p e r c e n t o f all w o r l d e x p o r t s , r o u g h l y the s a m e as P o l a n d , 6 0 to 7 0 p e r c e n t less t h a n s u c h s m a l l e c o n o m i e s as B e l g i u m a n d T a i w a n , a n d less t h a n 1 5 p e r c e n t o f C h i n a ' s total. O n e reason is t h a t 6 0 p e r c e n t o f India's p o p u l a t i o n still w o r k s in a g r i ­ c u l t u r e , c o m p a r e d t o 1 4 p e r c e n t in R u s s i a a n d less t h a n 5 0 p e r c e n t e v e n in C h i n a . M o r e o v e r , p r o d u c t i v i t y in a l m o s t e v e r y sector in I n d i a r e m a i n s far t o o l o w to m a k e the c o u n t r y a force in g l o b a l t r a d e , r e g a r d l e s s o f h o w l o w its w a g e s are. T h e p r o d u c t i v i t y o f India's v a s t a g r i c u l t u r a l w o r k f o r c e is a b o u t 1 p e r c e n t that o f A m e r i c a n f a r m e r s .

5 0

A n o t h e r 2 0 p e r c e n t o f India's w o r k e r s

h o l d jobs in v e r y s m a l l b u s i n e s s e s — s t r e e t

v e n d o r s , tailors, a n d so o n — a n d

their p r o d u c t i v i t y is a b o u t 7 p e r c e n t t h a t o f w o r k e r s in t h e s a m e sectors in a d ­ v a n c e d c o u n t r i e s . T h e final 2 0 p e r c e n t h o l d j o b s in r e a s o n a b l y l a r g e b u s i ­ nesses in m a n u f a c t u r i n g or services, a n d e v e n t h e i r p r o d u c t i v i t y is a b o u t 1 5 p e r c e n t that o f A m e r i c a n s in s i m i l a r j o b s .

5 1

I n d i a is still a b a c k w a r d e c o n o m y

decades a w a y f r o m g l o b a l e c o n o m i c influence, a k i n p e r h a p s to C h i n a t w e n t y five years a g o . P u n d i t s w h o f o c u s o n India's h u g e l a b o r p o o l e a r n i n g w a g e s a b o u t h a l f o f C h i n a ' s levels m i s s t h e f u n d a m e n t a l d i f f e r e n c e s b e t w e e n t h e t w o c o u n t r i e s ' s t r a t e g i e s to m o d e r n i z e t h e m s e l v e s . C h i n a has m a d e i t s e l f o n e o f t h e w o r l d ' s largest (and f a s t e s t - g r o w i n g ) g l o b a l export p r o d u c t i o n platforms b y c o m ­ b i n i n g authoritarian politics, e x t r e m e openness to foreign i n v e s t m e n t , and e x p e r t i s e in m o s t areas o f m a n u f a c t u r i n g . B y c h o i c e a n d p o l i t i c a l

necessity,

FUTURECAST

162

I n d i a has t r i e d t o m o d e r n i z e b y g o i n g a l o n e , c h o o s i n g a m o r e b a l a n c e d p a t h tied to a nineteenth-century

model of gradual, indigenous

development.

T h i s c o u r s e reflects in p a r t its m o r e d e m o c r a t i c p o l i t i c s , in w h i c h c o u n t l e s s p o l i t i c a l c o m p r o m i s e s a n d t h e efforts o f e v e r y s i g n i f i c a n t g r o u p to a v o i d the dislocations

o f r a p i d m o d e r n i z a t i o n s l o w or stall e c o n o m i c p r o g r e s s .

S e v e r a l g e n e r a t i o n s f r o m n o w , w h e t h e r C h i n a or I n d i a w i l l p r o v i d e g r e a t e r p r o s p e r i t y for its p e o p l e is u n k n o w n . W h a t is c e r t a i n is t h a t India's s t r a t ­ e g y w i l l n o t r e m a k e its e c o n o m y i n t o a g l o b a l p o w e r in t h e n e x t ten to fif­ teen years. T h e result is t h a t India's m a r k e t s are m u c h less o p e n to t h e rest of the w o r l d , f o r e i g n t e c h n o l o g i e s a n d e x p e r t i s e p l a y a v e r y m o d e s t role, a n d g r o w t h d e p e n d s on d o m e s t i c c o n s u m p t i o n rather t h a n i n v e s t m e n t a n d e x p o r t s . I n s u c h e c o n o m i c a l l y p i v o t a l areas as m o s t h e a v y i n d u s t r y a n d r e t a i l i n g , I n d i a l o n g a g o b a r r e d m o s t F D I (foreign d i r e c t i n v e s t m e n t ) . I n 2 0 0 4 , w h e n g l o b a l companies invested

$ 2 3 3 b i l l i o n in d e v e l o p i n g

c o u n t r i e s , C h i n a received

$ 6 0 . 6 b i l l i o n , or 2 6 p e r c e n t o f it, w h i l e I n d i a a t t r a c t e d $ 5 . 3 b i l l i o n , or 2 . 3 p e r c e n t . D e s p i t e its r a n k as one o f t h e w o r l d ' s l a r g e s t e c o n o m i e s in total G D P , I n d i a a t t r a c t e d less F D I t h a n P o l a n d a n d b a r e l y m o r e t h a n M a l a y s i a . A n d 2004

w

a

s

a

record y e a r for f o r e i g n i n v e s t m e n t in I n d i a . T a k i n g a l o n g e r v i e w ,

I n d i a c a n c l a i m less t h a n 2 p e r c e n t o f t h e total s t o c k o f f o r e i g n d i r e c t invest­ m e n t in all d e v e l o p i n g n a t i o n s — a share o n e - t h i r d s m a l l e r than P o r t u g a l , w h o s e e c o n o m y is o n e - f o u r t h India's size, a n d j u s t o n e - q u a r t e r g r e a t e r than V i e t n a m , w i t h a n e c o n o m y one-fifteenth the size o f I n d i a .

5 2

E v e n in areas w h e r e I n d i a has a l l o w e d f o r e i g n i n v e s t m e n t , m o s t foreign b u s i ­ nesses site t h e i r m o d e r n p l a n t s a n d o r g a n i z a t i o n s in o t h e r c o u n t r i e s , because India's d i s m a l i n f r a s t r u c t u r e a n d s u f f o c a t i n g g o v e r n m e n t r e g u l a t i o n m a k e it so h a r d to g e n e r a t e profits in t h e s u b c o n t i n e n t .

53

F o r e x a m p l e , state g o v ­

e r n m e n t s g e t to a p p r o v e layoffs in c o m p a n i e s w i t h m o r e than one h u n d r e d e m p l o y e e s . I n d i a n l a w also s t i p u l a t e s t h a t m o r e t h a n e i g h t h u n d r e d m a j o r in­ d u s t r i a l p r o d u c t s c a n b e p r o d u c e d o n l y b y b u s i n e s s so s m a l l that the v a l u e of t h e i r p l a n t a n d e q u i p m e n t does not e x c e e d $ 2 0 0 , 0 0 0 — n o t e n o u g h to operate one m o d e r n p r o d u c t i o n m a c h i n e . M o r e o v e r , m a n y businesses c a n n o t b u i l d n e w facilities e v e n i f t h e y w a n t t o , b e c a u s e m o r e t h a n 9 0 p e r c e n t o f l a n d titles in I n d i a are s u b j e c t to legal d i s p u t e . T h e a n a r c h i c l a n d registration s y s t e m also s t r a n g l e s t h e c o n s t r u c t i o n sector, since b a n k s w o n ' t lend a n y o n e the m o n e y to b u i l d a factory, office, or h o m e on l a n d t h a t has n o clear title. W h e r e large fac­ tories d o o p e r a t e , t h e c o u n t r y ' s a n t i q u a t e d state railroad m o n o p o l y — a lastd i t c h e m p l o y e r for m i l l i o n s o f p o o r I n d i a n s — p o o r l y m a i n t a i n e d road s y s t e m s ,

THE TWO POLES OF GLOBALIZATION: CHINA AND THE UNITED STATES

163

a n d c h a o t i c a n d g o v e r n m e n t - r u n seaports a n d a i r p o r t s c a n n o t e n s u r e t h e reli­ able d e l i v e r y o f a n y t h i n g for e x p o r t . In

p r i n c i p l e , I n d i a c o u l d lift these r e s t r i c t i o n s a n d r e f o r m l a n d t i t l e s , a n d

its national a n d m o s t state g o v e r n m e n t s a l m o s t c e r t a i n l y w i l l d o so in t i m e — a l t h o u g h g i v e n the c o u n t r y ' s f r a c t u r e d a n d interest g r o u p — d r i v e n p o l i t i c s , it w i l l take m a n y years. E v e n t h a t w o n ' t c h a n g e w h a t m a n y o b s e r v e r s c o n s i d e r the s i n g l e g r e a t e s t barrier to r a p i d p r o g r e s s in I n d i a , the c o u n t r y ' s d e s p e r a t e l y antiquated

and inadequate

energy systems.

The

Economist

surveyed

these

a r r a n g e m e n t s in 2 0 0 5 a n d r e p o r t e d , " p o w e r c u t s are a w a y o f life in I n d i a , at least in p a r t s o f the c o u n t r y l u c k y e n o u g h to r e g a r d t h e m as an i n t e r r u p t i o n rather t h a n the n o r m . . . . W h e r e e l e c t r i c i t y is a v a i l a b l e it is often o n l y for a c o u p l e o f h o u r s a day, u n u s a b l e for i n d u s t r y a n d o f s u c h p o o r q u a l i t y t h a t power surges routinely w r e c k e q u i p m e n t . " The cal

5 4

national a n d state g o v e r n m e n t s still o w n m o s t o f t h e c o u n t r y ' s e l e c t r i ­

p o w e r generation and distribution operations, but an electricity g r i d a

h a l f - c e n t u r y b e h i n d m u c h o f t h e rest o f t h e w o r l d isn't m e r e l y t h e l e g a c y o f d e c a d e s of inefficient p u b l i c o w n e r s h i p . C h i n a h a d a g o v e r n m e n t e n e r g y m o ­ nopoly, too, b u t o p e n e d its e n e r g y sector t o A m e r i c a n a n d E u r o p e a n i m p o r t s of t h e r m a l a n d clean coal p o w e r - g e n e r a t i n g e q u i p m e n t , g a s , h y d r o p o w e r , a n d w i n d turbines, large-capacity p u m p storage units, advanced nuclear p o w e r station e q u i p m e n t , g a s d e s u l p h u r i z a t i o n e q u i p m e n t , a n d m i d d l e - a n d h i g h voltage capacitors.

55

C h i n a also has r e g u l a r p o w e r s h o r t a g e s , b u t its e l e c t r i c ­

i t y g e n e r a t i o n has g r o w n b y m o r e t h a n 1 2 5 p e r c e n t in t h e last d e c a d e , a n d C h i n a n o w produces more current than any other country except the U n i t e d S t a t e s — a n d m o r e t h a n four t i m e s as m u c h as I n d i a .

5 6

O n e reason is t h a t I n ­

dia's e l e c t r i c i t y m o n o p o l i e s still h a v e n e i t h e r t h e resources n o r interest in i m ­ porting modern plant and equipment. T h e western companies building new g e n e r a t i n g c a p a c i t y in C h i n a s t a y a w a y f r o m I n d i a — t h e n o t a b l e

exception

b e i n g an ill-fated j o i n t v e n t u r e w i t h E n r o n t h a t i m p l o d e d w i t h t h e c o m p a n y in 2 0 0 1 . W h y w o u l d t h e y i n v e s t t h e r e , w h e n t h e y can't g e t clear t i t l e t o m o s t l a n d , their e q u i p m e n t i m p o r t s are s u b j e c t to h i g h tariffs, a n d I n d i a n l a w p r o ­ v i d e s free p o w e r t o f a r m e r s a n d o t h e r f a v o r e d g r o u p s ? A l l t o l d , s o m e 4 0 p e r ­ c e n t o f the c o u n t r y ' s e l e c t r i c i t y o u t p u t is e i t h e r g i v e n a w a y or stolen. T h e s e c o n d i t i o n s not o n l y d e s t r o y n o r m a l e c o n o m i c i n c e n t i v e s to electrify t h e v a s t p a r t s of the c o u n t r y that are still off t h e g r i d , t h e y also force t h e c o u n t r y ' s i n ­ dustrial a n d c o m m e r c i a l businesses t o foot m o s t o f t h e nation's e n e r g y b i l l s , w i t h the p r e d i c t a b l e result t h a t India's b u s i n e s s sector is one o f t h e w o r l d ' s least e n e r g y - i n t e n s i v e . W i t h n o serious steps to c h a n g e these c o n d i t i o n s , a n d national d e m a n d for p o w e r g r o w i n g t w i c e as fast as c a p a c i t y , India's s h o r t a g e s a n d other e n e r g y p r o b l e m s w i l l o n l y g r o w w o r s e o v e r t h e n e x t d e c a d e .

FUTURECAST

164

T h e i s s u e for I n d i a is n o t w h e t h e r it w i l l b e a g l o b a l p o w e r h o u s e in ten or fifteen y e a r s — t h a t ' s not in t h e c a r d s — b u t w h e t h e r it can sustain sufficient g r o w t h and incremental progress to ultimately become a broadly prosper­ o u s a n d m o d e r n e c o n o m y f u r t h e r d o w n t h e l i n e . I n d i a has clear e c o n o m i c s t r e n g t h s ; b u t i f it i n t e n d s t o k e e p u p w i t h c o u n t r i e s s u c h as M a l a y s i a a n d T h a i l a n d , it w i l l h a v e t o e x p a n d t h e m in w a y s t h a t t a k e serious a c c o u n t o f globalization. Let's start w i t h c a p i t a l . W i t h no n e a r - t e r m p r o s p e c t s o f a t t r a c t i n g large a m o u n t s o f f o r e i g n d i r e c t i n v e s t m e n t , I n d i a w i l l h a v e to rely m a i n l y on its o w n s a v i n g s . T h e o u t l o o k here is m i x e d . India's g r o s s d o m e s t i c s a v i n g s rate is m o r e t h a n 2 0 p e r c e n t — l e s s t h a n h a l f C h i n a ' s rate b u t still r e s p e c t a b l e b y g l o b a l s t a n d a r d s . G o v e r n m e n t deficits c l a i m a fairly m o d e s t share o f those s a v i n g s t o d a y , a l t h o u g h t h a t c o u l d c h a n g e if t h e g o v e r n m e n t w e r e to b e c o m e serious a b o u t i m p r o v i n g t h e nation's r o a d s , b r i d g e s , e n e r g y g r i d , a n d w a t e r a n d s a n i t a t i o n s y s t e m s — a s it m u s t d o to g r o w . T h e l a r g e r issue for s a v i n g s a n d f u t u r e b u s i n e s s i n v e s t m e n t is t h a t I n d i a n h o u s e h o l d s h o l d a relatively s m a l l share o f t h e i r s a v i n g s in t h e s t o c k s , b o n d s , a n d b a n k a c c o u n t s that f u n d b u s i n e s s e x p a n s i o n . I n s t e a d , I n d i a n h o u s e h o l d s prefer to h o l d t h e i r s a v i n g s in l a n d a n d h o u s e s , c a t t l e , a n d e s p e c i a l l y g o l d . H a l f o f t h e personal assets of all I n d i a n h o u s e h o l d s are h e l d in g o l d j e w e l r y , m a k i n g t h e m the world's largest c o n s u m e r s o f g o l d . T h e result, as t h e M c K i n s e y G l o b a l I n s t i t u t e p u t it re­ cently, is t h a t "India s i m p l y has a lot less m o n e y c i r c u l a t i n g in its financial s y s t e m t h a n one w o u l d e x p e c t , g i v e n t h e size o f its e c o n o m y . " changes, there w i l l be little prospect of strong domestic

57

U n t i l this

investment

to

m a k e u p for t h e r e l a t i v e l y m e a g e r flows o f f o r e i g n i n v e s t m e n t , p r o d u c i n g t w o n e g a t i v e s as c o m p a r e d to t w o o f t h e m o s t i m p o r t a n t e c o n o m i c p o s i t i v e s in China's rapid progress. D e s p i t e t h e r e l a t i v e l y s m a l l h o l d i n g s o f I n d i a ' s b a n k s , its b a n k i n g s y s ­ t e m is m o r e d e v e l o p e d t h a n C h i n a ' s , w i t h p r i v a t e l e n d i n g t i e d m o r e c l o s e l y t o t h e real e c o n o m i c p r o s p e c t s o f b u s i n e s s b o r r o w e r s . B u t s p e c i a l r e q u i r e ­ m e n t s set b y t h e R e s e r v e B a n k o f I n d i a m u t e t h a t a d v a n t a g e as w e l l , b y d i ­ r e c t i n g d o m e s t i c b a n k s t o a l l o c a t e 4 5 p e r c e n t o f all b u s i n e s s loans t o s m a l l a n d m e d i u m - s i z e enterprises. T h e s e rules m a y hearken b a c k to M a h a t m a G a n d h i ' s v e n e r a t i o n for t h e s e l f - s u s t a i n i n g v i l l a g e . B u t t h e y p r e s e r v e a n d p r o t e c t t h e inefficient

m o m - a n d - p o p e n t e r p r i s e s t h a t a c c o u n t for h a l f o f

n o n a g r i c u l t u r a l j o b s in I n d i a — 7 0 p e r c e n t o f a p p a r e l i n d u s t r y w o r k e r s , for 5 8

e x a m p l e , are tailors w h o w o r k a l o n e — a n d needlessly l i m i t financing for the l a r g e r n a t i v e b u s i n e s s e s t h a t c o u l d h e l p d r i v e faster a n d m o r e b r o a d - b a s e d modernization. I n d i a is c h a n g i n g , a n d in recent years its g o v e r n m e n t has t a k e n i m p o r t a n t

THE TWO POLES OF GLOBALIZATION: CHINA AND THE UNITED STATES

165

steps to e n c o u r a g e m o r e f o r e i g n i n v e s t m e n t , l o w e r t r a d e b a r r i e r s , c u t b u s i n e s s taxes, a n d relax i n d u s t r i a l l i c e n s i n g a n d c u r r e n c y c o n t r o l s . M u c h o f t h e c r e d i t g o e s to t h e c o u n t r y ' s c u r r e n t leader, P r i m e M i n i s t e r M a n m o h a n S i n g h , t h e c h i e f a r c h i t e c t a n d d r i v i n g force b e h i n d these r e f o r m s . B u t m u c h l i k e J a p a n ' s recent, r e f o r m - m i n d e d P r i m e M i n i s t e r J u n i c h i r o K o i z u m i , S i n g h ' s effective­ ness is l i m i t e d b y t h e s t a u n c h resistance o f t h e N a t i o n a l C o n g r e s s P a r t y t h a t he leads. J a g d i s h B h a g w a t i , a n o t e d I n d i a n e c o n o m i s t n o w at C o l u m b i a U n i ­ versity, describes S i n g h as a m a n " w a l k i n g in m i n e f i e l d s defined b y special i n ­ terest g r o u p s . "

5 9

F o r his o w n p a r t , S i n g h r e c e n t l y s a i d , one suspects w i s t f u l l y ,

that, "it takes a lot o f t i m e for us to t a k e b a s i c d e c i s i o n s (in) m a n y t h i n g s , like getting land, getting water, g e t t i n g electricity . . . W e recognize that global­ ization offers us e n o r m o u s o p p o r t u n i t i e s in t h e race to l e a p f r o g in d e v e l o p ­ m e n t processes. I t also o b l i g e s us to set in m o t i o n processes w h i c h w o u l d m i n i m i z e its r i s k s . "

60

India's a u t o sector p r o v i d e s a s n a p s h o t o f t h e s t r e n g t h s a n d w e a k n e s s e s o f these m o d e r n i z a t i o n efforts, e s p e c i a l l y since t h e a u t o m o b i l e i n d u s t r y h e l p e d d r i v e A m e r i c a n , B r i t i s h , a n d G e r m a n i n d u s t r i a l d e v e l o p m e n t in t h e first h a l f o f the t w e n t i e t h c e n t u r y a n d m o r e r e c e n t l y p l a y e d a s i m i l a r role for S w e d e n , J a p a n , a n d K o r e a . F o r d e c a d e s , all b u t t h e richest I n d i a n s h a d j u s t t w o c h o i c e s in a u t o m o b i l e s , b o t h p r o d u c e d b y s t a t e - o w n e d c o m p a n i e s . T h e n in 1 9 8 3 , New

D e l h i a g r e e d to a s i n g l e j o i n t v e n t u r e b e t w e e n S u z u k i a n d a n e w I n d i a n

a u t o m a k e r , M u r a t i . T h e tale is t o l d t h a t t h e i m p e t u s c a m e f r o m t h e n - P r i m e M i n i s t e r I n d i r a G a n d h i ' s son, R a j i v , w h o w a n t e d to g e t i n t o the a u t o b u s i ­ ness. W h e t h e r or not that's t r u e , S u z u k i ' s m o d e r n t e c h n o l o g i e s a n d p r o d u c t i o n m e t h o d s c a t a p u l t e d M u r a t i to an 8 0 p e r c e n t m a r k e t share b y the m i d - 1 9 9 0 s . Yet,

d e s p i t e this success, no o t h e r f o r e i g n a u t o c o m p a n y w a s g r a n t e d a r i g h t

to p r o d u c e cars in I n d i a u n t i l t h e late 1 9 9 0 s . I n 1 9 9 8 , t h e g o v e r n m e n t

finally

e n d e d state l i c e n s i n g for a u t o p r o d u c t i o n , a n d since 2 0 0 0 , A m e r i c a n a n d J a p a n e s e a u t o m a k e r s h a v e set u p m o d e s t p r o d u c t i o n facilities there. B u t h i g h tariffs on e q u i p m e n t i m p o r t s , h i g h taxes o n f o r e i g n c o m p a n i e s , a n d t h e s o r r y state of I n d i a n i n f r a s t r u c t u r e k e e p I n d i a o u t o f t h e e x p a n s i o n p l a n s o f m o s t g l o b a l a u t o m a k e r s . T h e result is t h a t t h e fierce c o m p e t i t i o n t h a t characterizes a u t o m a k i n g in a d v a n c e d c o u n t r i e s — a n d C h i n a — i s still m u t e d in I n d i a . M u ­ rati still d o m i n a t e s the national m a r k e t w i t h m o r e t h a n 6 0 p e r c e n t o f sales, w h i l e a 4 4 p e r c e n t tariff on a u t o i m p o r t s p r e c l u d e s c o m p e t i t i o n f r o m f o r e i g n imports. W h i l e China's t w o largest privately o w n e d auto companies, C h e r y A u t o m o t i v e a n d G e e l y A u t o m o t i v e , t o d a y p r o d u c e cars for a b o u t $ 2 , 0 0 0 each t h a t a l r e a d y are s e l l i n g in f o r e i g n m a r k e t s , M u r a t i r e m a i n s a n I n d i a - o n l y enterprise. A

n u m b e r of f o r e i g n a u t o m a k e r s led b y T o y o t a a n d D a i m l e r C h r y s l e r n o w

166

FUTURECAST

s o u r c e s o m e o f t h e i r c o m p o n e n t s f r o m I n d i a n s u p p l i e r s s u c h as B h a r a t F o r g e , R i c o A u t o , S u n d a r a m F a s t e n e r s , a n d A m t e k A u t o ; a n d since the late 1 9 9 0 s , I n d i a n a u t o p a r t s e x p o r t s h a v e g r o w n 2 5 p e r c e n t a year. B u t at $ 2 . 8 b i l l i o n in 2 0 0 6 , these e x p o r t s still a c c o u n t for less t h a n 1 . 5 p e r c e n t o f w o r l d w i d e a u t o p a r t s e x p o r t s , far b e h i n d o t h e r l o w - w a g e a u t o p a r t s centers s u c h as B r a z i l a n d Mexico.

6 1

India's u n i v e r s i t i e s — m u c h l i k e S w e d e n ' s — s t r e s s e n g i n e e r i n g , a n d

a n u m b e r o f E u r o p e a n a n d J a p a n e s e a u t o m a k e r s r e c e n t l y h a v e set u p d e s i g n and engineering centers t h e r e .

6 2

B u t here, t o o , I n d i a is a v e r y s m a l l p l a y e r in

an industry d o m i n a t e d b y m o r e developed economies. T h e facet o f India's e c o n o m y t h a t d r a w s the m o s t attention in E u r o p e a n d t h e U n i t e d S t a t e s is t h e success o f a n u m b e r of I n d i a n c o m p a n i e s

in

k n o w l e d g e - b a s e d i n d u s t r i e s t h a t a d v a n c e d countries consider their e x c l u s i v e preserve, especially software, pharmaceuticals, and entertainment. T h e s e suc­ cessful i d e a - b a s e d c o m p a n i e s all d r a w on India's considerable pool of y o u n g , c r e a t i v e talent a n d s k i l l e d w o r k e r s . W e l l - e d u c a t e d y o u n g w o r k e r s are a critical resource for a n y c o u n t r y b e n t on m o d e r n i z a t i o n . B u t in I n d i a , they represent a v e r y s m a l l slice o f an e c o n o m i c a l l y d e s t r u c t i v e e d u c a t i o n a l s y s t e m that for d e ­ cades has n e g l e c t e d b a s i c e d u c a t i o n for a l m o s t e v e r y o n e else. B y the r a n k i n g s o f the U n i t e d N a t i o n s , for e x a m p l e , India's national literacy rate is 1 4 6 t h out o f 1 7 7 c o u n t r i e s , w e l l b e h i n d the C o n g o , R w a n d a , a n d L a o s . T h e r e are no p o ­ sitions in a m o d e r n e c o n o m y for illiterate w o r k e r s , a n d countries w i t h large n u m b e r s o f p e o p l e u n a b l e t o read or d o basic m a t h can m o d e r n i z e on an e c o n o m y - w i d e basis o n l y v e r y slowly. I t w i l l b e at least another g e n e r a t i o n b e ­ fore t h e a v e r a g e I n d i a n has t h e basic capacities for m o d e r n e c o n o m i c life. A n d w h i l e nearly six thousand Indian institutions

of higher education

g r a d u a t e 2 . 5 m i l l i o n p e o p l e a year, m o s t o f those g r a d u a t e s h a v e far f e w e r skills t h a n t h e i r A m e r i c a n or E u r o p e a n c o u n t e r p a r t s , or even n e w g r a d u a t e s in s o m e o t h e r d e v e l o p i n g c o u n t r i e s . A r e c e n t s u r v e y o f h u m a n resource m a n ­ a g e r s at U . S . a n d E u r o p e a n m u l t i n a t i o n a l s r e p o r t e d t h a t j u s t 2 5 p e r c e n t of I n ­ d i a n e n g i n e e r i n g g r a d u a t e s m e e t t h e i r s t a n d a r d s , a n d 1 0 p e r c e n t o f those w i t h d e g r e e s in t h e arts a n d s c i e n c e s — i n b o t h cases, m u c h s m a l l e r p e r c e n t ­ ages than recent graduates from Central E u r o p e .

6 3

W h i l e more y o u n g Indians

r e c e i v e p o s t - s e c o n d a r y d i p l o m a s e v e r y y e a r t h a n F r e n c h or G e r m a n s , a n d n e a r l y as m a n y as A m e r i c a n s , t h e i r a v e r a g e k n o w l e d g e a n d skills r e m a i n s u b ­ stantially lower. S t i l l , e v e r y year, India's u n i v e r s i t y s y s t e m p r o d u c e s s o m e fifty to one h u n ­ d r e d t h o u s a n d g r a d u a t e s w h o c o m p a r e f a v o r a b l y w i t h t h e i r c o u n t e r p a r t s else­ w h e r e in t h e w o r l d , e s p e c i a l l y in t h e sciences a n d m a t h e m a t i c s . T h e y p r o v i d e t h e h i g h l y s k i l l e d l a b o r for t h e j e w e l s o f I n d i a n m o d e r n i z a t i o n , the software a n d p h a r m a c e u t i c a l s sectors. B u t t h e I n d i a n c o m p a n i e s t h a t h a v e m a d e these

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167

sectors w o r l d - c o m p e t i t i v e d o n o t o w e t h e i r success to t h e l a r g e r d y n a m i c s o f I n d i a n d e v e l o p m e n t . R a t h e r , t h e i r success has b e e n p a t h - d e p e n d e n t , o w i n g as m u c h to s e r e n d i p i t o u s c o n d i t i o n s at t h e i r f o u n d i n g as t o t h e n e u t r a l j u d g ­ m e n t s of m a r k e t s . ( M a n y e c o n o m i s t s w h o s t u d y M i c r o s o f t a t t r i b u t e m u c h o f its m a r k e t d o m i n a n c e to p a t h d e p e n d e n c e as w e l l . ) The

Indian d r u g industry's path began w i t h the country's particular patent

regime, w h i c h until recently protected the w a y a d r u g w a s p r o d u c e d b u t not its f o r m u l a . W i t h w e s t e r n p h a r m a c e u t i c a l c o m p a n i e s l a r g e l y b y p a s s i n g t h e Indian m a r k e t — d i s c o u r a g e d b y the country's strict price controls on d r u g s and

its readiness to a w a r d licenses for f o r e i g n - d e v e l o p e d d r u g s to d o m e s t i c

c o m p a n i e s — a handful of entrepreneurial enterprises led b y R a n b a x y and S u n P h a r m a b e g a n d e v e l o p i n g a l t e r n a t i v e m a n u f a c t u r i n g p r o c e s s e s for d r u g s a l ­ ready p a t e n t e d in o t h e r c o u n t r i e s .

6 4

I n d i a w a s n o t t h e first c o u n t r y to create a

d r u g i n d u s t r y b y i g n o r i n g f o r e i g n p a t e n t s . S w i t z e r l a n d d i d t h e s a m e t h i n g in the late n i n e t e e n t h c e n t u r y so it c o u l d p r o d u c e a s p i r i n , a n d a c t u a l l y d i d n ' t i n ­ t r o d u c e p r o d u c t p a t e n t s for p h a r m a c e u t i c a l s u n t i l 1 9 7 8 . B u t I n d i a is t h e o n l y d e v e l o p i n g n a t i o n t h a t u s e d this a p p r o a c h to create a w o r l d - c l a s s p h a r m a c e u ­ tical i n d u s t r y ; a n d today, I n d i a n g e n e r i c v e r s i o n s o f w e s t e r n d r u g s m e e t

70

percent of the country's o w n d e m a n d , and their producers export 60 percent o f their p r o d u c t i o n , m a i n l y to o t h e r d e v e l o p i n g m a r k e t s . For

all this g l o b a l success, India's g e n e r i c d r u g sector has h a d l i t t l e i m p a c t

on the rest o f the e c o n o m y . I n t e r m s o f j o b s , I n d i a n p h a r m a c e u t i c a l c o m p a ­ nies e m p l o y a b o u t 5 0 0 , 0 0 0 p e o p l e o u t o f a n a t i o n a l l a b o r force o f n e a r l y 4 0 0 m i l l i o n . T h e d r u g i n d u s t r y in I n d i a also g e n e r a t e s f e w o f the " s p i l l o v e r s " — w h i c h h a p p e n s w h e n t e c h n o l o g i e s a n d b u s i n e s s e x p e r t i s e d e v e l o p e d in o n e sector are a d o p t e d b y o t h e r lines o f b u s i n e s s — t h a t c a n h e l p d r i v e b r o a d e r d e ­ v e l o p m e n t . T h e reason is t h a t c o m p e t i t i o n d r i v e s s u c h s p i l l o v e r s , a n d m o s t sectors in I n d i a are d o m i n a t e d b y s m a l l e n t e r p r i s e s p r o t e c t e d f r o m c o m p e t i ­ t i o n b y strict r e g u l a t i o n . M o r e o v e r , India's l a r g e p h a r m a c e u t i c a l c o m p a n i e s w i l l l i k e l y face m u c h h a r d e r t i m e s in t h e n e x t ten t o fifteen years. I n J a n u a r y 2 0 0 5 , India's l o n g free r i d e o n t h e R & D o f A m e r i c a n a n d E u r o p e a n d r u g m a k e r s e n d e d w h e n it officially a c c e p t e d t h e p a t e n t r u l e s o f t h e W o r l d I n t e l ­ lectual P r o p e r t y O r g a n i z a t i o n , a c o n d i t i o n set b y t h e U n i t e d S t a t e s for India's WTO

membership. Since the old patent r e g i m e strongly discouraged Indian

companies from developing n e w d r u g s , the country's world-class producers still i n v e s t a p i t i f u l l y s m a l l fraction o f t h e i r r e v e n u e s in R & D . W i t h t h e S i n g h g o v e r n m e n t ' s d e c i s i o n t o finally e n d r e s t r i c t i o n s o n f o r e i g n d i r e c t i n ­ v e s t m e n t in the sector, m o s t l a r g e I n d i a n d r u g m a k e r s w i l l h a v e t o f o r m j o i n t v e n t u r e s w i t h U . S . a n d G e r m a n g e n e r i c p r o d u c e r s t o s t a y in t h e g a m e . India's s o f t w a r e a n d I T service c o m p a n i e s c o m p r i s e t h e nation's l e a d i n g

FUTURECAST

168

sector in t h e g l o b a l e c o n o m y . W h i l e t h e y don't a c c o u n t for m o r e jobs t h a n India's

drug

producers—barely

employment—the

one-tenth

of

i

percent

of

all

Indian

sector's $ 2 8 . 5 b i l l i o n r e v e n u e s in 2 0 0 5 w e r e m o r e than

3 . 5 p e r c e n t o f t h e G D P . T h a t ' s a g r e a t e r share for the sector t h a n e v e r y a d ­ v a n c e d c o u n t r y e x c e p t t h e U n i t e d S t a t e s a n d I r e l a n d . M o r e o v e r , the industry's $ 1 5 . 2 b i l l i o n in e x p o r t s a c c o u n t for m o r e t h a n 2 0 p e r c e n t of t h e v a l u e o f all I n d i a n g o o d s a n d services sold o u t s i d e t h e c o u n t r y . A recent M c K i n s e y s t u d y e s t i m a t e s t h a t before t h e e n d o f t h e d e c a d e , I n d i a n s o f t w a r e a n d I T service c o m p a n i e s w i l l earn r e v e n u e s o f n e a r l y $ 9 0 b i l l i o n a year, or 7 . 5 p e r c e n t o f the nation's G D P , a n d t h e i r a n n u a l e x p o r t s w i l l t o p $ 5 0 b i l l i o n , or a 3 5 p e r c e n t w o r l d m a r k e t share. M u c h l i k e t h e g e n e r i c d r u g m a r k e r s , I n d i a n s o f t w a r e o w e s p a r t o f its s u c ­ cess t o h a p p e n s t a n c e e v e n t s . I n 1 9 8 6 , w h e n U . S . s o f t w a r e m a k e r s w e r e b a t ­ t l i n g each o t h e r for t h e A m e r i c a n m a r k e t , a f o r w a r d - t h i n k i n g I n d i a n national commission determined that the country's banks should adopt a standardized s y s t e m b a s e d o n a U n i x p l a t f o r m . T h a t one a c t t r i g g e r e d a fierce

competition

t o d e s i g n t h e p l a t f o r m ; a n d in a f e w y e a r s , d o z e n s o f y o u n g p r o g r a m m i n g outfits t h a t are n o w h o u s e h o l d n a m e s in N e w D e l h i a n d B a n g a l o r e — I n f o s y s , W i p r o , Softek, T C S , and others—were turning out cheap accounting pack­ a g e s t o w o r k w i t h t h e n e w U n i x p l a t f o r m . T h e b u d d i n g i n d u s t r y received a n ­ o t h e r boost in 1 9 9 1 w h e n t h e U . S . g o v e r n m e n t d i r e c t e d A m e r i c a n software c o m p a n i e s to p a y t h e i r f o r e i g n w o r k e r s p r e v a i l i n g U . S . w a g e s . O n c e a d v a n c e d t e l e c o m m u n i c a t i o n s w e n t g l o b a l in t h e m i d - t o late 1 9 9 0 s , O r a c l e , M i c r o s o f t , a n d others

figured

out that they could sidestep the prevailing w a g e require­

m e n t b y o u t s o u r c i n g s o m e p r o g r a m m i n g to I n d i a , w h e r e t h o u s a n d s o f y o u n g , E n g l i s h - s p e a k i n g workers were skilled w i t h code. Y 2 K provided more impe­ t u s for t h i s o u t s o u r c i n g , a n d t h e s t r a t e g y has p r o d u c e d s o m e n o t a b l e m a r k e t successes, i n c l u d i n g R a m c o ' s M a r s h a l l p r o g r a m , B a n c o 2 0 0 0 f r o m Infosys, and the E X p r o g r a m developed b y T C S . I n d i a n s o f t w a r e also has p r o d u c e d m o r e s p i l l o v e r s t h a n I n d i a n p h a r m a c e u ­ ticals. M o s t n o t a b l y , the r a p i d g r o w t h o f p r o g r a m m i n g jobs has a t t r a c t e d h u n d r e d s o f t h o u s a n d s o f I n d i a n s t u d e n t s to c o m p u t e r sciences a n d e n g i n e e r ­ i n g , p r o v i d i n g a l a b o r force for a f a s t - g r o w i n g I T service industry. B u t other facts o f I n d i a n e c o n o m i c

life h a m p e r t h e sector's p o t e n t i a l

to help propel

broader modernization. R a m p a n t software piracy discourages b u d d i n g Indian g e n i u s e s f r o m d e v e l o p i n g t h e n e x t W i n d o w s or N o r t o n ' s U t i l i t i e s ; a n d for all its h e f t , I n d i a n p r o g r a m m i n g has d e v e l o p e d f e w b r e a k t h r o u g h s . M o r e o v e r , in other countries w i t h s t r o n g I T industries, f r o m Ireland a n d Israel to the U n i t e d S t a t e s , the b i g e c o n o m i c p u n c h c o m e s not f r o m d e v e l o p i n g n e w I T t e c h n o l o g i e s , b u t f r o m their natural a p p l i c a t i o n a n d spread to other industries.

THE TWO POLES OF GLOBALIZATION: CHINA AND THE UNITED STATES

169

India's l a r g e i n d u s t r i a l a n d c o m m e r c i a l c o m p a n i e s h a v e g o n e d i g i t a l t o a g r e a t e r e x t e n t t h a n t h e i r c o u n t e r p a r t s in m a n y o t h e r d e v e l o p i n g n a t i o n s , es­ p e c i a l l y in areas w h e r e the g o v e r n m e n t has finally a l l o w e d s i g n i f i c a n t f o r e i g n d i r e c t i n v e s t m e n t . B u t t h e c o u n t r y ' s h u g e a n d p r i m i t i v e a g r i c u l t u r a l se c tor has no use for I T ; a n d its s p r e a d to o t h e r i m p o r t a n t sectors s u c h as retail, a p ­ p a r e l , c o n s t r u c t i o n , a n d p e r s o n a l services is s t a l l e d b y t h e d o m i n a n c e o f v e r y s m a l l enterprises a n d l a b o r r e g u l a t i o n s t h a t p r e v e n t c o m p a n i e s t h a t m i g h t a d o p t n e w t e c h n o l o g i e s f r o m firing or r e a s s i g n i n g e m p l o y e e s . I n s t e a d , A m e r ­ ica

has b e c o m e a beneficiary o f s p i l l o v e r s f r o m I n d i a n I T . A s n o t e d earlier,

it's c o m m o n l y s a i d — a l t h o u g h t h e source is e l u s i v e — t h a t 4 0 p e r c e n t o f t h e founders a n d t o p e x e c u t i v e s o f S i l i c o n V a l l e y s t a r t u p s in t h e late 1 9 9 0 s w e r e Indian,

6 5

a n d a s u b s t a n t i a l b r a i n d r a i n o f t o p I n d i a n p r o g r a m m e r s a n d soft­

w a r e e n t r e p r e n e u r s to A m e r i c a ( a n d B r i t a i n ) c o n t i n u e s today. India's other idea-based sector w i t h g l o b a l d i m e n s i o n s is its m o v i e business. W h a t westerners call " B o l l y w o o d " p r o d u c e s m o r e m o v i e s a n d v i d e o s t h a n a n y other c o u n t r y save the U n i t e d States. M a n y o f t h e m are p r o d u c e d o n t h e o u t ­ skirts o f H y d e r a b a d , at the w o r l d ' s l a r g e s t s t u d i o c o m p l e x , t h e t w o t h o u s a n d acres a n d m o r e than five h u n d r e d s o u n d s t a g e s a n d set locations that m a k e u p R a m o j i F i l m C i t y . A t any t i m e , s o m e t w e n t y f o r e i g n films a n d forty I n d i a n films are The

in s o m e stage of p r e p r o d u c t i o n , p r o d u c t i o n , or p o s t p r o d u c t i o n there. Indian m o v i e industry today resembles the heyday of the contract

hyperstar H o l l y w o o d system of the

1930s, dominated

by larger-than-life

personalities such A i s h w a r y a R a i , M i s s W o r l d 1 9 9 4 , and S a l m a n K h a n , the bad

boy of Indian celebrities. F r o m

1 9 9 7 t o 2 0 0 6 , M s . R a i a p p e a r e d in

t h i r t y - s i x films, i n c l u d i n g six E n g l i s h - l a n g u a g e f e a t u r e s , a n d t h e g l a m o r o u s actress is w e l l on h e r w a y to b e c o m i n g India's first g l o b a l m o v i e star. I n r e ­ c e n t y e a r s , she b e c a m e t h e first I n d i a n j u r y m e m b e r at C a n n e s , t h e first I n ­ dian

woman

to

be

immortalized

in

M a d a m e Tussaud's W a x

Museum

in L o n d o n , t h e first I n d i a n b e a u t y t o w i n a w o r l d w i d e c o n t r a c t w i t h L ' O r e a l c o s m e t i c s , a n d t h e o n l y I n d i a n a c t o r n a m e d t o Time m a g a z i n e ' s " 1 0 0 M o s t Influential P e o p l e in t h e W o r l d . " M r . K h a n c u l t i v a t e s a d i f f e r e n t a n d e q u a l l y successful p u b l i c i m a g e . W h i l e t h e B o l l y w o o d p r e s s m a c h i n e has l i n k e d M r . K a h n to M s . R a i ( a n d t o a s u c c e s s i o n o f lesser I n d i a n actresses), his l a r g e r t h a n - l i f e i m a g e is defined b y r e g u l a r r u n - i n s w i t h t h e l a w , i n c l u d i n g c h a r g e s of h u n t i n g t h e e n d a n g e r e d B l a c k b u c k a n t e l o p e ( b e l i e v e d in I n d i a n m y t h o l ­ o g y to be the s t e e d for the m o o n g o d C h a n d r a m a ) , d r u n k d r i v i n g , i n c l u d i n g an u g l y case in w h i c h he ran o v e r a n d k i l l e d t h r e e p e o p l e s l e e p i n g

on a

M u m b a i sidewalk, and r u m o r e d connections to the Indian u n d e r w o r l d . A d a s h i n g figure b y a n y s t a n d a r d , M r . K a h n has m a d e fifty films in t h e last t e n years for his tens o f m i l l i o n s o f d e v o t e d I n d i a n fans.

170

FUTURECAST I n a b u s i n e s s d o m i n a t e d e v e r y w h e r e else b y A m e r i c a n s a n d E u r o p e a n s ,

B o l l y w o o d o w e s its u n u s u a l success to t h r e e features o f I n d i a n e c o n o m i c life. F i r s t , India's G D P relies o n o l d - f a s h i o n e d

consumption

rather t h a n i n v e s t ­

m e n t a n d e x p o r t s ; a n d w h e r e c o n s u m e r p r i c e s are v e r y l o w — t h e

average

m o v i e t i c k e t in I n d i a costs t w e n t y c e n t s — t h e v o l u m e o f d o m e s t i c d e m a n d is e n o r m o u s . I n d i a n s p u r c h a s e m o r e t h a n 4 b i l l i o n m o v i e t i c k e t s e v e r y year, t h r e e - q u a r t e r s o f all m o v i e a d m i s s i o n s in A s i a . I n a d d i t i o n , t h e sad state o f I n d i a n i n f r a s t r u c t u r e t h a t b e d e v i l s m o s t i n d u s t r i a l enterprises is i n c i d e n t a l to t h e m o v i e b u s i n e s s , e s p e c i a l l y one so c e n t r a l i z e d in R a m o j i F i l m C i t y . F i n a l l y , filmmaking

in I n d i a , as in A m e r i c a a n d E u r o p e , is a business t a i l o r - m a d e for

t a l e n t e d , e n t r e p r e n e u r i a l p e r s o n a l i t i e s . C u l t u r e m a t t e r s , a n d India's e n t r e p r e ­ n e u r i a l e t h i c is also e v i d e n t in t h e d o m i n a n c e o f all the s m a l l enterprises in m u c h o f t h e e c o n o m y . I n t h e I n d i a n film i n d u s t r y , t h e u n c o m m o n

business

leader t h a t l e d t h e w a y is C h e r u k u r i R a m a R a o , India's version o f a c o m b i n a ­ tion of Samuel G o l d w y n , W i l l i a m R a n d o l p h Hearst, and D o n a l d

Trump.

R a m o j i F i l m C i t y is his c r e a t i o n , a n d he's a g e n u i n e m e d i a b a r o n w h o has set t h e s t a n d a r d s in t h e I n d i a n n e w s p a p e r , television,

and

film

industries

m o r e t h a n t h i r t y y e a r s , a n d w h o s e b u s i n e s s e m p i r e n o w e x t e n d s to

for

hotels,

b a n k i n g , f o o d p r o d u c t s , a d v e r t i s i n g , a n d n u m e r o u s other enterprises. F o r all its s u c c e s s , I n d i a n m o v i e s are a d o m e s t i c s e c t o r w i t h f e w e x p o r t s a n d l i t t l e g l o b a l i m p a c t . W h i l e R a o ' s R a m o j i o p e r a t i o n p r o d u c e s features m u c h m o r e cheaply than A m e r i c a n or E u r o p e a n studios, other largely drive the g l o b a l entertainment

intangibles

i n d u s t r y , f r o m stars a n d w r i t e r s t o

t h e i n e f f a b l e c a p a c i t y t o t a p i n t o w o r l d w i d e p o p u l a r taste. C o m p a r e d to the h u g e g l o b a l e n t e r t a i n m e n t c o n g l o m e r a t e s t h a t o p e r a t e w o r l d w i d e a n d serve g l o b a l a u d i e n c e s , t h e I n d i a n film i n d u s t r y is a p a r o c h i a l s m a l l - f r y a n d l i k e l y t o r e m a i n so. B o l l y w o o d ' s r e v e n u e s are s t i l l less t h a n $ 2 b i l l i o n a year, c o m ­ p a r e d t o w o r l d w i d e r e v e n u e s o f $ 3 0 b i l l i o n t o $ 4 5 b i l l i o n a y e a r each for T i m e W a r n e r , Disney, V i v e n d i Universal, and m o r e than $ 5 0 billion a year for A m e r i c a n - m a d e m o v i e s . T o m a k e it in t h e g l o b a l i n d u s t r y , I n d i a n stars s u c h as M s . R a i o r C h i n e s e d i r e c t o r A n g L e e e n d u p w o r k i n g for V i v e n d i or T i m e Warner. Indian software and generic pharmaceutical companies

do have global

reach, a n d as g l o b a l p l a t f o r m s , t h e y o c c u p y a s i m i l a r p l a c e in India's e c o n o m y as m a n u f a c t u r i n g d o e s in C h i n a . T h a t c o m p a r i s o n , h o w e v e r , helps

explain

w h y I n d i a has l i t t l e p r o s p e c t o f b e c o m i n g a g l o b a l p o w e r h o u s e in the n e x t ten t o fifteen y e a r s . C o m p a r e d t o C h i n e s e m a n u f a c t u r i n g , India's m o d e r n , ideab a s e d sectors c a n n o t c a t a l y z e e c o n o m y - w i d e p r o g r e s s because they're too s m a l l a n d h a v e f e w ties to t h e rest o f t h e e c o n o m y . I n C h i n a ' s case, the flood o f for­ e i g n d i r e c t i n v e s t m e n t o v e r t h e c o m i n g d e c a d e w i l l g i v e its m a n u f a c t u r e r s

THE TWO POLES OF GLOBALIZATION: CHINA AND THE UNITED STATES

171

a g r o w i n g a d v a n t a g e over their rivals in o t h e r d e v e l o p i n g c o u n t r i e s . F o r I n d i a , l o w e r costs in s o f t w a r e a n d g e n e r i c d r u g p r o d u c t i o n w i l l m a k e t h e m m a j o r p l a y e r s , b u t m a i n l y for o u t s o u r c i n g b y w e s t e r n I T a n d p h a r m a c e u t i c a l c o m ­ panies. T h e U . S . F o o d a n d D r u g A d m i n i s t r a t i o n has a p p r o v e d m o r e p l a n t s in I n d i a to p r o d u c e d r u g s for the A m e r i c a n m a r k e t t h a n a n y o t h e r c o u n t r y o u t ­ side the U . S .

6 6

O t h e r w i s e , India's s o f t w a r e a n d p h a r m a c e u t i c a l c o m p a n i e s

w i l l h a v e to c o m p e t e w i t h t h e w o r l d ' s m o s t a d v a n c e d a n d R & D - i n t e n s i v e w e s t e r n enterprises; a n d there's l i t t l e p r o s p e c t in t h e n e x t ten t o fifteen years o f Infosys d i s p l a c i n g M i c r o s o f t or O r a c l e or R a x b u r y o v e r t a k i n g Pfizer or Astra-Zeneca. W h i l e I n d i a w i l l not be a n o t h e r C h i n a in t h e near f u t u r e , it d o e s h a v e t h e p o t e n t i a l for s t e a d y e c o n o m i c p r o g r e s s . F o r t h e last four y e a r s , N e w D e l h i has m o v e d to relax the I n d i a n b u r e a u c r a c y ' s stifling g r i p o n n e w businesses

by 6

s l o w l y d i s m a n t l i n g t h e o l d raj s y s t e m o f l i c e n s i n g a n d p r o d u c t i o n controls. " R e c e n t reforms in t e l e c o m

a n d electricity, a n d a d v a n c e d e q u i p m e n t

should help p r o d u c t i v i t y over the next d e c a d e .

6 8

7

also

W h e r e Singh's liberalization

policies h a v e t a k e n h o l d , the results are e n c o u r a g i n g . I n t h e last f e w y e a r s , for e x a m p l e , A B B , H o n e y w e l l , a n d S i e m e n s h a v e set u p p r o d u c t i o n facilities for electrical a n d e l e c t r o n i c p a r t s a n d p r o d u c t s , L G E l e c t r o n i c s o f K o r e a has shifted s o m e o f its h a n d s e t m a n u f a c t u r i n g t h e r e , a n d D e g u s s a a n d R o h m & Haas manufacture chemicals. A decade ago, western multinationals couldn't g e t a f o o t h o l d a l m o s t a n y w h e r e in I n d i a ; t o d a y , t h e i r share o f t h e I n d i a n m a r ­ ket has risen to 4 9 p e r c e n t in breakfast cereals a n d w a s h i n g m a c h i n e s , 5 1 p e r ­ c e n t in televisions, a n d 2 7 p e r c e n t in a u t o s .

6 9

A n d t h e p r i m e m i n i s t e r a n d his

r e f o r m - m i n d e d allies can d r i v e h o m e t h e e x a m p l e s o f s o f t w a r e a n d p h a r m a ­ ceuticals, w h i c h n o u r i s h e d o n c e t h e g o v e r n m e n t b e g a n t o d e r e g u l a t e f o r e i g n direct i n v e s t m e n t a n d relax s o m e l a b o r r e s t r i c t i o n s . D e m o g r a p h i c s also c o u l d f a v o r r a p i d p r o g r e s s for I n d i a . T h e c o u n t r y ' s b o o m e r s are j u s t n o w r e a c h i n g a d u l t h o o d , a n d b y 2 0 2 0 t w o - t h i r d s o f t h e p o p u l a t i o n w i l l be o f w o r k i n g a g e . I n d i a c o u l d reap the s a m e k i n d o f d e m o ­ g r a p h i c d i v i d e n d in t h e n e x t t w o d e c a d e s as t h e A s i a n T i g e r s d i d in t h e 1 9 7 0 s and

1 9 8 0 s — i f , l i k e T a i w a n a n d K o r e a , I n d i a d e v o t e s resources t o e d u c a t i n g

its y o u n g p e o p l e a n d rolls b a c k r e g u l a t i o n s t h a t still p r o t e c t m i l l i o n s m o m - a n d - p o p businesses f r o m c o m p e t i t i o n .

O n e o f India's l e a d i n g

of

econo­

mists, J a g d i s h Sheth, recently proposed an even more radical approach: A l i g n his c o u n t r y ' s p o l i c i e s w i t h t h e A m e r i c a n m o d e l o f p r i v a t i z a t i o n , i n c e n t i v e s for

i n n o v a t i o n , a c o n v e r t i b l e c u r r e n c y t i e d to t h e U . S . dollar, m a r k e t s o p e n to

foreign i n v e s t m e n t a n d g o o d s , a n d m a s s i v e i n f r a s t r u c t u r e i m p r o v e m e n t s .

7 0

But

if I n d i a fails t o p u t in p l a c e t h e " a p p r o p r i a t e e c o n o m i c , social a n d p o l i t i ­

cal

i n s t i t u t i o n a n d p o l i c i e s , " as t h e d i r e c t o r o f t h e I n t e r n a t i o n a l I n s t i t u t e for

FUTURECAST

172

P o p u l a t i o n S c i e n c e s in M u m b a i , P. N . M a r i B h a t , has p u t it, India's d e m o ­ g r a p h i c s w i l l "only lead t o h i g h e r levels o f u n e m p l o y m e n t . "

7 1

It's a l a r g e u n d e r t a k i n g . T h e I M F still rates India's e c o n o m y as one o f the m o s t r e s t r i c t i v e in t h e w o r l d . O n its p r e s e n t c o u r s e , N o b e l laureate A m a r t y a S e n w r o t e recently, I n d i a c o m b i n e s

t h e w o r s t aspects o f c a p i t a l i s m a n d

s o c i a l i s m — " i t hasn't m a d e t h e g a i n s in h e a l t h care a n d e d u c a t i o n that social­ ist n a t i o n s d o , a n d has failed t o l e v e r a g e t h e profit i n c e n t i v e o f c a p i t a l i s m to produce a dynamic economy."

72

I f t h a t course doesn't c h a n g e , I n d i a w i l l still

m a t t e r in t h e g l o b a l e c o n o m y , b u t m a i n l y as a c o n s u m e r m a r k e t for e v e r y ­ t h i n g p r o d u c e d in C h i n a , t h e o t h e r A s i a n T i g e r s , a n d t h e a d v a n c e d nations. T o d a y , I n d i a has s o m e 1 . 2 m i l l i o n households w i t h annual i n c o m e s o f $ 1 0 , 0 0 0 or m o r e ( e q u i v a l e n t to $ 5 0 , 0 0 0 , m e a s u r e d b y p u r c h a s i n g p o w e r p a r i t y ) c o n ­ suming western-branded products.

7 3

M o r e i m p o r t a n t is India's e m e r g i n g

m i d d l e class. S o m e 4 0 m i l l i o n h o u s e h o l d s h a v e a n n u a l i n c o m e s o f $ 4 , 0 0 0 to $ 1 0 , 0 0 0 — e q u i v a l e n t t o $ 2 0 , 0 0 0 to $ 5 0 , 0 0 0 a y e a r in b u y i n g p o w e r — a n d t h e i r n u m b e r s s h o u l d reach 6 5 m i l l i o n h o u s e h o l d s b y 2 0 1 0 a n d 8 0 to 9 0 m i l ­ lion b y 2 0 2 0 . T h e y w i l l c o m p r i s e a h u g e c o n s t i t u e n c y for l o w e r i n g India's p r o ­ h i b i t i v e tariffs on f o r e i g n g o o d s . W h e n t h a t h a p p e n s , as it a l m o s t i n e v i t a b l y w i l l u n d e r W T O r u l e s a n d f u t u r e n e g o t i a t i o n s , I n d i a w i l l b e c o m e the world's n u m b e r - t h r e e m a r k e t for t h o u s a n d s o f p r o d u c t s — m o s t of t h e m p r o d u c e d s o m e w h e r e else.

T h e e x t r a o r d i n a r y p o w e r o f g l o b a l i z a t i o n is e v i d e n t w h e r e v e r w e are a n d w h a t e v e r w e d o . I t e n a b l e s a d e v e l o p i n g c o u n t r y to not o n l y i m p o r t a d v a n c e d g o o d s a n d e q u i p m e n t , b u t secure entire a d v a n c e d industries a n d t h e latest m a n a g e m e n t e x p e r t i s e t h r o u g h transfers a n d t r a n s p l a n t s , a n d t h e n e x p o r t w h a t those i n d u s t r i e s p r o d u c e to c o u n t l e s s m a r k e t s a r o u n d the w o r l d . I n so d o i n g , g l o b a l i z a t i o n enables tens o f m i l l i o n s of p e o p l e in d e v e l o p i n g economies t o w o r k w i t h m o d e r n t e c h n o l o g i e s a n d business m e t h o d s for t h e first t i m e , a n d t h u s lift t h e m s e l v e s o u t o f p o v e r t y . F o r the a d v a n c e d c o u n t r i e s , g l o b a l i z a ­ t i o n e n a b l e s l a r g e c o r p o r a t i o n s t o locate each s t a g e o f the p r o d u c t i o n of their g o o d s , a n d soon m a n y services too, w h e r e v e r in t h e w o r l d it m a k e s e c o n o m i c sense. T h e s e g l o b a l c o m p a n i e s can t a p m a r k e t s across the w o r l d w h o s e g o v ­ e r n m e n t s a n d p e o p l e are e a g e r for t h e n e w , a d v a n c e d p r o d u c t s , processes, a n d t e c h n o l o g i e s . T h e p e o p l e in t h e a d v a n c e d e c o n o m i e s g a i n access t o countless lower-priced g o o d s and services, w h i l e their employers achieve productivity g a i n s t h a t e v e n t u a l l y m a y p r o d u c e t h e i n c o m e g r o w t h for t h e i r w o r k e r s that leads t o u p w a r d m o b i l i t y . T e c h n o l o g y p l a y s a c r i t i c a l b u t still s u p p o r t i n g role in all o f this. A d -

THE TWO POLES OF GLOBALIZATION: CHINA AND THE UNITED STATES

173

v a n c e d t e l e c o m m u n i c a t i o n s a n d i n f o r m a t i o n t e c h n o l o g i e s are t h e b a c k b o n e o f e v e r y g l o b a l c o r p o r a t e n e t w o r k , a n d these a n d o t h e r t e c h n o l o g i e s

are t h e

transfers t h a t m a t t e r m o s t to t h e p r o g r e s s o f d e v e l o p i n g c o u n t r i e s . W h i l e a n y o n e w i t h t h e r e q u i s i t e skills c a n use these t e c h n o l o g i e s , c r e a t i n g a t h e o r e t ­ ical p o s s i b i l i t y o f w h a t T h o m a s F r i e d m a n f a m o u s l y calls a w o r l d that's flat, e v e r y o n e c a n n o t use t h e m w i t h c o m p a r a b l e effectiveness. T o s t a r t , these t e c h ­ nologies

are useless o u t s i d e m o d e r n b u s i n e s s o r g a n i z a t i o n s . A n d t h e real

w o r l d is no flatter for entire n a t i o n s , b e c a u s e t h e c a p a c i t y to t a k e serious a d ­ v a n t a g e of g l o b a l i z a t i o n differs so m u c h f r o m c o u n t r y t o c o u n t r y . At

this t i m e , C h i n a is d e r i v i n g g r e a t e r benefits f r o m g l o b a l i z a t i o n t h a n

other d e v e l o p i n g n a t i o n s , e v e n t h o u g h t h e r e l a t i v e h u m a n a n d n a t u r a l r e ­ sources o f m a n y others rival C h i n a ' s . B u t C h i n a ' s p o l i t i c a l c o m m i t m e n t

to

g l o b a l i z a t i o n has been g r e a t e r , e s p e c i a l l y in its e x t r e m e o p e n n e s s to f o r e i g n d i r e c t i n v e s t m e n t a n d its l a r g e p u b l i c i n v e s t m e n t s in e d u c a t i o n a n d infra­ s t r u c t u r e . M o r e o v e r , the C h i n e s e p e o p l e t h u s far h a v e b e e n w i l l i n g t o a c c e p t the w r e n c h i n g social costs o f t h e i r c o u n t r y ' s t u r b o c h a r g e d m o d e r n i z a t i o n . C h i n a ' s e x t r a o r d i n a r y e c o n o m i c p r o g r e s s is a p p a r e n t t o e v e r y o n e . T h e o b s t a ­ cles it w i l l face in e x t e n d i n g t h i s p r o g r e s s for t h e n e x t t e n to fifteen years h a v e been less w e l l a p p r e c i a t e d . The

U n i t e d S t a t e s s i m i l a r l y is d e r i v i n g g r e a t e r benefits f r o m g l o b a l i z a t i o n

t h a n other l a r g e a d v a n c e d nations. A m e r i c a b e g i n s w i t h c e r t a i n a d v a n t a g e s in g l o b a l i z a t i o n , e s p e c i a l l y in the d e v e l o p m e n t a n d s p r e a d o f n e w and

technologies

the relative e d u c a t i o n a n d skills o f its w o r k f o r c e . M o s t o f all, t h e c o u n ­

try's m o r e intense c o m p e t i t i o n d r i v e s its c o m p a n i e s t o m a k e b e t t e r a n d often m o r e e x t e n s i v e use o f b o t h the n e w t e c h n o l o g i e s a n d t h e n e w o p p o r t u n i t i e s in d e v e l o p i n g m a r k e t s . C u r i o u s l y , w h i l e A m e r i c a ' s c u r r e n t difficulties w i t h s t a g ­ n a t i n g w a g e s a n d s l o w j o b creation h a v e b e c o m e a p p a r e n t t o m o s t p e o p l e , its s t r e n g t h s for s u s t a i n i n g its p r e e m i n e n t p o s i t i o n are less w e l l a p p r e c i a t e d , es­ p e c i a l l y in m u c h of the U . S . a n d E u r o p e a n m e d i a a n d in A m e r i c a n p o l i t i c a l debate.

CHAPTER FIVE

THE NEW ECONOMICS OF DECLINE FOR EUROPE AND JAPAN

THE

SLOW U N R A V E L I N G of the economic strength of J a p a n and the b i g

three e c o n o m i e s o f E u r o p e is as i m p o r t a n t as C h i n a ' s rise a n d A m e r i c a ' s s u s ­ tained success. I n all four instances, o n c e - s t r o n g e c o n o m i e s a n d societies to date h a v e b e e n u n a b l e to a c c o m m o d a t e t h e basic c h a n g e s o f g l o b a l i z a t i o n . S i n c e a c o u n t r y ' s g l o b a l influence a n d p o w e r are t i e d closely to its e c o n o m i c c a p a c i t y a n d c l o u t , these d e v e l o p m e n t s are t h e m a t e r i a l o f w o r l d history. It's

ironic, since E n g l a n d , G e r m a n y , a n d F r a n c e , i n d i v i d u a l l y a n d c o l l e c ­

tively, led industrialization a n d d o m i n a t e d g l o b a l c o m m e r c e a n d p r o d u c t i o n for

m o r e t h a n t w o h u n d r e d years, a n d their w a r s a n d d o m e s t i c p o l i t i c s r e v e r ­

berated w o r l d w i d e as A m e r i c a ' s d o today. A s r e c e n t l y as 1 9 4 0 , E u r o p e ' s b i g three a c c o u n t e d for nearly 2 0 p e r c e n t o f w o r l d w i d e p r o d u c t i o n , d o w n o n l y s l i g h t l y f r o m 1 9 1 3 a n d a little m o r e t h a n t h e U n i t e d S t a t e s in the s a m e year, w h i l e J a p a n w a s Asia's first m o d e r n m i l i t a r y p o w e r a n d e c o n o m i c p o w e r h o u s e . E v e n t w o decades later, w h e n A m e r i c a a n d t h e S o v i e t U n i o n f u l l y d o m i n a t e d g l o b a l p o l i t i c s , the defeated G e r m a n y a n d J a p a n b e c a m e p o s t w a r m o d e l s o f e c o n o m i c recovery a n d p r o g r e s s . T h e i r e c o n o m i c a c h i e v e m e n t s s e e m e d so a w e ­ s o m e that t h e y w e r e w i d e l y d u b b e d "miracles," w h i l e p o s t w a r E n g l a n d a n d F r a n c e created n e w w o r l d w i d e standards for social w e l f a r e p r o t e c t i o n s . O n t o p of all that, t w o generations o f E u r o p e a n leaders m o v e d g r a d u a l l y to m a k e their continent m e a n s o m e t h i n g m o r e t h a n g e o g r a p h y . T h e E u r o p e a n C o m m u n i t y and

then the E u r o p e a n U n i o n a d o p t e d the r e m a r k a b l e a m b i t i o n o f c r e a t i n g a

n e w g l o b a l s t a n d a r d for transnational c o m i t y a n d c i v i l i z a t i o n , a n d r e s t o r i n g its

175

FUTURECAST

176

m e m b e r nations to e c o n o m i c a n d p o l i t i c a l e m i n e n c e . J a p a n , w h i c h s e e m e d to t a k e its m i l i t a r y defeat h a r d e r t h a n G e r m a n y or Italy, focused on b e c o m i n g the w o r l d ' s richest society. F o r all t h e i r a c h i e v e m e n t s a n d e x p e c t a t i o n s , for fifteen years E u r o p e ' s m a ­ jor c o u n t r i e s a n d J a p a n h a v e b e e n f a l l i n g b e h i n d in m o s t w a y s t h a t m a t t e r e c o n o m i c a l l y a n d , for t h e rest o f t h e w o r l d , p o l i t i c a l l y , too. B y 2 0 0 6 , E u r o p e ' s b i g t h r e e a c c o u n t e d for j u s t 1 0 p e r c e n t o f w o r l d G D P , less t h a n h a l f of w h a t A m e r i c a p r o d u c e d t h a t year, w h i l e J a p a n c o n t i n u e d to s t r u g g l e w i t h

the

w o r s t e c o n o m i c r e c o r d in t h e a d v a n c e d w o r l d . M o s t s o b e r i n g of all, there's lit­ tle reason to e x p e c t a real t u r n a r o u n d for a n y o f t h e m o v e r the n e x t ten years. A n d they cannot claim that the U n i t e d States and C h i n a s i m p l y have unique n a t i v e a d v a n t a g e s for t h i s p e r i o d . I r e l a n d a n d K o r e a s h o w t h a t a n y c o u n t r y c a n create a successful p l a c e for itself in g l o b a l i z a t i o n — a s successful as the U n i t e d S t a t e s or C h i n a , i f on a m o r e l i m i t e d scale. F r o m 1 9 9 0 t o 2 0 0 5 , t h e c o m b i n e d o u t p u t o f F r a n c e , G e r m a n y , a n d the U n i t e d K i n g d o m , a d j u s t e d for inflation, g r e w a b o u t 3 4 p e r c e n t — b a r e l y 2 p e r c e n t a y e a r — a n d J a p a n g r e w at h a l f t h a t u n r e m a r k a b l e rate. O v e r the s a m e fifteen y e a r s , t h e A m e r i c a n e c o n o m y e x p a n d e d 5 8 p e r c e n t , w h i c h translates i n t o m o r e t h a n 3 . 5 p e r c e n t a y e a r or 7 0 p e r c e n t faster t h a n E u r o p e ' s m a j o r e c o n o m i e s a n d 1 5 0 p e r c e n t faster t h a n J a p a n . T h e u n s u r p r i s i n g o u t c o m e is t h a t A m e r i c a n s are a lot b e t t e r off e c o n o m i c a l l y t h a n E u r o p e a n s or J a p a n e s e , w i t h i n c o m e p e r p e r s o n in J a p a n a n d E u r o p e ' s m a j o r c o u n t r i e s r a n g i n g f r o m $ 2 9 , 2 0 0 to $ 3 2 , 7 0 0 , c o m p a r e d to $ 4 2 , 0 0 0 in t h e U n i t e d S t a t e s . S o an aver­ a g e A m e r i c a n n o w earns 2 8 p e r c e n t m o r e t h a n an a v e r a g e B r i t o n , 3 6 p e r c e n t m o r e t h a n a n a v e r a g e G e r m a n or J a p a n e s e , a n d 4 0 p e r c e n t m o r e t h a n a t y p i ­ cal F r e n c h p e r s o n ; a n d those g a p s h a v e w i d e n e d since 1 9 9 0 . U n l e s s m a n y t h i n g s c h a n g e , b y 2 0 2 0 a t y p i c a l E u r o p e a n a n d J a p a n e s e w i l l l i v e on a b o u t h a l f w h a t an a v e r a g e A m e r i c a n w i l l earn. Ignore the chorus of A m e r i c a n economic

t r i u m p h a l i s m — w h i c h is not

m u c h different f r o m G e r m a n y ' s v i e w o f itself in t h e 1 9 7 0 s , J a p a n ' s in the 1 9 8 0 s , or B r i t a i n ' s t h r o u g h m o s t o f t h e n i n e t e e n t h c e n t u r y — a n d it's a p p a r ­ e n t t h a t t h e U . S . e c o n o m y p e r f o r m e d w e l l o v e r t h e last d e c a d e , b u t n o t e x t r a o r d i n a r i l y so. T h e r e l a t i v e l y e r o d i n g e c o n o m i c c o n d i t i o n s o f so m a n y E u r o p e a n s a n d J a p a n e s e c o m e m a i n l y f r o m their o w n c o u n t r i e s ' s u b s t a n d a r d p e r f o r m a n c e s . B r i t a i n ' s r e c o r d is b e t t e r t h a n France's a n d m u c h b e t t e r than G e r m a n y ' s , a n d G e r m a n y ' s p e r f o r m a n c e has b e e n s t r o n g e r t h a n J a p a n ' s . B u t all o f t h e i r r e c e n t r e c o r d s are m a r k e d l y w o r s e t h a n n o t o n l y the U n i t e d S t a t e s , b u t also t h a n t h e i r o w n p e r f o r m a n c e in t h e p r e c e d i n g d e c a d e s . T h e p r e s s i n g m a t t e r is n o t t h i s recent p a s t or the b e t t e r d e c a d e s t h a t p r e ­ c e d e d it, b u t t h e v e r y l i k e l y p r o s p e c t t h a t these e c o n o m i e s w i l l d o as b a d l y or

THE NEW ECONOMICS OF DECLINE FOR EUROPE AND JAPAN

177

w o r s e o v e r the n e x t ten to fifteen years. P u t t o g e t h e r t h i r t y y e a r s or m o r e o f s u b s t a n d a r d e c o n o m i c p e r f o r m a n c e , a n d b y 2 0 2 0 t h e y c o u l d b e e c o n o m i e s in g e n u i n e a n d serious d e c l i n e .

WHAT'S GONE WRONG IN EUROPE The

usual e x p l a n a t i o n s for E u r o p e ' s e c o n o m i c difficulties b e g i n w i t h t h e i r

welfare

states.

unemployment

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example,

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rates for n e a r l y t w o d e c a d e s h a v e r u n 5 0 t o

too—

1 0 0 percent

h i g h e r t h a n A m e r i c a ' s . F o r m o s t e c o n o m i s t s , t h e c u l p r i t s are o v e r l y g e n e r o u s u n e m p l o y m e n t benefits t h a t m a k e jobless E u r o p e a n s v e r y c h o o s y a b o u t g o i n g b a c k to w o r k , a l o n g w i t h h i g h m i n i m u m w a g e s , s k y - h i g h p a y r o l l taxes a n d legal barriers to firing a n y b o d y t h a t m a k e e m p l o y e r s r e l u c t a n t to h i r e t h e m . It's

all t r u e , b u t it's p r o b a b l y o n l y a s m a l l p a r t o f t h e i r l a r g e r e c o n o m i c p r o b ­

l e m s . T a k e a b r o a d e r v i e w a n d n o t i c e , for starters, t h a t o v e r t h e s a m e t w e n t y years, m o s t n e w A m e r i c a n jobs c a m e f r o m n e w businesses or f a s t - g r o w i n g y o u n g ones. N o w the l o w rates o f n e w b u s i n e s s c r e a t i o n in J a p a n a n d m o s t o f E u r o p e — l e s s t h a n h a l f as s t r o n g as A m e r i c a ' s , a c c o r d i n g to

McKinsey

s t u d i e s — l o o k at least as i m p o r t a n t as all t h e w o r k e r p r o t e c t i o n s . T h e r e ' s n o s h o r t a g e o f y o u n g or y o u n g i s h p e o p l e in all o f these p l a c e s w i t h d r i v i n g e n ­ trepreneurial a m b i t i o n . B u t as O E C D s t u d i e s r e g u l a r l y c o m p l a i n , a n y o n e set­ t i n g u p a n e w business in G e r m a n y , F r a n c e , or E n g l a n d faces m u c h g r e a t e r b u r e a u c r a t i c h u r d l e s a n d m u c h g r e a t e r d i f f i c u l t y finding b a n k or v e n t u r e c a p ­ ital

financing,

a n d t h e n has to c o m p e t e w i t h r i v a l s t h a t r e c e i v e g e n e r o u s g o v ­

e r n m e n t s u b s i d i e s a n d p r o t e c t i o n s . M c K i n s e y c o n s u l t a n t s h a v e f o u n d , for e x a m p l e , t h a t it takes t w o h u n d r e d d a y s to r e g i s t e r a sizable b u s i n e s s p r o p ­ e r t y in F r a n c e , v e r s u s t w o d a y s in S w e d e n , a n d m o n t h s or years to g e t a p ­ p r o v a l to b u i l d a n e w f a c t o r y in F r a n c e , G e r m a n y , or I t a l y .

1

T h a t still doesn't solve the m y s t e r y , b e c a u s e t h e s a m e barriers a n d i m p e d i ­ m e n t s m a d e less difference for g r o w t h a n d e v e n u n e m p l o y m e n t in t h e 1 9 7 0 s and

1 9 8 0 s . M o r e o v e r , h i g h u n e m p l o y m e n t hasn't b e e n a f a c t o r in J a p a n . I t

t u r n s o u t t h a t h i g h u n e m p l o y m e n t — a l l e g e d l y t h e h a l l m a r k failure o f E u ­ rope's w e l f a r e s t a t e s — m a t t e r s less, for e x a m p l e , t h a n differences in h o w m u c h of a c o u n t r y ' s p o t e n t i a l l a b o r force a c t u a l l y seeks or does w o r k . E v e r y c o u n t r y has its o w n w a y o f m e a s u r i n g t h i s , w h i c h e c o n o m i s t s call t h e "labor p a r t i c i ­ p a t i o n rate." S o the U . S . B u r e a u o f L a b o r S t a t i s t i c s r e c a l c u l a t e s e v e r y b o d y ' s 2

d a t a so t h e y c a n b e c o m p a r e d , a n d it t u r n s o u t t h a t c o m p a r e d to A m e r i c a n s , a s m a l l e r share o f w o r k i n g - a g e E u r o p e a n s a n d J a p a n e s e are in t h e i r c o u n t r i e s ' labor force at all. S o m e 6 3 p e r c e n t o f w o r k i n g - a g e B r i t o n s w o r k or w a n t t o , as

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178

d o 6 0 p e r c e n t o f J a p a n e s e , 5 6 p e r c e n t o f F r e n c h , 5 8 p e r c e n t of G e r m a n s , a n d j u s t less t h a n 5 0 p e r c e n t o f I t a l i a n s — t h a t ' s c o m p a r e d to 6 6 p e r c e n t o f A m e r ­ icans. T h e share o f E u r o p e a n s t h a t c o u l d w o r k a n d a c t u a l l y d o or w a n t to is d e ­ pressed b y some of the w o r k e r protection p r o g r a m s that d r y u p potential j o b s , a n d b y t r u l y s e l f - d e f e a t i n g p o l i c i e s e n c o u r a g i n g early r e t i r e m e n t . B u t a b i g g e r factor is p r o b a b l y c u l t u r e , s i n c e m u c h o f t h e differences c o m e f r o m the share o f w o m e n w o r k i n g or l o o k i n g for j o b s . N e a r l y 6 0 p e r c e n t of A m e r i c a n w o m e n are in t h e i r c o u n t r y ' s l a b o r force, a n d E n g l i s h w o m e n c o m e close to t h a t at 5 6 p e r c e n t ; b u t o n l y h a l f or less o f all w o r k i n g - a g e J a p a n e s e , F r e n c h , a n d G e r m a n w o m e n h a v e jobs or say t h e y w a n t t h e m , a n d an a s t o n i s h i n g l y l o w 3 8 p e r c e n t o f I t a l i a n w o m e n . E x p e r t s o n t h e left often say t h a t this is a re­ s u l t o f i n a d e q u a t e p u b l i c c h i l d care; t h o s e o n t h e r i g h t p o i n t to h i g h taxes on s e c o n d earners; a n d t h o s e in t h e m i d d l e s o m e t i m e s b l a m e s h o r t school d a y s . A l l t h o s e factors a p p l y as m u c h or m o r e t o A m e r i c a as to G e r m a n y , F r a n c e , B r i t a i n , or Italy. E c o n o m i c a l l y , w o m e n are s i m p l y less t h e w o r k i n g equals of m e n in c o n t i n e n t a l E u r o p e a n d J a p a n t h a n in A m e r i c a or E n g l a n d . I n the U n i t e d S t a t e s a n d B r i t a i n , the b i g c h a n g e in t h e n u m b e r s of w o m e n g o i n g to w o r k o c c u r r e d in t h e 1 9 7 0 s , w h e n h i g h inflation a n d s m a l l p r o d u c t i v i t y g a i n s s q u e e z e d f a m i l y i n c o m e s a n d d r o v e m o r e w i v e s to w o r k . B u t families in G e r ­ m a n y , F r a n c e , Italy, a n d J a p a n felt t h e s a m e squeeze w i t h o u t a s i m i l a r r e ­ sponse, w h i c h further suggests

t h a t t h e p e r s i s t e n t differences

in

women

w o r k i n g t o d a y s u b s t a n t i a l l y reflect c u l t u r e . F o r e c o n o m i e s t h a t create m u c h o f t h e i r v a l u e b y a p p l y i n g h u m a n a n d t e c h n o l o g i c a l c a p i t a l , e n c o u r a g i n g those w i t h t h e m o s t e x p e r i e n c e to retire early a n d t a c i t l y d i s c o u r a g i n g w o m e n f r o m w o r k i n g at all are v e r y c o s t l y m i s ­ t a k e s . I f these a t t i t u d e s p e r s i s t , as t h e y s e e m l i k e l y t o , t h e y c o u l d c u t i n t o E u ­ r o p e a n a n d J a p a n e s e g r o w t h e v e n m o r e in c o m i n g years, as g l o b a l i z a t i o n leaves a d v a n c e d e c o n o m i e s w i t h l i t t l e else to d r i v e g r o w t h b u t their h u m a n a n d t e c h n o l o g i c a l resources. T h a t ' s n o t all o f it. W h a t m a t t e r s j u s t as m u c h is h o w h a r d a n d h o w w e l l t h e p e o p l e w h o h a v e j o b s a c t u a l l y w o r k . H e r e , too, E u r o p e ' s m a j o r e c o n o m i e s o p e r a t e differently. F i r s t , t h e a v e r a g e w o r k i n g G e r m a n , F r e n c h p e r s o n , I t a l ­ ian, o r B r i t o n t o d a y w o r k s f e w e r h o u r s t h a n t h e y u s e d to a n d a lot f e w e r than t h e a v e r a g e A m e r i c a n or J a p a n e s e . A m e r i c a n s a n d J a p a n e s e w o r k on a v e r a g e a b o u t 1 , 8 0 0 h o u r s a year, w h i c h c o m e s to 3 7 . 5 h o u r s a w e e k ( a s s u m i n g y o u t a k e off four w e e k s a y e a r for v a c a t i o n s a n d h o l i d a y s ) . T h e a v e r a g e B r i t o n w o r k s 8 percent fewer hours than that; the average Italian 1 3 percent fewer hours; and the average G e r m a n and French w o r k i n g person, about 2 5 percent 3

f e w e r h o u r s . T h a t c o m e s to an a v e r a g e w o r k w e e k in G e r m a n y a n d F r a n c e o f

THE NEW ECONOMICS OF DECLINE FOR EUROPE AND JAPAN

179

less t h a n 3 0 hours p e r w e e k . A s it h a p p e n s , A m e r i c a n s a n d J a p a n e s e l o o k l i k e slackers, too, c o m p a r e d to t h e S o u t h K o r e a n s , w h o w o r k a n a v e r a g e 5 0 - h o u r w e e k or one t h i r d m o r e t h a n A m e r i c a n s or J a p a n e s e a n d t w o - t h i r d s m o r e t h a n the F r e n c h or G e r m a n s . A s w e w i l l see a l i t t l e later, that's one reason w h y p e r c a p i t a i n c o m e s in K o r e a w e n t f r o m less t h a n $ 6 0 0 in i 9 6 0 to a b o u t $ 1 8 , 0 0 0 today.

O n t o p o f all o f this, p e o p l e in J a p a n a n d m a n y E u r o p e a n c o u n t r i e s ( b u t not all) don't p r o d u c e as m u c h for e v e r y h o u r t h e y d o w o r k . T h a t ' s w h a t " p r o d u c ­ t i v i t y " m e a s u r e s , a n d the v a r i a t i o n s are s t r i k i n g a n d i m p o r t a n t . T h e m a r q u e e case here is the J a p a n e s e : T h e i r h o u r s are as l o n g as a n y in t h e a d v a n c e d w o r l d , their u n e m p l o y m e n t

rates are l o w e r t h a n a l m o s t anyone's, a n d m o r e o l d e r

p e o p l e k e e p on w o r k i n g in J a p a n t h a n m o s t o t h e r p l a c e s . B u t m u c h o f those g a i n s are offset b y the w o r s t p r o d u c t i v i t y rates o f a n y m a j o r a d v a n c e d e c o n ­ o m y (as w e l l as the l o w rates o f w o m e n w o r k i n g ) . J a p a n ' s w o r k e r s p r o d u c e g o o d s a n d services w o r t h on a v e r a g e $ 3 4 . 4 0 p e r h o u r , w h i c h is m o r e t h a n 4 0 p e r c e n t less t h a n the a v e r a g e v a l u e p r o d u c e d each h o u r b y A m e r i c a n w o r k e r s . F r a n c e is the o p p o s i t e case: F r e n c h w o r k e r s p r o d u c e as m u c h for e v e r y h o u r t h e y w o r k as A m e r i c a n s — a b o u t $ 4 9 in v a l u e o f G D P p e r h o u r — b u t suffer very high u n e m p l o y m e n t and w o r k relatively few h o u r s .

4

( W o r k e r s in B e l ­

g i u m , N o r w a y , a n d L u x e m b o u r g p r o d u c e e v e n m o r e p e r hour, b u t they're in niche e c o n o m i e s w i t h special c i r c u m s t a n c e s . ) G e r m a n s don't d o m u c h b e t t e r t h a n the F r e n c h in t h e share o f p e o p l e w o r k i n g or t h e h o u r s t h e y w o r k , a n d on t o p of t h a t , the a v e r a g e v a l u e o f w h a t t h e y p r o d u c e in an h o u r is a b o u t 8 p e r ­ cent less. A n d B r i t o n s w o r k l o n g e r h o u r s a n d h a v e h i g h e r l a b o r p a r t i c i p a t i o n rates t h a n the F r e n c h or G e r m a n s , b u t t h e y p r o d u c e 1 8 p e r c e n t less p e r h o u r than A m e r i c a n s . W i t h these national v a r i a t i o n s , s o m e c o m b i n a t i o n o f b e i n g m o r e l i k e l y to be u n e m p l o y e d or o u t o f the w o r k f o r c e , a n d for those w i t h j o b s , w o r k i n g fewer hours a n d p r o d u c i n g less p e r hour, m e a n s it's n o s u r p r i s e t h a t the a v e r ­ a g e E u r o p e a n a n d J a p a n e s e n o w earns so m u c h less t h a n t h e a v e r a g e A m e r i ­ can,

a n d t h a t their c o u n t r i e s c o n s i s t e n t l y g r o w less t h a n t h e U n i t e d S t a t e s . If J a p a n , G e r m a n y , a n d F r a n c e — a n d B r i t a i n t o a lesser d e g r e e — i n t e n d

to

a v o i d even h a r d e r t i m e s o v e r t h e n e x t d e c a d e a n d b e y o n d , t h e i r best b e t lies in g o o s i n g their p r o d u c t i v i t y . A t this p o i n t , a t t r a c t i n g m o r e w o m e n i n t o t h e labor force or p e r s u a d i n g older p e o p l e to k e e p w o r k i n g w o u l d m a i n l y m e a n h i g h e r u n e m p l o y m e n t for t h e i r y o u n g p e o p l e a n d l o w e r - s k i l l e d m e n . M o r e ­ over, w h a t e v e r t h e y d o in those areas, t h e i r harsh d e m o g r a p h i c realities w i l l i n e x o r a b l y worsen the p r o b l e m o f too f e w p e o p l e w o r k i n g or w o r k i n g too f e w

FUTURECAST

180

h o u r s . A l r e a d y in J a p a n a n d soon across m o s t of E u r o p e , t h e r e t i r e m e n t of m i l l i o n s o f b o o m e r s is b e g i n n i n g t o s h r i n k t h e i r w o r k f o r c e s , a n d t h a t w i l l c o n t i n u e for at least t h e n e x t g e n e r a t i o n . I f G e r m a n or J a p a n e s e p o l i c y m a k e r s c a n figure o u t w h y , for e x a m p l e , the p r o d u c t i v i t y o f t h e i r m a n u f a c t u r e r s g r e w 6 0 p e r c e n t less t h a n their A m e r i c a n c o u n t e r p a r t s f r o m 1 9 9 2 to 2 0 0 6 , or B r i t i s h m a n u f a c t u r e r s 9 0 p e r c e n t less,

5

t h e y m i g h t b e a b l e t o affect t h e e c o n o m i c d e c l i n e l o o m i n g o u t there for t h e m . T h e r e ' s no s h o r t a g e o f s t a n d a r d e x p l a n a t i o n s . T h e g l o b a l c o n s u l t a n c y M c K i n sey a n d C o m p a n y has m a d e a c o t t a g e i n d u s t r y o u t o f p i n n i n g p r o d u c t i v i t y p r o b l e m s o n g o v e r n m e n t r e g u l a t i o n in t h e c o u n t r i e s o f its m a j o r f o r e i g n c l i e n t s . It's t r u e t h a t in J a p a n a n d m u c h o f E u r o p e , z o n i n g m a k e s it m u c h h a r d e r to b u i l d factories or s h o p p i n g m a l l s in t h e s u b u r b s , or large-scale stores in m a n y u r b a n areas, a n d l a b o r r e g u l a t i o n s p r e v e n t retailers f r o m s t a y ­ i n g o p e n in t h e e v e n i n g a n d m a n u f a c t u r e r s f r o m a d j u s t i n g w o r k s h i f t s .

6

In­

ternational surveys of g l o b a l executives regularly report that France, G r e a t B r i t a i n , a n d G e r m a n y , u s u a l l y in t h a t order, are m a j o r offenders w h e n it c o m e s to i m p o s i n g h u g e r e g u l a t o r y b u r d e n s . It's also c e r t a i n l y the case that t h e t h o u s a n d s o f s m a l l , f a m i l y - o w n e d g r o c e r y , c l o t h i n g , a n d w h a t - n o t shops in T o k y o , M a r s e i l l e s , B o n n , a n d L i v e r p o o l s t a y in business m a i n l y because v a r i o u s r e g u l a t i o n s p r o t e c t t h e m f r o m c o m p e t i t i o n f r o m larger, m o r e efficient retailers. Y e t b i g A m e r i c a n cities h a v e t h o u s a n d s o f m o m - a n d - p o p stores, too, m a n y r u n b y recent i m m i g r a n t s ; a n d m o s t o f these stores are w i l d l y inefficient c o m ­ p a r e d to W a l - M a r t , or for t h a t m a t t e r , C a r r e f o u r in F r a n c e a n d T e s c o in B r i t a i n . A n y w a y , G e r m a n y , F r a n c e , a n d E n g l a n d all h a v e t r i m m e d their r e g u l a t o r y r e g i m e s o v e r the fifteen years d u r i n g w h i c h the p r o d u c t i v i t y g a p has w i d e n e d . O t h e r often c i t e d c u l p r i t s don't e x p l a i n all o f this m u c h better. C o r p o r a t e t a x rates, a f a v o r e d t a r g e t for c o n s e r v a t i v e s on b o t h sides o f t h e A t l a n t i c , h a v e c o m e d o w n in E u r o p e f a i r l y s h a r p l y in r e c e n t years, so m u c h so t h a t the U . S . rate is n o w h i g h e r t h a n a l m o s t a n y w h e r e else. A n d since 1 9 9 0 , s l o w - g r o w i n g F r a n c e , G e r m a n y , a n d J a p a n all d e v o t e d m o r e o f t h e i r G D P to business in­ v e s t m e n t t h a n t h e U n i t e d S t a t e s . F r u s t r a t i n g as it is, the e c o n o m i c p r o b l e m f a c i n g J a p a n a n d m o s t o f E u r o p e is d e e p e r — a n d a lot h a r d e r to a d d r e s s — t h a n a n y t h i n g t h a t s i m p l e t a x or r e g u l a t o r y c h a n g e s c o u l d affect. H e r e ' s t h e best g u e s s : T h e g u t s o f t h e p r o b l e m n o w lies in the basic orien­ t a t i o n o f m u c h o f E u r o p e a n a n d J a p a n e s e b u s i n e s s , e c o n o m i c policy, a n d c o m ­ m e r c i a l c u l t u r e , w h i c h is at o d d s w i t h t h e role t h a t g l o b a l i z a t i o n offers for advanced economies.

T h e role for d e v e l o p i n g e c o n o m i e s is clear: A b o u t a

score o f t h e m h a v e b e c o m e serious p r o d u c t i o n a n d a s s e m b l y p l a t f o r m s for

THE NEW ECONOMICS OF DECLINE FOR EUROPE AND JAPAN

181

e v e r y g o o d in g l o b a l t r a d e t h a t can b e s t a n d a r d i z e d , f r o m T - s h i r t s a n d p l a s t i c caps to c o m p u t e r s a n d a u t o m o b i l e s . M o s t o f t h i s s i m p l y f o l l o w s f r o m all o f the c a p i t a l , t e c h n o l o g i e s , m a n a g e r s , a n d , finally, entire m o d e r n business o r ­ g a n i z a t i o n s t h a t g l o b a l c o r p o r a t i o n s h a v e transferred to t h e d e v e l o p i n g w o r l d over the last t w o d e c a d e s . O n t o p o f t h a t , t h e s t u p e n d o u s g r o w t h o f C h i n e s e e x p o r t s is f o r c i n g o t h e r d e v e l o p i n g n a t i o n s t o stay a h e a d o f t h e S i n o e x p o r t tsunami b y accelerating the modernization of their o w n m a n u f a c t u r i n g . T h e s e d e v e l o p m e n t s create n e w e c o n o m i c i m p e r a t i v e s for a d v a n c e d c o u n ­ tries. S m a l l , a d v a n c e d economies can s u c c e e d b y b e c o m i n g p r e e m i n e n t in a f e w h i g h l y a d v a n c e d niche areas for w o r l d w i d e c u s t o m e r s — o f f s h o r e software d e v e l ­ o p m e n t in Ireland a n d cellular t e c h n o l o g y in F i n l a n d , for e x a m p l e , a n d cellular electronics a n d a d v a n c e d p a c k a g i n g in S w e d e n . L a r g e r a d v a n c e d e c o n o m i e s have additional hurdles. Pressed b y countries s u c h as K o r e a a n d B r a z i l

in

a d v a n c e d m a n u f a c t u r i n g a n d b y t h e successful n i c h e c o u n t r i e s in h i g h - e n d services and v e r y - h i g h - e n d p r o d u c t i o n , they have to take a d v a n t a g e of g l o b a l i z a t i o n on a large s c a l e — o r u l t i m a t e l y face decline. A s a start, their b i g businesses h a v e to seize on n e w o p p o r t u n i t i e s in d e v e l o p i n g countries b y s o u r c i n g f r o m a r o u n d the w o r l d a n d selling a r o u n d the w o r l d , so their i m p o r t s , exports, a n d foreign direct i n v e s t m e n t s c o m e to span the g l o b a l economy. E q u a l l y i m p o r t a n t , their c o r p o r a t i o n s , s c i e n t i s t s , a n d q u i r k y p i o n e e r s h a v e to d o w h a t can o n l y be d o n e c o n s i s t e n t l y in a d v a n c e d p l a c e s — i n n o v a t e across their sectors a n d i n d u s t r i e s b y c o m i n g u p w i t h or b r o a d l y a d o p t i n g n e w t e c h ­ nologies, m a t e r i a l s , a n d p r o d u c t i o n p r o c e s s e s — n e w w a y s o f f i n a n c i n g , d i s t r i b ­ u t i n g , a n d m a r k e t i n g w h a t e v e r y b o d y p r o d u c e s , a n d n e w a p p r o a c h e s for o r g a n i z i n g a n d c o n d u c t i n g t h e i r businesses. N o c o u n t r y or c u l t u r e has a m o ­ n o p o l y o n i n n o v a t i o n — N o r t h e r n E u r o p e is t h e

home

of cellular break­

t h r o u g h s , for e x a m p l e , a n d J a p a n is t h e p r i m a r y s o u r c e o f best p r a c t i c e s in o r g a n i z i n g l a r g e , m o d e r n p r o d u c t i o n o p e r a t i o n s . B u t an i n n o v a t i o n in o n e p l a c e can be e v e r y b o d y ' s b o o n , b e c a u s e g l o b a l i z a t i o n a n d g l o b a l i n f o r m a t i o n t e c h n o l o g i e s g i v e nearly e v e r y b u s i n e s s s o m e access to t h e n e w t h i n g s a n d n e w m e t h o d s created d o w n t h e street or ten t h o u s a n d s m i l e s a w a y . In

fact, research s h o w s t h a t a society's c a p a c i t y t o q u i c k l y a n d b r o a d l y

a d o p t a n d a d a p t the i n n o v a t i o n s d e v e l o p e d b y others is at least as i m p o r t a n t e c o n o m i c a l l y as its c a p a c i t y t o c o m e u p w i t h b r e a k t h r o u g h s itself. F i n a l l y , g l o b a l i z a t i o n requires t h a t businesses in a d v a n c e d e c o n o m i e s b e a b l e t o use the m o s t s o p h i s t i c a t e d m a n a g e m e n t m e t h o d s , i n f o r m a t i o n t e c h n o l o g i e s , a n d I n t e r n e t - b a s e d tools a v a i l a b l e t o b u i l d a n d m a n a g e g l o b a l n e t w o r k s t h a t tie t o g e t h e r e v e r y t h i n g . I n m o s t o f these areas, E u r o p e a n d J a p a n are n a g g i n g or f a i l i n g o u t r i g h t , a n d h a v e b e e n for a l o n g t i m e .

182

FUTURECAST S t a r t w i t h t h e basics: E u r o p e ' s m a j o r e c o n o m i e s aren't really g l o b a l . T h e

v a s t m a j o r i t y o f t h e i r t r a d e a n d i n v e s t m e n t is still f o c u s e d on t h e m s e l v e s , p l u s the U n i t e d S t a t e s , w h i l e t h e y let t h e rest o f t h e g l o b a l e c o n o m y pass t h e m by. I n 2 0 0 5 , m o r e t h a n 8 0 p e r c e n t o f all e x p o r t s b y F r a n c e , G e r m a n y , a n d B r i t a i n s t a y e d in E u r o p e or w e n t to A m e r i c a , w i t h j u s t 1 4 to 1 8 p e r c e n t g o i n g to the entire d e v e l o p i n g

world. E v e n more striking, only

1 7 to 2 1 p e r c e n t

of

F r e n c h , G e r m a n , or B r i t i s h i m p o r t s c o m e f r o m d e v e l o p i n g n a t i o n s , i n c l u d i n g t h e C h i n e s e e x p o r t b e h e m o t h a n d t h e i r p e t r o l e u m i m p o r t s . B y neither s o u r c i n g f r o m n o r s e l l i n g i n t o t h e d e v e l o p i n g w o r l d on a s u b s t a n t i a l state, E u ­ rope's b i g t h r e e sacrifice m o s t o f t h e efficiencies o f g l o b a l i z a t i o n . N o o n e c a n afford t o i g n o r e so m u c h o f t h e w o r l d . G e r m a n y , l o n g

the

w o r l d ' s l a r g e s t e x p o r t e r , s a w its share o f w o r l d e x p o r t s in p h a r m a c e u t i c a l s fall in t h e 1 9 9 0 s f r o m 1 7 p e r c e n t t o b a r e l y 1 0 p e r c e n t , in m a c h i n e r y f r o m 2 0 to 1 6 p e r c e n t , a n d e v e n in a u t o s , a d e c l i n e f r o m 1 8 to less t h a n 1 7 p e r c e n t .

7

Ger­

m a n h i g h - t e c h e x p o r t s h a v e r e c o v e r e d a b i t in the last five years b u t those o f others h a v e fallen sharply. F r o m 1 9 9 5 to 2 0 0 3 , B r i t a i n ' s share o f w o r l d ex­ p o r t s in d r u g s fell f r o m n e a r l y 1 2 p e r c e n t to j u s t o v e r 9 p e r c e n t , a n d it has lost an e v e n g r e a t e r share o f w o r l d w i d e e x p o r t s in c o m p u t e r s a n d c o m m u n i ­ cations e q u i p m e n t .

8

T h e n u m b e r s are e v e n g r i m m e r for J a p a n , w h i c h s a w its

share o f w o r l d e x p o r t s in c o m p u t e r s c o l l a p s e f r o m nearly 1 4 to b a r e l y 8 p e r ­ c e n t , a n d fall in c o m m u n i c a t i o n s e q u i p m e n t f r o m n e a r l y 1 7 to 1 0 p e r c e n t . H e r e ' s w h a t t h e s a m e m e a s u r e s c a n l o o k l i k e in a n a t i o n a d a p t i n g to g l o b ­ a l i z a t i o n : A s n o t e d o n c e b e f o r e , s o m e 4 4 p e r c e n t o f A m e r i c a n e x p o r t s g o to d e v e l o p i n g n a t i o n s , a n d m o r e t h a n 5 0 p e r c e n t o f all its i m p o r t s c o m e f r o m t h o s e d e v e l o p i n g n a t i o n s — i n b o t h cases, b e t w e e n t w o a n d t h r e e t i m e s the share for E u r o p e ' s E u r o c e n t r i c b i g t h r e e . I n t h i s r e g a r d , J a p a n p e r f o r m s w e l l . W i t h all its e c o n o m i c p r o b l e m s , J a p a n sends 4 9 p e r c e n t o f its e x p o r t s to developing

n a t i o n s , a n d t h e y a c c o u n t for 6 3 p e r c e n t o f its i m p o r t s . F o r

J a p a n , t h i s l a r g e l y c o m e s f r o m oil a n d f r o m its m a j o r m a n u f a c t u r e r s s h i f t i n g m u c h o f t h e i r p r o d u c t i o n t o C h i n a a n d o t h e r A s i a n c o u n t r i e s o v e r t h e last d e c a d e , so t h e y n o w e x p o r t lots o f i n t e r m e d i a t e g o o d s to t h e i r p l a n t s across A s i a a n d t h e n i m p o r t m u c h o f t h e final p r o d u c t i o n . T h e s a m e h a p p e n s w i t h A m e r i c a ' s g l o b a l b u s i n e s s e s — n e a r l y h a l f o f all U . S . i m p o r t s f r o m C h i n a , for e x a m p l e , c o m e f r o m t h e C h i n e s e s u b s i d i a r i e s o f U . S . c o m p a n i e s . T h e differ­ e n c e is t h a t J a p a n ' s ties t o d e v e l o p i n g e c o n o m i e s are h i g h l y c o n c e n t r a t e d in A s i a w h i l e A m e r i c a ' s foreign operations and networks span more of Latin A m e r i c a , Africa, and the transition economies of Eastern and Central E u ­ r o p e , as w e l l as A s i a . T h e cost to E u r o p e of largely i g n o r i n g the developing w o r l d — i n c l u d i n g , r e m a r k a b l y , m a n y o f t h e i r o w n f o r m e r c o l o n i e s — l i e s n o t o n l y in d e n y i n g

THE NEW ECONOMICS OF DECLINE FOR EUROPE AND JAPAN

183

G e r m a n , F r e n c h , a n d B r i t i s h c o n s u m e r s access t o m a n y o f t h e w o r l d ' s c h e a p ­ est sources o f s t a n d a r d p r o d u c t s , a n d t h e i r b u s i n e s s e s a c c e s s t o t h e l o w e s t p r i c e d m a t e r i a l s a n d i n t e r m e d i a t e g o o d s . J u s t as i m p o r t a n t , t h e y ' r e c l o s i n g t h e m s e l v e s off f r o m t h e w o r l d ' s fastest g r o w i n g m a r k e t s at j u s t t h e w h e n t h e businesses a n d p e o p l e s o f m a n y d e v e l o p i n g c o u n t r i e s are

time finally

a b l e a n d e a g e r to b u y w h a t m o r e a d v a n c e d c o u n t r i e s p r o d u c e . E u r o p e ' s e c o n o m i c p r e o c c u p a t i o n w i t h itself c u t s e v e n d e e p e r w h e n

it

c o m e s to w h e r e B r i t i s h , F r e n c h , a n d G e r m a n c o m p a n i e s set u p f o r e i g n o p e r a ­ tions or g o i n t o business w i t h local firms. T h a t ' s m e a s u r e d b y w h e r e a c o u n ­ try

locates its f o r e i g n d i r e c t i n v e s t m e n t . I n t h i s area, F r a n c e s e e m s

almost

p h o b i c a b o u t the d e v e l o p i n g w o r l d : I n 2 0 0 4 , less t h a n 5 p e r c e n t o f t h e total stock of F r e n c h f o r e i g n d i r e c t i n v e s t m e n t w a s in d e v e l o p i n g c o u n t r i e s , w i t h C h i n a h o s t i n g less t h a n 1 p e r c e n t , w h i l e 9 4 p e r c e n t w a s l o c a t e d in o t h e r E u ­ ropean c o u n t r i e s or t h e U n i t e d S t a t e s . G e r m a n y a n d B r i t a i n h a v e s p r e a d t h e i r stock o f F D I o n l y a little m o r e b r o a d l y — 8 to 9 p e r c e n t is in t h e d e v e l o p i n g w o r l d , a n d 1 to 2 p e r c e n t in C h i n a — w h i l e 8 5 p e r c e n t r e m a i n s in E u r o p e or A m e r i c a . It's especially r e m a r k a b l e , since c o u n t r i e s l i k e P o l a n d , H u n g a r y , and

the C z e c h R e p u b l i c offer G e r m a n a n d F r e n c h c o m p a n i e s t h e s a m e a d v a n ­

tages t h a t M e x i c o offers the U . S . a n d C h i n a n o w offers J a p a n — m u c h l o w e r w a g e s a n d o t h e r costs, q u i t e nearby. O n l y the f o r e i g n d i r e c t i n v e s t m e n t p a t t e r n s o f A m e r i c a a n d J a p a n l o o k t r u l y g l o b a l . B o t h h o l d 2 7 p e r c e n t o f t h e i r total s t o c k s o f F D I in d e v e l o p i n g e c o n o m i e s , or three to five times t h e share o f E u r o p e ' s b i g t h r e e . W h e n the l e a d i n g c o m p a n i e s o f a n o t h e r c o u n t r y s o u r c e f r o m t h e l o w e s t p r i c e d a n d f a s t e s t - d e v e l o p i n g p l a c e s in t h e w o r l d , set u p o p e r a t i o n s t h e r e , a n d learn h o w to operate a n d sell there, t o t w o , t h r e e , or m o r e t i m e s t h e e x t e n t o f c o m p a n i e s f r o m y o u r o w n c o u n t r y p r o d u c i n g t h e s a m e t h i n g s , t h e costs are large a n d t e l l i n g . T h i s b a s i c a t t i t u d e t o w a r d s t h e w o r l d b e y o n d t h e i r o w n c o n t i n e n t is one o f t h e m o s t p o w e r f u l reasons w h y , at t h i s p a r t i c u l a r t i m e , G e r m a n y , F r a n c e , a n d B r i t a i n h a v e b e e n g r o w i n g so m u c h m o r e s l o w l y , h a v e d e v e l o p e d m u c h l o w e r i n c o m e s , a n d are n o w g e n e r a l l y less p r o d u c t i v e t h a n the U n i t e d S t a t e s . C e r t a i n l y , E u r o p e a n c o m p a n i e s in a u t o s , m o b i l e t e c h n o l o ­ g i e s , a n d energy-efficient p r o d u c t i o n , t o n a m e t h r e e areas, are at least as g l o b ­ alized as their A m e r i c a n rivals. O n e E u r o p e a n airline r e c e n t l y m o v e d

its

b i l l i n g a n d c o l l e c t i o n o p e r a t i o n s t o I n d i a , for e x a m p l e , a n d c u t 4 0 m i l l i o n e u ­ ros

f r o m its costs a n d c o l l e c t e d a n o t h e r 6 4 m i l l i o n euros in p r e v i o u s l y u n p a i d

invoices.

9

B u t in c o u n t l e s s o t h e r areas t h a t d r i v e l a r g e e c o n o m i e s ,

German,

F r e n c h , a n d B r i t i s h c o m p a n i e s h a v e b e e n s t e a d i l y l o s i n g m a r k e t share in b o t h t h i r d c o u n t r y m a r k e t s a n d t h e i r o w n , to c o m p a n i e s f r o m n o t o n l y A m e r i c a but

also S c a n d i n a v i a , K o r e a , T a i w a n , a n d e v e n B r a z i l . S o , s i n c e j u s t 1 9 9 0 , t h e

184

FUTURECAST

g l o b a l m a r k e t share o f E u r o p e a n m a n u f a c t u r e r s s h r a n k f r o m 1 8 . 5 to just over 14

p e r c e n t , w h i l e t h e g l o b a l m a r k e t h e l d b y A m e r i c a n c o m p a n i e s rose f r o m

21

to 2 3 percent.

JAPAN'S PATH TO ECONOMIC DECLINE J a p a n ' s w e a k n e s s as a g l o b a l p l a y e r is different a n d q u i t e u n i q u e for an e c o n o m y that has been one o f the world's m o s t a d v a n c e d for decades. Its g l o b a l trade and i n v e s t m e n t patterns s h o w that its c o m p a n i e s are out there in the w o r l d . Its w e a k n e s s is that it keeps the rest o f the w o r l d o u t of its o w n e c o n o m y a l m o s t as s i n g l e - m i n d e d l y as I n d i a . I t p r o b a b l y g o e s b a c k to the 1 9 5 0 s a n d 1 9 6 0 s , w h e n J a p a n b u i l t i m p e n e t r a b l e p r o t e c t i o n i s t w a l l s to insulate itself f r o m any c o m p e ­ tition f r o m a n y w h e r e else.

B e h i n d all that p r o t e c t i o n ,

elaborate

subsidies

h e l p e d m a k e the d o m e s t i c a u t o a n d c h e m i c a l sectors into w o r l d - c o m p e t i t i v e exporters ( b u t not J a p a n e s e aviation a n d p h a r m a c e u t i c a l s , w h i c h w e r e just as s u b s i d i z e d ) . T h e serious m i s s t e p c a m e in the 1 9 7 0 s , w h e n the oil price shocks shook the e c o n o m y a n d J a p a n ' s g o v e r n m e n t redirected its subsidies and regula­ t o r y a n d other p r o t e c t i o n s (as w e l l as p r i v a t e b a n k credit) f r o m s t r o n g export c an d i d at es to floundering sectors. T h i s w a s the real b e g i n n i n g of Japan's current t w o - t i e r e c o n o m y , split b e t w e e n s t r o n g , i n n o v a t i v e e x p o r t i n g corporations w i t h g l o b a l reach in a h a n d f u l o f areas, a n d h u n d r e d s of w e a k , p r o t e c t e d d o m e s t i c industries, f r o m food p r o c e s s i n g a n d textiles to retail a n d financial services. J u s t as i m p o r t a n t , t h r o u g h t h e 1 9 7 0 s J a p a n c o n t i n u e d to l e g a l l y b a r nearly any

k i n d o f f o r e i g n d i r e c t i n v e s t m e n t in t h e c o u n t r y . J a p a n ' s p o w e r f u l finance

m i n i s t r y eased these bars a l i t t l e in 1 9 8 0 , b u t not in w a y s t h a t m a t t e r e d , a n d a l i t t l e m o r e in 1 9 9 2 , a g a i n n o t e n o u g h for a n y b o d y else to notice.

Many

o f these r e s t r i c t i o n s d i d finally e n d in 1 9 9 8 , b u t t h e i r l e g a c y is e n o r m o u s : N e a r l y a d e c a d e later, f o r e i g n d i r e c t i n v e s t m e n t s in J a p a n as a share of its GDP

are o n e - s e v e n t h t h e level in t h e U n i t e d S t a t e s , a n d o n e - t w e n t i e t h

o n e - t h i r t i e t h t h e levels in G e r m a n y a n d B r i t a i n , r e s p e c t i v e l y .

10

and

J a p a n is so far

off t h e scale here t h a t f o r e i g n - o w n e d o p e r a t i o n s in J a p a n , relative to the econ­ o m y ' s size, are one-fifth t h a t o f T u r k e y . ( B a r r e d f r o m p i t c h i n g a d i r e c t stake in t h e J a p a n e s e e c o n o m y , f o r e i g n e r s h a v e b o u g h t u p stocks in J a p a n e s e c o m p a ­ nies a n d c u r r e n t l y h o l d 2 2 p e r c e n t o f t h e N i k k e i m a r k e t . ) M o r e o v e r , a l o t o f s e r i o u s r e s t r i c t i o n s r e m a i n in p l a c e . F o r e x a m p l e , J a p a ­ nese l a w s t i l l b a r s f o r e i g n c o m p a n i e s f r o m c a r r y i n g o u t m o s t m e r g e r s a n d a c q u i s i t i o n s o f J a p a n e s e c o m p a n i e s . T h i s m a t t e r s b e c a u s e e v e r y w h e r e else, M

& A s a c c o u n t for m o r e t h a n h a l f o f all F D I t r a n s a c t i o n s — W a l l - M a r t or

J a p a n ' s o w n M i t s u b i s h i , for e x a m p l e , t y p i c a l l y e s t a b l i s h t h e m s e l v e s in n e w

THE NEW ECONOMICS OF DECLINE FOR EUROPE AND JAPAN

185

f o r e i g n m a r k e t s b y t a k i n g o v e r d o m e s t i c i n c u m b e n t s a n d r e m a k i n g t h e m in their o w n i m a g e . B u t J a p a n e s e l a w s still e f f e c t i v e l y b a r f o r e i g n c o m p a n i e s f r o m u s i n g t h e i r s t o c k to b u y a J a p a n e s e c o m p a n y , h o s t i l e t a k e o v e r s are v i r t u ­ ally i m p o s s i b l e , a n d f r i e n d l y b i d s t h a t don't use f o r e i g n s t o c k are r o u t i n e l y r e ­ jected b y b o a r d s still d o m i n a t e d

b y " c r o s s - s h a r e h o l d i n g " or

interlocking

directors. T h a t ' s the c o m m o n J a p a n e s e c o r p o r a t e p r a c t i c e o f a g r o u p o f c o m ­ panies h o l d i n g each other's shares a n d u s i n g t h e m t o p r o t e c t each o t h e r f r o m all

c o m e r s . S o , even as J a p a n ' s e c o n o m i c s t a g n a t i o n a n d deflation h a v e m a d e

lots of its c o m p a n i e s c h e a p to buy, the w o r l d ' s second-largest e c o n o m y a c c o u n t s for

barely 2 percent of global, cross-border M & A s . The

record o f f o r e i g n c o m p a n i e s t h a t h a v e m a n e u v e r e d t h e i r w a y i n t o

Japan's market should encourage others. T h e p r o d u c t i v i t y of the J a p a n e s e subsidiaries o f f o r e i g n m a n u f a c t u r e r s , for e x a m p l e , is 6 0 p e r c e n t h i g h e r t h a n their d o m e s t i c J a p a n e s e c o u n t e r p a r t s , a n d t h e g a p in services is 8 0 p e r c e n t . T h a t ' s not n o r m a l : I n F r a n c e a n d t h e U n i t e d S t a t e s , t h e a v e r a g e d o m e s t i c c o m p a n y is nearly as p r o d u c t i v e as t h e a v e r a g e f o r e i g n affiliate or s u b s i d i a r y . So

those differences in J a p a n o u g h t t o g i v e f o r e i g n c o m p a n i e s h u g e a d v a n ­

t a g e s , b u t t h e y don't because t h e y still face J a p a n ' s e x t e n s i v e s u b s i d i e s a n d r e g u l a t o r y p r o t e c t i o n s for t h e l e s s - p r o d u c t i v e n a t i v e c o m p a n i e s t h e y c o m p e t e w i t h . S o , in 2 0 0 5 (the m o s t recent y e a r for w h i c h t h e r e are d a t a ) , F D I i n t o J a p a n fell to t h e l o w e s t level since 1 9 9 6 , before m o s t o f t h e f o r m a l l e g a l r e ­ strictions o n F D I w e r e lifted. J a p a n ' s w a y o f d e n y i n g g l o b a l e c o n o m i c r e a l i t y is j u s t as d e s t r u c t i v e as E u ­ rope's. W h i l e G e r m a n y , F r a n c e , a n d B r i t a i n each l a r g e l y l i m i t s i t s e l f to t h e relatively s l o w - g r o w i n g m a r k e t s a n d e x p e n s i v e l a b o r a n d m a t e r i a l s o f o t h e r a d v a n c e d c o u n t r i e s , J a p a n w a l l s off its d o m e s t i c c o m p a n i e s f r o m c o n t a c t w i t h w h a t g l o b a l leaders in t h e i r i n d u s t r i e s or sectors are d o i n g . T h e i n n o v a t i o n s r e d o i n g the c o m p a n i e s a n d e c o n o m y o f t h e U n i t e d S t a t e s are l a r g e l y lost o n J a p a n . T h e c o m b i n a t i o n o f e x t e n s i v e r e g u l a t o r y p r o t e c t i o n s for tens o f t h o u ­ sands of inefficient s m a l l c o m p a n i e s a n d t h e a b s e n c e o f c o m p e t i t i o n

from

c o m p a n i e s f r o m other a d v a n c e d c o u n t r i e s d e s t r o y s t h e n e e d t o d e v e l o p t h e i r o w n t e c h n o l o g i e s a n d best p r a c t i c e s , a n d t o a d o p t t h o s e o f others. T h e r e s u l t is t h a t J a p a n is n o w the w o r l d ' s least p r o d u c t i v e a d v a n c e d e c o n o m y a n d , d e ­ spite its g l o b a l i n v e s t m e n t s a n d t r a d i n g p a t t e r n s its w o r l d w i d e m a r k e t share in m a n u f a c t u r e d g o o d s has c o n t r a c t e d f r o m 1 9 p e r c e n t d o w n t o 1 3 p e r c e n t since 1 9 9 0 , or e v e n m o r e t h a n E u r o p e ' s . S o m e J a p a n e s e c o m p a n i e s b u c k these t r e n d s , e s p e c i a l l y e x p o r t i n g c o m p a ­ nies t h a t h a v e to c o m p e t e o u t s i d e t h e c o u n t r y , a n d m o s t o b v i o u s l y T o y o t a , n o w the w o r l d ' s n u m b e r - t w o a u t o a n d t r u c k m a k e r a n d p o i s e d t o o v e r t a k e G e n e r a l M o t o r s . ( O n t h e s a m e d a y in F e b r u a r y 2 0 0 6 t h a t G M c l o s e d a f a c t o r y

FUTURECAST

186

in L i n d e n , N e w J e r s e y , a n d T o y o t a o p e n e d o n e in T i j u a n a , M e x i c o , G M c h a i r ­ m a n R i c h a r d W a g o n e r i n s i s t e d , " W e ' v e b e e n a h e a d for s e v e n t y - t h r e e years in a r o w , a n d t h e b e t t i n g o d d s are w e ' l l b e a h e a d for t h e n e x t s e v e n t y - t h r e e years."

11

H e ' s e i t h e r b l u f f i n g or d a n g e r o u s l y u n i n f o r m e d . ) E a c h o f E u r o p e ' s

b i g t h r e e also has w o r l d - c l a s s e x c e p t i o n s — f r o m G e r m a n y , c o m p a n i e s such as t h e e n e r g y g i a n t E . o n , e l e c t r o n i c s m a k e r S i e m e n s , a n d i n s u r a n c e leader A l l i a n z ; f r o m F r a n c e , t h e e n e r g y g i a n t T o t a l , i n s u r a n c e leader A x a , a n d retailer C a r r e f o u r ; a n d f r o m B r i t a i n , B r i t i s h P e t r o l e u m , H S B C H o l d i n g s in

financial

s e r v i c e s , a n d V o d a f o n e in t e l e c o m m u n i c a t i o n s .

B e h i n d these m a r q u e e e n t e r p r i s e s , m o s t o t h e r c o m p a n i e s in all o f these c o u n ­ tries h a v e h a d t e r r i b l e difficulties a d o p t i n g , a n d a d a p t i n g to,

innovation,

w h i c h g l o b a l i z a t i o n m a k e s i m p e r a t i v e for all o f t h e m . T h e b i g g e s t issue here isn't w h o c o m m i t s t h e g r e a t e s t r e l a t i v e resources to d e v e l o p i n g i n n o v a t i o n s . S i n c e 1 9 9 0 , J a p a n has s p e n t m o r e o f its G D P o n research a n d d e v e l o p m e n t t h a n t h e U n i t e d S t a t e s , a n d w h i l e A m e r i c a leads E u r o p e ' s b i g t h r e e , m u c h o f t h e difference c o m e s f r o m A m e r i c a ' s R & D in defense a r e a s .

12

T h e best c l u e to w h a t ' s r e a l l y g o i n g o n c o m e s f r o m s t u d i e s o f the source o f A m e r i c a ' s p r o d u c t i v i t y g a i n s . H e r e , a consensus has e m e r g e d a m o n g m o s t A m e r i c a n economists and sociologists

w h o ' v e t h o u g h t a b o u t it. F i r s t — n o

shock here—it's linked closely to the spread of information technologies. T h e s u r p r i s e is t h a t t h e e x t e n t o f t h e a c t u a l benefits f r o m those t e c h n o l o g i e s c o m e s n o t f r o m h o w m u c h a c o m p a n y or a c o u n t r y s p e n d s o n t h e m , b u t f r o m the w a y t h e y use t h e m . T h a t ' s w h e r e E u r o p e ' s a n d J a p a n ' s r e g u l a t i o n s a n d s u b s i d i e s t a k e a serious toll. A l l t h e s u b s i d i e s for core i n d u s t r i e s a n d f a r m e r s m a k e their returns healthy, almost regardless of w h a t they do, w h i l e zoning and price control regulations discourage new competition. S o , even t h o u g h French, G e r m a n , a n d B r i t i s h firms h a v e i n v e s t e d as m u c h in t h e s a m e i n f o r m a t i o n t e c h n o l o g i e s as A m e r i c a n (or S w e d i s h ) c o m p a n i e s , all o f t h e i r s u b s i d i e s a n d r e g u l a t o r y p r o ­ t e c t i o n s b l u n t t h e m a r k e t p r e s s u r e s , w h i c h in A m e r i c a force t h e m to c h a n g e s o m e o f t h e w a y s t h e y d o b u s i n e s s t o m a k e d e c e n t use o f those i n v e s t m e n t s . E u r o p e a n a n d J a p a n e s e m a n a g e r s are j u s t as c a p a b l e as A m e r i c a n s in

figur­

i n g o u t w h a t c h a n g e s t h e y n e e d — a n d i f t h e y ' r e n o t , there are p l e n t y of inter­ n a t i o n a l c o n s u l t a n t s r e a d y t o d o it for t h e m . B u t it's difficult a n d u n p l e a s a n t for m o s t p e o p l e to m a k e t h e c h a n g e s r e q u i r e d t o a d a p t a business to n e w t e c h n o l o g i e s — c u t a n d r e o r g a n i z e d e p a r t m e n t s , j o b s , p r o d u c t s , a n d processes, b r i n g in p e o p l e w i t h n e w s k i l l s , g e t r i d o f those u n a b l e to w o r k w i t h all the n e w tools, a n d m u c h m o r e . S o m o s t p e o p l e w o n ' t t a k e the t r o u b l e a n d the

THE NEW ECONOMICS OF DECLINE FOR EUROPE AND JAPAN

107

g r i e f to m a k e s u c h h a r d c h a n g e s w h e n s u b s i d i e s a n d r e g u l a t i o n s w i l l let t h e m g o on d o i n g m o s t e v e r y t h i n g m u c h as t h e y ' v e a l w a y s d o n e . If

that's not e n o u g h , in G e r m a n y a n d F r a n c e , firms t h a t w a n t to a d a p t

s o m e t i m e s find t h a t it's a g a i n s t t h e l a w : T h e r e , all b u t t h e s m a l l e s t e m p l o y e r s c a n n o t d i s m i s s or r e a s s i g n w o r k e r s w i t h o u t c a u s e , a n d r e o r g a n i z i n g to m a k e g o o d use o f n e w t e c h n o l o g i e s doesn't c o n s t i t u t e l e g a l cause. A b a n k or retailer t h a t w a n t s to install a n e w i n v e n t o r y c o n t r o l s y s t e m or a n e w

automated

p h o n e o p e r a t i o n can d o it, b u t it can't let g o t h e e m p l o y e e s w h o ran a n d o p ­ erated the old s y s t e m s or, in m a n y cases, e v e n r e a s s i g n t h e m . T h a t ' s o n e o f t h e m a i n reasons w h y the O E C D c o n c l u d e d r e c e n t l y t h a t o u t s i d e G e r m a n y ' s a u t o and

m a c h i n e r y i n d u s t r i e s , t h e G e r m a n e c o n o m y has benefited h a r d l y at all

from new information technologies. All

13

the r e g u l a t i o n s a n d s u b s i d i e s , a l o n g w i t h h i g h p a y r o l l t a x e s , also h o l d

b a c k p r o d u c t i v i t y p r o g r e s s in J a p a n a n d m u c h o f E u r o p e b y m a k i n g it h a r d e r to start n e w businesses. T h a t m a t t e r s a l o t , b e c a u s e n e w enterprises are m o r e p r o n e to a d o p t , a n d a d a p t t o , n e w t e c h n o l o g i e s a n d b u s i n e s s m e t h o d s , as a way

to m a k e their m a r k in a m a r k e t p l a c e d o m i n a t e d b y w e l l - k n o w n i n c u m ­

b e n t s . A n d w h e n t h e y s u c c e e d , it creates p r e s s u r e s o n those i n c u m b e n t s to f o l l o w t h e i r lead or strike o u t in t h e i r o w n d i r e c t i o n . W e c a n n o t k n o w for c e r ­ tain, b u t B a r n e s a n d N o b l e m i g h t still b e a t r a d i t i o n a l b o o k s t o r e i f r e g u l a ­ tions a n d s u b s i d i e s h a d p r e v e n t e d A m a z o n . c o m f r o m t a k i n g h o l d . W o r k e r s in F r a n c e , G e r m a n y , B r i t a i n , a n d J a p a n also h a v e m o r e t r o u b l e a d a p t i n g to n e w t e c h n o l o g i e s a n d n e w b u s i n e s s m e t h o d s . O n e reason that's rarely a c k n o w l e d g e d is t h a t w o r k i n g - a g e E u r o p e a n s a n d J a p a n e s e are s i g n i f i ­ c a n t l y less e d u c a t e d t h a n the m o r e p r o d u c t i v e A m e r i c a n s . J a p a n a n d E u r o p e ' s big

three s p e n d b e t w e e n 1 5 a n d 2 5 p e r c e n t less each y e a r o n e d u c a t i o n , as a

share o f their G D P , t h a n t h e U n i t e d S t a t e s — w i t h s o m e o f t h o s e differences c o m i n g from A m e r i c a n families' greater private expenditures, m a i n l y to send their c h i l d r e n t o c o l l e g e . B u t the b i g g e r f a c t o r is t h a t for a l o n g t i m e , E u r o ­ peans

and Japanese have

been

attending

school

for

fewer

years

than

A m e r i c a n s — a n d there's a m p l e research s h o w i n g t h a t w o r k e r s w i t h m o r e e d ­ u c a t i o n t e n d t o be m o r e flexible a n d a d a p t a b l e t o n e w t e c h n o l o g i e s a n d n e w ways of w o r k i n g . As

w e n o t e d earlier, a c c o r d i n g to t h e O E C D a n d t h e W o r l d B a n k , G e r ­

m a n s a n d J a p a n e s e o v e r a g e t w e n t y - f i v e t o d a y h a v e s p e n t an a v e r a g e o f less than ten years in school, w h i c h is m o r e t h a n t h e E n g l i s h at a l i t t l e o v e r n i n e years o f f o r m a l e d u c a t i o n a n d t h e F r e n c h w i t h an a v e r a g e o f j u s t o v e r e i g h t years. T h e y ' r e all w e l l b e h i n d A m e r i c a n s a g e t w e n t y - f i v e a n d over, w h o a v e r ­ age

m o r e t h a n t w e l v e years in s c h o o l , or 2 0 p e r c e n t m o r e t h a n G e r m a n s or

J a p a n e s e , o n e - t h i r d m o r e t h a n B r i t o n s , a n d an a s t o u n d i n g 5 0 p e r c e n t m o r e

FUTURECAST

188 than the F r e n c h .

1 4

T h e o n l y c o u n t r i e s t h a t c o m e close to A m e r i c a in this re­

s p e c t are S w e d e n . . . a n d K o r e a . M o r e o v e r , t h e differences e x t e n d to h i g h e r e d u c a t i o n , w i t h t h e p e o p l e w h o g e t it p r e s u m a b l y b e i n g m o s t effective o f all w i t h n e w t e c h n o l o g i e s . S o m e 2 3 to 2 4 p e r c e n t o f F r e n c h a n d G e r m a n a d u l t s , and

28 percent of E n g l i s h adults have some education past high

c o m p a r e d to 3 8 p e r c e n t o f A m e r i c a n s . 37

1 5

school—

I n this r e s p e c t , o n l y t h e J a p a n e s e , at

p e r c e n t , c o m e close to t h e A m e r i c a n s . These

findings

s h e d n e w l i g h t o n r e p o r t s t h a t A m e r i c a n s t u d e n t s score

l o w e r t h a n s t u d e n t s f r o m m a n y o t h e r c o u n t r i e s in s t a n d a r d i z e d m a t h , science, and

r e a d i n g tests. I n f a c t , A m e r i c a n s t u d e n t s score w e l l in all s u b j e c t s at

f o u r t h - a n d e i g h t h - g r a d e l e v e l s , c o m p a r e d to s t u d e n t s f r o m other a d v a n c e d countries.

1 6

A n d A m e r i c a n h i g h schoolers score h i g h e r in r e a d i n g skills t h a n

o l d e r s t u d e n t s f r o m all o t h e r G - 7 c o u n t r i e s e x c e p t B r i t a i n . H o w e v e r , the re­ s u l t s also s h o w t h a t A m e r i c a n m a t h a n d science e d u c a t i o n fails m a n y older students, especially those f r o m lower-income families. A t ages

fifteen

and

s i x t e e n , s t u d e n t s f r o m t h r e e o t h e r G - 7 c o u n t r i e s o u t p e r f o r m A m e r i c a n s in m a t h , a n d s t u d e n t s f r o m four G - 7 c o u n t r i e s o u t p e r f o r m A m e r i c a n s in sci­ ence. B u t that's n o t t h e w h o l e story, b e c a u s e a l a r g e r share o f A m e r i c a n k i d s are

still in s c h o o l at a g e s fifteen a n d s i x t e e n t h a n k i d s in o t h e r a d v a n c e d c o u n ­

tries, r e m o v i n g f r o m t h e s a m p l e r e l a t i v e l y m o r e n o n - A m e r i c a n y o u n g p e o p l e who

w o u l d score l o w . E u r o p e a n s a n d J a p a n e s e a p p r e c i a t e as w e l l as a n y o n e else t h a t in a t i m e

w h e n t e c h n o l o g i e s are c h a n g i n g r a p i d l y a n d c o m p e t i t i o n f r o m d i s t a n t , l o w cost c o u n t r i e s is i n c r e a s i n g m i g h t i l y , m o r e e d u c a t i o n c a n m a k e m o s t p e o p l e m o r e p r o d u c t i v e a n d c o m p e t i t i v e . B u t in m u c h the s a m e w a y t h a t subsidies and

regulation insulate m a n y E u r o p e a n and Japanese businesses—perversely

s o — t h e e l a b o r a t e f o r m a l a n d i n f o r m a l p r o t e c t i o n s for w o r k e r s in these places s h i e l d t h e m f r o m t h e h a r d e d g e o f t h e realities i n e x o r a b l y n a r r o w i n g their o w n prospects.

WHAT LIES AHEAD FOR EUROPE AND JAPAN L i k e o u r o w n t i m e , the

1 9 7 0 s a n d 1 9 8 0 s w e r e c h a l l e n g i n g for a d v a n c e d

e c o n o m i e s . E v e r y o n e l a r g e l y d i d w h a t t h e t i m e s d i c t a t e d . T h e y r e s p o n d e d to p e r s i s t e n t inflation b y r a i s i n g interest rates a n d s o l d i e r i n g t h r o u g h the sharp s l o w d o w n s t h a t f o l l o w e d . T h e y d e a l t w i t h n a s t y oil p r i c e s h o c k s b y m a k i n g t h e i r e c o n o m i e s a l i t t l e m o r e e n e r g y efficient t h r o u g h n e w a u t o - m i l e a g e stan­ d a r d s a n d g a s o l i n e t a x e s . A n d t h e y r e s p o n d e d t o an u n e x p e c t e d d r o p in p r o d u c t i v i t y g r o w t h b y c u t t i n g b u s i n e s s taxes to boost c a p i t a l i n v e s t m e n t .

THE NEW ECONOMICS OF DECLINE FOR EUROPE AND JAPAN

189

V o t e r s c o m p l a i n e d a n d leaders fell, b u t t h e m a j o r c o u n t r i e s m o s t l y c o n t r o l l e d their o w n e c o n o m i c course a n d m a n a g e d to a d j u s t r e a s o n a b l y w e l l w i t h o u t seriously d i s t u r b i n g the w a y their societies w o r k e d . G l o b a l i z a t i o n is less a c c o m m o d a t i n g ; a n d t h i s t i m e J a p a n a n d m u c h o f

Eu­

rope h a v e less c o n t r o l o v e r t h e i r e c o n o m i c fates. A l r e a d y , t h e y ' v e fallen b e ­ h i n d its a d j u s t m e n t c u r v e so q u i c k l y t h a t t h e i r o p t i o n s for t h e n e x t d e c a d e are l i m i t e d . M o r e o v e r , a d a p t i n g s u c c e s s f u l l y to e c o n o m i c realities w i l l r e q u i r e m a j o r a n d u n p o p u l a r c h a n g e s in s o m e o f t h e i r b a s i c social a r r a n g e m e n t s . T h a t ' s not likely, so t h e o u t l o o k for E u r o p e ' s b i g e c o n o m i e s l o o k s p r e t t y d i s m a l . S t a r t i n g w i t h t h e b a s i c s , i f t h e y p e r s i s t in i g n o r i n g m o s t o f t h e d e v e l ­ o p i n g w o r l d in their t r a d e a n d i n v e s t m e n t s — a n d there's no e v i d e n c e o f a learning curve h e r e — t h e y w i l l increasingly relegate themselves to

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into and b u y i n g from the world's s l o w e s t - g r o w i n g m a r k e t s — t h e i r o w n — a l o n g w i t h the U n i t e d S t a t e s . P r o b l e m s w i t h t h e i r d o m e s t i c e c o n o m i e s w i l l m a k e shifts in their d i r e c t i n v e s t m e n t h a b i t s costly. I n A m e r i c a , e v e r y d o l l a r sent a b r o a d in f o r e i g n d i r e c t i n v e s t m e n t p r o d u c e s $ 1 . 1 4 in g a i n s at h o m e , f r o m t h e cost s a v i n g s for o u t s o u r c i n g businesses a n d t h e n e w j o b s t h a t t h e 17

d i s p l a c e d w o r k e r s find a n d fill.

B u t F r a n c e a n d G e r m a n y are so w e a k at c r e ­

a t i n g jobs t h a t for e v e r y e u r o sent a b r o a d , t h e i r e c o n o m i e s earn j u s t

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euros a n d 0 . 7 4 euros respectively. M o r e o v e r , A m e r i c a n , J a p a n e s e , K o r e a n , a n d the m o s t f o r e s i g h t e d E u r o p e a n c o m p a n i e s a l r e a d y h a v e g r a b b e d t h e b e s t i n ­ v e s t m e n t o p p o r t u n i t i e s in C h i n a a n d m a n y o t h e r d e v e l o p i n g n a t i o n s — w h i c h is just the e c o n o m i c l a w o f d i m i n i s h i n g r e t u r n s in a c t i o n . The

o u t l o o k looks g r i m for E u r o p e ' s m a n u f a c t u r i n g w o r k e r s , w h o are p e r ­

ilously d e p e n d e n t o n e x p o r t i n g w h a t t h e y m a k e t o t h e U n i t e d S t a t e s . T h a t ' s a perilous position, because G e r m a n , French, and British manufacturers p r o ­ d u c e l a r g e l y the s a m e t h i n g s as A m e r i c a n c o m p a n i e s — a n d t h e i r A m e r i c a n r i ­ vals are m o r e g l o b a l i z e d t h a n t h e y are. S o t h e i r U . S . c o m p e t i t o r s d r a w m o r e on c h e a p e r f o r e i g n labor, m a t e r i a l s , p r o d u c t i o n , as w e l l as m o r e o f t h e best ideas a n d t e c h n o l o g i e s f r o m a n y w h e r e in t h e w o r l d . E u r o p e ' s g l o b a l m a r k e t share in m a n u f a c t u r i n g has b e e n s h r i n k i n g for y e a r s . O v e r the n e x t d e c a d e , it is l i k e l y to c o n t r a c t e v e n m o r e in n o t o n l y t h i r d - c o u n t r y m a r k e t s w h e r e e v e r y b o d y c o m p e t e s , b u t also t h e m a m m o t h U . S . m a r k e t a n d , u l t i m a t e l y , in E u r o p e ' s h o m e m a r k e t s as w e l l . Turning

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h e a l t h y c a p a c i t y to i n n o v a t e a n d t o a d o p t a n d a d a p t i n n o v a t i o n s f r o m o t h e r p l a c e s — t h e n e x t d e c a d e w i l l be v e r y difficult for J a p a n a n d E u r o p e ' s b i g three, if t h e y don't g e t serious a b o u t m a k i n g b e t t e r use o f i n f o r m a t i o n t e c h ­ nologies. T h e c a t c h is t h a t it r e q u i r e s c h i p p i n g a w a y at lots o f w o r k e r p r o t e c ­ tions at a t i m e w h e n years o f s l o w g r o w t h h a v e m a d e w o r k e r s e v e n m o r e

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a t t a c h e d t o t h e m . S i m i l a r l y , h e l p i n g E u r o p e a n firms create a lot m o r e n e w j o b s — s o t h o s e w h o lose theirs in b u s i n e s s r e o r g a n i z a t i o n s can still c o n t r i b u t e to t h e e c o n o m y — w i l l m e a n l o w e r m i n i m u m w a g e s , p e r h a p s l o w e r p a y r o l l t a x e s , a n d c e r t a i n l y less g e n e r o u s u n e m p l o y m e n t

s y s t e m s . A g a i n , all this

w o u l d h a v e t o h a p p e n at a t i m e w h e n t h e i n c o m e s o f m o s t E u r o p e a n w o r k e r s are s t a g n a t i n g a n d E u r o p e ' s g o v e r n m e n t s n e e d all the revenues t h e y can g e t . The

recent e l e c t i o n o f a N i c h o l a s S a r k o z y , a c o n s e r v a t i v e reformer, as

F r e n c h p r e s i d e n t has b e e n w i d e l y seen as the m o s t e n c o u r a g i n g n e w s in years for France's e c o n o m i c p r o s p e c t s . S a r k o z y is far f r o m a f r e e - t r a d e , f r e e - m a r k e t l i b e r a l o n t h e A m e r i c a n or B r i t i s h m o d e l . A f e w years a g o as b u d g e t m i n i s t e r , h e l e d a g o v e r n m e n t rescue o f t h e F r e n c h p o w e r a n d railroad g i a n t A l s t r o m a n d o p p o s e d t h e p u r c h a s e o f the h u g e steel m a k e r A r c e l o r b y M i t t a l Steel f r o m I n d i a . A s a p r e s i d e n t i a l c a n d i d a t e , h e r e g u l a r l y c a l l e d for "economic p a ­ t r i o t i s m " a n d m a i n t a i n i n g state s u p p o r t s for l a r g e i n d u s t r i e s . N e v e r t h e l e s s , since t a k i n g office in M a y 2 0 0 7 , S a r k o z y has p r o p o s e d c h a n g e s that w o u l d c o n s t i t u t e a g e n u i n e b r e a k w i t h t h e p a s t , i n c l u d i n g l a r g e c u t s in the state b u ­ r e a u c r a c y t h r o u g h a t t r i t i o n , s i g n i f i c a n t or s y m b o l i c a l l y p o w e r f u l p e n s i o n r e ­ f o r m s , n e w i n c e n t i v e s for p e o p l e to w o r k l o n g e r h o u r s , a m i n i m u m - w a g e r e f o r m , p o t e n t i a l l y i m p o r t a n t t a x c h a n g e s , a n d critical m o d i f i c a t i o n s in w o r k ­ ers' l e g a l p r o t e c t i o n s a g a i n s t b e i n g

fired.

S a r k o z y ' s p r o g r a m w o u l d b e r o u g h o n m a n y F r e n c h w o r k e r s , b u t it w o u l d b e t t e r a l i g n F r a n c e ' s e c o n o m y w i t h t h e n e e d s of g l o b a l i z a t i o n . H o w e v e r , the early results s u g g e s t t h a t t h e president's p r o m i s e s m a y e x c e e d his p o l i t i c a l reach. H e m a n a g e d to c u t t h e t o p i n c o m e - t a x rate a n d i n h e r i t a n c e taxes in s h o r t order; b u t b r o a d e r , m o r e i m p o r t a n t p r o p o s a l s to s p u r j o b creation b y c u t t i n g p a y r o l l taxes ( w h i l e r a i s i n g V A T c h a r g e s ) a n d to s t i m u l a t e h o m e c o n ­ s t r u c t i o n b y m a k i n g m o r t g a g e interest t a x - d e d u c t i b l e haven't m o v e d at all. H i s p l a n to e f f e c t i v e l y l e n g t h e n the t h i r t y - f i v e - h o u r w o r k w e e k b y m a k i n g o v e r t i m e t a x - e x e m p t also has s t a l l ed . M o r e o v e r , his initial effort to b u i l d a g r a n d c o a l i t i o n w i t h F r a n c e ' s p o w e r f u l u n i o n s — f o r f a r - r e a c h i n g p l a n s to re­ d u c e s o m e state p e n s i o n s , raise t h e r e t i r e m e n t a g e , s l o w f u t u r e increases in France's c u r r e n t m i n i m u m w a g e o f m o r e t h a n $ 1 2 p e r hour, a n d m a k e it eas­ ier for e m p l o y e r s to d i s m i s s w o r k e r s — f a i l e d as w e l l . S o m e o f this m i g h t c h a n g e , b u t these early r e t u r n s s u g g e s t

that like J a p a n under J u n i c h i r o

K o i z u m i , F r a n c e is m o r e p r e p a r e d for a r e f o r m e r t h a n for real reforms. C r e a t i n g j o b s a n d a t t r a c t i n g i n v e s t m e n t b y c u t t i n g p a y r o l l taxes, as Presi­ d e n t S a r k o z y p r o p o s e s , s e e m s w e l l b e y o n d t h e reach o f all the m a j o r E u r o p e ­ an c o u n t r i e s — e s p e c i a l l y finance

as t h e

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the workforces that

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it all b e g i n to s h r i n k . T h e u n h a p p y fact is that

THE NEW ECONOMICS OF DECLINE FOR EUROPE AND JAPAN

191

E u r o p e has p u t off its a d j u s t m e n t to g l o b a l i z a t i o n for so l o n g t h a t n o w it's set to b u m p u p a g a i n s t t h e a d d i t i o n a l p r e s s u r e s o f a d j u s t i n g to t h e i r d e m o ­ g r a p h i c c h a n g e s . E v e n i f G e r m a n y , F r a n c e , Italy, a n d J a p a n h a d e c o n o m i e s a t ­ tuned

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g r e a t e r d o w n w a r d p r e s s u r e on t h e i r s t a n d a r d s o f l i v i n g t h a n a n y force since the e n d of W o r l d W a r I I . E u r o p e a n g o v e r n m e n t s h a v e s t u d i e d t h e issue o f l o o m i n g p e n s i o n costs for t h i r t y years. I n the one case o f M a r g a r e t T h a t c h e r ' s B r i t a i n , a c o u n t r y d i d s o m e t h i n g a b o u t it. I n fact, T h a t c h e r ' s r e f o r m s c u t so d e e p l y t h a t t o d a y 2 0 p e r c e n t o f e l d e r l y B r i t o n s l i v e in p o v e r t y . W i t h o u t r e v e r s i n g c o u r s e a n d e x ­ p a n d i n g state p e n s i o n s — w h i c h is i n c r e a s i n g l y l i k e l y — b y 2 0 2 0 n e a r l y o n e t h i r d o f B r i t i s h retirees w i l l l i v e in p o v e r t y . N o t so in F r a n c e a n d G e r m a n y , w h i c h still h a v e s u c h g e n e r o u s p e n s i o n s y s t e m s t h a t t h e y ' r e p l a i n l y u n s u s ­ tainable even for the n e x t fifteen years. F r a n c e t o o k a s t a b at r e f o r m in 2 0 0 3 . The

p r o s p e c t s p a r k e d p u b l i c p r o t e s t s b y t w o m i l l i o n p e o p l e in a h u n d r e d

cities, even t h o u g h t h e c h a n g e s w e r e so m o d e s t t h a t t h e s y s t e m still faces f u n d i n g shortfalls b y 2 0 2 0 e q u a l to 4 p e r c e n t or m o r e o f t h e c o u n t r y ' s G D P . Sarkozy's p r o p o s a l s to m o d e s t l y a n d g r a d u a l l y increase t h e c u r r e n t r e t i r e m e n t age

o f s i x t y a n d e n d special p r o v i s i o n s for e v e n earlier r e t i r e m e n t in c e r t a i n

professions a n d b y w o r k e r s in s t a t e - o w n e d c o m p a n i e s a l r e a d y h a v e d r a w n a t ­ tacks f r o m the u n i o n s w h o s e s u p p o r t is p r o b a b l y i n d i s p e n s a b l e . G e r m a n y also e n a c t e d s o m e m o d e s t p e n s i o n c h a n g e s in 2 0 0 1 , a n d t h e latest e s t i m a t e s o f their effects see total costs r i s i n g b y 1 p e r c e n t o f G D P e v e r y three y e a r s f r o m n o w on. The

basic q u a n d a r y for E u r o p e a n r e f o r m e r s o v e r t h e n e x t d e c a d e is t h a t

g l o b a l i z a t i o n depresses t h e p r o d u c t i v i t y g a i n s a n d c o m p e t i t i v e n e s s o f t h o s e who

don't a d a p t w e l l to it, w h i c h in t u r n s l o w l y a n d s u r e l y r e d u c e s people's

l i v i n g s t a n d a r d s . A s E u r o p e a n l i v i n g s t a n d a r d s stall or s l o w l y e r o d e , people's a t t a c h m e n t w i l l o n l y intensify t o the d i s t i n c t i v e g u a r a n t e e s a g a i n s t firing or b e i n g r e a s s i g n e d , the g e n e r o u s u n e m p l o y m e n t benefits, a n d the h i g h m i n i ­ m u m w a g e s t h a t m a k e E u r o p e E u r o p e . A n d across t h e v a s t service e c o n o m i e s of G e r m a n y , F r a n c e , B r i t a i n , a n d Italy, t h e l u m b e r i n g , d o m e s t i c m a r k e t l e a d ­ ers

w i l l c l i n g j u s t as t i g h t l y to their o w n s u b s i d i e s a n d r e g u l a t o r y p r o t e c t i o n s . The

E u r o p e a n U n i o n is s u p p o s e d to ease s o m e o f t h i s q u a n d a r y b y c r e a t i n g

a s i n g l e m a r k e t as l a r g e a n d s t a b l e as A m e r i c a ' s , w i t h i n w h i c h e v e r y t h i n g c a n pass w i t h o u t tariffs or q u o t a s , c a p i t a l can flow w i t h o u t r e g u l a t i o n , a n d a n y person can m o v e w i t h o u t r e s t r i c t i o n . T h e E U ' s d i l e m m a is t h a t its m e m b e r states don't w a n t s u c h a free m a r k e t u n i o n . F o r e x a m p l e , in 2 0 0 0 , t h e m e m ­ bers a d o p t e d t h e " L i s b o n S t r a t e g y " t o m a k e t h e E U "the m o s t and

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a l m o s t none o f t h e r e c o m m e n d a t i o n s h a v e g o n e a n y w h e r e . T h e s t r a t e g y called for m o r e R & D o u t s i d e t h e four i n d u s t r i e s t h a t h a v e c l a i m e d t w o - t h i r d s of it in E u r o p e , a n d n o t h i n g has c h a n g e d . I t u r g e d p a t e n t reforms to b r i n g d o w n those c o s t s , a n d n o t h i n g has h a p p e n e d . I t c a l l e d for full p r i v a t i z a t i o n o f E u rope's t e l e c o m a n d e l e c t r i c i t y state c o m p a n i e s , a n d t h a t m o s t l y hasn't h a p p e n e d . I t u r g e d m e m b e r c o u n t r i e s to e n c o u r a g e n e w business creation b y e n d i n g s u b s i d i e s for m o n o l i t h i c " E u r o p e a n c h a m p i o n s , " a n d here, too, little o f s u b s t a n c e has c h a n g e d . F i n a l l y , L i s b o n c a l l e d for l o w e r taxes; a n d w h i l e c o r p o r a t e taxes h a v e c o m e d o w n in m a n y c o u n t r i e s , the overall tax b u r d e n hasn't d e c l i n e d at all. F o r all o f t h e E U ' s p r o n o u n c e m e n t s , its core c o u n t r i e s s e e m to prefer a s t r a t e g y closer to F o r t r e s s E u r o p e — a n E U t h a t resists g l o b a l p r e s s u r e s — t h a n one o p e n t o t h e g l o b a l e c o n o m y . S o G e r m a n y has c a l l e d on the E U ' s ten n e w m e m b e r s to raise t h e i r t a x e s to G e r m a n levels "in the n a m e o f fairness"; a n d B r u s s e l s a c t u a l l y o r d e r e d Poland's g o v e r n m e n t t o raise m o r e taxes. I n the s a m e v e i n , S w e d e n w a s o r d e r e d t o increase its f a r m s u b s i d i e s , a n d the C z e c h R e p u b l i c has h a d t o a d o p t s t r i c t e r l a b o r m a r k e t r e g u l a t i o n s . A n d recently, G e r m a n y a n d F r a n c e s t o p p e d m o v e s t o l o w e r barriers to sales of services f r o m c o m p a n i e s in one E U c o u n t r y to another, o u t o f t h e i r w e l l - g r o u n d e d fears t h a t l o w - c o s t E a s t e r n E u r o p e a n businesses w o u l d o v e r w h e l m their o w n , w e l l p r o t e c t e d a n d inefficient s e r v i c e c o m p a n i e s . It's h a r d n o t to s u s p e c t t h a t t h e E U no l o n g e r believes in i t s e l f — a n d based o n t h e r e j e c t i o n o f its c o n s t i t u t i o n b y the F r e n c h a n d D u t c h in 2 0 0 6 , neither d o m a n y E u r o p e a n s . E U s k e p t i c s h a v e b e e n o n the p o l i t i c a l a s c e n d a n c y in B r i t a i n , P o l a n d , F r a n c e , S w e d e n , a n d H o l l a n d ; a n d t h e I t a l i a n , F r e n c h , and S p a n i s h g o v e r n m e n t s all h a v e t a k e n steps t o insulate t h e i r d o m e s t i c c o m p a nies f r o m t a k e o v e r s b y others inside t h e E U . A n d in F r a n c e , w h e r e the E U w a s b o r n , a " D o n ' t T r e a d o n M e " a t t i t u d e t o w a r d s t h e U n i o n w a s a p o i n t o f rare a g r e e m e n t in t h e 2 0 0 7 p r e s i d e n t i a l c a m p a i g n . T h e socialist M a r i e - S é g o l è n e R o y a l c a l l e d for n e w i n d u s t r i a l p o l i c i e s , a "social treaty" t h a t w o u l d i m p o s e France's w o r k e r p r o t e c t i o n s across the E U , a n d tariff w a l l s a r o u n d E u r o p e , w h i l e S a r k o z y b l a m e d t h e e u r o for u n d e r m i n i n g F r e n c h c o m p e t i t i v e n e s s a n d s p o k e o f n e u t e r i n g t h e E u r o p e a n C e n t r a l B a n k . O n t o p of these p r o b l e m s , the U n i o n n e w faces n e w a n d e x p l o s i v e social p r e s s u r e s s t o k e d b y b r i n g i n g in C e n t r a l a n d E a s t e r n E u r o p e a n m e m b e r s . T h e E U ' s e n l a r g e m e n t not o n l y has o p e n e d t h e l a b o r m a r k e t s in G e r m a n y , F r a n c e , a n d I t a l y to m i l l i o n s o f w o r k ers p r e p a r e d t o w o r k for l o w e r w a g e s . I t is also i n c r e a s i n g M u s l i m i m m i g r a t i o n a n d u g l y responses to it in s o m e o f E u r o p e ' s m o s t tolerant c o u n t r i e s , d e v e l o p m e n t s t h a t e v e n t u a l l y c o u l d lead t o r e i n s t a t i n g national borders inside the E U .

THE NEW ECONOMICS OF DECLINE FOR EUROPE AND JAPAN

193

M o s t recent forecasts s u g g e s t t h a t at a m i n i m u m , b e i n g p a r t o f t h e E U w o n ' t h e l p E u r o p e ' s m a j o r e c o n o m i e s o v e r t h e n e x t d e c a d e . A c c o r d i n g to t h e O E C D , F r a n c e s h o u l d e x p e c t to g r o w b y a b o u t 1 . 5 p e r c e n t a y e a r f r o m 2 0 1 0 to 2 0 2 0 — a m i s e r a b l e r a t e — a n d G e r m a n y ' s o u t l o o k is n o better. O n e o f G e r ­ m a n y ' s l e a d i n g t h i n k t a n k s , t h e I n s t i t u t fur W e i t w i r t s c h a f t , is e v e n m o r e p e s ­ s i m i s t i c , forecasting g a i n s o f j u s t a b o u t

1 p e r c e n t a year. T h e e x p e r t s at

D e u t s c h e B a n k take a rosier v i e w a n d figure t h a t w i t h d e c e n t doses o f r e f o r m , G e r m a n y a n d F r a n c e c o u l d g r o w , respectively, b y 1 . 9 p e r c e n t a n d 2 . 3 p e r c e n t annually. B u t the bank's e x p e r t s also w a r n t h a t w i t h o u t r e f o r m a n d s t r o n g i m m i g r a t i o n , this g r o w t h p a t h c o u l d fall to as l i t t l e as o n e - h a l f o f 1 p e r c e n t a year for a d e c a d e , w h i c h w o u l d b e social d y n a m i t e . A m i d s t all t h i s g l o o m , t h e O E C D ' s c h i e f e c o n o m i s t , J e a n P h i l i p p e C o t i s , offers t h e t y p i c a l E u r o p e a n consolation: "in the e n d . . . o u r o w n w a y o f life is w o r t h so m u c h m o r e t h a n a v u l g a r G D P p e r c a p i t a statistic." O n e b r i g h t spot is Britain's o u t l o o k . A f t e r t w o d e c a d e s o f T h a t c h e r a n d B l a i r , B r i t i s h g o v e r n m e n t is smaller, its taxes a n d u n e m p l o y m e n t rates are lower, its r e g u l a t i o n s are less s t r i n g e n t , its s u b s i d i e s are less g e n e r o u s , a n d its labor p a r t i c i p a t i o n rates are h i g h e r t h a n G e r m a n y , F r a n c e , or Italy. E v e n i f a r e m a r k a b l e o n e - q u a r t e r o f a d u l t B r i t o n s l a c k l i t e r a c y skills, y o u n g B r i t o n s on a v e r a g e are as e d u c a t e d as y o u n g G e r m a n s a n d m o r e so t h a n t h e y o u n g in F r a n c e . Its businesses also i n v e s t m o r e p e r w o r k e r t h a n G e r m a n c o m p a n i e s , a l t h o u g h still less t h a n F r e n c h or A m e r i c a n firms. T h e e x p e r t s ' o u t l o o k for B r i t a i n o v e r the next d e c a d e a v e r a g e s a b o u t a h a l f - p e r c e n t a g e p o i n t h i g h e r than G e r m a n y , a n d at least as g o o d as t h e o u t l o o k for F r a n c e . Not

so in J a p a n , w h e r e resistance to r e f o r m is a l m o s t a p u b l i c v i r t u e . T o

w e s t e r n eyes, J a p a n offers a baffling case o f a d e m o c r a t i c s o c i e t y t h a t a c c e p t e d m o r e than a d e c a d e o f e c o n o m i c s t a g n a t i o n w i t h l i t t l e p r o t e s t a n d no m o r e than c o s m e t i c c h a n g e s in its p o l i t i c s a n d p o l i c i e s . M a n y J a p a n e s e b l a m e t h e i r p r o b l e m s on a s i n g u l a r e v e n t t h a t a l l e g e d l y n o one c o u l d foresee or b e h e l d r e ­ sponsible f o r — t h e collapse o f the " b u b b l e e c o n o m y " in t h e early 1 9 9 0 s , w h e n real estate a n d s t o c k p r i c e s c r a s h e d a n d t h o u s a n d s o f business loans w e n t sour. The

b u b b l e a n d its b u r s t i n g w e r e no acts o f n a t u r e , b u t t h e clear a n d d i r e c t

results o f certain t a x a n d m o n e t a r y p o l i c i e s , s u b s i d i e s , r e g u l a t i o n s , a n d b u s i ­ ness a r r a n g e m e n t s w e l l k n o w n to nearly e v e r y b o d y . M o r e o v e r , e v e n i f J a p a n ' s o n e - p a r t y p o l i t i c s a n d social n o r m s m a k e it difficult for J a p a n e s e v o t e r s to h o l d their p o l i t i c a l a n d e c o n o m i c elites r e s p o n s i b l e for a n y t h i n g , t h e b u r s t b u b b l e s h o u l d h a v e r u n its course in a f e w years. T h e U n i t e d S t a t e s has s h r u g g e d off s t o c k m a r k e t crashes a n d serious b a n k i n g p r o b l e m s in recent t i m e s . T h e s h o c k to J a p a n ' s s y s t e m w a s also c e r t a i n l y less severe t h a n t h e one dealt to K o r e a in t h e financial crisis o f 1 9 9 7 - 1 9 9 8 . B u t there, as w e w i l l see,

FUTURECAST

194

K o r e a n r e f o r m e r s t o o k c h a r g e a n d w i t h i n a f e w years K o r e a once a g a i n w a s one o f t h e w o r l d ' s f a s t e s t - g r o w i n g e c o n o m i e s . In J a p a n , decisive economic reforms seem out of r e a c h — a t a m i n i m u m , t h e y h a v e n ' t h a p p e n e d ; a n d w i t h o u t t h e m t h e e c o n o m y has s t a g n a t e d a n d s l i p p e d i n t o recession five t i m e s in fifteen y e a r s . T h r o u g h it all, a succession of p r i m e ministers have done little to reform p u b l i c and private economic a r r a n g e m e n t s as o u t d a t e d as c o m m u n i s m . E v e n w h e n t h e c h a r i s m a t i c r e ­ f o r m e r J u n i c h i r o K o i z u m i m a n a g e d t o c o m e t o p o w e r , his o w n p a r t y s t o p p e d all b u t t h e m o s t m o d e s t c h a n g e s ; a n d K o i z u m i w a s s u c c e e d e d b y p a r t y f u n c ­ t i o n a r i e s t h a t w o u l d h a v e fit r i g h t in d u r i n g t h e d o - n o t h i n g subsidies,

protections,

shareholding

and

regulations

have

changed

arrangements that help keep thousands

afloat c o n t i n u e , a n d t h e c o u n t r y ' s

financial

1990s. Most

little;

the

o f inefficient

crossfirms

system remains underdeveloped,

w i t h a l m o s t n o I P O or c o m m e r c i a l p a p e r c a p a c i t i e s as a l t e r n a t i v e s t o a w e a k ­ ened b a n k i n g system. O u t s i d e the small circle of Japanese exporting giants, led these days b y the hypersuccessful T o y o t a , economic p r o d u c t i v i t y contin­ ues t o l a n g u i s h . T h e r e also has b e e n l i t t l e p r o g r e s s t o w a r d s c r e a t i n g a n e n v i r o n m e n t for f o r e i g n d i r e c t i n v e s t m e n t , J a p a n ' s b e s t shot at i n t r o d u c i n g the b r a c i n g c o m ­ p e t i t i v e forces t h a t g l o b a l i z a t i o n insists on. A n d t h e nation's e c o n o m i c b l i n d s p o t a b o u t t h e role o f w o m e n in t h e e c o n o m y r e m a i n s s t r o n g . K o i z u m i ' s for­ m e r c h i e f a d v i s o r o n this issue, M a r i k o B a n d o , d e s c r i b e s h e r n a t i o n as "a d e ­ v e l o p i n g c o u n t r y in t e r m s o f g e n d e r e q u a l i t y , "

18

a n d she doesn't e x a g g e r a t e :

W o m e n earn b a r e l y h a l f o f w h a t J a p a n e s e m e n d o for the s a m e hours; a n d d e ­ s p i t e t h e w o r l d ' s f a s t e s t - s h r i n k i n g l a b o r force, less t h a n o n e - t h i r d o f J a p a n e s e c o m p a n i e s say t h e y w o u l d c o n s i d e r r e c r u i t i n g w o m e n for m a n a g e m e n t or technical positions.

1 9

P u b l i c p e n s i o n s are t h e one area w h e r e J a p a n has e m ­

b r a c e d real r e f o r m — a l t h o u g h it's easier t o raise t h e p a y r o l l t a x in a c o u n t r y w h e r e , a c c o r d i n g t o t h e O E C D , n e a r l y 4 0 p e r c e n t o f the p e o p l e m a n a g e to a v o i d or e v a d e at least p a r t o f i t .

2 0

T h e w a y t o g e t o u t o f a h o l e w h e n y o u w o n ' t or can't c l i m b o u t is to w a i t for s o m e o n e to rescue y o u . I n m o d e r n J a p a n , t h a t t y p i c a l l y has m e a n t c o m ­ m e r c i a l i z i n g a n e w g a d g e t or e q u i p m e n t t h a t t h e w o r l d w i l l w a n t — c o p y i n g m a c h i n e s , c o l o r t e l e v i s i o n s , V C R s , a n d t h e W a l k m a n — o r b e t t e r still, a c h i e v ­ i n g a real t e c h n o l o g i c a l b r e a k t h r o u g h . M i k i o W a k a t s u k i , h e a d of the B o a r d o f C o u n s e l o r s o f t h e J a p a n R e s e a r c h I n s t i t u t e , has said t h a t w i t h so m u c h of his c o u n t r y ' s t r a d i t i o n a l m a n u f a c t u r i n g g o i n g offshore, its f u t u r e lies in r o ­ b o t i c s , b i o t e c h n o l o g y , a n d n a n o t e c h n o l o g y . H o n d a , S o n y , a n d M i t s u b i s h i all h a v e m a j o r R & D p r o g r a m s in r o b o t i c s , a n d there's c o n s i d e r a b l e interest in solar cell t e c h n o l o g i e s . B u t for nearly t w e n t y y e a r s , as The Economist recently

THE NEW ECONOMICS OF DECLINE FOR EUROPE AND JAPAN put

195

it, "Japanese firms h a v e n o t c o u n t e d for m u c h in s o f t w a r e , t h e I n t e r n e t ,

b i o t e c h n o l o g y , a n d o t h e r h i g h - g r o w t h i n d u s t r i e s , " a n d there are n o J a p a n e s e e q u i v a l e n t s t o M i c r o s o f t , G o o g l e , A m a z o n , or e v e n A p p l e . The

c u l t u r a l , social, a n d p o l i t i c a l forces c o n t r i b u t i n g t o J a p a n ' s o n g o i n g

e c o n o m i c w e a k n e s s are s t r o n g e r t h a n e v e n a f e w serious t e c h n o l o g i c a l b r e a k ­ t h r o u g h s . R y o s e i K o k u b u n , a K e i o U n i v e r s i t y e x p e r t o n J a p a n ' s p l a c e in t h e w o r l d , has f o u n d t h a t m o s t J a p a n e s e still see g l o b a l i z a t i o n as j u s t a t h r e a t a n d not an o p p o r t u n i t y .

21

T h a t a t t i t u d e reinforces J a p a n ' s p o l i t i c a l a n d social a t ­

t a c h m e n t s to all the a r r a n g e m e n t s t h a t g l o b a l i z a t i o n d i c t a t e s m u s t c h a n g e . W i t h a l a b o r force c o n t r a c t i n g i p e r c e n t a y e a r a n d d e s u l t o r y efforts at b e s t to raise p r o d u c t i v i t y , J a p a n n o w looks f o r w a r d t o a n o t h e r ten or fifteen y e a r s o f g r o w t h a v e r a g i n g i p e r c e n t a y e a r or a l i t t l e m o r e , p u n c t u a t e d b y o c c a s i o n a l s p u r t s o f s t r o n g e r g a i n s (as r e c e n t l y ) a n d p e r i o d i c s l o w d o w n s . O n t h i s l i k e l y p a t h , the i n c o m e s o f m i l l i o n s o f a v e r a g e J a p a n e s e w i l l s t a g n a t e or e d g e d o w n ­ w a r d , as l o w rates o f r e t u r n a n d f a s t - f a l l i n g s a v i n g s rates also e r o d e t h e real w e a l t h o f J a p a n e s e h o u s e h o l d s . O n t h i s c o u r s e — a n d it takes a v i v i d i m a g i n a ­ tion to see h o w J a p a n can g e t itself on a b e t t e r o n e — b y 2 0 2 0 J a p a n w i l l b e a national e c o n o m y in u n e q u i v o c a l d e c l i n e a n d a d i m i n i s h i n g f a c t o r in

the

world economy. W h i l e G e r m a n y , F r a n c e , a n d J a p a n all are f a i l i n g t o a d a p t s u c c e s s f u l l y t o g l o b a l i z a t i o n — a n d to s o m e d e g r e e , B r i t a i n , t o o — I r e l a n d a n d K o r e a are u s ­ i n g g l o b a l i z a t i o n to p r o m o t e t h e m s e l v e s t o t h e t o p tier o f w o r l d e c o n o m i e s . N e i t h e r has the size or b r e a d t h r e q u i r e d for g l o b a l effects, b u t w h e n E u r o p e ­ an c o u n t r i e s s u c h as G r e e c e , H u n g a r y , or P o r t u g a l l o o k for a n e w e c o n o m i c m o d e l these d a y s , or A s i a n c o u n t r i e s l i k e T h a i l a n d , M a l a y s i a , a n d I n d o n e s i a d o so, t h e y are m o r e l i k e l y to t h i n k a b o u t I r e l a n d a n d K o r e a t h a n t h e m u c h larger a n d , o f late, m u c h - l e s s - s u c c e s s f u l m o d e r n e c o n o m i e s in t h e i r r e g i o n s .

THE CELTIC TIGER K o r e a is the g r e a t e s t s m a l l e c o n o m y success s t o r y o f t h e last h a l f c e n t u r y , w h i l e I r e l a n d is the b i g g e s t success o f t h e last g e n e r a t i o n . T h e I r i s h success already d r a w s d e l e g a t i o n s f r o m C e n t r a l a n d E a s t e r n E u r o p e a n g o v e r n m e n t s and

research i n s t i t u t e s , l o o k i n g for lessons. It's o b v i o u s w h y — t h e n e w C e l t i c

T i g e r has b e e n t h e w o r l d ' s fastest g r o w i n g d e v e l o p e d e c o n o m y o v e r the last fifteen years. F r o m 1 9 9 0 t o 1 9 9 5 , t h e c o u n t r y g r e w n e a r l y 5 p e r c e n t a y e a r and

t h e n accelerated to a l m o s t 1 0 p e r c e n t a n n u a l g r o w t h o v e r 1 9 9 5 - 2 0 0 0 .

E v e n f r o m 2 0 0 0 to 2 0 0 5 , Ireland's real g r o w t h a v e r a g e d n e a r l y 6 p e r c e n t a year, a b o u t t w i c e as fast as t h e U n i t e d S t a t e s , m o r e t h a n t h r e e t i m e s t h e rate

FUTURECAST

196

for t h e E u r o z o n e c o u n t r i e s , a n d n e a r l y four t i m e s as fast as G e r m a n y .

2 2

And

o v e r t h e last t w e n t y y e a r s , Ireland's real G D P t r i p l e d , p r o d u c i n g b y 2 0 0 3 (the last y e a r for t h i s c o m p a r a t i v e d a t a ) t h e w o r l d ' s h i g h e s t G D P p e r e m p l o y e e .

2 3

I t has also e s c a p e d E u r o p e a n - s t y l e u n e m p l o y m e n t : S i n c e 1 9 9 3 , even as the c o u n t r y ' s l a b o r force g r e w b y m o r e t h a n 6 0 p e r c e n t , its jobless rate fell f r o m t y p i c a l l y h i g h E u r o p e a n levels o f a l m o s t 1 5 p e r c e n t to the l o w e s t in N o r t h A m e r i c a or E u r o p e .

2 4

The Economist s u m s u p these recent a c h i e v e m e n t s :

Fifteen years ago Ireland was deemed an economic failure . . . Y e t within a few years, it had become . . . a rare example of a devel­ oped country w i t h a g r o w t h record to match East Asia's, as well as enviably low unemployment and inflation, a low tax burden and a tiny public d e b t .

25

N e a r l y everyone's l i v i n g s t a n d a r d s in I r e l a n d h a v e i m p r o v e d sharply. F r o m 2 0 0 0 t o 2 0 0 5 , t h e a v e r a g e real i n c o m e in I r e l a n d g r e w nearly 2 0 p e r c e n t , sev­ eral t i m e s faster t h a n A m e r i c a n s a n d t w e n t y t i m e s or m o r e faster t h a n the F r e n c h a n d G e r m a n s . B y 2 0 0 5 , t h e a v e r a g e Irish h a d a c o n s i d e r a b l y h i g h e r i n c o m e , at $ 4 0 , 1 5 0 , t h a n t h e a v e r a g e J a p a n e s e , B r i t o n , F r e n c h p e r s o n , or 2 6

G e r m a n , a n d n e a r l y as m u c h as the a v e r a g e S w e d e or A m e r i c a n . T h e r e is one u n u s u a l feature t h a t qualifies s o m e o f these a c h i e v e m e n t s . T h e Irish e c o n o m y d e p e n d s e n o r m o u s l y o n f o r e i g n i n v e s t m e n t s , a n d m u c h of their e a r n i n g s , w h i c h are i n c l u d e d in I r i s h n a t i o n a l i n c o m e , flow b a c k to p a r e n t c o m p a n i e s in the U n i t e d States, the U n i t e d K i n g d o m , and continental Europe. If w e adjust Ireland's n a t i o n a l i n c o m e for these l a r g e o u t f l o w s o f profits a n d d i v i d e n d s ( t e c h n i c a l l y , b y u s i n g " G r o s s N a t i o n a l P r o d u c t , " or G N P , instead o f the stan­ d a r d G D P ) , t h e a v e r a g e Irish p e r s o n still earns n e a r l y as m u c h or m o r e as the a v e r a g e p e r s o n a l m o s t a n y w h e r e else in E u r o p e . B u t a d j u s t i n g as w e l l for dif­ ferences in t h e cost o f l i v i n g secures Ireland's c u r r e n t e d g e o v e r the rest of E u r o p e . A n d b y a n y m e a s u r e , I r e l a n d t o d a y is o n e o f the w o r l d ' s ten richest countries. I r e l a n d o w e s t h i s r a p i d p r o g r e s s t o a s t r a t e g y t h a t c o m b i n e s the p a t h s o f t h e A s i a n T i g e r s in the 1 9 7 0 s a n d 1 9 8 0 s a n d s o m e o f C h i n a ' s p o l i c i e s in the last d e c a d e . L i k e t h e A s i a n T i g e r s , d e c a d e s o f l a r g e social i n v e s t m e n t s p r o ­ d u c e d e c o n o m i c d i v i d e n d s w h e n Ireland's b o o m e r d e m o g r a p h i c s h i t h o m e . W h i l e Ireland's b o o m e r s w e r e g r o w i n g u p , D u b l i n s u b s t a n t i a l l y increased s u p p o r t for h i g h e r e d u c a t i o n a n d c r e a t e d a b u s i n e s s - f r i e n d l y e n v i r o n m e n t for c o m p a n i e s t h a t w o u l d later e m p l o y t h e d e m o g r a p h i c b u l g e , b y s p e n d i n g l i b ­ e r a l l y o n p u b l i c i n f r a s t r u c t u r e a n d offering t a x relief a n d special i n c e n t i v e s for f o r e i g n i n v e s t o r s . T h i s n e w a p p r o a c h b y a c o u n t r y t h a t for d e c a d e s h a d

THE NEW ECONOMICS OF DECLINE FOR EUROPE AND JAPAN

197

shielded itself f r o m p r o g r e s s w i t h t r a d i t i o n a l p r o t e c t i o n i s m a n d m e a g e r p u b ­ lic i n v e s t m e n t s

b e g a n in an u n u s u a l w a y — w i t h a g o v e r n m e n t s t u d y t h a t

b r o k e d e c i s i v e l y w i t h the g o v e r n m e n t ' s t h e n - c u r r e n t p o l i c i e s . I n 1 9 5 9 , t h e Secretary of Finance, T h o m a s K e n W h i t a k e r , directed a policy review w h i c h to nearly everyone's s u r p r i s e , p r o p o s e d d e e p c u t s in tariffs, a shift in p u b l i c priorities f r o m E u r o p e a n - s t y l e w o r k e r s u p p o r t s t o n e w i n v e s t m e n t s in i n d u s ­ try,

education, and roads, and s w e e p i n g tax and regulatory changes to attract

f o r e i g n c o m p a n i e s . O n e recent a n a l y s i s d i d n ' t e x a g g e r a t e g r e a t l y w h e n called W h i t a k e r "the a r c h i t e c t o f m o d e r n I r e l a n d . "

it

2 7

M o r e s u r p r i s i n g , o v e r the n e x t d e c a d e D u b l i n f o l l o w e d his a d v i c e , e n d i n g restrictions on f o r e i g n o w n e r s h i p of Irish c o m p a n i e s ,

repealing

corporate

taxes o n profits f r o m e x p o r t s , u n i l a t e r a l l y l o w e r i n g i m p o r t tariffs, n e g o t i a t i n g a free trade a g r e e m e n t w i t h the U . K . , a n d d e c l a r i n g its i n t e n t i o n to j o i n t h e E u r o p e a n E c o n o m i c C o m m u n i t y ( E E C ) , t h e E U ' s predecessor. I r e l a n d w a s n ' t a d m i t t e d to the E E C u n t i l 1 9 7 3 , w h e n F r a n c e finally s t o p p e d v e t o i n g it as p a r t o f Paris's p o l i c y o f b l o c k i n g G r e a t B r i t a i n ' s entry. Y e t e v e n in t h e 1 9 6 0 s , Irish g r o w t h j u m p e d to m o r e t h a n 4 p e r c e n t a year, as its a m p l e n u m b e r s o f low-wage,

English-speaking workers—along with

the

new

tax b r e a k s —

b e g a n to a t t r a c t U . S . a n d E u r o p e a n c o m p a n i e s . B y 1 9 7 0 , m o r e t h a n t h r e e h u n d r e d a n d fifty f o r e i g n c o r p o r a t i o n s h a d set u p facilities t h e r e , Ireland finally m a d e it i n t o the E E C ,

2 8

so w h e n

it p r o m p t l y b e c a m e a l o w - c o s t p l a c e for

A m e r i c a n a n d B r i t i s h i n d u s t r i a l firms t o sell i n t o E u r o p e . A n d w h i l e Ireland's n e u t r a l i t y in W o r l d W a r I I h a d d i s q u a l i f i e d it for t h e M a r s h a l l P l a n , its rela­ t i v e p o v e r t y w i t h i n t h e E E C e n t i t l e d it for s u b s t a n t i a l " c o n v e r g e n c e " p a y ­ m e n t s that h e l p e d f u n d t h e n e w i n f r a s t r u c t u r e a n d e d u c a t i o n s p e n d i n g . T h i s w a s a g o o d b e g i n n i n g , b u t t h e real force o f Ireland's n e w e c o n o m i c s t r a t e g y t o o k l o n g e r to g a t h e r . T h r o u g h t h e 1 9 6 0 s , it r e m a i n e d h e a v i l y d e ­ p e n d e n t on basic a g r i c u l t u r e , m u c h o f it e x p o r t e d t o B r i t a i n , a n d u n e m p l o y ­ ment stayed h i g h even w i t h substantial emigration. D r a w i n g on a

1965

O E C D analysis o f Ireland's p r o s p e c t s t h a t stressed e d u c a t i o n , the g o v e r n m e n t in 1 9 6 7 e n d e d fees for s e c o n d a r y e d u c a t i o n a n d offered all Irish y o u t h free t r a n s p o r t a t i o n to school. E d u c a t i o n a l levels b e g a n to rise; a n d b y t h e m i d 1 9 7 0 s , e m p l o y m e n t , p o p u l a t i o n , a n d n a t i o n a l i n c o m e all b e g a n t o g r o w at the s t r o n g e s t s u s t a i n e d rates since I r i s h i n d e p e n d e n c e , a h a l f - c e n t u r y earlier. W h i l e its l a r g e p u b l i c i n v e s t m e n t s l i n k e d I r e l a n d to t h e E a s t A s i a T i g e r s ' p o l i c i e s , its t u r n a w a y f r o m p r o t e c t i o n i s m a n d a p p e t i t e for f o r e i g n transfers a n t i c i p a t e d later C h i n e s e p o l i c y . F r o m t h e 1 9 7 0 s , I r e l a n d set o u t t o b e c o m e a p r o d u c t i o n p l a t f o r m for the E u r o p e a n m a r k e t , f o c u s e d o n

high-technology

p r o d u c t s t h a t w o u l d n e e d h i g h l y s k i l l e d a n d h i g h l y p a i d labor, e s p e c i a l l y in computers, pharmaceuticals, and medical e q u i p m e n t . B y 1 9 7 5 , the t w o U . S .

FUTURECAST

198

mainframe makers A m d a h l and W a n g , the medical device producer Baxter T r a v e n o l ( n o w B a x t e r I n t e r n a t i o n a l ) , a n d d r u g m a k e r s M e r c k S h a r p and W a r n e r - L a m b e r t all h a d set u p n e w facilities in I r e l a n d , a n d m o r e t h a n four h u n d r e d a n d fifty f o r e i g n - o w n e d o p e r a t i o n s a c c o u n t e d for t w o - t h i r d s of the country's industrial o u t p u t .

2 9

A s these f o r e i g n transfers rose, t h e country's ex­

p a n d e d c o m m i t m e n t s t o p u b l i c e d u c a t i o n p r o d u c e d t h e i r s k i l l e d labor. F r o m 1 9 6 5 t o 1 9 8 0 , I r e l a n d d o u b l e d the n u m b e r o f s t u d e n t s in s e c o n d a r y or p o s t s e c o n d a r y e d u c a t i o n , a n d in t h e f o l l o w i n g

t w e n t y y e a r s , it r e d o u b l e d

the

n u m b e r o f s t u d e n t s in c o l l e g e s , u n i v e r s i t i e s , or o t h e r p o s t s e c o n d a r y i n s t i t u ­ t i o n s , a s i x f o l d increase in t h i r t y - f i v e y e a r s . T h e s e i n v e s t m e n t s set u p I r e l a n d for w h a t t h e l e a d i n g scholars of d e m o ­ graphics and economics, Harvard's D a v i d B l o o m and D a v i d C a n n i n g , dub t h e d e m o g r a p h i c d i v i d e n d — w h e n a b o o m e r - s i z e g e n e r a t i o n enters the labor force w i t h m o r e e d u c a t i o n a n d t h e e c o n o m y creates t h e a d d i t i o n a l s k i l l e d j o b s for t h e m to

30

fill.

high-

F o r sustained progress, B l o o m and Canning's

research f o u n d t h a t a b a b y b u s t g e n e r a t i o n has to f o l l o w the b o o m e r s , so the share o f t h e nation's p o p u l a t i o n that's a c t i v e l y w o r k i n g ratchets u p . T h a t d r o p in I r i s h f e r t i l i t y rates b e g a n in t h e 1 9 8 0 s , w h e n c o n t r a c e p t i o n w a s finally le­ g a l i z e d a n d t h e c o u n t r y ' s e c o n o m i c o p p o r t u n i t i e s b e g a n to d r a w m o r e Irish w o m e n into the workforce and a w a y from h a v i n g large families. B l o o m and C a n n i n g c a l c u l a t e t h a t d e m o g r a p h i c s a c c o u n t for o n e - t h i r d o f the increase in t h e g r o w t h rates o f I r e l a n d — s l i g h t l y less t h a n in E a s t A s i a .

3 1

Europe's large

e c o n o m i e s a n d J a p a n also r e a p e d t h e s a m e k i n d o f initial b e n e f i t s — i n 1 9 7 0 s a n d 1 9 8 0 s p u n d i t s c a l l e d t h e m " m i r a c l e s " — b u t d i d n ' t sustain

the them

w i t h additional reforms that could take account of globalization. Ireland's p r o g r e s s n e a r l y d e r a i l e d in t h e late 1 9 7 0 s a n d early 1 9 8 0 s , u n t i l o n c e a g a i n it f o l l o w e d t h e e x p e r t s ' a d v i c e . W h e n t h e oil shocks o f the 1 9 7 0 s b e g a n t o eat i n t o t h e r i s i n g i n c o m e s o f I r i s h w o r k e r s , D u b l i n reverted to b i g b u d g e t deficits a n d easy m o n e y p o l i c i e s ; a n d b y t h e early 1 9 8 0 s , inflation a n d u n e m p l o y m e n t w e r e b a c k a n d g r o w t h w a s s p u t t e r i n g . I n 1 9 8 5 , the national deficit r e a c h e d n e a r l y 1 0 p e r c e n t o f G N P , a n d the I M F w a r n e d that Ireland w a s h e a d e d for a fiscal m e l t d o w n a n d c u r r e n c y crisis. M o r e u p close a n d p e r ­ sonal t h a n t h e I M F ' s w a r n i n g s , I r i s h a c a d e m i c s a n d journalists n o t e d that m a n y o f t h e c o u n t r y ' s best a n d b r i g h t e s t w e r e l e a v i n g for b e t t e r p r o s p e c t s , i n ­ c l u d i n g v i r t u a l l y e n t i r e classes o f g r a d u a t e s f r o m T r i n i t y C o l l e g e , the H a r ­ v a r d or O x f o r d o f I r e l a n d . O v e r a l l , s o m e 2 0 0 , 0 0 0 Irish e m i g r a t e d to other c o u n t r i e s in t h e 1 9 8 0 s , a l m o s t 6 p e r c e n t o f the total p o p u l a t i o n . T o its c r e d i t , Ireland's g o v e r n m e n t t o o k t h e w a r n i n g s seriously a n d b e g a n t o q u i c k l y b r i n g d o w n its deficits. I n 1 9 8 6 , f u n d s for h e a l t h a n d e d u c a t i o n fell b y 6 p e r c e n t , defense lost 7 p e r c e n t , roads a n d h o u s i n g t o o k c u t s o f 1 1

THE NEW ECONOMICS OF DECLINE FOR EUROPE AND JAPAN

199

p e r c e n t , a n d a g r i c u l t u r a l s p e n d i n g fell 1 8 p e r c e n t . T h e f o l l o w i n g year, a n e w F i a n n a Fail g o v e r n m e n t p u t in p l a c e e v e n s h a r p e r c u t s a n d w o r k e d o u t a n e w social a g r e e m e n t a m o n g l a r g e e m p l o y e r s , u n i o n s , a n d f a r m e r s to a c c e p t v e r y l i m i t e d w a g e increases in r e t u r n for m o d e s t c u t s in d i r e c t taxes. I n three years' t i m e , Irish g o v e r n m e n t s p e n d i n g as a share o f G N P h a d fallen b y o n e quarter, f r o m 5 5 to 4 1 p e r c e n t . Ireland's real g o o d f o r t u n e , h o w e v e r , w a s t h a t a s t r a t e g y i n t e n d e d to m a k e it p a r t of g r e a t e r E u r o p e p o s i t i o n e d its e c o n o m y q u i t e w e l l w h e n g l o b a l i z a ­ tion left m u c h o f t h e rest o f E u r o p e off b a l a n c e . F o r y e a r s , t h e g o v e r n m e n t d i d e v e r y t h i n g it c o u l d to a t t r a c t A m e r i c a n a n d B r i t i s h firms in t h e I T h a r d w a r e and

software businesses. B y the 1 9 9 0 s , m u c h like W a s h i n g t o n u n d e r B i l l

C l i n t o n , D u b l i n m o v e d f r o m b u d g e t deficits to s m a l l s u r p l u s e s , p r i v a t i z e d t e l e c o m m u n i c a t i o n s , i n v e s t e d 5 p e r c e n t o f G D P a y e a r in u p g r a d i n g its p o r t s , train s y s t e m s , a n d r o a d s — t w i c e t h e E U a v e r a g e — a n d increased f u n d i n g for p u b l i c health a n d w a t e r p r o j e c t s a n d , a l w a y s , e d u c a t i o n . P u b l i c s p e n d i n g o n e d u c a t i o n has g r o w n 1 5 0 p e r c e n t since 1 9 8 5 , e s p e c i a l l y o n c e t h e g o v e r n m e n t a b o l i s h e d c o l l e g e a n d u n i v e r s i t y t u i t i o n fees for Irish y o u n g p e o p l e in 1 9 9 5 . A l t h o u g h Ireland still s p e n d s less as a share o f G D P on e d u c a t i o n t h a n m a n y o t h e r p l a c e s in E u r o p e , a h i g h e r p e r c e n t a g e o f its y o u n g p e o p l e a t t e n d school than in G e r m a n y , Italy, or J a p a n . M o r e o v e r , 3 7 p e r c e n t o f Irish m e n a n d w o m e n ages t w e n t y - f i v e to t h i r t y - f o u r h a v e s o m e p o s t s e c o n d a r y e d u c a t i o n , c o m p a r e d to 2 7 p e r c e n t across the E U (in t h e U n i t e d S t a t e s it's 4 0 p e r c e n t ) . So, was

3 2

w h e n the A m e r i c a n I T b o o m g a t h e r e d force in t h e m i d - 1 9 9 0 s , I r e l a n d

w e l l - p o s i t i o n e d to p a r t i c i p a t e . B y 2 0 0 4 , Ireland's $ 2 3 0 b i l l i o n s t o c k o f

direct foreign i n v e s t m e n t w a s as l a r g e as Italy's, an e c o n o m y e i g h t t i m e s I r e ­ land's s i z e ;

33

a n d t o d a y the s t o c k o f f o r e i g n i n v e s t m e n t , r e l a t i v e to Irish G D P ,

is ten t i m e s that o f G e r m a n y , five t i m e s t h a t o f F r a n c e , a n d four t i m e s t h a t o f the U n i t e d K i n g d o m . L i t t l e I r e l a n d also has a b o u t o n e - t h i r d t h e F D I o f C h i n a , the world's l e a d i n g n e w d e s t i n a t i o n for f o r e i g n i n v e s t m e n t a n d a n e c o n o m y nearly t w e l v e t i m e s its size. Ireland's c o m m i t m e n t

to e d u c a t i o n a n d f o r e i g n d i r e c t i n v e s t m e n t

have

created a special f o r m o f g l o b a l i z a t i o n s y n e r g y , as t h e f o r e i g n t r a n s p l a n t s e x ­ pose t h o u s a n d s of the country's h i g h l y s k i l l e d w o r k e r s to l e a d i n g - e d g e t e c h ­ nologies a n d o p e r a t i n g p r a c t i c e s , w h i c h e n a b l e t h e m to f u r t h e r i m p r o v e t h e i r skills. T h o s e d i r e c t transfers are g e n e r a l l y focused on i n f o r m a t i o n

technolo­

g i e s , p h a r m a c e u t i c a l s , a n d m e d i c a l e q u i p m e n t . T o d a y , seven o f t h e w o r l d ' s t o p ten I T c o m p a n i e s — I B M , I n t e l , H P , D e l l , O r a c l e , L o t u s , a n d M i c r o s o f t — have Irish p r o d u c t i o n facilities. T h i r t e e n o f t h e w o r l d ' s fifteen m a j o r p h a r m a ­ ceutical

companies

also h a v e m a j o r o p e r a t i o n s

there,

including

Wyeth;

S c h e r i n g - P l o u g h ; M e r c k , S h a r p a n d D o h m e ; Pfizer; N o v a r t i s , A l l e r g a n ; a n d

FUTURECAST

200

G l a x o S m i t h K l i n e ; a n d j u s t o u t s i d e D u b l i n , t h e w o r l d ' s largest b i o t e c h n o l o g y c a m p u s w a s r e c e n t l y c o m p l e t e d . F i n a l l y , fifteen o f the w o r l d ' s t o p t w e n t y - f i v e m e d i c a l e q u i p m e n t m a k e r s are in I r e l a n d , i n c l u d i n g B o s t o n Scientific; B e c ton D i c k i n s o n ; B a u s c h and L o m b e ; A b b o t t ; J o h n s o n & J o h n s o n ; and Stryker. O n e result is t h a t a d v a n c e d t e c h n o l o g i e s p l a y a m u c h l a r g e r role in m a n u f a c ­ t u r i n g in I r e l a n d t h a n a n y w h e r e else in E u r o p e o u t s i d e o f F i n l a n d — m o r e t h a n 2 0 p e r c e n t , c o m p a r e d to an E U a v e r a g e o f b a r e l y 8 p e r c e n t , a n d not far b e h i n d A m e r i c a ' s 2 6 p e r c e n t . A n d f o r e i g n c o m p a n i e s in these three h i g h t e c h n o l o g y areas e m p l o y 8 5 , 0 0 0 I r i s h , or o n e - t h i r d o f t h e c o u n t r y ' s m a n u ­ facturing w o r k e r s .

3 4

N e a r l y 8 5 p e r c e n t o f all t h i s m a n u f a c t u r i n g is e x p o r t e d , so t h a t w h e r e a f e w d e c a d e s a g o Ireland's p r i n c i p a l e x p o r t s w e r e f o o d s t u f f a n d its y o u n g p e o ­ p l e , t o d a y it's m o s t l y t h e h i g h - t e c h p r o d u c t s o f its 1 , 2 0 0 or so f o r e i g n - o w n e d c o m p a n i e s . I n t e l , D e l l , a n d M i c r o s o f t t o g e t h e r , for e x a m p l e , a c c o u n t for 2 0 p e r c e n t o f all I r i s h e x p o r t s ; a n d o n a p e r c a p i t a basis, Ireland's e x p o r t s are n o w seven t i m e s t h o s e o f t h e U n i t e d S t a t e s , six t i m e s those o f J a p a n , a n d four t i m e s those of G r e a t Britain. R e m a r k a b l y , Irish modernization

has also s p r e a d t o s o m e h i g h - e n d ser­

vices, b y the same path. T h e educated workers, tax incentives, and telecom­ munications investments that attracted the advanced technology also h a v e d r a w n m a j o r F D I in

financial

w i t h l i t t l e n o t i c e f r o m t h e Wall Street Journal b e c o m e a s i g n i f i c a n t l o c a t i o n for g l o b a l

transplants

services; a n d in t h e last d e c a d e or so, a n d the London Times, I r e l a n d has

finance.

M o r e t h a n o n e - t h i r d o f the

F D I in I r e l a n d is n o w c o n c e n t r a t e d at the D u b l i n I n t e r n a t i o n a l F i n a n c i a l S e r ­ v i c e s C e n t r e , a n d m o r e t h a n h a l f o f t h e w o r l d ' s t w e n t y largest insurance c o m ­ p a n i e s a n d fifty l a r g e s t b a n k s are n o w l o c a t e d there. S t r a n g e as it m a y s e e m to traders at t h e Paris B o u r s e or t h e B a n k o f C h i n a in H o n g K o n g , I r e l a n d is a genuine

hub

international

in

global

capital

markets,

with

f u n d s m a n a g e d there n o w t o p p i n g

the

total

value

more than $ 5 0 0

of

the

billion,

or t w i c e t h e c o u n t r y ' s G D P . A m e r i c a n a n d B r i t i s h c o n s e r v a t i v e s l i k e to insist t h a t Ireland's t r a n s f o r m a ­ t i o n w a s p r o p e l l e d b y a 1 2 . 5 p e r c e n t c o r p o r a t e t a x rate a n d zero t a x on profits f r o m e x p o r t s . W h i l e t h e y e x a g g e r a t e t h e role o f l o w t a x rates, l o w e r taxes are b e t t e r t h a n h i g h e r taxes for a n y e c o n o m y , so l o n g as t h e y c o v e r the p u b l i c s p e n d i n g t h e c o u n t r y w a n t s . Ireland's total t a x b u r d e n at 2 8 p e r c e n t of G D P is far b e l o w t h e 4 0 p e r c e n t a v e r a g e for t h e E U 1 5 ; a n d as a share o f l a b o r costs, Irish taxes are a b o u t ten p e r c e n t a g e p o i n t s l o w e r t h a n a n y o t h e r a d v a n c e d E u ­ ropean e c o n o m y .

3 5

T h e c o n v e r g e n c e p a y m e n t s f r o m the E U also p l a y e d a role,

p a y i n g for a g o o d p a r t o f i n f r a s t r u c t u r e a n d e d u c a t i o n a l s p e n d i n g

in

the

1 9 8 0 s a n d e a r l y 1 9 9 0 s . B u t l o w taxes w o u l d h a v e h a d l i t t l e effect if I r e l a n d

THE NEW ECONOMICS OF DECLINE FOR EUROPE AND JAPAN

201

hadn't o p e n e d its e c o n o m y to f o r e i g n c o m p e t i t i o n a n d f o r e i g n and

investment;

E U subsidies w o u l d n ' t h a v e m a t t e r e d i f D u b l i n h a d n ' t u s e d t h e m wisely. M o r e o v e r , these factors m a k e l i t t l e difference today, since c o r p o r a t e t a x e s

h a v e c o m e d o w n in m a n y c o u n t r i e s a n d I r e l a n d hasn't qualified for E U s u b s i ­ dies for s o m e t i m e . W h a t m a t t e r s n o w is t h a t t h e t e c h n o l o g i e s a n d b u s i n e s s m e t h o d s o f m a n y of t h e w o r l d ' s m o s t a d v a n c e d c o m p a n i e s are firmly e m b e d ­ ded

in Irish m a n u f a c t u r i n g a n d business

services. M o r e o v e r , these

huge

i n v e s t m e n t s are p a r t o f t h e w o r l d - s p a n n i n g n e t w o r k s o f those g l o b a l c o r p o r a ­ tions, l i n k i n g Ireland's e c o n o m y to t h e m o s t successful aspects o f g l o b a l i z a ­ tion. T h e result, in the j u d g m e n t o f t h e g l o b a l business c o n s u l t a n c y A T K e a r n e y , is, "the w o r l d ' s m o s t g l o b a l i z e d e c o n o m y " w i t h t h e best b u s i n e s s e n ­ v i r o n m e n t in E u r o p e . W h e t h e r Ireland w i l l sustain its a d v a n t a g e s o v e r the n e x t ten to

fifteen

years is an o p e n q u e s t i o n . O n the p l u s side, t h e s t r a t e g y is still p r o d u c i n g t h e s t r o n g e s t p r o d u c t i v i t y g a i n s in E u r o p e , a n d t h e c o u n t r y doesn't face the s h r i n k i n g labor force t h a t h a u n t s t h e rest o f t h e c o n t i n e n t a n d J a p a n .

Not

o n l y are Irish b i r t h r a t e s h i g h e r t h a n m o s t o f t h e rest o f E u r o p e ; b u t its p r o s ­ p e r i t y has b e c o m e a p o w e r f u l m a g n e t for i m m i g r a n t s . L i k e t h e U n i t e d S t a t e s , i m m i g r a t i o n a c c o u n t s for m o r e t h a n h a l f o f t h e total g r o w t h in t h e c o u n t r y ' s p o p u l a t i o n since 1 9 9 5 ,

3 6

a n d f o r e i g n nationals c o m p r i s e n e a r l y 1 0 p e r c e n t o f

all Irish residents. A n d u n l i k e t h e w a v e s o f p o o r M u s l i m i m m i g r a n t s m e e t i n g fierce

resistance in F r a n c e , G e r m a n y , D e n m a r k , a n d t h e N e t h e r l a n d s , I r e ­

land's i m m i g r a n t s are w e s t e r n , g e n e r a l l y e d u c a t e d , a n d e a g e r to a s s i m i l a t e . H a l f o f t h e m c o m e f r o m the U . K . , a n d m o s t o f the rest are e i t h e r r e t u r n i n g Irish w h o h a d e m i g r a t e d in t h e 1 9 8 0 s a n d 1 9 9 0 s or n e w i m m i g r a n t s f r o m P o l a n d , L i t h u a n i a , a n d o t h e r n e w E U accession c o u n t r i e s . Ireland also w i l l a v o i d m u c h o f t h e p u b l i c p e n s i o n crisis l o o m i n g for m o s t a d v a n c e d c o u n t r i e s . N o w a n d for the n e x t g e n e r a t i o n , t h e share o f t h e Irish p o p u l a t i o n a g e s i x t y - f i v e a n d o v e r w i l l be t h e s m a l l e s t in t h e E U . M o r e o v e r , as a recently p o o r c o u n t r y , Ireland's p u b l i c p e n s i o n s h a v e n e v e r b e e n g e n e r ­ ous. A n d d e s p i t e its e x t r a o r d i n a r y recent p r o s p e r i t y , D u b l i n a c t u a l l y p a r e d b a c k future benefits in 1 9 9 9 a n d , alone a m o n g a d v a n c e d e c o n o m i e s ,

puts

aside 1 p e r c e n t o f its G D P e v e r y y e a r in a N a t i o n a l P e n s i o n s R e s e r v e F u n d . But

g l o b a l i z a t i o n w i l l p r e s e n t a n e w a n d difficult c h a l l e n g e for I r e l a n d

over the n e x t d e c a d e . T h e c o u n t r y b u i l t its p r o s p e r i t y on w a v e s o f d i r e c t i n ­ v e s t m e n t b y offering a c h e a p , e d u c a t e d w o r k f o r c e , t a x benefits, a n d d u t y - f r e e access to the rest o f the E U . T h i s s t r a t e g y still w o r k s : T h e a n n u a l r e t u r n on American investments

in I r e l a n d a v e r a g e d o v e r 2 0 p e r c e n t f r o m 1 9 9 5

2 0 0 2 , or t w i c e as h i g h as i n v e s t m e n t s in o t h e r E U c o u n t r i e s .

37

to

M o r e o v e r , in

2 0 0 5 , A m e r i c a n c o m p a n i e s still i n v e s t e d m o r e in I r e l a n d t h a n in C h i n a . B u t

202

FUTURECAST

a g e n e r a t i o n o f s t r o n g g r o w t h a n d p r o d u c t i v i t y g a i n s has erased Ireland's w a g e a d v a n t a g e ; a n d w i t h the E U ' s recent e x p a n s i o n , n e w m e m b e r s s u c h as H u n g a r y , t h e C z e c h R e p u b l i c , a n d P o l a n d can c o m p e t e for Ireland's g a t e w a y status to t h e E u r o p e a n m a r k e t . T h e test for I r e l a n d o v e r t h e n e x t d e c a d e — o n e C h i n a also w i l l face in a dif­ ferent e n v i r o n m e n t — i s t o w e a n itself f r o m its d e p e n d e n c e on f o r e i g n i n v e s t ­ m e n t a n d d e v e l o p m o r e d o m e s t i c c o m p a n i e s t h a t can c o m p e t e in a d v a n c e d m a n u f a c t u r i n g a n d services. I n t h e last d e c a d e , a h a n d f u l o f Irish c o m p a n i e s h a v e b e c o m e p l a y e r s in w o r l d w i d e m a r k e t s , n o t a b l y : C R H , a g l o b a l c e m e n t a n d b u i l d i n g m a t e r i a l s c o r p o r a t i o n a n d Ireland's o n l y c o m p a n y in the F o r t u n e G l o b a l 5 0 0 ; the K e r r y G r o u p , a food and

flavoring

manufacturer headquar­

tered in T r a l e e , I r e l a n d ; a n d t h e i n t e r n a t i o n a l hotel c h a i n J u r y s D o y l e . B u t t h e nation's v a u n t e d p r o d u c t i v i t y a n d e x p o r t g a i n s still c o m e m o s t l y f r o m f o r e i g n - o w n e d o p e r a t i o n s . T o a d d r e s s t h e issue, t h e Irish g o v e r n m e n t in 2 0 0 0 c r e a t e d t h e S c i e n c e F o u n d a t i o n I r e l a n d a n d the T e c h n o l o g y F o r e s i g h t F u n d to p r o m o t e a n d s u p p o r t d o m e s t i c R & D in areas s u c h as D N A c h i p s used to d e c i p h e r c o m p l e x g e n e s , g e n e t i c a l l y m o d i f i e d a g r i c u l t u r e , parallel p r o c e s s i n g s y s t e m s , w e a r a b l e sensors, a n d nanoscale assembly.

E v e n so, Irish p u b l i c

s p e n d i n g o n R & D , as a share o f G D P , is still the l o w e s t o f a n y a d v a n c e d E U country. O v e r t h e n e x t d e c a d e , Ireland's e x p l o s i v e g r o w t h w i l l a l m o s t c e r t a i n l y set­ tle d o w n to n e a r - U . S . levels. O f g r e a t e r c o n s e q u e n c e is the e v i d e n c e , recently c o m p i l e d in a M i c r o s o f t - f u n d e d s t u d y c o n d u c t e d b y one o f the country's eco­ nomic

g u r u s , D r . Paul Tansey, that

the

country's productivity

progress

"mas k s a d u a l e c o n o m y " in w h i c h n a t i v e c o m p a n i e s still l a g far b e h i n d .

3 8

Ire­

land's b i g c h a l l e n g e for t h e n e x t d e c a d e w i l l b e t o a p p l y its t e c h n o l o g i e s a n d o p e r a t i n g m e t h o d s t o t h e d o m e s t i c service c o m p a n i e s w h e r e the m a j o r i t y of I r i s h w o r k e r s still w o r k . I f it c a n n o t m a n a g e t h a t , t h e C e l t i c m i r a c l e w i l l c o m e d o w n to earth for m o s t I r i s h .

KOREA: MAKING IT ON ITS OWN Ireland's r e c o r d is i m p r e s s i v e ; b u t t h e R e p u b l i c o f K o r e a ' s d e v e l o p m e n t f r o m o n e o f t h e w o r l d ' s p o o r e s t a g r i c u l t u r a l societies t o a m o d e r n i n d u s t r i a l e c o n ­ o m y in less t h a n h a l f a c e n t u r y is o n e o f t h e m o r e e x t r a o r d i n a r y in e c o n o m i c history. It's also an i m p o r t a n t p o l i t i c a l story, since m o s t o f t h e p r o g r e s s w a s d i r e c t e d b y a s u c c e s s i o n of b r u t a l m i l i t a r y d i c t a t o r s . A s one n a t i v e c o m m e n ­ t a t o r has p u t it, K o r e a has b e e n a " d e v e l o p m e n t a l d i c t a t o r s h i p " f r o m v i r t u a l l y n o t h i n g w o r l d - c l a s s e x p o r t i n d u s t r i e s a n d the

39

t h a t created

best-educated

THE NEW ECONOMICS OF DECLINE FOR EUROPE AND JAPAN

203

w o r k f o r c e in the d e v e l o p i n g w o r l d . T h e s e n a t i o n a l assets h a v e c a r r i e d t h e e c o n o m y t h r o u g h a w r e n c h i n g financial crisis a n d p r e p a r e d it r e a s o n a b l y w e l l for

the d e m a n d s o f g l o b a l i z a t i o n . A n d u n l i k e I r e l a n d or C h i n a , K o r e a a c h i e v e d

this w i t h a l m o s t no f o r e i g n d i r e c t i n v e s t m e n t f r o m g l o b a l c o r p o r a t i o n s , a l ­ t h o u g h it d i d g e t s u b s t a n t i a l financial a i d f r o m t h e U n i t e d S t a t e s . W h e n the K o r e a n W a r e n d e d , the S o u t h w a s o n e o f t h e p o o r e s t p l a c e s o n earth. T h r o u g h the J a p a n e s e o c c u p a t i o n f r o m 1 9 1 0 t o 1 9 4 5 , K o r e a ' s r a i l ­ roads, p o r t s , h y d r o e l e c t r i c d a m s , factories, a n d m i n e s w e r e all d e v e l o p e d

in

the n o r t h , a r o u n d the Y a l u R i v e r ; a n d b y 1 9 4 5 , t h e factories a n d p l a n t s o f n o r t h e r n K o r e a a c c o u n t e d for o n e - q u a r t e r o f J a p a n ' s i n d u s t r i a l b a s e .

4 0

The

southern p r o v i n c e s t h a t b e c a m e the R e p u b l i c o f K o r e a h a d t o settle for b e i n g J a p a n ' s b r e a d b a s k e t ; a n d w h a t l i t t l e m o d e r n i n f r a s t r u c t u r e a n d factories t h e s o u t h h a d w e r e d e c i m a t e d w h e n t h e c i v i l w a r w a s f o u g h t m a i n l y in t h e s o u t h . In

i 9 6 0 , seven years after t h e a r m i s t i c e , S o u t h K o r e a ' s G D P o f $ 2 . 3 b i l l i o n

and per capita income of $ 7 9 w e r e a m o n g the world's l o w e s t .

4 1

M e a s u r e d in

2 0 0 6 dollars, the i 9 6 0 i n c o m e o f an a v e r a g e K o r e a n w a s $ 5 3 4 , w h i c h t o d a y w o u l d r a n k 1 4 8 t h in t h e w o r l d b e h i n d K e n y a . B y 2 0 0 5 , t h e i n c o m e o f t h e a v ­ e r a g e S o u t h K o r e a n w a s $ 1 6 , 8 0 0 , a t h i r t y f o l d real increase since i 9 6 0 a n d r a n k e d t h i r t y - s i x t h in the w o r l d ; a n d t h e c o u n t r y ' s G D P r e a c h e d n e a r l y $ 8 0 0 billion, n u m b e r ten in the w o r l d a n d a fiftyfold real increase since i 9 6 0 . for

4 2

As

the o n c e - p r o s p e r o u s N o r t h , its G D P in 2 0 0 5 w a s $ 3 0 b i l l i o n , less t h a n 4

p e r c e n t o f the S o u t h s , a n d its p e r c a p i t a i n c o m e o f $ 1 , 7 0 0 w a s b a r e l y 1 0 p e r ­ cent of its s o u t h e r n cousins. D e s p i t e the p r e s e n c e o f tens o f t h o u s a n d s o f A m e r i c a n s in K o r e a t h r o u g h ­ o u t this p e r i o d , this e x t r a o r d i n a r y p r o g r e s s o w e d m o r e t o C h i n e s e a n d J a p a ­ nese a p p r o a c h e s , a l o n g w i t h f o r t u i t o u s d e v e l o p m e n t s t h a t t h e c o u n t r y ' s elites used to a d v a n t a g e . T h e k i n s h i p to C h i n a w a s m a i n l y p o l i t i c a l . I n t h e c r u c i a l years f r o m t h e 1 9 5 3 a r m i s t i c e t o t h e late 1 9 8 0 s , K o r e a ' s leaders d e c r e e d all o f the t e r m s o f e c o n o m i c d e v e l o p m e n t , l i k e t h e orders o f a m i l i t a r y c a m p a i g n . In "The

fact, in the 1 9 7 0 s , P r e s i d e n t - G e n e r a l P a r k C h u n g L e e reissued S u n T z u ' s A r t o f War"

in a K o r e a n v e r s i o n t h a t cast e c o n o m i c c o m p e t i t i o n as a w a r

w o n b y a c h i e v i n g d o m i n a n t m a r k e t share. T h e nation's s p r a w l i n g c h a e b o l cartel c o n g l o m e r a t e s t h a t arose in t h o s e y e a r s w e r e t h e artillery, c r e a t e d b y g o v e r n m e n t d e s i g n not to m a i n t a i n w e a l t h y d y n a s t i e s — m o s t o f those f a m i ­ lies w e r e w i p e d o u t d u r i n g t h e c o l o n i z a t i o n a n d t h e c i v i l w a r

4 3

— b u t because

it w a s easier for the g o v e r n m e n t t o c o n t r o l a h a n d f u l o f l a r g e c o m p a n i e s t h a n t h o u s a n d s of s m a l l e r enterprises. F r o m 1 9 5 3 to 1 9 8 7 , e v e r y K o r e a n g o v e r n m e n t b e g a n a n d e n d e d in u p r i s ­ ings and military c o u p s .

4 4

Y e t a s i n g u l a r feature o f m o d e r n K o r e a w a s its d i c ­

tators' consistent c o m m i t m e n t to e c o n o m i c c h a n g e s t h a t i m p r o v e d t h e l i v e s

FUTURECAST

204

o f m o s t K o r e a n s . S y n g m a n R h e e , w h o r u l e d f r o m 1 9 4 8 to i 9 6 0 , closed the n a t i o n a l a s s e m b l y , p u r g e d or e x e c u t e d m o s t o f his p o l i t i c a l o p p o n e n t s a n d p o ­ t e n t i a l r i v a l s , a n d b a n n e d i n d e p e n d e n t p o l i t i c a l a c t i v i t y . H e also i n s t i t u t e d u n i v e r s a l p r i m a r y a n d s e c o n d a r y s c h o o l i n g a n d i n v e s t e d h e a v i l y in the c o u n ­ try's b a s i c i n f r a s t r u c t u r e . W h e n P a r k C h u n g - L e e seized c o n t r o l f r o m R h e e , P a r k also p u r g e d his o p p o n e n t s , k e p t t h e a s s e m b l y p o w e r l e s s , a n d created a n e w i n t e r n a l p o l i c e force a n d p e r s o n a l p o l i t i c a l p a r t y t h a t d o m i n a t e d

the

c o u n t r y ' s p u b l i c life i n t o t h e 1 9 9 0 s . B u t he also d r o v e r a p i d i n d u s t r i a l i z a t i o n , s t a r t i n g w i t h a u n i q u e a n d i n g e n i o u s p l a n : P a r k arrested h u n d r e d s o f business leaders for c o r r u p t i o n , i m p o s e d h u g e fines, a n d t h e n t o l d t h e m t h e y w o u l d p a y t h e i r fines b y i n v e s t i n g t h e i r assets in a n u m b e r o f l a b o r - i n t e n s i v e l i g h t i n d u s t r i e s a n d " d o n a t i n g " l a r g e b l o c s o f shares to t h e g o v e r n m e n t .

4 5

To pro­

t e c t his n e w p o r t f o l i o , P a r k c r e a t e d a s y s t e m o f loans, t a x b r e a k s , a n d b u r e a u ­ c r a t i c favors for t h e b u s i n e s s e s , w h i c h b e c a m e the c h a e b o l s t h a t p r o p e l l e d the country's industrialization. Park's p l a n w o n A m e r i c a ' s b l e s s i n g w h e n P r e s i d e n t K e n n e d y ' s national se­ curity advisor, W a l t e r R o s t o w , persuaded h i m that K o r e a could become Asia's b e s t s h o w c a s e for w e s t e r n c a p i t a l i s m . M o r e i m p o r t a n t , he c o n v i n c e d J F K to m a i n t a i n U . S . a i d for K o r e a ' s defense, i n f r a s t r u c t u r e , a n d e d u c a t i o n , w h i c h f r o m 1 9 5 3 t o 1 9 6 5 t o t a l e d s o m e $ 1 2 b i l l i o n — n e a r l y as m u c h as the entire Marshall P l a n .

4 6

A n d f r o m 1 9 7 2 , w h e n P a r k d e c l a r e d h i m s e l f p r e s i d e n t for

life, t o his assassination in 1 9 7 9 (on orders f r o m his close p o l i t i c a l a l l y K i m J o n g - P i l ) , P a r k e n s u r e d t h a t t h e c h a e b o l s h a d the c a p i t a l t h e y n e e d e d to carry o u t his n e w p l a n s for d e v e l o p i n g t h e h e a v y a n d h i g h - t e c h i n d u s t r i e s t h a t later would become world-competitive. T h e 1 9 8 0 s followed the same patterns. Generals C h u n D o o H w a n and R o h T a e W o o seized p o w e r after Park's d e a t h , p r o m p t l y d e c l a r e d m a r t i a l law, a n d d i r e c t e d t h e arrests a n d e x e c u t i o n s o f t h o u s a n d s o f p o l i t i c a l a c t i v i s t s , b a n n e d p o l i t i c a l a c t i v i t y b y e v e r y o n e else, a n d c l o s e d t h e u n i v e r s i t i e s . T h e i r b r u t a l i t y d i d n ' t e n d there: W h e n t h e first serious recession in d e c a d e s led to large-scale p r o t e s t s in e a r l y 1 9 8 1 in t h e a n c i e n t c i t y o f K w a n g j u , C h u n ' s soldiers k i l l e d t h o u s a n d s in w h a t b e c a m e k n o w n as t h e K w a n g j u m a s s a c r e . T h e g e n e r a l then n a m e d h i m s e l f p r e s i d e n t a n d p u r g e d e i g h t t h o u s a n d officials a n d business l e a d e r s — a n d l i k e his p r e d e c e s s o r s , t u r n e d to e c o n o m i c reforms t h a t s t r e n g t h ­ e n e d t h e i n d u s t r i a l i z i n g c h a e b o l s a n d e x p a n d e d d o m e s t i c businesses for K o ­ rea's e m e r g i n g , n e w c o n s u m e r class. T h e shift t o d e m o c r a c y b e g a n in J u n e 1 9 8 7 , w h e n C h u n t r i e d to pass on the presidency to G e n e r a l R o h and massive protests erupted again. T h i s time, C h u n d e c i d e d t o h o l d t h e c o u n t r y ' s first real e l e c t i o n s a n d G e n e r a l R o h s q u e a k e d i n t o office. N e w P r e s i d e n t R o h , a c t i n g l i k e B o r i s Y e l t s i n to C h u n ' s

THE NEW ECONOMICS OF DECLINE FOR EUROPE AND JAPAN

205

M i k h a i l G o r b a c h e v , p e r s u a d e d his o p p o n e n t a n d one o f C h u n ' s m o s t p r o m i ­ nent c r i t i c s , K i m Y o u n g S a m , to join a c o a l i t i o n g o v e r n m e n t ; a n d t h e n in 1992,

K i m defeated f e l l o w d i s s i d e n t K i m D a e - J u n g to b e c o m e his c o u n t r y ' s

first n o n m i l i t a r y p r e s i d e n t . The

basic s t r a t e g y o f K o r e a ' s l o n g line o f d i c t a t o r i a l e c o n o m i c r e f o r m e r s —

j u m p - s t a r t i n g selected i n d u s t r i e s b y g i v i n g f a v o r e d c o m p a n i e s s u c h as S a m ­ s u n g a n d H y u n d a i h u g e loans f r o m s t a t e - r u n b a n k s , special t a x b r e a k s , g o v e r n m e n t contracts, and other bureaucratic f a v o r s — c a m e from J a p a n . B u t Korea's rulers rejected J a p a n ' s o t h e r k e y p o l i c y o f p r o t e c t i n g y o u n g i n d u s t r i e s f r o m f o r e i g n c o m p e t i t i o n a n d u s i n g its o w n p e o p l e as c a p t i v e c u s t o m e r s . T h i s approach, w h i c h economists

call " i m p o r t s u b s t i t u t i o n , "

was followed

not

o n l y b y J a p a n , b u t also b y t h e U n i t e d S t a t e s in t h e s e c o n d h a l f o f t h e n i n e ­ teenth c e n t u r y a n d I n d i a in t h e s e c o n d h a l f o f t h e t w e n t i e t h c e n t u r y . B u t K o ­ rea's d i c t a t o r s s h r e w d l y r e c o g n i z e d t h a t t h e i r c o u n t r y w a s too p o o r in t h e 1 9 6 0 s a n d 1 9 7 0 s to g e n e r a t e e n o u g h e c o n o m i c d e m a n d to k e e p t h e i r p r o ­ tected industries g r o w i n g . S o , f r o m t h e 1 9 6 0 s — a n d v i r t u a l l y alone a m o n g p o o r d e v e l o p i n g nations in t h e p o s t w a r e r a — K o r e a o p e n e d its e c o n o m y i m p o r t s o f r a w m a t e r i a l s , p a r t s a n d m a c h i n e r y , so its b u d d i n g

to

companies

c o u l d use t h e m to p r o d u c e e x p o r t s . T h e r e w a s n o t h i n g free m a r k e t a b o u t t h i s " E x p o r t s F i r s t " p r o g r a m . P a r k and

his successors set specific e x p o r t t a r g e t s for each c o m p a n y a n d d i r e c t l y

tied its loans, t a x b r e a k s , a n d o t h e r g o v e r n m e n t preferences to m e e t i n g

its

target. T h e y also m a d e it illegal for K o r e a n s to p u r c h a s e m a n y o f t h e p r o d u c t s i n t e n d e d for e x p o r t , i n c l u d i n g p h o n o g r a p h s , c o l o r t e l e v i s i o n s , p o r t a b l e tele­ p h o n e s , a n d m i n k coats. O n l y w h e n t h e d o m e s t i c m a r k e t w a s finally g r o w i n g s t r o n g l y in the m i d - 1 9 7 0 s d i d P a r k i n t r o d u c e a parallel t r a c k o f i m p o r t p r o ­ tections for the chaebols' n e w v e n t u r e s in h e a v y m a n u f a c t u r i n g . T h e n e w K o r e a n p r o d u c e r s o f steel, h e a v y m a c h i n e r y , a u t o s , i n d u s t r i a l

electronics,

s h i p b u i l d i n g , m e t a l s , a n d p e t r o c h e m i c a l s also soon r e c e i v e d 6 0 p e r c e n t o f all K o r e a n b a n k loans a n d m o r e t h a n 7 5 p e r c e n t o f all m a n u f a c t u r i n g i n v e s t ­ ment. T h e s e p o l i c i e s w o r k e d , a n d the c o m p a n i e s b e c a m e t h e s e c o n d g e n e r a t i o n o f K o r e a n exporters. B y the e n d o f t h e 1 9 7 0 s , o n e - q u a r t e r o f t h e c o u n t r y ' s fastg r o w i n g G D P w a s b e i n g e x p o r t e d ; a n d in t h e 1 9 8 0 s , t h e a v e r a g e j u m p e d to o n e - t h i r d . ( M o s t o f those e x p o r t s w e n t to t h e U n i t e d S t a t e s or to J a p a n , w h i c h had

n o r m a l i z e d relations w i t h K o r e a in 1 9 6 5 .

4 7

) T h i s flood o f e x p o r t s s l o w e d

a b i t in the 1 9 9 0 s , w h e n t h e g o v e r n m e n t e n d e d restrictions o n K o r e a n s b u y ­ i n g their o w n c o u n t r y ' s p r o d u c t s ; b u t since 2 0 0 0 , t h e y h a v e j u m p e d a g a i n to nearly 4 0 p e r c e n t o f Korea's G D P . T h i s latest flood o f e x p o r t s is d r i v e n n o t b y g o v e r n m e n t loans a n d state favors, b u t b y g l o b a l d e m a n d for m a n y K o r e a n

FUTURECAST

206

p r o d u c t s a n d b y t h e expertise a n d relationships in the world's m o s t d e m a n d i n g m a r k e t s t h a t c o m p a n i e s s u c h as L G E l e c t r o n i c s , S a m s u n g , a n d H y u n d a i b u i l t u p o v e r d e c a d e s o f m e e t i n g t h e i r state e x p o r t t a r g e t s . S o , u n l i k e I r e l a n d a n d C h i n a , K o r e a d i d n ' t i m p o r t a m o d e r n industrial base b y i n v i t i n g t h e w o r l d ' s m o s t a d v a n c e d c o m p a n i e s to set u p

business

there. Q u i t e t h e o p p o s i t e — R h e e a n d P a r k b a r r e d f o r e i g n d i r e c t i n v e s t m e n t in m o s t i n d u s t r i e s , a n d u n t i l t h e 1 9 8 0 s f o r e i g n businesses c o u l d n ' t even o w n l a n d or b u i l d i n g s in K o r e a . I n s t e a d , t h e y c h a n n e l e d their s u b j e c t s ' h i g h p r i ­ v a t e s a v i n g s i n t o state b a n k s t h a t l o a n e d it to t h e g r o w i n g c h a e b o l s , a n d then d i r e c t e d t h e c h a e b o l s to p u r c h a s e or license f o r e i g n t e c h n o l o g i e s f r o m a b r o a d . A l o n g w i t h loans f r o m w e s t e r n a n d J a p a n e s e b a n k s a t t r a c t e d b y the country's r a p i d g r o w t h , t h i s s t r a t e g y m a d e K o r e a one o f t h e world's h i g h e s t - i n v e s t i n g c o u n t r i e s . E v e n in t h e 1 9 6 0 s , w h e n t h e c o u n t r y w a s p o o r a n d b a c k w a r d , in­ vestments

in

fixed

b u s i n e s s assets c l a i m e d a l m o s t

roughly America's gross investment

1 8 percent of

GDP—

rate o v e r the last forty years. B y the

1 9 7 0 s , K o r e a n b u s i n e s s i n v e s t m e n t j u m p e d to 2 7 p e r c e n t o f G D P a n d k e p t on r i s i n g to n e a r l y 3 0 p e r c e n t o f G D P in t h e 1 9 8 0 s a n d 3 6 p e r c e n t in the

1990s.

4 8

A d d it u p , a n d s i n c e 1 9 7 0 , K o r e a has d e v o t e d m o r e o f its G D P to business investments

than

any other

significant

economy—about

ten

percentage

p o i n t s m o r e p e r y e a r t h a n M e x i c o or B r a z i l , e i g h t p e r c e n t a g e p o i n t s m o r e than the countries of the E u r o p e a n U n i o n , and t w o percentage points more p e r y e a r t h a n C h i n a or T h a i l a n d . which

includes

the

financial

4 9

E v e n in t h e d e c a d e f r o m 1 9 9 5 to 2 0 0 4 ,

crisis, K o r e a ' s g r o s s i n v e s t m e n t

rate nearly

matched China's. S o , w h e n e v e n t s d i s t a n t or n e a r b y created n e w o p p o r t u n i t i e s — t o

supply

U . S . forces in V i e t n a m , for e x a m p l e , or p a r t i c i p a t e in t h e M i d d l e E a s t b u i l d ­ i n g b o o m o f t h e 1 9 7 0 s a n d 1 9 8 0 s — K o r e a n c o m p a n i e s , v i r t u a l l y alone in the d e v e l o p i n g w o r l d , h a d t h e i n v e s t m e n t s r e q u i r e d to take a d v a n t a g e o f t h e m . A n d t h e d e c a d e s o f h i g h i n v e s t m e n t , m o s t l y c h a n n e l e d to t h e c h a e b o l s , p r o ­ d u c e d an u n u s u a l l y l a r g e n u m b e r o f successful g l o b a l c o m p a n i e s : F o u r t e e n o f t h e w o r l d ' s five h u n d r e d l a r g e s t c o r p o r a t i o n s t o d a y are K o r e a n , w h i c h is m o r e t h a n S p a i n , S w e d e n , Italy, or I n d i a , a n d t w i c e as m a n y as S i n g a p o r e , T h a i l a n d , and T a i w a n c o m b i n e d .

5 0

T h e o t h e r c r i t i c a l e l e m e n t in K o r e a ' s s i n g u l a r p r o g r e s s is s u m m e d u p in one s t a r t l i n g fact: S i n c e t h e 1 9 6 0 s , the K o r e a n g o v e r n m e n t a n d its p e o p l e h a v e d e v o t e d m o r e o f their G D P to e d u c a t i o n — a n a v e r a g e o f 1 0 p e r c e n t a y e a r — t h a n a n y o t h e r d e v e l o p i n g c o u n t r y a n d a l m o s t all a d v a n c e d nations. T h e f a r s i g h t e d v i s i o n o f a succession o f d i c t a t o r s p l a y e d the largest role; b u t m u c h o f t h e c r e d i t also g o e s to K o r e a n p a r e n t s w h o ' v e p a i d for h a l f o f all that

THE NEW ECONOMICS OF DECLINE FOR EUROPE AND JAPAN

207

s p e n d i n g . T o d a y , a b o u t 4 0 p e r c e n t o f t h e c o u n t r y ' s h i g h school s t u d e n t s a n d 8 0 p e r c e n t o f its c o l l e g e s t u d e n t s a t t e n d p r i v a t e s c h o o l s , t h e h i g h e s t p e r c e n t ­ ages in t h e w o r l d . The

5 1

e n d result is one o f t h e w o r l d ' s m o s t h i g h l y e d u c a t e d w o r k f o r c e s .

S o m e 2 8 p e r c e n t o f K o r e a ' s m a l e w o r k e r s h a v e c o l l e g e t r a i n i n g , a l a r g e r share t h a n F r a n c e , G e r m a n y , or t h e U n i t e d K i n g d o m ( K o r e a also leads G e r m a n y in the share o f f e m a l e w o r k e r s w h o a t t e n d e d c o l l e g e , b u t l a g s b e h i n d F r a n c e a n d the U . K . ) .

5 2

T h e n u m b e r s are still r i s i n g . I n 2 0 0 5 , m o r e t h a n f o u r o u t o f five

K o r e a n h i g h school g r a d u a t e s w e n t on t o c o l l e g e , t h e h i g h e s t share in t h e world.

5 3

G l o b a l i z a t i o n has m a d e these i n v e s t m e n t s p a y off b i g , b e c a u s e as it f o r c e d K o r e a o u t o f the l o w e r - v a l u e i n d u s t r i e s n o w d o m i n a t e d b y C h i n a a n d o t h e r l o w - w a g e n a t i o n s , K o r e a ' s l e a d i n g c o m p a n i e s c o u l d d r a w o n an e x t r a o r d i ­ narily w e l l - e d u c a t e d w o r k f o r c e t o m o v e i n t o m a r k e t s d o m i n a t e d

by

the

world's m o s t a d v a n c e d e c o n o m i e s . T h e e x t r a o r d i n a r y e d u c a t i o n o f t h e K o r e a n p e o p l e is one of the c r i t i c a l reasons w h y t o d a y S a m s u n g o u t c o m p e t e s S o n y , T o s h i b a , a n d P h i l i p s ; a n d w h y H y u n d a i M o t o r s , e v e n after its s e t b a c k s in t h e late 1 9 9 0 s , is l a r g e r than V o l v o , R e n a u l t , or M a z d a a n d m o r e p r o f i t a b l e t h a n F o r d , V o l k s w a g e n , or F i a t . H i g h e r e d u c a t i o n o n s u c h a d e m o c r a t i c scale also m a k e s K o r e a t h e w o r l d ' s m o s t e q u a l d e v e l o p i n g society. B y an e c o n o m i s t ' s s t a n d a r d m e a s u r e , K o r e a t o d a y is the e l e v e n t h - m o s t - e q u a l society o n e a r t h — w e l l ahead o f F r a n c e , Italy, G r e a t B r i t a i n , a n d the U n i t e d S t a t e s , a n d b e h i n d o n l y S c a n d i n a v i a , J a p a n , G e r m a n y , Austria, L u x e m b o u r g , the N e t h e r l a n d s , and B o s n i a - H e r z e g o v i n a . And

5 4

the steady e c o n o m i c p r o g r e s s o f a v e r a g e K o r e a n s a l m o s t c e r t a i n l y h e l p e d

k e e p the c o u n t r y stable t h r o u g h its l o n g years o f d i c t a t o r s h i p s , m i l i t a r y c o u p s , and

financial

s e t b a c k s . P e r h a p s this w i l l b e a lesson n o t lost o n B e i j i n g ' s l e a d ­

ership. K o r e a also offers an i m p o r t a n t e x a m p l e for F r a n c e , G e r m a n y , a n d J a p a n a b o u t h o w to a d a p t w h e n e c o n o m i c c o n d i t i o n s c h a n g e . K o r e a faced serious e c o n o m i c p r o b l e m s t w i c e in t h e last g e n e r a t i o n , a n d b o t h t i m e s g o v e r n m e n t and

business elites s w a l l o w e d h a r d a n d chose p a i n f u l r e f o r m s . I n 1 9 8 0 t h e

w o r l d w i d e oil s h o c k , the w o r s t h a r v e s t in a g e n e r a t i o n , m a s s u n r e s t f o l l o w i n g Park's assassination, a n d r e e s t a b l i s h m e n t o f m i l i t a r y r u l e all b r o u g h t t h e K o ­ rean e c o n o m y to a full s t o p . T h e g o v e r n m e n t p i n n e d t h e b l a m e o n t h e h u g e and

p o w e r f u l c h a e b o l s , w h i c h in t r u t h h a d g r o w n so b i g , inefficient, a n d d e b t -

h e a v y f r o m their c o n s t a n t d i e t o f state loans, s u b s i d i e s , t a x b r e a k s , a n d e x p o r t d i r e c t i v e s , t h a t the t o p ten a c c o u n t e d for n e a r l y h a l f o f t h e c o u n t r y ' s G D P .

5 5

M o r e u n u s u a l , G e n e r a l C h u n , fresh f r o m t h e K w a n g j u m a s s a c r e , c a r r i e d o u t a series o f s w e e p i n g a n d e c o n o m i c a l l y sensible r e f o r m s . H e n o t o n l y b r o k e u p

208

FUTURECAST

s o m e o f t h e c h a e b o l s i n t o s m a l l e r business u n i t s a n d b e g a n p h a s i n g o u t m a n y o f t h e i r d i r e c t s u b s i d i e s , he forced t h e m to focus m o r e on the d o m e s t i c m a r ­ k e t b y c u t t i n g t h e i r e x p o r t s u b s i d i e s a n d r e p e a l i n g the l a w s r e s t r i c t i n g w h a t K o r e a n c o n s u m e r s c o u l d p u r c h a s e . E v e n m o r e f a r - r e a c h i n g , he d e c r e e d that a m a j o r i t y o f local b a n k loans a n d 3 5 p e r c e n t of loans b y the l a r g e national b a n k s w o u l d g o to s m a l l a n d m e d i u m - s i z e

companies. W i t h i n a decade,

s m a l l e r enterprises a c c o u n t e d for n e a r l y h a l f o f all K o r e a n m a n u f a c t u r i n g , value-added, and two-thirds of manufacturing jobs. T h e n in the late 1 9 8 0 s , as I T a d v a n c e s w e r e r e m a k i n g the A m e r i c a n econ­ o m y , C h u n ' s successor, G e n e r a l R o h , m a d e another fateful p o l i c y shift r o l l i n g b a c k restrictions on foreign direct i n v e s t m e n t — w e l l

by

before I n d i a or

C h i n a — w h i l e e n c o u r a g i n g K o r e a n c o m p a n i e s to d e v e l o p their o w n advanced technologies. A f e w chaebols w e r e already successful i n n o v a t o r s — n o t a b l y S a m ­ s u n g , w h i c h d e v e l o p e d t h e first 6 4 - b i t D R A M c h i p in 1 9 8 3 a n d a few years later p i o n e e r e d a s t r a t e g y I B M w o u l d follow later o f offering extensive I T ser­ vices to the c u s t o m e r s for its c h i p s , electronics, a n d other a d v a n c e d p r o d u c t s . N o w , w i t h n e w g o v e r n m e n t s u p p o r t , H y u n d a i b e g a n to d e v e l o p p r o t o t y p e s of cars fueled b y h y d r o g e n , electricity, a n d alcohol, all w e l l before its western ri­ vals. B y 2 0 0 0 , K o r e a w a s i n v e s t i n g m o r e of its G D P in R & D — 2 . 4 p e r c e n t — than all b u t e i g h t other c o u n t r i e s .

56

T o d a y , g e e k s a n d c o n s u m e r s around the

w o r l d use such recent K o r e a n advances as precision laser w e l d i n g e q u i p m e n t , technologies that let cell p h o n e users receive broadcasts traveling at h i g h speeds, alternative fuels for a u t o m o b i l e s , fuel cells that can r u n laptops for a m o n t h , a n d n e w t e c h n i q u e s to c u l t u r e a n d transplant skin for b u r n v i c t i m s . T h e c a p a c i t y to a d a p t to n e w c o n d i t i o n s also is clear in Korea's response to t h e financial crisis o f 1 9 9 7 - 1 9 9 8 , w h i c h u p e n d e d the l i v e l i h o o d s or e c o n o m i c s e c u r i t y o f m i l l i o n s o f K o r e a n s . I n one year, the c o u n t r y ' s G D P c o n t r a c t e d b y nearly 7 p e r c e n t , t h e c u r r e n c y lost h a l f o f its international v a l u e , fifteen of the t h i r t y l a r g e s t c h a e b o l s a n d ten national b a n k s w e n t under, a n d u n e m p l o y ­ m e n t t r i p l e d f r o m less t h a n 3 p e r c e n t to nearly 9 p e r c e n t .

5 7

A $ 5 7 billion

b a i l o u t f r o m t h e I M F s t a b i l i z e d t h e c u r r e n c y a n d the financial s y s t e m , so for­ e i g n investors w o u l d return. B u t America's A l a n Greenspan and R o b e r t R u ­ b i n set s t r i c t c o n d i t i o n s for t h e b a i l o u t : J e t t i s o n i n d u s t r i a l p l a n n i n g a n d the m u t u a l back-scratching of large companies, b i g banks, and g o v e r n m e n t ; and a d o p t t h e U . S . m o d e l o f o p e n t r a d e , d e r e g u l a t e d m a r k e t s , a n d financial t r a n s ­ p a r e n c y . T h e A m e r i c a n a p p r o a c h to g l o b a l i z a t i o n a n d t h e c r i t i c i s m of the c h a e b o l s h a p p e n e d to resonate w i t h l o n g t i m e d i s s i d e n t a n d n e w l y elected P r e s i d e n t K i m D a e - J u n g , w h o seized on t h e I M F c o n d i t i o n s to a n n o u n c e his " B i g D e a l I n d u s t r i a l P r o g r a m " for b r e a k i n g u p the largest c o n g l o m e r a t e s a n d f o r c i n g t h e m to c o m p e t e at h o m e w i t h w e s t e r n c o m p a n i e s .

5 8

THE NEW ECONOMICS OF DECLINE FOR EUROPE AND JAPAN

209

H a l f o f the m a j o r c h a e b o l s d i s a p p e a r e d in t w o y e a r s — a r e c o r d C h i n a ' s leaders m u s t e n v y as t h e y w o r k to u n w i n d t h e i r s t a t e - o w n e d e n t e r p r i s e s — a n d the K o r e a n e c o n o m y r e b o u n d e d w i t h 9.5 p e r c e n t g r o w t h in 1 9 9 9 a n d

8.5

p e r c e n t g a i n s in 2 0 0 0 . F o r e i g n d i r e c t i n v e s t o r s flooded in to b u y h u n d r e d s o f K o r e a n businesses at fire-sale p r i c e s d e p r e s s e d b y t h e d e p r e c i a t e d c u r r e n c y ; a n d b y 2 0 0 5 , f o r e i g n c o m p a n i e s o w n e d or c o n t r o l l e d m o r e t h a n 4 0 p e r c e n t o f the c o m p a n i e s listed o n t h e S e o u l S t o c k E x c h a n g e a n d e i g h t o f t h e f o u r t e e n national b a n k s .

5 9

U n d e r the K i m - G r e e n s p a n / R u b i n p r o g r a m , t h e c h a e b o l s t h a t s u r v i v e d had

to r e m a k e t h e m s e l v e s . S a m s u n g sold off ten l a r g e b u s i n e s s l i n e s t o for­

e i g n c o m p a n i e s , i n c l u d i n g c o n s t r u c t i o n e q u i p m e n t (sold t o V o l v o A B ) a n d the a u t o d i v i s i o n (sold to R e n a u l t ) , a n d t h e n s p u n off S a m s u n g E l e c t r o n i c s a n d i n v e s t e d e v e n m o r e in p r o d u c t d e v e l o p m e n t . I t w o r k e d w e l l : T o d a y S a m ­ s u n g is the w o r l d ' s largest p r o d u c e r o f D R A M c h i p s , flash m e m o r y , o p t i c a l storage d e v i c e s , a n d L C D m o n i t o r s ; its aerospace d i v i s i o n is d e v e l o p i n g space stations, its c o n s t r u c t i o n affiliate is b u i l d i n g t h e w o r l d ' s tallest b u i l d i n g in D u b a i , a n d t h e c o m p a n y ' s t h i r t e e n t h o u s a n d researchers are a m o n g t h e t o p ten recipients o f U . S . p a t e n t s . H y u n d a i , t h e l a r g e s t c h a e b o l before t h e finan­ cial crisis, f o l l o w e d a s i m i l a r s t r a t e g y , s e l l i n g off p e r i p h e r a l businesses

and

r e o r g a n i z i n g e v e r y t h i n g else i n t o five b u s i n e s s g r o u p s w i t h g l o b a l m a r k e t s . But

D a e w o o used the business p a n i c t o t a k e o v e r f o u r t e e n f a l t e r i n g firms

as a d d i t i o n s t o the c o m p a n y ' s 2 7 5 s u b s i d i a r i e s , a n d v a s t l y i n c r e a s e d its o w n d e b t . T h e b u y i n g spree failed: B y late 1 9 9 9 , D a e w o o w a s b a n k r u p t a n d its f o u n d e r a n d c h a i r m a n , K i m W o o - J u n g , fled t h e c o u n t r y u n d e r i n d i c t m e n t . A l m o s t all t h a t r e m a i n s t o d a y o f D a e w o o is its c o n s u m e r e l e c t r o n i c s b u s i n e s s , w h o s e p r o d u c t s n o w sell at T a r g e t stores u n d e r t h e T r u t e c h b r a n d .

J u d g i n g b y b r o a d m e a s u r e s , K o r e a ' s e c o n o m y s h o u l d b e in s o u n d s h a p e for the near f u t u r e , b u t it's not a sure t h i n g . G r o w t h s i n c e 2 0 0 0 has a v e r a g e d m o r e than 4 . 5 p e r c e n t a year; a n d p r o d u c t i v i t y has risen 4 . 3 p e r c e n t a year, w e l l ahead o f I r e l a n d a n d t h e U n i t e d S t a t e s , a n d t w o or t h r e e t i m e s t h e rate o f G e r m a n y , F r a n c e , J a p a n , a n d the U n i t e d K i n g d o m .

6 0

T h e chaebols'

eclipse

a n d K i m ' s reforms also r e m a d e t h e c o u n t r y ' s l a b o r m a r k e t s a l o n g A m e r i c a n l i n e s — m o r e flexible for businesses, w i t h m u c h less j o b s e c u r i t y for m i l l i o n s of K o r e a n s . U n e m p l o y m e n t has r e m a i n e d less t h a n 4 p e r c e n t , a l t h o u g h s o m e 4 5 p e r c e n t o f w o r k i n g K o r e a n s are n o w "irregular" e m p l o y e e s w h o w o r k w i t h ­ o u t l o n g - t e r m c o n t r a c t s a n d often o n l y p a r t - t i m e .

6 1

B u t o v e r t h e n e x t ten to

fifteen y e a r s , K o r e a n w o r k e r s w i l l also h a v e t o c o m p e t e for t h e b e s t j o b s w i t h a n e w influx o f f o r e i g n w o r k e r s f r o m t h e U n i t e d S t a t e s , J a p a n , E u r o p e , a n d

FUTURECAST

210

o t h e r A s i a n d e v e l o p i n g c o u n t r i e s . Y o u n g p e o p l e are b e i n g h i t p a r t i c u l a r l y h a r d b y these c h a n g e s , w i t h t h e i r jobless rate r u n n i n g four t i m e s the national a v e r a g e . U n s u r p r i s i n g l y , t h o u s a n d s n o w e m i g r a t e to A m e r i c a a n d E u r o p e , in­ c l u d i n g a n e w b r a i n d r a i n b y m a n y t r a i n e d in c o m p u t e r science, electronics, a n d research a n d d e v e l o p m e n t . K o r e a w i l l n e e d to k e e p its m o s t e d u c a t e d w o r k e r s at h o m e , a l o n g w i t h all t h e f o r e i g n w o r k e r s it c a n a t t r a c t , b e c a u s e it also faces d e m o g r a p h i c stresses t h a t c o u l d s l o w its p r o g r e s s . K o r e a f o l l o w e d t h e b a b y - b o o m a n d b a b y - b u s t p a t t e r n o f o t h e r d e v e l o p i n g societies, b u t w i t h special features that intensified its b a b y b u s t . T o s t a r t , its e n o r m o u s i n v e s t m e n t s in h i g h e r e d u c a t i o n a n d its p r o d i g i o u s g r o w t h c r e a t e d tens o f t h o u s a n d s o f a t t r a c t i v e j o b o p p o r t u n i t i e s for w o m e n , p u t t i n g s t r o n g e r d o w n w a r d pressure on b i r t h r a t e s than in m a n y o t h e r p l a c e s . O n t o p o f t h a t , t h e P a r k a n d C h u n g o v e r n m e n t s i n t r o d u c e d free c o n t r a c e p t i o n in 1 9 6 2 a n d , f r o m 1 9 8 3 o n w a r d , c a n c e l l e d insurance c o v e r a g e for m a t e r n a l care for p r e g n a n t w o m e n w i t h three or m o r e c h i l d r e n . T h e u p ­ s h o t w a s a v i r t u a l c o l l a p s e in K o r e a n f e r t i l i t y rates, w h i c h fell f r o m m o r e than 4 . 5 c h i l d r e n p e r w o m a n in 1 9 7 0 to 2 . 8 in 1 9 8 0 , 1 . 6 in 1 9 9 0 , a n d less than 1.2 today.

6 2

T h e c o n s e q u e n c e s c o u l d c r a m p K o r e a ' s g r o w t h d o w n t h e road. U N p r o j e c ­ t i o n s s u g g e s t t h a t w o r k i n g - a g e K o r e a n s w i l l t o p o u t at a r o u n d 3 3

million

f r o m 2 0 1 0 to 2 0 1 5 a n d thereafter c o n t r a c t b y a b o u t 1 p e r c e n t a year. O n this p a t h , K o r e a ' s p o t e n t i a l w o r k f o r c e w i l l fall to 3 1 . 5 m i l l i o n b y 2 0 2 0 a n d less t h a n 2 8 m i l l i o n in 2 0 3 0 .

6 3

A t t h e s a m e t i m e , t h e n u m b e r of elderly K o r e a n s

w i l l soar f r o m a b o u t 6.6 m i l l i o n in 2 0 0 5 to 1 1 . 4 m i l l i o n in 2 0 2 0 , a j u m p of m o r e t h a n 7 0 p e r c e n t — a n d k e e p o n i n c r e a s i n g to m o r e than 1 5 m i l l i o n b y 2 0 3 0 . T h e s e shifts w i l l also p r o d u c e serious p r o b l e m s for K o r e a ' s older p o p u ­ lation. T h e c o u n t r y o n l y i n t r o d u c e d state p e n s i o n s in 1 9 8 8 , u s u a l l y l i n k e d to j o b s at a c h a e b o l . S o m u c h l i k e C h i n a , w h e r e t h e d i s m a n t l i n g o f the a g r i c u l ­ t u r a l c o m m u n e s a n d s t a t e - o w n e d enterprises u n r a v e l e d its r u d i m e n t a r y safety net, K o r e a n p e n s i o n s (and h e a l t h - c a r e c o v e r a g e ) h a v e e r o d e d b a d l y as first the g o v e r n m e n t a n d t h e financial crisis d r o v e m o s t of the chaebols o u t o f business. E v e n so, t h e O E C D forecasts t h a t b y 2 0 2 0 the c o n t r a c t i n g labor force a n d f a s t - g r o w i n g n u m b e r s of elderly w i l l m a k e the country's p u b l i c pension s y s t e m "unsustainable."

64

A s t h e n u m b e r s o f e l d e r l y a n d near-elderly rise sharply,

K o r e a a l m o s t c e r t a i n l y w i l l face d e m a n d s to e x p a n d p e n s i o n c o v e r a g e — i n a s o c i e t y w h e r e e v e n u n d e r m i l i t a r y r u l e , tens o f t h o u s a n d s o f p e o p l e r e g u l a r l y t o o k to t h e streets to p r o t e s t . A s t h e l a b o r p o o l c o n t r a c t s a n d t h e e l d e r l y p o p u l a t i o n e x p a n d s , the o n l y w a y to k e e p i n g g r o w i n g — a n d g e n e r a t e the revenues for b r o a d e r pension c o v e r a g e — w i l l b e to increase t h e share o f K o r e a n s w h o w o r k or enable those

THE NEW ECONOMICS OF DECLINE FOR EUROPE AND JAPAN who

211

d o w o r k to b e m o r e p r o d u c t i v e . T h e first a p p r o a c h c o u l d b e m o r e p r o m ­

i s i n g in K o r e a t h a n in m u c h o f E u r o p e . F o r e x a m p l e , there h a v e b e e n m o v e s to e n d the p r a c t i c e b y m a n y l a r g e K o r e a n c o m p a n i e s o f f o r c i n g e m p l o y e e s to retire at a g e fifty. T h e l a r g e s t p o o l o f p o t e n t i a l w o r k e r s , h o w e v e r , are w o m e n : T o d a y , o n l y 5 6 p e r c e n t o f w o r k i n g - a g e K o r e a n w o m e n h o l d j o b s , m u c h less t h a n t h e 6 9 p e r c e n t a v e r a g e for all i n d u s t r i a l i z i n g n a t i o n s .

6 5

A s Korea's labor

m a r k e t s g r o w t i g h t e r in c o m i n g y e a r s , businesses t h a t h a v e a d a p t e d to o t h e r pressures m a y be e x p e c t e d t o revise t h e i r a t t i t u d e s t o w a r d s w o m e n . It's

h a r d e r to see h o w K o r e a c o u l d i m p r o v e its c u r r e n t rates o f h i g h e r e d u ­

cation in order to raise p r o d u c t i v i t y . H o w e v e r , its businesses c o u l d e x p a n d t h e scope o f their R & D b e y o n d t h e I T a n d a u t o i n d u s t r i e s t h a t c u r r e n t l y c l a i m nearly 8 0 p e r c e n t o f it. T h e b i g g e s t o p p o r t u n i t i e s for h i g h e r p r o d u c t i v i t y , h o w e v e r , lie in service c o m p a n i e s — b a n k i n g , retail, b u s i n e s s s e r v i c e s , h e a l t h care, a n d so o n — w h i c h are b a r e l y h a l f as p r o d u c t i v e as K o r e a n m a n u f a c t u r ­ ing.

6 6

T h e recent records o f I r e l a n d a n d C h i n a s h o w t h a t o n e d i r e c t w a y to lift

the p r o d u c t i v i t y o f l a g g i n g sectors is to increase d i r e c t i n v e s t m e n t s b y m u c h more productive foreign companies. Since the

financial

crisis, t h e K o r e a n

g o v e r n m e n t has tried to d o that b y c r e a t i n g special "zones" w h e r e f o r e i g n firms receive t h e k i n d s of subsidies t h a t u s e d t o g o t o t h e

chaebols—exemptions

f r o m i n c o m e a n d c o r p o r a t e taxes for seven y e a r s , p e r m a n e n t e x e m p t i o n s f r o m c u s t o m s d u t i e s a n d excise taxes a n d , in h i g h - t e c h m a n u f a c t u r i n g or s e r v i c e s , free g o v e r n m e n t leases a n d m e d i c a l care a n d e d u c a t i o n for e m p l o y e e s . S o far it hasn't w o r k e d . F r o m 2 0 0 0 to 2 0 0 5 , F D I t o K o r e a a v e r a g e d less t h a n 1 p e r ­ cent o f G D P ,

o n e o f t h e l o w e s t rates in t h e w o r l d .

There's g o o d reason to e x p e c t t h a t F D I t o K o r e a w i l l increase s u b s t a n t i a l l y over the n e x t d e c a d e . M a n y f o r e i g n c o m p a n i e s h a v e s t a y e d a w a y b e c a u s e K o ­ rea's labor costs are n o w d o u b l e , or n e a r l y so, t h o s e in T a i w a n , S i n g a p o r e , a n d 6

7

H o n g K o n g , " a n d the c o u n t r y is w e l l k n o w n for its m i l i t a n t l a b o r u n i o n s . But

w i t h m o s t o f t h e c h a e b o l s g o n e or w e l l p a r e d d o w n , t h e l a r g e n u m b e r s o f

i r r e g u l a r w o r k e r s h a v e created a n e w n o n u n i o n l a b o r p o o l . I n t i m e , p e r c e p ­ tions s h o u l d c a t c h u p w i t h reality, a n d f o r e i g n d i r e c t i n v e s t m e n t s h o u l d i n ­ crease. M o r e F D I , e s p e c i a l l y in s e r v i c e s , w o u l d n o t o n l y create j o b s , p e r h a p s for

w o m e n a n d older p e o p l e n o t w o r k i n g n o w , b u t also w o u l d e x p o s e d o m e s ­

tic service c o m p a n i e s to the best p r a c t i c e s o f t h e w o r l d ' s m o s t p r o d u c t i v e ser­ v i c e businesses a n d the c o m p e t i t i o n t o force s o m e o f t h e m t o a d o p t t h o s e practices. K o r e a also can offer f o r e i g n c o m p a n i e s t h e w o r l d ' s m o s t i n t e n s e l y w i r e d d e v e l o p i n g e c o n o m y . I n 2 0 0 5 , 8 0 p e r c e n t o f h o u s e h o l d s h a d access t o h o m e c o m p u t e r s , s u b s t a n t i a l l y m o r e t h a n t h e U n i t e d S t a t e s , B r i t a i n , F r a n c e , or G e r m a n y , a n d an order o f m a g n i t u d e a h e a d o f o t h e r d e v e l o p i n g n a t i o n s .

6 8

In

FUTURECAST

212

t h e s a m e year, t w o - t h i r d s o f K o r e a n s u s e d the I n t e r n e t a n d m o r e t h a n 2 6 p e r ­ c e n t o f its h o u s e h o l d s s u b s c r i b e d to b r o a d b a n d , a g a i n m o r e t h a n the U n i t e d States and the large E u r o p e a n countries, and leagues ahead of other develop­ ing countries. tomer

6 9

For western companies, K o r e a provides a workforce and cus­

base that's a l r e a d y c o m p u t e r literate a n d I n t e r n e t

savvy, a n d

the

i n f r a s t r u c t u r e to p l u g i n t o t h e i r g l o b a l n e t w o r k s . F i n a l l y , w h i l e K o r e a ' s h e a v y d e p e n d e n c e o n e x p o r t s — n e a r l y 4 0 p e r c e n t of G D P is e x p o r t e d each y e a r — a l i g n s its e c o n o m y w i t h s t r o n g forces in g l o b a l ­ ization, it also m a k e s its national g r o w t h hostage to its m a j o r - c o u n t r y c u s ­ t o m e r s , especially the U n i t e d States. A recession in the U n i t e d States, especially o n e t h a t s p r e a d s t o t h e rest o f the w o r l d , w o u l d q u i c k l y stall o u t the K o r e a n e c o n o m y . B u t d o w n t u r n s c o m e a n d g o , a n d t h e m o s t p r o m i s i n g s i g n for K o r e a ' s f u t u r e is its c o n s i s t e n t

c a p a c i t y to t a k e w h a t the g l o b a l

economy

dishes out and m a k e progress anyway. W h e n i n d i v i d u a l s , c o m p a n i e s , or c o u n t r i e s e x p e r i e n c e u n u s u a l

success,

t h e y b e c o m e role m o d e l s to those a s p i r i n g to t h e s a m e result. I n A m e r i c a , C h i n a , I r e l a n d , a n d K o r e a , t h e w o r l d has four e c o n o m i c role m o d e l s today. T h e n u m b e r - o n e e c o n o m y , t h e U n i t e d S t a t e s , offers a b i g - c o u n t r y m o d e l o f t h e benefits o f r e l a t i v e l y u n r e g u l a t e d m a r k e t s , s t r o n g p u b l i c i n v e s t m e n t

in

education and infrastructure, entrepreneurism, domestically driven develop­ m e n t , a n d a g g r e s s i v e g l o b a l i z a t i o n . T h e A m e r i c a n m o d e l also rests on basic d e m o c r a t i c p o l i t i c s , l i m i t e d social benefits a n d p r o t e c t i o n s , a n d a tolerance for r e l a t i v e l y h i g h i n e q u a l i t y . It's l i k e l y t o b e the m o d e l for I n d i a a n d , p e r ­ h a p s in t i m e , G e r m a n y , F r a n c e , B r a z i l , a n d M e x i c o . C h i n a offers different g u i d e l i n e s for e c o n o m i c s u c c e s s — w a g e s a n d o t h e r resources p r i c e d to attract massive foreign direct investment, a m i x t u r e of h i g h l y regulated and lightly r e g u l a t e d m a r k e t s , l o w c o n s u m p t i o n a n d v e r y h i g h personal s a v i n g s , s t r o n g p u b l i c i n v e s t m e n t in i n f r a s t r u c t u r e , e d u c a t i o n a l i n v e s t m e n t s t a r g e t e d to o n l y p a r t o f t h e p o p u l a t i o n , a n d s e v e r e l y l i m i t e d social benefits a n d p r o t e c t i o n s . M o s t i m p o r t a n t for o t h e r c o u n t r i e s , C h i n a ' s a p p r o a c h d e p e n d s on a u t h o r i t a r ­ ian p o l i t i c s , as w e l l as, a g a i n , a tolerance for h i g h inequality. It's a m o d e l that c o u l d w e l l a p p e a l to A f r i c a n c o u n t r i e s , t h e m o r e a u t h o r i t a r i a n A s i a n c o u n ­ tries, a n d p e r h a p s , in t i m e , R u s s i a . T h e w o r l d n o w has t w o o t h e r m o d e l s . I r e l a n d is a s m a l l c o u n t r y m o d e l for t h e benefits o f t a x a n d s u b s i d y p o l i c i e s d e s i g n e d to a t t r a c t l a r g e - s c a l e f o r e i g n d i r e c t i n v e s t m e n t , s u b s t a n t i a l i n v e s t m e n t s in e d u c a t i o n a n d i n f r a s t r u c t u r e , a n d r e l a t i v e l y l i m i t e d social benefits a n d p r o t e c t i o n s , all b u i l t on m i d d l e class d e m o c r a c y a n d p r o d u c i n g r e l a t i v e e q u a l i t y . B e c a u s e Ireland's success is t i e d t o its e c o n o m i c access to the E u r o p e a n U n i o n , it is b e c o m i n g a m o d e l for t r a n s i t i o n a l e c o n o m i e s in C e n t r a l a n d E a s t e r n E u r o p e . F i n a l l y , K o r e a offers

THE NEW ECONOMICS OF DECLINE FOR EUROPE AND JAPAN

213

s m a l l e r e c o n o m i e s a different a p p r o a c h , b a s e d o n m a s s i v e p u b l i c a n d p r i v a t e i n v e s t m e n t s in e d u c a t i o n a n d h e a l t h c a r e , l a r g e i n i t i a l s u b s i d i e s for c o r e i n ­ dustries a c c o m p a n i e d b y l o w barriers to i m p o r t s and foreign

competition,

substantial social p r o t e c t i o n s w h i c h , l i k e the i n d u s t r i a l s u b s i d i e s , p h a s e d o w n , and

s u p p o r t for e n t r e p r e n e u r i s m . U n l i k e I r e l a n d , it r e l i e d i n i t i a l l y o n a u ­

thoritarian p o l i t i c s , w i t h a p r o s p e c t o f a t r a n s i t i o n t o d e m o c r a c y . K o r e a c o u l d w e l l b e c o m e a m o d e l for s o m e A f r i c a n a n d A s i a n c o u n t r i e s w i t h f a r s e e i n g a u t h o r i t a r i a n leaders. In are

the e n d , m a n y c o u n t r i e s w o n ' t f o l l o w a n y o f these a p p r o a c h e s ; a n d t h e y

not l i k e l y to d e v e l o p q u i c k l y or p r o s p e r g r e a t l y in t h i s p e r i o d . T h a t is t h e

l i k e l y course o f m u c h o f the M i d d l e E a s t a n d p a r t s o f L a t i n A m e r i c a . Y e t , w h a t is p e r h a p s m o s t s t r i k i n g in all o f t h i s is t h e h i s t o r i c d e v e l o p m e n t t h a t the m a j o r e c o n o m i e s o f E u r o p e a n d J a p a n n o l o n g e r p r o v i d e a v i a b l e e c o ­ n o m i c m o d e l for other c o u n t r i e s .

CHAPTER SIX

THE NEW GEOPOLITICS OF THE SOLE SUPERPOWER: THE PLAYERS

AMERICA'S

GLOBAL

MILITARY

POWER

is

so c o m m o n p l a c e

that

it's

easy

to o v e r l o o k h o w h i s t o r i c a l l y u n i q u e it is. W h a t ' s so u n u s u a l a n d w o r l d c h a n g ­ i n g is n o t the e x t e n t o f A m e r i c a ' s m i l i t a r y , p o l i t i c a l , a n d e c o n o m i c c a p a c i t i e s , b u t t h e a b s e n c e o f c o u n t r i e s t h a t c o m e a n y w h e r e close. T h i s creates w h a t o n e p r o m i n e n t theorist o n these m a t t e r s , S t e p h e n W a l t , calls a n " i m b a l a n c e o f p o w e r i n A m e r i c a ' s favor ( t h a t ) is h i s t o r i c a l l y u n p r e c e d e n t e d . . . i n v i r t u a l l y every important dimension

of power."

1

In the seventeenth

and eighteenth

c e n t u r i e s , F r a n c e w a s a f o r m i d a b l e m i l i t a r y a n d c u l t u r a l p o w e r , a n d so w e r e B r i t a i n a n d S p a i n — a n d B r i t a i n w a s richer. I n the second h a l f o f t h e n i n e t e e n t h century, w h e n B r i t a i n h a d the w o r l d ' s l a r g e s t a n d m o s t i m p o r t a n t e c o n o m y , i t w a s n ' t so l a r g e t h a t t h e U n i t e d S t a t e s c o u l d n ' t o v e r t a k e i t b y t h e c e n t u r y ' s end. A n d in this respect a t least, t h e t w e n t i e t h c e n t u r y w a s e n t i r e l y t y p i c a l , u n t i l its final d e c a d e . B r i t a i n , G e r m a n y , t h e U n i t e d S t a t e s , a n d J a p a n h a d c o m p e t i t i v e e c o n o m i c , m i l i t a r y , p o l i t i c a l , a n d c u l t u r a l c l o u t fo r m o s t o f t h e first h a l f o f the t w e n t i e t h c e n t u r y , a n d for f o r t y - f i v e y e a r s after W o r l d W a r I I , A m e r i c a ' s reach w a s not g r e a t l y m o r e d a u n t i n g t h a n t h e S o v i e t U n i o n ' s . A l l that has c h a n g e d . A m e r i c a ' s h i s t o r i c a l l y a n o m a l o u s p o s i t i o n as a sole s u p e r p o w e r w i t h n o near p e e r e n d e d t h e b a l a n c e - o f - p o w e r g e o p o l i t i c s

that

organized m u c h o f w o r l d affairs for m o r e t h a n a t h o u s a n d y e a r s , a n d w i l l f u n d a m e n t a l l y shape a n e w g e o p o l i t i c s for a t least t h e n e x t g e n e r a t i o n . W i t h g l o b a l i z a t i o n i n c r e a s i n g l y affecting h o w nations i n t e r a c t , A m e r i c a ' s s i n g u l a r w o r l d position d e p e n d s s u b s t a n t i a l l y o n its e c o n o m y . I t is clear that A m e r i c a ' s

215

FUTURECAST

216

e c o n o m i c p o w e r g o e s w e l l b e y o n d b e i n g the largest e c o n o m y a n d , a m o n g the m a j o r ones, the m o s t p r o d u c t i v e a n d fastest g r o w i n g . T h e g e o p o l i t i c a l p o w e r that the U n i t e d States derives f r o m its e c o n o m y is based, first, on h o w m u c h a n d p r o f o u n d l y it affects o t h e r e c o n o m i e s . A s w e ' v e n o t e d before, A m e r i c a ' s businesses a n d c o n s u m e r s b u y u n p r e c e d e n t e d a m o u n t s o f g o o d s a n d services f r o m t h e rest o f the w o r l d — $ 2 . 2 trillion w o r t h in 2 0 0 6 , or m o r e than the en­ tire e c o n o m i e s o f all b u t five o t h e r c o u n t r i e s , a n d m o r e t h a n 6 percent of e v e r y ­ thing

produced

in

the

w o r l d outside

the

United

States. T h i s

matters

g e o p o l i t i c a l l y because the jobs a n d i n c o m e s o f tens of m i l l i o n s o f people in o t h e r c o u n t r i e s n o w d e p e n d d i r e c t l y on the U n i t e d States g r o w i n g e n o u g h to k e e p this g o i n g . T h e result is t h a t p o w e r f u l g r o u p s in other countries n o w identify t h e i r interests w i t h A m e r i c a ' s , w h i c h in t u r n can l i m i t the a b i l i t y of their g o v e r n m e n t s t o take steps adverse to the U n i t e d States. F o r e x a m p l e , B r a z i l in 2 0 0 5 a n d T h a i l a n d t w o years later b o t h a n n o u n c e d plans to nullify the p a t e n t s o f A m e r i c a n - m a d e H I V d r u g s — a n illegal b u t p o p u l a r m o v e at h o m e t h a t w o u l d h a v e c u t the costs o f their p u b l i c health p r o g r a m s a n d , in the b a r g a i n , e n a b l e d t h e m to p r o d u c e g e n e r i c versions to e x p o r t to other countries. T h e y b o t h b a c k e d d o w n w h e n t h e i r o w n business elites o p p o s e d t h e m (and t h e y b o t h h a p p i l y a c c e p t e d s w e e t n e w d i s c o u n t s f r o m the rattled d r u g m a k e r s ) . T h e U n i t e d S t a t e s also d e r i v e s g e o p o l i t i c a l p o w e r f r o m its s i n g u l a r c a p a c ­ i t y t o d e v e l o p n e w t e c h n o l o g i e s a n d o t h e r v a l u a b l e intellectual p r o p e r t y in l a r g e v o l u m e s , e s p e c i a l l y in t h e s o f t w a r e a n d I n t e r n e t areas t h a t d r i v e so m u c h e c o n o m i c c h a n g e a n d the processes o f g l o b a l i z a t i o n itself. O t h e r countries n o w lead in p r o d u c i n g a n d i m p r o v i n g t h e basic m a n u f a c t u r e s t h a t A m e r i c a n c o m p a n i e s d o m i n a t e d a f e w g e n e r a t i o n s a g o — s t e e l , c o n s u m e r electronics, a u t o m o b i l e s , a n d m u c h m o r e . A n d N o r t h e r n E u r o p e is h o m e to a g o o d n u m ­ b e r o f t h e w o r l d ' s m o s t i n n o v a t i v e I T firms, e s p e c i a l l y in w i r e l e s s t e c h n o l o ­ g i e s . B u t so far, t h e r e are no J a p a n e s e , G e r m a n , B r i t i s h , F r e n c h , or C h i n e s e peers t o M i c r o s o f t , G o o g l e , A m a z o n , O r a c l e , D e l l , a n d A m g e n — o r in b u s i ­ ness m e t h o d s , W a l - M a r t a n d G o l d m a n S a c h s . T h i s c a p a c i t y e n h a n c e s A m e r i c a ' s g l o b a l p o s i t i o n not because it increases t h e profits t h a t U . S . c o m p a n i e s earn on t h e i r f o r e i g n sales; m u c h m o r e farr e a c h i n g , it s u b t l y a l i g n s t h e e c o n o m i c p a t h s o f o t h e r c o u n t r i e s w i t h the U n i t e d S t a t e s a n d , w h e t h e r or not t h e y l i k e it, m a k e s t h e m a little m o r e like America.

T h e Internet's s o f t w a r e i n f r a s t r u c t u r e d e v e l o p e d

in a t y p i c a l l y

A m e r i c a n w a y — b y e n t r e p r e n e u r s w o r k i n g in areas l a r g e l y u n t o u c h e d b y g o v ­ e r n m e n t r e g u l a t i o n — i n t o a r a d i c a l l y o p e n a n d d e c e n t r a l i z e d s y s t e m . A s a re­ s u l t , t h e I n t e r n e t has b e c o m e essentially " A m e r i c a n " w h e r e v e r it is, a n d not j u s t b e c a u s e U . S . c o m p a n i e s d o m i n a t e its d e v e l o p m e n t a n d c o n t e n t . M u c h m o r e t h a n t h a t , it creates A m e r i c a n - s t y l e o p p o r t u n i t i e s w h e r e v e r it reaches,

THE NEW GEOPOLITICS OF THE SOLE SUPERPOWER: THE PLAYERS

217

disseminating information w i t h o u t restriction and spurring the d e v e l o p m e n t o f n e w services a n d p r o d u c t s b y n e w l y f o r m e d c o m p a n i e s o p e r a t i n g in n e w w a y s . A n d t h a t can p r o d u c e g e o p o l i t i c a l benefits for A m e r i c a , as tens or h u n ­ d r e d s of t h o u s a n d s of n e w l y successful p e o p l e a r o u n d t h e w o r l d associate t h e i r success w i t h its c o n t i n u i n g t e c h n o l o g i c a l a c h i e v e m e n t s . I m a g i n e i f C h i n a w e r e t h e w o r l d ' s l e a d i n g i n n o v a t i v e e c o n o m y , its l a n ­ g u a g e w a s the international s t a n d a r d , a n d t h e I n t e r n e t h a d c o m e o u t o f its g o v e r n m e n t labs. A s it is, C h i n a m a k e s s u b s t a n t i a l efforts t o r e s t r i c t its p e o ­ ple's I n t e r n e t access to c o n t e n t it d e e m s p o l i t i c a l l y u n a c c e p t a b l e , p e r h a p s r e ­ c a l l i n g h o w E a s t G e r m a n s led the u n r a v e l i n g o f t h e S o v i e t e m p i r e after y e a r s o f d i r e c t access to u n c e n s o r e d n e w s f r o m W e s t G e r m a n t e l e v i s i o n . A C h i n e s e designed W o r l d W i d e W e b almost certainly w o u l d be a closed system

in

w h i c h i n f o r m a t i o n c o u l d be c e n t r a l l y m a n a g e d . A n d i f it h a d h a p p e n e d t h a t way,

it c o u l d h a v e s t a y e d t h a t w a y , at least for a t i m e . G l o b a l m a r k e t s are

filled w i t h instances o f w h a t e c o n o m i s t s call " p a t h - d e p e n d e n t "

outcomes—

t h i n k of the V C R or, s o m e w o u l d say, M i c r o s o f t W i n d o w s — i n w h i c h a p r o d ­ uct's initial critical a d v a n t a g e c r e a t e d a p a t h t h a t b e c a m e h a r d t o alter, e v e n w h e n alternatives e m e r g e d t h a t w e r e m o r e efficient or effective. The

heart of the g e o p o l i t i c a l c l o u t t h a t A m e r i c a d e r i v e s f r o m its e c o n o m i c

p r e e m i n e n c e , h o w e v e r , is t h a t so m u c h o f the w o r l d n o w e m b r a c e s its b a s i c a p p r o a c h to o r g a n i z i n g their e c o n o m i e s a n d d o i n g b u s i n e s s . I n less t h a n a g e n e r a t i o n , the a l t e r n a t i v e m o d e l s t h a t m u c h o f t h e w o r l d h a d f o l l o w e d for decades h a v e b e e n d i s c r e d i t e d a n d l a r g e l y d i s c a r d e d . T h i s reaches p a s t t h e epochal collapse of S o v i e t c o l l e c t i v i s m a n d C h i n a ' s s t a r t l i n g c o n v e r s i o n to capitalism. T h e appeal of the more m i x e d models of a private e c o n o m y w i t h h e a v y g o v e r n m e n t d i r e c t i o n also has w a n e d , after A s i a ' s b u m p e r e c o n o m i e s m e l t e d d o w n or s t a g n a t e d a n d E u r o p e ' s e n t e r e d a d e c a d e o f d i s a p p o i n t i n g g r o w t h . S o m e leaders in E u r o p e a n d J a p a n m a y d e n y it, b u t for t h e first t i m e there are no c r e d i b l e , g r a n d a l t e r n a t i v e s a n y w h e r e in t h e w o r l d t o A m e r i c a ' s basic t a k e on t h e l i m i t s o f the g o v e r n m e n t ' s role in t h e e c o n o m y a n d h o w businesses s h o u l d r u n . T h i s doesn't m a k e t h e A m e r i c a n e c o n o m i c a p p r o a c h " r i g h t " in a n o b j e c ­ t i v e sense, l i k e t h e c o m p o s i t i o n o f t h e a t o m . R a t h e r , it's v e r y b r o a d l y p r e ­ ferred r i g h t now, because it's in s y n c w i t h the c u r r e n t d e m a n d s o f g l o b a l i z a t i o n . For

a l o n g t i m e , the E u r o p e a n a n d J a p a n e s e a p p r o a c h e s — n o t to m e n t i o n

w h a t passed for an e c o n o m i c m o d e l in t h e S o v i e t U n i o n , E a s t e r n E u r o p e , a n d C h i n a — p r o d u c e d m o r e e q u a l i t y a n d e c o n o m i c s e c u r i t y for i n d i v i d u a l s t h a n A m e r i c a n - s t y l e c a p i t a l i s m . B u t for n e a r l y a g e n e r a t i o n , g l o b a l i z a t i o n crippled

the

c a p a c i t y o f those a p p r o a c h e s to g e n e r a t e

strong,

has

sustained

g r o w t h — a n d g r e a t e r e q u a l i t y a n d s e c u r i t y are less a p p e a l i n g w h e n

people

FUTURECAST

218

also face a p r o s p e c t o f g r o w i n g poorer. T h i s s i m p l y is a t i m e w h e n g r o w t h in b o t h a d v a n c e d a n d d e v e l o p i n g e c o n o m i e s d e p e n d s o n g o v e r n m e n t s not o n l y s t e p p i n g u p to i n v e s t in e d u c a t i o n , h e a l t h , a n d m o d e r n i n f r a s t r u c t u r e , b u t also s t e p p i n g b a c k f r o m p r o t e c t i o n s a n d r e g u l a t i o n s t h a t s l o w or m u c k u p the era's m a s s i v e transfers o f t e c h n o l o g i e s ,

capital, and expertise. A n d almost

e v e r y c o u n t r y also n o w s u p p o r t s t h e i n t e r n a t i o n a l i n s t i t u t i o n s t h a t enforce A m e r i c a n - s t y l e r u l e s o f g l o b a l i z a t i o n , e s p e c i a l l y the W o r l d T r a d e O r g a n i z a ­ t i o n a n d W o r l d I n t e l l e c t u a l P r o p e r t y O r g a n i z a t i o n , b u t also t h e older I n t e r ­ n a t i o n a l M o n e t a r y F u n d , W o r l d B a n k , a n d Paris C l u b ( w h i c h deals w i t h s o v e r e i g n d e b t d e f a u l t issues a m o n g c o u n t r i e s ) . T h e core b u s i n e s s o f g e o p o l i t i c s is n a t i o n a l s e c u r i t y ; a n d the other critical g e o p o l i t i c a l fact a b o u t U . S . e c o n o m i c d o m i n a n c e is t h a t it w i l l indefinitely fi­ n a n c e A m e r i c a ' s p o s i t i o n as t h e w o r l d ' s sole m i l i t a r y s u p e r p o w e r . I n 2 0 0 6 , the U n i t e d S t a t e s s p e n t a b o u t $ 5 7 0 b i l l i o n o n defense, or r o u g h l y as m u c h as the rest o f t h e w o r l d c o m b i n e d . T h i s a s y m m e t r y in m i l i t a r y s p e n d i n g is also h i s ­ t o r i c a l l y u n p r e c e d e n t e d . I n f a c t , t h e U . S . m i l i t a r y s p e n d s m o r e o n research a n d d e v e l o p m e n t i n t o n e w defense s y s t e m s — s o m e

$ 7 3 b i l l i o n in

2007—

t h a n t h e e n t i r e defense b u d g e t s o f e v e r y o t h e r c o u n t r y e x c e p t C h i n a . A l l this s p e n d i n g has b o u g h t t h e U n i t e d S t a t e s its r e m a r k a b l e m i l i t a r y d o m i n a n c e as t h e first m i l i t a r y s u p e r p o w e r in m o r e t h a n a m i l l e n n i u m w i t h n o near p e e r in s i g h t . O t h e r n a t i o n s h a v e a r m i e s , air forces, a n d navies c a p a ­ b l e o f p r o t e c t i n g t h e i r b o r d e r s f r o m j u s t a b o u t a n y o n e else; a n d w i t h s o m e c o n s i d e r a b l e lead t i m e , a f e w o f t h e m c o u l d send t h e i r soldiers, sailors, a n d p i ­ lots t o fight in o t h e r c o u n t r i e s in t h e i r o w n r e g i o n s . B u t the U n i t e d S t a t e s alone has a b l u e - w a t e r n a v y c a p a b l e o f o p e r a t i n g in a n d across the w o r l d ' s v a s t o c e a n s , a n d a b l u e - s k y air force t h a t w i t h l i t t l e n o t i c e can p r o j e c t forces a n y ­ w h e r e f r o m U . S . bases a n d t h o s e a r o u n d the w o r l d . W h e n t h e y arrive, they w i e l d t e c h n o l o g i e s at least t w o g e n e r a t i o n s m o r e a d v a n c e d t h a n a n y o n e else's, i n c l u d i n g C h i n a , B r i t a i n , a n d R u s s i a . T h e s e forces c a n p r e v e n t others f r o m u s i n g t h e i r o w n m i l i t a r i e s b e y o n d t h e i r o w n b o r d e r s a n d , as S a d d a m H u s s e i n l e a r n e d , n o g o v e r n m e n t c a n s u r v i v e for l o n g a g a i n s t t h e i r serious assault. G e o g r a p h y reinforces A m e r i c a ' s a w e s o m e m i l i t a r y a d v a n t a g e s . T h e U n i t e d S t a t e s is t h e o n l y c o u n t r y w i t h t h o u s a n d s o f m i l e s o f ocean s e p a r a t i n g it f r o m a n y o n e else w i t h a n a r m y , n a v y , or air force to s p e a k of. A n d the oceans a n d t h e a i r s p a c e a b o v e t h e m a n d a b o v e e v e r y o t h e r c o u n t r y are p a r t of A m e r i c a ' s m i l i t a r y territory, s i n c e o n l y its n a v y a n d air force can r o a m t h e m freely. M o s t w a r s b e g i n in conflicts t h a t in s o m e w a y arise o u t o f g e o g r a p h i c a l p r o x i m i t y ; a n d e v e n today, t h e p r o x i m i t y o f R u s s i a , C h i n a , a n d I n d i a , for e x a m p l e , w i l l m a k e it h a r d e r for t h e m t o w o r k t o g e t h e r to b a l a n c e A m e r i c a ' s m i l i t a r y a d ­ vantages.

THE NEW GEOPOLITICS OF THE SOLE SOPERPOWER: THE PLAYERS

219

A m e r i c a ' s d i s p r o p o r t i o n a t e m i l i t a r y p o w e r is a d i r e c t result o f g e n e r a t i o n s of U.S. The

policy, b u t w i t h t h e t a c i t a g r e e m e n t o f m u c h o f t h e rest o f t h e w o r l d .

U n i t e d S t a t e s c r e a t e d a peerless m i l i t a r y b y d e v o t i n g t h e last fifty y e a r s

to d e v e l o p i n g fearsome t e c h n o l o g i e s a n d s y s t e m s , a n d s p e n d i n g w h a t e v e r it t o o k to b u i l d a n d m a i n t a i n t h e m . T h o s e c o m m i t m e n t s

likely w o u l d have

m a d e the U n i t e d S t a t e s t h e m i g h t i e s t m i l i t a r y p o w e r r e g a r d l e s s o f w h a t a n y ­ one else d i d . B u t the l a c k o f a near p e e r c a p a b l e o f p r o v i d i n g a m e a s u r e o f g e o p o l i t i c a l b a l a n c e is not s i m p l y a r e s u l t o f t h e S o v i e t U n i o n ' s fatal defects. It also t o o k the e x t r a o r d i n a r y d e c i s i o n b y c o u n t r i e s t h a t h a d m i l i t a r i l y d o m i ­ nated m u c h o f the w o r l d for c e n t u r i e s — n o t a b l y , G e r m a n y , F r a n c e , B r i t a i n , a n d J a p a n — t o stop c o m p e t i n g m i l i t a r i l y for fifty y e a r s . I n s t e a d , E u r o p e ' s m a ­ jor

countries and J a p a n outsourced their security to the U n i t e d States, leaving

it to A m e r i c a to deter or fight w h e r e v e r t h e S o v i e t s or C h i n e s e s e e m e d t o o a g ­ g r e s s i v e . T h e s e o n c e - g r e a t p o w e r s b e c a m e p r o v i d e r s o f l a r g e l y t o k e n forces, s e r v i n g for m a i n l y s y m b o l i c p u r p o s e s , in w h a t h i s t o r i a n P a u l K e n n e d y has called a h o l l o w , or " P o t e m k i n , " alliance: " T h e U . S . d o e s 9 8 p e r c e n t o f t h e fighting, was

the B r i t i s h 2 p e r c e n t , a n d t h e J a p a n e s e s t e a m a r o u n d M a u r i t i u s . " I t

an a r r a n g e m e n t t h a t s u i t e d e v e r y o n e , since it also fit n i c e l y w i t h

the

shared A m e r i c a n a n d S o v i e t c o n v i c t i o n t h a t t h e i r t i m e to d i r e c t t h e w o r l d ' s affairs h a d a r r i v e d . W h e n the S o v i e t e m p i r e i m p l o d e d , A m e r i c a m a d e n o effort to p r e s e r v e s o m e f o r m o f b i p o l a r s y s t e m — a n d w h y s h o u l d it h a v e ? — a n d m o v e d q u i c k l y to a b s o r b the W a r s a w P a c t i n t o t h e N A T O alliance. M o r e o v e r , w i t h o u t a S o ­ v i e t near p e e r to b a l a n c e t h e U n i t e d S t a t e s , E u r o p e a n d J a p a n c o n t i n u e d

to

d o w n g r a d e their o w n m i l i t a r y c a p a c i t i e s — a s , w i t h o u t a S o v i e t t h r e a t , A m e r ­ ica

c o n t i n u e d to u p g r a d e its defenses a n d fight n e w w a r s . T o d a y , t h e U n i t e d

States has several h u n d r e d t h o u s a n d b a t t l e - r e a d y t r o o p s in m o r e t h a n

one

h u n d r e d c o u n t r i e s — t h a t ' s not c o u n t i n g I r a q — a n d p r o v i d e s m i l i t a r y t r a i n i n g for

m o r e t h a n one h u n d r e d a n d t h i r t y n a t i o n s . E x p e r t s say t h a t t h e e n t i r e E u ­

ropean U n i o n c o u l d n ' t p u t s i x t y t h o u s a n d w e l l - e q u i p p e d t r o o p s in t h e field in s i x t y d a y s a n d k e e p t h e m there for a year. E u r o p e ' s f o r e i g n - a n d d e f e n s e - p o l i c y elites h a v e raised a l a r m s , so far w i t h no results. T h e V e n u s b e r g g r o u p o f h i g h - l e v e l E u r o p e a n e x p e r t s , b r o u g h t t o ­ g e t h e r nearly a d e c a d e a g o b y t h e B e r t e l s m a n n F o u n d a t i o n t o e x a m i n e E U se­ c u r i t y policy, issued its m o s t r e c e n t a n d m o s t s o b e r i n g r e p o r t in J u l y

2007.

T h e y a c k n o w l e d g e d t h a t "no E u r o p e a n state c a n b e d e s c r i b e d as a t r u l y G r e a t P o w e r in today's w o r l d " a n d c o n c l u d e d , "it is n o w or n e v e r for a n effective E U f o r e i g n a n d s e c u r i t y p o l i c y . . . ( a n d ) t i m e t h a t E u r o p e e n d e d its o b s e s s i o n w i t h internal s t r u c t u r e . " T h e i r c o n c l u s i o n w a s s t a r k a n d a c c u r a t e : "Fail a n d E u r o p e a n s w i l l lose a n y a b i l i t y t h e y n o w h a v e t o shape d e v e l o p m e n t s . "

2

FUTURECAST

220 It

c o u l d h a v e b e e n different, a n d it w o u l d h a v e been, i f G e r m a n y , F r a n c e ,

B r i t a i n , a n d J a p a n h a d a p p r o a c h e d t h e c o l d w a r as p a r t n e r p o w e r s o f the U n i t e d S t a t e s , w i t h A m e r i c a as t h e m a n a g i n g p a r t n e r . E v e n t h o u g h

they

d i d n ' t d o so, E u r o p e ' s b i g t h r e e a n d J a p a n c o u l d h a v e d e v o t e d m o r e of their resources a n d a t t e n t i o n t o t h e W e s t ' s c o m p e t i t i o n w i t h the S o v i e t s . T a k i n g that p a t h , t h o u g h , w o u l d have c r a m p e d the d e v e l o p m e n t of the m o d e r n E u r o p e a n w e l f a r e states, s i n c e t h e costs o f m a j o r defense b u i l d u p s w o u l d h a v e c o m e f r o m d o m e s t i c p r o g r a m s . I t c a n b e fairly said t h a t the c h o i c e b y E u ­ rope's m a j o r c o u n t r i e s t o let t h e U n i t e d S t a t e s a s s u m e r e s p o n s i b i l i t y for h o w t h e W e s t c o n f r o n t e d c o m m u n i s m a l l o w e d t h e m to b u i l d a n d p r e s e r v e the v e r y n e t w o r k s o f benefits, p r o t e c t i o n s , a n d r e g u l a t i o n s t h a t n o w are so at o d d s w i t h t h e d e m a n d s o f g l o b a l i z a t i o n a n d the a g i n g o f their p o p u l a t i o n s . A m e r i c a ' s m i l i t a r y p o w e r is n o t u n l i m i t e d . C h i n a a n d R u s s i a — a n d p e r ­ h a p s N o r t h K o r e a s o o n — c a n g e t a n u c l e a r m i s s i l e to W a s h i n g t o n , N e w Y o r k , or

L o s A n g e l e s , w h i c h l i m i t s A m e r i c a ' s m i l i t a r y o p t i o n s , at least at the ex­

t r e m e . ( B r i t a i n c o u l d , t o o , b u t t h a t doesn't c o u n t . ) M o r e i m p o r t a n t , the Iraq War

s h o w s t h e w o r l d b o t h h o w easily its sole s u p e r p o w e r can defeat another

g o v e r n m e n t m i l i t a r i l y , a n d h o w h a r d it is for t h a t s u p e r p o w e r to o c c u p y a l a r g e f o r e i g n society. A n d as A l Q a e d a d e m o n s t r a t e d o n 9 / 1 1 ,

America's over­

w h e l m i n g m i l i t a r y s u p e r i o r i t y inspires n e w f o r m s o f a t t a c k t h a t l e v e r a g e an a s p e c t o f its s t r e n g t h a g a i n s t it.

THE NEW GEOPOLITICS MEETS GLOBALIZATION T h i s n e w g e o p o l i t i c s intersects w i t h g l o b a l i z a t i o n in three p o r t e n t o u s w a y s . F i r s t , b u t for g l o b a l i z a t i o n , C h i n a w o u l d be a m o d e s t g e o p o l i t i c a l force for several m o r e g e n e r a t i o n s . I n s t e a d , C h i n a ' s e c o n o m i c a s c e n d a n c y t h r o u g h g l o b ­ a l i z a t i o n w i l l create an e x p a n s i v e i n t e r n a t i o n a l role for the c o u n t r y o v e r the n e x t t e n t o fifteen years. S e c o n d , g l o b a l i z a t i o n has h e l p e d m a k e e n e r g y a n d t e r r o r i s m c e n t r a l issues for g e o p o l i t i c s for at least t h e n e x t d e c a d e . W e w i l l l o o k at these m a t t e r s later. F i r s t , h o w e v e r , w e w i l l e x a m i n e a t h i r d g e o p o l i t i ­ cal

issue t h a t is e v e n m o r e f u n d a m e n t a l t h a n C h i n a , e n e r g y , or terrorism:

D o e s g l o b a l i z a t i o n p r e c l u d e d i r e c t m i l i t a r y conflicts b e t w e e n m a j o r countries and

recast g e o p o l i t i c s i n t o a series o f s m a l l clashes b e t w e e n t h e c o u n t r i e s en­

g a g e d in g l o b a l i z a t i o n a n d t h e g r o u p s a n d states o u t s i d e i t ? T h i s is not the first t i m e t h a t p e o p l e h a v e t h o u g h t or h o p e d that countries e x t e n s i v e l y c o n n e c t e d t h r o u g h trade a n d c o m m e r c e w i l l never g o to w a r w i t h each other. It's at least as o l d as the e i g h t e e n t h - c e n t u r y E n l i g h t e n m e n t , w h e n m o s t e d u c a t e d E u r o p e a n s b e l i e v e d t h a t their era's progress in science and reason

221

THE NEW GEOPOLITICS OF THE SOLE SUPERPOWER: THE PLAYERS

w o u l d inexorably p r o d u c e peace t h r o u g h the i n s t r u m e n t s of trade a n d c o m ­ merce.

T h e y were obviously

wrong.

Science

and

reason

only

made

the

N a p o l e o n i c w a r s a n d the U . S . - B r i t i s h W a r o f 1 8 1 2 m o r e lethal. T h e g r e a t a d ­ vances in g l o b a l i z a t i o n in the second h a l f o f the n i n e t e e n t h c e n t u r y also didn't usher in an era of peace. R a t h e r , the m a j o r p o w e r s ' intensive c o m p e t i t i o n s in in­ ternational m a r k e t s c o m b i n e d w i t h their n a t i o n a l i s m a n d led e v e n t u a l l y to the horrors of W o r l d W a r I . I n the e n d , n o t h i n g in h i s t o r y is m o r e c o m m o n t h a n m a j o r countries s t r i v i n g to m a k e t h e m s e l v e s richer; a n d in m o s t instances those s t r i v i n g s are closely associated w i t h a d r i v e for m i l i t a r y p o w e r . A n d w h e n t w o or

m o r e countries strive for m o r e national m i l i t a r y p o w e r in the s a m e r e g i o n ,

they a l m o s t a l w a y s have c o m e to b l o w s . The

idea t h a t , this t i m e , g l o b a l i z a t i o n w i l l p r o d u c e p e r m a n e n t p e a c e b e ­

t w e e n the m a j o r c o u n t r i e s is p r e s s e d m o s t a v i d l y a n d c l e v e r l y b y a H a r v a r d trained P e n t a g o n a n a l y s t n a m e d T h o m a s B a r n e t t . M o r e t h a n a n y o n e

else,

B a r n e t t has d e v e l o p e d t h e v i e w t h a t t h e g e o p o l i t i c s o f o u r t i m e w i l l b e d e ­ fined b y a g r e a t d i v i d e b e t w e e n t h o s e e n g a g e d in e c o n o m i c g l o b a l i z a t i o n a n d those o u t s i d e the c l u b — a n d e v e r y o n e in the c l u b w i l l figure o u t h o w to g e t along.

3

T h i s isn't m e r e l y an u p d a t e on the E n l i g h t e n m e n t . B a r n e t t figures

that the spread of n u c l e a r w e a p o n s w i l l p r e c l u d e e v e n c o n v e n t i o n a l w a r s b e ­ t w e e n t h e m a j o r p o w e r s , w h i l e leaders in p l a c e s c u t off f r o m t h e g l o b a l e c o n ­ o m y w i l l find t h e y can o n l y a c h i e v e t h e i r g o a l s b y v i o l e n t m e a n s . At

a m i n i m u m , t h e o p t i m i s t i c p a r t s o f this v i e w r e q u i r e a lot o f faith. W a r

b e t w e e n n u c l e a r p o w e r s is c l e a r l y n o t u n t h i n k a b l e . T h e U n i t e d S t a t e s a n d the S o v i e t s c a m e p e r i l o u s l y close to n u c l e a r e x c h a n g e s o n m o r e t h a n o n e o c c a s i o n , as h a v e P a k i s t a n a n d I n d i a . M o r e o v e r , t h e m o s t senior m i l i t a r y a n d f o r e i g n p o l i c y advisors to the heads of g o v e r n m e n t s in e v e r y n u c l e a r p o w e r h a v e b e e n t h i n k i n g h a r d a b o u t it for t w o g e n e r a t i o n s , a n d t h e y ' r e d o i n g so r i g h t n o w in W a s h i n g t o n , M o s c o w , L o n d o n , P a r i s , B e i j i n g , D e l h i , K a r a c h i , T e l A v i v , P y o n g y a n g , a n d soon T e h r a n . A n d n u c l e a r - a r m e d c o u n t r i e s t h a t t r a d e e x t e n ­ sively w i t h each o t h e r can still h a v e i m p o r t a n t conflicts o f interest o v e r b o t h e c o n o m i c a n d n o n e c o n o m i c m a t t e r s — t h i n k o f e n e r g y a n d t h e n o f territorial a m b i t i o n s . S o m i l i t a r y p l a n n e r s in W a s h i n g t o n , B e i j i n g , M o s c o w , a n d o t h e r capitals h a v e d e v e l o p e d conflict scenarios a n d p l a n s w h i c h , if p o s s i b l e , k e e p a confrontation w i t h another nuclear p o w e r n o n n u c l e a r — a n d if they cannot, w h a t they'll d o . A n d w h i l e s o m e w i l l say t h a t I n d i a is p a r t o f g l o b a l i z a t i o n b u t P a k i s t a n is not, a conflict b e t w e e n these t w o p o w e r s w o u l d h a v e l i t t l e to d o w i t h that d i s t i n c t i o n . The

extensive interactions o f this era's g l o b a l i z a t i o n also h a v e n o t t e m p e r e d

the nationalistic tendencies closely associated w i t h c o n f r o n t a t i o n s a n d w a r s . O n e of the reasons that C h i n a a n d the U n i t e d S t a t e s e m b r a c e g l o b a l i z a t i o n

FUTURECAST

222

t o d a y is t h a t it offers a w a y to b e c o m e m o r e c o n s e q u e n t i a l — m o r e p o w e r f u l — in the w o r l d . M o d e s t y is n o t a trait o f c o u n t r i e s t h a t consider t h e m s e l v e s g r e a t a n d e x c e p t i o n a l . C h i n a a n d A m e r i c a t o d a y — a n d , at other t i m e s , Europe's m a ­ jor c o u n t r i e s a n d J a p a n — s e e t h e m s e l v e s not as the pieces o f a large g l o b a l sys­ t e m , b u t as nations in h i s t o r y c l a i m i n g l a r g e r p l a c e s for t h e m s e l v e s . A n d that's classic n a t i o n a l i s m . E v e n as C h i n e s e corporations b e c o m e p a r t of the s u p p l y a n d d i s t r i b u t i o n n e t w o r k s t h a t A m e r i c a n businesses created, their societies s h o w f e w s i g n s o f c o n v e r g i n g social v a l u e s . S t a t e d plainly, C h i n a is not e n d u r ­ i n g t h e w r e n c h i n g social a n d e c o n o m i c d i s r u p t i o n s t h a t g o a l o n g w i t h rapid m o d e r n i z a t i o n because it w a n t s to be A m e r i c a or S w e d e n ; it w a n t s to be w h a t it's a l w a y s b e e n , C h i n a , o n l y m o r e so. E v e n so, B a r n e t t a n d his a d m i r e r s are r i g h t t h a t t h e w a r s of the n e x t ten t o fifteen y e a r s are m o s t l i k e l y to i n v o l v e internal conflicts in p o o r countries ( o u t s i d e t h e c l u b ) or r e t a l i a t o r y or p r e e m p t i v e a t t a c k s o n r e n e g a d e g r o u p s a n d states b y the sole s u p e r p o w e r , a l o n g w i t h w h a t e v e r allies it can m u s t e r . B u t t h e salient features o f t h e g e o p o l i t i c a l l a n d s c a p e w i l l not be the g r e a t d i v i d e s o f g l o b a l i z a t i o n , c r i t i c a l as t h e y are, b u t the t r a d i t i o n a l p h e n o m e n o n o f p o o r c o u n t r i e s c o m i n g a p a r t a n d t h e e n t i r e l y n e w one o f one s u p e r p o w e r a s s u m i n g r e s p o n s i b i l i t y for g l o b a l security. T h e r e ' s a n o t h e r serious a n d t r o u b l i n g reason w h y g l o b a l i z a t i o n c a n n o t p r e ­ c l u d e a m a j o r w a r , e v e n in t h e n e x t t e n to fifteen years. G r a d u a l l y b u t n o w fi­ nally, t h e w o r l d has e n t e r e d a n e w era o f n u c l e a r p r o l i f e r a t i o n , in w h i c h w e a k c o u n t r i e s w e l l "outside the o r b i t " h a v e g a i n e d access to n u c l e a r w e a p o n s . F o r d e c a d e s , a c o u n t r y h a d to b e l a r g e a n d p r o s p e r o u s t o b u i l d n u c l e a r w e a p o n s . T h a t era e n d e d d e c i s i v e l y w i t h t h e n u c l e a r a r m i n g o f P a k i s t a n a n d N o r t h Korea. T h e m o s t i m p o r t a n t — a n d t h r e a t e n i n g — d e v e l o p m e n t in proliferation has b e e n t h e l a r g e l y u n c o n t r o l l e d s p r e a d o f n u c l e a r p o w e r t e c h n o l o g y , a n d the a b i l i t y o f e v e n w e a k states t o e v e n t u a l l y l e v e r a g e t h a t t e c h n o l o g y to d e v e l o p n u c l e a r w e a p o n s . P a k i s t a n , N o r t h K o r e a , a n d in all l i k e l i h o o d I r a n , soon e n o u g h , p r o v i d e s o b e r i n g cases in p o i n t . M o r e o v e r , across the M i d d l e E a s t , S a u d i A r a b i a has e x p r e s s e d interest in b u i l d i n g n u c l e a r - p o w e r c a p a b i l i t i e s , E g y p t a n d A l g e r i a a l r e a d y h a v e n u c l e a r research reactors, a n d other A r a b na­ t i o n s ( i n c l u d i n g J o r d a n ) h o p e to f o l l o w t h e m w i t h i n a d e c a d e . T h e risk t h a t these n a t i o n s w i l l use t h e i r reactors to p r o d u c e p l u t o n i u m c a n b e c o n t a i n e d o n l y so l o n g as t h e i r g e n e r a l l y a u t o c r a t i c g o v e r n m e n t s let t h e I n t e r n a t i o n a l A s s o c i a t i o n o f A t o m i c E n e r g y m a i n t a i n s t r i c t controls and oversight of their nuclear-power activities. N o r t h K o r e a and Pakistan demon­ strate w i t h s o b e r i n g

finality

t h a t those c o n t r o l s are not reliable barriers to

p r o l i f e r a t i o n o n c e states d e c i d e t h e y w a n t to a c q u i r e n u c l e a r w e a p o n s . T h e

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223

spread o f n u c l e a r p o w e r is n o t n e w ; E i s e n h o w e r ' s A t o m s for P e a c e i n i t i a t i v e 4

h e l p e d l a u n c h that s p r e a d d e c a d e s a g o . W h a t is n e w is t h e a c c e l e r a t i n g p a c e w i t h w h i c h u n s t a b l e c o u n t r i e s b o t h p o o r a n d r i c h are a c q u i r i n g n u c l e a r skills a n d t e c h n o l o g y , a n d t h e t e c h n o l o g i c a l p r o g r e s s t h a t has t r a n s f o r m e d t h e o n c e complex and customized components of nuclear arms into standard industrial commodities.

The

n e x t ten years w i l l see m o r e states g o nuclear. M o s t likely, t h e t r i g g e r

w i l l be w h a t p o l i t i c a l scientists call a "cascade scenario," w h e r e , for e x a m p l e , Iran's t e s t i n g of a n u c l e a r w e a p o n t r i g g e r s t h e r a p i d d e v e l o p m e n t a n d t e s t i n g of w e a p o n s b y E g y p t a n d S a u d i A r a b i a , b o t h o f w h i c h h a v e b e e n o n t h e n u ­ clear a r m s fence for s o m e t i m e . T h i s scenario has h a p p e n e d o n c e already, w h e n C h i n a ' s b o m b m o v e d I n d i a to d e v e l o p its o w n , a n d India's t e s t i n g

led

P a k i s t a n to p r o d u c e one for itself. T a i w a n ' s c a p a c i t y t o d o t h e s a m e p r o b a b l y helps c h e c k s o m e o f C h i n a ' s a g g r e s s i v e n e s s t o w a r d s t h e i s l a n d — a n d

vice

v e r s a — b u t it takes o n l y o n e to start a c a s c a d e . To

a v o i d r e g i o n a l d o o m s d a y s o v e r t h e n e x t ten t o

fifteen

years, the n e w

n u c l e a r - a r m e d states w i l l h a v e to r e p l i c a t e t h e d e t e r r e n c e r e l a t i o n s h i p t h a t the U n i t e d S t a t e s a n d the S o v i e t s c o n s t r u c t e d o v e r d e c a d e s , a n d w i t h a lot o f g o o d l u c k . C l e a r l y , the m o s t d a n g e r o u s area for n u c l e a r p r o l i f e r a t i o n o v e r t h e n e x t d e c a d e is the M i d d l e E a s t , w h e r e e v e r y b o d y has m a j o r interests. It's n o t l i k e l y t h a t the U n i t e d S t a t e s , R u s s i a , or C h i n a c a n s t o p E g y p t or S a u d i A r a b i a f r o m g o i n g n u c l e a r i f I r a n does a n d doesn't b e h a v e — o r s t o p Israel f r o m d o i n g w h a t e v e r it believes it has to d o . W e a k states also m a y b e m o r e l i k e l y t h a n s t r o n g e r nations to use n u k e s a g a i n s t each other, b e c a u s e a n a d v e r s a r y w i t h o n l y a f e w n u c l e a r w e a p o n s is a m o r e t e m p t i n g t a r g e t for a first s t r i k e .

5

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i n g the c a t a s t r o p h i c g l o b a l c o n s e q u e n c e s o f a n u c l e a r b l o w u p in t h e M i d d l e E a s t w i l l a l m o s t c e r t a i n l y be a m a j o r issue for A m e r i c a a n d C h i n a , as w e l l as R u s s i a a n d e v e n E u r o p e , in the n e x t d e c a d e .

THE GEOPOLITICS OF THE O.S. SUPERPOWER For

the last fifteen y e a r s , one c o u n t r y , t h e U n i t e d S t a t e s , has e x e r c i s e d p o w e r

a n d r e s p o n s i b i l i t y across v i r t u a l l y e v e r y p a r t o f t h e w o r l d . T h e m o s t i m p o r ­ tant s i n g l e factor in t h e g e o p o l i t i c s o f t h e n e x t fifteen years is t h a t r e g a r d l e s s o f the u l t i m a t e o u t c o m e in I r a q , this w i l l n o t c h a n g e . J u s t as v e r y f e w p e o p l e w i t h g r e a t w e a l t h live as i f t h e y h a v e t o w o r r y a b o u t t h e i r n e x t p a y c h e c k s , s u ­ p e r p o w e r s a l m o s t a l w a y s act b a s e d o n w h a t t h e y a r e , w h i c h is v e r y p o w e r f u l .

224

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A n d w i t h o u t a near p e e r t o b a l a n c e , b l o c k , or seriously c h a l l e n g e A m e r i c a ' s a b i l i t y t o t a k e w h a t e v e r steps it chooses in e v e r y r e g i o n , U . S . interests a n d c o n d u c t w i l l c o n t i n u e t o be g l o b a l in s c o p e f r o m n o w to 2 0 2 0 a n d b e y o n d . In this respect, the presidencies of B i l l C l i n t o n and G e o r g e W . B u s h have m u c h in c o m m o n . W h i l e C l i n t o n used U . S . m i l i t a r y forces m u c h m o r e briefly a n d m u c h less i n t e n s i v e l y t h a n B u s h ( a l t h o u g h also on m o r e separate occa­ 6

sions), his g e o p o l i t i c a l a p p r o a c h w a s as g l o b a l a n d a c t i v i s t as B u s h ' s . U n d e r C l i n t o n , t h e U n i t e d S t a t e s sent aircraft carriers i n t o t h e T a i w a n S t r a i t a n d later c o n v i n c e d B e i j i n g t o e n d n u c l e a r assistance to I r a n a n d P a k i s t a n , w h i l e u s i n g access t o its m a r k e t t o g e t C h i n a to a c c e p t the W T O ' s A m e r i c a n - m a d e r u l e s o n d o m e s t i c c o m p e t i t i o n a n d f o r e i g n i n v e s t m e n t . A m e r i c a in the 1 9 9 0 s also g o t N o r t h K o r e a to freeze its p l u t o n i u m p r o d u c t i o n , used N A T O a n d the E u r o p e a n U n i o n to end the

fighting

a n d c h a n g e r e g i m e s in the B a l k a n s ,

b r o u g h t R u s s i a into the G - 8 and the W a r s a w Pact into N A T O , denuclearized t h e U k r a i n e , B e l a r u s , a n d K a z a k h s t a n , c o n t a i n e d S a d d a m Hussein's a m b i ­ t i o n s , u s e d n e w t r a d e a r r a n g e m e n t s t o h e l p e n d o n e - p a r t y r u l e in M e x i c o , re­ s t o r e d a d e m o c r a t i c p r o c e s s in H a i t i , p r o t e c t e d w e s t e r n c a p i t a l m a r k e t s f r o m financial

m e l t d o w n s in A s i a a n d M e x i c o , a n d p l a y e d the broker's role success­

f u l l y in I r e l a n d , I n d i a - P a k i s t a n , a n d T u r k e y - G r e e c e , a n d less successfully in the M i d e a s t . T h e C l i n t o n a d m i n i s t r a t i o n also t a r g e t e d a n d tried to kill O s a m a bin Laden. T h e traditional foreign policy realism of the administrations of Clinton a n d his predecessor, G e o r g e H . W . B u s h , l e d to different g e o p o l i t i c a l strate­ g i e s t h a n t h e d o c t r i n e s o f G e o r g e W . B u s h a n d his close a d v i s o r s . B u t those differences in w o r l d v i e w s d i d n o t affect the fact or i n e s c a p a b l e l o g i c o f A m e r ­ ica e x e r c i s i n g its p o w e r across t h e w o r l d . W h i l e n o o t h e r c o u n t r y c a n s t o p t h e U n i t e d S t a t e s f r o m p u r s u i n g the p o l i c i e s it c h o o s e s , t h o s e p o l i c i e s c a n fail or b e so w r o n g h e a d e d t h a t e v e n in s u c c e s s t h e y d a m a g e its o w n i n t e r e s t s ( a n d t h o s e o f o t h e r s ) . A m e r i c a ' s Iraq p o l i c y a l m o s t c e r t a i n l y w i l l b e j u d g e d a f a i l u r e , a n d it also m a y w e l l h a v e b e e n f a t a l l y w r o n g h e a d e d . A t a m i n i m u m , it has e s t a b l i s h e d t h a t the s u p e r ­ p o w e r c a n o v e r t u r n t h e l e a d e r s h i p o f a n y o t h e r c o u n t r y , b u t n o t necessarily o c c u p y it successfully. T h o s e r e s u l t s w i l l affect t h e s t r a t e g i c j u d g m e n t s of n o t o n l y f u t u r e U . S . p r e s i d e n t s a n d t h e i r a d v i s o r s , b u t also o t h e r c o u n t r i e s a n d g r o u p s . I t also m a y w e l l lead t o a p r o l i f e r a t i o n o f t h e t e c h n o l o g i e s a n d u n c o n v e n t i o n a l s t r a t e g i e s u s e d b y i n s u r g e n t s in I r a q t o c o u n t e r t h e s u p e r ­ power's traditional m i l i t a r y superiority. Since America's v a u n t e d "networkc e n t r i c w a r f a r e , " it t u r n s o u t , is useless a g a i n s t I E D s , its forces w i l l c o n f r o n t t h e m a g a i n w h e r e v e r t h e y fight in t h e f u t u r e . T h e s a m e fate p r o b a b l y a w a i t s R u s s i a n forces in C h e c h n y a . Y e t A m e r i c a ' s u n h a p p y v e n t u r e in Iraq w i l l not

THE NEW GEOPOLITICS OF THE SOLE SUPERPOWER: THE PLAYERS

225

r e d u c e U . S . a c t i v i s m o v e r t h e n e x t d e c a d e , e v e n in t h e M i d d l e E a s t . T h e fact is, U . S . a c t i v i s m in t h a t r e g i o n — a s in L a t i n A m e r i c a , A s i a , a n d E u r o p e — i s b u i l t i n t o t h e g l o b a l interests a n d g e o p o l i t i c s o f a sole s u p e r p o w e r . An

o p e n - e n d e d , a c t i v i s t g l o b a l role is j u s t w h a t t o p U . S . m i l i t a r y a n d i n ­

t e l l i g e n c e strategists see in A m e r i c a ' s f u t u r e , b a s e d o n the m o s t r e c e n t drennial

Defense Review

Report f r o m t h e P e n t a g o n a n d n a t i o n a l

Qua­

intelligence

e s t i m a t e s . T h i s role doesn't c o m e f r o m an o b v i o u s , e x i s t e n t i a l t h r e a t to t h e U n i t e d S t a t e s . I n fact, in v i v i d c o n t r a s t t o t h e c o l d w a r y e a r s , o n l y R u s s i a o n occasion a n d a h a n d f u l o f s m a l l e r c o u n t r i e s s e e m w i l l i n g t o c h a l l e n g e United

States

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Iran,

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the and

V e n e z u e l a — a n d all of t h e m are also r e a d y t o d o b u s i n e s s w i t h t h e U n i t e d States in m o s t areas. N e v e r t h e l e s s , t h e e x p e r t s w h o e x p l a i n t h e w o r l d to U . S . p r e s i d e n t s all see a c o m p e l l i n g case for U . S . g l o b a l a c t i v i s m , b a s e d o n t h e "capabilities" of those hostile to A m e r i c a n interests a n d t h e c a p a b i l i t i e s o f t h e U n i t e d S t a t e s in t h w a r t i n g t h e m . Its g l o b a l s c o p e starts w i t h t h e w o r l d w i d e reach o f terrorist g r o u p s — s a i d t o d a y t o o p e r a t e in e i g h t y c o u n t r i e s — c a p a b l e of i n f l i c t i n g h a r m on U . S . interests a n d assets a r o u n d t h e w o r l d . T h e P e n t a ­ g o n states t h i s clearly: " T h e U n i t e d S t a t e s is . . . e n g a g e d in w h a t w i l l b e a l o n g w a r . . . g l o b a l in scope . . . a g a i n s t v i o l e n t e x t r e m i s t s w h o use t e r r o r i s m as their w e a p o n of c h o i c e , a n d w h o seek t o d e s t r o y o u r free w a y o f life." The

7

U . S . interests t h a t c o n c e r n these s t r a t e g i s t s , a n d t h e c o n s e q u e n t g o a l s

o f U . S . defense p o l i c y for the n e x t d e c a d e , g o far b e y o n d "defeating terrorist n e t w o r k s " a n d "defending the U . S . h o m e l a n d . " S a u d i A r a b i a has a c a p a b i l i t y to i n t e r r u p t U . S . oil s u p p l i e s , for e x a m p l e , a n d C h i n a c o u l d use its m i l i t a r y b u i l d u p a n d e c o n o m i c c l o u t to i n t i m i d a t e its n e i g h b o r s i n t o c l o s i n g d o w n their U . S . bases. M o v i n g a l o n g , N o r t h K o r e a has t h e c a p a b i l i t y t o sell a d ­ vanced weapon and missile technologies

to o t h e r r o g u e states, a n d R u s s i a

could w i t h h o l d natural gas and electricity from m u c h of E u r o p e . A p p r o a c h the w o r l d t h e w a y t h a t A m e r i c a ' s senior defense a n d i n t e l l i g e n c e do,

strategists

a n d the U n i t e d S t a t e s has a l m o s t l i m i t l e s s o p t i o n s for e x e r c i s i n g its s u ­

p e r p o w e r s to "shape t h e s t r a t e g i c c h o i c e s o f o t h e r c o u n t r i e s , " i n c l u d i n g m i l i ­ tary force if it c o m e s to t h a t . T o p r e p a r e for t h e use o f force, t h e P e n t a g o n also is r e o r g a n i z i n g its m i l i t a r y p o w e r , " m o v i n g a w a y f r o m a s t a t i c defense in o b ­ solete c o l d w a r g a r r i s o n s , a n d p l a c i n g e m p h a s i s o n

t h e a b i l i t y to

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q u i c k l y to t r o u b l e spots across t h e g l o b e . . . a n d c o n d u c t m u l t i p l e , o v e r l a p ­ ping wars." The

8

m o s t recent Quadrennial

Defense Review o r g a n i z e s the u n i v e r s e o f threats

u s i n g a t o p o l o g y t h a t also r e q u i r e s an e x p a n s i v e exercise o f A m e r i c a n p o w e r for

the foreseeable future. F i r s t , there are t r a d i t i o n a l t h r e a t s f r o m states u s i n g

"recognized m i l i t a r y c a p a b i l i t i e s a n d forces in w e l l - u n d e r s t o o d

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m i l i t a r y c o m p e t i t i o n a n d conflict." W h i l e n o o t h e r c o u n t r y t o d a y can take on A m e r i c a in this w a y , t h e R e v i e w looks a h e a d to a g e n e r a t i o n f r o m now, w h e n C h i n a m i g h t b e a real m i l i t a r y c o m p e t i t o r , a n d calls for a n e w g e n e r a t i o n of s t r a t e g i c m i s s i l e s a n d defense s y s t e m s . T h e p r o s p e c t o f f u t u r e t r a d i t i o n a l c o n ­ flicts is also b e h i n d t h e P e n t a g o n ' s c u r r e n t p l a n s for new, a d v a n c e d t e c h n o l o ­ g i e s for c o n v e n t i o n a l

w a r f a r e — s h o u l d the s u p e r p o w e r d e c i d e to take

on

a n o t h e r h o s t i l e state (the I r a q m o d e l ) or i f U . S . forces are n e a r b y w h e n a tra­ d i t i o n a l w a r b r e a k s o u t b e t w e e n t w o o t h e r c o u n t r i e s (and they're stationed near a l m o s t e v e r y b o d y ) . T h e p l a n n e r s m a y be t h i n k i n g a b o u t A f r i c a n oil states for t h e first p o s s i b i l i t y , a n d I n d i a - P a k i s t a n , or s o m e o f the i n d e p e n d e n t states f r o m t h e o l d S o v i e t U n i o n . A second class o f threats is w h a t U . S . m i l i t a r y planners call "irregular chal­ l e n g e s f r o m those e m p l o y i n g u n c o n v e n t i o n a l m e t h o d s to counter the tradi­ tional a d v a n t a g e s o f s t r o n g e r opponents." T h a t covers terrorism outside

the

U n i t e d S t a t e s , as w e l l as an I r a q i - s t y l e insurgency, a n d its status as the n u m b e r t w o threat signals the U . S . military's d e t e r m i n a t i o n to b u i l d the "capability" to w i n n e x t t i m e . F o r these strategists, there's little q u e s t i o n that there w i l l be a n e x t t i m e — i f o n l y to address their t h i r d class o f threats, "catastrophic chal­ l e n g e s (that) i n v o l v e the a c q u i s i t i o n , possession, a n d use of W M D s . " T h e U . S . failure in I r a q , for all its p o l i t i c a l d a m a g e to G e o r g e W . B u s h a n d his party's b r a n d , w i l l not c h a n g e the saliency of a W M D threat for future U . S . presidents. F e w people

in U . S . national p o l i t i c s — a n d

p e r h a p s not m a n y in

Europe,

e i t h e r — w o u l d o b j e c t to a future p r e e m p t i v e strike that c o u l d successfully p r e ­ v e n t a hostile c o u n t r y f r o m a r m i n g itself w i t h W M D s . T h e practical p r o b l e m is c o m i n g u p w i t h the incentives or operations to p r e v e n t countries f r o m g o i n g nuclear, m u c h less b i o l o g i c a l or c h e m i c a l . S o future U . S . actions to counter these threats, o f necessity, w i l l focus o n p r e v e n t i n g others f r o m actually u s i n g W M D s . T h i s e x p l a i n s w h y the P e n t a g o n is n o w e m p h a s i z i n g its pressing need for not o n l y "advanced d e t e c t i o n technologies for c h e m i c a l , biological, and n u ­ clear w e a p o n s , " b u t also "new or i m p r o v e d capacities for persistent surveillance a n d i n t e l l i g e n c e , g l o b a l m o b i l i t y , (and) r a p i d strikes." I f a n y o n e still d o u b t s t h e g l o b a l a p p r o a c h o f U . S . m i l i t a r y s t r a t e g i s t s , the f o u r t h class o f threats settles it: " d i s r u p t i v e c h a l l e n g e s . . . f r o m adversaries w h o d e v e l o p a n d use b r e a k t h r o u g h s in t e c h n o l o g i e s to n e g a t e c u r r e n t U . S . a d v a n t a g e s in k e y o p e r a t i o n a l d o m a i n s . " T h e s e threats i n v o l v e u l t r a - h i g h ­ t e c h v e r s i o n s o f a 9 / 1 1 t y p e a t t a c k t h a t r e q u i r e a nation's resources to carry o u t . T h e t h i n k i n g here is t h a t w h i l e it w o u l d takes C h i n a or R u s s i a g e n e r a ­ t i o n s a n d t r i l l i o n s o f dollars to m a t c h A m e r i c a ' s v a r i o u s m i l i t a r y c a p a c i t i e s , b o t h c o u n t r i e s a n d a f e w others c o u l d d e v e l o p b r e a k t h r o u g h

technologies

t h a t c o u l d d i s a b l e s o m e c r i t i c a l s u p e r p o w e r capacity. P e r h a p s scientists

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THE NEW GEOPOLITICS OF THE SOLE SUPERPOWER: THE PLAYERS

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S h a n g h a i or S t . P e t e r s b u r g c o u l d d e v e l o p , for e x a m p l e , n a n o t e c h n o l o g i e s t h a t c o u l d d i s a b l e t a n k s or a i r p l a n e s ; s o f t w a r e v i r u s e s t h a t c o u l d d i s r u p t U . S . financial s y s t e m s , or m o r e o m i n o u s l y , c y b e r w a r f a r e p r o g r a m m i n g t h a t c o u l d p e n e t r a t e the s e c u r i t y of U . S . and

hydroelectric d a m s and nuclear p o w e r utilities,

d i r e c t t h e m to o p e n t h e i r g a t e s or i n i t i a t e m e l t d o w n s . ( T h e l a t t e r s c e ­

nario, w h i c h p l a n n e r s t a k e

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space a n d d i r e c t e d - e n e r g y w e a p o n s t h a t c o u l d t a k e o u t its m i l i t a r y s y s t e m s . C o u n t e r i n g s u c h threats w i l l c l a i m an i n c r e a s i n g share o f t h e U . S . m i l i ­ tary's h u g e a n n u a l R & D b u d g e t . O v e r t h e n e x t d e c a d e , as defense R & D passes the $ 1 0 0 b i l l i o n a y e a r m a r k , m u c h o f it w i l l g o to d e v e l o p b e t t e r c a ­ p a c i t i e s f o r — a n d the P e n t a g o n t i c k s t h e m o f f — p e r s i s t e n t s u r v e i l l a n c e a n d intelligence, global mobility, rapid strikes, sustained unconventional warfare, counterterrorism and counterinsurgency c a m p a i g n s , medical countermeasures against genetically engineered bioterror agents, advanced detection technolo­ g i e s for c h e m i c a l , b i o l o g i c a l , a n d n u c l e a r w e a p o n s , m o r e a d v a n c e d n u c l e a r deterrents, more u n m a n n e d surveillance, and the d e v e l o p m e n t of the next generation of long-range strike systems. B e y o n d the R & D , the p r o p o s a l s t h a t t h e P e n t a g o n a n d W h i t e H o u s e are w i l l i n g to d e s c r i b e p u b l i c l y to a d d r e s s these t h r e a t s i n c l u d e a m a j o r r a m p - u p of S p e c i a l O p e r a t i o n forces in e v e r y s e r v i c e , t h i r t y - f i v e h u n d r e d m o r e p e r s o n ­ nel for P S Y O P S , or p s y c h o l o g i c a l o p e r a t i o n s , t h e a d v a n c e d p r o c u r e m e n t o f the P r e d a t o r a n d G l o b a l H a w k u n m a n n e d aircraft, a n e w g e n e r a t i o n o f c o n ­ v e n t i o n a l b a l l i s t i c m i s s i l e s for t h e T r i d e n t s u b m a r i n e s , a n d a n e w g e n e r a t i o n o f l a n d - b a s e d m i s s i l e s t h a t c a n w i p e o u t an e n e m y ' s m i l i t a r y w i t h o u t u s i n g nuclear e x p l o s i v e s . W h i l e the p r i n c i p a l stated focus o f this p l a n n i n g a n d p r o c u r e m e n t is t e r ­ r o r i s m , U . S . m i l i t a r y strategists also are f o c u s e d o n f u t u r e threats f r o m C h i n a , based on reports of its i n v e s t m e n t s in " h i g h - e n d , a s y m m e t r i c m i l i t a r y c a p a ­ bilities, e m p h a s i z i n g e l e c t r o n i c a n d c y b e r - w a r f a r e , c o u n t e r - s p a c e o p e r a t i o n s , b a l l i s t i c a n d c r u i s e m i s s i l e s , a d v a n c e d i n t e g r a t e d air defense s y s t e m s , n e x t generation torpedoes, advanced submarines, strategic nuclear strikes from m o d e r n , s o p h i s t i c a t e d l a n d a n d sea-based s y s t e m s , a n d t h e a t e r u n m a n n e d aerial v e h i c l e s . " T h e r e w a s a frenzy o f P e n t a g o n c o n c e r n in early 2 0 0 7 w h e n the C h i n e s e d e s t r o y e d one o f their o w n w e a t h e r satellites, s i n c e an effective antisatellite w e a p o n c o u l d b l i n d A m e r i c a ' s s p a c e fleet o f m o r e t h a n o n e h u n ­ dred military surveillance and c o m m u n i c a t i o n s satellites.

9

T h e r e w a s even g r e a t e r c o n c e r n in J u n e 2 0 0 7 , after successful c y b e r a t t a c k s on the c o m p u t e r s y s t e m s s e r v i n g the office o f D e f e n s e S e c r e t a r y R o b e r t G a t e s w e r e t r a c e d to the People's L i b e r a t i o n A r m y .

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G e r m a n g o v e r n m e n t s y s t e m s also w e r e t r a c e d to C h i n e s e g o v e r n m e n t facili­ ties.

T h e United

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R u s s i a , Israel, a n d

o t h e r s — r e g u l a r l y t r y t o p r o b e each o t h e r other's m i l i t a r y n e t w o r k s . T h e p r o b l e m here w a s t h a t C h i n a s u c c e e d e d in p e n e t r a t i n g central P e n t a g o n s y s ­ t e m s , s u g g e s t i n g a n e w c a p a b i l i t y to d i s r u p t A m e r i c a n m i l i t a r y n e t w o r k s at c r i t i c a l m o m e n t s . A c c o r d i n g t o r e p o r t s , " H a c k e r s f r o m n u m e r o u s locations in C h i n a s p e n t several m o n t h s p r o b i n g the P e n t a g o n s y s t e m before o v e r c o m i n g its defenses," a n d t h e P e n t a g o n w a s forced to t a k e d o w n its n e t w o r k for m o r e than a w e e k d u r i n g the a t t a c k s . For

1 1

a g l o b a l s u p e r p o w e r w i t h interests e v e r y w h e r e , the threats are even

b r o a d e r t h a n t e r r o r i s m , c y b e r a t t a c k s a n d t h e C h i n e s e m i l i t a r y in another g e n e r a t i o n . W i t h i n c r e a s i n g f r e q u e n c y , n e w p e r c e i v e d threats w i l l arise, as m a t t e r s t h a t t h e U n i t e d S t a t e s n e v e r c a r e d m u c h a b o u t are seen as n e w secu­ r i t y issues. T h e B u s h a d m i n i s t r a t i o n ' s i n t e n s e a t t e n t i o n to A I D S in A f r i c a , for e x a m p l e , has b e e n d r i v e n l a r g e l y b y c o n c e r n s t h a t t h e e p i d e m i c ' s c o r r o s i v e so­ cial effects c o u l d t u r n s o m e M u s l i m A f r i c a n nations i n t o terrorist havens or t h r e a t e n flows o f A f r i c a n p e t r o l e u m . T h a t ' s also the reason w h y the U n i t e d S t a t e s , t h e o n l y c o u n t r y t h a t d i v i d e s the w o r l d i n t o m i l i t a r y " c o m m a n d s , " re­ c e n t l y c r e a t e d a n e w A f r i c a M i l i t a r y C o m m a n d . I t takes its p l a c e a l o n g s i d e t h e Pacific C o m m a n d ( A s i a ) , t h e E u r o p e a n C o m m a n d , the C e n t r a l C o m m a n d ( t h e M i d d l e E a s t ) , t h e S o u t h e r n C o m m a n d ( L a t i n A m e r i c a ) , a n d the N o r t h ­ ern C o m m a n d ( c r e a t e d in 2 0 0 2 t o c o o r d i n a t e the defense of the h o m e l a n d ) . T h i s t e n d e n c y to r e c o n c e i v e n o n m i l i t a r y m a t t e r s as n e w security threats could well expand over the next decade, starting w i t h climate change. Scien­ tists a n d f o r m e r V i c e P r e s i d e n t G o r e settled the d o m e s t i c p o l i t i c a l a r g u m e n t o v e r t h e risks o f c l i m a t e c h a n g e in 2 0 0 6 ; a n d b y 2 0 0 7 , several former generals a n d a d m i r a l s entered the fray. U . S . national security, t h e y a r g u e , w i l l require s t r o n g m e a s u r e s o n g l o b a l w a r m i n g , because even m o d e s t c l i m a t e c h a n g e s m i g h t s t r e n g t h e n the h a n d o f terrorists b y b r i n g i n g o n c a t a s t r o p h i c s t o r m s , famines, epidemics, and w a t e r shortages. T h e former c o m m a n d e r of U . S . N a v a l F o r c e s in E u r o p e , A d m i r a l T . J o s e p h L o p e z (ret.) m a k e s this case: " C l i ­ m a t e c h a n g e w i l l p r o v i d e t h e c o n d i t i o n s that w i l l e x t e n d the w a r on terror . . . in r e g i o n s o f the w o r l d t h a t are a l r e a d y fertile g r o u n d for e x t r e m i s m . "

12

THE SOLE SUPERPOWER AND THE REST OF THE WORLD The

g e o p o l i t i c s o f t h e n e x t d e c a d e w i l l be s h a p e d b y b o t h t h e steps A m e r i c a

takes t o r e m a i n t h e d o m i n a n t p o w e r in A s i a , E u r o p e , L a t i n A m e r i c a , a n d A f r i c a , a n d t h e responses o f o t h e r g o v e r n m e n t s . F o r e i g n p o l i c y realists, w h o

THE NEW GEOPOLITICS OF THE SOLE SUPERPOWER: THE PLAYERS

229

almost certainly will advise the next U . S . president, have long observed that countries b e c o m e v e r y u n c o m f o r t a b l e w h e n one n a t i o n is m u c h s t r o n g e r t h a n e v e r y o n e else. A s H a r v a r d ' s Professor W a l t p u t s it, "states r e s p o n d to u n b a l ­ a n c e d p o w e r b y b a l a n c i n g a g a i n s t t h e d o m i n a n t c o u n t r y . " It's easy t o a p p r e c i ­ ate w h y — a p o w e r f u l c o u n t r y t h a t no one c a n c h e c k c a n b r e a k a lot o f o t h e r countries' crockery, even w h e n it doesn't m e a n to. T h e U n i t e d S t a t e s d i d n ' t i n t e n d to destabilize C a m b o d i a a n d p a v e t h e w a y for t h e K h m e r R o u g e w h e n it p u r s u e d the V i e t C o n g there in 1 9 7 0 — a n y m o r e t h a n t h e B u s h a d m i n i s ­ tration e x p e c t e d its i n v a s i o n o f I r a q t o i g n i t e a sectarian c i v i l w a r a n d e m ­ p o w e r Iran. B u t that's w h a t h a p p e n e d . D i f f e r e n c e s in v a l u e s also c a n d r i v e nations a n d societies to find w a y s to b a l a n c e a s u p e r p o w e r , e s p e c i a l l y w h e n a s u p e r p o w e r ' s alien v a l u e s are f o r c i b l y i n t r o d u c e d i n t o p l a c e s t h e y ' r e not w e l ­ c o m e . M a n y S a u d i s hate t h e c u s t o m s t h a t A m e r i c a n s b r i n g w i t h t h e m , a n d e x t e n s i v e S a u d i financial s u p p o r t for M u s l i m f u n d a m e n t a l i s m is one o f t h e results. The

P e n t a g o n agrees w i t h the realists: " O u r l e a d i n g p o s i t i o n in w o r l d af­

fairs w i l l c o n t i n u e to b r e e d unease, a d e g r e e o f r e s e n t m e n t , a n d resistance." T e l l i n g l y , it's also w h a t m a n y f o r e i g n officials say p u b l i c l y . A f e w years a g o , for

example, J o s c h k a Fischer, then G e r m a n y ' s foreign minister, w a r n e d that,

"a w o r l d o r d e r in w h i c h the national interests o f the s t r o n g e s t p o w e r is t h e criterion for m i l i t a r y a c t i o n s i m p l y c a n n o t w o r k , " a n d his F r e n c h c o u n t e r p a r t at

the t i m e , H e r b e r t V é d r i n e , offered t h a t

"the entire f o r e i g n p o l i c y

of

F r a n c e . . . is a i m e d at m a k i n g t h e w o r l d o f t o m o r r o w c o m p o s e d o f several poles, not just one." As

a practical matter, w h i l e C h i n a and Russia show signs of following

these a x i o m s , E u r o p e or m o s t o f A s i a h a v e not. A p a r t f r o m p u b l i c c o m p l a i n t s , G e r m a n y , F r a n c e , B r i t a i n , a n d J a p a n h a v e m a d e l i t t l e serious effort to i n t r o ­ d u c e m o r e b a l a n c e in g e o p o l i t i c s , n o r are t h e y l i k e l y t o d o so in c o m i n g y e a r s . E v e n as E u r o p e a n c o u n t r i e s a n d J a p a n w o r r y a b o u t t h e c o n s e q u e n c e s

of

u n c h e c k e d A m e r i c a n p o l i c i e s , t h e y c a n r e m a i n d e t a c h e d , b e c a u s e those p o l i ­ cies h a v e p o s e d no d i r e c t threat to t h e i r interests. I n a n y case, after d e v o t i n g little m o n e y a n d a t t e n t i o n to the g r e a t conflicts o f recent p a s t d e c a d e s , E u ­ rope a n d J a p a n are in no p o s i t i o n n o w to e x e r t a c o u n t e r b a l a n c e in g l o b a l af­ fairs. T h e E u r o p e a n U n i o n d i d n ' t exercise l e a d e r s h i p e v e n in b l o o d y conflicts in its o w n b a c k y a r d , w a i t i n g for t h e U n i t e d S t a t e s t o t a k e t h e lead in K o s o v o and

Bosnia. In

t r u t h , t h e y don't s e e m to aspire to d o so; a n d n o m a j o r c a n d i d a t e in t h e

m o s t recent national elections in F r a n c e , G e r m a n y , or I t a l y p r o p o s e d t h a t E u ­ rope p l a y a serious g l o b a l role. T h e o n l y e x c e p t i o n s h a v e b e e n E u r o p e ' s c o n t r i ­ b u t i o n to the U . S . - l e d o v e r t h r o w o f t h e T a l i b a n in A f g h a n i s t a n a n d B r i t a i n ' s

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role in t h e U . S . - c r e a t e d I r a q W a r — a n d G o r d o n B r o w n a n d his successors are u n l i k e l y t o e m u l a t e T o n y B l a i r in this r e g a r d . A n d if E u r o p e a n leaders d e c i d e t o r e c l a i m a serious role in w o r l d affairs s o m e t i m e in the n e x t d e c a d e , t h e y w i l l need heroic persuasive abilities. P u b l i c opinion surveys show that most E u r o p e a n s don't see g l o b a l r e s p o n s i b i l i t i e s

as a t r a d i t i o n w o r t h r e v i v i n g .

T h o s e a t t i t u d e s are o n l y l i k e l y t o h a r d e n as G e r m a n y , F r a n c e , Italy, a n d m o s t o f t h e rest o f E u r o p e b e c o m e p r e o c c u p i e d w i t h the costs o f s u p p o r t i n g their r a p i d l y g r o w i n g e l d e r l y p o p u l a t i o n s , e s p e c i a l l y i f g l o b a l i z a t i o n c o n t i n u e s to d a m p e n their g r o w t h . O n e reason t h a t t h e U n i t e d S t a t e s h a d no serious conflicts w i t h E u r o p e or J a p a n u n d e r t h e first P r e s i d e n t B u s h a n d P r e s i d e n t C l i n t o n is t h a t w h e n those p r e s i d e n t s e x e r c i s e d A m e r i c a n p o w e r , w h e n a n d w h e r e t h e y chose to, t h e y d i d it a w i t h i n a U N or N A T O f r a m e w o r k a n d p r e s e n t e d the policies as p r u d e n t responses t o a g g r e s s i o n . T h e lesson o f t h e first G u l f W a r , K o s o v o , a n d B o s n i a is t h a t t h e U n i t e d S t a t e s c a n p r o j e c t its m i l i t a r y m i g h t as it chooses, so l o n g as it acts as i f there w e r e a b a l a n c e - o f - p o w e r r e l a t i o n s h i p w i t h its allies. O u t ­ side t h e m i l i t a r y r e a l m , the U n i t e d S t a t e s also has s u c c e s s f u l l y c o o p t e d other nations' impulses to balance b y a l l o w i n g international institutions

to d i s ­

a g r e e w i t h A m e r i c a o n m a t t e r s o f m a r g i n a l i m p o r t a n c e . T h i s is m o s t clear at the W T O , w h e r e the E u r o p e a n U n i o n and developing countries periodically w i n cases a g a i n s t t h e U n i t e d S t a t e s , e v e n c o m p e l l i n g the U . S . C o n g r e s s to m o d i f y c e r t a i n d o m e s t i c s u b s i d i e s t h a t affect t r a d e . R u s s i a p r e s e n t s a m o r e c o m p l i c a t e d p r o b l e m a n d c o u l d be m o r e o f a factor in t h e g e o p o l i t i c s o f t h e n e x t ten t o fifteen y e a r s b e c a u s e it has the w i l l to af­ fect e v e n t s . B u t it w i l l n o t b e a real p o w e r in g e o p o l i t i c s , b e c a u s e it no l o n g e r has t h e m i l i t a r y , e c o n o m i c , a n d p o l i t i c a l resources to m o v e a n y m a j o r c o u n t r y , m u c h less t h e s u p e r p o w e r . Russia's p r e s e n t role w a s l a r g e l y settled w h e n B o r i s Y e l t s i n c a m e to p o w e r more than

fifteen

years a g o , a n d t h e d i s i n t e g r a t i o n

o f t h e S o v i e t U n i o n left h i m no c h o i c e b u t to slash defense s p e n d i n g b y nearly 9 0 p e r c e n t a n d c u t m i l i t a r y p e r s o n n e l b y half. B y 1 9 9 9 , it t o o k tens o f t h o u ­ s a n d s o f R u s s i a n t r o o p s m o r e t h a n a m o n t h to repel a r a g t a g b a n d o f less t h a n t w o t h o u s a n d I s l a m i c m i l i t a n t s b a c k i n t o C h e c h n y a — l o n g e r t h a n it took U . S . forces t o defeat S a d d a m H u s s e i n ' s a r m y in e i t h e r 1 9 9 0 or 2 0 0 3 . I n a d d i ­ tion, Russia's once-fearsome strategic s y s t e m s are n o w o u t d a t e d a n d sufficiently d e t e r i o r a t e d t o b e d a n g e r o u s l y u n r e l i a b l e ; a n d one U . S . e x p e r t d i s m i s s e s R u s ­ sia's c u r r e n t c o n v e n t i o n a l forces as " i m p o v e r i s h e d , i n c o m p e t e n t , sullen, a n d sluggish."

1 3

W h i l e t h a t o v e r s t a t e s t h e i r p r o b l e m s , t h e R u s s i a n a r m y , navy,

a n d air force are n o w so p o o r l y t r a i n e d a n d b a d l y e q u i p p e d t h a t t h e y c o u l d no m o r e fight a real w a r t o d a y t h a n c o u l d I t a l i a n or J a p a n e s e forces. A n d w h e r e t h e o l d S o v i e t U n i o n ' s g e o p o l i t i c a l c l o u t c o u l d call on w o r l d w i d e alliances

THE NEW GEOPOLITICS OF THE SOLE SUPERPOWER: THE PLAYERS

231

a n d a w o r l d v i e w t h a t a p p e a l e d t o m a n y d e v e l o p i n g n a t i o n s , less t h a n a g e n e r ­ ation later N A T O has a b s o r b e d t h e W a r s a w P a c t a n d the S o v i e t i d e o l o g y is forever d i s c r e d i t e d . R u s s i a is also n o w a m i n o r p l a y e r in t h e g l o b a l e c o n o m y , a n d w i t h n o real­ istic p r o s p e c t s o f r e b u i l d i n g t h e e c o n o m i c m e a n s to restore its m i l i t a r y m i g h t a n d g e o p o l i t i c a l p o w e r . A f t e r five years o f solid g r o w t h fueled b y h i g h w o r l d oil p r i c e s , Russia's $ 9 8 7 b i l l i o n G D P in 2 0 0 6 w a s still less t h a n B r a z i l or C a n a d a , a n d b a r e l y 7 . 5 p e r c e n t o f A m e r i c a ' s G D P . E v e n a d j u s t i n g for costs o f l i v i n g across c o u n t r i e s , the R u s s i a n e c o n o m y is s m a l l e r t h a n I t a l y a n d b a r e l y larger t h a n B r a z i l . T o d a y , R u s s i a c o u l d n ' t

afford t o

rebuild

its

military

s t r e n g t h even if it chose to. Nor

w i l l R u s s i a b e a b l e to d o so a n y t i m e in t h e foreseeable f u t u r e , since

the c o u n t r y ' s l i k e l y e c o n o m i c

trajectory points d o w n . T h e P u t i n g o v e r n ­

ment's r o l l b a c k o f l e g a l r i g h t s a n d its a r b i t r a r y p r o p e r t y seizures h a v e d i s ­ c o u r a g e d the f o r e i g n d i r e c t i n v e s t m e n t t h a t t h e c o u n t r y d e s p e r a t e l y needs t o m o d e r n i z e its critical e n e r g y sector a n d b u i l d n e w i n d u s t r i e s . I n 2 0 0 5 ,

the

entire s t o c k o f f o r e i g n d i r e c t i n v e s t m e n t across t h e R u s s i a n F e d e r a t i o n t o ­ taled $ 1 3 2 b i l l i o n — l e s s

t h a n S i n g a p o r e , M e x i c o , B r a z i l , or B e l g i u m , a n d

o n e - q u a r t e r that of C h i n a . N o r c a n R u s s i a reassure f o r e i g n i n v e s t o r s a b o u t its f u t u r e internal stability. M o s c o w n o t o n l y faces b l o o d y c h a l l e n g e s in C h e c h ­ nya

a n d o t h e r M u s l i m areas in t h e N o r t h C a u c a s u s c u r r e n t l y f l i r t i n g w i t h i n ­

dependence.

1 4

In the n e x t f e w y e a r s , it also c o u l d b e d r a w n i n t o a series o f

conflicts in other p a r t s o f the f o r m e r S o v i e t U n i o n , i n c l u d i n g t h e d i s p u t e o v e r T r a n s n i s t r i a in M o l d o v a ( w h e r e R u s s i a still has t w o t h o u s a n d t r o o p s ) , a c o n ­ t i n u i n g effort b y N a g o r n o - K a r a b a k h t o b r e a k a w a y f r o m A z e r b a i j a n , a n d t h e secessionist

movements

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Ossetia

regions. E v e n if M o s c o w h a d the m o n e y a n d t h e p u r p o s e t o r e b u i l d its forces a n d a l ­ liances, it still w o u l d face t h e w o r l d ' s f a s t e s t - d e t e r i o r a t i n g

demographics:

R e l a t i v e l y soon, R u s s i a s i m p l y m a y n o t h a v e t h e m a n p o w e r a n d w o m a n p o w e r of a state t h a t m a t t e r s in g e o p o l i t i c s . T h e life e x p e c t a n c y o f R u s s i a n m e n has been d e t e r i o r a t i n g for m o r e t h a n a g e n e r a t i o n , a n d t h e t r e n d has a c c e l e r a t e d in the last d e c a d e . T o d a y , it stands at less t h a n s i x t y y e a r s , w h i c h m e a n s t h a t m e n in E g y p t , G u a t e m a l a , a n d V i e t n a m , o n a v e r a g e , can e x p e c t t o l i v e l o n g e r than the m e n in R u s s i a . R u s s i a n b i r t h r a t e s also are v e r y l o w , w i t h l i v e b i r t h s l a g g i n g d e a t h s b y 1 m i l l i o n a y e a r since 2 0 0 0 . B u t t h e l a r g e r issue in t h e h i g h death rates is the R u s s i a n g o v e r n m e n t ' s real a b a n d o n m e n t o f h e a l t h care. I n the m o s t recent y e a r for w h i c h t h e W o r l d B a n k has d a t a , 2 0 0 3 , R u s s i a s p e n t less than $ 1 8 7 p e r p e r s o n o n h e a l t h c a r e — C o s t a R i c a s p e n t

50

percent

m o r e p e r person, P o l a n d t w i c e as m u c h , a n d the U n i t e d S t a t e s , at $ 5 , 7 0 5 p e r

232

FUTURECAST

p e r s o n , s p e n t an a s t o n i s h i n g t h i r t y t i m e s m o r e t h a n R u s s i a .

1 5

A n d beyond

t h e d e a t h rates, a r e c e n t R u s s i a n h e a l t h census f o u n d t h a t m o r e t h a n h a l f of R u s s i a n c h i l d r e n n o w suffer f r o m a c h r o n i c disease o f s o m e k i n d .

1 6

A c c o r d i n g to p r o j e c t i o n s b y the R u s s i a n A c a d e m y o f Sciences, b y 2 0 2 0 the c o u n t r y w i l l h a v e 5 0 m i l l i o n f e w e r p e o p l e than N i g e r i a or B a n g l a d e s h — b a r e l y more

than

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its

life

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and

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to fall b y a l m o s t 1 5 p e r c e n t , a n d the n u m b e r o f children is forecast to decline about 2 0 p e r c e n t .

1 8

A s for m i l i t a r y a m b i t i o n s , the c o m b i n a t i o n of depressed

birthrates a n d h i g h d e a t h rates for m a l e s a g e fifteen to t w e n t y - f o u r (three times U . S . levels) w i l l c u t the pool o f y o u n g m e n of draft a g e b y nearly half. G i v e n these c o n d i t i o n s , the issue is not w h e t h e r R u s s i a w i l l recover its geopolitical c l o u t , b u t the l i k e l i h o o d that those c o n d i t i o n s w i l l lead to large-scale unrest. D e s p i t e its m a r g i n a l m i l i t a r y , e c o n o m i c , a n d h u m a n c a p a c i t i e s , R u s s i a has t w o c a r d s it c a n p l a y in t h e g e o p o l i t i c s o f the n e x t d e c a d e . F i r s t , w i t h the w o r l d ' s l o n g e s t border, a n y conflicts t h a t i n v o l v e N o r t h K o r e a , C h i n a , A z e r ­ b a i j a n a n d , across t h e C a s p i a n S e a , I r a n w i l l necessarily also i n v o l v e R u s s i a . S e c o n d a n d m o r e i m p o r t a n t , R u s s i a is a g e n u i n e force in the g e o p o l i t i c s o f e n e r g y . T o d a y , it is the w o r l d ' s l a r g e s t p r o d u c e r o f n a tur al g a s , the s e c o n d l a r g e s t p r o d u c e r o f oil after S a u d i A r a b i a , a n d n u m b e r seven in coal p r o d u c ­ tion. T h o s e p o s i t i o n s w i l l n o t d i m i n i s h m u c h o v e r the n e x t ten to

fifteen

y e a r s , b e c a u s e R u s s i a also has t h e w o r l d ' s l a r g e s t n a t u r a l g a s reserves, the w o r l d ' s s e c o n d - l a r g e s t coal reserves, a n d t h e e i g h t h - l a r g e s t oil reserves. I n f a c t , R u s s i a c o u l d b e c o m e a l a r g e r p l a y e r in g l o b a l e n e r g y o v e r the n e x t d e ­ c a d e i f it w e r e t o r e i n v e s t its oil r e v e n u e s in m o d e r n i z i n g its p r o d u c t i o n a n d t a k e serious steps to e n c o u r a g e w e s t e r n oil c o m p a n i e s to e x p a n d their foreign d i r e c t i n v e s t m e n t s there (a t o u g h sale after P u t i n ' s seizure o f the Y u k o s c o m ­ panies). R u s s i a t o d a y s u p p l i e s m o r e t h a n o n e - t h i r d o f G e r m a n y ' s oil a n d two-fifths o f its n a t u r a l g a s ; a n d b y 2 0 2 0 , a c c o r d i n g to forecasts b y the International E n e r g y A g e n c y , it w i l l b e E u r o p e ' s m a i n oil a n d g a s supplier. O n e reason is a m a j o r n e w p i p e l i n e l i n k i n g t h e B l a c k S e a p o r t o f B u r g a s , B u l g a r i a , w i t h the G r e e k p o r t o f A l e x a n d r o u p o l i s , so R u s s i a n oil c a n be t r a n s p o r t e d d i r e c t l y to t h e E u r o p e a n U n i o n . T h e R u s s i a n e l e c t r i c i t y g r i d also s u p p l i e s p o w e r to p a r t s o f E u r o p e , e s p e c i a l l y its f o r m e r E a s t e r n a n d C e n t r a l E u r o p e a n satellites.

In

a d d i t i o n , R u s s i a r e c e n t l y c h o s e J a p a n (over C h i n a ) to finance 2 , 6 0 0 m i l e s o f oil p i p e l i n e f r o m S i b e r i a to t h e Pacific, w h i c h w i l l m a k e R u s s i a one o f J a p a n ' s m a j o r oil s u p p l i e r s . Russia's oil a n d g a s w e a p o n s w i l l g i v e it g e n u i n e influence, b u t little real g e o p o l i t i c a l p o w e r . I t can use its e n e r g y s u p p l i e s to w r i n g p o l i t i c a l concessions

THE NEW GEOPOLITICS OF THE SOLE SUPERPOWER: THE PLAYERS f r o m countries that w e r e once p a r t o f the S o v i e t U n i o n , e s p e c i a l l y

233 those

in Russia's c u r r e n t confederation. I t also w i l l b e a b l e to use l o n g - t e r m c o n ­ tracts to secure e c o n o m i c a n d c o m m e r c i a l concessions

from European and

A s i a n g o v e r n m e n t s . B u t it doesn't h a v e t h e s t r a t e g y or t h e m e a n s to use its e n ­ e r g y resources to balance or even affect U . S . p o l i c i e s , e v e n w h e n it i n v o l v e s countries on its borders s u c h as Iran. I t m a y b e m o r e distasteful for R u s s i a than for E u r o p e a n d J a p a n , b u t it, too, w i l l h a v e t o l o o k the other w a y as the U n i t e d States p u r s u e s its g l o b a l interests in the r e g i o n s it o n c e d o m i n a t e d .

CHINA AND THE SOLE SUPERPOWER C h i n a a n d the U n i t e d S t a t e s m a y be seen as p o t e n t i a l p a r t n e r s or p o t e n t i a l c o m p e t i t o r s in g e o p o l i t i c s . H o w e v e r , g i v e n t h e g u l f b e t w e e n t h e i r p o l i t i c a l s y s t e m s , C h i n a ' s i n c r e a s i n g e c o n o m i c c l o u t in A s i a , a n d its c u r r e n t m i l i t a r y b u i l d u p , there's l i t t l e p r o s p e c t t h a t t h e n e x t ten t o fifteen years w i l l see t h e U n i t e d S t a t e s a p p r o a c h C h i n a as a g e n u i n e ally, as it does E u r o p e a n d J a p a n . For

its p a r t , C h i n a seems i n c r e a s i n g l y u n e a s y w i t h A m e r i c a ' s d o m i n a t i o n o f

g e o p o l i t i c s , e s p e c i a l l y in A s i a , a n d these c o n c e r n s w i l l l i k e l y increase o v e r t h e n e x t ten to fifteen years. Its p r a c t i c a l a b i l i t y to b a l a n c e U . S . g l o b a l p o l i c i e s w i l l also increase o v e r t h a t p e r i o d , b u t e v e n in its o w n r e g i o n , C h i n a ' s c a p a c ­ i t y to c h e c k U . S . actions w i l l be l i m i t e d . China's foreign p o l i c y is f o r m a l l y g o v e r n e d b y the " F i v e P r i n c i p l e s o f P e a c e ­ ful

C o e x i s t e n c e " set d o w n b y Z h o u E n l a i in 1 9 5 3 a n d w r i t t e n i n t o C h i n a ' s

c o n s t i t u t i o n t h i r t y years later. T h e y can b e seen as e m b o d y i n g t h e i n t e r n a ­ tional p o s t u r e of a c o u n t r y still s t u n g b y f o r e i g n o c c u p a t i o n a n d still feeling relatively w e a k , expressed in the first three p r i n c i p l e s o f " m u t u a l respect for every nation's s o v e r e i g n t y a n d territorial integrity," " m u t u a l n o n - a g g r e s s i o n , " and

"non-interference in each other's internal affairs." T h e " F i v e P r i n c i p l e s "

also s u g g e s t a c o u n t r y c o m m i t t e d to b e c o m i n g sufficiently p o w e r f u l to ensure that no other nation d o m i n a t e s it a g a i n , e s p e c i a l l y in the last t w o tenets, c a l l ­ i n g for "relations of e q u a l i t y a n d m u t u a l benefit" a n d "peaceful coexistence." W i t h i n this f r a m e w o r k , C h i n a ' s f o r e i g n p o l i c i e s are u n u s u a l in t h e e x t e n t to w h i c h t h e y are s h a p e d b y t h e g o v e r n m e n t ' s o v e r r i d i n g d o m e s t i c p r i o r i t y , o f m o d e r n i z i n g a n d g r o w i n g as fast as p o s s i b l e . R a p i d m o d e r n i z a t i o n is n o t m e r e l y a necessary c o n d i t i o n for d e f e n d i n g t h e c o u n t r y a g a i n s t p o t e n t i a l e n e ­ m i e s . B e y o n d t h a t , C h i n a ' s m o d e r n i z a t i o n s t r a t e g y d e p e n d s on m a i n t a i n i n g a m i c a b l e relations w i t h the c o u n t r i e s t h a t p r o v i d e its h u g e d i r e c t i n v e s t ­ m e n t s , as m u c h of its g r o w t h d e p e n d s o n its r e l a t i o n s h i p s w i t h t h e c o u n t r i e s t h a t b u y its e x p o r t s .

234

FUTURECAST C h i n a s leaders often s e e m fixated o n g r o w t h a n d m o d e r n i z a t i o n , a n d the

f o r e i g n p o l i c i e s t h a t h e l p sustain t h e m , b e c a u s e t h e y a p p a r e n t l y believe that's w h a t w i l l u l t i m a t e l y m a i n t a i n t h e C h i n e s e people's a l l e g i a n c e to t h e i r a u ­ t h o r i t y . It's n o t s u r p r i s i n g , g i v e n h o w m u c h the C h i n e s e g o v e r n m e n t has a s k e d o f its p e o p l e for m o r e t h a n a g e n e r a t i o n . F i r s t , the C u l t u r a l R e v o l u t i o n w r e n c h e d m i l l i o n s o f e d u c a t e d C h i n e s e f r o m t h e i r professions a n d h o m e s . T h e n , t h e s h a r p U - t u r n f r o m c o m m u n i s m t o c a p i t a l i s m jettisoned m u c h o f t h e n a t i o n a l i d e o l o g y , i n c l u d i n g a series o f r a d i c a l a g r i c u l t u r a l c h a n g e s t h a t cost m o r e t h a n 1 0 0 m i l l i o n p e a s a n t f a m i l i e s t h e i r h o m e s a n d

livelihoods.

T h a t has b e e n f o l l o w e d b y t h e g o v e r n m e n t c l o s i n g d o w n t h o u s a n d s o f stateo w n e d e n t e r p r i s e s , a p o l i c y t h a t e v e r y y e a r costs a n o t h e r 1 0 to 2 0

million

C h i n e s e w o r k e r s t h e i r l i v e l i h o o d s . A n d t h e d i s s o l u t i o n o f the a g r i c u l t u r a l c o m m u n e s a n d m o s t o f t h e s t a t e - o w n e d enterprises has cost m o s t C h i n e s e a n y p u b l i c r e t i r e m e n t or h e a l t h - c a r e security. F o r leaders c o n c e r n e d a b o u t h o w l o n g p e o p l e w i l l p u t u p w i t h g o v e r n m e n t p o l i c i e s t h a t d e m a n d so m u c h sacrifice, d e l i v e r i n g the w o r l d ' s m o s t r a p i d g r o w t h a n d m o d e r n i z a t i o n y e a r after y e a r can c o n v e y t h a t b e t t e r t i m e s d o lie ahead. T h e i r c o n c e r n s are f u e l e d b y t h e s h a r p l y r i s i n g i n c i d e n c e of p u b l i c protests across t h e c o u n t r y . O n e C h i n e s e e x p e r t , S u n L i p i n g , e s t i m a t e s t h a t e v e r y day, 1 2 0 to 2 5 0 d e m o n s t r a t i o n s o f m o r e t h a n a h u n d r e d p e o p l e t a k e p l a c e in u r ­ b a n areas, p l u s a n o t h e r 9 0 t o 1 6 0 i n c i d e n t s a d a y in c o u n t r y v i l l a g e s . T h e c o u n t r y ' s senior p o l i c e

official,

Z h o u Y o n g k a n g , has a c k n o w l e d g e d

that

n e a r l y 4 m i l l i o n p e o p l e t o o k p a r t in 7 4 , 0 0 0 s i g n i f i c a n t p u b l i c protests in 2 0 0 5 , r i s i n g in r e c e n t y e a r s "like a v i o l e n t w i n d . " A n d all these figures u n ­ d e r s t a t e w h a t ' s really h a p p e n i n g , since local officials often t r y to c o v e r u p d i s ­ turbances.

R e p o r t e r s f r o m The Economist m a g a z i n e scanned C h i n e s e press reports for a t y p i c a l f e w w e e k s a f e w years b a c k , a n d f o u n d , a m o n g the m a j o r incidents, a p r o t e s t m a r c h b y 5 , 0 0 0 retirees f r o m a s t a t e - o w n e d textile m i l l d e m a n d i n g an increase in t h e i r p a l t r y m o n t h l y p e n s i o n s , w h i c h b r o u g h t m u c h o f B e n g b u c i t y in eastern C h i n a t o a standstill; m a s s d e m o n s t r a t i o n s for h i g h e r p a y b y 3 , 0 0 0 w o r k e r s f r o m a C D f a c t o r y in the S h e n z h e n S p e c i a l E c o n o m i c Z o n e w h i c h d i s ­ r u p t e d t h e city's m a i n h i g h w a y s for four hours; a n d a b a t t l e b e t w e e n 5 0 0 riot p o l i c e a n d s o m e 5 , 0 0 0 w o r k e r s f r o m a J a p a n e s e - o w n e d p r i n t i n g facility in nearby D o n g g u a n over substandard f o o d .

1 9

M o r e recent e x a m p l e s f r o m M a r c h

2 0 0 7 i n c l u d e 2 0 , 0 0 0 p e o p l e p r o t e s t i n g an increase in b u s fares a n d b a t t l i n g 1 , 0 0 0 p o l i c e w i t h g u n s a n d electric cattle p r o d s in H u n a n p r o v i n c e , a n d a few

THE NEW GEOPOLITICS OF THE SOLE SUPERPOWER: THE PLAYERS

235

d a y s later, thousands o f v i l l a g e r s in G u a n g x i , near the V i e t n a m b o r d e r , s m a s h ­ i n g cars a n d s t a r t i n g fires to p r o t e s t fines o f u p to $ 1 , 3 0 0 for families b r e a k i n g the o n e - c h i l d l a w s . S o m e C h i n e s e w r i t e r s s u c h as S h u g u a n g W a n g , a professor at t h e C h i n e s e U n i v e r s i t y o f H o n g K o n g , p u b l i c l y l i n k t h e p r o t e s t s to t h e g o v e r n m e n t ' s p o o r p e r f o r m a n c e in f e r r e t i n g o u t t h e c o r r u p t i o n t h a t m a n y C h i n e s e b l a m e for

their i n c o m e p r o b l e m s , in f i g h t i n g c r i m e w h i c h has risen fivefold since

1980,

a n d in i m p r o v i n g d a n g e r o u s w o r k i n g c o n d i t i o n s t h a t r e s u l t in m o r e

t h a n 1 0 0 , 0 0 0 fatal i n d u s t r i a l a c c i d e n t s a y e a r .

2 0

J u d g i n g by Public Security

M i n i s t e r Z h o u ' s s t a t e m e n t s , t h e national g o v e r n m e n t w i l l l i v e w i t h the e c o ­ n o m i c p r o t e s t s — b u t n o t w i t h a n y t h i n g t h a t s u g g e s t s p o l i t i c a l d i s s i d e n t s are u s i n g t h e m to pressure the Party. S o m o s t local officials tolerate t h e t h o u s a n d s of low-decibel, small-scale marches and sit-ins b y peasants and workers w i t h p e t i t i o n s a n d p o s t e r s , e s p e c i a l l y if t h e y s e e m s p o n t a n e o u s a n d d i s o r g a n i z e d . D e m o n s t r a t i o n s o r g a n i z e d b y p e o p l e w i t h p o l i t i c a l a g e n d a s or w h i c h d i s r u p t a city's business d r a w harsher responses, a n d t h e y ' r e i n c r e a s i n g l y c o m m o n . W h e n The Economist a s k e d editorially, "Does C h i n a face serious i n s t a b i l ­ i t y ? " its a n s w e r w a s , "In t h e l o n g e r t e r m there are reasons t o w o r r y . "

2 1

That

c o n c l u s i o n m a y be o v e r s t a t e d , b u t t h e c o n c e r n s a b o u t social s t a b i l i t y felt b y the c o u n t r y ' s s e l f - a p p o i n t e d leaders d o i m p a r t a sense o f u r g e n c y to f o r e i g n policies t h a t m a y affect the c o u n t r y ' s g r o w t h a n d m o d e r n i z a t i o n . T h a t c o n ­ n e c t i o n alone has m a d e a s t a b l e r e l a t i o n s h i p w i t h t h e U n i t e d S t a t e s "the c e n ­ tral thread in C h i n a ' s f o r e i g n p o l i c y strategy," as P r e s i d e n t H u has p u t it. It's no m y s t e r y : A m e r i c a is the c r i t i c a l m a r k e t for C h i n e s e g r o w t h , b u y i n g 3 0 p e r c e n t of its e x p o r t s ( W a l - M a r t alone i m p o r t s m o r e t h a n $ 1 5 b i l l i o n a y e a r ) and,

t h r o u g h its h u g e i m p o r t s f r o m o t h e r c o u n t r i e s , i n d i r e c t l y s u p p o r t i n g

g l o b a l d e m a n d for C h i n e s e p r o d u c t s . T h e U n i t e d S t a t e s is also i n d i s p e n s a b l e for

China's modernization, p r o v i d i n g m u c h of the country's foreign direct in­

v e s t m e n t b o t h d i r e c t l y a n d i n d i r e c t l y t h r o u g h its role in o t h e r

economies.

C h i n a ' s leaders u n d e r s t a n d p e r f e c t l y w e l l t h a t t h e deal t h e y h a v e t a c i t l y s t r u c k w i t h A m e r i c a g o e s b e y o n d t r a d e a n d i n v e s t m e n t . S i n c e at least t h e late 1 9 9 0 s , w h e n t h e y a c c e d e d to W T O ' s e n t r y t e r m s , t h e y h a v e a c c e p t e d a l o n g t r a n s f o r m a t i o n b a s e d l a r g e l y on A m e r i c a n - s t y l e c a p i t a l i s m . F o r n o w , t h e y ' r e also w i l l i n g to live w i t h A m e r i c a ' s role as sole s u p e r p o w e r , e v e n in A s i a , b e ­ cause t h e y c a n n o t afford to c h a l l e n g e it a n d b e c a u s e it p r o v i d e s t h e g l o b a l sta­ b i l i t y t h e y n e e d t o m a i n t a i n the flow o f f o r e i g n t e c h n o l o g y , e x p e r t i s e , a n d energy. A m e r i c a ' s central role in t h e p a t h t h a t C h i n a has set for i t s e l f h e l p s t o e x ­ p l a i n w h y its leaders b e c o m e so u p s e t w h e n t h e U . S . C o n g r e s s or, w o r s e , t h e W h i t e H o u s e , p e r i o d i c a l l y rattles a t r a d e saber. I n B e i j i n g , A m e r i c a n calls t o

236

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c u t b a c k t r a d e w i t h C h i n a s o u n d l i k e a threat to t h e c o u n t r y ' s g r o w t h a n d , for m o r e c y n i c a l a n d d i s t r u s t f u l officials, p a r t o f a s u p e r p o w e r p l o t to u n d e r m i n e t h e c o u n t r y ' s stability. T o d i s c o u r a g e those calls, t h e l e a d e r s h i p r e c e n t l y i n ­ tensified its efforts t o increase C h i n a ' s i m p o r t s f r o m t h e U n i t e d S t a t e s , already u p 3 0 0 p e r c e n t in t h e last d e c a d e .

2 2

A n d o v e r t h e n e x t d e c a d e , C h i n a is l i k e l y

t o m a k e m o s t e c o n o m i c concessions t h a t t h e U n i t e d S t a t e s t r u l y d e m a n d s , so l o n g as t h e y don't i m p e d e its g r o w t h . U n l e s s U . S . - S i n o relations r u p t u r e over o t h e r m a t t e r s , C h i n a w i l l c o n t i n u e t o finance t h e U . S . c u r r e n t a c c o u n t deficit, c o n t i n u e t o e x p a n d its i m p o r t s f r o m t h e U n i t e d S t a t e s , a n d o p e n n e w areas to A m e r i c a n b u s i n e s s e s , e s p e c i a l l y in

financial,

b u s i n e s s , a n d h e a l t h - c a r e ser­

v i c e s . W h a t it w i l l n o t d o is let p res s u res f r o m W a s h i n g t o n d i c t a t e the v a l u e o f its c u r r e n c y , b e c a u s e t h a t w o u l d s l o w its e x p o r t s to o t h e r c o u n t r i e s a n d c o n c e d e an e l e m e n t o f its o w n s o v e r e i g n t y . N a t i o n a l s o v e r e i g n t y a n d p o w e r are t h e o t h e r reasons w h y the U . S . - S i n o r e l a t i o n s h i p w i l l r e m a i n t h e c e n t r a l issue in C h i n e s e f o r e i g n p o l i c y for the n e x t t e n t o fifteen y e a r s . C h i n a ' s i m m e d i a t e c o n c e r n s o v e r s o v e r e i g n t y i n v o l v e T a i w a n , T i b e t , a n d X i n j i a n g , w h i c h its leaders see as p u r e l y d o m e s t i c

issues

t h a t h a r d l i n e r s in t h e U n i t e d S t a t e s c o u l d still use to d i v i d e "greater" C h i n a . T h e secessionist u n r e s t b y e t h n i c U i g h u r in X i n j i a n g , p o s s i b l y g o a d e d b y A l Q a e d a in n e a r b y T u r k i s t a n , is n o t w i d e l y f o l l o w e d in the W e s t ; b u t it has w o r r i e d B e i j i n g m u c h m o r e t h a n T i b e t . A s for T i b e t , it has b e c o m e an issue t h a t s o m e A m e r i c a n c e l e b r i t i e s b e l i e v e justifies U . S . a c t i o n o f s o m e sort, b u t t h a t v i e w has n e v e r b e e n h e l d b y U . S . p o l i c y m a k e r s . T a i w a n is different. T h e w o r s t p e r i o d in U . S . - S i n o relations in recent t i m e s c a m e in 1 9 9 6 , w h e n C h i n a t e s t e d a n e w m i s s i l e t h a t s e e m e d d e s i g n e d to t h r e a t e n T a i w a n a n d the C l i n ­ t o n a d m i n i s t r a t i o n r e s p o n d e d b y s e n d i n g U . S . aircraft carriers i n t o the T a i ­ w a n S t r a i t s . T h e i n c i d e n t left a l a r g e i m p r e s s i o n in B e i j i n g . T h e d i r e c t o r of t h e C h i n a C e n t e r at t h e B r o o k i n g s I n s t i t u t i o n , J e f f r e y B a d e r , w r o t e recently, "China's m i l i t a r y p l a n n i n g is o v e r w h e l m i n g l y d i r e c t e d at o n e t a r g e t — t h e use o f force in t h e T a i w a n S t r a i t t o p r e v e n t f o r m a l T a i w a n i n d e p e n d e n c e . "

23

A s s u m i n g t h a t T a i w a n , A m e r i c a , a n d C h i n a all b e h a v e reasonably in the f u t u r e , t h e l a r g e r s o v e r e i g n t y issue for C h i n a is h o w to l i v e w i t h a sole s u p e r ­ p o w e r w h o s e g l o b a l r e s p o n s i b i l i t i e s m a k e e v e r y r e g i o n its area o f influence. B r i t a i n , J a p a n , G e r m a n y , F r a n c e , a n d R u s s i a h a v e t o l i v e w i t h this as w e l l , b u t t h e i r g e o p o l i t i c a l roles h a v e b e e n w i n d i n g d o w n for s o m e t i m e . C h i n a ' s p o w e r is g r o w i n g , a n d m a n y W e s t e r n observers n o w see the o u t l i n e s of a C h i ­ nese s t r a t e g y to b u i l d u p t h e e c o n o m i c a n d m i l i t a r y resources r e q u i r e d to b a l ­ a n c e or c o n s t r a i n A m e r i c a ' s a b i l i t y to p u r s u e its interests, at least in A s i a . O n e s i g n is t h a t C h i n a has b e e n t a k i n g a m o r e a c t i v e role in the regional aspects of a n u m b e r of global issues—helping

to p e r s u a d e N o r t h K o r e a to

THE NEW GEOPOLITICS OF THE SOLE SUPERPOWER: THE PLAYERS

237

scale b a c k its n u c l e a r p r o g r a m , p r o v i d i n g r e c o n s t r u c t i o n assistance for A f ­ g h a n i s t a n , a n d v o t i n g w i t h t h e U n i t e d S t a t e s to refer t h e I r a n i a n n u c l e a r p r o ­ g r a m to the U n i t e d N a t i o n s . S o m e p r o m i n e n t C h i n e s e f o r e i g n p o l i c y e x p e r t s also h a v e b e g u n to w r i t e forcefully a b o u t t h e i r c o u n t r y ' s r e g i o n a l a m b i t i o n s . W a n g J i s i , d i r e c t o r o f A m e r i c a n s t u d i e s at the C h i n e s e A c a d e m y o f S o c i a l S c i ­ ence, says t h a t C h i n a n o w sees itself as a c o n t i n e n t a l p o w e r t h a t has to deal w i t h a w i d e r a n g e of zhoubian guojia,

or n e i g h b o r i n g p l a c e s , i n c l u d i n g I n d i a ,

M o n g o l i a , P a k i s t a n , R u s s i a , a n d J a p a n , as w e l l as C e n t r a l A s i a . J i s i also has w r i t t e n t h a t C h i n a ' s g r o w i n g m i l i t a r y p o w e r w i l l n o t t h r e a t e n a n y o f its "re­ g i o n a l p a r t n e r s , " b u t rather p r o v i d e i n s u r a n c e a g a i n s t a U . S . - l e d c o a l i t i o n t o contain C h i n a . The

specter of C h i n a as a b a l a n c i n g p o w e r in A s i a is b a s e d m a i n l y o n its

ongoing

m i l i t a r y b u i l d u p . C h i n a tells t h e w o r l d l i t t l e a b o u t its m i l i t a r y

s p e n d i n g , a n d w e s t e r n e x p e r t s c a n n o t a g r e e o n e v e n its o r d e r o f m a g n i t u d e . A

f e w years a g o , for e x a m p l e , B e i j i n g said it s p e n t

$ 2 2 . 4 billion on

the

m i l i t a r y — a figure that e x p l i c i t l y e x c l u d e d m i l i t a r y research a n d d e v e l o p ­ m e n t , costs for the People's A r m e d P o l i c e , w e a p o n s p u r c h a s e d f r o m a b r o a d , a n d a f e w other areas. T h e A m e r i c a n C I A a n d t h e I n s t i t u t e for S t r a t e g i c S t u d ­ ies in L o n d o n b o t h c o n c l u d e d t h a t the real figure w a s a b o u t t h r e e t i m e s t h e official one, w h i c h w o u l d m a k e C h i n a t h e w o r l d ' s s e c o n d - l a r g e s t

defense

spender, b u t a l o n g w a y f r o m n u m b e r one. T h e R a n d C o r p o r a t i o n , h o w e v e r , e s t i m a t e s C h i n e s e defense s p e n d i n g at five t o e i g h t t i m e s t h e officially r e ­ p o r t e d levels, w h i c h w o u l d c o m e to p e r h a p s h a l f o f U . S . defense

spending.

W h a t e v e r the correct n u m b e r s , e v e n t h e official d a t a s h o w C h i n e s e m i l i t a r y s p e n d i n g g r o w i n g b y a b o u t 1 2 p e r c e n t a y e a r since t h e late 1 9 9 0 s . M o r e is k n o w n a b o u t t h e size o f C h i n a ' s forces. T h e c o u n t r y m a i n t a i n s at least 2 , 2 5 0 , 0 0 0 a c t i v e d u t y p e r s o n n e l , p l u s a n o t h e r 1 , 5 0 0 , 0 0 0 in t h e People's A r m e d P o l i c e . F i v e years a g o , it h a d m o r e t h a n 7 0 k n o w n s u b m a r i n e s , at least 7 5 0 n a v y p l a n e s a n d 2 , 0 0 0 c o m b a t a i r c r a f t — f l e e t s t h a t are m e a g e r s t a c k e d u p against A m e r i c a , b u t larger than France, G e r m a n y , Britain, J a p a n , and India combined.

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C h i n a also has a r e s p e c t a b l e b a l l i s t i c m i s s i l e force. A g a i n ,

five

years a g o , e x p e r t s c o u n t e d m o r e t h a n 3 0 m i s s i l e s w i t h t h e r a n g e t o reach E u r o p e or A m e r i c a , 1 1 0 t h a t c o u l d s t r i k e a n y w h e r e in A s i a , a n d s i g n i f i c a n t n u m b e r s o f s u b m a r i n e - l a u n c h e d a n d s h o r t - r a n g e m i s s i l e s for a p l a c e l i k e T a i ­ wan.

S i n c e t h e n , C h i n a has e x p a n d e d a n d u p g r a d e d these forces. U . S . defense

p l a n n e r s b e l i e v e , for e x a m p l e , t h a t C h i n a r e c e n t l y d e v e l o p e d a n d b u i l t n e w " J i n class" subs a r m e d w i t h n e w J L - 2

five

nuclear missiles that have a range

of m o r e t h a n 5 , 0 0 0 m i l e s , as w e l l as a n e w m o b i l e , l a n d - b a s e d I C B M s y s t e m that c o u l d t a r g e t the entire U n i t e d S t a t e s . At

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jets, and R u s s i a n - m a d e submarines w i t h

m i s s i l e s t h a t c a n t h r e a t e n a n aircraft carrier, c o u l d p o s e not o n l y an i m m e d i ­ ate t h r e a t t o T a i w a n b u t also, in t h e v i e w o f a f o r m e r U . S . m i l i t a r y a t t a c h é in B e i j i n g , "deter or d e l a y o u r a b i l i t y t o i n t e r v e n e . "

26

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the

c o m m o n i n t e r n a t i o n a l j u d g m e n t , it w o u l d b e g i n to revise the t e r m s of U . S . d o m i n a n c e in A s i a . T h e recent i m p r o v e m e n t s in C h i n a ' s n u c l e a r forces h a v e also m o v e d s o m e w e s t e r n analysts to ask i f C h i n a ' s official p o l i c y of m a i n t a i n ­ i n g "only e n o u g h n u c l e a r c a p a c i t y to retaliate" has b e e n superseded b y a "more flexible

use o f n u c l e a r w e a p o n s , " as a f o r m e r senior A s i a a d v i s o r to G e o r g e W .

B u s h , M i c h a e l G r e e n , has p u t i t .

2 7

C h i n e s e officials d i s m i s s the concern, p o i n t ­

i n g to A m e r i c a ' s g r o w i n g a b i l i t y to not o n l y m o n i t o r a n d t a r g e t China's exist­ i n g d e t e r r e n t b u t also t o d e v e l o p n e w b a l l i s t i c m i s s i l e defenses. T h i s is b e g i n n i n g to l o o k l i k e a n a r m s race; a n d w h o e v e r started it, the o u t c o m e m a y w e l l b e t h a t " w h a t w a s g r a y before is n o w c l e a r — C h i n a n o w c a n e f f e c t i v e l y fight a n u c l e a r w a r , " as a U . S . N a v a l W a r C o l l e g e C h i n a e x p e r t , L y l e G o l d s t e i n , w r o t e recently. H e m a y b e r i g h t — a l t h o u g h , w i t h an esti­ m a t e d 4 0 0 n u c l e a r w a r h e a d s , c o m p a r e d to 1 0 , 0 0 0 d e p l o y e d b y the U n i t e d S t a t e s , C h i n e s e leaders k n o w t h a t a n y a t t e m p t to

fight

one w i t h A m e r i c a

w o u l d b e t h e e n d o f C h i n a . C o m p a r e d to e v e r y o t h e r c o u n t r y in the r e g i o n , h o w e v e r , C h i n a ' s n u c l e a r a n d c o n v e n t i o n a l forces w i l l soon l o o m v e r y large. A n i n d e p e n d e n t task force f o r m e d to evaluate Ch i n a ' s m i l i t a r y p r o w e s s , headed b y former U . S . Defense Secretary H a r o l d B r o w n , came u p w i t h what's proba­ b l y a realistic a n d s o b e r i n g a s s e s s m e n t . I t c o n c l u d e d t h a t in a d d i t i o n to m a x ­ i m i z i n g its o p t i o n s on T a i w a n , its m i l i t a r y b u i l d u p is i n t e n d e d to m a k e C h i n a t h e l e a d i n g p o w e r in A s i a , w h e t h e r t h a t takes a d e c a d e or g e n e r a t i o n s . I n the m e a n t i m e , as H a r v a r d U n i v e r s i t y ' s Professor o f C h i n a in W o r l d A f f a i r s , A l a s tair I a i n J o h n s t o n , p u t s it, " C h i n a is w i l l i n g to see the U n i t e d States as a g l o b a l h e g e m o n y , so l o n g as it doesn't a c t l i k e one in A s i a . " G i v e n C h i n a ' s size a n d g r o w i n g e c o n o m i c i m p o r t a n c e , its r e g i o n a l a m b i ­ t i o n s are i n e v i t a b l e — m u c h as is A m e r i c a ' s g l o b a l a g e n d a , g i v e n its w o r l d ­ w i d e m i l i t a r y a n d e c o n o m i c d o m i n a n c e . T h e p r o b l e m for the n e x t d e c a d e is t h a t C h i n a ' s l o n g - t e r m g o a l conflicts w i t h A m e r i c a ' s c o n t i n u i n g a i m to be the p r i n c i p a l p o w e r in A s i a (as w e l l as E u r o p e , t h e M i d d l e E a s t , L a t i n A m e r i c a , a n d A f r i c a ) . O n t h i s core issue, C h i n a ' s leaders r e p o r t e d l y d i s c o u n t the r e g u ­ lar U . S . s t a t e m e n t s t h a t A m e r i c a ' s interests are best s er ve d b y a stable, p r o s ­ p e r o u s C h i n a , b e l i e v i n g i n s t e a d t h a t as f o r e i g n p o l i c y realists recover their influence in t h e U n i t e d S t a t e s , A m e r i c a w i l l m o v e to "contain" C h i n a . T h i s h e l p s e x p l a i n C h i n a ' s c o n t i n u i n g h o s t i l i t y to J a p a n , w h i c h it sees as a l l i e d t o t h e U n i t e d S t a t e s in c o n t a i n i n g C h i n a , as w e l l as C h i n a ' s 2 0 0 1 f r i e n d s h i p t r e a t y w i t h R u s s i a a n d its r e p e a t e d efforts to cooperate w i t h the

THE NEW GEOPOLITICS OF THE SOLE SUPERPOWER: THE PLAYERS

239

E u r o p e a n U n i o n . I n t h e last f e w y e a r s , C h i n a has s e t t l e d l o n g t i m e b o r d e r d i s ­ p u t e s w i t h several C e n t r a l A s i a n c o u n t r i e s as w e l l as w i t h R u s s i a , a n d o p e n e d serious b o r d e r talks w i t h I n d i a . I t also is w o r k i n g t o m a k e its e c o n o m i c rela­ tions w i t h other E a s t A s i a n c o u n t r i e s as i m p o r t a n t to t h e m as t h e i r ties t o t h e U n i t e d S t a t e s . I n the last d e c a d e , its t w o - w a y t r a d e has g r o w n b y n e a r l y 3 5 0 percent w i t h Singapore, 7 0 0 percent w i t h Korea, 8 3 5 percent w i t h T h a i l a n d , and

more than r , o o o percent w i t h India, M a l a y s i a , and the

And

Philippines.

2 8

e v e r y one of those t r a d e p a r t n e r s r u n s a s u r p l u s w i t h C h i n a . The

U . S . - S i n o c o m p e t i t i o n in A s i a is here t o stay. W h i l e C h i n a ' s m i l i t a r y

t o d a y p r o b a b l y c o u l d not t a k e a n d h o l d , for e x a m p l e , t h e i s l a n d s d i s p u t e d w i t h J a p a n or t e r r i t o r y d i s p u t e d w i t h I n d i a , b y 2 0 2 0 its m i l i t a r y p o w e r w i l l d w a r f e v e r y o n e else in A s i a i n c l u d i n g R u s s i a . B e t w e e n n o w a n d t h e n , A m e r ­ ica's A s i a s t r a t e g y w i l l w o r k to d e l a y C h i n a ' s r e g i o n a l influence as m u c h a n d for

as l o n g as p o s s i b l e . T h a t ' s the s t r a t e g i c m e a n i n g o f t h e p e n d i n g U . S . free

trade a g r e e m e n t w i t h K o r e a , a m o d e l l i k e l y to b e r e p l i c a t e d w i t h o t h e r A s i a n countries in c o m i n g years. A n d t o s h o r t e n C h i n a ' s r e a c h , A m e r i c a has b e e n b u s y b u i l d i n g a n e t w o r k o f m i l i t a r y bases across A s i a a n d t h e P a c i f i c — i n Japan, G u a m ,

Australia, South Korea, Singapore, Malaysia, Afghanistan,

P a k i s t a n , K y r g y z s t a n , T a j i k i s t a n , a n d D i e g o G a r c i a in t h e I n d i a n O c e a n . {For­ eign Policy M a g a z i n e calls D i e g o G a r c i a a n d t h e M a n a s A i r F o r c e base in K y r ­ g y z s t a n t w o o f A m e r i c a ' s m o s t i m p o r t a n t g l o b a l bases.) A l l o f this f o r w a r d p l a c e m e n t o f U . S . m i l i t a r y assets can also serve a "dual use" b y t e m p e r i n g s o m e o f Russia's a n d Iran's a m b i t i o n s . C h i n a is u n l i k e l y to find a g e n u i n e a l l y a g a i n s t t h e U n i t e d S t a t e s in a n y o f Asia's o t h e r m a j o r c o u n t r i e s — e s p e c i a l l y J a p a n , K o r e a , a n d R u s s i a . F o r rea­ sons o f p r o x i m i t y a n d oil, t h e K r e m l i n w o r r i e s m o r e a b o u t C h i n a c h a l l e n g i n g R u s s i a t h a n a b o u t the c o n s e q u e n c e s o f A m e r i c a c h a l l e n g i n g C h i n a . K o r e a is tied m o r e closely t o t h e U n i t e d S t a t e s e c o n o m i c a l l y , m i l i t a r i l y , a n d p o l i t i c a l l y than any other country, w i t h the possible exceptions of J a p a n and Britain. And

S i n o - J a p a n e s e relations h a v e b e e n in a d e e p freeze d e s p i t e J a p a n ' s e x t e n ­

sive i n v o l v e m e n t in C h i n a ' s e c o n o m y . W h e n e v e r a J a p a n e s e p r i m e m i n i s t e r visits the Y a s u k u n i shrine to t h e c o u n t r y ' s w a r d e a d — i n c l u d i n g war

convicted

criminals from Japan's occupation of C h i n a — B e i j i n g permits massive

a n t i - J a p a n p u b l i c d e m o n s t r a t i o n s a n d e v e n has l o o k e d t h e other w a y at a t t a c k s on J a p a n e s e - o w n e d businesses. O f l a r g e r m o m e n t , C h i n a a n d J a p a n c o m p e t e d i r e c t l y o v e r access t o oil a n d n a t u r a l g a s f r o m S i b e r i a a n d d r i l l i n g in t h e E a s t C h i n a Sea; a n d C h i n a c o n s i s t e n t l y b l o c k s J a p a n ' s b i d for a p e r m a n e n t seat o n the U N S e c u r i t y C o u n c i l . At

the s a m e t i m e , J a p a n is C h i n a ' s l a r g e s t i n v e s t o r , a n d C h i n a is J a p a n ' s

largest t r a d i n g p a r t n e r , w h i c h alone w i l l m a k e p e a c e f u l relations a n a t u r a l

FUTURECAST

240

p r i o r i t y for b o t h g o v e r n m e n t s o v e r t h e n e x t d e c a d e . T h a t ' s c e r t a i n l y the v i e w in J a p a n e s e b u s i n e s s c i r c l e s . A s M o t o y a O k a d a , h e a d o f t h e large J a p a n e s e re­ tailer c h a i n A e o n said not l o n g a g o , " T h e r e w a s one t i m e w h e n p e o p l e t a l k e d a b o u t t h e C h i n a t h r e a t , b u t I b e l i e v e t h a t t h e C h i n e s e p e o p l e w i l l m a k e us rich."

2 9

It's also clear t h a t as C h i n a has b u i l t u p its m i l i t a r y , J a p a n ' s s t r a t e g i c a n d d e ­ fense ties t o t h e U n i t e d S t a t e s h a v e s t r e n g t h e n e d . F o r several years, J a p a n ' s N a t i o n a l D e f e n s e P r o g r a m g u i d e l i n e s h a v e stressed b o t h the c e n t r a l i t y o f the U . S . alliance and n e w p r o c u r e m e n t plans that seem driven b y China's mili­ t a r y b u i l d u p , i n c l u d i n g n e w t r a n s p o r t aircraft, fighters, a n d destroyers "to re­ s p o n d to a n i n v a s i o n o f offshore islands," n e w s y s t e m s to d e t e c t a n d t r a c k i n c o m i n g b a l l i s t i c m i s s i l e s (the l a t t e r is also a i m e d at N o r t h K o r e a ) ,

3 0

and a

n e w a g r e e m e n t to a c q u i r e b a l l i s t i c m i s s i l e defense s y s t e m s f r o m the U n i t e d States.

3 1

J a p a n ' s ties t o t h e U n i t e d S t a t e s are s t r o n g e n o u g h t h a t d e s p i t e w i d e

p u b l i c c r i t i c i s m o f A m e r i c a in I r a q , T o k y o p r o v i d e d eleven h u n d r e d troops t o t h e U . S . w a r effort f r o m late 2 0 0 3 t o m i d - 2 0 0 6 . C h i n a ' s l e a d e r s , h o w e v e r , c a n p r o b a b l y b e confident t h a t J a p a n w i l l re­ m a i n n o n n u c l e a r for s o m e t i m e . T o s t a r t , it's u n i m a g i n a b l e so l o n g as J a p a n r e m a i n s w e l l w i t h i n t h e e x t e n d e d defense p e r i m e t e r o f t h e U n i t e d S t a t e s , s i n c e t h e s u p e r p o w e r w o u l d n ' t c o u n t e n a n c e it. W h i l e t h e J a p a n e s e p u b l i c is less o p p o s e d t o r e a r m a m e n t t h a n it o n c e w a s , s t r a t e g i s t s s u c h as M a t a k e K a m i y a of the N a t i o n a l Defense A c a d e m y of J a p a n argue that a Japanese b o m b w o u l d s o w d i s t r u s t o f J a p a n across m u c h o f A s i a a n d c o u l d p u s h S o u t h K o r e a a n d T a i w a n to f o l l o w s u i t .

3 2

E v e n a p r o m i n e n t Japanese analyst w h o

c r i t i c i z e s A m e r i c a ' s " g l o b a l , u n i l a t e r a l " a p p r o a c h t o t h e w o r l d a n d believes J a p a n should consider g o i n g nuclear, N a k a n i s h i T e r u m a s a of K y o t o U n i v e r ­ sity, a g r e e s t h a t C h i n a ' s m i l i t a r y b u i l d u p e n h a n c e s A m e r i c a ' s v a l u e as J a p a n ' s natural a l l y .

3 3

T h e b i g u n k n o w n in C h i n a ' s a p p r o a c h t o g e o p o l i t i c s a n d the U n i t e d States is its o w n p o l i t i c a l e v o l u t i o n o v e r t h e n e x t d e c a d e . T h e D e a n o f H a r v a r d ' s J o h n F. K e n n e d y S c h o o l o f G o v e r n m e n t , J o s e p h N y e , has b e e n an o p t i m i s t , s u g ­ g e s t i n g t h a t C h i n a ' s d e p e n d e n c e on f o r e i g n m a r k e t s a n d its d e v e l o p m e n t of a m i d d l e class c o u l d b e g i n to roll b a c k a u t h o r i t a r i a n i s m , b e t t e r a l i g n i n g its in­ terests w i t h A m e r i c a ' s . I n theory, w i d e s p r e a d social unrest c o u l d lead to p o ­ l i t i c a l r e f o r m s ; b u t i n s t a b i l i t y c o u l d j u s t as l i k e l y p r o d u c e a c r a c k d o w n , e s p e c i a l l y on e c o n o m i c f r e e d o m s . F o r the foreseeable f u t u r e , C h i n a ' s leaders

THE NEW GEOPOLITICS OF THE SOLE SUPERPOWER: THE PLAYERS are

241

the o n l y p l a u s i b l e source o f m e a n i n g f u l p o l i t i c a l c h a n g e . T h e c u r r e n t

"fourth g e n e r a t i o n " o f leaders w i l l b e in p o w e r u n t i l 2 0 1 2 , a n d t h e y a l m o s t c e r t a i n l y w i l l r e m a i n c o m m i t t e d to a v o i d i n g t h e " R u s s i a n m i s t a k e " o f r a p i d p o l i t i c a l reforms t h a t u l t i m a t e l y w e a k e n t h e P a r t y ' s a u t h o r i t y . An

insider's account of China's c u r r e n t leadership b e c a m e available in late

2 0 0 2 , w i t h the w e s t e r n p u b l i c a t i o n o f s o m e o f the internal i n v e s t i g a t i o n s o f candidates for the S t a n d i n g C o m m i t t e e , called Disidai The

(fourth g e n e r a t i o n ) .

34

m o s t s t r i k i n g portrait is that o f P r e m i e r W e n J i a b a o , w h o rose t h r o u g h the

ranks as the r i g h t - h a n d m a n first o f Z h a o Z i y a n g , the P a r t y secretary g e n e r a l p u r g e d after s i d i n g w i t h the students d u r i n g T i a n a n m e n , a n d t h e n o f P r e m i e r Zhu

R o n g j of the t h i r d generation. W e n is p o r t r a y e d as f a v o r i n g s o m e far-

reaching e c o n o m i c reforms a n d q u e s t i o n i n g s o m e o f C h i n a ' s m a s s i v e p u b l i c w o r k s projects, i n c l u d i n g p l a n s to b u i l d three t h o u s a n d - m i l e n e t w o r k s o f canals and

a q u e d u c t s to carry w a t e r f r o m southern C h i n a to the northern p r o v i n c e s .

But

on political reforms, W e n is as conservative as H u J i n t a o . T h e security

chief, L u o G a n , w h o rose to the t o p as the k e y aide t o the security head d u r i n g T i a n a n m e n , L i P e n g , also is p o r t r a y e d as f a v o r i n g reform in s o m e a r e a s — i n c l u d i n g an end to police torture, f e w e r restrictions o n p e o p l e m o v i n g f r o m place to p l a c e , and a single benefit s y s t e m for u r b a n a n d rural C h i n e s e . B u t he is also a hard-liner on l a w a n d order a n d political dissent, p r e s i d i n g o v e r a s y s t e m that executed an e s t i m a t e d s i x t y t h o u s a n d p e o p l e f r o m 1 9 9 8 to 2 0 0 1 . No

one can say h o w t h e fifth g e n e r a t i o n w i l l a p p r o a c h g e o p o l i t i c s

and

A m e r i c a ' s role in A s i a , e s p e c i a l l y s i n c e n o o n e k n o w s w h o t h e y w i l l b e . E v e r y s o v e r e i g n c o u n t r y has t h e a b i l i t y to say n o to t h e U n i t e d S t a t e s — G e r m a n y and

F r a n c e f a m o u s l y d i d so o v e r t h e w a r in I r a q . B u t s a y i n g n o t o a sole s u ­

p e r p o w e r often doesn't affect w h a t t h e s u p e r p o w e r d o e s , e v e n in a c o u n t r y ' s o w n neighborhood. In another generation, C h i n a m a y have the economic and m i l i t a r y resources to say no to the U n i t e d S t a t e s a n d b a c k it u p c o n v i n c i n g l y , especially in A s i a . T h a t ' s n o t l i k e l y to h a p p e n in t h e n e x t t e n years.

THE EXTENT AND LIMITS OF THE SOLE SUPERPOWER A

little later w e w i l l e x a m i n e the l i k e l y s h a p e o f t w o c r i t i c a l g e o p o l i t i c a l

issues for t h e n e x t d e c a d e , e n e r g y a n d t e r r o r i s m . H e r e , w e c o n c l u d e o u r d i s ­ cussion o f the b a s i c t o p o g r a p h y o f g e o p o l i t i c s b y e x a m i n i n g t h e sole s u p e r ­ power's largest c u r r e n t g l o b a l a c t i o n , t h e U . S . m i l i t a r y o v e r t h r o w o f t h e g o v e r n m e n t of S a d d a m Hussein and subsequent occupation of Iraq. No

one k n o w s h o w t h e Iraq s a g a w i l l u n f o l d o v e r t h e n e x t y e a r or t h e n e x t

decade; a n d as y o u read t h i s , c o n d i t i o n s m a y b e q u i t e different f r o m w h e n it

FUTURECAST

242 w a s w r i t t e n in m i d - 2 0 0 7 ,

a n <

^

m

w a y s t h a t no one c o u l d p r e d i c t . H o w e v e r ,

t h e w a y t h a t e v e n t s in I r a q a l r e a d y h a v e u n f o l d e d p r o v i d e s i n s i g h t i n t o c r i t i ­ cal features o f t h e n e x t decade's g e o p o l i t i c s . B e g i n n i n g w i t h t h e o b v i o u s , t h i s sole s u p e r p o w e r can w a g e a m a j o r w a r w i t h g r e a t e c o n o m i c a n d p o l i t i c a l i m p l i c a t i o n s for e v e r y o t h e r i m p o r t a n t c o u n t r y b y its o w n d e c i s i o n a n d v i r t u a l l y on its o w n . T h e U n i t e d States took this c o u r s e o v e r t h e o b j e c t i o n s o f f o u r o t h e r g e o p o l i t i c a l p l a y e r s — F r a n c e , G e r m a n y , R u s s i a , and C h i n a — a n d w i t h the endorsement of just t w o , Britain a n d J a p a n , a n d m a t e r i a l s u p p o r t f r o m o n l y one. W i t h t h e e n d o f balance-ofp o w e r g e o p o l i t i c s , no c o u n t r y is in a p o s i t i o n to alter w a r - a n d - p e a c e decisions b y t h e U n i t e d S t a t e s . A m e r i c a d i d secure f r o m t h e U n i t e d N a t i o n s w h a t it in­ t e r p r e t e d as f o r m a l c o n s e n t for its m i l i t a r y a c t i o n , w h i l e d e c l a r i n g its r i g h t — t h a t is, its p o w e r — t o p r o c e e d w i t h o u t a n y o n e else's a p p r o v a l . T h e o n l y s u p p o r t t h a t t h e U n i t e d S t a t e s t r u l y n e e d s to u n d e r t a k e m a j o r m i l i t a r y action is d o m e s t i c p o l i t i c a l s u p p o r t , a n d s e c u r i n g t h a t w a s w i d e l y seen as the B u s h a d m i n i s t r a t i o n ' s m a i n p u r p o s e in g o i n g to t h e U n i t e d N a t i o n s . B e c a u s e a s u p e r p o w e r c a n m a k e these decisions w i t h o u t c o n s u l t i n g other c o u n t r i e s , it also d o e s n o t h a v e to a p p e a l to t r a d i t i o n a l casus b e l l i — a s in clear a g g r e s s i o n ( W o r l d W a r I I ) , a h u m a n i t a r i a n c a t a s t r o p h e (Serbia), or an ally u n d e r a t t a c k ( V i e t n a m a n d t h e first G u l f W a r ) . I n s t e a d , the U n i t e d States of­ fered a n e w , s u p e r p o w e r d o c t r i n e o f p r e e m p t i v e w a r a n d r e g i m e c h a n g e . W e a p o n s o f m a s s d e s t r u c t i o n in t h e h a n d s o f an "irrational" e n e m y m a y w e l l justify p r e e m p t i v e w a r in a l m o s t anyone's v i e w — a l t h o u g h the d o c t r i n e also w o u l d fit t h e S o v i e t U n i o n in t h e 1 9 5 0 s . A m e r i c a n e v e r seriously considered a u n i l a t e r a l , p r e e m p t i v e w a r on t h e U S S R because it also requires m i l i t a r y su­ p e r i o r i t y so g r e a t t h a t it c a n b e c a r r i e d o u t at r e l a t i v e l y s m a l l cost a n d w i t h ­ o u t d r a w i n g in others. T h e d e g r e e to w h i c h a r i g h t to w a g e p r e e m p t i v e w a r has b e c o m e p a r t o f t h e w o r l d v i e w o f s o m e o f those w h o m i g h t lead the U n i t e d States w a s evident d u r i n g a televised debate b y R e p u b l i c a n presidential hope­ fuls in J u n e 2 0 0 7 , w h e n several said t h e y w o u l d consider a p r e e m p t i v e n u ­ clear s t r i k e to e n d Iran's W M D p r o g r a m .

3 5

E v e n as the Iraq W a r p l a y s o u t so b a d l y that no future U . S . a d m i n i s t r a t i o n w i l l t r y to replicate it, its failure does not c h a n g e the s u p e r p o w e r c a p a c i t y to w a g e w a r at its o w n d i s c r e t i o n , nor e l i m i n a t e p o t e n t i a l threats that c o u l d lead to f u t u r e p r e e m p t o r y a t t a c k s . N o r h a v e the countries t h a t o p p o s e d the Iraq W a r f r o m its start i m p o s e d p o l i t i c a l costs t h a t m i g h t force the U n i t e d States to secure their s u p p o r t for the n e x t w a r . W h e n a future U . S . president asks if a n ­ other p r e e m p t i v e w a r w o u l d serve s o m e v i t a l A m e r i c a n interest, the decisive issues w i l l still b e t h e p r o s p e c t s o f success a n d the extent o f d o m e s t i c political s u p p o r t , not w h e t h e r o t h e r c o u n t r i e s w i l l s u p p o r t the policy.

THE NEW GEOPOLITICS OF THE SOLE SUPERPOWER: THE PLAYERS As

243

l i k e l y as not, that d e c i s i o n w i l l a g a i n i n v o l v e t h e M i d d l e E a s t . E v e n as

the U n i t e d S t a t e s a p p r o a c h e s its interests in g l o b a l t e r m s a n d e n g a g e s a c ­ t i v e l y in e v e r y r e g i o n , t h o s e i n t e r e s t s are g r e a t e s t t o d a y in A s i a a n d

the

M i d d l e E a s t . A s i a w i l l necessarily receive a g r e a t deal o f t h e s u p e r p o w e r ' s a t ­ t e n t i o n , because that's w h e r e C h i n a is, a n d C h i n a is b o t h v i t a l t o t h e U . S . a n d w o r l d e c o n o m i e s a n d the o n l y m a j o r c o u n t r y w i t h t h e c a p a c i t y a n d i n c l i n a ­ t i o n to c h a l l e n g e A m e r i c a in a n y m e a n i n g f u l w a y . T h e M i d d l e E a s t w i l l b e the o t h e r m a j o r , p e r m a n e n t focus o f A m e r i c a n g e o p o l i t i c s o v e r t h e n e x t ten to fifteen years, because that's w h e r e m u c h o f t h e w o r l d ' s oil is, a n d e v e r y m a j o r e c o n o m y s t i l l d e p e n d s o n its s t e a d y s u p p l i e s . U n f o r t u n a t e l y , m o s t o f t h e oil lies in the sands o f nations r u l e d b y f r a g i l e a n d i n s e c u r e a u t h o r i t a r i a n r e g i m e s , all in close p r o x i m i t y t o t h e c o n t i n u i n g I s r a e l i - P a l e s t i n i a n conflict that itself is a source o f r e g i o n a l tensions a n d i n s t a b i l i t y . A s a sole s u p e r p o w e r , the U n i t e d S t a t e s has t a c i t l y b e c o m e t h e g u a r a n t o r o f t h e region's s t a b i l i t y a n d the s o v e r e i g n t y o f m a n y c o u n t r i e s there, i n c l u d i n g Israel for t h e last fifty years. N o n e o f that w i l l c h a n g e in t h e n e x t d e c a d e . F i n a l l y , t h e M i d d l e E a s t is also the p r i m a r y seat of I s l a m i c f u n d a m e n t a l i s m a n d s u p p o r t for terrorist g r o u p s t h a t w i l l c o n t i n u e to m e n a c e A m e r i c a n interests for t h e

foreseeable

future. A g a i n , the failures o f A m e r i c a ' s I r a q c a m p a i g n w i l l n o t r e d u c e t h e stakes for

the U n i t e d S t a t e s in the M i d d l e E a s t , a n d u l t i m a t e l y c o u l d raise t h e m . R e ­

g a r d l e s s o f w h o A m e r i c a n s elect p r e s i d e n t , t h e U n i t e d S t a t e s o v e r t h e n e x t t e n to fifteen years w i l l be a c t i v e l y a n d a g g r e s s i v e l y e n g a g e d in t h e r e g i o n a n d its c o n f l i c t s — i n c l u d i n g t h e real p o s s i b i l i t y o f a n o t h e r s i g n i f i c a n t m i l i t a r y c a m ­ p a i g n . E v e n i f t h e U n i t e d S t a t e s finds it w i l l n o t h a v e p e r m a n e n t bases in I r a q f r o m w h i c h to o p e r a t e , it still w i l l retain bases in Q a t a r , K u w a i t , B a h r a i n , a n d T u r k e y , as w e l l as its secret bases in o t h e r p l a c e s in t h e r e g i o n . The

Iraq s a g a also s h o w s t h a t t h e real c o n s t r a i n t o n A m e r i c a as a s u p e r ­

p o w e r c o m e s f r o m its o w n p e o p l e : T h e y c a n force t h e U . S . g o v e r n m e n t to d o w h a t no o t h e r state can r e q u i r e o f it, n a m e l y t o c h a n g e c o u r s e . A s i g n i f i c a n t m i n o r i t y o f A m e r i c a n s o p p o s e d t h e I r a q p o l i c y f r o m t h e start. I t s t a r t e d t o c h a n g e o n l y after a s i g n i f i c a n t m a j o r i t y t u r n e d a g a i n s t i t , n o t for w h a t it h a d i n t e n d e d to a c c o m p l i s h b u t for its failure t o d o so. A m e r i c a n s w i l l f o r g i v e m a n y t h i n g s in their g o v e r n m e n t a n d p r e s i d e n t s , b u t n o t failure. The

Iraq W a r also p r o v i d e s an i m p o r t a n t g a u g e o f t h e A m e r i c a n s u p e r ­

power's g e o p o l i t i c a l capacities. N o w a n d for the foreseeable f u t u r e , t h e U n i t e d States can defeat the m i l i t a r y o f a n y other c o u n t r y , q u i c k l y a n d c o n v i n c i n g l y , b u t b y itself c a n n o t b r i n g a b o u t the d e m o c r a t i c r e g i m e c h a n g e s it seeks. I t can w i p e out a foreign g o v e r n m e n t ' s l e g i o n s , b u t n o t alter a c o u n t r y ' s social d y ­ n a m i c s . T h e U n i t e d States has a l r e a d y b e g u n w h a t w i l l be a p r o t r a c t e d d e b a t e

244

FUTURECAST

o v e r w h e t h e r its Iraq p o l i c y f u n d a m e n t a l l y reached too far or m e r e l y w a s p o o r l y p l a n n e d a n d b a d l y i m p l e m e n t e d . H o w the foreign p o l i c y a n d defense professionals

resolve

this

question—and

whether

the

American

public

a g r e e s — c o u l d v i t a l l y influence h o w t h e U n i t e d States m a n a g e s g e o p o l i t i c s for as l o n g as it r e m a i n s the sole s u p e r p o w e r . S o far, one p o i n t o n w h i c h m o s t e x p e r t s s e e m to a g r e e is that the U n i t e d S t a t e s is u n l i k e l y on its own to s u c c e e d in s t a b i l i z i n g a d e e p l y d i v i d e d society o n c e it t o p p l e s its g o v e r n m e n t . J a m e s D o b b i n s , w h o d i r e c t s the International S e c u r i t y a n d D e f e n s e P o l i c y C e n t e r at the R A N D C o r p o r a t i o n , m a k e s this case p l a i n l y . H e a r g u e s t h a t t h e r i g h t m o d e l for Iraq w a s K o s o v o a n d B o s n i a , w h e r e t h e U n i t e d S t a t e s l e d a N A T O c o a l i t i o n a n d w i t h the cooperation of n e i g h b o r i n g countries, successfully pacified e t h n i c conflicts as bitter as I r a q ' s . But

K o s o v o a n d B o s n i a are d a u n t i n g

e x a m p l e s , because based on

36

what

w o r k e d t h e r e , I r a q w o u l d r e q u i r e an i n t e r n a t i o n a l force o f a h a l f - m i l l i o n w i t h the support of n e i g h b o r i n g Iran, Russia, Turkey, and Syria. M o r e i m p o r t a n t , t h e R e p o r t o f t h e Iraq S t u d y G r o u p takes a s i m i l a r v i e w . T h e g r o u p e m b o d i e s t h e w o r l d v i e w o f W a s h i n g t o n elders, b e i n g c o m p r i s e d o f t w o f o r m e r secretaries o f state, a f o r m e r a t t o r n e y g e n e r a l , a f o r m e r defense secretary, a f o r m e r W h i t e H o u s e c h i e f o f staff, t w o f o r m e r senators, a former c h a i r m a n o f the H o u s e F o r e i g n A f f a i r s C o m m i t t e e , a n d a p r o m i n e n t W a s h ­ i n g t o n fixer. T h e i r k e y r e c o m m e n d a t i o n :

T h e United States should immediately launch a new diplomatic offensive to build an international consensus for stability in Iraq and the region. T h i s diplomatic effort should include every coun­ try that has an interest in avoiding a chaotic Iraq, including all of Iraq's neighbors. Iraq's neighbors and key states in and outside the region should form a support group to reinforce security and na­ tional reconciliation within Iraq, neither of which Iraq [and the United States] can achieve on its own.

I n this case, p l a i n l y the i n s u r g e n c y w i l l not end w i t h o u t cooperation from Iran a n d S y r i a , since t h e y s u p p l y a n d s u p p o r t the S h i a militias. M o r e generally, w h e r e v e r a state is in t u r m o i l , its n e i g h b o r s w i l l i n v o l v e themselves (if they can), since the nearby t u r m o i l i n e v i t a b l y affects t h e m . A n d so, six m o n t h s after d i s m i s s i n g the s t u d y g r o u p ' s analysis, the W h i t e H o u s e in m i d - 2 0 0 7 m o v e d to o p e n talks w i t h Iran a n d intensify its contacts on Iraq w i t h R u s s i a a n d Turkey. T h e r e is n o sensible w a y to p r e d i c t t h e u l t i m a t e o u t c o m e in Iraq a n d its i m p l i c a t i o n s for t h e s t a b i l i t y o f t h e M i d d l e E a s t a n d e v e r y t h i n g else w h i c h t h a t entails. T h e lessons d r a w n f r o m the e x p e r i e n c e b y f u t u r e U . S . presidents

THE NEW GEOPOLITICS OF THE SOLE SUPERPOWER: THE PLAYERS and

245

C o n g r e s s e s , a n d b y o t h e r g o v e r n m e n t s , are also u n c e r t a i n . O n t o p o f

t h a t , e v e n t s a n d p e r s o n a l i t i e s u n k n o w n t o d a y m a y t i p t h e b a l a n c e in f u t u r e d e c i s i o n s o f w a r a n d p e a c e . W h a t c a n b e k n o w n is t h e e n o r m o u s c a p a c i t i e s and

real l i m i t s o f t h e U n i t e d S t a t e s , t h e c e n t r a l i t y o f t h e M i d d l e E a s t in its

geopolitics, and the likely disposition of future A m e r i c a n a d m i n i s t r a t i o n s to o r g a n i z e g l o b a l s u p p o r t for t h e p o l i c i e s t h a t t h e U n i t e d S t a t e s w i l l c o n ­ t i n u e t o set.

CHAPTER SEVEN

THE COMING CRISES IN HEALTH CARE, ENERGY, AND THE GLORAL ENVIRONMENT

SOMETIMES,

SERIOUS

PROBLEMS

t h a t w i l l s h a k e a n d s h a p e a nation's life

are p r e d i c t a b l e , because w h a t d r i v e s t h e m is b o t h d e e p - r o o t e d a n d a p p a r e n t . F a s t - r i s i n g h e a l t h - c a r e a n d e n e r g y costs are t w o issues t h a t a l m o s t i n e v i t a b l y w i l l create e n o r m o u s social a n d e c o n o m i c stresses in e v e r y m a j o r c o u n t r y o v e r the next ten to fifteen years. H o w each s o c i e t y m a n a g e s these stresses c o u l d h a v e m o m e n t o u s effects n o t o n l y for t h e h e a l t h o f h u n d r e d s o f m i l l i o n s

of

p e o p l e , b u t also for the overall g r o w t h o f t h e i r e c o n o m i e s . C o m b i n e d w i t h the intense c o m p e t i t i o n c o m i n g f r o m g l o b a l i z a t i o n , these a c c e l e r a t i n g costs may

c o n t i n u e t o s t u n t j o b a n d w a g e g a i n s in a d v a n c e d c o u n t r i e s , a n d so p r o ­

f o u n d l y affect the p r o s p e c t s of m i d d l e - c l a s s f a m i l i e s a r o u n d t h e w o r l d . The

h e a l t h - c a r e crises f a c i n g m o s t c o u n t r i e s all i n v o l v e t h e c o m b i n a t i o n o f

fast-rising n u m b e r s o f o l d e r p e o p l e a n d t h e e q u a l l y f a s t - r i s i n g costs o f t h e m e d i c a l t e c h n o l o g i e s u s e d to treat t h e m . T h e costs o f t r e a t i n g y o u n g e r p e o p l e are

r i s i n g , too. B u t o v e r t h e n e x t d e c a d e a n d b e y o n d , b o o m e r s w i l l t u r n s i x t y

a n d then seventy, as t h e i r o l d e r b r o t h e r s a n d sisters a g e i n t o t h e i r seventies and eighties,

and some

of their parents survive into their eighties

and

nineties. T h o s e are t h e a g e s w h e n l a r g e n u m b e r s w i l l d e v e l o p c o n d i t i o n s t h a t cost $ 1 5 , 0 0 0 or $ 1 5 0 , 0 0 0 to treat, i n s t e a d o f $ 2 0 0 or $ 1 , 0 0 0 . The

timing

of this c r i s i s — n o w — r e f l e c t s

not only the singular

demo­

g r a p h i c s , b u t also the effects o f g l o b a l i z a t i o n . T h e p o t e n t i a l m a r k e t s for n e w health-care d e v i c e s , e q u i p m e n t , a n d d r u g s all h a v e g o n e g l o b a l , d r i v i n g m o r e (and m o r e c o s t l y ) R & D , a n d d o w n t h e r o a d , m o r e a n d m o r e c o s t l y

247

new

FUTURECAST

248

t r e a t m e n t s . W h e n G i l e a d S c i e n c e s o u t s i d e S a n F r a n c i s c o or S o u t h K o r e a ' s L G L i f e S c i e n c e s c o n s i d e r s i n v e s t i n g $ 1 . 2 b i l l i o n in a p r o m i s i n g line o f b i o t e c h research—that's

the

a v e r a g e cost

today

of developing

a new

biological

t r e a t m e n t — i t e s t i m a t e s f u t u r e r e v e n u e s f r o m p o t e n t i a l p a t i e n t s in not o n l y A m e r i c a a n d E u r o p e , b u t m u c h o f A s i a , L a t i n A m e r i c a , a n d a n y w h e r e else p e o p l e o r g o v e r n m e n t s m a y b e c a p a b l e o f p a y i n g for t h e t r e a t m e n t . M a n y o f these n e w e r m a r k e t s are e x p a n d i n g v e r y r a p i d l y , a n d not o n l y because of their d e m o g r a p h i c s . I n a d d i t i o n , g l o b a l i z a t i o n is m a k i n g m o r e o f the w o r l d p r o s ­ p e r o u s ; a n d e v e r y w h e r e as p e o p l e b e c o m e m o r e affluent, t h e y v a l u e s m a l l i m ­ p r o v e m e n t s in t h e i r h e a l t h care m o r e h i g h l y . A n d the intellectual p r o p e r t y p r o t e c t i o n s t h a t h e l p d r i v e m e d i c a l p r o g r e s s also h a v e g o n e g l o b a l in the last five

to ten y e a r s , i n s u l a t i n g d e v e l o p e r s f r o m m o s t d i r e c t c o m p e t i t i o n

and

often k e e p i n g p r i c e s at least f a i r l y h i g h in m o s t p l a c e s . N o c o u n t r y t o d a y is p r e p a r e d to p a y t h e b i l l s t h a t w i l l c o m e d u e in 2 0 2 0 , a n d before, f r o m t h e c o m b i n a t i o n

o f so m a n y e x p e n s i v e t e c h n o l o g i e s a n d

t r e a t m e n t s , a n d so m a n y m o r e p e o p l e w h o c o u l d use t h e m . I n s o m e p l a c e s , t h i s p r o b l e m w i l l b e c o m e a p o l i t i c a l a n d social crisis as p e o p l e seek treat­ m e n t s t h a t n e i t h e r t h e y n o r t h e i r g o v e r n m e n t s can afford. H e a l t h care is u n l i k e a l m o s t a n y t h i n g else in t h e m a r k e t p l a c e , because w h i l e p e o p l e can s u b s t i t u t e a u s e d F o r d , or p u b l i c t r a n s i t , for a n e w B M W t h a t t h e y can't p a y for, or a b a n a n a for r a sp b erri es w i t h t h e i r m o r n i n g cereal, there are no re­ p l a c e m e n t s for c h e m o t h e r a p y or d i a l y s i s . S o , e v e n w h e n p r i c e s are v e r y h i g h , p e o p l e are v e r y r e l u c t a n t t o c u t b a c k o n their o w n health c a r e — e s p e c i a l l y w h e n t h e i r g o v e r n m e n t o s t e n s i b l y g u a r a n t e e s e v e r y o n e access, as it does in e v e r y d e v e l o p e d c o u n t r y e x c e p t t h e U n i t e d S t a t e s . A s the r a n k s o f the elderly a n d t h e array o f e x p e n s i v e n e w t e c h n o l o g i e s c o n t i n u e to g r o w , that g u a r a n t e e w i l l crack the

financing

a r r a n g e m e n t s for h e a l t h care a l m o s t e v e r y w h e r e . A n d

as t h o s e d e m a n d i n g t h e care face off a g a i n s t those w h o finance it, b o t h w i l l t a k e t h e i r cases a n d t h e i r f r u s t r a t i o n s to t h e p o l i t i c a l arena. E a c h c o u n t r y has its o w n special c i r c u m s t a n c e s . I n J a p a n a n d m u c h o f E u ­ r o p e , as t h e d e m a n d for c o s t l y t r e a t m e n t s m a r c h e s u p , the n u m b e r o f w o r k i n g p e o p l e a r o u n d t o finance it w i t h taxes w i l l b e s h r i n k i n g — a n d s l o w g r o w t h a n d g l o b a l i z a t i o n w i l l p r o b a b l y b e h o l d i n g d o w n their w a g e s . T h i s c r u n c h w i l l b e e s p e c i a l l y d i f f i c u l t in F r a n c e a n d G e r m a n y , w h e r e h e a l t h - c a r e costs al­ r e a d y are v e r y h i g h a n d t h e total t a x b u r d e n s a l r e a d y are 4 5 p e r c e n t to 5 0 p e r ­ c e n t . J a p a n a n d B r i t a i n s p e n d c o n s i d e r a b l y less o n h e a l t h care, a n d their taxes are l o w e r . B u t J a p a n has t h e w o r l d ' s m o s t e l d e r l y - d o m i n a t e d p o p u l a t i o n a n d a v e r y w e a k e c o n o m y , w h i l e B r i t a i n ' s N a t i o n a l H e a l t h S e r v i c e faces w i d e s p r e a d p u b l i c p r e s s u r e s to s h a r p l y e x p a n d its resources a n d services.

THE COMING CRISES IN HEALTH CARE, ENERGY, AND THE GLOBAL ENVIRONMENT

249

H e a l t h - c a r e costs p r e s e n t special p r o b l e m s for t h e U n i t e d S t a t e s , t o o , d e s p i t e its m o r e f a v o r a b l e d e m o g r a p h i c s , b e c a u s e A m e r i c a n s a l r e a d y s p e n d a m u c h g r e a t e r share o f t h e i r n a t i o n a l i n c o m e o n h e a l t h care t h a n o t h e r s . A m e r ­ icans also are s t r o n g l y c o m m i t t e d t o u s i n g t h e latest t e c h n o l o g i e s , m a n y o f t h e m d e v e l o p e d there. O n t o p o f t h a t , t h e n e x t U . S . p r e s i d e n t a n d C o n g r e s s w i l l v e r y l i k e l y m o v e t o p r o v i d e i n s u r a n c e c o v e r a g e for t h e f a s t - g r o w i n g n u m b e r s o f p e o p l e w h o lost theirs to t h e s k y - h i g h p r i c e s . M o s t i m p o r t a n t , t h e U n i t e d S t a t e s v i r t u a l l y alone has f e w p r i c e c o n t r o l s or g l o b a l b u d g e t s t o k e e p costs in c h e c k . A l l o f these factors t o g e t h e r w i l l d r i v e t h o s e o v e r a l l costs t o $ 1 0 , 0 0 0 p e r p e r s o n w i t h i n a f e w y e a r s , a n d t h e e n s u i n g p o l i t i c a l clashes c o u l d c o m e o v e r the h i g h e r taxes n e e d e d t o c o v e r t h e e x p l o d i n g m e d i c a l b i l l s for the elderly, or o v e r h o w m u c h m e d i c a l costs are h o l d i n g d o w n w o r k i n g p e o ­ ple's w a g e s . E v e r y a d v a n c e d c o u n t r y has d e a l t w i t h f i n a n c i n g p r o b l e m s in t h e i r h e a l t h ­ care s y s t e m s before, b u t n o t h i n g l i k e w h a t t h e y w i l l face o v e r t h e n e x t d e c a d e . In

J a p a n , A m e r i c a , a n d across E u r o p e , p e o p l e ' s t a x e s , p r e m i u m s , a n d c o -

p a y m e n t s w i l l rise, a n d t h e q u a l i t y o f t h e i r m e d i c a l care w i l l s l o w l y d e g r a d e as access to s o m e o f t h e latest t r e a t m e n t s b e c o m e s i n c r e a s i n g l y l i m i t e d . C h i n a faces a h e a l t h - c a r e crisis o f a different k i n d . T h e r e , t h e c e n t r a l issue w i l l not be the h i g h costs o f the latest g e n e r a t i o n o f d r u g s , d e v i c e s , a n d p r o ­ c e d u r e s , b u t t h e m o r e e x p e n s i v e c h a l l e n g e o f r e s t o r i n g b a s i c care for s o m e o n e b i l l i o n C h i n e s e . I n a s o c i e t y g r o w i n g m o r e p r o s p e r o u s e v e r y year, b u t o n l y for a b o u t o n e - t h i r d o f the p e o p l e , w i t h a g o v e r n m e n t u n d e r t a k i n g scores o f e x ­ p e n s i v e p u b l i c p r o j e c t s for m o d e r n i z a t i o n , t h e m i l l i o n s o f C h i n e s e w h o n o w protest over w a g e s and corruption could w e l l d e m a n d the restoration of u n i ­ versal m e d i c a l care. E n e r g y costs c o u l d p r e s e n t n e a r l y as g r e a t a b u r d e n for m a n y s o c i e t i e s o v e r t h e n e x t d e c a d e as h e a l t h - c a r e c o s t s . T h e d i m e n s i o n s a n d u r g e n c y o f t h i s p r o b l e m c o m e f r o m an i n t e r s e c t i o n or c o l l i s i o n o f a n u m b e r o f e c o n o m i c a n d p o l i t i c a l d e v e l o p m e n t s , as w e l l as i n e x o r a b l e forces o f n a t u r e . T h e first t w o factors here are t h e s t a n d a r d e c o n o m i c o n e s — f a s t - r i s i n g w o r l d w i d e d e m a n d for

e n e r g y , d r i v e n b y t h e r a p i d m o d e r n i z a t i o n in C h i n a a n d o t h e r d e v e l o p i n g

c o u n t r i e s c o m m i t t e d t o g l o b a l i z a t i o n , a n d t h e i n c r e a s i n g costs o f s e c u r i n g the e n e r g y s u p p l i e s to m e e t t h e n e w d e m a n d . T h e s a m e e c o n o m i c p r o c e s s e s n o w e n a b l i n g C h i n a , I n d i a , a n d o t h e r s t o d e v e l o p a n d g r o w faster t h a n a n y s o c i e t y before t h e m h a v e a l r e a d y p u s h e d oil p r i c e s f r o m $ 2 0 t o $ 3 o a b a r r e l in the first y e a r s o f t h i s d e c a d e , t o $ 5 0 t o $ 8 0 a b a r r e l a n d m o r e for t h e last several y e a r s , t a k i n g slices o f v a r y i n g sizes o u t o f g r o w t h e v e r y w h e r e . T h e n e x t ten to

fifteen

y e a r s m a y w e l l i n c l u d e p e r i o d s w h e n e n e r g y p r i c e s fall

250

FUTURECAST

s h a r p l y ; b u t it's e v e n m o r e l i k e l y t h a t t h e p r i c e w i l l reach $ 9 0 , $ 1 0 0 , a n d more per barrel. O n t o p o f s u p p l y a n d d e m a n d , t h e terrain o f "petropolitics" has b e c o m e m o r e t r e a c h e r o u s . O i l s u p p l i e s are i n c r e a s i n g l y c o n c e n t r a t e d in p o l i t i c a l l y f r a g i l e M i d d l e E a s t e r n a n d A f r i c a n c o u n t r i e s , a l o n g w i t h R u s s i a — a n d the s t a b i l i t y o f the M i d d l e E a s t in p a r t i c u l a r m a y be m o r e p r o b l e m a t i c than at a n y t i m e in d e c a d e s , as t h e U n i t e d S t a t e s e x t r i c a t e s itself f r o m Iraq a n d the r i s i n g r e g i o n a l p o w e r o f I r a n p u t s a d d i t i o n a l pressures on its S a u d i n e i g h b o r . E n e r g y w i l l complicate the geopolitics

o f t h e n e x t d e c a d e in other w a y s .

China's g r o w i n g n e t w o r k of investments, joint ventures, and long-term con­ tracts w i t h oil states in t h e M i d d l e E a s t , A f r i c a , L a t i n A m e r i c a , a n d C e n t r a l A s i a c o u l d i n c r e a s i n g l y p l a c e it at o d d s w i t h R u s s i a , J a p a n , a n d the U n i t e d S t a t e s . A n d R u s s i a w i l l c o n t i n u e to t r y to w r i n g g e o p o l i t i c a l a d v a n t a g e s o u t o f E u r o p e ' s g r o w i n g d e p e n d e n c e o n R u s s i a n oil a n d g a s . T h e A m e r i c a n s u ­ p e r p o w e r w i l l t r y t o oversee all o f t h i s , m a n e u v e r i n g to c o n t a i n C h i n a ' s a m b i t i o n s , deflect t h o s e o f t h e R u s s i a n s , a n d m a i n t a i n t h e M i d d l e E a s t as a s t a b l e e n e r g y s u p p l i e r for the w o r l d . T h e n e w f a c t o r is t h e g r o w i n g w o r l d w i d e c o n c e r n t h a t the e n v i r o n m e n t a l effects o f all t h i s e n e r g y use o n t h e g l o b a l c l i m a t e m a y soon reach a serious t i p p i n g p o i n t . T h e s e c o n c e r n s w i l l s e n d w o r l d w i d e e n e r g y p r i c e s even h i g h e r , first b y r e d u c i n g i n v e s t m e n t in c a r b o n - i n t e n s i v e w a y s o f g e n e r a t i n g p o w e r . A l r e a d y , for e x a m p l e , t h e p r o s p e c t o f f u t u r e r e g u l a t i o n is s l o w i n g n e w i n v e s t ­ m e n t s in c o a l - f u e l e d p o w e r p l a n t s ; a n d five years f r o m n o w that s l o w d o w n w i l l p u s h u p E u r o p e a n e l e c t r i c i t y p r i c e s . T h e p o s i t i v e side is that these c o n ­ cerns are also f u e l i n g g r e a t e r interest in r e n e w a b l e e n e r g y sources s u c h as w i n d , solar p o w e r , a n d b i o m a s s , w h i c h b y one e s t i m a t e c o m p r i s e d 3 0 p e r c e n t o f n e w p o w e r - g e n e r a t i o n i n v e s t m e n t s w o r l d w i d e in 2 0 0 5 .

1

M u c h l a r g e r c o s t s w i l l c o m e as t h e a d v a n c e d c o u n t r i e s a c t u a l l y r e g u l a t e the greenhouse

g a s e s t h a t c o m e f r o m fossil f u e l s , an i n c r e a s i n g l y

likely

p r o s p e c t o v e r t e n y e a r s . A s o l i d c o n s e n s u s has f o r m e d in E u r o p e , J a p a n , a n d A m e r i c a t h a t t h e w o r l d ' s c u r r e n t t r a j e c t o r y for p r o d u c i n g C 0 g r e e n h o u s e g a s e s w i l l e v e n t u a l l y d o serious d a m a g e t o c l i m a t e

2

and other conditions

e v e r y w h e r e . S t i l l , the proposed responses w i l l be divisive, from t o p - d o w n regulation to carbon taxes and c o m p l e x c a p - a n d - t r a d e systems. H o w e v e r , there's n o s i g n t h a t C h i n a , I n d i a , a n d o t h e r d e v e l o p i n g c o u n t r i e s w i t h v e r y f a s t - g r o w i n g emissions share the consensus.

A n y prospect of their

going

a l o n g w i l l require the k i n d of effective international leadership from the United

S t a t e s t h a t has n o t b e e n s e e n s i n c e t h e

W T O ' s successful launch.

first

G u l f W a r and

the

THE COMING CRISES IN HEALTH CARE, ENERGY, AND THE GLOBAL ENVIRONMENT

251

HOW MUCH COUNTRIES WILL HAVE TO SPEND ON HEALTH CARE D i f f e r e n t societies s p e n d g r e a t l y v a r y i n g a m o u n t s o n h e a l t h care. C h i n a u n ­ s u r p r i s i n g l y s p e n d s m u c h less t h a n a n y a d v a n c e d c o u n t r y , w i t h its g o v e r n ­ m e n t d e d i c a t i n g less t h a n 2 p e r c e n t o f G D P t o h e a l t h care a n d its c i t i z e n s contributing another 2.5 percent on their o w n . B y any measure, A m e r i c a spends the m o s t — a b o u t 1 6 p e r c e n t o f its G D P at last c o u n t in 2 0 0 6 or a b o u t $ 6 , 7 0 0 p e r p e r s o n , c o m p a r e d to b e t w e e n 1 0 a n d 1 1 p e r c e n t o f G D P in F r a n c e 2

and

G e r m a n y , a n d a b o u t 8 p e r c e n t in J a p a n a n d B r i t a i n . T h a t m a k e s J a p a n

and

Britain's

financial

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to h e a l t h

care c o n s i d e r a b l y closer

to

C h i n a t h a n to the U n i t e d S t a t e s . No

one k n o w s h o w m u c h difference t h e s e d i s p a r i t i e s m a k e in t h e a c t u a l

q u a l i t y o f the care t h a t p e o p l e r e c e i v e , e s p e c i a l l y across a d v a n c e d c o u n t r i e s . I n 2 0 0 4 , the C o m m o n w e a l t h F u n d issued a l o n g - t e r m s t u d y o f m e d i c a l care in B r i t a i n , A m e r i c a , C a n a d a , N e w Z e a l a n d , a n d A u s t r a l i a .

3

W h i l e spending

t w i c e as m u c h p e r p e r s o n , the U n i t e d S t a t e s d i d o u t p a c e t h e U . K . in s u r v i v a l rates for breast c a n c e r a n d c e r v i c a l c a n c e r — b u t B r i t i s h s u r v i v a l rates w e r e h i g h e r t h a n A m e r i c a ' s for a n u m b e r o f o t h e r c a n c e r s , i n c l u d i n g c o l o r e c t a l , c h i l d h o o d l e u k e m i a , a n d n o n - H o d g k i n ' s l y m p h o m a , as w e l l as k i d n e y a n d liver transplants. B u t the s t u d y couldn't say, for e x a m p l e , w h e t h e r m o r e B r i t o n s s u r v i v e t r a n s p l a n t s b e c a u s e t h e i r care is b e t t e r or b e c a u s e A m e r i c a n s p e r f o r m transplants on s i c k e r p a t i e n t s . One ers

clear difference is t h a t B r i t o n s e x p e r i e n c e m a n y f e w e r financial b a r r i ­

to care. T h a t ' s because t h e U . K . N a t i o n a l H e a l t h S e r v i c e p i c k s u p m o r e

than 8 5 p e r c e n t o f the nation's total t a b for m e d i c a l care; a n d G e r m a n y , F r a n c e , a n d J a p a n aren't far b e h i n d , w i t h g o v e r n m e n t p e r c e n t o f their people's total h e a l t h - c a r e s p e n d i n g .

4

financing

7 5 to 8 1

W h a t that ultimately

m e a n s is t h a t p e o p l e p a y for each other's care t h r o u g h t h e i r t a x e s , w h i c h is a c l u e to w h y these c o u n t r i e s s p e n d so m u c h less t h a n A m e r i c a : T h e h a r d p o ­ litical fact is t h a t t a x p a y e r s w i l l tolerate o n l y m o d e s t a n d o c c a s i o n a l t a x h i k e s to k e e p the s y s t e m g o i n g , a n d so E u r o p e a n d J a p a n a p p l y p r i c e c o n t r o l s a n d s o m e f o r m o f g l o b a l b u d g e t s to t h e i r h e a l t h - c a r e sectors. A m e r i c a o b v i o u s l y has v e r y different a r r a n g e m e n t s , w i t h the g o v e r n m e n t p i c k i n g u p 4 5 p e r c e n t of the national t a b to c o v e r l o w - i n c o m e a n d retired p e o ­ p l e (and its o w n e m p l o y e e s ) , w h i l e m o s t c o m p a n i e s p r o v i d e p r i v a t e i n s u r a n c e for

their e m p l o y e e s . A m e r i c a n s b l a m e s o m e o f their h i g h costs o n this system's

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252

i n e f f i c i e n t — a n d in a n y case, the g r e a t e s t "inefficiencies" c o m e f r o m the u n c e r ­ tainties i n h e r e n t in m o s t m e d i c i n e . T h e m o s t i m p o r t a n t reason w h y A m e r i c a s p e n d s so m u c h m o r e o n h e a l t h care is s i m p l y political: W h i l e E u r o p e a n s a n d J a p a n e s e c a n force their p o l i t i c i a n s to find w a y s to d e l i v e r care w i t h o u t raising t h e i r taxes too m u c h , A m e r i c a n s u n h a p p y w i t h their r i s i n g costs or s h r i n k i n g c o v e r a g e c a n n o t d o m u c h a b o u t it e x c e p t t r y to find another j o b . A m e r i c a n s s p e n d so m u c h on health care that the p e r capita taxes that s u p ­ p o r t the elderly a n d p o o r are g r e a t e r t h a n the p e r c a p i t a taxes the G e r m a n s , 5

J a p a n e s e , a n d B r i t o n s p a y to c o v e r e v e r y b o d y . O n t o p o f those taxes, A m e r i c a n s h a v e to p a y for their p r i v a t e insurance p l u s o u t - o f - p o c k e t costs, w h i c h together are g r e a t e r p e r person t h a n all per-person m e d i c a l s p e n d i n g in B r i t a i n and Japan.

6

A m e r i c a n s h a v e p u t u p w i t h it because their i n c o m e s are h i g h e r than

J a p a n e s e or m o s t E u r o p e a n s , a n d there's been little they c o u l d d o a b o u t it. S t i l l , m e d i c a l s p e n d i n g has b e e n r i s i n g r a p i d l y in E u r o p e a n d J a p a n , too, b e c a u s e p r i c e c o n t r o l s c a n n o t s t o p p e o p l e f r o m a g i n g or arrest the t e c h n o l o g ­ ical a d v a n c e s b e i n g d e v e l o p e d to treat t h e illnesses o f o l d a g e . F r o m 2 0 0 0 to 2 0 0 4 , p e r c a p i t a l h e a l t h - c a r e s p e n d i n g rose b y a b o u t 4 p e r c e n t a year in J a p a n , 5 p e r c e n t a y e a r in G e r m a n y , a l m o s t 7 p e r c e n t a y e a r in F r a n c e , a n d 7

m o r e t h a n 9 p e r c e n t a y e a r in B r i t a i n . Britain's increases even o u t p a c e d the U n i t e d S t a t e s , w h e r e t h e costs g r e w b y a l i t t l e o v e r 8 p e r c e n t a year. T h i s is j u s t t h e b e g i n n i n g . A s t h e b o o m e r s start t o retire f r o m 2 0 1 0 to 2 0 2 0 , t h e share o f t h e p o p u l a t i o n a g e s i x t y or older w i l l rise in F r a n c e f r o m 2 3 to 2 7 p e r c e n t , in G e r m a n y f r o m 2 7 to 2 9 p e r c e n t , a n d in J a p a n f r o m 3 0 to 8

3 4 p e r c e n t . T h e U n i t e d K i n g d o m is in a l i t t l e b e t t e r s h a p e , w i t h its share o f p e o p l e s i x t y a n d o l d e r g o i n g f r o m 2 3 t o 2 5 p e r c e n t , w h i l e A m e r i c a ' s older c o h o r t w i l l rise f r o m 1 8 to 2 2 p e r c e n t . T h i s r a p i d a g i n g is a p r o b l e m , b e c a u s e the older w e are, the h i g h e r o u r m e d i c a l costs, w i t h m o s t people's final illnesses the m o s t e x p e n s i v e o f all. I n t h e U n i t e d S t a t e s , t h e a v e r a g e cost o f a person's m e d i c a l services j u m p s 7 0 percent f r o m ages 6 5 - 6 9 to ages 7 5 - 7 9 , and another 3 5 percent over age 8 0 .

9

T h e s e increases are less d r a m a t i c w h e n t h e g o v e r n m e n t c o n t r o l s h e a l t h - c a r e p r i c e s , b u t still s u b s t a n t i a l . T h e a v e r a g e J a p a n e s e person's m e d i c a l costs rise 6 2 p e r c e n t f r o m a g e s 6 5 - 6 9 t o a g e s 7 5 - 7 9 ; in G e r m a n y , those costs rise 3 9 p e r c e n t ; a n d in B r i t a i n , 3 7 p e r c e n t .

1 0

A n d f r o m 2 0 1 0 to 2 0 2 0 , the share of

t h e p o p u l a t i o n a g e 7 5 a n d o v e r w i l l reach 1 5 p e r c e n t in J a p a n , 1 2 p e r c e n t in G e r m a n y , a n d 1 0 p e r c e n t in F r a n c e .

1 1

H e r e , too, t h e d e m o g r a p h i c o u t l o o k is

b e t t e r for B r i t a i n a n d A m e r i c a , w i t h 7 5 - y e a r - o l d s a n d older a c c o u n t i n g for j u s t 8 p e r c e n t o f all B r i t o n s in 2 0 2 0 a n d 6.4 p e r c e n t o f A m e r i c a n s . T h e costs rise so m u c h b e c a u s e o l d e r p e o p l e are so m u c h m o r e l i k e l y t o h a v e h e a r t disease, c a n c e r s , a n d o t h e r c o n d i t i o n s t h a t h a v e b e c o m e v e r y

THE COMING CRISES IN HEALTH CARE, ENERGY, AND THE GL08AL ENVIRONMENT

253

e x p e n s i v e to treat. M o r e t h a n 8 0 p e r c e n t o f all A m e r i c a n s w h o d i e f r o m c o r o n a r y disease are a g e 6 5 or older, for e x a m p l e . C a n c e r d e a t h s also are h i g h l y c o n c e n t r a t e d in o l d p e o p l e in e v e r y a d v a n c e d c o u n t r y , w i t h m o r e t h a n 7 0 p e r c e n t o c c u r r i n g in p e o p l e a g e 6 5 or o l d e r a n d t h e m o s t c o m m o n a g e g r o u p for cancer deaths b e i n g 7 5 to 8 4 years o l d .

1 2

W h i l e t h e a g i n g o f the b o o m e r s a n d t h e i r p a r e n t s w i l l p l a y a l a r g e p a r t in future health-care costs, the facts are t h a t those costs rose t w e n t y - s i x f o l d o v e r the last t h i r t y - f i v e years, g o i n g f r o m $ 7 5 b i l l i o n in 1 9 7 0 to $ 2 . 1 t r i l l i o n in 2 0 0 6 , increasing 4 to 5 p e r c e n t a y e a r after inflation e v e n w h e n t h e b o o m e r s entered their g e n e r a l l y h e a l t h y t w e n t i e s a n d t h i r t i e s . and

1 3

L o o k i n g both back

ahead, the m o s t p o w e r f u l cost d r i v e r in h e a l t h care is i n n o v a t i o n ,

the

s a m e force that helps m a k e an e c o n o m y s t r o n g . E x p e n s i v e n e w d r u g s r e c e i v e m o s t of the p o l i t i c a l a t t e n t i o n , b u t t h e l a r g e s t c o s t - d r i v e r in h e a l t h care is t h e proliferation of n e w p r o c e d u r e s s u c h as a n g i o p l a s t i e s , j o i n t

replacements,

transplants, a r t h r o s c o p i c s u r g e r i e s , n e w m e d i c a l d e v i c e s f r o m M R I a n d C T scanners to i m p l a n t e d defibrillators, a n d t h e d o c t o r s ' t i m e a n d h o s p i t a l care r e q u i r e d to carry o u t the p r o c e d u r e s a n d use t h e e q u i p m e n t . I n 2 0 0 6 , w h i l e A m e r i c a n s spent $ 2 1 4 b i l l i o n on p r e s c r i p t i o n d r u g s , t h e y s h e l l e d o u t $ 4 2 1 b i l l i o n for p h y s i c i a n s a n d $ 6 5 2 b i l l i o n for h o s p i t a l c a r e .

1 4

M o s t o f t h e n e w p r o c e d u r e s a n d t e c h n o l o g i e s are w o r t h t h e cost. H e a r t d i s ­ ease a n d heart a t t a c k s h a v e l o n g b e e n t h e l e a d i n g causes o f d e a t h in a d v a n c e d countries. B u t since 1 9 8 0 , their U . S . m o r t a l i t y rate has fallen b y n e a r l y half, and

m e d i c a l i n n o v a t i o n s are the m a i n r e a s o n .

15

I n t h e 1 9 7 0 s , w h e n heart a t ­

tacks k i l l e d a b o u t 3 . 5 p e o p l e p e r t h o u s a n d A m e r i c a n s e v e r y year, p e o p l e s u r ­ v i v i n g an initial a t t a c k w e n t to c a r d i a c care u n i t s w h e r e t h e y u s u a l l y r e c e i v e d lidocaine for i r r e g u l a r h e a r t b e a t s , a short r e g i m e n o f b e t a - b l o c k e r s to l o w e r b l o o d pressure, a "clot buster" d r u g , a n d in s o m e cases, a r t e r y b y p a s s surgery. By

the m i d - 1 9 8 0 s , a n g i o p l a s t i e s r e p l a c e d m a n y o f t h e b y p a s s e s , a n d b e t a -

blockers b e c a m e a l o n g - t e r m m a i n t e n a n c e t h e r a p y for h i g h b l o o d p r e s s u r e . I n the 1 9 9 0 s , n e w d r u g s c a m e on t h e m a r k e t t h a t p r e v e n t clots f r o m f o r m i n g , a l o n g w i t h stent a n d r e v a s c u l a r i z a t i o n p r o c e d u r e s to k e e p b l o o d

flowing,

and

i m p l a n t e d defibrillators. T h e n u m b e r o f heart a t t a c k p a t i e n t s w h o r e c e i v e d s u r g e r y soared, f r o m a b o u t 1 0 p e r c e n t in 1 9 8 4 to m o r e t h a n 5 0 p e r c e n t in 1998,

1 6

a n d total s p e n d i n g on heart a t t a c k s rose 5 0 p e r c e n t — b u t the n u m b e r

of A m e r i c a n s d y i n g f r o m heart a t t a c k s fell to 1 . 9 p e r t h o u s a n d . T h e s e i m p r o v e m e n t s a n d c o m p a r a b l e ones for c o n d i t i o n s

that only re­

c e n t l y w e r e c o n s i d e r e d u n t r e a t a b l e — A I D S , renal disease, m a n y c a n c e r s , a n d m o r e — r a i s e costs not o n l y because the n e w d r u g s a n d e q u i p m e n t are e x p e n ­ sive a n d the d o c t o r s a n d nurses w h o use t h e m h a v e to be t r a i n e d a n d p a i d a c c o r d i n g l y ; in a d d i t i o n , m o r e p e o p l e s u r v i v e t h e i r crises a n d t h e n g o o n to

254

FUTURECAST

e x p e n s i v e l o n g - t e r m t r e a t m e n t s , m o r e p e o p l e h a v e to b e treated for s e c o n d a r y c o n d i t i o n s , s u c h as a n e m i a in d i a l y s i s p a t i e n t s , a n d m o r e p e o p l e s u r v i v e to e v e n t u a l l y d e v e l o p o t h e r c o n d i t i o n s t h a t also r e q u i r e e x p e n s i v e , treatment.

high-tech

1 7

A c c o r d i n g t o n e a r l y e v e r y o n e w h o looks c l o s e l y at h e a l t h - c a r e costs, these factors a c c o u n t for m o s t o f t h e real g r o w t h in m e d i c a l s p e n d i n g e v e r y w h e r e .

1 8

A n d these c o s t l y t e c h n o l o g i c a l a d v a n c e s a n d i n n o v a t i o n s are a c t u a l l y acceler­ a t i n g . I n 2 0 0 5 , U . S . d r u g , b i o t e c h , a n d m e d i c a l e q u i p m e n t c o m p a n i e s spent $ 6 5 b i l l i o n o n research, t h e U . S . g o v e r n m e n t s p e n t a n o t h e r $ 4 0 b i l l i o n , a n d universities a n d f o u n d a t i o n s another $ 1 0 b i l l i o n — a l l to d e v e l o p the n e w treat­ m e n t s , procedures, and e q u i p m e n t of the next decade. A case s t u d y o f h o w n e w t e c h n o l o g i e s p u s h u p m e d i c a l costs, i n v o l v i n g the d e v e l o p m e n t o f a n e w p r o c e d u r e for o v e r t w o m i l l i o n A m e r i c a n s w i t h a c o n ­ d i t i o n c a l l e d atrial

fibrillation,

c o u n t e d in The New

York Times.

or r a p i d a n d i r r e g u l a r h e a r t b e a t s , w a s re­ 19

A decade ago, the condition usually w e n t

u n t r e a t e d ; b u t after scientists a f e w y e a r s a g o d e t e r m i n e d t h a t it can lead to s t r o k e s or serious h e a r t d e t e r i o r a t i o n , i n d u s t r y a n d a c a d e m i c researchers d e ­ v e l o p e d a n e w treatment called catheter-based ablation. Surgeons thread long c a t h e t e r s t h r o u g h a patient's v e i n s a n d i n t o his or her h e a r t , w i t h t i n y d e v i c e s a t t a c h e d t o t h e e n d t h a t p e r m a n e n t l y n e u t r a l i z e t h e p a r t o f the heart m u s c l e t h a t p r o d u c e s t h e a b n o r m a l electrical i m p u l s e s . T h e p r o c e d u r e costs $ 2 5 , 0 0 0 t o $ 5 0 , 0 0 0 b e c a u s e it r e q u i r e s v e r y s p e c i a l i z e d e q u i p m e n t t h a t costs $ 5 , 0 0 0 a n d c a n b e u s e d o n l y o n c e , four h o u r s o f a c a r d i a c surgeon's t i m e a l o n g w i t h his or h e r t e a m , a n d t h e hospital's facilities. T h e F D A h a d n ' t e v e n a p p r o v e d t h e p r o c e d u r e as o f s u m m e r 2 0 0 7 , b u t t h e A m e r i c a n H e a r t A s s o c i a t i o n a n d A m e r i c a n C o l l e g e o f C a r d i o l o g y s u p p o r t it, a n d the s u r g e o n s a n d hospitals t h a t h a v e a l r e a d y d o n e it t h o u s a n d s o f t i m e s s i m p l y b i l l insurers a n d M e d i c a r e u s i n g t h e c o d e s for o t h e r c a r d i a c p r o c e d u r e s . O n c e t h e t r e a t m e n t is f o r m a l l y a p p r o v e d , as it a l m o s t c e r t a i n l y w i l l b e , its use w i l l g r o w . T h e h o s p i t a l s a n d c a r d i o l o g y c l i n i c s t h a t w i l l offer it w i l l b u y a lot o f h i g h - p r i c e d e q u i p m e n t b e y o n d t h e catheters a n d their a t t a c h m e n t s , in­ cluding high-tech diagnostic, computerized m a p p i n g , and robotic guidance s y s t e m s . I n d u s t r y e x p e r t s figure t h a t t h e e q u i p m e n t alone w i l l g e n e r a t e sales of $ 1 . 5 to $ 5 billion over the next decade; and the surgical personnel, hospi­ tal, a n d a s s o c i a t e d costs w i l l c o m e to several t i m e s as m u c h . I f the p a t i e n t s u s ­ i n g t h e p r o c e d u r e a v o i d s t r o k e s a n d h e a r t d e t e r i o r a t i o n , it w i l l save m o n e y o v e r a l o n g t e r m — a n d so l o n g as it's o n l y u s e d for cases in w h i c h an alterna­ t i v e $ 1 , 0 0 0 d r u g t h e r a p y doesn't w o r k . Y e t d o c t o r s a n d hospitals g e n e r a t i n g l a r g e r e v e n u e s f r o m c a t h e t e r - b a s e d a b l a t i o n s h a v e l i t t l e i n c e n t i v e to m a k e that distinction, and m o s t patients w i l l follow their advice.

THE COMING CRISES IN HEALTH CARE, ENERGY, AND THE GLOBAL ENVIRONMENT

255

A m e r i c a n h e a l t h care has no c e n t r a l a u t h o r i t y t h a t c a n l i m i t t h e use o f t h e t r e a t m e n t or set its p r i c e , b u t it does h a v e s o m e i n d i r e c t , b u i l t - i n c o n s t r a i n t s . L a c k o f i n s u r a n c e effectively denies m a n y t r e a t m e n t s t o a b o u t 1 5 p e r c e n t o f p e o p l e . P r i v a t e insurers a n d t h e federal g o v e r n m e n t in its M e d i c a r e a n d M e d ­ icaid p r o g r a m s also a p p l y a loose f o r m o f p r i c e c o n t r o l s b y u s u a l l y p a y i n g h o s ­ p i t a l s , d o c t o r s , a n d p h a r m a c i e s less t h a n t h e i r retail rates. T h e p r i v a t e insurers t h a t c o v e r 6 0 p e r c e n t o f A m e r i c a n s also w i t h h o l d c o v e r a g e for p r o c e d u r e s or d r u g s t h e y c o n s i d e r " e x p e r i m e n t a l " or o u t s i d e t h e n o r m ; a n d in a b o u t 1 0 p e r ­ cent of cases, t h e y d e n y c o v e r a g e t o s o m e p a t i e n t s , often for " p r e e x i s t i n g c o n ­ ditions." T h e s e p r a c t i c e s h i g h l i g h t the i n e q u i t i e s t h a t e m e r g e i n e v i t a b l y w h e n the p u r s u i t o f profits in p r i v a t e h e a l t h care c o l l i d e s w i t h f a s t - r i s i n g m e d i c a l p r i c e s a n d s t r o n g resistance t o h i g h e r p r e m i u m s . B u t c o m p a r e d to t h e p r o t o ­ cols and prices set b y the B r i t i s h , J a p a n e s e , G e r m a n , a n d F r e n c h health s y s t e m s , these p r a c t i c e s h a v e h a d m o d e s t effects o n p r i c e s a n d access t o h i g h - t e c h m e d ­ icine for m o s t A m e r i c a n s . A n o t h e r reason w h y U . S . h e a l t h - c a r e costs are so m u c h h i g h e r is t h a t the s y s t e m s in other c o u n t r i e s t a c i t l y shift s o m e o f t h e i r costs t o t h e

United

States. W h i l e A m e r i c a sticks w i t h l a r g e l y u n c o n t r o l l e d p r i c e s for n e w m e d ­ ical e q u i p m e n t , d r u g s , a n d o t h e r t r e a t m e n t s , m o s t o f t h e m are also u s e d in E u r o p e a n d J a p a n , w h e r e p r i c e c o n t r o l s force t h e U . S . d e v e l o p e r s t o a c c e p t less for each sale. S o , for e x a m p l e , t h e s a m e p r e s c r i p t i o n s d r u g s cost b e t w e e n 4 3 a n d 5 0 p e r c e n t less in G e r m a n y , B r i t a i n , a n d F r a n c e t h a n in t h e U n i t e d States.

2 0

S i n c e t h e c o m p a n i e s p r o d u c i n g these p r o d u c t s p r i c e t h e m to g e n e r ­

ate an overall r e t u r n set b y financial m a r k e t s , E u r o p e a n a n d J a p a n e s e p r i c e controls d r i v e u p p r i c e s inside t h e A m e r i c a n m a r k e t . The are

other b i g p r o b l e m is t h a t s o m e o f t h e m o s t c o s t - e f f e c t i v e

technologies

u n d e r u s e d a n d others t h a t are m u c h less c o s t - e f f e c t i v e are o v e r u s e d .

2 1

C o r o n a r y b y p a s s s u r g e r y w o r k s w e l l for p e o p l e w i t h h e a r t disease o f t h e left m a i n c o r o n a r y artery, b u t not for those w i t h s i n g l e - v e s s e l

disease—although

m a n y o f t h e m also h a v e the surgery. D r u g s t h a t l o w e r c h o l e s t e r o l w o r k w e l l for

those w i t h heart disease or m u l t i p l e r i s k factors for i t , b u t n o t for m i l l i o n s

of others w h o also t a k e t h e m . A n d D r . A l a n L o t v i n , a c a r d i o l o g i s t w h o n o w heads the l a r g e s t m e d i c a l c o n t i n u i n g

education

c o m p a n y in t h e

United

S t a t e s , e s t i m a t e s t h a t h a l f o f c u r r e n t a n g i o p l a s t i e s d o n ' t h a v e to b e d o n e . F u r ­ ther, s o m e n e w t r e a t m e n t s p r o v i d e o n l y m o d e s t benefits at l a r g e cost. F i v e years a g o , the t w o p r i n c i p a l d r u g s for colon cancer cost a b o u t $ 5 0 0 p e r r e g i m e n and

p r o d u c e d an average s u r v i v a l rate o f e i g h t m o n t h s ; c u r r e n t c h e m o t h e r a p i e s

for

colon c a n c e r cost $ 3 0 0 , 0 0 0 t o $ 5 0 0 , 0 0 0 w i t h a s u r v i v a l rate o f t h i r t e e n t o

t w e n t y m o n t h s . A n d h o w d o c t o r s a n d h o s p i t a l s are p a i d c a n affect t h e i r use o f e x p e n s i v e p r o c e d u r e s : P a t i e n t s w i t h fee-for-service c o v e r a g e are 5 0 p e r c e n t

FUTURECAST

256

m o r e l i k e l y t o h a v e e l e c t r o c a r d i o g r a m s a n d 4 0 p e r c e n t m o r e l i k e l y to h a v e c h e s t r a d i o g r a p h s , for e x a m p l e , t h a n others l i k e t h e m in all other respects. The

K a i s e r F o u n d a t i o n e s t i m a t e s t h a t on t h e c u r r e n t p a t h , U . S . h e a l t h ­

care e x p e n d i t u r e s

will top

$ 1 2 , 2 0 0 per A m e r i c a n ,

2 2

$ 4 trillion

b y 2 0 1 5 , w h i c h w i l l w o r k out

to

a n d $ 5 . 7 t r i l l i o n b y 2 0 2 0 . A m e r i c a c o u l d f o l l o w the

rest o f t h e w o r l d a n d c u t i n t o these costs w i t h p r i c e c o n t r o l s , either in a s y s ­ t e m t h a t k e e p s p r i v a t e insurers in b u s i n e s s or t h r o u g h a n e w national h e a l t h ­ care s y s t e m . T h e u n a v o i d a b l e r e s u l t w i l l b e a l i t t l e m o r e o f w h a t lies ahead for e v e r y o n e : People's m e d i c a l care w i l l g r a d u a l l y b e c o m e less h i g h - t e c h , at least for

t h o s e w h o can't afford t o p a y a l a r g e p r e m i u m o v e r e v e r y o n e else. People's

i n i t i a l t r e a t m e n t s w i l l b e c o m e t h e l e a s t - e x p e n s i v e o p t i o n s , insurers or the g o v e r n m e n t will approve fewer expensive new technologies, d r u g s , and pro­ c e d u r e s for g e n e r a l use; a n d t h e i r d e v e l o p m e n t e v e n t u a l l y w i l l s l o w d o w n .

THE COMING CRUNCH IN FRANCE, GERMANY, AND THE UNITED STATES P r i c e s are h i g h e r in A m e r i c a , b u t e v e r y a d v a n c e d c o u n t r y w i l l face m u c h the s a m e h e a l t h - c a r e crisis o v e r t h e n e x t d e c a d e . T h i s m a y b e especially so for F r a n c e , G e r m a n y , a n d t h e U n i t e d S t a t e s , b e c a u s e t h e i r h e a l t h - c a r e s y s t e m s are close c o u s i n s . T o b e g i n w i t h , all t h r e e s y s t e m s g i v e p e o p l e b r o a d a u t o n o m y to m a n a g e t h e i r o w n h e a l t h care. E v e r y o n e in F r a n c e a n d G e r m a n y can choose his or h e r p r i m a r y d o c t o r , as c a n m o s t A m e r i c a n s , w i t h the notable e x c e p t i o n o f u n i n s u r e d p e o p l e w h o h a v e t o a c c e p t w h o m e v e r t h e y g e t in h o s p i t a l e m e r ­ g e n c y r o o m s or c h a r i t y c l i n i c s . S e e i n g a d o c t o r is also fairly easy, w i t h the F r e n c h a n d G e r m a n s v i s i t i n g p h y s i c i a n s a n a v e r a g e o f e i g h t t o nine t i m e s a year, a n d A m e r i c a n s an a v e r a g e o f five t i m e s a y e a r .

2 3

A l l three countries also

p r o v i d e m o s t care o n a fee-for-service basis, w i t h A m e r i c a n s a n d F r e n c h p a y ­ i n g a n d t h e n b e i n g r e i m b u r s e d w h i l e G e r m a n p r o v i d e r s are p a i d d i r e c t l y b y the g o v e r n m e n t . All

t h r e e s y s t e m s also c o m b i n e p u b l i c a n d p r i v a t e e l e m e n t s , a l t h o u g h in

d i f f e r e n t w a y s . I n F r a n c e , t h e g o v e r n m e n t p i c k s u p 7 0 to 8 0 p e r c e n t o f e v e r y o n e ' s costs for m o s t s e r v i c e s , d r u g s , a n d d e v i c e s , r e g a r d l e s s o f a g e or i n ­ c o m e , a n d n e a r l y all F r e n c h p e o p l e also c a r r y p r i v a t e i n s u r a n c e for the o t h e r 2 0 to 3 0 p e r c e n t . The

2 4

I n G e r m a n y , t h e p u b l i c - p r i v a t e s p l i t is b a s e d o n i n c o m e :

g o v e r n m e n t c o v e r s n e a r l y all h e a l t h - c a r e costs for e v e r y o n e e a r n i n g u p

t o $ 6 0 , 0 0 0 a y e a r ( i n c l u d i n g "nature h e a l i n g , " a c u p u n c t u r e , h o m e o p a t h y , glasses, teeth replacements, health

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d u r e s ) . T h e t o p - e a r n i n g 1 5 p e r c e n t o f G e r m a n s also c a n t a k e the p u b l i c c o v ­ erage, but about two-thirds opt out and g o p r i v a t e .

2 5

F i n a l l y , in the U n i t e d

THE COMING CRISES IN HEALTH CARE, ENERGY, AND THE GLORAL ENVIRONMENT States, the g o v e r n m e n t

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care for e l d e r l y a n d l o w - i n c o m e p e o p l e , o r

a b o u t o n e - q u a r t e r o f t h e c o u n t r y , w h i l e 8 0 p e r c e n t o f t h e rest h o l d p r i v a t e i n s u r a n c e t h r o u g h t h e i r j o b s . T h o s e left, a b o u t 1 5 p e r c e n t o f A m e r i c a n s , fall s o m e w h e r e in b e t w e e n — t o o y o u n g a n d n o t p o o r e n o u g h t o q u a l i f y for t h e g o v e r n m e n t p r o g r a m s , a n d w o r k i n g in j o b s t h a t d o n ' t p r o v i d e p r i v a t e c o v e r ­ age

a n d p a y too l i t t l e to b u y it. T h e essential d i f f e r e n c e a f f e c t i n g c o s t s , h o w ­

ever, is t h a t G e r m a n y a n d F r a n c e h a v e s y s t e m s in w h i c h t h e

government

d e t e r m i n e s w h a t m e d i c a l s e r v i c e s , p r o d u c t s , a n d p r o c e d u r e s are r e i m b u r s e d , a n d sets t h e i r p r i c e s . T h e s e r e g u l a t i o n s a m o u n t t o n o t o n l y p r i c e c o n t r o l s o n m o s t d r u g s a n d p r o c e d u r e s , b u t also w a g e c o n t r o l s o n d o c t o r s : F r e n c h p h y s i ­ cians earn r o u g h l y t w i c e t h e a v e r a g e i n c o m e in F r a n c e , a n d G e r m a n d o c t o r s e v e n less, w h i l e A m e r i c a n d o c t o r s t a k e h o m e five t i m e s t h e U . S . a v e r a g e i n ­ come. All

2 6

three s y s t e m s are s t r a i n i n g t o c o n t a i n t h e i r costs. A n g i o p l a s t i e s , t r a n s ­

plants, third and fourth rounds of chemotherapy, and thousands of other ex­ p e n s i v e p r o c e d u r e s are a l i t t l e less w i d e s p r e a d in E u r o p e , a n d cost less in P a r i s a n d B e r l i n t h a n in N e w Y o r k or M i a m i . B u t all t h r e e s y s t e m s e m b r a c e m o d ­ ern m e d i c i n e a n d leave m o s t decisions to d o c t o r s a n d p a t i e n t s , w i t h l i t t l e to c o n s t r a i n their d e m a n d . T h e r e s u l t is t h a t t h e U n i t e d S t a t e s d e v o t e s

the

world's b i g g e s t share o f its e c o n o m y t o m e d i c a l c a r e , a n d F r a n c e a n d G e r ­ m a n y are n u m b e r s three a n d five. M o r e o v e r , w h i l e A m e r i c a n h e a l t h - c a r e costs h a v e been r i s i n g b y 8 p e r c e n t a y e a r since 2 0 0 0 , t h o s e costs h a v e b e e n r i s i n g 5 p e r c e n t a y e a r in F r a n c e a n d G e r m a n y . T a k e a c c o u n t o f t h e r a p i d a g i n g f a c ­ i n g F r a n c e a n d G e r m a n y , a n d , on t h e i r p r e s e n t p a t h s , all t h r e e s y s t e m s c o u l d see h e a l t h - c a r e costs d o u b l e or m o r e b e t w e e n n o w a n d 2 0 2 0 . All

three c o u n t r i e s a l m o s t c e r t a i n l y w i l l r e s p o n d in m u c h t h e s a m e w a y as

t h e y h a v e in the last d e c a d e , b u t w i t h g r e a t e r c u m u l a t i v e i m p a c t o n t h e q u a l ­ i t y o f people's care. T h e first line o f defense b y t h e F r e n c h a n d G e r m a n g o v ­ ernments, U . S . insurance companies, and A m e r i c a ' s M e d i c a r e and M e d i c a i d p r o g r a m s is to c u t r e i m b u r s e m e n t s to h o s p i t a l s , d o c t o r s , a n d d r u g c o m p a ­ nies. T h a t p r o b a b l y w o r k s least w e l l in F r a n c e a n d in c a r i n g for t h e e l d e r l y in A m e r i c a , since in b o t h cases p r i v a t e insurers offer s u p p l e m e n t a r y c o v e r a g e t o m a k e u p m o s t o f the difference. O t h e r l i m i t s t o this a p p r o a c h also h a v e b e c o m e a p p a r e n t recently. F o r e x a m p l e , F r e n c h a n d G e r m a n p h y s i c i a n s are u n i o n i z e d , a n d b o t h c o n d u c t e d successful strikes in 2 0 0 5 a n d 2 0 0 6 t o raise t h e i r fees or salaries. O v e r t i m e , this s t r a t e g y also w i l l i n e v i t a b l y d e g r a d e t h e q u a l i t y o f care, or at least s l o w its p r o g r e s s , b e c a u s e it t a r g e t s t h e m o s t e x p e n s i v e ser­ v i c e s , d r u g s , a n d p r o c e d u r e s , w h i c h are u s u a l l y t h e m o s t r e c e n t l y d e v e l o p e d a n d a d v a n c e d . A n d if it's m e a n t to p r o d u c e m a j o r s a v i n g s , it has t o b e t a r ­ g e t e d to those w i t h the m o s t serious p r o b l e m s : I n F r a n c e , 1 0 p e r c e n t o f t h e

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p e o p l e a c c o u n t for t h r e e - f o u r t h s o f h e a l t h - c a r e s p e n d i n g ,

2 7

a n d the p r o p o r ­

t i o n s are c o m p a r a b l e e v e r y w h e r e there are a d v a n c e d m e d i c a l s y s t e m s . T h e second line o f a t t a c k o n costs is to m a k e it m o r e e x p e n s i v e or m o r e dif­ ficult

to g e t t r e a t m e n t . I n 2 0 0 3 , G e r m a n y e n d e d its l o n g tradition of free care

a n d i n t r o d u c e d m o d e s t p a t i e n t c o - p a y m e n t s o f five to ten euros for each d o c ­ tor's v i s i t , d r u g p r e s c r i p t i o n , a n d d a y s p e n t in a hospital or rehab facility. T h e p a y m e n t s are still c o n s i d e r a b l y less t h a n the c o - p a y s o f 2 0 to 3 0 p e r c e n t in F r a n c e a n d J a p a n . I n F r a n c e , the h i g h e r c o - p a y m e n t s are passed on to people's s u p p l e m e n t a r y c o v e r a g e , w h e r e p r e m i u m s n a t u r a l l y h a v e been r i s i n g . A m e r i ­ cans p a y t h e h i g h e s t a n d fastest-rising o u t - o f - p o c k e t costs: I n 2 0 0 4 , they aver­ a g e d $ 2 5 5 p e r p e r s o n for those w i t h p r i v a t e c o v e r a g e , w i t h the t o p 1 0 percent s p e n d i n g m o r e t h a n $ 1 , 5 0 0 , a n d a l m o s t $ 6 0 0 p e r person i n c l u d i n g those w i t h ­ out c o v e r a g e .

2 8

T h e b i g l i m i t a t i o n o f this a p p r o a c h is its effect on people's

h e a l t h , because w h e n c o - p a y m e n t s a n d o u t - o f - p o c k e t costs rise sharply, p e o p l e g e t less care. E v e n so, it doesn't c o m e close to the root causes o f the fast-rising costs, since m o s t o f those costs c o m e f r o m a d v a n c e d t r e a t m e n t s for p e o p l e w i t h serious illnesses, a n d t h e y ' r e n o t d e t e r r e d b y c o - p a y m e n t s . T h e t h i r d r e s p o n s e t o t h e s e r i s i n g c o s t s is t o p a y t h e m b y r a i s i n g t a x e s or increasing

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m e n t s y s t e m b y h a l f a p e r c e n t a g e p o i n t , t o 7 . 1 p e r c e n t o f a w o r k e r ' s salary a n d 8 p e r c e n t o f a c o m p a n y ' s p a y r o l l c o s t s , or a t o t a l o f s o m e 1 5 p e r c e n t o f m o s t w o r k i n g f a m i l i e s ' i n c o m e s . T h e r e are also p l a n s in G e r m a n y t o raise t a x e s o n w a g e s a n d p e n s i o n i n c o m e t o l i m i t l o o m i n g deficits for l o n g - t e r m c a r e . I n F r a n c e , t h e g o v e r n m e n t r e p l a c e d t h e 6.8 p e r c e n t p a y r o l l t a x for e m ­ p l o y e e s w i t h a 5 . 2 5 p e r c e n t t a x o n all i n c o m e — t h e S o c i a l D e m o c r a t s h a v e c a l l e d for t h e s a m e s h i f t for G e r m a n y — p l u s t h e 1 1 p e r c e n t e m p l o y e r s ' t a x on p a y r o l l s .

2 9

I n t h e U n i t e d S t a t e s , t h e b i g increases h a v e c o m e in the p r i ­

v a t e i n s u r a n c e p r e m i u m s p a i d t h r o u g h w o r k , w h i c h rose 8 7 p e r c e n t f r o m 2 0 0 0 t o 2 0 0 6 , c o m p a r e d t o o v e r a l l inflation o f 1 8 p e r c e n t .

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y e a r s , a n d t h e costs o f t h e t r e a t m e n t s t h e y w i l l n e e d increase e v e n faster, t h e y w o n ' t b e a b l e t o raise taxes o r p r e m i u m s e n o u g h to c o v e r t h e m . T h i s tact w i l l p r o b a b l y reach its l i m i t e v e n sooner t h a n c u t s in r e i m b u r s e m e n t a n d increases in c o - p a y m e n t s , b e c a u s e t a x e s a n d p r e m i u m s a l r e a d y are so h i g h . W i t h o v e r ­ all t a x b u r d e n s o f 4 5 t o 5 0 p e r c e n t across m o s t o f E u r o p e , h o w m u c h h i g h e r t a x e s w i l l E u r o p e a n w o r k e r s b e w i l l i n g t o p a y to finance p r i m a r i l y the r i s i n g

THE COMING CRISES IN HEALTH CARE, ENERGY, AND THE GLOBAL ENVIRONMENT

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m e d i c a l bills o f retired p e o p l e ? A n d w i t h i n s u r a n c e p r e m i u m s p a i d t h r o u g h the w o r k p l a c e a v e r a g i n g $ i 1 , 5 0 0 for an A m e r i c a n f a m i l y o f four, h o w m u c h h i g h e r can t h e y g o ? T h e r e are still a f e w c o m p a r a t i v e l y easy w a y s left t o c u t costs in e v e r y s y s ­ t e m . T h e G e r m a n s a l m o s t c e r t a i n l y w i l l r e q u i r e t h a t p e o p l e w h o w a n t t o see a specialist g e t a referral f r o m t h e i r p r i m a r y d o c t o r , as e v e r y o n e else a l r e a d y does. T h e F r e n c h , w h o use a b o u t t w i c e as m a n y p h a r m a c e u t i c a l s as A m e r i c a n s or

m o s t o t h e r E u r o p e a n s , w i l l t a k e steps t o use m o r e g e n e r i c s . A n d t h e U . S .

g o v e r n m e n t c o u l d force d o c t o r s , h o s p i t a l s , a n d insurers t o c u t t h e i r a d m i n i s ­ t r a t i v e costs b y a d o p t i n g s t a n d a r d i z e d b i l l i n g

and reimbursement

d u r e s , p e r h a p s w h e n it finally takes steps t o c o v e r u n i n s u r e d p e o p l e .

proce­ 3 2

Even

so, these c h a n g e s a n d e v e r y t h i n g else w i l l still leave g r o w i n g c h a s m s o f costs. R e g a r d l e s s o f w h a t else h a p p e n s , b y 2 0 2 0 m o s t people's access to t h e m o s t e x ­ pensive and technologically advanced treatments and procedures of the t i m e w i l l b e r e d u c e d substantially. A n d o v e r t i m e , those r e d u c t i o n s w i l l s l o w t h e p a c e of a d d i t i o n a l m e d i c a l i n n o v a t i o n .

THE HEALTHCARE CRISIS IN JAPAN AND THE UNITED KINGDOM J a p a n a n d B r i t a i n already h a v e a r r i v e d w h e r e G e r m a n y , F r a n c e , a n d

the

U n i t e d States are h e a d e d . T h e a b i l i t y o f J a p a n a n d B r i t a i n t o k e e p t h e i r n a ­ tional h e a l t h - c a r e s p e n d i n g t o a b o u t 8 p e r c e n t o f ( 2 0 0 5 ) G D P — a b o u t h a l f the share that A m e r i c a s p e n d s , a n d t h r e e - q u a r t e r s t h e share in F r a n c e a n d 3 3

G e r m a n y — s e e m s r e m a r k a b l e . W h a t sets t h e m a p a r t a n d has m a d e s u c h a large difference, s i m p l y s t a t e d , are m u c h s t r i c t e r g o v e r n m e n t c o n t r o l s on t h e p r i c e s of e v e r y t h i n g in health care. In J a p a n , doctors' fees, the salaries o f nurses a n d o t h e r h e a l t h - c a r e p e r s o n ­ nel, h o s p i t a l c h a r g e s , p r i c e s for d r u g s , m e d i c a l e q u i p m e n t a n d m e d i c a l s u p ­ plies, are all d e t e r m i n e d , after s o m e n e g o t i a t i o n , b y t h e C e n t r a l S o c i a l M e d i c a l C a r e C o u n c i l o f t h e M i n i s t r y o f H e a l t h , L a b o r , a n d W e l f a r e . T h i s c o u n c i l has set these p r i c e s at s u c h l o w levels t h a t , f r o m 1 9 8 0 t o 2 0 0 0 , J a p a n e s e h e a l t h ­ care costs a c t u a l l y g r e w m o r e s l o w l y t h a n o v e r a l l c o n s u m e r p r i c e s .

3 4

O n e rea­

son is t h a t w h e n d e m a n d for a h e a l t h - c a r e s e r v i c e g o e s u p in J a p a n ,

the

g o v e r n m e n t k e e p s the l i d on s p e n d i n g b y c u t t i n g t h e r e i m b u r s e m e n t . W h e n the use o f M R I scans j u m p e d in 2 0 0 0 a n d 2 0 0 1 , for e x a m p l e , t h e J a p a n e s e g o v e r n m e n t c u t t h e fees it p a i d to d o c t o r s a n d h o s p i t a l s f r o m $ 1 5 0 t o a l i t t l e over $ 1 0 0 — t h e s a m e scan costs f r o m $ 6 5 0 t o $ 1 , 2 0 0 in A m e r i c a , a n d not m u c h less in G e r m a n y a n d F r a n c e — a n d J a p a n e s e d o c t o r s a n d started u s i n g t h e m l e s s .

35

hospitals

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J a p a n ' s s t r i c t p r i c e a n d w a g e c o n t r o l s in h e a l t h care i n e v i t a b l y c u t i n t o the s u p p l i e s o f d o c t o r s a n d t h e m o s t e x p e n s i v e services t h a t r e q u i r e the m o s t ex­ p e n s i v e e q u i p m e n t . T h e r e are s u b s t a n t i a l l y f e w e r d o c t o r s p e r t h o u s a n d p e o p l e in J a p a n a n d B r i t a i n t h a n in A m e r i c a , G e r m a n y , or F r a n c e , because t h e y earn so l i t t l e . S i n c e a n y o n e c a n see a n y d o c t o r or specialist in J a p a n w i t h o u t a re­ ferral o r p a y i n g a n y t h i n g b e y o n d a s t a n d a r d c o - p a y m e n t , J a p a n e s e also see t h e i r d o c t o r s v e r y f r e q u e n t l y — a l t h o u g h it's often said t h a t v i s i t s to J a p a n e s e doctors consist of "three-hour w a i t s and three-minute c o n t a c t s . "

36

J a p a n also

uses v e r y c o s t l y h i g h - t e c h m e d i c i n e less b r o a d l y , w i t h less t h a n h a l f as m a n y I C U a n d c o r o n a r y care b e d s as t h e U n i t e d S t a t e s p e r t h o u s a n d p e o p l e , a n d r o u g h l y one-third the surgeries.

37

I n s t e a d , d r u g therapies are m o r e c o m m o n —

d r u g s a c c o u n t for 2 0 p e r c e n t o f all h e a l t h - c a r e s p e n d i n g or nearly t w i c e as m u c h as a l m o s t a n y w h e r e else e x c e p t F r a n c e — b e c a u s e they're c h e a p e r t h a n s u r g e r y a n d J a p a n e s e d o c t o r s c a n sell d r u g s at a m a r k u p . S o the catheterb a s e d a b l a t i o n s d e s c r i b e d earlier w i l l n e v e r be u s e d as w i d e l y in J a p a n as in the U n i t e d States. W h i l e J a p a n e s e controls effectively ration h i g h - t e c h m e d i c a l care w h e r e t h e y c a n , Britain's p r i c e controls p r o d u c e shortages, especially of doctors and their t i m e , a n d b o t t l e n e c k s for hospital p r o c e d u r e s . O v e r a l l , B r i t a i n has one o f the world's s i m p l e s t g o v e r n m e n t - r u n m e d i c a l s y s t e m s . T h e B r i t i s h N a t i o n a l H e a l t h S e r v i c e ( N H S ) o w n s the hospitals, e m p l o y s the doctors, sets the fees for all i n p a t i e n t a n d o u t p a t i e n t

services, a n d then p a y s the costs w i t h o u t

co-

p a y m e n t s , e x c e p t for m o d e s t c h a r g e s o n a b o u t 1 5 p e r c e n t of prescriptions a n d larger fees for d e n t i s t r y a n d o p t i c a l s e r v i c e s .

38

Britain's l o w fees, c o m b i n e d w i t h

free access to personnel a n d facilities, h a v e led to the system's n o w - f a m o u s l y l o n g w a i t s a n d q u a l i t y p r o b l e m s . T h e shortages in B r i t i s h health care b e g i n w i t h the l o w e s t n u m b e r o f doctors p e r t h o u s a n d p e o p l e of a n y d e v e l o p e d c o u n ­ try.

3 9

T h e N H S is s u c h an u n a t t r a c t i v e p r o s p e c t for b u d d i n g doctors that it has

to fly in M D s f r o m other E u r o p e a n countries to be on call on w e e k e n d s ,

4 0

and

the B r i t i s h M e d i c a l A s s o c i a t i o n reports that t w o - t h i r d s o f the doctors w h o j o i n e d the health service in 2 0 0 4 w e r e trained outside B r i t a i n , m a i n l y in A f r i c a . T h e l o n g e s t w a i t s , a v e r a g i n g t w o m o n t h s or m o r e , i n v o l v e g e t t i n g to see spe­ cialists a n d , i f necessary, r e c e i v i n g hospital t r e a t m e n t .

41

A f t e r a m a j o r p u s h and

large f u n d i n g increases b y t h e n - P r i m e M i n i s t e r T o n y B l a i r , the n u m b e r s o f p e o p l e w a i t i n g m o r e t h a n six m o n t h s for hospital p r o c e d u r e s f e l l — b y

how

m u c h is a m a t t e r o f d i s p u t e — b u t the p u s h h a d little effect on the large n u m ­ bers w h o at a n y t i m e w a i t for u p to five m o n t h s . U n s u r p r i s i n g l y , those w h o can afford to o p t o u t o f this s y s t e m g e n e r a l l y d o so, w i t h 1 2 percent of B r i t o n s n o w p u r c h a s i n g p r i v a t e insurance a n d access to doctors p r a c t i c i n g outside the N H S a n d to hospitals not o w n e d b y the N H S .

4 2

THE COMING CRISES IN HEALTH CARE, ENERGY, AND THE GLOBAL ENVIRONMENT

261

O n e reason they're o p t i n g o u t is p u b l i c r e p o r t s a n d p r i v a t e s t u d i e s s h o w ­ i n g h o w the l o w levels o f s u p p o r t h a v e affected q u a l i t y . T h e N a t i o n a l A u d i t Office r e p o r t e d t h a t B r i t a i n has the w o r s t r e c o r d in E u r o p e for

hospital-

a c q u i r e d infections, w i t h 9 p e r c e n t i n f e c t e d at a n y t i m e a n d c a u s i n g

five

t h o u s a n d u n n e c e s s a r y deaths a year. S i m i l a r l y , t h e O E C D f o u n d t h a t fatalities in the first seven d a y s f r o m s t r o k e are t w i c e t h e a v e r a g e in B r i t a i n as o t h e r O E C D countries. A n d m u c h like J a p a n , British doctors and hospitals perform heart p r o c e d u r e s at o n e - t h i r d t o o n e - h a l f t h e rates o f F r a n c e a n d G e r m a n y , d e s p i t e h a v i n g the w o r l d ' s s e c o n d - h i g h e s t i n c i d e n c e o f h e a r t d i s e a s e . So

43

m a n y factors affect the health of a nation's p o p u l a t i o n t h a t it's p o s s i b l e to

characterize a health-care s y s t e m in a l m o s t a n y w a y . A g a i n s t those d a t a , for e x ­ a m p l e , are the reports t h a t Britain's neonatal m o r t a l i t y rate is l o w e r t h a n G e r ­ m a n y ' s , a n d its m a t e r n a l m o r t a l i t y rate is l o w e r t h a n F r a n c e ' s — b u t its d e a t h rate f r o m c o m m u n i c a b l e diseases is h i g h e r t h a n o t h e r a d v a n c e d c o u n t r i e s .

44

S i m i l a r l y , a recent report f r o m a c o n s e r v a t i v e t h i n k t a n k in L o n d o n a n n o u n c e d that a l m o s t 3 1 , 0 0 0 B r i t o n s d i e e v e r y y e a r because t h e N H S doesn't m a t c h t h e a v e r a g e standard o f care in E U c o u n t r i e s for heart disease, r e s p i r a t o r y disease, and cancer.

45

B u t the report's d a t a s h o w that B r i t i s h d e a t h rates f r o m t w o o f

those causes, heart disease a n d cancer, are w e l l b e l o w t h e E U a v e r a g e . W h a t e v e r the v e r d i c t on B r i t i s h p u b l i c m e d i c i n e , w i d e s p r e a d p u b l i c d i s ­ satisfaction has forced L o n d o n to d o u b l e g o v e r n m e n t s p e n d i n g o n h e a l t h care f r o m 2 0 0 0 to 2 0 0 8 . A s B r i t a i n ' s b o o m e r s b e g i n t o retire, t h e U . K . w i l l e x p e ­ rience the s a m e c r u n c h f a c i n g G e r m a n y a n d F r a n c e : I n 2 0 0 3 , t h e a v e r a g e cost of m e d i c a l care for a B r i t o n u n d e r a g e s i x t y - f i v e w a s 4 4 0 p o u n d s a year; o v e r s i x t y - f i v e , it j u m p e d to nearly 1 , 0 0 0 p o u n d s a year, a n d m u c h h i g h e r t h a n that after a g e seventy-five or e i g h t y - f i v e .

46

Britain's b a b y - b o o m b u l g e is s m a l l e r

t h a n m a n y other a d v a n c e d c o u n t r i e s , b u t t h e n u m b e r o f e l d e r l y B r i t o n s w i l l still increase nearly 2 3 p e r c e n t f r o m 2 0 0 5 t o 2 0 2 0 . The

4 7

B r i t i s h s y s t e m is financed b y s u b s t a n t i a l p a y r o l l t a x e s , p l u s a d d i t i o n a l

funds f r o m the i n c o m e t a x a n d the 1 7 . 5 p e r c e n t V A T .

B y the British g o v e r n ­

ment's e s t i m a t e s , k e e p i n g p a c e w i l l r e q u i r e i n c r e a s i n g f u n d i n g b e t w e e n n o w and 2 0 2 0 b y about t w o - t h i r d s .

4 8

That's a d a u n t i n g prospect politically. R a i s ­

i n g Britain's V A T b y ten p e r c e n t a g e p o i n t s , for e x a m p l e , w o u l d t a k e care of just o n e - q u a r t e r o f t h e p r o j e c t e d shortfall. B u t w h e n t h e p r e s i d e n t o f t h e R o y a l C o l l e g e of Surgeons, Bernie R i b e i r o , recently u r g e d the introduction of the s u b s t a n t i a l c o - p a y m e n t s seen e v e r y w h e r e else, t h e h e a d o f t h e l a r g e s t health w o r k e r s u n i o n , U n i s o n , d e n o u n c e d it. N e v e r t h e l e s s , o v e r t h e n e x t t e n to fifteen y e a r s , it's v i r t u a l l y i n e v i t a b l e t h a t B r i t i s h h e a l t h care w i l l n o t o n l y i n t r o d u c e c o - p a y m e n t s , b u t also h i g h e r taxes a n d less use o f e x p e n s i v e m e d i c a l t e c h n o l o g i e s , w h a t e v e r the c o n s e q u e n c e s for q u a l i t y .

new

FUTURECAST

262

J a p a n ' s l o o m i n g p r o b l e m is t h a t its l o w - t e c h cost c o n t a i n m e n t s t r a t e g y is c o l l i d i n g w i t h its d e m o g r a p h i c s . J a p a n has b e e n a g i n g faster t h a n a n y w h e r e else for o v e r a g e n e r a t i o n ; a n d b y 2 0 2 0 , m o r e t h a n o n e - t h i r d o f J a p a n e s e w i l l b e a g e s i x t y or o l d e r .

4 9

T h e a g i n g o f t h e b o o m e r s is an issue e v e r y w h e r e , b u t

n o w h e r e else w i l l it affect t h e h e a l t h - c a r e s y s t e m as m u c h . J a p a n s p e n d s five t i m e s as m u c h p e r p e r s o n o n care for e l d e r l y p e o p l e as for y o u n g e r J a p a n e s e ,

3 0

b e c a u s e its l o w - t e c h m e d i c i n e has f e w e r a p p l i c a t i o n s for t h e c o n d i t i o n s that affect o l d e r p e o p l e , i n c l u d i n g t h e h e a r t disease a n d cancers that cause t w o t h i r d s o f all d e a t h s in J a p a n .

5 1

O v e r the n e x t ten to fifteen years this p r o b l e m w i l l b e c o m e even m o r e seri­ ous. A recent analysis b y H a r v a r d health e c o n o m i s t D a v i d C u t l e r found that d e ­ spite J a p a n ' s t i g h t h o l d o n p r i c e s , the rising costs of the overall s y s t e m can be traced e q u a l l y to its a g i n g b o o m e r s a n d technological c h a n g e s .

5 2

Moreover,

m u c h o f t h e c u r r e n t d e v e l o p m e n t o f e x p e n s i v e n e w e q u i p m e n t , treatments, and d r u g s is focused on heart disease a n d cancer. B y 2 0 2 0 , a c c o r d i n g to the best e s t i m a t e , t e c h n o l o g y a n d a g i n g w i l l increase health-care s p e n d i n g in J a p a n b y s o m e 7 5 p e r c e n t or m o r e — d e s p i t e the strict c o n t r o l s — a n d e x p a n d the share of J a p a n ' s G D P d e v o t e d to health care b y four p e r c e n t a g e points or 5 0 p e r c e n t .

53

J a p a n finances its h e a l t h care t h e s a m e w a y a l m o s t e v e r y o n e else d o e s — b y t a x e s a n d c o - p a y m e n t s . I n t h e last fifteen y e a r s , t h e g o v e r n m e n t has a l r e a d y d o u b l e d t h e w a g e - b a s e d taxes p a i d b y w o r k e r s , w h i c h a c c o u n t for 7 0 p e r c e n t o f h e a l t h - c a r e r e v e n u e s . I t also raised c o - p a y m e n t s for the n o n e l d e r l y f r o m 1 0 t o 3 0 p e r c e n t in t w o s t e p s , w i t h n o a p p a r e n t effect on d e m a n d for m e d i c a l services.

5 4

T h e n in 2 0 0 0 , T o k y o c o m p o u n d e d its l o n g - t e r m p r o b l e m b y c r e ­

a t i n g u n i v e r s a l c o v e r a g e for l o n g - t e r m care, in a b e n i g h t e d a t t e m p t to save m o n e y in t h e s h o r t t e r m b y s h i f t i n g p e o p l e f r o m hospitals to n u r s i n g h o m e s . (It didn't w o r k . )

5 5

S o in 2 0 0 6 , t h e g o v e r n m e n t also raised c o - p a y m e n t s b y the

e l d e r l y to as h i g h as 3 0 p e r c e n t , b a s e d o n a g e a n d i n c o m e , i n t r o d u c e d a n e w 2 0 p e r c e n t c o - p a y for t h e m e d i c a l costs o f y o u n g c h i l d r e n , a n d c u t fees a g a i n to h o s p i t a l s , c l i n i c s , d o c t o r s , a n d p h a r m a c i e s . J a p a n w i l l h a v e v e r y f e w o p t i o n s left as its health-care costs rise s h a r p l y over t h e n e x t d e c a d e . S o m e J a p a n e s e e x p e r t s e s t i m a t e that the costs w i l l require a n ­ o t h e r d o u b l i n g o f t h e taxes p a i d b y w o r k i n g p e o p l e .

5 6

T h e actual c r u n c h c o u l d

b e e v e n w o r s e i f J a p a n fails t o o p e n u p its e c o n o m y in w a y s that u l t i m a t e l y can boost its g r o w t h a n d t a x base for its h e a l t h care. A l l o f these forces m a k e a m a ­ jor p o l i t i c a l b a t t l e in J a p a n o v e r health care a l m o s t certain. It's safe to a s s u m e , e v e n for J a p a n , t h a t n o elected g o v e r n m e n t can f o l l o w u p the steep tax in­ creases o f recent years w i t h a n o t h e r 5 0 p e r c e n t h i k e in the p a y r o l l t a x , t o p p e d off b y s u b s t a n t i a l increases in the i n c o m e , V A T , a n d m u n i c i p a l taxes that also h e l p f u n d h e a l t h care. N o r can c o - p a y m e n t s g o m u c h h i g h e r w i t h o u t c u t t i n g

THE COMING CRISES IN HEALTH CARE, ENERGY, AND THE GLORAL ENVIRONMENT

283

into universal c o v e r a g e . A n d the d r a c o n i a n p r i c e c o n t r o l s t h a t w o u l d be neces­ sary to close the g a p w i l l c u t off

J a p a n from most medical advances.

In J a p a n , as a l m o s t e v e r y w h e r e else, t h e m o s t l i k e l y d e v e l o p m e n t s o v e r t h e next ten to fifteen years w i l l b e n e w m e d i c a l p r o t o c o l s d i c t a t i n g l o w e r - t e c h m e d i c i n e , even w h e n a person's life lies in t h e b a l a n c e , as w e l l as h i g h e r t a x e s , h i g h e r c o - p a y m e n t s , a n d l o w e r fees for h i g h e r - t e c h t r e a t m e n t s . W e a l t h y p e o ­ p l e in J a p a n a n d e v e r y w h e r e else w i l l be a b l e to b u y p e r s o n a l access to t h e l a t ­ est t e c h n o l o g i e s a n d b i o l o g i c d r u g s . F o r m o s t o t h e r p e o p l e , t h e l o n g t r e n d o f i m p r o v e m e n t s in h e a l t h care w i l l l i k e l y s l o w a n d c o u l d e v e n s t o p .

CHINA'S VERSION OF THE HEALTH-CARE CRISIS C h i n a w i l l face its o w n , u n i q u e h e a l t h - c a r e crisis in t h e n e x t d e c a d e . A s t h e o n l y society in h i s t o r y t o u n r a v e l a s y s t e m o f b a s i c , u n i v e r s a l c o v e r a g e , C h i n a n o w faces the p r o s p e c t o f h a v i n g to b u i l d a m o d e r n m e d i c a l s y s t e m for m o r e t h a n i b i l l i o n p e o p l e in a s h o r t t i m e — a n d d i v e r t e n o r m o u s resources f r o m its core m o d e r n i z a t i o n p r o g r a m to d o it. In

the 1 9 7 0 s , v i r t u a l l y all rural C h i n e s e h a d access to v e r y b a s i c m e d i c a l

care t h r o u g h a vast n e t w o r k o f clinics o p e r a t e d b y the a g r i c u l t u r a l c o m m u n e s , w h i l e a l m o s t e v e r y o n e else w o r k e d for the g o v e r n m e n t or s t a t e - o w n e d enter­ prises that p r o v i d e d c o v e r a g e at c i t y a n d t o w n hospitals. W i t h the e n d o f the c o m m u n e s y s t e m in the 1 9 8 0 s , m o s t o f the rural c l i n i c s closed d o w n a n d free access ended; a n d as m o s t s t a t e - o w n e d enterprises h a v e p h a s e d o u t in t h e last fifteen

years, c o v e r a g e for their e m p l o y e e s has d i s a p p e a r e d , too, i n c l u d i n g for

m i l l i o n s of r e t i r e e s .

57

W h a t ' s left is a s y s t e m t h a t p r o v i d e s c o v e r a g e for a b o u t

2 0 p e r c e n t of C h i n e s e — t h e state's soldiers a n d c i v i l s e r v a n t s , a n d those w o r k ­ i n g for the r e m a i n i n g s t a t e - o w n e d enterprises or f o r e i g n - o w n e d c o m p a n i e s . W i t h a l m o s t no p r i m a r y care available t h r o u g h i n d e p e n d e n t doctors, h o s p i ­ tals and g o v e r n m e n t clinics serve all of C h i n a ' s m e d i c a l n e e d s ,

5 8

at least for the

fraction that are insured or can p a y on their o w n a n d w h o also live in a large c i t y w i t h m o d e r n hospitals. O u t s i d e the cities, a c c o r d i n g to D r . M i c h a e l M o r e t o n , an A m e r i c a n obstetrician w h o practiced at China's only privately o w n e d w e s t e r n style hospital, B e i j i n g U n i t e d F a m i l y H o s p i t a l , "hospitals h a v e little in the w a y of m o d e r n e q u i p m e n t , or even m o d e r n p l u m b i n g . "

5 9

A n d in C h i n a ' s v i l l a g e s ,

the W o r l d B a n k reports, 7 0 percent of "doctors" h a v e no m o r e t h a n a h i g h school degree p l u s an a v e r a g e o f t w e n t y m o n t h s m e d i c a l t r a i n i n g . For

6 0

the nearly 8 0 percent of C h i n e s e w i t h o u t insurance or the p r i v a t e m e a n s

to pay, doctors w o n ' t see t h e m a n d hospitals w o n ' t a d m i t t h e m , regardless o f h o w sick or injured they are. A y o u n g A m e r i c a n o f m y a c q u a i n t a n c e , t e a c h i n g

FUTURECAST

264

w i t h her h u s b a n d in T s i n g t a o , h a d a b a b y in 2 0 0 7 , p r e p a i d , a n d w h e n she asked for an e p i d e r m a l injection, her h u s b a n d h a d to r u n to their a p a r t m e n t to fetch 5 0 0 r e m e m b i before her obstetrician w o u l d p r o v i d e it. The New

York Times

r e c o u n t e d a m o r e serious b u t also t y p i c a l instance of pay-before-care in early 2 0 0 6 . J i n G u i l i a n , t h i r t y - s i x , h a d w o r k e d for ten years as an o r d e r l y at a hos­ p i t a l that refused to treat h i m w h e n he d e v e l o p e d a heart condition and a r m infection, because he couldn't p a y .

6 1

H i s f a m i l y traveled five h u n d r e d miles to

take h i m h o m e to F u y a n g , w h e r e they c o u l d afford to cover four days in the lo­ cal hospital at $ 1 5 p e r day. F r o m there, J i n w e n t to an unheated clinic "where stray d o g s w a n d e r e d the g r i m y , u n l i g h t e d halls," and then h o m e to die o f condi­ tions that c o u l d have been treated easily a n d successfully w h e r e he had w o r k e d . T h e p o l i c y o f "pay u p f r o n t or t a k e y o u r c h a n c e s " e x t e n d s e v e n to v a c c i n a ­ tions for c h i l d r e n a n d c o m m u n i c a b l e diseases. M e a s l e s a n d t u b e r c u l o s i s , for e x a m p l e , are still e p i d e m i c across C h i n a . T h e W o r l d H e a l t h O r g a n i z a t i o n es­ t i m a t e s t h a t 3 0 m i l l i o n C h i n e s e w i l l d e v e l o p T B in this d e c a d e ,

6 2

and that

e v e r y year, 2 5 0 , 0 0 0 C h i n e s e w i l l d i e f r o m it, a l o n g w i t h c o m p a r a b l e fatalities from hepatitis.

6 3

T h e g o v e r n m e n t ' s a b d i c a t i o n o f h e a l t h care is also e v i d e n t in

W o r l d B a n k d a t a s h o w i n g t h a t in C h i n a , people's o u t - o f - p o c k e t costs n o w a c ­ c o u n t for n e a r l y t w o - t h i r d s o f all h e a l t h - c a r e s p e n d i n g .

6 4

E v e n a m o n g the 2 0

p e r c e n t w i t h i n s u r a n c e , o n e - t h i r d o f h o s p i t a l costs are p i c k e d u p b y p a t i e n t s and their f a m i l i e s .

6 5

A n d t h e g o v e r n m e n t ' s o w n e s t i m a t e s are t h a t h a l f o f all

C h i n e s e w h o are ill or i n j u r e d g o u n t r e a t e d b e c a u s e t h e y c a n n o t afford it. T h e s e p r o s p e c t s also are a p r i n c i p a l reason w h y C h i n e s e save s o m e 3 0 p e r ­ c e n t o f t h e i r i n c o m e s — a l t h o u g h m o s t c a n n e v e r save e n o u g h to c o v e r care for a serious c o n d i t i o n . I n 2 0 0 3 , t h e a v e r a g e h o s p i t a l stay cost t h e e q u i v a l e n t of 4 3 p e r c e n t o f an a v e r a g e f a m i l y ' s y e a r l y i n c o m e .

6 6

T h i s p r o b l e m is especially

a c u t e a m o n g e l d e r l y C h i n e s e , 9 0 p e r c e n t o f w h o m are u n i n s u r e d a n d , a c c o r d ­ i n g to a recent s t u d y f r o m t h e E l d e r l y H e a l t h a n d F a m i l y R e s e a r c h C e n t e r at B e i j i n g U n i v e r s i t y , g e n e r a l l y l i v e in p o v e r t y . T h e social a n d p o l i t i c a l p r o b l e m for C h i n a ' s leaders is h o w l o n g t h e y can j u s t i f y w h a t t h e B r i t i s h m e d i c a l j o u r n a l The Lancet calls a "pay or die" policy, w h e n h u n d r e d s o f m i l l i o n s o f C h i n e s e c a n r e m e m b e r free access to care a n d k n o w t h a t t h e i r c o u n t r y has g r o w n m u c h m o r e p r o s p e r o u s . I n 2 0 0 2 ,

the

P o l i t b u r o p r o m i s e d t o r e b u i l d u n i v e r s a l access b y 2 0 1 0 a n d b e g a n a series o f p i l o t p r o g r a m s in fifty cities a n d t w o t h o u s a n d rural c o u n t i e s . S o far, h o w e v e r , all h a v e m e t w i t h l i t t l e success. T h e u r b a n p r o g r a m s are b u i l t a r o u n d p r i v a t e , tax-subsidized individual health accounts, but few people without coverage c a n afford t h e m . T h e p r o g r a m for r u r a l areas suffers f r o m the s a m e p r o b l e m . It's a v o l u n t a r y s y s t e m t o c o v e r serious illnesses, a n d c h a r g e s i n d i v i d u a l s ten r e m e m b i a m o n t h to j o i n , m a t c h e d b y ten each f r o m the local a n d central

THE COMING CRISES IN HEALTH CARE, ENERGY, AND THE GLOBAL ENVIRONMENT

265

g o v e r n m e n t s . S i n c e it's v o l u n t a r y , the p r o g r a m c a n n o t a v o i d a d v e r s e selec­ tion, w h e r e those m o s t l i k e l y to n e e d serious t r e a t m e n t are m o s t l i k e l y to join. T h a t ' s a serious issue, because t h e t h r e e p a y m e n t s c o m b i n e d raise o n l y about $ 4 per person per m o n t h .

6 7

Relatively few Chinese have joined, because

s u c h m e a g e r f u n d i n g still requires l a r g e o u t - o f - p o c k e t e x p e n s e s for serious ill­ nesses a n d no c o v e r a g e at all for lesser p r o b l e m s . P r o v i d i n g m e a n i n g f u l c o v e r a g e to m o r e t h a n i billion p e o p l e over the n e x t decade w o u l d c u t d e e p l y into the C h i n e s e g o v e r n m e n t ' s m o d e r n i z a t i o n p r o ­ g r a m s , because it w i l l i n v o l v e m o r e than the costs o f t r e a t m e n t . T o p r o v i d e that treatment, C h i n a also w i l l h a v e to b u i l d , e q u i p , a n d staff thousands of n e w c l i n ­ ics a n d hospitals across the c o u n t r y — a n d at the s a m e t i m e face the s a m e forces p u s h i n g u p health-care costs e v e r y w h e r e else. F r o m 2 0 0 5 to 2 0 2 0 , the n u m b e r of C h i n e s e a g e sixty or over w i l l g o f r o m 1 4 4 m i l l i o n to 2 4 4 m i l l i o n , as their share of the p o p u l a t i o n rises f r o m 1 1 to 1 7 p e r c e n t .

6 8

T h e additional burden of

caring for people of the a g e w h e n the m o s t serious a n d e x p e n s i v e p r o b l e m s u s u ­ ally s t r i k e — h e a r t disease a n d cancer a c c o u n t for m o r e than h a l f of deaths in 6 9

C h i n a — w i l l i n v o l v e not just the 1 0 0 m i l l i o n n e w elderly, b u t 2 3 0 m i l l i o n or so, since o n l y 1 0 p e r c e n t of the current elderly h a v e c o v e r a g e . T h e costs o f treat­ m e n t for y o u n g e r C h i n e s e w h o also h a v e no c o v e r a g e w i l l b e less p e r person, b u t p r o v i d i n g even basic care for another billion p e o p l e w i l l strain the g o v e r n m e n t ' s finances and depress d o m e s t i c i n v e s t m e n t in other areas. C h i n e s e h e a l t h care is l o w - t e c h n e x t to w h a t ' s a v a i l a b l e in A m e r i c a a n d E u ­ rope; b u t it is n o t i m p e r v i o u s to pressures to e x p a n d t h e m o s t c o s t l y services. C h i n e s e hospitals

a n d rural h e a l t h

centers o p e r a t e u n d e r w h a t ' s c a l l e d

a

" M a n a g e m e n t R e s p o n s i b i l i t y S y s t e m " t h a t p r o v i d e s fixed p a y m e n t s t o h o s p i ­ tals a n d clinics p l u s the r i g h t to c h a r g e p a t i e n t s , w i t h or w i t h o u t i n s u r a n c e , a d d i t i o n a l fees on a fee-for-service basis at rates set b y a c e n t r a l p r i c e c o m m i s ­ sion. A s e v e r y w h e r e else, m o s t o f the services r e c o m m e n d e d are t h e h i g h e r tech ones w i t h the h i g h e s t fees, e s p e c i a l l y since C h i n a ' s p o o r l y p a i d d o c t o r s earn bonuses based on the revenues t h e y g e n e r a t e . T h e s a m e r u l e s a p p l y t o p r e s c r i p t i o n d r u g s — t h e g o v e r n m e n t sets t h e p r i c e s t h a t h o s p i t a l s a n d d o c ­ tors pay, b u t t h e y can c h a r g e p a t i e n t s m o r e for t h e m . T h e i r o n i c r e s u l t is t h a t even w i t h 8 0 p e r c e n t o f C h i n a ' s p e o p l e h a v i n g a l m o s t n o access to serious m e d i c a l care, m u c h o f the care a n d m e d i c a t i o n s t h a t the rest receive are u n ­ necessary.

70

C h i n a ' s leaders are c e r t a i n to m i s s t h e i r 2 0 1 0 d e a d l i n e a n d u n l i k e l y achieve broad coverage b y 2 0 2 0 .

to

B u t t h e c u r r e n t a r r a n g e m e n t s are also

u n t e n a b l e . I n late 2 0 0 6 , t w o t h o u s a n d p e o p l e in s o u t h w e s t e r n C h i n a r a n ­ sacked a hospital o v e r h i g h m e d i c a l fees a n d t h e s h o d d y care p r o v i d e d a three-year-old b o y w h o d i e d f r o m a c c i d e n t a l p o i s o n i n g ,

7 1

a n d The

Lancet

FUTURECAST

266

r e p o r t s t h a t n u m e r o u s p r o t e s t s o f s i g n i f i c a n t size h a v e o c c u r r e d o v e r refusals of c a r e .

7 2

A serious effort t o e x t e n d c o v e r a g e a n d care also w o u l d p a y l a r g e

l o n g - t e r m e c o n o m i c d i v i d e n d s . B u t unless social u n r e s t forces the leadership's h a n d , real p r o g r e s s in this area w i l l c o n t i n u e to p l a y second

fiddle

to the

i n v e s t m e n t s for i n d u s t r i a l i z a t i o n .

THE WORLD'S ENERGY PROBLEMS START RUT DON'T END WITH SUPPLY AND DEMAND M u c h l i k e h e a l t h c a r e , h o w m u c h e n e r g y p r i c e s rise or fall o v e r t h e n e x t d e c a d e , a n d t h e r e s u l t i n g effects o n n a t i o n a l e c o n o m i e s , c o u l d d e p e n d as m u c h o n p o l i t i c s as o n s i m p l e s u p p l y a n d d e m a n d . G l o b a l i z a t i o n w i l l c o n ­ t i n u e t o d r i v e t h e d e m a n d for e n e r g y at faster rates t h a n t h e s u p p l i e s a v a i l ­ a b l e at c u r r e n t c o s t s , as it has for t h e last five y e a r s . A n d w h i l e t h e w o r l d has a m p l e s o u r c e s o f e n e r g y for a n y c o n c e i v a b l e level o f d e m a n d o v e r t h e n e x t d e c a d e , t a p p i n g m a n y o f t h o s e p o t e n t i a l s o u r c e s — t a r s a n d s a n d oil shale, solar p o w e r , b i o m a s s , d e e p - s e a n a t u r a l g a s — w i l l b e m u c h m o r e e x p e n s i v e t h a n m o s t p e o p l e are u s e d to. H o w t h e s e e n e r g y p r i c e increases w i l l affect countries, companies, and households,

however, w i l l depend on

whether

t h e y h a p p e n g r a d u a l l y , as t h e y u s u a l l y d o w h e n m a r k e t s d e t e r m i n e p r i c e s , or

a b r u p t l y , as o f t e n

happens w h e n political developments

drive up

the

price. W h e n p r i c e s rise g r a d u a l l y , p e o p l e can find w a y s to use a little less energy, a n d c o m p a n i e s c a n a b s o r b or pass a l o n g t h e i r cost increases in i n c r e m e n t s that m o s t shareholders a n d c o n s u m e r s c a n tolerate. S o , as oil p r i c e s g r a d u a l l y d o u ­ b l e d o v e r t h e last t h r e e y e a r s , m o s t h o u s e h o l d s a n d c o m p a n i e s successfully a d ­ j u s t e d t h e i r o t h e r s p e n d i n g a n d i n v e s t m e n t s , l i t t l e b y little. A t a m i n i m u m , t h e n e x t t e n y e a r s w i l l see a g o o d deal m o r e o f this b e l t t i g h t e n i n g b y A m e r ­ i c a n , E u r o p e a n , a n d J a p a n e s e businesses a n d h o u s e h o l d s . N o t o n l y w i l l g l o b ­ a l i z a t i o n force e v e r y o n e t o t a p i n t o i n c r e a s i n g l y e x p e n s i v e sources of energy, b u t responses t o c l i m a t e c h a n g e w i l l a l m o s t c e r t a i n l y f u r t h e r p u s h u p p r i c e s . But

it m a y n o t o n l y h a p p e n g r a d u a l l y . T h e M i d d l e E a s t c o n t i n u e s to be a w a r

z o n e , a n d t h e g o v e r n m e n t s o f p i v o t a l p r o d u c e r s s u c h as S a u d i A r a b i a , Iran, R u s s i a , N i g e r i a , a n d V e n e z u e l a all r e m a i n p o l i t i c a l l y fragile. P r i c e shocks f r o m s u d d e n d i s r u p t i o n s in oil flows, therefore, are also s i g n i f i c a n t p o s s i b i l i ­ ties for t h e n e x t d e c a d e . T h e g o o d n e w s is t h a t p e r i o d s of e n e r g y p r i c e d e ­ clines also are likely, as h i g h e r p r i c e s b r i n g o n l i n e n e w e n e r g y sources a n d m o r e energy-efficient

technologies.

W o r l d w i d e e n e r g y d e m a n d w i l l increase b y m o r e t h a n o n e - t h i r d

between

n o w a n d 2 0 2 0 , a c c o r d i n g to t h e m o s t recent U . S . g o v e r n m e n t analysis. M o s t

THE COMING CRISES IN HEALTH CARE, ENERGY, AND THE GLORAL ENVIRONMENT

267

o f that increase w i l l c o m e f r o m d e v e l o p i n g c o u n t r i e s , w i t h a n 8 0 j u m p p r e d i c t e d for C h i n a , I n d i a , a n d t h e rest o f d e v e l o p i n g A s i a .

7 3

percent

W h i l e en­

e r g y d e m a n d in E u r o p e , J a p a n , a n d t h e U n i t e d S t a t e s is e x p e c t e d to rise j u s t 14

percent, everyone w i l l p a y the h i g h e r prices driven b y A s i a n fast-rising

e n e r g y use. A n d b y 2 0 2 0 , all d e v e l o p i n g c o u n t r i e s w i l l c o n s u m e h a l f o f all w o r l d w i d e oil p r o d u c t i o n , 5 5 p e r c e n t o f all n a t u r a l g a s , a n d n e a r l y 7 0 p e r c e n t of c o a l . The

7 4

h u g e increases in e n e r g y d e m a n d c o m i n g f r o m d e v e l o p i n g

countries

reflect not o n l y their r a p i d e c o n o m i c g r o w t h , b u t also h o w e n e r g y - i n t e n s i v e their e c o n o m i e s are. C h i n a , I n d i a , a n d a l m o s t all o t h e r d e v e l o p i n g e c o n o m i e s focus a l m o s t entirely on m a n u f a c t u r i n g a n d a g r i c u l t u r e r a t h e r t h a n services, and

their m a n u f a c t u r i n g a n d f a r m i n g o p e r a t i o n s are u s u a l l y b o t h r e l a t i v e l y

energy-inefficient a n d c o n c e n t r a t e d in sectors t h a t r e q u i r e p a r t i c u l a r l y l a r g e a m o u n t s o f energy, such as s m e l t i n g , c e m e n t , iron a n d steel, m e a t a n d d a i r y products, and b r e w i n g .

7 5

T h e r e are b i g differences in t h e "energy intensity"

of the e c o n o m i e s o f the a d v a n c e d c o u n t r i e s , t o o — f o r e x a m p l e , I r e l a n d uses o n e - f o u r t h t h e e n e r g y to p r o d u c e one e u r o o f G D P as F r a n c e or G e r m a n y , b e ­ cause so m u c h o f Irish G D P c o m e s f r o m I T a n d

financial

7 6

services —but

n o t h i n g a p p r o a c h i n g the e n e r g y i n t e n s i t y a n d inefficiency o f C h i n a , I n d i a , or even A r g e n t i n a . No

one k n o w s w h a t all this n e w e n e r g y d e m a n d w i l l m e a n p r e c i s e l y for oil

prices one year f r o m n o w or in ten y e a r s , a n d one o f t h e reasons is t h a t m o s t o i l - p r o d u c i n g nations don't k n o w h o w l a r g e t h e i r o w n reserves are (or i f t h e y d o , t h e y w o n ' t say). K u w a i t , for e x a m p l e , c l a i m s oil reserves o f 9 9 b i l l i o n b a r ­ rels w h i l e Petroleum Intelligence Weekly e s t i m a t e s t h e m at h a l f t h a t level. A n ­ g o l a has leaned in t h e o t h e r d i r e c t i o n , c l a i m i n g 5.4 b i l l i o n barrels o f reserves b o t h before a n d after four l a r g e , n e w oil fields w e r e d i s c o v e r e d ; a n d w i t h o u t e x p l a n a t i o n , M e x i c o first r e d u c e d its c l a i m e d reserves f r o m 2 7 b i l l i o n to 1 3 b i l l i o n barrels in 2 0 0 2 a n d t h e n u p p e d t h e n u m b e r to 1 6 b i l l i o n barrels t h e next year. E v e n the d a t a on S a u d i A r a b i a n reserves are u n r e l i a b l e , as t h e g o v ­ e r n m e n t there has h i n t e d t h a t the c o u n t r y ' s reserves m i g h t b e t w i c e t h e 2 6 0 b i l l i o n barrels it has l o n g c l a i m e d . O n b a l a n c e , h o w e v e r , t h e w o r l d ' s c o n ­ firmed oil reserves j u m p e d 6 0 p e r c e n t o v e r t h e last 2 0 years a n d k n o w n n a t u ­ ral

g a s reserves d o u b l e d . W h a t e v e r w o r l d w i d e reserves actually are, over the next ten years, the w o r l d

w i l l m e e t its n e w e n e r g y d e m a n d at prices l i k e l y to reach $ 1 0 0 p e r barrel or m o r e for oil. O n e k e y reason is that i n v e s t m e n t s to d e v e l o p n e w fields a n d n e w areas of existing fields s l o w e d sharply over the last ten years, in i m p o r t a n t p a r t because l o w oil prices f r o m the m i d - 1 9 8 0 s to the late 1 9 9 0 s c o n v i n c e d O P E C that oversupplies are the n o r m . I n v e s t m e n t is also d o w n in R u s s i a , w h i c h

FUTURECAST

268

a c c o u n t e d for two-fifths o f all oil p r o d u c t i o n increases f r o m 2 0 0 0 to 2 0 0 5 , fol­ l o w i n g President Putin's decisions to seize the Y u k o s e n e r g y c o n g l o m e r a t e and further restrict w e s t e r n i n v e s t m e n t in R u s s i a n oil operations. T h e other reason for l o w i n v e s t m e n t in the face o f r i s i n g d e m a n d is that the world's ten largest oil c o m p a n i e s are all m o n o p o l i e s o w n e d b y the g o v e r n m e n t s of, in order, S a u d i A r a b i a , Iran, R u s s i a , I r a q , Q a t a r , K u w a i t , V e n e z u e l a , the U n i t e d A r a b E m i r ­ ates, N i g e r i a , a n d A l g e r i a .

7 7

( T h e b i g g e s t p r i v a t e oil c o m p a n y , E x x o n M o b i l ,

ranks n u m b e r fourteen.) T h e e n e r g y g r o u p at M c K i n s e y a n d C o m p a n y esti­ m a t e s t h a t in order to m e e t the r i s i n g d e m a n d o f the next t w o decades f r o m c o n v e n t i o n a l sources, capital i n v e s t m e n t s in M i d d l e E a s t e r n and A f r i c a n oil p r o d u c t i o n w o u l d h a v e to j u m p f r o m their c u r r e n t levels of $ 8 billion a year to s o m e $ 4 5 billion p e r y e a r .

7 8

B u t the s t a t e - o w n e d oil c o m p a n i e s that control

9 0 p e r c e n t o f w o r l d w i d e reserves a n d 8 0 p e r c e n t of g l o b a l p r o d u c t i o n continue to resist either m a k i n g those i n v e s t m e n t s themselves or a l l o w i n g foreign p r i ­ v a t e c o m p a n i e s to fill the g a p . A s e n e r g y p r i c e s m a r c h u p , t h e effects w i l l be felt m o s t in countries w h e r e t h e e c o n o m i e s are m o s t e n e r g y - i n t e n s i v e a n d t h e d e m a n d for e n e r g y is g r o w ­ i n g f a s t e s t — w h i c h means C h i n a and India, Brazil and A r g e n t i n a , and parts o f C e n t r a l a n d E a s t e r n E u r o p e . S c a n d i n a v i a , G e r m a n y , F r a n c e , a n d the rest of W e s t e r n E u r o p e w i l l be affected least, because their h i g h e n e r g y taxes a n d d e n s e p o p u l a t i o n s h a v e m a d e t h e m v e r y e n e r g y - e f f i c i e n t places. T h e effects on t h e U n i t e d S t a t e s a n d B r i t a i n w i l l fall s o m e w h e r e in b e t w e e n , because they're less e n e r g y - e f f i c i e n t t h a n m o s t o f E u r o p e , a n d in the A m e r i c a n case, tied closely to the m a j o r d e v e l o p i n g economies. T h e last d e c a d e o f e n e r g y u n d e r i n v e s t m e n t also has p r o d u c e d a p u b l i c d e ­ b a t e a b o u t "peak oil," or t h e p o i n t in t i m e w h e n w o r l d w i d e oil p r o d u c t i o n w i l l t o p o u t a n d b e g i n t o d e c l i n e , p u t t i n g e v e n m o r e u p w a r d p r e s s u r e s on prices.

Energy

scholar D a n i e l

Yergin

sensibly

calls t h i s

discussion

between "geological pessimists" and "technological o p t i m i s t s . "

7 9

one

T h e pes­

s i m i s t s f o c u s o n oil t h a t c a n b e t a p p e d in c o n v e n t i o n a l , i n e x p e n s i v e w a y s , w h i l e t h e o p t i m i s t s p o i n t t o t h e h u g e a m o u n t s o f " u n c o n v e n t i o n a l " oil l o c k e d in t a r s a n d s , s h a l e , a n d b e l o w d e e p ocean s h e l v e s . T h e A t h a b a s c a r e g i o n in A l b e r t a , C a n a d a , for e x a m p l e , has 5 4 , 0 0 0 s q u a r e m i l e s o f oil s a n d d e p o s i t s r i c h in b i t u m e n , a t a r l i k e s u b s t a n c e t h a t c a n be m i n e d a n d p r o c e s s e d i n t o oil.

8 0

I t costs a b o u t $ 4 0 t o m i n e a n d u p g r a d e e n o u g h b i t u m e n to p r o d u c e a

b a r r e l o f oil, c o m p a r e d t o a w o r l d w i d e a v e r a g e for c o n v e n t i o n a l c r u d e of $ 1 2 t o $ 1 5 p e r barrel. B a s e d o n e x t r a c t i n g o n e barrel o f oil f r o m each t w o tons o f s a n d , t h e s e d e p o s i t s c o u l d g i v e C a n a d a t h e w o r l d ' s s e c o n d - l a r g e s t reserves. A t a m i n i m u m , t h e C a n a d i a n tar s a n d s c o u l d p r o d u c e 4 m i l l i o n barrels a d a y b y 2 0 2 0 , or t h e e q u i v a l e n t o f o n e - t h i r d o f c u r r e n t S a u d i p r o d u c t i o n — a t

THE COMING CRISES IN HEALTH CARE, ENERGY, AND THE GLOBAL ENVIRONMENT

269

three to f o u r t i m e s t h e cost o f c o n v e n t i o n a l oil. M a n y o t h e r c o u n t r i e s h o l d large q u a n t i t i e s o f oil shale, w h i c h are r o c k s t h a t w h e n h e a t e d release f o r m s o f refinable p e t r o l e u m l i q u i d c a l l e d k e r o g e n s . G e o l o g i s t s e s t i m a t e t h a t t h e oil shale d e p o s i t s in W y o m i n g , C o l o r a d o , a n d U t a h h o l d t h e e q u i v a l e n t o f 8 0 0 b i l l i o n barrels, or three t i m e s S a u d i A r a b i a ' s p r o v e n c o n v e n t i o n a l r e ­ serves; a n d c o m p a n i e s in E s t o n i a , B r a z i l , a n d C h i n a a l r e a d y p r o d u c e oil f r o m shale on a m o d e s t scale, for a l i t t l e less t h a n oil f r o m tar s a n d s . A s g l o b a l oil d e m a n d c o n t i n u e s to rise faster t h a n p r o d u c t i o n o f c o n v e n t i o n a l c r u d e oil o v e r t h e n e x t d e c a d e , t h e w o r l d w i l l e x t r a c t m o r e oil, at h i g h e r c o s t s , f r o m b o t h tar sands a n d shale. The

w o r l d also has h u g e n a t u r a l g a s reserves, b o t h c o n v e n t i o n a l a n d u n ­

c o n v e n t i o n a l , to h e l p m e e t e n e r g y d e m a n d . M o s t o f t h e cost issue is t i e d to the expense o f m o v i n g the g a s f r o m t h e c o u n t r i e s t h a t p r o d u c e it to those t h a t c o n s u m e it; a n d o v e r t h e n e x t d e c a d e , g o v e r n m e n t s a n d c o m p a n i e s w i l l s p e n d tens of billions o f dollars b u i l d i n g n e w n a t u r a l g a s p i p e l i n e s

a n d special

tankers for liquefied n a t u r a l g a s . A s a m a t t e r o f e c o n o m i c s , s u c h l a r g e i n v e s t ­ m e n t s w i l l still be less e x p e n s i v e t h a n m a k i n g t h e use o f m o r e coal e n v i r o n ­ m e n t a l l y a c c e p t a b l e in E u r o p e or A m e r i c a , b y d e v e l o p i n g a n d a p p l y i n g n e w c h e m i c a l processes to c a p t u r e a n d sequester t h e c a r b o n , or b u i l d i n g n e w n u ­ clear p o w e r p l a n t s a n d d i s p o s i n g o f their w a s t e s safely. A t t h e p r i c e p o i n t s w h e r e those o p t i o n s b e c o m e v i a b l e e c o n o m i c a l l y , r e n e w a b l e e n e r g y f r o m t h e sun, w i n d , b i o m a s s p l a n t s s u c h as s w i t c h g r a s s a n d c o r n , a n d g e o t h e r m a l sources, all c o u l d b e d e v e l o p e d on significant scales. The

next decade w i l l p r o v e b o t h sides o f the "peak oil" d e b a t e r i g h t . D e ­

m a n d d r i v e n b y g l o b a l i z a t i o n w i l l d r i v e oil prices p a s t $ 1 0 0 p e r barrel; a n d at those p r i c e s , tar sand a n d shale oil w i l l b e c o m e c o m p e t i t i v e , as w i l l n e w t a n k e r fleets

for

liquefied natural g a s . A c c o r d i n g to U . S . g o v e r n m e n t e s t i m a t e s , at

those p r i c e s , w e s t e r n businesses a n d p e o p l e also w i l l shift m o r e o f their e n e r g y use to r e n e w a b l e s , as w e l l as natural g a s . into p l a y

more

energy-efficient

8 1

T h e h i g h e r p r i c e s also w i l l b r i n g

technologies

and

energy-saving

lifestyle

c h a n g e s that can also ease the c r u n c h . W h e n oil p r i c e s soared in 1 9 7 7 a n d stayed h i g h u n t i l the m i d - 1 9 8 0 s , A m e r i c a n c o m p a n i e s , h o u s e h o l d s , a n d d r i v ­ ers altered their patterns a n d habits e n o u g h to c u t t h e U . S . economy's overall oil intensity b y m o r e t h a n 5 p e r c e n t a year. I f r e n e w a b l e s c o m e online on a m a j o r scale this t i m e , those n e w uses also w i l l l i k e l y h o l d . A m o r y L o v i n s , a l e a d i n g e x p o n e n t o f n o n - o i l - b a s e d energy, notes t h a t it t o o k less t h a n a g e n e r ­ ation for a u t o m o b i l e s to displace carriages a n d for diesel to d i s p l a c e s t e a m in l o c o m o t i v e s — a n d n o b o d y ever w e n t b a c k .

8 2

E v e n t h e U . S . g o v e r n m e n t fore­

cast sees renewables a c c o u n t i n g for a l m o s t 1 0 p e r c e n t o f A m e r i c a n e n e r g y use

by 2 0 2 0 .

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270

T h e s e v a r i o u s shifts also w i l l p r o d u c e a b i t o f a roller coaster in e n e r g y p r i c e s , g o i n g w a y u p as d e m a n d m e e t s t h e l i m i t s of c o n v e n t i o n a l p r o d u c t i o n , a n d t h e n d o w n as n e w sources c o m e o n l i n e , h i g h p r i c e s c u t i n t o d e m a n d , a n d t h e costs o f n e w e n e r g y t e c h n o l o g i e s

decline.

8 3

OIL SHOCKS AND ENERGY SECURITY The

e n e r g y p r i c e increases t h a t w o r r y m o s t p e o p l e , or o u g h t t o , are those that

h a p p e n s u d d e n l y , b e c a u s e t h e y force e v e r y o n e to revise their p l a n s all at once a n d scale b a c k sharply. S u d d e n p r i c e h i k e s t h a t last for at least six to t w e l v e m o n t h s also p u s h u p o t h e r p r i c e s , r e d u c i n g a c o u n t r y ' s i n v e s t m e n t s a n d o v e r ­ all g r o w t h . W i t h a g r o w i n g share o f t h e w o r l d ' s e n e r g y c o m i n g f r o m c o u n ­ tries w i t h f r a g i l e or u n s t a b l e g o v e r n m e n t s , a n d s o m e e v i d e n c e that s t o r m s y s t e m s are w o r s e n i n g , a d i s r u p t i v e p r i c e s p i k e t r i g g e r e d b y p o l i t i c a l or n a t u ­ ral

e v e n t s is l i k e l y in t h e n e x t d e c a d e . E v e n if t h e r e g i m e s in the m a j o r oil ex­

p o r t i n g c o u n t r i e s all m a n a g e to h o l d on, m o s t O P E C m e m b e r s are located in t h e m i d s t o f or n e a r b y t h e w o r l d ' s m a i n w a r zones a n d t e r r o r i s m locales. L a r g e p r o d u c t i o n a n d s h i p p i n g o p e r a t i o n s are e s p e c i a l l y v u l n e r a b l e to a t t a c k s , a n d p a r t i c u l a r l y in S a u d i A r a b i a , w i t h the w o r l d ' s l a r g e s t oil fields at G h a w a r , l a r g e s t p r o c e s s i n g c o m p l e x at R a s T a n u r a , a n d l a r g e s t t a n k e r facilities at S e a I s l a n d . N e a r l y h a l f o f all S a u d i oil g o e s t h r o u g h R a s T a n u r a a n d the t w o h u g e t e r m i n a l c o m p l e x e s at S e a I s l a n d ; a n d b y one c a l c u l a t i o n , an a t t a c k on those facilities c o u l d c h o k e g l o b a l oil s u p p l i e s for t w o y e a r s .

8 4

M o r e g e n e r a l l y , t h e I n t e r n a t i o n a l E n e r g y A g e n c y c a l c u l a t e s that 8 0 p e r ­ c e n t o f M i d d l e E a s t oil e x p o r t s are s h i p p e d t h r o u g h three c h a n n e l s , "all o f w h i c h are p r e d i s p o s e d t o a c c i d e n t s , p i r a c y , terrorist a t t a c k s or w a r " — t h e Straits of H o r m u z b e t w e e n Iran and O m a n , the B a b e l - M a n d a b connecting t h e G u l f o f A d e n a n d the R e d S e a , a n d t h e S u e z C a n a l a n d S u m e d P i p e l i n e connecting the R e d Sea and the M e d i t e r r a n e a n .

8 5

S h o u l d v i o l e n c e d i s r u p t the

p r o d u c t i o n or s h i p m e n t s o f a m a j o r O P E C p r o d u c e r for a s u s t a i n e d p e r i o d in t h e n e x t d e c a d e , p r i c e s w o u l d shoot u p fast to e c o n o m i c a l l y d a m a g i n g levels in a l m o s t e v e r y c o u n t r y in t h e w o r l d . The

m o s t serious scenarios i n v o l v e the w o r l d ' s t w o d o m i n a n t oil e x p o r t e r s ,

S a u d i A r a b i a at a b o u t 1 0 m i l l i o n barrels p e r d a y a n d R u s s i a at 6 to 7 m i l l i o n barrels. E v e r y o n e else is far b e h i n d — N o r w a y a n d Iran e x p o r t a b i t u n d e r 3 m i l l i o n barrels a day, a n d N i g e r i a , t h e U n i t e d A r a b E m i r a t e s , K u w a i t , a n d V e n e z u e l a e a c h s h i p a l i t t l e o v e r 2 m i l l i o n barrels a day. A c a t a s t r o p h i c e v e n t t h a t s h a r p l y c u t b a c k e x p o r t s f r o m t h e S a u d i s or t h e R u s s i a n s , or a p o l i t i c a l d e c i s i o n b y e i t h e r w i t h t h e s a m e effect, w o u l d s e n d w o r l d w i d e oil p r i c e s

THE COMING CRISES IN HEALTH CARE, ENERGY, AND THE GLOBAL ENVIRONMENT

271

s o a r i n g . O f the t w o , S a u d i A r a b i a is m o r e l i k e l y to suffer s u c h an e v e n t , w h i l e R u s s i a is m o r e l i k e l y to t a k e a c t i o n itself. For

at least t w o d e c a d e s , S a u d i A r a b i a has u s e d its oil p o w e r m a i n l y to

m a n a g e O P E C a n d p o l i c e its m e m b e r s . I t has s h a p e d a n d l e d O P E C ' s p o l i c y of a l l o w i n g w o r l d oil p r i c e s to g r a d u a l l y d o u b l e since 2 0 0 4 , b y r e d u c i n g O P E C p r o d u c t i o n q u o t a s w h e n e v e r oil i n v e n t o r i e s rise in t h e m a j o r c o n s u m ­ i n g nations. A n d t h e S a u d i s don't tolerate o t h e r m e m b e r s d e v i a t i n g

from

their q u o t a s . I n 1 9 9 8 , w h e n V e n e z u e l a p u s h e d its e x p o r t s w e l l p a s t its q u o t a , R i y a d h r a m p e d u p its o w n p r o d u c t i o n a n d let t h e p r i c e fall u n t i l C a r a c a s fi­ nally g a v e in at $ 9 p e r barrel. ( T h e e p i s o d e d i s c r e d i t e d t h e n - P r e s i d e n t R a f a e l C a l d e r a R o d r i g u e z a n d his p r o w e s t e r n p a r t y , a n d h e l p e d

elect t h e

anti-

A m e r i c a n firebrand, H u g o C h a v e z . ) F o r t h e i r o w n security, t h e S a u d i s are u n ­ l i k e l y to e n g i n e e r a s u d d e n u p w a r d p r i c e s h o c k in t h e n e x t d e c a d e , e s p e c i a l l y one t h a t w o u l d i n j u r e the U n i t e d S t a t e s . A l Q a e d a a n d its associates a n d i m i ­ tators are firmly e n t r e n c h e d o n the S a u d i s ' n o r t h e r n b o r d e r in I r a q , a n d a d e ­ v o u t l y S h i a a n d m i l i t a n t I r a n is less t h a n o n e h u n d r e d m i l e s a w a y across t h e Persian G u l f . F o r t h e foreseeable f u t u r e , t h e S a u d i r e g i m e , a l o n g w i t h

the

g o v e r n m e n t s o f the U n i t e d A r a b E m i r a t e s , K u w a i t , a n d Q a t a r , w i l l c o n t i n u e to rely on U . S . m i l i t a r y p r o t e c t i o n . L o n g after the U n i t e d S t a t e s leaves Iraq to its o w n fate, A m e r i c a w i l l b e a c ­ t i v e l y e n g a g e d in d o i n g w h a t it can to e n s u r e stable oil

flows—which

w i l l in­

c l u d e p r o t e c t i n g S a u d i A r a b i a a n d the r e g i m e o f its r u l i n g family. A m e r i c a ' s c o m m i t m e n t to the M i d d l e E a s t is n o t a b o u t its o w n access t o oil. T h e U . S . i m p o r t s a l m o s t 6 0 p e r c e n t o f its oil, b u t 8 0 p e r c e n t o f t h a t n o w c o m e s f r o m outside the Persian G u l f a n d o n l y 1 3 p e r c e n t c o m e s f r o m S a u d i A r a b i a . J a p a n has m u c h m o r e at stake d i r e c t l y in t h e Persian G u l f , w i t h a l m o s t

8 6

90

p e r c e n t of its oil i m p o r t s c o m i n g f r o m t h e M i d d l e E a s t . S o does C h i n a . I t c u r ­ rently i m p o r t s m u c h less oil overall t h a n A m e r i c a , b u t a l m o s t 6 0 p e r c e n t o f it c o m e s f r o m the Persian G u l f , a n d b y 2 0 1 5 t h e G u l f r e g i o n w i l l a c c o u n t for 7 0 to 8 0 p e r c e n t o f C h i n e s e oil i m p o r t s .

If the U n i t e d States didn't i m p o r t one m o r e barrel of oil f r o m the G u l f , its e c o ­ n o m i c a n d g e o p o l i t i c a l interests there w o u l d still be c o m p e l l i n g . A s u p p l y shock o r i g i n a t i n g in the M i d d l e E a s t w i l l d i r e c t l y affect t h e p r i c e o f U . S . oil i m p o r t s f r o m M e x i c o , V e n e z u e l a , C a n a d a , a n d elsewhere. M o r e o v e r , g l o b a l i z a ­ tion v a s t l y increases A m e r i c a ' s e c o n o m i c stake in the G u l f s stability, since the U n i t e d States is the largest p a r t i c i p a n t a n d o w n e r in t h e g l o b a l e c o n o m y , w i t h annual t r a d e flows o f n e a r l y $ 4 t r i l l i o n a y e a r a n d f o r e i g n i n v e s t m e n t s some $ 1 3 trillion.

87

of

N o U . S . a d m i n i s t r a t i o n w i l l i g n o r e the p r o s p e c t o f an oil

FUTURECAST

272

shock rocking the Chinese and Japanese e c o n o m i e s — w i t h incalculable politi­ cal effects in C h i n a — a n d b e a c h i n g the g l o b a l economy. A s the o n l y c o u n t r y w i t h the c a p a c i t y to p r o v i d e a m e a s u r e o f g l o b a l security, the U n i t e d States also w i l l a c t — h o p e f u l l y m o r e w i s e l y a n d effectively t h a n in I r a q — i f political u p h e a v a l s in the G u l f or A f r i c a n oil states u n d e r m i n e the s t a b i l i t y of those g o v e r n m e n t s . F o r the n e x t d e c a d e a n d b e y o n d , the A m e r i c a n m i l i t a r y also w i l l c o n t i n u e to p r o v i d e w o r l d w i d e m a r i t i m e security for the 4 0 m i l l i o n barrels of oil that cross t h e w o r l d ' s oceans on tankers e v e r y day. B y 2 0 2 0 , d a i l y ocean oil s h i p m e n t s w i l l reach 6 7 m i l l i o n barrels, p l u s m i l l i o n s o f tons of liquefied natural g a s , a n d the U . S . N a v y w i l l h a v e the o n l y force c a p a b l e of m a i n t a i n i n g the s e c u r i t y o f the g l o b a l sea lanes. E u r o p e , J a p a n , a n d t h e U n i t e d S t a t e s are m u c h b e t t e r p r e p a r e d for an oil s h o c k s o m e t i m e in t h e n e x t d e c a d e t h a n t h e y w e r e in the early 1 9 7 0 s . F o l ­ l o w i n g t h e 1 9 7 3 A r a b oil e m b a r g o , t o g e t h e r t h e y created the International E n e r g y A g e n c y , h e a d q u a r t e r e d in Paris, to m o n i t o r w o r l d w i d e e ne r gy m a r k e t s . T h e y also e s t a b l i s h e d n a t i o n a l s t o c k p i l e s o f oil t h a t w e r e u s e d j u s t before the first G u l f W a r a n d f o l l o w i n g H u r r i c a n e K a t r i n a , p u s h e d national conserva­ t i o n efforts, a n d p r e p a r e d p l a n s to share t h e i r s u p p l i e s d u r i n g f u t u r e d i s r u p ­ tions. T h e y a g r e e d t o t a k e steps t o d i v e r s i f y t h e i r o w n e n e r g y i m p o r t s ; a n d to deal w i t h p o t e n t i a l d o m e s t i c d i s r u p t i o n s , t h e y e x p a n d e d refining a n d storage capacities, extended their distribution systems, and stockpiled

equipment.

O n e reason t h a t K a t r i n a d i d n ' t t a n k the U . S . e c o n o m y is that A m e r i c a n o w has m o r e t h a n 1 0 0 refineries, 2 , 0 0 0 offshore p l a t f o r m s , 1 6 0 , 0 0 0 m i l e s of oil p i p e l i n e s , facilities to h a n d l e 1 5 m i l l i o n barrels p e r d a y o f i m p o r t s a n d ex­ p o r t s , 4 1 0 u n d e r g r o u n d g a s s t o r a g e fields, a n d 1 . 4 m i l l i o n m i l e s o f natural gas pipelines.

8 8

F o r all these steps a n d p r e p a r a t i o n , a serious d i s r u p t i o n in the n e x t d e c a d e w i l l s e n d oil p r i c e s p a s t $ 1 0 0 t o p e r h a p s $ 1 5 0 p e r barrel, a n d t h e n p a n i c w i l l l i k e l y t a n k t h e w o r l d ' s s t o c k a n d b o n d m a r k e t s . I f the d i s r u p t i o n persists for e v e n a f e w m o n t h s , it w i l l d r i v e the w o r l d i n t o a serious recession, a n d in a period w h e n m a n y countries w i l l be especially vulnerable. In Europe's m a j o r e c o n o m i e s , a serious recession w i l l depress revenues b u t not health-care a n d w e l f a r e costs, p u t t i n g s i g n i f i c a n t pressures on the u n i t y o f the E u r o p e a n U n i o n . A n d if t h e recession's s e v e r i t y v a r i e s s i g n i f i c a n t l y f r o m E U m e m b e r to m e m b e r — a n d it m o s t l i k e l y w i l l — i t c o u l d strain the a l l e g i a n c e o f S o u t h e r n E u r o p e t o t h e e u r o , i n c l u d i n g t h a t o f I t a l y a n d S p a i n . A serious recession in J a p a n , after a d e c a d e o f g e n e r a l l y v e r y s l o w g r o w t h , c o u l d

finally

end

the

L D P ' s enfeebled political hold on p o w e r and break open Japanese politics. T h e U n i t e d S t a t e s w i l l b e m o r e e x p o s e d to an initial oil s h o c k , since it is less e n e r g y efficient t h a n m o s t o f E u r o p e or J a p a n ; b u t its m o r e m a r k e t - b a s e d

THE COMING CRISES IN HEALTH CARE, ENERGY, AND THE GLOBAL ENVIRONMENT

273

e c o n o m y w i l l a d j u s t m o r e q u i c k l y a n d efficiently to t h e n e w c o n d i t i o n s , r e ­ d u c i n g the d o w n t u r n ' s i m p a c t .

The

b i g q u e s t i o n is the effect o f an oil s h o c k a n d g l o b a l recession o n C h i n a ,

a n d h o w it w i l l r e s p o n d . M o r e t h a n a n y o t h e r m a j o r c o u n t r y , C h i n a ' s g r o w t h d e p e n d s p r o f o u n d l y o n its e x p o r t s a n d i n v e s t m e n t , a n d a g l o b a l recession w i l l hit b o t h h a r d . A s h a r p s l o w d o w n in g r o w t h also w i l l force B e i j i n g e i t h e r to s u s p e n d its p r o g r a m to u n w i n d s t a t e - o w n e d e n t e r p r i s e s , at least for a w h i l e , or

a l l o w u n e m p l o y m e n t to rise sharply. T h e m o s t serious issue for C h i n a ' s

l e a d e r s — a n d for the rest o f the w o r l d — i s w h e t h e r a serious d o w n t u r n in C h i n a w i l l u n d e r m i n e the leadership's s t r a t e g y o f m a i n t a i n i n g its m o n o p o l y on p o l i t i c a l p o w e r b y p r o v i d i n g c o n t i n u o u s e c o n o m i c p r o g r e s s . I f l a r g e - s c a l e unrest w e r e to b r e a k o u t , B e i j i n g c o u l d b e f o r c e d t o c r a c k d o w n a g a i n , as it d i d in 1 9 8 9 , or finally i n t r o d u c e the first e l e m e n t s o f m o d e r n p o l i t i c a l liberty.

THE PETROPOLITICS OF CHINA AND RUSSIA It is s o m e t i m e s c l a i m e d t h a t the c h a n g e s in e n e r g y m a r k e t s are c r e a t i n g a n e w international "petropolitics" t h a t w i l l h a v e f a r - r e a c h i n g e f f e c t s .

89

W h i l e the

i m p l i c a t i o n s are often e x a g g e r a t e d , e n e r g y issues w i l l p ose serious c h a l l e n g e s for

A m e r i c a n p o l i c y in the n e x t d e c a d e a n d c o u l d e n h a n c e t h e

geopolitical

clout of C h i n a and Russia. B e i j i n g ' s a p p r o a c h to t h e M i d d l e E a s t a n d i n t e r n a t i o n a l e n e r g y p o l i t i c s has been a v o w e d l y n o n i d e o l o g i c a l , e v e n o p p o r t u n i s t i c , s i n c e its first m o v e s t o w a r d s e c o n o m i c r e f o r m in t h e late 1 9 7 0 s .

9 0

In the 1 9 8 0 s and 1 9 9 0 s , C h i n a

sold a r m s to b o t h sides o f t h e I r a n - I r a q W a r , c o l l a b o r a t e d w i t h Israel o n t h e F-io

fighter

while selling intermediate-range missiles

to the S a u d i s , and

c o n s i d e r e d m i s s i l e sales to S y r i a a n d L i b y a before b a c k i n g off u n d e r U . S . pressure. I n recent y e a r s , C h i n a b l o c k e d U N a c t i o n a g a i n s t I r a n , its e n e r g y p a r t n e r , o v e r its n u c l e a r p r o g r a m in 2 0 0 6 , a n d t h e n a g r e e d t o m i l d e r s a n c ­ tions in 2 0 0 7 . T h e c o n s t a n t e l e m e n t has b e e n C h i n a ' s d e t e r m i n a t i o n t o secure reliable access t o t h e e n o r m o u s q u a n t i t i e s o f oil a n d n a t u r a l g a s it r e q u i r e s for

its m o d e r n i z a t i o n p r o g r a m . F r o m 1 9 9 0 t o 2 0 0 2 , C h i n e s e d e m a n d for oil

soared 9 0 p e r c e n t w h i l e d o m e s t i c p r o d u c t i o n g r e w 1 5 p e r c e n t , a n d t h a t d e ­ m a n d has a c c e l e r a t e d e v e n m o r e in t h e last five y e a r s .

9 1

T o m e e t these energy

needs, C h i n a has s p e n t fifteen y e a r s c o u r t i n g O P E C m e m b e r s , s t a r t i n g w i t h O m a n a n d Y e m e n in t h e e a r l y 1 9 9 0 s a n d t h e n m o v i n g o n n e x t t o K u w a i t , the U n i t e d A r a b E m i r a t e s , A l g e r i a , E g y p t , L i b y a , a n d S u d a n .

FUTURECAST

274

B y the t u r n o f the c e n t u r y , B e i j i n g focused its e n e r g y attention on S a u d i A r a b i a , I r a q , a n d I r a n , a n d b e c a m e a w o r l d p l a y e r in energy. I n 1 9 9 9 , C h i n a f o r m e d a "strategic oil p a r t n e r s h i p " w i t h R i y a d h , w i t h the S a u d i s

selling

c r u d e a n d na t ur a l g a s a n d C h i n a o p e n i n g its refining sector to A r a m c o , the S a u d i state oil g i a n t . T o d a y , S a u d i A r a b i a is C h i n a ' s l e a d i n g oil s u p p l i e r and the l e a d i n g investor in C h i n e s e refineries. F u r t h e r m o r e , in 2 0 0 2 , C h i n a adopted a n e w " g o i n g out" p o l i c y o f e n c o u r a g i n g its three, h u g e s t a t e - o w n e d e n e r g y c o m p a n i e s — C h i n a N a t i o n a l Petroleum C o r p . , C h i n a N a t i o n a l Petrochemicals C o r p . , a n d the C h i n a N a t i o n a l O f f s h o r e O i l C o r p . — t o p u r c h a s e o w n e r s h i p shares in oil p r o j e c t s a r o u n d t h e w o r l d . I t also d i r e c t e d other s t a t e - o w n e d en­ terprises t o e x p a n d their e x p o r t s to a n d i n v e s t m e n t s in countries w i t h stateo w n e d oil c o m p a n i e s . ( I n d i a r e c e n t l y a d o p t e d the s a m e a p p r o a c h . ) A t the same time, Beijing signed a twenty-two-year production-sharing arrangement with S a d d a m H u s s e i n to d e v e l o p the c o u n t r y ' s s e c o n d - l a r g e s t oil field, once

UN

sanctions w e r e lifted. Its c u r r e n t status is still u n c e r t a i n . C h i n a also has i n v e s t e d tens o f b i l l i o n s o f dollars in I r a n i a n oil operations o v e r t h e last d e c a d e , m u c h o f it in " b u y - b a c k " deals in w h i c h C h i n a p a y s to d e v e l o p t h e field a n d t h e n c l a i m s a share o f its p r o d u c t i o n . I n the n e x t d e c a d e , these ties are l i k e l y t o e x p a n d a n d d e e p e n . I r a n w i l l n e e d even m o r e foreign i n v e s t m e n t , t e c h n o l o g y , a n d e x p e r t i s e , because its c u r r e n t p r o d u c t i o n relies h e a v i l y o n a s m a l l n u m b e r o f l a r g e , t e c h n o l o g i c a l l y o u t d a t e d oil fields. A n d i f Iran's n u c l e a r p r o g r a m c o n t i n u e s t o isolate it f r o m w e s t e r n c o m p a n i e s , it a l m o s t c e r t a i n l y w i l l t u r n to C h i n a ' s state oil c o m p a n i e s , w h i c h

themselves

h a v e g a i n e d access to t h e latest t e c h n o l o g i e s a n d m e t h o d s t h r o u g h their joint v e n t u r e s w i t h w e s t e r n c o m p a n i e s . B e y o n d S a u d i A r a b i a a n d I r a n , C h i n a also has e n e r g y p r o j e c t s in v i r t u a l l y e v e r y o i l - p r o d u c i n g c o u n t r y in the w o r l d — Algeria, A n g o l a , Azerbaijan, Canada, Chad, Ecuador, E g y p t , Kazakhstan, Indonesia, M o n g o l i a , M y a n m a r , N i g e r , N i g e r i a , N e w G u i n e a , Peru, Russia, S u d a n , S y r i a , T h a i l a n d , V e n e z u e l a , a n d V i e t n a m , a n d in s o m e cases in joint v e n t u r e s w i t h I t a l i a n , I n d i a n , A u s t r a l i a n , a n d S a u d i c o m p a n i e s . A n d the d i ­ rect e c o n o m i c i m p o r t o f all this C h i n e s e e n e r g y a c t i v i t y has b e e n p o s i t i v e for t h e U n i t e d S t a t e s , E u r o p e , a n d e v e r y b o d y else, since it h e l p s e x p a n d g l o b a l oil s u p p l i e s . A l l o f these p r o j e c t s a n d a p p r o a c h e s are p a r t o f a p o l i t i c a l a g e n d a f o r m e d at t h e h i g h e s t levels o f t h e C h i n e s e g o v e r n m e n t . T h e three m a j o r s t a t e - o w n e d e n e r g y c o m p a n i e s t h a t c o m p r i s e nearly the entire i n d u s t r y in C h i n a are r u n b y e x e c u t i v e s n a m e d b y t h e C e n t r a l C o m m i t t e e o f the C o m m u n i s t Party, t h e i r s t r a t e g i e s are set b y t h e N a t i o n a l D e v e l o p m e n t a n d R e f o r m C o m m i s ­ sion, a n d t h e S t a n d i n g C o m m i t t e e o f the P o l i t b u r o has the final say on all major decisions.

92

A t least t h u s far, those s t r a t e g i e s a n d decisions are d r i v e n

THE COMING CRISES IN HEALTH CARE, ENERGY, AND THE GLOBAL ENVIRONMENT

275

p r i m a r i l y b y the e n e r g y i m p e r a t i v e s o f r a p i d i n d u s t r i a l i z a t i o n , n o t g e o p o l i t i ­ cal

a m b i t i o n s . S i n c e 2 0 0 3 , C h i n a has b e e n t h e source o f 4 0 p e r c e n t o f all t h e

g r o w t h in w o r l d w i d e oil use; a n d its e n e r g y d e m a n d s w i l l increase e v e n faster over the n e x t d e c a d e as the p r o g r a m to m o d e r n i z e a g r i c u l t u r e takes h o l d . C h i n a also is in the early stages o f e x p l o d i n g a u t o m o b i l e o w n e r s h i p , w h i c h w i l l further increase its e n e r g y needs. I n 2 0 0 5 , there w e r e a b o u t 2 3

million

cars on C h i n a ' s r o a d w a y s , r o u g h l y as m a n y as G r e a t B r i t a i n , o w n e d b y 5 p e r ­ cent o f C h i n a ' s p o p u l a t i o n . B y 2 0 2 0 , t h e n u m b e r o f cars in C h i n a is e x p e c t e d to reach 9 0 m i l l i o n , a n d t h e n 1 3 0 m i l l i o n b y 2 0 3 0 , or r o u g h l y t h e n u m b e r on A m e r i c a n roads in the m i d - 1 9 7 0 s .

9 3

T h e s e n e e d s , on t o p o f i n d u s t r i a l i z a t i o n ,

are

e x p e c t e d to e x p a n d C h i n e s e oil i m p o r t s to 7 m i l l i o n barrels a d a y b y 2 0 2 0

and

1 0 m i l l i o n barrels a d a y b y 2 0 3 0 , or as m u c h as t h e U n i t e d S t a t e s i m ­

p o r t e d in 2 0 0 6 . W h i l e g e o p o l i t i c s has not set C h i n a ' s c o u r s e in w o r l d e n e r g y m a r k e t s , t h e ties it is f o r m i n g w i l l h a v e g e o p o l i t i c a l effects. B y 2 0 2 0 , t h e S a u d i s w i l l sell m o r e oil to C h i n a t h a n to the U n i t e d S t a t e s ; a n d w h i l e t h e S a u d i g o v e r n m e n t w i l l a l m o s t c e r t a i n l y still b e d e p e n d e n t on t h e U n i t e d S t a t e s , it c o u l d call on B e i j i n g ' s s u p p o r t w h e n it finds itself d i s a g r e e i n g w i t h W a s h i n g t o n . C h i n a ' s e c o n o m i c ties to Iran also w i l l h a v e p o l i t i c a l i m p l i c a t i o n s . B e y o n d oil, C h i ­ nese state c o m p a n i e s h a v e set u p a u t o m o b i l e a n d television p l a n t s in I r a n , they're b u i l d i n g an extension o f t h e T e h r a n s u b w a y s y s t e m a n d a n a t i o n a l b r o a d b a n d n e t w o r k , a n d in a n u m b e r o f areas C h i n e s e c o m p a n i e s s t e p p e d in w h e n E u r o p e a n business p u l l e d b a c k u n d e r threats o f U . S . sanctions in 2 0 0 6 and

2 0 0 7 . A t a m i n i m u m , I r a n w i l l t u r n to C h i n a for m i l i t a r y p u r c h a s e s ,

a p o t e n t i a l l y serious m a t t e r as A m e r i c a recasts its p o s i t i o n in I r a q . C h i n a ' s d e t e r i o r a t i n g relations w i t h J a p a n also are b o u n d u p in energy. T h e m o s t serious conflict so far u n f o l d e d w h e n J a p a n g r a n t e d a J a p a n e s e c o m p a n y , T e i k o k u O i l , r i g h t s to e x p l o r e a v a s t u n d e r s e a n a t u r a l g a s field l y i n g in t h e E a s t C h i n a Sea b e t w e e n C h i n a ' s central coast a n d J a p a n ' s R y u k y u

island

chain. T h e sea b e t w e e n t h e t w o c o u n t r i e s is 3 6 0 m i l e s w i d e , a n d J a p a n offered to set the b o u n d a r y m i d w a y — w h i c h w o u l d g i v e T e i k o k u O i l access to t h e field.

C h i n a insists t h a t its t e r r i t o r y e x t e n d s to t h e e d g e o f its

continental

shelf, w h i c h takes in the entire field a n d w o u l d a c t u a l l y b r i n g C h i n e s e t e r r i ­ torial w a t e r s near the shores o f J a p a n ' s islands. W h e n t h e T e i k o k u vessels a r ­ rived in the d i s p u t e d area, C h i n a d i s p a t c h e d m i s s i l e - e q u i p p e d d e s t r o y e r s a n d frigates to its o w n n e a r b y d r i l l i n g p l a t f o r m — a n d t h e n , as T o k y o tells it, a C h i n e s e s h i p t u r n e d its g u n turrets t o w a r d s a J a p a n e s e p l a n e m o n i t o r i n g t h e activity. T h e i n c i d e n t s p a r k e d s t a t e - o r c h e s t r a t e d a n t i - J a p a n e s e d e m o n s t r a ­ tions in B e i j i n g , a n d t h e n c o u n t e r d e m o n s t r a t i o n s in T o k y o after C h i n a b e g a n d r i l l i n g in a field near t h e d i s p u t e d b o r d e r l i n e . T w o years later, an u n e a s y

FUTURECAST

276

s t a n d o f f still persists. E v e n t u a l l y , it c o u l d c o r r o d e S i n o - J a p a n e s e relations, w i t h b o t h sides l o o k i n g for A m e r i c a ' s s u p p o r t ; or it m i g h t e n d in t w o joint d e v e l o p m e n t p r o j e c t s , o n e a l o n g t h e m e d i a n a n d a n o t h e r near J a p a n ' s islands. C h i n a ' s e n e r g y a c t i v i s m in t h e M i d d l e E a s t , C e n t r a l A s i a , a n d

Africa

e v e n t u a l l y c o u l d m a k e it a c o m p e t i t o r o f t h e U n i t e d S t a t e s for influence in t h o s e r e g i o n s — b u t n o t for s o m e t i m e . F o r at least the n e x t d e c a d e , C h i n a w i l l h a v e c o m p e l l i n g reasons t o k e e p a n y s u c h c o m p e t i t i o n

in c h e c k . T h e

U n i t e d S t a t e s is n o t o n l y t h e i n d i s p e n s a b l e e c o n o m y for C h i n a ' s m o d e r n i z a ­ t i o n ; its b l u e - w a t e r n a v y is also t h e o n l y g u a r a n t o r o f t h e sea lanes t h r o u g h w h i c h m i l l i o n s o f b a r r e l s o f f o r e i g n oil w i l l flow t o C h i n a e v e r y d a y for t h e foreseeable f u t u r e . M o r e o v e r , C h i n a ' s e n e r g y s t r a t e g y s u g g e s t s t h a t its n e x t s t e p w i l l b e j o i n t v e n t u r e s w i t h U . S . oil c o m p a n i e s

in A f r i c a a n d L a t i n

A m e r i c a , a n d p e r h a p s in C e n t r a l A s i a a n d t h e M i d d l e E a s t as w e l l — m u c h as it has w i t h t h e I t a l i a n oil c o m p a n y A g i p a n d w i t h U . S . a n d o t h e r w e s t e r n oil c o m p a n i e s i n s i d e C h i n a . T h i s all w i l l l i k e l y c h a n g e w h e n C h i n a b e c o m e s a m a j o r m i l i t a r y a n d n a v a l p o w e r , b u t t h a t w o n ' t h a p p e n b y 2 0 2 0 a n d for some years b e y o n d . W h i l e C h i n a m o v e s a g g r e s s i v e l y t o nail d o w n t h e e n e r g y resources it w i l l n e e d t o c o n t i n u e m o d e r n i z i n g itself, R u s s i a s e e m s set o n u s i n g its e n e r g y re­ sources to t r y t o r e g a i n a m e a s u r e o f its f o r m e r g e o p o l i t i c a l p o w e r . T h r o u g h t h e 1 9 9 0 s a n d i n t o t h e early years o f this c e n t u r y , R u s s i a slid f r o m w o r l d p o w e r t o a m i d s i z e c o u n t r y w i t h an a i l i n g a n d s h r i n k i n g e c o n o m y ,

fighting

a

b r u t a l i n t e r n a l w a r in C h e c h n y a , a n d s t r u g g l i n g to h o l d itself together. I t c o u l d n o t s t o p A m e r i c a f r o m c o r r a l l i n g its f o r m e r c l i e n t states i n t o N A T O , a b r o g a t i n g t h e A B M treaty, w a g i n g t w o w a r s in t h e M i d d l e E a s t a n d t w o m i l i t a r y i n t e r v e n t i o n s in E a s t e r n E u r o p e , s e t t i n g u p n e w m i l i t a r y bases across n e a r b y C e n t r a l A s i a , a n d e v e n s u p p o r t i n g a n t i - R u s s i a n "color revolution" leaders in c o u n t r i e s t h a t h a d b e e n p a r t o f t h e o l d U S S R . T h e d o u b l i n g o f oil a n d g a s p r i c e s since 2 0 0 4 has g i v e n R u s s i a its

first

g e o p o l i t i c a l l e v e r a g e since t h e S o v i e t U n i o n c o l l a p s e d . A s the world's s e c o n d l a r g e s t oil p r o d u c e r a n d e x p o r t e r after t h e S a u d i s , a n d the w o r l d ' s largest p r o ­ d u c e r a n d e x p o r t e r o f n a t u r a l g a s , R u s s i a n fields p r o d u c e m o r e t h a n 8 m i l l i o n barrels o f oil a d a y ( m o r e t h a n t w i c e Iran's o u t p u t ) a n d nearly 2 b i l l i o n c u b i c m e t e r s o f n a t u r a l g a s a d a y ( 2 0 p e r c e n t m o r e t h a n the U n i t e d S t a t e s ) . M o r e barrels o f oil a day, m a i n l y

to

E u r o p e — w h i c h b u y s 4 m i l l i o n barrels o f R u s s i a n c r u d e a n d 2 m i l l i o n

i m p o r t a n t , the country exports 6 million

in

refined p r o d u c t s e v e r y day. R u s s i a also e x p o r t s 6 0 0 m i l l i o n c u b i c m e t e r s o f n a t u r a l g a s e v e r y day, m e e t i n g 4 3 p e r c e n t o f G e r m a n y ' s n e e d s , 2 6 to 3 0 p e r ­ c e n t o f I t a l y a n d France's n e e d s , 6 0 to 7 0 p e r c e n t o f t h e n a t u r a l g a s c o n s u m e d in A u s t r i a , H u n g a r y , a n d T u r k e y , 8 0 p e r c e n t o f t h e g a s u s e d in the C z e c h

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277

R e p u b l i c a n d U k r a i n e , a n d v i r t u a l l y all t h e n a t u r a l g a s u s e d in G r e e c e , F i n ­ land, B u l g a r i a , G e o r g i a , Slovakia, B e l a r u s , and the B a l t i c s t a t e s .

94

C o m m u n i s m m a y be d e a d , b u t t h e R u s s i a n g o v e r n m e n t has c o n s o l i d a t e d effective control over a l m o s t all oil a n d g a s p r o d u c t i o n in the c o u n t r y , so t h e i r e xp ort s a n d d o m e s t i c use can b e i n s t r u m e n t s of state policy. T h e P u t i n a d m i n ­ istration not o n l y seized a n d b r o k e u p Y u k o s , the g i a n t d o m e s t i c oil c o m p a n y , it also s t r e n g t h e n e d the effective m o n o p o l y o f G a z p r o m , the s t a t e - o w n e d g a s c o n g l o m e r a t e that p r o d u c e s 9 3 p e r c e n t o f the c o u n t r y ' s natur al g a s , b y p u t t i n g S i b n e f t , Russia's largest oil c o m p a n y , w i t h reserves o f 1 1 9 b i l l i o n barrels, or m o r e than any nation e x c e p t S a u d i A r a b i a a n d I r a n , u n d e r G a z p r o m . G a z p r o m is also d e v e l o p i n g the v a s t S h t o k m a n g a s field in the B a r e n t s S e a to p r o d u c e liquefied natural g a s to s h i p to the A m e r i c a n m a r k e t b y 2 0 1 2 . T h e K r e m l i n also is e x t e n d i n g the reach of T r a n s n e f t , t h e s t a t e - o w n e d c o m p a n y t h a t o p e r ­ ates the world's largest oil a n d g a s p i p e l i n e n e t w o r k s , b y b u i l d i n g a n e w p i p e l i n e u n d e r the B a l t i c S e a to G e r m a n y a n d e v e n t u a l l y B r i t a i n . The

R u s s i a n g o v e r n m e n t uses its v a s t e n e r g y assets, first, to take s o m e o f the

d o m e s t i c e d g e off t h e c o u n t r y ' s often d i s a p p o i n t i n g e c o n o m i c p e r f o r m a n c e , by

selling

G a z p r o m oil a n d g a s to R u s s i a n businesses

and households

at

r o u g h l y one-fifth w o r l d p r i c e s . T h e u p s h o t is t h a t e v e n w i t h r e c o r d e n e r g y e x ­ p o r t s at record e n e r g y p r i c e s , the R u s s i a n oil a n d g a s i n d u s t r y b a r e l y b r e a k s even a n d has v e r y f e w resources to u p g r a d e its e q u i p m e n t a n d o p e r a t i o n s . T h e R u s s i a n g o v e r n m e n t also sets p o l i t i c a l l y d e t e r m i n e d p r i c e s for its e n e r g y e x ­ ports. W h e n B e l a r u s w a s a K r e m l i n favorite, it p a i d G a z p r o m a b o u t $ 5 0 for the s a m e g a s that cost the n e w E U m e m b e r s L a t v i a a n d E s t o n i a $ 1 1 0 a n d cost P o l a n d , a f r e q u e n t c r i t i c , as m u c h as $ 2 0 0 . R u s s i a also hasn't h e s i t a t e d to e n ­ force its political prices: I n J a n u a r y 2 0 0 6 , w h e n U k r a i n e b a l k e d at a fivefold i n ­ crease in its G a z p r o m p r i c e s f o l l o w i n g its " O r a n g e R e v o l u t i o n , " P u t i n c u t off natural g a s flows to the c o u n t r y — a n d w h e n t h e E u r o p e a n U n i o n o b j e c t e d , the K r e m l i n s u g g e s t e d it m i g h t r e r o u t e the n a t u r a l g a s h e a d e d for E u r o p e to China.

9 3

S e l l i n g na t ur a l g a s f r o m fields in w e s t e r n S i b e r i a to C h i n a i n s t e a d o f

E u r o p e c o u l d cost R u s s i a $ 5 0 to $ 7 0 b i l l i o n — e v e n m o r e t h a n it w o u l d h a v e cost E u r o p e to replace i t — b u t for the K r e m l i n , it's all a b o u t cal

flexing

geopoliti­

power. Similarly, Moscow's decision to extend the Siberian pipeline

to

N a k h o d k a on the S e a of J a p a n instead o f D a q i n g in C h i n a , w h i l e J a p a n a n d C h i n a w e r e f e u d i n g o v e r oil in t h e S o u t h C h i n a S e a , w a s all a b o u t A s i a n politics. W h i l e the K r e m l i n w i l l a l m o s t c e r t a i n l y c o n t i n u e t o use access to its oil a n d g a s a n d the p r i c e s it c h a r g e s t o secure p o l i t i c a l c o n c e s s i o n s , its l e v e r a g e w i l l still be fairly l i m i t e d . G a z p r o m j a c k i n g u p its p r i c e s d i d n ' t roll b a c k t h e p o l i t i c a l c h a n g e s in t h e U k r a i n e ; a n d its w e s t e r n E u r o p e a n c u s t o m e r s h a v e

FUTURECAST

278

o t h e r a l t e r n a t i v e s . R u s s i a m a y b e a b l e to i n t i m i d a t e s m a l l c o u n t r i e s d e e p l y d e p e n d e n t o n its oil a n d g a s , b u t e v e n m a n y of t h e m h a v e o t h e r p o t e n t i a l s o u r c e s , i n c l u d i n g I r a n — a n d in a f e w y e a r s , p e r h a p s Iraq as w e l l . M o r e o v e r , Russia's d r i v e to c o n s o l i d a t e state c o n t r o l o v e r the c o u n t r y ' s e n e r g y p r o d u c ­ t i o n a n d e x p o r t s has s h a r p l y r e d u c e d its o w n access to the f o r e i g n

invest­

m e n t s , t e c h n o l o g i e s , a n d e x p e r t i s e n e e d e d t o e x p a n d those resources, m a k i n g R u s s i a o n e o f t h e w o r l d ' s least-efficient

e n e r g y p r o d u c e r s . W e s t e r n analysts

e x p e c t R u s s i a n oil a n d g a s p r o d u c t i o n

t o t r u l y p e a k b y 2 0 1 0 a n d then

d e c l i n e — e v e n official R u s s i a n forecasts see p r o d u c t i o n l e v e l i n g off in the next d e c a d e — a n d p r o d u c t i o n at the three g i a n t natural g a s fields in w e s t e r n Siberia that a c c o u n t for 7 0 p e r c e n t o f G a z p r o m ' s o u t p u t already is d e c l i n i n g . A n d any p e r i o d o f g l o b a l o v e r s u p p l y — o r a g l o b a l recession that c u t s d e m a n d — w i l l c r i p p l e the K r e m l i n ' s s t r a t e g y a n d send the R u s s i a n e c o n o m y reeling.

HOW THE WORLD WILL ADDRESS CLIMATE CHANGE The

d a r k side o f t h e w o r l d ' s f a s t - r i s i n g e n e r g y u s e — e v e n d a r k e r t h a n K r e m ­

lin p l o t t i n g — i s t h e p o l l u t i o n it's p r o d u c i n g a n d its i m p a c t on the c l i m a t e . T h e s e c o n c e r n s first w e n t g l o b a l in the 1 9 9 0 s , w h e n the U n i t e d N a t i o n s first t r i e d t o a d d r e s s g r o w i n g unease a b o u t t h e g r e e n h o u s e g a s e s released b y fossil fuels. T h e r e s u l t i n g K y o t o p r o t o c o l s h a v e failed to m a k e a serious d e n t in any c o u n t r y ' s e m i s s i o n s . B u t t h e n e x t ten years w i l l l i k e l y see a n o t h e r c o n c e r t e d effort to b u i l d n e w i n t e r n a t i o n a l a r r a n g e m e n t s to c o n t r o l e m i s s i o n s of c a r b o n d i o x i d e ( C 0 ) , t h e p r i n c i p a l g r e e n h o u s e g a s . T h e n e x t effort w i l l p r o b a b l y use 2

an a p p r o a c h different f r o m K y o t o , since in o r d e r to s u c c e e d , it w i l l p r o b a b l y h a v e to b e l e d b y t h e c h i e f a n t a g o n i s t t o the K y o t o p r o t o c o l s , the U n i t e d States g o v e r n m e n t , and include C h i n a and other fast-developing

countries

that have v o w e d to never join a K y o t o - t y p e p r o g r a m . The The

b a s i c science o f c l i m a t e c h a n g e is n o w i n t e r n a t i o n a l l y

undisputed.

g r e e n h o u s e g a s e s p r o d u c e d m a i n l y b y b u r n i n g fossil fuel a c c u m u l a t e in

t h e earth's a t m o s p h e r e — t h e y don't b r e a k d o w n for a b o u t a c e n t u r y — a b s o r b infrared r a d i a t i o n t h a t o t h e r w i s e w o u l d t r a v e l b a c k i n t o s p a c e , a n d radiate s o m e o f it b a c k to t h e e a r t h . S o , as C 0

2

levels h a v e increased in the a t m o s ­

p h e r e , so h a v e t h e t e m p e r a t u r e s o f t h e earth's oceans a n d air. O v e r the last 1 5 0 years, atmospheric C 0 37

2

levels rose f r o m 2 7 1 p a r t s p e r m i l l i o n to 3 7 0 , or b y

p e r c e n t . A m o n g t h e m o r e v i s i b l e effects o b s e r v e d in t h e last d e c a d e a n d

p o p u l a r l y a t t r i b u t e d t o t h e c o n s e q u e n t t e m p e r a t u r e increases h a v e b e e n m e l t ­ i n g g l a c i e r s a n d s n o w c a p s , d i s a p p e a r i n g l a k e s , s u cces s i ve years o f record h i g h t e m p e r a t u r e s o n m o s t c o n t i n e n t s , a n d s t r o n g e r a n d m o r e f r e q u e n t hurricanes

THE COMING CRISES IN HEALTH CARE, ENERGY, AND THE GLOBAL ENVIRONMENT a n d tornadoes in t h e U n i t e d S t a t e s , m o n s o o n s floods

in E u r o p e , A f r i c a , a n d A s i a .

9 6

279

a n d t y p h o o n s in A s i a , a n d

S c i e n t i s t s don't a g r e e o n h o w q u i c k l y or

h o w m u c h these effects w i l l w o r s e n , or at w h a t c o n c e n t r a t i o n s t h e c h a n g e s w i l l be irreversible. A r o u g h consensus has e m e r g e d , h o w e v e r , t h a t 4 5 0

to

5 0 0 p a r t s p e r m i l l i o n m a y b e t h e t i p p i n g p o i n t for serious, p e r m a n e n t c l i ­ m a t i c effects, a n d t h a t w i t h o u t serious steps C 0 per

million by 2 0 5 0 .

2

levels w i l l reach 6 0 0 p a r t s

9 7

If the w o r l d ' s m a j o r g o v e r n m e n t s i n t e n d to a v o i d t h a t n a s t y scenario, t h e y w i l l h a v e to figure o u t in the n e x t f e w years h o w to k e e p e m i s s i o n s their c u r r e n t levels e v e n as w o r l d w i d e e n e r g y use d o u b l e s twenty years.

9 8

below

over the

next

T h e c h a l l e n g e is p a r t l y t e c h n o l o g i c a l , since a c h i e v i n g t h e g o a l

w i l l require the d e v e l o p m e n t

and spread of m u c h

more

energy-efficient

e q u i p m e n t a n d m a t e r i a l s , a n d p r o b a b l y n e w a l t e r n a t i v e fuels. T h e c h a l l e n g e is also an e c o n o m i c a n d p o l i t i c a l one, since e v e r y p l a u s i b l e response i n v o l v e s higher energy prices that w i l l take a piece out of g r o w t h — a n d most politi­ cians are r e l u c t a n t to d o t h a t in o r d e r to h e a d off e v e n l a r g e costs at s o m e future t i m e . S o s o l v i n g c l i m a t e c h a n g e w i l l b e o n e o f t h e d a u n t i n g p o l i t i c a l p r o b l e m s o f the n e x t d e c a d e , w i t h m a n y g o v e r n m e n t s t r y i n g t o

convince

their electorates to a c c e p t even h i g h e r e n e r g y p r i c e s a l o n g w i t h o t h e r c h a n g e s in their lives.

The

g r e a t e s t c h a l l e n g e in c l i m a t e c h a n g e c o u l d w e l l b e g e o p o l i t i c a l . T h e E u ­

ropean U n i o n a n d J a p a n w i l l r a m p u p p r e s s u r e o n W a s h i n g t o n to t a k e t h e lead, because the r e l a t i v e l y h i g h e n e r g y - i n t e n s i t y o f t h e A m e r i c a n e c o n o m y a n d the a u t o m o b i l e - c e n t e r e d

lifestyles

of most

A m e r i c a n s dictate that

if

w o r l d w i d e emissions are to c o m e d o w n , t h e U n i t e d S t a t e s w i l l h a v e t o a b s o r b larger costs t h a n a n y o n e else. M o r e o v e r , an effective effort also w i l l h a v e t o i n ­ c l u d e C h i n a , I n d i a , B r a z i l , a n d o t h e r l a r g e , f a s t - d e v e l o p i n g c o u n t r i e s t h a t see c l i m a t e c h a n g e as a p r o b l e m t h a t s h o u l d b e s o l v e d b y t h e a d v a n c e d c o u n t r i e s that p r o d u c e d m o s t o f the g r e e n h o u s e g a s e s . T h a t m a y b e t r u e , b u t it also w i l l soon be beside the p o i n t , since d e v e l o p i n g nations w i l l soon p r o d u c e as m u c h g r e e n h o u s e g a s e s as the a d v a n c e d e c o n o m i e s . G i v e n these hurdles, s o m e observers see little p r o s p e c t for a m e a n i n g f u l g l o b a l c o m p r o m i s e on c l i m a t e c h a n g e . T h e p r o s p e c t s for the W o r l d T r a d e O r ­ ganization looked bleak for a t i m e , too; b u t it g a i n e d m o m e n t u m w i t h effective U.S.

a n d E u r o p e a n leadership a n d a g r o w i n g r e c o g n i t i o n that its costs w o u l d be

less than feared. A m e r i c a n leadership isn't there y e t for c l i m a t e c h a n g e , b u t w i l l likely e m e r g e in the next f e w years. T h e p u b l i c e d u c a t i o n a n d m e d i a b l i t z led by

former V i c e President A l b e r t G o r e has shifted A m e r i c a n p u b l i c

opinion

280

FUTURECAST

in s u p p o r t o f action; the D e m o c r a t i c m a j o r i t y in C o n g r e s s also has called for action, a n d a l m o s t e v e r y serious c a n d i d a t e for president in 2 0 0 7 d i d so as w e l l . M o r e o v e r , in 2 0 0 7 , E x x o n M o b i l , C h e v r o n , a n d other large U . S . oil c o m p a n i e s for the first t i m e called for a p u b l i c d e b a t e not o v e r w h e t h e r c l i m a t e c h a n g e is a serious p r o b l e m b u t on the best w a y s to address it. T h e r e ' s also g r o w i n g e v i d e n c e t h a t t h e a d j u s t m e n t s o f a serious p r o g r a m m a y cost less t h a n m a n y fear. A 2 0 0 7 s t u d y b y the M c K i n s e y c o n s u l t a n c y , for e x a m p l e , a n a l y z e d t h e costs o f t h e a v a i l a b l e o p t i o n s i f the m a j o r countries a g r e e d to c a p s o n C 0

2

emissions that w o u l d limit atmospheric concentrations

to 4 5 0 p a r t s p e r m i l l i o n in 2 0 3 0 . " T h e s t u d y f o u n d t h a t a c h i e v i n g t h a t g o a l w o u l d e n t a i l c h a n g e s in m o s t aspects o f m o d e r n e n e r g y use, b u t not v e r y d r a s t i c o n e s — a n d that's w i t h o u t s t a r t l i n g t e c h n o l o g i c a l b r e a k t h r o u g h s to ease t h e effects d o w n t h e r o a d . A g o o d p a r t o f t h e effort w o u l d i n v o l v e steps to i m p r o v e e n e r g y efficiency t h a t o v e r t i m e w o u l d n ' t cost p e o p l e a n y t h i n g . S h i f t i n g t o h y b r i d a u t o m o b i l e s , i m p r o v i n g t h e insulation in b u i l d i n g s , p l a n t s , and homes, and u s i n g m o r e energy-efficient heating, cooling, and lighting s y s t e m s w o u l d g e n e r a t e s a v i n g s t h r o u g h r e d u c e d e n e r g y use t h a t w o u l d offset t h e i n i t i a l h i g h e r costs. B y o n e e s t i m a t e , b e t t e r i n s u l a t i o n a n d m o r e efficient h e a t i n g , c o o l i n g , a n d l i g h t i n g alone c o u l d r e d u c e the g r o w t h in w o r l d w i d e e l e c t r i c i t y d e m a n d b y h a l f o v e r t w e n t y years. T h e n e x t , least e x p e n s i v e steps i n v o l v e p l a n t i n g m o r e forests a n d s l o w i n g d e f o r e s t a t i o n — v e g e t a t i o n absorbs C0

2

a n d p r o d u c e s o x y g e n , so t h e m o r e , t h e b e t t e r — a n d c h a n g e s in l i v e s t o c k

practices. A f t e r t h a t c o m e the m o r e costly steps that i n v o l v e the measures that m a n y people think of

first—shifting

to a l t e r n a t i v e e n e r g y sources t h a t p r o d u c e

less g r e e n h o u s e g a s e s , s u c h as w i n d , solar, a n d c a r b o n - c a p t u r e t e c h n o l o g i e s — f o l l o w e d b y e v e n m o r e e x p e n s i v e m e a s u r e s , s u c h as u s i n g biodiesel fuels a n d c l e a n coal in m a n u f a c t u r i n g . P r o g r e s s in a r r e s t i n g c l i m a t e c h a n g e o v e r the n e x t 1 0 to 1 5 years c o u l d be less p a i n f u l t h a n m a n y p e o p l e a s s u m e , b u t o n l y w i t h a g e n u i n e w o r l d w i d e effort. T h e g e o p o l i t i c a l c h a l l e n g e is t h a t the a d v a n c e d c o u n t r i e s m o s t l i k e l y to t a k e serious steps c a n n o t a c h i e v e t h e g l o b a l g o a l on their o w n , because the m a j o r i t y o f t h e l e s s - e x p e n s i v e o p t i o n s for c o n t a i n i n g g r e e n h o u s e g a s e m i s ­ sions i n v o l v e a c t i o n b y d e v e l o p i n g c o u n t r i e s . It's cheaper, for e x a m p l e , to o u t ­ fit n e w h o m e s , b u i l d i n g s , p l a n t s , a n d a u t o m o b i l e s w i t h m o r e efficient a n d c l e a n t e c h n o l o g i e s t h a n to retrofit e x i s t i n g s t r u c t u r e s a n d c a r s — a n d o v e r the n e x t t e n t o fifteen y e a r s , m o s t o f t h e w o r l d ' s n e w h o m e s , b u i l d i n g s , a n d p l a n t s w i l l b e b u i l t in f a s t - g r o w i n g d e v e l o p i n g c o u n t r i e s , p r i n c i p a l l y in A s i a . B u t t h i s w i l l b e h a r d to sell to d e v e l o p i n g c o u n t r i e s , s i n c e it's also m o r e e x p e n s i v e i n i t i a l l y t o use m o r e e n e r g y - e f f i c i e n t a n d clean t e c h n o l o g i e s , unless the a d ­ v a n c e d c o u n t r i e s create a g l o b a l f u n d to h e l p offset s o m e o f those initial costs.

THE COMING CRISES IN HEALTH CARE, ENERGY, AND THE GLOBAL ENVIRONMENT In

281

a d d i t i o n , m o s t of the p o t e n t i a l c l i m a t e - c h a n g e g a i n s f r o m forestation a n d

l i v e s t o c k p r a c t i c e s are l o c a t e d in L a t i n A m e r i c a a n d A f r i c a , a n d these steps w i l l i n v o l v e initial costs to c o r r e c t . The

issue of the C 0

2

e m i s s i o n s f r o m a u t o m o b i l e s is different. A m e r i c a n s ,

E u r o p e a n s , a n d J a p a n e s e w i l l still b u y t h e m a j o r i t y o f n e w cars in 2 0 2 0 , a n d p r o b a b l y 2 0 3 0 , too, because t h e n a t i o n a l fleets in a d v a n c e d c o u n t r i e s t u r n over e v e r y six to e i g h t years. B u t C h i n a , I n d i a , I n d o n e s i a , B a n g l a d e s h , B r a z i l , and

o t h e r l a r g e d e v e l o p i n g c o u n t r i e s also w i l l v a s t l y increase t h e i r a u t o p u r ­

chases o v e r the n e x t ten to fifteen y e a r s , a n d h o p e f u l l y they, t o o , can b e m o v e d to h y b r i d s or " p l u g - i n , " b a t t e r y - p o w e r e d v e h i c l e s . A

d i l e m m a for n o w is t h a t C h i n a , I n d i a , a n d t h e o t h e r f a s t - g r o w i n g d e v e l ­

o p i n g c o u n t r i e s say t h e y w i l l n e v e r j o i n a s y s t e m t h a t c a p s t h e i r e m i s s i o n s . The

onus of c h a n g i n g their m i n d s w i l l fall t o t h e U n i t e d S t a t e s , b e c a u s e it is

v i r t u a l l y the one c o u n t r y w i t h the l e v e r a g e to i n d u c e t h e m t o p a r t i c i p a t e . ( S a u d i A r a b i a p r o b a b l y has t h e r e q u i s i t e l e v e r a g e , t o o , b u t n o t t h e i n c e n t i v e . ) Two

years a g o , U . S . l e a d e r s h i p on c l i m a t e c h a n g e s e e m e d f a n c i f u l . I n 2 0 0 7 ,

President B u s h for the first t i m e a g r e e d t h a t i n t e r n a t i o n a l a c t i o n o n g l o b a l w a r m i n g is r e q u i r e d ; a n d in 2 0 0 9 , serious c l i m a t e c h a n g e t a l k s c o u l d b e p a r t o f the n e w president's efforts to r e b u i l d i n t e r n a t i o n a l s u p p o r t for A m e r i c a n leadership. The

real q u e s t i o n for C h i n a , I n d i a , S o u t h K o r e a — a n d , for t h a t m a t t e r , t h e

U n i t e d S t a t e s , G e r m a n y , a n d B r i t a i n — i s h o w m u c h it w i l l really cost to d o what's r e q u i r e d to r e d u c e the risk o f g l o b a l w a r m i n g . E c o n o m i s t s w h o a s k t h a t q u e s t i o n g e n e r a l l y c o n c l u d e t h a t t h e a v e r a g e cost o f all t h e m e a s u r e s n e e d e d to k e e p those f u t u r e g r e e n h o u s e g a s c o n c e n t r a t i o n s w i t h i n w h a t ' s t h o u g h t to be a safe r a n g e , t w e n t y a n d t h i r t y y e a r s f r o m n o w , w o u l d b e a b o u t 4 0 euros or $ 5 0 p e r ton o f C 0

2

reduced.

1 0 0

T h a t ' s n o t t r i v i a l , b u t it's also n o t

b a c k b r e a k i n g : A t c u r r e n t rates o f e n e r g y u s e , it w o u l d cost a b o u t $ 3 0 0 a y e a r per

A m e r i c a n (today's d o l l a r s ) , a b o u t $ 1 0 0 p e r y e a r for E u r o p e a n s ( t h e y c o n ­

s u m e less e n e r g y b e c a u s e their e n e r g y taxes are four t i m e s h i g h e r t h a n A m e r ­ ica's), a n d a b o u t $ 2 5 a year p e r p e r s o n in C h i n a . T h o s e p e r - p e r s o n costs w o u l d be h i g h e r in

2020,

e s p e c i a l l y for C h i n a ,

because people

will

use

more

e n e r g y — b u t it also s h o u l d b e m o r e affordable for m o s t p e o p l e , since a v e r a g e i n c o m e s w i l l also be s u b s t a n t i a l l y l a r g e r b y t h e n in C h i n a , A m e r i c a , a n d m o s t other places. The

c a t c h is t h a t m o s t p e o p l e w i l l resist c h a n g e s t h a t e n t a i l

spending

m o r e today, say for a h y b r i d car or a h i g h l y e n e r g y - e f f i c i e n t w a s h e r , t o h e a d off

the l a r g e r costs o v e r t i m e o f c o n s u m i n g m o r e h i g h - p r i c e d e n e r g y . O n e

way

to o v e r c o m e t h i s resistance in s o m e areas w i l l b e g o v e r n m e n t m a n d a t e s

and

r e g u l a t i o n s r e q u i r i n g h i g h e r fuel efficiency s t a n d a r d s for a u t o m o b i l e s a n d

282

FUTURECAST

h i g h e r e n e r g y efficiency s t a n d a r d s for a p p l i a n c e s , l i g h t i n g , a n d

insulation.

T h e s e r e g u l a t i o n s w i l l cost c o n s u m e r s a n d b u i l d e r s m o r e at first, a n d save c o n s u m e r s a n d h o m e o w n e r s e v e n m o r e later on. B u t those m e a s u r e s are o n l y e n o u g h to g e t h a l f o f t h e j o b d o n e , a n d o n l y i f e v e r y o n e in t h e w o r l d w a s p a r t o f it. I f t h e U n i t e d S t a t e s , C h i n a , a n d t h e rest o f t h e w o r l d can a g r e e to seri­ o u s l y a d d r e s s t h i s p r o b l e m in t h e n e x t d e c a d e , p e o p l e a n d businesses w i l l find t h e m s e l v e s d e a l i n g w i t h e i t h e r a " c a p - a n d - t r a d e " r e g i m e s u c h as K y o t o , or w i t h n e w c a r b o n t a x e s — a n d b o t h a p p r o a c h e s w i l l lift e n e r g y p r i c e s even h i g h e r t h a n g l o b a l s u p p l y a n d d e m a n d h a v e in store.

U n d e r c a p - a n d - t r a d e , each c o u n t r y w o u l d a g r e e to c a p its a n n u a l C 0

2

emis­

sions at a n a g r e e d - u p o n level a n d t h e n a l l o c a t e t h e total in p e r m i t s d i s t r i b ­ uted

to

its

major greenhouse

gas

producers—utilities,

manufacturers,

a g r i b u s i n e s s e s , a n d oil a n d g a s o l i n e p r o d u c e r s or d i s t r i b u t o r s — b a s e d

on

s o m e f r a c t i o n o f t h e i r e m i s s i o n s in s o m e p r e v i o u s year. T h o s e t h a t can c o m e u n d e r t h e i r c a p s at r e l a t i v e l y l o w cost w i l l d o so a n d sell t h e i r excess p e r m i t s t o o t h e r s w h o can't m e e t t h e i r o w n c a p s , so, in theory, t h e o v e r a l l e m i s s i o n s c a p c a n b e a c h i e v e d e a c h y e a r at t h e l o w e s t o v e r a l l cost. C o n s u m e r s a n d b u s i ­ nesses u l t i m a t e l y w i l l s h o u l d e r t h o s e c o s t s . U t i l i t i e s or m a n u f a c t u r e r s w h o m a k e c h a n g e s to c o m e u n d e r t h e i r c a p s w i l l pass o n the costs o f their c h a n g e s , as w i l l t h o s e w h o h a v e to b u y m o r e p e r m i t s . I f e v e r y t h i n g is p a s s e d a l o n g , it s h o u l d d i s c o u r a g e p e o p l e f r o m u s i n g e n e r g y p r o d u c e d b y t h o s e least ef­ f e c t i v e at r e d u c i n g t h e c a r b o n c o n t e n t . M o s t A m e r i c a n a n d E u r o p e a n p o l i t i ­ cians

who

want

to

address

greenhouse

gas

emissions

currently

favor

c a p - a n d - t r a d e . It's n o t h a r d t o d i s c e r n its p o l i t i c a l a p p e a l , since the

in­

e v i t a b l e e n e r g y p r i c e increases w i l l a p p e a r to c o m e f r o m t h e m a r k e t , not the government. H o w e v e r , m o s t e c o n o m i s t s w h o f a v o r serious a c t i o n don't favor c a p - a n d t r a d e — a n d for g o o d reasons. T h e y see t h a t a n y s y s t e m o f preset caps w i l l m a k e e n e r g y p r i c e s e v e n m o r e v o l a t i l e t h a n t h e y are already, a n d that's b a d for i n v e s t m e n t a n d t h e overall e c o n o m y . T h e y r e m e m b e r t h e late 1 9 7 0 s , w h e n t h e U . S . F e d e r a l R e s e r v e set a c a p o n the m o n e y s u p p l y , a n d the p r i c e of m o n e y — i n t e r e s t r a t e s — s h o t u p . I n this case, t h e p r i c e s for p e r m i t s a n d the u n d e r l y i n g e n e r g y c o u l d soar w h e n e v e r e n e r g y d e m a n d is g r e a t e r t h a n w a s e x p e c t e d w h e n t h e c a p s w e r e s e t — f o r e x a m p l e , because the s u m m e r is u n u s u ­ a l l y h o t , t h e w i n t e r u n e x p e c t e d l y c o l d , or the e c o n o m y g r o w s faster t h a n p r e ­ d i c t e d . C a p - a n d - t r a d e also s e e m s v u l n e r a b l e to c o r r u p t i o n a n d m a n i p u l a t i o n . T h e p e r m i t s w i l l b e w o r t h tens o f b i l l i o n s o f d o l l a r s , w h i c h g o v e r n m e n t s b o t h h o n e s t a n d c o r r u p t w i l l h a v e to d i s t r i b u t e a n d t h e n m o n i t o r after e v e r y trade.

THE COMING CRISES IN HEALTH CARE, ENERGY, AND THE GLORAL ENVIRONMENT The

283

s y s t e m w i l l be a b o o n to the financial firms t h a t w i l l t r a d e a n d s p e c u l a t e

in the p e r m i t s — f i n a n c i a l m a r k e t s for these p e r m i t s h a v e b e e n c r e a t e d a l r e a d y in C h i c a g o a n d L o n d o n — a n d t h e i r c o m m i s s i o n s

a n d t r a d i n g profits

ulti­

m a t e l y w i l l raise p e r m i t p r i c e s as w e l l . Instead, m a n y e n v i r o n m e n t a l e c o n o m i s t s favor c a r b o n fees or taxes over c a p and-trade, because they like the clear a n d direct p r i c e s i g n a l that a c a r b o n fee p r o v i d e s to favor less c a r b o n - i n t en s i v e fuels. M o r e o v e r , c a r b o n fees don't m a k e en ergy prices m o r e volatile w h e n d e m a n d rises u n e x p e c t e d l y , as c a p - a n d - t r a d e does. S u c h taxes or fees also certainly s h o u l d reduce the use of the m o s t c a r b o n intensive forms of energy, as h i g h u t i l i t y a n d g a s o l i n e taxes in E u r o p e h a v e m o v e d businesses a n d households there to be m o r e energy-efficient t h a n in A m e r i c a . A n d e v e r y o n e agrees that c a r b o n taxes w o u l d b e m u c h s i m p l e r to a d ­ m i n i s t e r than the p e r m i t s y s t e m u n d e r c a p - a n d - t r a d e , a n d less o p e n to c o r r u p ­ tion. A carbon tax s y s t e m also c o u l d be d e s i g n e d to e n c o u r a g e p e o p l e to favor less carbon-intensive fuels a n d p r o d u c t s w h i l e p r o t e c t i n g t h e m f r o m

high

s h o r t - t e r m costs, for e x a m p l e , b y u s i n g the revenues f r o m a steep c a r b o n tax to reduce their p a y r o l l taxes. T h e d r a w b a c k is that c a r b o n taxes w i l l a l l o w e m i s ­ sions to increase w i t h u n e x p e c t e d d e m a n d , as h a p p e n s today. T h o s e increases could be offset b y increasing the c a r b o n t a x rate or fee the f o l l o w i n g year, if politicians are w i l l i n g to raise taxes for the planet's l o n g - t e r m health. W h e t h e r or not the w o r l d c o m e s to g r i p s w i t h c l i m a t e c h a n g e o v e r the n e x t d e c a d e w i l l u l t i m a t e l y d e p e n d on t h e U n i t e d S t a t e s a n d C h i n a . A m e r i c a is the largest p r o d u c e r o f g r e e n h o u s e g a s e s , b y far; a n d b y 2 0 2 0 , C h i n a w i l l be c l o s i n g in fast. T h e U n i t e d S t a t e s w i t h d r e w f r o m t h e K y o t o c a p - a n d - t r a d e a r r a n g e m e n t w h e n it b e c a m e clear t h a t G e r m a n , B r i t i s h , a n d R u s s i a n g a m e s ­ m a n s h i p w i t h t h e i r caps w o u l d relieve t h e m o f a n y s i g n i f i c a n t b u r d e n , l e a v ­ i n g nearly all o f the w o r l d w i d e a d j u s t m e n t s to t h e U n i t e d S t a t e s , A u s t r a l i a (it also w i t h d r e w ) , J a p a n , a n d C a n a d a ( t h e y s t a y e d b u t r e i n t e r p r e t e d K y o t o ' s t e r m s to a v o i d m o s t costs). I f the U n i t e d S t a t e s leads a s e c o n d g l o b a l effort, it w i l l t r y to use its s u p e r p o w e r l e v e r a g e a n d resources to p e r s u a d e C h i n a to p a r t i c i p a t e — p e r h a p s w i t h p l e d g e s o f j o i n t v e n t u r e s to d e v e l o p a n d p r o d u c e alternative fuels a n d n e w e n e r g y - e f f i c i e n t t e c h n o l o g i e s . A n d i f C h i n a reverses its p o s i t i o n a n d joins t h e U n i t e d S t a t e s , E u r o p e , a n d J a p a n in a g l o b a l a p ­ p r o a c h to g r e e n h o u s e g a s e m i s s i o n s , it w i l l b e difficult for o t h e r l a r g e d e v e l ­ o p i n g nations to h o l d b a c k . A p a r t from w h a t the U n i t e d States m i g h t w a n t , China's incentives to a d ­ dress c l i m a t e c h a n g e w i l l increase o v e r t h e n e x t d e c a d e . T h e W o r l d H e a l t h O r g a n i z a t i o n reports t h a t seven o f t h e w o r l d ' s t e n m o s t p o l l u t e d c i t i e s are in C h i n a ; a n d the W o r l d B a n k e s t i m a t e s t h a t p o l l u t i o n c u r r e n t l y costs C h i n a t h e a s t o u n d i n g e q u i v a l e n t o f 8 p e r c e n t o f its G D P each year, m a i n l y in h e a l t h

284

FUTURECAST

problems

and

damage

to

crops

and

structures. W i t h o u t

serious

policy

c h a n g e s , C h i n a ' s p o l l u t i o n is p r o j e c t e d to increase a n o t h e r fourfold b y 2 0 2 0 , c r e a t i n g b u r d e n s t h a t " C h i n a isn't a b l e to w i t h s t a n d , " as the h e a d o f C h i n a ' s S t a t e E n v i r o n m e n t a l P r o t e c t i o n A d m i n i s t r a t i o n , Z h a n g L i j u n , has p u t i t .

1 0 1

P e r h a p s m o s t a p p e a l i n g o f all, B e i j i n g m a y c o m e to see that s u p p o r t for c l i ­ m a t e c h a n g e r e f o r m s w i l l h e l p s l o w t h e g r o w t h o f C h i n a ' s e n e r g y needs a n d oil d e p e n d e n c e . N o one can k n o w w h a t a n e w g l o b a l a p p r o a c h to c l i m a t e c h a n g e w i l l look like. I f the c o m m i t m e n t is s e r i o u s — w h i c h still is far f r o m c e r t a i n — c a r b o n taxes w i l l m e e t the need better than a K y o t o - t y p e c a p - a n d - t r a d e . C a r b o n taxes also h a v e one v e r y v a l u a b l e p o l i t i c a l a d v a n t a g e : T h e y generate large a m o u n t s of revenue that g o v e r n m e n t s can use as t h e y choose. Ch i n a 's leaders m a y c o m e to see c a r b o n taxes as a g r o w i n g f u n d i n g source for health care, w h i l e a future U . S . p r e s i d e n t is m o r e likely to use the revenues to c u t p a y r o l l or other taxes. C a p a n d - t r a d e w i l l generates tens o f billions of dollars, too, b u t the funds g o to en­ e r g y p r o d u c e r s a n d other businesses w i t h excess p e r m i t s to sell, to the financial institutions that w i l l m a n a g e the p e r m i t t r a d i n g , a n d to speculators and in­ vestors w h o correctly g u e s s the s h o r t - t e r m direction of p e r m i t prices. W h e t h e r the world's m a j o r countries agree in the n e x t ten years on h a r m o ­ n ized c a r b o n taxes, s o m e other w a y o f r e d u c i n g g r e e n h o u s e g a s emissions, or n o t h i n g at all, e n e r g y prices w i l l k e e p rising. T h a t , in itself, w i l l p u s h g o v e r n ­ m e n t s a n d businesses to take helpful steps. B y legislation, regulation, or s i m p l y because g a s o l i n e prices reach $ 5 ~ $ 6 p e r g a l l o n in A m e r i c a a n d , m u c h h i g h e r t h a n that in E u r o p e a n d J a p a n , a g r o w i n g share o f the world's a u t o m o b i l e s and t r u c k s w i l l r u n o n electric fuel cells, cellulosic ethanol, a n d other

biofuels.

B r a z i l already p r o d u c e s h y d r o g e n ethanol for less, p e r g a l l o n , than gasoline, and V o l k s w a g e n a n d G e n e r a l M o t o r s h a v e i n t r o d u c e d "flex cars" that can r u n on p u r e g a s o l i n e , p u r e ethanol, or a n y c o m b i n a t i o n of the t w o . W h i l e h i g h e r prices for electricity a n d h e a t i n g w i l l not d r i v e m a n y people to retrofit their h o m e s or replace their a p p l i a n c e s , h i g h e r e n e r g y prices w i l l eat into m o s t people's e ne r gy c o n s u m p t i o n , w h i c h in t u r n w i l l reduce emissions on the m a r g i n . Ultimately,

neither

the

world's energy problems

nor the

prospective

c h a n g e s t o t h e c l i m a t e can b e s e t t l e d on those m a r g i n s . M u c h l i k e the financ­ i n g o f h e a l t h care as m i l l i o n s o f b o o m e r s reach the a g e w h e n t h e y w i l l need e x p e n s i v e m e d i c a l t r e a t m e n t s , t h e issues of e n e r g y a n d c l i m a t e c h a n g e w i l l b e c o m e m o r e h e a t e d a n d serious o v e r the n e x t d e c a d e a n d r e q u i r e l a r g e a n d serious r e f o r m s .

CHAPTER EIGHT

HISTORY'S WILD CARDS: CATASTROPHIC TERRORISM AND TECHNOLOGICAL BREAKTHROUGHS

NATIONS

C A N N O T

C H A N G E

T H E SINGULAR

GLOBAL

FORCES

now

shap­

i n g their p a t h s . Y e t no o u t c o m e s are o r d a i n e d , a n d societies a l w a y s h a v e lee­ w a y to affect the consequences of large forces that t h e y c a n n o t control directly. A m e r i c a ' s c o m p a r a t i v e l y open a p p r o a c h to i m m i g r a t i o n w i l l lessen the eco­ n o m i c costs of its b a b y b o o m e r b a b y - b u s t c y c l e , a n d other societies c o u l d a d o p t a similar attitude. China's p r o f o u n d e c o n o m i c reforms p o s i t i o n it to d e v e l o p and prosper t h r o u g h g l o b a l i z a t i o n in w a y s c u r r e n t l y b e y o n d India's reach, b u t w i t h aggressive leadership, I n d i a c o u l d c o n c e i v a b l y u n d e r t a k e c o m p a r a b l e re­ forms. N o r is it b e y o n d i m a g i n i n g

that G e r m a n y a n d F r a n c e — e s p e c i a l l y

France of l a t e — c o u l d reverse their s l o w e c o n o m i c declines b y recasting their welfare states m o r e a l o n g the A m e r i c a n or Irish m o d e l s . T h e r e is no scenario that w i l l alter A m e r i c a ' s p o s i t i o n as sole s u p e r p o w e r for a l o n g t i m e , b u t C h i n a and R u s s i a c o u l d find their w a y to an alliance that m i g h t b r i n g b a c k e l e m e n t s of balance-of-power geopolitics in C e n t r a l a n d S o u t h e r n A s i a . T h e h i s t o r y o f j u s t the p a s t g e n e r a t i o n also is replete w i t h u t t e r l y u n e x ­ p e c t e d e v e n t s , especially t h e S o v i e t U n i o n ' s i m p l o s i o n a n d C h i n a ' s e m b r a c e o f c a p i t a l i s m , a n d the n e x t ten to t w e n t y y e a r s w i l l i n c l u d e m a n y

unforeseen

d e v e l o p m e n t s . E v e n so, there are v e r y f e w t h a t c o u l d m a t e r i a l l y affect t h e three forces e x a m i n e d here. B u t there are at least t w o w i l d c a r d s — o n e d a r k a n d one m u c h m o r e p r o m i s i n g — t h a t j u s t m i g h t . T h e p o w e r f u l , d a r k p o s s i ­ b i l i t y is c a t a s t r o p h i c t e r r o r i s m . A m e r i c a ' s h i s t o r i c a l l y d i s p r o p o r t i o n a t e m i l i ­ tary s u p e r i o r i t y has led its o p p o n e n t s to t r y u n c o n v e n t i o n a l t a c t i c s s u c h as

285

286

FUTURECAST

guerilla insurgencies and unconventional weapons from improvised explosive d e v i c e s ( I E D s ) t o b i o l o g i c a l w e a p o n s . A m e r i c a ' s s l u g g i s h response to these w e l l - u n d e r s t o o d d e v e l o p m e n t s a l r e a d y m a y h a v e cost the U n i t e d S t a t e s its a u r a o f i n v i n c i b i l i t y . W h i l e it is still v e r y u n l i k e l y , terrorists c o u l d success­ f u l l y escalate t h e i r u n c o n v e n t i o n a l t a c t i c s a n d w e a p o n s to s u c h e x t r e m e s in t h e n e x t d e c a d e , t h a t t h e effects c o u l d alter g e o p o l i t i c s a n d g l o b a l i z a t i o n . A t e r r o r i s t a t t a c k t h a t d e v a s t a t e s S a u d i oil facilities, for e x a m p l e , w o u l d s i n k e q u i t y a n d b o n d s m a r k e t s a r o u n d t h e w o r l d , set off a d e e p g l o b a l reces­ sion, a n d s l o w or p o s s i b l y stall o u t C h i n a ' s m o d e r n i z a t i o n p r o g r a m , w i t h l a r g e a n d u n p r e d i c t a b l e p o l i t i c a l effects. T e r r o r i s t s also m i g h t m a n a g e to p l a y a n u m b e r o f n u c l e a r cards. T h e easiest to p u l l off w o u l d be an a t t a c k on a n u ­ clear p o w e r p l a n t or s e t t i n g off a r a d i o l o g i c a l w e a p o n , a l t h o u g h the concrete e c o n o m i c a n d p o l i t i c a l effects w o u l d p r o b a b l y n o t be n a t i o n - c h a n g i n g .

A

m o r e d r e a d f u l p o s s i b i l i t y — a l t h o u g h also a m u c h s l i m m e r o n e — i s the d e t o ­ n a t i o n o f a s t o l e n "loose n u k e " or i m p r o v i s e d n u c l e a r d e v i c e in a l a r g e A m e r ­ i c a n or E u r o p e a n city. T h i s scenario is u s u a l l y c o n t e m p l a t e d safely in thriller m o v i e s ; b u t if it e v e r h a p p e n s , its effects c o u l d c h a n g e m u c h t h a t w e n o w take for g r a n t e d . T h e m o r e u p b e a t , h i s t o r i c a l w i l d c a r d is u n e x p e c t e d t e c h n o l o g i c a l a d ­ v a n c e s t h a t c o u l d relieve or e v e n solve i n t r a c t a b l e e c o n o m i c a n d social p r o b ­ l e m s . T h i s h a p p e n e d r e c e n t l y on a h i s t o r i c scale w h e n a g e n e r a t i o n o f advances in c o m p u t i n g p o w e r a n d c a p a c i t y h e l p e d d r i v e g l o b a l i z a t i o n a n d , w i t h it, the e c o n o m i c a s c e n d a n c e o f C h i n a a n d t h e s t r o n g e s t s u s t a i n e d p e r i o d of w o r l d ­ w i d e g r o w t h o n r e c o r d . It's n o t likely, y e t j u s t p o s s i b l e , t h a t the n e x t ten to fifteen

years w i l l see b r e a k t h r o u g h s in n a n o t e c h n o l o g y t h a t fairly q u i c k l y lead

to i n e x p e n s i v e l a r g e - s c a l e h y d r o g e n or solar p o w e r . S u c h u n e x p e c t e d a d v a n c e s w o u l d d i a l b a c k s o m e o f t h e e c o n o m i c pressures c o m i n g f r o m f a s t - r i s i n g en­ e r g y d e m a n d a n d s l o w - r i s i n g oil i n v e s t m e n t a n d p r o d u c t i o n , p o s s i b l y m a k e c l i m a t e c h a n g e a p r o b l e m t h a t c o u n t r i e s c o u l d m a n a g e w i t h o u t m a j o r sacri­ fices, a n d r e d u c e t h e g e o p o l i t i c a l l e v e r a g e o f R u s s i a a n d t h e M i d d l e E a s t . I f n a n o - e n a b l e d clean e n e r g y isn't in o u r near f u t u r e , it is also c o n c e i v a b l e t h a t b i o t e c h n o l o g y a d v a n c e s c o u l d c h a n g e w h a t it m e a n s to g r o w old just as b a b y b o o m e r s in m o s t c o u n t r i e s reach t h e a g e w h e n serious m e d i c a l p r o b l e m s b e c o m e c o m m o n p l a c e . S c i e n t i s t s d r a w i n g on the r e c e n t , b r e a k t h r o u g h s u c ­ cesses in d e c i p h e r i n g t h e h u m a n g e n o m e , for e x a m p l e , c o u l d c o m e u p w i t h t h e r a p i e s t h a t w i l l r e p a i r or r e p l a c e d e f e c t i v e g e n e s t h a t b r i n g on m a n y d i s ­ eases, i n c l u d i n g c a n c e r s . P e r h a p s a b i t m o r e p o s s i b l e are a d v a n c e s in s t e m cell t h e r a p i e s n o t o n l y for c o n d i t i o n s l i k e Parkinson's a n d H u n t i n g t o n ' s diseases, spinal cord injuries, and cystic

fibrosis,

b u t also heart disease,

diabetes,

HISTORY'S WILD CARDS: CATASTROPHIC TERRORISM AND TECHNOLOGICAL BREAKTHROUGHS

207

Alzheimer's, strokes, burns, osteoarthritis, and r h e u m a t o i d arthritis. W e can­ n o t k n o w n o w w h e t h e r these k i n d s o f m e d i c a l leaps w o u l d h e l p relieve t h e fi­ n a n c i n g p r o b l e m s t h r e a t e n i n g n a t i o n a l h e a l t h s y s t e m s or m a k e t h e m w o r s e . If t h e y d o a r r i v e , h o w e v e r , t h e y c o u l d redefine w h a t it m e a n s t o g r o w o l d a n d ease the d e m o g r a p h i c b u r d e n s on m a n y n a t i o n s .

THE TERRORISM WILD CARD-WHOM TO FEAR A m e r i c a ' s w a r on t e r r o r i s m w i l l h e l p define t h e g e o p o l i t i c s o f t h e n e x t d e c a d e , regardless of w h o is p r e s i d e n t . T h e f o r m t h a t t h a t w a r t a k e s , h o w e v e r , w i l l d e ­ p e n d o n h o w each U . S . a d m i n i s t r a t i o n defines t h e e n e m y a n d its t h r e a t . I n t h e c u r r e n t A m e r i c a n " u s - v e r s u s - t h e m " p a r a d i g m , t h e "them" has b e e n defined b r o a d l y as I s l a m i c f u n d a m e n t a l i s t s a n d e x t r e m i s t s . T h e f u t u r e p a t h o f t h e w a r on t e r r o r i s m w i l l d e p e n d in g o o d p a r t o n h o w A m e r i c a n p r e s i d e n t s

and

Congresses distinguish between Islamic fundamentalists w h o m the W e s t can learn to live w i t h a n d the v i o l e n t I s l a m i s t e x t r e m i s t s w h o w i l l n o t c o e x i s t w i t h a n y o n e else. I s l a m has d e e p d i v i s i o n s , as Iraq's c u r r e n t t u r m o i l a t t e s t s , t h a t g o b a c k to a debate a m o n g M u h a m m a d ' s original followers, following the prophet's death in 6 3 2 A D , o v e r w h e t h e r his successor or "caliph" s h o u l d b e s o m e o n e f r o m his d i r e c t b l o o d l i n e

or the p e r s o n c o n s i d e r e d m o s t

worthy, learned, and

1

p i o u s . W h e n t r i b a l leaders in A r a b i a d e c l a r e d t h a t one o f M u h a m m a d ' s close c o m p a n i o n s , A b u B a k r , w o u l d b e t h e first c a l i p h , a m a j o r i t y a g r e e d a n d c a l l e d t h e m s e l v e s "Sunni" after " A h l a s - S u n n a h w a ' 1 - J a m â ' h , " or t h o s e w h o f o l l o w the e x a m p l e of M u h a m m a d . B u t a m i n o r i t y

insisted that M u h a m m a d ' s

cousin a n d s o n - i n - l a w , A l i i b n A b i T a l i b , s h o u l d s u c c e e d , a n d t h e y c a l l e d t h e m s e l v e s S h i ' a or S h i t t i e s f r o m "shi'at A l i , " or h e l p e r s o f A l i . F o r t h r e e d e ­ cades, there w e r e t w o c o m p e t i n g c a l i p h s , c u l m i n a t i n g in a series o f m u r d e r s and

battles t h a t f o r m a l l y split I s l a m i n t o t h e t w o sects. T h e S h i ' a r e m a i n e d a

s m a l l m i n o r i t y ever since, c o m p r i s i n g t o d a y 1 0 to 1 5 p e r c e n t o f M u s l i m s c e n ­ tered in Iran a n d p a r t s o f I r a q , Y e m e n , a n d c e n t r a l a n d s o u t h e r n A s i a .

2

S u n n i a n d S h i ' a d i s a g r e e o n m a n y p o i n t s , b u t t h e m o s t i m p o r t a n t for t w e n t y - f i r s t c e n t u r y g e o p o l i t i c s is t h a t S h i ' a leaders retain p o l i t i c a l as w e l l as r e l i g i o u s a u t h o r i t y , w h i l e S u n n i c a l i p h s t r a d i t i o n a l l y are s u b o r d i n a t e t o M u s ­ l i m k i n g s a n d g o v e r n m e n t s . S u n n i I s l a m also d e v e l o p e d n u m e r o u s

sects,

based o r i g i n a l l y on v a r i o u s i n t e r p r e t a t i o n s o f A l l a h ' s a d m o n i t i o n to h e l p t h e poor. I n the w a y t h a t t h e o l o g i c a l d e b a t e s c a n e v e n t u a l l y b e c o m e m a t t e r s o f c o n s e q u e n c e for e v e r y o n e else, one o f t h e i n t e r p r e t a t i o n s f o r m e d t h e basis for

FUTURECAST

288 Sunni

W a h h a b i s m and a fundamentalist

a p p r o a c h to the

Quran,

whose

founder, A b d al W a h h a b , m a d e a fateful p o l i t i c a l a n d r e l i g i o u s alliance in the e i g h t e e n t h c e n t u r y w i t h a n A r a b i a n leader n a m e d M u h a m m a d b i n S a u d . S o m e t w o c e n t u r i e s later, w h e n b i n S a u d ' s d e s c e n d e n t unified A r a b i a in one k i n g d o m , W a h h a b i s m b e c a m e t h e official r e l i g i o n o f S a u d i A r a b i a .

3

G l o b a l i z a t i o n has c r e a t e d a sense o f crisis for m a n y W a h h a b i M u s l i m s w h o , l i k e m a n y C h r i s t i a n a n d J e w i s h f u n d a m e n t a l i s t s , a d h e r e to a strict a n d literal r e a d i n g o f t h e i r sacred t e x t . L i v i n g b y t h e Q u r a n ' s l a w s has c o m e to m e a n re­ j e c t i n g w e s t e r n v a l u e s , in a t i m e w h e n g l o b a l i z a t i o n b r i n g s those v a l u e s i n t o e v e r y facet o f b u s i n e s s life a n d m o s t M u s l i m h o m e s . W h a t the p r o p e r re­ sponse s h o u l d b e n o w d i v i d e s M u s l i m f u n d a m e n t a l i s t s in m a n y w a y s , b u t m o s t i m p o r t a n t l y b y s p u r r i n g n e w "Islamist" m o v e m e n t s w i t h p o l i t i c a l as w e l l as r e l i g i o u s g o a l s .

4

W h i l e all f u n d a m e n t a l i s t s w a n t t o restore a m o r e

p u r e I s l a m i c f a i t h , I s l a m i s t s p u r s u e p o l i t i c a l p o w e r in o r d e r to r a d i c a l l y re­ s h a p e t h e i r societies w h i l e m o s t o t h e r S u n n i f u n d a m e n t a l i s t s are w i l l i n g to c o e x i s t w i t h w h a t e v e r p o l i t i c a l s y s t e m is in p l a c e . T h i s d i v i d e n a r r o w e d a b i t in t h e late 1 9 8 0 s a n d early 1 9 9 0 s w i t h a n e w " n e o - f u n d a m e n t a l i s t " m o v e m e n t t h a t seeks to p e r s u a d e M u s l i m s to g r a d u a l l y 5

c h a n g e t h e i r societies i n t o s t r i c t I s l a m i c s t a t e s . T o w e s t e r n e r s , n e o f u n d a m e n talists m a y s o u n d m u c h l i k e I s l a m i s t s . T h e i r v i s i o n s o f an ideal I s l a m i c soci­ e t y are s i m i l a r ; a n d t h e y all reject d e m o c r a c y , because m e n ( m u c h less w o m e n ) have no r i g h t to usurp the laws of G o d . B u t neofundamentalists

w a n t to

a c h i e v e t h e ideal s o c i e t y b y c h a n g i n g people's hearts a n d m i n d s , w h i l e I s ­ l a m i s t s t a k e d i r e c t a i m at M u s l i m leaders t h e y c o n s i d e r traitors, a l o n g w i t h all n o n - M u s l i m f o r e i g n p o w e r s . O n t h e f r i n g e o f t h e I s l a m i s t m o v e m e n t are the g r o u p s p r e p a r e d to d o b a t ­ tle w i t h t h e W e s t a n d k i l l a n y o n e s t a n d i n g in t h e i r r i g h t e o u s w a y . T h e s e r a d ­ ical, v i o l e n t g r o u p s e m e r g e d in the 1 9 8 0 s a n d 1 9 9 0 s , at the s a m e t i m e as the neofundamentalists,

f r o m t h e c a t a l y t i c w a r a g a i n s t the S o v i e t s in A f g h a n i ­

stan. T h e b a t t l e t o e x p e l t h e S o v i e t infidels a n d create an I s l a m i c state in A f ­ g h a n i s t a n b r o u g h t t o g e t h e r I s l a m i s t s a n d j i h a d — i n a s t r u g g l e t h a t received e x t e n s i v e U . S . m a t e r i a l s u p p o r t — a n d p r o v i d e d t h e s e t t i n g a n d c o n d i t i o n s to r a d i c a l i z e a n d train t h o u s a n d s o f y o u n g M u s l i m f u n d a m e n t a l i s t m e n . M o r e ­ over, t h e i r v i c t o r y o v e r t h e S o v i e t s v a l i d a t e d xhejihadi

approach and provided

a l a r g e c o r p s o f b a t t l e - t e s t e d f o l l o w e r s w h o n o w c o u l d fight infidels in other p l a c e s . T h e U n i t e d S t a t e s soon b e c a m e t h e central t a r g e t , for its secular, g l o b alist b e h a v i o r a n d v a l u e s , for e s t a b l i s h i n g w e s t e r n m i l i t a r y bases in the l a n d o f M e c c a for t h e first G u l f W a r — a n d for t w e l v e years a f t e r — a n d lastly for its s u p p o r t o f Israel. O v e r t h e n e x t d e c a d e , t h e U n i t e d S t a t e s a n d m u c h o f E u r o p e w i l l face at

HISTORY'S WILD CARDS: CATASTROPHIC TERRORISM AND TECHNOLOGICAL BREAKTHROUGHS

289

least three d i s t i n c t c h a l l e n g e s f r o m the I s l a m i c w o r l d . I n S a u d i A r a b i a a n d other S u n n i c o u n t r i e s , m i l l i o n s o f I s l a m i c f u n d a m e n t a l i s t s , m a n y e d u c a t e d in S a u d i - f i n a n c e d W a h h a b i m a d r a s s a s , w i l l r e g u l a r l y express t h e i r v i e w o f t h e W e s t as a d i r e c t t h r e a t to the life d i c t a t e d b y t h e Q u r a n . W e s t e r n leaders a n d p u b l i c s can learn t o live w i t h this o p p r o b r i u m , as t h e y d i d for a l o n g

time

w h e n m a n y m i l l i o n s o f C h i n e s e a n d R u s s i a n s e x c o r i a t e d t h e W e s t . A m o n g all the I s l a m i c f u n d a m e n t a l i s t s , there also w i l l b e tens o f t h o u s a n d s o f n e o f u n d a m e n t a l i s t s a n d h a r d - c o r e I s l a m i s t s c o m m i t t e d as w e l l t o r e m a k i n g t h e i r s o c i ­ eties i n t o strict I s l a m i c states.

If they

succeed,

it w i l l p r e s e n t

a larger

c h a l l e n g e , because s t r i c t S u n n i I s l a m i s t states are m o r e l i k e l y t o defy A m e r ­ ica's g l o b a l s e c u r i t y p o l i c i e s , to resist k e y aspects o f g l o b a l i z a t i o n s u c h as free flows o f f o r e i g n i n v e s t m e n t , a n d t o c o m e i n t o conflict w i t h S h i ' a Iran. D e a l ­ i n g w i t h this c h a l l e n g e w i l l be t h e r e a l m o f A m e r i c a n a n d E u r o p e a n d i p l o ­ m a c y a n d statecraft, i f t h e i r successful p r a c t i c e c a n b e r e v i v e d . A m o n g all the I s l a m i s t s , there also are t h o u s a n d s o f v i o l e n t fanatics w h o w i l l pose the t h i r d c h a l l e n g e a n d m o s t i m m e d i a t e t h r e a t . T h e c u r r e n t differ­ ence b e t w e e n A m e r i c a ' s R e p u b l i c a n s a n d D e m o c r a t s in g e o p o l i t i c s

might

be f r a m e d as w h e t h e r the w a r o n t e r r o r i s m s h o u l d t a r g e t b o t h I s l a m i s t s a n d j i h a d i s t s — t h e s e c o n d a n d t h i r d c h a l l e n g e s — o r focus o n threats f r o m t h e j i hadists w h i l e a p p l y i n g c o n v e n t i o n a l d i p l o m a t i c a n d p o l i t i c a l a p p r o a c h e s to the I s l a m i s t c h a l l e n g e . W h e t h e r the n e x t d e c a d e o f A m e r i c a ' s w a r o n t e r r o r i s m s h o u l d t a r g e t o n l y the v i o l e n t e x t r e m i s t s or also I s l a m i s t g r o u p s c o u l d be said t o d e p e n d o n w h a t h a p p e n s w h e n I s l a m i s t s create s t r i c t , I s l a m i c s t a t e s — d o t h e y b e c o m e a c t i v e allies of terrorists, or I s l a m i c societies c o n t e n t t o a t t e n d to t h e i r o w n affairs? D e s p i t e the rhetoric of A m e r i c a ' s n e o c o n s e r v a t i v e s , I s l a m i s t o p p o s i t i o n

to

d e m o c r a c y is not t a n t a m o u n t to a i d i n g t e r r o r i s m , s i n c e m o s t o f A m e r i c a ' s a l ­ lies in the M i d d l e E a s t also fiercely o p p o s e it. I n f a c t , o f fifty c o u n t r i e s w i t h m a j o r i t y I s l a m i c p o p u l a t i o n s in the w o r l d t o d a y , o n l y n i n e t e e n h a v e a n y t h i n g like d e m o c r a t i c g o v e r n m e n t . A n d t h e W e s t coexists h a p p i l y w i t h o t h e r i m ­ p l a c a b l e foes o f d e m o c r a c y , n o t a b l y C h i n a , as it d i d t h r o u g h o u t t h e c o l d w a r . E v e n f o c u s i n g on a c t i v e s u p p o r t for terrorists doesn't p r o d u c e easy a n s w e r s b e y o n d the e x t r e m e case of the T a l i b a n a n d t h e i r a g g r e s s i v e p r o t e c t i o n o f t h e terrorists w h o h a d j u s t p e r p e t r a t e d a h i d e o u s a t t a c k o n t h e U n i t e d S t a t e s . Iran's S h i ' a I s l a m i s t g o v e r n m e n t is h a r d t o classify, s u p p o r t i n g terrorists at s o m e t i m e s a n d n o t at others. T h e r e ' s also n o s i m p l e response to H a m a s , a terrorist g r o u p t h a t has a s s u m e d p o l i t i c a l p o w e r b y d e m o c r a t i c m e a n s , a n d H e z b o l l a h , w h i c h c o m b i n e s j i h a d i s t t a c t i c s a g a i n s t Israel w i t h social a c ­ tivism inside L e b a n o n . The

complexities of M i d d l e Eastern and A m e r i c a n politics suggest that

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290

t h e U . S . w a r o n t e r r o r i s m in c o m i n g years w i l l b e an ad h o c affair focused m a i n l y o n g r o u p s d e t e r m i n e d to express t h e i r i m p l a c a b l e o p p o s i t i o n to the W e s t b y c o m m i t t i n g m a s s m u r d e r s . A l Q a e d a is still the m o s t influential a n d w e l l k n o w n . W h i l e t h e U n i t e d S t a t e s has n o t m a n a g e d to c a p t u r e O s a m a b i n L a d e n , it has d e s t r o y e d t h e g r o u p ' s state s u p p o r t in the T a l i b a n , d e c i m a t e d its o r i g i n a l l e a d e r s h i p , a n d r e d u c e d its role to p r o v i d i n g i d e o l o g i c a l , t e c h n i c a l , a n d financial s u p p o r t for o t h e r t e r r o r g r o u p s . I n effect, A l Q a e d a has r e t u r n e d t o its o r i g i n s in t h e M a k t a b a l - K h a d a m a t , a m u j a h a d e e n g r o u p in A f g h a n i ­ stan t h a t d i d l i t t l e a c t u a l

fighting

m u j a h e d e e n for m o r e a c t i v e The

b u t raised f u n d s a n d r e c r u i t e d a n d trained

fighting

groups.

6

n e x t several y e a r s o f t h e w a r o n t e r r o r i s m also w i l l l i k e l y focus o n h u n ­

d r e d s o f h o m e g r o w n cells a n d n e w o r g a n i z a t i o n s t h a t s y m p a t h i z e w i t h A l 7

Q a e d a a n d s o m e t i m e s receive its s u p p o r t , e s p e c i a l l y in E u r o p e . T h e G e n e r a l I n t e l l i g e n c e a n d S e c u r i t y S e r v i c e o f t h e N e t h e r l a n d s ( A I V D ) , for e x a m p l e , es­ t i m a t e s t h a t there are t w e n t y j i h a d i s t n e t w o r k s in t h a t c o u n t r y alone, w i t h l i n k s t o s o m e t h r e e t o four h u n d r e d m o r e o u t s i d e .

8

O n e e n c o u r a g i n g s i g n is

evidence that m a n y of these g r o u p s n o w c o m m u n i c a t e w i t h parts of orga­ n i z e d c r i m e , in o r d e r to use t h e i r "supply, t r a n s p o r t , a n d m o n e y - m o v i n g net­ works."

9

These connections

m a y create a n e w v u l n e r a b i l i t y , since c r i m i n a l

g r o u p s h a v e l o n g b e e n sources o f i n t e l l i g e n c e for U . S . a n d E u r o p e a n l a w en­ forcement. The

m o s t t r o u b l i n g t r e n d is t h e e m e r g e n c e o u t of I r a q o f n e w terrorist

g r o u p s t h a t one d a y c o u l d b e as effective w o r l d w i d e as A l Q a e d a w a s . L i k e A f ­ g h a n i s t a n in the 1 9 8 0 s , I r a q is n o w a m a g n e t for terror r e c r u i t e r s for b o t h the j i h a d a g a i n s t A m e r i c a n forces a n d t h e s t r u g g l e b e t w e e n S h i ' a a n d S u n n i . A n d j u s t l i k e A f g h a n i s t a n d u r i n g t h e S o v i e t o c c u p a t i o n , Iraq has b e c o m e an ideal p l a c e to t r a i n u n t e s t e d

fighters

under live conditions. T h o u s a n d s of y o u n g Is­

l a m i s t s are l e a r n i n g h o w to f o l l o w o r d e r s , g a t h e r i n t e l l i g e n c e a n d b u i l d ex­ p l o s i v e d e v i c e s as t h e y o b s e r v e h o w A m e r i c a n a n d B r i t i s h soldiers fight, a n d d e v e l o p t h e m o s t effective w a y s t o k i l l t h e m . T h e s e n e w terror g r o u p s a p p e a r to b e o r g a n i z e d m a i n l y in s e m i - i n d e p e n d e n t

cells, w h i c h m a y p r o v e to be

h a r d e r t o t r a c k a n d b e t t e r s u i t e d t o terror w a r f a r e t h a n t o p - d o w n o r g a n i z a ­ tions o f t h e A l Q a e d a t y p e .

THE TERRORISM WILD CARD: WHAT TO FEAR E x t r e m e , v i o l e n t t e r r o r i s m has a l o n g l i n e a g e , g o i n g b a c k at least to the c l a n ­ d e s t i n e J e w i s h c u l t , t h e " Z e a l o t s o f J u d e a , " or Sicarii

( " d a g g e r m e n " ) , in the

first c e n t u r y A D , w h o a t t a c k e d R o m a n soldiers o c c u p y i n g J u d e a (and their

HISTORY'S WILD CARDS: CATASTROPHIC TERRORISM AND TECHNOLOGICAL BREAKTHROUGHS

291

J e w i s h collaborators) u n t i l t h e y w e r e w i p e d o u t at M a s a d a . T h e F r e n c h R e v o ­ l u t i o n g a v e terrorists t h e i r m o d e r n n a m e , a l t h o u g h the R e i g n o f T e r r o r w a s a f o r m of g o v e r n m e n t p o l i c y m o r e a k i n to S t a l i n i s m in t h e late 1 9 3 0 s . T h e loose n e t w o r k s of v i o l e n t a n a r c h i s t cells in t h e late n i n e t e e n t h c e n t u r y w e r e closer to m o d e r n t e r r o r i s m , m a n a g i n g in t h e years f r o m 1 8 7 8 to 1 9 1 3 t o assassinate a F r e n c h p r e s i d e n t , t w o S p a n i s h p r i m e m i n i s t e r s a n d a R u s s i a n p r i m e m i n i s t e r , T s a r A l e x a n d e r I I , K i n g U m b e r t o I o f Italy, K i n g G e o r g e I o f Greece, and U . S . President W i l l i a m M c K i n l e y . M o s t m o d e r n t e r r o r i s m , h o w e v e r , has b e e n d o m e s t i c r a t h e r t h a n g e o p o l i t i ­ cal,

b e g i n n i n g w i t h the Irish terrorists o f t h e late 1 9 t h c e n t u r y w h o f o r m e d a

secret a r m y to fight an o c c u p y i n g p o w e r m u c h as d i d the Z e a l o t s o f J u d e a . The

m o d e l o f a secret d o m e s t i c a r m y s p r e a d o v e r t h e t w e n t i e t h c e n t u r y to

Spain, Greece, G e r m a n y , J a p a n , M e x i c o , J o r d a n , Syria, Lebanon, and Pales­ tine. W h a t d i s t i n g u i s h e s m o s t o f t h e t e r r o r i s m f a c i n g t h e W e s t n o w f r o m those g r o u p s are its g e o p o l i t i c a l a g e n d a a n d its p r a c t i t i o n e r s ' w i l l i n g n e s s

to

use e x t r a o r d i n a r y w e a p o n s o f m a s s d e s t r u c t i o n . ( D o o m s d a y w e a p o n s are t h e e x c l u s i v e p r o v i n c e o f g e o p o l i t i c a l terrorists w i t h e n e m i e s far a w a y , since n o g r o u p w o u l d e x p l o d e a n u c l e a r d e v i c e or set loose a p l a g u e in a c o u n t r y it hopes to r e c l a i m . ) Terrorists don't need w e a p o n s o f m a s s d e s t r u c t i o n to h a v e a l a r g e i m p a c t . But

several d e c a d e s o f e x p e r i e n c e has s h o w n t h a t w h i l e a n y m a j o r terrorist a c t

will m a k e millions of people anxious, the vast m a j o r i t y have little l o n g - t e r m e c o n o m i c or p o l i t i c a l effects. F o r t h a t to h a p p e n , t e r r o r i s m has to b e fairly p e r v a s i v e across a society a n d p r o t r a c t e d o v e r t i m e — a s it has b e e n in C o l o m ­ bia,

N o r t h e r n I r e l a n d , t h e B a s q u e r e g i o n o f S p a i n , Israel, a n d n o w I r a q . I n

those p l a c e s , t e r r o r i s m has d e p r e s s e d e c o n o m i e s a n d s t u n t e d

development.

E v e r y w h e r e else, w h e r e t e r r o r i s m has b e e n occasional a n d l o c a l i z e d , its c o n ­ crete i m p a c t has been s u r p r i s i n g l y m o d e s t . S o l o n g as A l Q a e d a a n d its s u c ­ cessors are u n a b l e to use w e a p o n s m o r e p o w e r f u l t h a n airliners or to c a r r y o u t m u l t i p l e a t t a c k s r e g u l a r l y for y e a r s , as t h e y d o in I r a q , t h e i r a m b i t i o n s

to

seriously d a m a g e the U n i t e d S t a t e s or o t h e r l a r g e w e s t e r n c o u n t r i e s w i l l fail. E v e n the i m m e d i a t e e c o n o m i c costs o f t e r r o r i s m are rarely h i g h . S m a l l o p e r a t i o n s — a p o l i t i c a l m u r d e r or b o m b i n g t h a t k i l l s a f e w

people—have

n e g l i g i b l e e c o n o m i c effects. E v e n a h u g e s t r i k e is a b l i p in a l a r g e c o u n t r y . The

hard d a t a s h o w t h a t the 9 / 1 1 a t t a c k s d i d n o t m o v e the U . S . e c o n o m y ,

w i t h c o n s u m e r s p e n d i n g , i n v e s t m e n t , a n d G D P a c c e l e r a t i n g in t h e f o l l o w i n g quarter. A n d m o d e r n e c o n o m i e s r e g u l a r l y a b s o r b m u c h g r e a t e r h u m a n a n d fi­ nancial losses f r o m b a d w e a t h e r a n d n a t u r a l d i s a s t e r s — t h e 1 9 8 8 heat w a v e that took the lives o f m o r e t h a n 5 , 0 0 0 A m e r i c a n s , for e x a m p l e , or t h e 1 9 9 9 e a r t h q u a k e in I z m i t , T u r k e y , t h a t k i l l e d 1 7 , 0 0 0 .

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292

T e r r o r i s m uses v i o l e n c e to create an e x p e c t a t i o n o f m o r e to c o m e ; and w h e r e t h o s e e x p e c t a t i o n s t a k e h o l d , people's fears can d a m p e n

investment.

T h e s e effects are g r e a t e s t in s m a l l c o u n t r i e s w h e r e no p l a c e s e e m s safe, a n d in s m a l l e c o n o m i e s t h a t d e p e n d o n f o r e i g n c a p i t a l . S o f o r e i g n c a p i t a l

fled

C o l o m b i a for t w e n t y y e a r s , a n d its p e r - c a p i t a i n c o m e is still a b o u t 4 0 p e r c e n t below

Latin America's average. W h e n

religious

violence

raged

through

B e l f a s t , N o r t h e r n I r e l a n d b e c a m e t h e U . K . ' s p o o r e s t r e g i o n — a n d it b e g a n to recover in t h e 1 9 9 0 s w h e n t h e v i o l e n c e a b a t e d . Israel is the other m a j o r case o f a t e r r o r i s m - i m p a i r e d e c o n o m y . T h e i n t i f a d a has c r e a t e d a w a r t i m e p o l i t i c a l a n d e c o n o m i c c l i m a t e ; a n d t h e B a n k o f Israel figures it costs Israel 4 p e r c e n t o f G D P a y e a r b y d e p r e s s i n g f o r e i g n i n v e s t m e n t a n d t o u r i s m a n d increasing b u d g e t deficits. I n p l a c e s l a r g e r t h a n C o l o m b i a , N o r t h e r n I r e l a n d , a n d Israel, h o w e v e r , t h e e c o n o m i c effects are l o c a l i z e d . P o l i t i c a l v i o l e n c e has p l a g u e d the B a s q u e r e g i o n o f S p a i n since t h e e a r l y 1 9 7 0 s , a n d w h i l e p e r - c a p i t a G D P has g r o w n 1 0 p e r c e n t m o r e s l o w l y in t h a t r e g i o n , the rest o f S p a i n has g r o w n fast e n o u g h to b e c o m e the world's ninth-largest economy. I n t h e U n i t e d S t a t e s , J a p a n , a n d o t h e r l a r g e e c o n o m i e s , acts of terrorism scare a w a y i n v e s t m e n t f r o m i n d u s t r i e s a n d local areas t h o u g h t to be p a r t i c u ­ l a r l y v u l n e r a b l e , a n d t o w a r d s safer sectors a n d p l a c e s . T h e W o r l d T r a d e C e n ­ ter a t t a c k s d e a l t a t e m p o r a r y b l o w to M a n h a t t a n ' s e c o n o m y , b u t not to B o s t o n o r C h i c a g o . E v e n in M a n h a t t a n , t h e i m p a c t w a s c o n c e n t r a t e d

downtown,

w h e r e t h e terrorists d e s t r o y e d nearly 3 0 p e r c e n t o f class A office space. S e p ­ t e m b e r 1 1 also set b a c k t h e a i r l i n e , h o t e l , a n d i n s u r a n c e industries. B u t in­ v e s t m e n t a n d d e m a n d s h i f t e d to o t h e r sectors, e s p e c i a l l y once the F e d e r a l R e s e r v e eased c r e d i t t o c a l m t h e m a r k e t s . A n d six years later, real estate in d o w n t o w n M a n h a t t a n is m u c h m o r e v a l u a b l e t h a n it w a s in the s u m m e r o f 2 0 0 1 . S i m i l a r l y , w h e n t h e R e d B r i g a d e ' s a t t a c k s s p i k e d in G e r m a n y a n d I t a l y in t h e late

1 9 7 0 s a n d e a r l y 1 9 8 0 s , t o u r i s m suffered b u t not the overall

economies. L a r g e m o d e r n e c o n o m i e s c a n roll w i t h occasional acts o f d e s t r u c t i v e terror b e c a u s e t h e i r m a r k e t s q u i c k l y r e d i s t r i b u t e c a p i t a l a n d j o b s a w a y f r o m the v i ­ olence. I t m a y be p o l i t i c a l l y i n c o r r e c t to say so b u t t h e e c o n o m i c i m p a c t o f an a t t a c k l i k e 9 / 1 1 m o s t closely r e s e m b l e s a n a t u r a l disaster, w i t h s u d d e n losses f o l l o w e d b y t h e s t i m u l u s o f r e b u i l d i n g . W h a t d i s r u p t s an e c o n o m y like the U n i t e d S t a t e s , J a p a n , or B r i t a i n are not local a t t a c k s , b u t shocks that hit all of t h e i r m a r k e t s at o n c e , as w h e n O P E C t r i p l e d the p r i c e o f e n e r g y o v e r n i g h t . In principal, the Internet could present such a target. In October 2 0 0 2 a n d a g a i n in F e b r u a r y 2 0 0 7 , for e x a m p l e , an u n k n o w n g r o u p or persons m o u n t e d a s o p h i s t i c a t e d "denial o f service" a t t a c k on a series o f W e b "root servers" a i m e d at d i s a b l i n g t h e A m e r i c a n m i l i t a r y n e t w o r k s t h a t use t h e m .

1 0

HISTORY'S WILD CARDS: CATASTROPHIC TERRORISM AND TECHNOLOGICAL BREAKTHROUGHS

293

M o r e o v e r , A l Q a e d a c o m p u t e r s seized b y A m e r i c a n soldiers in A f g h a n i s t a n contained reams of information about the digital devices that remotely con­ trol U . S . p o w e r , w a t e r , p i p e l i n e , t r a n s p o r t a t i o n , a n d c o m m u n i c a t i o n s g r i d s , a n d h o w to r e p r o g r a m t h e m .

1 1

U . S . officials also h a v e c o n c e r n s a b o u t a s m a l l

cell o f terrorists t r a i n e d in c o m p u t e r s c i e n c e s u s i n g t h e I n t e r n e t t o access t h e "digital distributed

control

systems" that t h r o w railway switches,

close

c i r c u i t - b r e a k e r s in p o w e r g r i d s , a n d a d j u s t v a l v e s in d a m s a n d t h e p i p e l i n e s c a r r y i n g w a t e r , oil, a n d n a t u r a l g a s . S e r i o u s c y b e r t e r r o r a t t a c k s on t h e I n t e r n e t i t s e l f or o n a c o u n t r y ' s c r i t i c a l i n f r a s t r u c t u r e s y s t e m s accessed t h r o u g h the I n t e r n e t are p o s s i b l e , a n d a t t a c k s on p o w e r , p i p e l i n e , or d a m s y s t e m s c o u l d p r o d u c e b i l l i o n s o f d o l l a r s in d a m ­ age.

L a r g e r a n d l o n g e r - l a s t i n g costs a n d effects, h o w e v e r , are u n l i k e l y . T h e I n ­

ternet's d e c e n t r a l i z e d , open-access s t r u c t u r e , w h i c h m a k e s a t t a c k s p o s s i b l e , also m a k e s it easier t o sequester d a m a g e d areas o f t h e W e b a n d r e pair t h e m . And

w h i l e i n f r a s t r u c t u r e a t t a c k s c o u l d p r o d u c e c o n s i d e r a b l e local d a m a g e ,

the d i s r u p t i o n s w o u l d pass fairly q u i c k l y , a g a i n m u c h l i k e a n a t u r a l disaster. To

w r e a k serious d a m a g e , c y b e r t e r r o r i s t s w o u l d h a v e to d i s r u p t t h e W e b or

i n f r a s t r u c t u r e s y s t e m s for a s u s t a i n e d p e r i o d , w h i c h for n o w s e e m s n e a r l y impossible. The

limited i m p a c t of most terrorism won't matter, however, if terrorism

s h o u l d b e c o m e m u c h m o r e d e a d l y in the n e x t d e c a d e . A m o n g t h e p o s s i b i l i ­ ties, terrorists u n l e a s h i n g

n u c l e a r or b i o l o g i c a l

w e a p o n s o n A m e r i c a n or

E u r o p e a n cities, e s p e c i a l l y i f it h a p p e n e d m o r e t h a n o n c e , c o u l d shift t h e p a r ­ a d i g m o f t e r r o r i s m to a l l - o u t w a r . A n d m o d e r n w a r s h a v e v e r y l a r g e p o l i t i c a l , social, a n d e c o n o m i c costs. A n u c l e a r or b i o t e r r o r a t t a c k o n a m a j o r A m e r i c a n or

E u r o p e a n c i t y w o u l d be a "black s w a n " in t h e c u r r e n t p h r a s e — a rare a n d

h a r d - t o - p r e d i c t e v e n t , a n d o n e w i t h l a r g e i m p l i c a t i o n s for t h e p a t h s o f g l o b ­ alization a n d g e o p o l i t i c s . The

m o s t l i k e l y a t t a c k (all still l o w p r o b a b i l i t y ) w o u l d i n v o l v e n u c l e a r m a ­

terials b u t n o t n u c l e a r w e a p o n s , w i t h s i g n i f i c a n t b u t p r o b a b l y n o t changing effects.

12

nation-

F o r e x a m p l e , n u c l e a r p o w e r p l a n t s in A m e r i c a , E u r o p e ,

a n d J a p a n are c o n s i d e r e d q u i t e v u l n e r a b l e t o terrorist a t t a c k s or s a b o t a g e , b u t p r o b a b l y n o t to events w i t h c a t a s t r o p h i c effects. N u m e r o u s t i m e s , d e r a n g e d p e o p l e h a v e c r a s h e d t h r o u g h the fences a r o u n d n u c l e a r p l a n t s a n d e v e n d r i v e n their cars t h r o u g h the doors o f b u i l d i n g s . T h e s e p l a n t s also c a n b e a t t a c k e d b y air

like the P e n t a g o n a n d t h e W o r l d T r a d e C e n t e r . B u t t h e c h a n c e s are v a n -

i s h i n g l y s m a l l t h a t s u c h k a m a k a z i a t t a c k s c o u l d t r i g g e r t h e release o f l a r g e a m o u n t s o f d e a d l y r a d i a t i o n . F o r t h a t to h a p p e n , terrorists w o u l d h a v e to breach the f o u r - f o o t - t h i c k c o n c r e t e w a l l s o f t h e b u i l d i n g s c o n t a i n i n g t h e r e a c ­ tors a n d the s e v e n - t o t w e l v e - i n c h - t h i c k steel w a l l s a r o u n d t h e reactors, a n d

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294

t h e n set off a l a r g e c h e m i c a l e x p l o s i o n or fire to disperse t h e radiation into the a t m o s p h e r e . I n the 1 9 7 9 T h r e e M i l e I s l a n d a c c i d e n t , t h e c o o l a n t failed a n d t h e fuel m e l t e d , b u t w i t h o u t l a r g e breaches in the c o n t a i n m e n t w a l l s a n d a s u b s t a n t i a l fire or e x p l o s i o n , v e r y l i t t l e r a d i o a c t i v i t y e s c a p e d . A n d experts say t h a t e v e n a l a r g e airliner c a n n o t d o all t h a t . T e r r o r i s t s a b o t a g e t h a t r e p l i c a t e d the h u m a n a n d m e c h a n i c a l errors t h a t d e s t r o y e d C h e r n o b y l in 1 9 8 6 w o u l d s e e m a m o r e reliable w a y to w r e a k real h a v o c . T h e C h e r n o b y l m e l t d o w n s p r e a d r a d i a t i o n o v e r 5 0 , 0 0 0 square m i l e s , r e n d e r e d o v e r 2 , 3 0 0 s q u a r e m i l e s indefinitely u n i n h a b i t a b l e , a n d u l t i m a t e l y w i l l cause t h e d e a t h s o f an e s t i m a t e d 4 , 0 0 0 p e o p l e . T h e U n i o n o f C o n c e r n e d S c i e n t i s t s has e s t i m a t e d t h a t an a t t a c k t h a t released as m u c h radiation f r o m t h e I n d i a n P o i n t p l a n t in W e s t c h e s t e r C o u n t y , t h i r t y - f i v e m i l e s f r o m M a n ­ hattan, could kill 4 4 , 0 0 0 A m e r i c a n s .

1 3

B u t t h e radiation release at C h e r n o b y l

w a s so l a r g e a n d serious b e c a u s e t h e S o v i e t s b u i l t their reactors w i t h o u t c o n ­ t a i n m e n t ; so t h e h y d r o g e n e x p l o s i o n a n d g r a p h i t e fire c o u l d b l o w p a r t of the r a d i o a c t i v e core d i r e c t l y i n t o the a t m o s p h e r e . T h e r e ' s n o t h i n g like C h e r n o b y l in W e s t e r n E u r o p e , J a p a n , or t h e U n i t e d S t a t e s .

1 4

T e r r o r i s t s a b o t a g e of a n u ­

clear p l a n t in F r a n c e , t h e c o u n t r y w i t h t h e m o s t s u c h p l a n t s , or another a d ­ v a n c e d c o u n t r y , w o u l d b e a t e r r i f y i n g a n d s p e c t a c u l a r e v e n t that

would

t r i g g e r m u c h m o r e s t r i n g e n t s e c u r i t y m e a s u r e s . B u t the real, l o n g - t e r m eco­ n o m i c a n d social i m p a c t , as w i t h T h r e e M i l e I s l a n d , w o u l d be l i m i t e d . A terrorist g r o u p w o u l d find it easier t e c h n i c a l l y to b u i l d a "dirty b o m b " b y a t t a c h i n g p l u t o n i u m to c o n v e n t i o n a l e x p l o s i v e s , t h a n to replicate C h e r ­ nobyl's d a m a g e . T h e o b s t a c l e is s e c u r i n g t h e p l u t o n i u m a n d m o v i n g and h a n d l i n g it. E v e n if a g r o u p c a n p u l l off all o f t h a t , t h e real d a m a g e , once t h e d e b r i s s e t t l e d , m i g h t still b e l i m i t e d . A r a d i o l o g i c a l b o m b c o u l d p e r m a ­ n e n t l y c o n t a m i n a t e t h e B r i t i s h P a r l i a m e n t or t h e N . Y . S t o c k E x c h a n g e ; a n d with

enough

plutonium

and explosive

force, several s u r r o u n d i n g square

b l o c k s . B u t b u i l d i n g s a n d b l o c k s are f u n g i b l e , a n d m e m b e r s of P a r l i a m e n t or b r o k e r s w o u l d m o v e e l s e w h e r e . T h e l a r g e r effects w o u l d c o m e f r o m t e r r i f y i n g e v e r y o n e in t h e w o r l d , b e c a u s e e v e r y o n e m i g h t w e l l believe it c o u l d h a p p e n a g a i n a n d a g a i n . E v e r y m a j o r c i t y w o u l d install elaborate radiation sensors, as t h e y h a v e in W a s h i n g t o n , D . C . ; e v e r y g o v e r n m e n t w o u l d d r a s t i c a l l y t i g h t e n security around nuclear m a t e r i a l s — w h i c h they should have done long a g o — a n d t h e m i l i t a r y reprisals a g a i n s t t h e c u l p r i t s or those s u s p e c t e d o f it w o u l d b e d e a d l y a n d d e v a s t a t i n g . Y e t e v e n here, it's d o u b t f u l t h a t the

reactions

w o u l d c h a n g e t h e p a t h s o f g l o b a l i z a t i o n or e v e n g e o p o l i t i c s . A l l bets w i l l b e off, h o w e v e r , i f terrorists m a n a g e to set off a real nuclear b o m b . T h e m o s t l i k e l y w e a p o n w o u l d be an " i m p r o v i s e d n u c l e a r device" ( I N D ) a s s e m b l e d at t h e t a r g e t u s i n g h i g h l y e n r i c h e d u r a n i u m ( H E U ) .

1 5

An

HISTORY'S WILD CARDS: CATASTROPHIC TERRORISM AND TECHNOLOGICAL BREAKTHROUGHS IND

295

w o u l d p r o b a b l y be a " g u n a s s e m b l y " d e v i c e r e s e m b l i n g a c r u d e v e r s i o n

o f the H i r o s h i m a b o m b , w h i c h h a d a barrel six i n c h e s in d i a m e t e r a n d six feet l o n g c a p p e d at b o t h e n d s , w i t h s t a n d a r d e x p l o s i v e s at one e n d , a m a s s o f H E U next to those e x p l o s i v e s , a n d a second H E U m a s s at t h e o t h e r e n d . D e t o n a t ­ i n g the e x p l o s i v e s p r o p e l s one m a s s o f H E U i n t o t h e other, c r e a t i n g a l a r g e e n o u g h m a s s to s u p p o r t a fission c h a i n reaction. It's n o t as s i m p l e to b u i l d a n d detonate as this s o u n d s , b u t close e n o u g h for five L o s A l a m o s n u c l e a r w e a p o n s e x p e r t s to c o n c l u d e that terrorists w i t h no p r e v i o u s e x p e r i e n c e , a f e w c r i t i c a l skills, a n d access to the u r a n i u m c o u l d b u i l d one a n d set it o f f .

10

T h e w i l l is

c e r t a i n l y there in A l Qaeda's case: O s a m a b i n L a d i n has t o l d his f o l l o w e r s t h a t their r e l i g i o u s d u t i e s i n c l u d e h e l p i n g h i m a c q u i r e n u c l e a r m a t e r i a l . The

1 7

terrorists' m a j o r h u r d l e w i l l b e s e c u r i n g t h e h i g h l y e n r i c h e d

nium.

1 8

ura­

T h e m o s t l i k e l y w a y is t o steal it, s o m e t h i n g m a d e p o s s i b l e b y t h e

s p e c t a c u l a r failure o f the w o r l d ' s n u c l e a r n o n p r o l i f e r a t i o n r e g i m e . S i n c e t h e 1 9 5 0 s , the n o n - p r o l i f e r a t i o n effort has a l l o w e d a n y c o u n t r y to d e v e l o p p e a c e ­ ful

nuclear p o w e r ; a n d t o d a y there are 4 3 5 n u c l e a r p o w e r p l a n t s in t h i r t y

c o u n t r i e s , all p o t e n t i a l sources o f stolen, h i g h l y e n r i c h e d u r a n i u m . T h e m o s t l i k e l y sources, h o w e v e r , are f o u n d in R u s s i a ' s c r u m b l i n g n u c l e a r i n f r a s t r u c ­ t u r e , w h e r e s o m e e x p e r t s b e l i e v e o n l y 5 0 p e r c e n t o f fissile m a t e r i a l s are safe­ g u a r d e d adequately. A l Q a e d a , the J a p a n e s e t e r r o r c u l t A u m S h i n r i k y o , I r a q , a n d Iran all r e p o r t e d l y s o u g h t n u c l e a r m a t e r i a l s in R u s s i a .

1 9

A n d the U . S .

N a t i o n a l R e s e a r c h C o u n c i l c o n c l u d e d a f e w years a g o t h a t "large i n v e n t o r i e s of S N M

(special n u c l e a r m a t e r i a l ) are still s t o r e d at m a n y sites (in R u s s i a ) t h a t

a p p a r e n t l y l a c k i n v e n t o r y c o n t r o l s , a n d i n d i g e n o u s threats h a v e i n c r e a s e d . " The

20

U n i t e d S t a t e s created the C o o p e r a t i v e T h r e a t R e d u c t i o n p r o g r a m in

1991

to secure a n d d e s t r o y n u c l e a r m a t e r i a l s a n d w e a p o n s in t h e f o r m e r S o ­

v i e t U n i o n ; b u t its f u n d i n g has b e e n so l i m i t e d t h a t t h e j o b is n o t e x p e c t e d to be d o n e u n t i l 2 0 1 8 . The

2 1

failures o f nonproliferation also create o p p o r t u n i t i e s for terrorists to

steal fully m a d e w e a p o n s . W i t h nuclear p o w e r t e c h n o l o g i e s transferable to n u ­ clear w e a p o n s p r o d u c t i o n a n d o n l y inspections t o p r e v e n t those transfers, n u ­ clear w e a p o n s h a v e spread already t o Israel, I n d i a , P a k i s t a n , a n d N o r t h K o r e a . And,

in all l i k e l i h o o d , Iran w i l l be a n u c l e a r p o w e r w i t h i n the n e x t d e c a d e .

W i t h i n ten to fifteen years, m a n y e x p e r t s e x p e c t the n u c l e a r c l u b c o u l d also i n c l u d e a significant n u m b e r f r o m a g r o w i n g g r o u p o f J a p a n , S o u t h K o r e a , Indonesia, S a u d i A r a b i a , E g y p t , S o u t h A f r i c a , B r a z i l , a n d p e r h a p s o t h e r s . day

22

To­

the w e a p o n s in the arsenals o f the U n i t e d S t a t e s , B r i t a i n , F r a n c e , C h i n a ,

and p r o b a b l y I n d i a a n d N o r t h K o r e a are l o c k e d d o w n t i g h t . B u t there are se­ rious concerns a b o u t the n u m e r o u s m u l t i k i l o t o n d e v i c e s a m o n g t h e "special nuclear materials" not fully secured in the f o r m e r S o v i e t U n i o n ,

including

FUTURECAST

296

m a n y m u c h m o r e p o w e r f u l t h a n the H i r o s h i m a a n d N a g a s a k i b o m b s .

2 3

Strate­

g i c a n d c i v i l defense e x p e r t s also w o r r y a b o u t A l Q a e d a s y m p a t h i z e r s in the P a k i s t a n i m i l i t a r y a n d i n t e l l i g e n c e services a r r a n g i n g access to one o f their c o u n t r y ' s w e a p o n s or to the country's e n r i c h e d u r a n i u m for an I N D .

2 4

T h e e n c o u r a g i n g fact is t h a t no terrorist g r o u p has m a n a g e d y e t to b u y or steal a w e a p o n or w e a p o n s - g r a d e u r a n i u m . I f t h a t c h a n g e s , there's little d o u b t t h a t terrorists c o u l d d e l i v e r a n d d e t o n a t e at least an i m p r o v i s e d nuclear d e ­ v i c e a l m o s t a n y w h e r e in t h e w o r l d . T h e U n i t e d S t a t e s inspects p e r h a p s 2 p e r ­ c e n t o f t h e s e v e n to e i g h t m i l l i o n c o n t a i n e r s t h a t arrive at its p o r t s e v e r y year, and most other countries inspect even less.

25

T h e r e are p l a n s to s u b j e c t m a n y

m o r e c o n t a i n e r s to r a d i o a c t i v e s c r e e n i n g ; b u t the sensors w o r k better w i t h the p l u t o n i u m in s t a t e - m a d e w e a p o n s t h a n w i t h h i g h l y e n r i c h e d u r a n i u m , w h i c h emits little r a d i a t i o n .

2 6

E v e r y c o u n t r y also has h u n d r e d s or t h o u s a n d s of m i l e s

o f b o r d e r s w i t h o u t sensors or m o n i t o r s . A w e a p o n also c a n b e d e t o n a t e d in a p o r t before it c o u l d b e screened or i n ­ s p e c t e d . T h e R A N D C o r p o r a t i o n has a n a l y z e d the p r o b a b l e effects o f a tenkiloton nuclear detonation—a device—in

s m a l l b o m b , b u t m o r e t h a n an i m p r o v i s e d

the P o r t o f L o n g B e a c h , t w e n t y m i l e s s o u t h o f L o s A n g e l e s .

2 7

S o m e 6 0 , 0 0 0 p e o p l e w o u l d d i e i n s t a n t l y ; 1 5 0 , 0 0 0 m o r e w o u l d b e e x p o s e d to r a d i o a c t i v e w a t e r a n d s e d i m e n t , 2 to 3 m i l l i o n p e o p l e w o u l d h a v e to be relo­ c a t e d f r o m c o n t a m i n a t e d areas, a n d a total o f 6 m i l l i o n m i g h t t r y to flee the L o s A n g e l e s area. T h e d i r e c t m o n e t a r y costs w o u l d e x c e e d $ 1 trillion,

the

e q u i v a l e n t o f a b o u t 8 p e r c e n t o f U . S . G D P , or 4 0 to 4 5 p e r c e n t o f the a n n u a l o u t p u t o f B r i t a i n , F r a n c e , or C h i n a . A c r u d e n u c l e a r d e v i c e set off in l o w e r M a n h a t t a n w o u l d p r o d u c e costs at least as g r e a t .

2 8

T h e i n d i r e c t g l o b a l costs i f this h a p p e n s in the n e x t d e c a d e w i l l be far greater. E v e r y c o u n t r y w o u l d close its p o r t s a n d m o s t o f its b o r d e r s , a n d these closures c o u l d g o o n for a l o n g t i m e . T h e first c a s u a l t y w o u l d be oil s h i p ­ m e n t s , a n d t h e n w o r l d w i d e t r a d e . T h e s t o c k a n d b o n d m a r k e t s w o u l d crash; a n d w h i l e t h e F e d e r a l R e s e r v e a n d o t h e r central b a n k s m i g h t b e able to take a l i t t l e air o u t o f the p a n i c , t h e y c o u l d n ' t u n d o the u n p r e c e d e n t e d losses.

29

real

T h e w o r l d a l m o s t c e r t a i n l y w o u l d fall q u i c k l y i n t o d e e p recession.

E c o n o m i e s w o u l d r e c o v e r e v e n t u a l l y w i t h m o s t o f their capacities i n t a c t , b u t g l o b a l i z a t i o n a n d g e o p o l i t i c s w o u l d n e v e r be the s a m e / F i n a n c i a l transfers w o u l d slow, b e c a u s e so m u c h c a p i t a l w o u l d flow to t h e areas affected d i r e c t l y a n d b e c a u s e g o v e r n m e n t s w o u l d s c r u t i n i z e all financial transfers m u c h m o r e strictly. G o v e r n m e n t s also w o u l d c l a m p d o w n h a r d on trade in all t e c h n o l o ­ g i e s t h a t c o n c e i v a b l y c o u l d be used b y terrorists, i n c l u d i n g m o s t i n f o r m a t i o n t e c h n o l o g i e s . N o o n e c a n k n o w the p r e c i s e i m p a c t on g e o p o l i t i c s ; b u t nations w i t h s i g n i f i c a n t n u m b e r s o f terrorists or t h e i r s y m p a t h i z e r s , i n c l u d i n g m u c h

HISTORY'S WILD CARDS: CATASTROPHIC TERRORISM AND TECHNOLOGICAL BREAKTHROUGHS

297

o f the M i d d l e E a s t , w o u l d b e at risk o f l a r g e - s c a l e U . S . - l e d p o l i c i n g o p e r a ­ tions or a t t a c k s . T h e d o m e s t i c aftereffects also c o u l d b e s e i s m i c . A successful nuclear a t t a c k b y terrorists in a n y a d v a n c e d c o u n t r y c o u l d lead q u i c k l y to m a j o r c h a n g e s in t r a d i t i o n a l p o l i t i c a l f r e e d o m s , i n c l u d i n g e n h a n c e d e x e c u ­ tive p o w e r s associated w i t h w o r l d w a r s , c o v e r i n g s u r v e i l l a n c e , d e t e n t i o n , a n d press censorship. A

nuclear detonation

is the w o r s t - c a s e w i l d c a r d , b u t c e r t a i n f o r m s o f

bioterrorism in the next decade also c o n c e i v a b l y c o u l d affect the c u r r e n t p a t h s of globalization, geopolitics, and even global demographics. D r . A n t h o n y F a u c i , d i r e c t o r o f the U . S . N a t i o n a l I n s t i t u t e o f A l l e r g i e s a n d I n f e c t i o u s D i s ­ eases, a n d A m e r i c a ' s l e a d i n g p u b l i c h e a l t h p h y s i c i a n , has s a i d — e v e n before 9/11—that

"a b i o t e r r o r i s m a t t a c k a g a i n s t t h e c i v i l i a n p o p u l a t i o n

in

the

U n i t e d S t a t e s is i n e v i t a b l e . . . the o n l y q u e s t i o n is w h i c h a g e n t ( s ) w i l l b e used a n d u n d e r w h a t c i r c u m s t a n c e s w i l l t h e a t t a c k ( s ) o c c u r . "

3 0

N o t h i n g in p o l i t i c s is i n e v i t a b l e , b u t releasing a d e a d l y b i o l o g i c a l a g e n t in an A m e r i c a n or E u r o p e a n c i t y is a t a c t i c w i t h a n u m b e r o f features t h a t w o u l d appeal to terrorists. I t doesn't i n v o l v e l a r g e e q u i p m e n t or r a d i a t i o n t h a t can be noticed or d e t e c t e d easily. E s c a p e for those c a r r y i n g it o u t also is s i m p l e , because the t a r g e t w o n ' t even k n o w it's b e e n a t t a c k e d for s o m e t i m e . A b i o ­ l o g i c a l a t t a c k also requires f e w e r resources t h a n n u c l e a r t e r r o r i s m ; a n d if it w o r k s , it's easy to r e p l i c a t e .

31

P e r h a p s m o s t i m p o r t a n t , there are m a n y p o t e n ­

tial sources o f d e a d l y b i o l o g i c a l a g e n t s t h a t c o u l d b e stolen or e v e n t r a n s ­ ferred. T h e C e n t e r for N o n p r o l i f e r a t i o n S t u d i e s at t h e M o n t e r e y I n s t i t u t e o f International S t u d i e s c o u n t s eleven states w i t h s u s p e c t e d or c o n f i r m e d offen­ sive b i o l o g i c a l p r o g r a m s , i n c l u d i n g I r a n , S y r i a , E g y p t , A l g e r i a , L i b y a , S u d a n , and

Pakistan.

3 2

L i k e other forms of t e r r o r i s m , t h e b i o t e r r o r a t t a c k s easiest to c a r r y off w o u l d h a v e l i m i t e d effects. M a n y e x p e r t s b e l i e v e t h a t t h e m o s t l i k e l y t a r g e t w o u l d b e A m e r i c a n a n d allied troops in the M i d d l e E a s t , or an a g r o t e r r o r a t t a c k on a c o u n t r y ' s f o o d .

3 3

A n a t t a c k o n a U . S . m i l i t a r y installation a b r o a d

w o u l d h a v e l i m i t e d e c o n o m i c or h e a l t h c o s t s — e x c e p t for those i n f e c t e d , o f c o u r s e — b u t it c o u l d h a v e g e o p o l i t i c a l effects b y t r i g g e r i n g d e m a n d s f r o m host g o v e r n m e n t s t h a t t h e U . S . m i l i t a r y w i t h d r a w .

3 4

A n o t h e r tactic m i g h t

i n v o l v e i n f e c t i n g i m p o r t e d foodstuffs. I n a d v a n c e d c o u n t r i e s , h o w e v e r , s u c h a g r o t e r r o r can be d e t e c t e d fairly q u i c k l y , a n d t h e k i n d s o f foodstuffs affected can be a v o i d e d . I n 1 9 9 6 , a l m o s t 1 , 5 0 0 A m e r i c a n s in t w e n t y states w e r e a c c i ­ d e n t a l l y infected w i t h a parasite t h a t causes severe intestinal distress, c a l l e d cyclosporoiasis, f r o m raspberries i m p o r t e d f r o m G u a t e m a l a , w i t h no social or economic aftereffects.

35

W h a t w o r r i e s p u b l i c health e x p e r t s are the b i o l o g i c a l a g e n t s t h a t the U . S .

FUTURECAST

298

C e n t e r for D i s e a s e C o n t r o l a n d P r e v e n t i o n ( C D C ) classifies "high risk," b e ­ cause t h e y h a v e h i g h m o r t a l i t y rates a n d c o u l d t r i g g e r p u b l i c p a n i c s .

3 6

The

t o p c a n d i d a t e s are a n t h r a x , b o t u l i s m , a n d s m a l l p o x . A n t h r a x is w o r r i s o m e b e ­ cause it's d e a d l y a n d s i m p l e to m a s s - p r o d u c e : T h e b a c t e r i a infest the soil in m a n y p a r t s o f t h e w o r l d , a n d w h e n a g r a s s - g r a z i n g a n i m a l i n g e s t s it, it can be e x t r a c t e d f r o m t h e a n i m a l ' s b l o o d a n d t h e n g r o w n in q u a n t i t y in a n y l a b . S t e p - b y - s t e p i n s t r u c t i o n s c a n b e p u r c h a s e d o n the I n t e r n e t for $ I 8 . I I ,

3 7

and

the 9 / 1 1 C o m m i s s i o n staff f o u n d t h a t A l Q a e d a "was m a k i n g a d v a n c e s in its a b i l i t y to p r o d u c e a n t h r a x p r i o r to S e p t e m b e r 1 1 . "

3 8

B u t it's v e r y difficult t o infect l a r g e n u m b e r s of p e o p l e w i t h a n t h r a x , b e ­ cause a p e r s o n has to b e d i r e c t l y e x p o s e d t o a h i g h d e n s i t y o f its spores. T h e spores are h a r d y a n d c a n b e t r a n s p o r t e d o n c l o t h i n g or a n y t h i n g t h a t c o m e s in c o n t a c t w i t h an i n f e c t e d p e r s o n , b u t the disease c a n n o t b e o t h e r w i s e spread d i r e c t l y f r o m p e r s o n to p e r s o n . T o use a n t h r a x as a serious w e a p o n o f bioterror, a terrorist g r o u p m i g h t m a n u f a c t u r e several h u n d r e d p o u n d s of it and s m u g g l e it i n t o the U n i t e d S t a t e s or B r i t a i n in c a r e f u l l y l i n e d b a g s , t a r g e t one or m o r e m a j o r c i t i e s , a n d d i s p e r s e t h e t o x i n b y p l a n e or a u t o m o b i l e s . W i t h j u s t the r i g h t c o n d i t i o n s , a g r e a t m a n y p e o p l e c o u l d b e i n f e c t e d , o v e r w h e l m ­ i n g the medical s y s t e m .

3 9

B u t that's v e r y r e m o t e , since this k i n d of operation

is w e l l b e y o n d the c a p a c i t y o f a n y terror g r o u p o p e r a t i n g t o d a y — a n d since t h e 2 0 0 1 a n t h r a x a t t a c k s in A m e r i c a , the U n i t e d S t a t e s a n d o t h e r g o v e r n ­ ments have stockpiled anthrax vaccine. L i k e a n t h r a x , b o t u l i s m t o x i n s are easy to s e c u r e a n d so d e a d l y t h a t t h e y ' r e c o n s i d e r e d t h e m o s t t o x i c p r o t e i n in n a t u r e . B u t t e r r o r i s t s w o u l d find it v e r y d i f f i c u l t t o i n f e c t l a r g e n u m b e r s o f p e o p l e w i t h b o t u l i s m as w e l l , b e c a u s e it d e g r a d e s q u i c k l y w h e n e x p o s e d to t h e air. T h a t ' s w h y J a p a n ' s A u m S h i n rikyo cult

abandoned

a multimillion-dollar

effort

to m a n u f a c t u r e it

in

q u a n t i t i e s a n d t u r n e d i n s t e a d t o t h e n e r v e a g e n t s a r i n , w h i c h it u s e d to k i l l t w e l v e p e o p l e a n d i n j u r e t h i r t y - e i g h t h u n d r e d in t h e T o k y o s u b w a y s in 1 9 9 5 . 4 ° M o r e o v e r , s i n c e J u l y 2 0 0 4 , t h e A m e r i c a n g o v e r n m e n t has s t o c k ­ p i l e d t r e a t m e n t s for b o t u l i s m , as w e l l as a n t h r a x a n d s m a l l p o x , u n d e r " P r o ­ ject B i o s h i e l d . "

4 1

S m a l l p o x is m u c h m o r e c o m m u n i c a b l e t h a n a n t h r a x or b o t u l i s m , s p r e a d i n g easily f r o m p e r s o n to p e r s o n , especially since m o s t p e o p l e in the w o r l d either h a v e n e v e r b e e n i n o c u l a t e d a g a i n s t it or their inoculations h a v e e x p i r e d . I f a terrorist g r o u p m a n a g e d to unleash the s m a l l p o x v i r u s in q u a n t i t i e s , it c o u l d h a v e d e v a s t a t i n g effects. I t also w o u l d be v e r y difficult for a n y terror o r g a n i z a ­ t i o n to d o so. S i n c e the disease w a s e r a d i c a t e d a l m o s t t h i r t y years a g o , the o n l y k n o w n s t o c k s o f t h e v i r u s h a v e b e e n h e l d at the U . S . C D C labs in A t l a n t a and in R u s s i a n state labs. W h i l e there are u n c o n f i r m e d reports of security breaches

HISTORY'S WILD CARDS: CATASTROPHIC TERRORISM AND TECHNOLOGICAL BREAKTHROUGHS at

299

these sites, the W o r l d H e a l t h O r g a n i z a t i o n ( W H O ) has c o n c l u d e d t h a t a

s i n g l e o u t b r e a k c o u l d p r o b a b l y b e c o n t a i n e d . S m a l l p o x v a c c i n e can p r e v e n t the infection or r e d u c e its severity, if a d m i n i s t e r e d u p to four d a y s after e x p o ­ sure. T h a t m a k e s it possible to "break the t r a n s m i s s i o n c h a i n a n d h a l t a s m a l l ­ p o x o u t b r e a k w i t h i n a relatively short t i m e , " so l o n g as t h e c o u n t r y w h e r e it starts has a "strong surveillance s y s t e m " sensitive to s m a l l p o x cases a n d a p u b ­ lic health s y s t e m t h a t can isolate the cases a n d a d m i n i s t e r the v a c c i n e t o e v e r y ­ one who's h a d c o n t a c t w i t h t h e m .

4 2

T h e vaccines available today wouldn't

c o v e r m o s t p e o p l e — t h e U n i t e d S t a t e s has a b o u t 1 5 . 4 m i l l i o n doses, the W H O stores another h a l f - m i l l i o n doses in the N e t h e r l a n d s for an e m e r g e n c y , a n d other nations r e p o r t e d l y h a v e 6 0 m i l l i o n m o r e doses o f v a r y i n g q u a l i t y a n d 4 3

p o t e n c y — b u t are sufficient to c o n t a i n an e p i d e m i c . L i k e the d e t o n a t i o n o f a n u c l e a r w e a p o n in a m a j o r u r b a n center, there is a bioterror w o r s t - c a s e scenario. I t i n v o l v e s an a g e n t s u c h as s m a l l p o x released s i m u l t a n e o u s l y in a n u m b e r o f p l a c e s w i t h o u t "strong s u r v e i l l a n c e s y s t e m s , " or

ones that d i d n ' t w o r k as p l a n n e d . I f a s m a l l p o x e p i d e m i c s t a r t e d in c o u n ­

tries or cities u n p r e p a r e d a n d t h e n s p r e a d o u t o f c o n t r o l , it c o u l d be a n a t i o n c h a n g i n g e v e n t . A i r a n d rail t r a v e l w o u l d b e s u s p e n d e d to t r y t o c o n t a i n t h e o u t b r e a k s ; a n d l a r g e shares o f t r a d e w o u l d h a l t as c o u n t r i e s , states,

and

p r o v i n c e s tried to seal their b o r d e r s . P u b l i c schools a n d p u b l i c e v e n t s w o u l d be s u s p e n d e d for fear o f c o n t a g i o n ; a n d businesses w o u l d close b e c a u s e so m a n y of t h e i r e m p l o y e e s w o u l d b e s i c k or terrified o f c o n t r a c t i n g t h e disease. The

o n l y b o o m i n g sector w o u l d b e h e a l t h c a r e , w h i c h w o u l d b e o v e r w h e l m e d

q u i c k l y , a n d the g l o b a l e c o n o m y w o u l d l i k e l y fall a b r u p t l y i n t o recession. I n the w o r s t cases, the d e a t h toll c o u l d c h a n g e n a t i o n a l d e m o g r a p h i c s . O t h e r ­ w i s e , w h e n the crisis p a s s e d in t h r e e , six, or n i n e m o n t h s , e c o n o m i c a n d p o ­ litical life w o u l d r e t u r n to s o m e t h i n g l i k e w h a t it w a s before. The

t w o o t h e r t e r r o r - r e l a t e d w i l d c a r d s t h a t c o u l d reshape t h e t r a j e c t o r y o f

g l o b a l i z a t i o n a n d g e o p o l i t i c s i n v o l v e e x t r e m e I s l a m i s t u p h e a v a l s or t a k e o v e r s in S a u d i A r a b i a or P a k i s t a n . A l Q a e d a is still an influential force in

both

c o u n t r i e s , because after t h e w e s t e r n c o a l i t i o n o v e r t h r e w t h e T a l i b a n , m o s t o f Bin

Laden's f o l l o w e r s fled across t h e b o r d e r i n t o P a k i s t a n or b a c k t o S a u d i

A r a b i a . O n c e h o m e , m a n y j o i n e d the affiliated Q A P , or " A l Q a e d a o n t h e Arabian Peninsula."

44

A Saudi police crackdown following

the M a y 2 0 0 3

b o m b i n g s o f w e s t e r n c o m p o u n d s in R i y a d h w e a k e n e d t h e Q A P , b u t

most

m e m b e r s r e m a i n free a n d l o y a l to B i n L a d e n . The

real p r o s p e c t s o f A l Q a e d a - i n s p i r e d t e r r o r i s m in S a u d i A r a b i a are u n ­

k n o w n . B i n Laden's d e p u t y , D r . A y m a n a l - Z a w a h i r i , has c a l l e d r e g i m e c h a n g e in S a u d i A r a b i a a p r i o r i t y , u r g i n g f o l l o w e r s in a J u l y 2 0 0 7 v i d e o to " w o r k se­ riously to c h a n g e these c o r r u p t r e g i m e s a n d c o r r u p t e r s " b y w i n n i n g " p o p u l a r

FUTURECAST

300

s y m p a t h y for a c h a n g e to I s l a m i c J i h a d i s m . "

4 5

A l e a d i n g y o u n g E u r o p e a n ex­

p e r t o n M i d d l e E a s t e r n t e r r o r i s m , T h o m a s H e g g h a m m e r , sees m o s t S a u d i m i l i t a n t s as n a t i o n a l i s t i c a n d therefore m o r e i n c l i n e d to a t t a c k the U n i t e d States than their o w n r e g i m e .

4 6

B u t A m e r i c a n e x p e r t s see it differently, e m ­

p h a s i z i n g t h e e x t r e m e a u s t e r i t y a n d intolerance o f the W a h h a b i I s l a m i s t ide­ o l o g y as a s o u r c e o f d e e p r e s e n t m e n t s a g a i n s t a royal f a m i l y k n o w n for its opulence and corruption. S a u d i A r a b i a ' s S h i ' a p o p u l a t i o n , e s t i m a t e d at 1 0 p e r c e n t o f the c o u n t r y a n d m a r g i n a l i z e d b y t h e official S u n n i W a h h a b i s m , are a n o t h e r b r e e d i n g g r o u n d for a n t i - r o y a l i s t f e e l i n g s .

47

T h e S h i ' a S a u d i s are c o n c e n t r a t e d in the nation's

eastern r e g i o n w h e r e m o s t o f the oil facilities are l o c a t e d a n d v u l n e r a b l e to a t ­ t a c k , e s p e c i a l l y t h e h u g e p r o c e s s i n g c o m p l e x at A b q a i q t h a t handles t w o t h i r d s o f S a u d i oil o u t p u t , t h e m a j o r e x p o r t t e r m i n a l s at R a s T a n u r a , a n d the P e t r o l i n e p i p e l i n e f r o m t h e A b q a i q a n d G h a w a r fields to Y a n b u on the R e d Sea.

4 8

I f e x t r e m i s t s o v e r t h r o w t h e S a u d f a m i l y — o r p e r h a p s w o r s e , i f terrorists

t a k e o u t a n y o f the k e y f a c i l i t i e s — t h e oil d i s r u p t i o n c o u l d last for a y e a r or e v e n t w o . T h e S a u d i g o v e r n m e n t has r e c e n t l y seen this threat as g r o w i n g , a n d a n n o u n c e d in A u g u s t 2 0 0 7

a

n

e

w

3 5 , 0 0 0 - s t r o n g s e c u r i t y force to p r o t e c t its

oil i n f r a s t r u c t u r e f r o m a t t a c k , to b e t r a i n e d a n d e q u i p p e d b y the U . S . defense giant Lockheed M a r t i n .

4 9

T h e world's major economies could weather a brief

i n t e r r u p t i o n in S a u d i oil b y d r a w i n g on their s t r a t e g i c reserves; b u t one last­ i n g a h a l f y e a r o r l o n g e r w o u l d t r i g g e r a d e e p g l o b a l recession w i t h p o t e n ­ t i a l l y serious p o l i t i c a l c o n s e q u e n c e s . T h e a r i t h m e t i c o f a cutoff in S a u d i oil is sobering. O i l p r o d u c e r s w o r l d w i d e c o u l d p u m p a b o u t 6 m i l l i o n additional barrels a d a y b y p u l l i n g out all the stops, a n d the S a u d i s a c c o u n t for 4 m i l l i o n of those 6 m i l l i o n barrels. I f half of current S a u d i p r o d u c t i o n w e n t off l i n e — a b o u t 5 m i l l i o n barrels a d a y — t h a t w o u l d leave the w o r l d 3 m i l l i o n barrels a d a y short, if everyone else p u m p e d all t h e y c o u l d . U n d e r those c o n d i t i o n s , one i n d u s t r y expert, J u l i a n L e e , has said "it w o u l d b e difficult to p u t an u p p e r l i m i t on the k i n d of p a n i c reaction that y o u w o u l d see in the g l o b a l oil m a r k e t s . " C o n s e r v a t i v e l y , oil prices w o u l d g o to $ 1 5 0 p e r barrel a n d b e y o n d . T h e I M F estimates that a $ 1 0 per-barrel increase for a y e a r reduces the world's G D P b y 0 . 6 p e r c e n t , w i t h a 0 . 8 percent decline in A m e r i c a , the E u r o area, a n d d e v e l o p i n g A s i a .

5 0

B y this calculation, $ 1 5 0 per-

barrel oil w o u l d c u t five to six p e r c e n t a g e p o i n t s off G D P in the U n i t e d States a n d E u r o p e , w h i c h w o u l d m e a n v e r y serious recessions. M o r e o v e r , a sudden j u m p o f $ 5 0 , $ 7 0 , or m o r e p e r barrel w o u l d have c a s c a d i n g effects that could be even m o r e d i s r u p t i v e . I t c o u l d arrest China's m o d e r n i z a t i o n p r o g r a m , overturn g o v e r n m e n t s i n c l u d i n g the S a u d i s t h e m s e l v e s , a n d v a s t l y increase the political leverage of R u s s i a a n d Iran, the w o r l d largest p r o d u c e r s after the Saudis.

HISTORY'S WILD CARDS: CATASTROPHIC TERRORISM AND TECHNOLOGICAL BREAKTHROUGHS The

301

overthrow of the current Saudi r e g i m e b y Islamist extremists some­

t i m e in the n e x t ten to fifteen y e a r s w o u l d p r e s e n t o t h e r r i s k s . B a s e d o n Iran's r e c o r d , t h e n e w g o v e r n m e n t c o u l d n o t afford t o t u r n its b a c k o n t h e oil m a r k e t s . B u t as w i t h I r a n , a n t i w e s t e r n a n d a n t i - A m e r i c a n f e e l i n g s heighten, perhaps throughout the r e g i o n , 5 2

a l e a d i n g U . S . ally to p o t e n t i a l f o e .

5 1

would

and Saudi Arabia w o u l d g o from

W h i l e the Islamists' economic p r o g r a m

is v a g u e b e y o n d their o p p o s i t i o n to t h e c o r r u p t i o n a n d c o n s p i c u o u s

con­

s u m p t i o n o f the A l S a u d f a m i l y , t h e i r f o r e i g n p o l i c y a g e n d a is clearer: I m ­ p l a c a b l e o p p o s i t i o n to t h e U n i t e d S t a t e s , Israel, a n d all w e s t e r n p r e s e n c e a n d influence in the M i d d l e E a s t .

5 3

T h i s a g e n d a f r o m t h e w o r l d ' s l a r g e s t oil p r o ­

d u c e r w o u l d pose serious p r o b l e m s for A m e r i c a ' s d e t e r m i n a t i o n to p r o t e c t Israel a n d m a i n t a i n s t a b l e oil s u p p l i e s for t h e g l o b a l e c o n o m y . An but

e x t r e m i s t t a k e o v e r o f the P a k i s t a n i g o v e r n m e n t w o u l d h a v e different

e q u a l l y p r o f o u n d effects o n the g e o p o l i t i c s o f t h e n e x t d e c a d e . P a k i s t a n is

already "a c o u n t r y t h a t has failed five or six t i m e s , " in t h e p h r a s e o f U . S . for­ eign policy expert Stephen C o h e n ; there. A s r e c e n t l y as J u l y 2 0 0 7 ,

t

n

5 4

e

a n d e x t r e m e I s l a m i s t s are v e r y p o w e r f u l " R e d M o s q u e m i l i t a n t s " h e l d off n e a r l y

t w e l v e t h o u s a n d o f P r e s i d e n t M u s h a r r a f ' s h e a v i l y a r m e d s e c u r i t y forces in a w e e k l o n g battle. If the militants and their legions of Islamist sympathizers c a m e to p o w e r in K i r a c h i , it c o u l d m e a n a n u c l e a r - a r m e d , T a l i b a n - l i k e g o v ­ e r n m e n t w i t h s t r o n g ties to A l Q a e d a . S o m e a n a l y s t s b e l i e v e t h e y w o u l d q u i c k l y p r e c i p i t a t e a c o n f r o n t a t i o n in K a s h m i r , w h i c h c o u l d s p u r a p r e e m p ­ tive strike b y I n d i a a n d e n d in a r e g i o n a l n u c l e a r e x c h a n g e .

5 5

A n equally

a l a r m i n g scenario t h a t c o n c e r n s s o m e w e s t e r n m i l i t a r y e x p e r t s is the m i l i t a r y collapse of the U . S . - l e d c o a l i t i o n c a m p a i g n in A f g h a n i s t a n , w h i c h c o u l d soon m e a n , as L o r d A s h d o w n , the f o r m e r B r i t i s h L i b e r a l D e m o c r a t leader, p u t s i t , "Pakistan g o e s d o w n . . . ( a n d ) y o u c o u l d n o t t h e n s t o p a w i d e n i n g r e g i o n a l war

t h a t . . . w o u l d b e c o m e essentially a w a r b e t w e e n S u n n i a n d S h i ' a r i g h t

across the M i d d l e E a s t . "

5 6

F o r these reasons, the U n i t e d S t a t e s in c o m i n g years

w i l l g o to g r e a t l e n g t h s to p r o t e c t t h e M u s h a r r a f g o v e r n m e n t or a s u c c e s s o r m u c h like it. C h i n a , a g o o d friend o f P a k i s t a n , also w o u l d l i k e l y t r y to s t o p any

slide to I s l a m i s t e x t r e m i s m , i f o n l y t o p r e v e n t P a k i s t a n i s u p p o r t for t h e

A f g h a n I s l a m i s t s w h o in t u r n s u p p o r t M u s l i m separatists in C h i n a ' s X i n j i a n g province.

5 7

W h i l e it's u n l i k e l y t h a t terrorists w i l l p u l l off a n y o f these w i l d - c a r d events in the n e x t d e c a d e , i f t h e y d i d , t h e e c o n o m i c a n d p o l i t i c a l costs w o u l d be e n o r m o u s , a n d the s e c o n d a r y effects c o u l d r e s h a p e t h e p a t h s o f g l o b a l i z a ­ tion a n d g e o p o l i t i c s . S u c h h i g h stakes s h o u l d focus the w a r o n t e r r o r in c o m ­ i n g years on these threats, e s p e c i a l l y o n c e t h e U n i t e d S t a t e s w i n d s d o w n its role in Iraq. T h e s o b e r i n g c o n s e q u e n c e s o f s u c h s p e c t a c u l a r terrorist acts also

302 may

FUTURECAST p r o v i d e a p o l i t i c a l c o n t e x t a n d a g e n d a for m o r e e x t e n s i v e g e o p o l i t i c a l c o ­

o p e r a t i o n b e t w e e n t h e U n i t e d S t a t e s , t h e E u r o p e a n U n i o n , a n d C h i n a , as w e l l as

Japan.

THE TECHNOLOGY WILD CARD-WHAT TO HOPE FOR As

u n p r e d i c t a b l e e p i s o d e s o f e x t r e m e t e r r o r i s m c o u l d c h a n g e the w o r l d for

t h e w o r s e , e q u a l l y u n p r e d i c t e d b r e a k t h r o u g h s in t e c h n o l o g y in the n e x t ten to fifteen y e a r s c o u l d s t r e n g t h e n w o r l d w i d e g r o w t h a n d d e v e l o p m e n t , a n d p o s s i b l y h e l p solve t h e e n e r g y , e n v i r o n m e n t a l , a n d h e a l t h - c a r e crises t h a t m a n y c o u n t r i e s w i l l soon face. T e c h n o l o g i c a l i n n o v a t i o n s t h a t c h a n g e t h e w a y m i l l i o n s of p e o p l e live a n d w o r k are n e i t h e r r e g u l a r n o r rare; a n d t h e features o f the n e x t i m p o r t a n t a d v a n c e , w h e n it w i l l h a p p e n , a n d h o w it w i l l affect p e o p l e are all u n k n o w n . But

there are serious reasons t o b e l i e v e t h a t t h e overall p a c e o f t e c h n o l o g i c a l

i n n o v a t i o n has been q u i c k e n i n g , i n c r e a s i n g t h e l i k e l i h o o d t h a t s o m e conse­ q u e n t i a l a d v a n c e w i l l e m e r g e in t h e n e x t ten to fifteen years. O n e reason is t h a t p h y s i c i s t s , b i o l o g i s t s , g e n e t i c i s t s , a n d c h e m i s t s today, as never before, can

harness the e n o r m o u s p o w e r o f n e w i n f o r m a t i o n t e c h n o l o g i e s for their

fields. A n o t h e r f a c t o r is t h a t for t h e first t i m e in the h i s t o r y o f science, t e c h ­ n o l o g i c a l p r o g r e s s has g o n e t r u l y g l o b a l . T e n s o f t h o u s a n d s of the w o r l d ' s m o s t inventive engineers, scientists, entrepreneurs, and clever people w i t h o u t p o r t f o l i o s in S a n J o s e , S h a n g h a i , T e l A v i v , S t o c k h o l m , a n d a l m o s t e v e r y w h e r e else, read t h e s a m e a n a l y s e s , p a r t i c i p a t e in t h e s a m e d i s c u s s i o n s , or observe t h e m , a n d t h e n w o r k t o g e t h e r or c o m p e t e a g a i n s t each other, all routinely. G l o b a l i z a t i o n has another, less o b v i o u s effect o n t h e p a c e o f t e c h n o l o g i c a l p r o g r e s s . B y e n a b l i n g so m a n y societies to b e c o m e m o r e p r o s p e r o u s , it v a s t l y e x p a n d s t h e m a r k e t for m o r e p o w e r f u l s o f t w a r e , n e w m e d i c a l t r e a t m e n t s , m o r e fuel-efficient a u t o m o b i l e s , a n d o t h e r n e w t e c h n o l o g i e s . A l a r g e r p o t e n ­ tial m a r k e t raises t h e p o t e n t i a l r e t u r n on d e v e l o p i n g i n n o v a t i o n s , w h i c h in­ creases the resources d e v o t e d to d o i n g t h a t — a n d u l t i m a t e l y the n u m b e r o f n e w t e c h n o l o g i e s t h a t m a k e it to offices, factories, a n d h o m e s . S o it's not sur­ p r i s i n g t h a t t h e w o r l d ' s m o s t r e t u r n - d r i v e n a n d m a r k e t - b a s e d m a j o r econ­ omy, few

t h e U n i t e d S t a t e s , has b e c o m e t h e w o r l d ' s i n n o v a t i o n h o t h o u s e ( w i t h a n o t a b l e e x c e p t i o n s s u c h as s t e m cell research). A m e r i c a ' s p o s i t i o n as sole s u p e r p o w e r also p l a y s a p a r t . O v e r t w o centuries

ago,

I m m a n u e l K a n t o b s e r v e d t h a t w a r s often d r i v e p r o g r e s s b y s p u r r i n g the

d e v e l o p m e n t a n d s p r e a d o f n e w t e c h n o l o g i e s . T h a t r e l a t i o n s h i p persists t o d a y in t h e U n i t e d S t a t e s , w h e r e the P e n t a g o n ' s $ 7 4 b i l l i o n a year R & D b u d g e t is

HISTORY'S WILD CARDS: CATASTROPHIC TERRORISM AND TECHNOLOGICAL BREAKTHROUGHS

303

g r e a t e r t h a n t h e entire m i l i t a r y b u d g e t o f a n y o t h e r c o u n t r y , e x c e p t p e r h a p s C h i n a . T h e m a i n office for basic m i l i t a r y R & D , t h e D e f e n s e A d v a n c e d R e ­ search P r o j e c t s A g e n c y ( D A R P A ) , f a m o u s l y c a m e u p w i t h w h a t b e c a m e t h e I n t e r n e t . I t s c u r r e n t p r o j e c t s i n c l u d e n e w w a y s t o sense t h e c o m p o n e n t s

of

e x p l o s i v e s for the w a r on t e r r o r i s m , w h i c h c o u l d lead to m e d i c a l d i a g n o s t i c c h i p s ; research in s u p e r c o m p u t i n g t h a t c o u l d c h a n g e t h e a r c h i t e c t u r e o f and

techniques

to accelerate t h e d e v e l o p m e n t

PCs;

of vaccines from years

to

months. W h i l e w e cannot predict w h a t the next critical b r e a k t h r o u g h w i l l be, w e can

i d e n t i f y w h e r e m u c h o f w o r l d ' s research t a l e n t a n d

financing

are f o c u s e d

today. M a n y o f the l a r g e s t R & D bets in n a n o t e c h n o l o g y are p l a c e d o n a l t e r ­ native energy technologies, w h i c h could have a m a j o r global i m p a c t if they ever p a y off. S i m i l a r l y , scientists o n t h e frontiers o f b i o t e c h n o l o g y are t a r g e t ­ i n g n e w a p p r o a c h e s to treat or c u r e cancer, h e a r t disease, a n d diseases w i t h genetic components, w h i c h eventually could help bail out national health­ care s y s t e m s . M u c h o f the c u r r e n t e n e r g y in I T i n n o v a t i o n s e e m s f o c u s e d o n increased m o b i l i t y a n d m i n i a t u r i z a t i o n , t r e n d s t h a t c o u l d f u r t h e r s p r e a d I n ­ ternet a n d c o m m u n i c a t i o n s t e c h n o l o g i e s in d e v e l o p i n g c o u n t r i e s a n d a c c e l e r ­ ate their g r o w t h a n d g l o b a l i z a t i o n .

NANOTECHNOLOGY AND THE WORLD'S ENERGY CRISIS N a n o t e c h n o l o g y is the science o f a l m o s t u n i m a g i n a b l y s m a l l " m a c h i n e s " a n d components—one-ten-millionth "nanometer").

58

to o n e - b i l l i o n t h

of a meter

( w h i c h is

a

R e s e a r c h e r s can b u i l d n a n o t h i n g s t o p - d o w n , for e x a m p l e b y

d e p o s i t i n g u l t r a - t h i n films o n a s i l i c o n w a f e r a n d t h e n e t c h i n g a w a y m a t e r i a l to m a k e a up, One

fifteen-nanometer

c o m p u t e r c h i p . T h e y also can b u i l d t h e m b o t t o m -

u s i n g c h e m i c a l processes to c o m b i n e p a r t i c u l a r a t o m s or

molecules.

5 9

o f the field's p i o n e e r s , B e r k e l e y Professor P a u l A l i v i s a t o s , calls t h e d a w n

of n a n o t e c h n o l o g y "an i m p o r t a n t m o m e n t in t h e h i s t o r y o f science" b e c a u s e "instead o f b r e a k i n g pieces a p a r t , w e ' r e p u t t i n g t h e m b a c k t o g e t h e r . "

60

The

next decade m a y establish w h e t h e r Professor A l i v i s a t o s and other enthusi­ asts are r i g h t w h e n t h e y c o m p a r e n a n o t e c h n o l o g y ' s p o t e n t i a l i m p a c t t o t h e advent of electricity and computers. G o v e r n m e n t s w o r l d w i d e c l e a r l y are p a y i n g a t t e n t i o n ,

expanding

their

n a n o t e c h n o l o y R & D b u d g e t s n i n e f o l d since 1 9 9 7 , f r o m $ 4 3 2 m i l l i o n

to

a b o u t $ 4 . 1 b i l l i o n in 2 0 0 5 ; a n d c o m p a n i e s in at least s i x t y c o u n t r i e s are c o n ­ d u c t i n g serious nanoresearch. M u c h o f t h i s research focuses o n b u i l d i n g t h e basic c o m p o n e n t s , m a i n l y n a n o t u b e s a n d n a n o l a y e r s , p u t t i n g t h e m t o g e t h e r

FUTURECAST

304

in s i m p l e n a n o s t r u c t u r e s , a n d u n d e r s t a n d i n g w h y at t h e nano level o f m o l e ­ cules a n d a t o m s , a n a n o s t r u c t u r e s basic p h y s i c a l characteristics often c h a n g e as it "operates." T h e y are h a r d to v i s u a l i z e , b u t in labs a r o u n d the w o r l d to­ day, there are n a n o - b i o d e v i c e s ,

nanotransistors, nanoamplifiers,

nanodrugs

a n d n a n o c h e m i c a l s , m o l e c u l a r m a c h i n e s a n d m o l e c u l a r m o t o r s , a n d nanod e v i c e s t h a t e m i t lasers a n d store e n e r g y .

61

W i t h o u t r e a l i z i n g it, m i l l i o n s o f p e o p l e a l r e a d y use p r o d u c t s that have nanoscale c o m p o n e n t s . N a n o m a t e r i a l s are u s e d in m a g n e t i c r e c o r d i n g tapes, s u n s c r e e n s , a u t o m o b i l e sensor a n d c a t a l y t i c s y s t e m s , corrosion a n d scratchresistant p a i n t s , l o n g - l a s t i n g

t e n n i s balls a n d l i g h t w e i g h t tennis rackets,

stain-free t r e a t m e n t s for c l o t h e s , a n d d r e s s i n g s for b u r n s a n d w o u n d s .

6 2

The

h a r d d r i v e s in m o s t c o m p u t e r s h a v e n a n o - t h i n layers o f m a g n e t i c m o l e c u l e s t h a t increase their s t o r a g e c a p a c i t y . I n a short t i m e , n a n o - c o a t i n g s also w i l l be u s e d in m a n y m e d i c i n e s , w e a r - r e s i s t a n t floors, a n d d i a m o n d - h a r d p a r t s for a i r p l a n e s a n d r o c k e t s t h a t are so l i g h t t h e y save f u e l .

6 3

T h e uses are e x p a n d i n g

so r a p i d l y t h a t t h e n a n o m a t e r i a l s m a r k e t passed $ i b i l l i o n in 2 0 0 7 , a n d in­ d u s t r y forecasters p r o j e c t g a i n s o f a n o t h e r 4 0 p e r c e n t in 2 0 0 8 a n d a $ 3 5 b i l ­ lion market b y 2 0 2 0 .

6 4

A n d a joint project b y the M i t s u b i s h i Research

I n s t i t u t e , D e u t s c h e B a n k , a n d L u x R e s e a r c h in t h e U n i t e d States recently estimated

t h a t b y 2 0 1 5 , $ 1 t r i l l i o n in p r o d u c t s w o r l d w i d e w i l l

contain

nanocomponents, produced by t w o million nanotechnology workers.

6 5

T h e n a n o t e c h n o l o g y m o t h e r l o d e for researchers a n d i n v e s t o r s is a p r a c t i ­ c a l , s c a l a b l e , a f f o r d a b l e , n a n o - b a s e d w a y to p r o d u c e h y d r o g e n or solar e n ­ e r g y , w h i c h c o u l d w e a n t h e w o r l d f r o m fossil fuels a n d a p p r e c i a b l y s l o w g l o b a l w a r m i n g . T h e use o f c l e a n , r e n e w a b l e h y d r o g e n fuels m a y be ten, t w e n t y , or t h i r t y y e a r s a w a y — t o o late at t h e far e n d to h e l p m u c h w i t h c l i ­ m a t e c h a n g e — b u t if a n d w h e n it h a p p e n s , it w i l l l i k e l y d e p e n d on n a n o ­ materials. F o r e x a m p l e , the most

promising

research p r o j e c t s t o d a y for

e x t r a c t i n g t h e h y d r o g e n f r o m w a t e r — w i t h o u t b u r n i n g fossil fuels to d o it—involve

either

nanoscale

electrodes

n a n o w i r e s to p r o d u c e e l e c t r i c i t y .

66

to

produce chemical

energy

or

N o b e l Laureate Richard Smalley predicts

t h a t in a d e c a d e or less, s c i e n t i s t s w i l l d e v e l o p successful p r o t o t y p e s o f fuel cells a n d b a t t e r i e s b u i l t f r o m n a n o t u b e s , w h i c h are r o l l e d - u p "sheets" o f car­ b o n a t o m s , as w e l l as solar e n e r g y c o n v e r t e r p a n e l s c o v e r e d w i t h n a n o s t r u c ­ t u r e s . O n c e f u l l y d e v e l o p e d , t h e y c o u l d m a k e h y d r o g e n a p r a c t i c a l , clean, s u s t a i n a b l e e n e r g y r e s o u r c e , a n d "solve t h e e n t i r e w o r l d ' s e n e r g y p r o b l e m w i t h j u s t s i x solar e n e r g y p l o t s s m a l l e r t h a n a f r a c t i o n o f A r i z o n a . "

6 7

If that

doesn't p a n o u t , d e v e l o p e r s also are w o r k i n g on m e m b r a n e s b u i l t u p f r o m nanostructures that can remove C 0 being p r o d u c e d .

6 8

2

( a n d n i t r o g e n ) f r o m n a t u r a l g a s as it is

HISTORY'S WILD CARDS: CATASTROPHIC TERRORISM AND TECHNOLOGICAL BREAKTHROUGHS

305

N a n o c o m p o n e n t s also are c e n t r a l to m a n y research p r o j e c t s i n t o h o w t o store the h y d r o g e n to p o w e r an a u t o m o b i l e . I t w o u l d t a k e a b o u t ten p o u n d s of h y d r o g e n to g e n e r a t e t h e e n e r g y o f a full t a n k o f g a s o l i n e , b u t t h a t m u c h h y d r o g e n at r o o m t e m p e r a t u r e w o u l d b e a g a s t h a t w o u l d fill 5 0 , 0 0 0 liters, or 1 4 , 0 0 0 g a l l o n s . I n o r d e r to use h y d r o g e n as fuel, a u t o m a k e r s h a v e t o b u i l d a car

t h a t can k e e p it u n d e r e n o r m o u s p r e s s u r e — a c o n c e p t c a r b e i n g d e v e l o p e d

by

H o n d a w o u l d store the h y d r o g e n at p r e s s u r e s e q u i v a l e n t to t h e h y d r a u l i c

p u m p s on an A i r b u s

6 9

— o r use m e t a l or c h e m i c a l c o m p o u n d s t h a t c a n a b s o r b

the h y d r o g e n a n d t h e n release it t h r o u g h a t h e r m a l , e l e c t r i c a l , or c h e m i c a l r e ­ a c t i o n to p o w e r the car. S o far, t h e best h y d r o g e n - a b s o r b i n g m a t e r i a l a n y o n e has c o m e u p w i t h are m e t a l a n d c h e m i c a l n a n o t u b e s .

7 0

H e r e , too, D r . S m a l l e y

believes t h a t n a n o - b a s e d s t o r a g e d e v i c e s for h y d r o g e n are less t h a n a d e c a d e away. The

other area w h e r e n a n o t e c h n o l o g y

breakthroughs could

h a v e far-

r e a c h i n g effects are nanoscale m a c h i n e s . O n e t y p e is a v e r y m i n i a t u r e v e r s i o n o f an e x i s t i n g m a c h i n e . A g r o u p o f s c i e n t i s t s at t h e U n i v e r s i t y o f C a l i f o r n i a at B e r k e l e y h a v e b u i l t a n a n o - c o n v e y o r b e l t for f e r r y i n g a t o m s , a n d t h e w o r l d ' s smallest nanomotor, i n c l u d i n g pistons, electromechanical switches, and tran­ sistors all created f r o m n a n o t u b e s . A nanoscale "cantilever" c r e a t e d b y t h e g r o u p c o u l d b e n d l i k e a d i v i n g b o a r d w h e n a p a r t i c u l a r m o l e c u l e b i n d s t o it, c r e a t i n g a h i g h l y sensitive c h e m i c a l or b i o l o g i c a l w i r e l e s s sensor. A n d o t h e r researchers are w o r k i n g on c a p s u l e s a f e w h u n d r e d a t o m s l o n g t h a t w o u l d b e i n j e c t e d like a t i n y s u b m a r i n e i n t o t h e b l o o d s t r e a m t o seek o u t a n d d e s t r o y diseased cells. A n o t h e r t y p e o f nanoscale m a c h i n e is t h e m o l e c u l a r or n a n o f a b ricator, w h i c h theoretically w i l l be a b l e to select a n d a r r a n g e i n d i v i d u a l a t o m s , one b y one, to p r o d u c e a n o t h e r n a n o s t r u c t u r e .

7 1

T h e m o d e l here is n a t u r e i t ­

self: R a l p h M e r k l e , a n a n o s c i e n c e pioneer, notes t h a t , "nature c a n g r o w c o m ­ plex molecular machines using nothing more than a p l a n t . "

7 2

M o s t scientists see this k i n d o f n a n o t e c h n o l o g y as a l o n g w a y o f f — i f it ever c o m e s — b u t also c r i t i c a l t o c o m m e r c i a l i z i n g n a n o t e c h n o l o g y . T h e B e r k e ­ ley g r o u p ' s lead p h y s i c i s t , D r . A l e x Z e t t l , e x p l a i n s , " R i g h t n o w , w e m a k e m o s t n a n o d e v i c e s one at a t i m e , s o m e t i m e s . . . a t o m b y a t o m . . . b u t i f y o u can't scale u p t h e n it b e c o m e s a c u r i o s i t y i n s t e a d o f a v i a b l e t e c h n o l o g y . " One

73

of the field's p i o n e e r s , D o n E i g l e r at I B M , w h o c o n d u c t e d a f a m o u s

nanoscale d e m o n s t r a t i o n in 1 9 8 9 b y a r r a n g i n g t h i r t y - f i v e i n d i v i d u a l x e n o n a t o m s to f o r m t h e I B M l o g o , is still c a u t i o u s : " W e c a n i m a g i n e a w h o l e b u n c h of w i l d a p p l i c a t i o n s . T h e c h a n c e s t h a t w e ' r e g o i n g t o nail s o m e o f t h e b i g ones on the h e a d are, I t h i n k , fairly l o w . "

7 4

F o r n a n o t e c h n o l o g y to affect t h e

world's p r e s s i n g e n e r g y a n d e n v i r o n m e n t a l p r o b l e m s in t h e n e x t t e n to

fifteen

years, a recent p r e d i c t i o n b y the research d i r e c t o r o f the C e n t e r for R e s p o n s i b l e

306

FUTURECAST

N a n o t e c h n o l o g y , C h r i s P h o e n i x , w i l l h a v e to be r i g h t , t h a t nanofabricators a n d nanofactories w i l l soon b e p r o d u c e d r o u t i n e l y in laboratories a n d ready for

industrial-scale production b y 2 0 1 3 . A

7 5

n a n o t e c h n o l o g y b r e a k t h r o u g h in t h e e n e r g y area c o u l d h a v e l a r g e effects

in m a n y c o u n t r i e s . A c o m p e t i t i v e l y p r i c e d , scalable f o r m o f solar or h y d r o g e n p o w e r a d a p t e d t o fuel m a n u f a c t u r i n g p l a n t s a n d to heat a n d cool b u i l d i n g s a n d h o m e s c o u l d h a l t or e v e n reverse t h e u p w a r d spiral o f e n e r g y p r i c e s , p r o ­ v i d i n g additional

impetus

for C h i n a ' s m o d e r n i z a t i o n .

T h e U n i t e d States,

w i t h t h e m o s t e n e r g y - i n t e n s i v e e c o n o m y o f t h e a d v a n c e d nations, w o u l d also benefit significantly. B u t a n e n e r g y b r e a k t h r o u g h w o u l d n o t be a q u i c k or an easy p a n a c e a for m a n y p l a c e s , s u c h as I n d i a or L a t i n A m e r i c a , since m o v i n g to n e w fuel sources w o u l d r e q u i r e t r i l l i o n s o f dollars in n e w i n v e s t m e n t s . T h e largest effects, especially in the first d e c a d e , c o u l d be e n v i r o n m e n t a l and g e o p o ­ litical rather t h a n e c o n o m i c . N e w , n a n o - b a s e d e n e r g y sources c o u l d c o n t r i b u t e g r e a t l y to efforts t o c o n t a i n C 0

2

e m i s s i o n s a n d t h e i r c o n c e n t r a t i o n in the a t ­

m o s p h e r e . T h e s p r e a d o f s u c h n e w e n e r g y sources also c o u l d b e a b o d y b l o w t o t h e o i l - p r o d u c i n g states, i n c l u d i n g R u s s i a a n d I r a n , a n d o v e r t i m e r e d u c e the geopolitical significance of the M i d d l e East.

BIOTECHNOLOGY AND THE HEALTH-CARE CRISIS P o t e n t i a l l y p o w e r f u l b r e a k t h r o u g h s also c o u l d o c c u r in b i o t e c h n o l o g y ,

espe­

c i a l l y i f a n o t h e r l e a p o f p r o g r e s s in m a n i p u l a t i n g g e n e t i c m a t e r i a l s p r o d u c e s p r a c t i c a l a d v a n c e s in m e d i c a l care. The

c u r r e n t i n t e r n a t i o n a l p u b l i c a n d c o m m e r c i a l efforts to m a p the h u m a n

g e n o m e b y a n a l y z i n g t h e order, c h e m i c a l c h a r a c t e r i s t i c s , s p a c i n g , a n d f u n c ­ t i o n o f t h e m o r e t h a n 2 3 , 0 0 0 g e n e s o n h u m a n c h r o m o s o m e s is one o f the g r e a t scientific v e n t u r e s o f m o d e r n t i m e s . T h e p r o j e c t w a s o r i g i n a l l y c o n ­ c e i v e d , s t r a n g e l y e n o u g h , in t h e U . S . D e p a r t m e n t o f E n e r g y a n d a h a n d f u l of u n i v e r s i t i e s in t h e 1 9 8 0 s , a n d f o r m a l l y b e g a n in 1 9 9 0 as a p r o j e c t o f the E n ­ e r g y D e p a r t m e n t , t h e U . S . N a t i o n a l I n s t i t u t e s of H e a l t h , a n d a c o n s o r t i u m of research i n s t i t u t i o n s in F r a n c e , G e r m a n y , J a p a n , B r i t a i n , a n d C h i n a , as w e l l as t h e U n i t e d S t a t e s . P r o p e l l e d in t h e latter 1 9 9 0 s b y a d v a n c e s in s o f t w a r e , the H u m a n G e n o m e P r o j e c t ( H G P ) a n n o u n c e d a r o u g h first draft o f the g e n o m e in 2 0 0 0 a n d m o r e c o m p l e t e a n d d e t a i l e d v e r s i o n s in A p r i l 2 0 0 3 a n d M a y 2 0 0 5 , c o v e r i n g a b o u t 9 2 p e r c e n t o f all g e n e sequences. P r i v a t e c o m p a n i e s also took on the mission of m a p p i n g the g e n o m e , including Celera G e n o m i c s , w h i c h p u b l i s h e d its o w n g e n e m a p at t h e s a m e t i m e as t h e H G P , a n d H u m a n G e n o m e S c i e n c e s , w h i c h a p p l i e d the results to d e v e l o p m e d i c a l t r e a t m e n t s .

HISTORY'S WILD CARDS: CATASTROPHIC TERRORISM AND TECHNOLOGICAL BREAKTHROUGHS

307

D e c o d i n g the r e m a i n i n g 8 p e r c e n t o f s e q u e n c e s , i n c l u d i n g m i l l i o n s o f base DNA

pairs at the core a n d e n d s o f each c h r o m o s o m e , w i l l h a v e to w a i t for

n e w t e c h n o l o g i e s ; b u t m a n y scientists b e l i e v e t h a t m o s t o f those s e q u e n c e s are

"junk D N A " t h a t m a y not e v e n c o n t a i n g e n e s . W h i l e C e l e r a has n e v e r p u b l i c l y released its D N A s e q u e n c i n g m a p to

m e d i c a l researchers, the H G P ' s analysis is stored in " G e n B a n k " d a t a b a s e s a v a i l a b l e to a n y o n e on the I n t e r n e t , a l o n g w i t h scientific l i t e r a t u r e o n each se­ q u e n c e . T h e interpretations o f t h e d a t a are still fairly b a s i c , b u t p r i v a t e a n d g o v e r n m e n t researchers are d e v e l o p i n g n e w s o f t w a r e to a n a l y z e a n d m i n e t h e results for i n s i g h t s t h a t c o u l d e v e n t u a l l y h e l p p r o d u c e p r a c t i c a l n e w m e d i c a l t r e a t m e n t s . T h e m a j o r a p p l i c a t i o n s so far h a v e b e e n n e w tests for g e n e t i c p r e ­ dispositions to breast cancer, c y s t i c fibrosis, a n d l i v e r diseases; a n d there also has been p r o g r e s s in d e v e l o p i n g tests for o t h e r c a n c e r s a n d A l z h e i m e r ' s d i s ­ ease. B y one e s t i m a t e , 2 0 0 m i l l i o n p e o p l e w o r l d w i d e h a d u s e d g e n e t i c a l l y en­ g i n e e r e d tests a n d p h a r m a c e u t i c a l s b y 2 0 0 1 , a n d the n u m b e r t o d a y is several times larger.

76

O v e r the n e x t ten years, g e n e t i c t e s t i n g c o u l d b e c o m e a r o u ­

tine m e d i c a l p r a c t i c e for p a t i e n t s in all a d v a n c e d c o u n t r i e s . A n o t h e r , related frontier of b i o t e c h n o l o g y i n v o l v e s w o r k on

identifying

the 2 0 0 , 0 0 0 p r o t e i n s in the h u m a n b o d y a n d t h e i r i n t e r a c t i o n s w i t h g e n e s , since m a n y diseases are t h o u g h t to b e c a u s e d b y d e f e c t i v e g e n e s t h a t i n c o r ­ rectly c o d e a p r o t e i n . S o far, scientists h a v e d e v e l o p e d e x p e r i m e n t a l t r e a t ­ m e n t s t a r g e t i n g a b o u t 5 0 0 p r o t e i n s , or o n e - q u a r t e r o f 1 p e r c e n t o f t h e total. M a n y researchers a n d the b i o t e c h c o m p a n i e s t h a t e m p l o y t h e m b e l i e v e t h e y can

m a p m o s t i m p o r t a n t p r o t e i n s in a n o t h e r five y e a r s a n d create g e n e t h e r a ­

pies to repair or replace t h e d e f e c t i v e g e n e s t h a t cause p a r t i c u l a r diseases in a decade's t i m e after t h a t .

7 7

A n o t h e r line o f g e n e t i c research i n v o l v i n g p r o t e i n s ,

t o u t e d b y the f o u n d e r o f H u m a n G e n o m e S c i e n c e s , D r . W i l l i a m H a s e l t i n e , a i m s to a v o i d m o s t a d v e r s e d r u g r e a c t i o n s — w h i c h in t h e U n i t e d S t a t e s alone result in s o m e 1 0 0 , 0 0 0 d e a t h s each year, or m o r e t h a n d i a b e t e s , A I D S , p n e u ­ m o n i a , or a u t o m o b i l e a c c i d e n t s . T h i s l i n e o f research is d e s i g n e d to i d e n t i f y and

isolate p a r t i c u l a r g e n e s t h a t c o u l d b e i n j e c t e d i n t o cells a n d i n d u c e t h e m

to p r o d u c e a desired p r o t e i n t h a t w o u l d "deliver" t h e m e d i c i n e .

7 8

S t e m cell a p p l i c a t i o n s to treat a n d p e r h a p s c u r e "single-cell diseases" are closer at h a n d .

7 9

S t e m cells are u s e d t o d a y in b o n e m a r r o w t r a n s p l a n t s for s o m e

cancers, l e u k e m i a , a n d serious b l o o d diseases. I n t h e near f u t u r e , a c c o r d i n g t o the U . S . N a t i o n a l I n s t i t u t e s o f H e a l t h , s t e m cells m a y b e c o m e "a r e n e w a b l e source of r e p l a c e m e n t cells a n d tissues" to treat Parkinson's a n d A l z h e i m e r ' s diseases, spinal cord i n j u r y , s t r o k e , b u r n s , heart disease, d i a b e t e s , osteoarthri­ tis, a n d r h e u m a t o i d a r t h r i t i s .

80

O n the frontier o f research in this area, B r i t i s h

scientists h a v e used s t e m cells f r o m the u m b i l i c a l c o r d s o f n e w b o r n s to g r o w

FUTURECAST

308

s m a l l versions o f the h u m a n l i v e r in their laboratories. T h e y h o p e to be able to use s t e m cells to repair d a m a g e d livers in another five years a n d to g r o w n e w livers for t r a n s p l a n t a d e c a d e after that. S i m i l a r research also is p r o c e e d i n g in o t h e r c o u n t r i e s . A r g e n t i n e d o c t o r s h a v e s u c c e s s f u l l y i n j e c t e d b o n e m a r r o w s t e m cells i n t o the pancreas o f d i a ­ betes p a t i e n t s , e n a b l i n g t h e m to p r o d u c e t h e i r o w n i n s u l i n a n d l o w e r their b l o o d g l u c o s e levels. I t a l i a n researchers h a v e a l l e v i a t e d the s y m p t o m s of m u s ­ c u l a r d y s t r o p h y in g o l d e n retrievers b y i n j e c t i n g t h e m w i t h s t e m cells. P e r ­ h a p s m o s t i m p o r t a n t , S p a n i s h scientists h a v e u s e d s t e m cells to treat p e o p l e suffering f r o m a n g i n a a n d h e a r t failure, S w i s s scientists h a v e g r o w n heart v a l v e s in t h e i r labs f r o m a m n i o t i c fluid, a n d A m e r i c a n scientists recently used e m b r y o n i c s t e m cells t o s u c c e s s f u l l y r e b u i l d heart m u s c l e s a n d i m p r o v e their f u n c t i o n i n g in l a b rats, four d a y s after a heart a t t a c k .

8 1

T h e r e are m a n y scien­

tific a n d t e c h n i c a l o b s t a c l e s , b u t it is p o s s i b l e t h a t w i t h i n the n e x t ten to fif­ teen years, scientists w i l l b e a b l e t o use s t e m cell therapies to successfully treat a fair share o f c u r r e n t h e a r t disease a n d c a n c e r s , a n d g r o w n e w o r g a n s for transplants.

82

P r e d i c t i o n s in m e d i c a l science are often o f f - t a r g e t . A s D r . E r i c J u e n g s t at C a s e W e s t e r n R e s e r v e U n i v e r s i t y notes, " B i o l o g y is a l w a y s m o r e c o m p l i c a t e d than w e think."

8 3

D r . E r i c L a n d e r , t h e a u t h o r o f t h e first p u b l i s h e d h u m a n

g e n o m e s e q u e n c e , believes it c o u l d t a k e several m o r e decades to d e v e l o p ef­ fective d r u g s from the g e n o m e p r o j e c t .

8 4

O t h e r scientists p r e d i c t t h a t the

first g e n e r a t i o n o f "designer," g e n e t i c a l l y e n h a n c e d b a b i e s w i l l be b o r n in the n e x t d e c a d e , a n d n e w g e n e r a t i o n s o f g e n o m i c d r u g s w i l l be d e v e l o p e d t h a t w i l l "switch off" the genes that p r o d u c e certain types of c a n c e r s .

85

T h e surest p r e d i c t i o n is t h a t c u l t u r a l , r e l i g i o u s , a n d p h i l o s o p h i c a l o b j e c ­ tions w i l l c o n t i n u e to b e raised in these areas a n d w i l l d e l a y s o m e lines o f re­ search. B u t w i t h the g l o b a l i z a t i o n o f science a n d t e c h n o l o g i c a l d e v e l o p m e n t , r e s t r i c t i o n s o n research in o n e or e v e n several c o u n t r i e s c a n n o t p e r m a n e n t l y s t o p t h e science. T h e B u s h a d m i n i s t r a t i o n ' s refusal to f u n d w o r k w i t h e m b r y ­ o n i c s t e m cells has shifted m a n y lines o f research to s t e m cells f r o m u m b i l i c a l c o r d s a n d to facilities in o t h e r c o u n t r i e s , w h i c h is a p p a r e n t in the recent a d ­ v a n c e s in s t e m cell t r e a t m e n t s c o m i n g f r o m E u r o p e , L a t i n A m e r i c a , a n d A s i a . A n d i f t h e p r e d i c t i o n o f a p r o m i n e n t g e n e t i c i s t at the U n i v e r s i t y o f L o n d o n , D r . S t e p h e n J o n e s , is r i g h t t h a t t h e first h u m a n c l o n i n g w i l l o c c u r in the n e x t five y e a r s , it w o n ' t h a p p e n in t h e U n i t e d S t a t e s .

8 6

S i m i l a r l y , E u r o p e a n resis­

t a n c e t o g e n e t i c a l l y m o d i f i e d f o o d w i l l not s t o p the r a p i d b i o t e c h n o l o g i c a l p r o g r e s s e x p e c t e d in t h a t a r e a .

87

I n the near f u t u r e , for e x a m p l e , g e n e t i c a l l y

e n h a n c e d strains o f "golden rice" h i g h in beta-carotene s h o u l d be available in developing countries w i t h widespread v i t a m i n A deficiencies;

88

and according

HISTORY'S WILD CARDS: CATASTROPHIC TERRORISM AND TECHNOLOGICAL BREAKTHROUGHS

309

to one of the fathers o f t h e "green r e v o l u t i o n , " D r . N o r m a n B o r l a u g , v e r y soon, "we w i l l h a v e the k n o w - h o w t o p r o d u c e the f o o d t h a t w i l l b e n e e d e d t o feed the p o p u l a t i o n o f 8 . 3 b i l l i o n p e o p l e t h a t w i l l e x i s t in t h e w o r l d in

2025.

8 9

If safe a n d effective g e n e t i c a l l y e n g i n e e r e d or s t e m cell t r e a t m e n t s for d i a ­ betes, heart disease, a n d cancers c o m e t o p a s s in the n e x t d e c a d e , t h e y c o u l d h e l p bail o u t s t r a p p e d national h e a l t h - c a r e s y s t e m s b y s u p p l a n t i n g m i l l i o n s o f expensive surgeries a n d l o n g - t e r m t r e a t m e n t s . I f these or o t h e r b r e a k t h r o u g h s o c c u r in t r e a t i n g a n d even c u r i n g the m o r e c o m m o n serious

conditions—

a g a i n , heart disease, c a n c e r s , a n d d i a b e t e s — c o u n t r i e s t h a t a d o p t t h e m c o u l d see s t r o n g e r g r o w t h a n d p r o d u c t i v i t y in j u s t a f e w y e a r s , as m i l l i o n s o f p e o p l e recover a n d w o r k a g a i n full t i m e . G r e a t a d v a n c e s in t h o s e areas also c o u l d h e l p s o m e c o u n t r i e s deal w i t h their d e m o g r a p h i c pressures b y e x t e n d i n g t h e p e r i o d w h e n o l d e r p e o p l e can w o r k p r o d u c t i v e l y . B u t these t r e a t m e n t s also c o u l d be so c o s t l y to d e v e l o p a n d use t h a t t h e y w o r s e n t h e financial b u r d e n s that a d v a n c e d nations a l r e a d y face in t h e i r h e a l t h - c a r e s y s t e m s a n d force s o m e countries to f o r g o t h e i r b r o a d use.

INFORMATION TECHNOLOGIES AND THE OUTLOOK FOR GLOBALIZATION W h i l e nanotechnologists

and biotechnologists

w r i t e regularly about their

g r o u n d b r e a k i n g research h o r i z o n s , i n f o r m a t i o n t e c h n o l o g y scientists g e n e r ­ ally s e e m m o r e m o d e s t . A f t e r d e c a d e s o f a s t o u n d i n g b r e a k t h r o u g h s , m a n y I T scientists see m o r e p o w e r f u l h a r d w a r e a n d s o f t w a r e c o m i n g soon, b u t n o r e v ­ o l u t i o n a r y c h a n g e s . G r e a t e r c o m p u t i n g p o w e r a n d s o f t w a r e c a p a c i t i e s alone, h o w e v e r , w i l l m e a n f a l l i n g real p r i c e s for b o t h ; a n d t h a t s h o u l d f u r t h e r a c c e l ­ erate their spread in m a n y d e v e l o p i n g c o u n t r i e s . In t h e a d v a n c e d n a t i o n s , m o s t o f t h e d e v e l o p m e n t dollars are g o i n g t o soft­ w a r e . T h e p r e s i d e n t o f M i c r o s o f t I n t e r n a t i o n a l , J e a n - P h i l i p p e C o u r t o i s , sees s m a r t s o f t w a r e c o m i n g t h a t c a n p r o c e s s t h e w a y a p e r s o n uses it a n d t h e n a u ­ t o m a t i c a l l y c u s t o m i z e itself for each u s e r .

9 0

A m u c h - f o l l o w e d b l o g g e r on I T

trends, R o b e r t S c o b l e , sees n e w s o f t w a r e t h a t w i l l a t t a c h m e t a d a t a to p h o t o ­ g r a p h s so t h e y can b e searched as easily as t e x t , a n d p r o g r a m s t h a t w i l l c o n ­ v e r t t e x t to speech a n d t h e n b a c k a g a i n so s e a m l e s s l y t h a t a W e b search o n a cell p h o n e or c o m p u t e r for a r e s t a u r a n t or h o t e l w i l l p r o d u c e a v e r b a l a n ­ swer.

9 1

O t h e r i n d u s t r y e x p e r t s see a n o t h e r t r e n d t h a t M i c r o s o f t , for one, w o n ' t w e l c o m e — t h e spread o f the o p e n - s o u r c e m o v e m e n t , w h e r e p e o p l e g e t free a c ­ cess to s o f t w a r e p r o g r a m s a n d t h e i r s o u r c e c o d e s , so t h e y c a n revise t h e m at

FUTURECAST

310

w i l l or hire s o m e o n e else to m a k e t h e c h a n g e s t h e y w a n t . T h e p r e s i d e n t a n d C O O o f S u n M i c r o s y s t e m s , J o n a t h a n S c h w a r t z , p r e d i c t s a "tidal w a v e w a s h ­ i n g o v e r t h e m a r k e t p l a c e " as "every p r o d u c t at S u n at s o m e p o i n t w i l l be free or o p e n - s o u r c e d , "

92

a n d others see the s a m e w a v e c o m i n g .

9 3

A n o t h e r poten­

tial d e v e l o p m e n t t h a t w o u l d s h a k e t h e firms t h a t c u r r e n t l y d o m i n a t e software m a r k e t s , a c c o r d i n g to a f o r m e r e x e c u t i v e e d i t o r o f t h e Harvard

Business

Review,

N i c h o l a s C a r r , is the e m e r g e n c e in t h e n e x t f e w years o f I T "utilities," w h e r e business a n d c o n s u m e r s w i l l b e a b l e to access a n d use t h o u s a n d s of software p r o g r a m s o n l i n e , in a shift s i m i l a r to the one a h u n d r e d years a g o , w h e n m a n ­ ufacturers w i t h t h e i r o w n electric g e n e r a t o r s b e g a n b u y i n g e l e c t r i c i t y f r o m central u t i l i t i e s .

94

T h e a c c e l e r a t i n g s p r e a d o f b r o a d b a n d also is c h a n g i n g t h e I n t e r n e t f r o m a t e x t - b a s e d m e d i u m to a v i d e o - b a s e d one. T o d a y , I n t e r n e t v i d e o is still largely e n t e r t a i n m e n t ; w i t h i n t h e n e x t f e w years, it w i l l d o m i n a t e m a i l a n d business c o m m u n i c a t i o n s as w e l l .

9 5

T h i s shift w i l l l i k e l y c h a n g e the w a y m o s t people

p a y for their I n t e r n e t access, a n d m o r e i m p o r t a n t , increase t e l e c o m m u t i n g or teleworking. H o w I n t e r n e t p r o v i d e r s c h a r g e for W e b access is a sensitive p o l i t i c a l issue in t h e U n i t e d S t a t e s today, in t h e g u i s e o f a d e b a t e o v e r " n e t w o r k neutrality," or w h e t h e r I n t e r n e t access p r o v i d e r s s h o u l d be able to c h a r g e W e b sites dif­ ferent p r i c e s b a s e d on h o w m u c h b a n d w i d t h their c o n t e n t requires. T h e eco­ n o m i c pressures c o m e f r o m t h e fact t h a t e v e n as t h e n u m b e r s o f n e w Internet s u b s c r i b e r s s l o w in m o s t a d v a n c e d c o u n t r i e s , w h e r e access rates are t o p p i n g o u t at 7 0 to 8 0 p e r c e n t , d e m a n d for b a n d w i d t h is r i s i n g r a p i d l y w i t h the s p r e a d o f v i d e o . O n e m i n u t e o f t e x t b r o w s i n g takes b e t w e e n 2 a n d 2 0 0 K B of b a n d w i d t h , c o m p a r e d to at least 4 , 0 0 0 K B for a m i n u t e o f v i d e o , even w i t h advanced compression technologies.

A l r e a d y , v i d e o a c c o u n t s for 5 0 to

60

p e r c e n t o f all w o r l d w i d e b a n d w i d t h traffic; a n d w i t h the a d v e n t o f n e w v i d e o applications including Internet-based high-definition p e c t e d to reach 8 0 to 9 0 p e r c e n t b y 2 0 1 0 .

T V , its share is e x ­

9 6

B y t h e n , b a n d w i d t h d e m a n d c o u l d h i t u p a g a i n s t the Internet's c a p a c i t y to h a n d l e it, c a u s i n g c o n g e s t i o n a n d serious s l o w d o w n s unless W e b p r o v i d e r s a n d b a c k b o n e c o m p a n i e s increase their i n v e s t m e n t s b y a factor o f three to four. S i n c e m o s t o f t h e n e w d e m a n d c o m e s f r o m v i d e o - b a s e d a p p l i c a t i o n s , not n e w s u b s c r i b e r s , t h e s t a n d a r d m o n t h l y flat fees for I n t e r n e t access w o n ' t s u p ­ p o r t l a r g e increases in i n v e s t m e n t . S i n c e real I n t e r n e t c o n g e s t i o n w o u l d be i n t o l e r a b l e for tens o f m i l l i o n s o f p e o p l e a n d businesses, the w a y p e o p l e p a y for I n t e r n e t access w i l l c h a n g e . E i t h e r all flat fees w i l l g o u p , p e o p l e w i l l p a y

HISTORY'S WILD CARDS: CATASTROPHIC TERRORISM AND TECHNOLOGICAL BREAKTHROUGHS

311

in tiers based on h o w m u c h b a n d w i d t h t h e y use, or c o n t e n t p r o v i d e r s w i l l p a y in tiers based on h o w b a n d w i d t h - i n t e n s i v e t h e i r offerings are. M o r e i m p o r t a n t , the g r o w i n g use o f I n t e r n e t - b a s e d v i d e o w i l l affect t h e way

businesses operate in m a n y c o u n t r i e s . I n a f e w y e a r s , t h e I n t e r n e t w i l l

t r a n s m i t l i v e , l a r g e - s c r e e n m o v i n g i m a g e s a l m o s t as c l e a r l y as a t h e a t r i c a l film. T h a t w i l l a l l o w m i l l i o n s m o r e p e o p l e t h a n t o d a y t o w o r k f r o m r e m o t e locations,

especially

their h o m e s ,

a n d still m a i n t a i n

regular face-to-face

c o n t a c t w i t h their bosses a n d c o l l e a g u e s . O n c e t h e t e c h n o l o g y is in p l a c e , t h e e c o n o m i c s o f t e l e w o r k i n g s u g g e s t it c o u l d e x p a n d q u i c k l y . C o m p a n i e s c o u l d save on not o n l y business t r a v e l , b u t also b a s i c o v e r h e a d for office s p a c e a n d utilities. L a r g e - s c a l e t e l e w o r k i n g also c o u l d ease s o m e o f the conflicts b e t w e e n f a m i l y a n d j o b for m i l l i o n s

of two-earner families w i t h children.

AT&T,

w h i c h has p r o m o t e d its use for several y e a r s , figures t h a t in 2 0 0 5 t e l e w o r k i n g s a v e d the c o m p a n y $ 3 0 m i l l i o n in office s p a c e , r e d u c e d j o b t u r n o v e r b y h a l f a m o n g those d o i n g i t , a n d increased p r o d u c t i v i t y w o r t h $ 1 5 0 m i l l i o n .

9 7

Ex­

p e r t s in this area e s t i m a t e t h a t m o r e t h a n 1 2 m i l l i o n A m e r i c a n s w o r k e d r e ­ motely

at least one d a y a m o n t h

in

2006

9 8

a n d b y 2 0 0 8 or 2 0 0 9 ,

an

a d d i t i o n a l 2 4 m i l l i o n A m e r i c a n s a n d 1 0 0 m i l l i o n p e o p l e w o r l d w i d e w i l l telew o r k on a r e g u l a r b a s i s .

9 9

If the t e c h n o l o g y a n d e c o n o m i c s p l a y o u t in this w a y , b y 2 0 1 5 a n d 2 0 2 0 the w o r k d a y s of tens o f m i l l i o n s o f c o m p a n y m e n a n d w o m e n in A m e r i c a , E u ­ r o p e , a n d J a p a n w i l l be v e r y different t h a n today. T h e s a v i n g s f r o m so m a n y p e o p l e w o r k i n g full t i m e f r o m h o m e or f r o m satellite c e n t e r s , a n d so m a n y others s p l i t t i n g their w o r k i n g t i m e b e t w e e n h o m e a n d t h e office, c o u l d h e l p increase profits, i n v e s t m e n t , a n d g r o w t h . P e r h a p s as i m p o r t a n t , t e l e w o r k i n g at significant levels c o u l d p l a y a role in r e d u c i n g g r e e n h o u s e g a s e m i s s i o n s . H o w e v e r , the largest c h a n g e s e x p e c t e d b y m o s t I T experts o v e r the n e x t d e ­ cade i n v o l v e c o n t i n u i n g increases in the p o w e r a n d c a p a c i t y o f b o t h h a r d w a r e and

software. T h e s e increases w i l l translate i n t o f a l l i n g prices for the t e c h n o l o ­

gies already in place in A m e r i c a , E u r o p e , a n d J a p a n , especially wireless a n d m o ­ bile I T , and their m o r e rapid spread in large d e v e l o p i n g

countries.

The

e c o n o m i c a n d social i m p a c t of wireless p h o n e a n d Internet c o u l d be g r e a t e r in A s i a and A f r i c a w h e r e they constitute the first m o d e r n c o m m u n i c a t i o n s s y s t e m in m a n y places, than in a d v a n c e d countries w h e r e t h e y s u p p l a n t or s u p p l e m e n t old, w i r e d versions. A n d the m a i n reason w h y wireless c o m m u n i c a t i o n s t e c h ­ nologies w i l l b e c o m e p a r t o f the basic infrastructure across C h i n a , I n d i a , a n d other d e v e l o p i n g countries over the n e x t d e c a d e is their l o w cost. W i r e l e s s s y s ­ t e m s cost so m u c h less to b u i l d than c o p p e r landline s y s t e m s that wireless ser­ v i c e costs a b o u t o n e - t h i r d that of c o p p e r or fiber service. T h i s i n c r e a s i n g use o f w i r e l e s s in d e v e l o p i n g n a t i o n s a l r e a d y has p r o d u c e d

FUTURECAST

312

l a r g e e c o n o m i c d i v i d e n d s , a c c o r d i n g to a recent M c K i n s e y study, b y b o o s t i n g p r o d u c t i v i t y in 2 0 0 6 e n o u g h to a d d an e s t i m a t e d 2 p e r c e n t to India's G D P , 5 p e r c e n t to C h i n a ' s G D P , a n d 7 . 5 p e r c e n t to t h a t o f the P h i l i p p i n e s .

1 0 0

Cab­

bies in B e i j i n g a n d M a n i l a for e x a m p l e , w a s t e less t i m e d r i v i n g a r o u n d b e ­ cause t h e y c a n call for d i r e c t i o n s a n d t h e i r r e g u l a r c u s t o m e r s can call t h e m for service.

1 0 1

S i m i l a r l y , I n d i a n fishermen use cell service to d e t e r m i n e

which

p o r t to b r i n g t h e i r fish i n t o , P h i l i p p i n e f a r m e r s use it to c o m p a r e prices for feed a n d e q u i p m e n t , a n d p o o r L a t i n A m e r i c a n d a y laborers call a r o u n d to find o u t w h i c h n e a r b y v i l l a g e s m i g h t n e e d their s e r v i c e s .

1 0 2

T h e increasing use of

m o b i l e c o m m u n i c a t i o n s in d e v e l o p i n g c o u n t r i e s also m a y ease s o m e o f the strains o f m o d e r n i z a t i o n , e n a b l i n g C h i n e s e p e a s a n t s , for e x a m p l e , to m o v e to cities for j o b s a n d still stay in t o u c h w i t h their f a m i l i e s . (In the s a m e w a y , p r e ­ p a i d i n t e r n a t i o n a l c a l l i n g c a r d s s u p p o r t i m m i g r a t i o n to the U n i t e d States b y p r o v i d i n g an affordable w a y for L a t i n A m e r i c a n s a n d A s i a n s to m a i n t a i n c o n ­ tact w i t h h o m e .

1 0 3

) T h e o n l y reason t h a t the g a i n s in I n d i a are less so far than

in C h i n a a n d t h e P h i l i p p i n e s is t h a t w i r e l e s s use is less w i d e s p r e a d in I n d i a , b e c a u s e t h e p e o p l e are p o o r e r a n d t h e p h o n e s a n d service are m o r e e x p e n s i v e there. B u t those costs are c o m i n g d o w n in I n d i a , too, w i t h I n d i a n wireless s u b s c r i p t i o n s p a s s i n g t h e 1 0 0 m i l l i o n m a r k in A p r i l 2 0 0 6 a n d e x p e c t e d to top 2 0 0 million by 2 0 1 0 .

1 0 4

O v e r the next decade, the same economics will almost certainly produce i n e x p e n s i v e w i r e l e s s I n t e r n e t access in these c o u n t r i e s . B u i l d i n g o u t a w i r e ­ less b r o a d b a n d s y s t e m s u c h as W i - F i costs a b o u t o n e - n i n t h as m u c h as a l a n d l i n e s y s t e m , since it c a n serve l a r g e r n u m b e r s o f p e o p l e w i t h less e q u i p m e n t , and can be deployed and repaired more q u i c k l y and inexpensively.

105

Allow

m u l t i p l e w i r e l e s s I n t e r n e t p r o v i d e r s to c o m p e t e w i t h t h e m s e l v e s a n d w i t h l a n d l i n e p r o v i d e r s , a n d all access p r i c e s f a l l — a s t h e y h a v e in a d v a n c e d c o u n ­ tries, w h e r e b r o a d b a n d p r i c e s are d o w n a n d b r o a d b a n d use s h a r p l y u p . F r o m 2 0 0 3 to 2 0 0 6 , U . S . h o u s e h o l d s w i t h b r o a d b a n d j u m p e d f r o m less than 2 1 m i l l i o n to m o r e t h a n 5 0 m i l l i o n ; a n d i n d u s t r y e x p e r t s p r e d i c t that w o r l d w i d e b r o a d b a n d use w i l l g o f r o m s o m e 2 5 0 m i l l i o n h o u s e h o l d s in 2 0 0 7 to 4 7 4 million by 2 0 1 0 .

1 0 6

M u c h as l o w e r - i n c o m e A m e r i c a n households h a v e g o n e

o n l i n e at t h e s a m e rates as h i g h e r - i n c o m e h o u s e h o l d s , b u t five or six years later o n c e p r i c e s h a v e fallen, so p o o r e r c o u n t r i e s s h o u l d b e able to g o online on a l a r g e scale, e s p e c i a l l y on w i r e l e s s s y s t e m s , o v e r the n e x t d e c a d e . T h i s t r e n d m a y b e reinforced b y the i m m i n e n t release o f a l a p t o p c o m ­ p u t e r p r i c e d so l o w t h a t it c o u l d b e c o m e b r o a d l y a v a i l a b l e to c h i l d r e n a n d adults

in d e v e l o p i n g

countries

a r o u n d the w o r l d . T h e M I T M e d i a L a b

l a u n c h e d t h e " O n e L a p t o p P e r C h i l d " p r o j e c t three years a g o at the W o r l d E c o n o m i c F o r u m in D a v o s , S w i t z e r l a n d .

1 0 7

T h e project's " X O " c o m p u t e r

HISTORY'S WILD CARDS: CATASTROPHIC TERRORISM AND TECHNOLOGICAL BREAKTHROUGHS uses free, o p e n - s o u r c e s o f t w a r e , a n d costs $ 1 7 6 p e r u n i t t o p r o d u c e .

1 0 8

313 I t also

incorporates i n n o v a t i o n s d e s i g n e d for c o n d i t i o n s in d e v e l o p i n g c o u n t r i e s , b u t w h i c h l i k e l y w i l l b e c o m e s t a n d a r d in m a n y l a p t o p s — a screen d i s p l a y r e a d ­ able in b r i g h t s u n l i g h t , h i g h resistance to rain a n d d u s t , a p r o t e c t e d W i - F i antenna t h a t a l l o w s v e r y b r o a d r a n g e , a n d a t w e l v e - h o u r b a t t e r y w i t h p o w e r alternatives i n c l u d i n g a solar p a n e l or a s o l a r - p o w e r e d b a t t e r y c h a r g e r .

1 0 9

Pro­

t o t y p e s of the X O a l r e a d y are in use in schools in B r a z i l , N i g e r i a , T h a i l a n d , and

U r u g u a y . W i t h the machine's f o r m a l l a u n c h , g o v e r n m e n t s t h a t a d o p t a

p o l i c y o f one l a p t o p p e r c h i l d w i l l b e a b l e to b u y tens o f t h o u s a n d s o f t h e m a ­ chines at cost, i n c l u d i n g o p e r a t i n g s y s t e m s a n d o t h e r s o f t w a r e in t h e i r o w n languages.

1 1 0

I n h o p e s o f f u r t h e r b r i n g i n g d o w n the p r i c e for p o o r c o u n t r i e s ,

the X O also w i l l be sold in the U n i t e d S t a t e s a n d E u r o p e for $ 3 5 0 to $ 5 2 5 per

machine. The

and

1 1 1

t r e n d s in I T , l i k e the p r o s p e c t s o f b r e a k t h r o u g h s in n a n o t e c h n o l o g y

b i o t e c h n o l o g y , c o u l d affect t h e p a t h s o f m a n y c o u n t r i e s o v e r t h e n e x t d e ­

cade. T h e convergence of m o b i l e telephone, m o b i l e Internet, and inexpen­ sive l a p t o p s c o u l d d r i v e a n o t h e r b u r s t o f g r o w t h a n d d e v e l o p m e n t o v e r t h e n e x t d e c a d e — e s p e c i a l l y in p l a c e s t h a t w e l c o m e f o r e i g n c o m p a n i e s t o b u i l d the n e t w o r k s a n d p r o v i d e t h e h a r d w a r e a n d s o f t w a r e , a n d i n v e s t in e d u c a t ­ i n g their c h i l d r e n a n d w o r k e r s to use t h e t e c h n o l o g i e s . T h i s d e v e l o p m e n t c o u l d be e s p e c i a l l y p o w e r f u l in p a r t s o f L a t i n A m e r i c a t h a t r e c e n t l y eased restrictions on f o r e i g n i n v e s t o r s , in areas o f A f r i c a n o t t o r n b y c i v i l c o n f l i c t , and

p e r h a p s in I n d i a . B u t t h e p r o s p e c t o f w i d e s p r e a d I n t e r n e t access w i l l

p r e s e n t a p r o b l e m for C h i n a ' s l e a d e r s h i p , w h o c o n s i s t e n t l y w o r k to r e s t r i c t t h e i r people's u n f e t t e r e d W e b access. I n a d v a n c e d c o u n t r i e s , m o r e c o m p u t ­ i n g p o w e r a n d f a l l i n g s o f t w a r e p r i c e s also s h o u l d p r o v i d e a n o t h e r b o o s t t o p r o d u c t i v i t y , especially in the U n i t e d States a n d other less-regulated e c o n o m i e s w h e r e c o m p a n i e s are b e t t e r a b l e t o a d j u s t t h e i r o p e r a t i o n s t o t a k e a d v a n t a g e o f n e w t e c h n o l o g y . B u t i f there are o t h e r k i n d s o f b r e a k t h r o u g h s c o m i n g in IT,

on the o r d e r o f c l e a n , c h e a p e n e r g y f r o m a d v a n c e s in n a n o t e c h n o l o g y or

potentially

revolutionary treatments

biotechnology

for c a n c e r s a n d h e a r t disease

labs, the scientists d e v e l o p i n g

them

aren't t a l k i n g

from about

them yet.

THE FUTURE THAT MAJOR NATIONS CANNOT AVOID T h i s is a n e w e p o c h , a n d e v e r y b u s i n e s s , g o v e r n m e n t , a n d s o c i e t y w i l l h a v e t o find their p l a c e s in it. F r o m t i m e t o t i m e , s i n g u l a r p o l i t i c a l figures can i n s p i r e nations

to

follow

new

paths—Franklin Roosevelt,

Winston

Churchill,

FUTURECAST

314 Charles

De

Gaulle,

Mao

Zedong,

Martin

Luther

King,

and

Mikhail

G o r b a c h e v — a n d c h a n g e t h e i r societies for g e n e r a t i o n s . O u t s i d e p o l i t i c s , c r e ­ a t i v e g e n i u s e s a n d t h e i r t e a m s can a c h i e v e t e c h n o l o g i c a l b r e a k t h r o u g h s that u l t i m a t e l y r e o r g a n i z e aspects o f everyone's life. A n y o f this c o u l d h a p p e n t o ­ m o r r o w a l m o s t a n y w h e r e . H o w e v e r , t h e three s e i s m i c d e v e l o p m e n t s

exam­

i n e d here are a l r e a d y e m b e d d e d d e e p l y in t h e social, e c o n o m i c , a n d p o l i t i c a l a r r a n g e m e n t s o f e v e r y m a j o r c o u n t r y , a n d m a n y o f t h e i r i m p o r t a n t conse­ q u e n c e s are v i r t u a l l y c e r t a i n . S i n c e n o o n e c a n a p p r e c i a b l y affect t h e size o f g e n e r a t i o n s already b o r n , m o s t o f t h e d i r e c t effects f r o m t h e h i s t o r i c a g i n g o f national p o p u l a t i o n s c a n ­ n o t b e a v e r t e d . T h e b i g g e s t c o n s e q u e n c e for m o s t p e o p l e is t h a t the era of g o v e r n m e n t s p r o m i s i n g a n d p r o v i d i n g e v e r l a r g e r r e t i r e m e n t a n d health-care benefits has e n d e d . T e n or fifteen years f r o m n o w , n e w retirees across W e s t e r n E u r o p e w i l l receive p e n s i o n c h e c k s less t h a n t h e y e x p e c t today, the taxes to fi­ n a n c e t h o s e c h e c k s w i l l b e h i g h e r , a n d b u d g e t deficits once a g a i n w i l l be g r o w i n g l a r g e r y e a r after year. T h e m o s t serious p r o b l e m s , h o w e v e r , w i l l hit h e a l t h - c a r e p r o g r a m s as t h e costs o f p r o c e d u r e s a n d other t r e a t m e n t s for the s h a r p l y r i s i n g n u m b e r s o f e l d e r l y p e o p l e in e v e r y a d v a n c e d c o u n t r y e x p a n d b e y o n d e v e r y c o u n t r y ' s real c a p a c i t y . A m e r i c a n s , E u r o p e a n s , a n d J a p a n e s e w i l l all see l a r g e increases in t h e i r h e a l t h - c a r e - r e l a t e d taxes, insurance p r e m i ­ u m s , d e d u c t i b l e s , a n d o u t - o f - p o c k e t c o s t s — a n d m a n y g o v e r n m e n t s a n d in­ surers w i l l b e g i n to c h i p a w a y at b r o a d access to the m o s t e x p e n s i v e a n d advanced treatments. This aging

of nations

will

almost

c e r t a i n l y also m e a n

less

economic

p r o g r e s s , e s p e c i a l l y for t h e n e x t g e n e r a t i o n o f E u r o p e a n s a n d J a p a n e s e , b e ­ cause it w i l l b e g i n to s h r i n k t h e i r l a b o r forces a n d r e d u c e their national sav­ i n g s , w h i c h in t u r n w i l l t e n d to l o w e r t h e i r i n v e s t m e n t rates a n d p r o d u c t i v i t y g a i n s . T h e d r a g o n p r o d u c t i v i t y m a y b e offset in c o m i n g years b y h o w m u c h m o r e e d u c a t i o n E u r o p e a n s a n d J a p a n e s e in their t w e n t i e s a n d thirties h a v e , c o m p a r e d to t h e i r p a r e n t s — f r o m 1 9 7 0 to 2 0 0 0 , the n u m b e r o f p e o p l e a t ­ t e n d i n g c o l l e g e in F r a n c e , B r i t a i n , a n d J a p a n , as a share o f their c o l l e g e - a g e p o p u l a t i o n s , w e n t f r o m less t h a n 2 0 p e r c e n t to nearly 5 0 p e r c e n t or m o r e .

1 1 2

B u t it w o n ' t m a t t e r m u c h u n l e s s t h e i r g o v e r n m e n t s ensure t h a t t h e y have h i g h - p a y i n g j o b s to g o t o , b y r e f o r m i n g their e c o n o m i e s a n d i n c r e a s i n g p u b ­ l i c i n v e s t m e n t s . A n d that's n o t l i k e l y to h a p p e n in m o s t p l a c e s , because m o s t E u r o p e a n s a n d J a p a n e s e w i t h j o b s w i l l resist reforms t h a t m i g h t u n d e r c u t t h e i r o w n j o b security, a n d t h e resources t o finance m o r e p u b l i c

investment

w o u l d h a v e to c o m e o u t o f the s a m e p o t t h a t w i l l f u n d the

burgeoning

b o o m e r s ' r e t i r e m e n t benefits. T h e U n i t e d S t a t e s w i l l feel less d e m o g r a p h i c p r e s s u r e t h a n E u r o p e or

HISTORY'S WILD CARDS: CATASTROPHIC TERRORISM AND TECHNOLOGICAL BREAKTHROUGHS

315

J a p a n for at least the n e x t d e c a d e — s e t t i n g aside h e a l t h c a r e — a n d C h i n a as w e l l w i l l be able to c o n t a i n t h e i m p a c t o f its o w n r a p i d a g i n g o n its e c o n o m y and b u d g e t . B u t Chi na ' s decision to let its old p e n s i o n a n d health-care a r r a n g e ­ m e n t s u n r a v e l m a y p r o d u c e p o p u l a r d e m a n d s for c h a n g e t h a t it c a n n o t safely resist. M o r e o v e r , A m e r i c a ' s a n d C h i n a ' s a d v a n t a g e s are t e m p o r a r y . L o o k i n g ahead ten or fifteen years after 2 0 2 0 , b o t h societies w i l l face a g i n g - d r i v e n e c o ­ n o m i c a n d fiscal pressures c o m p a r a b l e to w h a t E u r o p e a n d J a p a n h a v e t o d e a l w i t h m u c h sooner. A c r o s s the w o r l d , g l o b a l i z a t i o n w i l l c h a n g e people's l i v e s e v e n m o r e t h a n d e m o g r a p h i c s . I t m a y be said t h a t t h e essential d r i v e o f g l o b a l i z a t i o n is t o break d o w n t h e barriers t h a t c o u n t r i e s u s e t o p r o t e c t t h e i r businesses

from

c o m p e t i t i o n a n d t h e i r w o r k e r s f r o m r i s k , a n d t h a t its c e n t r a l v a l u e is c o m p e ­ t i t i o n at h o m e a n d t h r o u g h o u t t h e w o r l d . Its p r o m i s e is t h a t b y b r e a k i n g d o w n barriers a n d e m b r a c i n g c o m p e t i t i o n , w o r k e r s a n d businesses w i l l create m o r e w e a l t h — a n d t h e early r e t u r n s s u g g e s t t h a t o n a g l o b a l scale, t h a t p r o m ­ ise is realistic: A s g l o b a l i z a t i o n has t a k e n full h o l d in t h e last five t o t e n y e a r s , w o r l d o u t p u t has g r o w n faster t h a n d u r i n g a n y c o m p a r a b l e p e r i o d o n r e c o r d . And

e c o n o m i e s are p a y i n g l a r g e costs for t r y i n g t o h o l d t h e m s e l v e s b a c k f r o m

g l o b a l i z a t i o n , s u c h as R u s s i a a n d p a r t s o f L a t i n A m e r i c a , or to h o l d o n t o their o l d a r r a n g e m e n t s , as in m u c h o f E u r o p e a n d J a p a n . O v e r the n e x t d e c a d e , t h e e c o n o m i c i m p e r a t i v e for m o s t n a t i o n s w i l l c o n ­ t i n u e to be: O p e n y o u r e c o n o m y to t h e a m b i t i o n s o f y o u r o w n p e o p l e a n d t h e capacities of others. T h e c o u n t r i e s t h a t w i l l p r o s p e r in t h e n e x t d e c a d e w i l l b e those t h a t o p e n t h e i r m a r k e t s as m u c h as p r a c t i c a b l e t o t h e ideas a n d d r i v e o f their e n t r e p r e n e u r s , t h e i n v e s t m e n t s

and operations of foreign

companies,

a n d the g o o d s a n d services p r o d u c e d t h r o u g h g l o b a l n e t w o r k s . F o l l o w i n g t h i s c o u r s e — o r not d o i n g s o — i s n o t a m a t t e r o f r i g h t or w r o n g , b u t s i m p l y t h e best w a y the w o r l d has at this t i m e to g e n e r a t e g r o w t h a n d w e a l t h . G l o b a l i z a t i o n w i l l p r o d u c e tens o f m i l l i o n s o f w i n n e r s w h o f o l l o w its r u l e s . The

most prosperous advanced countries over the next decade w i l l be those

that focus m o s t successfully on w h a t a d v a n c e d e c o n o m i e s d o b e s t — c r e a t i n g , a d o p t i n g , a n d a d a p t i n g to p o w e r f u l n e w t e c h n o l o g i e s a n d p r o d u c t i o n p r o ­ cesses; to n e w w a y s to finance, m a r k e t , a n d d i s t r i b u t e t h i n g s ; a n d to n e w a p ­ p r o a c h e s for o r g a n i z i n g a n d m a n a g i n g businesses. H e r e ' s w h e r e t h e e x t e n s i v e r e g u l a t o r y p r o t e c t i o n s for w o r k e r s a n d s m a l l e r c o m p a n i e s t h a t m u c h o f E u ­ rope a n d J a p a n still p r o v i d e w i l l t a k e t h e i r l a r g e s t toll. C o m p a r e d t o t h e m , the U n i t e d S t a t e s , I r e l a n d , a n d a f e w others s h o u l d see s t r o n g e r g r o w t h , t h e i r c o m p a n i e s w i l l g e n e r a l l y rack u p h i g h e r profits a n d l a r g e r m a r k e t shares, a n d their c o n s u m e r s w i l l p a y l o w e r p r i c e s . A n d w i t h i n e v e r y a d v a n c e d c o u n t r y , the b i g g e s t g a i n s w i l l g o to t h o s e w h o w o r k in, m a n a g e , or o w n a p i e c e o f t h e

316

FUTURECAST

enterprises t h a t d e v e l o p or c o m m e r c i a l i z e i n n o v a t i o n s

or t h a t s i m p l y

use

t h e m effectively. C h i n a and other developing nations that stick w i t h the rule book of g l o b ­ a l i z a t i o n w i l l c o n t i n u e to m o d e r n i z e a n d g r o w at a h i s t o r i c p a c e , a n d m o v e several h u n d r e d m i l l i o n m o r e p e o p l e o u t o f p o v e r t y o v e r t h e n e x t d e c a d e . B y 2 0 2 0 , C h i n a m a y o v e r t a k e t h e U n i t e d S t a t e s as t h e w o r l d ' s l a r g e s t t r a d i n g na­ tion, a n d m o s t o f its w o r l d - c l a s s m a n u f a c t u r e r s w i l l be native C h i n e s e c o m p a ­ nies rather t h a n A m e r i c a n or J a p a n e s e t r a n s p l a n t s — s o l o n g as serious d o m e s t i c u n r e s t o r its b a c k w a r d s e r v i c e sector a n d financial s y s t e m don't derail the rapid progress. O v e r t h e n e x t d e c a d e , C h i n a also w i l l b e c o m e a l a r g e i n v e s t o r a n d o w n e r o f A m e r i c a n and E u r o p e a n companies. China's foreign direct investment ( F D I ) abroad g r e w t w e n t y f o l d f r o m 2 0 0 0 to 2 0 0 6 , w h e n they topped $ 1 6 bil­ lion.

1 1 3

T h a t ' s still s m a l l c o m p a r e d t o t h e $ 2 1 7 b i l l i o n A m e r i c a n s i n v e s t e d

a b r o a d in 2 0 0 6 , a n d t h u s far m o s t o f t h e h u n d r e d s o f b i l l i o n s o f dollars, euros, a n d y e n t h a t flow i n t o C h i n a e v e r y y e a r c o m e b a c k t h r o u g h p u r c h a s e s o f w e s t ­ ern g o v e r n m e n t se c ur i t i e s or i n v e s t m e n t s in oil p r o j e c t s in t h e M i d d l e E a s t a n d A f r i c a . B u t since 2 0 0 6 , F D I f r o m C h i n a has b e e n m o r e d i v e r s e a n d u p ­ scale, i n c l u d i n g t h e p u r c h a s e o f l a r g e stakes in B e a r S t e a r n s , B a r c l a y ' s , the B l a c k s t o n e G r o u p , and 3 M , and the o u t r i g h t purchases of Britain's M G brand b y the auto m a k e r C h e r y and I B M ' s P C division b y Chinese computer maker L e n o v o . O v e r t h e n e x t ten y e a r s , C h i n e s e state enterprises or p r i v a t e c o m p a ­ nies w i l l b u y stakes in scores o f m a r q u e e A m e r i c a n a n d E u r o p e a n b a n k s , m a n u f a c t u r e r s , a n d s e r v i c e b u s i n e s s e s — o r b u y t h e m o u t r i g h t — e s p e c i a l l y in w e s t e r n m a r k e t s , s u c h as a u t o s , aircraft, e l e c t r o n i c s , m a c h i n e r y , a n d software, that C h i n a plans to break into. T h e n e x t d e c a d e o f g l o b a l i z a t i o n also w i l l e x a c t l a r g e costs in e v e r y c o u n ­ try. D e v e l o p i n g n a t i o n s t h a t r e m a i n l a r g e l y c l o s e d a n d don't i n v e s t seriously in t h e i r i n f r a s t r u c t u r e a n d e d u c a t i o n — m o s t

notably Russia, parts of Latin

A m e r i c a , and m u c h of A f r i c a — w i l l slip further behind. M a n y African coun­ tries, for e x a m p l e , c o u l d face w a v e s o f e m i g r a t i o n b y e d u c a t e d y o u n g p e o p l e a n d m i d d l e - c l a s s professionals, so l a r g e that t h e y further w e a k e n their prospects a n d , in t u r n , t h e s t a b i l i t y o f s o m e r e g i m e s . E v e n in C h i n a , g l o b a l i z a t i o n w i l l n o t leave e v e r y o n e b e t t e r off. T h e last d e c a d e s a w tens o f m i l l i o n s o f peasants d r i v e n o u t o f a g r i c u l t u r e , tens o f m i l l i o n s o f f a c t o r y w o r k e r s t h r o w n o u t of w o r k as t h e g o v e r n m e n t c l o s e d d o w n s t a t e - o w n e d e n t e r p r i s e s , a n d the e n d of b r o a d - b a s e d p e n s i o n a n d h e a l t h - c a r e c o v e r a g e . T h e n e x t ten years w i l l p r o ­ duce more dislocations that w i l l be equally w r e n c h i n g . T h e n e x t d e c a d e also w o n ' t be easy for m a n y A m e r i c a n s , E u r o p e a n s , a n d J a p a n e s e . O v e r t h e last five y e a r s , t h e real w a g e s of a v e r a g e w o r k e r s fell in

HISTORY'S WILD CARDS. CATASTROPHIC TERRORISM AND TECHNOLOGICAL BREAKTHROUGHS

317

F r a n c e a n d G e r m a n y , m o v e d l i t t l e in J a p a n , a n d rose less t h a n i p e r c e n t a y e a r even in the U n i t e d S t a t e s , w h e r e p r o d u c t i v i t y g a i n s a v e r a g e d 3 p e r c e n t a year. T h i s w a g e squeeze is an u n e x p e c t e d side effect o f t h e c o m p e t i t i o n a n d g r o w t h that g l o b a l i z a t i o n p r o m o t e s , a n d it's n o t g o i n g a w a y . W i t h t h o u s a n d s o f c o m ­ panies s c o u r i n g t h e w o r l d for the c h e a p e s t a n d m o s t efficient sources o f labor, materials,

financing,

a n d services, a n d s t r i v i n g t o g r a b a p i e c e o f t h e i r rivals'

business b y c o m i n g u p w i t h the n e x t n e w i n n o v a t i o n , all the h e i g h t e n e d c o m ­ p e t i t i o n m a k e s it h a r d e r for e v e r y b o d y to raise t h e i r p r i c e s . ( T h a t ' s an i m p o r ­ tant reason w h y overall inflation has b e e n t a m e for s o m e t i m e a n d l i k e l y w i l l r e m a i n so for the n e x t d e c a d e . ) A n d as the costs o f e n e r g y a n d h e a l t h care rise s h a r p l y for c o m p a n i e s t h a t often can't raise t h e i r o w n p r i c e s , t h e y ' r e forced i n ­ stead to h o l d d o w n their l a b o r costs. T h e r e ' s n o t h i n g o n t h e h o r i z o n t o c h a n g e any

o f these forces, a n d tens o f m i l l i o n s o f E u r o p e a n s , J a p a n e s e , a n d A m e r i ­

cans can e x p e c t , at best, o n l y m o d e s t w a g e increases o v e r t h e n e x t d e c a d e . E v e n t h a t w i l l be o u t o f reach for p e o p l e in a d v a n c e d e c o n o m i e s w h o s e e d u c a t i o n and

t r a i n i n g stops at h i g h school or, w o r s e , stops s h o r t o f t h a t . O t h e r aspects o f g l o b a l i z a t i o n w i l l e x a c t a d d i t i o n a l costs, e s p e c i a l l y in E u ­

rope. R e g a r d l e s s o f w h a t a n y g o v e r n m e n t d o e s , t h e g r e a t b u l k o f b a s i c m a n u ­ f a c t u r i n g operations a n d jobs are n o t c o m i n g b a c k to a d v a n c e d c o u n t r i e s . N o r can

a n y o n e p r e v e n t the a d d i t i o n a l losses o f m i l l i o n s o f service j o b s t h a t w i l l

soon be p e r f o r m e d e l e c t r o n i c a l l y a n d r e m o t e l y . T h e U n i t e d S t a t e s , I r e l a n d , S w e d e n , a n d other c o u n t r i e s o p e n to g l o b a l i z a t i o n a n d i n n o v a t i o n w i l l create n e w jobs to offset t h e losses. T i r e a n d steel factories in t h e U n i t e d S t a t e s a n d E u r o p e w o n ' t be h i r i n g , b u t s o m e o f t h e i r A m e r i c a n w o r k e r s w i l l b e c o m e c a ­ ble installers or m e d i c a l m a c h i n i s t s — w h i l e others l o o k i n g for w o r k w i l l find it at f a s t - e x p a n d i n g firms l i k e G o o g l e , w h i c h l a u n c h e d a n e w p r o d u c t n e a r l y e v e r y w e e k for the last three years a n d t r i p l e d its w o r k f o r c e . B u t i f m o s t E u ­ ropean c o m p a n i e s c o n t i n u e to l a r g e l y i g n o r e t h e w o r l d o u t s i d e E u r o p e a n d A m e r i c a , t h e y w i l l lose m o r e o f t h e i r h o m e a n d f o r e i g n m a r k e t s . R e c e n t p r o m i s e s b y France's S a r k o z y t o roll b a c k s o m e l a b o r r e s t r i c t i o n s , l i k e r e c e n t m o v e s in J a p a n to u n r a v e l s o m e o f its barriers on f o r e i g n d i r e c t i n v e s t m e n t s — if t h e y f o l l o w t h r o u g h — c o u l d h e l p in c o m i n g years. B u t in m o s t r e s p e c t s , d o m e s t i c pressures in E u r o p e a n d J a p a n t o s u b j e c t t h e i r n a t i v e c o m p a n i e s t o m o r e c o m p e t i t i o n w i l l r e m a i n w e a k . Y e t i f these c o u n t r i e s don't shift c o u r s e , g l o b a l i z a t i o n w i l l be u n f o r g i v i n g . O n t o p o f t h e cost s q u e e z e o f w a g e s , these p r o b l e m s m a y w e l l leave t h e real i n c o m e s o f a v e r a g e E u r o p e a n s a n d J a p a n e s e l o w e r in 2 0 2 0 t h a n today, a r e m a r k a b l e failure for an a d v a n c e d e c o n o m y . As

globalization pitilessly divides workers, companies, and countries into

w i n n e r s and losers, the g a p s b e t w e e n t h e m w i l l n a r r o w or w i d e n . I n a p r o c e s s that economists call "convergence," successful d e v e l o p i n g c o u n t r i e s led b y

FUTURECAST

318

K o r e a , S i n g a p o r e , T a i w a n , a n d P o r t u g a l w i l l close s o m e o f their i n c o m e g a p w i t h a d v a n c e d e c o n o m i e s . A n d inside the f a s t - g r o w i n g d e v e l o p i n g

nations,

l a r g e n u m b e r s o f v e r y p o o r p e o p l e w i l l b e c o m e m u c h b e t t e r off, even if the s t a n d a r d e c o n o m i c m e a s u r e s o f e q u a l i t y d o not i m p r o v e m u c h . ( C h i n a has b e ­ c o m e one o f the w o r l d ' s least e q u a l societies e v e n as several h u n d r e d m i l l i o n p e o p l e h a v e m o v e d u p a n d o u t o f p o v e r t y , because s o m e

1 0 million

high-

s k i l l e d w o r k e r s h a v e m a d e e v e n m o r e p r o g r e s s a n d a h a n d f u l at the t o p have b e c o m e v e r y r i c h , v e r y fast.) B u t the m o r e successful d e v e l o p i n g

economies

also w i l l p u l l f u r t h e r a w a y f r o m the l a g g a r d s in L a t i n A m e r i c a , A f r i c a , and parts of A s i a . I n e q u a l i t y b e t w e e n a d v a n c e d c o u n t r i e s also w i l l increase as A m e r i c a , S w e ­ d e n , I r e l a n d , a n d a f e w o t h e r s w i l l c o n t i n u e t o g r o w faster t h a n places like G e r m a n y , F r a n c e , a n d J a p a n . I n e q u a l i t y also w i l l intensify inside m o s t a d ­ v a n c e d c o u n t r i e s , e s p e c i a l l y t h e U n i t e d S t a t e s . H i g h returns on c a p i t a l are m a k i n g t h e r i c h m u c h richer, a n d the salaries o f those w h o d e v e l o p or w o r k w i t h the panoply of twenty-first-century innovations

are i n c r e a s i n g faster

t h a n t h e salaries o f e v e r y o n e e l s e — w h i l e A m e r i c a n s , E u r o p e a n s , a n d J a p a n e s e w h o h a v e t o c o m p e t e w i t h r e m o t e w o r k e r s in d e v e l o p i n g c o u n t r i e s see their p a y c h e c k s s h r i n k , a n d t h e salaries o f m o s t o t h e r w o r k i n g p e o p l e are squeezed b y the intense competition that globalization promotes. Globalization w i l l present advanced countries w i t h some formidable po­ l i t i c a l c h a l l e n g e s . M a n y d o m e s t i c p o l i t i c a l b a t t l e s o f the n e x t d e c a d e , espe­ c i a l l y in A m e r i c a , B r i t a i n , a n d G e r m a n y , w i l l focus o n the s p i r a l i n g p r i c e s for e n e r g y a n d h e a l t h c a r e , d r i v e n in p a r t b y g l o b a l i z a t i o n . H o w e v e r , the largest p o l i t i c a l c h a l l e n g e w i l l entail m a i n t a i n i n g p o p u l a r s u p p o r t for open economies e v e n as m a n y people's i n c o m e s s t a g n a t e . T h e h a r d t r u t h is t h a t the

only

c o u r s e in this p e r i o d t h a t w o n ' t lead t o national d e c l i n e is to r e c o g n i z e the w a y t h e w o r l d is c h a n g i n g a n d d o w h a t c a n be d o n e — k e e p the e c o n o m y open w h i l e , for e x a m p l e , p r o v i d i n g b r o a d t r a i n i n g in n e w t e c h n o l o g i e s , s u p p o r t i n g n e w b u s i n e s s f o r m a t i o n to create m o r e j o b s , a n d e a s i n g pressures on w a g e s b y s l o w i n g t h e r i s i n g costs o f h e a l t h care a n d e n e r g y for businesses. Societies that w o r k w i t h t h e forces d r i v i n g g l o b a l i z a t i o n — t h e U n i t e d S t a t e s , I r e l a n d , a n d S w e d e n c o m e to m i n d , a n d K o r e a a n d C h i n a a m o n g d e v e l o p i n g

nations—

s h o u l d find t h e n e x t t e n t o fifteen y e a r s a p e r i o d o f real prosperity. T h e core e l e m e n t s o f today's g e o p o l i t i c s also w i l l b e w i t h us at least t h r o u g h t h e y e a r 2 0 2 0 . A m e r i c a ' s p o s i t i o n as a s u p e r p o w e r w i t h no near p e e r w i l l not c h a n g e , w h a t e v e r t h e o u t c o m e o f the U . S . - l e d c a m p a i g n s in Iraq a n d A f g h a n i ­ stan; a n d for a n o t h e r g e n e r a t i o n or longer, no o t h e r nation or p l a u s i b l e alliance o f nations w i l l be a bl e to create a real b a l a n c e o f p o w e r w i t h the U n i t e d States. T h e c u r r e n t g l o b a l m i s s i o n o f t h e U n i t e d S t a t e s to p r e s e r v e security across the

HISTORY'S WILD CARDS: CATASTROPHIC TERRORISM AND TECHNOLOGICAL BREAKTHROUGHS

319

w o r l d is v e r y u n l i k e l y to c h a n g e , either, h o w e v e r A m e r i c a n v o t e r s u l t i m a t e l y j u d g e the B u s h administration's p o l i c i e s a n d w h o m e v e r t h e y n e x t elect p r e s i ­ dent. A m e r i c a ' s g l o b a l p o w e r in t h i s p e r i o d is n o t b u i l t o n its p o l i c y finesse or e x e c u t i o n , b u t on h o w its g l o b a l m i s s i o n serves t h e needs o f m o s t

other

nations a n d its d i s p r o p o r t i o n a t e l y l a r g e c a p a c i t y t o c a r r y o u t t h a t m i s s i o n . W h a t e v e r the leaders o f o t h e r n a t i o n s s o m e t i m e s say for d o m e s t i c p o l i t i c a l reasons, a l m o s t e v e r y c o u n t r y w e l c o m e s A m e r i c a ' s t a c i t p l e d g e to p r e v e n t regional p o w e r s f r o m o v e r w h e l m i n g t h e i r n e i g h b o r s — a s

in K u w a i t

and

B o s n i a — a n d s a f e g u a r d the sea lanes a n d air routes t h a t c a r r y t h e w o r l d ' s t r a d e and

oil s u p p l i e s .

G o v e r n m e n t s throughout the w o r l d accept that

unless

s o m e o n e a s s u m e s those r e s p o n s i b i l i t i e s , t h e i r o w n s e c u r i t y c o u l d b e at r i s k — and as

for the foreseeable f u t u r e , no n a t i o n b u t t h e U n i t e d S t a t e s c a n or w i l l . S o , Iran or later S y r i a m o v e f u r t h e r d o w n t h e r o a d to n u c l e a r w e a p o n s — o r i f

radical I s l a m i s t s s h o u l d seize p o w e r in P a k i s t a n — F r a n c e , G e r m a n y , C h i n a , and

even R u s s i a w i l l a c c e p t a n d p r i v a t e l y w e l c o m e A m e r i c a n - l e d c a m p a i g n s

to s t o p it. O t h e r d e v e l o p m e n t s u n k n o w n t o d a y w i l l affect t h e c o u r s e o f g e o p o l i t i c s over the n e x t d e c a d e , a n d w h e n it h a p p e n s o n l y t h e U n i t e d S t a t e s w i l l b e in a p o s i t i o n to lead t h e w o r l d ' s response. E u r o p e a n d J a p a n h a v e t h e resources to create a serious g e o p o l i t i c a l role for t h e m s e l v e s , b u t d e c a d e s a g o t h e y p u t aside the i n c l i n a t i o n a n d c o m m i t m e n t t o d o so. T h e p o w e r t o b a l a n c e or c h a l ­ l e n g e the U n i t e d S t a t e s on a p o l i c y l i k e t h e I r a q w a r , as t h e S o v i e t U n i o n c o u l d d o d u r i n g the c o l d w a r , r e q u i r e s t h e c a p a c i t y to b a c k u p a n d c a r r y o u t that c h a l l e n g e . G i v e n E u r o p e ' s a n d J a p a n ' s l o o m i n g d o m e s t i c d e m a n d s a n d e c o n o m i c p r o b l e m s a d j u s t i n g to g l o b a l i z a t i o n , t h e r e is n o p r o s p e c t t h a t e i t h e r w i l l c o m m i t those resources t o g e o p o l i t i c s . R u s s i a u n d e r P u t i n has t h e i n c l i ­ nation to c h a l l e n g e the U n i t e d S t a t e s a n d does so r e g u l a r l y in w o r d s , b u t it is m u c h too w e a k m i l i t a r i l y a n d too s m a l l e c o n o m i c a l l y t o b a c k u p its b o m b a s t . L o o k i n g a h e a d , Russia's disastrous d e m o g r a p h i c s a n d its p e r v a s i v e e c o n o m i c distortions a n d c o r r u p t i o n w i l l e f f e c t i v e l y p r e c l u d e it f r o m r e b u i l d i n g t h e resources r e q u i r e d to c o n s t r a i n the w o r l d ' s o n l y s u p e r p o w e r . A R A N D p o r a t i o n s t u d y e n t i t l e d Assessing

Russia's

Decline

concludes that the

Cor­ once-

s u p e r p o w e r has b e c o m e "a w e a k state" in " m i l i t a r y , s o c i a l , a n d p o l i t i c a l 4

decline" a n d w i t h little "ability to resolve its e c o n o m i c t r o u b l e s . " " C h i n a is the o n l y c o u n t r y w i t h the m e a n s a n d t h e w i l l t o e v e n t u a l l y m a k e itself h e a r d and

h e e d e d in g e o p o l i t i c s . B u t C h i n a w i l l b e in no g r e a t h u r r y to d o so in t h e

next ten to fifteen years, since its leaders are c o n v i n c e d t h a t t h e i r p o l i t i c a l a u ­ t h o r i t y d e p e n d s on r a p i d e c o n o m i c p r o g r e s s , w h i c h in t u r n d e p e n d s v i t a l l y o n g o o d relations w i t h t h e U n i t e d S t a t e s .

320

FUTURECAST C h i n a ' s g l o b a l influence w i l l be felt in at least one i m p o r t a n t w a y in c o m ­

i n g years. Its s p e c t a c u l a r e c o n o m i c success a n d the p r o s p e c t that s o m e d a y it w i l l b e a b l e to c h a l l e n g e t h e U n i t e d S t a t e s w i l l m a k e it a p o l i t i c a l a n d eco­ n o m i c m o d e l for o t h e r c o u n t r i e s , in s t a r k a n d d i r e c t c o m p e t i t i o n w i t h the A m e r i c a n m o d e l . T h e i n t e r n a t i o n a l a p p e a l o f the U . S . a p p r o a c h — c o m b i n i n g o p e n m a r k e t s , i n d i v i d u a l p o l i t i c a l f r e e d o m , p l u r a l i s m , a n d the r u l e of l a w — rests as m u c h on its r e c o r d o f p o l i t i c a l a n d social s t a b i l i t y as on its c u r r e n t e c o n o m i c a n d m i l i t a r y d o m i n a n c e . M o s t o f t h e r e c o n s t i t u t e d nations of cen­ tral a n d eastern E u r o p e , m u c h o f A s i a , a n d a g o o d p a r t o f L a t i n A m e r i c a h a v e a d o p t e d t h e b a s i c A m e r i c a n m o d e l . C h i n a offers a u t h o r i t a r i a n i s m c o m b i n e d w i t h w e s t e r n t e c h n o l o g y a n d b u s i n e s s m e t h o d s , a n d the p r o m i s e that it can g e n e r a t e faster g r o w t h a n d d e v e l o p m e n t t h a n the c o m p r o m i s e s a n d d e l a y s of d e m o c r a c y . T h e a p p r o a c h a n d the p r o m i s e w i l l a p p e a l a l m o s t c e r t a i n l y to s o m e A s i a n , A f r i c a n , a n d L a t i n A m e r i c a n g o v e r n m e n t s o v e r the n e x t decade. T h e r e is a t h i r d m o d e l as w e l l in t h e w o r l d t o d a y : the n e w I s l a m i s t a p p r o a c h t h a t uses a u t h o r i t a r i a n p o l i t i c s in t h e service o f r e l i g i o n , c o m b i n e d w i t h hos­ t i l i t y t o w e s t e r n v a l u e s a n d s o m e t i m e s e c o n o m i c ties w i t h w e s t e r n nations. T h i s m o d e l in its s t r i c t f o r m , as in A f g h a n i s t a n u n d e r the T a l i b a n , has l i m ­ i t e d i n t e r n a t i o n a l a p p e a l a n d reach; b u t c o m b i n e d w i t h w e s t e r n

investment

a n d t r a d e , t h e I s l a m i s t m o d e l is a l r e a d y a p r o m i n e n t a p p r o a c h in the M i d d l e E a s t a n d c o u l d s p r e a d t o p a r t s o f A f r i c a a n d A s i a o v e r the n e x t d e c a d e .

F o r all o f A m e r i c a ' s d i s p r o p o r t i o n a t e e c o n o m i c a n d m i l i t a r y p o w e r , its a b i l i t y t o w i e l d t h a t p o w e r t o s h a p e w o r l d w i d e d e v e l o p m e n t s w i l l c o n t i n u e to be l i m i t e d b y d o m e s t i c o p i n i o n , e s p e c i a l l y s h o u l d the U n i t e d S t a t e s o n c e a g a i n t r y to g o t o w a r l a r g e l y alone. A s Z b i g n i e w B r z e z i n s k i has r e c e n t l y o b s e r v e d o f the U n i t e d S t a t e s in t h e M i d d l e E a s t , " W h i l e ( A m e r i c a ' s ) p o w e r is i n c o m ­ p a r a b l y g r e a t e r t h a n t h a t o f a n y state . . . it c a n n o t , for d o m e s t i c reasons, m o ­ b i l i z e on a sufficient scale t o i m p o s e its w i l l b y f o r c e . "

1 1 5

W h a t e v e r the n e x t

U . S . p r e s i d e n t b e l i e v e s c o n c e r n i n g f o r e i g n affairs, she or h e w i l l h a v e to re­ b u i l d d o m e s t i c s u p p o r t for a sole s u p e r p o w e r ' s i n e s c a p a b l e m i s s i o n of p r e ­ s e r v i n g g l o b a l stability. A l Q a e d a a n d its i m i t a t o r s c o u l d m a k e that task p o l i t i c a l l y easier b y c a r r y i n g o u t a n o t h e r h i g h - p r o f i l e a t t a c k o n the order of 9 / 1 1 . T h e essential e l e m e n t , h o w e v e r , w i l l b e t h e n e x t a d m i n i s t r a t i o n ' s v i r t u ­ a l l y c e r t a i n r e t u r n to t h e t r a d i t i o n a l U . S . a p p r o a c h o f a d d r e s s i n g threats b y b u i l d i n g a n d l e a d i n g e x p a n s i v e i n t e r n a t i o n a l coalitions. O v e r t h e n e x t d e c a d e , A m e r i c a w i l l use b r o a d c o l l a b o r a t i v e a p p r o a c h e s to deal w i t h , for e x a m p l e , g r o w i n g p res s u res to r e d u c e the risks o f c l i m a t e c h a n g e a n d t h e n e x t e p i s o d e o f g l o b a l financial t u r m o i l t h a t threatens trade

HISTORY'S WILD CARDS: CATASTROPHIC TERRORISM AND TECHNOLOGICAL BREAKTHROUGHS and

321

i n v e s t m e n t flows. D e a l i n g w i t h f u t u r e i n c i d e n c e s o f d o m e s t i c i n s t a b i l i t y

in oil states or a t t a c k s on t h e i r r e g i m e s also w i l l i n v o l v e b o t h A m e r i c a n l e a d ­ ership a n d the a c t i v e p a r t i c i p a t i o n b y k e y M u s l i m c o u n t r i e s , F r a n c e a n d G e r ­ many, and perhaps C h i n a and Russia. Moreover, even w h i l e the U n i t e d States takes the lead role, all o f the w o r l d ' s m a j o r n a t i o n s w i l l be a c t i v e l y i n v o l v e d in t r y i n g to s l o w the c o n t i n u e d s p r e a d o f n u c l e a r c a p a b i l i t i e s , a v o i d clashes b e ­ t w e e n n u c l e a r - a r m e d d e v e l o p i n g c o u n t r i e s , a n d p r e v e n t terrorists f r o m s e c u r ­ i n g n u c l e a r m a t e r i a l s or w e a p o n s . T h e n e x t d e c a d e also m a y d e m o n s t r a t e t h e l i m i t s o f s u c h c o a l i t i o n s — a n d p e r h a p s e v e n t h e efficacy o f a l o n e A m e r i c a n r e s p o n s e — i f p o l i t i c a l t u r m o i l in t h e R u s s i a n F e d e r a t i o n or d o m e s t i c u n r e s t in C h i n a s h o u l d threaten to d e s t a b i l i z e t h o s e g o v e r n m e n t s . A n c i e n t G r e e k s t a u g h t their c h i l d r e n t h a t t h e u n i o n o f Z e u s a n d T h e m i s , the g o d d e s s o f necessity, p r o d u c e d three d a u g h t e r s k n o w n as t h e M o i r a i or F a t e s , w h o d e t e r m i n e d the span a n d c o u r s e o f people's l i v e s . M o s t o f us n o w see the w o r l d differently, confident t h a t h u m a n d e c i s i o n s a l o n g w i t h

some

r a n d o m events d e t e r m i n e the c o n d i t i o n s t h a t i n d i v i d u a l s a n d societies c o n ­ front a n d the p a t h s t h e y t a k e . B u t n a t u r e a l w a y s has a p o w e r f u l h a n d in all h u m a n m a t t e r s , a n d the t h r e e h i s t o r i c shifts o f o u r t i m e h a v e t h e p r a c t i c a l force o f n a t u r e in t h e i r o w n spheres. Y e s , p o l i t i c a l leaders w i t h p a r t i c u l a r l y g o o d or b a d ideas w i l l t r i g g e r u n e x p e c t e d t u r n s in o u r g e o p o l i t i c s , b u s i n e s s e s and

g o v e r n m e n t s w i l l c o m e u p w i t h n e w w a y s t o a d d r e s s t h e stresses o f g l o b ­

alization a n d c a p i t a l i z e on its o p p o r t u n i t i e s , a n d e v e n t h e i n e x o r a b l e a g i n g o f m o s t societies w i l l p r o d u c e u n a n t i c i p a t e d social, e c o n o m i c , a n d p o l i t i c a l r e ­ sponses. Y e t these h i s t o r i c d e v e l o p m e n t s h a v e s t a k e d t h e i r c l a i m s o n o u r lives, a n d in this t i m e , at least, t h e y w i l l n o t b e d e n i e d .

NOTES I. THE GLOBAL BLUEPRINT 1. Population and the American Future: The Report of the Commission on Population Growth and the American Future, The Center for Research on Population and Security, http://www .population-security.org/rockefeller/ooi_population_growth_and_the_american_future .htm#TOC. 2. Interview, January 5, 2006. 3. Bureau of Labor Statistics (BLS), Data on Mass Layoffs, http://www.bls.gov/home.htm. 4. Alexander Hamilton, James Madison, John Jay, The Federalist Papers, Paper Four (New York: Signet Classics, 2003). 5. Julie DaVanzo, Olga Oliker, and Clifford A . Grammich, Too Few Good Men: The Security Implications of Russian Demographics (Santa Monica, C A : R A N D Corp, 2003). 6. Ibid. 7. Interview, September 1 2 , 2006. 8. Interview, December 1 , 2005.

2. THE DEMOGRAPHIC EARTHQUAKE 1. DeVanzo, Oliker, and Grammich, Too Few Good Men. 2. Ibid. 3. Diane Farrell, Sacha Ghai, and Tim Shavers, "The demographic deficit: How aging will re­ duce global wealth," McKinsey Quarterly Online, March 2005, http://www.mckinseyquarterly .com/. 4. Quoted in Robert Stone England, Aging China: The Demographic Challenge to China's Economic Prospects (Westport, CT: Praeger/Greenwood, 2005). 5. Interview, January 2 5 , 2006.

3. THE PRIMACY OF GLOBALIZATION 1. International Labour Organization, Key Indicators of the Labour Market (KILM), chapter 6, "Wage and Labour Cost Indicators," figure 1 5 c , "Real manufacturing wage indices, selected Asian economies, 1 9 9 5 to latest available years," http://www.ilo.org/ public/english/employment/strat/kilm/download/kilmi 5 .pdf. 2. World Bank, Human Development Indicators, 2005. 3. "China Boosts Road Construction," People's Daily,

323

http://www.english.people.com

324

NOTES .cn/english/2000i2/2o/eng2000i220_58274-html;

and "Road Financing in China,"

http://www.unescap.org/ttdw/common/TIS/AH/files/egmo6/nnancing_china_2nd.pdf. 4. Telecom Regulatory Authority of India, cited in Candace Lombardi, "Cell phone subscrip­ tions surge in India," C N E T ,

http://news.com/Cell+phone+subscriptions+surge+in+

India/2110-1037_3-6059482.html. 5. World Bank, Human Development Indicators, 2005. 6. Interview, August 2006. 7. Jonathan Watts, Guardian, March 1 5 , 2006. 8. Fortune, "Global 500,"

http://money.cnn.com/magazines/fortune/global500.

9. "Studying McDonald's abroad: overseas branches merge regional preferences, corporate directives," http://www.findarticles.eom/p/articles/mi_m3190/is_15_39/ai_n13649042 10. Ibid. 1 1 . William W. Lewis, The Power of Productivity: Wealth, Poverty and the Threat to Global Sta­ bility (Chicago: University of Chicago Press, 2004). 1 2 . Ibid. 1 3 . Ibid. 14. Lowell L. Bryan and Michelle Zanini, "Strategy in an era of global giants," McKinsey Quarterly, no. 4 (2005). 1 5 . International Telecommunications Union, http://www.itu.int/ITU-D/ict/statistics. 1 6 . "China Boosts Road Construction," People's Daily. 1 7 . David Wessel, Wall Street Journal, April 2, 2004, cited in Diana Farrell, The Emerging Global Labor Market (McKinsey Global Institute, June 2005). 1 8 . Northeast

Human

Resources

Association,

http://www.nehra.com/articlesresources/

article.cfm?id=i 106. 19. Shabana Hussein, "And now a domestic outsourcing boom," Expressindia.com, http:// www.expressindia.com/fullstory.phpPnewsid-39601. 20. Farrell, The Emerging Global Labor Market. 2 1 . Bureau of Economic Analysis, "Summary Statistics for Multinational

Companies,"

http://www.bea.gov/bea/newsrel/mncnewsrelease.html. 2 2 . The Impact of Offshore IT Software and Services Outsourcing on the U.S. Economy and the IT Industry (Lexington, M A : Global Insight, March 2004). 2 3 . Ibid. 24. Farrell, op. cit. 2 5 . Ibid. 26. http : //www.pri vatehealth. co. uk/. 27. Kristin Gerencher, "Vital Signs: Going abroad for medical and dental care," Market Watch, May 5, 2006, http://www.marketwatch.com/News/Story/Story.aspx?guid=%7Bo CiBE8DD-24FE-4AFE-ABo3-B728D9A59990%7D&siteid=bigcharts&dist=. 28. Catherine L. Mann, "Offshore Outsourcing and the Globalization of US Services: Why Now, How Important, and What Policy Implications," in The United States and the World Economy, ed. C. Fred Bergsten (Washington, DC: Institute for International Economics, January 2005). 29. Ibid. 30. Bureau of Labor Statistics, "Hourly Compensation Costs for Production Workers in

NOTES

325

Manufacturing, 3 3 Countries or Areas, 2 2 Manufacturing Industries,

1992-2005,"

http://www. bis .gov/fis/flshcindnaics .htm. 31.

Ibid.

32.

"Andy Stern Introduction Booklet," http://www.seiu.org/docUploads/Andy%20Stern

33.

Alexander Jung, "Taming the Globalization Monster," Spiegel Online, http://www

34.

International Monetary Fund (IMF), World Economic Outlook (2006), Statistical Appendix,

% 2 ©Introduction % 2 oBooklet% 2 0 0 1 3 1 2 0 0 6 % 2Epdf.

. Spiegel. de/i nternational/o, 1518,392276,oo.html.

tables 1 , 20, 4 3 ; and Mangal Goswami, Jack Ree, and Ina Kota, "Global Capital Flows: Defying Gravity," Finance and Development 4 4 , no. 1 , March 2007, http://www.imf.org/ external/pubs/ft/fandd/2 007 /o 3 /picture. htm. 35.

McKinsey Global Institute, " $ 1 1 8

Trillion and Counting: Taking Account of Global

Capital Markets." 36.

Senate Committee on Banking, Housing, and Urban Affairs, Federal Reserve's First Monetary Report for 2005, 109th Cong., 1st sess., 2005, http://frwebgate.access.gpo.gov/cgi-bin/ getdoc.cgi ?dbname=i 09_senate_hearings&docid=f:21981. wais.

37.

International Monetary Fund, World Economic Outlook (April 2006), chapter 1 , "Global Prospects and Policy Issues."

38.

Thomas Helbling, Florence Jaumotte, and Martin Sommer, "How Has Globalization Af­

39.

DeAnne Julius, "Back to

fected Inflation?" International Monetary Fund, World Economic Outlook (April 2006). the

Future of

Low Global

Inflation,"

http://www

.bankofengland.co.uk/publicatons/speeches/1999/speech57.pdf. 40.

Helbling, Jaumotte, and Sommer, "How Has Globalization Affected Inflation?"

41.

The Economist Housing Survey, June 1 6 , 2005.

42.

Chiaku Chukwuogor-Ndu, "Stock Market Returns Analysis, Day of the Week Effects, Volatility of Returns: Evidence from European Financial Markets 1 9 9 7 - 2 0 0 4 , " Interna­ tional Research Journal of Finance and Economics, no. 1 (2006).

43.

Bureau of Economic Analysis.

44.

National Intelligence Council, Mapping the Global Future: Report of the National Intelligence Council's 2020 Project, December 2004, http://www.dni.gov/nic/NIC_globaltrend2020 .html.

45.

Ibid.

4. THE TWO POLES OF GLOBALIZATION: CHINA AND THE UNITED STATES 1. World Bank Group, EdStats, http://wwwi.worldbank.org/education/edstats/. 2. World Bank, World Development Indicators. 3. United

Nations,

World Investment Report 2005,

http://www.unctad.org/en/docs/

wir2005annexes_en.pdf. 4. World Bank, World Development Indicators. 5. World Bank data. 6. Christopher Koch, "Making It in China," CIO, http://www.cio.com/archive/101505/ china.html. 7. Ibid. 8. Interview, July 1 9 , 2006.

NOTES

326

9. Lai Nai-keung, "It's time to take seriously a US-led global recession," China Daily, http://www.chinadaily.com.cn/english/doc/2005-10/06/content_482807.htm. 10. Ibid. 1 1 . Jinglian W u , Understanding and Interpreting Chinese Economic Reform, trans. Wang Jianmao (Mason, OH: Thomson/South-Western, 2005). 1 2 . "Protests in China, the Cauldron Boils," Economist, September 29, 2005. 1 3 . Charles Pigott, China in the World Economy: The Domestic Policy Challenges (Paris: Organi­ sation for Economic Co-operation and Development, 2002). 14. Elizabeth C. Economy, The River Runs Black (Ithaca, N Y : Cornell University Press, 2005). 1 5 . Andrew Batson, "China Warns Pollution Will Grow with the Economy," Dowjones News wire, October 2 5 , 2005. 1 6 . Emmanuel Pitsilis, Jonathan Woetzel, and Jeffrey Wong, "Checking China's Vital Signs" (McKinsey Global Institute, December 2004), http://www.mckinseyquarterly.com/ Economic_Studies/Country_Reports/Checking_Chinas_vital_signs_i483. 1 7 . China Daily, January 1 2 , 2006. 1 8 . Diana Farrell, Ulrich Gersch, and Elizabeth Stephenson, "The Value of China's Emerging Middle Class" (McKinsey Global Institute, June 2006), http://www.mckinseyquarterly .com/Retail_Consumer_Goods/The_value_of_Chinas_emerging_middle_class_i798. 19. Dorothy Guerrero, "China: Beyond the Growth Figures," Globalist, February 2 1 , 2006, http://www.theglobalist.com/DB Web/StoryId.aspx?StoryId=5095. 20. World Bank, World Development Indicators, 2006. 2 1 . Ibid. 2 2 . Ibid. 2 3 . U.S. Department of Commerce, International Trade Administration data, 2006. 24. World Trade Organization data, 2006. 2 5 . United Nations Conference on Trade and Development ( U N C T D ) , 2006. 26. Ibid. 2 7 . As America's population continues to age, those profits will help support the retirement of tens of millions of elderly people—and thereby also help support the overall domestic demand that helps create the jobs whose wages are rising only very slowly. And Europe­ ans also miss out on this benefit, since the elderly there depend much more heavily on state pensions and hold few stocks, directly or indirectly. There, the only way to boost demand by the elderly will be to increase their pension checks, which would only reduce the incomes of everyone who would to pay higher taxes. 28. See, for example, "The Economic Impact of Wal-Mart," Business Planning Solutions Global Insight Advisory Services Division (Boston, M A : Global Insight, November 2, 2005). 29. The O E C D takes all the jobs statistics from around the world and applies standard defi­ nitions. OECD Employment Outlook 2005 (Paris: Organisation for Economic Cooperation and Development, 2005). 30. International Telecommunications Union, 2006. 3 1 . R. Sean Randolph, "The Innovation Edge: Meeting the Global Competitive Challenge," in The Innovation Edge: Meeting the Global Competitive Challenge (San Francisco: Bay Area Economic Forum, September 2006).

NOTES

327

3 2 . National Science Board, Science and Engineering Indicators, 2006. 3 3 . PricewaterhouseCoopers and the National Venture Capital Association, Money Tree Report, 2006. 34. Clyde Prestowitz, "America's Technology Future at Risk: Broadband and Investment Strategies to Refire Innovation," Economic Strategy Institute, 2006. 3 5 . National Science Board, "Science and Engineering Indicators," 2006. 36. Randolph, "The Innovation Edge." 37. Raffaella Sadun and John Van Reenen, "Intellectual property, technology and productiv­ ity: It ain't what you do it's the way you do I.T." (Discussion Paper No. 002, E D S Inno­ vation Research Programme, October 2005). 38. World Bank Group, EdStats, http://wwwi.worldbank.org/education/edstats/. 39. Nivedita Das Kundu, "Resurgence of the Russian Economy," IDSA Strategic Comments, http://www.idsa.in/publications/stratcomments/NiveditaKundu100706.htm. 40. Mehmet Ôgiitçu, "Attracting Foreign Direct Investment for Russia's Modernization: Battling Against the Odds," http://www.oecd.org/dataoecd/44/45/1942539.pdf. 4 1 . See "Russian Federation: 2005 Article IV Consultation" at http://www.imf.org/external/ pubs/ft/scr/2005/0-05377.pdf; see also the IMF's World Economic Outlook database at http://www.imf.org/external/pubs/ft/weo/2006/01/data/index.htm. 4 2 . Bank of Finland, "Russia: Growth Prospects and Policy Debates," http://www.bof.fi/. 4 3 . See http://mosnews.com/money/2006/08/08/gdpforecast.shtml; istry upgrades G D P forecast,"

and "Economic Min­

http://top.rbc.ru/english/index.shtmlP/news/english/

2006/08/08/0812 362 3_bod.shtml. 44. William W. Lewis, The Power of Productivity: Wealth, Poverty and the Threat to Global Sta­ bility (Chicago: University of Chicago Press, 2004). 4 5 . Ibid. 46. E . Andreev, S. Scherbov, and F. J . Willekens, "The Population of Russia: Fewer and Older," Demographic Report 2 2 , Groningen Demographic Reports, http://www.rug.nl/ prc/publications/demographicreports/abstract22. 47. Nicholas Eberstadt, "Growing Old the Hard Way: China, Russia, India," Policy Review, no. 1 3 6 (April-May 2006), http://www.hoover.org/publications/policyreview/2912391 .html. 48. United Nations, Human Development Indicators, 2004. 49. Norbert Walter, "Why I Worry About Russia," http://www.dbresearch.com/servlet/ reweb2.ReWEB?rwkey=u6929389. 50. Lewis, The Power of Productivity. 5 1 . Ibid. 52. United

Nations,

World Investment Report 2005,

http://www.unctad.org/en/docs/

wir2005annexes_en.pdf. 5 3 . "Domestic Constraints on International Participation," in T. N . Srinivasan and Suresh D. Tendylkarm, Reintegrating India with the World Economy (Washington, D C : Peter G . Peterson Institute, March 2003). 54. "India's Economy," Economist (September 2 2 , 2005). 5 5. http://www.buyusa.gov/china/en/power.html. 56. http://www.cslforum.org/china/htm; and http://www.cslforum.org/india.htm. 57. Diana Farrell and Aneta Marcheva Key, "India's lagging financial system," McKinsey

NOTES

328 Quarterly, no.

2

(2005),

http://www.mckinseyquarterly.com/Indias_lagging_financial

_system_i6oo. 58.

Lewis, The Power of Productivity.

59.

Jagdish Bhagwati and Arvind Panagariya, "Defensive plays simply won't work," http:// www.economictimes.indiatimes.com/.

60.

Rajat Gupta, "India's economic agenda: An Interview with Manmohan Singh," McKinsey Quarterly

(September

2005),

http://www.mckinseyquarterly.com/Indias_economic

_agenda_An_interview_with_Manmohan_Singh_i674. 61.

India Brand Equity Foundation, http://www.ibef.org/industry/autocomponents.aspx.

62.

Shashank Luthra, Ramesh Mangaleswaran, and Asutosh Padhi, "When to make India a manufacturing base," McKinsey Quarterly (September 2005), http://www.mckinseyquarterly .com/Automotive/When_to_make_India_a_manufacturing_base_i650.

63.

Diana Farrell, Noshir Kaka, and Sascha Sturze, "Ensuring India's offshoring future," McKinsey Quarterly (September 2005), http://www.mckinseyquarterly.com/Operations/ Outsourcing/Ensuring_Indias_offshoring_future_i66o.

64.

Prabuddha Ganguli, "The Pharmaceutical Industry in India," http://www.touchbriefings

65.

Cited, for example, in Raj Jayadev, "To Silicon Valley Indian Entrepreneurs," Asian Week

66.

Ibid.

67.

Lawrence Klein and T. Palanivel, Economic Reforms and Growth Prospects in India (Canberra:

68.

Dani Rodrik and Arvind Subramanian, "Why India Can Grow at 7 Percent a Year or

.com/pdf/17/pt03 i_p_ganguli.pdf.

.com, http://www.asianweek.com/2001_12_07/opinion_voices.html.

Australian National University, Publishers, 2000).

More: Projections and Reflections" (IMF Working Paper, International Monetary Fund, 2004), http://www.imf.org/external/pubs/ft/wp/2004/wp04118.pdf. 69.

V. T. Bharadwaj, Gautam Swaroop and Ireena Vittal, "Winning the Indian consumer," McKinsey Quarterly (September 2005).

70.

Jagdish Shethm, "Making India Globally Competitive," Vakalpa, 2004.

71.

P. N . Mari Bhat, "Demographic Scenario, 2025," http://www.planningcommission.nic

72.

Jean Druze and Amartya Sen, "India's Economic Development and Social Opportunity,"

73.

Morgan Stanley, October 3 1 ,

.in/reports/sereport/ser/vision2025/demogra.pdf.

http://www.questia.com/. 2005.

5. THE NEW ECONOMICS OF DECLINE FOR EUROPE AND JAPAN 1. Martin Baily and Diana Farrell, "A road map for European economic reform," McKinsey Quarterly

(September

2005),

http://www.mckinseyquarterly.com/A_road_map_for

_European_economic_reform_ 167 9. 2. Bureau of Labor Statistics, Comparative Civilian Labor Force Statistics, Ten Countries, 1960-2006

(2007), 1 8 , table 4, "Civilian Labor Force Participation Rates Approxi­

mating U.S. Concepts by Sex, 1 9 6 0 - 2 0 0 6 , "

http://www.bls.gov/fls/lfcompendium

.pdf. 3. Organisation for Economic Co-operation and Development, "Annual Houses Worked," in OECD in Figures, 2004.

NOTES

329

4. Organisation for Economie Co-operation and Development, O E C D Statistics, "OECD Estimates of Labour Productivity Levels," http://stats.oecd.org/WBOS/Default.aspx ?DatasetCode=PDYGTH. 5. Bureau of Labor Statistics, International Comparisons of Manufacturing Productivity and Unit Labor Cost Trends, Supplementary Tables, table 1 . 1 , "Output per hour in manufac­ turing, 1 6 countries or areas, 1950—2006," http://www.bls.gov/fls/prodsupptabletoc .htm. 6. For example, see "Reaching Higher Productivity Growth in France and Germany" (McKinsey Global Institute, October 2002). 7. United Nations, Comtrade database. 8. U.S. National Science Foundation, Science and Engineering Indicators. 9. "How France Can Win from Offshoring" (McKinsey Global Institute, August 2005). 10. The best recent treatment of these issues comes from the O E C D : Randall Jones and Taesik Yoon, "Strengthening the Integration of Japan in the World Economy to Benefit More from Globalisation" (Economics Department Working Paper no. 5 2 6 , Organisa­ tion for Economic Co-operation and Development, November 29, 2006). 1 1 . Christine Tierney and Ed Garsten, "Toyota, G M locked in fight for worldwide supremacy,"

Detroit News,

February

1 3 , 2005,

http://www.detnews.com/2005/

specialreport/0502/13AA01-87977.htm. 1 2 . The results are apparent in the number of U.S. patents issued to American or foreign companies and citizens, especially as America is an indispensable market for everyone else. The 950,000 U.S. patents issued to U.S. firms and citizens since 1 9 9 0 are, again, nearly three times the number issued to Japanese filers and eight to twenty times the number granted to German, French, or British companies and citizens. 1 3 . Andres Fuentes, Eckhard Wurzel, Margaret Morgan, "Improving the Capacity to Inno­ vate in Germany" (Economics Department Working Paper no. 4 0 7 , Organisation for Economic Co-operation and Development, October 2 2 , 2004). 14. World Bank Group, EdStats, http://wwwi.worldbank.org/education/edstats/. 1 5 . Stephen Machin and Sandra McNally, "Tertiary Education Systems and Labour Mar­ kets," Organisation for Economic Co-operation and Development, January 2007. 16. Jim Hull, More than a horse race: A guide to international tests of student achievement, Center for Public Education, http://www.centerforpubliceducation.0rg/site/c.kjJXJ5MPIwE/b .2422943/k.36o8/More_than_a_horse_race_A_guide_to_international_tests_of_student _achievement.htm. 1 7 . "How France Can Win from Offshoring" (McKinsey Global Institute, August 2005). 18. "Japan and Globalization," Globalist, August 5, 2005,

http://www.theglobalist.com/

Story Id. aspx ?Story Id=4 559. 19. Louis Hayes, Introduction to Japanese Politics, 4th ed. (Armonk, N Y : M . E . Sharpe, 2005). 20. Organisation for Economic Co-operation and Development, Economic Survey of Japan 2005,

http://www.oecd.org/document/6i/o,3343,en_33873io8_33873539_3427462i

_i_i_i_i,oo.html. 2 1 . Ryosei Kokubun, "China and Japan in the Age of Globalization," Japan Review of Inter­ national Affairs 1 7 , no. 1 (Spring 2003). 22. World Bank, World Development Indicators, 2006.

NOTES

330

2 3 . Paul Tansey, Productivity: Ireland's Economic Imperative (prepared for Microsoft Ireland, 2005). 24. Gerry Pyke, FAS Ireland (presentation to Workforce Innovations Conference, Philadel­ phia, PA, 2005); FAS (Irish National Training and Employment Authority), "Quarterly Labour Market Commentary, First Quarter, 2005." 2 5 . "The luck of the Irish," Economist (October 1 4 , 2004). 26. Ibid. 2 7 . Timothy Barnicle, "Ireland Case Study, National Center on Education and the Economy" (manuscript, November 2005). 28. Sean Dorgan, "How Ireland Became the Celtic Tiger," Heritage Foundation, Backgrounder # 1 9 4 5 , June 2 3 , 2006. 29. Ibid. 30. For the Irish case, see David Bloom and David Canning, "Contraception and the Celtic Tiger," Economic and Social Review 3 4 , no. 3 (Winter 2003). 3 1 . Ibid.; see also David E . Bloom, David Canning, and Jaypee Sevilla, "Economic Growth and the Demographic Transition" ( N B E R Working Paper no. 8685, National Bureau of Economic Research, December 2001). 3 2 . United Nations, Human Development Indicators, 2006. 3 3 . United Nations Conference on Trade and Development, World Investment Report (2005); and Organisation for Economic Co-operation and Development data. 34. International Labour Organization, Laborstat, 2005. 3 5 . Organisation for Economic Co-operation and Development, 2005. 36. FAS (Irish National Training and Employment Authority), "Quarterly Labour Market Commentary, 1995—2005." 3 7 . Ibid. 38. Tansey, Productivity: Ireland's Economic Imperative. 39. Hun Joo Park, "Between Development and State: Recasting Korean Dirigisme" (work­ ing paper, K D I School of Public Policy and Management, 2003). 40. Bruce Cummings, Korea's Place in the Sun: A Modern History (New York: W. W. Norton, 1997)4 1 . Charles Harvie and Hyun-Hoon Lee, "Export-Led Industrialization and Growth— Korea's Economic Miracle, 1 9 6 2 - 8 9 " (Economic Working Paper Series 0 3 - 0 1 , Univer­ sity of Wollongong, 2003). 4 2 . World Bank, World Development Indicators, 2006. 4 3 . Cummings, Korea's Place in the Sun. 44. Ibid. 4 5 . Ibid. 46. Ibid. 4 7 . Ibid. 48. World Bank, World Development Indicators, 2006. 49. Ibid. 50. Fortune Global 500, 2007. 5 1 . World Bank Group, EdStats, 2006, http://wwwi.worldbank.org/education/edstats/. 5 2 . Ibid.

NOTES 53.

331

Organisation for Economie Co-operation and Development, Economie Survey of Korea 2005, http://www.oecd.org/document/i8/o,2340,en_2649_20ii85_35428626_i_i_i _i,oo.html.

54.

Economie equality is measured by the G I N I Index, with a higher value signifying greater inequality. Korea's G I N I rating is 31.6,

substantially lower than Thailand (42),

Singapore (42.5), and China (44.7), and lower than advanced countries such as France (32.7), Italy, the U . K . (36), and the U.S. (40.8). World Bank, World Development Indi­ cators, 2006; see also

http://www.earthtrends.wri.org/text/economics-business/variable

-353.html. 55.

Harvie and Lee, "Export-Led Industrialization and Growth." In addition, 97 percent of all commodities were produced in sectors where three or fewer companies accounted for at least 60 percent of the market.

56.

World Bank, World Development Indicators, 2006. The top eight: The United States, Japan, Germany, Finland, Sweden, Switzerland, Israel, and Iceland.

57.

Andrew Eungi Kim and Innwon Park, "Changing Trends of Work in South Korea," Asian Survey 46, no. 3 (May/June 2006).

58.

Yeonho Lee, "Participatory Democracy and Chaebol Regulation in Korea," Asian Survey 45,

59.

no. 2 (March/April 2005).

Organisation for Economic Co-operation and Development, Economic Survey of Korea 2005.

60.

Organisation for Economic Co-operation and Development, Productivity Statistics,

61.

Kim and Park, "Changing Trends of Work in South Korea."

2005.

62.

World Bank, World Development Indicators, 2006.

63.

United Nations, Population Division, World Population Prospects, 2006 Revisions, December 2 7 , 2006, http://www.esa.un.org/unpp/.

64.

Organisation for Economic Co-operation and Development, Economic Survey of Korea 2005.

65.

The gap in opportunities here is greatest for the country's college-educated women: Only 55 percent of them are in the workforce today, compared to 82 percent in other O E C D countries.

66.

On average, O E C D countries commit about 2 1 percent of R & D to service sectors, and the average gap between manufacturing and service sector productivity is just 7 percent.

67.

U.S. Bureau of Labor Statistics, International Comparisons of Hourly Compensation Costs for Production Workers in Manufacturing, Supplementary Tables, 2006.

68.

Korea's service sectors account for just 1 3 percent of the nation's R & D . Organisation for Economic Co-operation and Development, ICT

69.

Indicators, 2006.

World Bank, World Development Indicators, 2006; and Organisation for Economic Co­ operation and Development, Broadband Statistics, 2006. In 2005, Korea trailed only Denmark, the Netherlands, and Iceland in broadband use.

6. THE NEW GEOPOLITICS OF THE SOLE SUPERPOWER: THE PLAYERS 1. Stephen M. Walt, Taming American Power, The Global Response to U.S. Primacy (New York: W. W. Norton, 2005).

332

NOTES 2. The Venusberg Group, Beyond 2010: European Grand Strategy in a Global Age (3rd Venusberg Report, July 2007). 3. Thomas B. M . Barnett, The Pentagon's New Map, War and Peace in the Twenty-first Century (New York: Berkley Books, 2005).

4. Leonard Weiss, "Atoms for Peace," Bulletin of the Atomic Scientists 59, no. 6 (November 1 , 2003). 5. Scott Sagan, "Why Do States Build Nuclear Weapons? Three Models in Search of a Bomb," International Security 2 1 , No. 3 (Winter 1 9 9 6 / 1 9 9 7 ) . 6. Samuel R. Berger, "A Foreign Policy for the Global Age," Foreign Affairs 7 9 , no. 6 (November-December 2000). 7. U.S. Department of Defense, Quadrennial Defense Review Report, February 6, 2006. 8. Ibid. 9. Peter Spiegel, "Review ordered into vulnerability of U.S. satellites," Los Angeles Times, April 2 2 , 2007. 10. Demetri Sevastopulo, "Chinese military hacked into Pentagon," Financial Times, Sep­ tember 3 , 2007. 1 1 . Ibid. 1 2 . National Security and the Threat of Climate Change, C N A Corporation, 2006. 1 3 . Leon Aron, "Where is Russia Headed?"

http://www.aei.org/publicaitons/filer.all.pubID

. 2 2 4 7 3 /pub_detai 1. 1 4 . Peter Lavelle, "U.S. and Russia—What's Next?" http://www.spacedaily.com/news/ russia-04b.html; and Janusz Bugajski, "American vs. Russian imperialism," http: //www.examiner.com/a-i73697~Janusz_Bugajski

American_vs

Russian_imperialism

.html. 1 5 . World Bank, World Development Indicators, 2007. 1 6 . Murray Feshbach, Woodrow Wilson International Center for Scholars. 1 7 . Nicholas Eberstadt, "Growing Old the Hard Way: China, Russia, India," Policy Review, no. 1 3 6 (April—May 2006), http://www.hoover.org/publications/policyreview/2912391 .html. 1 8 . E . Andreev, S. Scherbov, and F. J . Willekens, "The Population of Russia: Fewer and Older," Demographic Report 2 2 , Groningen Demographic Reports, http://www.rug.nl/ prc/publications/demographicreports/abstract22. 19. "Protests in China, the Cauldron Boils," Economist, September 29, 2005. 20. Shaoguang Wang, "The Problem of State Weakness," Journal of Democracy 1 4 , no. 1 (Jan­ uary 2003). 2 1 . "Protests in China, the Cauldron Boils." 2 2 . Jeffrey Bader, "China's Emergence and Its Implications for the United States" (presenta­ tion to Brookings Council, February 1 4 , 2006). 2 3 . Ibid. 24. David Shambaugh, "Modernizing China's Military" (Chinese White Paper on National Security, 2002), http://www.globalsecurity.org/. 2 5 . Demetri Sevastopulo and Mure Dickie, "U.S. fears over China's long-range missiles," Financial Times, May 2 5 , 2007. 26. Eric McVadon, quoted in the International Herald Tribune, April 8, 2005.

NOTES 27.

Sevastopulo and Dickie, "U.S.

28.

Bader, "Chinas Emergence and Its Implications for the United States."

333

fears over Chinas long-range missiles."

29.

Quoted in Globalist, August 5, 2005.

30.

Mid-term Defense Program ( F Y 2 0 0 5 - F Y 2 0 0 9 ) .

31.

Mike M. Mochizuki, "Japan: Between Alliance and Autonomy," in Strategic Asia 2004-2005:

Confronting Terrorism in the Pursuit of Power, ed. Ashley Tellis and Michael

Wills (Seattle: National Bureau of Asian Research, 2004). 32.

Matake Kamiya, "Nuclear Japan: Oxymoron or Coming Soon?" Washington Quarterly 2 6 ,

33.

Nakanishi Terumasa, "Nuclear Weapons for Japan," in Japan Echo 30 (October 2003).

34.

Andrew J . Nathan and Bruce Gilley, China's New Rulers: The Secret Files (New York:

no. 1 (Winter 2 0 0 2 - 2 0 0 3 ) .

New

York Review Books, 2003).

35.

C N N , Tuesday, June 5, 2007.

36.

"What to Do in Iraq: A Roundtable," Foreign Affairs 8 5 , no. 4 (July—August 2006).

7. THE COMING CRISES IN HEALTH CARE, ENERGY, AND THE GLOBAL ENVIRONMENT 1. Ivo Bozon, Warren Campbell and Mats Lindstrand, "Global trends in energy," McKinsey Quarterly, no. 1 (February 2007). 2. World Bank, World Development Indicators, 2007. 3. Commonwealth Fund, "First Report and Recommendations of the Commonwealth Fund's International Working Group on Quality Indicators. A Report to Health Minis­ ters of Australia, Canada, New Zealand, the United Kingdom and the United States," June 2004. 4. World Bank, World Development Indicators, 2007. 5. Christian Hagist and Laurence Kotlikoff, "Health Care Spending: What the Future Will Look Like" (report 286, National Center for Policy Analysis, June 2006). 6. World Health Organization, database,

http://www.who.int/whosis/database/core/core

_select.cfm. 7. Ibid. 8. Ibid. 9. Hagist and Kotlikoff, "Health Care Spending: What the Future Will Look Like." 10.

Ibid.

1 1 . United Nations, Population Division, World Population Prospects, 2004 Revisions, http : //esa. un. org/unpp/. 12.

"Age Distribution of Diagnosis and Death," SEER Cancer Statistics Review, 1 9 7 5 -

13.

National Health Expenditures, Office of the Actuary, Centers for Medicare and Medicaid

14.

Ibid.

2004, National Cancer Institute, http://www.seer.cancer.gov/csr/1975_2004/.

Services, January 2007, http://www.cms.hhs.gov/NationalHealthExpenData/.

15.

"How Changes in Medical Technology Affect Health Care Costs," Henry J . Kaiser Fam­ ily Foundation, March 2007, http://www.kff.org/insurance/snapshot/chcmo308070th .cfm.

16.

David M. Cutler and Mark McClellan, "Is Technological Change in Medicine Worth It?" Health Affairs 20, no. 5 (September-October 2001).

334

NOTES

1 7 . Richard A . Rettig, "Medical Innovation Duels Cost Containment," Health Affairs 1 3 , no. 3 (Summer 1994). 1 8 . Joseph P. Newhouse, "Medical Care Costs: How Much Welfare Loss?" Journal of Economic Perspectives 6, no. 3 (Summer 1992). 19. Barry Feder, "Heart Therapy Strains Efforts to Limit Costs," New York Times, July 7, 2007. 20. Elizabeth Docteur and Valérie Paris, "Pharmaceutical Pricing and Reimbursement Policies in Canada" (Health Working Papers no. 2 4 , Organisation for Economic Co­ operation and Development, February 1 5 , 2007). 2 1 . Peter Neumann and Milton Weinstein, "The Diffusion of New Technology: Costs and Benefits to Health Care," in The Changing Economics of Medical Technology, ed. Annetine C. Gelijns and Ethan A . Halm (Washington, D C : National Academy Press, 1 9 9 1 ) . 2 2 . "How Changes in Medical Technology Affect Health Care Costs." 2 3 . Victor Rodwin, "The Health Care System Under French National Health Insurance: Lessons for Health Reform in the United States," American Journal of Public Health 9 3 , no. 1 (January 2003); and "Ambulatory Care Use/Physician Visits," National Center for Health Statistics, U.S. Centers for Disease Control, http://www.cdc.gov/nchs/fastats/ docvisit.htm. 24. Thomas Buchmueller and Agnes Couffinhal, "Private Health Insurance in France" (Health Working Papers no. 1 2 , Organisation for Economic Co-operation and Develop­ ment, March 2004). 2 5 . David Green and Benedict Irvine, "Health Care in France and Germany: Lessons for the UK," at http://www.civitas.org.uk/pdf/cs17.pdf. 26. "Medical Malpractice Policy: France," http://www.electoral-math.com/archive/200504/ 20050420.html. French and German doctors, however, also don't have to pay for the medical education or malpractice insurance. In America, most new doctors carry educa­ tional debts averaging $ 1 0 0 , 0 0 0 to $ 1 4 0 , 0 0 0 , and U.S. doctors pay malpractice pre­ miums that in 2002 ranged from $ 3 , 8 0 0 a year for an internist in rural Minnesota to more than $200,000 for an ob/gyn in Miami, Florida. Paul Jolly, "Medical School Tu­ ition and Young Physician Indebtedness," Association of American Medical Colleges, March 2004,

http://www.sls.downstate.edu/financial_aid/docs/MedicalSchoolDebt.pdf;

and "Medical Malpractice: Implications of Rising Premiums on Access to Health Care," General Accounting Office, G A O - 0 3 - 8 3 6 , August 2003, http://www.gao.gov/new .items/do3836.pdf. 2 7 . "Trouble for French medicine," Economist, http://www.economist.com/displaystory.cfm ?story_id=2 6 7 0 6 5 4 . 28. Didem Bernard, "Out of Pocket Expenditures on Health Care Among the Non-elderly Population, 2004" (Medical Expenses Panel Survey, Agency for Healthcare Research and Quality, Department of Health and Human Services, January 2007). 29. "Highlights on health, France 2004," World Health Organization, http://www.euro.who . int/éprise/main/ who/progs/chhfra/system/2 00 5 0 1 3 I _ I • 30. "Health Insurance Cost," National Coalition on Health Care, http://www.nchc.org/facts/ cost.shtml. 3 1 . Ibid.

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3 2 . Paul Dutton, "Health Care in France and the United States: Learning from Each Other," Center on the United States and France, The Brookings Institution, http://www . brookings. edu. /fp/cusf/analysis/dutton .pdf. 3 3 . World Health Organization, Statistical Information System Online. 34. Ibid. 3 5 . Ibid. 36. Hideki Nomura and Takeo Nakayama, "The Japanese healthcare system," BMJ 3 3 1 , no. 7 5 1 8 (September 2 4 , 2005), http://www.bmj.com/cgi/content/full/331/7518/648 ?etoc&eaf. 37. James R.Bean, "National Healthcare Spending in the U.S. and Japan: National Eco­ nomic Policy and Implications for Neurosurgery," Neurologia medico-chirurgica 4 5 , no. 1 (2005), http://www.jstage.jst.go.Jp/article/nmc/45/1/45_18/_article. 38. Ibid. 39. Eddy van Doorslaer, Cristina Masseria, and Xander Koolman, "Inequalities in access to medical care by income in developed countries," Canadian Medical Association Journal 1 7 4 , no. 2 (January 1 7 , 2006), http://www.pubmedcentral.nih.gov/articlerender.fcgi ?artid=i329455. 40. Derek Wanless, "Securing Good Health for the Whole Population," February 2 5 , 2004, http://www.hm-treasury.gov.uk/consultations_and_legislation/wanless/consult _wanlesso4_final. cfm. 4 1 . "Health care systems in eight countries: trends and challenges," European Observatory on Health Care Systems, April

2002, http://www.hm-treasury.gov.Uk/media/8/3/

observatory_repor t. pdf. 4 2 . Ibid. 4 3 . King's Fund, "An Independent Audit of the N H S Under Labour ( 1 9 9 7 - 2 0 0 5 ) , " http:// www.kingsfund.org.uk/publications/kings_fund_publications/an_independent.html. 44. "Core Health Indicators," Statistical Information System Online, World Health Organi­ zation. 4 5 . Chris Philip and Aaron Smith, "The Quality of U K Healthcare: Comparison to Europe," The Bow Group, http://www.bowgroup.org/harriercollectionitems/HealthStandards.pdf. 46. The Economics of Health Care, appendix v, "NHS cost by age group," table, "Estimated H C H S per capita expenditure by age group, England, 2002/03," Office of Health Eco­ nomics, http://www.ohe.org/page/knowledge/schools/appendix/nhs_cost.cfm. 47. United Nations, Population Division, World Population Prospects, http://www.esa.un .org/unpp/. 48. "Health care systems in eight countries: trends and challenges." 49. United Nations, Population Division, World Population Prospects, http://www.esa.un .org/unpp/. 50. Tadahiko Tokita, "The Prospects for Reform of the Japanese Healthcare System," PharmacoEconomics 20, suppl. 3 (2002). 5 1 . World Health Organization, Global InfoBase Online. 52. David Cutler, "An International Look at the Medical Care Financing Problem," in Health Care Issues in the United States andJapan, ed. David Wise and Naohiro Yashiro (Chicago: University of Chicago Press, 2006).

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5 3 . David Wise, "Introduction," in Health Care Issues in the United States andJapan. 54. Ibid. 5 5 . Tokita, "The Prospects for Reform of the Japanese Healthcare System." 56. Elizabeth Docteur and Howard Oxley, "Health Care Systems: Lessons from the Reform Experience" (Health Working Papers no. 9, Organisation for Economic Co-operation and Development, December 5, 2003); and Tadashi Fukui and Yashushi Iwamoto, "Pol­ icy Options for Financing the Future: Health and Long-Term Care Costs in Japan," ( N B E R Working Paper no. 1 2 4 2 7 , National Bureau of Economic Research, August 2006). 5 7 . Jean Woo, T. Kwok, F. K. H. Sze, and H. J . Yuan, "Aging in China: Health and Social Consequences and Responses," International Journal of Epidemiology 3 1 , no. 4 (2002). 58. Michael Moreton, M . D , "Healthcare in China," http://www.medhunters.com/articles/ healthcareInChina.html. 59. Ibid. 60. World Bank, Briefing Note no. 3 3 2 3 3 . 6 1 . Howard French, "Wealth Grows, But Health Care Withers in China," New York Times, January 1 4 , 2006. 62. "700 People Die from T B in China Every Day," People's Daily, http://english.people.com .cn/english/20oio6/o5/eng20o 1 0 6 0 5 _ 7 1 7 9 0 . h t m l 63. "China launches battle against hepatitis," B B C News, June 1 , 2002, http://news.bbc.co .uk/2/low/asia-pacific/2020586.stm. 64. World Bank, Briefing Note no. 2 2 3 2 5 . 65. World Bank, Briefing Note no. 3 3 2 3 4 . 66. World Bank, Briefing Note no. 3 3 2 3 2 . 67. World Health Organization database; and "Assessing Government Health Expenditure in China," China National Health Economics Institute, October 2005. 68. United Nations, Population Division, World Population Prospects, 2004 Revisions and World Urbanization Prospects, http://www.esa.un.org/unpp/. 69. W H O Global Infobase Online. 70. World Bank, Briefing Note no. 3 3 2 3 4 . 7 1 . "Crowd Protests Health Care in China—Joseph Kahn," China Digital Times, http:// chinadigitaltimes.net/2006/11/crowd_protests_health_care_in_china_joseph_kahn. php. 7 2 . J . Watts, "Protests in China over suspicions of a pay-or-die policy," Lancet 369, no. 9 5 5 6 (January 1 3 - 1 9 , 2007). 7 3 . International Energy Outlook 200 j , Energy Information Administration, U.S. Department of Energy. 74. Ibid. 7 5 . "Industrial Energy Intensity by Industry," Natural Resources Department, Canada, http:// www.oee. nrcan .gc. ca/corporate/statistics/neud/dpa/tableshandbook2 /agg_oo_6_e _i.cfm?attr=o. 76. "Total Energy Intensity," European Environment Agency, http://themes.eea.europa.eu/ IMS/ISpecs/ISpecification2004ioo7i32i34/IAssessmentii44242696225/view_content 7 7 . Ibid.

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78. Ivo Bozon, Subbu Narayanswamy and Vipul Tuli, "Securing Asia's Energy Future," McKinsey Quarterly Online, April 2 0 0 5 , http://www.mckinseyquarterly.com. 79. Jacqueline Lang Weaver, "The Traditional Petroleum-based Economy's Eventful Future: Of Peak Oil, Big Oil, Chinese Oil, Flags and Open Doors," Public Law and Legal The­ ory Series 2006-W-06, University of Houston. Princeton geologist Kenneth Deffeyes set off the debate by predicting that world crude oil production would peak in 2 0 0 5 . It didn't. See "Is the World Running Out of Oil?" Wall Street Journal, October 8, 2005. 80. "Is the World Running Out of Oil?" Wall Street Journal, October 8, 2005. 8 1 . International Energy Outlook 2 0 0 7 , appendix D , "High World Oil Price Projections," En­ ergy Information Administration, U.S. Department of Energy. 82. Amory Lovins, Winning the Oil Endgame (Snowmass, CO: Rocky Mountain Institute, 2005). 83. Three McKinsey and Company energy experts wrote recently, "Today's tight supply and hefty prices could conceivably spark an energy boom and bust like the one that shook the world economy in the 1980s." See Bozon, Narayanswamy, and Tuli, "Securing Asia's En­ ergy Future." 84. Lovins, Winning the Oil Endgame. 85. I E A Statements, International Energy Agency,

http://www.iea.org/journalists/infocus

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http://www.eia.doe.gov/pub/oil_gas/petroleum/data_publications/

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NOTES

338 97.

Kevin Baumert, "The challenge of climate protection: Balancing energy and environ­ ment," in Energy and Security: Towards a New Foreign Policy Strategy, ed. Jan Kalicki and David Goldwyn (Baltimore: The Johns Hopkins Press, 2005).

98.

Melanie Kenderdane and Ernest Moniz, "Technology Development and Energy Secu­

99.

Per-Anders Enkvist, Tomas Nauclér, and Jerker Rosander, "A cost curve for green­

rity" in Energy and Security: Towards a New Foreign Policy Strategy.

house gas

reduction,"

McKinsey Quarterly, no.

1 (February 2007),

.mckinseyquarterly.com/A_cost_curve_for_greenhouse_gas_reduction_i

http://www 911.

100.

Ibid.

101.

Andrew Batson, "China warns pollution will grow with economy," Dowjones Newswire, October 2 5 , 2005.

0. HISTORY'S WILD CARDS: CATASTROPHIC TERRORISM AND TECHNOLOGICAL BREAKTHROUGHS 1. Christopher Blanchard, "Islam: Sunnis and Shiites" (Washington, DC: Library of Con­ gress, Congressional Research Service, December 1 1 , 2006). 2. Ibid. 3. Christopher Blanchard, "The Islamic Traditions of Wahhabism and Salafiyya" (Washing­ ton, D C : Library of Congress, Congressional Research Service, January 17, 2007). 4. Guilain Denoeux, "The Forgotten Swamp: Navigating Political Islam," Middle East Policy 9, no. 2 (2002). 5. Ibid. 6. Kenneth Katzman, "Al Qaeda: Profile and Threat Assessment," (Washington, DC: Li­ brary of Congress, Congressional Research Service, February 1 0 , 2005). 7. Spencer Ackerman, "Religious Protection: W h y American Muslims Haven't Turned to Terrorism," New Republic 233,

no. 4 7 4 3 (December 1 2 , 2005).

8. "Violent Jihad in Netherlands: Current Trends in the Islamic Terrorist Threat," Center for Strategic and International Studies, 2006. 9. Raphael Perl, "Trends in Terrorism: 2006" (Washington, D C : Library of Congress, Con­ gressional Research Service, July 2 1 , 2006; updated March 1 2 , 2007). 10.

Ellen Messmer, "U.S. cyber counterattack: Bomb 'em one way or the other." Network World, February 8, 2007, http://www.networkworld.com/news/2007/020807-rsa-cyber -attacks.html.

1 1 . Barton Gellman, "Cyber-Attacks by A l Qaeda Feared," Washington Post, June 2 7 , 2002, http://www.washingtonpost.com/ac2/wp-dyn/A50765-2002Jun26. 12.

William Potter, Charles Ferguson, and Leonard Spector, "The Four Faces of Nuclear Ter­ ror and the Need for a Prioritized Response," Foreign Affairs 8 3 , no. 3 (May-June 2004).

13.

Eben Kaplan, "Safeguarding Nuclear Energy," Council on Foreign Relations, April 1 4 ,

14.

Carl Behrens and Mark Holt, "Nuclear Power Plants: Vulnerability to Terrorist Attack"

2006,

http://www.cfr.org/publication/10449/safeguarding_nuclear_energy.html.

(Washington, D C : Library of Congress, Congressional Research Service, February 4, 2005). 15.

Potter, Ferguson, and Spector, "The Four Faces of Nuclear Terror."

16. Jonathan Medalia, "Terrorist Nuclear Attacks on Seaports: Threat and Response" (Wash­ ington, D C : Library of Congress, Congressional Research Service, January 24, 2005), http : / /www.

fas. org/i rp/crs/RS212 9 3 .pdf.

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1 7 . William J . Perry, "Preparing for the Next Attack," Foreign Affairs 80, no. 6 (NovemberDecember 2001). 18. Medalia, "Terrorist Nuclear Attacks on Seaports." 19. Daniel Lindley, "The Dark Side of Playing Out the War Scenario," Chicago Tribune, October 27, 2002, http://www.nd.edu/~dlindley/handouts/ChicagoTribuneLindleyonIraqWar.htm. 20. Making the Nation Safer: The Role of Science and Technology in Countering Terrorism, Com­ mittee on Science and Technology for Countering Terrorism, National Research Council (Washington, D C : The National Academies Press, 2002), 40. http://www.nap.edu/ catalog/10415 .html. 2 1 . Sam Nunn, "The Race Between Cooperation and Catastrophe," Vital Speeches of the Day 7 1 , no. 1 2 (April 2, 2005), 369; and Lindley, "The Dark Side of Playing Out the War Scenario." 2 2 . Nunn, "The Race Between Cooperation and Catastrophe." 2 3 . Cham Dallas, Address to U . N . General Assembly, U.S. Federal News Service, March 2 7 , 2006. 24. Medalia, "Terrorist Nuclear Attacks on Seaports: Threat and Response." 2 5 . Graham Allison, "How to Stop Nuclear Terror," Foreign Affairs 8 3 , no. 1 (JanuaryFebruary 2004). 26. Medalia, "Terrorist Nuclear Attacks on Seaports: Threat and Response." 27. Charles Meade and Roger Molander, "Considering the Effects of a Catastrophic Terrorist Attack" (Santa Monica, C A : R A N D Corp., 2006), http://www.rand.org/pubs/technical _reports/20o6/RAND_TR391 .pdf. 28. Matthew C. Weinzierl, "The Cost of Living," National Interest (April 1 , 2004), 1 1 8 - 1 2 2 . 29. Meade and Molander, "Considering the Effects of a Catastrophic Terrorist Attack." 30. Anthony Fauci, The Diane Rehm Show, W A M U 88.5 F M , October 3 1 , 2 0 0 1 , http://www .wamu.org/programs/dr/o 1 / 1 0 / 3 1 .php. 3 1 . Marc L. Ostfield, "Bioterrorism as a Foreign Policy Issue," SAIS Review 2 4 , no. 1 (Janu­ ary 2004). 3 2 . "Chemical and Biological Weapons: Possession and Programs Past and Present," James Martin Center for Nonproliferation Studies,

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.htm. 3 3 . Jim A . Davis, "The looming biological warfare storm: Misconceptions and probable scenarios," Air & Space Power Journal (April 1 , 2003), 57—67. 34. Ibid. 3 5 . Mark G . Polyak, "The Threat of Agroterrorism: Economics of Bioterrorism," Georgetown Journal of International Affairs 5, no. 2 (July 2004). 36. Robert J . Leggiadro, "Bioterrorism: A Clinical Reality," Pediatric Annals 3 6 , no. 6 (June 2007). 37. Davis, "The looming biological warfare storm." 38. Robert Lenzner and Nathan Vardi, "Catching the Bad Bug," Forbes (August 1 6 , 2004). 39. Davis, "The looming biological warfare storm." 40. Public health response to biological and chemical weapons: WHO guidance, World Health Or­ ganization

(2004),

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340

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4 2 . F. Fenner, D. A . Henderson, I. Arita, Z . Jezek, and I. D. Ladnyi, "Smallpox and its Erad­ ication," World Health Organization, 1 9 8 8 . 4 3 . Laurie

Garrett, "The Nightmare

of

Bioterrorism," Foreign Affairs

80,

no.

1

(January-February 2001). 44. Q A P is a Sunni terrorist organization, located primarily in Saudi Arabia. It was named for Al-Qaeda and claims to be subordinate to that group and Osama bin Laden. Like A l Qaeda, it opposes the Saud monarchy. The group is suspected in a number of mass mur­ ders in Saudi Arabia, the kidnap and murder of Paul Johnson in Riyadh, and bombings in Doha, Qatar, in March 2005. 4 5 . "Bin Laden deputy calls for regime change in Saudi Arabia, Egypt," Al Bawaba, May 5, 2007, http://www.albawaba.c0m/en/countries/Egypt/214789. 46. Thomas Hegghammer, "Terrorist Recruitment and Radicalization in Saudi Arabia," Middle East Policy Council 1 3 , no. 4 (Winter 2006), http://www.mil.no/multimedia/ archive/ooo87/Terrorist_Recruitmen_87 543a.pdf. 4 7 . John C. K. Daly, "Saudi 'Black Gold': Will Terrorism Deny The West Its Fix?" Terrorism Monitor (December 4, 2003),

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2 004),

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1 1 3 . United Nations Conference on Trade and Development, World Investment Report 2007, http://www.unctad.org/Templates/webflyer.aspPdocid-900

i&intItemID=436i&lang=i

&mode=highlights. 1 1 4 . Olga Oliker and Tanya Charlick-Paley, Assessing Russia's Decline: Trends and Implications for the United States and the U.S. Air Force (Santa Monica, C A : R A N D Corp., 2002). 1 1 5 . Zbigniew Brzezinski, Second Chance, Three Presidents and the Crisis of American Superpower (New York: Basic Books, 2007), 1 5 2 - 1 5 3 .

INDEX Abkhazia (Georgian region), 2 3 1 Afghanistan, 2 2 9 - 3 0 , 2 3 7 , 2 8 8 , 290 Africa demography, 4 7 , 49 energy markets, 2 5 , 2 7 , 2 7 0 future prospects, 3 1 6 globalization, 8 4 - 8 5 international trade, 9 aging. See also demography; health care; pension systems; public health; social welfare systems China, 5 2 demography, 1 - 2 , 3 , 4, 5, 7 - 8 health-care costs, 2 5 2 - 5 3 pension system, 5 9 - 7 8 public health, 2 3 - 2 5 agriculture biotechnology, 3 0 8 - 9 China, 1 3 6 corporations, 96 Alexander II (tzar of Russia), 2 9 1 Algeria, nuclear proliferation, 2 2 2 Alivisatos, Paul, 29, 3 0 3 A l Qaeda, 2 8 , 2 2 0 , 2 3 6 , 2 7 1 , 290, 2 9 3 , 2 9 5 , 2 9 6 , 2 9 8 , 2 9 9 - 3 0 0 , 3 2 0 . See also Islamic terrorism; nuclear terrorism; terrorism alternative energy sources, 26 anarchism, 2 9 1 Andreev, Evgeny, 1 5 9 - 6 0 anthrax, bioterrorism, 2 9 8 Apfel, Kenneth, 7 6 Argentina globalization, 86 migration (internal), 98 Ashdown, Paddy (Lord Ashdown), 3 0 1 Asia. See also China; Japan; specific other Asian nations China, 1 3 4 , 2 3 3 , 2 3 6 - 3 7 , 2 3 8 - 3 9 demography, 6—7, 44, 4 7 , 4 8 energy markets, 26—27, 267

inflation, 1 1 6 international finance, 8—9 international trade, 9, 1 8 2 pension system, 67 technology, 6 Asian financial crisis ( 1 9 9 7 - 1 9 9 8 ) , 8 2 , 8 5 , 117,224 Asia-Pacific Economic Cooperation organiza­ tion (APEC), 1 8 - 1 9 assassinations, 2 9 1 assets. See also capital markets; investment bubbles in, 1 1 7 - 1 8 capital markets, 1 1 1 - 1 4 intangible, corporations, 88, 91—93 asymmetrical warfare, 224—25, 2 2 6 , 286. See also terrorism Aum Shinrikyo cult, 2 8 , 2 9 5 Australia housing prices, 1 1 7 , 1 1 8 pension system, 64, 67 Austria, 1 1 8 , 2 7 6 automobile industry climate change, 2 8 1 - 8 2 , 284 globalization, 8 India, 165—66 nanotechnology, 305 baby booms and busts, demography, 4 - 5 , 45—53, 49. See also demography Bader, Jeffrey, 2 3 6 Bangladesh, migration (internal), 98 banking. See financial institutions; financial services Barnett, Thomas, 2 2 1 , 2 2 2 Belarus, energy markets, 2 7 7 Belgium, productivity, 1 7 9 Bhat, P. N . Mari, 1 7 2 bin Laden, Osama, 2 2 4 , 290, 295 biotechnology, 2 4 7 - 4 8 , 3 0 6 - 9 bioterrorism, 2 9 7 - 9 9 birth control, 49

344

INDEX Black Death, 4 1 Blair, Tony, 1 5 , 1 2 4 , 1 9 3 , 2 3 0 , 260 Bloom, David, 1 9 8 Borlaug, Norman, 96, 309 Boserup, Ester, 46 Bosnia, 2 3 0 , 244 botulism, bioterrorism, 298 Brazil climate change, 2 7 9 corporations, 90 globalization, 86 migration (internal), 98 Brin, Sergey, 1 3 1 Brown, Gordon, 2 3 0 Brown, Harold, 2 3 8 Brzezinski, Zbigniew, 3 2 0 Bulgaria, energy markets, 2 7 7 Bush, George H. W., 2 2 4 , 2 3 0 Bush, George W., 7 0 , 7 6 , 1 3 2 , 2 2 4 , 2 2 6 , 2 2 8 , 229, 2 3 8 , 2 8 1 , 308, 3 1 9 business cycle, China, 1 4 0 Caldera Rodriguez, Rafael, 2 7 1 Calderon, Felipe, 86 Cambodia, 2 2 9 Canada, 2 5 , 90, 2 6 8 - 6 9 , 7 Canning, David, 1 9 8 cap-and-trade strategy, climate change, 2 8 2 - 8 3 , 284 capital. See globalization; investment; market economy capital markets. See also globalization; investment; market economy China, 1 1 3 , 1 1 4 - 1 5 , 1 1 8 , 1 1 9 , 1 2 0 , 1 2 1 , 122, 1 3 3 - 3 4 France, 1 5 0 globalization, 1 1 1 - 1 8 India, 1 2 0 Japan, 1 1 2 - 1 3 , 1 1 4 , 1 2 2 , 1 5 0 Latin America, 1 1 2 protectionism, 124—25 Saudi Arabia, 1 2 2 United Kingdom, 1 1 3 , 1 5 0 United States, 1 1 2 - 1 4 , 1 1 8 - 2 4 , 1 2 7 , 1 3 1 , 140, 1 5 0 carbon dioxide emission caps, 280, 2 8 1 carbon tax strategy, climate change, 2 8 3 , 284 Carr, Nicholas, 3 1 0 Carter, Jimmy, 48 Centers for Disease Control and Prevention (CDC), 298 Central Asia, energy markets, 2 5 , 27 central banks, capital markets, 1 1 6 , 1 2 0 Central Europe, demography, 47 Chavez, Hugo, 2 7 1 Chechnya, 2 2 4 , 2 3 0 Chernobyl, Ukraine nuclear accident, 294 2

x

345

China, 1 3 2 - 4 8 advantages of, 34—40, 1 3 3 , 1 4 6 agriculture, 1 3 6 business cycle, 1 4 0 capital markets, 1 1 3 , 1 1 4 - 1 5 , 1 1 8 , 1 1 9 , 120,121,122,133 class structure, 84 climate change, 2 7 8 , 2 7 9 , 2 8 1 , 2 8 3 - 8 4 competition, 1 3 corporations, 90, 1 3 7 demography, 3 4 , 4 4 , 5 1 - 5 3 » 5 8 - 5 9 , 7 * , 74, 1 3 4 , 1 4 1 , 2 6 5 , 3 1 5 domestic production and consumption, I

I

ï

1 2 8 - 2 9 , * 3 9 , 4 » 41 education, 1 0 1 energy markets, 2 5 , 2 6 , 2 7 , 29, 2 5 0 , 2 6 7 , 2 7 1 - 7 2 , 2 7 3 - 7 6 , 300 environmental pollution, 1 4 3 exports, 1 0 7 , n o , 1 4 6 - 4 7 financial institutions, 3 7 , 7 4 , 1 2 9 , 1 4 2 future prospects, 3 1 6 , 319—20, 3 2 1 geopolitics, 1 8 , 1 9 - 2 2 , 3 9 - 4 0 , 1 4 0 , 2 2 0 , 225, 226, 2 3 3 - 4 1 , 2 7 3 - 7 8 globalization, 3 - 4 , 1 6 - 1 7 , 3 4 , 8 3 , 8 5 , 127-28, 132-48,172, 176 health-care costs, 1 3 5 , 1 4 6 , 2 4 9 , 263-66 inequality, 1 3 4 - 3 5 , 1 3 8 , 1 4 1 information technology, 9 3 , 1 5 5 , 2 1 7 infrastructure, 3 7 - 3 8 , 8 3 , 1 3 8 - 3 9 , 1 4 2 , 145-46 intellectual property rights, 1 4 2 , 1 4 6 international trade, 9, 4 8 , 1 0 7 , n o , 1 4 6 - 4 7 , 1 8 2 , 235-36, 239 investment in, 1 4 - 1 5 , 1 3 3 - 3 4 , 1 3 7 , 138-39, 150, 162, 183, 239-40, 3 1 6 Islamic fundamentalism, 2 3 6 Japan, 3 3 , 2 3 8 , 2 3 9 - 4 0 , 2 7 5 - 7 6 job creation, 1 4 8 Korea, 203 legal system, 1 3 9 , 1 4 6 manufacturing, 1 2 7 - 2 8 , 1 3 8 - 3 9 , 1 4 7 market economy, 8 2 - 8 3 migration (internal), 98, 1 3 7 military expenditures, 4, 2 3 6 , 237-38,240 nationalism, 2 2 2 , 2 3 6 nuclear proliferation, 2 2 4 , 236—37 pension system, 7 1 - 7 5 , 1 4 1 , 1 4 6 politics, 3 5 - 3 7 , 1 3 5 - 3 7 , 1 4 0 , 1 4 1 , 144-46, 147-48, 233-35, 240-41 poverty in, 1 7 , 1 3 4 - 3 5 , 1 3 8 productivity, 1 4 7 public health, 5 2 regulatory state, 1 7 , 143—44 Russia, 2 3 8 - 3 9 Saudi Arabia, 2 7 4 , 2 7 5 savings rates, 1 3 3 , 1 4 1 , 1 4 6 , 264

346

INDEX

China (continued) social welfare system, 3 8 , 1 2 9 , 1 3 5 , 1 4 1 , 145-46 state-owned enterprises, 1 0 , 1 3 9 , 1 4 6 , 148, 234 Taiwan, 236—37 technology, 6, 1 3 7 , 2 2 7 - 2 8 United States, 1 1 8 - 2 4 , 1 4 0 , 2 3 3 - 4 1 wages, 8 3 , 84, 1 0 2 , 1 0 7 , 1 4 7 , 2 3 5 workforce, 5 8 - 5 9 , 1 3 3 , 1 4 2 - 4 3 , 146, 234 World Trade Organization ( W T O ) , 10, 1 1 , 224 China Daily (newspaper), 1 4 7 Chirac, Jacques, 7 0 Chun Doo Hwan, 204, 2 0 7 - 8 Clark, Don, 28 class structure. See also inequality China, 84 globalization, 2 2 - 2 3 , 8 5 - 8 6 climate change, 2 7 8 - 8 4 . See also environmental pollution cap-and-trade strategy, 2 8 2 - 8 3 carbon tax strategy, 2 8 3 China, 2 7 8 , 2 7 9 , 2 8 1 , 2 8 3 - 8 4 crisis in, 2 5 0 energy markets, 25—27, 96 geopolitics, 279—82 India, 2 7 9 , 2 8 1 leadership in, 2 8 3 - 8 4 national security, 2 2 8 science of, 278—79 technology, 2 8 0 - 8 2 United States, 2 7 8 , 2 7 9 - 8 0 , 2 8 3 - 8 4 Clinton, William J . , 7 0 , 7 6 , 1 2 4 , 2 2 4 , 2 3 0 Cohen, Stephen, 3 0 1 Cold War. See also geopolitics Europe, 2 2 0 international trade, 9, 4 8 , 1 4 9 United States, 1 4 9 warfare, 20 communism, China, 1 3 6 , 1 4 5 . See also Cold War; geopolitics; Soviet Union competition employment, 13—14 inflation, 1 1 6 - 1 7 international trade, 79—80 investment, 1 4 - 1 5 prices, 1 0 8 - 9 wages, 1 0 6 - 8 consumption function capital markets, 1 2 2 globalization, 8 1 - 8 6 increases in, 1 1 7 corporations China, 90, 1 3 7 globalization, 80, 84, 8 6 - 9 7 manufacturing, 95—96

multinational, 8—9, 8 6 - 9 7 regulatory state, 9 1 , 9 4 - 9 5 South Korea, 90, 206 United States, 1 3 2 , 1 5 1 - 5 2 , 1 5 6 - 5 7 cosmopolitanism, corporations, 88—89 Cotis,Jean Philippe, 1 9 3 Courtois, Jean-Philippe, 309 Cuba, 9, 4 8 , 2 2 5 Cultural Revolution (China), 1 4 1 , 1 4 8 , 2 3 4 Cutler, David, 262 cyberterror, 2 2 7 - 2 8 , 2 9 2 - 9 3 Czech Republic energy markets, 2 7 6 - 7 7 globalization, 83 investment in, 1 5 8 modernization, 1 5 7 outsourcing, 104 regulatory state, 1 9 2 wages, 1 0 2 death rates. See demography defense spending. See military spending; warfare demography, 41—78. See also aging; health care; pension systems; public health; social welfare systems Africa, 4 7 , 49 baby booms, 4 4 - 4 9 baby busts, 4 9 - 5 3 biotechnology, 3 0 8 - 9 China, 3 4 , 44, 5 1 - 5 3 , 58-59> 7 1 . 7 4 , 134, 1 4 1 , 2 6 5 , 3 1 5 economic ramifications of, 4—8 Europe, 1 9 1 family planning, 3 France, 3 , 4, 7, 4 2 , 4 3 , 4 7 , 5 1 , 60 future prospects, 3 1 4 - 1 5 Germany, 3 , 4, 7, 4 2 , 4 3 , 4 7 , 5 1 , 59-60, 191 health-care costs, 2 4 7 , 2 5 2 - 5 3 , 2 5 7 , 262 historical perspective, 1 - 2 India, 1 7 1 - 7 2 interactions of, 3 0 - 4 0 investment, 4 8 - 4 9 Ireland, 7, 5 1 , 1 9 8 Italy, 4 3 , 5 1 , 5 9 - 6 0 , 1 9 1 Japan, 3, 7, 30, 4 2 , 4 7 , 4 8 , 5 1 , 5 9 - 6 0 , 70, 1 9 1 , 262 Latin America, 7, 44, 46, 47 manufacturing, 6 overview, 41—44 pension system, 59—78 politics, 6 - 8 , 4 3 - 4 4 productivity, 6, 179—80 public health, 2 3 - 2 5 regulatory state, 6, 5 7 - 5 8 Russia, 2 1 - 2 2 , 49, 1 5 9 - 6 0 , 2 3 1 , 2 3 2 savings rates, 54—55

INDEX South Korea, 7, 48, 2 1 0 - 1 1 Sweden, 5 1 , 60 technology, 6 Thailand, 48 United Kingdom, 4 3 , 5 1 , 60 United States, 4 3 - 4 4 , 4 7 , 4 8 , 50, 5 1 , 5 5 , 60,315 workforce, 7 - 8 , 5 3 - 5 9 Deng Xiaoping, 34, 1 3 6 Denmark, 4 2 , 67, 80 direct foreign investment. See investment "dirty bomb" terrorism, 294 Dobbins, James, 2 4 4 domestic consumption China, 1 2 8 - 2 9 , 1 3 9 , 1 4 1 , 1 4 7 South Korea, 2 0 5 , 208 Driscoll, John, 1 2 - 1 3 East Asia. See Asia; China; Japan; specific other Asian nations Eastern Europe. See also specific Eastern European nations demography, 47 energy markets, 2 3 2 international trade, 9 The Economist (magazine), 1 1 7 , 1 6 3 , 1 9 4 , 196,234,235 education China, 1 0 1 demography, 6—7 France, 1 8 7 - 8 8 Germany, 1 8 7 - 8 8 India, 1 6 6 - 6 7 Ireland, 1 9 6 , 1 9 7 Japan, 1 8 7 - 8 8 outsourcing, 1 0 1 - 2 , 1 0 3 public spending on, 8 3 , 84, 1 8 7 - 8 8 Russia, 160 South Korea, 1 8 8 , 2 0 6 - 7 , Sweden, 1 8 8 United Kingdom, 1 8 7 - 8 8 , 1 9 3 United States, 1 5 6 , 1 8 7 - 8 8 Egypt, 98, 2 2 2 , 2 2 3 Eigler, Don, 305 Eisenhower, Dwight D., 1 2 2 , 2 2 3 electrical power, India, 1 6 3 embryonic stem cell research, 308—9 employment. See also wages; workforce competition, 13—14 demography, 4 8 - 4 9 East Asia, 8 - 9 Europe, 6 1 , 1 7 7 France, 3 2 , 1 5 2 , 1 7 7 Germany, 3 2 , 1 7 7 globalization, 1 1 — 1 3 , 1 6 investment, 109 Ireland, 1 5 2 Japan, 1 5 2 , 1 7 7 2

1

1

347

outsourcing, 80, 9 7 - 1 0 6 Russia, 1 5 8 South Korea, 2 1 0 Sweden, 1 5 2 technology, 6 United States, n , 1 6 , 1 0 9 , 1 5 2 - 5 3 World Trade Organization ( W T O ) , 1 0 - 1 1 energy markets, 2 6 6 - 7 8 . See also oil exporting countries Africa, 2 5 capital markets, 1 2 2 China, 2 5 , 2 6 , 2 7 , 29, 2 5 0 , 2 6 7 , 2 7 1 - 7 2 , 2 7 3 - 7 6 , 300 corporations, 96 crisis in, 249—50 Czech Republic, 2 7 6 - 7 7 France, 2 6 7 , 2 7 6 geopolitics, 2 7 3 - 7 8 Germany, 2 6 7 , 2 7 6 globalization, 25—27, 29 Hungary, 2 7 6 India, 2 5 , 26, 2 6 7 Iran, 2 7 , 2 7 0 , 3 0 1 Ireland, 267 Islamic fundamentalism, 299—302 Italy, 2 7 6 Japan, 2 3 2 , 2 7 1 , 2 7 2 Mexico, 2 6 7 , 2 7 1 military spending, 2 7 1 , 2 7 2 nanotechnology, 2 8 6 , 303—6 national security and oil shocks, 2

70-73 peak oil, 2 6 8 - 6 9 Russia, 2 5 - 2 6 , 2 7 , 9 1 , 1 5 8 - 5 9 , 2 3 1 , 2 3 2 - 3 3 , 250, 267-68, 2 7 0 - 7 1 , 276-78 Saudi Arabia, 2 7 , 2 6 7 , 2 7 0 - 7 1 supply and demand forces, 266—70 technology, 2 8 6 , 3 0 3 - 6 terrorism, 2 9 9 - 3 0 2 United States, 2 6 , 2 7 , 1 3 1 , 269, 2 7 1 - 7 3 , 300 Engels, Friedrich, 95 England. See United Kingdom entrepreneurship, 31. See also innovation environmental pollution, China, 1 4 3 , 283—84. See also climate change equality. See class structure; inequality Europe. See also European Union; specific Eu­ ropean nations capital markets, 1 1 2 — 1 3 , 1 1 4 consumption, 1 2 3 corporations, 89—90 demography, 3 , 30, 4 2 - 4 3 , 4 7 , 4 8 , 50, 51, 59-60, 191 employment, 1 7 7 energy markets, 2 3 2 , 2 6 7 , 2 7 6 - 7 8

INDEX

348 Europe (continued) future prospects, 1 8 8 - 9 5 , 3 1 5 geopolitics, 2 1 , 2 1 9 - 2 0 , 2 2 9 - 3 0 globalization, 1 4 - 1 5 , 3 0 - 3 4 , 1 7 5 - 7 7 , 182-84 immigration, 50, 80, 1 9 2 information technology, 1 5 2 - 5 3 innovation, 1 8 0 - 8 1 international trade, 9, 1 4 9 , 1 8 2 - 8 4 investment, 1 4 , 1 8 3 market economy, 86 nationalism, 2 2 2 pension system, 6 1 - 6 9 , 1 9 1 problems of, 1 7 7 - 8 4 productivity, 3 1 , 1 7 8 - 8 1 regulatory state, 86, 1 2 3 - 2 4 , 1 8 6 service industries, 1 9 1 social welfare system, 1 3 0 , 1 7 7 - 7 8 technology, 6 wages, 1 4 9 workforce, 5 3 - 5 9 , 1 5 6 , 1 7 7 - 7 8 European Central Bank, 1 1 6 European Union. See also Europe; specific European nations China, 2 3 8 - 3 9 demography, 60 energy markets, 2 3 2 expansion of, 32—33 geopolitics, 18—19, 3 ° globalization, 175—76 international trade, 1 5 0 Ireland, 200—201 military expenditures, 4 pension system, 6 5 , 68 politics, 1 9 1 - 9 2

energy markets, 2 6 7 , 2 7 6 future prospects, 3 2 1 G D P of, 1 7 6 geopolitics, 2 2 9 , 2 3 0 globalization, 1 4 , 3 0 - 3 1 , 3 4 , 1 2 3 - 2 4 health-care costs, 2 5 6 - 5 9 historical perspective, 1 7 5 housing prices, 1 1 7 immigration, 80 international trade, 1 4 9 , 1 8 2 - 8 3 investment, 1 8 3 job creation, 1 7 7 , 190—91 legal system, 1 8 7 pension system, 60, 6 1 , 6 2 , 6 3 , 65—66, 68,191 politics, 1 9 0 productivity, 1 7 9 regulatory state, 1 9 2 social welfare system, 1 7 7 stock prices, 1 1 8 wages, 3 1 7 women, 1 7 8 workforce, 5 3 - 5 4 , 5 7 , 5 8 , 1 5 6 , 1 7 7 , 178, 187 Freeman, Richard, 98 free world, international trade, 9 Friedman, Thomas, 1 7 3 fuel-efficiency standards, 89

2

Gandhi, Indira, 1 6 5 Gandhi, Rajiv, 1 6 5 Gates, Bill, 3 1 Gates, Robert, 2 2 7 General Agreement on Tariffs and Trade (GATT), 9 geopolitics, 215—45. $ ^ politics; Soviet Union capital markets, 1 2 0 , 122—24 China, 1 8 , 1 9 - 2 2 , 3 9 - 4 0 , 1 2 9 , 140, 2 2 0 , 225, 226, 2 3 3 - 4 1 , 2 7 3 - 7 8 climate change, 279—84 energy markets, 273—78 Europe, 2 1 , 2 1 9 - 2 0 , 2 2 9 - 3 0 France, 2 2 9 , 2 3 0 future prospects, 3 1 8 - 2 0 Germany, 2 2 9 , 2 3 0 globalization, 1 7 - 2 2 , 2 2 0 - 2 3 historical perspective, 2 1 5 interactions of, 3 0 - 4 0 Iran, 2 2 5 Iraq War, 2 4 1 - 4 5 Islamic fundamentalism, 2 8 - 2 9 Italy, 2 2 9 , 2 3 0 Japan, 1 9 , 2 1 , 240 nationalism, 2 2 1 - 2 2 Russia, 2 1 , 2 2 5 , 2 3 0 - 3 3 , 2 7 3 - 7 8 Saudi Arabia, 2 2 5 , 2 2 9 South Korea, 1 9 ee

family planning, demography, 3 Federal Reserve Bank (U.S.), 1 1 6 financial institutions capital markets, 1 1 2 - 1 3 , 1 1 6 , 1 2 0 China, 3 7 , 7 4 , 1 1 5 , 1 2 9 , 1 4 2 Japan, 1 9 4 financial services corporations, 9 5 , 97 Ireland, 200 outsourcing, 9 9 - 1 0 0 , 1 0 3 - 4 United States, 8 - 9 , 1 2 7 Finland, 3 3 , 2 7 7 Fischer, Joschka, 2 2 9 foreign investment. See investment Foreign Policy Magazine, 2 3 9 foreign subsidiaries, outsourcing, 99—100 Fox, Vincente, 86 France capital markets, 1 5 0 demography, 3 , 4, 7, 4 2 , 4 3 , 4 7 , 5 1 , 60 education, 1 8 7 - 8 8 employment, 3 2 , 1 5 2 , 1 7 7

a

so

349

INDEX terrorism, 2 2 5 United Kingdom, 229—30 United States, 1 8 , 1 9 - 2 2 , 1 3 2 , 2 1 5 - 2 0 , 223-28 war on terror, 287—90 George I (king of Greece), 2 9 1 Georgia, Republic of, 2 3 1 , 2 7 7 Germany capital markets, 1 5 0 demography, 3 , 4, 7, 4 2 , 4 3 , 4 7 , 5 1 , 59-60, 1 9 1 education, 1 8 7 - 8 8 employment, 3 2 , 1 5 2 energy markets, 2 6 7 , 2 7 6 future prospects, 3 2 1 G D P of, 1 7 6 , 1 9 3 geopolitics, 2 2 9 , 2 3 0 globalization, 1 4 , 3 1 , 3 4 , 123—24 health-care costs, 2 5 1 - 5 2 , 2 5 6 - 5 9 historical perspective, 1 7 5 housing prices, 1 1 8 immigration, 80 international trade, 1 8 2 - 8 3 investment, 1 8 3 job creation, 1 7 7 legal system, 1 8 7 pension system, 60, 6 1 , 6 2 , 6 3 , 65—66, 68, 1 9 1 productivity, 1 7 9 , 1 8 0 regulatory state, 1 9 2 social welfare system, 1 7 7 stock prices, 1 1 8 terrorism, 2 9 2 wages, 3 1 7 women, 1 7 8 workforce, 5 3 - 5 4 , 56, 5 8 , 1 7 7 , 1 7 8 , 1 8 7 globalization, 7 9 - 1 2 6 . See also climate change; international trade Africa, 8 4 - 8 5 China, 3 - 4 , 1 6 - 1 7 , 34> 3 > 8 5 , 1 2 7 - 2 8 , 132-48, 172, 176 climate change, 2 7 8 - 8 4 corporations, 8 6 - 9 7 economic ramifications of, 8 - 1 7 energy markets, 2 5 - 2 7 , 2 6 6 - 7 3 features of, 79—81 France, 1 4 , 3 0 - 3 1 , 3 4 , 1 2 3 - 2 4 future prospects, 1 2 4 - 2 6 , 1 8 8 - 9 5 , 315-21 geopolitics, 17—22, 220—23 Germany, 1 4 , 3 1 , 3 4 , 1 2 3 - 2 4 health care, 2 4 7 - 4 8 historical perspective, 2 impact of, 3 India, 1 7 , n o , 1 6 0 - 7 2 inequality, 2 2 - 2 3 , inflation, 1 1 6 - 1 7 information technology, 3 0 9 - 1 3 8

1

1

0

interactions of, 3 0 - 4 0 investment, 1 0 6 - 2 4 Ireland, 3 3 - 3 4 , 1 7 6 , 1 9 9 - 2 0 2 Italy, 3 4 , 1 2 3 Japan, 1 4 , 3 1 - 3 4 , 1 7 5 - 7 7 , 1 8 5 - 8 8 job creation, 1 0 9 - 1 1 Latin America, 8 5 , 86 manufacturing, 1 0 - 1 1 Mexico, 86 migration (internal), 98 military spending, 4 outsourcing, 97—106 politics, 9, 1 1 , 3 2 - 3 3 production and consumption functions, 81-86 productivity, 1 2 - 1 3 , 3 1 , 1 9 1 public health, 2 3 - 2 5 regulatory state, 3 1 - 3 2 Russia, 1 5 7 - 6 0 South Korea, 1 7 6 , 2 0 2 - 1 3 state-owned enterprises, 1 0 Sweden, 3 3 Taiwan, 83 technology, 8, 1 7 2 - 7 3 , 3 0 2 - 3 terrorism, 287—90 United Kingdom, 1 4 , 1 5 , 1 2 4 United States, 3 - 4 , 1 4 , 1 5 - 1 6 , 3 4 , 129-32, 149-57 Goldstein, Lyle, 2 3 8 Gorbachev, Mikhail, 3 4 Gore, Albert Arnold, Jr., 2 2 8 , 2 7 9 - 8 0 Great Britain. See United Kingdom Great Depression, 4 5 Greece, energy markets, 2 7 7 Green, Michael, 2 3 8 Greenfield, Susan, 3 0 Greenspan, Alan, n o , 1 1 3 , 208, 209 Haiti, 2 2 4 Hale, David, 1 3 9 Hamas, 2 8 9 Harvard Business Review, 3 1 0 Haseltine, William, 30 health care. See also demography; pension systems; pharmaceuticals; public health; social welfare systems biotechnology, 3 0 6 - 9 China, 1 3 5 , 1 4 6 , 2 4 9 , 2 6 3 - 6 6 corporations, 95—96 cost projections, 2 5 1 - 5 6 crisis in, 2 4 7 - 4 9 demography, 4 - 5 , 2 4 7 , 2 5 2 - 5 3 , 257,262 France, 251—59 Germany, 2 5 1 - 5 9 , 2 5 6 - 5 9 globalization, 1 2 — 1 3 , 3 5 > 4 7 4 8 Japan, 2 4 8 , 2 4 9 , 2 5 2 , 2 5 9 - 6 3 medical tourism, 1 0 2 - 3 2

— 2

2

—

INDEX

350 health care (continued) politics, 2 4 - 2 5 , 2 4 8 , 2 4 9 , 2 5 2 , 2 5 8 - 5 9 , 261, 262, 264-65 Russia, 2 3 1 - 3 2 technology, 2 4 , 2 9 - 3 0 , 1 3 1 , 2 4 7 - 4 8 , 253-54, 286-87 United Kingdom, 2 4 8 , 2 5 1 - 5 2 , 2 5 9 - 6 3 United States, 7 7 , 1 3 0 - 3 1 , 2 4 9 , 2 5 1 - 5 9 Hegghammer, Thomas, 300 Hezbollah, 289 hours of labor, productivity, 178—79 housing price bubble, 1 1 7 — 1 8 Hu Jintao, 1 4 5 - 4 6 , 2 3 5 , 2 4 1 human genome project, 306—7 Hungary, 1 5 8 , 2 7 6 Hurricane Katrina, energy markets, 2 7 2 Hussein, Saddam, 2 2 4 , 2 3 0 hydrogen fuel cells, 2 6 , 305 Iijima, Sumio, 2 9 immigration. See also migration (internal) demography, 3 Europe, 50, 80, 1 9 2 internal migration, globalization, 98 Ireland, 2 0 1 outsourcing, 1 0 2 United States, 6, 50, 5 1 , 1 3 1 , 1 5 3 India automobile industry, 1 6 5 - 6 6 capital markets, 1 2 0 climate change, 2 7 9 , 2 8 1 corporations, 90 demography, 1 7 1 - 7 2 education, 1 6 6 - 6 7 electrical power, 1 6 3 energy markets, 2 5 , 2 6 , 267 globalization, 1 7 , 1 1 0 , 1 6 0 - 7 2 information technology, 1 5 5 , 167—69 infrastructure, 1 6 2 - 6 3 intellectual property rights, 1 6 7 international trade, 9, 4 8 investment in, 1 6 2 , 164—65 legal system, 1 6 2 - 6 3 , 7 migration (internal), 98 motion picture industry, 1 6 9 - 7 0 nuclear proliferation, 2 2 1 , 2 2 3 outsourcing, 1 0 1 , 1 0 4 , 1 7 1 pharmaceuticals, 1 6 6 , 1 6 7 politics, 161—62, 163—64 regulatory state, 1 6 2 state-owned enterprises, 1 0 technology, 1 6 1 , 1 6 6 - 6 9 wages, 8 3 , 1 0 2 , 1 6 1 workforce, 1 6 1 , 166—67, 1 6 8 World Trade Organization ( W T O ) , 10 Indian Point nuclear power plant (New York), 294 I

I

Indonesia, migration (internal), 98 inequality. See also class structure China, 1 3 4 - 3 5 , 1 3 8 , 1 4 1 future prospects, 3 1 8 globalization, 2 2 - 2 3 , Korea, 207 South Korea, 207 inflation, globalization, 1 1 6 — 1 7 , 3 1 7 influenza epidemic ( 1 9 1 8 - 1 9 1 9 ) , 4, 4 5 , 1 2 5 information technology. See also technology advances in, 309—13 capital markets, 1 1 2 China, 9 3 , 1 5 5 , 2 1 7 corporations, 9 2 - 9 3 , 96 education, 1 0 1 - 2 globalization, 3 0 9 - 1 3 India, 1 5 5 , 1 6 7 - 6 9 investment in, 3 1 Japan, 1 5 2 - 5 3 Latin America, 3 1 3 outsourcing, 9 9 - 1 0 0 , 1 0 1 , 1 0 3 - 4 productivity, 105—6 regulatory state, 1 8 6 - 8 7 South Korea, 208, 2 1 1 - 1 2 terrorism, 2 2 7 - 2 8 , 2 9 2 - 9 3 United States, 1 5 2 - 5 4 , 2 1 6 - 1 7 infrastructure China, 3 7 - 3 8 , 8 3 , 1 3 8 - 3 9 , 1 4 2 , 145-46 globalization, 83 India, 1 6 2 - 6 3 South Korea, 203 innovation corporations, 92 Europe, 1 8 0 - 8 1 future prospects, 1 8 9 - 9 0 Japan, 1 8 0 - 8 1 , 1 8 5 , 1 8 6 South Korea, 208 technology, 2 9 - 3 0 , 2 8 6 - 8 7 , 3 ° - 3 United States, 1 2 7 , 2 1 6 - 1 7 , 3 0 2 - 3 intangible assets, corporations, 88, 9 1 - 9 3 intellectual property rights China, 1 4 2 , 1 4 6 corporations, 88, 9 1 - 9 3 geopolitics, 1 8 - 1 9 , 2 0 - 2 1 , 1 2 2 India, 1 6 7 WIPO, 1 8 - 1 9 , 167, 2 1 8 interest rates capital markets, 1 1 5 - 1 6 , 1 2 1 - 2 2 , 140 consumption rates, 1 1 7 United Kingdom, 1 1 6 International Association of Atomic Energy, 2 2 2 International Energy Agency (Paris, France), 270,272 international finance, United States, 8 - 9 1

1

0

2

I

351

INDEX International Labor Organization (ILO), 107 International Monetary Fund (IMF), 1 8 - 1 9 , 1 1 5 - 1 6 , 2 0 8 - 9 , 8 , 300 international trade. See also capital markets; energy markets; globalization; investment Africa, 9 capital markets, 1 1 8 - 2 4 China, 9, 48, 1 0 7 , n o , 1 3 3 - 3 4 , 1 4 6 - 4 7 , 1 8 2 , 2 3 5 - 3 6 , 239 Cold War, 9, 48, 1 4 9 Europe, 9, 1 4 , 1 4 9 , 1 8 2 - 8 4 Germany, 1 8 2 - 8 3 historical perspective, 8 1 - 8 2 , 1 3 5 India, 9, 48 Ireland, 200 Italy, 1 4 9 Japan, 9, 1 4 9 , 1 8 2 Latin America, 9 protectionism, 1 2 4 - 2 5 rates of, 7 9 , 8 1 South Korea, 2 0 5 - 6 , 2 1 2 United Kingdom, 1 4 9 , 1 8 2 - 8 3 United States, 9, 4 7 - 4 8 , 8 1 , 1 3 1 - 3 2 , 140, 1 4 8 - 5 7 , 1 8 2 , 2 1 6 warfare, 20, 220—23 Internet. See information technology investment. See also capital markets capital markets, 1 1 1 - 2 4 China, 1 4 - 1 5 , 1 3 3 - 3 4 , 1 3 7 , 1 3 8 - 3 9 , 150, 1 6 2 , 183, 2 3 9 - 4 0 , 3 1 6 Czech Republic, 1 5 8 demography, 4 8 - 4 9 energy markets, 267—68 Europe, 1 4 , 1 8 3 future prospects, 1 8 9 Germany, 1 8 3 globalization, 1 0 6 - 2 4 Hungary, 1 5 8 India, 1 6 2 , 1 6 4 - 6 5 Ireland, 1 9 6 , 1 9 7 Japan, 1 8 4 - 8 5 , 1 9 4 Poland, 1 6 2 protectionism, 1 2 4 - 2 5 research and development, 153—54 Russia, 1 5 8 , 1 5 9 , 2 3 1 South Korea, 2 0 3 , 206, 2 0 8 - 9 , 2 1 1 terrorism, 292 United Kingdom, 1 8 3 wages, 106—8, 1 1 0 — 1 1 workforce, 109 World Trade Organization (WTO), 1 0 - 1 1 Iran energy markets, 2 7 , 2 7 0 , 3 0 1 geopolitics, 2 2 5 2 I

Iraq War, 2 2 9 nuclear proliferation, 2 2 2 , 2 2 3 , 2 2 4 , 2 3 7 Iraq War, 2 2 3 , 2 2 4 - 2 5 financing of, 68 geopolitics, 2 4 1 - 4 5 Japan, 2 4 0 , 2 4 2 terrorism, 290 Ireland, 1 9 5 - 2 0 2 , 2 1 2 budgets, 1 9 8 - 9 9 demography, 7, 5 1 , 1 9 8 education, 1 9 6 , 1 9 7 employment, 1 5 2 energy markets, 2 6 7 financial services, 200 future prospects, 3 1 5 G D P of, 1 9 5 - 9 6 globalization, 3 3 - 3 4 , 1 7 6 , 1 9 9 - 2 0 2 immigration, 2 0 1 international trade, 200 investment in, 1 9 6 , 1 9 7 outsourcing, 1 0 1 pension system, 6 1 , 6 2 , 64, 68—69, politics, 1 9 6 - 9 7 productivity, 201—2 technology, 197—98, 199—200 terrorism, 2 9 2 wages, 1 9 6 workforce, 1 9 6 Islamic fundamentalism Chechnya, 2 3 0 China, 2 3 6 corporations, 94 energy markets, 2 6 - 2 7 , 2 7 1 geopolitics, 2 8 - 2 9 Islamic terrorism contrasted, 2 7 - 2 8 nation-state seizure, 299—302 Saudi Arabia, 29, 1 2 5 , 2 8 9 , 2 9 9 - 3 0 1 terrorism, 287—90 Islamic terrorism. See also A l Qaeda; nuclear terrorism; terrorism geopolitics, 1 9 globalization, 1 2 5 Islamic fundamentalism contrasted, 27-28 political agenda of, 2 8 war on terror, 287—90 Israel, 1 0 1 , 2 9 2 Italy demography, 4 3 , 5 1 , 5 9 - 6 0 , 1 9 1 energy markets, 2 7 6 geopolitics, 2 2 9 , 2 3 0 globalization, 3 4 , 1 2 3 international trade, 1 4 9 job creation, 1 7 7 pension system, 60, 6 2 , 6 3 , 6 5 - 6 6 , 68 social welfare system, 1 7 7 stock prices, 1 1 8 2

0

1

INDEX

352 Italy (continued) terrorism, 2 9 2 women, 1 7 8 workforce, 5 3 - 5 4 , 5 7 , 5 8 , 1 5 6 , 1 7 7 , 1 7 8 Japan bubble economy collapse ( 1 9 9 0 s ) , 1 9 3 capital markets, 1 1 2 - 1 3 , 4 > , 5® China, 3 3 , 2 3 8 , 2 3 9 - 4 0 , 2 7 5 - 7 6 consumption, 1 2 3 demography, 3 , 7, 30, 4 2 , 4 7 , 4 8 , 5 1 , 59-60, 70, 1 9 1 , 262 education, 1 8 7 - 8 8 employment, 1 5 2 , 1 7 7 energy markets, 2 3 2 , 2 7 1 , 2 7 2 financial institutions, 1 9 4 future prospects, 1 8 8 - 9 5 , 9$-95> 3 5 GDP, 1 7 6 , 1 8 6 geopolitics, 1 9 , 2 1 , 2 4 0 globalization, 1 4 , 3 1 - 3 4 , 1 7 5 - 7 7 , 185-88 health-care costs, 2 4 8 , 2 4 9 , 2 5 2 , 259-63 historical perspective, 1 7 5 housing prices, 1 1 8 information technology, 1 5 2 - 5 3 innovation, 1 8 0 - 8 1 , 1 8 5 , 1 8 6 - 8 7 international trade, 9, 1 4 9 , 1 8 2 investment, 1 8 4 - 8 5 , 1 9 4 Iraq War, 2 4 2 job creation, 1 7 7 Korean occupation, 203 legal system, 1 8 4 - 8 5 manufacturing, 1 2 7 - 2 8 nationalism, 2 2 2 pension system, 60, 6 2 , 6 3 , 67, 69—71 politics, 1 9 3 - 9 5 problems of, 1 8 4 - 8 8 productivity, 3 1 , 1 5 7 , 1 7 8 - 8 1 , 1 8 5 protectionism, 184—85 regulatory state, 1 0 6 , 1 8 5 , 1 8 6 - 8 7 technology, 6, 1 9 4 - 9 5 terrorism in, 2 8 , 2 9 5 United States, 2 4 0 wages, 3 1 7 women, 1 7 8 workforce, 5 3 - 5 9 , 1 5 6 , 1 7 8 , 1 8 7 Jay, John, 20 Jiang Zemin, 3 6 , 1 3 6 - 3 7 Jin Guilian, 264 job creation China, 1 4 8 France, 1 7 7 , 1 9 0 - 9 1 Germany, 1 7 7 globalization, 109—11 Italy, 1 7 7 Japan, 1 7 7 n

1

l

2

2

l

J

payroll taxes, 5 7 - 5 8 United Kingdom, 1 7 7 United States, 1 2 9 - 3 0 , 1 5 2 , 1 7 7 Johnston, Alastair Iain, 2 3 8 Jones, Stephen, 308 Jordan, nuclear proliferation, 2 2 2 Juengst, Eric, 308 Julius, Deanne, 1 1 6 just-in-time inventory, 89 Kamiya, Matake, 240 Kant, Immanuel, 302 Katrina (Hurricane), energy markets, 2 7 2 Kennedy, John F., 204 Kennedy, Paul, 2 1 9 Kerry, John, 9 8 - 9 9 Khan, Salman, 1 6 9 Kim Dae-Jung, 2 0 5 , 208, 209 Kim Jong-Pil, 204 Kim Woo-Jung, 209 Kim Young Sam, 205 Kohler, Horst, 1 1 0 Koizumi, Junichiro, 1 4 , 70, 1 2 2 , 1 9 4 Kokubun, Ryosei, 1 3 6 , 1 9 5 Korea. See North Korea; South Korea Kosovo, 2 3 0 , 244 Krugman, Paul, 1 4 7 Kuwait, energy markets, 2 6 7 , 2 7 0 Kuznets, Simon, 46 Kwangju massacre, 204, 207 Kyoto protocols, 2 7 8 , 284 labor costs, payroll taxes, 5 7 - 5 8 . See also employment; workforce labor force. See workforce labor laws. See regulatory state The Lancet (medical journal), 264, 265-66 Lander, Eric, 308 language, outsourcing, 1 0 3 - 4 Latin America. See also specific Latin American nations capital markets, 1 1 2 demography, 7, 44, 46, 47 future prospects, 3 1 6 globalization, 8 5 , 86 inflation, 1 1 6 information technology, 3 1 3 international trade, 9 pension system, 67 Lau Nai-keung, 1 4 0 Lebanon, 289 legal systems. See also politics; regulatory state China, 1 3 9 , 1 4 6 France, 1 8 7 Germany, 1 8 7

INDEX l 1

India, 1 6 2 - 6 3 , l Japan, 1 8 4 - 8 5 Lenin, V. I., 3 6 life expectancy, demography, 4 - 5 , 4 8 , 49. See also demography Li Peng, 2 4 1 Lombardi, Ann, 1 0 2 Lopez, T. Joseph, 2 2 8 Lotvin, Alan, 24 Lula da Silva, Luiz Inacio, 86 Luo Gan, 1 4 5 , 2 4 1 Luxembourg, productivity, 1 7 9 Machiavelli, Niccolo, 7 4 Malaysia, 8 3 , 1 6 2 Malthus, Thomas, 5, 6, 46, 47 manufacturing China, 1 2 7 - 2 8 , 1 3 8 - 3 9 , 1 4 7 corporations, 95—96 demography, 6 globalization, 10—11 historical perspective, 1 2 8 Japan, 1 2 7 - 2 8 outsourcing, 100 wages, 107 Mao Zedong, 6, 3 5 , 36 market economy. See also capital markets; investment China, 3 5 - 3 7 , 8 2 - 8 3 corporations, 8 6 - 9 7 Latin America, 86 Russia, 9 0 - 9 1 World Trade Organization, 82 Marx, Karl, 95 McKinley, William, 2 9 1 McVeigh, Timothy, 28 medical care. See health care; pharmaceuticals; public health medical tourism, 1 0 2 - 3 megacorporations. See corporations; multinational corporations Merkel, Angela, 2 5 8 Merkle, Ralph, 305 Mexico competition, 80 energy markets, 2 6 7 , 2 7 1 globalization, 86 migration (internal), 98 wages, 83 Middle East. See also specific Middle Eastern nations China, 2 7 3 - 7 8 energy markets, 2 5 , 2 6 - 2 7 , 2 5 0 nuclear proliferation, 2 2 2 terrorism, 2 8 7 - 9 0 United States, 2 2 4 - 2 5 migration (internal), globalization, 98

military spending. See also warfare China, 4, 2 3 6 , 2 3 7 - 3 8 , 240 energy markets, 2 7 1 , 2 7 2 globalization, 4 Russia, 2 3 0 - 3 1 technology, 302—3 United States, 2 1 8 - 1 9 , 2 3 9 , 3 0 2 - 3 Moreton, Michael, 2 6 3 mortality rates. See demography motion picture industry, India, 169—70 multinational corporations globalization, 8 6 - 9 7 United States, 8 - 9 Mushraff, Pervez, 3 0 1 National Academy of Sciences (U.S.), 5 - 6 National Institutes of Health (U.S.), 307 nationalism China, 2 2 2 , 2 3 6 geopolitics, 221—22 Japan, 2 2 2 United States, 2 2 2 national security energy markets, 2 7 0 - 7 3 United States, 2 1 8 , 2 2 8 nation building, 2 4 4 nation-state seizure, terrorism, 2 9 9 - 3 0 2 natural gas. See energy markets Netherlands, 80, 89, 90 New York City terrorism attack, 2 8 , 220, 292 New York Times (newspaper), 2 5 4 , 2 6 4 Nigeria, energy markets, 2 7 , 2 7 0 9 / 1 1 terrorism attacks, 2 8 , 2 2 0 , 2 9 2 nonproliferation. See nuclear proliferation North Atlantic Treaty Organization (NATO), 2 1 9 , 2 2 4 , 2 3 0 , 2 3 1 , 2 4 4 North Korea geopolitics, 2 2 5 international trade, 4 8 nuclear proliferation, 2 2 2 , 2 2 4 , 2 2 5 , 236-37 Norway, 1 7 9 , 2 7 0 nuclear proliferation, 2 2 1 China, 2 2 4 , 2 3 6 - 3 7 future prospects, 3 1 9 India, 2 2 1 , 2 2 3 Iran, 2 2 2 , 2 2 3 , 2 2 4 , 2 3 7 North Korea, 2 2 5 nuclear terrorism, 2 9 3 , 2 9 5 - 9 7 Pakistan, 2 2 1 , 2 2 2 , 2 2 4 , 2 9 6 Russia, 295—96 Saudi Arabia, 2 2 2 , 2 2 3 Soviet Union, 2 9 5 - 9 6 threat of, 2 2 2 - 2 3 United States, 2 2 4 nuclear terrorism, 2 8 , 1 2 5 , 2 2 0 , 2 9 3 - 9 7

354

INDEX

nuclear warfare China, 2 3 7 - 3 8 geopolitics, 2 2 0 Nye, Joseph, 240 oil exporting countries. See also energy markets capital markets, 1 1 9 - 2 0 , 1 2 1 , 1 2 2 China, 273—78 energy security, 270—73 Russia, 1 5 8 oil shocks, energy markets, 2 7 0 - 7 3 Okada, Motoya, 240 Oklahoma City terrorism attack, 2 8 Organization of Petroleum Exporting Countries (OPEC), 8, 2 7 0 , 2 7 1 , 273, 292 outsourcing globalization, 80 India, 1 0 1 , 1 0 4 , 1 7 1 manufacturing, 100 protectionism, 124—25 regulatory state, 99—100 workforce, 97—106 Pakistan Islamic fundamentalism, 299, 3 0 1 nuclear proliferation, 2 2 1 , 2 2 2 , 2 2 4 , 2 9 6 Paris Club, 2 1 8 Park Chung-Lee, 2 0 3 , 204, 206, 207 payroll taxes France, 1 9 0 labor costs, 5 7 - 5 8 United States, 7 5 - 7 6 , 7 7 peak oil debate, energy markets, 2 6 8 - 6 9 . See also energy markets pension systems China, 7 1 - 7 5 , 1 2 9 , 1 4 1 , 1 4 6 demography, 5 9 - 7 8 Europe, 6 1 - 6 9 , 1 3 0 France, 60, 6 1 , 6 2 , 6 3 , 6 5 - 6 6 , 68, 1 9 1 Germany, 60, 6 1 , 6 2 , 6 3 , 6 5 - 6 6 , 68, 1 9 1 Ireland, 6 1 , 6 2 , 64, 6 8 - 6 9 , 2 0 1 Italy, 60, 6 2 , 6 3 , 6 5 - 6 6 , 68 Japan, 60, 6 2 , 6 3 , 6 7 , 6 9 - 7 1 Latin America, 67 Russia, 1 6 0 savings rates, 6 3 , 7 0 - 7 1 , 7 3 South Korea, 2 1 0 - 1 1 Spain, 68 Sweden, 60, 6 1 , 6 2 , 6 3 , 6 7 , 68 United Kingdom, 60, 6 1 , 6 2 , 6 3 , 64-65, 191 United States, 4 3 - 4 4 , 6 1 , 6 3 , 64, 69, 75-77, 130-31 Persian Gulf War ( 1 9 9 0 - 1 9 9 1 ) , 2 3 0 petroleum. See energy markets; oil exporting countries

Petroleum Intelligence Weekly ( journal), 267 pharmaceuticals. See also health care; public health corporations, 96 globalization, 2 4 7 - 4 8 India, 1 6 6 , 1 6 7 outsourcing, 100 Phoenix, Chris, 306 piecemeal outsourcing, 103—5, 124—25 Pincus, Gregory, 49 Poland, 1 0 2 , 1 5 7 , 1 6 2 politics. See also class structure; geopolitics; inequality; legal systems; regulatory state; social welfare systems I

China, 3 5 - 3 7 , i 3 5 " 3 7 , 4 ° , 1 4 1 , 144-46, 1 4 7 - 4 8 , 2 3 3 - 3 5 , 240-41 climate change, 2 7 9 - 8 0 , 2 8 3 - 8 4 demography, 6 - 8 , 4 3 - 4 4 energy markets, 249—50, 270—72 European Union, 191—92 France, 1 9 0 future prospects, 3 1 8 - 2 0 globalization, 9, n , 3 2 - 3 3 health care, 2 4 - 2 5 , 2 4 8 , 249, 2 5 2 , 258-59, 261, 262, 264-65 India, 1 6 1 - 6 2 , 1 6 3 - 6 4 Ireland, 1 9 6 - 9 7 Japan, 1 9 3 - 9 5 South Korea, 1 9 3 - 9 4 , 2 0 2 - 7 terrorism, 289—90 United States, 1 4 4 - 4 5 , 2 2 3 - 2 8 , 2 3 0 , 243,244-45 pollution, China, 1 4 3 , 2 8 3 - 8 4 Portugal, wages, 1 0 2 preemptive war, 2 4 2 - 4 5 prices, competition, 1 0 8 - 9 , 1 1 6 - 1 7 production function, globalization, 8 1 - 8 6 productivity China, 1 4 7 corporations, 9 6 - 9 7 demography, 6, 1 7 9 - 8 0 Europe, 3 1 , 1 7 8 - 8 1 France, 1 7 9 Germany, 1 7 9 , 1 8 0 globalization, 1 2 — 1 3 , 3 , 9 inflation, 1 1 7 information technology, 105—6, 311-13 Ireland, 2 0 1 - 2 Japan, 3 1 , 1 5 7 , 1 7 8 - 8 1 , 1 8 5 Russia, 1 5 9 South Korea, 2 1 1 United Kingdom, 1 7 9 United States, 3 1 , 1 5 5 - 5 7 , 8 6 , 3 1 7 wages, 1 0 9 - 1 0 profits corporations, 8 7 - 8 8 investment, 109 1

I

I

J

355

INDEX protectionism international trade, 1 2 4 - 2 5 Japan, 1 8 4 - 8 5 Korea, 205 United States, 1 2 8 public health. See also health care; pharmaceuticals biotechnology, 306—9 China, 52 demography, 4 - 5 , 6 - 7 , 49 globalization, 1 2 - 1 3 , 3 ~ 5 public spending on, 8 3 , 84 technology, 2 9 - 3 0 , 2 8 6 - 8 7 Putin, Vladimir, 1 5 8 , 1 5 9 , 1 6 0 , 2 3 1 , 268, 277 2

2

Quadrennial Defense Review Report (U.S.), 225-26 Rai, Aishwarya, 1 6 9 Rao, Cherukuri Rama, 1 7 0 Reagan, Ronald, 1 2 4 regime change, 2 4 2 - 4 5 regulatory state. See also legal systems; politics; social welfare systems China, 1 7 , 1 4 3 - 4 4 corporations, 9 1 , 9 4 - 9 5 demography, 6, 5 7 - 5 8 Europe, 86, 1 2 3 - 2 4 , 1 8 6 France, 1 9 2 Germany, 1 9 2 globalization, 3 1 - 3 2 India, 1 6 2 Japan, 1 0 6 , 1 8 5 , 1 8 6 - 8 7 outsourcing, 99—100 protectionism, 124—25 Sweden, 1 9 2 United States, 1 1 3 - 1 4 Reich, Robert, 8 7 - 8 8 research and development. See information technology; technology retirement systems. See pension systems Rhee, Syngman, 204, 206 Ribeiro, Bernie, 2 6 1 Rockefeller, John D., III, 6 Roh Tae Woo, 2 0 4 - 5 , Royal, Marie-Ségolène, 1 9 2 Rubin, Robert, 208, 209 Russia. See also Soviet Union China, 2 3 8 - 3 9 corporations, 90 demography, 21—22, 49, 159—60, 231, 232 education, 1 6 0 energy markets, 2 5 - 2 6 , 2 7 , 9 1 , 1 5 8 - 5 9 , 231, 2 3 2 - 3 3 , 250, 267-68, 2 7 0 - 7 1 , 276-78 future prospects, 3 1 9 , 3 2 1 2

0

8

GDP, 2 3 1 geopolitics, 2 1 , 2 2 5 , 2 3 0 - 3 3 , 2 7 3 - 7 8 globalization, 157—60 health care, 2 3 1 - 3 2 investment, 1 5 8 , 1 5 9 , 2 3 1 market economy, 90—91 migration (internal), 98 military spending, 230—31 nuclear proliferation, 295—96 pension system, 1 6 0 productivity, 1 5 9 stock prices, 1 1 8 United States, 2 3 0 - 3 3 wages, 1 5 8 Santorum, Rick, 7 6 Sarkozy, Nicholas, 1 4 , 1 2 4 , 1 9 0 , 1 9 1 Saudi Arabia capital markets, 1 2 2 China, 2 7 4 , 2 7 5 energy markets, 2 7 , 2 6 7 , 2 7 0 - 7 1 geopolitics, 2 2 5 , 2 2 9 Islamic fundamentalism, 2 9 , 1 2 5 , 289, 299-301 nuclear proliferation, 2 2 2 , 2 2 3 savings rates China, 1 3 3 , 1 4 1 , 1 4 6 , 264 demography, 5 4 - 5 5 pension system, 6 3 , 70—71, 7 3 United States, 1 1 9 , 1 3 1 Schroeder, Gerhard, 7 0 Schwartz, Jonathan , 3 1 0 Scoble, Robert, 309 Seattle, Washington, protests in, 1 9 Sen, Amartya, 1 7 2 Serbia, 2 4 2 Service Employees International Union, n o service industries Europe, 1 9 1 globalization, 1 1 — 1 2 outsourcing, 100—102 Shi'a Islam, 2 8 7 - 8 9 , 300 Shira law, 94 Shunguang Wang, 2 3 5 Slovakia, energy markets, 2 7 7 smallpox, bioterrorism, 2 9 8 - 9 9 Social Security system (U.S.), 4 3 - 4 4 , 69> 7 6 - 7 7 social welfare systems. See also demography; health care; pension systems; public health China, 3 8 , 1 2 9 , 1 3 5 , 1 4 1 , 1 4 5 - 4 6 Europe, 1 3 0 , 1 7 7 - 7 8 France, 1 7 7 Italy, 1 7 7 United States, 4 3 - 4 4 workforce, 5 6 - 5 7 software programming, globalization, 1 1 - 1 3

INDEX

356 Solow, Robert, 92 Soros, George, 1 2 8 South Africa, energy markets, 2 6 South Korea competition, 1 3 corporations, 90, 206 demography, 7, 4 8 , 2 1 0 - 1 1 domestic consumption, 2 0 5 , 208 education, 1 8 8 , 2 0 6 - 7 , employment, 2 1 0 equality, 207 future prospects, 209—13 GDP, 2 0 3 , 205 geopolitics, 1 9 globalization, 1 7 6 , 202—13 growth rates, 209 historical perspective, 202—4 information technology, 208, 2 1 1 — 1 2 infrastructure, 2 0 3 innovation, 208 international trade, 205—6, 2 1 2 investment, 2 0 3 , 206, 2 0 8 - 9 , migration (internal), 98 modernization, 1 5 7 , 2 0 4 - 5 pensions, 2 1 0 - 1 1 politics, 1 9 3 - 9 4 , 2 0 2 - 7 productivity, 2 1 1 reforms, 2 0 7 - 8 , 209 United States, 204, 2 3 9 wages, 2 0 3 women, 2 1 1 workforce, 2 0 7 , 2 1 0 - 1 1 South Ossetia (Georgian region), 2 3 1 Soviet Union. See also geopolitics; Russia China, 1 3 6 demography, 4 7 fall of, 9, 1 7 - 1 8 , 20, 3 5 , 3 6 , 8 2 , 1 3 6 - 3 7 , 217,219 historical perspective, 2, 3 international trade, 9 Islamic fundamentalism, 2 8 8 nuclear proliferation, 295—96 Spain, 68, 1 0 2 , 1 1 7 , 2 9 2 Spanish flu epidemic ( 1 9 1 8 — 1 9 1 9 ) , 2

1

1

2

2

1

1

4,45, * 5 state-owned enterprises China, 1 3 9 , 1 4 6 , 1 4 8 , 2 3 4 energy markets, 2 6 8 globalization, 1 0 Korea (chaebols), 2 0 7 - 8 , 209 state seizure, terrorism, 299—302 steel industry, Russia, 1 5 9 stem cell research, 3 0 8 - 9 Stern, Andy, 1 1 0 stock price bubble, 1 1 8 subsidiaries, foreign, outsourcing, 99—100 Summers, Lawrence, 1 2 0 Sun Liping, 7 4 ~ 7 5 , 3 4 2

Sunni Islam, 2 8 7 - 8 9 , 300 Sun Tzu, 2 0 3 Surdhar, Arvinder, 1 3 8 Sweden demography, 5 1 , 60 education, 1 8 8 employment, 1 5 2 globalization, 3 3 housing prices, 1 1 7 pension system, 60, 6 1 , 6 2 , 6 3 , 67, 68 regulatory state, 1 9 2 workforce, 5 3 Switzerland, corporations, 89—90 Syria, geopolitics, 2 2 5 Taiwan, 8 3 , 2 3 6 - 3 7 Taliban, 2 2 9 - 3 0 Tansey, Paul, 202 taxation. See regulatory state technology. See also information technology advances in, 2 9 - 3 0 , 2 8 6 - 8 7 , 3 ° - 3 biotechnology, 3 0 6 - 9 China, 6, 1 3 7 , 2 2 7 - 2 8 climate change, 2 8 0 - 8 2 demography, 6 globalization, 8, 1 7 2 - 7 3 , 3 0 2 - 3 health care, 2 4 , 2 9 - 3 0 , 1 3 1 , 2 4 7 - 4 8 , 253-54, 286-87 health-care costs, 1 3 1 , 2 4 7 - 4 8 , 2 5 3 - 5 4 India, 1 6 1 , 1 6 6 - 6 9 information technology, 3 0 9 - 1 3 Ireland, 1 9 7 - 9 8 , 1 9 9 - 2 0 0 Japan, 6, 194—95 military spending, 302—3 nanotechnology, 286—87, 3 ° 3 6 productivity, 3 1 United States, 6, 1 5 - 1 6 , 1 3 0 , 1 5 3 - 5 6 warfare, 2 2 6 - 2 8 World Trade Organization (WTO), 1 0 - 1 1 terrorism, 287—302. See also Al Qaeda; Islamic terrorism bioterrorism, 297—99 cyberterror, 292—93 effects of, 2 9 1 - 9 2 forms of, 2 8 , 2 8 5 - 8 6 future prospects, 3 2 0 geopolitics, 2 2 5 historical perspective, 2 9 0 - 9 1 information technology, 2 2 7 - 2 8 , 292-93 Ireland, 2 9 2 Islamic fundamentalism, 2 8 7 - 9 0 Italy, 2 9 2 nation-state seizure, 2 9 9 - 3 0 2 9 / 1 1 terrorism attacks, 2 8 , 2 2 0 , 2 9 2 nuclear terrorism, 2 8 , 1 2 5 , 2 2 0 , 2 9 3 - 9 7 Oklahoma City terrorism attack, 28 Spain, 2 9 2 2

-

I

357

INDEX technology, 2 2 6 - 2 8 Tokyo, Japan terrorism attack, 28 Thailand, 1 3 , 4 8 , 88 Thatcher, Margaret, 1 5 , 64, 6 5 , 70, 1 2 4 , 191, 193 Thomas, Bill, 7 6 Three Mile Island nuclear accident, 294 Tiananmen Square repression (Beijing, China), 2 4 1 Tibet, China, 2 3 6 Tokyo, Japan terrorism attack, 28 tourism, medical tourism, 1 0 2 - 3 Truman, Harry S., 48 Turkey, 1 1 8 , 2 7 6 Ukraine, energy markets, 2 7 7 Umberto I (king of Italy), 2 9 1 unemployment. See employment; workforce unintended consequences, geopolitics, 2 2 9 Union of Concerned Scientists, 294 United Arab Emirates, energy markets, 2 7 0 United Kingdom capital markets, 1 1 3 , 1 5 0 demography, 4 3 , 5 1 , 60 education, 1 8 7 - 8 8 , 1 9 3 employment, 1 5 2 future prospects, 1 9 3 G D P of, 1 7 6 geopolitics, 2 2 9 - 3 0 globalization, 1 4 , 1 5 , 1 2 4 health care, 2 4 8 , 2 5 1 - 5 2 , 2 5 9 - 6 3 historical perspective, 1 2 8 , 1 7 5 housing prices, 1 1 7 , 1 1 8 interest rates, 1 1 6 international trade, 1 4 9 , 1 8 2 - 8 3 investment, 1 8 3 Iraq War, 2 2 9 - 3 0 , 2 4 2 job creation, 1 7 7 outsourcing, 1 0 1 pension system, 60, 6 1 , 6 2 , 6 3 , 64-65, 191 productivity, 1 7 9 stock prices, 1 1 8 women, 1 7 8 workforce, 5 3 , 1 7 7 - 7 8 , 1 8 7 United Nations, 5 - 6 , 2 3 0 China, 2 7 3 climate change, 2 7 8 Iraq War, 2 4 2 United States advantages of, 1 3 1 - 3 2 , 1 5 1 - 5 7 capital markets, 1 1 2 - 1 4 , 1 1 8 - 2 4 , 1 2 7 , 1 3 1 , 140, 1 5 0 China, 1 1 8 - 2 4 , 1 4 0 , 2 3 3 - 4 1 climate change, 2 7 8 , 2 7 9 - 8 0 , 2 8 3 - 8 4 demography, 4 3 - 4 4 , 4 7 , 4 , 5 ° . 5 1 , 5 5 , 60, 3 1 5 8

domestic production and consumption, 1 4 9 education, 1 5 6 , 1 8 7 - 8 8 employment, n , 1 6 , 1 0 9 , 1 5 2 - 5 3 energy markets, 2 6 , 2 7 , 1 3 1 , 269, 2 7 1 - 7 2 , 2 7 1 - 7 3 , 300 future prospects, 3 1 4 , 3 1 8 - 2 1 G D P in, 1 7 6 geopolitics, 1 8 , 1 9 - 2 2 , 1 3 2 , 2 1 5 - 2 0 , 223-28 globalization, 3 - 4 , 1 4 , 1 5 - 1 6 , 3 4 , 129-32, 149-57 health care, 7 7 , 1 3 0 - 3 1 , 2 4 9 , 2 5 1 - 5 9 historical perspective, 1 2 8 , 148—49 housing prices, 1 1 7 immigration, 6, 50, 5 1 , 1 3 1 , 1 5 3 information technology, 152—54, 216-17 innovation, 1 2 7 , 2 1 6 - 1 7 , 3 0 2 - 3 interest rates, 1 1 6 , 1 2 1 - 2 2 , 1 4 0 international finance, 8—9 international trade, 9, 47—48, 8 1 , 1 3 1 - 3 2 , 140, 148-57, 182, 2 1 6 investment, 1 8 9 Iraq War, 2 4 1 - 4 5 Japan, 2 4 0 job creation, 1 2 9 - 3 0 , 1 5 2 , 1 7 7 military commands, 2 2 8 military spending, 2 1 8 - 1 9 , 2 3 9 , 3 0 2 - 3 nationalism, 2 2 2 national security, 2 1 8 , 2 2 8 nuclear proliferation, 2 2 4 outsourcing, 1 0 0 , 1 0 1 pension system, 4 3 - 4 4 , 6 1 , 6 3 , 64, 69, 75-77, 130-31 politics, 1 4 4 - 4 5 , 2 1 7 - 1 8 , 2 3 0 , 2 4 3 , 244-45 productivity, 3 1 , 1 5 5 - 5 7 , 1 8 6 , 3 1 7 regulatory state, 1 1 3 — 1 4 Russia, 2 3 0 - 3 3 savings rates, 1 1 9 , 1 3 1 Social Security system, 43—44 social welfare systems, 43—44 South Korea, 204, 2 3 9 stock prices, 1 1 8 superpower status of, 2 1 5 - 2 0 , 2 2 3 - 2 8 , 318-21 technology, 6, 1 5 - 1 6 , 1 3 0 , 1 5 3 - 5 4 , 153-56 wages, 8 3 , 1 4 9 , 1 5 1 - 5 2 , 1 7 6 , 3 1 7 war on terror, 287—90 women, 1 7 8 workforce, 1 3 1 , 1 5 1 , 1 5 2 , 1 7 8 U.S. Bureau of Labor Statistics, 1 0 0 , 107,177 value-added taxes (VATs), 60, 2 6 1 , 2 6 2 Védrine, Herbert, 2 2 9

358

INDEX

Venezuela energy markets, 2 5 - 2 6 , 2 7 , 2 7 0 , 2 7 1 geopolitics, 2 2 5 globalization, 86 Verlinsky, Yuri, 96 Vietnam War, Korea, 206

United Kingdom, 1 7 8 United States, 1 7 8 workforce, 1 7 8 workforce. See also employment; wages China, 5 8 - 5 9 , 1 3 3 , 1 4 6 demography, 7 - 8 , 5 3 - 5 9 Europe, 1 5 6

wages. See also employment; workforce China, 1 0 7 , 1 2 3 consumption, 1 2 3 Czech Republic, 1 0 2 France, 3 1 7 future prospects, 316—17 Germany, 3 1 7 globalization, 8 3 , 84 India, 8 3 , 1 0 2 , 1 6 1 investment, 106—8 Ireland, 1 9 6 Japan, 3 1 7 manufacturing, 1 0 7 Mexico, 83 outsourcing, 1 0 2 Poland, 1 0 2 Portugal, 1 0 2 productivity, 1 0 9 - 1 0 Russia, 1 5 8 South Korea, 203 Spain, 1 0 2 United States, 8 3 , 1 2 9 - 3 0 , 1 4 9 , 1 5 1 - 5 2 ,

France, 5 3 ~ 5 4 , 5 7 , 5 » , 1 5 6 , 1 7 7 . 178,187 future prospects, 1 8 9 - 9 0 Germany, 5 3 - 5 4 , 56, 5 8 , 1 7 7 , 1 7 8 , globalization, 83 immigration, 80 India, 1 6 1 , 1 6 6 - 6 7 , $ 8 investment, 109 Ireland, 1 9 6 Italy, 5 3 - 5 4 , 5 7 , 5 8 , 1 5 6 , 1 7 7 . 1 7 8 Japan, 5 3 - 5 9 , 1 5 6 , 1 7 8 , 1 8 7 outsourcing, 97—106 pension system, 5 9 - 7 8 social welfare systems, 56—57 South Korea, 2 0 7 , 2 1 0 - 1 1 Sweden, 5 3 United Kingdom, 5 3 , 1 7 7 - 7 8 , 1 8 7 United States, 1 3 1 , 1 5 1 , 1 5 2 , 1 7 8 women, 1 7 8 World Trade Organization (WTO), IO-I 1 World Bank, 1 0 7 , 2 1 8 World Health Organization (WHO), 264,299 World Intellectual Property Organizati (WIPO), 1 8 - 1 9 , 1 6 7 , 2 1 8 World Trade Center (New York City) terrorism attack, 2 8 , 2 2 0 , 292 World Trade Organization (WTO), 2 establishment of, 9 - 1 0 , 82 geopolitics, 1 8 - 1 9 , 2 3 0 impact of, 10—11 India, 1 6 7 United States, 2 1 8 , 2 2 4 World War I, 4, 2 2 1 World War II, 4 5 , 2 4 2 Wujinglian, 1 4 1

176, 317 Wagoner, Richard, 1 8 6 Wahhabism, 2 8 8 - 9 0 , 289, 300 The Wall Street Journal (newspaper), 99 Walt, Stephen, 2 1 5 , 2 2 9 Walter, Norbert, 1 6 0 Walton, Sam, 3 1 Wangjisi, 2 3 7 warfare. See also military spending asymmetrical, 2 2 4 - 2 5 , 2 2 6 , 286 cyber warfare, 227—28 geopolitics, 19—20, 220—23 international trade, 20, 220—23 technology, 226—28 United States, 1 8 , 68 Warsaw Pact, 2 1 9 , 2 2 4 , 2 3 1 welfare state. See health care; pension systems; public health; social welfare systems Wen Jiabao, 7 5 , 1 4 5 , 2 4 1 Whitaker, Thomas Ken, 1 9 7 women demography, 4 8 - 4 9 France, 1 7 8 Germany, 1 7 8 Italy, 1 7 8 Japan, 1 7 8 South Korea, 2 1 1

l (

Xinjiang (Chinese province), 2 3 6 , 3 0 1 Yeltsin, Boris, 2 3 0 Zealots of Judea, 290, 2 9 1 Zeng Qinghong, 1 4 5 Zettl, Alex, 305 Zhang Lijun, 284 Zhou Enlai, 2 3 3 Zhou Yongkang, 7 4 , 1 4 1 , 2 3 4 , 2 3 5 Zhou Ziyang, 2 4 1 Zhu Rongj, 2 4 1