Rising Tide: Is Growth in Emerging Markets Good for the United States?
Since the Eisenhower years the pivotal debates about America's role in the world economy have been mostly an inside-the-beltway affair. Such issues as protecting the steel or auto industries, propping up the dollar, cutting off trade with Moscow, manipulating foreign aid or pressing Japan and Europe to buy more American farm products have rarely challenged our most deeply held beliefs about economics or business. Throughout the Cold War foreign economic policy was seen as a way to strengthen the nation and its allies in the East-West competition. America's goals would be achieved by strong U.S. companies stretching their tentacles to every corner of the globe. America believed in Adam Smith and tried to convert anyone who would listen.
There have been tumultuous changes in recent years: the United States' shift from being the world's largest lender to its biggest debtor, fierce technological competition from Japan, the growing economic cohesion of the European Community, the crumbling of the Soviet empire, the crises in America's classrooms and on its city streets. Amidst all this the big question is whether the fundamental tenets of past economic policies are still correct. Two new books answer with an unambiguous "no." Written for a truly national audience, together they constitute a frontal assault on mainstream American policy. If they do not cause America to think hard about where it is headed in the coming decades, it is unlikely that anything in writing can or will.
Robert B. Reich's very first paragraph sets the tone for his thinking. "We are living through a transformation that will rearrange the politics and economics of the coming century," he says. "There will be no national products or technologies, no national corporations, no national industries. There will be no national economies. . . . All that will remain rooted within national borders are the people who comprise a nation." Is this another lesson about economic interdependence, another call for bigger and better summit meetings? Definitely not.
The Work of Nations starts with the idea that post-World War II economic policy has focused on the big American corporations-the General Motors, the Westinghouses, the Colgate Palmolives. As long as such companies were doing well, says Reich, so were American citizens. At mid-century these big firms made and sold their products in America. They reinvested profits in their own communities and throughout the nation. Together with Washington and Big Labor they worked to create an economic climate in which the middle class could steadily expand, both in size and living standards. Everything fit well together: the big companies were in the business of mass production of standardized goods-from look-alike washing machines to identical black telephones-which, in turn, required a growing work force of moderately well-educated white and blue collar workers to staff corporate bureaucracies and routine factory jobs. U.S. companies were fully supported by Uncle Sam, who relentlessly pushed other nations to lower barriers to American sales and investment and dealt a strong blow to countries that threatened the likes of Standard Oil, Kennecott Copper or United Fruit.
But now, says Reich, all this has changed. "That the strength of the American economy is synonymous with profitability and productivity of American corporations is . . . an axiom on the brink of anachronism." Why? Reich cites two developments. First is the changing nature of business among the highly competitive advanced industrialized nations. Standardized mass production is giving way to products that are custom tailored: specialty steel mills are replacing mammoth plants; one-of-a-kind machine tools are being turned out routinely; plastics are molded to order; telecommunications networks are designed for individual corporate clients. As a result big companies are breaking up into autonomous, specialized units. They are rapidly moving away from mass employment of workers with only general skills; instead they need creative specialists with extensive skills and education.
Second, many of the big companies have lost their American character. They make "composite products" like microprocessors that contain chips from South Korea, but are designed in California and financed in Germany and Japan. Whether they locate their production in Philadelphia, Düsseldorf or Osaka depends on where they find the most talented and experienced workers. Whether they invest in Wall Street, London or Tokyo depends on where the returns are highest. There is no national allegiance. "I was asked the other day about United States competitiveness," says the president of NCR Corporation in The Work of Nations, "and I replied I don't think about it at all. We at NCR think of ourselves as a globally competitive company that happens to be headquartered in the U.S."
The combination of changing labor requirements and the rootlessness of the big companies leads Reich to talk about the growing disparity of economic prospects among Americans. It used to be, he recalls, that in America a rising economic tide lifted all boats. This is no longer true. Better than looking at the tide, consider the many vessels. Those which contain the engineers, the strategic planners, the management consultants, the lawyers, the investment bankers, the accountants and the public relations experts will have smooth sailing in the years ahead because their skills will be in demand by any big company operating in the United States, be it General Electric, Siemens, Toyota or Samsung. For the others-whom Reich estimates to be 80 percent of the American population-the prospects are bleak.
If the goal of economic policy is to enhance the wealth of a broad section of the nation, Reich says, then it is wrong to focus on the profits of companies with American names, American headquarters, American senior managers and even American shareholders. Instead, the overriding policy objective should be to help the majority of Americans attain modern-day work skills, no matter who employs them. "It is not what we own that counts, it's what we do," he says. If the skills are here, investors from every continent will gravitate toward us. Good jobs with high incomes will result in a healthier tax base; this will lead to better schools, hospitals and laboratories. It would be a virtuous circle.
Robert Kuttner poses a different challenge to American orthodoxy. Whereas Reich finds traditional economic nationalism irrelevant to the well-being of most Americans, The End of Laissez Faire argues for more government control over the nation's economic policy combined with more international regulation to lend some order to the different drives of nations and to moderate mercantilism and protectionism. Kuttner is not taking aim at IBM; he is not dwelling on economic class distinctions; he is, instead, going for the jugular of America's free-market philosophy. He says, "It is high time to think seriously about the design of the post-hegemonic world, where sovereignty should be reclaimed from private institutions and where it should be pooled with new supranational institutions."
The End of Laissez Faire is based on the assumption that today's markets will not correct themselves in a way that is politically tolerable. There is either too much production or too little, as often happens in agriculture. Rollercoaster exchange rates play havoc with businesses trying to invest for the long term. New technologies such as robotics may improve manufacturing efficiency, but they can also displace jobs and destroy communities. The market must be cushioned by public intervention, says Kuttner. "The real debate is how to structure the departures from pure laissez-faire, not whether to have them."
Kuttner believes there was a time when an unbridled laissez-faire approach may have made sense for the United States-when the American economy was churning out ever higher standards of living, when American firms had free run of the global market and when economic and strategic policy were complementary weapons in the U.S. Cold War arsenal. But that era is over, he says. Economic competition has replaced military rivalry as the biggest threat to the United States, and Japan and the European Community "neither preach nor practice U.S.-style classical liberalism." Moreover, America's naïve and unilateral support of open markets has undermined the vitality of the economy. It has created a strong psychological block against close government-business cooperation and strategic economic planning, both of which he says are essential because Tokyo and Brussels are doing it. A free-market obsession has allowed massive foreign penetration without quid pro quo abroad; how, for example, could the United States have allowed foreign firms to take advantage of its deregulated telecommunications market without having equivalent access? It has led to ineffective half measures, such as import quotas for Japanese cars without a plan for Detroit's revival. America's zeal for a laissez-faire world economy-for example, in the never-ending push for more open agricultural trade or the arm-twisting of the World Bank to favor private investment over public infrastructure or the blasé attitude toward exchange rates-is a recipe for a highly volatile backlash from panicked governments desperate to regain some political control.
How would Reich and Kuttner change existing policy? Reich wants to redefine the very notion of competitiveness. Set aside concerns about the budget deficit, the trade imbalance and foreign control of U.S. technology, he says. Focus instead on the work force and build up its skills. Reich would make no distinction between U.S. and foreign firms doing business in the United States. In today's world, he says, it is becoming impossible to identify "who is them and who is us." Nationality of the firm's owners is irrelevant, says Reich; Japan's NEC does far more for America by building a new semiconductor plant in this country than does Motorola by setting up in Kyoto; an American citizen does more for the country by taking home a Honda made in Ohio than a Pontiac LeMans, because the "Japanese" car contains far more American parts and labor than the "American" one. Any U.S. government support-subsidies, tax concessions, training programs, participation in Washington-backed research and development consortia-should be conditioned not on where the company is headquartered but on the answers to questions like these: Will the firm build up the skills of American workers? Will it be bringing the latest production techniques? Will it do its most advanced research on U.S. soil?
Kuttner's skepticism about free markets leads to an organized regulatory framework for trade and finance on a global scale, with a more active role for Washington in the management of the domestic economy. He advocates a more powerful world trade organization with enlarged enforcement powers, including the ability to penalize countries that run chronic trade surpluses; the evolution of the International Monetary Fund into a global central bank; common standards for international investment, including issues such as antitrust. Kuttner would be much tougher than recent administrations in licensing American technology to foreign companies without equivalent concessions.
With respect to U.S. trade policy he is a strong supporter of "managed trade," and uses the long-standing international agreement to control trade in textiles-the Multi-Fibre Arrangement-as the general approach that could be tailored to other chronically troubled industries. For Kuttner such arrangements should not be classified as protectionist, but as more orderly ways to deal with trade problems that are not being handled in a laissez-faire way to begin with. Steel is one example. He points to the existence of a byzantine patchwork of quotas, tariffs and subsidies. He asks why these could not be rationalized so as to phase out inefficient uneconomic production, thereby giving those countries that have a comparative advantage the best shot at eventually realizing it. Semiconductors are another case. He asks why there is a government-to-government agreement between Washington and Tokyo, but nothing on a more multilateral level to deal with the inevitable problems from South Korea and Taiwan.
It is not difficult to raise serious questions about some of these ideas. Reich, for example, may exaggerate the extent to which American and foreign companies have totally globalized their businesses and shed national identities. Perhaps today's IBMs and Sonys are tomorrow's prototypes, but in the early 1990s even international giants such as American Express, Boeing, Daimler-Benz and Mitsubishi Corporation-let alone so many smaller companies-have yet to cut their national umbilical cords. This said, however, change is surely coming with mind-boggling speed: technology is evolving faster than we can write about it; regulations are crumbling in finance, communications and transportation; trade and investment across borders outstrip the ability of government to track what is really going on, let alone act effectively to deal with the trends. The 21st century will arrive long before its time.
Kuttner, on the other hand, may be overestimating the feasibility of "organizing" U.S. economic policy, let alone the world economy. He debunks what he calls the utopia of laissez-faire but replaces it with an equally idealistic vision of governments' ability to tame economic markets, pursue common objectives and share responsibilities. But here, too, his basic point is on target. America is moving-in fact, has already moved-from a world in which it could afford to treat multilateral regulation cavalierly to one in which economic collaboration should be central to U.S. interests. The question is whether we fight the trend or lead it in a direction most congenial to American goals.
The more fundamental point is that we have here two contrasting visions of the future. Reich sees business pressures creating a seamless global economy requiring policy responses that public officials have not come close to contemplating. Kuttner sees political forces putting a break on interdependence and requiring a tougher nationalism than is currently practiced. Who is right? It is a measure of the enormous uncertainties overhanging the world economy that it is impossible to say. The 1970s were dominated by unexpected swings in oil prices, the 1980s by unintended debts and deficits caused by Reaganomics. Looking ahead, the forces of global integration will be competing with such separatist tendencies as the rapid evolution of trading blocks in North America, Europe and East Asia. In the next ten years the shape of the world economy will depend on such imponderables as what happens to economic growth; on whether Washington, Tokyo and Bonn manage their emerging differences over trade and monetary policy; on whether a collapsing Soviet Union or a turbulent China creates destabilizing global ripples not yet envisioned.
Despite their different scenarios for the future, however, both authors are ringing a loud alarm about where America is heading in the next century. Reich's most devastating warning is the potential impact of gaping income inequalities that are due to the new division of labor in a sophisticated world economy. He understates the problem: "The peace of mind potentially offered by platoons of security guards, state-of-the-art alarm systems and a multitude of prisons is limited." Kuttner is worried about a "slow bleed" of the U.S. economy, a continuous decline in living standards and debilitating dependence on others for essential capital and technology. If the authors are even close in their visions, these concerns will sooner or later become America's political preoccupations, overshadowing all else.
Both writers are wrestling with the most contentious issues of the global economy today, problems that by their very nature have no clear solutions. What is the meaning of economic sovereignty? What is the right balance between national autonomy and international integration? How much freedom should be given to market forces versus regulations? That these debates are flaring simultaneously on both national and global levels makes the answers that much more elusive.
Perhaps the most fundamental issue raised is one that has been debated since the Articles of Confederation: the balance between public and private interests. Reich is hoping that Americans can rebuild a sense of community around a new idea of public concern for the 80 percent of the population that is losing out. Kuttner is pleading for Washington to adopt a policy of active strategic intervention in the economy. Each is deeply bothered by recent administrations and congresses that seem to have defined the public interest with little relation to the world around it, either with regard to the work force or the nature of foreign competition.
Whether the authors' projections are a bit off, whether their proposals are in 1991 politically impractical, whether they are asking for too much or too little from government, does it really matter? In their call for a rethinking of the purpose of U.S. foreign economic policy as a new era beckons, in their concern for how America should deal with awesome economic rivals with different political and economic systems, in the connection they make between America's eroding position in the global economy and its explosive social problems and, most of all, in their conviction that the new world order begins not in the Persian Gulf or the GATT but here at home-in all these matters, how could they possibly be wrong?