In This Review
The Lexus and the Olive Tree
At a time when terms like "global glut" and "commodity-price deflation" are on the tip of every tongue, competent economic journalism may be the one commodity still in short supply. All too often, journalists are assigned to the economics desk even if their only experience lies in domestic politics or foreign policy. The top journalism schools claim to be turning out graduates literate in economics, but a semester or two of instruction is hardly adequate for grasping the complexity of modern markets. For their part, economists writing for a broad audience tend to get bogged down in technicalities and lose sight of the big picture.
Thomas L. Friedman is the exception. With a background in foreign affairs, two Pulitzer Prizes, and a National Book Award-winning book on the Middle East under his belt, he redefined the "Foreign Affairs" column of The New York Times by covering the intersection of economics and foreign policy. "Sure, I'm honored to be asked to serve as foreign affairs columnist for The Times," we can imagine him saying upon being given the beat. "But what exactly am I supposed to write about? For my predecessors, the answer was the Cold War. If it mattered for the Cold War, it mattered for their readers, and their task was to explain how and why. Now that the Cold War is history, everything is fair game. What is my technique for finding order in this chaotic world?"
The metastory, Friedman quickly came to see, was globalization. It may now be obvious that historians will look back on the 1990s as the decade of globalization, but this was less than apparent, even to "informed opinion," only a few years ago. Friedman's columns have done much to transform this state of affairs. Through strategic use of the anecdote and the medium of the travelogue, he has brought home the sweeping impact of globalization on the most remote corners of the world. If it's Monday, Friedman must be in Albania; if it's Tuesday, he must be in Zambia. One envies his frequent flyer account and his battery life.
Although there is nothing startling about the author's theme of the impact of global markets on the post-Cold War world, it is hard to think of another book that succeeds so fully in drawing out the implications. Francis Fukuyama's The End of History and the Last Man identified liberalism as the foundational ideology of the post-Cold War age and market capitalism as its economic superstructure but failed to imagine the world they would create. Daniel Yergin and Joseph Stanislaw's The Commanding Heights emphasized the challenge of global markets for the state but did not anticipate the scope for instability in the transition from statist to market-led economics. Samuel Huntington's The Clash of Civilizations and the Remaking of World Order saw the end of the Cold War as heralding renewed ethnic and religious conflict but failed to appreciate economic interdependence as a stabilizing counterforce. The book closest to Friedman's may be William Greider's One World, Ready or Not -- whose title Friedman should have seized had his timing been better. But unlike Greider, Friedman gets the economics right. His book is a wellspring of economic common sense that will inoculate its readers against the "globaloney" so prevalent in popular discussions of the subject. One can only hope that, despite its ungainly title, The Lexus and the Olive Tree attracts the audience it deserves.1
For Friedman, globalization is inevitable and irreversible; the forward march of technology makes it so. Governments can no longer control the flow of information now that the cell phone and satellite television have come to the most remote Indonesian village. Day-to-day economic decisions can no longer be decreed from above by corporate CEOs, much less government planning ministers, now that markets mutate with frightening speed. Finance can no longer be dominated by "white-shoe" commercial banks now that anyone can be a day trader. Capital can no longer be bottled up within borders now that billions of dollars can be moved with the click of a key. And in an age when instantaneous communications let U.S. software companies outsource product development to India, participation in global markets affords the world's poorer countries more opportunities than ever before.
None of this, Friedman says, implies that the nation-state and its distinctive social values are about to wither away. States will still continue to respond to globalization in different ways, and how they respond will determine their economic success or failure. Whether they capitalize on globalization's opportunities will depend on whether they succeed in attracting international investors, dubbed by Friedman the "Electronic Herd." And whether countries attract investors will depend in turn on their willingness to don the "Golden Straitjacket": privatizing enterprises, balancing budgets, lowering tariffs, removing restrictions on foreign investment, and eliminating subsidies for state-owned firms. At a deeper level, states' success in courting the Herd and capitalizing on globalization will depend on whether they install the institutional prerequisites for reliably functioning markets -- internationally recognized auditing and accounting standards, strong financial market regulation, clear shareholder rights, and equitable bankruptcy procedures -- in effect, whether they succeed in replacing cronyism with a culture of transparency. For all his talk about distinctive national cultures and differing responses, Friedman sees the embrace of globalization as the only route toward economic growth.
But what assurance is there that governments and societies will see the light? However distressed the French are by the Burger King on the Champs Elysees, the Taco Bell in the casbah must be even more disturbing to the average Qatari. Governments believing that the shock is too great may choose to slam their doors closed, regardless of the cost. Friedman warns that the Internet will defeat them by giving individuals other ways of reaching the outside world. (One might say that what is not allowed in through doors will come in through Windows.) Moreover, modern information technology will intensify the pressure to conform to global market standards by making it essentially costless for producers to shift activities to competing locations. For Friedman, the Internet is the agent that renders inevitable a transparent, democratic, decentralized, and market-based society.
THE OPEN SOCIETY
Friedman calls this brave new world "the dominant international system at the end of the twentieth century." His terminology is revealing; he sees globalization as a system rather than a trend or a set of policies superseding the entire Cold War system. The constituents of that old system were the rival ideologies of communism and capitalism, the technology of nuclear deterrence, and the allocation mechanisms of plan and market. So long as both plan and market were viable and developing countries could count on assistance from Moscow or Washington, they could put off modernizing their economies. But with the collapse of the Soviet Union those subsidies were withdrawn, clearing the last obstacle to the emergence of a post-Cold War international system based on the ideology of laissez faire, the culture of consumerism, and the power of finance.
The stability of that system -- its equilibrium, as an economist would have it -- rests precariously on a fragile balance of power. Most obvious is the balance between states and markets. Mahathir can rail all he wants against an international conspiracy of currency speculators, but at the end of the day he will be forced to acknowledge that Malaysia cannot keep pace unless it adopts the policies that international financial markets demand as the price of admission. India can test nuclear weapons, but doing so will disrupt its trade relations, lead Moody's to downgrade its bonds, and discourage other countries from following suit. States can adopt whatever policies they choose, but they remain captive to the discipline of the markets.
At the geopolitical level, meanwhile, lies the balance between the United States, which derives its singular strength from an economic structure uniquely suited to the information revolution, and other countries, which are less agile technologically but still able to form a collective counterweight. And at the domestic level is the increasingly even balance between the state and the individual newly empowered by information technology.
Why did the old system give way to the new? Friedman stops short of an answer. He alludes to the decline of pegged exchange rates and strict capital controls as facilitating the emergence of the global financial markets so integral to the post-Cold War system. Although he does not say why governments abandoned capital controls, he would surely answer "technology" if pressed. New information and communications technologies made it that much more difficult to stop capital flows at the border -- hence the decline of controls and the rise of capital mobility. They made it that much more costly for the Soviet Union, bent on suppressing personal freedoms, to keep pace with its American rival. Once this problem was acknowledged, Mikhail S. Gorbachev had to opt for perestroika rather than suppress the personal computer -- and a political and economic system based on compulsion was doomed. However much it smacks of technological determinism, the implication of Friedman's argument is that everything we need to know about recent history flows from the microchip.
THE RAZOR'S EDGE
Readers convinced that local culture remains a powerful antidote to global markets will object to Friedman's vision of the latter's infectious influence. As the metaphor of the Golden Straitjacket implies, he sees every country as having to conform to the same model, with little room for national variation. This may reflect his time spent in less-developed countries, which still have a long way to go in putting in place the institutional prerequisites for a market economy. But does globalization really mean that each developing country must embrace an identical set of Internet-driven institutions?
The experience of today's advanced economies suggests not. Different institutional constellations can coexist if their elements complement one another. In the United States, economic activity is shaped by a set of institutions all designed to encourage radical innovation: a university system that churns out scientists, a market-based financial system that provides venture capital to unproven technologies, generous compensation for CEOs, and a fluid labor market. These institutions work well because the operation of each is complemented by the operation of the others. In Europe, the emphasis on product quality and continuous, incremental improvement in existing technology means that efficiency is served by technical education, apprenticeship training, cohesive employers' associations that discourage competitors from poaching workers, and banks that monitor companies whose investments in innovation are hard for outsiders to assess. Again, each of these institutions works well because its operation is strengthened by the operation of the others.
Friedman would object that such institutional variation was viable once but that the speed of convergence has now been ratcheted up. His vision is a world where only U.S.-style institutions survive. Countries that resist will suffer the fate of France, whose refusal to authorize the free use of U.S. encryption technology led the frustrated head of Intel's European marketing to use a razor blade to physically excise the country from his map of the world.
Globalization may be good for the Michael Jordans and Paul Krugmans of the world, who can sell their services in a global market courtesy of satellite television and the Internet, but it is not so beneficial for the journeyman basketball player and the academic gypsy. It corrodes social cohesion not just by challenging cultural and religious values but by allowing a winner-take-all society to generate historically unprecedented inequalities. Friedman prescribes additional spending on education to give each individual the chance to become a knowledge worker. But we can give Bill Wennington all the basketball instruction in the world and he still won't become Michael Jordan. And Friedman's own arguments raise questions about the capacity of governments to fund social programs in a world of high capital mobility and cutthroat competition.
Nor does Friedman fully develop the implications of globalization for security policy. He advances the "Golden Arches" theory of international relations, noting that no two countries with McDonald's franchises have ever gone to war. He predicts that the 21st century will be the century of civil wars between social forces favoring and opposing globalization and rightly warns that financial globalization makes poorly managed economies more susceptible to economic, financial, and political meltdowns. But what this means for U.S. security policy is not clear. Although Friedman's discussion of contagion and herd behavior in financial markets is a model of clarity, he gives us little sense of the implications for international security if a financial crisis were to strike a large country with a nuclear capability and strong trade links to the rest of the world -- like China.
Finally, Friedman does not offer prescriptions to governments of developing countries for guarding against financial catastrophe other than adopting some modest institutional reforms. International financial markets, he observes, are like a live wire running into your house: although they can light and heat your home, they can also burn it down. But he says little about the kind of financial surge protectors emerging markets should install to prevent their hardware from being fried. He also offers only vague recommendations for reform of the International Monetary Fund.
But these are agendas for scholars and policymakers, not journalists, whose task is to provoke and highlight problems for academics to analyze and officials to solve. In this respect, Friedman succeeds admirably. Readers in search of a window onto the problems of the cyberspace-driven "virtual world economy" of the 21st century are unlikely to find a better place to start.
1 The Lexus, the author's favorite car, symbolizes the drive for prosperity and modernization and the growth of technology and finance. The olive tree represents the traditional values in which societies remain rooted, even in the age of global markets.