Magazines: As the One World Turns

The global economy is a lot more complicated than conspiracy theorists predicted.


Twenty-five years ago the conspiratologists of the right and left had competing theories of what would happen to the world economy. The right-wingers were worried about "one-worlders" who would use the United Nations to chain America in the bonds of world government. It was unclear who these one-worlders were, or what power they had, since it was a first principle of right-wing eschatology that all changes the conspiracy theorists did not like—communist advances in Southeast Asia, the New York Mets' winning the World Series—were the fault of the nefarious "insiders" who wanted America enslaved under a world government that they would secretly control.

The left, for its part, was busily blaming multinational corporations for the plight of the Third World. These multinationalists were the Cheshire cats of commerce, all teeth and no face. They were supposedly gobbling up Third World economies—Botswana for breakfast, Brazil for brunch, Sierra Leone for a snack—at a fearsome pace. These corporations were, in left-wing theology, stoppable only by revolution.

These competing visions have been proven partially true. The world in 1994 is closer to being "one world" than in 1969, but this global integration is due to corporations, including multinational ones, not to governments or "insiders." It's hard to imagine any command that the Council on Foreign Relations or the Trilateral Commission might give that would cause thousands of East Germans to smash the Berlin Wall. And while these multinational corporations are powerful, the falling cost of information and computer power has done more to change the world than any activity of a big enterprise.

In the December 13 Fortune, Thomas A. Stewart compiles some interesting statistics on how the falling cost of information has affected the world economy. Some examples:

• The number of international telephone calls to and from the United States quadrupled between 1981 and 1991.

• The amount of computer power in the world (measured in millions of instructions per second) tripled between 1988 and 1992.

• U.S. corporate investment in foreign companies increased by 35 percent between 1987 and 1992, to $776 billion.

• Foreign direct investment in American firms more than doubled in the same time period, reaching $692 billion.

• In 1991, for the first time, American firms spent more for communications equipment and computers than they did for such traditional improvements as new machinery and new construction.

• For the last 20 years, the amount of energy needed to produce 1 percent of a nation's gross national product has fallen, on average, by 2 percent a year.

These changes, says Stewart, do not just mean the end of thousands of middle-management jobs; they also mark the end of traditional methods of distribution. General Electric's lighting division, for example, closed 26 of its 34 warehouses since 1987. "In effect," Stewart writes, "those buildings and stockpiles—physical assets—have been replaced by networks and databases—intellectual assets."

In the Winter Media Studies Journal, Walter B. Wriston, the former CEO of Citicorp, predicts that this shift to information-based capitalism will mean a gradual end to trade barriers and to war. "The pathways open to the transformation of data and information are now so prolix as to make national borders totally porous," Wriston writes. "Intellectual capital will go where it is wanted and stay where it is well treated. Any teen-age computer nerd knows this."

"The Information Standard," says Wriston, "has replaced the Gold Standard." With information as the standard by which wealth is measured, he argues, there will be less need to conquer territory, since such an act will not give the expanding power any better information than it had before. And if a country attempts a policy of economic autarky, "the giant vote-counting machine that is the global market" will cause that nation's currency to plummet in value, ensuring that "central-bank intervention is doomed to expensive failure as the size and speed of the market overwhelms governments. Governments do not welcome the Information Standard any more than absolute monarchs embraced universal suffrage."

Perhaps Wriston is too optimistic, but it's clear that better communications will do more for Third World countries than simply allow them to see endless episodes of Laverne and Shirley and Dallas. In the November Harvard Business Review, Sam Pitroda describes his efforts to make sure the people of India could gain access to telephones.

After Pitroda immigrated to America from India when he was 21, he became a millionaire by developing over 50 patents for "digital switches"—the devices that enable telephone calls to travel from one phone to another. Having built a company and sold it to Rockwell International, Pitroda vowed to return to his homeland and try to improve India's phone system.

When Pitroda went back to India in 1981, he found that the Indian telephone system was not only state-owned but excessively bureaucratic: One bureaucrat supervising every 10 telephones. After years of cutting through red tape, Pitroda was finally able to install an experimental 100-line exchange in a town of 5,000 that previously had no telephone service.

The result was an economic boom, as truck owners could see where their drivers were and farmers could call other cities and compare prices of products. Six months after the telephone was introduced, bank deposits increased by 80 percent. But daily life also improved, as people could now easily call a doctor, complain to a politician, or buy textbooks for the schools.

Pitroda predicts that installing a telephone in every one of India's 600,000 villages will produce similarly dramatic changes. Not only will modern telecommunications stimulate growth and entrepreneurship, says Pitroda, but better information technologies "can help destroy exploitation in the developing world." Pitroda sees an India with modern telecommunications as a nation that will no longer need to have children working long hours at unskilled jobs. And politicians will be less likely to engage in corruption if someone can easily use a telephone to complain to the local newspaper.

"With telecommunications networks now spreading across the Second and Third Worlds," Pitroda writes, "I believe that no amount of effort can put information back in the hands of the few, to be isolated, concentrated, and controlled."

So if Wriston and Pitroda are right, the world, thanks to the expanding communications network, is becoming more democratic and wealthier. But not all futurologists are as optimistic. Edward Luttwak of the Center for Strategic and International Studies, for example, is wallowing in gloom and despair.

In the January Across the Board, Luttwak extrapolates from current trends and predicts that by 2020 America will have become a member of the Third World. Not only have European and Japanese competitors surpassed the American growth rate, Luttwak argues, they will do better than America because of our poor schools and a lack of will to overcome competition.

As America's economy declines, Luttwak predicts, "the politics of racist, xenophobic, or class resentment can more honestly gain votes." U.S. universities will grovel to Japanese and European mandarins for grants. And by 2020, "most Americans will be able to travel to Europe only as casual labor, just as the poor of Latin America and the Caribbean now come to California and Florida as stoop labor for the harvest and in search of menial jobs."

One wonders what, exactly, is so admirable about the advanced welfare states of Europe, given the stagnation, malaise, and high unemployment in these nations. But there is a more fundamental reason to question Luttwak's analysis: Is there any evidence that the nations of the world do in fact compete with one another?

In a hard-hitting article in the March Foreign Affairs, MIT economist Paul Krugman argues that "competitiveness is a meaningless word when applied to national economies. And the obsession with competitiveness is both wrong and dangerous."

American policy makers, Krugman contends, are obsessed with competitiveness for three reasons. First, "competitive images are exciting, and thrills sell tickets." A book promising scary revelations about America's decline sells much better than one that says things aren't bad. And think tanks promising their contributors that they will find the cure for economic malaise get more contributions than ones that tell potential donors that they don't need to fret about foreign rivals.

Second, it's much easier for a government leader to blame foreigners for economic misery rather than suggest that their own policies might have something to do with the problem. Last June, for example, European Union leader Jacques Delors made a speech in Copenhagen in which he blamed the stagnating economies of the E.U. member states not on generous unemployment or hefty welfare benefits but on an alleged deficiency in infrastructure and high technology that could only be remedied with massive government programs. "Delors had to say something at the summit," Krugman writes, "yet to say anything that addressed the real roots of European unemployment would have involved huge political risks." So by blaming the Japanese and the Americans for Europe's plight, Delors could evade the real causes of Europe's economic decline.

As Krugman observes, President Clinton's statement that America is "like a big corporation competing in the global marketplace" is misleading, because governments cannot lose an economic contest with another government. A corporation that fails to please its customers merges or goes bankrupt, whereas a government that causes an economy to stagnate still collects taxes. Governments can still go to war, but that's an unlikely option between wealthy democracies. And most statistics that claim to measure "competitiveness" do nothing of the sort; a nation can have big trade surpluses, for example, and a sick economy. Mexico artificially created trade surpluses in the 1980s because this was the only way to pay the national debt. But as the Mexican economy revived, foreign investment in Mexico increased—resulting in trade deficits. These deficits, Krugman argues, are evidence not of malaise but of Mexican economic health.

So instead of thinking of the global economy as a battlefield, the world's leaders should practice cooperation. Instead of invoking protectionist schemes, they should cut taxes, budgets, and tariffs to stimulate economic growth. The best way to preserve time-honored national industries is to make sure that people in other nations have enough leisure, education, and disposable income to try something new. The wealthier and more educated you are, after all, the more likely you are to see a subtitled movie, buy a nice wine from a small French or Italian vineyard, or order a made-to-measure suit from a tailor in London or Hong Kong.

The global economy will change dramatically in the next decade, but the available evidence suggests that these changes will make our lives better, not worse. We shouldn't whine about these changes or create scary—and false—conspiracy theories about how America will be crushed by the multinationals, the Japanese, or the "insiders." Embracing the future with the traditional American faith in entrepreneurship, self-reliance, and free trade is a far better way to adapt to the changing world economy than wallowing in fear, protectionism, and gloom.

Contributing Editor Martin Morse Wooster is a visiting fellow at the Capital Research Center. His book Angry Classrooms, Vacant Minds: What's Happened to Our High Schools was recently published by the Pacific Research Institute.