World 3.0

by Pankaj Ghemawat

  What tend to get underplayed are the ways of promoting productivity that help create the right kinds of jobs as well. Instead of an abstract account, let me focus on this point in the context of Spain, where the unemployment rate was nearly 20 percent at the end of 2010—the highest of any OECD economy. Much of this reflected the collapse in the real estate and construction sectors. But a contribution was also made by a high structural rate of unemployment due to labor market institutions that included a bewildering variety of labor contracts (44, according to the head of an employers' federation), a two-tier structure underlying them that coddled those with permanent contracts while forcing temporary contracts on the young and other newcomers to the workforce, and relatively high social overheads and costs of firing workers. In the aftermath of the financial crisis, the Spanish government did attempt to effect some changes in these labor market institutions, but with limited success.

  But other engines of productivity and jobs growth, particularly business-related ones, still hadn't gotten as much attention as of this writing. Entry continued to be discouraged by the barriers to starting a new business: according to the World Bank, Spain ranked around 150 out of roughly 180 countries in ease of doing this. And existing firms, especially small and medium enterprises, took it in the chin: the number of firms with 10 to 500 employees fell by 20 percent between 2008 and 2010 (versus 8 percent for all other firms) and although they accounted for 46 percent of total employment in 2008, they were responsible for 66 percent of the (net) jobs shed between 2008 and 2010. Many such firms collapsed for lack of working capital—while official funds earmarked for such financing reportedly sat undisbursed.

  The Spanish government seemed more focused on the country's largest enterprises. Thus, at the end of 2010, Spanish Prime Minister Zapatero invited the heads of the country's thirty-seven largest enterprises—accounting for roughly 5 percent of total employment—to a summit on refloating the Spanish economy. Subsidies and cash handouts were also primarily directed at large firms in the auto and construction sectors and seemed geared toward preserving jobs that added relatively little value on a relatively high capital base instead of facilitating changes in enterprise strategy or the creation of new jobs. The larger firms also seemed to be the primary beneficiaries of earmarks for innovation (frequently billed as “the” strategy despite its limited job creation potential in the short to medium run). The smaller firms would have done better, probably, with more of an emphasis on the diffusion of innovations, rather than just on innovation. And if all this emphasis on productivity growth seems somewhat removed from the business of job creation or preservation, remember that probably the most worrying thing about Spain is that it has experienced no growth in total factor productivity since about 2000 (maybe longer). It is hard to imagine a robust employment scenario without productivity growth picking up.

  Policies to promote productivity and protect people are, as the Spanish example suggested, mainly the purview of national governments. Governments have the ability to stimulate sophisticated demand, open up access to foreign inputs, increase firm rivalry, facilitate redeployment of resources, fund education and unemployment insurance, and so on. But many people fear that globalization is robbing governments of the flexibility to respond to the citizens' concerns, and sapping their power in favor of multinational corporations. Thus it is to worries about globalization's impact on politics and policy that we turn next.

  But before moving on, it is worth noting that it is hardly fair to conclude a discussion such as this one with an exclusive focus on jobs in rich countries. We can also do a lot more to make globalization more fair for developing countries. The plight of Haiti's rice farmers, alas, is far from unique. Cutting rich countries' agricultural trade protection would be a good step, since farmers suffer in many poor countries. Also, less emphasis might be put on trying to get the poor to pay for lifesaving drugs. Intellectual property deserves respect, but so does access to medicine. To make globalization fairer for the poor, we need to think about integration from their perspective. They need to be met partway instead of being made to conform to rules they had no part in writing and don't see as inherently legitimate.

  And while such policies can help, what we really need is a longer-term mental shift. We have expanded our circles of sympathy and trust enormously since World 0.0, but the extent of inequality that persists is shocking. One World Bank estimate indicates that by 2050, African per capita income will be in the $2,000–$4,000 range, as compared with $100,000 in the United States. Trying to worry more about absolute rather than relative income, and approaching distant people with more understanding and compassion, would take us a long way toward building a fairer, safer, and more prosperous world. How we might move ourselves in this direction is the topic we will return to in chapter 15.

  Chapter Ten

  Global Oppression

  Source: John Backderf

  RECENT CHAPTERS HAVE focused on anxieties about potential economic dysfunctions linked to globalization and greater openness. We've seen that problems such as concentration and inequality—problems relating to the economic consequences of markets not working—can occur, but also that they are not nearly as damaging as popular perceptions suggest, and that there are ways that national governments can manage them while still pursuing greater openness. Market failures are not, therefore, an insurmountable barrier to World 3.0; on the contrary, they help define the contours of a kind of limited and sensible regulation that protects us without taking us all the way back to World 1.0.

  Of course, not all fears about opening up involve market dysfunctions. The opening cartoon expresses two powerful political concerns related to globalization: the notions that the United States is taking over the world thanks to greater openness, and that corporate interests are also out of control, threatening the freedom of everyday people like you and me. While crudely expressed in the cartoon, such fears are to be encountered across the political spectrum, left, right, and center.

  This chapter argues that these dark forebodings are wildly exaggerated, if not totally disconnected from reality. It does so by examining several fears about globalization's political impact and arguing that considerations of freedom, far from preventing us from moving toward a more open World 3.0, should probably push us in that direction. It concludes by looking at what really underlies the various political complaints about globalization—and what might be done about it.

  Pax Americana?

  Isn't America taking over the world? Might not “globalization” be just another name for American transnational empire and hegemony exercised in both the military and business realms? Such fears were more prevalent before the crisis, but remain widespread.

  Let's begin with the military realm. After the demise of the Soviet Union, military power became more concentrated in the hands of the United States: in 2009, the United States accounted for nearly one-half of the world's total military expenditure, roughly seven times as much as China, which ranked second.1 But it is important to realize that such military might—hard power, in Harvard political scientist Joseph Nye's terms—is limited in its ability to bring about desired foreign policy outcomes.

  The most vivid examples of this point are Afghanistan and Iraq. The total cost of the wars there is estimated at more than $2 trillion—which represents ten times the GDP of those two countries—and yet the United States has had only partial success in meeting its objectives.2 It's worth noting too that in 2008, when Russia sent tanks into Georgia, a strong American ally in Russia's backyard, the United States found itself essentially unable to act, despite its large military. Domestic politics also severely constrain the use of American force, a fact illustrated in the United States' attempt to pacify Somalia during the early 1990s. After the embarrassing 1993 ambush of a U.S. Army Rangers force at the hands of relatively unsophisticated and ill-equipped forces fielded by local warlords, the United States wound up turning away from military intervention in those third world conflicts that we
re judged not to bear directly on U.S. national interests.

  Turning to business, we also find reason to question whether globalization really equals Americanization or American hegemony. We don't see evidence of U.S. companies being disproportionately or increasingly successful in international competition. In fact, recent decades have seen large decreases in the number of U.S. companies figuring among the world's largest and in their market shares across a broad spectrum of industries—decreases only partly explicable by exchange rate realignments. In 1971, fifty-nine of the (capitalist) world's one hundred largest manufacturing corporations were based in the United States and they accounted for 66 percent of the top one hundred's sales, proportions that were probably down already since the 1950s.3 By 2010, only thirty-two of the world's one hundred largest companies were American, and they accounted for only 34 percent of total sales.4

  In financial terms, the previous chapter already discussed the United States's negative and declining net international investment position. Other financial indicators such as share of equity market capitalization point in the same direction. And one can even make some of the same points about technology indicators such as shares of R&D, patents, PhDs granted, and foreign student enrollment. Along all these dimensions, assertions of U.S. hegemony look more dubious than they did a few decades ago.

  The possibility of collective hegemony exercised by the triad of the United States, Europe, and Japan is sometimes cited as an alternative to U.S. domination. But given the growth now being posted by China, and to a lesser extent India, and the sluggishness of the triad, this seems a particularly odd time to harp on triad power. Rather, what does seem to have affected the economic fortunes of particular nations is their degree of openness. The concentration of international trade and investment flows declined over the last two decades among relatively open economies, whereas the opposite was true of relatively closed economies.5 This is at least somewhat reassuring. It suggests that continued marginalization is more likely a product of domestic policies in relatively closed countries than an ineradicable feature of globalization.

  Looking to the future, economists are forecasting faster growth in the Chinese and Indian economies, and in emerging economies in general, than in the triad. In fact, what is being predicted for 2050 is a shift from dominance by America, Europe, and Japan to a situation where China and India are two of the world's three largest economies. This will return us roughly to where we were in 1820, when China and India represented almost half of the world's economy and the G7 just a quarter.6 And while the United States' stature as the world's lone superpower erodes, the simple arithmetic of GDP distributions suggests that neither China nor India nor anyone else will rise to take its place over the next several decades. The dominant dynamic of the next few decades, according to many observers, is likely to be one of a shift away from the much-discussed Pax Americana toward multipolarity.

  Corporate Overlords?

  Okay, so maybe no nation, not even the United States, has quite taken over the world thanks to globalization. But what about multinational companies (MNCs) as opposed to nations? Haven't the largest MNCs become larger than many countries, with far-reaching implications for national sovereignty? Note that this is an issue around superconcentration across industries, in terms of the share of national or world GDPs accounted for by a handful of companies, as opposed to industry-level concentration, measured in terms of shares of worldwide output in particular industries, which was discussed in chapter 5. While industry-level concentration raises issues of power in particular markets, superconcentration stirs concerns about economic, social, and political power on a broader front.

  As an aid to calibration, compare global levels of superconcentration with the global concentration levels of the individual industries looked at in chapter 5, which exhibited an average five-firm concentration ratio in the range of 30 percent. In 2009, the sales of all MNCs' foreign affiliates, not just the largest, accounted for an estimated 54 percent of global GDP; however, correcting this to focus on value added reduced the fraction to 11 percent of global GDP.7 And while the global sales of the world's hundred largest nonfinancial MNCs by foreign assets nominally accounted for 15 percent of global GDP,8 adjusting revenues just to focus on value added probably reduces this to less than 5 percent. And while this measure does seem to have increased in recent years, that has to be seen in the context of an earlier decline, starting in the mid-1980s.

  The value-added correction is a reminder of one of the problems of simply comparing the sales of an MNC with a country's GDP: the former has to be adjusted downward, often by more than 50 percent, whereas the latter already embodies such a correction. But there is an even more fundamental problem with comparing large businesses to governments that is exposed by considering the ways in which each of these agents influences outcomes in markets. Businesses and governments are both economic participants; they procure or provide goods and services, and they can also serve as venture partners/owners. But governments perform a second role that companies don't: they set the rules for markets, which is what tremendously expands the scope of governmental power relative to business.

  More specifically, governments force businesses (and public enterprises) to adhere to all sorts of rules as market participants, including taxes, subsidies, price/profit restrictions, disclosure requirements and other financial regulations, regulations over products and manufacturing processes, requirements that products be made with local ingredients, trade and industrial policies, requirements that companies be locally owned, policies governing competition, restrictions on company access and expansion, patent law, intellectual property right recognition, technology transfer policies, and the list goes on and on.

  Governments make all these laws; companies, along with other interested parties, can only influence their passage through the political process. And companies' degree of influence in this regard is typically limited, at least if confined to legal channels. My experience of business leaders such as the late Ken Lay of Enron has taught me to recognize that, when I (occasionally) hear companies bragging about being rule makers rather than rule takers, they may actually be talking about being rule breakers.

  To summarize, the relative sizes of companies versus governments does not, even if corrected for value added, begin to take into account government's special function and authority as a rule maker. It also ignores the other roles that governments play in markets besides economic participant and rule maker, including adjudicating disputes about the rules, insuring market risk, overseeing public investment (on a different basis, ideally, than pure profit maximization), and even representing “their” companies' interests at multilateral organizations such as the WTO.

  Openness, superimposed on a system of this sort, can boost competitive vitality in a broader sense by placing some constraints on the relationships between governments and businesses. In closed economies, more effort and money tends to be expended on lobbying politicians and government officials to try to shape public policy to provide private benefits for particular industries, companies, or individuals. As noted in chapter 4, a closed economy may dissipate a significant fraction of its potential GDP in this fashion, not just a few percentage points. Also note that most sources of nonmarket power that permit this to happen reside at the national rather than the global level, particularly in one's home country (think Enron, once again), and so are typically reduced by globalization.

  The Golden Straitjacket?

  Fears that globalization might remove room for domestic discretion in regulatory policies really resurfaced with the collapse of the centrally planned economies or (in the case of China) their movement, in some respects, toward becoming market economies. This created false perceptions of a new consensus about economic policy that was typified by works such as Francis Fukuyama's The End of History. And in this context, the “Washington Consensus,” a set of principles originally designed as the “standard” reform package for crisis-wracked developing cou
ntries, metastasized into a general recommendation of market fundamentalism for all countries. As my friend and former Harvard colleague Dani Rodrik wrote in 2006 in the authoritative Journal of Economic Literature, “‘Stabilize, privatize, and liberalize’ became the mantra of a generation of technocrats.”9

  Rodrik also formalized the notion that global competition might narrow the policy space available to national governments in terms of the “political trilemma of the world economy,” according to which deep international economic integration either requires nation-states to accept constraints on their ability to freely choose particular policies (including regulations), which curtails mass politics, or mass politics has to operate internationally, setting aside the primacy of the nation-state.10 In other words, Rodrik's point is that policy makers can pick any two of the three objectives—deep international economic integration, nation-states, and mass politics—but not all three.

  Enter Thomas Friedman with his conviction that deep international economic integration is already (almost) here with World 2.0. Given the unlikelihood, even to him (and especially now) of nation-states withering away in favor of a world government, he predicted the forces of integration (and particularly the “electronic herd” moving money around the world) would force nations to don a “Golden Straitjacket,” restricting themselves to business-friendly policies and therefore leaching mass politics at the national level of any meaningful influence on policy choices. As he apocalyptically put it, “Once your country puts on the Golden Straitjacket, its political choices get reduced to Pepsi or Coke—to slight nuances of policy, slight alterations in design to account for local traditions, some loosening here or there, but never any major deviation from the core golden rules.”11 In other words, Friedman saw deep integration and nation-states as givens, and so predicted that mass politics—the third element of the trilemma—would be marginalized.