New Growth Theory and Friedman's "Flat Earth"

Here's an interview with Thomas Friedman in Yale Global Online (18 April 2005). Some quotes, with the issues I see in them italicised:

Lean thinking:

Wal-Mart doesn't make anything. But what they do is draw products from all over the world and get them into stores at incredibly low prices. How do they do that? Through a global supply chain that has been designed down to the last atom of efficiency. So as you take an item off the shelf in New Haven, Connecticut, another of that item will immediately be made of that item in Xianjin, China. So there's perfect knowledge and transparency throughout that supply chain.

International trade vs local social costs:

The consumer in me loves Wal-Mart... And not just me... Some lower-income people are stretching their dollars further because of Wal-Mart...The shareholder in me... loves Wal-Mart... The citizen in me... hates Wal-Mart, because they only cover some 40 percent of their employees with health care... [For the rest,] we tax-payers pay their health care. And the neighbor in me... is very disturbed about Wal-Mart. Disturbed about stories about how they've discriminated against women, disturbed about stories that they've locked employees into their stores overnight, disturbed about how they pay some of their employees. So... I've got multiple identity disorder, because the shareholder and the consumer in me feels one thing, and the citizen and the neighbor in me feel something quite different.

New Growth Theory issues:

What is the mix of assets you need to thrive in a flat world? Money, jobs, and opportunity in the flat world will go to the countries with the best infrastructure, the best education system that produces the most educated work force, the most investor-friendly laws, and the best environment. You put those four things together: quality of environment that attracts knowledgeable people, investment laws that encourage entrepreneurship, education, and infrastructure. So that's really where, in a flat world, the money is going to go.

And I don't really believe much in foreign aid because I think, at the end of the day, that's not how countries grow and get rich. But to the extent that you are going to give foreign aid, it should be to inspire, encourage, and help develop one of those four pillars for whatever developing country you're dealing with. But I do believe in trade, not aid. I think that axiom still applies, even more so in a flat world.

Security:

The flat world is a friend of Infosys and of Al-Qaeda. It's a friend of IBM and of Islamic jihad. Because these networks go both ways. And one thing we know about the bad guys: They're early adopters...

Trade, nationalism and peace:

...what I call the "Dell Theory" – you know, Dell Computers. The Dell Theory says that no two countries that are part of the same global supply chain will ever fight a war as long as they're each still part of that supply chain... here's what I predict: If you do go to war and you're part of one these supply-chains, whatever price you think you're going to pay, you're going to pay ten times more. Once you lose your spot in the supply chain because you've gone to war, the supply chain doesn't come back real soon. They're not going to. Fool me once, shame on you; fool me twice, shame on me. That's why you really risk a lot. And that's why these supply chains now really mean a lot. They're the new restraints.

Anti-globalization:

The anti-globalization movement ... is basically dead today – because China and India have embraced this process and this project... The anti-globalization movement... [are] all still talking about the IMF and the World Bank and conditionality – as if globalization is all about what the IMF and World Bank impose and force on the developing world. Well when the world is flat, there's a lot more globalization that's about pull. This is people in the developing world – in China, Russia, India, Brazil – wanting to pull down these opportunities.

Intellectual property rights:

Look at what happened in [India] with intellectual property law... there's no question that we did want India to have intellectual property protection to protect our products... But what it turned out was that a lot of Indians wanted it as well because they become innovators themselves. They are now plug-and-playing in this world and they want the intellectual property protections for their innovations.

Failure of Western technical education:

There is a crisis. We're not producing in this country, in America, enough young people going into science and technology and engineering – the fields that are going to be essential for entrepreneurship and innovation in the 21st Century. So we're at a crisis – it's a quiet crisis, as Shirley Ann Jackson from the Rensselaer Polytechnical Institute says. If we don't do something about it, then in 10 to 15 years from now this quiet crisis will be a very big crisis. And that's why my friend Paul Romer at Stanford says – and I totally agree with him – is a crisis is a terrible thing to waste. And right now we're wasting this crisis.

The world is flat - or is it? Is Leamer right about Friedman?

Thomas Friedman's book, "The World Is Flat" is a best-seller - Wikipedia summary here. Friedman's related website is here - I think the photograph of the author is interesting, for those who like to read faces.

Last year, Edward Leamer reviewed Friedman somewhat snippily here. Gosh, I wish people could be more succinct. As Byron wrote of Coleridge, "I wish he would explain his explanation". Still, I guess Leamer has to fly the flag for critical scholarship.

The issue is important: does globalization threaten America's standard of living? Free traders say no. But have a look at Figure 6 on page 33 of Leamer, showing global income distribution in 1980, when US per capita GDP was 4 times the world average. That's quite some inequality, and if they were two very different levels of water in the same canal, opening the lock between them would see wealth gush from A to B.

So as barriers to trade are coming down, why hasn't this happened? Leamer says (p.34), "Much of the difference in GDP per capita among countries comes from the greater amounts of physical and human capital in the West, which advantages aren’t going to go away any time soon."

I'm not so sanguine. As regards human capital, I think the East is very keen indeed to increase its investment in education and training, and isn't hampered by notions of equality of outcome for its students. As to industrial capital, we are watching a vast sucking-in of resources, right down to our iron manhole covers, by China and other emerging economies; but also (particularly in China) we see a rapid and determined acquisition of slowly-accrued Western intellectual capital.

I think the catch-up process would be even faster in China if their industries observed patent and copyright more scrupulously, so they weren't almost wiping out each other's profit margins in their domestic market; and financial capital will accumulate far more rapidly when Chinese manufacturers get to keep more of the foreign buyer's price, instead of losing most of the profit to shippers, distributors, marketers and advertisers. If I were Chinese, I'd be looking at those areas for the training of my bright young people; and I bet they are.

Figure 7 on page 35 compares global income distribution in 1980 and 2000. The rich have done fine, the middle earners have made almost no progress, the poor are gradually rising. But when you think about it, maybe the middle is progressing: Western industrial workers are losing their jobs and looking for work in less well-paid service industries, while new industrial jobs are being created abroad. James Kynge ("China Shakes The World") says he sees heavy industry taking over on the Chinese coast, and labour-intensive light industry being forced inland. The move from low-skilled to higher-skilled labour in China is certainly a progression, matched by downward movement in the West. I wonder what the higher end of the graph will look like in another 20 years, when the Chinese have their own armies of industrial tycoons, company VPs, economics professors, investment analysts and marketing experts? I bet they're quite content to watch their coolie-work go to even poorer countries, as long as it doesn't happen too soon in the game.

Leamer admits (p.46): "The real bottom line: we do not know the breadth and intensity of global contestability of US jobs, and until we do, we will not have a real handle on the impact of global competition on the US workforce."

Why is he relaxed? See page 48:

"Finally, I want to comment on what I think is the big issue. It isn’t globalization or a flat world; it’s technology and the post- industrial labor markets.

The US is in the midst of a radical transformation from industrial to post-industrial society. Some of this transition is associated with the movement of mundane manufacturing jobs to low-wage foreign locations, but much of it comes from the dramatic changes in technology in the intellectual services sectors. The policy response to the globalization force is pretty straightforward: we need to make the educational and infrastructure investments that are needed to keep the high-paying non-contestable creative jobs here at home and let the rest of the world knock themselves silly competing for the footloose mundane contestable jobs."

Well, I don't think the rest of the world is quite as silly as that. I don't think Western education systems are geared to excellence, as once they were; so for that reason, as well as IPR enforcement issues, I don't think we can bank on using our intellectual property to sustain our global income differential. I don't think multinational businesses have, or feel they can afford, nationalistic sentiment. And whenever I read statements that start "we need to do x", I get the feeling that x isn't going to happen. Individuals will still make their stellar way, but I can't envision the West as a whole reclining in comfort in a "post-industrial" society.

But maybe I'm wrong.