Friday, February 03, 2006

Davos Shmavos: Globalization, Interrupted?

Little minds and lushy lips (plus Bill Gates) for a small world

Davos: I should have found a seat next to the door. Really have to go to the potty
Woodstock: It's so groovy -- man

Now... Where would you want to be?

For members of the 1960's generation it was the 1969 rock concert at Woodstock. If you were there, you were part of the countercultural "mini-nation" in which minds were open, drugs were all but legal and love was "free". Indeed, Woodstock became part of the cultural lexicon of the 1960's. As Watergate is the codeword for the national crisis of confidence of that age, Woodstock has become an instant adjective denoting youthful hedonism and 60's excess. "What we had here was a once-in-a-lifetime occurrence," according to Woodstock "historian" Bert Feldman. "Dickens said it first: 'It was the best of times. It was the worst of times'. It's an amalgam that will never be reproduced again."
And then came Davos. For members of the 1990's generation, those who belonged to the Roaring Globalization Age, the annual meeting of chief executives of the world's richest corporations, national political leaders, intellectuals and journalists, held in Davos, Switzerland, uner the auspices of the World Economic Forum (WEF) would become a symbol of the greatest achievements (Microsoft and Intel) and the greatest excesses of the time (Bono and Angelina Jollie's lips?). In any case, if you weren't there, well, you probably just didn't make it. And I must confess that despite the fact that I've been a flaming free trader and bullish on globalization, I've never been invited to Davos.
I was one of the first of my generation to go online. I was a charter to "Wired" magazine. I called myself a "content provider" when others journalists were still referring to themseles as just... journalists. And I've been what Robert Reich described as a "symbolic analyst" (guys who manipulate knowledge and information for a living, as opposed to people who work for a living) and belonged to the cosmopolitan "congnitive elite," imagining, in the words of the Beetles that "there's no country. Nothing to kill or die for. And no religion, too.Imagine all the people Living life in peace ..." and doing a lot of cool stuff on the internet, watching CNN and MTV, and day trading... And Klaus Schwab still didn't send me an invitation to Davos. Not that I was able to find my way to Woodstock...
But an old friend, Nicholas Berry, director of the Foreign Policy Forum was more lucky (if you consider watching Tom Friedman's doing his shtick on the Swiss Alps a sign that Lady Luck is on your side). He he has been a Davos Man (Samuel Huntington actually coined this term as a way of criticizing those Americans who don't think that there is a "US," a sense of national identity anymore) for the last four years. In his four years attending, a clear, near consensus on the "state of the world" emerged from each year’s program and participant discussions, he writes.
"In January 2003, the five-day WEF produced "this loud theme: 'You’re making a big mistake, United States, if you attack Iraq.'" recalls Berry. "It was polite. It was prescriptive. And it was pervasive. Bush, of course, ignored the message." “We told you so” rang through the Congress Centre meeting hall in 2004."Anti-Americanism – really anti-Bushism – became palatable among the vast majority of participants, 90 percent of whom were non-Americans," according to Berry. U.S. government officials who attended and spoke received little applause when they touted their aim to bring freedom and democracy to Iraq. Chaos, bloodshed, and bungled occupation were all too apparent. and American corporate executives focused on business – as they usually do of course – and made the point of staying away from politics. "The brighter world economic picture contrasted sharply with the gloomier political one." Iraq started to fade in 2005, as it became clear that trying to sway the United States was a lost cause, and the participants turned to their own agenda, the slogan being "time for businesses and governments to get on with their own work and pursuing their own interests."
This year, as Berry point out, the program and conversations produced a clear theme: "Energy is big, China and India are rising, and the United States is sinking." The decline in the U.S. role affecting the state of the world arose because China and India are on the move, with the GDPs of both giants growing at record rates. China and India are more dynamic and confident compared to the unpopular United States and President Bush. The mess in Iraq, the Hamas victory in Palestine, and the nuclear crises involving Iran and North Korea only helped to accentuate the eroding U.S. influence and prestige, dramatized by the fact that none of the top top Bushies attended this year's WEF (although Condi Rice did a tele-conference during which she repeated a few cliches and platitudes).
But perhaps Washington's cold shoulder towards Davos (reflected in the miniscule American media coverage of the event this) has to do with more than just a failed Bush Administration foreign policy agenda.Economist Stephen Roach, writing for who attended Davos this year (and every year) suggests that perhaps the Internet, the technological boon which in a way has become the symbol of globalization and help facilitate the expansion of the global economic is now posing serious problems to economic growth in the United States and the rest of the developed world, and as a result, could be igniting anti-globalization sentiments even among the members of the "cognitive elite" to the "symbolic analysts" who were expected to be the main winners of globalization in the industrialized West:

The win-win endorsement of globalization — that the development of poor countries is a huge plus for rich, developed countries — was first coined in Davos. Alternatively, there have been anti-globalization protests associated with this event for years. But this year is different. The debate has moved from the outside to the inside. Serious challenges to globalization are now being openly aired in the rooms and corridors of Davos’s fabled Congress Centre. The reasons behind this shift are not hard to fathom. One of the “wins” in the win-win of globalization has failed to materialize. Job creation and real wages in the mature, industrialized economies have seriously lagged historical norms. It is now commonplace for recoveries in the developed world to be either jobless, or wageless — or both.
That this shortfall has occurred in the midst of accelerating globalization and surging global trade is all the more disconcerting. It was one thing for this to happen to the structurally-impaired economies of Europe and Japan. But now it is occurring in the world’s most flexible economy — the United States. Gains in U.S. worker compensation — by far, the biggest component of overall personal income — have lagged while productivity growth has soared.
This slow wage growth is at odds with one of the basic premises of economics, which maintains that labor is always paid in accordance with its productivity contribution. Yet, the facts say otherwise: Over the first 48 months of the present economic expansion, private-sector compensation in the United States has increased only 12% in inflation-adjusted terms. By contrast, over comparable periods of the past four business cycles, gains in private compensation averaged 20% in real terms.
The Davos crowd was stunned by this turn of events. A recent spate of high-profile layoff announcements in the global car industry only added to the grim realization.
Of course, a hollowing out of the manufacturing sector is nothing new for the industrial world — it has been going on for over 30 years. But in a year when the World Economic Forum is celebrating the emergence of China and India, the impacts of the global labor arbitrage hit home as never before. After all, if India is to services as China is to manufacturing, what does the future hold for high-wage workers in the rich, industrial world?

And Roach concludes that:
The toughest part of this story is that there may be no easy way out. That’s because there is an important new wrinkle in the equation — the most disruptive technology in the history of the modern world. The Internet has changed the rules of engagement for globalization. It has revolutionized the logistics of supply chain management, accelerating the diffusion of global manufacturing platforms.
But perhaps, even more importantly, e-based connectivity has introduced the possibility of offshore outsourcing and wage compression in once non-tradable services industries. Five years ago, the globalization of the information function was confined to call centers and data processing. Courtesy of the Internet, those pressures have migrated quickly to the upper end of the value chain, bearing down on workers in software programming, engineering, design and the medical profession. Equally affected is a broad array of professionals in the legal, accounting, actuarial, consulting and financial services industries. The speed of this transformation, to say nothing of its capacity to blur the distinction between non-tradables and tradables, turns the win-win models of globalization inside out.

And this depressing thought:
And it puts knots in the stomachs of most free-market economists, including myself. For generations, we harbored the belief that while it was painful, it was also understandable for rich countries to lose market share in tradable manufacturing activities. This was never viewed as a serious threat because the developed world was blessed with a growing profusion of highly-educated knowledge workers toiling in non-tradable services — workers that were effectively sheltered from the tough pressures of global competition. It was win-win because rich countries would be able to buy cheaper things from poor countries, thereby expanding the purchasing power of an increasingly knowledge-based workforce. And as producers in the developing world turn into consumers, a proliferation of new markets would provide nothing but opportunity for the industrial world. This positive-sum outcome was the true hope of globalization.

Didn't happen:
Those hopes have now been dashed. The old fears of the zero-sum outcome have crept back into the discussions at Davos. Gains in the developing world are increasingly feared to come at the expense of the developed world. This has taken the world to the brink of a very slippery slope — the blame game. Middle-class workers and their political representatives are up in arms. The pressures bearing down on a productivity-led U.S. economy are the final straw for the body politic. Witness the outbreak of China bashing in the U.S. Congress.
Yet, protectionism may not be the real risk in all this. I do not believe that the world would be so foolish to repeat the tragic mistakes of the 20th century.
The more likely danger is that the powerful countries in the industrial world now view the Chinas and Indias of the developing world with a growing sense of distrust — more as economic adversaries than as strategic partners. A world of distrust may well squander the greatest opportunities of globalization.

Like it or not, IT-enabled globalization has unexpectedly tilted the playing field. Labor markets in the industrial world have an increasingly hollow ring. And so did this year’s debate at Davos.

Which suggests to me that it would be a good idea for the Davos Man to do less cheer-leading for globalization and take a year off and do some serious behind-the-scenes business in Washington, Brussels, Beijing, Tokyo and Geneva aimed at ensuring that our (relatively)free global economic system doesn't collapse.
But... guys, if you'll mail an invite I promise I'll come...

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