Thursday, May 1, 2008

Three Billion Capitalists

Clyde Prestowitz, Three Billion New Capitalists: the Great Shift of Wealth and Power to the East, (New York: Basic Books, 2005). 278 pages

Three Billion New Capitalists tells the story of three billion new entrants into the global economy. The new entrants work mostly from China, India, Japan, Korea, and places that were formerly isolated, socialist strongholds that refused to open their economies and to trade. Not that many years ago it was Japanese cars and Japanese cameras that introduced Americans to imports and foreign trade. The introductory period has past. Three Billion New Capitalists tells us how far we have come and where we are going in the global economy.

The book has a brief prologue and 12 chapters. The opening chapter describes three waves of globalizing integration among national economies: 1415-1914, 1947-2000 and now. In the new wave, time and distance continue to compress and technology keeps spreading over the world at ever faster rates, but the United States keeps losing more and more manufacturing and a variety of services while running bigger and bigger trade and currency deficits. In chapter one, we learn America’s problems.

The heart of the book comes in Chapters 2 through 7. These chapters divide material by country, China, India, and so on, but all include discussion of the changing policies and efforts of foreign governments to build their economies by entering and trading in the global economy. Prestowitz sketches the transformation of China and India to saving, investing and exporting. He describes the evolution of Europe to economic union and the processes leading to NAFTA.

We are introduced to many people, some pioneering Americans, but especially foreign nationals who played key entrepreneurial roles developing specific products and processes in the global economy. The focus is on recent events and he uses a story telling narrative, including personal and family examples, as well as a mixture of data and documentation.

Meet Morris Chang whose family escaped mainland China in 1949 and came to America. He earned mechanical and electrical engineering degrees, including a doctorate at Stanford University, before working at Texas Instruments. It was there Mr. Chang had an idea to build a better and cheaper semi conductor using one big plant that could produce multiple products for different companies. He shopped the proposal and found the Taiwanese government eager to provide a package of incentives to attract ideas and investments like Mr. Chang.

Other stories of global investments in China, India and elsewhere include foreign government schemes to attract investments with cheap land, tax holidays, low utility rates, stable currencies, capital grants and cheap labor. Cheap labor is mentioned in the prologue and again on pages 59 and 75 where he writes “… for all practical purposes, the Chinese labor supply is endless.” It is a fact worth repeating.

Foreign government policy contrasts with today’s Democrats and Republicans who preach free trade and free markets and the good it will bring Americans. For those not devoted to the economist’s way, America’s losses sound like bad policy and it is here Mr. Prestowitz looks back at American attitudes in more practical times. We learn that IBM Corporation developed computer technology as part of a federal government contract to pay for the B-52 computer guidance system. We learn that Boeing started in 1916 with a federal government contract and continued to prosper with government contracts for WWII bombers and later the KC-135 military plane that doubled as the Boeing 707. We are reminded of the government’s role creating AT&T and Bell Labs.

The emphasis changes in Chapters 8 through 10 where topics cover specific issues rather than following countries and historical narrative. Chapter 8 discusses natural resources in the global economy, which primarily covers oil, agriculture and water. Chapter 9 covers the dollar and its role as a reserve currency in the international economy. Chapter 10 covers competition in the global economy: labor market and job issues especially. At this juncture Mr. Prestowitz makes a brave and audacious effort to explain theoretical economics to a general audience. The easy reading narrative of previous chapters breaks down somewhat amid nouns mostly known to economists, but his task is monumental so we sympathize and read on.

These three chapters have a common theme. America has specific problems with potentially serious economic and social consequences, but Americans and America’s politicians prefer to ignore them. Some of America’s current prosperity depends on foreigners who use dollars as a reserve currency. Still more of America’s prosperity depends on pricing oil in dollars. Some Americans in positions of influence believe that will go on indefinitely. Mr. Prestowitz is not one of them.

Chapter 11 makes an assessment and forecast for major countries in the global economy. China, Russia, India, Japan, Europe get most of the emphasis, but Brazil, Mexico and South America are mentioned. American prospects come at the end of the chapter. There is guarded optimism.

It is only fitting in a book that describes problems for the last chapter to offer solutions. Chapter 12 is the book’s policy chapter. Suggestions include a list of doing something to reduce energy use, increase savings, control government spending, especially social security and military spending, and reform taxes, health care, and education. Those are standard policy fare, but he also suggests promoting an international currency and several other strategies to reduce the use of the dollar as an international reserve currency. Otherwise the chapter is a plea for new attitudes and a realistic review of results.

Mr. Prestowitz does not try to hide his frustration with America’s practices and policies over the last 20 years. American politics has always paid homage to capitalism, an economic order that counsels waiting for self correcting improvements. In the past though, voters were less willing to wait out poor economic performance. In the present those of us with a practical outlook hope results will start to count more than they have been lately, but that is what Mr. Prestowitz’s book is really about.

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