Five Tectonic Shifts

Amidst all the turmoil of daily events –Ukraine, Gaza, Iraq, Syria, Congo– five tectonic shifts are reshaping the new world. While they don’t always dominate the turmoil, in the long run they change the way we need to look at the world.   Billions of people in emerging market countries and the developed world will be more affected by these shifts than by the twists and turns in the daily news.  For our part, we need to offer less intervention and better governance to these billions.

First, value chains.  In Trenton New Jersey there’s bridge with a big sign that says “Trenton Makes, the World Takes.”  Our idea of trade –and our trade policy– is based on this idea that “I make something and sell it to you, you make something and sell it to me.”   It’s not like that anymore; we make things together with a group of our friends.  Manufacturing, since Henry Ford at least, has always been a serial process.  As firms have understood how to break production down more efficiently and move each step to where it could be done at least cost, everything becomes the product of many sources.  Nutella is made from a dozen inputs.   Sixty percent of China’s exports are based on imports.  An iPhone comes from China, but its parts come from Japan, Korea, the US, Southeast Asia and dozens of other places.  If we start measuring trade in value-added terms, the balances look different –US deficit with China is really a third less– and the flows become more obvious.   Check out the WTO/OECD work.

For countries, this means that policies to benefit from value chains are the path to development:  open investment rules, frictionless borders, educated workers, modern infrastructure, advanced logistics.   By investing in these tools, Costa Rica, for example, has secured its position.  China as well, but China occupies a position at the low value end of value scale. They make about $10 bucks off an iPhone.  The real money comes from research and development, design and marketing. That’s how Apple makes the big profits.  But, we’d better watch out:  computerized manufacturing, 3D printing and other technologies are taking the manufacturing jobs out of the production chain. The design and marketing will remain.  Instead yearning for bygone days of manufacturing jobs, we’d better enhance our role at the high end:  with better technological infrastructure, real investment in education and smoother regulatory systems.

 

The second big shift grows from worldwide manufacturing:  multiple engines of growth. If we make things together, we pull each other along or pull each other down.   The US economy used to be the “engine of the free world.”    It’s not just us any more. There are 17 economies that produce more than $1,000,000,000 of output per year — yes, seventeen trillion dollar economies now.   And, by 2025 there will be thirty trillion-dollar markets.   More big markets means more consumers to pull the world’s economy.  We saw this during the US-European crash; China kept  Brazil, Australia and Southeast Asia afloat.   Essentially, this is a good thing for everyone, even we must struggle to keep our place at the top.

 

Third, these engines obtain their power from a growing middle-class.   You can measure the middle-class in various ways.  My favorite is Uri Dadush’s method:  how many people can buy a car?    He estimated 573 million potential car-buyers in developing countries already in 2010 –55% more than other methods.   And, the middle class are not just buying cars.   They’re revolting.   We see it all over the world, even in the U.S.    Occupy Wall St and the Tea Party both reflect middle-class revolts.   The anti-corruption wave in India and Prime Minister Modi’s ascendant electorate channel middle-class revolts.  China’s new middle class and peasant aspirants demonstrate against privilege.  The Arab Spring was a middle class revolt, run on cell-phones and the internet, and in the subsequent counter-revolution, entrenched interests, military and cronies are trying to protect their power and other contenders, like the Islamists, try to prevent a middle-class society.  The middle class is now coming to Africa; eight of the top twenty countries in economic growth last year were African.  Around the world, middle-class revolt isn’t always pretty, but I think the middle class in the end is unstoppable.

 

Fourth, these contenders for emerging power inside countries lead us to more wars fought internally, often with external intervention, than the classic struggle between nations for domination and territory.  Think Iraq, Afghanistan, Syria, eastern Ukraine, Libya, and Congo  more often than Crimea and the South China Sea.   We need to think twice before we intervene in these messes, but we also have to rethink how we fight wars when we do get involved.  Our biggest failures have been failures to understand the internal sources of conflict in Vietnam, Iraq and Afghanistan.   Jumping willy nilly into piranha pools doesn’t make a good foreign policy.  We need a better way to help resolve internal conflicts.

 

Fifth, governance matters.  Most of these struggles start with a failure of governance: people revolt against regimes that don’t deliver to the growing aspirations of a middle class or a would-be middle class.  The Tunisian fruit seller whose suicide started the Arab spring wanted less bureaucratic interference and corruption in his business.   The solutions, like the causes, also involve better governance.  Several recent books argue that governance is the critical factor for development and for growth that spreads its benefits fairly.  Quality governance produces quality growth.

In Afghanistan, Central America, Haiti, and Iraq, we’ve done a lousy job of helping people govern:  we either substituted ourselves and our system or held elections and walked away.  Our own paralysis of governance at home does not offer a good example to others.    The European Union has done better in spreading good governance across its continent, albeit to a hungry group of Eastern European countries willing to do whatever it takes to make it in the modern world.  More will come.  We’d better be ready to help with a kit of real tools:   e-government, open regulatory systems, better healthcare systems, education that works, timely justice, and governance systems that work in developing countries.

How do we play our leading role in this world?   First, we need to clean up our own act. An economy is like a boat:  every few years we need to pull it out of the water and scrape off the barnacles of the tax code, of inefficient regulation, of overlapping programs, of subsidies for friends of legislators.   We’re still the main organizers of value chains, the biggest engine of growth, the (somewhat tarnished) model of the middle-class society, the destination for education and example for those trying to deliver better governance.  We need to work harder, though:  work harder at opening up channels for investment and trade, at delivering quality governance, at replacing conflict with new opportunities, even as we cope with the messes that these tectonic shifts produce as they grind forward.


Bottom line:   as these underlying forces change our world, maybe we need to be less of Mr. Fixit and more of Mr. Clean.

Mrfixit-newspaperadvert-1918                                                                M.Propre

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