Documente Academic
Documente Profesional
Documente Cultură
VOLUME 10
Editor
Adrian.V. Gheorghe
Swiss Federal Institute of Technology, Zürich, Switzerland
Aims and Scope. Fundamental questions which are being asked these days of all products,
processes and services with ever increasing frequency are:
What is the risk?
How safe is it?
How reliable is it?
How good is the quality?
How much does it cost?
This is particularly true as the government, industry, public, customers and society become
increasingly informed and articulate.
In practice none of the three topics can be considered in isolation as they all interact and
interrelate in very complex and subtle ways and require a range of disciplines for their
description and application; they encompass the social, engineering and physical sciences
and quantitative disciplines including mathematics, probability theory and statistics.
The major objective of the series is to provide a series of authoritative texts suitable for
academic taught courses, reference purposes, post graduate and other research and practi-
tioners generally working or strongly associated with areas such as:
Safety Assessment and Management
Emergency Planning
Risk Management
Reliability Analysis and Assessment
Vulnerability Assessment and Management
Quality Assurance and Management
Special emphasis is placed on texts with regard to readability, relevance, clarity, applicability,
rigour and generally sound quantitative content.
The titles published in this series are listed at the end of this volume.
Challenging American
Leadership
Impact of National Quality on Risk
of Losing Leadership
Published by Springer,
P.O. Box 17, 3300 AA Dordrecht, The Netherlands.
www.springer.com
List of Figures xi
List of Tables xiii
Acknowledgements xv
Introduction 7
The Need for an Economic Policy 8
America’s Condition 10
The Meaning of Economics 10
Understanding Economics 11
American Democracy is not for Everyone 14
The Country of the Lonely 15
Bibliography 249
References 251
Index 253
LIST OF FIGURES
xi
LIST OF TABLES
xiii
ACKNOWLEDGEMENTS
I would like to thank Dr. Frank Davidson, Professor Theodore Postol, and Professor
Lester Thurow for many illuminating discussions which led to the identification
of the challenges world leadership face. I am immensely grateful to my assistant,
Ms. Sheila McNary, for her great help and for keeping me organized. Finally,
the work would not have been possible without the nurturing love of my wife,
Inna Frankel.
xv
PREAMBLE
The 20th century was the most successful ever for mankind notwithstanding two
World Wars, huge political upheavals, the dismantling of colonialism, the failure
of Communist and other socio-economic experiments, and the quintupling of the
world’s population. Absolute poverty has decreased from affecting 70% to 30%
of the world’s population, life expectancy more than doubled on average, living
standards have been vastly bettered, and both public safety and health have been
greatly improved.
We started this century with a divided world. Enslaved colonial countries, a
divided Europe, an Asia highly isolated or controlled by outside powers. Africa had
been divided among the European powers, and even South and Central America,
though newly independent, were largely ruled by despots. The U.S. was basically
an agrarian country, which had not yet exploded onto the world scene as a major
player. Canada and Australia were part of the British Empire and were used to
provide raw materials and food from their vast territories. The British ruled the seas
and thereby international trade, which amounted to a bare 8% of the world’s gross
product.
There were few public services and technology only started to emerge from
the confines of the industrial revolution of the 19th century, which was driven by
coal-fired steam power. Electricity was only sparsely used and Marconi sent his
first trans-Atlantic radio message in 1901. Orville and Wilbur Wright successfully
flew the first powered aircraft in 1904. Gasoline and diesel engines were starting to
be used in automobiles; yet locomotives continued to be steam driven. Per capita
electric power consumption was less than one percent of today’s and most electricity
was generated by coal-fired steam power plants. Wired telephones became common
in rich, urban areas, but urban private transportation continued to be a mix of
horse-driven carriages and gasoline-driven automobiles. Public transportation was
provided by electric trams and gasoline-engine-driven buses.
Many ships were driven by coal-fired steam engines, though sail power remained
an important source of propulsion until about 1910. Petroleum was not really of
1
2 PREAMBLE
started to spring up in the major oil consuming countries of Europe and America
and oil provided over 25% of the fuel used by society. In 1936 the Hoover Dam on
the Colorado River in Nevada, the world’s largest dam creating the world’s largest
reservoir, Lake Mead, was completed. The Zeppelin started to compete with ocean
liners for trans-Atlantic passenger traffic. Passenger liners grew to over 50,000-ton
displacement and 800 ft. in length, with a capacity of over 2000 passengers. In
freight transport the first specialized liquid bulk tankers and dry bulk coal carriers
entered service. In 1937 Frank Whittle built the first jet engine, but was ridiculed,
and the engine only entered service at the end of World War II, too late to make
a difference. It was just before the outbreak of World War II that Joliot-Curie
demonstrated the possibility of generating huge amounts of energy by splitting the
atom. The same year Igor Sikorsky constructed the first helicopter. In 1941 the
Manhattan Project, a true macro engineering project of intense atomic research,
was started. In 1942 Henry J. Kaiser developed techniques for the mass production
of ships of 10,000 tons, called Liberty Ships, in just 30 days, a process which had
required 12–18 months to complete before. At the same time penicillin was first
successfully used in the treatment of chronic diseases. This was also the era for
use of large hospitals and health care complexes. In 1945 the atomic age started
with the detonation of the first atomic bomb on July 16 in New Mexico. The first
pilotless rocket missile was flown in 1946, the year a weapons grade atomic bomb
was detonated at the Bikini atolls.
Supersonic speed in flight was first achieved in 1947, the year the transistor
was invented which really opened the electronic age. In 1948 antibiotics were first
developed for effective use. Although radar was a secret weapon developed by the
Allies during the War, its first commercial application was in Liverpool in 1948.
The first transcontinental jet flights were accomplished in 1949, the year the first
guided missile was launched that flew 250 miles. In 1954 the first electric power
was produced from atomic energy in Arvon, Idaho.
In 1956 trans-Atlantic cable telephone service was first inaugurated. Sputnik
(3000 lbs.) was launched in 1958, the year the U.S. nuclear submarine “Nautilus”
passed under the ice cap at the North Pole. In 1959 the first U.S. nuclear powered
merchant vessel, the USNS “Savannah” was launched.
While the first 60 years of this century were a time of discovery and scientific
breakthroughs, during the last 40 years man became increasingly concerned with
innovation and technology development or application. Though scientific discovery
and search for knowledge continued, more emphasis was given to the solution of
problems. This was largely due to the increasing demand of the rapidly growing
population of newly independent developing countries for access to technology
as well as the demand of people in developed countries for improvements in the
quality of life. The world’s population had more than doubled since the beginning
of the century and would more than double again before its end.
This then was the world in which America stretched its wings and emerged
from a sleepy, largely agricultural backwater into a world power, which after two
devastating World Wars started largely in Europe, assumed the responsibility of
4 PREAMBLE
leading the world towards a more sane peaceful future. Learning from the mistakes
of peacemaking after World War I when Germany was defeated, America was
magnanimous and offered the Marshal Plan to the vanquished Germans and others
after World War II. But the Cold War resulting from the emergence of the USSR
as a super power as well as replacement of dormant colonialism by various types
of dictatorships throughout many former colonial regions of Africa, Middle East,
South Asia, and South/Central America, had a devastating effect on the world at
large. Many of the hopes and pious commitments made after World War II were
ignored and replaced by an increasingly divided and dissatisfied world with rampant
differences in living standards, personal freedom, and prospects for the future. This
is the stage, on which America has and is trying to exert leadership under increasing
challenges to its approach and values.
This book evaluates America’s economy, socio-political developments, social
structure, institutions, and values in terms of their impact on America’s position
as a world leader. We consider the challenges to American leadership both from
within and without, and provide projections for the future of American leadership
in a more global world, yet one increasingly challenged by political, religious, and
cultural discord. These not only impact on attempts to make this a more equitable
and peaceful world, but also on efforts designed to assure greater access to freedom,
education, health care, justice, and economic opportunities.
While some dire predictions of the Club of Rome report of a population explosion
and resulting inability of this globe to sustain its population has been proven wrong,
there are now new ominous developments that challenge global advances towards a
more prosperous, just or equitable and peaceful future. American leadership, which
contributed so much towards the many advances, particularly during the second half
of the twentieth century, is now being challenged and will be forced to respond.
America will have to learn from the rest of the world to be able to lead it and itself.
As noted by John Fitzgerald Kennedy:
“Leadership and Learnership
are indispensable to one another”
America assumed global leadership as a result of its economic eminence, techno-
logical prowess, and strategic power. It was successful in undermining Soviet influence
abroad and its power within until the Soviet empire collapsed, released many of the
affiliated states and retrenched as a less powerful Russia within its ethnic bound-
aries. Many of the former Soviet states have since become serious economic powers
in their own right, particularly those which control large reserves of oil and gas.
America, as the sole remaining superpower, with unrivalled military capability
and reach assumed the role of global leader in economic, political, and strategic or
military terms. It not only intervened in Yugoslavia or Bosnia and later Kosovo, but
took an increasingly active role in the Middle East and Africa, both as an arbitrator
and impartial intervener, as well as a supporter and policeman.
After the terrorist attack of 11 September 2001, it became increasingly proactive
and after invading Afghanistan and toppling its extremist Taliban regime, invaded
THE 20TH CENTURY STAGE FOR AMERICAN LEADERSHIP 5
Iraq on the unproven assumption that that country was developing weapons of mass
destruction and may use them or make them available to enemies of the West.
This costly war seems to have no end. Even 2 years after conquering the country,
massive insurgency persists.
America is facing increasing economic competition from China, which replaced
Japan, as the second largest economy in the world. With more than twice the
economic growth rate of the U.S. and for that matter most other Western countries,
China can be expected to challenge the U.S. for global economic leadership before
the middle of the 21st century. India is also emerging from its long slumber and
is rapidly developing into a modern economy. It too can be expected to challenge
major Western countries and become the third largest economy in the world by the
middle of this century. At the same time, America is facing increasingly difficult
challenges that may threaten its global leadership.
Militarily it may soon overextend itself with commitments not just in Iraq and
Afghanistan, but also other parts of the Middle East as well as in Europe, Africa,
and Asia. While its modern military prowess gives it great flexibility, its manpower
capabilities seem to be overextended. At the same time, the beginning of the 21st
century has exposed new weaknesses. There is an increasing number of Americans
who live in poverty (37 million in 2004), and the educational levels of Americans
have decline significantly. In fact, young adult (25–35 year old) Americans on
average attain only 9th place in education and knowledge among the world’s
developed nations.
An even greater potential threat to continued leadership is America’s apparent
inability to deal effectively with catastrophes posed by hurricanes such as Katrina
and other disasters, in a timely and responsive manner. It is becoming increasingly
clear that America has difficulty in dealing with crises of all sorts. It is hard to
say if this is the result of an overextended bureaucracy and inefficient executive
structure, lack of broad understanding of issues and implications by its leaders or
simply lack of leadership skills and organization. Yet leadership is the hallmark of
pre-eminence. It requires knowledge, skill, determination, willingness and power to
act, as well as ability to manage. The Katrina disaster and other recent catastrophes
in the U.S. have shown a lack of effective organization, planning, coordination, and
leadership, not just in providing timely aid but also in recognizing the magnitude
of the disasters or crises and response requirements. The security threats faced
today make this particularly dangerous as future disasters resulting from nuclear
or biological attacks could pose much greater hazardous dangers and consequent
challenges.
America is a wide open society with a complex social, economic, and political
structure developed over centuries. Its values are often conflicting and its ability
to cope often questionable. Its global leadership will soon be challenged by new
powers such as China, with a rigid and well-structured government leadership,
a well educated and motivated populace, and unbridled ambitions. It also has
overwhelming human and material resources that America may not be able to match
in the long run. This then is the situation faced by America in 2005. Its response
6 PREAMBLE
may not only affect its future and future role, but also that of the so-called Western
World.
Other nations, particularly China, are poised to replace America as the world
leader, not through military but economic power. Their increasingly viable global
penetration in trade, technology, education, and social programs is now a concern
for the future of America’s leadership. It seems that America is now losing much
of the support it had gathered over a long time and at great cost.
To maintain leadership, nations, like companies and individuals, must learn to
manage risk and assure quality in all their diverse activities. They must be nimble
in their approach, hold fast to basic values and principles, and yet move with
ever-changing conditions and requirements. The challenges of this globalized world
are now under attack by an increasingly difficult natural environment, damaged
by human greed and folly, which for too long ignored the impact of their actions
on the environment. People try to advance their condition by use of technologies
whose impacts are increasingly difficult to manage and contain. Health hazards as a
consequence now often emerge in new and often epidemic forms. All of this requires
much greater risk awareness, and effective quality management. Leadership, which
in the past was mainly claimed and associated with size and power, will in future
be more and more assigned to nations who prove an ability to manage quality and
risk in their activities.
Terrorism and related security threats pose increasing challenges on the local,
regional, national or even global scale. But, as noted, threats by nature are also
more frequent and destructive. These in addition to health or biological threats
pose increasing risks to people or mankind at large. The quality of management
of risk has, as a result, become a most important condition for leadership, not
just at a personal and corporate but also at the national level. Nations, no matter
how powerful, and the world at large increasingly find themselves under attack
by natural disasters, terrorism, and other unpredictable as well as uncontrollable
events. These today quite often challenge the capabilities and resources of even
the most powerful leading nation. Yet these are foremost tests of the quality of
leadership and the ability to manage under conditions of uncertainty, imposed by
external and unpredictable forces or events.
The qualities of American leadership in all important aspects are discussed in
this book and its ability to lead and manage domestic and world affairs and truly
guide the world towards a better future under conditions of increasing risks are
being evaluated. This at a time when there are serious questions about the quality
of American education, institutions, as well as social services. America is both
admired and reviled. It is respected and detested. In fact, the world is not just
divided in its opinion about America, but individuals all over appear to have mixed
feelings about it; this largely as a result of a lack of consistency as well as principle
in many of its actions. But leaders, to be respected, must present clear visions,
adherence to accepted and respected standards, effective quality in their leadership,
and firm, effective management under conditions of uncertainty. Otherwise, their
leadership is at risk.
INTRODUCTION
and development than does the use of more traditional factors; for example, they
certainly have greater value in explaining economic developments in our inner cities
or other local developments.
Many modern economies, particularly those of the U.S., are greatly distorted not
only because they have largely become service economies and consider services
of all types productive output but because they consume more than they produce,
and as a result build up huge monetary and resource deficits; they increasingly
lose touch with reality. We assume that deficits can build up indefinitely and that
we will never have to face the need for restitution or repayment. The world’s
economy may approach a zero sum game in the long run and, though quite robust
over the short run, can only absorb limited imbalances over sustained periods of
time. The same applies to our consumption of resources and the lack of effective
recycling which causes only a small part of resources consumed to be effectively
used. Most importantly, economists assume rational economic behavior by men and
their governments, something that hardly ever exists.
There is a long-standing view in the U.S. that government should not be involved
in setting economic or industrial policy, and that economic and industrial devel-
opments are best left to the market place. It is argued that government should
concentrate on national defense and social policy which, in turn, is expressed
in terms of education, health, welfare, law enforcement, infrastructure, and
other service programs. Yet government expenditures account for nearly one-
quarter of the gross national product and over 70% of these are non-defense
expenditures. It is interesting that under the Clinton Administration the role of
government in economic policymaking was being seriously re-considered and
questioned.
While many government service programs may be justified, the effectiveness
of their delivery is often subject to question. More importantly, government
involvement in health care, law enforcement, and education has led these institu-
tions, plus the other service and government sectors in the U.S. economy, to grow
to the current staggering level where they constitute more than 60% of the GNP
and consume over 60% of total employment. This figure is nearly double that of the
economic participation of the institutional, service, and government sectors in other
major industrial countries such as Germany and Japan. Furthermore the service and
institutional sectors, in particular health care, law enforcement, and education are
growing at an appreciably faster rate than the economy in general.
Manufacturing - which provided 50% of all jobs in 1950 - has shrunk to a present
level of less than 18%. Farming - which offered 12% of the jobs in 1950 - is now
down to just over 3%. In other words, less than 3% of our total population produces
all our domestically produced food and generates healthy agricultural exports on
top of it.
INTRODUCTION 9
AMERICA’S CONDITION
In the last 50 years America’s economic condition has improved. Real personal
income, adjusted for inflation, has increased substantially, as have job opportunities,
the percentage of high school and college graduates, and the percentage of scientists,
engineers, doctors, and lawyers. The number of square feet of housing per capita has
increased by nearly 80%, as has the quality of housing. The health of the average
person is significantly better and life expectancy has increased by nearly 20%. All of
this was made possible by constant annual growth of productivity of 2.5% between
1947 and 1973 and large public investments in infrastructure and institutions that
benefit society. However since 1973, the annual growth in productivity as well as
in investments in infrastructure and institutions have declined from these levels.
Productivity growth has slowed to a scant 1% per year, and median income growth
has often fallen below the rate of inflation in recent years.
While the U.S. is still the world’s largest economy and most powerful and
productive nation, others are gaining both in productivity and quality of life. Much
of this relative decline is the result of our failure to maintain the required investment
in productive assets, education and job training, infrastructure and services. We have
among the world’s lowest savings rates and, except for some of our universities,
have a dismal educational system. We invest too little in job training and discourage
savings by taxing interest on savings. With an increasing proportion of our economy
in the service sector, our middle class is declining as more people find themselves
among the working affluent or working poor. With manufacturing and skilled
service jobs either being phased out or replaced by machines, more and more
Americans find themselves either among the low or high wage earners. As we will
note, we must redevelop and foster our middle class lest we destroy the very fabric
of Americanism.
UNDERSTANDING ECONOMICS
Economists too often tend to think like cultist priests whose arcane powers claim
to be able to explain the past and predict the future. They seldom agree among
themselves on the explanation, forecast or prescription. In fact, they spend an
12 INTRODUCTION
inordinate amount of time talking to each other to achieve, if not a consensus, at least
some degree of mutual acceptance of their projections; yet their projections often
prove ultimately wrong, irrelevant or have been overtaken by real developments by
the time a consensus is reached, if ever.
It is important for economists to communicate not just the results, however
controversial, but also the process of economic discovery and analysis in order
to enable users of economics to understand the conclusions. This is important to
convince the public that economics is a rational and well-rounded method of analysis
of human behavior and interpretation of the resulting developments and that it also
assures meaningful feedback as well as effective use of the recommendations.
To be useful, economics must permit learning from the past and the development
of more effective planning for the future. This should be combined with a full
recognition that environments and conditions continuously change. Similarly, it
must give weight to factors that cannot readily be expressed in monetary terms as
they may be equally, if not more, important. In the end, people are generally more
affected by ideas than by monetary gain. Economists often talk down to people as
if they themselves are the keepers of the Holy Grail, forgetting that most people
have a keen, often profound, theoretically sound perception of what counts. They
are the ultimate judges and will decide the future no matter what the economists
say. The influence of economists has declined in recent years, not because of faulty
interpretation or forecasts, even though most are made as qualified projections, but
because economists have proven incapable of interpreting economic findings in
human and societal terms – terms the average person understands and can associate
with. They have lost stature because they could not descend from their ivory tower to
the arena of reality where what you predict is actually experienced and where reality
not only catches up with you but rules! It is not by chance that few economists,
including those working for financial institutions, are financially successful.
Economics should not be considered a science or even an art, but a method that
explains the well being of man realistically and in a rational form. To be useful, it
should show how man can improve his condition and at the same time leave a better
world than he found. The principal function of economics is to develop, guide, and
assist decision-making, and as such present the reasons for development.
It must not be an abstract method used to explain complex, often unrealistic or
contrived situations and interactions, but a simple tool to aid the understanding
of the use of resources, such as capital, labor, material, technology, and social
relationships, in the production of values for mankind. Economics must address
real issues and consider the common good and how best to advance it.
More specifically, economics must become an effective tool for policymaking at
all levels, and not primarily a tool to correct or respond to economic developments
which must be corrected. In other words, it should be used proactively and not
reactively. It should prevent policy mistakes and not be used primarily as a tool
to explain and excuse and possibly correct them. Proactive use of economics must
not be limited to correcting undesirable, expected or impending developments such
as inflation. Economic analysis should be used as a real and meaningful policy
INTRODUCTION 13
The major cause of recent failures of American foreign policy has been the
assumption that our American or Western concepts of democracy and free market
economy are so superior to any other political, social, and economic system that
everyone should want to adopt them and thrive towards their introduction. Our
conviction is largely based on our own successful experience and the assumption
that if we were able to make it work, and work it did in America and to some
extent in Europe, then it must be possible if not outright desirable to make it work
everywhere else. No consideration or for that matter concern was given to the basic
requirements for such an experiment. It worked in America because people wanted
it to work, and were willing to sacrifice anything for economic and social freedom.
They had experienced freedom and were willing to die for it. They appreciated not
only physical but also intellectual and economic freedoms as well as freedom of
expression and communication. To appreciate such freedoms required an educa-
tional and intellectual base and a willingness to assume responsibility for one self,
including the responsibility of job and physical production.
However, there are many in our society who only want to enjoy the benefits
of American economic freedom and democracy without personally contributing to
it and its maintenance. Poor countries as well as our own poor or disadvantaged
want to catch up and enjoy the fruits of prosperity even if it means trampling
on some economic freedoms and social norms. They are more concerned with
economic advancement than social righteousness; more interested in doing well
than in doing good. However, they are not alone. Many well-to-do and educated
similarly disdain the need for form and structure in a free economic society
and seek not only short cuts but also ways to undercut and undermine its very
purposes.
It is easy to understand the attempt and frequent success of the poor to crash
the rules of free economic capitalism. It is more reprehensible when people who
attained financial and social success through the freedoms our free market capitalism
provides, turn around to trample on its rules and tenets so as to further their
interests. Free market economic and democratic systems assume that their citizens
are adequately educated, positively motivated, and understand their responsibil-
ities as well as their rights. Opportunities which permit each individual to perform
and advance to the best of his abilities and efforts go hand in hand, and in
fact depend on the maintenance of all our rights and freedoms. Yet many in
America do not or cannot exert their rights and take advantage of opportunities
because of actual or perceived barriers, interference by individuals or institutions
or personal inadequacies which are often the result of cultural, ethnic or geographic
constraints.
INTRODUCTION 15
In few countries do people have so many rights as individuals yet are so lonely as
in America. Individual freedom and rights to privacy combined with a tremendous
drive towards economic success have developed a lonely people. Few Americans
have really good friends with whom they share some of their most private concerns
or problems, to whom they admit their weaknesses and rely on in time of need.
Similarly, few are really intimate with both their family or close friends. True, they
share formal occasions such as holidays, birthdays, and similar events, but few are
close enough to their families to trust them with their failures, faults, defeats or
even successes. We Americans like to show off even if there is little to show and
hide or cover up things that could happen to anyone. We are a lonely people who
live largely within ourselves. We trust psychiatrists with our innermost secrets but
not our closest family or friends. We think that by paying someone to listen we
will have better, more objective advice. The opposite is often true.
Loneliness makes an important contribution to the American economy. It drives
life style, spending patterns, social structures, work environment, and most impor-
tantly performance of individuals. It also affects peoples’ attitudes and their
behavior, particularly in the work place. There is no other country in which
issues such as sexual harassment, political correctness, individual freedom including
freedom of information permeate the work and social environment as much as in
the U.S. These issues are usually ill defined and Americans have tried for decades
to define applicable standards. The fact is that such standards are difficult if not
impossible to define as they depend on circumstances. Yet U.S. media have for
long assumed the right to define standards of social behavior by reporting on every
interesting occurrence not just in fact but by use of moral judgement. This not only
takes away the public rights for open discussions and judgement, but also introduces
16 INTRODUCTION
an unwanted and dangerous third party evaluation that may have little to do with
the actual cause and event.
The influence of the media extends from the moral to the economic aspects
of American life. Americans are probably influenced more by their media than
anyone else. The media, particularly now through the Internet, not only affects but
also really influences the social and economic behavior of the average American.
This is dangerous as the media and Internet are neither representative nor do they
necessarily reflect the interests of the public. The media only represent their own
narrow interests and no others. Although the media and Internet have opened a
huge new flow of and access to information, the indirect costs paid for this may be
exorbitant and often the damage caused by misuse of information or actual fraud
in its use may be excessive.
We currently pass through a time when dreams and hopes drive investment
decisions more than ever before. Internet companies who represent nothing more
than a basic on-line marketing concept, without revenues and huge losses, which
are not nor will ever be profitable in their own business, but are expected to be
able to sell advertising to their huge numbers of visitors, now attract large invest-
ments and often achieve market capitalization in excess of highly profitable large
companies producing real goods or services. Although this appears illogical, there are
respectable economists who insist that this is economically justified. Only the future
will tell if this is just a temporary bubble or a new era of technology and marketing.
In this book, we will concentrate on the future of America as a leader, its
economy, and the role economics will play not just in guiding what needs to be
done, but how, when, and where economic decisions must be made to assure our
continued prosperity and growth towards hopefully an increasingly just environment
of income distribution. America, as the sole superpower at the beginning of the
21st century has been trying to convert the rest of the world to its values, concepts,
and interpretation of democracy and freedoms. Yet there are many questions about
America as a leader and its ability to inspire and show the way towards a more
equitable, peaceful, and better world. A world in which all have and can take
advantage of opportunities, a world free of fear which is secure, and permits free
expression and movement. A world governed by the people and for the people.
These are all principles America espouses. The question though is can it lead
the world towards these concepts, which are largely utopian and are only partially
or imperfectly practiced in America itself. Americans are an impatient people
who want it all: boundless freedom, endless supply of cheap energy, food, and
other goods, large dwellings and freedom of expression, movement, and economic
activity. We want a clean environment but are not willing to reduce consumption
of pollutants. We want cheap gasoline, but will not allow new refineries to be
built in our backyards. We want freedom of movement and access to information,
but are increasingly putting barriers in place, ostensibly to keep bad people and
information out. We have a wide-open financial system which has few barriers to
transactions but which is being corrupted by misuse, fraud, and dishonesty. Obscene
remuneration, particularly in U.S. investment banking, has become an outrage, with
INTRODUCTION 17
dishonest so-called analysts and investment bankers earning 100 times the average
income of working Americans.
Americans want it all, independent of the massive inconsistencies in our economic
and social systems. We cannot have a clean environment and reduce air pollution
if so many Americans insist on driving huge SUVs as commuting vehicles. We
cannot expect clerks and workers to be honest in their work if they read daily about
huge thefts and corruption among executives who often get away with a slap on
their wrist, while workers are jailed for a long time for minor offenses. We cannot
be an example for the world without being an example for ourselves first.
America is now facing its greatest challenge, both from within and from outside.
It must show that its lofty ideals are truly the principles guiding it in everyday life,
in its dealings with others, in the way it governs itself and projects itself onto the
international scene. It has a huge responsibility as the principal global power and
must guide by example in all the different aspects of modern life and government.
It does not have to be perfect in all aspects but must show a firm commitment to
its principles and true efforts in moving towards its ideals.
There are many areas where America needs major improvements such as in
education, which after many years of often forced integration is still discriminating
against blacks and other minorities. The criminal justice system similarly exhibits
major inequities, particularly in punishment. Access to effective health care is far
from universal, with some segments of society and regions ill served or without
protection. Similarly, when it comes to foreign policy, we often forgo our principles
for parochial or short-term advantages. To lead the world, America will have to
truly become an example based on the ideas, ideals, and principles we espouse
without compromise.
The challenge to American leadership is mounting, as many in the world question
American commitment to its principles and ideals, and as a result qualification
for world leadership. Leadership requires example, not just words and slogans
but real action based on these principles and ideals. Shameful prisoner abuses
in Iraq, unconscionable or obscene executive pay, various scandals in the health
care industry, corrupt schemes at Enron, WorldCom, Tyco, and other major U.S.
corporations, all caused major loss of faith in the American political, economic,
and justice systems, not just by many Americans but around the world.
While it is true that once crimes are discovered, the American people and their
institutions will move to correct such ills, it usually takes an inordinately long time
before such correction occurs and the guilty are punished. Punishment furthermore
seldom fits such monumental crimes. This is one reason why America has lost
credibility as a leader. Leaders, to be effective, must unscrupulously commit to
their principles and not allow political or economic convenience or benefits to
distort their actions. There are many examples where principles were compromised
which obviously affected credibility. This is of particular concern as America is
moving towards a largely service-oriented economy, which not only outsources
much manufacturing but increasingly also service jobs and functions, as it makes
America more vulnerable than at any other time.
CHAPTER 1
American economists not only identified but developed the use of input-output
analysis and regional, sectorial and enterprise planning. Input-output tables are being
maintained by different levels of government and are supported by input-output
analysis at the regional, state, and national levels. However few enterprises or firms
in the U.S., small or large, make use of these important methods of economic
analysis, projection, and planning. In fact, few U.S. enterprises or even industrial
or economic sectors use such tools to develop their policies and resulting strategies
and plans.
This is curious because an increasing number of enterprises, even in developing
countries such as China, have begun to use these tools to plan investment require-
ments, marketing and pricing strategies, sources of production factors, or inputs and
more. This shortcoming is particularly unfortunate in the U.S. where nearly 70%
of the industrial and 46% of the total output of the economy is produced by less
than 200 major firms. The reason is in part the preoccupation of U.S. management
with short-term performance and lack of concern for truly strategic issues. These
issues could be highlighted by trends identified in input/output analysis that could
determine strategic opportunities and threats. In particular, needs for technological
change could be derived by cross-impact analysis, a method based on input/output
analysis in which opportunities and threats from changes in technology, competition,
political developments, and more are included in determining future developments.
But this is seldom done as it is of only strategic value and in general our planning
concentrates on near term horizons both at the federal level and in companies or
businesses.
The economic expansion in the U.S. which started with the recession in March
1991 and continued unabated until the 2001 recession is only now in 2005 reviving
its growth. That economic expansion was the longest since the 1960s. Business
cycles in the U.S. seem to get longer, largely because of the post-industrial switch
to more service activities, greater social safety nets, less in system inventory invest-
ments, greater banking insurance, new technology, and most importantly global-
ization. Another and probably even more important factor is the effective response
19
20 CHAPTER 1
of the Federal Reserve which only very gradually lowered interest rates to sustain
a very gradual growth. The surprising thing was that the Asian’ crisis of 1997–99
hardly affected American prosperity and growth, as external shocks usually do.
With apparent resistance by the U.S. economy to these traditional causes for
a disruption of growth, the sole factors, which could curtail continued growth
is a financial imbalance. The U.S. has again a negative savings rate, as people
remain confident of continued growth and low unemployment. They therefore shop
excessively and take advantage of cheap credit. In fact, the consumer has become
the major driving force in sustaining economic expansion. At the same time, the
stock market continued an historic advance, particularly in high technology shares
in the 1990s. People felt well off and worry free. They did not perceive the potential
for a financial crisis and major decline in equity values and employment. While
this would force the Federal Reserve to raise interest rates in the past, which in
turn would reduce growth further or actually result in negative growth, the Federal
Reserve continued to lower rates five times in the first six months of 2001 to stem
the potential of recession.
Globalization, technological advance, and a shift to less cyclical service industries
all helped, but prosperity may not last, particularly if major global players renege
on their commitments to free trade, political harmony, open markets, free currency
systems, and more.
Economic growth depends on and is achieved by the interplay and effective use of
factors of economic performance, such as
• available physical and human resources,
• economies of scale,
• productivity and quality improvements,
• technological progress or
• a combination of the above.
While economies of scale depend on increases in factors of production, such as
investment, and an increase in resources depends on investment, discovery, and
demographic factors – all of which cause an increase in the factors of production –
technological progress is often independent of the level of the factors available
and has been recognized as a principal vehicle for economic growth of nations,
particularly those without adequate resources.
Recent studies have shown that technological progress reduces costs or increases
productivity more rapidly than economies of scale or productivity improvements
resulting from changes in factors of production. For many years, the U.S. has
attempted to sustain economic growth largely by the use of economies of scale,
while Japan, for example, has used technological progress as the principal driving
economic force. The results have been rapid growth in Japan and lackluster growth
in the U.S. during the period from 1965 to 1990 when much of the technology used in
Japan’s economic growth was developed. This has obviously been reversed in more
recent years when the U.S. economy was mainly technology driven. Japan concen-
trated on technology applications by improvements of products and processes,
while the U.S. spent most of its research efforts on basic research then. There is
nothing wrong with the emphasis on basic research as long as adequate resources
are devoted to bringing basic research results into applications as improvements in
or new processes and products which can be rapidly brought to use in the market
place. We considered research largely an ivory tower that should concentrate on
generating knowledge not applications and uses. Other studies show that quality
and productivity improvements go hand in hand and are also affected by techno-
logical progress. In other words, economic growth is no longer simply dependent
22 CHAPTER 1
Politicians are generally not concerned with narrow problem solving, and more
importantly not with long-term progress, but with their own short-term agenda
which usually comprises issues that advance their personal interests, supports their
re-election, and covers their tails. As a result, they often advance economic policies
that have a short-run impact, very much like a traditional manager in a U.S. corpo-
ration. Similarly, legislation proposed and enacted is highly likely to be narrowly
focused and designed to benefit politicians themselves and maybe their constituents
and supporters, but not the nation, the public at large or the world. Too often
their principal concern is reelection, which for Congress occurs every two years.
Congressmen begin to work on their reelection the day they are elected, and they
vote economic policy accordingly.
Today this approach is self-defeating and can only lead to economic and political
decline. It affects our ability to deal with national and international problems, at
a time when the world is ruled more and more by global market considerations
and interests. Similarly, strategic interests have moved from political and military
associations towards market orientations. In other words, political progress on both
the domestic and international levels depends increasingly on economic progress or
economic success.
Unfortunately, few of our politicians know much about economics or what makes
the economy succeed. As a result, they will more often than not choose the politically
convenient and expedient approach instead of the economically sound one to solve
economic problems. This is also true when it comes to socioeconomic problems,
such as the financing of welfare, education, and health care, as well as in the
development of an industrial policy. In other words, politics in the U.S. seldom
addresses long- or even medium-term problems, instead concentrating on short-term
issues which affect voters and thereby the next election.
Radical policy changes designed to correct long-term problems are seldom
enacted and often remain unresolved, particularly when, as with our present
economic problems, a radical long-term change is required to reduce the staggering
budget and balance of payment deficits, and to begin to pay off the unprecedented
AMERICA’S ECONOMIC ENVIRONMENT 23
public debt of more than $6 trillion. Today servicing our public debt is one of the
major budgetary costs of the federal government. In fact, it consumes over 15% of
our annual government expenditures at the federal level alone.
Even though many in Congress and government claim that they are concerned
with the health of the U.S. economy and its long-term growth, their votes, policies,
and actions often contradict these claims. We need more economically responsible
legislation and government and more socially responsive economic development.
This may take more courage than most of our legislators and government leaders
are willing to exert. However, the future well being and leadership of this country
may be at stake as economic health, growth, and leadership becomes the single
most important issue for us in our global village. Effective growth is more and
more driven by trade, and trade is driven by the effective use of technology, use of
human and physical resources, and most importantly management of change.
Planning for the future requires knowledge of where we are and a strategy for
where we are going. This strategy should be based on objectives and goals and
incorporate policies for the attainment of these goals. It requires an understanding
of the resources available or which can be marshaled to implement the strategy.
A strategy also requires management designed to translate a plan into tactics that
will implement its objectives. In other words, strategic management is based on
the audit and analysis of conditions, an evaluation of threats and opportunities, an
identification of resources including strengths and weaknesses, and an evaluation
of objectives and policies designed to meet expected goals.
The U.S. economy, much like that of U.S. firms and individuals, must be subjected
to strategic management procedures based on continuously updated plans if it
is to meet expectations. The basic requirements for planning, formulation, and
implementation of strategic management on a national scale can be represented
diagrammatically as shown in Figure 1. While strategic management assumes a
long-term time horizon, continuous or periodic updating is required to assure its
validity. In other words, our strategic plans are continuously rolled over.
The most difficult problem is usually establishing strategic objectives. While in
business, strategic objectives often include profitability, market share, costs, and
competitive advantage, national strategic objectives are quite different. They may
include economic growth, income redistribution, technological advance, defense
security, political influence, and various quality-of-life goals.
The functional policies that constitute the strategy or that are designed to achieve
its objectives must be consistent. To implement policies or converge on the objec-
tives of the strategy, various tools or resources are available, such as:
• financial controls or means
• trading controls or means
• resource controls or means
• technology development
24 CHAPTER 1
CONDITION
ANALYSIS
STRATEGY STRATEGIC
RESOURCES THREATS AND FORMULATION PLANNING
OPPORTUNITIES
STRENGTHS TACTICAL
POLICIES ALTERNATIVE
AND
WEAKNESSES
• distribution
• international relations
• labor laws
• government regulations
• subsidies and support payments
• taxes
• licenses
A government’s economic strategy should embody the fundamental character and
vision of the nation. It should incorporate the defined policies as well as the existing
conditions. It should thereby include the effects of and ameliorating steps to counter
threats and the approaches that allow the nation to take advantage of and benefit
from opportunities.
An economic strategy is formulated to permit identification of tactical alterna-
tives which, in turn, establish the preferred strategic plan whose implementation is
designed to achieve the defined objectives.
Strategic management is a process that must be continuously updated to remain
valid as it affects the economy by its own actions, while the economy is simul-
taneously changed by external or exogenous developments. Similarly threats and
opportunities are dynamic and subject to both marginal and radical change.
Strategic management of the national economy is more essential today than ever
before because our environment as well as technology changes continuously as do
the economic factors which contribute to economic growth and well being. The
age of stable, long-term economic policies has passed, as has the age of stable
long-term economic relationships. Therefore it is necessary to continuously audit
economic conditions and adjust economic strategy and resulting policy so as to
respond effectively to ever changing threats and opportunities.
AMERICA’S ECONOMIC ENVIRONMENT 25
John Maynard Keynes [Ref. 1] advocated keeping the economy at nearly full
employment by using selective budget deficits as needed to increase output and
thereby jobs. This approach was used quite effectively in the 1960–1965 period,
but has been largely discredited in more recent years.
Keynesian economics called for simultaneous tax increases and cost reductions,
as needed, but even though tried as national policy for some time in some countries
it never actually achieved the Utopia of full employment as expected. It brought with
it both economic and political problems which were not easily resolved. The results
eventually discredited the Keynesian approach and ultimately led to supply side
economics, an adventure that a succession of Republican administrations attempted
to use as a radical variation on economic policy. While this created jobs and
great economic prosperity over a period of time, it resulted in the ironic price of
historically unprecedented and cumulative budget deficits which over a ten-year
period increased public debt nearly ten fold in recent decades.
The evolving school of economic thought since 1992 favors intervention in or
management of the market, trade, and most importantly services such as health care
and education. This approach contradicts basic concepts of a free market economy
and may encourage establishment of bureaucracies that could more than offset any
cost savings that managed trade or services could achieve. It probably contributed
to the loss of both houses by the Democrats to the Republicans in 1994. Since then,
both the government and Congress have compromised on many issues, particularly
health care and education.
The standard of living in the U.S. has led that of all other nations for many years,
but the gap is rapidly closing with the erosion of our educational standards, lack
of effective savings, and personal incomes, which now trail those of several other
countries. According to the Bureau of the Census, median family income increased
by 3.3% and 3.2% per year, respectively, in the 1950–1959 and 1960–1969 periods,
well ahead of inflation and the cost-of-living. Yet in the periods 1970–1979 and
1980–1989, family incomes rose by a paltry 0.7% and 0.6% per year, respec-
tively, rates which lagged well behind inflation and cost of living increases.
During the decade 1990–1999, things improved somewhat only to fall back to a
paltry increase of family income in the early years of the 21st century. In fact,
on average, U.S. families have lost over 30% of our relative standard of living
advantage since 1970, and are now marginally ahead of many European countries.
Similarly, Japan is rapidly gaining on us in terms of a comparative standard of
living.
It is interesting to note that while in the 1950–1969 period the average growth
of U.S. family income was just slightly behind the growth of GDP, this correlation
broke down after 1970, and although the GDP continued to grow at an average rate
26 CHAPTER 1
of 2.7% during the period 1970–1989, the growth of the average family income
in the U.S. dropped to 0.6–0.7% for that period, a trend which was only slightly
improved upon during the recent decade of prosperity.
There is concern that even though the American GDP is expected to continue to
grow at a marginal rate in the first decade of the new century, the real growth of
average family income may well become negative and real average family income
actually drop, unless the rate of unemployment is not only maintained at a low level
of less than 5%, but also real wages are raised. One reason for this possibility is the
continuous lag in the growth of U.S. productivity as living standards grow only as
fast as output in the long run. Yet productivity has only grown at an average of 1%
per year since 1970 [Ref. 2]. While our average productivity in most areas is still
among the highest in the world, we are rapidly losing our productivity advantage
in many areas.
Another issue, and one which affects productivity and thereby living standards,
is the drop in national savings from a healthy 15% in the fifties to only 12%
in 1990 and much less now. Similarly, U.S. investment in plants and equipment
remained stubbornly between 7.5% and 9.8% of GDP between 1950 and 1990
which is less than half the amount invested by our industrial competitors. In fact, it
has actually dropped by more than 2% per annum since then. Of particular concern
is the fact that family incomes in the traditional economically leading states on the
northeast and west coasts have not only lagged behind the growth experienced in
other parts of the U.S. in recent years, but are now actually dropping in absolute
terms.
U.S. productivity has maintained a small albeit increasing growth rate. Yet
notwithstanding productivity gains by individual workers, firms or at the national
level, additional indirect costs for health care, product liability, insurance,
government regulation, and other compliance and administrative costs have more
than negated the effects of most productivity gains. As a result, wages, the
percentage of workers employed, and therefore standard of living have all declined
or at best remained constant in recent years.
These additional costs which have grown at two to three times that of the GNP
and U.S. industrial productivity are forcing U.S. firms to tighten their belts, hire
fewer workers or let workers go to maintain affordable payroll costs, a trend
which was rapidly accelerating as the prospects of recession loomed in 2001.
These bleak developments are forcing U.S. firms to reduce the labor cost compo-
nents in manufacturing in both relative and absolute terms, notwithstanding low
unemployment and an otherwise healthy economy.
Wages and therefore family incomes are increasingly challenged by peripheral or
indirect employee expenses such as health care, retirement, and vacation expenses.
Employee benefits, particularly those designed to provide social support services are
often incapable of improving worker efficiency as workers take them for granted.
Employers consider worker costs, not wages, as their costs in an increasingly
competitive marketplace. Many indirect wage costs increase at rates well above the
rate of inflation while benefits provided under these programs are often reduced.
AMERICA’S ECONOMIC ENVIRONMENT 27
This requires wage earners to use part of the family income, often after-tax income,
to pay for services and benefits they no longer receive.
The growth in family income is therefore no longer an effective measure of
improvement in the standard of living. In fact, as much as 7% of an average family
income in 1999 was spent on services or benefits previously covered by employer
or government programs, and this percentage is growing.
Considering recent developments, health care coverage of employees, particularly
retirees have been drastically reduced, particularly by major corporations. It is
expected that the average U.S. wage earner will have to spend an increasing amount
of his take home pay to simply maintain the level of services, including health
care that he used to get for free. Similarly, an increasing percentage of the cost
of insurance for continued coverage after retirement is being born by workers
themselves.
These costs to family income are conservatively estimated to increase now at
a rate of 1.6–2.4% of average family income per year, unless radical changes in
health care and related costs are introduced. This erosion will negate any growth
in family income and will assure a decline in the standard of living of the average
American.
While we continue to claim the world’s highest living standard, these ominous
signs indicate that we are rapidly losing our advantage. Even if we consider average
after-tax income, the U.S. is still ahead of most countries because of our lower
income and consumption taxes. However, things are changing rapidly, and tax
burdens may soon erode the current small after-tax advantage of U.S. wage earners.
The total cost of health care in the U.S. is not only burdened by overstaffed
hospitals, overpaid doctors, and excessive investment in expensive, often highly
underutilized diagnostic equipment, but also by the high cost of an inefficient
insurance system, inefficient government bureaucracy, and an over-zealous legal
establishment which considers health care an easily mined lode of riches, where
mining is completely risk-free.
Although the Clinton administration proposed a $41 billion cost reduction in
hospital, doctors, and related costs, such a saving in Medicare/Medicaid costs will
probably simply be added as a new cost to non-Medicare/Medicaid patients, mostly
wage earners. (Total proposed cuts in Medicare/Medicaid were $62.6 billion.)
Not really addressed is the plight of over 36 million uninsured Americans, 80%
of whom work for small businesses or for themselves, who cannot afford insurance
and often receive only rudimentary medical care. As the average age of America’s
population increases, these problems will increase and have a significant impact
on America’s standard of living, particularly as the same people often do not have
retirement or pension benefits beyond social security.
While U.S. living standards are still among the highest in the world in terms of
real GDP per capita (using purchasing power exchange rates), they are not far ahead
of those of Canada and Switzerland. Using similar standards, Japan and Germany
were over 30% behind in 1990, with France, Britain, and Italy lagging even further,
but the gaps are closing rapidly. The U.S., Canadian, Japanese, German, French,
28 CHAPTER 1
and Italian GDP/capita in 1990 were $21.1, $20.8, $15.8, $14.8, $14.2, and $13.6,
in thousands respectively. Since then, the gap has narrowed appreciably with the
U.S. only about 18% ahead in GDP per capita terms. Not only is the gap closing,
but using purchasing power exchange rates, U.S. living standards will probably be
lower than those of several European and East/South East Asian countries within a
few years, and can be expected to fall even further behind if relative growth rates
do not improve.
motives apply to society at large which, to function effectively, must establish incen-
tives and disincentives to encourage people to behave in a manner that increases
the public, interests, and not just their personal interests.
While theoretical economists, and particularly development economists, have
included societal costs and benefits in their economic evaluations, little of these
concepts has ever played a role in the development of national economic policy,
particularly in highly industrialized countries that have been driven largely by
financial or capital market behavior and by trends in macroeconomic factors such
as employment, per-capita income, balance of payments, and government budget
requirements.
As the U.S. moves toward becoming largely a service economy, output and perfor-
mance by individual groups and companies are taking a back seat to dealmaking.
Effective dealmaking has become a major criterion for the evaluation of perfor-
mance and the principal measure of success in recent years. This after the U.S. led
the world into the post-industrial revolution over the last eighty years.
American productivity grew by an average of only 0.7% annually between 1973
and 1991. Output was largely increased not by improvements in labor productivity,
but by increases in capacity and employment. Now that productivity is finally
starting to improve as well, in some cases by respectable margins (3.5% in 1992
and by about 2.0% per year between 1993 and 2000 and now growing by over
3% again), we are faced with an excess in capacity. Ironically, this imbalance is
causing unemployment of the lower wage earners and improves mean income at
the same time. The situation will take time to change, as companies start to reap the
benefits of higher productivity and fewer workers combined with outsourcing of
mainly low skill work. Fewer workers means lower overhead cost per unit of output,
as overhead costs are a function of the number of workers and are independent
of worker output. Companies will therefore stop reducing workforces only when
productivity and lower workforce cost benefits allow them to increase their market,
which in turn may require some new hiring if, sales volume starts to outpace
productivity improvements.
While many U.S. industrial firms have experienced significant productivity
improvements and, as a result, greater competitiveness, the same is not true for
American health care, educational, and legal institutions. Also, while U.S. industrial
output has increased, as has U.S. manufacturing goods export, few new manufac-
turing jobs have been generated. During the period 1992–1993 (first quarter) only
100,000 new manufacturing jobs were generated, compared to 600,000 professional,
400,000 management, 340,000 service, and 260,000 new sales and marketing jobs.
This period saw declines of 400,000 clerical and support staff jobs and of 100,000
technical jobs mostly displaced by computer and office technology. In other words,
employees with inadequate skills and education are being replaced by technology
and by employees with technological skills. An interesting phenomenon is the
30 CHAPTER 1
U.S. industrial labor costs are not very different now from those of major
developed nations and are lower than those of some (Table 1). At the same time,
the distribution of the U.S. workforce has experienced a radical reversal, with over
54% of the employed now working for government, in services or finance and only
18.4% in manufacturing (Table 2).
During the first half of this century, U.S. industry led the world in the intro-
duction and use of laborsaving devices, largely by the invention and application
of automation in manufacturing, agriculture, textiles, and food processing. It has
fallen seriously behind in recent years. Although many of the advances in robotics
automation and artificial intelligence originated here, the U.S. has been slow to
adopt such technology and only started a serious move toward large-scale robotic
plants during the last 10–20 years, largely driven by electronic communications
equipment and component manufacture.
U.S. robotic manufacturers posted a 21.5% increase in new orders in 1992 and
delivered 5,261 robots valued at $495.9 million – the highest figure since 1986. The
trend has continued and the United States now (2004) uses approximately 86,000
robots (Chrysler alone used 3,000 by 1992). Yet Japan installed that many every
year and by 1999 had over 650,000 in use, a competitive edge that will increas-
ingly affect U.S. trade, particularly in manufacturing. Unless the U.S. increases its
use of robots in manufacturing soon, other industrial countries will surpass U.S.
manufacturing labor productivity. The rate of introduction of automated equipment
in U.S. manufacturing has accelerated in the last decade but still lags behind Japan
and Germany.
Today services are the most important source of new jobs. Yet in service indus-
tries, the single most rapidly growing economic sector, not just in developed but
also developing countries, productivity growth lags far behind that in manufac-
turing. The service sector in the U.S. now accounts for over 70% of all private
employment and for nearly 48% of total worldwide (2000) employment.
In manufacturing the use of total quality management has shown to greatly
improve productivity, but service industries have made little effort to improve their
service quality to improve their productivity.
The worst performing service industries in the OECD countries are financial
and business services, with an average annual rise in worker productivity between
1973 and 1999 of 1.0% in the U.S., 1.9% in West Germany, and 1.7% in
Japan. The wholesale and retail trade industries achieved average productivity
increases of 0.6%, 1.7%, and 3.5% respectively during the same period. Overall,
service industries in OECD countries achieved productivity increases of only
20% during that period. The situation has not improved appreciably notwith-
standing massive investments in information management and communication
technology.
At the same time, service industries are expanding rapidly and their major sectors,
including government except for the military, accounted for nearly half the total
GNP of the U.S. as shown in Table 3 for 1992/93. Since then, their contribution to
total GNP of the U.S. has increased from 48% to 60.8% of GNP (2000).
By year 2020, the service sector is expected to account for well over 76% of
the total U.S. economy. Productivity of the service sector varies much more widely
than in manufacturing and agriculture and is significantly lower in relative and
absolute terms. More than 60% of the service sector will be devoted to institutional
services such as education, health care, and law enforcement.
reached historic lows. Discount rates for these countries, as reported by the Federal
Reserve, the Bundesbank, and the Bank of Japan during the period 1988–1992,
were as shown in Table 4. During the eighties the U.S. was definitely a high-capital,
high-labor-cost country, but conditions have changed and America has become a
country with low interest rates and higher labor skills.
The main problem in the U.S. was really a lack of adequate credit. The failure of
so many banks and the resulting stringent credit requirements made it difficult to
raise capital. Banks also found it increasingly difficult to attract deposits at the low
rate of interest offered to depositors, particularly as interest earned is taxable under
both federal and state law, reducing the effective return to depositors to about 60%
of the interest earned. American banks in general also maintain a wider gap between
interest charged and interest paid on deposits than banks in other industrialized
countries.
The costs of raising capital from other sources, such as the stock market, are
significantly lower in the U.S. The long slide of foreign markets, particularly in
Japan, has made it exceedingly difficult and increasingly expensive to raise money
this way. Similarly, bonds provide capital at much lower costs in the U.S.
The lower cost of capital has allowed U.S. industry a greater parity with its
principal competitors by providing opportunities for lower-cost capital and more
level labor rates. As shown in Table 5, U.S. costs of labor, including all benefits,
were well below those of most Western European industrial nations in 1992,
although still 50% above those of Japan. These numbers exclude profit sharing or
bonus costs, which in Japan often add 30–50% to the cost of labor. The conditions
shown in Table 5 continued and exhibited the same hourly labor wages plus benefits
relationships until 2004, with an average increase of 50% during the 12 year period.
At the same time, the rate of growth of labor cost in the U.S. was not only the
lowest among industrial nations, but was only one-quarter of the average increase
in labor cost in the major industrial nations during the period 1985–92. At the
present rate of labor cost escalations, which remained nearly constant until 1996
and only increased by an annual rate of 2.9% since, U.S. labor costs are among
the lowest of the major industrial nations now in 2005. At the same time the
productivity of the U.S. industrial worker continues to lead that of workers in
other industrialized countries, yet the productivity lead of U.S. workers is declining
rapidly. Worker productivity in Italy, France, Germany, and Japan is expected to
34 CHAPTER 1
surpass that of the U.S. workers within a few years if the comparative rate-of-
productivity gains are maintained.
U.S. IMMIGRATION
has grown substantially since then. Total immigration from Eastern Europe and
the former Soviet Union between 1990 and 1999 is now estimated to exceed one
million. These new waves of immigrants had a profound effect on the U.S. labor
market. They permitted revival of much of the garment industry, which often used
illegal and underpaid immigrant labor and has sustained the economies of certain
sectors of U.S. agriculture, particularly in Florida and California where illegal
or uncertified immigrants often serve as the major source of agricultural labor,
particularly in meeting the needs of seasonal employment. Today most immigrants
come to the U.S. for economic not political or religious reasons.
There has long been a debate about energy taxes, and the Clinton administration
had advocated a modest energy tax of 3–8 percent to be phased in over a three-
year period. This tax was expected to raise about $22 billion in revenues over
the 1993 to 1997 period, a rather small increase when considered against the then
projected cumulative budget deficit over the same period. Energy use, especially of
automobile fuels, imposes major environmental and socio-economic costs for which
future generations will have to pay. In addition we are burdening them with an
increasing national debt and penalizing the economy with larger balance-of-payment
deficits.
We are the only OECD country which does not impose a large fuel tax to
discourage wasteful use of fuel, particularly in transportation, so as to encourage
reduction in fuel imports, increased use of alternative less-polluting fuels, greater
use of mass or public transportation, or to provide incentives for the development
of more efficient or renewable energy sources for the propulsion of transport and
other liquid-fuel users.
While some drivers are starting to use hybrid and other fuel efficient cars,
government policy, particularly at the federal level, does little if anything to
encourage use of low fuel consumption and polluting cars. In fact, the ownership
of monstrous so-called Sport Utility Vehicles or SUVs, most of which get as little
as 12–15 mpg, is encouraged by special tax and dealer incentives even now at a
time when there is a severe shortage of U.S. refining capacity, very high level and
costs of imports, and increasing reduction in air quality, particularly in the major
urban areas. Few SUVs are bought for rural or rough country road transport, for
which they are designed. Most serve as commuting vehicles for soccer moms. The
automobile industry which attains a much higher profit margin in the sale of SUVs
than ordinary automobiles is pushing this policy, which is on all accounts against
the public interest.
No new refineries are planned in America at this time, which means that the U.S.
will have to import an ever-larger amount of refined products, mainly gasoline.
The public in general objects to new refinery construction and few politicians are
willing to make the need for new refineries an issue. In other words, Americans
want the cake and eat it too. They want cheap fuel and a clean environment without
36 CHAPTER 1
refineries in their backyards. Some states have made feeble efforts of encouraging
use of fuel efficient cars, but their numbers are small and the incentives provided
are often of little value. At the same time, neither the federal government nor the
states are willing to increase fuel taxes significantly. In fact, the U.S. has among
the lowest fuel and particularly gasoline taxes in the world. The new energy bill
discussed by Congress in 2004 is largely a farce, as it neither addresses fuel use
efficiency or supply in a meaningful way.
In practically all other developed countries, these taxes increase the cost of fuel
by 70–120% and thereby provide real incentives for change. We, on the other
hand, proposed to increase the price of oil by only about 18%, using a BTU tax.
Similarly coal would be burdened by a tax of only about $5.60/ton, a 26% increase,
independent of the cleanliness of the coal, while gas would be taxed at about 13%.
The increased cost to consumers would obviously be less, as noted before, as many
other costs (including local taxes) are added before the retail sale of the fuel. As a
result, the price of gasoline would have increased a paltry 5% or 7–8 cents/gallon,
with a 3–4% increase in the cost of electricity. This did not happen, but the price
of fuel increased anyway by 1999 as crude oil and natural gas prices skyrocketed
through the concerted effort of the petroleum/gas-producing monopolies. Major
gasoline price shock was experienced in May 2004 when the average cost of gasoline
at the pumps in the U.S. climbed above two dollars nationwide and later in August
2004 when the price of crude oil reached nearly $50 per barrel in the international
market. In the aftermath of Hurricane Katrina, the retail cost of gasoline climbed
to over $3.20/gal in 2005.
The proposed energy tax would do little to reduce consumption, oil imports or
air pollution, and may in fact achieve the opposite in some cases, without providing
meaningful additions to tax revenues. As an example, oil imports may fall by less
than 4% if at all according to the Congressional Budget Office. Similarly, the impact
on air pollution would be insignificant and may be negative as people switch to
lower-quality fuels. Notwithstanding the opposition of some industrial and public
interest groups to even these more than modest increases in fuel taxes, the impact
on energy costs of these tax increases would be less than those caused by:
1. frequent changes in rates of exchange of the value of the dollar;
2. changes in the demand/supply balance of fuels;
3. supply and resulting price distortions;
4. changes in state and local taxes; and
5. political changes and unrest or conflicts in the world.
The growth of GNP usually causes significantly larger changes in fuel and energy
consumption than would the marginal BTU tax the Clinton administration proposed
or the energy bills proposed later. Similarly, maintaining low energy taxes does not
help the growth of real GNP, as shown in Table 7.
The former Office of Technology Assessment of the U.S. Congress reported in a
Report Brief dated April 1993 that the proposed energy tax would be levied at the
rate of $0.599 per million BTU for petroleum products and at $0.257 per million
BTU for most other fuels (assessed rates are shown in Table 8). Energy materials
AMERICA’S ECONOMIC ENVIRONMENT 37
1960–1969 41%
1970–1979 28%
1980–1989 24%
1990–1992 06%
1993–2004 29%
NA = not available. Mct = 1,000 cubic feet. Kwh = kilowatt hour. Coal prices for Canada are for 1989.
Source: International Energy Agency, Energy Prices and Taxes, Third Quarter, 1992.
used as individual feedstock would be exempted from the tax. The tax would be
phased in over three years and would be indexed to inflation beginning in the fourth
year. The actual price increases caused by these taxes would depend on their energy
supply-and-demand effects in addition to their assessed rates.
On average, U.S. industry pays lower energy prices than do its major foreign
competitors, except in the case of natural gas and electricity in Canada (see Table 8).
The proposed energy taxes would not raise U.S. industrial energy prices above
those of most other highly industrialized countries and would maintain them at a
fraction of the prices of our major industrial competitors.
At the same time that the rate of growth of real GNP during the period of
1990–92 (Table 7) continued to plunge to its lowest level since WWII, the degree
of inequality as measured by the distribution of income has grown more and more
and is now over 0.40 in terms of the “Gini” ratio, an accepted method for the
analysis of income inequality. This unacceptably high growth is more than three
times that of Japan.
Similarly worldwide energy use expressed in equivalent tons of oil used
per unit of GNP has declined from nearly 0.9 tons/$1,000 GNP in 1920 to only
about 0.3 tons/$1,000 GNP in 1985, 0.27 tons/$1000 GNP in 1995, and 0.22
38 CHAPTER 1
tons/$1000 GNP in 1999. France and Japan had been able to reduce their energy
consumption to just over 0.21 tons/$1,000 GNP by 1995, while the U.S. continued
its inefficient oil use and consumed over 0.45 tons/$1,000 GNP in 1995 or well
over twice that of other major OECD countries. As a result, the U.S. continues to
emit an inordinate amount of carbon air pollution as shown in Table 9.
This wasteful energy consumption can also be expressed in tons of oil equivalent per
capita energy consumption. Goldenberg [Ref. 4] computed U.S. consumption as 7.1
tons/year/capita or more than twice that of other OECD countries such as Italy, Japan,
France, England, and Germany and 7 times that of Brazil, 15 times that of China, and a
whopping 38 times that of India and sub-Saharan Africa. It is not surprising that we are
charged with not only being wasteful but also being the major air polluter in the world.
The U.S. with a population of less than 4.79% of the world total emits over
3 times as much carbon per capita as the world average emission. Similarly, with the
exception of the period from 1977 to 1982, the use of U.S. (residential/commercial)
building energy (quads/year primary) has continued to increase at an annual rate of
0.4 quads/year since 1970 and is now equal to over 30 quads/year, with an equivalent
energy cost of about $170 billion on energy used in U.S. residential and commercial
buildings. This annual increase of about 1.35%, while in line with net population
increase and just slightly below the increase in residential and commercial building
space inventory, shows that little if any improvements are experienced in building
energy efficiency. Materials and technologies are available which could reduce or
at least maintain U.S. building energy costs level and there is a potential to actually
reduce building energy consumption from a projected growth to 41.1 quads/year in
2015 to only 28.0 quads/year or a savings of 14 quads or one third of the projected
level if currently available technology is used in
1. additional insulation
2. compact energy efficient light bulbs
3. efficient gas furnaces
4. efficient room and central air conditioners
5. water and pipe insulation
6. improved burners
7. duct tightness and insulation
8. electronic ballast for commercial lighting
9. computerized energy building control systems
AMERICA’S ECONOMIC ENVIRONMENT 39
While many of these technologies are more expensive, the typical payback period
at current fuel costs varies from as little as one year for water heater insulation to
4–7 years for efficient furnaces or boilers. With increasing fuel costs (or a declining
value of the dollar) payback periods may become even shorter. Furthermore, federal
or local government incentives may reduce payback periods even further.
Most importantly, we can reduce our expected building energy costs in year
2015 from about $240 billion in 1990 terms to less than $160 billion with appro-
priate building energy efficiency levels. The same applies to transport, commercial,
agricultural, and industrial energy consumption. While successful efforts have
been made to improve industrial and transport air and water emission standards,
energy conservation is largely perfunctory. It is unfortunate that the world’s leading
economy is not leading the world in conservation, energy use efficiency, and
environmental protection. There is a need for real action, meaningful incentives,
and drastic measures to lead the world towards a cleaner, sustainable environment.
Throughout most of the last century the U.S. has been the world’s largest and most
productive economy in both absolute and relative terms. Its total gross product still
surpasses that of its nearest competitors by a factor of four; and even the European
Union continues to lag behind the 1995 U.S. GNP of over $6.42 trillion and the 2002
U.S. GNP of $9.86 trillion. (Figure 2). On a per-capita basis, however, the picture is
different. Several industrial countries are now ahead of the U.S. in personal income
and per-capita GNP, which reached $35,040 in 2002. Their relative advantage is
growing because of greater productivity growth rates notwithstanding the fact that
U.S. labor productivity is still the highest in the world – but only barely so.
There is also the potential that China may displace the U.S. as the world’s largest
economy in absolute terms within 15–20 years. China’s population is nearly 4.6
times that of the U.S., and its economic rate of growth was in recent years 8–12%
or 4 times that of the U.S. on average. If China is able to maintain this growth
rate, then its GNP would grow to over 8.0 trillion in 1995 terms by the period
2015–2020, surpassing that of the U.S.
Japan responded in 1996 to U.S. demands to stimulate its economy by announcing
a plan worth more than $100 billion in infrastructure investment. This follows an
$80 billion stimulus package just nine months earlier. It is curious to note that
Washington considered this amount to be insufficient, notwithstanding the fact
that it is several times the size of the stimulus program proposed by the Clinton
administration for the U.S. at the time. While Japan certainly did not always behave
as a fair trading partner in a Western sense in recent years, and does not show
economic and political leadership corresponding to its importance in a global sense
in world trade and the world economy, their approach to international trade has
been consistently different from ours or from that of Western Europe. It has largely
focused on narrow national objectives.
40 CHAPTER 1
7
GNP
Capital
Consumption
6 NNP
While many U.S. and European firms have been quite successful in expanding
trade with Japan, others have been woefully unsuccessful and the U.S. government
seems to have been frustrated by the Japanese perception of open trade. At the same
time, it is increasingly obvious that the world and we need Japan and the other
Asian economies, and that these nations, which comprise more than half the world’s
population and about one-third of the world’s total product, play an increasingly
important role in the world economy.
The economies of Singapore, Korea, Taiwan, Hong Kong, Thailand, and China
have since 1984 grown at an average rate of 2–3 times that of the OECD nations and
3–4 times the rate of the U.S. and Europe. If this rate is maintained, these countries,
plus Japan, will account for over 42% of the world economy by 2020. China’s GNP
is expected to equal that of Japan by the end of 2008, and should outgrow that of
the U.S. only ten to fifteen years later, unless the U.S. economy achieved economic
growth rates of more than the measly 2–3% per year of recent times.
It is of the utmost importance to insure that this newly powerful Chinese economy
and its economically important Oriental neighbors remain cooperative members of
AMERICA’S ECONOMIC ENVIRONMENT 41
the world’s trading system. Japan has moved closer to China and Southeast Asia
in recent years, and has made major investments in these countries. In fact, these
investments are now nearly equal to those made by Japan in Europe.
There is a real danger that the East and Southeast Asian countries might form
strategic blocks to rival the North American trading block or the European Union.
There is an equal threat that they could develop an Oriental block to counter the
two Western trading blocks combined. Japanese trade is following its investment,
rapidly tilting toward East and Southeast Asia. Its exports to Southeast Asia alone
grew from 23% to 31% of Japan’s total between 1987 and 1991 to 35% by 1999
and nearly 40% by 2004. If exports to China are added, then nearly 48% of Japan’s
exports went to Asian countries in 1999. It is estimated that more than 50% of
Japanese trade was intra-Asia in 2003.
In many ways China offers an ideal market for Japan. It has a large, increasingly
affluent population, important coal and other resources, a vast labor pool, and a
culture similar to their own. In fact, business and social customs are similar in these
countries and quite different from those in the West. Therefore, it is not surprising
that expatriate Chinese, even Taiwanese, Japanese, and Koreans, seem able to pick
and choose some of the most attractive business deals with China, even in areas
where Western firms once held traditional advantages.
At the same time, these Asian countries absorb nearly 29% of American exports
and were the source of nearly 50% of U.S. imports in 2004. Therefore, we cannot
ignore the region and must find ways to do business under new conditions, in a
different environment, in which legal niceties account for less than personal contacts
and trust. Oriental trading terms are often determined not by hard-nosed negotiation
in which one emerges as the winner and the other the loser, but where all win and
continue to win as part of a long-term relationship based on trust.
Considering Asia as a whole, growth has been quite uneven. The total Asian
population was 2.854 billion in 1994, over 50% of the world’s total, with an average
per capita GNP of US$1,624. But this figure is misleading, as 2.538 billion Asians
or 88.93% lived in low-income countries, with an average per capita GNP of only
US$365. They accounted for only 19.98% of Asia’s total GNP of 4,635 billion.
Asia’s middle-income nations, with a population of 184 million, had a per capita
GNP of US$2,200 in 1994, while high-income countries, with a population of
132.3 million, had a per capita GNP of US$24,495. Therefore they contributed
8.79% and 71.23% respectively to Asia’s GNP. These huge discrepancies provided
both opportunities for expanded markets and threats of political upheaval. Asia
is fortunate in that it has ample land areas, and even with its large population,
maintains a reasonable population density in most areas.
Total average population density in Asia was only 135.7 per square Km in 1995.
The high-income countries of Asia comprise less than 5% of the population, occupy
1.8% of the land area, and produce 71% of the total GNP. Because of the large
discrepancy in income and large population, economic growth, growth with more
equity in Asia, is a difficult problem. For example, the GNP of Asia would have
to increase by 40% if the per capita income of low-income Asian countries were
42 CHAPTER 1
Exports play a much smaller role in the U.S. than in other countries. Major U.S.
competitors, for example Germany and Japan, had export trades in 1991 of 28%
and 13.5% of GNP respectively versus the dismally low U.S. export value of under
7.5% of GNP. The picture looks even worse when considering newly industrialized
countries such as South Korea, Taiwan, and Singapore which achieved export
volumes of 27%, 34%, and 40% of GNP, respectively, in 1994. Although the U.S.
has remained the world’s largest trader, its imports and exports continue to lag
those of its major trading partners in terms of percentage of GNP and in fact are
actually declining in the beginning years of the twenty-first century.
U.S. manufacturers often consider foreign markets as difficult and requiring long-
term development and commitment as well as local know-how and presence. They
often feel that their existing technology may not be appropriate and do not want to
invest in the effort required to adapt it to meet export requirements. Although U.S.
exports have boomed in relative terms, in the early 1990s, this was due in large part
to the low value of the dollar, which made U.S. goods cheap to foreign importers
in hard currency countries. This was a temporary phenomenon that was reversed
in part due to the high value of the dollar in 1998–2000, only to see it reverse
again during the period 2001–2004 when the dollar again depreciated against major
currencies.
In the long run, the U.S. must undergo a radical change to participate in world
markets, particularly markets of manufactured goods. The U.S. government must
become much more supportive of U.S. export trade by providing effective links,
contacts, and other aids. Small government programs, such as the U.S. Trade and
Development Program, are well meant but are insignificant in size and disjointed in
their operations. U.S. foreign delegations should and could do much more to assist
U.S. export trade, and the U.S. government will have to streamline and expand its
export loan guarantee and other similar programs.
Most importantly, U.S. industry must learn to think globally. For too long we have
considered the U.S. to be the dominant market for U.S. industry and discounted the
need to look for other marketing opportunities. This is no longer true, particularly
as foreign companies have seriously penetrated U.S. domestic markets and reduced
market opportunities for U.S. industry in our own country. While in Japan over
60% of the 500 largest companies export at least 20% of their output, more than
half the U.S. exports are generated by less than 100 U.S. companies. This means
that 15% of all U.S. companies produced 85% of total U.S. exports (1996).
AMERICA’S ECONOMIC ENVIRONMENT 43
Foreign trade disputes have become major American foreign policy issues in recent
years. U.S. trades with Japan, Taiwan, and more recently China, have experienced
major negative balances and we always blame our trading partners for these trade
deficits. True, some of these countries do not play fair and impose direct or indirect
barriers to American exports, but the major cause is really the fact that more and
more American companies are outsourcing the manufacture of their products or at
least components required for their products. In the period from 1965 to 1980, most
American electronics and small appliance producers moved their manufacturing to
Japan, then later to Taiwan, Korea, Malaysia, and the Philippines, and in the most
recent past to China and India. The same occurred in automobile production and
textiles, as well as in garment manufacture. In fact, this outsourcing by American
firms accounted for 16–26% of the value of our imports from 1980 to 1995, and is
estimated to have exceeded 36% in 2003.
In other words, had U.S. manufacturers maintained their domestic productivity
and product quality, and educated their customers to prefer domestically produced
goods, America would have experienced positive balances of payments in its foreign
trade throughout this period. Therefore, most if not all our imbalance of trade
AMERICA’S ECONOMIC ENVIRONMENT 45
While the U.S. recognizes the growing importance of Pacific Rim economies and
trade, it is still largely focused on Western, meaning basically European, approaches
to trade. In 1996 Japan represented about two-thirds of the Asian economy. While
this ratio had been growing until recently, it has stabilized and in fact declined
since 1998. At the same time, the relative position of American companies in Asia
has been weakened, and their ability to partake in the economic growth of Asia is
actually declining. This picture is made even more acute by the rapid emergence
of China as an economic power. Although China’s annual per capita income is still
low, estimated to be somewhere between US$1600–2300 (2004), the sheer size of
the country with its estimated population of over 1.2 billion makes it a formidable
economy which is even now estimated to have a GNP of US$1.8 billion. Assuming
an annual growth rate of 9–12%, China will overtake Japan as the world’s second
largest economy in less than 5 years and the U.S. in about 15 years. By the end
of 2005, the combined economies of East Asia (Japan, Korea, China, Taiwan, and
Southeast Asia) were estimated to have surpassed the economy of the U.S. By
2005 China and Japan are each expected to represent about 36% of the total Asian
economy.
Similarly the East Asian countries commonly referred to as the Orient will
account for 50% of world trade by 2010 and will in fact surpass U.S. foreign trade
in value by the year 2006. Therefore, it is increasingly important for the U.S. to
direct more of its trade toward Asia if it is to maintain a significant role in world
46 CHAPTER 1
trade at large and take advantage of the rapid growth of the Asian, and particularly
East and Southeast Asian, economies.
Such a strategy may require a major change in American attitude and policy
toward its trading partners. It may also require different approaches and methods of
doing business. Oriental culture is deeply rooted and, unlike ours and that of South
America, is not founded on European heritage nor was it ever deeply affected by
European ways as were the former colonial countries of Africa, South Asia, South
America, and Southeast Asia. East Asian Oriental countries are unique in that they
have been only peripherally affected by European or Western ways, concepts, ideas,
morals, and religion. They have always maintained their own cultural, moral, and
religious base. Religion and moral values are much more closely intertwined in
the Orient than in the West, and one implies the other in most Oriental societies.
Interpersonal relations, heritage, and family ties have a very different meaning, and
education plays a much greater role than in most of the Western societies.
Similarly, interpersonal trust is taken very seriously in the East and forms the
basis not only for social but business relations. Reputation and name are valuable
assets and must be earned by long-term proof of reliability and trustworthiness.
As a result, business as well as social relations are more permanent and require
little if any outside or third party, particularly legal, involvement. Oriental societies
have little need for lawyers or arbitrators of any kind, and the obligations of the
parties in any relation or undertaking are traditionally developed on an equitable
basis, something we would describe as a win-win relationship. The result is that
relationships last, and parties to agreements and undertakings are cooperative and
assume that the success of the overall undertaking is their success. Therefore,
suppliers usually consider themselves part of the principal manufacturer’s under-
taking. These close relationships continue to the sub-contractor and worker levels.
Profit sharing is employed at all levels to assure the maintenance of long-term mutual
benefits.
American firms, accustomed to competitive and usually adversarial relationships,
often have difficulty adjusting to and working in such a different environment. In
the Orient, cooperation and mutual benefit are the important driving forces in any
relationship. To succeed in this environment, American business practices as well as
American government policies may have to change. American business must learn
to work cooperatively, with long-term objectives. Similarly, government similarly
will have to develop a cooperative and supportive approach and policies.
In addition to adjusting our approach to business practices when dealing with the
East, the U.S. government – and Americans at large – cannot assume that Oriental
values are the same as ours in terms of human rights, interpersonal relations, political
freedoms, economic laissez faire, individual expression or cultural and religious
liberties.
The historic and cultural developments were distinctly different in the Orient and
affected the relative importance and values of many factors. For example, in the
Orient, freedom of expression is considered less relevant than freedom from fear
and deprivation. On the other hand, we in the U.S. are more immediately concerned
AMERICA’S ECONOMIC ENVIRONMENT 47
with intellectual and political freedoms than with personal safety and economic
security.
We are outraged when Singaporean courts convict a 6-foot tall, 18-year-old to
caning as punishment for vandalism, but we do little to prevent teenagers from
carrying and using guns in American schools. We suffer from and abhor crime,
but are unwilling to effectively punish the guilty, preferring so-called rehabilitation
even if it does not work. We are unwilling to introduce radical deterrents to crime.
Drug abuse and drug-trade-induced crime is now at the root of much of America’s
lawlessness. However, most of our so-called solutions aim at stopping the influx
of drugs into the country instead of reducing or eliminating illegal drug use in
America. In other words, we often try to solve our problems by enforcement outside
our borders instead of attacking them from within. We are fighting drug imports
but do little to reeducate our society and provide meaningful disincentives for drug
use in the U.S. Similarly we try to reduce the import of cheap handguns but not
their ready availability and access in the U.S. Yet, we know well that as long as
there is a demand and money to satisfy it, some one will always be there to meet
or satisfy it.
Attempting to impose our ideals, principles, and values on others makes sense only
if we abide by them ourselves and if they are consistent with the historic, cultural,
economic, and political environment in which we want to impose them. It would
be ludicrous to try to impose ideals that we ourselves do not use or believe in or
our own national concepts that do not apply outside the U.S.A.
Conditioning trade with China on human rights is not effective when our
definition of human rights is historically strange to that country and when our own
human rights record is less than perfect. We must first understand foreign culture,
history, and value systems before we try to impose our norms, which are often
measured in a way that makes little sense in another environment.
Britain’s elite schools used caning until recently without being criticized. Many
in the U.S. accepted it as simply a queer British practice used in building character
in the British upper class. However, when it is applied to an American teenager
who vandalized property in an Oriental country, it is considered cruel. If the same
teenager were enrolled in an elite British school, his parents would necessarily
consider caning an effective part of his education. We similarly condone hazing in
our universities or even more cruel rites of entry in some of our military schools.
To be effective in our relations and trade with the Orient, we must understand the
fundamental differences in cultural, social, political, and other values. We cannot
simply impose ours on these much older and, in many respects culturally more
advanced, societies. This is particularly clear when the Western world, including
America, is increasingly guilty of hypocrisy in applying their standards to others,
as evidenced in Bosnia and other places around the world, in terms of security. Our
48 CHAPTER 1
way may be good and good for us, but it certainly is not the only way. We must learn
to understand and accept those of other people. The world gains by its diversity.
We are similarly hypocritical as shown before in imposing our newly found
standards of environmental consciousness or pollution standards on others even
when we were and are the world’s premier polluter and others contributed little if
anything to the deterioration of the global environment. At the same time, we make
no determined effort at limiting our consumption of energy and other materials that
produce pollution and environmentally dangerous waste products.
Oriental societies have adopted much of the basic capitalist and democratic
principles of the West and have tailored them to their environment and culture.
They have come a long way and both they and we have reaped many benefits in
the process. However, they will remain Asians with traditions and morals unique
to their ancient culture.
Political freedom, including freedom of expression, in Japan and even China,
has greatly advanced, and authoritarianism is less and less imposed. But their
freedoms will never be the same as in the West, particularly in the U.S. Oriental
culture values the rights of society above those of the individual, independent of the
political environment or system. Group consensus and not individual order is the
preferred approach to Oriental decision-making. The tide of economic change and
new opportunities, even for lone entrepreneurs, may eventually change the system.
In the meantime, we must respect the differences and not judge others by our
own parochial standards. I may be free to criticize my government as well as my
boss, and pay only with loss of opportunity to work for the government or loss of
my job – I will not be imprisoned. On the other hand, I am not free to walk our
city streets without threat of physical danger or to transact some business without
being ripped off, fall prey to some scam or otherwise suffer. Lack of these freedoms
makes some of our individual rights meaningless.
Human rights have many dimensions that are interpreted differently by different
people. Who are we to assume the right to interpret the meaning of human rights
to the rest of the world? Maybe we are the most perfect union, but until we are
able truly to live by the tenets of our Constitution, I believe that we should work
on improving ourselves before preaching to others.
It is difficult to explain to others that we in America object to caning as
punishment when we cannot walk our streets without fear of attack and when half
of all murders in the U.S. are committed by convicted murderers on parole. It
is difficult even to explain our concept of economic freedom when white collar
crime abounds, for example when our savings and loan banking industry collapsed
as a result of gross greed and corruption. Many of our mutual funds engage in
fraudulent transactions and investment bankers, advisors, and brokers engage in
unsavory practices with impunity. Our political freedom of expression is less than
effective political freedom, when much of our legislation is influenced more by
power cliques and lobbyists than by the voiced sense of the electorate. True, we
should support human rights, but let us not be too doctrinaire as long as our own
house needs improvements and cleaning.
AMERICA’S ECONOMIC ENVIRONMENT 49
While large wage differences are a fact of life in a complex technological society,
these are more pronounced in the U.S. than in other industrialized countries. In the
long run this not only affects U.S. worker moral but also U.S. trade competitiveness
and incentives. In France and Germany, the wages of the lowest paid have risen
significantly in recent years relative to average earnings. On the other hand, in
America real wages for the bottom earners have fallen in relation to average earnings
since 1980. This may be due in part to declining union membership and power,
but some claim that our post-industrial society in which high-paying manufacturing
jobs are replaced by low-paying service jobs may be to blame. In the U.S. the top
10% of earners now earn on average 5.8 times as much as the bottom 10%. This
compares with a differential of 2.5 in Germany and 2.7 in Japan.
Figure 4 shows the widening gap between the real wages of the top and bottom
10% of wage earners in the U.S. As the supply growth of highly trained workers has
slowed in the U.S., we must expect this differential to continue. This is explained
in part by the lack of discipline and more concern with differentials which in some
cases, such as executive salaries or income in the U.S. are approaching absurd
or obscene levels. CEO’s incomes are now commonly 20–100 times those of
professional employees in their company. These imbalances are a serious economic
issue, which may haunt future development as we move into an even more advanced
technological society and could ultimately eliminate our middle class altogether.
To prevent this, labor unions and professional associations may have to reinvent
themselves and form a new type of middle-class union whose aim would not be
restricted to wages, working conditions, job security, health care, and retirement
50 CHAPTER 1
benefits, but which would include continued education, job and social status, profes-
sional role, and labor/worker management cooperation.
Worker’s compensation in the U.S. has grown less in the last 15 years than in
any OECD country. While it grew in the U.S. from an average hourly compensation
of $12.81 in 1985 to $17.42 in 1996 and $26.30 in 2003, Germany and Japan
experienced raises from $8.92 to $29.20 and $34.20, as well as $6.48 to $20.48 and
$25.00, respectively. Canada’s and Britain’s raises though were less spectacular.
Low labor cost countries such as Hong Kong and Korea experienced even more
explosive increases in labor compensation. Low inflation was a major factor, but
another was probably the increasing percentage of service jobs. In manufacturing
where the U.S. only experienced a 30% increase in hourly compensation during
that period, Germany had an increase of over 190%. In the decade of 1985–1996
the U.S. experienced restrained wage inflation which greatly contributed to the
improvement in U.S. trade competitiveness as well as very low rates of inflation.
Similarly, the decline in the value of the dollar during that period and again in
2001–2004 improved America’s export position. The situation may change in future
with increases in the value of the dollar.
to feel that in addition to these issues we have an obligation to lead the world
and correct its ills. We lead the war in Afghanistan and Iraq to correct aggression.
We took the lead in Somalia and were leading the peacekeeping efforts in Bosnia,
Kosovo, Macedonia, and more. All probably just issues.
Yet while these actions perpetuate the image of America as a leader in world
politics and security, it is not always evident that they advance America’s economic
position and leadership nor necessarily its political and moral influence and prestige.
They may in fact cause the reverse, not only in fiscal terms but also by diverting our
attention from many of our domestic problems. We have done and are continuing
to do more than our share in world politics and peace keeping. Yet we must more
clearly pronounce a policy of American interests which provide a proper balance
of American political, moral, and economic leadership, a policy that assures our
ability to maintain our values and continuous improvements in the quality of life for
all Americans. We will not achieve this if we continue to allow the U.S. economy
to degenerate into a pure service, institution, and government economy, wholly
dependent on others for real goods.
To maintain U.S. leadership, we must be economically strong. Yet, our economy
is increasingly being drained by ineffective and wasteful government and institu-
tions. Unless this trend is reversed, the U.S. may not only lose its economic, but
also moral and political, leadership.
America is now the undisputed economic and military leader of the world, but
it lacks an international outlook in its strategic, economic, and social policies. In
other words, it is perceived as a leader because of the size of its economy and
strength of its military, but many in the world at large accept its leadership more as
an accepted fact than an earned position. Though American culture often provides
the spark for new developments in art, music, dress or even culinary habits, these
are usually accepted more by the young who want change than by other cultures
because of their leadership or superiority.
American culture, visual, art, music, as well as literature have all made signif-
icant contributions. In science and technology, America stands supreme, not just
because its citizens won nearly half of all the Nobel Prizes and were respon-
sible for many of the important technological advances during this century, but
because Americans make science and technology work and develop new and
highly original uses or applications. Yet somehow with all these accomplish-
ments America has earned the envy, but not really the respect, of the rest of the
world. Americans are an enigma to many outsiders. They are unassuming, yet
often at the same time conceited. They are approachable but not very social. They
consider themselves largely isolated but always find themselves in the thick of
things.
Americans stress individuality instead of community that is the emphasis in most
east and south East Asian nations. America’s religious landscape is forever changing
and on the move. We look for spiritualism but our lack of religious and cultural roots,
combined with our lack of trust in both public institutions as well as family, makes
this difficult. We want to be connected without assuming obligations. We want
52 CHAPTER 1
SECURITIES MARKETS
The U.S. Stock Exchange is affected by inflation more than by any other factors.
Since World War II, the U.S. has experienced low inflation from 1948 to 1965 and
then again from 1982 to now. In each of these two periods, stock prices increased
significantly. Similarly, during the interim period of 1966 to 1982, when oil prices
escalated and large defense as well as other government expenses drove up inflation,
stock prices barely held their own.
The inflationary period was fueled by the Vietnam period with its 60% increase
in defense spending in 1969 alone followed by the Arab oil embargo in 1972. U.S.
inflation reached 14% by 1980 and was only deflated again towards the end of
the decade by new moves towards commercialization, technological competition,
AMERICA’S ECONOMIC ENVIRONMENT 53
deregulation, and privatization which continue until today not only in the U.S. but
has now encompassed the whole globe.
The American securities markets prospered between 1990 and 1999 in the longest
market rise since the big crash. Although there have been a few corrections, none
was more than 10–20% which in relative terms is rather small and too little to
result in large-scale flight from the markets. In fact, inflow of capital both by
individual and institutional investors, as well as by mutual funds has continued to
grow without abatement. Inflows into mutual funds reached near peak levels at the
end of 1998, a trend which continued during the first half of 1999. Since then, the
market has experienced a correction and a decline until 2003 and is only now in
2004 beginning to climb again.
A major impetus for the market’s growth in volume and value terms was the
introduction of large numbers of internal stock initial public offerings particularly
in 1998. The public’s fascination with the potential revolution in communications,
marketing, and information management offered by this technology caused obscene
valuations of Internet stocks, most of which had no profits and some even no
revenues when they went public. The public’s irrational interest in a stake of the
Internet’s future potential caused huge fluctuations in the stock market.
U.S. private savings, at the same time, continue their decline from an average
of 8.7% during 1947–1973 to 4.9% for 1986–1990 and well below that in
recent years (Alice Riflin, Reviving the American Dream). Similarly, net domestic
investment has declined from 7% of national income in 1947–1973 to only
4.7% between 1980 and 1990 and even less today in 2005. There is now a
large flow from other traditional investments into the stock market. A major
source of new stock investment funds are from home mortgages or home equity
loans. Many people are refinancing their homes, with new lower and attractive
interest rates. Home mortgage refinancing has increased available investment funds
significantly.
America is a consumer society. Savings rates are low and as people Americans have
always been optimistic. Things will get better or even better than now. Americans
live for today and have confidence that the future will take care of itself. Consumer
spending now accounts for about two-thirds of our GNP and there are no signs of the
slowing down of consumer spending. At the same time, consumer credit, excluding
mortgage debts, is at an all time high in both relative and absolute terms. It remained
nearly constant at $770 billion between 1990 and 1993 but has since surged to
reach $1300 billion by the end of 1998 and over $1650 billion at the end of 2003.
If we add mortgage debt of about $5000 billion, we find the Americans sustained
a debt burden of $6650 billion or about $26,000 per person or nearly $64,000 per
working American in 2003. In other words, the average working American owes
the equivalent of 2.1 times annual income before taxes and about 2.5 times after
tax income. At the same time or as a result of this, personal bankruptcy filings are
54 CHAPTER 1
at an all time high and there are an increasing number of defaults on loans. While
interest rates are now comparatively low, the actual cost of lending continues to
increase.
American industry has recently grown at a much slower rate than that of other
industrial countries. According to statistics published by the Federal Reserve Board
and the Commerce Department, annual growth rates of U.S. industrial capacity
fell from 3.5% in 1981 to 2% in 1987 and dropped to 1.5% in 1993, a trend
which continues to today (2004). At the same time, capacity utilization is gradually
creeping up, and after languishing at the 78–80% level in 1991/92 it grew in 1996
to the 82.5% level and after growing to 84% has settled at just under 80% in
2004. Similarly, industrial production is slowly increasing and the inventory-sales
ratio (month end business inventories to monthly business sales) is declining, and
reached 1.46 during the first quarter of 1993, the lowest level in some time. This
level has remained nearly constant until 1999 when it started a decline, which was
only reversed in 2004.
The slow increase in capacity is due to lack of industrial investor confidence
and a desire to make better use of existing capacity. It is also an indication that
American industry does not recognize the urgent need for renewal and improvement
or modernization in industrial capacity.
Although industry maintains its technological position, low investment and
renewal of capacity may ultimately affect its productivity and technological compet-
itiveness.
Americans have been trained to be individual profit or gain and consumption
maximizers. Consumption is assumed to provide business opportunities, as does the
increase in demand for goods and services. Savings – though encouraged – have
never been given important moral, economic, or social emphasis in the national
image. Capital was expected to grow largely through investments from abroad
by foreigners eager to participate in the opportunities offered by the American
economy. But this trend is being reversed as other, often better, investment oppor-
tunities develop in countries such as China.
Domestic productive investments in the U.S. have recently fallen well below
the industrialized world average of only 10.1% of GNP. On the other hand, total
U.S. investments are significantly higher, but more than half, as mentioned before,
55
56 CHAPTER 2
are usually placed into asset churning and other non-productive areas such as
company mergers or sell-offs. This diverts important sources of investment funds,
as well as adversely affecting the productivity and competitiveness of the merged
or acquired companies. Mergers and acquisitions are often and unfortunately driven
by considerations of short-term capital gain from such restructuring rather than
by expected improvements in performance of the new or reorganized entity and
resulting long-term profits.
Among the most important economic problems of the U.S. is the critical shortage
in savings and investment. In both, the U.S. ranks at the bottom of the major
industrial nations and well behind many developing nations as well, at least in
relative terms. Over the last 25 years, the U.S. has never invested as much as Japan
as a percentage of GNP. In 1991, for example, Japan invested $5,320/per-capita
versus $2,177/per-capita in the U.S. Even the meager savings in the U.S. economy
were largely absorbed by government deficits, with their insatiable appetite for
public debt financing. This trend continues until now (2004).
Private savings in the U.S. now amount to a paltry 2.5% of GNP, which is not
even adequate to continue to underwrite the financing of new public debts. As a
result, the U.S. must import or attract investments from abroad – to finance not
only productive assets but also government deficits.
In expenditures by private industry on plant and equipment, the U.S., as noted
earlier, ranks also near the bottom of the other industrialized countries, and well
below the average spent by private industry in the Group of Seven. This low
expenditure is a problem that will haunt U.S. industrial growth and economic
development for a long time, as American industrial infrastructure grows more
antiquated and becomes technologically obsolete. The need for a higher level of
investment is driven by the rapid advances in both product and process technology.
In addition to underinvestment in plant and equipment, we suffer greatly under
the gross underinvestment in and often outright neglect, of public and private
infrastructure. Both must be maintained in order to improve American produc-
tivity and reverse the decline in the purchasing power of Americans. Gains in
productivity depend on investment, and real wages cannot increase unless we raise
productivity. This vicious circle is a fundamental law of economics.
Another issue is underinvestment in commercially useful research and devel-
opment. Here the U.S. lags far behind most major industrialized countries, in part
because nearly half of our research scientists and engineers work for the federal
government, and many corporations invest less in research on the ill-founded
assumption that federal government research will satisfy their needs. It therefore
comes as no surprise that academic research until quite recently was funded largely
by government.
AMERICAN INDUSTRIAL DEVELOPMENTS 57
While European and Japanese companies invest largely in long-term R&D, which
is not expected to pay off for many years but provides a solid technological base
for the company, U.S. companies by and large invest mainly in short-term R&D
leading to direct process and product development and expect a quick return on
their investments. Although technological change is rapid, and it often takes just
a few years for a new more advanced technology to emerge, technological trends
are difficult to predict and the financial results from investment in R&D cannot
be effectively projected. Risks in technology development have increased, but so
have opportunities for breakthrough. A problem in many U.S. companies is that
management is strictly accountable to no one as boards are often proposed by
management. Similarly, shareholders often tend to be preoccupied more with short-
term profits than long-term prospects and performance. R&D introduces uncertainty,
and long-term benefits are seldom credited to those in management who made the
decisions, either because they are no longer there, or because credit is claimed
by someone else. Contrary to popular opinion, however, long-term growth and
technological advance are not necessarily incompatible with short-term returns.
In the U.S., ownership of corporations is often widely distributed among
individuals, and shareholder owners usually know little about the company. They
are assumed to be interested mainly in short-term performance, which will yield
improved earnings and higher share values.
In Germany, Japan, and many other countries, corporations are owned to a
large extent by banks, trading companies, or even other firms. This form of cross-
ownership often prevents hostile takeovers, emphasizes use of long-term over short-
run corporate or management objectives, and reduces the volatility of share prices,
as most larger shareholders are in it for the long-run and are not interested in
short-term variations in share prices.
While in the U.S. some institutions, such as pension funds and insurance
companies, are major corporate shareholders, they are usually passive ones.
Furthermore, U.S. securities laws strictly limit the influence or even ownership
of major shareholders, in particular financial institutions. This opens company
ownership to all kinds of manipulation and takeovers which, particularly in recent
years, have caused major corporate restructuring, ownership manipulation and
dilution of corporate control. Most importantly, U.S. stock ownership has in many
cases now become a gamble instead of a long-term investment. It is evident that
restrictive ownership policies that followed the financial scandals early in this
century are now counter-incentive and breed exactly what they were supposed to
prevent, which is short-term stock manipulations occurring instead of long-term
investment. Germany and Japan, on the other hand, encourage large stockholding
58 CHAPTER 2
by financial and other institutions and facilitate their active involvement in company
policy. Intercompany ownership, with one company owning major shares of other
companies and vice-versa is common in Japan, Germany, and other countries.
It assures stability and cooperation, and encourages effective relationships. Most
importantly it stimulates long-term developments and growth. Further, it assures
the election of independent directors, not just directors who act as pawns of the top
management by whom they have been chosen. Most directors in U.S. companies
are neither shareholder (owner) representatives nor shareholders themselves. Their
interests or concerns are seldom those of the shareholders or owners. In other words,
in many companies the real owners are not on the board or effectively represented
by the board.
The current method of board elections largely result in boards that are wholly
beholden to the management, particularly to the CEO’s of U.S. companies. As
mentioned earlier, many CEO and senior management salaries and compensation
are disproportionately large and bear little if any relation to company performance.
Directors are usually coddled by CEO’s and top management, making sure that
their directors are loyal to them and not the company or its owners, meaning
shareholders.
Some concerned CEO’s, such as Dr. G. Hatsopoulos of Thermo Electron Inc.,
have suggested that both management and board members should have significant
stake (shareholdings) in the company in order to qualify.
Changes in top management and boards of U.S. companies are urgently required
to assure greater emphasis on the long-term performance of a company. The
increasing impact of rapidly changing technology requires greater investment in
technology development, even when benefits from such investment may not show
up for years and when they do show up may not be directly associated with
a particular decision or decision-maker. We urgently need top management and
boards who are concerned with the success of the company, and not particularly
with their own success within a company. This may not occur, however, unless
shareholders act as real owners and require real time accounting by management
and boards. Unless radical changes in owner-management relations are introduced,
the long-term competitiveness of U.S. Industry may be in real jeopardy.
Investment in technology development must concentrate more on technology
innovation, development for use, and application, and not largely on basic science
and technology invention and development such as usually achieved by R&D in
the U.S. As mentioned, investment in technology development must cover the
whole range, from initial technology invention or discovery to improvements or
innovations in products and processes, areas that make the technology truly useful,
producible, applicable, and marketable.
Investment in technology must therefore focus on the customer and market,
and not on technological prestige. Researchers as well as managers must learn to
understand and interpret the potentials of new product and process technology,
and know how to transform embryonic technology developments into desirable,
marketable products and processes. Only if we learn both technology invention
AMERICAN INDUSTRIAL DEVELOPMENTS 59
(R&D) and technology innovation well and are able to do this as a continuous
integrated process, will we be able to maintain our leading position in basic
science and technology invention or development and also to maintain and improve
our industrial competitiveness in the production of new product and process
technology.
After centuries during which large resource-rich countries dominated the world
economy and financial centers gravitated towards them, technology and knowledge
have now become the most important economic magnets. Knowledge usually
thrives best under conditions of economic, political, and intellectual freedom. Yet
if left to itself, knowledge generation may become narrowly focused, intellec-
tually and/or economically self-serving, and as a result may cause knowledge
monopolies and “ivory towers” which do not attempt to diffuse and apply the
knowledge.
It is for these reasons that it is wise for government to assist technology devel-
opment and encourage it, its use and its transfer. Some guidance is often advisable
in the development of a consensus designed to help the setting of priorities for
research agendas. Such technology priority setting does not necessarily imply a
rigid government policy that identifies narrow areas of technology on which to
concentrate. Instead, it could serve as an outline for industrial and economic policy-
making which concentrates on setting objectives based on comparative strengths,
needs, and opportunities, yet makes no technology choices.
The problem is that we often have different governmental and industrial priorities.
This is usually a result of differences in objectives. For an economy to work well
and for technology to become a real economic and industrial driving force, these
differences must be reconciled, otherwise much effort is wasted and the required
focus is lost. Both must recognize that advances in technology are today the principal
forces driving economic growth on a national as well as company or corporate level.
Economists such as Robert Solow [Ref. 5] demonstrated more than 40 years
ago that technology is a most important factor in advancing economic growth.
Technological advance – contrary to popular and often political opinion – actually
fosters generation of new and better jobs, as well as improved living standards.
However, the role of government, industry, and educational institutions in setting
technological goals and in developing technology policy has not yet been estab-
lished. Instead, we advance technology and thereby national and world economic
progress by trial and error, and assume that technology will develop and serve us
in some mystical way.
Scientific advances more often than not remain academic exercises; as an
example, fewer than 2% of all patents granted in the U.S. have in recent years led
to meaningful technological or scientific developments of products or services of
use to society, and many scientific discoveries are never used.
60 CHAPTER 2
The responsibility for such a policy rests primarily on the government, but
includes industry and academia. We must recognize that the increased worldwide
industrial and economic competition in which we find ourselves, and our greater
dependence on world trade for economic growth, require us to consider our
technological status in terms of world and not only national technological leadership.
This situation in turn introduces the need for much closer collaboration among
universities, industries, and government, and an effective streamlining of the
technology development process, from scientific breakthroughs to technology
application.
New types of integrative organizations must be formed which insure an
effective and smooth flow from scientific discovery to technology development,
innovative product development, and the processes for its manufacture, effective
integration of user or customer needs, and consideration of both the world market-
place requirements and customer feedback for continuous technology quality
improvement.
We can no longer afford the fragmentation of U.S. scientific research and
technology development, manufacture, and marketing, if we are to win the economic
battles which lie ahead and which we must win in order to retain our way of life
and hopefully improve our standard of living and that of our environment. Yet,
to succeed in this, we must change the way government, industry, and academics
interact. We must reduce or remove the adversarial relationships that so often mar
effective collaboration, particularly in setting mutually and nationally advantageous
agendas.
What we need is a technology policy that prescribes priorities and recommends
resource allocations. We can no longer afford to be the world’s policeman. Neither
can we afford to be the scientific laboratory for the world-at-large and produce the
bulk of all basic scientific discoveries and thereby Nobel laureates, while losing
out on product and process development technology and thereby on the economic
competitiveness front.
Our scientific and technological prowess must be harnessed to solve the large
number of real problems of concern to society and our economy as well as for taking
advantage of meaningful technology application opportunities. This redirection may
require a new structure for U.S. research and education, one that recognizes long-
term opportunities.
Technology policy setting is needed at the federal, state, local, and industry level.
We must develop technology road maps and choose technological developments
which make sense and which benefit us. “Science for science’s sake” is nice, and
academically attractive, but when carried too far may miss the point and certainly
will miss major economic opportunities.
We always thought that we were so big that choices did not have to be made. The
present reality is that we cannot afford not to make choices and set priorities. The
setting of a technology development policy is essential now when we need clear
directives to proceed in this new century as technological leaders and not merely
as the premier scientific discoverers.
62 CHAPTER 2
Japan 2,076
U.S. 1,923
Canada 1,835
U.K. 1,818
Norway 1,619
France 1,605
Denmark 1,581
Germany 1,560
Sweden 1,488
a company is only half that of their European counterparts, and is an even smaller
fraction of the average time managers and technical personnel stay with a company
in the Orient where employment is still quite often a mutual contract for life-
time employment. Notwithstanding these traditional differences, the recent radical
layoffs by U.S. corporations have affected an already tenuous relationship between
management personnel and corporations, an effect that may be expected to have
lasting repercussions.
While some companies have reduced staff largely by attrition, others have used
more radical means that put all management, technical personnel, and workers at
risk of losing their jobs. This in turn affects performance. Few companies announce
formal strategies for cost reductions, a move which, though painful, would give
employees notice of impending layoffs, and also relieve the anxiety for those it
intends to retain. Yet this is seldom done. It would be beneficial if U.S. companies
would develop cost reduction and layoff strategies well ahead of need and keep
these strategies up to date as well as transparent. Such an approach would not
only immensely improve employee attitude, but also assure more effective and cost
efficient cost reduction performance.
More and more corporations, large and small, have underfunded pension plans;
and as a result they are either reducing pension benefits of their retirees or, if they
declare bankruptcy as many do under a credit crunch, have the Government Benefit
Pension Guarantee Corporation (BPGC) – and thereby the taxpayer – pick up the
tab. The BPGC is now billions of dollars in the red and is expected to require
billions more to live up to its obligations. It is widely expected that underfunded
pensions will cost the U.S. taxpayer billions per year, and the total losses over the
next ten years are expected to approach taxpayer costs of the Savings and Loan
bank disaster more than a decade ago.
The curious thing is that corporations that underfunded, lapsed in funding or even
borrowed money from their pension funds did so perfectly legally. The law permits
companies to borrow moneys from their pension funds, and to reassign it to other
purposes without rigid commitments for repayment or placing of real collateral.
Some of the nation’s largest and wealthiest corporations, which often pay their
executives increasingly large salaries and other benefits, have recently been found
to have underfunded their pension obligations. While some, for example GM and
IBM, are trying to correct this situation by huge write-offs, a very large number
of U.S. corporations are still behind in fully funding their pension programs. This
will haunt us for a long time and may have a multiplying effect and even amplify
the impacts of the 2001 recession. Furthermore, these deficits come on top of the
huge federal and in many cases state deficits that will take a long time to correct.
A major danger is that foreign investors who for years invested heavily in U.S.
Treasury and similar securities may start to invest elsewhere and even withdraw
some of their investments.
AMERICAN INDUSTRIAL DEVELOPMENTS 65
TECHNOLOGY OWNERSHIP
While there is little doubt that America has been and still is the most inventive
society, there is serious concern about its ability to translate this inventiveness into
technological advance and economic growth.
Patent protection has long been the major incentive for invention, and the number
of patents is often used as a measure of a country’s inventiveness. Yet many
inventors, particularly corporate inventors, question both the value and effectiveness
of the patenting process at a time of rapid technological change.
Patents, while providing some protection, require disclosure of technological
details and claims. Such disclosure publicizes information on how to circumvent
the patent’s protection by inventing around it or by introducing new claims not
previously entered.
While the U.S. is still a leader in the number of patents filed, Japanese corpo-
rations far outstrip U.S. companies in the number of patents filed in the U.S. In
fact, the first three U.S. patents filed in 1992 were by Japanese companies (Canon,
Hitachi, and Toshiba), and among the 25 companies filing the most U.S. patents,
only ten were U.S. companies. In fact, nearly half of all patents filed in the U.S.
that year are owned by foreign companies [Ref. 6].
U.S. companies often do not file for patent protection for strategic or commercial
reasons, a trend which is fortunately being reversed, and the share of U.S. patents
awarded to U.S. companies is increasing albeit slowly. This reversal may be in part
the result of a change in the attitude of the U.S. Patent and Trademark Office, which
is now moving toward a more uniform worldwide patenting approach, encouraged
by the recently formed United Nations Agency for Intellectual Property Rights and
similar developments.
“Nearly all significant scientific and technological developments are based on breaks
with tradition, with the old ways of thinking and with old paradigms”, as quoted
by Thomas Kuhn [Ref. 7]. Breakthroughs do not come from the mainstream of
accepted ideas, but from the eccentric peripheries. As a result, new technology is
not normally the result of marginal improvement in existing technology, but of
unorthodox thinking and approach. Inventors and scientific/technological innovators
therefore face opposition of the scientific establishment as well as of traditionalists
in society in general. Dramatic examples abound.
Trained engineers and scientists, who are vested in the status quo, often fail to
recognize new scientific or technological solutions to problems of interest to them,
unless the solution method or technology proposed falls within their narrow field
of expertise.
The management of technological change requires effective choice, timing, and
rate of introduction of the new technology. This in turn requires open access to
information on new technology and an ability to interpret, use, and predict the
66 CHAPTER 2
In the last 100 years, since the advent of the large U.S. corporation, the path
to economic and social success as an employee was to go into management.
Management originally dealt mainly with the control of people, and through people
the operations of the company. The greater the number of people reporting to a
manager, directly or in the pyramid below those people, the more rewarded was the
manager. Managers need not have been expert in the functions or even the business
of the company, and in fact the concept of the generalist manager took hold and was
lauded as a secret of American industrial success. Such managers could manage
anything, often moving up the management ladder by changing jobs or companies in
completely unrelated businesses. This is in a way still a practice today: the CEO of
Big Blue (IBM) was chosen from RJR Nabisco, a food and tobacco-manufacturing
firm. Managers in fact have for many years been selected from beyond the ranks of
professionals or those experienced in the business of the company. They have come
from accounting, legal services, finance, and marketing, on the assumption that such
backgrounds provided a broad ability and a capability to control the profits and
short-term prospects of the company. Few American industrial companies have been
managed by technologists, or even by experts in production or manufacturing, and
similarly few service companies were managed by experts in the service field, be it
68 CHAPTER 2
now endorsing the rule that the importance of a job is not a function of the number
of people managed, but the importance of the decisions made.
The effect of technology as well as management systems on the need for people
is being reevaluated. In many cases technology can effectively replace people but
will only do so if such replacement does not affect the importance and status of
the job.
Because of this many companies are now developing career and compensation
schemes based on the importance of the job, not on the level of the job in the
management hierarchy. In other words, people’s status depends on what they know
and what they do and not on their level in a management hierarchy. For some
companies this has led to dual or multiple career paths, one for traditional managers
and others for professionals. This procedure has been found quite effective as it
assures greater corporate retention of professional knowledge and improves the
morale of the professionals in addition to enhancements in corporate performances.
It permits creation of effective career paths for professionals who do not aspire to
traditional management careers. The trends of increase in salaries and compensation
paid by U.S. corporations are summarized in Table 12. These trends continue until
now (2004) with increases in CEO and senior management compensation usually
growing at twice the rate of employee compensation.
Most of the new career paths are offered to professionals such as engineers,
scientists, information systems experts, and others. Their income is now often
comparable to that of managers with the same experience though their advancement
is not as well defined and often much slower. The principal advantages of this
new approach are an increase in retained knowledge, improvements in the morale
of professionals, lower turnover of professionals, and reduction in the size of
management.
Since 1960, when the average pay of a chief executive of a major U.S. corporation
(sales $100 million plus) was about twenty times that of a professional engineer and
forty times that of a teacher, remuneration of American executives and particularly
CEOs has reached outrageous levels. By 1992 average CEO salaries, stock options,
stock, and bonuses had grown to 74 times the average pay of engineers (see
Table 13) and from forty times to 157 times the average worker’s pay during the
same period. As if this were not enough, other perks and so-called “long-term
compensation”, often in the form of tax-advantaged options or pension benefits
have reached astronomical levels. By 2003 the average compensation of a CEO
of a Fortune 500 company had reached over $5 million, while that of the average
worker had leveled off and actually declined in real terms.
Total compensation of the twenty highest salaried chief executives of American
corporations, according to Business Week (April 26, 1993), was between $11 and
$127 million and $23–249 million in 2003. It is interesting to note that these
executives did not lead the twenty largest or most profitable corporations, and in
fact included companies which were rather small, not very profitable or even loss
making.
Another interesting issue is that three out of the seven most compensated CEOs
headed health care companies that received significant revenues from government-
funded programs.
Few of the companies who compensated their CEOs so lavishly performed well
for their shareholders, and many of the most rewarded CEOs actually caused
significant losses.
There appears to be little correlation between CEO pay and performance. The
traditional incentives provided for management performance, such as stock options,
have become either useless or counter-incentive or have simply become an added
opportunity for greedy executives to line their pockets at shareholders expense.
It is interesting to compare U.S. executive pay with that given CEOs of major
Japanese corporations. Salaries of the highest compensated Japanese CEOs vary
between $660,000 and $6,306,000, with an average total pay per CEO of about
$262,000, or about 6.84% of the average pay of a U.S. executive of a major corpo-
ration in 1999. During the same time period, average pay of engineers, teachers,
and workers in Japan was about 12–16% below that of their counterparts in the
U.S. In other words, the ratio of worker to CEO pay in Japan was about 1 to 12,
meaning that a U.S. executive was paid on average 15.5 times as much as his
Japanese counterpart.
Cash compensation of CEOs rose in 1992 at the fastest pace in five years. Cash
compensation had increased since 1983 at an average annual rate of over 10%,
or more than twice the pay of salaried employees in general. As a result, the gap
in direct cash compensation between U.S. CEOs and salaried employees nearly
doubled in a decade.
The pay of senior executives such as vice presidents in terms of salaries and
bonuses increased by 8.1% in 1992, and has since continued to increase well ahead
of inflation, as well as the rate of salary increases by staff and workers. The median
salary and bonus package was $1,095,000 in a sample of 350 of the largest U.S.
firms. These are the largest increases since 1988. The widening of the gap between
executive and worker or staff pay which reached a multiple of nearly 26.7 in 1992
continued to widen to reach 29 in 1999. In other words, the average executive in
these large firms makes 29 times as much as the firm’s average employee (worker,
engineer, administrator, etc.). With profit from exercise of stock options included,
the median in 1999 was $2.1 million.
The pay of salaried staff increased by only 4.9% in 1992 versus 5.2% in 1991
and continued to increase since by a modest 4.21% or barely ahead of the rate of
inflation. Bonuses, now often paid in the form of stock options, are tied to profit
and stock value performance, as shareholders become more critical of executive
rewards which are unrelated to company performance. While this makes sense from
the shareholder’s point of view, it may encourage short-term performance boosting
at the expense of long-term profit and market expansion.
New requirements by the Securities and Exchange Commission (SEC) demand
that companies disclose all executive compensation, including incentive plans,
bonuses, deferred compensation, and perks such as memberships and non-cash
services for executives. The new SEC rules also require disclosure of the value of
non-exercised stock options and compare the value of the company’s stock over a
five-year period against both a broad market index and that of a peer group. The
new disclosure rules were introduced in response to public, shareholder, and worker
outcries that executive compensation is not only obscene, but that it bears no relation
to performance nor to the relative contribution of recipients to the profitability and
share price of the company.
While staff and workers are routinely asked by corporations for sacrifices during
lean times, either in terms of salary freeze or cuts and temporary or complete
layoff, executives have historically isolated themselves from any sacrifice during
72 CHAPTER 2
such times. Both the public and shareholders are becoming increasingly frustrated
with such self-serving behavior and are starting to demand more equity and
accountability.
work. Other industrial sectors in the U.S. have joined this bandwagon, but much
remains to be done. The decline in union membership and influence, largely
the result of the change in work content and organization, must be replaced by
something that gives workers a sense of belonging, contribution, and pride. People
need recognition in order to do their best.
American workers can show as high a working morale, job ethics, and quality of
output performance as workers anywhere if given their due including a meaningful
feeling of belonging, of being part of the team, of being recognized for themselves
and their contribution, as well as given appropriate material rewards.
PRODUCTIVITY IN AMERICA
automatic processes installed, and workers retrained, to increase the annual value of
worker output. These measures indeed improved output, from about $55,500/blue
collar production worker in manufacturing in 1975 to over $100,000 in 1991 and
over $120,000 in 1999. During this same period, management or administrative
productivity usually associated with overhead in terms of dollars of manufacturing
GDP per white-collar worker increased only from $125,000 to $151,578. Also
during these periods, office automation, communications, and related investment
and operating costs grew in U.S. manufacturing industries from less than 0.1% to
over 0.34% of manufacturing GDP. In other words, while a blue-collar productivity
growth reached 220% over this twenty-five-year period (a compound productivity
growth of about 5%), white collar or overhead productivity barely grew notwith-
standing massive investment in new technologies.
Manufacturing overhead in the U.S. remained nearly constant at 26.2%, while
Japanese and Western European overheads are estimated to be respectively 16.8%
and 33.4% lower than the U.S. overhead costs. Although on average U.S. manufac-
turing worker productivity is still even with or ahead of that of other major industrial
countries in 1999 (see Table 14), overall manufacturing productivity lags behind
that of our major competitors, not because our production workers do not improve
their productivity as quickly as their counterparts in competitor nations but because
the overhead gap keeps growing.
Much has been said about the fact that U.S. productivity, while not increasing
as rapidly as that of other industrial countries, is so far ahead that there is little to
worry about. In other words, we are at such a high niveaux of productivity that the
difference in productivity growth is inconsequential. While this was true ten years
ago, it has certainly changed, particularly with respect to Japan and Germany. When
considering all industrial workers, which includes support and other workers and
not just the blue collar production workers, the U.S. now lags behind both Japan
and Germany in industrial worker productivity as measured by output in dollars
per year.
As early as forty years ago, many students of American civilization voiced
concern with the growing mediocrity among American students. In a 1959 speech at
Douglas College in New Brunswick, New Jersey, for example, renowned journalist
Max Lerner noted that “we should be less concerned about the missile gap than
the intelligence gap, less worried about the missile rate than the intelligence rate”.
Lerner might have added that we should be more concerned about poor worker
education and training.
Less than 10% of American production workers understand the basic statis-
tical concepts necessary for the implementation of quality control or management.
Ten percent of American production workers are virtually functionally illiterate.
This is due not only to the failure of our school systems, but is also the result
of inadequacies in on-the-job training, skill enhancement, and worker education.
American corporations in general spend significantly less in percentage as well as
absolute terms on worker training and education than do their competitors in Japan
and Germany, though we spend much more on management training.
AMERICAN INDUSTRIAL DEVELOPMENTS 75
QUALITY MANAGEMENT
The production stage is the traditional place for quality control activities. There
are both structured and unstructured methods for quality control. Structured
methods include Statistical Process Control (SPC), also known as Statistical Quality
Control (SQC), Quality Control Circles (QCC), and employee suggestion schemes.
Unstructured methods include the concept that the next workstation is the customer.
Generally, quality control in production includes the following activities:
• training and educating workers
• improving product quality
76 CHAPTER 2
One principle imbedded in the American free enterprise system, and fairly rigidly
enforced by some sectors of industry and most segments of government, is that
procurement or purchasing must be wide open to all and subject to free competitive
bidding and subsequent procurement.
While this principle is fair in theory, it has over the years led to an inefficient
system which bears little, if any, resemblance to the idealistic concept of fairness
and equity envisioned by its developers the forefathers of our nation. The reason it
does not work is that it assumes an ideal world where fairness in procurement is
accompanied by equal access to pre-bid information and knowledge (by personal
78 CHAPTER 2
contact, lack of rigging, open and uniform bidding, procurement rules, propriety of
supplied information, lack of ability to influence the selection process, known and
readily verifiable selection criteria, and more).
Requests for bids, proposals, and the actual bidding and procurement process
have not only become highly skewed and often unfair, but are also extremely
expensive and time consuming. As a result the process is often captured by the same
few, and the results are quite frequently predetermined. Notwithstanding the fact
that all of this has been known for some time, we continue to go through this farce,
at immeasurable cost to our government or taxpayer as well as to U.S. industry.
This is done largely for political reasons, but its principal driving force appears
to be the vested interest of the parties involved who have fine-tuned it to their
advantage and see no reason for change. While giving an image of broad fairness and
efficiency in procurement, the system provides tremendous, often unearned profits to
the few
The process furthermore impedes selection of the most advanced technology
or solution, and thereby often forces acceptance of obsolete or no longer needed
solutions by its built-in inertia. It also forces an artificial gap between supplier and
procurer that reduces opportunities for cooperation and advancement.
While America is still the economic locomotive and leader of the world, it is on
the verge of losing some of its leadership in productivity, and possibly also in
technology development, unless changes occur in government-industry and labor-
management relationships, as well as in the basic organizational methods used
by American industry. Similarly, government will have to become more supportive.
American industry must reorganize into efficient decision-based structures in which
decisions are delegated to the lowest competent level, introduce more worker
training and incentives, assure that rewards at all levels are based on performance,
involve everyone in planning, integrate the latest technology into effective products
and process development in a timely manner, and make sure that government and
management as well as labor work cooperatively towards maintaining U.S. global
economic competitiveness.
Another issue of concern is often the lack of institutional support for industrial
and economic revitalization. American educational institutions must focus more
on the real needs of American industry. A very small percentage of graduates
from American universities are really trained to fill jobs required by industry.
Similarly our legal and health care institutions are not doing enough to advance
industrial and economic competitiveness or growth, but instead concentrate on their
narrow, internally focused concern with little consideration for the impact on U.S.
industrial and economic effectiveness. In fact, our legal and regulatory systems are
not supportive but adversarially oriented toward industry and economic development
in general and often prevent U.S. industry and economy from achieving its potentials
by unnecessary legal actions or regulations.
Our educational institutions by and large make little effort in learning the real
needs of industry and often adjust their programs accordingly only belatedly if
at all. Industrial and preventative health care is similarly given little priority and
resources. All this must change if we are to remain the world’s industrial and
economic leader. Our major institutions must become responsive and service or
customer oriented and not largely self-righteous institutions with their own agenda.
ability of institutions, government, and the service sector to create sufficient wealth
in the long run if at all. Some in fact claim that services, to a large extent, simply
churn assets and values without actually creating new wealth. Others contend that
services such as transport can add wealth by moving assets from a place of low asset
value to places of higher asset value. This claim is often also made by practitioners
of mergers and acquisitions who simply move assets among owners.
While manufacturing adds value to input materials and creates real goods through
the use of labor, knowledge, and technology, the identification of wealth creation
in services is much more difficult, and sometimes even impossible. Many are
now concerned that manufacturing and agricultural production may be unable to
attract sufficient numbers of people in developed countries to be sustained as viable
economic sectors capable of rewarding its workers appropriately. Rewards in the
service industry, particularly by institutions, are usually much higher because they
are not tied to output, in terms of either volume or value.
One difficult issue that industrialized nations face today is how to assure compa-
rable rewards for employees in jobs generating real value or wealth and those of
employees in non-value generating jobs. While it is easy to determine the value
added by a farmer, production worker, or design engineer, the value added by a
lawyer, clerk, nurse, doctor, bureaucrat or even teacher is not so easily defined or
measured.
So long as law, health care, and education remained focused on contributing
directly to the ability of society to produce real value by keeping workers educated,
on the job, and safe, some value could be assigned to these services, but this is no
longer true. As mergers and acquisitions usually produce simply churning of assets
without adding to the total value, many of our legal, health, and educational services
also have lost their primary focus and simply cause churning without adding value.
As an example, a large number of class action suits are not designed to improve
management but to enrich lawyers. While some may challenge product or service
quality deficiencies, many deal with financial and asset allocation or control issues
which generally do not enhance productivity. Similarly, few actually result in a
meaningful compensation for losses of shareholders, users or other injured. By
and large, class actions are a boondoggle for trial lawyers who obtain the bulk
of any damages assigned by the courts. As a result, this approach does little to
improve economic efficiency and in fact actually burdens the system with additional
unproductive costs.
Similarly a large percentage of health care services take the form of unnecessary
treatments and tests. In fact, American health care has devoted too little attention
to prevention and concentrated largely on treatment. In turn treatment has become
more and more high-tech. As a result, America is probably the best country in
which to find oneself in need of high-tech medical treatments, such as MRI, CAT
scan or organ transplants, but the worst place among developed countries in which
to get a run-of-the-mill illness such as a sore back, severe cold or infection. There
are no doctors’ home visits, and to get immediate attention by a physician or in a
hospital emergency room is nearly impossible. The way the American health care
AMERICAN INDUSTRIAL DEVELOPMENTS 81
system is run now contributes significantly to lost working days. Compared to the
preventative medicine and home care practiced in other industrialized countries,
American health care is not only significantly more expensive, but also severely
affects the productive output of the nation, both by tying up an inordinate number
of people in health care provision and administration, and by tying down productive
workers waiting for services.
Similarly education wastes productive capacity by inducing students to continue
education past high school who are neither equipped to benefit from nor are neces-
sarily qualified for higher education. Instead of learning a marketable skill, they
spend an additional 2–4 years in what can be best described as remedial high school
education, while neither improving their skills nor employability. In fact many of
these over-educated, under-skilled students end up in a life of dissatisfaction and
lack of fulfillment such as a liberal arts degree holder working as a secretary or
receptionist. The loss in people years, skill learning and productive output is signif-
icant and estimated to cost approximately 2% of the entire U.S. GDP. Additionally
there is the obvious waste in the costs to educational institutions. Universities spent
unnecessary billions to educate unqualified students who could otherwise make a
productive contribution to the American economy during the years they spend in
college doing something they are capable to do. The ratio of administrative and
support staff to teaching and instructional staff in American educational institutions
has more than doubled in the last 25 years, notwithstanding large-scale invest-
ments in “labor saving” technology, such as computers, which should have reduced
administrative costs. The reasons are usually over-management and fund-raising
which has become a major, if not dominant, activity of U.S. universities.
America’s economic strength and political stability have been largely due to its
substantial middle class which was the personification of the American way of
life, of opportunity, and of personal freedom. In our more than two centuries of
existence as an independent nation, the middle class has grown to comprise the
bulk of Americans, a sector that has enjoyed a good life. We have supported a
two-party system, with both parties advocating essential middle-class values though
with some differences in the emphasis on the role of government.
The anti-party, anti-government movements initiated by the American middle
class in the last twenty years has culminated in the Perot and Nader third party
developments and more recently in the Republican take-over of Congress. The
increasing internal discords in both the Republican and Democratic parties similarly
makes it difficult to distinguish between the right of the Democrats and the left
of the Republicans. A proportion of the American middle class is now opting out
of or at least questioning the traditional two-party system. This defection is the
result of an increasing trend by the parties and the three branches of government
to de-emphasize support of the large American middle class and instead increase
their support of the economic extremes – the poor and the rich.
82 CHAPTER 2
The boundary between poor and middle class in America was previously blurred,
and even low-paid workers considered themselves middle class. No more. The poor
are distinct, not because their income level has been reduced in relation to the
middle class, but because many of them no longer aspire to become middle class.
There are fewer and fewer working poor and more and more publicly supported
poor now. Many of these are better off than people at the lower range of the so-
called working middle class. To be poor and publicly supported has not only been
institutionalized, but has attracted hordes of new members because it provides a
high degree of social and income security. Its guaranteed income, health care, low
cost housing, and other benefits far outweigh the advantages of a low wage and a
low middle-class existence.
As a result of this trend, the traditional American middle class is being decimated
as more and more low-wage middle-class workers find it attractive to join the
publicly supported poor. At the other extreme, managers at the upper level of the
middle class desert as a result of a radical transformation of the American economy –
an economy once based on manufacturing and similar productive activities to one
of growing financial, service, and institutional organizations. Unlike manufacturing,
agriculture, etc., these new economies reward their professionals and managers
with huge, often ludicrously high incomes, which in turn disqualify them from
membership in the American middle class.
The overall result of this shift is a disillusionment of the remaining American
middle class that leads them to take a diminishing interest in politics and social
issues. In turn, politics is more and more driven by the economic and social extremes
of American society, a dangerous trend that threatens the principles of Americanism
as we know it – the Americanism which has for long been the guiding light and
goal for people worldwide.
It is not too long since disability was defined as a physical and mental condition
which prevented a person from performing normally to his or her ability and which
could be defined as a medical predicament. Medical here meant a condition which
had a medically definable cause and effect, such as a muscular condition preventing
certain movements or mental condition which rendered a person incapable of
performing certain tasks such as schizophrenia.
In recent years the Americans with Disability Act (ADA) has been used to protect,
subsidize or give unearned benefits to people simply on the basis of incompetence,
laziness or lack of intelligence or motivation. The press is full of examples of
people who claimed to have learning disabilities for example and demand special
conditions to compensate them for this disability. While there are real medical
conditions which may affect learning or memory, increasingly lack of competence,
ability or simply commitment to hard work involved in learning is used to receive
special consideration under the Americans with Disabilities Act.
A case reported by John Lee [Ref. 9] in U.S. News and World Report dated
October 5, 1998 about a young woman, Marilyn Bartlett, is an example. Here a
federal judge ruled that because she was less able to perform than other aspiring
lawyers because of her learning disability that impaired her reading she had the
right to help. She was given special terms and ultimately on her sixth try in the Bar
examination passed after being given double time to take the exam.
There are obviously people with different abilities but it is irrational to lower the
Bar to the lowest ability in each case. People do not all have the same competence
and some excel at things that others cannot perform well. The problem is that there
is really no way to determine if a learning disability is a true medical condition or is
the result of a lack of commitment, stupidity, low intelligence, laziness, disinterest
or fake. Allowing anyone to demand special considerations in tests, admissions,
and professions will not only lower standards but would ultimately undermine the
very foundations of our society and civilization. These examples are being misused
84 CHAPTER 2
now with droves of students and others demanding special considerations without
medical or scientific proof of their condition.
American high school students are already performing worse than students in any
developed and many developing nations in both verbal or English, mathematics,
and science scores. If we let these scores decline even further, we will end up as a
society with a minority of real performers who run our increasingly techno-economy
and a horde of semi-imbeciles who cannot effectively function and will ultimately
just hang on and become a burden to society.
The cost of this in economic terms would be devastating, as a significant part of
society would perform below par, yet demand equal payment with those who carry a
full load. We may in fact have to support an increasing number of unemployable who
are not sick or actually disabled. They are just lazy, incompetent, and maybe not too
bright. They may also come from non-supportive backgrounds. The solution is not
to stretch the standards to encompass such imbeciles and give them a free ride, but to
provide better and earlier education, longer school hours and years, better teacher’s
qualifications, incentives, and teaching hours, and finally real motives for parents to
be involved. Ultimately, people should be given opportunities commensurate with
their abilities, interests, and commitments.
We have today the most successful and thriving economy driven largely by our
technological inventiveness, but the proportion of Americans contributing to it is
declining. This not only because of the increase in the percentage of retirees but
now increasingly because of the large increase in Americans who insist on getting
a free ride under the guise of disability. While there are obviously many who are
truly disabled and must be helped, the curious thing is that truly disabled usually
do their utmost to contribute and prove their worth to society in whatever form.
I am talking of those able but unwilling to serve and who hide behind the curtain
of ill-defined disability.
There is no question that labor had and has to organize to be able to negotiate with
employers on the basis of equal strength. Similarly, it is generally accepted that
labor must not only negotiate for and regulate employees for terms of working and
economic conditions of employment which assure safe, clean, and comfortable work
places as well as wages, health care, and other benefits which assure reasonable
living conditions and economic opportunities.
Today though union involvement is still concerned with wages or employment
conditions of workers, emphasis is increasingly on political union interests that are
often of little or no consequence to the union membership represented. In fact,
labor unions have become primarily pawns of their leadership in advancing various
agendas. Similarly unions, through pension funds often managed by the unions on
behalf of their membership, have become major players in the financial markets
which give their leadership great new powers which it wields with considerable
effectiveness.
AMERICAN INDUSTRIAL DEVELOPMENTS 85
With all the hype on TV and other media of the importance of customers to
American business and how business is going out of its way to improve customer
relations, I at least find that I waste more time than ever doing business in America.
Automated, computerized answering systems are designed to minimize service
staff time and cost, independent of the time wasted by customers. In most cases,
customers are required to wade through layers of menus and wait inordinate amounts
of time in order to save a company 5–10 seconds of service staff time. Similarly,
medical doctors, plumbers, telephone repairmen, and others require their patients
or customers to be ready at the appointed time at the risk of a penalty or loss of
appointment. Yet on average the same doctor or service person will usually let the
patients or customers wait longer than the time required for the service.
Doctors do not perform home visits even in cases of severe illness, even when
transport time spent and exertion in an ambulance could make the illness worse,
because home visits waste the doctors’ time commuting. In other words, the doctors’
time is more valuable or important than the patients’ well being. Courier or other
delivery services refuse to give a specific time, such as early morning, but requires
customers to wait all day or at least half a day for delivery or pick up, all for
the convenience of the business and not the customer. While the Internet, fax,
and E-mail are supposed to facilitate commerce, the reality is that they reduce the
cost of doing business but do not necessarily save customers’ time or money. In
fact, notwithstanding the hype of business that the customer is king and customer
relations their primary concern, customer service and satisfaction is at an all
time low.
In the last few years the U.S. economy has regained momentum, particularly in
the manufacturing industry which, though the smallest of the major economic
sectors, now serves as the locomotive pulling the U.S. out of its recession. It
has reestablished leadership by improving both its absolute and relative industrial
productivity, which in terms of 1990 labor productivity was 17% ahead of Japan
and 21% ahead of Germany. Growth in U.S. manufacturing labor productivity
has continued unabated, though the gap has narrowed. Yet capital investment in
manufacturing in the U.S. lags behind that in Japan and Germany that partially
86 CHAPTER 2
The new communication technology age, with its tremendous influence on human
lifestyle, relations, and intra-societal behavior is now commonly termed the age of
the post-industrial society. No longer do industrial and economic prowess alone
determine the state of advancement of a nation or society. Knowledge and use
of communication technology may in future years be an equally or even more
important indicator of economic and societal power, yet there are many other
factors which influence societal behavior and man’s ambitions and which determine
emergence into the post-industrial society. Among them are increasing longevity,
environmental management, and mobility as distinct from communications and
transportation.
The post-industrial society is in need of radical changes in societal and institu-
tional structures. Most of our major institutions were formed to respond to the law
enforcement, health care, and educational demands of the industrial society. These
demands were perceived to require large institutions to provide the services and
needs of a hierarchical industrial society under rapid transformation. The role of
government is now rapidly diminishing as the traditional functions of government –
which in even the most market-oriented democratic nations have included control
AMERICAN INDUSTRIAL DEVELOPMENTS 87
The most important tasks of government today are to encourage economic, cultural,
and social growth, generate jobs, improve the standard of living, ensure health care
as well as personal safety, protect personal freedom and the nation’s security, and
safeguard the environment. Similarly, government has a duty to establish confi-
dence, to restore hope, and to instill pride by Americans as individuals and as
a nation. The problems faced by America today are not due to the failure of its
economy or to any decline in the abilities of its people; it is largely the result of
the inability of government to lead and to inspire. Government, notwithstanding
high-sounding pronouncements and policy discussions, has at heart primarily the
interest of those who constitute government in its various branches not those of the
American people in general.
The American people are willing to make the sacrifices required to put the nation
back on course and advance its prospects. They are willing to serve and even give
their lives in essential service to the nation. It is our government and leaders who are
unwilling to bite the bullet and make the hard decisions. The reasons are simply that,
unlike Americans in general, government – or at least Congress and the Executive
Branch – are not willing to make sacrifices or to take chances, particularly risks of
defeat at the polls.
In order for American government to work, to be responsive to the needs of
America, its economy, and its people, it will have to be reengineered.
Reengineering is a new management concept that suggests that in many cases
it is necessary to start all over and introduce new thinking, new approaches, and
new organization in order to improve efficiency or performance. The reinvention
process requires creativity, not just replacing one method of management with
another, albeit more efficient and automated. The very possibilities introduced by
new information technology allow new creative uses of information not before
available which, in turn, affect how, when, and how fast efficient decisions are
made, and management can function.
89
90 CHAPTER 3
Although Americans have a comparatively low tax burden when compared with
those of other industrialized countries, U.S. taxes have increased consistently since
1950, and now comprise 32.1% of GNP, compared with 24.9% forty years ago.
While federal taxes, including user fees, have increased from approximately
17.8% to 20.4% of GNP, state and local taxes increased from 7.1% to 11.7% of
GNP during the same period. In other words, while federal taxes have increased
by 14.6% in relation to GNP, state and local taxes escalated by a whooping 64.8%
or over 4 times as fast during these years. At the same time public services
have declined in quality despite the claim that more services are now provided to
the public. Most importantly, the services supplied by government have radically
changed. Law enforcement, education, health care, and direct entitlement programs
such as welfare, unemployment, and food stamps now account for over 85% of the
non-defense expenditure of federal and state government. Little is spent on infras-
tructure, infrastructure maintenance, or capital assets or on improvements in social
systems.
The U.S. tax system has stymied capital expenditures by private industry on
plant and equipment. The U.S. spent on average less than half the percentage of
GDP on plant and equipment as the other Summit 7 members and only about
20% that of Japan, in the twenty-eight years between 1971–1999. Translated into
cumulative plant and equipment investment, even considering the difference in
GDP, the total investment in the U.S. between 1971 and 1999 was only 31.2%
that of Japan. Furthermore, most of that investment was not in high technology
processes, but in buildings and heavy equipment replacement. It is noteworthy
that most other industrialized countries recognized the declining economic life of
plant and equipment resulting from more rapid technological changes and, as a
result, began to accelerate their investments in new plants and equipment. U.S.
investment since 1980, on the other hand, has remained virtually constant in terms
of percentage of GDP.
AMERICAN SOCIAL AND ECONOMIC DEVELOPMENTS 91
not coordinated and often conflicting, huge amounts of money and long periods of
time are wasted in offshore or coastal development projects.
surpluses did not materialize, and federal budget deficits grew to record heights by
2004. This trend may continue and severely impede U.S. government’s ability to
meet all its domestic and foreign obligations.
GOVERNMENT SPENDING
With over 52% of federal spending or about 14.2% of GNP now going for entitle-
ments, it is useful to note what this money is spent on, particularly as the average
growth of GDP per person continues to decline.
Federal spending, which now exceeds 27% of GNP, is growing at a rate faster
than the rate of inflation and GNP growth combined. Today federal spending
for defense is down to less than 18% of all federal expenditures. International
programs consume a bare 1%, and all remaining domestic programs combined,
such as agriculture, commerce, transport, and interior, consume only 16%. The
two fastest-growing areas of federal expenditure are entitlements and interest on
the national debt that in 1999 required 52% and 13% of all federal spending,
respectively and which continue to grow. According to the Congressional Budget
Office, non-means-tested programs consume the bulk of the budget with:
1993
Social Security 21%
Medicare 10%
Federal Retirement and Disability 5%
Unemployment Compensation 2%
Other 3%
Means-tested programs, on the other hand, consume only 13% of federal spending,
such as
Medicaid 6%
Food Stamps 2%
Supplemental Security Income 2%
Family Support 1%
Other 2%
Source: CDI, DOD, CEP. Table prepared by the Center for Defense
Information.
DOD, and CEP documents, actually reached $416 billion if we add $13 billion for
nuclear weapons cost in the DOE budget, $79 billion for the military share of the
national debt, $34 billion for veterans’ costs, $7 billion for military aid, and $5 billion
for military NASA, Coast Guard, and similar defense expenditures. The defense budget
or expenditures mushroomed during the Iraq war 2003/04 to an unsustainable level.
Our national debt is rapidly overtaking the U.S. GNP. The figure was barely 28% of
GNP in 1982, and has since grown to over 70%. The budget surpluses expected in
1999 and the next few years could have reversed this trend if Congress would have
agreed to use much of it for debt reduction. Unfortunately the Bush administration
and Congress decided in 2001 to use most of it for tax cuts. In subsequent years
2002–2004 budget deficits increased to historic levels. In the past budget balancing
efforts by the government did not aim at eliminating, but only reducing, the budget
deficit. More recently continued rapid and sustained growth of the U.S. economy
had resulted in larger than expected tax revenues that not only reduced the expected
deficits but also started to build up budget surpluses in recent years. This was
expected to continue for several years, but the 2001 revision, combined with reduced
tax income and tax returns, as well as the September 11th attack and subsequent
wars in Afghanistan and Iraq caused a reversal in the budget results and a large
budget deficit.
96 CHAPTER 3
Until recently, budget and trade surpluses of our major trading partners and the
relatively high U.S. interest rates caused major parts of our debt to be financed from
abroad. However the decline in prosperity of Western Europe and Japan, together
with the newly low U.S. interest rates have largely dried up these sources of U.S.
debt financing.
Well-meaning actions, for example the Gramm-Rudman Act designed to reduce
the federal budget deficit to zero, all contain escape clauses that exempt their
implementation during times of recession or grave economic problems, such as the
crisis introduced by the S&L bank failures.
We now face a critical situation in which demands are increasing while our
ability to bring solutions is on the decrease. Our social costs are rising, foreign
financing of U.S. debt and investment needs is drying up, demands have increased
for U.S. involvement in solving the world’s security and economic problems, and
our ability to cure even our own problems is diminishing.
Even with interest rates now in 2004 at a long-term low, interest on the national
debt consumed over 16% of our federal budget in 1999 and is expected to grow to
18% by 2005. Lower interest rates may permit the government to exchange high-
coupon-rate federal bonds for lower-interest securities. Yet, other debt problems
loom on the horizon. Third World debt for example, standing today at over $1.6
trillion, continues to climb, and is experiencing more and more defaults. While
some Third World countries, such as Mexico, have made admirable progress in
reducing or stabilizing their debt by a combination of restructuring, debt-equity
swaps, and privatization or sell-off of government assets, the majority of Third
World debtor nations are sinking deeper into debt, particularly countries such
as Argentina, Brazil, and much of Africa. Although the World Bank, IMF, and
other international finance institutions, together with national OECD governments,
pump money into Third World countries, a large and increasing percentage of this
funding is used to repay existing debt and does not enhance production nor decrease
dependence on outside economic help, particularly in sub-Saharan Africa and
South Asia.
We are now approaching a time when most new funding will be used to pay
for current consumption (import financing) and outstanding debt financing. This
condition will invariably lead to massive defaults, as new funding is unable to
keep pace with debt servicing and current consumption financing. Because the
U.S. is the world’s largest direct and indirect creditor through government or
government-guaranteed loans, U.S. shares in international funding agency financing,
and private/commercial lending, we would be hurt more than any other country by
these defaults. Further, private U.S. banks are exposed to developed country debt
to the tune of approximately $300 billion. Overall, a massive default by developing
countries, which may well occur before long, could cost the U.S. government a
loss approaching the size of the S&L bank default. This potentiality is further
exacerbated by the exposure of U.S. private investors, as well as pension funds and
insurance companies, which invested heavily in bond issues of the former Soviet
Union, now Russia, and other former Communist countries.
AMERICAN SOCIAL AND ECONOMIC DEVELOPMENTS 97
Such debt never has been and probably never will be repaid. Therefore, even if
the federal government were to manage to cut costs and increase tax revenues, and
as a result achieve a lowering of budget deficits, the national debt will continue to
grow. As refinancing becomes more and more difficult, it will force interest rates
up and its ratings decline.
The national debt, with less foreign investment, would absorb much of American
savings, leaving little for investment in productive assets. As a result, U.S. capital
equipment investments, particularly in manufacturing and transportation, may fall
to dangerous levels, notwithstanding the fact that the cost of capital is now at a
twenty-year low. This trend will be difficult to reverse in the short term. Banks
are unnecessarily cautious in their lending, a policy which has resulted from strict
government controls, increased risk aversion of lenders, and the unnecessarily wide
gap between interest rates charged and the cost of funds. This gap is, percentage-
wise wider than at any time in recent years, with CD rates offered for example as
low as 50% of thirty-year fixed mortgage rates and 70% of the prime rate (2001).
Bankers are concerned with the country’s low savings rate which, according
to U.S. Department of Commerce figures, declined from 18% in the 1970s, to
15% in the 1980s, and is now at less than 12%. Business investment in the U.S.
is now less than 8% of GNP and has actually declined slightly since the late
1980s.
Debt has become an integral part of American life. We were taught as individuals
and as a nation that debt is good for the economy and that the Keynesian theory
works on a personal as well as national scale. Deficit spending will generate greater
opportunities, income, and growth, for individuals and for the nation. Such an ever-
rising spiral will assure that there are always enough resources for growth. It is
supposed to result in a continuously self-adjusting system.
We assume that we cannot be held responsible for future generations, as they
will have similar opportunities to ride up the debt spiral. This philosophy, supported
by many economists – at least in the past – has been the principal driving force
towards our current predicament. We now find that the benefits of debt have their
limits.
The federal debt fluctuated around a quarter of a trillion dollars from the end
of World War II to about 1965. It then took another ten years to reach about half
a trillion dollars in 1975. It doubled to just under one trillion dollars in the next
six years or by 1981, and then began a rapid increase to about $2 trillion in 1986,
$3 trillion in 1989, and nearly $4 trillion in 1992. At the end of 1993, the deficit
exceeded $4.5 trillion and by 1999 about $5.2 trillion. The Clinton deficit reduction
plan was proposed not to reduce our federal debt, but simply to decrease the rate
of growth of the budget deficit. It resulted in the federal debt of nearly $4.9 trillion
in 1995 which grew to over $5.0 trillion by 1998.
The cost of borrowing by the federal government is projected to average 6%,
and the resulting annual debt servicing costs is estimated to exceed $320 billion by
1999 or over 4% of GNP and about a quarter of the federal budget – nearly equal
to defense costs.
98 CHAPTER 3
It not only encourages huge numbers of potentially productive people not to work
and contribute to their own and the nation’s well being, but it also fosters crime
and encourages fraud. It contributes to the breakup of family structures by making
it more profitable for men and women to live officially apart.
If all able-bodied welfare recipients were required to work on whatever job
is available and that they are capable of performing, direct welfare costs would
probably plummet by nearly 50% and many low-skill jobs that now go begging or
serve as magnets for illegal immigrants would be productively filled by Americans.
At the same time, opportunities for illegal immigrants would decline, and as a result
also their numbers, which in turn would further reduce welfare costs, as many illegal
immigrants ultimately qualify for or are offered some welfare or other support.
A related issue is that of education of the poor and their training for meaningful
jobs. Welfare is virtually never contingent on work or training, even when the
recipient is healthy, working age, and able. The number of vocational schools and
other skill training facilities in the U.S. is woefully small, as are welfare-related
skill training, on-the-job training facilities, and education towards some profession.
Although it is recognized that schooling is cheaper than long-term welfare or jailing,
our welfare system lacks any organized focus towards training and education.
are capable of contributing. Handouts are demeaning and demoralizing, and their
imposition contradicts the basic philosophy of democratic capitalism.
Following the example of some European countries, the U.S. has sweetened
unemployment benefits, particularly for long-term unemployed, under the erroneous
assumption that this will provide relief to people temporarily laid off by economic
dislocations and changes in demand labor. This move is also expected to assist
industry’s adjustment to new conditions.
The problem is that long-term unemployment, which in the past included a
very small fraction of unemployed, has increased appreciably in recent years. The
question arises as to whether improved benefits for the long-term unemployed make
long-term or permanent unemployment an attractive enough proposition, particu-
larly for those whose ratio of unemployment benefits to previous pay exceeds 50%.
European Union countries which generally offer longer unemployment benefits
have found that higher and longer duration of benefits cause higher long-term
unemployment. In other words, long-term unemployment benefits create the long-
term or permanent unemployed.
Unemployment is also furthered by restrictions on firing. The harder it is for
an employer to fire a worker for cause and the greater the cost of firing, the less
employers are inclined to hire new workers. In the past, employers in the U.S.
could terminate employees at will, with proper notice and compensation, just as
employees were free to leave or quit employment. Employers now quite often must
justify any firing and are penalized severely for dismissal, even for causes such as
incompetence or lack of adequate performance.
In addition, employers assume burdens such as health insurance, unemployment
contributions, accident insurance, vacation pay, sick leave, maternity leave, family
leave, and more. These burdens have grown at a rate well in excess of inflation and
now average 34.9% of the (before tax) wage bill in U.S. industry. Larger and high
visibility employers spend as much as 46.7% of the (before tax) wage bill on these
benefits. This figure is about 60% higher than benefit costs of typical Japanese
corporations and 30% higher than that of German and French corporations, though
the latter offer significantly longer vacations and Japanese corporations usually
offer profit-sharing or bonuses. Much of this is the result of the inefficiency of U.S.
health care and other services.
we assume we have a government of, for, and by the people, it is often painfully
obvious that government does not always consider the people its customers or its
business to serve the people using the nation’s resources.
The problem, to a large extent, is one of accountability. Checks and balances
have been built into our system of government by the constitution, but it is evident
that these no longer suffice in assuring satisfaction of the people’s interest nor
guarantee the elimination of fraud or mismanagement in government.
Government should be run more like a business which is open to scrutiny,
accountable for its actions, and oriented towards providing quality services to its
customers, the public, with efficiency and concern for the well-being, security,
safety, and social and moral well-being of the nation. Government behaves as if it
is accountable only at election time, and that people vote mainly with short-term
topical interests in mind. Legislators and for that matter the administration usually
make promises at election time they neither can nor intend to keep.
Most government decisions are, as a result, short-term. For example, government
now tampers with the tax laws so frequently that it is virtually impossible for
individuals or corporations to develop long-term strategies. Yet long-term strategies
are essential for sustained economic growth. As a result, American business, and
people in general, are short-term optimizers. They prefer to look a few quarters
ahead and generally do not save or build up significant reserves for the future.
This lack of savings in turn negatively impacts investment and economic growth.
Taxing interest on savings for example is a counter incentive for the build up
of investment capital, this particularly as savings are usually made with after tax
money. This and other laws really discourage citizens from fully contributing to our
economy.
The problem is in part caused by the uncertainties in the federal and other
budgets as well as by actual expenditures. It is clear that government agencies do
not maintain effective cost controls and probably do not even know their costs.
As a result, budget deficits are often unpredictable and as they occur are usually
financed by government debt on an as needed approach.
It appears that government should be required to maintain the same accounting
standards as business, to maintain real-time accounts, and to publish balance sheets
periodically. Recent press accounts report that the IRS does not abide by the
standards of accounting it requires of American business and individuals. Similarly,
many government agencies do not follow their own regulations or standards.
Government can maintain the respect and cooperation of people and business only
if it demonstrates leadership in applying its own rules and standards.
It is equally important that the government keep the promises made to the
electorate, particularly in the absence of established policy. Much-needed economic
and social stability can be attained only with longer-term policy and maintenance of
election promises and commitments. Unfortunately the people, the electorate, take
a back seat soon after the election. Legislators and government too often become
responsive to special interest groups, particularly those representing the American
institutions of health care, education, and law enforcement or criminal justice as
102 CHAPTER 3
GOVERNMENT FAILURE
The government has failed to provide both economic and moral leadership for the
nation by its inability to establish meaningful economic and social policies and
by its inability or unwillingness to stay the course. In most cases, Washington
responds only to crisis and advances short-term or temporary solutions. The present
lack of clear economic guidelines and strategic policies is doing great damage to
America’s world leadership and competitiveness. Inappropriate interpretation and
use of anti-trust and anti-cooperative laws, and the inability of government to rapidly
and effectively redirect defense research into commercial technology development
where appropriate without affecting security, are hampering U.S. industrial effec-
tiveness and development. At the same time, U.S. industry is required to cover
growing social burdens in an increasingly more permissive social environment.
This combination of ineffective economic and social government leadership and
AMERICAN SOCIAL AND ECONOMIC DEVELOPMENTS 103
America has the world’s largest welfare system which provides a safety net under
those not in the workforce or otherwise handicapped or disadvantaged. In some
sectors of American society, whole generations continue to subsist on welfare.
Though many attempts have been made to transfer people from welfare to the
104 CHAPTER 3
workforce using workfare, training, and various other approaches, the problem has
actually increased and labor market prospects for poor, low wage earners have
actually declined with the increased use of advanced technology. There are many
arguments concerning the benefits and costs of workfare as well as various training
programs. The question is really – do such expenditures pay off even if not right
away? The answer is usually complex and increasingly wrapped into socio-political
arguments.
High social security and other employment taxes usually cause an increase in
unemployment. So do various constraints on work rules by unions and conditions by
employers who increasingly substitute machines and programs for workers. Other
factors causing loss of employment are high minimum wages, unreasonable benefits,
and unfettered union power, particularly in setting the work place environment.
There is no question that labor benefits from organization and that well trained,
well rewarded, and well treated labor performs more effectively and more produc-
tively. In the end, such labor will also add proportionately much more value per
unit of output or per total value for a unit of output and thereby actually provide
a larger return per unit of expenditure for labor. But this is not always the case.
Attempts to solve unemployment or low employment problems by shortening work
weeks or days or by job generating work rules have always failed as they added
costs the employer could not afford. They ultimately resulted in an increase and
no decrease in unemployment. America had historically a freer labor market than
most European countries and therefore lower unemployment rates.
Unfortunately labor politics is playing an increasingly important role and if
not recognized may become a significant factor in reducing our near total or full
employment by forcing employers to reduce workers. But well paid union leaders
have no incentives to back off. They do not lose their jobs nor do they have to
accept lower wages or less desirable jobs.
Life expectancy has grown steadily in the last 50 years and now exceeds 77 years
for men and 79 years for women in many developed countries, including the USA,
which is slightly below those numbers. As a result, the percentage of people above
age 65 has grown rapidly as has the ratio of retired people to working people. In
fact, if this trend continues there will only be 3–4 working to each retired person
by 2020. Under such conditions, normal retirement benefits will be difficult to
maintain.
In the U.S. retirement age once compulsory in most jobs at age 60, later 62 and
65 has now been pushed to 70 and is not really compulsory in many cases anymore.
At the same time, the increase in time required for education or job training has
increased significantly. In 1960, the average starting age for job seekers was under
20, but this has since grown to over 23.5, with the vast majority of American youth
attending 2- and 4-year colleges and about 22% continuing in graduate study. The
average leaving age from a 4-year college is 22.7 years. As a result, the increase
AMERICAN SOCIAL AND ECONOMIC DEVELOPMENTS 105
in retirement age has hardly extended the number of working years of the average
American. This particularly if time-off for retraining and on-the-job training is
considered as well. At the same time, per capita costs of education and training have
increased significantly in absolute and relative terms, a trend that is expected to
continue. The increased costs to society of longer educational and retirement periods
cannot be borne by a declining percentage of working people. Overall, the ratio
of working people to non-working people (young and not working, non-working
working age, and retired) is converging on 2–3 in most developed countries and
was equal to 2.6 in the USA in 2002.
There is a tremendous economic value in many people of retirement age (65–70)
who are healthy, have accumulated huge amounts of experience and knowledge,
and are willing to continue to work. Unfortunately, most of our laws discourage
continuation of work after retirement age. In fact, in many cases people suffer
outright discrimination if they dare go beyond the rules or norms. The loss of this
to the economy and society is hard to estimate, but can safely be assumed to be
large. Not only would it reduce the cost of retirement benefits and increase tax
revenues, but it would also add significantly to the gross national product. In fact,
allowing people to continue work without penalty could greatly reduce the cost of
Social Security, add to the Social Security fund, in addition to the tax and national
income benefit.
Another important benefit is the use of experience and accumulated knowledge,
which the older worker brings to the job. Today the average American spends
17 1/2 years in school, university, and professional training before starting work
and another 2 1/2 years on average retraining for a total of 20 years out of a total
of 59 years from age 6 to 65. In other words, we work 2 years for every year of
schooling and training, which is a rather low return that will only get worse with the
need for more and more retraining as technology changes more and more rapidly.
Extending working life by 5–10 years by making retirement voluntary after age 65
would become a popular alternative to our more rigid current system. Some may
also prefer to retire earlier, when still young enough to enjoy what they retire for
and then return to work. Few people are really happy with retirement, particularly
if physically and mentally able because they cannot afford to do everything they
enjoy all the time for all those years and if mentally and physically unable because
they cannot do the things they retired for at all. As a result, many retirees yearn
to return to their old life after a few years of retirement but by then their old life
is gone.
The twentieth century was not only the period when we experienced two world
wars, each time involving the majority of the world’s population, but also a period
of unparalleled social, environmental, and technological progress. Colonialism and
other forms of bondage by nations or individuals practically vanished; absolute
106 CHAPTER 3
poverty was reduced from 70% to 30% of the world’s population, and per capita
food production doubled notwithstanding a quadrupling of the number of people on
the earth. The increase in population was fostered by increases in life expectancy
that nearly doubled worldwide. This in turn was due to a large extent to vast
improvements in health care, preventative medicine, and advances in medical
technology.
The most important development of this century though was probably global-
ization that took comparative advantage of the traditional economic forces that
encourage production and trade to the limit. We truly made a global village of
the world not just in terms of communications but also finance, transport, energy,
water supply, education, health care, and production. Person-to-person contacts
have improved and thereby improved understanding of the world. Few people
traveled beyond their abode one hundred years ago. Today nearly 10% of the
world’s population visit foreign countries every year and over 30% have access to
international radio or television. All of this obviously has advanced globalization.
Companies in telecommunications, finance, energy, water, supply, transport, and
manufacture are increasingly merging into multi-national and often global entities
to better serve mankind in their respective activities. We are now on the way toward
a true globalized world economy.
These trends are aimed at achieving greater efficiency and performance as well
as better accessibility by developing countries to modern services and technologies.
These trends have not been uniformly sustained though, as many fear the effects
of globalization on national sovereignty, particularly in developing countries. Most
developed countries have or are now forming trading blocs or other large economic
units that will further accelerate globalization. Developing countries though may
find themselves left out and unable to attain economies of scale necessary for
effective competition.
Globalization has encouraged larger projects and macro engineering is ever more
relevant today when big is considered beautiful and effective. In some cases,
macro-engineering projects can solve problems, particularly in transport, energy,
water supply, and communications. Much of this was driven by rapidly advancing
technology such as computers, satellite communication, high-speed trains, and more.
The dawn of the next millennium calls attention to the key problem of mankind, the
huge and growing imbalance in wealth and standard of living among peoples of the
world. This is not the result of unbalanced resources or lack of access to the world’s
wealth, but a much more fundamental problem that cannot be resolved just by
changing borders or by mass migration. Many of the poorest countries of the world
in South Asia, Africa or South America are well endowed with natural resources.
What many of them lack is education, discipline, the rule of law, technology, and a
unifying history as well as an integrated culture. They have been ruled by foreign
invaders, colonial powers or domestic despots for much of their history. These rulers
AMERICAN SOCIAL AND ECONOMIC DEVELOPMENTS 107
Portland, Oregon sometime ago imposed a $1,000 per job “growth impact fee” on
Intel if it creates too many jobs. This is a new approach to social phenomena. Job
growth has been one of the major ambitions of cities and states, not only to reduce
unemployment or underemployment with the associated social and economic costs,
but also to broaden and increase the tax base. Jobs were assumed to add to local,
regional, and national growth, as value created by jobs was in most cases a multiple
of the cost of the job. Direct and indirect taxes on new jobs were in general far in
excess of the cost of added physical and social infrastructure costs.
The Portland action therefore questions not only accepted economic and social
policy but also development strategy. For long, policy makers assumed that the
cost of unemployment compensation and related costs were less than the costs of
employment or job generation. Portland seems to claim that this is not so and that
other factors must be considered, such as the sprawl of suburbs which provide
affordable housing for new job takers, while the city or location of the job providers
assumes new costs of congestion, as well as direct and indirect services. Some cities
address this problem by taxing jobs or job takers but the problem is much broader.
As noted, all want the benefits of economic growth for themselves as individuals
and seldom consider the impact of these benefits on society. Yet, ultimately, we
will reach a point when continued prosperity-driven individual consumption of
public goods and services will collide with society’s ability to grow goods and
services without seriously affecting individual rights and freedoms. We increasingly
leave our cities and use them only as concentrated areas of business, entertainment,
production, and services. But there is a limit to what cities can do or provide, and
in many cases we are reaching the limit. Cities are urban concentrations designed to
meet the varied economic, social, and cultural interests not only of their inhabitants
but also of those who just work or visit there. Cities derive much of their tax
revenues from real estate taxes and as more and more of the city’s users live and pay
real estate taxes elsewhere, cities find it increasingly difficult to meet the growing
demands of absentee resident users of city infrastructure.
Portland’s job fee is probably only the first of many new approaches designed
to make city users pay for the services that cities provide. The economic impact of
demographic relocation and particularly the huge growth of bedroom communities
surrounding city centers have caused a lack of balance in commercial and residential
use. This increasingly affects city budgets. Cities have become the employment
generators but more and more lose shopping, housing, and often even entertainment
activities. They are often ghost towns after dark. Yet they are called upon to provide
the services of full activity urban centers without the tax base to pay for them.
New imaginative methods of taxation will have to be developed to assure a more
equitable burden sharing. The situation is expected to become worse as Internet
electronic commerce assumes a larger role and more and more commercial activities
are transacted from suburban homes. This would seriously reduce the role of cities
as commercial and administrative centers.
AMERICAN SOCIAL AND ECONOMIC DEVELOPMENTS 109
American agricultural policies are supposed to assure a stable, low cost supply
of food and to support farm incomes. These objectives are obviously mutually
interdependent. Yet, notwithstanding huge government expenditures for price
support and other agricultural programs, food prices vary substantially and many
farmers are forced off the fields because they cannot subsist on the income from
farming.
Government price supports do not simply stabilize, but also raise prices of many
foods. In a way it is curious that although productivity gains had led to a gradual
but consistent decline in world food prices, prices to the consumer should come
down as well over time but they do not, particularly in the U.S. It is generally
assumed that governments have the duty to assure ready availability of food and
water at affordable prices and also a moral duty to help feed starving people in other
countries. The policies adopted to assure this and achieve market stability at the
same time seem to be ineffective. It is generally agreed by agricultural economists
that the cost of protection is high and continues to grow. In fact, Anderson and
Tyers [Ref. 11] conducted a study in which they compared the costs of production
of the world’s food under extrapolated protection conditions with the costs in a
completely liberalized simulated market. They found that farm protection cost each
non-farming household about $1400/year in 1990 and about $1800/year in 2000.
The total cost of farm supports worldwide in 1990 was $260 billion. They also
made the startling discovery that an average American family could have bought
its own cow with the money it contributed to American dairy farmers during the
decade 1980–1990, a trend that continues to today.
Similarly 37% of farm support is actually wasted because of food grown in the
wrong place or because it spoils before it reaches consumers. As farm support in
the US is linked to production or output, large often-rich farmers usually collect
a windfall. In fact, only about 10% of farm subsidies actually reach poor, needy
farmers. In addition, the costs of administering farm support adds billions in charges
to taxpayers worldwide, much of it to U.S. taxpayers.
The findings conclude that without subsidies world prices would be about 20%
higher, but this added cost is substantially less than the direct and administrative
cost of subsidies. Furthermore, a liberalized market can be expected to be much
more efficient both in terms of production and distribution. It would also be much
more responsive to changing demands.
Regarding the supply of food aid to poor countries, the present system of subsidies
with large-scale overproduction and often dislocation of production often provides
excess food for ready transfer to developing countries or famine victims. But there
are many more efficient ways to assure availability of food aid which are both
more economical and introduce meaningful incentives. An important issue is that
most of the foods identified as contributing to obesity are subsidized and therefore
sold at prices attractive to consumers. In other words, American government farm
110 CHAPTER 3
As the first nation to explode a nuclear bomb and operate a nuclear power plant,
we continue to be faced with the long-term problem of nuclear waste disposal.
We have preached the gospel on the ills of nuclear weapons and nuclear power
and in fact stopped building nuclear power plants many years ago. Yet the nuclear
waste peril continues to haunt us. Nuclear power plant operators, the Department
of Energy, and the Department of Defense have used temporary disposal methods
for years, most of which were really nothing more than shielded holding sites.
Other nations, such as Japan and France, among the largest users of nuclear power
generators have developed somewhat more sophisticated disposal methods which
we obviously criticized because, though better than what we did, were not safe,
long-term solutions.
Now come the revelations that we plan to store huge amounts of nuclear waste
in a mine in the Yucca Mountains northwest of Las Vegas. The obvious question is
the long-term safety and environmental impacts of this massive project. The plan
is to dig a network of tunnels starting in year 2010 that will be loaded with cladded
nuclear disposal containers. Each container will hold 21–44 fuel assemblies and
radiation-shielded trains will move these casks into tubular tunnel sidings. These
tunnel sidings will be reinforced with concrete linings. The array of tunnels will be
ventilated by two huge air-circulation systems with movable airlocks. Automated
mobile radiation leak detection equipment will monitor all the stored casks for
leaks.
The network of tunnels is planned to be loaded with the most radioactive waste
from about 100 nuclear reactors that supply about 20% of the nation’s electric
power. After all the nuclear waste is placed in the underground mine it will be
closed. But as every 1000 megawatt reactor generates about 33 tons of nuclear
waste per year, accumulations of nuclear waste grow at the rate of about 3300 tons
per year. There are some concerns that leaks could occur over time as a result of
• seepage
• container fracture
• internal chemical reactions
• heat generation, expansion, and cracks
• external chemical reactions
• tremors
The chances of failure and radiation exposure are extremely small. However there
are serious concerns that surface (soil, crop, water table, air, and dust) pollution
could occur.
AMERICAN SOCIAL AND ECONOMIC DEVELOPMENTS 111
The economic costs of safe nuclear waste disposal of all the accumulated waste
in the U.S. alone is estimated to be $50–100 billion, assuming no further nuclear
reactors are built and existing reactors are decommissioned when they reach their
design life of 25–30 years. Otherwise the costs could escalate to a multiple of these
estimates. In addition we have other nuclear and highly toxic waste from weapons
and various process plants. At this time all the disposal methods envision temporary
and then semi-permanent storage, both of which are not only expensive but pose
many unknown hazards.
Over 20 years since construction of the last U.S. nuclear power reactor, nuclear
power generation is again under consideration. This change in policy is not driven
by breakthroughs in nuclear waste treatment or disposal technology, but by the
increasing concern with greenhouse effects of fossil fuel power plants and the
increasingly high cost of fossil fuels. Many new power plants in the U.S. are now
fueled by natural gas and though much cleaner than coal or petroleum still produce
significant greenhouse (carbon dioxide) pollution. Furthermore the price of natural
gas has escalated even more than petroleum. There is an urgent need to design more
effective nuclear plants in terms of investment as well as operating efficiencies. Yet
the most important drive must be towards safer and more effective nuclear waste
disposal technology.
As mentioned earlier, the amount of global nuclear waste is growing rapidly
and continued use of “temporary” storage facilities, however well shielded and
protected, is simply unacceptable. Ways must now be found to process and reprocess
nuclear waste without adding to the global nuclear weapons pile and also to reuse
spent nuclear fuel for long term low level power or at least heat generation. At the
same time strict international spent fuel inventory controls and inventory condition
monitoring must be instituted to assure uniform global maintenance standards. In
fact, it would be desirable to make the International Atomic Energy Commission
not only responsible for the maintenance of the global spent fuel inventory and
its repositories, but also for the development of nuclear waste reprocessing and
disposal technology. This would be financed by annual payments by nuclear waste
generators, primarily nuclear reactor operators, research laboratories, and military
organizations worldwide.
and hopefully ultimately reversed. The increasing cost of fossil fuels will make
alternative energy sources more and more attractive. It is currently projected by
the International Energy Agency (July 2001) that fossil fuel and particularly global
petroleum fuel consumption growth rates will decline to just 1–2% by 2005. It is
also estimated that consumption will level off by 2010 and from then on actually
decline. By year 2010 world consumption will reach about 84 million barrels/day
(up from 76 million bbls/day in 2001). This will be reduced to just over 65 million
barrels/day by year 2025 and 50 million barrels/day by year 2035, at which time
petroleum fuels will supply less than half the worlds’ energy needs. It is projected
that petroleum will contribute less than 30% of world energy needs by 2050 and
become a very minor contributor before the end of the 21st century. In other words,
the age of the petroleum fuel that started just before World War II will essentially
come to an end.
This trend driven largely by alternative energy conversion technology develop-
ments will make the U.S. independent of petroleum imports from non-NAFTA
countries by 2025–2035 and altogether by 2035–2045. The time table for petroleum
import independence could be advanced by another 5–10 years if petroleum
exporting countries become even more demanding and increase the price per barrel
of crude to $70 per bbl by 2006 and more thereafter. This would accelerate
investment in oil production outside OPEC. Considering the total cost of the use
of alternative energy production, including the costs of technological developments
in wind, ocean/river current, hydro, nuclear, and solar power, show that delivered
electric power costs including all depreciation, maintenance, transmission, and other
costs will equal those of petroleum/gas fueled power plants by 2005 if crude
petroleum and corresponding LNG costs are equal to $40–45 per barrel in 1999
dollars by then. In other words, we are getting very close to equivalence in costs.
If we were to add the environmental costs or the cost (penalty) for pollution, such
cost equivalency could occur even sooner. Thereafter alternative energy develop-
ments should take over rapidly as the combination of economic, environmental,
and political advantages drive the introduction of these new technologies. Though
initially alternative fuel or energy technologies will be used primarily in electric
power generation, rapid advances in alternative power sources in both private and
public transportation, communication, and agriculture are expected to result in the
replacement of fossil fuel energy by alternative means soon thereafter. Another
major bonus will be effective use of waste energy (low temperature heat, etc.).
The result will not only be a much needed improvement in the U.S. air and water
quality environment, but also major improvements in the U.S. balance of payment
and personal health.
Greater use of renewable energy will have a major impact on the American
way of life, while improving our quality of life. It will reduce our health care
costs and improve standards of living while assuring better income distribution.
Personal transport and other services will become more convenient and affordable,
while public transport, education, health care, and other services will become more
accessible and ultimately completely free.
AMERICAN SOCIAL AND ECONOMIC DEVELOPMENTS 113
The shop fronts, administrative offices, classrooms, and even engineering design,
legal, and medical consulting offices of the future will not be physical spaces
as they are now, filled with people who inefficiently perform various functions,
but the services they supply will all be delivered instantly by the Internet with
most functions performed automatically without any or at least real time human
participation.
We will have access to all these services, consultations, and information at any
place and at any time. The impact on economic productivity is hard to project. Not
only will we be able to reduce or eliminate nearly all inventory losses and assure
real just-in-time delivery of goods and services and have access to any information
or advice required at any time and place, but we will be able to assure a nearly
perfect match of supply and demand, high capacity utilization, and just-in-time
technological change which eliminates obsolescence.
When I first arrived in Los Angeles some 30 years ago, I rented an apartment
in a duplex home in Santa Monica, California, a nice neighborhood of single-
and double-family houses and small apartment buildings. It all looked very trim
and solid. I was fascinated though to observe the construction of a new multi-
level apartment building. Two-by-four inch lumber sticks at one-foot pitch made
up eight-by-eight foot structural frames that were erected on a poured concrete
foundation. These frames in turn supported a framed floor deck for the next floor
and so on. In other words, a multi-level residential building was nailed together
from sticks. Interior and exterior panels of gypsum, plywood or some composite
materials provided the surfacing. The spaces between the sticks in each frame were
usually filled with insulation and wiring, piping and ventilation ducts were similarly
installed in these spaces.
As such flimsy structures went up, I could not help but wonder how a grand
piano would be supported on an upper floor or how such a structure would resist an
automobile or similar vehicle impact. This type of construction is used in the vast
majority of residential homes in America. Notwithstanding high labor costs, most
houses even when identical are nailed together stick by stick or prefabricated panel
by panel. There is very little steel or concrete construction used in U.S. residential
housing. While construction materials are or used to be cheap, the cost of labor in
American housing construction consumes a much higher percentage than elsewhere
in the world. More importantly though is the strength of such housing. Wind storms,
hurricanes, earthquakes, fire storms, and other natural disasters to which many parts
of the U.S. are prone destroy an inordinately large number of dwellings, many of
which would survive such natural furies if they were built more solidly. Similarly,
residential home fires are many times those experienced in other countries where
masonry construction is more popular.
A steel and concrete house has a substantially higher probability of survival in a
storm, fire or earthquake and damage, if any would be much less. The construction
116 CHAPTER 3
costs of such houses would be comparable if not cheaper and their maintenance
costs much lower. Conservative estimates of annual damage costs caused by natural
disasters to residential housing in America are between $20b and $40b. A similar
amount is spent on home maintenance. It is estimated that more than 65% of these
costs could be saved if different methods of construction were used.
Historically the methods of construction were based on availability of local
materials and abundant local labor, wood, and carpenters that were readily available
in most parts of America. Yet today, when most building materials are transported
over long distances and construction labor is no longer abundant and cheap nor
is there a need for provision of local employment in most areas, this approach to
residential housing construction appears outmoded and uneconomic in most parts
of this country.
If brick, concrete or steel were more extensively used, the potential savings in
new housing costs could ultimately exceed $30 billion per year, excluding the
huge costs in loss of human life, injuries, and temporary shelter. It may also make
residential housing more affordable and maintainable. Other advantages could be
savings in heating and cooling costs, surface coating and maintenance costs, and
even personal security. It is curious that while U.S. construction of buildings for
commercial purposes is efficient and uses long-life materials, much of the residential
housing industry is largely stuck in the past.
rich young tycoons. Young people who became rich at a very young age through
their involvement in high tech, often Internet start ups, as investment bankers or
analysts or simply entrepreneurs. As a result, there is now a whole new young upper-
class which made its money not by accumulation or rewards during a long career
but nearly instantly during their early years by advancing an idea, involvement
in a successful start up or role in a high leverage or bonus earning financial
position.
The interesting part of this phenomenon is that many of these young newly
rich made their fortunes not as a result of a successful venture but quite often a
spectacular but exciting failure. Particularly Internet start-ups often attracted huge
amounts of venture and investor capital, even when they did not offer solid business
plans or revenue/profit potentials. The sheer excitement of the ideas quite often gave
them access to otherwise cautious markets. The result is a rather radical change
in the wealth distribution. Where previously earned versus inherited wealth could
largely be correlated with age and experience, such factors play a declining role now.
The reverse unfortunately can also be recognized among the poor where now an
increasing percentage of poor are among the elderly. This trend may be accelerated
if proposals to retard the retirement age to 68 or even 70 years, particularly for the
receipt of Social Security benefits, is enacted, this obviously to assure the continued
viability of the Social Security System under conditions of greater longevity and
a lower number of contributors for each benefit recipient. With our low savings
rate, many retirees have few other resources and must subsist on Social Security
benefits alone. The system was never set up for this purpose, but this reality is
now catching up and may cause large social dislocations and an increasingly poor
elderly population.
Americans are very much concerned with the quality of the environment and
demand clean air and water. At the same time, we somehow take such condi-
tions for granted and are usually unwilling to make any sacrifices or even slight
118 CHAPTER 3
changes in our lifestyle to help assure the quality of our environment. We consume
over one-quarter of the fossil fuel burned on earth, though we are only about
5% of the world’s population. We recycle very little and do it largely ineffec-
tively. We consume on average four times the material resources (steel, aluminum,
paper, etc.) per capita than the world average. We waste huge amounts of food
and other renewables without considering the unfulfilled needs of others. At the
same time, we are not even trying to contain our unreasonable consumption
by taxation or even changes in lifestyle. In fact, the growth of our gasoline
consumption, as on example, has actually accelerated with increased popularity of
SUVs that consume twice as much gasoline as the traditional family cars they usually
replace.
Though we are the world’s largest polluters, we, at the same time, have one of the
most complex environmental protection systems which involve government at the
federal, state, and local levels. There are numerous federal, state, and local agencies
supposedly charged with the protection of the environment which have actually
developed into often opposing and inconsistent bureaucracies more concerned with
the environmental laws and permitting processes than the actual protection or
improvement of the environment. For example, coastal management issues such as
say dredging or deepening a navigational channel for a U.S. port involves at the
federal level
• U.S. Army Corps of Engineers
• U.S. Coast Guard (Department of Homeland Security)
• U.S. Department of Agriculture (Fish and Wildlife)
• U.S. Department of Commerce (Marine Fisheries)
• Environmental Protection Agency
• U.S. Department of the Interior
and possibly others. At the state level we usually have
• Environmental Protection Agency
• Coastal Zone Management Administration
• State Fisheries Department
• State Economic Development Department
• others
Furthermore, there are usually numerous local agencies, interest groups, community
organizations, and others that are involved in ruling on or permitting of environ-
mentally sensitive projects. The problem is lack of standards, coordination and
consistency in the requirements of all the agencies even among say federal
agencies. As a result, it is practically impossible to meet the requirements of
one agency without infringing on those of another. The time and money spent
on the environmental approval process has sky-rocketed and now constitutes a
major financial and schedule obstacle to many economically and environmentally
desirable projects. In many, project time and money spent on bureaucratic documen-
tation exceeds that spent on surveys, engineering, and design. For example, the
preliminary Environmental Impact Statements (EIS) proposed for a recent port
project for both federal and local EPAs, which only reported known facts and did
AMERICAN SOCIAL AND ECONOMIC DEVELOPMENTS 119
In other words, the average Norwegian worker worked only 71% as many hours as
his/her American counterpart. While working hours have increased in America by
nearly 12 hours/year every year since 1985, the number of working hours in almost
every other industrialized country decreased during the same period.
At the same time, recruiting costs in America average 13% of the annual salary of
employees, which is somewhat higher than that in other countries. This is largely due
to larger worker turnaround. Americans outproduce workers in other industrialized
countries by an average of $10,000/year not only because of more working hours
but also because of larger hourly productivity. Notwithstanding this higher output
per worker or because of it, more and better paying jobs are being created in
an ever-escalating spiral. Worker productivity growth has outstripped increases in
worker costs in recent years and therefore contained any inflationary pressures. At
the same time, some countries such as France are trying to increase job generation
by curtailing the work week to 35 hours/worker, a rather short-sighted approach
which can only increase inflationary pressures and reduce worker productivity. The
U.S. at the same time has not only been able to maintain a low 4.1–5.0% rate
of unemployment (1994–2001), but at the same time annually admit and absorb
large numbers of legal and illegal immigrants which are estimated to have averaged
0.3–0.5% of the U.S. population and about 1% of its workforce.
The brave new high technology world was expected to generate huge new
demands for labor notwithstanding the fact that much of the new technology is labor
saving. The reasoning was that it would bring many more demands than job replace-
ments. At the same time, many, particularly labor leaders, opposed new technology
introduction claiming that it would take jobs away. The U.S. Bureau of Labor
statistics now projects 151 million jobs for 2006, with only 141 million employed
or job seekers. In other words, they predict a 7% labor shortfall (2000). While most
of these will be in skilled, high technology jobs, many basic service and manufac-
turing jobs will also be generated and go begging. More and more people will work
at home, use work flexible hours, work several jobs or work as independents. The
fast moving changes in technology are going to radically change the traditional
work place as well as the traditional employment or work relationships. Unlike the
AMERICAN SOCIAL AND ECONOMIC DEVELOPMENTS 121
dire predictions of a few years ago that downsizing, outsourcing, and technological
change, the principal responses to re-engineering, will result in large layoffs and
unemployment, the opposite actually occurred. For every job lost in downsizing,
nearly two jobs were created by outsourcing and new job or work creation. This
trend is expected to continue notwithstanding short-term employment downsizing
in 2001, particularly by high technology firms. In fact, even with large-scale layoffs
in 2001, the percentage of unemployed remains near historic lows.
The composition of jobs in the future will be distinctly different not only in
job content and skill requirements but also in job organization and performance.
More and more jobs will be stand-alone jobs which can be performed anytime and
anywhere. This not only because of ready IT access and multi-modal real time
communications, but also because workers at all levels will be delegated more and
more, if not all, the responsibilities and decision making powers related to their job.
Another issue is that workers will continually be encouraged to upgrade their
skills and knowledge. Long-long education, in other words, will not be largely
reserved for professionals or professional workers but offered to all workers. This
way the whole economy will be able to maintain its technological competence.
AMERICAN EDUCATION
American schools are becoming the major drag on the American economy. High
school students’ competence continues to drop in relation to achievements of
students in Germany, France, Japan, and many other industrialized or even devel-
oping countries, particularly in math and science. There are many reasons for this,
but one basic reason is that American students go to school on average only 180
days per year, much less than students in Japan (243), Germany (240), Denmark
(200), and many other countries. In 1994, a U.S. Federal Commission found that
high school students in Japan, France, and Germany received on average twice as
many hours of teaching in core subjects such as math, science, and language as
U.S. students.
Some American schools recognize this deficiency and are extending the school
year, but the number is small. There are serious questions if lengthening the school
year would be enough to close the achievement gap. There may be a need to
improve teacher qualifications, change school curriculum, develop better student
and teacher incentives and develop a different school environment.
There is also the issue of costs of extending the school year and improving
learning. While a longer school year would make better use of existing infras-
tructure, it may add some salary, air conditioning, etc. costs. Also many claim that
it would interfere with the American tradition of long family summers. On the
other hand, fewer American families do take long summer ‘family’ vacations, this
partly because fewer Americans are working under traditional working contracts.
The number of people working at home has doubled every 10 years since 1970
and is now over 5 million or about 4% of the work force. Most of these people
work as independents and do not take long vacations. More important though is
122 CHAPTER 3
the fact that in an increasing high technology economy, there are fewer who work
traditional 5-day a week 9–5 jobs, as most technology jobs are performed on a very
flexible schedule. Also students, particularly high school students, no longer take
part in long family vacations. They often have their own schedules which in many
cases involves not just summer jobs but also various entrepreneurial activities in
programming, the Internet, and more.
The increasing technological gap between American teenagers and their parents
has a definite impact on joint or family leisure time and particularly family vacation
activities. Fewer American teenagers spend their summer vacations with their
parents or family, but instead devote their time to friends, cyberspace, and related
activities. Although American primary and high school students are mostly computer
and Internet literate and in fact often excel in programming and computer skills,
school curricula as well as delivery systems take scant advantage of the resulting
opportunities for better teaching, subject, and knowledge delivery.
In fact teachers in America in general do not share classroom experience. They
do not consider teaching as an evolving and ever renewing craft but as something
“once learned, always known” gift. They keep their teaching methods to themselves
and usually do not visit or learn from each other, and in fact jealously guard the
privacy of their teaching. Teachers keep to themselves or to their “classroom” and
do not share a larger joint or team room. This is unfortunate in the Internet age.
Unlike medical doctors and many other professionals, teachers do not regularly
upgrade their skills or knowledge. They may participate in discussions or seminars
on teaching methods, but seldom in basic knowledge-enhancing programs. This is
particularly dangerous at a time when rapidly changing technology and knowledge
base often makes much of their prior knowledge obsolete, this not only in mathe-
matics and science but also biology and even social sciences. Their computer skills
are often inferior to those of their own students who, as a result, are better equipped
to surf the Web and extract information. This in turn puts teachers at a distinct
disadvantage in their classroom.
More money, better and more teachers, and rebuilding or repairing of our schools
is not going to improve education standards or learning, particularly of the children
of our poor. School meals and support with clothing are not going to eradicate
poverty and improve the dismal environment in which children of our poor or
otherwise disadvantaged find themselves.
What is needed is a radical structural change in the basic American system
of primary and secondary education in the method of delivery and the relation
between the educational and social system, in other words the American family.
It requires more discipline, less bureaucracy, greater teacher involvement in the
life of their pupils, and complete elimination of schools as local political power
plays. It requires real involvement of parents, of the family, and of the social
environment.
It is well established that American students do not achieve the educational levels
of those in other industrialized countries or even poorer developing countries. Their
reading, mathematics, and science skills are usually well below those achieved
AMERICAN SOCIAL AND ECONOMIC DEVELOPMENTS 123
by their equals in Europe and East Asia. Poor children certainly need a change
in their environment which usually includes no books or even newspapers, no
discussions or even social interactions with adults or serious conversation with
anyone, even peers. Their environment is often limited to a very narrow self-
defeating community. They have neither challenges nor incentives. But children
of American middle or upper class families are by and large not much better
prepared and similarly often suffer under lack of an intelligent and supportive family
environment. They do not suffer under physical neglect but often receive little
intellectual stimulus, encouragement or incentives. Their role models are more often
than not financial or economic success stories not intellectual achievements. Their
time will be mainly spent in using the latest technology which most often offers
little intellectual challenge. Even computers have become more a good than a tool
for educational and intellectual advancement. It is more a game than a challenge.
There is a growing need for a radical change in the American educational system
and particularly in its schools. Not only do we need more uniform standards and
content nationwide, but methods of grading and advancing students must also be
made more uniform. We can no longer afford to advance failing students ‘so as
not to injure their self esteem’. To me this argument should be rephrased to ‘not
identify incompetent teachers’. Many of our universities now provide remedial
high-school education during their freshman year, wasting at least a year’s worth of
their students’ time and money. We have a bright generation of young Americans
who benefit greatly from access to computers and the Internet, but are often left
unchallenged by their school programs and teachers.
We spend more than any other nation for basic education ($5,950 per student
average nationwide, 1999) without delivering world class education to our children.
The fault is not only with the system as described above but also with the budgeting
priorities of our school systems. Expenses for prestige sports (football, etc.) nearly
always receive priority over basic educational expenses. In fact, less than half the
operating budget of most school districts goes for education related expenses such
as teachers, teaching materials, libraries/books, and related costs. This must be
changed if future America is to be able to maintain its economic and standard of
living growth.
Equally important is the need to prepare our young for the great changes in
lifestyle, working, and commerce in the future America in which the promises of
our advancing technology bear fruit.
We now spend more than one trillion dollars a year or about 13% of GDP on
law enforcement and related public safety services, yet neither our streets nor our
homes are by and large safe. In fact, while crime used to be largely committed
in our cities, now suburbs and rural communities are as prone to suffer crime as
urban areas
124 CHAPTER 3
Many of the crimes in the U.S. are drug related. Nearly forty years since starting
our war against drug trafficking we are further from eradicating this curse than ever
before. We fight the drug war abroad, primarily in South and Central America,
but much of the drug trade now originates in Afghanistan, Burma, and Central
Asian countries. Nearly half of those in U.S. jails are incarcerated on drug-related
charges. It is estimated that U.S. costs of fighting drug crimes as well as the cost
of incarceration of drug criminals costs the U.S. hundreds of billions of dollars
a year. In other words, we probably spend more on fighting drug crimes than
the total value of the U.S. drug trade. Surely there must be different ways to
help eradicate this plague. Radical solutions such as adopted by Singapore which
enforces capital punishment for drug traders may not be acceptable, but we do need
greater disincentives for drug trader than currently enforced.
Punitive damage awards have become a major direct and indirect cost to the
American economy. Not only have cases and resulting awards spiraled out of
control and caused a huge cost to American businesses, households, individuals,
and ultimately society, but the direct costs of protection, prevention, and insurance
as well as the indirect costs of loss of time in responding to claims as well
as investigative and other costs are spiraling up at an even higher rate. The
reasons are that it is not sufficient to respond to damage claims, but it is now
necessary also to rebuild image, pacify interest groups, and re-establish media
support.
Punitive damage awards usually go far beyond reasonable compensation for real
or imagined damages today. In even more cases, they go well beyond the call
of justice. A large proportion of damage claims are not initiated by the real or
imagined “victim” but by trial lawyers, many of whom now specialize in damage
claims. It is increasingly common to have punitive damages awarded for proven
inadvertent accidents where fault of any sort could not be proven. In today’s
regulatory environment which imposes criminal penalties on contravention, much of
punitive damage litigation does not improve safety, correct wrongs or compensate
for actual direct and indirect damages, but offers lawyers and complaintants oppor-
tunities to milk the system which usually means our communities and our economy.
Most punitive awards bear no relationship to damages nor do trial lawyers’ fees to
fair compensation for work done.
Defendants in such cases do not have the basic protection that even criminals
enjoy. A preponderance of evidence and not evidence beyond reasonable doubt is
required and there is no presumption of innocence until proven otherwise. There are
no rules or guides to the jury regarding appropriate levels of punitive awards nor a
maximum level. The result is usually an award level proportional to the depth of
the pockets of a chosen, not necessarily most guilty, defendant. There are no limits
on attorney contingency fees and class action suits against wealthy defendants have
therefore become popular. The result is often that the major if not only beneficiaries
are the plaintiff’s attorneys. This had led to huge numbers of frivolous claims.
Losers are not required to pay even the legal costs of the defendant and attorneys
have therefore little to lose in filing such claims.
AMERICAN SOCIAL AND ECONOMIC DEVELOPMENTS 125
In a class action suit brought on behalf of some flight attendant who claimed
illness resulting from second-hand smoke, defendants settled for $300 million for
second-hand smoke research and $49 million for the plaintiff’s attorneys, with the
plaintiffs receiving nothing.
The problem though has many more far-reaching implications. It stymies
research, delays the marketing of new technology and products, removes important
and useful product, processes or services from the market, adds significant costs
for insurance, etc., and in general delays progress. At the same time, there is little
if any evidence that it improves safety and the well being of society. As matters
now stand, every misfortune or even perceived or made-up damage is cause for a
law suit. The result is that torts extract money from the economy to benefit mainly
a small group of lawyers who contribute nothing to society.
There are many other distortions of our law enforcement system, which hurt
the economy without significantly, if at all, improving public safety and well
being. Among these is our parole system, which is not only lenient but in many
cases subverts the intent of the law. More than 70% of those incarcerated for
violent crimes are repeat offenders. Their release, usually on parole, not only
endangers public safety but greatly increases the costs of law enforcement. We
need a system where a sentence is a sentence unless misuse of judgment is proven.
Similarly, minor crimes such as drug use and others which did not endanger public
safety should be punished using economic penalties, not incarceration. These can
be effectively enforced to the benefit of society. Law enforcement and security
go hand in hand. Security though has more dimensions and requires different
approaches. It has become a serious issue affecting all levels of society and all
locations. Assuring security is much more complex than law enforcement as the
perpetrators have much more complex agendas, use different and often highly
lethal weapons or methods, and are irrational in their exposure. In fact suicide
has become an important weapon of terrorism. Weapons of mass destruction
are often sought by extremists among them and have on occasion been used in
terrorist acts.
U.S. law enforcement is woefully inadequate to deal with terrorism in an effective
way and is quite ineffective in dealing with drug crimes. The U.S. law enforcement
system is highly fragmented in the intelligence, enforcement, and jurisdictional
or legal areas. It is amazing that each is handled by a whole array of federal
and local intelligence agencies, law enforcement organizations, and court systems
that cooperate rather loosely if at all. In fact, there are many instances where
turf battles prevented effective pursuit of major crimes, drug smuggling, and even
terrorist acts. This is a major issue at a time when terrorism has become a most
dangerous threat, particularly after the September 11, 2001 attack on the World
Trade Center and the Pentagon. The Patriot Act and the establishment of the
Homeland Security Department resolve some of the issues of intelligence and law
enforcement coordination, but the major gaps persist. In fact, this new department
has so far failed to effectively coordinate most intelligence and law enforcement
functions.
126 CHAPTER 3
In this world America, as the technology leader, will have many new prospects,
yet also confront many new challenges; not the least of which will be the challenge
of transforming a multi-cultural society from an open, free, and mobile environment
into a brave new world of equal access but technologically-driven impersonal
networks.
New concepts of technological democracy will have to be invented which
recognize the individual as the ultimate arbitrator, but also recognize that interper-
sonal relations and communications will be highly affected by new technologically
supported decision management systems in which the individual is the arbitrator
but not the implementer.
New technology will not only affect how our government and institutions work
and interact with the public in the future, but also how business is done, goods
and services are produced and distributed, and most importantly how our society
operates. Social and interpersonal interactions will be quite different in both form
and substance. This may affect the structure of society down to the family level.
The way people communicate has already changed quite radically. In future, it
may also influence our approach to the expression of compassion, love, gratitude,
disagreement, objection, and hate. New technology not only offers new venues for
the expression of feelings, but also how to communicate feelings. All of this may
affect societal developments.
At the same time, this new world in which America is the undisputed military
leader with global powers and military technology second to none poses a serious
danger of strategic overreach where America not only becomes the world’s
policeman and peacemaker but also the adjudicator and thereby imposes its rules
and values on others.
CHAPTER 4
The technological revolution, which has engulfed the world since World War II,
has brought radical changes to the way we design, manufacture, transport, commu-
nicate, trade, and deliver services. It has also affected international relations and
changed our concepts of a post- industrial economy. Yet with all its successes it has
failed to make often meaningful contributions to improvements to social interrela-
tions, social welfare, universal health care, international and intra-national relations,
poverty remediation, global literacy, income redistribution, and most importantly
global peace. The reasons appear to be that technological change was largely intro-
duced without any consideration for the associated requirements for change in
social structure, interpersonal relations, institutions, and political systems. In fact,
technology simply marched forward, leaving much of society well behind.
Changes in work content and the workplace environment to be successful require
meaningful changes in social systems, education, and interpersonal behavior. It is
therefore not surprising that so many imaginative electronic and Internet businesses
and other new technology- based ventures failed abysmally. They only considered
the technical and sometimes also the commercial side and benefits, ignoring the
social, societal, and human implications or the need for a change in social and human
behavior and values, to make the new ventures succeed. The result was a short
lived infatuation which introduced new ways to trade or purchase services, toys
(e-toys), groceries (Web Van), books (Amazon.com), automobiles (Autobytel.com),
and more. Many of these Business-to-Consumer (B to C) electronic businesses have
gone out of business or are in severe decline after just a few years. Some like eBay,
an electronic auction business, were original and unique enough to attract sufficient
business and thrive.
Wireless communications, computers, personal digital assistants, digital photog-
raphy, laser video and sound reproduction, internet, among others are all techno-
logies which attracted wide public use in little time, this not only because of the
novelty of the technology but its convenience and range of uses. People in general
considered these as conveniences which made their everyday life simpler and
offered them many new personal and economic opportunities. Many in developed
129
130 CHAPTER 4
at the click of a mouse. The Internet has introduced access to huge amounts of
information and new ways to execute transactions from purchase of goods and
services to auctions of goods and services, registration and filing of documents,
and more. All this from the convenience of ones home, office or even a cell phone
or personal digital assistant on the road. Electronic transactions are transforming
our personal lives and the way business is done. Though business-to-consumer
electronic commerce did not live up to its original and highly exaggerated expecta-
tions, business-to-business electronic commerce, which developed more slowly and
more deliberately, appears to truly catch on and to revolutionize business transac-
tions. The reasons are that trust and confidence based on extensive knowledge of
the other party is much greater in B-to-B commerce.
Businessmen usually know whom they do business with and have effective
controls in place. They also often know the material, product or service they want
to acquire or the buyer’s reputation, creditworthiness, and business practices. This
does not usually apply to business-to-consumer transactions. In addition, consumers
often unfamiliar with the goods or services they want to acquire really want to see,
touch or try first before committing to a purchase. This applies to groceries where
highly touted e-commerce firms such as Webvan went out of business with huge
losses as well as e-toys, and many more.
Another reason is obviously that shopping, particularly in America, is for many
people not just an acquisition process but a social event and entertainment. Shops
and shopping malls are attractive destinations, which offer more than just shopping
opportunities. They are visual promenades, people watching venues, enticing eating
opportunities, locations for gathering new ideas, meeting or making new friends,
showing off, and as mentioned just to be entertained. Going shopping is an event
not a transaction for most Americans. This is the reason that electronic consumer
shopping only caught on over a limited range of transactions in goods and services
which are well defined, subject to major price changes, are national or global,
and are served by reliable sellers or businesses. Airline tickets, books, hotel rooms,
and similar are typical examples.
We are rapidly entering an electronic world where transactions can all be done
from the convenience of one’s home, office or even on the road. Not just purchases
or sales, but money transfers, bill payments, date and information transfer or acqui-
sition, distant learning, medical diagnosis, teleconferencing, board meetings, legal
services, project management, and more will in future all benefit from use of the
Internet. Simultaneous voice, data and information transmission provides exciting
real time global transactional capabilities, which will affect the way we commu-
nicate, learn, make decisions, manage, and plan. The technology is not only here
but increasingly capable and affordable. As a result, it is truly infiltrating all types
of activities and even more importantly the way we interact and do our business.
It also affects interpersonal relations in all kinds of ways and may ultimately have
a major impact on both social and business organizations. It allows more work
to be done in isolation or even at home, eliminating much of the social contact
that office and even manufacturing work generates. As a result, there is both
132 CHAPTER 4
more and less interaction. On one hand people at all levels are more accessible,
yet interactions are less personal and exclude much of the physical interpersonal
chemistry or psychology. While this could be interpreted as a leveling of the playing
field, unimpeded by organization or hierarchical rigor, it may result in loss of the
give-and-take that physical contacts among people encourage.
Similarly, work is now often becoming less personal. Interpersonal relations play
a declining role as more work is done in physical isolation and more information
transfers as well as general communications are done electronically. This is not
only true of work which can now be done at home or remotely such as bookings,
inventory, traffic, and routing control, financial transactions and even medical or
technical diagnostics but also of various production, testing, and assembly functions
so typical in manufacturing.
Work is also more routine now and less satisfying for many people involved
in monotone or simple, often repetitive, tasks, while at the other extreme people
are challenged continuously to improve, innovate, and advance knowledge and
technology. We now as a result have two classes of workers, without much of
a working middle level, the unchallenged routine task worker and the challenged
worker. The main drawback is an increasing barrier between the lower and upper
classes or types of workers, with one essentially stuck in a narrow band of oppor-
tunities for live interactions, while the others often have unlimited opportunities to
advance. Much of this is the result of a two tier American educational system. Many
young Americans barely achieve high school levels of education and even then
quite often lack effective reading, basic mathematical and other skills necessary
for success in modern society. Others again often attend some of the world’s best
institutions of higher learning and attain knowledge and skills that allow them to
move American technology, medicine, and science as well as culture and produc-
tivity to the highest levels. This increasing educational, cultural, and skill gap
is leading to a broad and widening economic divide and social abyss for many.
This has serious implications. Among these is the inadequacy of U.S. security and
intelligence services. Airport security personnel, as an example, are largely drawn
not from among the well educated, trained, and alert, but largely from among
the unskilled, often unmotivated with very basic education who are given crash
courses on how to inspect or check people and luggage. The inspection stations are
usually inefficient and overmanned. This compared to say security at airports in
some other countries manned by a very small number of highly trained, motivated
security professionals, often with training and degrees in psychology, intelligence,
and security technology. The result is both greater efficiency and reliability of the
security process.
The problem caused by the increasing educational, motivational, and competence
gap among Americans has far reaching implications, which go beyond increasing
economic and social gaps of American society. It affects America’s standing and
ability to live up to its goals. It also affects its role as a world leader. The atrocities
committed by American soldiers and civilian contractors in the Abu Ghraib prison
near Baghdad in 2003 are just one example of the increasing gap between the values
CLAIMS TO WORLD LEADERSHIP 133
and resulting actions or behavior of some Americans. This gap among the newly
diverse Americans probably presents the greatest challenge to American leadership.
The American Constitution and American institutions have for long been
examples for the civilized world. They provided scope and guidance for a balanced,
democratic society established for the good of its people, a system of real partici-
patory government with equal opportunities for all, at least in theory. The mainstay
of American society has for long been the middle class. This three class society
where class was largely determined by economic status is being replaced by
a society of educated or skilled and uneducated and/or unskilled people. Some
among the first are extravagantly highly rewarded classes of people which include
managers and professionals, largely in finance.
For many this new environment imposes ceilings that prevent them from
advancing which are more severe than any previously experienced. It also repre-
sents a new America that is increasingly segmented or segregated into two distinct
groups with little in common and very different values. It is hard for this America
to lead the world as it itself has difficulty defining its values beyond slogans and the
original Constitution which is quite often imperfectly interpreted and implemented.
This new America is different from the one represented by our Constitution,
laws, and socio-economic values. It is also different from the image America did
and is still trying to present to the world at large: the image of a benign superpower
with no ambition to rule or exploit others, ever ready to assist those in need and to
expand the virtues of democracy, human dignity, and freedom.
In many ways America has become more self-centered and in some ways less
compassionate, more concerned with its own than the world’s interests, its own than
the world’s security. This greatly affects America’s ability to lead and the world’s
acceptance of America as its leader. Its role has greatly changed since the Marshall
Plan when America was generally accepted as the most powerful, yet benevolent
leader of the world.
America is today the unchallenged financial leader of the world. More financial
trades are transacted in the U.S. than in the rest of the world combined, this not
only because of the size of its economy which constitutes more than a quarter of
that of the whole world, but also because America has a trading economy and
mentality. More people invest in equities and fixed income securities as well as
other financial instruments than anyplace else. U.S.-financed markets, as a result,
also have a higher value throughput than those of the rest of the world.
America had a number of regulatory and watchdog agencies at the federal and
state level which were supposed to assure honesty, fairness, and order in the
financial markets and in financial transactions in general. Notwithstanding their
existence, there were a large number of incidents that rocked U.S. financial markets,
investor confidence, and even the U.S. economy. The Enron, World.com, and
other similar affairs that involved outright corruption as well as theft, were more
134 CHAPTER 4
Huntington [Ref. 13] in his most recent book claims that America remains essen-
tially Anglo-Protestant and resists change. In particular, he asserts, probably with
justification, that the country would have turned out radically different had early
settlers been Spanish, Italian or Irish Catholics. As a result, he is concerned with
the massive influx of Mexican and other Latin immigrants who now constitute the
largest minority in America and are in fact a majority in many, particularly South-
western states. The contention is that American secularism, tolerance, religions, and
other freedoms which are all part of the strict separation of church and state would
not have been embodied in the U.S. Constitution, government, and legal structures
had early settlers come from a different background. Yet things are not the same
today and the distinct American approach to secularism and civil freedoms has
survived large waves of non-Protestant immigrants from throughout the world who
usually choose to make America their home, precisely because it embodied all these
freedoms.
The fear that the very large Latin immigration may change the character of
America is largely based on the fact that unlike other immigrants many Latins not
only remain bilingual for many generations, but also demand bilingual instruction
in school. They furthermore quite often fail in or at least make a lesser effort at
trying to integrate into the wider American society. They maintain greater affinity
to their traditions and cultures than most other immigrants who usually attempt to
136 CHAPTER 4
become true Americans as soon as possible. Huntington may be right in his fear
that Latin influence will increasingly turn America into a bilingual, bicultural, and
thereby divided nation. While English or at least American English is no longer
the mother tongue of the majority of Americans, it has been accepted as a unifying
means of communication, an effective cultural base, and a force for the effective
integration of all Americans into a coherent nation of many backgrounds but with
one set of civil, cultural, political, and economic freedoms and values.
English, today, is the universal language of communication and trade, and its
use has little or no political or even cultural connotation. Its use is an easy and
effective way to gain access to global knowledge and trade. I therefore found it
curious that the University of Puerto Rico, for example, in introducing courses in
logistics, international finance, and communications in preparation to making the
island into a logistics hub insisted that these subjects be taught in Spanish. I only
won my argument when I pointed out that the same courses were taught in English
at China’s largest universities because the Chinese were not as pragmatic and
interested in results and not idle dogma. Yet notwithstanding a general acceptance
of a secular doctrine and the basic Anglo-Protestant heritage that made America
such a successful melting pot and a land of opportunity for all who sought it, the
country is facing the potential of major changes. These largely as a result of massive
Latin immigration and infiltration which together with the high Latin birth rate may
account for some one quarter of the American population by 2040. According to
Huntington, out of 135 million Mexicans about 35 million are currently living in
the U.S. as legal or illegal residents. In a way this is a recapture by Mexico of
lands lost to the U.S. about 160 years ago. Out of 23 million legal immigrants to
the United States between 1965 and 2000, the majority came from Latin America.
The Southwestern USA is today already largely Latin and will increasingly be so.
In contrast with its traditional role of a melting pot in which immigrants Ameri-
canize within one or two generations and thrived to become like other Americans,
assuming its language, culture, and values, these immigrants want to maintain their
own culture and are often unwilling to accept American nationalism and values.
This separation of economic and cultural loyalties bodes potential problems for the
traditional structure of Americanism. Not just its Anglo-Protestant roots, its secular
political and social systems, but also its role as an exemplary integrating forum
in which peoples from different economic and religious backgrounds with diverse
customs, social values, and cultures learned to live together and build a society with
common values.
Much of this trend is due to the imbalance of U.S. immigration that is now
so heavily Hispanic. But the problem is deeper in that it is also a reflection of
historic injustices inflicted by the Yankees on Latins in Mexico, the Caribbean, and
even parts of South America that for long had been considered U.S. protectorates,
after the ousting of Spain from the American continent. As a result, America’s
identity is no longer firm. Throughout its history America has fought to establish
its true identity, only to have it challenged repeatedly by the Civil War, racial and
other equal rights, as well as religious challenges, but in most cases the issues
CLAIMS TO WORLD LEADERSHIP 137
were resolved and the secular, egalitarian identity of America as a society was
reestablished. Today’s challenges are different because they are not only driven by
internal developments but also by globalization and an ever more inclusive world
in which it is increasingly difficult to maintain unique national identities.
The major economic activity in which most developing countries thrive and which
provides employment for much of their population is agriculture to feed themselves
and for trade to earn export revenues for essential imports. After WWII devastation,
agricultural subsidies were introduced to provide the incentives in Europe, North
America, and Japan to deal with severe global and also local food shortages. But the
situation has radically changed since then. America and Europe are now producing
huge agricultural surpluses that are extremely profitable to their farmers who obtain
unconscionably large subsidies to produce that surplus. The main effect of these
subsidies is now the prevention of developing countries’ ability to compete in the
world markets in the one economic activity where they have a natural advantage
and opportunity to compete in the international agricultural product trade. But this is
prevented by the irrational subsidies provided to American, European, and Japanese
farmers.
There is no meaningful explanation why the U.S. for example spends over
$3 billion a year to subsidize U.S. cotton production by domestic cotton growers, a
sum that by the way is about equal to the value of their output at international trade
prices. Europe spends a similar amount subsidizing European sugar beet exports
in addition to butter, milk, and other subsidies. Japan subsidizes its rice farmers
to the tune of over 500% of the cost of rice in developing countries. Altogether
developed countries spend an estimated $28 billion/year subsidizing their farmers,
which not only eliminates major foreign markets for developing country farmers,
but also often undermines their local markets when subsidized produce is dumped
there. This double whammy is estimated to cost developing country farmers nearly
$50 billion per year equivalent to the employment opportunity for nearly 100 million
farmers in these poor countries.
So while America preaches developing countries free market economics and
democracy it undermines their ability to trade fairly, sustain their economies,
and provide meaningful employment, all of which are necessary for functioning
democracies.
America prides itself to be a moral leader and example of human freedoms. Its
Constitution is probably one of the most liberal and human documents over written
and has become an example for other democracies. The separation of powers among
three branches of government (executive, legislative, and judicial) assures effective
checks and balances. It has served America well since independence 229 years
138 CHAPTER 4
ago and very few amendments were required to adjust it to meet changing needs.
Yet notwithstanding the superb guidelines provided by the Constitution, America
has experienced its share of injustices, fraud, judicial failures, and less than moral
developments, which contribute to its loss of moral authority.
Black citizens, though given equal rights under the Constitution, suffered humil-
iating discrimination until quite recently. The American civil war fought largely
because of the differences in attitude on slavery and did not really resolve the issues
after the North won. Though slavery was outlawed, discrimination continued both
in the North and the South, and exists even now though usually in a subtle way.
The Patriots Act diminished some personal freedoms and individual rights; the
Iraq war and prisoner abuse eroded basic concepts of American moral standards,
fraud and theft in financial institutions undermined confidence in the reliability and
fairness of the U.S. market systems and the corrupt environment in some corporate
suites has affected public confidence in American business.
There is an increasing concern with the way America deals with moral issues at
home and abroad. As the sole surviving superpower, it is judged by the world today
by its example in moral and spiritual issues. By the way it responds to wrongdoings
at home as well as abroad. By the methods used to correct ills and assure fairness.
America is today perceived as a bumbling giant in many parts of the world as a huge
economic and military power which lacks the will to stand behind and enforce its
own principles and values. This is a dangerous situation and a condition, which may
foster global unrest. The world’s people need leadership and guidance, particularly
now when technology has converted the globe into a truly global village with ready
access to information everywhere.
FINANCIAL MANAGEMENT
The Federal Reserve Bank and its Chairman use the federal funds rate to control
and fine tune the American and indirectly the world economy. Monetary policy
has in fact become the principal tool of economic management. We do not control
prices of raw materials, finished goods, food or other consumables and only control
the cost of labor by setting minimum standards. The cost of borrowing is directly
affected by the federal funds rate, as are bond prices and very indirectly stock
prices – though many, particularly Internet stock prices, seem to be immune from
rational linkages and just grow merrily or speculatively.
It is interesting to note how the Federal Reserve’s singular involvement in setting
federal funds rates is able to control and stabilize a whole economy which consists
of many disparate markets, only some of which are directly affected by the funds’
rate. It is a sign of the changes in the role of monetary policy and the effects of
economic globalization.
The free flow of huge amounts of funds between different countries every day
and the large global investments without borders have made it difficult to talk about
or even consider national economies. So much of most economies are now owned
by foreign nationals, corporations or governments, and this wealth can readily be
CLAIMS TO WORLD LEADERSHIP 139
There are people who take care of relatives, friends or even strangers; who take them
in and care for them full time. There are others who visit or invite such people very
occasionally. There are people who support others in all respects all the time and
others who bring an occasional gift. People and history remember only the second
type. Not the ones who gave their time, their life, and their full support, but the
ones who illuminated the lives of the needy for rare isolated moments. We do not
remember who took care of us full time and suffered with us through our problems,
but only those who very occasionally brightened our lives with brief highlights,
with fun, entertainment or gifts. We do not recognize those who give their life,
compassion, and wealth to us, who sustain us, but only those who entertain us and
make us feel good.
Throughout my life, I always belonged to the first type, to the givers, and not
the entertainers, to the ones who took care and were there when needed and not the
140 CHAPTER 4
ones who came and went with a flash, the ones who were devoted and concerned
and not the ones who presented a short lived but beautiful bouquet and became
famous and leaders.
Society has become entertainment and only those who make splashes really count.
Not the country doctor who sacrifices his or her life to help a remote community
of thousands stay well with home visits and little economic reward, but the famous
surgeon who managed to succeed in extending the life of one patient for a little with
a complex transplant, after possibly numerous failures that may have abbreviated
the lives of many others; the lawyer who obtained obscene awards in a class action,
and not the attorney who represents hundreds of indigents who would lack access
to justice without him. The same applies to politics, academia, and even the arts
today. In management too it is not the constant achievers but those who have an
often singular and chance success who become the stars. Similarly in investment
banking it is the analyst who once made a correct prediction and not those who
consistently project correct trends. They may never repeat it, but their reputa-
tions and fortunes are made. Even in business in today’s high-speed technology
age, it is the splashy IPO and not the great invention which brings fame and
fortune.
Life has really become entertainment and our reward and recognition system has
been turned upside down. How long can this last? How long can we build on myth
and not reality, on splashes instead of real achievement? This is a question only
history can answer. But this trend has a pronounced effect on people and society
at large. It is not sustained achievements, long-term commitments, and selfless
sacrifices that count and are appreciated, but the splashy, often self-serving, actions
usually performed in the limelight.
Leadership is increasingly not earned but achieved by planned, largely focused
activities performed with proper public, well-advertised exposure. It is no longer
the results but the perceptions that count. Many may argue that this is a planned
mirage but the public usually buys in and accepts the one time or short-time star as
a leader, yet is profoundly disappointed when his subsequent leads do not work out.
The damages done by misplaced or chance leadership are becoming increasingly
severe. Misplaced leadership is now found not only in politics but also in economics,
finance, science, medicine, social services, education, law, and intelligence. In
all these fields chance successes or discoveries are increasingly accepted as true
leadership that serve to identify successful trends. This is a dangerous condition as
singular successes seldom form a basis for a trend of future needs, developments
or discoveries and solutions.
Leadership in any field cannot be based on chance events, however successful, but
must be earned by a sustained trend of successes. In many fields of human endeavor
America has shown such a sustained trend of successes. This particularly in science,
medicine, and technology, but there are others where American leadership has failed
to provide any form of sustained success; this particularly in social and behavioral
areas, interpersonal relations, basic education, universal health care, and poverty
eradication, among others.
CLAIMS TO WORLD LEADERSHIP 141
As one of the wealthiest nations and only superpower on earth, we have failed to
provide equitable conditions and access to common goods and services to many of
our own citizens. We allow highly and inappropriately skewed systems of remuner-
ation where executives may earn 1000 times what an average employee makes.
We are superb in treating highly complex health problems but cannot effectively
provide basic care. We offer the world’s best higher education but cannot effectively
educate our youth in basic skills of reading, writing, mathematics, and science. As
a result, our leadership is highly focused and narrow in its application, something
that makes our leadership often hollow and difficult to sustain.
To lead, the meaning of leadership must be understood in terms of the values
it conveys, the freedoms and democratic principles it truly represents, and the
institutions it develops. It must truly represent the things people of the world value.
It is not sufficient to lead by example of lifestyle, use of technology and economic
developments, but by example of how to live up to our basic principles, goals, and
objectives.
It must be a true beacon for the poor, oppressed, disillusioned, and hopeless,
an example of a truly human democracy, living under a really representative
government with limited powers and organized with effective balance of power. It
must show that it has a government of laws and not men, laws that are never perfect
and must therefore be adjusted to truly represent the changing needs of people and
the society they represent.
The dividing line between contradiction and hypocrisy was blurred with every new
step towards exploring the Clinton-Lewinsky affair. There was a real question if
this could be called an affair as it appears to be more an infatuation of a sex-crazed
young woman for a powerful, middle-aged, sex-starved man who, like most men,
had a need to prove his manliness. He may have allowed her to perform oral sex;
yet, all advances were apparently initiated by her. He did not go further nor did
he ever take advantage of her or his position. She was the aggressor and admitted
to it. Yes, he should have maintained self-control and forced her out of his office.
He should not have responded to her advances with signs of appreciation, be they
minor gifts or offers of help in finding a job.
I just wonder how the average red-blooded American, married, middle-aged male
would have responded in a similar situation. He is bombarded daily by sex through
the media. Sexual deviations, taboo not too long ago, are now not only accepted by
society but are encouraged and many in society show them off with pride. We have
the world’s highest percentage of teenage and out-of-wedlock pregnancies as well
as single family children. Homosexuality and U.S. entertainment and the media are
preoccupied with sex and it appears that the major reason that they have become
so preoccupied with the Clinton affair is not that the President lied, but that it was
an interesting sex story. Sex sells; lies do not.
142 CHAPTER 4
Everybody lies some time, and the definition of what constitutes a lie is subject
to many interpretations. Lies can be untruths, half-truths, distorted truths or misrep-
resentations. But then again we face the problem of what is or was the truth. We
are a land of contradiction. We feast on sex, crime, and scandal and consider these
the main ingredients of our entertainment. Most of our idols are famous because of
their presentation of or involvement in such activities. Most of our past presidents
and many of our current legislators had sexual affairs and either hid them or lied
about them. We claim to be Puritan church-going individuals; yet divorce is up, as
is crime, drug addiction, and child pornography. At the same time, the sanctity of
marriage has become a mockery with no fault divorce laws that make it easy for
any partner to call it off at anytime. Yet social offenders are often criminalized,
while many real criminals go free or are treated with kid gloves or even considered
victims of society. It is high time that we get our priorities in order again and punish
those who truly hurt society instead of those who are caught doing something that
does not hurt anyone and does not even fall outside the norms of behavior we
preach but do not adhere to.
Let us be frank. A large proportion of adult Americans have or have had extra-
marital affairs and lied about them sometime or all the time. If lying about such
affairs, even non-intercourse sexual encounters, becomes a criminal or impeachable
offense, then we had better transform much of our residential housing in America
into prisons so as to be able to hold the offenders. I also feel that all lawmakers
who are guilty of the same behavior, including members of judicial committees,
should disqualify themselves from any voting on such issues. This would probably
reduce the number of those eligible to vote to a minority.
As a frequent traveler abroad, I find that we have become the laughing stock of
the world, which considers us outright hypocrites. Martha Stewart was convicted
of lying about a stock deal of minor magnitude that hurt no one, not even other
stock-holders. At the same time, major financial thefts or misappropriations often
go unpunished. Our health services could save as much as 30–40% of their costs,
significantly improve the quality and accessibility of health care if no fault type of
insurance was introduced that would still assure hurt individuals the right to proper
compensation for damages without the horrendous legal fees and related expenses.
In fact, the legal costs of our health care system have continued to go up even
though advancing health care technology is reducing potential error rates.
For thousands of years, since the concepts of states and sovereignty evolved,
the treatment of individuals residing in and citizens of countries or states was
assumed to be the sole prerogative and responsibility of the government and/or
rulers of each state. As a result, treatment of and conditions for residents in different
countries differ widely, with some being treated largely as servants in certain
countries, independent of their contribution. Countries like Sudan, Somalia, and
others in Africa and the Middle East assume that sovereign power permits the use
CLAIMS TO WORLD LEADERSHIP 143
and treatment of residents as vassals of the rulers. Similarly only some residents,
independent of their birthplace and heritage, are given the right of citizenship. In
Kuwait, for example, people such as Bedouins or Palestinians who resided in the
country for generations are not allowed the right to citizenship and, as a result, have
few rights and even fewer civil protections.
Today we increasingly recognize that sovereignty implies responsibility towards
the residents of states, their well being, protection, and civil freedoms; yet only
a few of the member countries of the UN, including members who are signatories
of various international human rights agreements, actually provide these rights to
all their populations. The hypocrisy of many signatories is often shameful when
large groups of their own residents or even citizens are prevented from exercising
basic human rights that have become universally accepted standards. The conditions
of women in many Moslem, African, and South Asian countries are a travesty of
norms of accepted treatment.
America must become more consistent in fighting abuses of human rights in
line with its consistent approach in its war on terror. Assurance of human rights
is an essential focus of the fight against terror. Without it, it becomes hollow.
Yet America has been rather inconsistent in its condemnation of human rights
abuses and its response to severe contraventions against the Helsinki and other
international conventions. America must lead in the fight for human rights to
earn global acceptance as a world leader. Leadership requires example lest it be
interpreted as bullying.
America became the world’s preeminent power largely by default. With a history
of reluctant involvement in global affairs, periods of isolationism, and often belated
entry into world conflicts, the U.S. did not exhibit a long-term leadership role.
In fact its entry into many of the conflicts during the last century was triggered
more by reaction to direct or indirect threats than by its leadership in world
affairs.
America has probably the most democratic constitution and by virtue of its
“Declaration of Independence” should have been among the first to outlaw slavery
and assure universal liberties for all. But much of this original idealism was soon
buried under considerations of practicality, economic viability, and socio/political
demands. As a result, America evolved into a true democracy for all rather reluc-
tantly and only over a long time. Even now, early in the 21st century, America
is still a divided country as recent Presidential election results clearly indicate.
While the densely populated Northeast and West Coast are largely liberal and
concerned with environmental and social issues, the rest of the country is econom-
ically and socially conservative, more inward looking, nationalistic, and religious.
This pronounced trend towards Republicanism largely supported by “Born Again
Christians” and the “socially responsible” has given conservatives important new
powers. Though not isolationist in a traditional sense, this America is more prone
144 CHAPTER 4
to respond to its concerns and advance its interests. In other words, America
has become decidedly more nationalistic. While this trend was largely triggered
by the terrorist attack on the World Trade Center in New York on September
11th of 2001, it was already set in motion by the election of a Republican admin-
istration and legislature in year 2000. America is taking its undisputed economic
and military power as a license to correct the world’s ills. This while maintaining
an open yet more nationalistic domestic environment. Increasingly decisions are
made on the basis of assumed national as well as global threats. Threat-based
analysis now often forms the rationale for both domestic and international decisions.
This has put America into a new light on the international stage. Since World
War II when it was known for its concerns for the underdog, threatened, and
disadvantaged to be protected, the Marshal Plan generosity towards allies and
vanquished foe alike and it defense of the East Pacific nations and Europe during
the subsequent Cold War with the Soviet Union, America gained a reputation of
an open-handed, protective ally. It had the trust and confidence of the Free World
and was the leader in international organizations as well as in the support of the
disadvantaged.
It is still an open, generous society but now under the threat of terrorism more
defensive, nationalistic, and as mentioned before inward looking. At the same time
major changes are occurring in the social and economic structure of the country.
America has largely become a post-industrial service economy in which health
care, education, and law enforcement, the most rapidly growing sectors of the
economy, constituted nearly 44% of GDP in 2003. These sectors are expected
to grow to over 50% of GDP by 2008. At the same time, productive sectors,
like manufacturing, agriculture, and transportation are growing at a much smaller
pace or not at all. America still leads in research and technology developments
but much of the implementation of research or technology development results is
now performed abroad. The result is an increased independence on manufactured
goods imports and financing of the large balance of trade deficits from abroad. In
fact, the bulk of the U.S. public debt of about $6 trillion is owned by foreigners.
Servicing this growing debt adds to the balance of payment deficits. In other words,
America has become not only increasingly dependent on imports but also on foreign
financing.
Its strengths are its scientific and technological prowess, the effectiveness of its
institutions, the quality of its higher education and high technology, health care,
its openness, and freedoms which permeate all aspects of life, its agricultural and
manufacturing productivity, the originality and inventiveness of its people and its
caring generosity. But there are also great weaknesses that may affect its future
role and effectiveness. Among these are a new and disturbing discord among major
sections of American society, widening gaps between rich and poor with a resulting
decline of the middle class, greater potential differences, faltering and inefficient
health care, educational and law enforcement systems that cost several times the
money spent on these services in other advanced developed countries and a decline
in global trust and resulting respect.
CLAIMS TO WORLD LEADERSHIP 145
America can only continue to lead in the world long term if it regains the trust
and respect of people and nations everywhere. It similarly will have to change
its economy to become less dependent on foreign imports (particularly fuel) and
financing. It cannot afford the short- and long-run dependence on essential energy
supplies from potentially hostile sources or the financing of its debt by its major
competitors.
CHAPTER 5
because globalization has fostered not only political but also economic unification.
As a result, we experience increasing mergers of both small and large companies
which often form mega commercial entities that, while not monopolies in the
traditional sense, do control major aspects in their markets. These developments
may impede economic growth and technological advance and thereby ultimately
leadership, particularly by America.
All around the world technology companies are facing new challenges. While the
problems are now largely concentrated in the telecommunications, information, and
computer sectors, other so-called high technology sectors suffer as well. It has
become obvious that the economic revolution that high technology was to foster
was exaggerated. Combined with recent scandals in corporate America, the bursting
of the highly touted Internet bubble and unrealistic expectations of the impact of
high technology on the economy may force us to reevaluate the direction of the
American and world economy. Lucent, Nortel, WorldCom, and a host of other
companies in these fields not only lost most of their capitalization but were forced
to let many of their staff go and are today a faint shadow of their past. So soon after
the bursting of the Internet bubble, we now witness a disintegration of the high
technology bubble and no self-delusion can change this fact. Today the industry is
only half the size of just a few years ago, and few expect it to regain its former
size and glory near term.
High technology will continue to advance but only if it serves larger markets
than telecommunications, information, and computers for the narrow purposes of
the service sector, largely ignoring manufacturing and other productive sectors.
This was mainly a response to the conversion of the U.S. economy into a service
economy, where three institutional sectors – education, health care, and law
enforcement – account for nearly 50% of the U.S. economy (growing by 5%/year
(see Ref. [14])). But there is a limit to the size of the service sector, particularly
in a large economy such as that of the U.S. which now substantially depends on
manufactured goods from abroad.
The American economy is now trying to reach a more healthy balance by
improving competitiveness in manufacturing, mining transportation equipment,
materials handling, energy conversion, construction, and more sectors where we
have largely fallen behind. All of these could benefit by a marriage with high
technology.
America can again become a leader in these fields and at the same time expand the
uses and usefulness of high technology in computing, IT, and communications by
effective integration of the more traditional engineering fields with high technology.
But this will not happen if we continue to ignore and in fact discard traditional
fields of engineering. The opportunity is now to become a leader in the integration
of old and new technology and ensure that high technology makes an effective
contribution in all the productive sectors of the American and world economy.
MANAGING AMERICAN LEADERSHIP 149
ETHNIC INTEGRATION
America has a long history of ethnic integration and cordial relations. It is a country
of immigrants and served as a refuge for people, particularly Europeans who were
discriminated against in their homelands. Over 34 million European immigrants
entered the U.S. between 1820 and 1924. Most assimilated quickly and adopted
American culture. They mostly desired to shed their old identities and affiliations
and became Americans. This trend continued until the second half of the 20th
century when the flow of immigrants changed to largely Latin and East Asian
people. Today (2005) nearly 25% of Mexicans (35 million out of 135 million)
live in the U.S. legally or illegally. This trend and the high Hispanic birth rate
per woman (3.0 Hispanic, 2.1 African American, 1.8 non-Hispanic white) assures
continued growth of the Hispanic population in the U.S. through both immigration
and demographics. This by itself may just be a change in direction were it not
for the cultural and linguistic nationalism of many Latin or Hispanic residents of
the U.S.
They demand and often succeed in obtaining separate education and bilingual
administration and services. Many as mentioned before also consider this to be a
trend towards “reconquista” or reconquering of the 50% of Mexico that was ceded
to the U.S. during the border wars of 1833–48, such as Texas, California, Nevada,
Arizona, Utah, and New Mexico. The result is a radical change in the American
culture that historically thrived on integration and co-existence with loyalties solely
150 CHAPTER 5
to the new American homeland. The U.S. has always been a country of immigrants
and not a diaspora of cultural and ethnic groups.
Some writers, such as Huntington [Ref. 13] are concerned that the U.S. might
resemble typical South American countries within 20–30 years and lose both its
immigrant/refugee as well as its secular status. It may also change from a country
with an open tolerance towards religion and social behavior into one governed
largely by Catholic/Protestant Christian beliefs. This may affect the reality and
perception of American freedoms as well as individual rights, individualism, work
ethics, freedom of expression and behavior, and access to opportunities.
These developments may have a profound effect on American leadership. Cultural
diversity and acceptance of cultural, ethnic, and religious differences have long
been fostered and sustained the American melting pot. It has made America not
only productive and strong but also acceptable as a global arbiter.
The rise of conflict and terrorism though has forced America into the position
of policeman and arbiter, a role that is never popular and often results in grave
misunderstandings. While traditional U.S. ethnic ties should be an advantage, they
can also be interpreted as a bullying pulpit that provides America with an opportunity
of interfering in other people’s affairs. American intervention is as a result quite
often objected to even if it is done without self-interest or ulterior motive. In recent
years the U.S. has responded to external threats to maintain its leadership, national
unity, and international cooperation or at least acceptance.
The war on terror of the U.S. has two major enemies as pointed out by the 9/11
Commission in its report. There is Al Qaeda, a global network of terrorists without
any particular national identification and the radical ideological movements in the
Islamic world. In addition there are numerous other fringe groups all over the world
who use terror as a means to advance their interests that may include America,
but more often than not are really elsewhere or more general. There are many
anti-Western or anti-Christian-Judeo groups with social, religious, and economic
grievances that use violence as a strategy. There are others more focused on purely
economic or racial grievances who use violence to advance their interests. Unrest
or genocide in Darfur, Somalia, Rwanda, Burundi, Democratic Republic of Congo
are all examples of horrendous crimes committed to advance social, racial, and
economic interests.
America has been fighting terror since 9/11 with dedication but without an
effective strategy. This was not only evident from the unexpected upheavals in
Iraq after the U.S. led defeat of the dictatorship of Saddam Hussein and the
earlier ousting of the horrendous Taliban rule in Afghanistan but also by the
lack of international support of these costly campaigns. In particular, neigh-
boring countries such as Iran, Turkey, and Saudi Arabia that were all directly or
indirectly and repeatedly threatened by Iraq failed to support the action. While
many of the world’s nations pay lip service to the war on terror and the threat
MANAGING AMERICAN LEADERSHIP 151
terror poses, few are willing to commit themselves openly to this war. Many
are trying to protect their home turf against terrorist attack, but most do little
in preventing access to their lands by potential terrorists. Europe in particular
is vulnerable with easy access both from the south and the east and in general
wide open, largely uncontrolled intra-European Union borders. As a result, any
potential terrorist who infiltrates one country has usually free range in most of
Europe.
Large public debt and budget deficits constrain ability for social spending that may
reduce the size and cost of government. Socially conscious democracies tend to
spend more than they can afford not only to fund their own programs but also
to constrain any successor government. They therefore try to push through and
fund their own program or agenda, particularly in the years leading up to the
next election. This both advances their own political goals as well as imposes
policy on any succeeding government. The problem is now becoming acute as
entitlement spending is becoming such a dominant factor in the U.S. government’s
budget.
While the U.S. is not unique in deficit spending and in fact lags behind many
other developed nations in the magnitude of its public debt (Table 18), there
are two issues that make it hazardous: first is the size of the U.S. economy
and, as a result the size of its public debt that is nearly equal to the combined
public debt of all other nations while the second is the fact that much of it
is financed by investments from abroad and not by domestic savings. In other
words, America’s economy and economic stability depends much more on global
confidence.
Japan 15462
Italy 10667
Belgium 10200
France 6920
Germany 6390
USA 6243
Netherlands 5540
Sweden 5280
Britain 514
also to show other less fortunate people a road to effective health care. The costs
of health care must be reduced and access to health care must be improved and
ultimately made universal. This will not only benefit the population but ultimately
the American economy.
The greatest challenge for America is the reclamation of peace in the world
and a move towards cooperation and understanding among all people. America
must retain its leadership for all the right reasons. Not because of its size, its
economic dominance or its military strength but because of its high moral standards,
compassion, willingness to share, to help, and most importantly to serve as an
example of a free people, governed by true democratic principles.
There is no right to leadership or to domination of other people. Leadership must
be earned and freely accepted by those led. America must be a much more pro-
active leader not in terms of economic and military strength but as a developer and
proponent of human values and values for humans. Its most important leadership
contribution has to be the betterment of mankind and its conditions. This means
helping and sharing.
America is a nation of competent, hard working people living in a bountiful
country ruled by a government under a most liberal and democratic constitution.
Yet as all people it has many faults. To be accepted as a leader and earn the right to
leadership it must gain or regain the trust of the peoples of the world. Trust is the key
to acceptance of leadership at the global or personal level. America has lost much
of the trust built up over decades by supporting often immoral, unrepresentative
governments, engaging in sometimes unjust wars, and occasionally disappointing
committed allies. America is a mirror of mankind, a mixing bowl of people from
all over the world, many of whom found refuge from oppression and who became a
nation of nations. Yet at the same time it displaced the indigenous Indian population
and disenfranchised them. It is a country grown out of controversy into controversy,
yet into a people of the world for the world, a country that has shown how people
from everywhere can form a union with unity of purpose, that can represent the soul
of man everywhere, and provide hope for the future by example. America can be a
leader and help mankind regain confidence in itself and peace among its nations.
For over 60 years America has claimed a world leadership role. First as the savior
of Europe from Nazi domination during World War II and later as a protector of
Western Europe and East Asia against potential Soviet incursion. It also served as
the economic locomotive since World War II, helping global economic growth and
world trade expansion. Since the fall of Soviet domination and the emergence of
Russia as an aspiring market economy, the U.S. has become the main supporter of
its transition. America led the pacification of the former Yugoslavia as it broke into
separate ethnic states, assisted in the political and economic integration of Eastern
Europe into Europe, and provided continued strategic cover for nations in East Asia
and Western Europe.
154 CHAPTER 5
Notwithstanding all these pro-active moves, America has lost much of its tradi-
tional support among its natural allies. In recent years America has acted often
without consulting its allies or the world of nations at large. It has often made
unilateral decisions, some of which could be interpreted as self-serving and not in
the common interest. While decisions may have been truly based on faith in the
righteousness of the action, lack of consideration of the interests of others and the
reality of the situation made the U.S.A. unpopular with a resulting loss in American
credibility. Leaders must lead by example and show their concern for the common
interests in addition to their own. To be followed, leaders must be respected and
even loved.
DEMOCRACY IN ACTION
many countries lack a history of good transparent government, equal rights, and
effective legal systems that are essential to assure free elections and choice of a
truly representative government. Similarly free access to media and other channels
of communications is essential as well as effective voter instruction. There are
many so-called democracies which hold elections that are seriously faulted. This
not only gives non-representative results but also discourages eligible voters from
participating, leaving in many cases only the diehard supporters of the government
in power to vote. Results such as a 98% vote for an incumbent are usually suspicious.
The U.S. has a reasonably fair and transparent voting system but various real
or imagined claims of voter disfranchisement appear to discourage a significant
percentage of eligible voters from participating. This is sad, particularly at a time
when the U.S. as a world leader has as its main objective the spread of democracy
and human freedom.
Something must be done to improve this situation and thereby show the rest of
the world and particularly people in countries that do not experience democratic
freedoms that democracy works and everyone counts and can influence the choice
and programs of government. America must really become a beacon of democracy
in action, an even more participatory democracy where everyone’s vote truly counts.
It must become an example of freedom where everyone can pursue his dreams and
desires without hindrance. We are nearly there but like all human constructs ours
needs adjustments to put it right.
The introduction of democracy must be planned. It does not just happen, particu-
larly in countries which never experienced it, such as Moslem countries. Democra-
tization though must also consider that opponents of democratic principles, such as
Moslem Fundamentalists, may use the very principles of democracy to gain control
and reverse the process by ‘democratically’ installing fundamentalist regimes that
introduce laws restricting human freedoms of expression, movement, and rights
of women.
ADVANCING DEMOCRACY
America has been a long-term supporter of Arab development, not just in the
oil producing countries of the Middle East but also other Arab and Moslem
countries throughout the world. In fact the U.S. has sent food and economic aid
to Somalia, interceded in Bosnia and Kosovo to halt murder of Moslems and
discrimination, freed Kuwait from Iraqi invasion and domination, helped Egypt,
Jordan, and the Palestinians economically, and has distanced itself from Israel.
America has helped North African Arab states politically and restrained or prevented
intervention when Christians and other minorities were attacked in the Sudan,
Lebanon, and other countries. It has steadfastly supported the Saudi and other
regimes that shelter or encourage restrictive fundamentalists in the hope that they
will gradually become more democratic and assure greater public participation,
individual freedom, governmental transparency, and individual rights. All to no
avail. Notwithstanding pious statements by many leaders, the situation, particularly
156 CHAPTER 5
in the Persian Gulf Moslem countries, has not improved, hatred of non-Moslems,
particularly western Judeo-Christians continues to be fanned, and Arab media,
largely government controlled, continue their venomous tirades. America has spent
hundreds of billions of dollars and thousands of lives in this effort to no avail.
There is a serious question if the approach used makes sense, as most if not all the
regimes in question are non-representative and maintain their support and power by
blaming all local shortcomings on the West, particularly the U.S. For example, the
severe youth unemployment largely the result of lack of investment of oil revenues
in local productive assets is blamed on the West and the hatred of those disad-
vantaged is channeled towards the West. This cannot continue and these largely
non-representative regimes must be made to face reality. The close interdependence
of clerics and governments makes this a difficult problem but one that must be
addressed if the chasm between Moslems (mainly Arab Moslems) and the rest of
the world is to be bridged.
The hatred of largely unemployed Moslem youth has been diverted by clerics
towards the West, which is blamed for their situation of hopelessness. In other
words, clerics have become the protectors of these regimes that in turn pay off and
protect the clerical establishments. Any move towards secularism that represents
not just the West but democracy is anathema to them and is vehemently opposed.
The Bush administration’s objective of democratizing the Middle East, starting
with Iraq, is in my opinion doomed to failure. It cannot succeed until greater
economic and social equity is established in the region, and governments are more
transparent, accountable, and representative. Similarly, these countries must learn
to reinvest their oil revenues in local productive and employment generating assets,
and separate church and state toward a more secular society.
The demise of the Soviet Union and the resulting freeing of newly independent
states formerly part of the Soviet Union had generated great hope for democra-
tization of Russia and its affiliated states. But the road has been rocky. While
officially embracing a free market model, it has been quite different with the State
interfering in the free market on numerous occasions, particularly in the media
and energy sectors. The Yukos affair that captured the headlines throughout 2004
though is only the latest and possibly largest of such state interferences. Yet these
developments throw a deep shadow over the long-term commitment of Russia
towards democracy and a free market economy.
The situation is quite different in China, which maintains central Communist
government control with a distinct open market strategy which permits private,
including foreign ownership, free exchange markets, and comparatively little
government interference in the private economy, particularly in manufacturing,
telecommunication, and transportation. This while using government resources for
large-scale energy, infrastructure and service sector developments, particularly in
the interior. As a result, China has become an example of successful economic devel-
opment and a society that is gradually achieving increased freedoms and democratic
rights. While these are now mainly at the local level, it appears that China is
slowly moving towards a general approach of greater transparency, representative
MANAGING AMERICAN LEADERSHIP 157
government, and accountability. While, for some time, this may be far from the
Western concept of democracy, it appears to be a gradual move in the direction
taking due account of both the recent strict Maoist community experience and the
long-term cultural history of China, with its Confucian foundation.
America attained the height of global respect after World War II when it showed
selfless concern for its allies, the vanquished, its potential opponents such as the
Soviet Union, the oppressed people in various colonies, and the poor or disadvan-
taged of the world. Its concerns knew no boundaries of politics, type of government,
religion, ethnicity, culture or economic system. It shared its wealth, compassion and
goodwill, and tried to unify the world under a common banner of human values and
respect for people everywhere. The reemergence of the rift between Communist
and capitalist nations’ ideology and world development goals, the Korean and later
Vietnam wars and the increasing competition between the East and the West fueled
by the emergence of ever more dangerous weapons developed into a global rift or a
two world environment. It actually was a three world environment where the poor
developing countries of Africa, South Asia, and to a lesser degree South America
became unsuspecting pawns in a power play that used them, without providing
them with much needed real development aid.
America put increasing emphasis on science and technology developments and,
although initially lagging the Soviet Union in space and other technologies, soon
caught up and became the undisputed technological leader in the nineteen seventies.
Its economy continued to grow and became dominant in size and in world trade.
America’s main strength lay in its ability to make people succeed by providing them
with the freedom and access to resources needed. America proved to be a country of
promises, mostly kept, though sometimes not. It developed a highly productive work
force and an economic flexibility that allowed it to respond effectively to changes
in technology, demand, and other conditions. It was as a result effective in adapting
to the new environment of a post-industrial society in which services played an
increasingly important role. The demise of the Soviet Union and emergence of
the Russian Federation that had shed some of the former member countries of the
Soviet Union, established the U.S. as the single dominant economic and military
power in the world.
This new position has provided both new challenges and opportunities for
America, which has responded to them with mixed success. This not only because
of the novelty of the situation in which America found itself but also its lack of
global strategy in politics, economics, trade, the environment, and sociology or
human relations. On one hand, the U.S. was ideally suited for this new role as
the only country that truly represents a successful melting pot of peoples from
throughout the world. At the same time it found that it was traditionally an inward
looking society, with little global political involvement.
158 CHAPTER 5
America was a minor, reluctant colonial power and much of its colonial
involvement occurred more by chance than by design. Its participation in interna-
tional conflicts was more reactive than pro-active and isolationism was for long
a major force in American politics. This has now changed and America finds
itself in the unaccustomed role of global arbiter, protector, and economic power,
a position for which its political system was ill prepared. This largely because of
the complexity and diversity of American society, its open yet highly diffused or
disorganized political system, and its traditional inward outlook.
CHAPTER 6
America has led the world since the demise of the Soviet Union yet for America
to maintain this leadership role it must refocus its values and purposes, establish
achievable objectives as well as come up with clear directions that advance the
common good. It is essential for America to regain the confidence of both govern-
ments and peoples throughout the world. One cannot lead without the confidence
of the led and America has lost much of that confidence in recent years. As a
result it was increasingly forced to act unilaterally, often without the support or
even consent of major segments of the world community. In a globalized world a
large consensus is essential for major strategic decisions to succeed. This applies
to economic, social, and political, as well as security issues.
America decided to go it alone or with a minority of the world in some major
security and also economic developments, an approach that reduced global support for
its leadership and in some cases encouraged opposition to it. Leadership can only be
maintained by example that represents common values, principles, and beliefs.
A leader or leading nation must motivate, inspire, and provide a vision that
people and other nations can use and follow. A leader must convince followers
that his leadership will be a move toward positive change and that it represents
a mind set of true goals. Most importantly a leading nation must be a model of
positive planning and achievements as well as show universal concern. The future
of the world depends on the effectiveness of today’s leadership. Rapid technological
and other developments such as the AIDS epidemics, Africa’s persistent famines
and poverty, Islamic fundamentalism, rapid environmental degradation, widespread
terrorism, national and international conflicts, including suppression of minorities,
a proliferation of civil wars all require resolution that only a respected, powerful,
forceful, committed, and focused world leader can supply.
policies, but also because of the inconsistency of American leadership, its lack of
broader considerations, particularly those of its allies.
America considers itself the center of the world. In baseball we have the World
Series in which the winner of the two American leagues battle for the world trophy,
although only U.S. teams participate. The same applies to other sports events in
which only American teams battle for a world cup. America has become used to
leading the world. The dollar has for long been the world standard currency and
many global organizations such as the World Bank are led by Americans or are
located in and largely funded by America. Many Americans consider themselves
lucky to live in the “best” country in the world, though they work more hours per
year than people in most other countries, have fewer holidays, lack universal health
care, have a crime rate higher than most developed countries, and have a shorter
life expectancy than most West European and East Asian countries.
Americans are really the most diverse people in terms of heritage, culture or
religion. Their forefathers or they themselves come from every corner of the world
and practice any one of the world’s religions. They live in a rich land that allowed
them to prosper, express themselves freely, worship as they choose, and that limits
the role of government. The foundation of all of this rich freedom and feeling of
well being is the American “Declaration of Independence” whose primary claim
is that each person has the right to freedom, freedom of expression, happiness,
worship, and movement.
Americans have always felt more lucky than most and have often expressed their
feelings by sharing their wealth with others, even when far away, such as in and
after World Wars I and II, Korea, Bosnia, et al. Sometimes such generosity was
interpreted not as aid but as interference in domestic affairs; other times as attempts
to dominate others politically or economically.
They similarly have come to the aid of democratic countries when attacked such
as in World Wars I and II and the Gulf War or when a particular people were
suppressed or even murdered for their ethnicity, religion or culture, such as in
Bosnia, Somalia, Afghanistan, and other countries. Americans pride themselves in
being the protector of human freedoms worldwide but some of their recent actions
have been interpreted as imperialistic or at least self-serving.
Americans consider themselves the embodiment of human freedoms, but many
judge some of America’s actions as restricting self-determination. Although
concerned with the quality of the global environment, America is the only major
holdout from ratifying the Kyoto Protocol which even Russia, the other major
polluter, has ratified.
Many consider America’s positions and actions hypocritical and without
conviction. They want America to lead and lead by example, an example that
embodies all the lofty principles America stands for and expounds. But they often
fail to find consistency in principle and action. In fact, many are suspicious of an
emergence of American imperialism that uses the threat of terrorism to advance
American political and economic interests. America’s “liberation” of countries such
as Bosnia, Kosovo, Afghanistan, and Iraq is by some even considered an occupation
THE FUTURE OF WORLD LEADERSHIP 161
Asia, with more than half the world’s population, is leading a global boom, with
China’s and India’s economies growing at unprecedented rates. China in particular
has led the world economy, with its GDP growing at more than 10% per year
for some years now. It contributed about one third of the world’s growth in real
output, measured in purchasing power parity in 2003. This was nearly as high as its
contribution in 2002 when it reached nearly 40%, a historic high for any one nation.
But China’s contributions during 2000–2003 to increases in global imports (32%),
fixed investments (60%), and oil consumption (32.5%) were similarly impressive.
True, historic low interest rates in America and other developed nations not only
prevented a deeper recession in the first few years of the 21st century but also
reduced the risk of deflation. The result was increased consumer demand that may
decline as American and other countries’ interest rates are raised to more normal
levels or about 4–5% in response to rising inflationary pressures.
At the same time, crude oil prices started to increase to unheard of levels of
$55/barrel in the fall of 2004 as a result of increased demand largely by China,
India, etc. This together with increasing costs of borrowing may clip consumer
spending and thereby reduce the growth rate of international trade. China increased
its cost of borrowing in October 2004 to slow down its economy and assure a soft
landing of its overheating economy. Yet notwithstanding this temporary braking of
China’s economy, all indications are that China and other East Asian countries plus
India will resume their economic growth.
162 CHAPTER 6
always will” but this was before China opened up to the world over 20 years ago.
Napoleon on the other hand was reported to have suggested “let China sleep for
when she awakes she will shake the world”, a prediction that is now becoming
reality. China is rapidly catching up not only economically but also in terms of
science, technology, medicine, and management. In fact, in some areas China has
advanced at phenomenal speed. This largely as a result of its willingness to learn,
unabashedly acquire or transfer, and spend inordinate efforts and resources on
education, technology, and knowledge transfer, and research. In many areas China
has already caught up while in others it is rapidly closing the gap. By keeping costs
down China has been able to contain inflation yet sustain high liquidity. Excesses
are invested in real assets and foreign, largely fixed, interest instruments.
China’s growth is not as often claimed mainly achieved only by massive use
of cheap labor to out produce others and attract investments in manufacturing and
services. Among developing countries there are many with lower labor costs. Yet
it is China that attracts the bulk of foreign investments and export markets. China
provides a business and investor-friendly environment with few non-tariff barriers.
It encourages trade and welcomes foreign expertise; there are many obstacles to
continued economic growth, however, such as an archaic banking system and a
central government bureaucracy. According to the IMF, given China continues its
structural reform and reform or privatization of state-owned enterprises, it should
be able to achieve a 7–8% growth rate in GDP terms and though still far behind
the USA in GDP terms in 2020 would actually overtake America in PPP terms. As
seen in Table 19 that shows a comparison of economic output in GDP measured
in PPP terms, China was already far ahead of all nations except the USA in 2003.
The size of China’s economy is usually undervalued because it maintains low
labor cost and consumer prices. As a result and because China pegs its currency
to the dollar at an artificially low rate, China’s GDP accounts for a much smaller
percentage of world output, in fact only about 4%, a much smaller player in the
world economy.
China’s economic growth rate has been larger than that of its East Asian
neighbors. Its growth in world trade has been even more phenomenal. As a result, it
is bound to become a major if not the major player in the world economy. Although
there are other large emerging economies such as India, Brazil, and Russia, in
addition to Asean and Korea, China’s size dwarfs their contribution. China and India
together account for 38% of the world’s population and over $9 trillion of GDP
in PPP terms nearly equal that of the US $11 trillion. Yet their rate of economic
growth is over twice that of the U.S. and they as a result should overtake the U.S.
economy in PPP terms within 5 years or by about 2010.
Both China and India are potential economic powerhouses, each with its own
advantages. China has a great educational system, widespread literacy, and a
hardworking population. But its population has an average age about 6 years older
than that of India, which continues to grow relatively younger. India also has better
free market institutions in finance and law as well as a more transparent system
with little corruption.
China consumes more basic materials such as steel, coal, and cement than any
other country. Even in oil consumption it now (2005) has become the world’s
second largest oil importer, though with a total oil consumption of only 6% of
total world demand, its per capita energy and particularly oil demands are still very
low. Yet China’s increasing consumption of basic materials will continue as China
builds its transport, telecommunications, energy, housing, education, and health care
infrastructure which, while quite advanced on the Pacific coast, does not yet extend
inland and so far only serves about a quarter of its population. At the same time
living standards are improving particularly in the eastern areas with automobile
ownership growing by 20–30% per year. Similarly electric power consumption in
that area is also growing by about 20% per year as home appliances, computers,
and other devices become popular.
Today we essentially have two Chinas – the increasingly developed Pacific
coastal area with about 25% of the population, and the rest; the average per capita
income of the first is more than twice that of the rest, a situation that cannot be
sustained. Because of this recognition, the government of the People’ Republic
is now putting major emphasis on the development of the interior by massive
investments in infrastructure and services. It is also providing major incentives for
foreign direct investment in these areas, particularly for manufacturing.
China is also developing gateways to the interior for raw material supplies such
as pipelines to central Asia and the Caspian Sea region for oil and gas. Construction
of a 620-mile oil pipeline from east Kazakhstan to the Xingjian region was started
in mid 2004. China’s economy that experienced a limited slow down in the middle
of 2004 when the government increased interest rates that obviously affected only
borrowing from public banks but not private institutions or individuals. It started to
expand again in the fall of 2004, reaching a rate of growth of 9.5% during the first
nine months of 2004 which may lead to a record-shattering 12% annual growth
for all of 2004. At this compound rate, as noted before, its economy would nearly
double in six years.
166 CHAPTER 6
China is already the world’s largest producer of TVs with TCL-Thomson China
plants the largest single TV manufacturer. China is expected to produce nearly
19% of the world newbuildings of ships by 2005 and similarly become the largest
steel and textile producer. Even in automobile, telecommunications, and computing
equipment manufacture China will be among the top producers in the world within
a few years. It benefits from a cheap, inexhaustible and trainable labor supply,
a supportive government, improving infrastructure, and a very large potential or
rapidly developing domestic market. Its huge positive trade balances, particularly
with the U.S. ($120bn in 2004) permit it to not only build up huge foreign exchange
reserves, but also invest in domestic projects or abroad.
China’s clothing exports alone are expected to grow to $124bn/year by 2008
or to about half the world total. China’s economic growth at an average rate in
excess of 9% for nearly 25 years now has been largely the result of its success in
exporting. But China has simultaneously succeeded in advancing living standards,
though primarily in the coastal areas. In the past, growth albeit at a lower rate
has been achieved throughout the land. The trend is evident. China’s Pearl River
Delta in Guandong Province, the mainland backwater of Hong Kong had become
the principal export manufacturing area but increasing labor shortage and costs
are driving new economic developments north and west, largely towards the
Yangtze basin.
Initially Shanghai, Nanjing, and Suzhu/Wuzi attracted massive new investments
but more recently investments and economic developments have been moving
westward, a trend that the imminent completion of the huge Three Gorges Power
and Flood Control Project will only accelerate. Cheaper, abundant, non-polluting
electric power and huge numbers of new workers will become available and provide
a foundation for large-scale industrial development. This move that extends both
the Pearl River as well as the Yangtze River delta economic power westwards will
establish an industrial zone in China with a population in excess of 500 million and
a domestic product of $700 billion. The expanded Chinese economic powerhouse
will in future provide large new markets for manufactured goods, both imports
and local products. However for now Chinese exports of manufactured goods are
sky-rocketing from $50bn in 1990 to over $400bn in 2003.
China’s trade is facilitated by the pegging of the Yuan to the U.S. dollar (at about
8.3 Yuan per U.S. dollar in 2004). The falling value of the dollar and thereby the
Yuan has made it easier for China to compete in world markets and increase market
share. Even the slight rise in interest rates by China’s central bank had little effect
on slowing the Chinese economy and trade. Other Asian economies also effectively
link their currencies to the U.S. dollar. As these are both China’s major competitors
in the U.S. markets as well as its principal trading partners, China may continue this
policy. America’s trade with Asia accounts for practically all its trade deficits in
recent years. These deficits continue to grow and even a yet weaker dollar may not
stem these developments, particularly if China maintains its Yuan dollar peg. As
a result the U.S. will be increasingly indebted to Asian nations, particularly Japan
and China followed to a lesser extent by south and Southeast Asian countries. This
THE FUTURE OF WORLD LEADERSHIP 167
puts Asia into a dominant global economic position as financier of America, the
world economic and military leader.
China, in particular, as noted, is trying to slow down rates of economic growth by
controlling credit, inflation, and investments, yet moving towards a more market-
oriented economy. Some have suggested that China is contributing to global
deflation by depressing the price of its exports, particularly of manufactured goods.
At the same time China’s large and growing demand for raw materials is driving up
world prices of iron ore, petroleum, natural gas, and other commodities contributing
to global inflation. These two countervailing pressures are not really unique to
China, as other large, newly emerging developing countries like India have also
greatly increased their demands for imports of raw materials. These two pressures
do seem to balance with deflationary trends generated by lower manufactured
goods and services, outweighing the inflationary pressures of increased commodity
demands.
China doubled its foreign exchange reserves to nearly $500bn in the two-year
period of 2002 to 2004, with much of it invested in U.S. government securities.
But the declining value of the dollar may make this increasingly less attractive,
which could even further accelerate the dollar’s decline. This is a dilemma. China
among other major exporters to the U.S. is largely financing America’s current
account deficits. However the declining dollar may reduce its interest in these
investments which would further the decline of the dollar. For the time being it
appears to be in the mutual interest to maintain the status quo with China, Japan,
and other Asian exporters to the U.S. investing their surplus in America and thereby
maintain the ability of the U.S. to continue its global trade with huge account
imbalances.
China is continuing its gradual and often hesitant transition from a centrally
planned to a market economy, with its stop and go or sometimes even retreating
actions. The country still has a dominant central bureaucracy but is increasingly
allowing local economic decision making. The problem is that with a rapidly
growing private sector and private versus government-controlled bank lending or
investment, the central government is gradually loosening its firm grip in controlling
the economy. China’s economic growth will continue to be based on exports and
foreign direct investment in profitable ventures in China.
China is sometimes blamed for taking manufacturing jobs from other devel-
oping countries, thereby perpetuating or even accelerating long-term un- or under-
employment there. This is only partially true as China at the same time has
vastly increased raw material imports and thereby price. As most raw materials
come from developing countries, their export revenues and employment in raw
material production is escalating, this in general more than makes up for the loss
of employment in basic manufacturing.
India, the other major emerging Asian economy, started much later but though
growing at a slower rate still achieved a growth rate of more than twice that of
western economies. As a result, it is rapidly becoming another important Asian
economy that by virtue of its size may become a major global player within 10
168 CHAPTER 6
years. India has the major advantage of a free democratic and political system of
government, and effective legal system and transparency in most of its business
practices. It suffers under remnants of Maoist’ confrontations (Naxalites). These are
influential in many parts of the country and particularly in the northeast of India. It
also suffers from a large, imbedded and inefficient bureaucracy. It is a huge country
with major social problems, an archaic administration, and yet a highly educated
modern youth among the urban population.
India’s other major obstacles to economic growth are its lack of modern transport,
electricity, and communications infrastructure. This in addition to the huge debil-
itating bureaucracy at all levels of government and local administration. Much of
the infrastructure dates from British colonial times and has neither been updated
nor properly maintained. Yet while the government recognizes these problems,
persistent budget deficits of about 10% of GDP of all government expenditure, make
it difficult to correct these deficiencies. Yet without it, the economic growth of India
will be severely hampered. At the same time India’s foreign exchange reserves have
grown from about $35bn in 2000 to well over $115bn in 2004 (Source: Economics
Intelligence Unit). India’s exports as noted have similarly grown significantly in
recent years, a trend expected to escalate further.
India has been particularly effective in exporting services; recognizing that it
cannot compete with China in massive manufacturing for exports that requires huge
foreign investments, it has encouraged development of and succeeded in attracting
large-scale service exports in communications, banking, software developments,
accounting, booking services, and more.
India has the advantage of an open democratic market economy, but suffers from
an outlawed but still practiced caste system as well as restrictive labor laws that
make it hard to fire workers, even for cause. It still has reservations for public
sector jobs and school or college admissions that are designed to assure access by
previously discriminated lower caste members. At the same time, these reservation
schemes have adverse effects on productivity and discourage both foreign and local
private investments.
Trade between the two Asian mega states of China and India has grown signifi-
cantly in recent years, and reached $4bn in each direction in 2004. At this time their
economies seem to complement each other, but India expects to emulate China’s
success in manufacturing to provide jobs for its huge pool of under-educated workers
who do not quality for service jobs. This may not be easy because Indian labor is
less disciplined, skilled, and organized. Yet notwithstanding their difficulties the
two Asia mega states will become major global players within the next 10–20 years,
with China moving into second place in the global economy in 2020 or earlier
and probably surpassing America 10 years later, to become the world’s premier
economic power. India may take much longer to achieve real economic status
though it too is expected to surpass Japan and the individual European economies
in total product by 2050 or before.
These developments that will firmly anchor the center of the world economy
in East Asia and later all of Asia will have consequences of historic proportions.
THE FUTURE OF WORLD LEADERSHIP 169
For nearly a millennium Europe and the West and later North America have been
the economic and strategic centers of the world, this notwithstanding the fact that
Asia and particularly China have had a longer history of civilization. It is interesting
to contemplate the prospects of the return of the pendulum of economic power to
Asia after such a long time. It is similarly important to ponder the implications of
these prospective developments, particularly when considering the impact of the
radically different cultural and even moral values of many Asian people on the
world largely influenced by dominant Asian economic power that without doubt
will demand a very different global leadership.
In fact, the apparently inevitable emergence of Asia as the economic leader of the
world will require the West, consisting largely of Europe and America, to reevaluate
not only their conditions but also their role in global leadership. The West has
experienced declining competitiveness, not just in manufacturing but more recently
also in services. Some of this is due to Western complacency as well as over-
confidence in its long-term inherited leadership role. Since Western Europe’s rise
to economic prominence by the early 18th century that later became dominance,
followed by America’s emergence as an economic power at the beginning of the
20th century, the West has taken its economic leadership for granted. As the
major technology developer the West used technology to advance its product and
process developments, followed by communication and transport systems advance.
It integrated its leading role in engineering and science, into advances in product
and process technology that gave it an unassailable advantage. This in turn was
used to advance living standards that could climb on the ladder of productivity
improvements. This trend though is unraveling now as particularly Asian countries
catch up in engineering skills and often even surpass Western standards. Japan
accomplished this over the second half of the 20th century, followed by South
Korea and now China, followed by India which both graduate by far more engineers
and scientists than the entire West combined.
In fact India graduates 5 times as many engineers as America every year as does
China, and the quality of their engineering graduates is improving. In fact, in some
areas such as civil engineering, it may even be superior. Since 1970 over 600,000
Chinese went abroad to study and only 200,000 returned; however, the percentage
of returning students is increasing and now the majority of Chinese student’s,
mainly graduate students, return after completion of their studies plus a few years of
practice. The returnees not only bring back engineering and/or scientific knowledge
but in many cases valuable business experience.
The same is happening with Indians, though at a slower pace. One reason for the
reversal of the past brain drain is the gradual closing of the salary gap. While in
1990 a graduate engineer in America would make 100 times as much as in China
and 60 times as much as in India, by 2004 the gap has closed to a multiple of four.
Lower living, property, and service costs quite often permitted returnees to actually
attain a higher living standard in China and India under these conditions.
Wage inflation in China and India continues at 15–17% for highly educated and
skilled professionals, a multiple of the improvements such people could expect in
170 CHAPTER 6
the West. This combined with the attraction of a familiar culture, comfortable and
less demanding lifestyle, and often better career or business opportunities, make a
return very attractive.
China’s and India’s rise to greater economic prowess and potential leadership is
no longer a question but just a matter of time. With a growth rate three times and
twice that of the Western countries, including Japan, China and India respectively
will inevitably become the leading economies within a few decades.
China still faces the problem of controlling inflation, reforming its banking
system, eliminating rural poverty, improving its infrastructure, and cleaning up
of its rivers, air, and environment in general. India faces even more formidable
obstacles such as a morbid bureaucracy and an archaic social system in addition
to the problems that China faces. Yet both have embraced economic growth as
the main objective and are moving rapidly in that direction. While China needs
to develop greater confidence in its own competence, India needs an infusion of
greater discipline. Both benefit from deference to learning, though Confucianism
in China combines it with deference to authority. The future trend though is clear.
Asia, led by the two super-nations, will assume increasing dominance in the world,
led largely by economic prowess and not political or military dominance.
Asia’s emergence as the global economic powerhouse started by Japan 50 years ago
and followed by South East Asia and South Korea, is now exploding with the rapid
growth of China followed by India, the two most populous countries in the world.
China’s economic awakening, barely 25 years ago, slumbered along for the first
decade, when the newly opened Communist state tried to develop an effective
strategy for its reentry into the global economy. Since then its focus on economic
growth, increasingly open markets, attracting large-scale foreign direct investments,
technology transfer, and improving transparency has made China the preferred
partner for some of the most important industrial leaders, service providers, and
financial institutions of the world.
China has managed to provide attractive investment and manufacturing as well
as trading opportunities. At the same time, it has devoted huge resources to build
up its own infrastructure, social services, and institutions, though not always in an
equitable manner. Large discrepancies in income, living standards, and employment
opportunities persist between the rich eastern coastal regions in the interior, though
major changes are taking place now. For example, Chongqing, China’s largest city
and the former capital of the Nationalist Government on the upper reaches of the
Yangtze in Szechuan Province, is undergoing a building boom that puts even the
massive rebuilding of Shanghai in the early 1990s to shame.
Investments in large hydroelectric, road, rail, telecommunication, ports, schools,
and other infrastructure projects consume a larger percentage of GDP than in any
other major country in the world. Over the past 20 years China’s real GDP has
averaged a 9.5% growth per year versus India’s 5.7% and that of OECD countries
THE FUTURE OF WORLD LEADERSHIP 171
of 2.6%. In other words, its economy has grown at 3.65 times the rate of the major
industrialized countries and about 3.2 times the rate of growth of the U.S.
China, unlike Russia, has maintained a strategy aimed at economic development
with comparatively little emphasis on strategic and particularly military prowess.
Even the occasional threats levied at Taiwan appear to be more politically motivated
than strategic objectives. In fact, China recognizes and takes full advantage of
Taiwan’s thriving economy. It encourages large-scale investment by Taiwanese as
well as indirect trade with Taiwan via Hong Kong. Taiwanese are among, if not the
top, investors in China and many Taiwanese ventures operate in Mainland China.
By spending a comparatively small percentage of GDP on the military and
strategic developments, China has been able to concentrate on domestic economic
and social development. Although it is an active participant in selected develop-
ments, particularly in Africa and other regions that do or may provide raw material
and other product sources, China has largely refrained from becoming politically
or strategically involved in the various trouble areas in the world.
Much of the growth of China’s manufacturing and to a lesser extent service
industries and resulting exports to major importing countries such as the U.S. and in
Europe is often claimed to have been at the expense of U.S./European manufacturers
as well as both emerging and poorer developing countries. America’s trade deficit
with China has grown to over $124bn in 2003, but China’s trade with Japan and
South Korea is nearly balanced and it has a negative trade balance with most
developing country trading partners even those who lost manufacturing to China.
The emerging economies such as South Korea, Taiwan, and countries in South
East Asia have moved up the value or technology chain and now produce higher
technology goods or components, many of which are exported to China for assembly
and re-export or local consumption. Similarly, poorer countries often become raw
material, food or simple goods suppliers to China.
Another important consideration is that much of the increase in exports by China
has been generated by the relocation of foreign multi-nationals or their subsidiaries
to China. These firms, while initially relocating to take advantage of lower labor
costs and large pools of competent workers, are really interested, in the longer run,
to capture shares in the rapidly developing domestic market in China, which is
expected to exceed that of the U.S. for consumer goods within 10–20 years.
In other words, China is not really competing with other developing or emerging
countries for jobs, but is encouraging a shift in paradigm and in a way consistent with
David Ricardo’s conclusions that economies will ultimately gravitate towards their
comparative advantage, which by its nature is usually temporary as it encourages
greater competitiveness, higher income, more consumption, and ultimately another
economic shift. Such developments are evident in Japan, South Korea, Taiwan, and
other emerging Asian countries, which have been able to follow the shift and adjust
their economies and trade, particularly with China, to maintain an effective trading
balance. In fact, most of these countries as well as developing countries in Africa
and South Asia usually have a net surplus trading balance with China. China’s trade
with developing countries has grown by nearly $60 billion between 2000 and 2004,
172 CHAPTER 6
a trend that is expected to continue as China’s appetite for raw material and food
imports grows unabatedly.
At the same time China is advancing its infrastructure, both in size and coverage,
as well as quality at an unprecedented rate. China completed more large or macro
infrastructure projects and invested more in their development since 1994 than the
rest of the world combined. It also completed most of these projects in record
time and on budget. The Three Gorges Dam project, a multi-purpose hydroelectric
project of unrivaled size that also serves to improve navigation, irrigation, and flood
control of the Yangtze River and its tributaries while generating enough electricity
to permit the shut down of about 30 polluting old coal-burning power plants, the
diversion of fresh water from Yangtze tributaries to supply water to the water-
starved north around Beijing and the regions of the advancing Gobi Desert, are
just a few of the additional benefits of this mammoth project whose final stage is
expected to be completed before 2010.
There are many other macro projects underway or recently completed. The
development of the formerly blighted south shore of the Huangpu River flowing
through Shanghai, the Pudong area formerly occupied by coal piers and piles as
well as all kinds of low level activities has been converted into a most modern
financial and business center, connected to the traditional north shore of the city by
several new high level bridges and a tunnel.
The new Pudong Airport which is replacing the old Shanghai airport in the north
of the city is served by the world’s most modern and efficient Maglev (magnetic
Levitated) train system. In fact, it was the only really working Maglev system in
2004. Shanghai has one of the most modern transport systems and its transport,
power, communication, health care, and educational systems were all rebuilt in a
period of 10 years or less, making Shanghai an example of what can be done in
transforming a decrepit megacity into a true global metropolis. This is just one of
many such projects that China has developed since 1990.
As a dominant trading nation, China recognized early that it must have efficient,
well managed ports, equipped with the latest technology and capable of serving the
largest ships in world trade. Notwithstanding its long history of state control, China
moved quickly after 1990 to privatize its ports and today has a larger percentage of
major ports run and often owned by private, usually foreign investors/operators than
most countries in the world. This strategy not only assured China of rapid inflow
of port investments and technology but also of introduction of the most efficient
port management and marketing.
China often used innovative approaches to assure rapid and efficient growth in
say port or other redevelopment. To reduce the problem of large traditional over-
manning of ports for example, it used the fact that port workers were normally
housed in estates right in the port or in waterfront buildings. As part of port
privatization, workers were, in many instances, given ownership of their apart-
ments that were then sold to a developer for $20–50,000, a sum big enough for
workers to acquire newly-built apartments on the outskirts of the port city near new
industrial plants and attractive employment. Most port workers took advantage of
THE FUTURE OF WORLD LEADERSHIP 173
China produces and consumes more steel than the U.S. and Japan combined, and
though it produces already (2004) over 220 m tons/year, it imports another 60 m
174 CHAPTER 6
tons/year to keep up with the large demand imposed mainly by its infrastructure,
housing, and industrial sectors. China is expected to become the second largest
world market by 2015, surpassing both Japan and even the European Union. At
the same time it is rapidly advancing its technological capability IT spending in
China, for example will net $418bn per year in 2008, twice the amount spent in
2004. IT spending in China grows now three times as fast as in the U.S. and five
times the average world growth rate. Shanghai alone already produces 40% of the
world’s semiconductors, and China will soon manufacture over half the total world
output.
China’s economic policy was set by Deng in the 1980s when he declared that
“socialism must prove itself through markets and prosperity”. In other words,
economic growth and well being was to be the driving force. Since then China’s
government has put emphasis on economic growth using all the tools that capitalism
had developed over 200 years to achieve its goals of economic prosperity with large-
scale employment and modern infrastructure. China has developed an interesting
economy, with a capitalist base and a benign socialist superstructure.
Wealth creation both in public and private has become an objective and not a
social negative. In fact, the policy encourages consumerism, private ownership,
as well as private participation in the stock market in which both public as well
as private company stock is traded. As a result, as noted, China’s economy has
mushroomed and its GDP is now larger than that of Russia, Brazil, and India
combined. Its economy is also much more integrated into the world’s economy and
markets than that of Russia and India. It is a fairly open economy. China exports 6
times as much as India. In fact the annual increase in the value of China’s foreign
trade in 2003 was larger than the whole of India’s foreign trade in that year. One
reason for this is the fact that unlike India, which by 2005 will still maintain average
tariffs of 30%, China will have reduced its foreign import tariff to only 9%. China
is well integrated into the global supply chain and with the large presence of foreign
companies is China is able to market its products much more effectively.
Foreign direct investments in China dwarf those in India and were over 13 times
larger in 2004. While China is currently concentrating on labor-intensive activities,
particularly in the interior, it did not ignore technology development and transfer
so as to assure a gradual entry into more lucrative higher-paying activities. In fact,
China, while spending much less on research than developed nations on a per capita
basis, achieves a much greater return on its R&D investment. This largely because
it encourages and pays for large-scale technology transfer to more rapidly close the
technology gap, and benefits from returning Chinese scientists who were educated
and got their experience abroad. It also concentrates more on applied versus basic
research and on technology development more than basic science.
Investment in research and technology in China is led by the public sector,
but private enterprises including foreign companies working in China increasingly
perform research and technology development there. One result of China’s entry into
the world economy, its aggressive growth policy and rapid employment generation
is the large-scale increase in labor effectively employed. The ratio of labor to capital
THE FUTURE OF WORLD LEADERSHIP 175
used to generate global economy output has as a result increased, which in turn has
raised the world return on capital employed. This, as a result, makes investment
in economic activities more attractive and will continue to generate investment in
productive assets.
Combined with worldwide, low-interest rates at the beginning of the 21st century,
this can be expected to fuel continued investment not only in manufacturing and
resource production but also infrastructure and housing. China has truly become a
global economic powerhouse. By emphasizing economic growth and social devel-
opment in a free and open market with large-scale private ownership, gradual
transfer of state enterprises, encouragement of foreign investment and ownership,
quality education, and research with less concern with military, strategic, and
political power and influence, China has carved out a unique position in the world.
While it maintains a sizeable military and weapons capability, nuclear prowess and
even developed basic space technology, its priority has been and is to become a
major economic power and to raise its peoples’ living standards, this by becoming
a full and vibrant participant and eventually leader in the world economy in which
China is destined to be the most dominant player.
India is, after many false starts, finally starting to emerge as an economic
power, particularly as noted in services, communication and computing, where
the large numbers of well-trained English-speaking professional provide it with
a major advantage. India’s problem though, for some years to come, will be its
huge and highly entrenched inefficient bureaucracy, the huge number of disenfran-
chised and often illiterate lower class or caste people, its failure to maintain and
develop its infrastructure, and finally the burden of a large military and weapons
program, largely in place to counter and/or prevent threats by its neighbor, Pakistan.
These factors will continue to delay India’s emergence as a truly world-class
economic power.
Still India’s principal development problem is the low quality of its infras-
tructure. Comparatively little has been invested in transport, communications,
energy, and social infrastructure. Furthermore, India is burdened by a huge and
largely ineffective bureaucracy that causes major obstacles and delays in required
advances. White collar or service outsourcing to India has really taken off and now
employs several hundred thousands of people. While initially concentrating on call
services, credit card, and other financial transactions including customer service,
it later included software development and programming, as well as technology
development for foreign/US designers, including preparation of product design for
manufacture in the US, Singapore (Flextronics or Solection) or elsewhere.
White collar outsourcing is simpler and is unaffected by lack of effective
transport/logistic infrastructure. India will soon be the world’s most populous
country with a projected population of 1.6 billion by 2050, compared to China’s
1.4 billion at that time. India, which uses English as its main language, will give
a major boost to the more universal use of the language, not just in business and
commerce but also as a major means of communication. Notwithstanding India’s
recent emergence as a new economic tiger with a 5% plus growth rate and rapid
176 CHAPTER 6
population growth, it will not match or overtake China as Asia’s premier economic
power in the foreseeable future and probably not during the 21st century.
China’s population growth has been slowed to a trickle as a result of the one-
child policy but even with the potential introduction of a 2-child policy by 2010,
China’s population should peak at about the same time and then stay level as life
expectancy continues to increase though more and more gradually.
The proportion of older people 65+ will continue to grow more rapidly while
the percentage of working age population 18–65 will decline and the ratio of working
to 65 year plus will decrease from 6 in 2004 to 2 in 2040. For America China has
been a strategic partner, competitor and economic opponent for a long time. It will
continue to concentrate on capacity building versus technology development. Many
Chinese companies fail not because of poor products or high costs but because
of bad organization, business strategy, and organization. These are often the result
of political and regulatory barriers that prevent otherwise sound companies from
achieving a quality status.
Japan’s trade with China continues to escalate and in 2004 exceeded that with
America for the first time. China has become an increasingly important outsourcing
base for Japanese companies. While initially Japanese companies only used China
for simple component manufacture and other labor-intensive production activities,
it is increasingly moving whole manufacturing to China, this not only to reduce the
cost of its products but also to stake a claim in the rapidly growing Chinese market.
In 2004 China’s plus Hong Kong’s trade with Japan accounted for more than a fifth
of Japan’s total foreign trade, compared to 18.6% for trade with the U.S.
Interestingly though Japan’s trade with China is balanced and in fact Japan has
a small trade surplus with China, compared with the huge trade deficit that the
U.S. experiences in its trade with China. Japan though continuing a rather stagnant
economic growth is still able to attain an overall trade surplus, led largely by
expansion of exports such as automobiles, steel, and high-end consumer electronics.
Japan has been moving more and more sophisticated production to China while
using its leading process technology to maintain control over design and manufac-
turing management. Much of the Japanese exports to China were really parts of
products that were ultimately sold in the U.S. and Europe and thereby contributed
to both Japanese and Chinese export competitiveness and market share.
China exerts a deflationary influence on the world economy and is carrying an
increasing weight in international finance. It has introduced brakes on credit to
assure the soft landing of its overheating economy and is trying to reduce its rate of
economic growth from 9-5 in 2004 to 7%. It similarly is trying to reduce the rate of
growth of investment from an unsustainable rate of 35%, much of it contributed by
foreign direct investment. Yet China under pressure to float its currency recognizes
that it must clean up its banking system first for it to succeed.
China, unlike Japan and Korea, is still concerned with the support of strong,
particularly multi-national companies, particularly companies that may foster polit-
ically independent private sector development. As a result, while supporting a free
market approach in general, the Chinese government gives preferred access to
THE FUTURE OF WORLD LEADERSHIP 177
capital, technology, and markets to state firms. Yet foreign, mainly multi-national,
companies have grown much faster and they now control much of the manufactured
exports. They also have usually superior technology and management. These work
in parallel with a few very large, private Chinese companies.
Chinese companies often concentrate on labor intensive activities and short-term
profits. In fact China has averaged a $12bn trade deficit in electronics, components,
and complex machinery (China Ministry of Commerce). Its manufacturing is usually
low value added assembly, while the government R&D concentrates on big bang
space and other projects. As a result, foreign firms control nearly all intellectual
property in China.
China is exerting growing influence in Africa where it started to replace Western
companies and interests, particularly in the development of natural resources such
as minerals and oil in countries like Sudan, Zimbabwe, and others which were
penalized by Western governments for their treatment of minorities or destructive,
often illegal, policies or programs. China is active in constructing transport, commu-
nication, and other infrastructure in Africa, with few if any strings attached. It also
shares the views of many African leaders that human rights abuses are issues that
foreign governments should not use to punish countries and that such are internal
matters. In other words, “that human rights stand above sovereignty” as noted by
He Wenping, Director of the African Studies Section of the Chinese Academy of
Social Sciences, as reported by Paul Mooney in the Yale Global Online. China is
today on the offensive, not just in growing its economy but in growing its economic
influence abroad.
While China in the recent past concentrated mainly on building up its domestic
economy, employment, and infrastructure, it now uses its huge dollar hoard and
growing purchasing powers to corner energy and other resources in the world
in competition with the world’s major economic powers. China is encouraging
its corporations now not only to expand in China but to expand abroad. China
thereby is not only trying to secure its supply of energy, minerals, food, and
other resources, but also to assume a more proactive role in the global market
place. It also recognizes that it must now emerge from a largely cheap labor-
based manufacturing economy into one which can develop and utilize home-grown
technology and advance its product and process developments through domestically-
generated innovation. Chinese companies with access to easy credit increasingly
expand their penetration of global markets, including both resource supplies such as
iron ore, oil, and others, as well as in the delivery of increasingly more sophisticated
products.
China is particularly active in Africa and Latin America, resource-rich regions
of the world that have been largely ignored or at least not emphasized by the West,
both as resource suppliers and export markets. China is quietly increasing not only
its economic relations but also its influence in these countries and China has offered
to improve Latin American infrastructure.
There is a question of what role the under-valued Yuan plays in these develop-
ments but China’s huge surpluses, particularly with America and Europe, certainly
178 CHAPTER 6
Americans think of themselves as free people, living in a society where everyone has
equal opportunities, and where people are judged as well as attain prospects on the
basis of their ability. Family and heredity and other connections as well as physical
power or ability are assumed to play little or no role in people’s advancement.
Attainment of position and wealth is supposed to be largely the result of ability,
hard work, and commitment. This is the picture Americans paint of themselves and
like to express when explaining America, the land of unhindered opportunity, to
others.
Americans feel that they truly represent a people’s revolution or revolt against
feudalism, dictatorships, and unfair, debilitating class preference. A people with
equal rights for all and a chance for everyone to attain success based on ability
alone. This idealistic concept is imbedded in the American psyche, public opinion,
and government pronouncements. Yet there are serious questions about America’s
commitment to true meritocracy. Not only have there been and are there questions
on equal treatment of and opportunities for women, blacks, and various minorities,
but there are serious visible and invisible barriers imposed on both career and social
THE FUTURE OF WORLD LEADERSHIP 179
advancement for many. Inequality of income is greater today than at any other time
in American history. Salaries of high earners are often obscene and bare no relation
to their contribution or value of service.
The average income of the top 1% of earners is now nearly 200 times that
of the bottom 20% and over 50 times the income of the average America. In
this America is unique, particularly among Western democratic countries, none of
which comes even close to such an earnings gap. In parallel with the earnings gap
are growing educational, opportunity, and status gaps that affect the structure of
American society. America’s Senate has largely become a club of the privileged,
and an increasing number of political representatives are members of the self-
perpetuating elite. As a result, political power is more and more concentrated in the
hands of a comparatively small power group. Both, the Democratic and Republican
parties essentially play by the same rules, though each has its own power base of
supporters. These quite often represent groups that ideologically have little concern
with the political principles supposedly advanced by the party they support. It is
difficult for example to rationalize the close affiliation of the “Trial Lawyers” with
the Democratic Party, the party of the working man and supposed supporters of
liberal and social values. Both major parties have their elites who hold a tight grip
on power.
In parallel with the political lock, social mobility in America, as noted, has
declined, and fewer people advance socio-economically in their lifetime. America,
as a result, is today less a country of opportunity than one of status quo, this at a
time when other countries, often with a more traditional socio-political system, seem
to offer greater opportunities for socio-economic mobility. New information and
computing technology now offer many, particularly the technologically competent
young, new opportunities to leap frog social and economic boundaries. Some recent
research, however, shows that social mobility in America has declined since 1970.
In general the perception that America offers greater social mobility than other
Western industrialized countries seems to be questionable now. In fact, Scandi-
navian countries as well as Germany and Canada appear to offer greater opportu-
nities for advancement for ordinary people.
Americans pride themselves on living in a classless society that offers unique
opportunities for (upward) mobility, both professionally and socially. In reality
though there is a distinct class system with the membership in the ruling class
defined by heritage, education, and social circles affecting upward opportunity
in most cases. The long vaunted equality of opportunity is becoming less and
less prevalent. A recent study by Thomas Hearth, an economist at the American
University in Washington, studied a random sample of 6,273 American families
and found that social mobility has significantly slowed in recent years, this in
combination with a rapidly increasing income gap, which as noted before often
results in absurdly large salaries, bonuses, and fringe benefits. This has affected the
American notion of a land of the free with equal opportunities for all to largely
become a hollow refrain. Americans today save very little and most save less than
ever before as a percentage of their income. In part this is due to the ill-founded
180 CHAPTER 6
perception that rising home values will take care of future financial needs. With
the world’s highest percentage of home ownership, Americans put their trust in the
equity of their homes. In the U.S. the ratio of house prices to monthly income has
risen from about 100 between 1975 and 2000 to over 125 at the end of 2004. At
the same time household savings as a percentage of disposable income that was
about 10% in 1980–85 has now declined to only 2% in 2004; while in Europe for
example it continues at about 10%. In other words Americans rely largely on the
equity in their home, a value that could very quickly drop without notice, with no
savings cushion to soften the blow. Yet Americans feel wealthier than most and
this largely because in their view consumption signifies or determines wealth and
consequent standard of living.
Americans spend more on health care and education per capita than anyone else
and therefore assume that their health care and educational systems are superior,
and that they obtain the best of both. In reality, more money does not mean
better schools or hospitals or care. The reason is that there is a lot of waste, lack
of accountability, unnecessary or frivolous expenditure and defensive teaching or
health care that causes tremendous waste. With local control, politics and local
interests also interfere. New York, for example, with a 1.1m student body, $13b
school budget or $11,820/student in 2004 has not been able to uplift its educational
quality that is still well below developed country average.
U.S. health expenditures as a percentage of GDP grew to over 16.8% or $1.8
trillion in 2004, a little higher than expended for education. (This includes both
public and private expenditures.) At the same time, other developed countries such
as the UK, Spain, Italy, and others spend about half as much as a percentage of
their GDP yet achieve the same or higher life expectancy.
There simply is a lot of waste in the U.S. healthcare and in educational systems.
Defensive health care and education alone increase cost significantly. By 2013
health care costs are expected to grow to $3.4 trillion or to nearly 18% of GDP.
Their growth rate is and has been significantly higher than the rate of inflation as
has been the increase in the cost of education.
Dr. David Himmelstein of the Harvard Medical School estimated that a single
government-run system could save $325b in administrative costs, including those
of private insurers who charge 20% off the top. America prides itself in being the
leading secular democracy, yet so-called faith-based values have become a major
political issue for both the American people and their leaders. This notwithstanding
the universal agreement for the separation of church and state and acceptance of
a tolerant secular society rules by a representative government under a consti-
tution that advocates secularism. Actually the American government is not really
representative.
One may argue that the head of the Executive Branch, the President, should be the
choice of the majority of the people; presidents have been elected without a popular
majority as a result of the quirks represented by the so-called Electoral College.
Similarly the U.S. senate that gives equal representation (2 Senators) to each state
THE FUTURE OF WORLD LEADERSHIP 181
in the Union, independent of its size or population (which varies from less than half
a million to well over 50 million) invariably reduces representative government.
America claims to be a model of democracy that other nations should emulate to
achieve the benefits of a successful and free people with the unique opportunities
that only true democracy can provide. During the 2004 Presidential elections, the
turnout was nearly 60%, which was impressive considering that throughout the
previous three elections turnout barely reached 50%. In American elections on the
federal as well as state or local level usually less than 50% and often as few as
30% of eligible voters participate. As a result, American government and legislative
representation is not really representative.
Universal suffrage is now largely the rule in the world, but it was only in 1965
when universal voting rights were extended to all black adults in the U.S. In some
countries, particularly in the Arab Peninsula and much of Africa, it is only in the last
few years that women were given voting rights, though in many of these countries
severe restrictions continue.
Returning to the U.S., the problem is not the right to vote but getting people
to vote. America claims to be an exemplary democracy with a government by the
people and for the people, but the percent of the population voting for the national
leader or President and for national representatives or Congress is an abysmal
average of 49% and 47% respectively, among the lowest in the world. This is way
lower than in new democracies such as Belarus, Croatia, Kazakhstan, and others
which consistently achieve a better than 75% voter participation. Similarly, the
percent of women elected to legislatures in the U.S. is only 14% which compares
to nearly 40% in Scandinavian countries, and even higher percentages in some
African and South Asian countries. Also most Western European countries have a
significantly higher voter turnout and female representation. Data from 140 countries
which held democratic elections between 1945 and 1998 the U.S. came in at 114th
in participation and No. 1 in costs. As the claimant of the world’s democratic leader,
the U.S. is not really very representative in the exercise of democratic rights and
responsibilities of its citizenry. Much of this may, at least in part, be due to the
increase in negativism in advertising and campaigning.
By international standards, American campaigning is really nasty. One may also
argue that the government of the U.S. it not really representative in a statistical
representation or gender sense. The number of female voters usually exceeds that
of male voters, but as noted, female representation is far from equal. America really
should reexamine its own exercise of democracy and assure democratic principles at
home before selling or enforcing democracy abroad. This is particularly important
now when America, as the sole superpower, acts not only as the world’s policeman
but also as the arbitrator of political correctness.
Democracy is foremost a set of individual rights such as the freedoms imbedded
in the U.S. Constitution translated into principles to assure these rights. Cultural,
historic, ethnic, social, and environmental factors will always affect the way
democratic principles are applied. There is no one-size-fits-all democratic formula
nor can typical Western-style democratic institutions necessarily be transferred
182 CHAPTER 6
Source: Economy.com.
For the time being, U.S. productivity improvements and attractive economic
growth continues to make U.S. investments, particularly in government bonds,
THE FUTURE OF WORLD LEADERSHIP 183
attractive. But this can come to a screeching halt if the dollar continues to decline
in value and the U.S. does not correct its large budget deficits, which compound the
effects of the current account deficits, starts to support the dollar, and slows down
its drunken expenditure avalanche. At the same time world trade, which becomes
over-dependent on the large U.S. trade deficits, will have to correct the imbalances
by buying more American goods and services. Otherwise the dollar will continue
its precipitous decline, trade imbalances will mushroom, and the global economy
move towards a dangerous precipice.
Global trade, the locomotive of economic growth, now estimated to be nearly
worth $9 trillion (2005) per year, did support unprecedented global progress
and improved prosperity. But the imbalance, with some countries like the U.S.
consuming way above their means, while others are simply hoarding their export
earnings and investing them mainly in U.S. Treasuries, is a formula leading to
ultimate disaster.
With a current account deficit of 5.7% of GDP in 2004 and increasing, and a
budget deficit in excess of 3.7% of GDP in 2004, the U.S. is moving toward a
dire economic future. At the same time America appears overly complacent now
in early 2005. Over the last 5 years (1999–2004), the U.S. current account deficit
grew from $240b to over $630b, and the trend continues upward with the war in
Iraq, restructuring of the U.S. Social Security system, new educational and social
program initiatives, all demanding additional funding that, at least in the short run,
will make it difficult to reduce the deficit.
The Social Security system faces a short fall of about $12.7 trillion over the next
25 years unless radical changes in the rules are introduced such as a later retirement
age, adjusted to changing life expectancy, and/or some kind of need adjustment;
neither of which are popular, although in reality people do retire later anyway.
Possible Social Security system reforms suggested are Private Early Retirement
Accounts with a percentage of contribution put into private investments that would
supposedly earn a higher return and furthermore remain under personal control
of the contributor and heirs. Monthly Social Security benefits would remain the
same, but the age at which people would start to receive them would be increased
gradually and ultimately to 72 years.
The U.S. has staked much of its future on services and to a large extent
discouraged the manufacturing sector, which continues to decline. This is a
dangerous strategy for the world’s largest economy as it makes it excessively
dependent on the rest of the world. Another issue is that services unlike manufac-
turing are very mobile and require less time to install and less money to establish.
Similarly, service technology is usually readily accessible and people can be quickly
trained in its use. As a result, America may find itself under increasing economic
pressure as others learn to perform services better and cheaper.
America’s principal advantage is its innovativeness in science, technology,
methodology, and ultimately services. America must hone these traditional traits
and assure a growing cadre of free thinking, educated, and technologically advanced
184 CHAPTER 6
innovators who are able to reinvent services, techniques, and processes as well as
design new products and processes that are better, cheaper, and more competent.
Freewheeling innovation has always been the strength of America. It has allowed
America to become a global economic, technological, and strategic leader whose
inventions guided the world into the 21st century. Research and technology devel-
opment at all levels of endeavor will have to become the cornerstone of American
economic activities.
U.S. debt now requires 6% of GDP to be serviced and absorbs about 80% of the
world’s savings to finance. Most of the U.S. public debt is financed by foreigners,
mainly foreign governments that want to prevent radical devaluation of the U.S.
dollar. At the same time, service industry surpluses are going down. The U.S.
taxpayer covers 61% of America’s high health care costs, as well as most of the
astronomical costs of education and law enforcement that together now consume
well over 50% of the American GDP. In fact, if this trend continues the U.S. will
soon be a self-serving economy consisting largely of three sectors: health care,
education, and law enforcement.
It is quite difficult to see how such an economy could sustain itself serving only
its own service needs while producing little of anything else, except what its people
invent. There is obviously a limit to such a self-serving economy, particularly one
with huge current account and budget deficits as the U.S. has experienced for some
time now. While the reduction in the value of the dollar reduces U.S. current account
deficits, by making American goods and services more competitive abroad, such
devaluation does reduce the attractiveness of U.S. dollar denominated securities.
Since 2002 the dollar has declined 33% against the Euro in just over two years.
This unprecedented slide introduced an unprecedented loss of faith. Technology
drove the U.S. stock market in the 1990s; yet in the new millennium China has
become the growth engine and is expected to attract investments from throughout
the world for at least another decade or up to 2015.
The U.S. does and will continue to lead the world in advanced research and
technology development, but increasingly China will take the lead in process
technology and applications development such as robotics and control methods, just
as Japan and Korea did after reaching economic and technological maturity, this
largely the result of concentration on research and development of technology with
a shorter term payoff unlike basic science research.
All these new East Asian economic powers starting with Japan, followed by
Korea, Taiwan, and South East Asia, which are being overtaken by China, will
constitute a huge economic base that will make East Asia and thereby the Pacific
basin the economic heartland of the 21st century, replacing the long established
economic domination of the Atlantic economic alliance of America and Western
Europe. To maintain its leadership, America has to develop an inclusive agenda,
one that accommodates the wishes and concerns of all its global partners. America
must engage all its global allies as partners, and not attempt to lead only on the
basis of its current superior economic and military power. Otherwise it may soon
find itself disengaged.
THE FUTURE OF WORLD LEADERSHIP 185
Seldom in history has the world chosen and accepted a global leader. There were
periods when some countries or people dominated parts of the world such as Europe,
the Middle East, North Africa or East Asia. The Egyptians, Greeks, Persians,
Macedonians, Romans, and others dominated major regions but their rule was
usually the result of physical conquest and resulting dominance for a limited time.
The world really consisted of several worlds on different continents with little
contact between them. It is only now with the world a global village connected by
efficient transport, communication, trade, and social links that global leadership can
and is being claimed. The U.S., after the breakup of the Soviet Union, remains the
single largest economy and powerful military in the world. That by default makes
it the global leader.
However leadership really means more than domination. It requires an under-
standing of the issues, a commitment towards a better world, compassion for the
down-trodden or out of luck, an understanding of the needs of others, a moral
commitment towards the well being of people, their feelings and interests, a show
of unselfish help to others, a mind set towards doing good and being good with the
good of people, states, and the world utmost in mind. Leadership must be honorable
and make both leader and led proud. Good leadership does not tolerate arrogance
and suppression or domination of others. It must be accepted voluntarily. Leaders
have spirit and soul and use it to convince those led of the path proposed or chosen.
They are honest and true to their calling and their responsibility for others.
Leaders must serve as examples. As such, they must be among the first to accept
and adopt principles. They must show love and compassion for others, particularly
those less well endowed or competent and refrain from selfish concentration on
their own well being and interests. Leadership is not a right but an achievement
reached by voluntary acceptance by others of the examples and goals presented.
Leadership is a responsibility and has many dimensions. There is leadership in
particular sectors such as science, technology, finance, medicine, social services,
education, and more that is achieved by sustained superior accomplishments in those
areas of human endeavor. Such leadership does not depend on size or power of a
people or nation, and can be attained by small groups or nations. Such leadership
serves as an example and goal for others.
Global leadership, on the other hand, assumes and in fact requires not only
superior performance in many areas of performance, but also size and power to
support, assist, and lead the world towards peace, growth, and economic as well as
social development.
Global leadership must be accepted voluntarily, to be effective, and lead towards
universal betterment in all its dimensions, even though it may on occasion also
require a leader’s involvement in conflicts or disputes, when the leader should
largely serve as arbiter and not enforcer unless enforcement is required to assure
the common good, desired by most if not all.
188 CHAPTER 6
Leaders must stand up for their beliefs and convince others of their righteousness
without coercion. Their decision must be based on their beliefs and the correctness
of their actions in terms of contribution to the common good.
America has attained its world leadership role through the power of its economy,
its technological leadership, and its military prowess. The world both respects and
fears America’s power. It respects American willingness to step in when policing is
required and when serious injustices are committed such as in Bosnia and Kosovo,
where America took the lead in opposing genocidal moves by Serbia, though the
problem was located in Central Europe and should logically have been addressed
and possibly resolved by countries of the European Union. America stepped into
conflicts repeatedly since World War II and has since the demise of the Soviet
Union become the undisputed arbiter of conflicts in the world.
Increasingly, while the world looks to the U.S. for everything in terms of
protection, aid and conflict resolution, it is simultaneously considered by some
a crude leader, with little understanding or compassion for the underlying issues
and concerns. The Atlantic Alliance, for long the mainstay of Western power, has
suffered from its discord on action in Iraq, from a weak dollar that hurts Europe,
and the declining strategic and economic importance of Europe and the Atlantic
basin. Europe is no longer the center of U.S. interest. The Pacific basin and Asia,
particularly East Asia, has become the center of American concerns. With China’s
economy expected to double in size in the next ten years or by 2015, more than half
of the world’s gross product will then be produced in Asia, and China’s trade surplus
with the U.S. alone will account for more than 10% of its total economic output.
America’s attention and interest will therefore be increasingly devoted towards Asia
and away from Europe.
Low U.S. interest rates and large U.S. budget deficits in the early years of the 3rd
millennium have helped China in the short term by fueling U.S. consumption while
allowing American investors make large investments in China. China is increasingly
expanding its trades and is more and more consolidating trade agreements with
potential, and often new, sources of strategic resources such as oil, gas, and minerals.
As a result, China is becoming a growing trading partner with resource-rich countries
in Africa and Latin America, as well as the Central Asian republics and Russia.
Russia, which until a few years ago was expected to become a major oil and
gas supplier to Europe and the U.S., is instead now turning towards China, Japan
and India.
There is a trend by major nations in Asia to diversify their trades from narrow
dependence on the U.S. and Europe. At the same time Russia and Japan are
cooperating to counter Chinese expansion. China’s economy has become a global
manufacturing giant. Manufacturing is the major sector in the Chinese economy,
while the service sector accounted for a paltry 32% in 2004. This compared to indus-
trialized economies of the G7 and other nations, including emerging economies such
THE FUTURE OF WORLD LEADERSHIP 189
as India, whose service sectors all account for more than 50% of their economies
now. This makes China unique and establishes it as the manufacturing locomotive
of the world.
In many ways it replicates what America represented during and after World
War II, when it served as the world’s workshop or industrial center supplying
much of its manufactured goods demand. It is interesting to note how quickly
America changed from a country where over 63% of people worked in production
(manufacturing and agriculture) to one where over 70% work in services. While
in part this may be due to technological changes, such as automation, scale, and
process improvements, much of it is also due to a change in priorities, life style,
and mind set.
China is today gradually becoming a counterbalancing power to the U.S., a
role the Soviet Union played barely 20 years ago. Only China serves the role in
economic and not military or strategic terms. In the long run, in this globalized
world, economic power will probably determine world leadership and America may
well lose it to China within a few decades unless it gets its economy in order.
As noted, America’s current account and budget deficits have grown at an unsus-
tainable rate. While some Americans claim that even now America’ public debt to
GNP ratio is still below that of other G7 countries, the sheer size of the debt, the
planned extensions of the U.S. tax cut, the lack of savings by the American public,
the under-investment in social security, and many pension plans that may require
huge potential future public funding bailouts to meet their obligations, as well as
the lack of discipline by legislatures in public spending, although all pose a huge
burden on America’s economy. This in turn may affect America’s future ability to
lead the world and serve as a major or principal economic and security arbiter. It
may not be able to afford large economic and military interventions much longer,
particularly if major creditors to the U.S., such as China, choose to invest less in
America.
America is really too stretched out in all respects. The budget deficit is now
growing at a rate of $4 billion per week in real terms, without considering long-
term factors. Foreign central banks may not be willing to finance America’s trade
deficits much longer, particularly if the U.S. dollar continues its slide. For the time
being foreign governments and particularly China may continue this strategy to
push its exports. But this is more attractive for China with its currency, the Yuan,
pecked to the dollar. Other countries such as the EU do not have this benefit as
their currencies float freely.
America’s trading partners may at some time in the not too distant future call
in their chips, repatriate or reallocate their investments, revalue their currencies,
and change their trading strategies. This could hurt America not just economi-
cally, but also affect America’s ability to sustain its foreign activities as well as
business abroad. U.S. domestic social costs, such as health care, education, and law
enforcement have been growing at nearly twice the rate of domestic inflation and
assume an ever larger percentage of the GDP. They may soon reach an unsustainable
level, as at the same time, payoffs in better health care, education, and lower crime
190 CHAPTER 6
rates do not materialize. In other words, increased social spending did not and does
not provide an effective return.
As noted by former Secretary of the Treasury Robert E. Rubin in an article
in Newsweek (December 2004) “the federal government (Congressional Budget
Office) projected surplus of $5.6 trillion over a 10-year period starting in 2001 has
now degenerated into a $5.0–5.5 trillion deficit over the same period, as estimated
by various independent analysts”.
For the U.S. to maintain its global leadership will require greater fiscal discipline,
such as reduced spending, more rational tax policies, and greater involvement of
the world-at-large in global peacekeeping and development activities. Economic
reality may catch up with America sooner than some in government imagine and it
may hit without warning. America may then be taken by surprise, with the financial
reality hitting it hard when others start to lose faith in its leadership and start to
withdraw their chips.
The U.S. dollar has been falling incessantly since the 2004 Presidential elections,
largely due to long-term irresponsible financial management that permitted increas-
ingly large trade and current account deficits by the U.S. This combined with
comparatively low U.S. interest rates makes investment in U.S. treasuries increas-
ingly less attractive, a threat that may result not only in a decline of investment by
foreigners and their governments in the U.S., but actual withdrawal of the trillions
of dollars already invested in U.S. government bonds and other U.S. fixed income
securities. This would cause a huge drain and depletion of U.S. reserves and other
holdings.
Unfortunately, U.S. budget, trade, and current account deficits will continue at
least until 2008 and possibly even until much later, by which time the combination
of a declining value of the U.S. dollar, increased U.S. indebtedness to foreigners,
and U.S. dependence on more and more expensive oil and gas may lead to a
declining ability by America to lead the world economy and force it to curtail many
expensive leadership activities.
America is unique among nations as a platform for human creativity. Its freedom,
multi-national, cultural and ethnic population, and economic as well as physical
challenges have developed an environment that fosters experimentation, discovery,
and new uses. Americans are forever trying to change, improve, and tinker with
the status quo, with the way things are and the way things are done. They are
never satisfied with the current way, be it of government, business, social relations,
manufacturing, growing plants, and more. Americans want and live for change.
They are forever searching for novel ways in everything.
This makes for a restless and inventive society that takes nothing for granted.
Americans are also more willing than most to take risks, be it with new types of
music, visual art, theatre, transportation, organization, materials, and in effect just
about everything. They find new ways to use old concepts, materials, and operations
and will often invent new approaches to the solution of old problems. Some are
unique; others may just be the result of looking at an old problem in a different way.
Creativity is an inherent factor in American culture. It has its own personality and
is both affected by its surroundings and affects its surroundings. It affects everyday
life much more than in most other societies; this largely because Americans, by
and large, are never satisfied. They are always looking for change, and they take
nothing for granted. Americans are creative in both small and big ways. They are
always questioning the how, why, and when of about everything they confront.
They are a nation that expects and lives for change.
Many claim that in this new globalized technological world, knowledge and not
the traditional economic factors, such as capital, labor, and material, determine
economic growth and power. This may be true and was recognized nearly 50 years
ago when Robert Solow showed that technological change must be included in
economic performance valuation to properly account for economic change. But the
192 CHAPTER 6
role of knowledge goes beyond technological change and has many other implica-
tions. Knowledge has many dimensions and is acquired in many different ways.
Outsourcing is now entering a new stage. Instead of moving from one low labor
cost country to another as labor costs and availabilities change, there is now a
trend towards simply importing additional labor from low labor cost countries.
Ireland and more recently Dubai, for example, both of which have seen their
domestic labor availability shrink and costs increase in line with labor scarcity, are
now importing labor, including skilled labor from Eastern Europe and Malaysia,
Bangladesh, Pakistan or India respectively.
This new environment affects not only competition within technologies, but also
the ability of U.S. institutions to advance in their research. The new restrictions
result in a lower number and quality of foreign academic graduate admissions and
the progress of American university research, and inhibit the effective transfer and
use of research results to U.S. industry and, consequently, economic advances.
There is not only concern about rising anti-Americanism abroad, particularly among
Moslems and disadvantaged people in Africa or Asia, but increasingly also people in
what were considered Western countries such as France, Spain, Germany, and other
West and Central European countries have a negative view of American policies
as well as often American values and even culture. This notwithstanding the fact
that American music, art, lifestyle, and technology are not only used but are copied
nearly worldwide, including by people in countries vehemently opposed to anything
American. At the same time, the American government and people are concerned
with getting the world at large both to understand America’s real objectives and its
values. The many attempts to re-brand America have failed, largely because they
were introduced much like a public relations, advertising or marketing campaign,
often designed for a typical American public.
This is not only a wrong approach but also appears shallow and as talking down
to people. In most recent campaigns of America branding, the country’s image
abroad was very general and looked at American policy, investments, trade, and
other issues from an American point of view, with little if any consideration for
the different sets of values used by most people in other nations. One cannot buy
being liked or even sympathy, particularly when the American example is often
shallow. As one example, America prides itself to be an example of democracy,
yet most congressional and state elections are really not representative at all, and
in many cases the outcomes are not only predictable but virtually guaranteed by
the district lines that are frequently redrawn to assure perpetuity of these outcomes.
As a result, many electoral districts in America are drawn like jigsaw puzzles to
assure a responsive electorate. This, and other examples of the American electoral
process, often negate the conception of America as an ideal example of democracy
in action. While America’s public esteem was largely formed in response to its post
World War II role, the world is now a completely different place.
America intervened in World War I to help the Western European allies and
Russia defeat the German government and Hapsburg Empire onslaught. Yet in the
years after the war, the European powers regained their global influence and colonial
domination. America retreated to its traditional regional role, notwithstanding its
leadership at Versailles.
When America intervened in World War II and after being attacked by Japan
went on the offensive in the Pacific, particularly in East and South East Asia, and
led the allies in Europe and Asia to victory, it assumed a very different role. It
became proactive not only in rebuilding Europe but also in helping the development
THE FUTURE OF WORLD LEADERSHIP 195
of a new world order in which colonialism would vanish and all people would be
free to determine their own conditions and future. This led to a global involvement
by America that continues until now.
America assumed a new role not only of economic leader but also of arbiter
and protector. This role was challenged by the Soviet Union, which had played a
dominant role in defeating the axis powers in Europe and built up a huge military and
weapons capability, in addition to a large political following, particularly in newly
independent countries which had emerged from colonial rule. This challenge, mainly
in technological and military terms, played a major role in determining the interna-
tional or global political environment, affiliation, and consequent commitments.
The world truly became divided between East or Communist and West or
capitalist free market approaches to social, economic and political issues. After the
death of Stalin and later Mao, changes in both the Soviet Union and China started
to affect their internal structure and later international relations and behavior in
profound yet different ways. In Russia communist doctrine was gradually discarded
and state enterprises largely privatized by giving workers ownership rights that
most misused and sold for a pittance to smart oligarchs who soon dominated signif-
icant former state assets, particularly in the industrial, communications, media, and
energy sectors.
Europe led global development for several centuries; yet since World War I and
more importantly World War II it has lost much of its military and economic clout,
mainly to America. Although Europe served for many centuries as the cradle of
development, one may rightfully argue that the Chinese and others also contributed
significantly to world civilization and particularly basic sciences, and technology.
Similarly, the Arabs made great strides in both science and literature during the
period of 700–1200 AD, following the Greeks over 1000 years earlier. But there
is no doubt that industrialization, as well as the cradle of modern science and
technology, was chiefly fostered in Western and Central Europe.
European and particularly Western European nations from Britain, Holland,
Belgium, and France to Germany, Italy, Spain, and Portugal all used these
advances to expand their territorial and economic reaches. They established colonies
throughout the world and for several centuries built empires that greatly enhanced
their reach, as well as economic and strategic powers. In parallel, the Habsburg
empire extended its rule over Eastern Europe and the Balkans, while Russia absorbed
many bordering peoples in both Europe and Asia. Yet World War II caused a
radical change that ultimately resulted in freedom for most colonized peoples in
Africa and South as well as Southeast Asia, to be followed much later by the split
up of the Soviet Union into Russia and many newly independent former affiliated
states.
The Spanish and Portuguese colonies established in the 16th and 17th centuries
in Central and South America had all gained independence about a century earlier,
196 CHAPTER 6
and were protected later by America’s Monroe Doctrine. Britain, though no longer
a colonial power, continues till now to maintain a Commonwealth relationship with
the major countries of its former empire, which gives it both political and economic
advantages, though these ties have become less dominant in recent years.
The European Union recently expanded into east and southeast Europe and now
comprises most countries of Central and Western Europe and an increasing number
of Eastern European countries. It is now the world’s biggest market, exporter,
and foreign investor. It also has a high savings rate. It is the world’s third most
populous entity and has some of the world’s foremost scientific and educational
institutions, a rich cultural life, and vibrant political institutions. All of this should
mark Europe a world leader. Yet at the same time, Europe and particularly the
countries of the European Union have a very low and often not sustaining birth
rate, high unemployment, high taxes, a very regulated labor market, and a very
weak military capability. They were unable to lead in containing the atrocities and
upheavals after the breakup of the former Yugoslavia, a country in the center of
Europe, and relied largely on outside pressure and intervention largely by the U.S.
to guide the release of Eastern Europe from the Communist grip.
While Europe should be able to lead the world, it really lacks the unified strength
and common support to assume such a task. It is still torn apart by former, often
conflicting, national interests and priorities that often lead to acrimonious conflicts.
In other words, the European Union is far from being a unified entity; this, in part,
due to a continued focus on national interests, the lack of a unifying constitution, and
an introvert legacy. At the same time, Europe still considers itself most enlightened
and advanced, and therefore destined to be a moral and cultural, if not military and
economic leader, of the world.
Europe faces many problems, most of all the political and social integration of
Europe that may be much harder than economic integration. It involves more than
just eliminating customs borders and allowing freedom of movement and economic
activity throughout the European Union. Unlike the United States, the European
Union is an amalgam of nations and not just people. Each nation continues to
maintain its cultural and linguistic identity and usually retains a unique legal, social,
and political system. In fact, unlike states in the U.S., member states in the European
Union, each proudly maintains its unique political, legal, and administrative system.
This diversity, while culturally interesting, prevents Europe as represented by the
European Union from formulating and displaying a leadership strategy and, as a
result, convince the rest of the world of its ability to guide it.
European countries have repeatedly called for economic reform with little
response in the past, but now (2005) the continents’ nations seem to finally respond.
The driving force seems to be the persistent lag of about 30% in income per person
compared to America. While average worker productivity in France is a bit higher
than that in America, most of European worker productivity lags behind. Similarly,
the proportion of people gainfully employed is far behind that of America; this
not only because of a comparatively high unemployment rate but also because the
percentage of working women and people above 65 years of age who continue to
THE FUTURE OF WORLD LEADERSHIP 197
work is much smaller. Some of this is due to the generous unemployment benefits,
pension and early retirement schemes, together with quite lax disability rules, that
make gainful work for low skill, young women in general as well as older people
unattractive.
Unlike America, most European countries do not allow deferment of pension
benefits. In essence, all of this results not only in a much lower per capita output
but also an implicit added tax rate. These two factors in turn are probably the
dominant reasons why the European countries continue to lag America economically
notwithstanding the strong Euro. To gain greater stature and leadership in economic
terms, Europe may have to radically change its socio-economic strategies. Only
this, combined with a willingness to take on a larger role in maintaining world
peace and in the global political arena would allow Europe to challenge America
for world leadership.
Yet, there are some countries in Europe, such as Ireland, Sweden, and Finland
that are among the world’s most competitive economies. Europe suffers under a
declining birth rate and overall population. Although the unification process of
Europe is now nearly 50 years old, there is really a lack of enthusiasm among
people of many member nations. In fact, the EUs new constitution or constitutional
treaty seems to have a hard time getting popular support. Until Europe really
becomes united and advances its economy, military prowess, and willingness to
play a leading role in resolving real and potential conflicts throughout the world, it
cannot really claim global leadership.
America’s image has undergone radical changes in recent years. Near universal
global admiration for this country of immigrants, which devised a constitution,
government, and way of life that became the model and envy of much of the world
for long, is now being replaced by doubts, mistrust, and quite often disagreement
or outright opposition, this not only because of American foreign policy but also
its lack of consistent adherence to its most basic values. America is recognized as
the undisputed leader in technology development and use, though the latter is often
spotty or less effective than practiced elsewhere.
The reasons for the lack of more general and effective applications of technology
are probably the large discrepancies or gaps in skills, education, and living standards
among Americans. These hinder more universal and effective training in the use of
technology. As a result, technology invented and often first used in America is quite
often further developed elsewhere and used abroad to greater advantage. While
this may in part be due to political interference, diverse cultural backgrounds, and
ethical concerns, it does put America into a position where it often has to reimport
the fruits of its own inventions. This is not only caused by copying by foreigners but
also a result of new applications or other uses than originally perceived in America.
Similarly, on the basic American technology, improvements are often introduced.
198 CHAPTER 6
This is unfortunate because, for a long time, Americans were known for
innovation in its broadest sense. They were perceived as a people who forever found
not only new ways to use existing technology but invented technology for purposes
no one else knew existed or could be satisfied by technology. America continues
its scientific and technology forays and new breakthroughs into discovery, but is no
longer considered the cradle of innovation. In part, this may be due to a decline in
emphasis on quality and consequent reliability in many hardware as well as service
products and their applications.
Another issue is that America has become the world’s leading debtor. It is
addicted to unbridled consumption of everything from food, clothing, electronics,
and automobiles to services of all kinds. Americans use, eat, and demand more and
are willing to pay for it with their own or more often other people’s money. As
a result, they save little if anything. In fact, American saving rates are not only
approaching zero but have now (2005) become negative.
In this era of rampant globalization when much of America’s debt is owed to
foreigners, there is an urgent need for the U.S. government, the Federal Reserve,
and legislative leaders to be equipped with a good understanding of the world at
large, particularly international financial policy. They should have diplomatic skills
and be knowledgeable about foreign cultures, economies, procedures, and legal
approaches or rules.
America as the world’s largest debtor must increasingly deal with international
financial policy; yet many of its policy makers know little about the rest of the
world (U.S. saving rate in 2005 was -2% versus the average European of 8%, and
Japanese of 10% of GDP). With a 6% of GDP trade deficit (over $582 billion
est. 2005), a budget deficit which is expected to reach 3.5% of GDP in 2005 (a
swing from a projected 2.4% surplus), the American economy is looked upon with
both suspicion and trepidation. Many people feel that America will have to put
its economic house in order to maintain global economic leadership or lose the
confidence of the rest of the world.
Indeed there is growing concern about America’s ability to sustain its economic
growth with the world economy already running at near full capacity. It is now
in 2005 driving towards a potential inflation and increases in financing costs that
would become a major added burden for the U.S. in servicing its huge foreign debt
or potentially risk unserviceable recalls. The large inflows of foreign capital have
encouraged Americans to save less or nothing. They also helped keep American’s
interest rates low. Large American consumption sucks in imports while low foreign
consumption reduces American exports. While America is still the world’s largest
economy, its economy has fallen from 50% of global GNP in 1946 to just 25% or
less in 2005 and is still falling.
One reason for this is the growth of its service sector and decline in productive
output in manufacturing and agriculture. Its service sector is increasingly dominated
by health care, education, and law enforcement sectors, which now account for close
to 48% of GNP and growing; yet do not provide effective economic outputs. In other
words, about half of the U.S. economy is engaged in such self-serving activities.
THE FUTURE OF WORLD LEADERSHIP 199
Similarly, more and more of the other service activities are being outsourced to
India and elsewhere without a compensatory creation of manufacturing or other
activities.
Self-serving service sector costs, such as health care, furthermore are growing at
an unsustainable rate and since 2000 at 4–5 times the rate of inflation. Health care
now costs on average $6–8,000 per worker year or more than twice the amount
spent by other OECD countries. For America to get its economic house in order,
waste in education, health care, and law enforcement must be eliminated and strict
discipline be introduced to assure control of both service quality and costs. Most
importantly, people themselves must become part of the decision making process.
To outsiders Americans are becoming intolerably self-indulgent. They consume
over 25% of all fossil fuel used in the world (5 times the world average) and
complain bitterly about the recent increase in the price of oil and gas, while resisting
efforts to curtail their consumption as well as protect the environment. Little if
any effort is made to conserve not just energy but anything. Americans generate
5 times the amount of solid waste by weight as other industrialized such as Japan
and Europe. Food portions served in American restaurants are usually much too
large. This together with the American’s love for junk food and eating on the run
contribute greatly to obesity, which in turn puts huge added demands on health care.
Much of the lawlessness in America is being solved by incarceration, often
without right to parole. Thereby opportunities for rehabilitation are greatly reduced.
With 2–3 million in jail in mid 2005, America’s prison population is the highest
in the world and 25% above that of any other country. A most disturbing fact is
the high proportion of young among incarcerated offenders. In other words, crime
is being contained by attempts to remove criminals, with little effort to address the
underlying problems.
The image of America has taken a definite turn for the worse. It is no longer
the universal example of a successful modern democratic society. Admiration is
spotty and often conditioned. Transparency is still largely in place and often permits
discovery of political and financial misdeeds or outright corruption. But the image
of America is increasingly tarnished by revelations of public or private misdeeds
as well as lack of adherence to announced principles. From a macro economic
point of view, the U.S. deficits contribute great amounts of money to the global
economy and thereby drive global economic growth. A belt tightening in America
would reduce imports and impact on employment in Japan and Europe and to a
lesser extent China, unless these countries can get their consumers to increase their
outlays. However, Europe and Japan, with an increasingly older population, may
not be able to increase consumer spending. China, with an estimated 2005 trade
surplus with America exceeding $150b is buying up huge amounts of U.S. Treasury
bills which in turn finance American deficits and reduce the need for China to
revalue its currency.
There is also the loss of American prestige largely resulting from the war in Iraq
which continues to encourage growth of anti-Americanism or at least resentment
toward America. Not only are many people in Muslim countries negatively inclined
200 CHAPTER 6
towards America, but people in much of Europe, Africa, and East Asia also have an
increasingly low opinion of the U.S. The reasons now include not only America’s
politics, trade policies, and military adventures, but also the perception of the decline
in American education, its social system, and general behavior. These are just a few
of the issues affecting America’s global image, an image that becomes more and
more murky as easily accessible communications and free media coverage extol the
many ills of America. The American century, as a result, is giving way to a new
global century with major implications.
America’s image has suffered in recent years not only because of failings in its
social service, huge foreign debt, and foreign policy, but also the perception of a
general decline in moral standards. Its dependence on foreign borrowings, continued
consumer overindulgence and military involvements, often discouraged by much of
the rest of the world, have greatly diminished the esteem in which America used to
be held. America has become a knowledge economy, yet has left major segments
of its population behind, often with little hope of ever catching up.
America, the place known for unlimited opportunities, a country with the largest
middle class, and in fact where everyone considered himself middle class, now
represents a country of increasing extremes to the observer; a growing number
of poor and super rich; large numbers of people without hope, and others with
obscene incomes and wealth. America is rapidly losing its image of an example
to be followed and to aim for. It is still making a difference, but the difference
is not always perceived as positive. America’s failure to effectively react to the
Hurricane Katrina disaster and in preparing for flu outbreaks and a potential avian
flu pandemic are considered examples of lack of leadership ability. It is difficult to
choose particular focused examples of blame for America’s declining image, but
it is clear that it no longer commands universal trust and confidence as a global
leader. Leadership starts at home and must be proven there before claiming wider
influence. Yet the American public is today probably less confident in its own
government and its leadership ability than at any time since independence. There are
many other examples that contribute to a decline in America’s image and prestige.
Some like corruption in business or government, religious intolerance and more
were probably always present, but are now more visible and often more credible
than before. As a result, there is a serious decline in the global esteem, prestige, and
trust that had been the hallmark of America’s image for most of the last century.
CHAPTER 7
The new brave world of the 21st century is subjected to a myriad of continually
changing technological advances that are making it an ever smaller village. This
poses new leadership challenges and risks. Leadership no longer implies dominating
economic intellectual, moral or even military power, but deep involvement in all of
these as well as unique abilities to develop and use new technological and scientific
advances. But this is not all, because in our shrinking global village, leaders must be
able to look beyond narrow national objectives, assure global justice and peace, and
be understanding and compassionate, particularly with the lot of the disadvantaged
everywhere. They must lead with humanity, be devoted to accepted principles,
and generous particularly towards those less endowed and with fewer opportunities.
To lead now implies also to serve the led to improve their conditions and to
achieve a common good. Leaders must adapt and improve upon universal values
and not just try to change others in their image. They may get others to buy into
their ideas and ideals and inspire them. Their vision must not just be for their
own, but the broader good, and consider success of others’ important goals as well.
Leadership must be earned. It does not come naturally but should be based on
moral values, proven ability to manage and inspire, respect for others, concern for
the environment and clear goals.
Risks today are more diverse, pervasive, and dangerous. Social unrests, religious
strife, economic conflicts, and natural disasters are on the rise. These increasingly
lead to major damage and loss of life. Two large natural disasters in 2005 alone – the
Indian Ocean tsunami and the large 7.6 scale earthquake in Pakistan – killed nearly
a quarter of a million people. Large concentrations of hurricanes in the Gulf of
Mexico that year caused also extensive loss of life and hundreds of billions of dollars
worth of damage. In all, these both preparedness and response management were
less than effective, largely because of lack of planning, quality relief management,
and determined focused leadership. Similarly, few were and are able or willing to
truly project and assess the prevailing and potential risks and adequately prepare
for them. Most leaders use a comparatively short time horizon and assess risks over
too short a time period.
201
202 CHAPTER 7
Future leaders must be willing and able to use broader and longer vision in
assessing risks and responsive needs to counter potential impacts in a more effective
and fair manner. Leadership must be compassionate, gain and retain the respect and
confidence of the people, and challenge them to perform to their full potential.
In future, leaders must learn to guide towards tomorrow, without ignoring today as
well as time past. Ethics in leadership, largely lost in recent years, must be regained
and helping people everywhere to achieve their goals must become a leader’s
driving force. To lead into the future in this globalized village of a world requires
compassionate understanding of and concern for the needs of world’s humanity and
its environment. Although America was a leader in the development of regional as
well as global decision making forums, it has in more recent years started trends
toward unilateral decision making. This invariably leads to discord and lack of trust,
which ultimately causes loss of leadership.
MANAGING RISKS
Leaders face ever changing risks, yet must act decisively under conditions of
uncertainty. Risks can be defined as the products of the uncertainty of a consequence
or damage occurring as a result of some action, behavior, happening or operation.
Risks, as a result, may be the result of human decisions imposed internally or
externally by acts of God or physical failure. Risk, as a consequence, is a measure
of likelihood and importance and the outcome is evaluated according to each and
the results combined by taking the product of all likelihoods or probabilities.
Risks also include uncertainty of market, price, competition, costs, liability,
productivity, financing, exchange rates, technological change, political devel-
opment, taxation, regulation, and payment, in addition to physical, human error,
and acts of God. It is usually difficult to deal with uncertainty as it is conceptually
disturbing to consider or plan for an unknown uncertainty. Yet uncertainty and
resulting risks are facts of life and must be confronted so as to succeed in any
human activity or venture. It is often desirable to divide risk into
• Identifiable risks that can be resolved or eliminated
• Identifiable risks that need resolution and where an effective problem solution
may be available though as yet not identified
• Revealed risks not properly identified for which a resolution could be developed
• Revealed risks for which there are little changes of developing methods for risk
resolution
• Residual unknown risks that should be expected but cannot be planned for nor
can be identified
Resolution of risks may sometimes be possible but will ordinarily not exist. In
considering approaches to the management of risk we must recognize that the
preference for risky alternatives are affected by the
• Preference or aversion to consequences of risks
• Attitude towards risk taking
LEADING INTO THE FUTURE 203
These differ widely between public leaders and individuals. Risk preference or
aversion must be expressed as a multi-dimensional function that judges preferences
or aversion to risk in terms of both the relative utility of the outcome or consequences
and the attitudinal factors influencing the decision makers’ behavior.
In profiling risk, types and components of risk must be identified and types
defined as preventable and non-preventable. Similarly interdependence of risks must
be established where it exists. We should also divide risks into catastrophic (external
or internal) risks and non-catastrophic risks, all of which can be preventable, repet-
itive or occasional. On a global scale, risks can be divided as those imposed by
nature, nations or men. Most importantly, risk absorption ability and willingness
must be established and if possible qualified and quantified. In other words, we
must at all times know the magnitude and type of risk we can take and its potential
costs and implications, including subjective implications.
In today’s world, risks are more complex than ever before and include in addition
to risk of an act of God, operational and political risks, inflation, corruption,
legislative risks, and all kinds of legal risks including costs, competition, enforce-
ability, transferability, exchange rate change risks, and more. There are sometimes
methods whereby risks can be ameliorated. Risk management should aim at value
creation or cost reduction.
Risk management requires continuously updated identification of risks, their
causes, initiating events, interdependence, event sequences, and consequences.
Causal and consequential risk assessment benefits from a formal risk mode and
effects analysis. Here after identifying the occurrence of sequences of events that
generate risks that ultimately cause faults or damages starts with the identification
of top risk events and the factors contributing to these events and the analysis
of the potential causes leading to these events. Risks can be common cause or
independent.
Risk assessment is often broken down into risk determination that consists
of risk identification and risk estimation, and risk evaluation that in turn
consists of risk aversion or consequence analysis and risk acceptance or attitude
analysis.
In risk determination, it is important to identify new risks, changes in risks,
and risk parameters and then determine the expected occurrence and magnitude
of consequences of risks. In risk evaluation we determine degrees of possible risk
reduction and avoidance, establish risk aversion and acceptance references, and
evaluate the impacts of risks. It is important to assure also that risk of small impact
be included as these may have high probability though low cost per event. In other
words, it is suggested not to assume a threshold hypothesis, which is often done,
but which hides important consequences of risk.
Among the most important qualities of leadership at the corporate, strategic or
national level are the recognition and management of risks. Leaders must have
superior abilities in identifying risks and uncertainties, and the experience as well
as foresight to come up with effective actions designed to deal with or ameliorate
the effects of risks, be they opportunities or dangers.
204 CHAPTER 7
People are usually not rational in their approach to risk taking as discovered in the
ground breaking study by Daniel Kahneman and Amos Tversky, who investigated
the curious approaches humans take to decision making under risks. Few apparently
really try to evaluate probabilities in their decisions subject to risk, but instead use
experience, emotion, and generally bias or opinion to guide their decisions. Their
findings were further explained by more recent discoveries that decisions seem to
be affected by joint effects of the computing and reactive parts of the human brain,
with the latter usually winning out in the end, even if the rational part initially
convinces otherwise.
National leaders often take risks on behalf of their constituents that they would
not take if only their own interests were involved. In fact, the way many leaders at
various levels in government or business assess and manage risks is quite different
from the way individuals deal with it. While individuals usually consider conse-
quences as direct and try to realistically value the impact of the outcome and the
associated uncertainty in terms of their risk’s aversiveness as well as the utility
of the outcome, public leaders are more concerned with short term impacts of
outcomes on their political ambitions and plans. Yet, while this approach may have
been rational or even acceptable in a divided world, where such decisions only
affected one or a small group of people pr nations, it is not acceptable in our
globalized world where decisions by world leaders potentially affect the future of
the whole world and thereby mankind at large.
The management of risk by world leaders now requires global consultation and
consent, however difficult and time consuming. Unilateral actions not only have the
potential of seeding malcontent, but also often aggravate a problem and increase
the risk. This is true in strategic decisions such as going to war in Iraq without
wide support or effective outcome planning, which lead into a quagmire without
meaningful assistance by much of the world’s nations. The risks of this venture were
never fully identified and plans for extraditing America and its allies never fully
developed. Similar unknown risks exist in America’s uncontrolled indebtedness.
Recent U.S. economic growth was largely fostered by cheap foreign money, but
there is the risk that a point of waning confidence is reached when such money
will be recalled. This risk may be unpredictable but the outcomes could be effec-
tively projected in risk terms and remedial actions planned for such an eventuality.
However, leaders in the U.S. seem to ignore these potential developments.
America faces many other risks in areas such as energy supply, health care, crime
and law enforcement, basic education, political focus, and more. In all of these there
appears to be a lack of effective risk identification, assessment, and management.
To lead one must plan and define direction and identity risks. However, America
is devoting too little effort in managing identified and identifiable risks to come up
with a well considered, minimum risk direction that can truly serve it in developing
itself and in maintaining leadership in the world.
Risk management at the national level can gain effective benefits from the study
of the range of virtual realities developed to cover all possible happenings and
outcomes, and their ranges of probable occurrences than used in simulation as
LEADING INTO THE FUTURE 205
inputs into computer games to evaluate the range of potential outcomes and their
associated probabilities and consequences.
Cause and effect and fault tree analysis are related techniques of use in effective
risk management not just in operations and financial or project management but
also in the management of national and international risks. Large deviations of
outcomes are usually signs of inherent risk and should be signs of uncontrollable
danger. This is equally true in cases of narrow conflict as in global happenings.
If possible outcomes cannot be narrowed to a very limited range then the risks
may not be justified by the assumed potential rewards. This is particularly true in
decisions made by or for nations, which involve economic or military conflict.
National leadership often justifies actions by identifying threats or opportunities
and sometimes even both, and propose strategies or actions to deal with them.
However, in many cases, the risks and consequences of the actions remain obscure,
misunderstood, misinterpreted or even ignored. In fact, it appears that the more
global or far reaching the decisions, the less understood are their consequences.
Even worse is the fact that fewer are subjected to formal risk assessment and
analysis. As a result, major conflicts and intervention often result in quagmires, this
not only in terms of non-decisive outcomes but worse by a failure to remember or
understand the basic objectives or goals of the original decision to intervene.
We, and particularly our leaders, must learn to be more rational in our decision
making and assure not only a continued focus on the original rationale and goal,
but also make certain that risks are properly evaluated and their costs and benefits
if any understood and accepted. Similarly, any decision or action must be supported
by a completion or disengagement strategy that provides effective plans for discon-
tinuing the action with minimum cost and maximum benefit, if conditions or
outcomes require a revaluation of the action or disengagement from the activities.
Leaders must not only lead into battle but also into peace. In fact, leadership
into peace is the more important objective and requires much more planning and
commitment of resources and willpower. However, America with all its superior
technology and resources has become a reckless adventurer in the global arena,
advancing into major confrontations without plans for disengagements or resolutions
based on possible alternative outcomes or developments. This not only drained
America’s resources and public support and resolve, but also reduced much of the
global confidence in America as a world leader. Leaders must have plans that go
beyond winning or success, and must be able to show commitment to accepted
principles.
They must be able to mobilize people worldwide by their example. In the end, the
future of global leadership by America in this new 21st century will be shaped by
the way it defines itself and its role in the world. World leadership will depend less
and less on military prowess and power but on moral, economic, and technological
leadership abilities.
It is interesting to note that China and to a lesser degree India, the two emerging
global economies and powers, put little emphasis on military strength and show little
if any ambitions to control or even influence neighboring peoples or nations. They
206 CHAPTER 7
India’s emergence from colonialism has been accompanied by many pitfalls and
successes. It was able to retain most of the trimmings and workings of a Western-
style democracy, with a fair and transparent judicial system, while at the same
time continuing to suffer and even tolerate many of the social injustices such as
the traditional caste system as well as large-scale illiteracy and discrimination that
committed a majority of the urban as well as the rural population to abject poverty
and often even starvation. At the same time, class and income differences continued
to expand with dire effects on the declining middle class. These trends resulted in
sluggish development of India with a rapidly growing population and an economy
that grew at a very small rate for much of the time since independence. Much of this
was due to an inbred, often archaic political system in which leaders by and large
gave preference to personal and political interests ignoring national and particularly
social needs.
Although the caste system was outlawed decades ago, it is still practiced today
and opportunities for low caste people in education and work are still severely
restricted. The development and economic growth of India has been seriously hurt
by this social stigma, discord, and lack of access to social services by a large
percentage of the population. Narrow minded political decisions continued until
quite recently leading to encouragement of the development of two economies, one
for the educated, usually higher caste and often well-to-do and the other for the
rest. India has the world’s largest underclass.
The problem is that their status is not just a result of lack of education and poverty,
but birth. After decades of economic and political neglect by its own leaders, India
is now finally awakening to its own potentials. It graduates many more engineers,
scientists, programmers, doctors, and lawyers than the U.S. and Europe combined.
Furthermore their mathematical and science and other skills are usually superior
to those graduating from Western universities. Schools and universities in India
are much more demanding and their graduates expect to have to perform at much
LEADING INTO THE FUTURE 207
higher standards. They are used to and accept longer working hours and more
challenging tasks.
During the last ten years, India emerged as a new global economic power.
While initially India’s economic growth was fueled only by outsourced information,
computing, and other services, India is now rapidly improving and increasing its
manufacturing capability and the effectiveness of its logistic sectors. In parallel
India has improved and increased its basic material output in areas such as mining as
well as oil and gas production, refining as well as in material processing. It doubled
its refinery capacity between 2003 and 2005 and greatly increased the output and
range of products generated by Indian petrochemical and fertilizer plants.
Exports of refined petroleum products for example have grown rapidly in recent
years, while imports of clean products have fallen by more than 70% since 2000,
making India now a new petroleum product exporter. India is expected to continue
to increase its global refined product exports and increasingly become an important
player in world oil product trade. Domestic consumption of raw materials and
energy are also growing rapidly in line with the industrialization of the country.
Most of these developments were financed domestically, but recent successes
have attracted an avalanche of foreign direct investments. While in the mid 1990s
when India started to wake up to the challenges of globalization, there was a popular
perception that international call centers and other basic outsourced services are the
answer to poverty and deprivation in India, recent history shows that much broader
changes were required. The endemic limits on advancement, corruption in business
and government, the distinct class system with its firmly imbedded social barriers,
all needed to be dismantled so as to allow India to truly achieve its potentials.
During the period 2005–2010, as many as 3 million American and probably an
equal number of European and Japanese jobs will be outsourced to India. But it is
not that numbers still small compared to those outsourced to China which matter
but the type of job. New jobs will increasingly be technological. While outsourcing
to China involves mainly manufacturing, in India it more and more involves
programming, design, engineering, scientific research, and other intellectual
developments.
American economic partnership with India involves growing technological
cooperation that is facilitated by the relaxation of U.S. technology controls, collabo-
ration in space research, and sale of commercial nuclear reactors. India has become
one of the worlds most successful IT and software developers with revenues of
over $100 billion in this sector in 2004 alone or nearly 15% of its Gross National
Product.
Outsourcing driven by globalization has finally offered India an opportunity to
emerge from its endemic cycle of social stagnation and rampant poverty, much of
this driven by domestic and foreign direct investment that has grown at many times
the rate of economic growth and foreign trade.
Yet while outsourcing and the resulting rapid expansion of the export service
industry, located mainly in large yet comparatively isolated locations such as
Hyderabad and even more Bangalore has contributed greatly to India’s gross
208 CHAPTER 7
national product and balance of payments, it affected locally mainly the educated
lower middle class, and had little impact on social development in general. The
more recent investments in and growth of manufacturing can be expected to effect
India’s population to a much greater extent, not only by offering more jobs and jobs
distributed over much larger geographical areas, but also by providing new oppor-
tunities to the less or uneducated and low income people among the population.
Large-scale manufacturing also provides more stable and integrative economic
opportunities by not just generating narrowly defined job opportunities but by
establishing large supply networks to feed the new manufacturing industries with
materials, parts, as well as services. Each new manufacturing job can usually be
expected to generate a multiple of new supplier jobs from new to expanded supplier
networks. As a result, both the social and economic development impact of these
new initiatives can be expected to be much more beneficial to India’s development
into a world class economic power.
Recent reapproachment between India and Pakistan and the potential for the
resolution of the long festering Kashmir dispute also bodes well for the emergence of
India into a world leader in economic, cultural, political, and strategic terms. The
main problem to overcome though is and will remain the huge social and economic
gaps, the lack of a dominant middle class, absence of effective social safety nets,
and large-scale illiteracy. These may take much longer to overcome than the time
required to build up effective economic sectors.
India though continues to suffer under a complex of persecution by much
of the Western world and particularly the U.S., this notwithstanding a serious
reproachment of the two countries in recent years, resulting in a closer and warmer
relationship. America’s support of Pakistan though largely driven by the needs
for support in its anti-terrorism operations in Afghanistan is often perceived as an
anti-India bias and lack of support of its Kashmir claims, yet at the same time
India continues its advance towards effective globalization of its economy, indus-
trial modernization, and revitalization of its agriculture, education, and health care
services.
The major drag on development though continues to be state or public ownership
and control of much of the basic infrastructure, particularly land transportation and
communications. These are usually ill maintained and badly operated. Although
many state enterprises have recently been privatized in India, government continues
to maintain crucial direct or indirect lockholds on major economic activities. It
also employs archaic, bureaucratic rules, and an often widely outdated legal and
enforcement system. The most important factor though hindering India’s emergence
into a modern economy as mentioned before is the continued prevalence of caste
discrimination which though outlawed many years ago is still widely practiced.
India has made tremendous progress in many areas, particularly in the quality
of education, in the development of a thriving and largely transparent financial
and banking system, in industrial development, and in the privatization of many
important sectors of its economy such as ports, aviation, shipping, road transport,
education and health care, as well as telecommunications; yet it faces huge
LEADING INTO THE FUTURE 209
challenges and their associated risks such as dealing with millions of newly
displaced or redundant workers, many of whom are difficult to retrain because of
illiteracy or other predicaments. But progress is being made and India has regained
the confidence of the international financial community which considers it now
a safe and challenging investment opportunity.
As the economy grows, India will be building a thriving middle class, something
that had been lacking. Only a large growing and influential middle class can
guarantee social progress, democratic processes, and ultimately elimination of the
chance of a reversal of a move towards a more egalitarian economically thriving
democracy.
Recent developments though pose inherent risks. The most important are probably
those that challenge tradition and traditional patterns of behavior and life. Much of
these are based on cultural backgrounds and religious beliefs that are difficult to
rationalize in socio-economic terms; yet at the same time India must correct large
demographic and economic discrepancies. Its life expectancy is 10 years lower than
China’s, and 35% of Indians (2003) live on less than a dollar a day. Its foreign
trade is less than 1% of the world’s total or only 25% that of China. Similarly, its
working age population is only 55% that of China. Its average per capita income is
similarly less than half that of China on a per capita purchasing power basis.
With an average age of 26 years and a population growth of 1.6% per year, India
is expected to overtake China’s population before 2035. This population explosion
can make or break India’s economic future. On one hand, it gives India a much
larger working age population, yet unless its young are educated and trained in
modern skills in greater numbers the population increase will only be a drag on
continued economic growth and development.
The solution must lie in a vast expansion of social services, particularly education;
not just primary, secondary, and university education, but education or re-education
and training of adults including skill training. Only thus can the large functionally
illiterate older working age segment of the population be integrated into the socio-
economic mainstream. There is the risk of both political as well as cultural or
religious objection and obstruction to such efforts. But they must be implemented
nevertheless if India is to maintain the momentum and grow into a truly thriving
modern economy.
India’s population grew to over 1.1 billion in 2005, and with rising exports its
economy is expected to grow by over 8.1% that year. But China continues to expand
its relative growth rates in GDP and per capita income. While their economies were
about equal in size 20 years ago, and based predominantly on agriculture, China’s
economy is now twice as large as India’s and the gap is growing. China’s average
per capita income is now also twice that of India. Foreign direct investment in
China is over 12 times as much as is attracted by India.
Some maintain that the reasons can be found in a democracy gone amok;
a democracy more concerned with process than results, more with rules than
solutions. Many in India believe that as long as all the paperwork is done, a project
is completed. Theory rules and practice is shunned. Economic policy in India was
210 CHAPTER 7
in the past largely a theoretical exercise with few suggestions of practical or even
implementable solutions.
Its most striking impediments to economic growth today are lack of adequate
transport infrastructure as noted by Chandler [Ref. 15] (124,000 miles of roads in
India versus 870,000 miles in China), lack of human capital development, growth
of the urban population (29% India versus 40% China when both were about equal
at 22% in 1982), slow rate of privatization, and continued large-scale public or state
enterprise developments, and the resulting slower growth in GDP per capita ($520
in India versus $1150 in China by 2005). Other problems are an old-fashioned,
overmanned bureaucracy that impedes decision making, delays, clearance of goods,
licenses, and other permits, expensive and often unreliable services such as electric
power and water supply (electricity costs twice as much as in China), and labor laws
that are highly inflexible and counterincentive, as they neither effectively protect
labor now develop job skills and opportunities.
While Indian manufacturing has grown and been modernized, it continues to
constitute a declining percentage of GDP (16% in India versus 43% in China in
2004), while China’s continues to grow. Yet with all these comparative disadvan-
tages, India has a great potential for economic leadership as a result of its great
superiority in educated manpower, a fair judicial and transparent financial system,
and a capable populace ready to explode onto economic opportunity. Similarly,
as noted, its effective transparent legal system conveys confidence to investors
and customers alike, which should give India an advantage in international trans-
actions of all sorts. Yet much of these advantages are squandered by an ineffi-
cient, cumbersome, and often corrupt bureaucracy. Its future as a world leader is
also hindered by a complex, inconsistent, and opaque political system, which few
outsiders really understand.
China, the world’s most populous country with over 1.3 billion people or over
20% of the world’s total, is advancing technically, economically, and socially at
break neck speed. It is also changing its political priorities and cultural emphasis,
increasingly adopting capitalist free markets as well as western styles and customs.
The Chinese government is considering a more open political, social, and economic
system, and in many areas is slowly loosening old constraints to move China
towards a more open global nation.
It is expanding its infrastructure rapidly and will soon surpass the U.S. in the
lengths of its highways and railway systems, its communications network, and
users as well as in other infrastructure sectors. It graduates more engineers than
America and Europe combined, and is expanding its electric power output at break
neck speed.
Since 1980 China has grown into an economic powerhouse, with determination,
political flexibility, and greater social awareness. Confucianism, although tampered
LEADING INTO THE FUTURE 211
by communism and more recently capitalism, is China’s main social driving force.
With its tradition on discipline, learning, hard work, and devotion to elders, it
provides the basic incentives for China’s development. With a population now
approaching 1.3 billion and an average economic growth rate of 9% since that time,
China has now become the world’s third largest economy. Its economic output is
expected to again triple between now (2005) and 2020, overtake that of Japan by
2015, and that of the U.S. by 2035 or before. Since 1980 China has moved 360
million people out of poverty, mainly by absorbing them into urban environments
and quadrupled the average income of its population. At the same time, it does
suffer under increased income discrepancies, with poverty still rampant in much
of the interior. China’s development strategy appears to be firmly anchored on
achieving its political objectives by economic – not military – means. It appears to
be succeeding in this.
Since 1990 China’s exports to the U.S. grew by 1600% versus U.S. exports to
China, which grew by a paltry 415% during the same period. As a result, China has
built up a huge positive trade balance with America, which it uses largely for buying
U.S. treasury bills. In this way, it allows America to keep borrowing or importing
and spending, while preventing a U.S. recession, which would affect American
imports from China. According to the London Financial Times (9/16/05), China
will become the world’s biggest exporter by 2010, surpassing U.S., Germany’s, and
Japan’s exports.
While all of this is happening, income disparities as noted continue to widen and
are now slightly greater than in the U.S. and much wider than in most European
countries. The major differences are incomes among the coastal urban and interior
rural populations. China’s economic success is the result of the hard work of its large
population, combined with a respect for knowledge, learning, and discipline. This in
parallel with an emphasis on the development of infrastructure, international trade,
and technological progress provides a formula for economic growth. Yet many of its
factories and institutions, particularly current or former state enterprises and banks,
still suffer under lack of effective governance and transparency of transactions.
China, as the 2nd largest energy consumer and also petroleum importer, is
becoming increasingly influential in the global energy markets. It has also become
a vital player in world and particularly Asian commodity markets. China maintains
a generally open market or trade and investment strategy which attracts an increas-
ingly large number of partners, such as Brazil, Australia, South/South East Asia,
and Africa. For all of them China has become indispensable and an effective counter
balance to overdue dependency on trade with the U.S.
All of this is happening under conditions of gradual and paced economic relax-
ation in China, with a slow opening of domestic markets, foreign ownership of
banks, slow release of the Yuan to dollar peg, and other gradual relaxations. China
is wedded to a cautious foreign policy, which emphasizes non-confrontational
relations, even on subjects such as Taiwan, South East Asia, Korea, and certain
areas of international trade where China’s interests are very important. China is
building its sphere of political, economic, and strategic influence by cautious, yet
212 CHAPTER 7
in 2005. Other developing countries, particularly in East Asia, such as Japan and
Korea, advanced much faster in relative terms.
China had many advantages in addition to its hardworking, intelligent, and cheap
labor force, such as a huge rate of investment, unprecedented in as large an economy
as China’s. At purchasing power parity (PPP), China’s per capita GDP is only
as high today as Korea’s was 20 years ago. A major problem faced by China
as mentioned is the large number of decrepit, inefficient state enterprises, which
continue a huge drain on the economy. These and others account for an abnormally
large number of bad loans, which in turn result in the less than optimal application
of some of the large investments in China by both foreign direct as well as domestic
investors.
Another problem is the large discrepancy in the rate of development in the
coastal or Eastern regions versus the interior where more than three-quarters of
the population live. Not only have the coastal regions and particularly its cities
grown in size and economic activity but much of the investments in infrastructure
were concentrated there. Development of the interior is now largely hampered by
the lack of effective access and poor services, which makes it difficult to advance
opportunities in that region. Yet China will have to advance living standards and
employment in the hinterland to assure a fairer balance of living standards.
One of China’s most important initiatives of recent years was to assure safe,
effective, and long-term access to major raw materials, such as petroleum, iron ore,
and so on. To assure such supplies, China has gone a long way in establishing
friendly relations and making economic, political, and strategic commitments to
potential or existing sources of supply. In all of these activities, China has recently
gone out of its way to assure partners and competitors alike of its peaceful
and reasonable approach. There is though increasing concern that Chinese cheap
manufacturing muscle undermines the opportunities of poor cheap labor countries,
to compete in the international market place for manufactured goods, particularly
textiles and other consumer products in which China now dominates world markets
as pointed out by Tellis [Ref. 19].
At the same time, China has become a major importer of basic commodities,
many of which are produced in poorer countries though their production is usually
not labor intensive. As a result, China’s increasing economic power imposes both
beneficial as well as negative impacts on poorer countries. It is a superb example
of how an open market approach and effective use of investment can really help
develop economic activity and employment, while a major and growing importer
of raw materials from poor countries it also helps developing country economies.
In general though, its competition with the same countries for labor-intensive
manufactured goods exports is negative. Here its low labor costs and well organized
manufacturing activities present an inordinately difficult competition, particularly
for smaller, less organized and disciplined poor countries.
China, with 20% of the world’s population, has a GDP of 14.3% of the world’s
total product (per capital GDP $4700 in PPP terms); yet it now consumes 33% of
the world’s steel, 50% of the world’s cement, 25% of the world’s copper, and 20%
214 CHAPTER 7
was cheap and there were only a few major river crossings or bridges available.
Therefore, north-south transport arteries were concentrated along the coast, half
way up river or in the inland regions. For example, there is only one Yangtze River
crossing for road and rail transport at Nanjing, about 200 miles up river. The next
one is about 140 miles further up river at Wuhan.
This lack of efficient land transport to the interior convinced China to explore
an alternative gateway. A divided highway was built from Chongqing, China’s
largest city and manufacturing center, to Kunming and from there to Mandalay in
Myanmar, formerly known as Burma. It appears that the goal is to build a bridge
over the Iriwadi River and from there to a Burmese port on the Bay of Bengal,
about 250 miles south of Chittagong in Bangladesh. This would provide China with
a back door and an easy access to its interior. It would also reduce the distance
from the interior to the ocean, and the distance from China’s interior to Western
Europe and the U.S. East Coast by 40% and 34%, respectively.
China’s major emphasis is now on the development of its interior and thereby
a closing of the income differentials with the coastal region. The development
of China’s interior is largely driven by a need to reduce large-scale migration of
rural labor, more than 100 million since 1995. Another 250–300 million would be
expected to migrate to the eastern coastal areas during 2005–2025, unless major
economic advances are achieved in the interior. The migration problem is particu-
larly severe as there are no effective social safety networks installed in either the
interior or newly affluent coastal areas.
China, at this time, has no welfare system or unemployment benefits, and its
pension schemes are meager at best. At the same time, its educational and health
care systems do a reasonable job in providing basic education and medical services.
As a result, life expectancy in China is comparable to that in many developed
countries, as pointed out by Pei [Ref. 20].
Income differentials, both rural and urban, continue to be great between the indus-
trialized coastal and interior regions. On average, rural and urban per capita income
in the non-industrialized areas is less than half that earned in the coastal developed
areas. The provinces of Guangdong, Shanghai, Jiangsu, and Beijing all have income
levels of 2–3 times the nation’s average. The Chinese economic policies emphasize
now a four-pronged approach; continued growth of exports, economic development
of the interior and other underdeveloped regions, technological advancement, and
social development. The country is well on the way of progressing in all of these
objectives.
LEADERSHIP CHALLENGES
The example of China’s and India’s recent developments and their rapid and focused
economic advances offer many lessons for America and other Western countries.
China, in particular, has acted with single-minded concentration on economic
growth and consequent social development as a by-product. It has focused on
this with a unique combination of economic freedoms and communist governance.
216 CHAPTER 7
It allowed other interests to be put on the back burner or be simply ignored. Its
contention that Taiwan is an integral and non-separable part of China, for example,
did not prevent it from encouraging massive Taiwanese investments, transfer of
know-how, and capitalist practices into the mainland. It provided adequate security
and assurance of property rights as well as profit and capital repatriation rights to
convince Taiwanese of the attractiveness of such ventures.
China’s approach was focused on economic growth in a most single-minded
manner. It also encouraged the development of its neighbors and made Japan, its
former foe, its major trading partner and principal source of advanced technology.
It now serves as a major outsource center for Japanese services and manufacturing
industries, and is cooperating with its various neighbors in many economic projects,
without threat or domination. As a result, China has established itself as an economic
leader in Asia, and is now extending its influence throughput the developing world
in Asia, Africa, and the Americas. China’s and Japan’s economies are now more
interdependent than ever before.
Their economic relationship surpasses that between America and Japan, which
used to be the most important in the world. While politically China and Japan
still consider each other with suspicion, and China continues to remind Japan
of its World War II atrocities, the economic bonds between the two countries
is growing and feeding upon itself. As their economies complement each other,
each is benefiting from a closer relationship. Japan provides technology, markets,
advanced manufactured goods, and production equipment, while China provides
cheap manufacturing and assembly for Japanese companies and consumer goods
for Japan. Unlike the U.S., Japan has been able to maintain a positive balance of
payments with China.
Both countries benefit greatly from their mutual economic dependency, and
rely on each other for their development. Their economic relationships are very
important already and are too big to allow historic and political discords to affect
their continued growth. China and Japan, as a consequence, enjoy a love-hate
relationship based on mutual dependence for development, yet have a historic
mistrust and dislike for each other.
This focus by China on Japan and its quest for a more global role, represent
a major new development. At the same time, economic ties between China and
Korea are also growing. The combined economic strengths of China, Japan, and
Korea or East Asia have become a formidable challenge to both America and
NAFTA or the European Union, not only because of its size and technological
prowess but also its vastly greater rate of economic growth, the size of its export
volumes, and the huge and growing domestic markets. In fact, East Asia is emerging
as a new economic colossus, dwarfing all others. It has twice the population of
Europe and three times that of North America, and its combined GDP is expected
to overtake that of both within 10–15 years.
In parallel, India, as noted, is finally emerging as an economic power. It has not
only developed large new service sectors, varying from outsourced telephone, reser-
vation, and other information services, to software development, hardware design,
LEADING INTO THE FUTURE 217
India, on the other hand, is still largely captive to its traditional trading
partners. As a member of the British Commonwealth, it continues to be influ-
enced by preferential rules of this loose affiliation of independent nations, all
former members of the British Empire. India’s foreign trade has developed much
more slowly and its economic as well as political relations have remained largely
confined to its traditional trading and strategic partners. As a result, India is
not expected to emerge as a global leader soon, and unlike China will not
be able to claim an important role in global economic and strategic develop-
ments for some time to come. China is very slowly responding to demands for
more open governance and political reform, while at the same time increasing
its military collaboration with Russia which is its largest supplier of military
hardware.
Globalization, which has shown unexpected resilience, will continue its march
and incorporate an ever larger range of activities. Driving forces of globalization
such as information technology and particularly the role of the Internet, lower or
zero barriers to trade, logistic efficiencies and others will tend to encourage greater
trade and thereby improvements in economic growth and development. China has
become the largest beneficiary of globalization and will continue to push for its
expansion to further enhance its global role.
While America and the other Western countries have tried to counter the growth
of trade by China, India, Brazil, and other developing countries by direct or indirect
barriers, these actions have usually back fired. China and the other new developing
economies are simply the big new players of the globalized world which are
encouraged and supported. This new world of more effective trade, more open
borders, and freer flow of investments, ideas, technology, and people offers many
new opportunities for greater equity and peoples, as well as higher standards of
living.
America and Europe cannot counter these new challenges to their economic
dominance by shutting themselves in. Instead they must become better at the game
of globalization they themselves invented and used for long to their advantage.
This means even greater efforts in assuring advances in science and technology,
new product and breakthrough systems, and other imaginative developments. But
to achieve this will require a change in the approach to education and social
development, which assures greater competence levels by a much larger percentage
of the population. These goals cannot be achieved unless a much larger number
of people in these Western countries attain high levels of education, skill, and
ambitions aimed at advancing the overall level of scientific and technological
achievements.
The West which built its prosperity and leadership on the base of the industrial
revolution and subsequent technical advances is starting to woefully fall behind
the newly developing countries in the number of scientists and engineers trained,
and the research and technology development generated. Unless this trend can be
reversed, traditional technical and consequent economic leadership by the West and
particularly America may soon be lost.
LEADING INTO THE FUTURE 219
became a major burden for the social system. These problems, recent unrests
by immigrant youth in France, and concerns that some immigrants may post
security problems have caused many Western European countries to reconsider
their immigration and naturalization policies.
The second half of the 20th century in particular was a period of large and
increasing population transfer by immigration, of people from Africa, Eastern
Europe, and South Asia to Western Europe, and from Central and South America
as well as Eastern Europe and Asia to the United States. Immigration policy
has become a major political and economic issue, particularly in the European
Union and North America. While the issue was mainly economic earlier, it is now
increasingly considered a demographic, cultural or ethnic, social, political and even
religious issue.
Earlier most immigrated to escape persecution or economic despair. They left
countries that offered no freedoms and little employment and immigrated to
countries that welcomed them and were able to use their skills. Their ambition
was to assimilate and become an integral part of their new home country. This
situation has changed radically, particularly in Western Europe with more and
more immigrants entering not to assimilate and become truly contributing residents,
but take advantage of social benefits without accepting any responsibility or
commitment in their new home.
The argument often raised that many countries in Europe need immigration to
maintain a demographic balance, assumes that immigrants will be integrated and
become full performing citizens who accept the responsibilities, culture, language,
and laws of their new home country and become fully performing and contributing
citizens. This unfortunately is usually not the case and many immigrants simply act
as recipients of social benefits established by hard work and denial of generations
of people in the host country.
Many host countries particularly in Europe were recently forced to scale down
social programs and benefits because they could no longer afford the drain by the
immigrant population that absorbed an ever larger portion of the social budgets.
Another issue is loyalty. Though many countries require an oath of loyalty as
part of the award of citizenship, this procedure is meaningless to many Muslims
for whom only an oath on the Koran is considered a real commitment. As a result,
prospective Muslim citizens should be required to swear loyalty to their new
homeland on the Koran. Immigrants should be given contingent or provisional
residence permits and later citizenship which can and should be revoked if within
a specified period of time the able bodied immigrant is unwilling or unable to
integrate into the host society by virtue of language, custom, service, and behavior.
Unless an immigrant is willing and makes an effort to adopt the culture and norms
of behavior of his/her host country of choice he or she should, in my opinion, not
qualify for citizenship. Citizenship should be a mark of acceptance of a country’s
values, norms, and culture and not just of its economic benefits. Immigration cannot
and should not serve as a means of wealth transfer where people who achieved
high standards of living by self-denial and discipline are expected to share or give
LEADING INTO THE FUTURE 221
up the resulting hard-earned benefits to people who do not accept denial such as
a limit on number of children by devoting limited social resources increasingly to
prolifically reproducing new immigrants.
America, a country of immigrants with nearly a quarter of its citizens foreign born,
now faces the situation where the number of illegal immigrants vastly outnumbers
that of legal immigrants. While many of these are low skilled workers seeking
employment in agriculture and other simple jobs, an increasing number enter largely
to take advantage of social programs and opportunities for illicit activities in finance,
goods smuggling, trading of people, and others.
The resulting costs are not just economic but also moral, ethical, and social.
Similarly, there are serious political ramifications as people blame their own
lack of opportunity, high taxation as well as increased lawlessness on the lack
of enforcement of American immigration laws. The prevailing large-scale and
unbridled immigration into North America and the European Union may make
an indelible mark on those societies in future by changing their political, social,
economic, and most importantly democratic character.
Something will have to be done even obviously consistent with the basic concepts
of individual rights and freedoms of the American Constitution. Immigrants may
in future be required to accept and adopt fundamental norms and customs as well
as show their respect for the underlying principles on which a society or nation is
based to qualify for permanent residence as well as subsequent citizenship. This
may sound cruel but will in the long run be recognized to be not only in the interest
of the host country but also the immigrants.
In global terms, large-scale immigration has generally contributed to the
economies of host countries and often affected their technical and economic growth.
At the same time, a large number of graduate students in American universities,
particularly in science and technology, are now foreigners (largely East and South
Asians) who unlike in earlier times expect to return and make a career in their
home countries and not stay in America. This constitutes efficient technology and
knowledge transfer and has been a major contributor to the phenomenal technical
advances of China, for example,
America, and for that matter Europe, must develop means of attracting more of
their own citizens to commit to higher education. They must produce more citizen
scientists, engineers, medical, and other highly skilled professionals if they are to be
able to maintain their living standards and economic leadership positions. However,
to achieve this may require a complete overhaul of the American educational system,
from primary school to higher education as well as reconsideration of salaries and
reward systems. Standards of achievement by American students, particularly in
mathematics and science, are on average well below those of not just other Western
countries but even many developing countries such as China and India.
Similarly, while a large percentage of American students go on to college,
the vast majority graduate in liberal arts and similar subjects with only a small
percentage choosing medicine, science, and engineering. Many of those also chose
to work in finance after graduation where remuneration is much higher. America
222 CHAPTER 7
graduates only 10% as many engineers as countries such as China and India, and
the quality of their professional education is in many cases as high as or higher
than that in American universities. Similarly, America lags woefully behind East
Asian and other countries in skill training and continuing education, within or
without companies. As a result, many American workers cannot acquire the skills
needed in increasingly more technically or knowledge demanding jobs such as in
IT, communications, manufacturing, health care, and more. They simply lack the
basic education, analytical and communication or expression skills. The trouble is
that this trend permeates whole generations of some ethnic groups in America and
has to a large extent become a cultural trend.
This in turn impacts worker quality under conditions of rapidly changing and
advancing design, production, and product technology. At the same time, America
spends more than double the amount per capita for education and training than any
other country. There is an urgent need for a reevaluation of the whole education
sector in America.
Although American productivity has led the world for many years, there is
increasing evidence that large segments of American workers fall woefully behind
in the value of their output. This is not only the result of an increasing gap
in educational and skill competence, as mentioned before, but more importantly
between training of low skilled Americans and workers in other parts of the world.
There are few developed countries and even developing countries where the
educational and skill gaps are as large as in the U.S. While America claims a high
literacy rate, for example, the fact of life is that large segments of the population are
really only seemingly literate, and are in reality functionally illiterate. This is not
only true among minority Americans who often lacked the opportunity or incentive
to get educated, but also among Americans of European descent. As a result, even
simple manufacturing and service jobs are being emigrated abroad where better
skilled and educated labor is often available at a fraction of the cost.
While outsourcing of such jobs used to be driven primarily by lower labor costs,
it now quite often is the result of skill differentials. In many lower labor cost
countries such as Korea, China, and even India, large numbers of workers are not
only well trained but are often better skilled than their American counterparts. This
is largely due to the fact that these workers are usually younger and receive modern
training in the professions, while an increasing number of American workers find
themselves with outdated skills, work rules, and knowledge required to perform
a superior job.
America is facing a serious skill gap but our educational system does not respond
to their demand effectively. We need millions of health care, manufacturing, IT,
and engineering workers now and cannot find enough adequately trained people
to fill these huge numbers of vacancies, this as much as lower costs abroad are
feeding the outsourcing boom of American industry.
There is an urgent need for more skill and other training throughout a worker’s
career, which assures up-to-date knowledge of continuously updated technology
used. However, most continuing education in America is organized haphazardly
LEADING INTO THE FUTURE 223
and in many cases American workers are not required nor encouraged to update or
upgrade their skills and knowledge periodically, something which is often the rule
in foreign countries.
American workers have traditionally benefited from better, more modern facilities
and equipment, which together with better management and organization permitted
maintenance of high labor productivity. But this may not be true much longer as
major emerging economies such as Taiwan, Malaysia, Thailand, Korea, Philippines,
India, China, and others modernize their manufacturing and service facilities and
equipment. This together with usually better educated trained workers whose skill
and knowledge is periodically being updated is rapidly eliminating or even reversing
the productivity gap. All of these developments seriously affect America’s position
as the world leader and introduce challenges to its preeminent position. Many
American industries are simply no longer globally competitive.
Another issue of concern and a potential dilemma in maintaining American
world leadership are America’s addictions. Americans are the world’s supreme
consumers. They acquire and discard. They own, not mainly to use but to have.
This applies to consumables as well as things others may consider longer term use
items. Americans purchase clothing usually for the short run and on an impulse
and not to cherish and keep. This also applies to so-called long-term goods, such as
household items, appliances, and electronics. Even automobiles are scrapped much
sooner than in most other countries. Consumerism in America plays out in many
other ways. It is as prevalent in services as it is in goods. Americans eat on the go
and often use entertainment not as events but as a way to pass time. Few will dress
especially to go to a festive dinner, concert or theatre performance. Entertainment
is enjoyable time consumption, nothing more.
This goods and service consumerism has become the backbone of the American
economy. Before World War II, production in manufacturing and agriculture
sustained America and made it the world’s economic powerhouse. During the
second half of the 20th century its role changed decisively into a trading, service,
and consumer economy. Consumption by Americans has become addictive in
many ways. Food, considered precious in many parts of the world, is largely
wasted in America, not just because it is abundant and cheap but because it is not
considered culturally and ethically valuable. Americans eat largely for sustenance,
not enjoyment. They eat often on the go and few make meals social occasions
within the family or with friends, except during holidays. Only in business are
meals considered important events.
Living opposite a primary school, I was always astounded at the huge amounts of
food thrown out every day. It seemed as if more food was thrown out than actually
consumed. Similarly, weekly garbage discarded at curb sides was always full of
near new or hardly used or at least usable items of clothing, furniture or else.
Consumption is really an American national addiction which few resist. At first,
I assumed that it applied only to the well-to-do and the impatient young, but I learned
better. It is a part of a national character, approaching an addiction. Consumerism
of goods and services has its own reasons. Not to meet real needs but to simply
224 CHAPTER 7
be an American, a person who does not have to save and who lives in the land of
plenty. A land that provides all, more and better than any other, and where waste
does not matter.
Consumerism is the main contributor to America’s horrendous trade deficit,
particularly with China, not wage differential as many claim. Japan’s wage costs
are comparable to those in the U.S., yet Japan has a positive balance of trade with
China because its citizens are frugal and not addicted to consumer waste.
American’s generate many times the solid and liquid waste of people in other
countries, even those living in equally affluent societies. When it comes to air and
water pollution, we are not only the champions of the world but contribute many
times the world average. Americans are addicted to waste and pollute and somehow
assume it to be our right, not just because we can afford it, but because we live
in the greatest and most powerful economy. Waste itself has in a way become
addictive and children do not learn not to waste, unlike children in many other
countries who are taught to clean their plates and think of the starving children in
poor countries.
But addiction to consumption and resulting waste and pollution is only one of
the battles America has to fight. America is by far the largest consumer of addictive
drugs and has been unsuccessful in stemming their inflow, local production, and
ultimately use. The war on drugs has been fought mainly abroad, with America
trying to get drug producing or transiting countries to stem the flow. In other words,
America is trying to reduce or eliminate their supply. Yet it does little to lower
demand. In fact, penalties for drug use, possession, and even trading in America
are ineffective. Drug users usually get nothing more than a slap on the wrist, and
possessors or even traders receive sentences that are lower than those in practically
any other country in the world.
The results are continued skyrocketing prices for many drugs and their ready
availability to anyone in America able and willing to pay. Addicts who cannot pay
resort to crime to feed their addiction. America has lost its so-called war on drugs
by its unwillingness to address the demand side. This war cannot be won by trying
to force other governments to crack down on drug production or transit, militarily
or otherwise. As long as there is demand and huge profit potentials, supply will
materialize and reach the market.
Curtailment of drug demand in America may not require gargantuan measures
such as the death penalty for drug possession, a practice adopted by some South East
Asian countries with success, but much more severe civil and criminal penalties
than available now must be imposed on drug users and particularly traders and their
intermediaries. Only by forcefully cracking down on demand will drug use and the
associated crimes be reduced in America.
In general, Americans have an inflated sense of entitlement. They want to be able
to consume unreasonable amounts of everything and particularly energy (6 times
the world per capita average), while objecting to oil, gas, nuclear, and even solar
and wind energy production in their own neighborhood. They did not permit a
single refinery, never mind nuclear power plant to be built in the U.S. for about 30
LEADING INTO THE FUTURE 225
years now, and complain bitterly about the lack of gasoline supply and the cost of
fuel and electric power.
Many Americans want a beachfront home but few are willing to pay for proper
protection against the elements. Most family homes are built of sticks and plywood
because it is cheap, looks nice, and can readily be changed. Yet these houses are
fire hazards, lack security, and are blown apart by even mild storms. When that
happens, Americans expect the government to step in and help in the reconstruction.
We want ready access to shopping, entertainment, schools, hospitals, commu-
nication, and administrative centers, but object to roads, railway tracks, electric
power, telephone lines, and other necessary infrastructure near our homes. We build
on marshes, wetlands, earthquake faults, eroding beaches, and even in ravines,
expecting government to protect us and bail us out if things go wrong. Americans
expect to get what they want, where they want it, and how they want it, expecting
others to help or bail them out from adverse consequences. Although there are
zoning and other laws, few really prevent potentially hazardous waterfront and other
risky developments, such as home building on clear cut mountain slopes. Americans
want a minimum of government restriction and a maximum of government help to
feed their consumerism habits. Yet they also want a clean, healthy environment,
low costs, and ready access to everything.
Americans generally expect legal recourse to be available to them whenever they
feel damaged, inconvenienced or otherwise penalized. The legal system in America
consumes many times the percentage of the national economy than in any other
country of the world, though one could not really claim that the country benefits
from greater law-abidedness, safety, security or responsiveness to individual needs.
Litigiousness by Americans encouraged by a mercenary trial lawyer industry faces
few bounds and is largely responsible for the high cost of health care and other
services. The American legal and judiciary establishment consumes 15% of GNP
itself and is probably responsible for 20–30% of the 15% of GNP that health care
consumes in America.
Many of these addictions contribute little if anything to living standards and even
more importantly to the quality of life. American’s consume a lot, but enjoyment is
often fleeting. Much of the consumerism is more a cultural habit than a conscious
or intelligent choice for the attainment of greater satisfaction. Much of it is fueled
more by a desire to confirm than real need or pleasure. The social and educational
system is partly responsible for not encouraging and appreciating more individu-
alism. While group activities are laudable, can be rewarding, and can help build
character, social and other skills, group pressures towards consumption uniformity
are counterincentive.
Consumption, in other words, has truly become an addiction for many Americans,
which provided huge incentives for economic growth, while at the same time
undermining the fabric of American society. Consumption has become a status
symbol and an ambition, often without any underlying satisfaction or need. As
a result, Americans do not save and somehow assume that the future will always
take care of itself.
226 CHAPTER 7
not just inform them of a decision or action. This has not been done or done only
in a perfunctory manner in recent years, thereby aggravating friend and foe alike.
LEADERSHIP QUALITY
visible and have the courage and integrity to accept blame and stand behind their
own views and decisions. This includes admission for mistakes, giving credit to
others, and effective response to changing conditions.
Comments and actions by leaders should be constructive and aimed at saying and
doing the right thing without fear of making mistakes. Most importantly, leaders
and leading nations must know how to manage change and do it decisively, even
at the risk of making mistakes. Mistakes can often be averted by focusing on
essentials and using common sense. Conflicts sometimes develop but should only
be continued when inevitable. There are few reasons for the use of force or even
war, and neither should be started unless truly unavoidable.
The most important qualities of leadership are patience, compassion, under-
standing, and learning. Leaders never cease to learn and such lessons or ideas bring
greater understanding and better decision making in the public interest. Leaders
must be uniters and not dividers, and independent of prevailing political factors.
Ultimately even politics rewards the leader who is more concerned with the general
good than narrow parochial interests.
American political leaders have lost many of the qualities of good leadership
and have in recent years become increasingly narrowly interested in short-term
political advantages in their decision making. This has caused loss of confidence
and alienation by many previously stout supporters and allies within America and
around the world.
Somehow America has become more insular in its decision making while the
world is becoming a more globalized village. The World Trade Center terror attack
was a wake up call for greater global unity towards combating world poverty,
assuring human rights, improving the environment, and combating terrorism as
well as other extremist action, but America confiscated the issue and made it its
own, and the basis of largely unilateral actions. This is not an example of world
leadership and has hurt America’s standing.
CHAPTER 8
The beginning of the 21st century has been violent. Terrorism became a global
scourge and war erupted in Iraq and Afghanistan, among others. Major storms,
tsunamis, and hurricanes devastated large areas of Asia, Africa, and America, with
huge loss of life and property. America maintained its leadership by projecting its
military power, particularly in the Middle East. At the same time, America’s current
account deficits continued to grow, while its domestic savings rates declined to near
zero. Its tax revenues as a percentage of GDP fell to an historic low since 1950,
while the projected Social Security imbalance to 2080 increased to $3.7 trillion or
over one third of 2005 GDP.
Medicare and health care costs in general continued to soar in line with increasing
education and law enforcement costs. Major developing countries such as China
became major creditors to America and are in fact financing its increasing debt. The
major developing countries in Asia are advancing economically though their social
developments generally lag, particularly in South Asia. Most disturbing though is the
continued decline in living standards and freedoms in Africa, while Eastern Europe
advanced most rapidly into thriving economies with many countries qualifying for
EU membership.
The world is marching forward, and over two and a half billion people in China,
India, and South East Asia, or one half of mankind, are advancing rapidly out of
poverty into modern life. These people are entering the main stream of the global
economy. They are adding over 2.8 billion new consumers, and at the same time
contribute mightily to global economic output. The economic march of Asia is
unstoppable now. In 2005 China restated its GDP by adding 20% and continued its
growth rate of nearly 10%. After over 10 years of nearly double digit growth rates,
its economy seems to achieve a soft landing onto a 7–9% growth rate. India is now
following in step and has a similarly accelerating economy with a rapidly growing
lower middle class. Continental Asia (without Japan and Indonesia), with nearly
50% of the world’s population, had a combined gross economic output of less than
5% of the world’s growth, just 10 years ago. It more than doubled that output by
2005 and is expected to again double it by 2015 to over 20%, and to over 30%
231
232 CHAPTER 8
or more by 2025. In line with this growth comes the consumption of raw materials
which has more than doubled in the same 10-year period.
While there are still major differences in living standards with significant numbers
of people left far behind in both China and India, they are making great efforts
to close these gaps. In China the gaps are largely geographic with interior regions
being left behind, while in India the gap is greater for reasons of geography as well
as social, educational, and traditional caste discrimination. India’s illiteracy is still
wide spread, while it is nearly extinct in China. Although India is a Western-style
democracy with a transparent legal system, it is China which attracted the bulk of
foreign investment. This largely because even as a communist country, China is
perceived as having greater potential, a better, more educated, skilled, and motivated
work force, less corruption, and better law enforcement. Most importantly, the
Chinese government is encouraging free market developments and provides signif-
icant incentives. China also supports scientific and technological development to
transition from old type industrial concepts, using a socialist approach with distinct
Chinese characteristics.
Although China built up its military in recent years, its strategic approach appears
to be largely defensive. China is consciously working on being part of the developing
global system without subverting it or imposing its own preferences or standards.
It is gradually moving towards increasing human freedoms and rights, which in
some sense are still governed by a central communist government. Conditions
though are changing. It has a policy of export led economic growth and seems
to follow a mercantilist approach, this while supporting the emergence of Chinese
nationalism as a positive so as to consolidate unity of the country through people
power.
China’s major concerns are assurance of material resource and particularly energy
supply to support continued economic growth. It has acquired major interests in
oil, gas, and mineral resources in Africa, South America, Asia, and Australia. At
the same time, China controlled its population growth quite well at about 1.1–1.3%
which means that its real per capita income has on average been growing at a rate
of 6–8% per annum since 1995. It invested largely in the development of natural
resources in new areas such as Sudan, West Africa, Central Asia, Brazil, and others,
where major Western developers were not very active, thereby preventing direct
competition.
India, on the other hand, continues to be handicapped by a comparatively large
population growth which negates much of the recent economic growth of the nation
in per capita income terms. As a result, improvements in average standard of living
in India have been marginal notwithstanding the large recent increases in economic
growth. India, as mentioned before, is expected to actually overtake China in terms
of population within 20 years or sooner, yet will continue to increasingly lag behind
China in GDP and even more in per capita GDP terms. At the same time, India is
also emerging as a global player in world trade and developments of energy and
minerals, a trend expected to accelerate with the renewed industrialization of the
country.
TOWARDS A BETTER, FAIRER GLOBALIZED WORLD 233
The economic growth of China and India, following the phenomenal industrial
developments of Japan, South Korea, and more recently South East Asia, will
make Asia the economic center of the 21st century, with average income levels in
Asia growing at several times those of the rest of the world. In fact, China will
become the dominant world economy, overtaking the U.S. within 25–35 years or
sooner.
Asia’s emergence as the new economic and probably technological center of
the world will have major global ramifications for a variety of reasons. Asian
history, social customs, and culture are distinctly different from those of Europe.
Its histories are older and cultures much more deeply engrained. It experienced
a very different development. Asia is the birthplace of several major and many
minor religions or faiths; yet the role of religion in the everyday life of people in
Asia is quite different from that imposed by Judeo-Christian customs. Most of the
religions of South and East Asia for example assume much more personal versus
communal relationships and commitments. Also religion, faith, individual behavior,
philosophy, and personal responsibilities are more closely intertwined. In East Asia
in particular Confucianism continues to affect human behavior, interpersonal and
family relations, ethics, as well as respect for the environment. In other words, it is
a more proactive faith and moral guide that influences human behavior, unlike the
reactive atonement in Judaism and Christianity.
The economic emergence and growth of China and India plus that of their
Asian neighbors will profoundly affect future global developments, not just in
economic and trading terms but also in the way political, social, trade, intellectual
and economic relations are maintained. China and other East Asian nations make
their major priority the improvement of living standards. They all have compara-
tively small defense budgets. In fact the U.S. defense budget is bigger than that of
all of East Asia, India, and non-U.S. NATO nations combined. China has tried to
resolve all of its border and other conflicts peacefully and diplomatically. It has
in recent years used political and economic coercion in place of military action
quite successfully, and resolved foreign conflicts peacefully by using its enormous
economic clout and large market potential to expand its influence.
It also keeps political issues and economic dealings strictly apart. This is evident
from its close economic relations with Japan and even Taiwan, while maintaining an
adversary political relationship with both. Politically Japan is still considered a war
criminal that ravaged China during the second World War, yet Japan offers attractive
technology, transfers, and investments to China which are strongly supported by
the Chinese government. Similarly, Taiwan, as noted before, is considered a break
away province, yet investments from Taiwan and trade between China and Taiwan
are vigorously encouraged. This is because the Chinese government is uniquely
focused on economic growth, modernization, and social development.
In recent years economic development has moved inland and now some of
the largest industrial, infrastructure, and service developments are located in the
interior, particularly along the upper reaches of the Yangtze River, the most densely
populated area of China.
234 CHAPTER 8
Central planning in China is largely driven by capitalist ideas and market forces.
The country is open to foreign investors and the government tries to accommodate
foreign developers who increasingly are not primarily interested in investing in
outsourcing activities for export from China, but in establishing facilities or services
to meet an increasingly capable and demanding Chinese market, of a very rapidly
growing middle class and business community. China has been a fast learner. In
the 1980–90 transition period to an open market oriented economy, projects were
usually managed centrally by people with little local knowledge, requirements or
project management skills. This has changed radically. For example, by the mid
1990s the modernization of Shanghai under the then Major Chu Rhonji, who later
became Prime Minister of China, became an example of efficient and effective
urban modernization by world standards. In a matter of 5 years a new commercial
city was built opposite the traditional bund on land previously occupied by coal
depots, swamps, and pig farms. A new system of ring and arterial roadways as
well as new mass transit systems was constructed, and a brand new airport built
on the southern shore of the Huangpu River. This was later connected to the new
financial city center by the world’s first levitated high-speed rail system. In parallel
new bridges and tunnels were constructed to connect the old and new city centers,
the port was relocated down river to deeper water, and new multi-lane highways
built to connect the city to the north, south and west.
The speed and effectiveness of design and construction of all of these projects
was amazing. Such projects had never been accomplished anywhere in such a
short time. Similarly, the architecture was exemplary and the engineering highly
advanced. Just north of Shanghai, a huge free industrial township (one of many
others) was established in Suzhou. It attracted many of the world’s premier industrial
firms who invested billions in major manufacturing facilities. The local govern-
ments cooperated in establishing training, health care, and housing facilities to
accommodate the needs of tens of thousands of workers required. Again, all of this
was done in a few years. The point is that China is not only committed to rapid
development, industrialization, and modernization, but has the will and capability
to accomplish it.
Another example is obviously the often criticized “Three Gorges Dam”, which
as noted before will revolutionize the development of the Yangtze River interior.
It is probably the largest project ever undertaken in the world, yet it has advanced
on schedule and budget and is expected to be completed by 2010 when the last
phase of this ($68 billion) project is finished. The first two phases both came in
on time and budget, a rarity for such large civil engineering projects. Not only will
this project generate large amounts of renewable power, control floods, improve
irrigation, and permit large vessels to travel year round all the way up to Chouquing
on the upper Yangtze River, but it will also permit diversion of badly needed water
to the arid north of China.
In parallel, China is now upgrading the interior physical and service infrastructure
with new roads, communications, power, education, and health care systems in
areas which lagged behind during the last 20 years. China has been an exemplary
TOWARDS A BETTER, FAIRER GLOBALIZED WORLD 235
student of modern capitalism and has adopted most of its positive aspects while
retaining a Chinese version of communist central control over economic and social
development. This approach has served the country well and allowed its economy
to grow without the economic upheavals and distortions experienced by Russia or
the former Soviet Union.
It has effectively used people power as its major resource. It had few lapses in
its economic advance and is now ready to assume a greater role in both the global
economy and world affairs. As a new world leader, China can be expected to use a
different approach to assume a different role from that of previous leaders such as the
European nations, America, and the Soviet Union. It has used its economic power,
huge domestic market, and large material import demands as major negotiating
ploys. In its search for reliable energy supplies to meet a 7% increase in energy
consumption per year, China is engaged in Iran, Sudan, Central Asia, as well as
South America and Asian Russia while building up its domestic renewable energy
conversion capacity in nuclear and hydroelectric power plant developments.
China, with a military budget of $20b (2005) versus America’s $362b, is not
competing with the U.S. militarily but economically. Its strategy is to gain economic
influence and use it to build alliances. It also challenges the U.S. and the West in
intellectual or technical prowess and is investing heavily in education and research.
China is using diplomacy and economic or trade incentives to expand both its
power and influence, recognizing that soft power is much more effective to achieve
its goal of enhancing its world position. This not only not to offend America and
Europe but also put to rest concerns by its Asian neighbors such as India, Japan,
Russia, and the South East Asian countries. It has succeeded very well in convincing
the world and particularly its neighbors that it is not using its might to advance
China’s interests or oppress other people. It does not try to coerce others to adopt
its system of government and tries hard to be a good world citizen who shows
respect for others.
China is trying to show leadership by example and has succeeded in devel-
oping near universal appreciation of its approach. As a result, nations of different
political orientation and diverse economic conditions all maintain cordial relations.
China uses this situation to establish long-term economic and supply relation-
ships, often in competition with America and other Western nations. It is also
attempting to leapfrog in the sciences by overcoming decades of neglect of funda-
mental research by now mobilizing well-trained scientists to marshal resources for
scientific breakthroughs.
China’s approach is subtly undermining Western influence in many parts of
the world. It is being recognized as a potential alternative economic as well as
strategic leader by many and is using this new position well. In a way the West
and America are increasingly handicapped by their wide open and transparent
democratic systems. It restricts their freedom of action and puts them at a distinct
disadvantage in their decision making and response capability. Their governments
change frequently and are beholding to an unpredictable electorate. They often
cannot act fast enough in response to an emergency or an opportunity, and they
236 CHAPTER 8
are always accountable to a judiciary and their people. They are often beholding
to outdated principles and are also subject to many voluntary and prescribed
constraints.
They similarly are not free to take unduly large risks, even when supported by
their people. They must seek the consent of a multitude of institutions designed
to assure checks and balances before engaging in such actions. This is a major
disadvantage as it may take too long for an action to be effective. Countries such
as China do not suffer such disadvantages. China has taken full advantage of its
unique situation and has as a result made major inroads into Western economic and
political interests worldwide.
After years of shaky developments with uncertain rules for public and private
financial institutions, the Chinese financial system appears to finally become more
mature and in many respects improved from its traditional inept and often corrupt
ways. In recent years Chinese financial assets have been growing at 14.5% or twice
as fast as the world average and 50% faster than the Chinese economy. In China,
bank financing dominates, to an uncommon degree with equity markets and private
financing assuming a subordinate role.
China’s economic growth has increased domestic demands for life comfort goods
such as appliances, cars, and more, as its per capita GDP has grown from $1700
in 1990 to $4800 in 2005. It is expected to reach $10,000 in PPP terms by 2015
nearly double that expected in India. Building a socially stable society appears
to be a priority for the Chinese government. The growth of the Indian economy
is more distorted than that of China in terms of social equity. China emphasizes
investment in growth, ignoring the need for parallel investment in social and health
services. Such an unbalanced economic and social growth pattern may undermine
long-term political and social stability. For example, the mass failures of state-
owned enterprises that resulted in unpaid wages and pensions have caused growing
social unrest.
India produces several times the number of professionals than China, this particu-
larly in areas such as finance, medicine, logistics, law, and education. In other words,
while producing about the same number of engineers and skilled manufacturing
workers, it lags far behind India in the number of service industry professionals
trained and available. As a result, India has been able to rapidly grow its service
sector that takes both less time as well as capital to develop. It is difficult to predict
how emphasis on these different economic sectors will work out in the long run.
However, in parallel, India continues to suffer under gross social inequities. Both
countries have placed major emphasis on economic growth which while successful
has resulted in large segments of their respective population to be left behind.
Recent turbulence and social unrest in other countries, particularly in Africa where
continued poverty, starvation, and mass murders often fostered by global terrorism
and large-scale unrest by Moslems throughout the world, raises the question of what
has gone wrong. The world overall is more prosperous and technically advanced
than ever before and we should be able to solve its problems effectively. Unlike
the dire predictions of the Club of Rome, there is really no global shortage of food,
TOWARDS A BETTER, FAIRER GLOBALIZED WORLD 237
water or energy or for that matter anything else. Some resources may be in the
wrong place or be too expensive, but they are available.
The problem is really one of access, distribution, and willingness to share. Even
Africa, with the largest percentage of arid areas among all the continents, actually
has adequate water resources and in fact more fresh water per capita or per hectare of
land than most other continents. The problem is lack of effective water management,
allocation, distribution, and delivery.
The same applies to food, fuel/energy, and in services such as education and
health care. What is most urgently needed is an action plan on how to more
effectively and efficiently manage and deliver resources and services to those in
need. We require effective leadership which recognizes the world’s true needs and is
able and willing to manage the development and delivery of resources and services
to satisfy those needs.
Natural disasters such as the Christmas Day tsunami in 2004, the Katrina and other
major hurricanes in the U.S. Gulf Coast in 2005, the large earthquake that hit
Pakistan in 2005, and others killed hundreds of thousands of people and caused tens
of billions worth of damage recently. These unprecedented catastrophes emphasized
our exposure to ever greater uncontrollable events that modern science could neither
effectively predict nor prevent. In all of these there were few if any warnings and
disaster preparation was either inadequate or absent.
Experts and laymen disagreed on the causes for these disasters, but it is evident
that their frequency as well as magnitudes was larger than predicted. There are many
who blame pollution and the greenhouse effect and the resulting change in the global
weather system for these developments, while others maintain that these are simply
cyclical occurrences. Independent of the cause of these natural upheavals, there was
a definite lack of emergency preparedness and response. The delivery of aid in the
aftermath of the tsunami, which affected 5–6 nations bordering the Indian Ocean,
was comparatively effective and timely, particularly considering the remoteness of
most of the affected areas and the magnitude of the disaster. At the same time,
the emergency response to the hurricanes that hit the U.S. Gulf Coast and the
earthquakes that devastated Northern Pakistan in the fall of 2005 was not only
inadequate but also disorganized and mismanaged notwithstanding the availability
of vast resources and commitments. There are no reasonable explanations for these
failures and blame must be replaced by national and/or international global disaster
response plans designed to assure not only availability but also well coordinated
aid delivery.
We similarly need more effective warning, evacuation, and protection systems
to assure proper evacuation of exposed populations in disaster zones. There is
an urgent need to design and impose the use of wind and water surge proof
housing and structures. All of the above mentioned catastrophes showed clearly that
properly designed and built concrete structures will usually remain standing, while
238 CHAPTER 8
wooden stick and plywood or other flimsy structures would collapse or otherwise
be devastated. The world urgently needs global disaster prediction and warning
as well as response management and delivery systems that not only make real
time information and alerts universally available but also assure central worldwide
coordination of relief, aid, and reconstruction assistance.
We have the science and technology to predict most natural disasters as well as
effective communication and warning systems to deliver forecasts and warnings.
The costs of installing and operating such systems would be a fraction of the cost
of physical damage that could be prevented, independent of the savings of large
numbers of lives.
Similarly, relief management must be established as a single global organization
such as a World Emergency Response Agency with full powers to requisition,
assign, and deliver relief where and when required, using the most strategically
located competent resources. Relief is not as effective as it can be if it is assigned
on a parochial basis. Disaster relief must not allow competition for political benefit,
but should be done only with humanitarian and compassionate objectives in mind.
Therefore, as noted, an independent, qualified, well organized global disaster
prediction, warning, evacuation, and relief agencies with power and resources
to step in anywhere in the world are urgently required. Such an agency would
be responsible for running and/or coordinating all seismic and other monitoring,
warning, alert systems, as well as the planning, emergency resource pre-positioning,
and management of evacuation. It would similarly be responsible for coordi-
nating the damage assessment, fundraising, reconstruction planning and implemen-
tation and, most importantly, the care and rehabilitation of injured and displaced
people.
The main objective of this approach would be to assure the effective, timely, and
efficient response to major catastrophes. The idea is to marshal all resources under
one head and assure good management and coordination of emergency response
activities. The shameful failure in disaster response before, during, and after the
hurricanes that hit the U.S. Gulf Coast and the earthquake in Pakistan in the fall
of 2005 as well as the somewhat better response to the Indian Ocean tsunami in
2004 show that we must use a different approach. We cannot rely on disparate
uncoordinated local or central government departments plus large numbers of
private aid organizations to operate without effective coordination and management.
The amount of resources wasted in overhead, overlapping activities, inappropriate
uses of resources, and simple mismanagement are estimated to far outweigh those
productively employed.
Furthermore, these recent examples show that lack of effective response planning
management and coordination result in often devastating damage, social system
breakdown, interference, loss of life, and loss of trust or confidence by those who
need help most urgently, and are to receive assistance. Emergency response must
be centrally planned, managed, and coordinated if the largely unnecessary loss of
life, property, and economic activity experienced by these recent disasters are to be
prevented.
TOWARDS A BETTER, FAIRER GLOBALIZED WORLD 239
loyalties, faith loyalty is usually dominating and national interests often take a back
seat in people’s commitments. These issues must be resolved to achieve peace and
harmony not only in the Middle East but globally.
There is an urgent need for more interface teaching and interface governments
and the education of people in the real meaning of monotheism and the unity of
religion. The collision between Islam and Judeo-Christianity fostered largely by
extremists among Moslem clerics must be fought and defeated at the butt to prevent
continued escalation and growing animosity. The success of reproachment among
the Abramaic faiths and their adherents will also have a major impact on the future
of world leadership. East Asia has been largely immune from these confrontations,
an additional factor advancing their potential leadership role not only in economic
but also social, spiritual, and moral terms. As noted, a major reason for this is
the fact that faith is much more personal than communal as in Abrahamic faith
societies.
Eastern religions play a very different role in people’s lives and encourage greater
closeness to the earth, the celebration of nature, and the environment. They are
usually more frugal and concerned with long-term hereditary impacts. We can learn
a lot from interfaith studies as no one has a monopoly of the truth or a most
fundamental understanding or interpretation of god. Interface education would show
that the difference between all religions is really small and a matter of interpretation
and not substance. All believe in the same all powerful but merciful god and yearn
for peace and prosperity.
Religious leaders will have to recognize that faith is a universal human character-
istic even for people who have no formal religion and that all religions essentially
strive for the same time. Religions should be unifiers not dividers of mankind and
encourage people to work together and contribute to the overall good. This must be
taught as part of a new approach to universal education. In this vain, there is a most
urgent need to assure worldwide educational opportunities and standards, a world
where the rights to education and health care are a given and where educational
standards are moving towards a global norm as part of the universal rights of man.
Narrowly defined religions and nationalistic doctrines do not constitute education.
Education must equip people with life skills, the ability to judge right from wrong,
and knowledge that enhances life content.
We should really work towards organizing education to move us towards equality
of educational opportunities worldwide. This may be achieved by setting educa-
tional standards at least for primary education in terms of subjects and levels of
achievement and then establish the means and support that will allow it to be accom-
plished globally within a reasonable time, say 25 years. This step alone would do
more to eradicate poverty and move people towards greater equality and peace than
other development programs. It would probably also eliminate major differences in
mutual understanding, increase trust, and improve economic and social opportunity
worldwide.
While a supranational or global education authority would not be acceptable
and may be considered an infringement on sovereign rights, a World Education
TOWARDS A BETTER, FAIRER GLOBALIZED WORLD 241
Organization (WEO) or World Education Council (WEC) which would set standards
and direct or assign resources to move towards those standards where needed would
certainly be possible. In the health field the WHO has many of these responsibilities
though at this time little control over the assignment of resources, something that
is also urgently needed.
The United Nations and its affiliated agencies has limited responsibilities in health
care, education, security, and economic development. Some of these agencies have
been quite effective, while others suffered under infighting, lack of management,
political interference, and waste. We need a new or revised agenda for them, as
most are still directed by a charter and rules established for the post World War II
and post colonial eras.
We face very different problems now and the four overriding global issues –
security, economic development, education, and health care – must be addressed
quite differently, this particularly in an increasingly globalized world consisting
of a small number of growing economic groupings or unions and large nations
such as the USA and its immediate neighbors, the European Union, China, the
Association of South East Asian Nations, and India. These alone comprise about
two thirds of the world population and account for over 86% of its economic
output. If we add Japan, Pakistan, Brazil, Bangladesh, and Russia to this group,
it would now account for 79% of the world’s people and 94% of its gross
product.
It is increasingly evident that a better proportional representation is necessary in
dealing with major world problems, and that the old model of the United Nations,
the World Bank, and other such institutions must be brought up to date to deal
with the very different problems of the new globalized world. The world needs
have become global as the issues posed by the four dominating concerns know
no borders. Terrorism has eliminated any consideration of conflict boundaries.
Similarly, viruses and other health problems are easily transmitted across borders.
Globalization has erased most of the economic frontiers and with it the boundaries in
the use and application of skills.
Similarly, modern communications and the Internet have opened worldwide
learning opportunities, yet with all these developments, the world is still highly
segregated. It needs leadership in all the areas of need, leadership that can guide
and unite and not divide.
The world must recognize that the needs of man are material, spiritual, social, and
intellectual. We have made great strides in establishing the means of production and
delivery of physical materials, shelter and services to many people, yet seriously
lack in the delivery of educational, health care, and spiritual services. We similarly
failed in establishing means for effective social relationships and understanding
among man.
The universal rights of man go well beyond adequate shelter, nourishment, and
freedom of movement and expression. In fact, these rights can neither be achieved
nor guaranteed without access to meaningful education, health care, and economic
opportunity, all in a safe environment.
242 CHAPTER 8
Great strides are being made in advancing living standards, particularly in some
Asian countries but Africa and particularly sub-Saharan Africa is lagging far behind.
Lester Thurow noted in his book “Fortune Favors the Bold”, that “Africa was
substantially wealthier per capita than Asia in the mid 1960s”, soon after most of the
continent gained independence. Today Africa is poorer than it was then, with 66%
of the world’s very poor in Africa (versus 11% in the mid 1960s). During the same
period, Asia’s percentage of the world’s very poor decreased from 76% to 1.5%
in a stark reversal of fortune. Africa, by and large, is a continent of hopelessness,
with little future as it now stands.
We may need a complete reevaluation and redesign of the methods of delivery
of aid or assistance to Africa. The current approaches in which we work primarily
through existing, largely non-representative governments did not and does not work
in many cases. We need new delivery methods which may have to be imposed
if existing institutions fail in cooperating effectively in providing the necessary
assistance. The world cannot stand by and allow the continued slide into poverty,
starvation, lack of security, education, and health care particularly in Africa.
It is interesting to note that China has assumed an important role in several
African countries. While Chinese interests were initially driven by opportunities
to tap into underdeveloped resources such as oil and minerals in Africa, it has
more recently become active in large-scale infrastructure developments in countries
such as Angola. China provided a $2 billion line of credit and dispatched Chinese
workers to help rebuild roads, railways, housing, schools, and more. They are also
active in development projects elsewhere in Africa. Today more than a quarter of
China’s oil imports originate in Africa and the percentage is growing.
China’s limited success is a good example of what can be done. Such approaches
should be used to help develop a more comprehensive global means towards aid to
Africa, not just as an edge to gain access to Africa’s resources but to truly bring hope and
opportunity to its people. The international community must do more than introduce
half-hearted measures to improve the security and well being of down trodden people
in Zaire, Sudan, Bosnia, and elsewhere. There is a need for a more empowered inter-
national approach or body which can step in and correct grievous wrongs in security,
health, education, and provision of basic human shelter and sustenance. The old
concepts of inviolability of sovereign rights should not be an excuse for lack of action
by the international community where indisputable wrongs have been committed, such
as the recent developments in Dafur (Sudan) for example.
Such wrongs must be dealt with outside any political and economic consider-
ations. But to accomplish this may require completely reorganized international
bodies. The UN will have to change and assume broader responsibilities if it is not
to become as irrelevant as its predecessor the League of Nations.
dealings. These sometimes led to unilateral actions that many in the world opposed
even when agreeing to such actions in principle.
Considering America’s domestic performance, the U.S. Department of Homeland
Security, responsible for emergency management, appears to be a ship without a
rudder that lacks stability, purpose, and direction. It is wasting huge amounts of
resources without measurable success in either improving homeland security or
emergency response.
The world is looking for leadership to respond to the increasing numbers
and magnitude of natural disasters as well as mounting security problems.
While America responded effectively to global calamities in the past, recent
developments have raised serious concerns about its ability to take responsi-
bility for global safety. Leadership today must be more responsive and give
people confidence to be accepted. They must make a difference and not
only respond but also be expert in predicting and/or preventing damage or
disasters.
Developments such as the failure to adequately respond to disasters at home
during and after the massive hurricanes of 2005, have seriously damaged America’s
reputation and credibility at home and abroad. The sight of bodies discovered
four months after the event, of hundreds of thousands of people whose homes
had been devastated, who were left without effective shelter or recovery aid, and
an incompetent administrative system more interested in political infighting and
bureaucratic warfare than assisting people in distress has left a bad mark on the
country’s reputation.
At the same time, some institutions such as the U.S. Coast Guard after the Gulf
hurricanes and the U.S. military first responders after the Indian Ocean tsunami
and the Pakistan earthquake of 2005 performed in an exemplary fashion. While
most of the traditional services in the U.S. defense establishment and other depart-
ments are well organized, the new Department of Homeland Security appears
to lack leadership as well as competence. It is overmanned, over-budgeted, and
mismanaged. In fact, instead of improving security and emergency management
at a time of great exposure to terrorism and natural disasters, this new organi-
zation appears to have made things worse. Instead of focusing government response
capability, it seems to have diffused it by fostering a huge largely ineffective
bureaucracy.
When it comes to fighting terrorism, the principal function of this new department
performance is lack luster. The army of transport security personnel employed
at airports and other facilities are largely inadequately trained, unmotivated, and
lack the proper mentality required for modern security management. On a recent
domestic flight for example, I was pulled aside and asked to practically strip. As
a older, grey-haired person waiting in a line of muscular young men of different
color, I innocently asked the inspector why I was pulled out of the line. I simply
wondered what was suspicious about me and I was most surprised when told that
I was strip searched because I was number ten. Several similar occurrences showed
the basic failure of the system in not recognizing that security is not achieved
TOWARDS A BETTER, FAIRER GLOBALIZED WORLD 245
by routine operations. It requires sophistication, not just mechanical checks but real
psychological evaluation.
America seems to be far behind other nations here. Others approach security
by more effective use of modern technology such as fingerprint or eye pupil
recognition, psychological inquiries, and more, which improve the effectiveness of
such systems while reducing both the public waiting time and inconvenience as
well as total cost of the system. The approach to airport or transport security seems
to be more like that of an employment agency for difficult-to-place personnel than
that of a modern security agency.
America faces many problems. Its administration of the Afghanistan and Iraqi
wars lacked effective planning, particularly of needs after the campaigns to ouster
the Taliban and Saddam Hussein were won. It should have been evident that just
getting rid of these discredited rulers would not end the conflicts nor assure estab-
lishment of a so-called democratic regime. Democracy was and is an unknown
concept for the people of these countries. Furthermore, people must feel safe and
have ready access to services, food, shelter, and work before they will seriously
consider political issues. True elections in both countries attracted significant partic-
ipation, but the outcomes were quite dubious and may make it difficult to establish
a secular, truly representative government which has popular support.
There is a history in these countries of long-time tribal and ethnic loyalties
and local and regional conflicts. Many people there have not only long memories
but also a culture of vengeance in addition to religious fanaticism. Under such
conditions, concepts of installing a Western-style democracy by removing dictatorial
regimes is simple minded. We deal with old established customs, historic vendettas,
religious hatreds, and cultural differences, all of which would have to be reconciled
before there is a reasonable chance at forming a truly popular government in these
countries.
There is a major difference in approach between Western and Oriental resolution
of conflicts, problems, and differences. The Western and American approach is to
use force and establish a new order while the Oriental approach relies largely on
incentives which move warring functions closer together and towards a permanent
resolution of their conflicts, this in terms that represent true value to the previously
antagonistic parties.
Leaders must know how to deal with conflict decisively and effectively. They
must represent moral values that surpass narrow cultural as well as religious
concepts of morality, and be willing and able to adjudicate conflicts fairly. In other
words, they must make a difference and be really needed. But to be needed requires
confidence that a leader has the ability and management skills to deal with all the
changes and problems that may occur in an effective and timely manner.
Recent developments in America previously described as well as others which
occurred recently unfortunately show a lack of American resolve and even ability
to tackle really difficult problems. Most importantly, there appears to be a lack
of misunderstanding of the rest of the world. Somehow Americans, and particu-
larly many of its leaders, assume that everyone wants to be and live like people
246 CHAPTER 8
in America. Americans in general know little about and show less interest in other
people’s cultures, religions, and way of life. But not all people and in effect few
people want to be led to the promised land of America. Most are quite content with
their way of life and where they are.
The world today is in the midst of radical social, economic, and most importantly
technical change. A leader must most importantly be an agent of change and
know where he is going. He must truly make a difference in people’s lives. He
must lead by example, but an example that is universally accepted, not imposed.
Unfortunately America’s approach to and performance in recent global issues such
as the Afghanistan and Iraqi wars as well as the response to the 2005 natural
disasters was less than expected and needed for success.
Similarly, America has refused to lead the world towards a cleaner, safer, and
less pollutant environment by refusing to be a party to the Kyoto protocol and
other environmental treatise. It is one of a handful of countries that allows the
bearing of fire arms by ordinary citizens and fails to crack down forcefully on drug
use. America represents a rather mixed bag of examples and performances. Most
importantly, it lacks real convictions and principles by which to lead, which in turn
affects the confidence of the rest of the world in its leadership.
In other words, people want to know more clearly where they are going or where
they are being led. They want to understand the banner under which they are being
led and the goals to be achieved by the march. They also need to be given greater
clarity of the objectives to be achieved and how fairly the spoils of the march will
be divided.
The world faces very different and new challenges in the 21st century and will
need a new kind of leadership; one that is not only based on economic and military
superiority and Western concepts of democracy, but more on the needs for global
peace, human well being, fairness, and opportunity.
Globalization has brought a group of new power players onto the world stage.
China, India, Brazil, and Russia all have not only huge potential but also exert
increasing influence on their neighbors as well as the world economy. China and
India by virtue of the size of their population and their current and potential output,
while Brazil and Russia both have huge resources and the potential for continental
leadership.
President Putin has reversed many developments that established the free-
wheeling Russian economy of the 1990s, where many of its resources and other
major state assets were acquired by a few individuals or oligards. Although Russia
dissolved the Soviet Union and allowed most of its constituent states to part and
become independent countries, it is reasserting its influence on many of them by
economic, strategic or political means, all apparently to reestablish Russia as a
world power in economic as well as strategic terms.
TOWARDS A BETTER, FAIRER GLOBALIZED WORLD 247
In future, we will therefore have a world where the USA, EU, China, Russia,
India, and Brazil will exert major influence with Japan and South East Asia
supporting one or another of these major players. With nearly 80% of the world
population and the bulk of its economic output, this group will lead the world.
While America with nearly 30% of the world’s gross economic output in 2005 had
been able to exert its leadership, this percentage contribution to the world’s output
is bound to decline as the new macro players exert themselves, continue to grow
their economies, and expand their political and strategic influence.
There is very little America can do to reverse this trend. Its economy is
highly concentrated in domestic services such as health care, education, and law
enforcement or public security where costs increase at rates well above the rate of
inflation. As a result, they will continue to constitute an ever larger percentage of
the Gross Domestic Product, leaving less and less to activities which can be traded
and/or sold in the world markets. The heavy burden of pension and health care costs
also greatly affect U.S. industrial and service sector competitiveness. This is most
evident in mature industries such as in automobile and machinery manufacturing
that have not only become less competitive internationally but also lost market
share at home, with giants such as General Motors even fighting for sheer survival
now. Similarly, America’s increasing dependence on imported fuel increases its
negative balance of payment and thereby its foreign indebtedness to risky levels.
At the same time, America continues to assume large foreign obligations, some
for security and others for political and economic reasons. But its own economy
may in future be unable to support many of these ventures without greatly increasing
its foreign debt and resulting exposure. There is also an ever present risk of less of
confidence by creditors in the U.S. currency and government credit worthiness.
While Japan’s economy is rebounding smartly after a decade long stagnation,
the economies of the aforementioned new macro players are not only growing at a
much higher rate than America’s, but are also successfully expanding their claims
to raw material resources on one hand and export markets on the other. China in
particular is quietly building up an international presence not only in consumer
markets but also in global oil, gas, and mineral production sources. Most recently,
it expanded its foreign presence in world logistics by investing in foreign ports,
shipping, aviation, and inland distribution terminals, while quietly extending its
economic reach throughout the world.
India lags behind China in most of these, but is increasingly active in higher level
service activities, manufacturing, and more recently refining. Most South Asian
countries have joined in a free trade zone and may combine it with the already
successful Association of South East Asian Nations group to form the world’s
largest trade association, with nearly one third of the world’s population.
In Russia, on the other hand, the government recently started to reacquire or
reassert control over large private enterprises which used to be state owned. This
reversal of policy has slowed the rate of growth of foreign investments in Russia,
particularly in the media, oil and gas, and other resource sectors. Russia has similarly
tried to reassert its interests in the newly independent, formerly associated states
248 CHAPTER 8
of the Soviet Union. This then is the new world of the twenty first century, a world
in which the vast majority of people live in macro states or unions.
America will have to learn to accommodate this new environment in which it is
not dominant beyond approach but where it will be one of several major economic
and possibly also strategic powers. The expanded European Union, China, and India
will certainly all become global economic leaders and challenge America in many
ways. But Brazil and even a reemerged and reconstituted Russia may also assert
themselves alone or in association with neighboring states. The global environment
will, as a result, be very different from that experienced in the last 20 years since
the breakup of the Soviet Union. Competition for resources will accelerate and
the new macro economies will lay out political stakes of influence which can be
expected to further expand their economic power.
The major unknown and potential powder keg is the future of the Islamic
revolution, of the rise of Moslem extremism, and its opposition to secularism and
globalization which feed the roots of the new economic world. America’s future role
will be largely affected by its ability to sustain its creativity in science, technology,
and services and in the translation of these developments and breakthroughs into
economic opportunities as well as service and lifestyle improvements. Most of the
new macro economic players mentioned, and particularly China, do not aspire to
become the world’s policemen. This may require America to continue this role for
some time, but it would be wise to demand a more equitable sharing of this burden
to be able to concentrate more on advancing its own domestic interests.
BIBLIOGRAPHY
Kennedy, Paul. “Preparing for the 21st Century”, New York, Random House, 1992.
Mancur, Olson. “The Rise and Decline of Nations”, New Haven, CT, Yale University Press, 1982.
Calleo, David. “The Imperious Economy”, Cambridge, MA, Harvard University, 1982.
Simmons, P. J. and Oudraat, Chantal de Jonge, Editors. “Managing Global Issues”, Washington, DC,
Carnegie Endowment for International Peace, 2001.
Friedman, Thomas L. “The Lexus and the Olive Tree”, New York, Farrar, Strauss & Giroux, 1999.
Chayes, Abraham and Chayes, Antonia Handler. “The New Sovereignty: Compliance with International
Regulatory Agreements”, Cambridge, MA, Harvard University Press, 1995.
Aggarwal, Vidod K., Editor. “Institutional Designs for a Complex World: Bargaining, Linkages and
Nesting”, Ithaca, NY, Cornell University Press, 1998.
Stiglitz, Joseph E. “Globalization and Its Discontents”, W. W. Norton & Co., New York, 2003.
249
REFERENCES
251
INDEX
Bank of Japan, 33
Darfur, 150
Bankruptcy, 53, 64, 92, 227, 228
Debt, 95–97
Bartlett, Marilyn, 83
public, 151
Becker, Gary, 28
Decision-based management, 78
Belgium, 44, 195
Decision-based organizations, 78, 79
Bell, Alexander G., 2
Democratic Party, 179
Bikini atolls, 3
Department of Commerce, 13, 97,
Bonds, U.S. Treasury, 64, 96, 199, 211, 216
113, 118
Bosnia, 4, 155, 160, 188, 242
Department of Defense, 110
Brazil, 38, 96, 165, 174, 211, 218, 232, 241, 246,
Department of Energy, 110
247, 248
Britain, 27, 30, 47, 195, 196 Department of Homeland Security, 244
Brzezinski, Zbigniew, 212
BTU tax, 36 EBay, 54, 129
Bundesbank, 33 Economic
Bundy, McGeorge, 49 analysis, 7, 12, 19
Bureau of Labor Statistics, U.S., 62, 120 discovery, 12
Bureau of Labor, U.S., 62, 120 findings, 12
Bureau of the Census, 25 prediction, 13
Burma, 124, 163, 215 stimuli, 11
Bush administration, 95, 156 Einstein, Albert, 2
Business-to-Consumer (B to C), 129, 131 Enron, 17, 133, 135
Environmental Impact Statements (EIS), 118
California, 35, 115, 149 Environmental Protection Administration,
Canada, 1, 43, 107, 179 EPA, 91, 118
253
254 INDEX
NATO, North Atlantic Treaty Organization, 233 Sport Utility Vehicles, SUV, 17, 35, 118, 119
Nuclear waste, 110–111 Sputnik, 3
Stewart, Martha, 142
Office of Technology Assessment, 36 Stock Exchange, U.S., 52
OECD, Organization for Economic Cooperation Strategic management, 23–24
and Development, 32, 35, 38, 40, 50, 96, Sudan, 107, 142, 155, 177, 217, 232, 235, 242
170, 199 Suzhou, 234
OPEC, Organization of Petroleum Exporting Switzerland, 27, 44
Countries, 112
Oriental, 46, 48 Taiwan, 41, 44, 171
Culture, 46 Taliban, 4, 150, 245
Technology, 20–21, 57–61, 65–66, 105–106,
Pacific Rim countries, 63 148–149
Pakistan, 175, 192, 201, 208, 237, 238, 241, 244 Tellis, Ashley J., 213
Parmalat, 135 Thornton, Grant, 91
Patent and Trademark Office, U.S., 65 Three Gorges project, 166, 172, 214, 234
Patents, 59, 65 Thurow, Lester, 73, 242
Patriot Act, 125 Trade and Development Program, U.S., 42
Perot, Ross, 81 Treasury, 13, 64, 190, 211
Portland (Oregon), 108 Rubin, Secretary, 13, 190
Process Control (Statistical), SPC, 75 Tsunami, 201, 231, 237, 238, 244
Public debt, 23, 25, 56, 144, 151, 184, 189 Tversky, Amos, 204
Pudong Airport, 172 Tyco, 17
Purchasing Power Parity (PPP), 162, 213 Tyson, D’Andrea, 73
Quality Control (statistical), SQC, 75, 162
U.S. News and World Report, 83
Quality Control Circles (QCC), 75
Union, Labor, 49, 84
Reengineering, 89, 103 Utopia, 16, 25
Republican Party, 25
administration, 25, 144 Vietnam, 52, 157, 243
Research and development, R&D, 22, 56, 60,
163, 184 Wall Street, 13, 69
Ricardo, David, 171 Waste, solid, 199
Riflin, Alice, 53 Watson, Thomas, 2
Risk, 6, 57, 191, 202–206 Web, 122, 129, 131
Risk management, 203, 204, 205 Whittle, Frank, 3
RJR Nabisco, 67 World Bank, 13, 96, 160, 241
Rubin, Robert, 13, 190 WorldCom, 17, 148
Russia, 9, 96, 107, 147, 153, 156, 174, 235, World Emergency Management
241, 248 Organization, 239
World trade, 38, 44, 125, 157, 172, 232
Sarbanes-Oxley Act, 135 World Trade Center, 125, 144, 230
Savings and Loan, S&L, 48, 64 World War II, 43, 60, 97, 112, 147, 153, 173,
Securities and Exchange Commission, SEC, 71 189, 194
Singapore, 40, 42, 44, 87, 124, 175 Wright, Orville and Wilbur, 1
Smith, Adam, 10
Social Security, 94, 105, 161, 183 Yangtze River, 166, 172, 214, 215, 233, 234
Solow, Robert, 59, 191 Yellow River, 214
Somalia, 51, 142, 150, 155 Yucca Mountains, 110
South America, 34, 46, 106, 136, 150, 154, Yugoslavia, 4, 107, 153, 196
157, 232
Soviet Union, 34–35, 96, 147, 157, 195, 235 Zaire, 107, 242
Spain, 44, 136, 180, 194, 195 Zimbabwe, 177