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CHALLENGING AMERICAN LEADERSHIP

TOPICS IN SAFETY, RISK, RELIABILITY AND QUALITY

VOLUME 10

Editor
Adrian.V. Gheorghe
Swiss Federal Institute of Technology, Zürich, Switzerland

Editorial Advisory Board


P. Sander, Technical University of Eindhoven, The Netherlands
D.C. Barrie, Lakehead University, Ontario, Canada
R. Leitch, Royal Military College of Science (Cranfield), Shriverham, U.K.

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

Ernst Gabriel Frankel


Massachusetts Institute of Technology,
Cambridge, Massachusetts, USA
A C.I.P. Catalogue record for this book is available from the Library of Congress.

ISBN-10 1-4020-4892-0 (HB)


ISBN-13 978-1-4020-4892-0 (HB)
ISBN-10 1-4020-4907-2 (e-book)
ISBN-13 978-1-4020-4907-1 (e-book)

Published by Springer,
P.O. Box 17, 3300 AA Dordrecht, The Netherlands.

www.springer.com

Printed on acid-free paper

All Rights Reserved


© 2006 Springer
No part of this work may be reproduced, stored in a retrieval system, or transmitted
in any form or by any means, electronic, mechanical, photocopying, microfilming, recording
or otherwise, without written permission from the Publisher, with the exception
of any material supplied specifically for the purpose of being entered
and executed on a computer system, for exclusive use by the purchaser of the work.

Printed in the Netherlands.


This book is dedicated to my oldest brother, Wolfgang Zeew Frankel, who has
been an example for me and others with creativity, steadfastness, and character
throughout his life.
CONTENTS

List of Figures xi
List of Tables xiii
Acknowledgements xv

Preamble: The 20th Century Stage for American Leadership 1

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

1. America’s Economic Environment 19


Industrial and Technological Policies 20
Factors of Economic Growth 21
Politics and Economy 22
Strategic Management of the Economy 23
Managed Economics of Markets, Services, and Trade 25
The U.S. Standard of Living 25
The Impact of Human Behavior on Economic Systems 28
American Performance and Productivity 29
Capital and Labor Costs 32
U.S. Immigration 34
Energy or Fuel Use 35
America’s Economic and Trade Dominance – Is it Real? 39
The U.S. as an Exporter 42
Foreign Trade Imbalance or Outsourcing 44
The U.S.-Asian Dilemma 45
Imposing our Principles on Others 47
Economic Inequities in the U.S. Job Market 49
Maintaining Economic Leadership 50
Securities Markets 52
The American Consumer 53
Wealth and Value Creation 54
vii
viii CONTENTS

2. American Industrial Developments 55


The Problem of U.S. Underinvestment 56
Investment in Technology Development 57
Technology as an Economic Driving Force 59
Working in American Industry 62
Interpersonal Relations, Work Place Productivity,
and Economic Impact 63
The U.S. Pension Debacle 64
Technology Ownership 65
Management of Technological Changes 65
Management Structures and Incentives 67
U.S. Corporate Pay 70
Worker Morale and Work Ethics 72
Productivity in America 73
Quality Management 75
Quality Control in Purchasing 76
Contradictions of Competitive Bidding and Procurement 77
The Decision-Based Industrial Organization (DBO) 78
Institutional Support for Industrial Development 79
America as a Service Economy 79
The Demise of the American Middle Class 81
Inequity in American Society 82
Economics of Disability in America 83
Political Correctness and Organized Labor 84
The Customer and the Cost of Doing Business in America 85
American Economic Prospects 85
The U.S. as A Post-Industrial Society 86
An Environment for Economic Success 87

3. American Social and Economic Developments 89


Tax Burdens and Economic Incentives 90
Effectiveness and Cost of Government Regulation 91
Government Budget-Making and Budgetary Needs 92
Government Spending 93
The National Debt Problem 95
The Entitlement Morass 98
A Welfare System which Discourages Work and Encourages Fraud 98
The Scourge of the Unemployed 99
Unemployment and Unemployment Benefits 100
The Business of Government 100
Government Failure 102
Improving Productivity by Downsizing 103
Welfare, Workfare, and Unemployment 103
Economic and Social Impact of Longevity 104
CONTENTS ix

The Twentieth Century Revolution in Technology and Social Structure 105


The Most Important Global Problem 106
Discouraging Job Growth 108
Misplaced Agricultural Support 109
Nuclear Waste Peril and Future Economic Costs 110
Renewable Energy Use Developments 111
Impact and Future Role of the Internet 113
Stick Built Housing 115
American Income Distribution 116
Environmental Protection Quagmire 117
The American Worker 120
American Education 121
Law Enforcement Costs 123
Immigration and the Future of America 126
Economic Prospects and Challenges 126

4. Claims to World Leadership 129


The New America 130
America’s Business and Financial Leadership 133
America’s Identity Crisis 135
Fostering Food Adequacy and Supply 137
American Moral and Spiritual Leadership 137
Financial Management 138
The Making of Leaders 139
American Contradictions and Hypocrisy 141
Sovereignty and Human Rights 142
American Strengths and Weaknesses 143

5. Managing American Leadership 147


Impact of Technological Change 148
Ethnic Integration 149
The War on Terror 150
Deficits and Public Debt 151
America’s Leadership in Innovation 152
America’s Health Care Leadership 152
The Right to Leadership 153
Democracy in Action 154
Advancing Democracy 155
American Strengths and Weaknesses 157

6. The Future of World Leadership 159


Challenging American Leadership 159
Growing Asian Dominance 161
Asian Road to Economic Success 170
x CONTENTS

America’s Mistaken Self-Perception 178


America’s Economic Challenges 182
Impact of Globalization and Outsourcing on Economic Leadership 185
Factors Determining Leadership 187
America’s Leadership Role 188
The Electronic Challenges to the American Service Economy 190
American Creativity and its Role in Perpetuating Leadership 191
The New Brain Drain and Reaction 192
Repositioning America in the Public Eye 194
Can Europe Again Become a World Leader? 195
America’s Changing Image 197

7. Leading into the Future 201


Managing Risks 202
India’s Emerging Economy and Leadership Potential 206
China’s Rebirth and Thrust Towards Global Economic Power 210
Leadership Challenges 215
Problems in Maintaining American Leadership 219
Leadership Quality 229

8. Towards a Better, Fairer Globalized World 231


What the World Needs 237
Can America Deliver? 242
Who Will Lead in Future 246

Bibliography 249
References 251
Index 253
LIST OF FIGURES

1. National Strategic Planning 24


2. The U.S. Economy 40
3. Merchandise Trade Balance 43
4. The Widening Gap in the United States 50
5. American Income Distribution 117

xi
LIST OF TABLES

1. Industrial Labor Costs of Major Industrial Countries 31


2. Distribution of the U.S. Workforce 31
3. U.S. Service Economy 32
4. Discount Rates 33
5. Labor Costs 34
6. U.S. Legal Immigrants 34
7. Average Annual Growth Rate in Real GNP 37
8. Industrial Prices – 1991 37
9. Carbon Emissions as a percentage of World Trade 38
10. Manufacturing Hours Worked 62
11. U.S. Corporate Research Funding 66
12. Trends of Salaries and Compensation of CEOs
of U.S. Companies 69
13. Average Salary and Bonus 70
14. Labor Productivity Index 75
15. Increase in U.S. National Debt 94
16. Sector Expenditures 95
17. Total Defense Spending Budget FY1993 95
18. Nations’ Public Debt 151
19. Major Country’s GDP Measured in PPP Terms in Trillions
of $ for 2003 164

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 STAGE FOR AMERICAN


LEADERSHIP

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

any importance and it provided a paltry 3% of energy fuel. Inter-urban transport


was largely by rail and every larger coastal city had a port, which served mainly its
immediate surroundings. Home heating was by coal or wood and air conditioning
was not yet in use except for a few experimental applications.
Even though some manufacture was concentrated in areas which had comparative
advantages such as cheap hydropower, access to raw materials or abundant labor,
most manufacture was on a comparatively small scale to meet local needs.
The same applied to most agricultural production, which provided mainly locally
grown food to the local markets. Few agricultural goods were transported over large
distances, except for special produce only producible in certain climatic zones such
as tropical fruits, coffee, tea, jute, and so on. As a result, few agricultural products
were processed.
Most economic activities were on a small local scale. Ships were individually
owned and operated and few, except for passenger ships, provided a regular fleet
service. Most transport investment and operations were private, as were most other
supplies. Early in this century the need for public distribution networks for electric
power, telephone, water, gas, sewer, and similar conduits, brought local or regional
government into play which assumed the investment and distribution or operation
of the supply systems, and later quite often also built or acquired the basic suppliers,
the power plants, telephone switchboards, water pumping, and so forth.
It was only in 1915 that Alexander G. Bell in New York transmitted the first
telephone messages to Dr. Thomas Watson in San Francisco. Yet, the beginning of
this century was an age of great discovery. In 1915 Einstein espoused his General
Theory of Relativity, and in 1909 the plastic age began with the discovery of
Bakelite. Just a few years earlier work had begun on the Panama Canal and the first
railroad tunnel was built under the Hudson River. Amundsen reached the South
Pole in 1911 and Edwin P. Hubbell discovered a distance indicating variable star in
the Andromeda nebula, a major astronomical discovery. Insulin was discovered and
insecticides were used for the first time in 1924. Television was first transmitted
in 1925, but it took another 12 years before it became commercially useful. Flight
started to become commercially attractive over comparatively short distances by
plane and longer distances by lighter-than-air craft or Zeppelins. In 1927 Charles
A. Lindbergh flew his monoplane non-stop from New York to Paris in 33.5 hours,
and the 15 millionth Model T Ford had been produced. Ford had revolutionized
the manufacturing industry by developing in line, mass production of a standard
product, the Model T. His example was soon followed not only by other carmakers
but also in other industries. This resulted not only in a drastic reduction in the cost
of manufactured goods, but it also radically changed the work place and the work
environment.
In 1931 the first long distance submarine, the Nautilus, navigated under the
Arctic Ocean. This was also the age when huge new bridges, tunnels, and dams
were built. It was also a time of intense research into the nature of fundamental
atomic particles. Oil by this time had become an important fuel and the first long
distance oil pipelines were built in the U.S. and in the Middle East. Refineries
THE 20TH CENTURY STAGE FOR AMERICAN LEADERSHIP 3

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

Economists in general – and American economists in particular – have developed


a mainstream economic theory based on sophisticated mathematical and scientific
principles. However, the public perception of economics in America is more that of
an art, practiced by a large community of learned, but often disagreeing practitioners
who argue the relevance of assumptions and spend much time defending their
analysis, results, and projections from charges of lack of realism and of inaccuracy
in explaining the actual behavior of the economy. Modern economic theory conceals
much of economic reality and also makes often unproven and unjustified assump-
tions regarding the economic behavior of man and society.
It appears that much of today’s economic theory is fostered by accepted political
attitudes and assumed standards of responsible moral behavior and that economic
realities are often buried, ignored or actually concealed in economic analysis. The
result is that economic models are often more concerned with the use of an accepted
theory and related assumptions than with the discovery of the truth underlying
many of our economic issues and problems, this particularly now when terrorism
and other developments re-introduce uncertainties and risks not experienced for a
long time.
The important roles of the consumer and his attitude, of productivity and worker
attitude, of waste and corruption, of inefficiency in government, industry, and
society, of politics and political stability, of terrorism and its effects on public
attitude and how all these factors impact economic developments are either ignored
or indefinitely deferred; this because they require painful decisions to be made or
positions to be taken. Such decisions may conflict with political posture, moral
values, and perceived social or national interests.
It is becoming increasingly evident that waste, corruption, misuse of resources
and inefficiency, lack of education, technological backwardness, incompetent
management, lack of security, and political factors have a much greater effect
on economic performance and development than do the more traditional and
readily quantifiable economic factors usually used. In fact, the above factors can
easily be shown to dominate and more readily explain economic performance
7
8 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.

THE NEED FOR AN ECONOMIC POLICY

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

Concentration on service industries and institutions has been defined by


government leaders and some economists as the path to a post-industrial economy
and a logical step for the U.S. which – less than one hundred years ago – moved from
an agricultural to an industrial economy. However, there are serious questions as
to whether a government-driven service economy can assure sustainable economic
growth for the U.S. Service jobs are mostly low paying and often low skilled.
The exceptions are top professionals employed in the service industry such as
in health care, law, and educational institutions who often draw obscenely large
salaries.
Lawyers normally make 10–20 times their secretary’s pay. Similar differentials
are found among doctors and nurses, hotel managers and hotel workers, university
presidents and faculty, as well as others. While top managers in manufacturing also
often draw obscene salaries in the U.S., the overall distribution of income and skill
here is much more uniform than in the service and particularly institutional sectors.
Emphasis on a service economy would therefore lead to even greater income distor-
tions than we experience now and would continue to decimate the U.S. middle class.
In fact, recent studies show that a continuation of the current policy that encourages
continued growth of the service sector would make the U.S. a two-class society.
In turn this could destroy our cherished democratic system which is tenuously
dependent, controlled, and fostered by a strong middle class. The very foundations
and principles on which America is built appear to be eroding now. All our major
institutions, from government and health care to education and law enforcement,
have been discredited in recent years as being inefficient and unresponsive to
society. The U.S. public has lost faith in the ability of these traditional institutions
to serve its needs and, in fact, often questions whether their focus is on the needs
of the public or their self-interest.
In economic terms, these developments have led to tremendous waste, which if
not stopped, could drown this unique country and its society. True, we are far from
the condition in which the other former superpower - the USSR and now Russia -
finds itself now; nevertheless, our symptoms are disturbing and must be addressed
if we are to preserve this great democracy, this great society, and all it stands for.
In this book we review America’s condition and its causes and then try to develop
and compare potential solutions to its problems. We have become a much more
individualistic, selfish, self-centered, and, to some extent, corrupt society than we
were in the past – or one we admit to. Now consideration of the interests and needs
of the community are more often than not submerged under personal greed and
short-sighted selfishness at all levels of American society, and even government.
The individual and his rights are assumed and have always been considered
supreme in our society. This is as it should be. But most individuals in America
now ignore the other side of this covenant that gives us these rights in return for
our loyalty and contribution to as well as participation in society. Many now renege
on any responsibility for society’s interests on which these rights depend. This is
not as it should be; yet it appears to now permeate all levels of our social structure
and institutions.
10 INTRODUCTION

We need a new approach, a rebirth of idealism, responsibility, concern for society


and our fellow men, and a focus which advances individual progress and rights – but
not to the exclusion of public or community interests. We must learn to advance our
self-interest without impacting on or hurting society’s interests. We must recognize
that as Americans our fate, prosperity, and security are linked to that of American
society as a whole.

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.

THE MEANING OF ECONOMICS

Economists as well as the public-at-large have struggled for three centuries


to define economics. While early economists perceived it to be a philosophy
and an organized skill, which is used in the study of human behavior and
the interaction of people and their activities, economists who followed, gravi-
tated toward the study of monetary exchange and material well-being or the
role of financial transactions in explaining human behavior. It is curious
to note, though, that the founder of ‘modern’ economics, Adam Smith, was
INTRODUCTION 11

concerned with broader issues and observed human behavior principally as


an economic factor. In fact, in The Wealth of Nations published in 1776,
he viewed human interaction as a principal force affecting development of
human well being. Yet later economists became increasingly oriented toward
monetary or financial performance and ignored the economics of human behavior.
One reason advanced to explain this is that as economics developed into an
increasingly complex theory, economists moved more into abstraction to explain
human and societal behavior as it affects the well-being of mankind as a whole
and groups of people or their particular activities and enterprises in particular. Thus
economics has become an increasingly abstract science which tries to explain devel-
opments, not in terms of people’s behavior and the interaction of various resource
applications, but largely in terms of monetary transactions. Modern economics
makes no value judgment that can be expressed in financial terms or converted into
the economic equivalent of monetary terms.
The approach is not necessarily amoral; it is concerned mainly with understanding
what has happened and why people, societies, nations or mankind have behaved in
certain ways which caused some measurable result. Unfortunately this preoccupation
with explaining past behavior and its resulting development, though useful in the
past, is decreasingly so now as it becomes more and more difficult to forecast
even the near-term future from the past. Technology, human behavior, and man’s
organizations are now changing so rapidly that the past is becoming less and less
relevant in projecting the future.
The foundation of modern economics is the study of the behavior of the individual
who is assumed to behave rationally and to aim at improving his lot. In other words,
economists assume that man behaves rationally, is materialistic, and tries to satisfy
his desires. However, this is usually not the case. Social, political, religious, and
sometimes criminal interests affect man’s behavior more and more.
Furthermore it is assumed that all men react the same to economic stimuli and
that their behavior is always economically rational. This has probably never been
true and is certainly not so today. Rationality in general has been largely overtaken
by greed, political interest, and various personal motives that are sometimes not
economic interests at all nor can they be explained in economic terms. Similarly,
recent developments indicate the increasing role of spiritual and religious or faith-
based rationales in driving peoples’ behavior. Quite often value judgments are not
based on financial or economic gain at all, but on power, revenge, pride, religious
fervor or personal interest. In other words, the definition of economics is quite
different today from the basic concepts used in the past or used in economic theory
which may become, as a result, less relevant in explaining developments.

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

tool aimed at achieving long-term objectives. American economists, like others,


have fallen prey to the weaknesses described and, as a result, have not been as
effective as they might have been in guiding American economic development. In
this book, we discuss the current use of economics in the U.S. and project its use
as a policy-making tool where economics serves as a means to consider the broader
aspects of society and its needs, and as a tool for the development of sound policy,
defined in terms of implementable strategies.
Economics must provide explanations for the behavior of individuals and nations,
in a way that helps individuals and nations to recognize and react to both threats and
opportunities. It should explain behavior in a way that reflects human weaknesses,
frailties, character failings, ambitions and concerns, and not that of idealistic and
rational man that is the exception and not the rule. Rapid technological change
demands that we become more responsive to society’s needs lest we are driven
towards conditions in which rationality and technology determine everything.
It is unfortunate that economists have ready answers to explain the past and
often even agree in part what is required to succeed in the future. Yet, they never
get involved in how things are to be done or how their explanation or theoretical
proposals are to be transformed into policy or action. They are great thinkers and
poor doers. As a result, few economic predictions really guide economic policy or
decision making. In part, this may be due to economists’ lack of familiarity with
the practical or real world, but often also with their lack of confidence in their own
explanations or predictions.
Very few economists put their money where their mouth is, and even fewer ever
become rich. Until economists learn to not only explain the past, post factum, and
predict the future by projecting what might happen or should be done, without
committing themselves to how, when, and where things ought to be done, their
influence will continue to remain peripheral.
It is sad in a way that some of our greatest economic thinkers had so little influence
on our economy and economic policy. True, the government bureaucracy, financial
institutions, and international organizations employ many competent economists in
influential positions. Yet if we truly consider how policies are formulated and decisions
made, we usually find that the economists exerted little influence on the process.
The World Bank, as one example, employs some of the world’s most renowned
economists and puts them in leading positions. Yet when large-scale lending decisions
must be made, the learned economic theories devised play little if any role in
these decisions. In fact, they are mostly used to perform post factum analysis
to show if the theory would have worked. The President’s Council of Economic
Advisors appears to play a similar role, and serves primarily to explain decisions
made by the Treasury, Department of Commerce, or the Federal Reserve after the fact.
Recent exceptions were Federal Reserve Chairman Greenspan, an economist,
and former Treasury Secretary Rubin, a Wall Street banker, who managed to
set and control American economic prosperity and growth through small adjust-
ments in economic policy. Throughout recent history, these were among few of
14 INTRODUCTION

the exceptions. This is unfortunate, as a more proactive participation of economists


would probably assure greater economic and even stock market stability.

AMERICAN DEMOCRACY IS NOT FOR EVERYONE

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

Although we have made progress towards personal equality and opportunity,


only a small proportion of blacks and other disadvantaged minorities have actually
emerged from their social and economic ghettoes. There are a few successful blacks,
but the proportion of poor blacks, single parent black families, and blacks who do
not complete a high school education remain abysmally high. We have thrown large
amounts of money at this problem only to grow a large new bureaucracy, without
actually attacking the roots of this problem.
A completely new approach is needed if we are not only to resolve this problem
of inequity, but also assure that our society does not break up into two increasingly
disparate parts. The growth of the Internet and modern information/communications
technology has made our world into a truly global village. This in parallel with
increased commercial and financial globalization and falling travel and communi-
cations barriers make it a fertile ground for questioning of the equity of our system
for the large number of people who are shut out and do not participate in or benefit
from our economic and technological advancements.

THE COUNTRY OF THE LONELY

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

AMERICA’S ECONOMIC ENVIRONMENT

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.

INDUSTRIAL AND TECHNOLOGICAL POLICIES

Commercial product and process technology is ahead of defense technology in


many areas and is usually developed by multiple use research, development, and
innovation. On the other hand, most military R&D is highly focused which makes
it difficult to identify either potential commercial uses or effective opportunities for
transfer.
Non-military government-funded R&D, on the other hand, is poorly organized,
unfocused, and often addresses irrelevant issues. As a result, it is incapable
of assisting U.S. technology development to greater industrial and economic
competitiveness.
The U.S. lacks both national industrial and technology policies which would at
least establish priorities; yet many in the U.S. oppose such government policymaking
as a potential infringement on their freedom of action, while at the same time relying
on government economic help for much of the research support. This contradiction
is becoming more obvious and in many cases self-defeating. We rely on government
for subsidies or discriminating regulation to assist non-competitive industries, while
demanding that government and thereby society not set priorities or standards.
Unfortunately we can no longer afford this contradictory approach.
Industrial and technological policy development at the federal government level
has been advocated by forward-looking leaders of industry and academics for many
years. One problem is the perception that the federal government should or may
not intervene in the free interaction of market forces or in the operation of the
AMERICA’S ECONOMIC ENVIRONMENT 21

market economy. This is an obviously fallacious consideration at a time of blatant


government involvement in environmental, human safety, as well as in some foreign
trade regulation. It is actually more a matter of politics and the traditional interplay of
economic, political, and societal lobbies with legislators which assures consideration
of special interests which in turn prevent the introduction of a clear industrial and
technological policy. We similarly face the problem of inadequate or non-existing
technology transfer between government and private industry. With over 65% of
U.S. research funded and/or performed by government or government-supported
agencies, private industry in the U.S. actually has smaller research exposure than
those in most industrialized countries.

FACTORS OF ECONOMIC GROWTH

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

on the traditional factors nor is it simply a function of effective use of economic


factors. To an ever-larger degree it depends on the effective use of a combination of
larger factors such as technology, information management, and human enterprise.
Another issue was that so much of U.S. research and development is performed
by government or is government supported. This research has an abysmal record
in terms of technology transfer and commercialization which is slow, inefficient or
simply does not take place. This, independent of the fact that Congress legislated
commercialization of government-supported and particular non-critical defense-
related research. Yet this was found to be more difficult than expected as many
researchers were concerned with potential liability issues, and hesitated or refused
to participate in the commercialization of federally funded research results.

POLITICS AND ECONOMY

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.

STRATEGIC MANAGEMENT OF THE ECONOMY

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

AUDIT OBJECTIVES EXPECTATIONS STRATEGIC PLAN


AND IMPLEMENTATION
GOALS

CONDITION
ANALYSIS

STRATEGY STRATEGIC
RESOURCES THREATS AND FORMULATION PLANNING
OPPORTUNITIES

STRENGTHS TACTICAL
POLICIES ALTERNATIVE
AND
WEAKNESSES

Figure 1. National Strategic Planning

• 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

MANAGED ECONOMICS OF MARKETS, SERVICES, AND TRADE

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 U.S. STANDARD OF LIVING

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.

THE IMPACT OF HUMAN BEHAVIOR ON ECONOMIC SYSTEMS

Economic principles are designed to explain the impact of human behavior on


the economy. Prior to Keynes’ demand side economic theory, unemployment
and slack economic behavior were fought by changing market prices and wages.
Keynes suggested that the cause of insufficient employment was simply insufficient
demand and that increasing demand, by government deficit spending, if necessary,
would raise employment and income levels.
Many now believe that this action may in fact stymie or retard economic growth.
This belief has led to the development of concepts of supply side economics that
advocate increased output to generate demand and ultimately greater government
tax income while reducing tax rates.
The United States was founded by men dedicated to political and moral principles
believed to be universally applicable which included the concept of ethical standards
and moral behavior incompatible with the single-minded pursuit of self-centered
egotism and self-interest. These principles require that common interests prevail
over more narrow or individual interests, particularly narrow profit or other personal
gains. Unfortunately these latter motives appear to rule the actions not only of
lowly elements of our society who care nothing about society as a whole, but
also of professionals – administrators and politicians, including political leaders
who owe all to our system of government but repay it by exploiting it for their
own gain, without regard for the impact on our society as we know it, so loftily
conceived.
It is only in the last ten years that economists have begun to analyze the economics
of human behavior in terms of the incentives required to get people to do things.
Gary Becker [Ref. 3] recently developed a theory to explain what makes people
behave morally, selfishly, ethically or criminally. He explains motives for such
behavior as social discrimination and drug abuse. Fighting prejudice and designing
public policy in the public interest have been driven by political interests and power.
Even social policy – such as family support – should be founded on the economics
of human behavior.
According to Becker, parents try to maximize their well being and will produce
the number of children needed for that economic and social purpose. More children
may provide more help, income, social welfare, and even pleasure, and people
will usually try to control their families with their own welfare in mind. The same
AMERICA’S ECONOMIC ENVIRONMENT 29

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.

AMERICAN PERFORMANCE AND PRODUCTIVITY

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

increase in employment in the entertainment, health care, educational, software,


and consulting sectors. While the average increase in employment during the period
1987–1992 was a paltry 2.3%, movie production gained 28%, health care 17.1%,
software services 17.1%, cable TV 13.1%, management consulting 11.4%, and
education 7.2%. It is interesting to note that only education, entertainment, service,
and software industries achieved an above-average increase in growth and conse-
quent employment during this period. This is a logical development during time
of prosperity and rapidly increasing productivity in manufacturing, agriculture, and
other productive industries, yet productivity gains in these sectors fall well below
the 2% achieved during the 1960s.
U.S. employers spend over $30 billion per year for training and education, with
nearly 70% of that spent on upper level, college-educated employees. Similarly,
90% of all training and education expenses are spent by one-half of one percent
of American firms. As a result, the technical skills of the U.S. workforce do not
improve overall, but only in isolated sectors of the economy.
Considering average take home wages (excluding benefit and social costs), U.S.
manufacturing workers were the world’s best paid, with $13.92/hour in 1988,
but West German and Canadian workers follow close behind with $13.80/hour
and $12.51/hour respectively. As German wages were rising at twice the U.S.
annual rate of 3.85%, they surpassed U.S. wages in 1990 and in 1992 were about
7.8% higher. The wages in 1991 in Italy, France, and Britain averaged $11.8/hour,
$11.5/hour, and $10.0/hour, respectively. Japan’s wage rate growth is slowing.
Japanese manufacturing wages, which in 1988 averaged $8.9/hour, rose to only
$9.6/hour by 1991. Similarly, as noted before, American workers must now pay out
of their wages for many services which were once covered by employers and which
their counterparts enjoy as a non-wage expense. On the other hand, U.S. direct and
indirect tax rates are on average well below those in Europe where governments
often cover more social services.
It is noted that at the same time U.S. productivity – as measured in output growth
by manufacturing workers – approached that of Germany at 3.75%/year in 1992,
while Japan’s continued at a rate of over 9%/year largely as a result of large-scale
introduction of automation.
While the U.S. is still the most productive manufacturing economy, its rate
of productivity growth falls well below that achieved by Japan, Italy, Britain,
France, and West Germany when measured in terms of cumulative productivity
improvement since 1977.
Similarly, the GDP output per U.S. industrial worker, while still slightly ahead of
that of other industrial countries with $41,281/worker-year in 1992, barely exceeded
that of Canada with $39,261/worker-year, with only slightly lower figures for
France, Italy, Germany, and Japan. Since then, the GDP output per U.S. worker
has continued to lead, but only by a small margin. The above listed countries
benefit from larger worker productivity growth which will result in worker output
surpassing that of U.S. workers if U.S. productivity growth and the U.S. dollar
remain at their current level in relation to those of the other industrialized countries.
AMERICA’S ECONOMIC ENVIRONMENT 31

Table 1. Industrial Labor Costs of Major Industrial Countries - $/Hour

Germany USA France Japan Britain

1988 2303 2309 1915 1824 13.39


1992 2867 2406 2297 2097 16.61

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.

Table 2. Distribution of the U.S. Workforce (December 1992)

Industry Employees (Millions) % of Total

Transportation 3.51 3.21


Construction 4.59 4.25
Manufacturing 18.46 17.04
Trade 25.33 23.39
Services 28.32 26.15
Finance 6.68 6.17
Federal Government 2.97 2.74
State/Local Government 15.41 14.23
Other 3.05 2.82
TOTAL 108.33 100.00
32 CHAPTER 1

Table 3. U.S. Service Economy (1991 – in monetary terms)

Health Services $762 billion


Law Enforcement and Legal Services 720 billion
Education 440 billion
Financial 460 billion
Recreation 400 billion
Transportation 410 billion
Postal 10 billion
Government Administration 300 billion
Total in 1991 Dollars $2,740 billion

Source: U.S. Budget – Congressional Budget Office Statistics, 1992/93.

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.

CAPITAL AND LABOR COSTS


The cost of capital in the U.S., which exceeded that of its major competitors
(Germany and Japan) in the 1980s, has since 1991 dropped below that of most
European countries, a trend continuing to 2004 when U.S. and Japanese rates
AMERICA’S ECONOMIC ENVIRONMENT 33

Table 4. Discount Rates

U.S. Germany Japan

1988 6.2 2.8 2.9


1989 7.0 4.0 3.0
1990 6.6 6.0 4.2
1991 5.5 6.5 5.8
1992 3.5 8.0 4.0

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

Table 5. Labor Costs (1992)

Average Hourly Labor % Increase


Wages Plus Benefits Since 1985

Germany $21.80 125


Sweden $21.00 117
Netherlands $17.90 108
Italy $16.20 121
Canada $15.80 48
France $15.15 103
USA $15.00 14
Japan $9.80 97
U.K. $11.40 101
Korea $4.20 206

Source: Bureau of Labor Statistics, AFL-CIO.

surpass that of the U.S. workers within a few years if the comparative rate-of-
productivity gains are maintained.

U.S. IMMIGRATION

According to the U.S. Immigration and Naturalization Service, legal immigration


to the U.S. during the decade 1981–1990 was 7,338,062. Statistics, as shown in
Table 6, indicate a rapid increase in Asian immigration.
The number of non-legal immigrants is unknown, but is estimated to significantly
exceed that of legal immigrants, with a majority of non-legal immigrants or about
70% originating in Mexico, Central America, South America, and the Caribbean.
Since 1989 the number of both legal and illegal immigrants from the former Soviet
Union and Eastern Europe has also grown rapidly. It is estimated that in the period
1990–91 alone there were over 350,000 legal immigrants from these countries,
about equal to the number of immigrants during the 1981–90 period. This number

Table 6. U.S. Legal Immigrants (1981–1990)

Origin Total Immigration Number

Mexico 22.6% 1,658,402


Canada 2.1% 154,099
Central America 6.4% 469,635
South America 6.3% 462,298
Caribbean 11.9% 873,229
Asia 37.3% 2,737,097
Europe 10.4% 763,158
Oceania 0.6% 44,028
Others 0.1% 7,338
Total 100.0% 7,338,062
AMERICA’S ECONOMIC ENVIRONMENT 35

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.

ENERGY OR FUEL USE

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

Table 7. Average Annual Growth Rate in


Real GNP

1960–1969 41%
1970–1979 28%
1980–1989 24%
1990–1992 06%
1993–2004 29%

Source: U.S. Department of Commerce.

Table 8. Industrial Prices (including taxes) 1991

Clinton United Japan Germany France United Canada


tax States Kingdom

Natural 27 263 1104 523 394 419 226 $/mct


Gas
Light Fuel 08 70 102 102 NA 84 72 $/gallon
Oil
Heavy 09 30 86 49 41 44 37 $/gallon
Fuel Oil
Steam 566 3351 6329 16549 9184 6982 5492 $/ton
Coal
Electricity .3–.4 49 136 88 54 71 39 ö4/kWh

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

Table 9. Carbon Emissions as a percentage of World Trade (1995)

U.S. 178% India 21%


Russia/USSR 144& Columbia 20%
China 78% Poland 16%
Brazil 56% Mexico 16%
Japan 36% Canada 16%
East/West Germany 40% France 15%
Indonesia 25% Italy 13%
U.K. 22% Remainder 482%

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.

AMERICA’S ECONOMIC AND TRADE DOMINANCE – IS IT REAL?

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

1960 1970 1980 1990


YEARS

Figure 2. The U.S. Economy

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

to be raised to, say US$1,200; a level now considered a low-income objective. In


turn, this would require world GNP to grow by over 6%. In other words, Asia, and
particularly South Asia, has a long way to go to catch up with Western Europe and
North America, but it is making tremendous headway particularly by emphasizing
foreign trade as a growth locomotive, something Americans have not yet caught on.

THE U.S. AS AN EXPORTER

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

Similarly, U.S. exporters usually concentrate on very narrow, often single-country


markets. Only 3% of U.S. exporting companies export to more than five overseas
markets. Though we talk about the importance of export growth, the fact is that
exports grew by 2%, 6%, 10%, and 15.8% per year for the years 1985 to 1988,
but the growth rate has since declined, and was only 11.8%, 7.5%, 5.6%, and 4.1%
for the years from 1989 to 1992, respectively. It has since regained greater rates
of growth, particularly in 2003 and 2004 when the U.S. dollar declined in value
against most currencies.
U.S. merchandise trade (Figure 3) was nearly balanced between 1960 and 1975,
but has since experienced increasing deficits, which were only partially offset by
invisible exports. In fact, the U.S. trade deficits were reaching historic levels of
over $500 billion in 2003, deficits which may be exceeded in 2004.
Since World War II, the U.S. has led the rest of the nations in world trade and,
although foreign trade amounted to a comparatively small percentage of the U.S.
GNP, it represented as much as 38% of total world trade in 1970. This situation
has radically changed since 1970. Although the U.S. trades a growing portion of its
total output, its percentage of world trade has declined precipitously. For example,
the U.S. share of total world exports fell between 1980 and 1988 from over 15% to
12%, equal to the value of exports of Germany and only slightly ahead of those of
Japan. Other industrial countries such as France, U.K., Italy, and Canada accounted
for 4.5–6.0% of world export trade. By 2003 it regained some volume but this may
be temporary and largely due to the low value of the dollar.
Overall, the countries listed above along with Japan, Germany, and the U.S.,
accounted for over 55% of total world export trade in 1988. By 1991 this figure
grew to over 61.2% and by 2003 to nearly 68%. Adding exports of smaller

Figure 3. Merchandise Trade Balance


Source: U.S. Department of Commerce, Bureau of Economic Analysis, Business Conditions Digest,
September 2000.
44 CHAPTER 1

industrial countries such as Korea, Taiwan, Belgium, Netherlands, Spain, Singapore,


Switzerland, and Austria, each of which accounts for 1.2–2.3% of total world
exports, industrial countries worldwide contributed over 76% of world export
trade by 2003.
According to GATT, the overall volume of the world’s merchandise trade
increased by 4.5% in 1992, a sharp 50% increase over the growth rate of 1991.
The overall value of trade climbed by 5.5%, reaching US$3.7 trillion, while trade
in services (transport, telecommunications, banking, insurance, etc.) reached $960
billion in 1992, for a total value of world trade of $4.66 trillion or about 22.4% of
the world’s gross product.
The world’s fastest growing economy is now China that has achieved an export
growth of 18% in 1992, and 26% in 2003. While U.S. trade is growing, its position
as world leader is now challenged by the European community, Japan, and even
China, particularly with the dollar maintaining its low value.
While U.S. foreign trade has historically comprised a smaller percentage of GNP
than that of other major trading nations, as noted before, the fact that the American
GNP constituted such a large proportion of world GNP assured its dominance in
world trade. The U.S. GNP has consistently fallen as a percentage of world GNP
and, although U.S. foreign trade has steadily grown in both real and absolute terms,
this growth was usually smaller than that of world GNP and of world international
trade. In other words, while the U.S. is still the world’s largest trader, its participation
in and influence on world trade is continuously declining. China is now expected
to become not only the world’s largest economy but also its dominant trader before
year 2025.

FOREIGN TRADE IMBALANCE OR OUTSOURCING

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

is the result of the decision of American manufacturers to produce abroad. In


some cases, this is done by simply outsourcing to suppliers abroad. This was the
primary approach used initially by American electronic, appliance, and apparel
manufacturers in 1970–1990. Since then, more and more American manufacturers
have established their own plants abroad, either themselves or as joint ventures.
In any case, the import of their own American brand name goods into the U.S.
counts as an outflow of trade costs, even though the profits actually accrue to the
American manufacturer who may or may not repatriate such profits. This situation
is amplified by the export of investment capital to establish plants abroad. Few
trade statistics properly account for this phenomenon or make adjustment in the
foreign trade statistics.
This trend can be expected to continue as industry and trade become increasingly
global, and outsourcing more popular. New approaches may have to be developed
to properly account for the effects of exports and imports of outsourced production.
The first question is obviously whether ownership of manufacturing matters. Does
it matter if a consumer buys a U.S. or foreign brand American-made product or for
that matter a U.S. or foreign brand, foreign made product? In any case, adjustments
could be made for imported and domestic content, such as parts, etc., but even such
adjustments do not fully account for the resulting economic and trade impacts.

THE U.S.-ASIAN DILEMMA

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.

IMPOSING OUR PRINCIPLES ON OTHERS

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

Asia, particularly the Orient, is destined to become an economic powerhouse.


Right now we are wavering. On one hand, we recognize that the future is largely
based on the countries of the Pacific Rim. On the other hand, we are continuing our
old traditional relationship with Europe, with the maintenance of a Western alliance
and attempt to strengthen our bargaining position with our own North American
Free Trade Alliance. But Europe is looking eastward and will eventually encompass
all of Eastern Europe in its economic life.
America may then find itself waffling between two giant economic power-
houses, in the unaccustomed position of a smaller player among two giant economic
groupings. We need an effective economic and trading policy that establishes our
future role, and a meaningful strategy to this end. As noted by McGeorge Bundy
in a 1992 interview, “The first concern of Americans who care about the success
of foreign policy in 1992 must be with strengthening our own economy and civil
society. In addressing our international role, I must emphasize right at the start that
we cannot play it well if we have continuing failures at home”. This is as true
today as then. We must have the courage to set our own house in order in social
and economic terms if we want to continue to claim leadership. Leadership is not
a right but must continuously be earned.

ECONOMIC INEQUITIES IN THE U.S. JOB MARKET

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

Figure 4. The Widening Gap in the United States

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.

MAINTAINING ECONOMIC LEADERSHIP


Important economic issues now extend from the availability of decent jobs for
Americans, the productivity of our industry, and the effectiveness of our government
and institutions, to our technological prowess and trade competitiveness. We appear
AMERICA’S ECONOMIC ENVIRONMENT 51

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

to increase our humanness without giving of ourselves. We prefer impersonal and


short-term relationships to deep and long-standing commitments.
The U.S. labor force is very flexible which is a major advantage at a time of rapid
technological and structural change. World trade has grown from $7.05 trillion in
1990 to $11.0 trillion in 1996 to $12.9 trillion in 2000 and over $14.3 trillion in
2003. U.S. foreign trade which reached $607 billion in exports and $732 billion in
imports in 1996, while still the world’s largest, fell to 11.2% of the world total in
2003 versus 16.3% in 1990 and over 23.2% in 1975. It has since regained some of
this loss.
The U.S. economy has an unsurpassed vitality and has dealt successfully
with the challenge introduced not only by rapid technological advances but also
societal change and industrial developments. Capital markets now control most
U.S. economic developments and financial entrepreneurism has become the major
driving force of the U.S. economy. It has resulted in many mergers and acquisi-
tions and, although many claim rightfully that such transactions use scarce capital
without creating new values or opportunities, there is evidence that the resulting
economies of scale, transformations, and streamlining often improve performance.
The main concern should really be with their effects on competition on one hand
and small entrepreneurial entries that have traditionally driven American indus-
trial and technological advances as well as economic growth and job creation. A
majority of successful small capitalization entrepreneurial enterprises are bought up
by large corporations within their first ten years of operation, some for the value of
their products or processes and others to reduce or eliminate potential product or
process competition. In the latter case, the acquiring corporation will often suppress
technological developments, something which is not in society’s interest.
It also potentially affects U.S. economic leadership in the long run. The U.S. is
the world leader largely because it is the most innovative nation which provides its
inventors and entrepreneurs with the economic, social, and regulatory freedom to
advance, develop, and market their ideas. The new financial market domination may
stymie these freewheeling developments and thereby ultimately affect American
economic leadership.

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.

THE AMERICAN CONSUMER

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.

WEALTH AND VALUE CREATION

Much of America’s economy is no longer based on the traditional concept of wealth


or value creation but on economic churning. Here merging, acquiring, reorganizing
or spinning off of economic enterprises becomes the objective. In some cases, real
cost savings or improvements in productivity are achieved, but in the majority of
instances added value is only increased to owners and managers not the economy,
consumers or society at large. Unfortunately, this new type of “wealth creation” is
being copied and used by many developing and newly market-oriented countries as
well. They consider it a short cut to economic growth and prosperity.
It usually does not create new wealth or products that people or the markets
want and will buy; it just puts a new name on an old coat. Yet this is the approach
used by an increasing segment of our economy and copied by those of others. The
Internet stock bubble of recent years is similarly such an example, and a dangerous
precedent. The Internet bust of year 2000 reduced the wealth of many newly rich,
but also reduced the confidence of many investors in the market. Based often on
fanciful business plans, with little if any profit or even revenue potentials, such
investments were touted as the new economy’s great opportunities which were
based on new business models. Few had any meaningful foundations and much
wealth was drained from the economy in the search for unrealistic or fraudulent
grails. Even in the new economy, value creation still requires traditional concepts.
Products must be desirable and add value to buyers and markets must be accessible
and realizable. Some people can be fooled some of the time, but all people will
never be fooled all the time, as some new economy gurus expected.
The value of this type of economy is hard to determine. The U.S. has consistent
negative balances of payment and more and more U.S. government debt is owned
by foreigners. We have major companies whose capitalization is many times their
revenue that have marginal if any profits and whose real assets are worth very little.
Our valuations seem to be way out of line by any traditional measure. It has become
very difficult to assess the real value of companies as today most of it is based on
prospects and break up value is largely ignored. The value of on-line business such
as EBay, an on-line auction house, is as a result hard to determine; yet the market
uses future prospects as a main guide for its determination.
This may be useful over the short run but is certainly questionable in the long
run when technological change and new approaches to business may make the
EBay model obsolete. The issue is that an increasing percentage of the value of
the U.S. economy is built on such valuation, which may collapse without warning.
The economic leadership of America is therefore built on rather fragile foundations,
which may crumble with little notice.
CHAPTER 2

AMERICAN INDUSTRIAL DEVELOPMENTS

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.

THE PROBLEM OF U.S. UNDERINVESTMENT

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

Finally, there is a need for substantially more investment in training and


education, where again industry underinvests on the assumption that government
should and will take care of it.

INVESTMENT IN TECHNOLOGY DEVELOPMENT

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.

TECHNOLOGY AS AN ECONOMIC DRIVING FORCE

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

America is unique among nations in that it is a country without a well-defined


national, cultural, and religious history. In fact, it is built on the concept of a
melting pot in which the interaction of people with diverse backgrounds fosters
collaboration and association for advance. Because we are not constrained by rigid
cultural and historic ideas, we were better equipped to develop and use science
and technology for the introduction of new products and services, and thereby to
develop new industries and other economic activities which became the envy of
the world and the principal source of U.S. economic power, a power that in turn
formed the foundation of our strategic and military power.
In the last sixty years, however, and in fact since the massive defense-science
projects of World War II, the U.S. science and technology base has increasingly
been oriented towards and engaged in the development of technology for the defense
industry. By 1990, more than 60% of all U.S. scientists and engineers worked for
the U.S. government (largely in defense-related jobs) or for defense contractors, a
number that has remained constant until now (2004).
Even a substantial proportion of scientists and engineers at U.S. universities
were until recently largely engaged in defense-oriented research and development.
The need for defense-related R&D has declined in recent years – a trend that
is expected to continue. Yet, although the U.S. Congress has passed legislation
requiring effective transfer of technology from government laboratories to U.S.
industry, this is not happening because of
1. lack of incentives and recognition for technology transfer,
2. inadequate legal guidelines and protection,
3. inability of defense researchers to evaluate their technology in commercial
terms,
4. rigid secrecy and bureaucratic barriers,
6. lack of technology ownership specification,
7. ineffective technology transfer mechanisms,
8. organizational constraints,
9. competitive barriers, and
10. lack of plans for the effective retraining of defense scientists and engineers.
There appears to be a lack of national technology leadership and direction in
government, industry, and academia. Although the U.S. is still the most prolific
producer of scientific breakthroughs, particularly in basic science, we increasingly
lose in the battle for technology development, innovation, and use, particularly in
bringing inventions and innovations to the market place.
We are mired in prolonged delays in transforming scientific breakthroughs into
technological advances and applications. The reasons are manifold, but can be
summarized as the ineffectiveness of the management of technology, the lack of
technology planning, and the lack of a national and industry technology policy
which provides clear guidelines and resources for technological advance. It is clear
that we are paying dearly for these omissions, and unless we change and institute
an effective technology policy we will continue to lose economic advantage, in
both relative and absolute terms.
AMERICAN INDUSTRIAL DEVELOPMENTS 61

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

WORKING IN AMERICAN INDUSTRY

Labor-management relations in America are generally adversarial, and labor loyalty


to the employer and vice-versa is largely illusionary. Forty percent of all U.S.
workers are on average less than two years in their jobs. In Germany and Japan
the percentage of workers who are less than two years in a job is only 9% and
17%, respectively. These differences become even more dramatic when we consider
longer periods on the job. For example, fewer than 26% of U.S. workers are in
their job more than ten years, while 66% of Japanese workers work for the same
employer ten years or more.
According to the U.S. Bureau of Labor statistics, American manufacturing
workers work more hours per-year on average than do their European counterparts,
and are second only to Japanese and Korean workers in the number of hours worked
(Table 10). Yet there is a question if they work as effectively; in other words, is
their work is as effectively organized. All European countries work substantially
fewer hours, yet in some, such as Germany, they achieve equal or better outputs
per worker.
American workers spend more time traveling to and from work, as a larger
percentage of them live in suburbs and areas remote from their work place. On
average American workers spend nearly one hour and ten minutes getting to and
from work. In addition, they also spend more time preparing for work, coffee breaks,
and at-work socializing. In other words, there is less concentration on the work
itself, and as a result, hours worked productively is actually 10–20% lower than
hours/year spent at work as listed above. This puts the U.S. in line with actual hours
worked in most European countries but far behind those worked in the major Far
Eastern countries. An increasingly important issue in U.S. industry is continuous
education and retraining of the work force, something which is ingrained in many
Far Eastern countries but as yet not common in U.S. plants where workers are
considered less permanent.

Table 10. Manufacturing Hours Worked

Country Hours/Year Worked Exclusive


of Vacations and Holidays

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

Source: U.S. Bureau of Labor Statistics (2000).


AMERICAN INDUSTRIAL DEVELOPMENTS 63

INTERPERSONAL RELATIONS, WORK PLACE PRODUCTIVITY,


AND ECONOMIC IMPACT
Interpersonal relations in the U.S. are more informal than in most countries. We
call each other by our first names, a custom that transcends all peer groups. It is
quite common to call not only your co-workers or students by their first name,
but also your teachers and superiors. Similarly, teachers and superiors take it for
granted that they can call anyone reporting to them by their first name. On the
surface, this seems a fine idea, based on democratic principles and mutual respect
and confidence.
On closer examination, however, this informality appears to be a smoke screen
that covers radical differences such as huge differences in rewards as well as major
contrasts in status and power.
Furthermore, these informalities have not helped to improve the relationship
between labor and management, students and teachers, patients and doctors, nor
any of the many other important relationships that abound in our nation. In fact,
it appears that adversity between these groups is stronger in the U.S. than in most
countries and that informality, instead of smoothing and furthering cooperation,
actually reduces mutual respect and encourages confrontation.
There are many reasons for this conclusion, but informality combined with
inequity in remuneration and working conditions is often a spark, which readily
ignites inherent dissatisfaction. While it signals accessibility and equality, on one
hand, it actually serves as a smokescreen that disorients the average worker. Infor-
mality quite often breeds contempt, particularly when used to cover up misuse of
power and position. It also affects the effectiveness of organization and management
or decision making structures.
Layoffs by major U.S. corporations usually occur to react to changing market
conditions and as a result of changing technology. Yet they are usually described as
a move to improve competitiveness. They may in fact have the opposite effect. Such
layoffs are often a frantic effort to cut costs. Instead, a planned approach and changes
in operations and management to address the basic problems in the way these
businesses are run probably would provide greater and longer-lasting improvements
in performance. With consumer spending rising and improving revenues, it is often
easier and longer lasting to increase markets and product range than cutting costs.
This also improves economics of scale.
Layoffs often include highly technical employees who represent huge invest-
ments in knowledge and experience; improvements in performance or costs are
not necessarily achieved simply by massive layoffs. On the contrary, this approach
adversely affects the morale of not only those let go but also the morale and
loyalty of important management staff as well as the remaining workforce. It is
also disturbing interpersonal relations within the corporation and affect customer
perceptions.
Unlike corporations in Europe, Japan, and other Pacific Rim Countries, U.S.
corporations have traditionally encouraged turnover among workers as well as
among management. The average stay for managers and other professionals with
64 CHAPTER 2

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.

THE U.S. PENSION DEBACLE

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.

MANAGEMENT OF TECHNOLOGICAL CHANGES

“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

development of new technology. To be effective, technology development must


be a continuous process from scientific discovery to application. In the U.S., most
research is performed at academic, government or other specialized laboratories,
which have no relation to or understanding of the use of technology as a product or
process of commercial use. We do not usually consider real or potential applications
nor implications in terms of economic, social, and environmental impact. As a
result, a significant number of American scientific discoveries are first put in use
elsewhere in the world, particularly in Japan and other Far Eastern countries. Unless
we become more use and application oriented in our research, this trend is bound
to continue with potentially devastating economic effect for the U.S.
With federally funded research on the decline, particularly in universities and
commercial research laboratories, foreign firms are now tapping potential sources
of research and technology development in the U.S. Japanese firms, for example,
own over 150 U.S. research facilities and spent $1.2 billion on basic research in
the U.S. in 1990, over $2.0 billion in 1996, and even more in 2003. Foreign firms
accounted for over 17% of all corporate funded research in the U.S. in 1990, as
shown in Table 11.
This percentage is growing as foreign firms find R&D in the U.S. to be cheaper
as well as more productive than similar research elsewhere, including in their home
country, because of the following:
1. a broad and well-developed research base in the U.S.;
2. greater availability of research scientists and engineers;
3. a large amount of federally funded basic science research results on which to build;
4. well equipped research laboratories often financed by agencies of the U.S.
government; and,
5. openness and accessibility of U.S. research, at universities, but also recently at
federal research laboratories who attempt to transfer or commercialize federally-
funded research. These labs often find that foreign-funded, U.S.-based research
organizations quickly recognize the commercial potential of research results.
While some claim that the increased foreign presence in U.S. research is only a
reflection of the growth of foreign business activity here, including manufacture of
goods for the U.S. market, others claim that foreign firms do not make their research
results available, nor do they necessarily use them for commercial purposes in the
U.S. market. Their primary objective is seen to be to enhance their competitive
advantage worldwide and in particular in competition with U.S. firms.

Table 11. U.S. Corporate Research Funding ($ Billion)

Total Sample Percentage of Foreign Percentage of


Firms Operating in Firms that are
the U.S. Foreign Owned

1987 561 65 115


1990 642 113 176%
% Change +140% +737%
AMERICAN INDUSTRIAL DEVELOPMENTS 67

It is evident, that at this time of rapid technological change, that improving


products and processes in marginal steps is no longer good enough to maintain
market share and sustain profits. Technological progress must be based on new
discoveries and radically changed technology to assure continued growth, and this
requires continuous involvement in basic research, not just for image building but
for survival in a demanding and competitive world market-place.
The major issues in U.S. technology development that must be considered are as
follows:
• technical progress usually results from systematic endeavor;
• to model the sequential process linking R&D productivity, the economic concept
of “production function” is used;
• research (funding) knowledge of problem orientation is necessary;
• innovation is an invention which has been developed to include users’ needs; and
• the effects of elasticity of demand on rate of innovation is very pronounced in
the U.S.
It is for these reasons that we need more effective cooperation between the
government and industry as well as intra-and inter-industry collaboration in
technology development and application, with the outdated anti-trust concerns still
often voiced when such cooperation is sought. This notwithstanding the fact that
such intra- and inter-industry collaboration is common and encouraged in many
other countries, particularly in Japan, China, and other Far Eastern countries, with
the government serving as the coordinator and often also risk taker in industrial
research and technology development.

MANAGEMENT STRUCTURES AND INCENTIVES

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

transportation, hotels, or even information services. Only about 5% of top managers


and 2% of CEOs of major U.S. manufacturing firms are engineers, technologists or
production experts.
As a result, U.S. companies in general have built up huge white collar
management hierarchies, which are self-perpetuating and are usually quite remote
from the business of their own company. They too often know little about the
products produced and even less about the processes used in their production, as they
deal primarily in numbers and concepts. Their plans are paper studies and longer-
term aspects, and resulting prospects were seldom considered. When hit with lower
sales or profits, management’s response has typically been to reduce production
costs by reducing the work force while leaving the management hierarchy intact.
In fact even remuneration and reward of management were typically not affected
by any downturn in company performance. Management was assumed to be “the
company” while the productive or service part of the company was considered a
dispensable and adjustable appendix to be manipulated in response to changing
conditions.
In recent years, however, many leading American corporations have come to
recognize that this management approach and structure is not only very expen-
sive but also counter-incentive. With companies losing trained professionals and
production workers every time they outreached or made other changes, the cost of
replacing the talent became an extraordinary expense.
Corporations similarly have come to recognize that radical changes in white
collar management structure are required, particularly as productivity on the shop
floor increased at many times the rate of improvements in management productivity
both in absolute terms and as a function of investment in new production and
office technology. In fact while U.S. productivity on the shop floor increased by
an annual average of nearly 3.6% between 1980 and 1989, and again by nearly
4.4% between 1990 and 1999, management productivity barely advanced at all,
leaving industry with a dismal total productivity improvement of under 2% and
2.8% per year, although the industry spent more on office automation, management,
information, communications and related management technology than on new
production process technology. Similar dismal results are visible in the U.S. service
industry.
More recently American industry learned that investments in management support
technology may provide prestige but little productivity improvement if not accom-
panied by radical changes in management organizational structures and culture.
Most important, the traditional status and rewards based, not on the importance
of the decision-making responsibility, but on the rank in the hierarchy and the
number of people reporting to a manager, is an ineffective and often counter-
incentive management method. In fact this outmoded management style often
encouraged intervention or addition of unnecessary staff to maintain (or build) an
empire.
For this reason white-collar management ranks have been much more difficult to
reduce than blue-collar production workers have. As a result many companies are
AMERICAN INDUSTRIAL DEVELOPMENTS 69

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.

Table 12. Trends of Salaries and Compensation of CEOs of U.S. Companies


(Increase %/Year)

Salaried CEO Comp. CPI Corp.


Employee
Comp.

1983 73 128 32 200


1984 60 140 43 170
1985 62 62 38 –108
1986 58 136 21 88
1987 54 140 34 202
1988 50 139 41 228
1989 50 79 48 – 48
1990 50 62 50 –79
1991 49 45 43 –150
1992 49 81 30 +170

Source: William M. Mercer, Inc., Wall Street Journal, April 9, 1992.


70 CHAPTER 2

U.S. CORPORATE PAY

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.

Table 13. Average Salary and Bonus

1960 1970 1980 1992

Chief Executive Officers 190,383 548,787 624,696 3,842,247


100% 100% 100% 100%
Engineer 9,828 14,695 28,486 58,240
5.1% 2.67% 4.5% 1.51%
Teacher 4,995 8,626 15,970 34,098
2.6% 1,57% 2.56% 0.89%
Worker 4,665 6,933 15,008 24,411
2.45% 1.26% 2.40% 0.635%

Data: Bureau of Labor Statistics, National Education Association, Business Week,


April 26, 1993.
AMERICAN INDUSTRIAL DEVELOPMENTS 71

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.

WORKER MORALE AND WORK ETHICS

Restoration of American competitiveness can no longer be based solely on techno-


logical advantage, the size of the U.S. economy, the educational level in the U.S.,
the strength of the U.S. financial institutions and markets, and similar arguments,
but must rely increasingly on improvement in work ethics, worker-management
relationships, worker motivation, equity and fairness in the work place, and moral
values of both workers and management.
The American worker gets fewer holidays than most European workers do; in
theory working more hours per year, but in reality real productive work hours are
fewer. As noted before, the average American worker spends significantly more
time preparing for work and in non-work related activities in the work place than
do his European and Japanese counterparts. Part of the problem is lack of effective
organization of the work place. Few U.S. plants prepare material and tools at each
workstation prior to the beginning of a shift. In fact, U.S. workers must usually
assemble their own materials and tools. Similarly, there is little teamwork or peer
cooperation on the job.
Worker-management relations are increasingly adversarial. Few American firms
offer workers meaningful incentives such as profit sharing, bonuses, or even some
type of recognition that enhances a worker’s status. In many companies work ethic
is lax, and in some outright negative. Some American corporations have taken
determined and often successful steps to reverse this trend which developed over
the last 40 years. Still American manufacturing firms in many cases remain non-
competitive, though American wages and labor costs are the same or lower than
those in the same industry of other major industrialized nations. While American
worker productivity on a per person level is often more than comparable with that
of workers of our major competitors, the differences in overall worker productivity
are often the result of
• less effective work place management,
• less worker management cooperation,
• lower or non-existent worker incentives, and above all,
• lower morale and work ethic.
All of these impediments are obviously mutually reinforcing and decrease the
quality and effectiveness of output, which in turn again makes many American
firms non-competitive in a global environment. U.S. automakers turned much of
this around after finding a large share of their most lucrative domestic market
taken over by imports and cars manufactured in the U.S. by their foreign
competitors.
It took the U.S. automobile industry much time and soul searching to recog-
nize that the old ways of running industrial plants, with low worker morale,
under-investment in people, and lack of worker-management cooperation, did not
AMERICAN INDUSTRIAL DEVELOPMENTS 73

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

A recent study by McKinsey [Ref. 8] actually finds American workers to be more


productive than their Japanese and German counterparts at the worker level, notwith-
standing the public perception that American productivity is slipping and has fallen
well behind that of these major industrialized countries. The comparative decline
in U.S. productivity is often similarly blamed for many of our economic and social
ills, such as unemployment, homelessness, and crime.
In the nine major industries studied (automobiles, auto parts, metalworking, steel,
computers, consumer electronics, soaps and detergents, beer, and foods), Germany
was found to achieve only 83% and Japan 79% of the productivity of the U.S.
These findings contradict those of other influential economists, such as Lester
Thurow and Laura D’Andrea Tyson, who claim that German and Japanese manufac-
turers have overtaken their U.S. counterparts in productivity in many major indus-
trial sectors such as electronics, steel, automobiles, auto parts, metalworking, and
computers.
Both sides of the argument are partially correct. Both agree, for example, that
productivity in terms of output per hour worked in 1990 was higher in Japan
than in the U.S. in the automobile, auto parts, metalworking, steel, and consumer
electronics industries, and lower in computers, soap and detergents, beer, and food
industries. Productivity in Germany was equal to or lower than that in America for
all these industries, though in some only marginally so.
However, the size of the industries in which Japan and Germany excels or
are about equal in productivity to its U.S. counterparts constitute a very much
larger proportion of the GNP of these nations. Similarly, industrial employment in
the U.S. in McKinsey’s nine industries constitutes a much smaller proportion of
total employment in the U.S. than in these two industrial countries. In fact, this
proportion in the U.S. is only 40% of that in Japan (where these industries account
for nearly 30% of employees) and 55% in Germany. A second distorting factor
is that the number of administrative and support personnel per production worker
is significantly larger in the U.S. than in either of these other countries, which
accounts for the differences in aggregate productivity and productivity achieved at
the worker level.
For nearly twenty years now, we have considered low worker productivity to
be a major problem for U.S. manufacturing. As a result, labor costs were reduced,
74 CHAPTER 2

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

Table 14. Labor Productivity Index

U.S. Germany France U.K.

ER PPP ER PPP ER PPP ER PPP

Productivity per 95 141 93 108 95 120 68 105


worker
Productivity per 109 162 119 139 116 146 NA NA
man-hour
Productivity 212 313 95 111 153 194 123 189
per worker in
agricultural sector
Productivity per 102 151 27 32 48 60 125 193
worker in mining
sector
Productivity 80 118 77 90 80 101 52 81
per worker in
manufacturing
Productivity per 88 130 103 120 105 132 58 90
man-hour in
manufacturing
Productivity per 46 68 45 53 35 44 23 35
worker in utilities
sector
Productivity per 68 100 73 84 67 85 62 95
worker in
construction
Productivity per 129 190 107 125 153 193 81 109
worker in
wholesale/retail
Productivity per 93 138 83 97 75 95 62 96
worker in
transportation sector

NOTES: ER=exchange rate (productivity converted at current exchange rates).


PPP=Purchasing Power Parity (productivity converted at PPP).
Productivity index for Japan based in ER and PPP=100. For example, an index of 162 for
the U.S. means that U.S. is 62 percent more productivity than Japan on PPP basis.
Source: Boston Consulting Group, Department of Labor.

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

• eliminating excess quality


• process analysis and process improvement
• checking interactions among processes
• correcting process abnormalities and preventing recurrence
• improving equipment safety and maintenance
• improving work standards
• improving process control standards
• rectifying equipment or process capacity shortcomings
• designing and fabricating production aids
It is during the production stage that management expects the most quality control
activities, but it is also at the production level that quality control is most difficult
to implement and maintain, particularly if proper attention to quality management
was not given in the planning and design phases. The following are some causes
of this difficulty:
• low education of production work force
• union rules
• workers’ attitudes
• misunderstanding of meaning of quality control
• linking quality control to quality assurance responsibility
• unwilling to find fault with fellow workers
• expecting immediate benefits and monetary incentives
• simultaneous emphasis on quality, cost, quantity, and delivery
• performance measurement in quantity
• no feedback of quality problems
• lack of top management participation
• lack of top management support
• data collection difficulties
Workers are most likely to draw their lines when it comes to work responsibilities.
This is mostly due to the fact that management has educated the work force on a
clear distinction of work responsibilities and assembly line mentality. Well, the first
thing to do is to change this “assembly-line mentality” to “the next person on the
line is your customer” concept. I strongly advocate this change in attitude of the
work force before introduction of any structured quality control program. In fact,
to succeed, quality management must ensure not just involvement but integration
of planning, design, and production as well as marketing in setting standards and
procedures of product and process quality management.

QUALITY CONTROL IN PURCHASING

In most manufacturing, as much as half of a product’s costs is attributable to


materials, parts and resources that are purchased from outside the organization.
Defective materials and parts lead to additional cost. Even if the supplier does
not charge for replacement, production is disrupted and deliveries delayed or extra
costs incurred to meet delivery deadlines. It is thus correct to say that it is as
AMERICAN INDUSTRIAL DEVELOPMENTS 77

important to assure quality management in purchasing as in manufacturing for


quality control. This is particularly important now when so much is outsourced,
often in remote foreign locations. Quality control responsibilities in purchasing
include:
• insuring quality suppliers and subcontractors
• selecting suppliers and subcontractors for quality
• communicating quality requirements to suppliers and subcontractors
• relaying instructions and providing assistance to suppliers in the introduction and
use of quality management and standards
• acting as liaison between internal departments and suppliers to assure consistency
of standards
• inspecting materials and parts received using agreed standards and procedures
• reducing inventory costs by assuring quality tests before acceptance
• processing orders
• supervising delivery deadlines that may include complex logistic or supply line
deadline controls
To assure quality control of procured materials and parts, suppliers must be
made an integral part of the manufacturing enterprise or family. While this is being
achieved in Japan and Germany as well as by some U.S. manufacturers now, it is
often difficult to implement because of American perceptions and traditions that
interpret anti-trust and competitive supply to extend to the lowest level of the
supplier pyramid. This sometimes makes it difficult to impose quality standards
as well as to induce quality incentives. Standards include physical dimensions and
material properties, as well as conditions and time of supply or delivery. Most
importantly, introduction and use of high standards requires long-term relationships,
commitments between manufacturers and suppliers, and recognition of mutual inter-
dependence. This in turn must be exhibited in trust and mutual support. Increased
outsourcing now introduces great interdependencies that in turn demand confidence
and trust among the partners in the supply chain. Yet this will usually pay off by
assuring cooperative and mutually beneficial relationships.

CONTRADICTIONS OF COMPETITIVE BIDDING


AND PROCUREMENT

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.

THE DECISION-BASED INDUSTRIAL ORGANIZATION (DBO)

The principal function of management is to make effective, timely decisions. For


this purpose, management forms organizations with each level in the organiza-
tional structure responsible for certain decisions. We usually give titles to the
decision-makers in such an organizational structure and call them managers of their
respective decision domain. The problem is that such titles are often conferred
and respective organizational structures introduced without first insuring that all
information required for the decisions of such managers is actually available. In
fact, few if any decision makers in a typical hierarchical line organization have
access to the information required to permit effective decision making in a timely
manner. As a result, many decisions are made on the basis of inadequate infor-
mation, deferred, or simply ignored for lack of adequate or timely availability of
the necessary information.
Most American industrial firms maintain strict hierarchical or line organizational
and management structures, an approach made largely obsolete by the information
revolution. Current information technology not only makes it possible to reduce the
number of levels in a management hierarchy, but also actually makes it preferable
to delegate decision making to the lowest level at which complete information
needed for the decision is available. The result is a flattening of the organizational
structures into an efficient decision-based organization that many forward-looking
companies now introduce with much success. Decision-based management is the
logical approach to management in this information age where everyone can get
ready access to all information.
AMERICAN INDUSTRIAL DEVELOPMENTS 79

INSTITUTIONAL SUPPORT FOR INDUSTRIAL


DEVELOPMENT

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.

AMERICA AS A SERVICE ECONOMY

Post-industrialism is often interpreted as economic activity imbedded in service


rather than in manufacturing or industrial activities. By this definition America
is rapidly becoming a post-industrial economy or society. At the present rate of
expansion of our institutions, government, and service industries, this trend will
lead to the demise of our productive sectors, such as manufacturing, and agriculture
within the next quarter-century.
Well over 78% of all U.S. employees now work for institutions, government, and
service industries, and this number is expected to exceed 84% by 2005. Economies
must create wealth if they are to sustain themselves and to grow. Many question the
80 CHAPTER 2

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.

THE DEMISE OF THE AMERICAN MIDDLE CLASS

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.

INEQUITY IN AMERICAN SOCIETY

Although Americans respect financial success, they increasingly expect remuner-


ation to be linked to performance and not just position. It may be necessary to
reduce the exaggerated inequities in compensation in order to stifle social discontent.
As noted in 1992 the average corporate CEO of the major 500 U.S. corporations
was paid $3,842,247, the average engineer $58,240, teacher $34,098, and worker
$24,411. The twenty highest paid CEOs in the U.S. had compensation of $11.2 to
$127 million. This trend continues and while CEO incomes increased by another
58%, that of employees and workers increased only by 34% during the period 1992
to 1999. In only select cases was senior executive compensation related in any
way to performance, and many CEOs of companies with dismal records received
substantial pay and benefit increases while their companies lost money, laid off
workers, and asked remaining employees to forego salary increases.
There is a general perception of “immorality in the board room”, an attitude
that cares for neither the shareholder or for the staff or workers. The perception
sometimes includes the lack of caring for or interest in the customer or community
AMERICAN INDUSTRIAL DEVELOPMENTS 83

as well. While the scandal of unearned compensation permeates mainly senior


executive ranks of industry, it increasingly includes senior executives of service
companies such as banking and retailing as well as institutions in education, health
care, and law or legal services.
Annual compensation increases of executives (including bonuses) were 13.9%
in 1988 and 1989. They fell to 8.1% in 1992 and continued at that rate to 2003.
These rates were substantially higher than the average 4.6% increase in gross pay of
white collar and 4.0% blue-collar workers during the same periods. Remuneration
of executives has grown at a pace two to three times that of white-collar workers,
and at an even higher rate than that of blue-collar workers in the same industries.
The greatest disparity in the growth rate of remuneration has been in service and
institutional organizations, including not-for-profit institutions and organizations.

ECONOMICS OF DISABILITY IN AMERICA

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.

POLITICAL CORRECTNESS AND ORGANIZED LABOR

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

Even though union membership is at an all time low, unions continue to


exert outstanding political and economic power, largely because of their financial
prowess. They have also staked out politically correct positions and are playing
Republican and Democratic lawmakers against each other without clear-cut political
commitments to either side.

THE CUSTOMER AND THE COST OF DOING BUSINESS


IN AMERICA

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.

AMERICAN ECONOMIC PROSPECTS

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

negates the advantages in labor productivity as much of it is spent on laborsaving


automation.
Even in traditional heavy industries, such as steel, the U.S. has been able to
improve labor productivity to above the level of Japanese and European producers.
At the same time the U.S. economy continues its steady growth at 2–3% of GDP
and experiences low inflation. Even its exports have grown to 14.5% of the world’s
merchandise exports. All of this is an indication that the U.S. regained economic
world leadership, largely as a result of the determined efforts by American industry
to become leaner, meaner, and more effective. But this leadership, as noted before,
it fleeting and may not be maintained unless the U.S. introduces some radical
changes.
U.S. industry has learned to seize technological opportunities without delay and
to make painful and timely decisions and changes. But this is only part of the story.
Our huge trade and budget deficits continue and the percentage of domestic product
consumed by our institutions escalates without bound and at a rate which could
negate all the economic advances achieved by American industry and technology
development. We must reign in institutional growth and improve institutional effec-
tiveness, lest our otherwise bright economic prospects be dimmed or extinguished.
We must bring our institutions back to basics, to serve the public and not mainly
their own needs, and to do so efficiently. America will be able to achieve its
objectives and lead the world in moral and strategic terms only if it is economically
strong. Economic strength requires a productive society that adds significant wealth
and does not simply churn assets among institutions and service organizations.
What is at stake is no less than America’s world leadership and future.

THE U.S. AS A POST-INDUSTRIAL SOCIETY

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

of communications, transportation, health care, and education – are being dereg-


ulated and privatized. Institutional roles will continue to change as control of
traditional institutional and government functions are transferred from institutional,
government, and political control to society and the marketplace.
In parallel, new management methods need to be developed which de-emphasize
bigness and short-term institutional performance and emphasize satisfaction of
society’s needs.
Post-industrial societies will be service oriented, and many services are becoming
tradeable commodities. Some of today’s national economies already survive and
even grow based on the provision of services. The Republic of Singapore, for
example, an island nation with virtually no physical resources, a population of about
four million, and little land area, thrives as a service economy. Its economic growth
rate has consistently been in the double digits, and its per-capita income has grown
from that of a mid-level developing country to the ranks of the most prosperous
industrialized nations in the short span of 35 years.
This was achieved largely by providing services of transshipment, banking,
communications, factoring, transport, processing, information, storage, engineering,
and education, mainly to the resource-rich surrounding countries. Most of these
services were sold and not consumed, though. By comparison the U.S. has grown
into a post-industrial service economy which consumes most of its own financial,
educational, health care, legal, communications, and other services. In fact, the
percentage of our exported services is a pittance.
We run our service industry – comprised mainly of our large financial, retail,
legal, educational, and health care institutions – like a restaurant that serves only
family members and select friends. Such a restaurant would not stay in business
for long, particularly in a broad global economic environment.

AN ENVIRONMENT FOR ECONOMIC SUCCESS

The relative decline of America in manufacturing and other industrial activities,


economic sectors in which we reigned supreme, is often blamed on our industrial
laxity: lack of discipline in the work place, labor-management adversity, ineffective
and slow technology application or transfer from the invention to the appli-
cation stage, over-regulation and more. The most important barriers, however,
to improvement in manufacturing and industrial productivity and performance and
to the development of advanced projects, are institutional, or are barriers created
by the ineffectiveness of our institutions.
Industrial and economic success depends above all on the following four
premises:
1. a healthy financial environment; ready access to financing and efficient financial
mechanisms or products. To accomplish this, government must reduce the budget
deficit, take measures that increase savings rates, and eliminate major barriers
to free financial transactions.
88 CHAPTER 2

2. effective educational institutions that prepare students to meet professional needs


and not just train people in narrowly focused areas which are in vogue, but do
not necessarily prepare students for today’s work place.
3. law enforcement that assures safety and fairness, rewards honest contributors to
the economy, and penalizes those who steal from or corrupt the system or the
social environment,
4. health care institutions whose primary concerns are prevention of illness and
the maintenance of health, not with revenues gained from treating illness. Not
only are we a nation of hypochondriacs, but our medical establishment has
induced much of this attitude in an effort to promote public expenditure for and
dependence on health care providers.
The inefficiency of and lack of focus on the real needs of America’s financial,
educational, legal, and medical institutions does more to reduce American compet-
itiveness than all other factors combined.
It is important to recognize that our problems are essentially of our own making.
They are not the result of unfair competition from abroad nor of lack of access to
foreign markets (though some unfairness does exist), but of our lack of resolve to
clean our own house and reestablish the values that first made this country great.
America was the industrial leader of the world for a long time, a leadership
which is slipping away with the change over of the U.S. economy to a post-
industrial service-oriented economy. Leadership in this new environment will only
be maintained if we take a global view of services.
CHAPTER 3

AMERICAN SOCIAL AND ECONOMIC DEVELOPMENTS

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

At present most government work is organized very inefficiently. The ineffi-


ciencies of government bureaucracies are in fact an American cliché. Organi-
zations, particularly in government and public institutions, are seldom based on
decision requirements and the related information-flow. As a result, a decision
which should take only, say, 60 minutes of evaluation may take weeks or months
because information flow or management in such organizations is disjointed and
uncoordinated with decision requirements, and unstructured as an effective decision
support. Recent discoveries of the inefficiencies of the American intelligence
services are just one example of a general condition. Government, like corpo-
rations, must be reengineered or better yet reinvented so that decisions can be
made in an effective, timely, and decisive manner, and truly address problems
identified.

TAX BURDENS AND ECONOMIC INCENTIVES

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

EFFECTIVENESS AND COST OF GOVERNMENT REGULATION

Government in the U.S. operates under a dilemma of effective balance between


laissez faire, free enterprise, and a regulated environment where the sole purpose of
regulation is to protect the individual and society while not interfering with the free
economics of the marketplace. While this principle may be admirable, government
regulation has in many cases assumed a role of its own, often losing sight of its
larger purpose. As a result, it is often ineffective in performing its function, and
more importantly an economic counterincentive. The last category includes cases
where the government spends more on regulating some economic factor than its
whole value.
A case in point is a study for the Independent Bankers Association of America
by Grant Thornton [Ref. 10] of 200 community banks, which revealed a cost
of $3.2 billion annually to comply with thirteen specific regulations. Total
estimated annual expenditures of U.S. banks in complying with regulations are
$11 billion. Bank regulators probably spend large additional funds to check
compliance.
Many of these regulations have little or no impact on banks, and like many other
regulations should be reviewed periodically as to their relevance or effectiveness.
In an increasingly dynamic social, technological, and economic environment, the
need for regulation changes all the time. Yet we appear to assume that regulation,
once justified and introduced, should serve indefinitely.
The problem is largely with the build-up of special interests and a government
bureaucracy that together assure that regulations stay in place long after their
justification has evaporated. The legal profession, which appears to be the major
beneficiary of regulation, is obviously the most vocal in advocating retention of
regulations long beyond their justification.
Some of our regulations cover technology, procedures, or organizations and
services no longer in use or which were used only temporarily as long as 100 years
ago. Not only does this cause a huge bureaucracy in Washington and elsewhere
(a total of more than 100,000 federal employees work for regulatory agencies), but
as noted in the example above, the direct expense of unnecessary regulations is
estimated to cost the U.S. economy many hundreds of billions of dollars. In many
cases the indirect costs to the economy in lost business or trade are undoubtedly
even higher.
In recent years government environmental and social regulations have become
increasingly burdensome, not just in economic but also social terms. Though many
of these regulations are based on just social goals, such as equality of sexes in the
work place, elimination of sexual harassment, pollution prevention, work safety,
and more, most have become horrendously complex, cumbersome to implement,
and are often counter-productive, bureaucratic procedures. In the end they often
lose sight of their basic objectives and become simply rules without objectives. For
example, five federal departments (Transport, Defense, Commerce, Agriculture,
and the EPA) have regulatory functions in U.S. coastal waters. As their rules are
92 CHAPTER 3

not coordinated and often conflicting, huge amounts of money and long periods of
time are wasted in offshore or coastal development projects.

GOVERNMENT BUDGET-MAKING AND BUDGETARY NEEDS

We hear a lot about reductions in government spending. Yet, in reality, Congres-


sional budget-makers as well as the Administration usually imply by reduction in
spending a reduction or elimination in the growth of spending. In fact, we are told
to believe that continued spending at the same level or increasing it only at the rate
of inflation is the same as cost saving. Part of this perception by lawmakers is the
tradition that government agencies receive funding from Congress, not on the basis
of what they need effectively to fulfill their functions, but on the basis of what they
spent in the past and propose to spend in the near-term future.
Few programs, once started, are ever terminated, and few expenditures, once
justified, are ever eliminated even if radically changed conditions no longer justify
their need. This is true not only in defense programs, where as the only remaining
superpower we no longer need high technology space and similar systems expen-
ditures; but also in education, health, social services, energy, transportation, law
enforcement and other areas, where radical changes have dispensed with the need
for many existing programs.
Most importantly, the role of the vast and separate government research labora-
tories that employ more than half the nation’s scientists and engineers must be
reevaluated. Although recent attempts have been made to give these laboratories a
more commercial orientation, investigations have shown that the laboratories are
neither equipped nor have incentives for commercializing their work or findings.
Also, attempts to transform these laboratories into purely commercial operations
have failed for various reasons. Not only do these laboratories now pose an
increasing budgetary burden, but they also deprive U.S. industry of urgently needed
scientific and technical talent and capability.
As we will discuss later, the largest element of government spending is now
entitlements, which have become a virtual “Bill of Budget Rights” and not a “Budget
to Meet Essential Needs”. Entitlement fraud is now so commonplace that it has
become politically hazardous to address the issue without offending a large segment
of voters. Health care and criminal justice are similarly budget items that spiral
irreversibly upwards and are politically untouchable.
Yet, if we are ever to balance the federal budget and halt the risk of eventual
national bankruptcy when government income is inadequate to service the national
debt, we must gather the courage and resolve to address these problems and
eliminate fraud and waste without cutting the meat and muscle out of our nation’s
economic and societal needs.
I make these comments notwithstanding the recent (2001) tax cut and return of
some of the expected surpluses to the U.S. tax payers. While politically attractive,
our potential slide into recession in 2001 is bound to affect government tax revenues
and may even result in crossing out any 2001 fiscal year surpluses. Projected
AMERICAN SOCIAL AND ECONOMIC DEVELOPMENTS 93

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%

In other words, cutting or tightening means-tested programs is not going to


do much to reduce federal spending. While it is true that the percentage of
federal spending on entitlements has remained virtually unchanged since 1975 as a
percentage of the U.S. economy, health care costs have grown significantly.
While it appears therefore that entitlements are just keeping pace with the growth
in the economy, we must remember that the economy does not really keep pace with
itself. The growing budget and trade deficits have required not only enormous federal
borrowing, but also sale of large amounts of U.S. assets to cover federal revenue and
balance of payments shortfalls. In other words, we borrow increasingly more and more
to pay for federal expenditures (the federal debt was $5 trillion before 1998 and is
expected to exceed $6.7 trillion by the end of 2004) and sell off American property
to foreigners. Much of the earnings from assets sold to foreigners are exported.
94 CHAPTER 3

Expenditures by the government continue to grow at a rate in excess of that of


the GNP, and the proportion of entitlement spending is escalating at an increasing
rate, having grown from 49% of all government expenditures in 1992 (including
Social Security) to 52% in 1993 and 54.2% in 1999. Similarly, interest costs are
increasing at a rate of about 10% per year and now constitute over 13% of all
government spending. In fact, defense, domestic programs, and foreign aid which
together represented significantly more than half of all government costs only a
decade ago, are now down to only about one-third of government spending.
Social Security is not just a trust fund, but a social contract, and while it takes in
more than it spends now, it is viewed by government today as just another revenue
and entitlement, a dangerous perception, particularly considering that its spending
is expected to start to exceed its income shortly. Various budget proposals suggest
that the retirement age should be raised to 70 to increase the number of contributors
per beneficiary and to raise the ratio of contributions to benefit payments. Without
such a change, the number of contributors per beneficiary did drop from 16 in 1950
and 3 in 1992 to only 2 in year 2004.
In 1993, 41 million beneficiaries, receiving an average annual benefit of $7,646,
were paid an aggregate sum of nearly $313 billion, or over 20% of all government
expenditures. Yet Social Security contributions are expected to top this by 2–3%.
An increase in the retirement age to 70 in 1993, for example, would have increased
Social Security income by as much as $22 billion, while Social Security benefit
costs would have declined by over $64 billion, making Social Security a tempting
target for deficit cutters.
Considering the rate of increase in the national debt in the Reagan years
(Table 15), and more recently in the 2000–2004 period, only radical changes in
the health care, legal, or law enforcement and educational systems, with changes in
retirement benefits, and some value added or consumption taxes, could eliminate
the budget deficit by year 2008, thus achieving a budget surplus which could start
to reduce the crippling federal debt.
Expenses for large federal sectors, for example health and defense have reversed
their demands on public expenditure in terms of the percentage of GNP spent
by government on the sector (see Tables 16 and 17). Similar large reversals are
occurring in many entitlement programs.
U.S. direct allocations for defense in the 1993 budget were $278 billion, but
according to information collected by the Center for Defense Information from CDI,

Table 15. Increase in U.S. National


Debt

1980–1984 $654 billion


1984–1988 $1,040 billion
1988–1992 $1,462 billion
1991–1996 $1,479 billion∗
1980–1996 $4,635 billion

Estimated.
AMERICAN SOCIAL AND ECONOMIC DEVELOPMENTS 95

Table 16. Sector Expenditures (Percent of Gross National


Product)

1945 1955 1965 1975 1985 1995

Health 4.0 4.5 5.9 7.9 10.5 15.0


Defense 30.0 12.0 8.0 5.5 6.5 3.0

Estimate.
Source: Congressional Budget Office, 1995.

Table 17. Total Defense Spending Budget FY 1993

Department of Defense $278 billion


Department of Energy (nuclear weapons) $13 billion
Total Direct National Defense $291 billion
Military Share of Interest in Debt $79 billion
Veterans $34 billion
Military Air $7 billion
Military, NASA, Coast Guard, etc. $5 billion
Total $416 billion

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.

THE NATIONAL DEBT PROBLEM

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

THE ENTITLEMENT MORASS


Entitlements – from Social Security to health care, education, welfare, and more –
now account for over 50% of total government expenditure, and have jumped to
this level from less than 30% in 1968. They grew to over 65% by year 2003, and
are expected to reach 70% by year 2009 unless radical changes are introduced. At
the same time, federal expenditures are expected to increase by 50% over the next
ten years or at nearly twice the forecasted rate of growth of the GNP.
By the year 2010, the federal government will spend nearly 86% of its outflow
on entitlements and debt service, and its budget will grow from just over 22% to
over 28% of GNP. Entitlements are not only a drain on the Federal Budget and are
starting to dominate it, but worse, have become a root cause for low moral, lower
output, and to some degree for political decay.
The number and also the percentage of people wholly dependent on entitlements
have increased independent of the state of the U.S. economy. Welfare and similar
entitlement programs have become a way of life for a segment of the population,
and a major disincentive for education and employment. In fact, welfare and lack
of education feed on each other, as recipients shun improving their skills for fear
of losing welfare and other entitlement benefits.
As a certain percentage of entitlements is given to able-bodied working age people,
the cost of loss of working output of these people as mentioned before must be added
to the cost of the entitlements to the U.S. economy. The percentage of working-age
able-bodied people on long-term or permanent entitlements, such as welfare or child
support, is now over 3%. This number must be added to the number of unemployed,
as welfare recipients are not counted as unemployed, which in fact they are.
The entitlement morass will be controlled only when meaningful incentives and
limitations are introduced. These measures may include allowing recipients to earn
some money without reduction of their welfare income, until their outside income
significantly exceeds their welfare income, and even then welfare income should be
withdrawn only gradually and proportionally, so that the working recipient always
makes significantly more than the non-working recipient.
Another possible measure is time limitation, which should stipulate the maximum
time an able-bodied recipient can be on welfare. Finally, all able-bodied welfare
and unemployment benefit recipients should be required to work or perform some
public service, to compensate the public for the welfare or unemployment costs,
but more importantly, to insure that the recipient maintains his skills, morale, and
working attitude.

A WELFARE SYSTEM WHICH DISCOURAGES WORK


AND ENCOURAGES FRAUD
The greatest albatross on the neck of the U.S. economy is its welfare system. While
it costs less than the health care and law enforcement or legal systems and about
as much as our educational system, its economic impacts are out of proportion to
its costs. Let’s take a closer look at this very expensive system.
AMERICAN SOCIAL AND ECONOMIC DEVELOPMENTS 99

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.

THE SCOURGE OF THE UNEMPLOYED

Unemployment in America is no longer simply an economic phenomenon or a


condition arising from downturns in prosperity of the nation. Unemployment has
become a permanent condition for segments of American society and in too many
cases a life objective or career. It is no longer just the single mother without skills
who finds that child support can provide a larger, more reliable source of income
than a low-skill job, and as a result chooses single motherhood as a career. The
same applies to various unemployment benefit programs that have become largely
self-defeating, as they are no longer temporary means of support for people who
have lost a job but expect to return to employment. These programs are being
used as long-term support systems for the chronically unemployed or assumed
unemployable.
There is a growing class of non-working, able-bodied people in the U.S. who
are not included in the unemployment statistics. In the past it included mainly the
old, infirm, and underage, but today it is a burgeoning group of people of working
age, neither physically nor mentally handicapped, who become part of the publicly
supported unemployed. These problems are increasing the cost of the system itself.
There is also the added economic cost of lost output, negative impact on work
incentives, inability to fill low-skill jobs which, left open, tend to attract illegal
immigrants.
Public support systems which provide handouts to work-capable persons without
requiring some service or value in return undermine the foundations of a democratic,
market-oriented society. In theory, individuals should be rewarded for their contri-
butions and not solely because they are a member of the society, so long as they
100 CHAPTER 3

are capable of contributing. Handouts are demeaning and demoralizing, and their
imposition contradicts the basic philosophy of democratic capitalism.

UNEMPLOYMENT AND UNEMPLOYMENT BENEFITS

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.

THE BUSINESS OF GOVERNMENT

The government has long considered itself a regulator, arbitrator, supplier of


services, and general manager of the nation. It assumes the responsibility for
adjusting inequities and attempts to redistribute wealth however obtained. It owns
huge assets held in trust for the nation, but considered largely by government bureau-
crats to be assets reserved for the use and purposes of the government. Although
AMERICAN SOCIAL AND ECONOMIC DEVELOPMENTS 101

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

discussed in Chapter 1. These institutions consume an inordinate share of our GNP


and national wealth, and more and more control government decision-making.
On the issue of anti-trust, for example, we permit and in fact encourage collusion
of competitors in economic sectors such as manufacture of cigarettes, machines, and
electronics in forming and sustaining lobbying groups who try to affect government
and legislative policy towards their interests. Yet these same companies are not
permitted to collude in research and technology development. This skewed inter-
pretation of anti-trust principles certainly slows U.S. technological advance and
inhibits the long-term competitiveness of U.S. industry.
Today we are part of a global marketplace, and are not mainly a domestic market.
Anti-trust laws must be interpreted differently in a global market environment.
Others, such as the Japanese, for example, consider industry cooperation in major
new technology development essential and the government through MITI often
serves as a coordinator. They are less concerned with the domestic anti-trust issue
than with global competitiveness. Domestic competitiveness is maintained as each
company develops products based on the new technology independently. This is
just one example where U.S. government/industry relationships are not mutually
supportive.
Growing competition among all types of industries has produced a competitive
global business environment in which business and national frontiers become less
significant. In other words, competition is no longer confined to narrow economic
or business sectors or geographical regions, but is now global in scope and often
crosses traditional sectoral limits. This change is due largely to rapid technological
change that often offers opportunities for the use of technology in unrelated sectors,
such as the use of laser technology originally developed for measurement and
instrumentation in areas such as communications and printing.
These changes in business environment have had a profound impact on the
management of manufacturing and service organizations as well as business in
general.

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

the inability of government to develop long-term economic strategies introduces a


major threat to America’s continued economic world leadership. In addition, unlike
other governments, the U.S. administration is often seen as adversarial instead of
supportive of business and industry. There appears to be basic mistrust of private
industry that often causes unnecessary regulation as well as other constraints, which
in turn shackle U.S. industry in global competition. Radical changes are required
in government/business relations as well as in government involvement in social
programs. The government needs to develop and continually update policy to
provide effective guidance and leadership to the nation’s business, industry, and
people in general.

IMPROVING PRODUCTIVITY BY DOWNSIZING

There is a question whether downsizing and reengineering really enhance produc-


tivity and thereby corporate and national recovery. In the service sector, and
particularly the institutional service sector such as education, health care, and law
enforcement, investments in restructuring, mergers, computers, and other technology
have failed to improve productivity. True, there have been some increases in labor
productivity, but at the cost of increased use of capital. Total productivity in the
service sector has, as a result, remained constant or has actually fallen. We have
reduced the labor input in some cases, but that is all. Downsizing in other words has
become a double-edged sword. It increases capital use and squeezes out labor, with
a misleading increase in labor productivity. Yet, total productivity may not really
benefit unless capital productivity increases are greater than added capital costs.
Labor productivity in the US has been rising at 2.2% per year since 1990 or
more than double the rate in the previous 20 years. Yet, this was achieved by large
increases in investment per worker and large reductions in labor. Similarly, capital
or investment has assumed a new meaning. It no longer simply implies capital
investments or investments in physical productive assets, but increasingly implies
investment in knowledge. Today’s revenues of the software industry are larger
than those of the computer hardware manufacturers. As former Federal Reserve
Chairman Greenspan pointed out recently, the earning powers of companies like
Microsoft, Oracle, Computer Associates, and others, is mainly dependent on their
intellectual capital, the investment made in knowledge.
Traditional economic performance measures, such as GDP, GNP or produc-
tivity, may miss the contribution to the value of output made by the application of
knowledge, innovation, and technological change.

WELFARE, WORKFARE, AND UNEMPLOYMENT

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.

ECONOMIC AND SOCIAL IMPACT OF LONGEVITY

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 REVOLUTION IN TECHNOLOGY


AND SOCIAL STRUCTURE

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 MOST IMPORTANT GLOBAL PROBLEM

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

had no respect for cultural borders or historic affiliations. As a result, borders do


not define ethnic or cultural boundaries nor do they indicate language or religious
frontiers. They are artificial lines drawn by conquerors or dictators.
The countries in Europe have joined in an economic union which is designed
to increasingly diminish the effect of borders, by allowing all citizens of the EU
to live and work wherever they desire, travel and trade without hindrances or
duties, and otherwise become essentially citizens of a united Europe with its own
European passport. North America, the U.S., and Canada are also moving toward
a more liberal North American trading area which includes Mexico and may in
future include other Central or South American countries. All this while developing
countries in South East Europe, Africa, and South Asia continue their border
conflicts as well as ethnic thrives.
There are many nations today who share a common language, culture, and history
that are not given the right to self-determination, independence, and control of their
national territories. The Kurds and Armenians in the Middle East number 25 and
8 million, respectively but only a small minority of Armenians live in independent
Armenia, a former USSR republic. There are similar problems in Southern and
Western Sudan, Yugoslavia, Zaire, India, Indonesia, Myanmar, Nigeria, and several
countries of South and Central America where ethnic people, often a majority in
their land or part of the country, are suppressed and prevented from assuming their
right to self-determination and self-rule. In many of these countries these people
are also culturally suppressed and prevented from using their language, religion or
cultural expression.
In some parts of the world such as Russia or Yugoslavia, ethnic pressure has
resulted in the formation of new national states, which in most cases have become
independent nations. But more needs to be done to correct the injustices of arbitrary
borders, and rulers imposed for political or strategic reasons without concern for
the rights of the indigenous population. The majority of recent conflicts have
this as their root cause and until this problem is resolved, there is little hope for
peace in the world. Peace cannot be maintained without justice, and all procla-
mations of human rights are hollow as long as these most fundamental rights are
not given.
It is curious that borders arbitrarily drawn by politicians or the military become
sacrosanct and untouchable – as if god given. It is important to reconsider the
borders of the world and make them just. They should represent the facts on the
ground and not the arbitrary agreements of rulers or the bounty of conflict.
America, built on the voluntary association of many ethnically and culturally
different people, does not understand that what works in America cannot possibly
work elsewhere – that there are irrational or failed states that must be redesigned if
permanent peace is to be attained. We have the liberal view that pluralism is good
for any society and that it builds tolerance and cooperation that ultimately results
in social and economic prosperity. This concept, however, is not based on historic
evidence which shows that pluralism only works when all involved are equally
oppressed and desire new beginnings.
108 CHAPTER 3

DISCOURAGING JOB GROWTH

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

MISPLACED AGRICULTURAL SUPPORT

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

subsidies contribute to our health crisis represented by the obesity epidemic in


America. Obesity contributes to major diseases and is probably the major problem
of the 21st century. The U.S. leads the world in obesity and by lifestyle example
provides a negative leadership model.

NUCLEAR WASTE PERIL AND FUTURE ECONOMIC COSTS

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.

RENEWABLE ENERGY USE DEVELOPMENTS

Although renewable energy technologies such as wind, hydroelectric, water current


power generators, ocean thermal columns, ocean wave, solar, and other resources
are well developed and many advancements in these technologies originate in
the U.S., comparatively little use of these alternative energy sources is made in
America. In part this is probably due to the comparatively low cost of fossil fuels
in the U.S., particularly petroleum products. At the same time the impact of the
greenhouse effects on global climate, water supply, radiation exposure, and storms
is becoming more and more evident. Radical changes in the global environment are
now predictable unless damaging greenhouse effects can be reduced, eliminated,
112 CHAPTER 3

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

IMPACT AND FUTURE ROLE OF THE INTERNET


Computing and telecommunications technology have had an impressive effect on
economic growth, particularly in the U.S. and other developed countries. The
impact has been sustained over nearly 30 years now by facilitating scientific
research, engineering design, computer-aided and integrated manufacturing, data
base management, management information systems, and all kinds of transac-
tions. The impact of technological change and technology-driven improvements on
productivity were recognized nearly 50 years ago, but for many years contributed
only in a slow discontinuous fashion. Even though computers have become common
tools of management and commercial transactions, their impact on society at large
was slow.
The recent (1992–2000) sustained and unprecedented U.S. economic boom must
therefore be explained by a new technological revolution – not the introduction of
new technology but by new methods of linking, networking, and use of computer
and information technology. The Internet has tied together millions of computers
worldwide into a universal network of communication, commercial, data and infor-
mation exchange, transaction and trading channels. It has, as a result, improved the
productivity and efficiency of nearly everything from delivery of educational, health
care, and financial services, access to huge continuously updated data banks, enter-
tainment from visual to audio transmittal, data, verbal and video communications,
to all kinds of commercial, trading, financial, and auction transactions.
As a result, the world of manufacturing, commerce and transactions has changed
radically. Companies are saving billions of dollars in information management,
distribution, sales, service, delivery, and more. We are only at the beginning of this
revolution that may change not only the way we transact or do business but also
how we deliver all kinds of services.
The Internet is the culmination of computer, switching, storing, and delivery
technology evolution, which finally permitted effective use of electronics. The
Internet has spawned development of a whole new world of electronic devices
that finally permit us to make full use of computing, storing, and communications
technology.
In recent years, the majority of all capital investments of corporations in banking,
manufacturing or services have been in information technology. Similarly, according
to a report by the U.S. Department of Commerce [Ref. 12], information technology
advances contributed more than one-third of the growth of the U.S. economy in the
period 1995–2003.
Airlines have been able to reduce their costs of booking and ticketing by a third
using electronic ticketing. Similarly large and small companies alike save millions
in reducing telephone and other customer support costs using the Internet. Electronic
mail has reduced not just mailing but also paper, typing, and handling costs.
Automated markets connect buyers and suppliers and distribution and transport
providers as well as sellers to consumers.
The Internet has made just-in-time (JIT) delivery a feasible reality, cutting
inventory and obsolescence costs. There have been large improvements in efficiency
114 CHAPTER 3

in securities and financial transactions by getting close interactions between buyers


and sellers. Airlines, theaters, hotels, and other service providers are now able to
attract buyers to their unused capacity by offering temporary lower costs or an
auction-type sale of surplus capacity. Because such Internet transactions are in real
time, they are able to control the sales.
Education and health service providers are now able to deliver advice and services
directly by interactive tele-medicine and distant or tele-educational programs. All of
this not only improves transactional and delivery efficiency, but also the timelines
and relevance of information or service delivery. It permits more personal service
delivery. We are only scratching the surface of the Internet’s potential. It will in the
near future radically change the way we do business, provide services, and obtain
information. It will allow people to transact much more without transporting or
moving themselves or goods and supplies. Our world will become one in which
we can transact or perform most things right from our home, including work,
buying, selling, entertainment, education, and even socializing. In a way, it may be
a frightening future with less inter-human contact and direct communications; yet a
world which provides each of us wherever and however capable with equal access
to opportunities.
Shopping malls may become exhibition centers as people only look at but do not
purchase merchandise there. Universities may become centers for the development
of courses, curricula, and presentation, but not communities of students and teachers,
and hospitals may provide much of their diagnostic help via the Internet. Banks
and stock exchanges are already far advanced towards becoming electronic market
places, and it is highly likely that others will follow quickly.
Modern telephone connections are increasingly being replaced by high speed,
high capacity cable and satellite services with constant Internet connections.
Similarly, future Internet developments will not only include message waiting, but
also multiple parallel message receiving and dispatching. Buffers will allow large
volume messages to be temporarily stored for instant release when passages are
cleared. Instead of the annoying multi-level computer menus which waste callers’
or customers’ time to reduce supply or service provider costs, Internet services
will instantly connect customers to a multi-level service provider which answers
most, if not all, questions, is continuously updated, and can perform practically all
transactions without a human operator. Instead of multi-level menus, single level
vast array menus will instantly recognize customers’ requirements and respond in
an organized logical manner from identification of need, supply-demand match, and
transactional details to closure, confirmation, and delivery. This will not only speed
up transactions but also significantly reduce administrative marketing, processing,
and delivery costs. It will not only reduce inventory holding costs of physical goods
and materials but also those of service providers. Similarly money transfer delay
costs will be eliminated by nearly instant electronic transfers. Also information or
data search, assembly, evaluation, test, and delivery will not only be nearly instan-
taneous but will allow many multi-level data bases to be evaluated simultaneously
to extract the required information.
AMERICAN SOCIAL AND ECONOMIC DEVELOPMENTS 115

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.

STICK BUILT HOUSING

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.

AMERICAN INCOME DISTRIBUTION

American income distribution was distorted by the extended prosperity between


1990–1999 with the gap between poor and rich widening and the middle class
contracting. While median annual family income in America has increased gradually
(in constant 1994 dollars) between 1969 and 1989, it not only has leveled off now
but also experienced an actual decline in subsequent years 1990–1999 as seen in
Figure 5. The rate of increase of the 90th percentile was much greater and only
recently leveled off, while the lowest 20th percentile was essentially flat and in fact
started a gradual decline in 1979. The results show a growing income disparity that
indicates a widening gap both between the 80th percentile and a median income
family as well as between the median and 20th percentile family.
The ratio between the 80th and 20th percentile has grown from 2.75 in 1969 to over
3.68 in 1994 and 4.27 in 2003, this notwithstanding more extensive and more generous
social programs. This trend is of increasing concern because it affects the middle class,
the backbone of our free market economy. From a country where practically everyone
considered him/her self to be a member of the middle class, we now note distinct
clustering of low, middle, and high income people.
It is true that the 2th to 80th percentile gap is growing and was in 1998 over
$54,000 which is nearly 1.4 times the median family income in the U.S., a historic
high. The long economic growth America was experiencing until 2000 continued
to expand this trend, but the recession in 2001 is expected to have caused an
actual contraction of the middle class. An important phenomena is the newly
AMERICAN SOCIAL AND ECONOMIC DEVELOPMENTS 117

Terms defined: Median income - half of a group earns less


than the median income, half earns more. Average income -
the sum of all incomes divided by the number of families.
80% of all families earn less than the 80th percentile; 20% of
all families earn less than the 20th percentile.
Notes: Most measures of income dipped from 1989 to 1994
because of a 1990–91 recession in the U.S. economy. In 1969,
census tracts 3839.02 and 3939.01 were one tract.
Source: Center for Labor Management Studies at
Northeastern University analysis of US Census Bureau
figures.

Figure 5. American Income Distribution

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.

ENVIRONMENTAL PROTECTION QUAGMIRE

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

not involve any surveys, investigations or analysis, cost in excess of a million


dollars each and consisted of 1200 pages of largely repetitive or readily available
information.
Instead of spending money on environmental improvements or remediation,
more and more is spent to feed an increasingly bureaucratic, self-serving process
that contributes little if anything to the maintenance or improvement of the
environment. In fact, our environmental protection establishments have become
completely unwieldy and lack not only focus on their primary mission but are
often incapable of making effective environmental cost-benefit trade offs. As a
result, many projects with major and often overwhelming environmental benefits
are rejected because of minor and often inconsequential environmental costs. Not
only is there a lack of rational evaluation, but the approval process has become
mired in bureaucratic procedures and inter-agency turf assertions. As a result, costs
and time delays resulting from environmental assessments or approval processes
today often outweigh the cost and time required for technical, engineering, and
construction or procurement. This quite often not only reduces or eliminates the
environmental, economic, and social benefits of projects but also causes built-in
obsolescence.
There is no question that America causes more air and water pollution per
capita than any other country in the world and that our pollution laws, particularly
relating to air pollution, are extremely lax. Furthermore, low gasoline and other
fuel costs encourage extravagant and wasteful use. Use of SUVs for example for
basic often-single person personal or commuting travel is a ludicrous example of
waste. The same applies to domestic energy use such as heating and for home
appliances. We overheat and undercool poorly insulated homes and office buildings,
this again largely because energy costs are so low as to make insulation economically
unattractive.
Greenhouse emissions are only a part of our environmental malaise. We
discharge more pollutants into our streams, lakes, and coastal waters than
any one else on a per capita basis. Similarly we recycle less plastics, paper,
aluminum, etc. than most industrialized countries. At the same time, we continue
our vocal attack on other countries and criticize their lack of environmental
enforcement. The time has come for us to look in the mirror and clean
up our own house not by passing new environmental laws and enlarging an
already ridiculously large, varied, and conflicting environmental permitting and
regulating bureaucracy at both the federal and state level, but by providing
real and meaningful economic incentives and leadership in environmental
protection.
Alternative renewable energy sources are on our doorstep and efficient and
economically attractive recycling is feasible for most materials. To assure use
though may require some changes in organization, lifestyle, and priorities. It
is the government’s duty to provide the lead and incentives for its citizens. It
must become a leader and not just barricade itself behind bureaucratic rules and
regulations.
120 CHAPTER 3

THE AMERICAN WORKER


Americans work more hours per year than workers in any other industrialized
country do. According to the International Labor Organization (ILO), a United
Nations agency headquartered in Geneva, American workers averaged 1966 hours
in 1997 compared to
Japan 1889 hours
Australia 1866 hours
Spain 1809 hours
U.K. 1731 hours
France 1656 hours
Germany 1560 hours
Sweden 1552 hours
Norway 1399 hours

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.

LAW ENFORCEMENT COSTS

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

IMMIGRATION AND THE FUTURE OF AMERICA


America is a country of immigrants. Less than one percent of its population are
descendants of indigenous people. It has thrived as a melting pot of people from
many countries, with different languages, religions, cultures, skills, and preferences.
It achieved success by providing freedom and opportunity for all willing to work
for their prosperity and the common good of the Union. This trend is continuing
and America is admitting more immigrants than ever. It also absorbs an increasing
number of illegal immigrants or temporary workers who overstayed their visit
time. But there is now a change that may affect the long-term development of
America. While immigrants in the past were driven to U.S. shores not only by
desire to improve their economic conditions but also by a search for political and
religious freedom, as well as a desire to escape restrictive or oppressive environ-
ments, todays’ immigrants are predominantly pure economic refugees. This narrow
objective affects their willingness to adopt the culture and values as well as language
of their new home country. In fact many, particularly Latin immigrants, insist not
only on retaining their culture and language but also demand that the Spanish
language and culture be used in schools, business, and government in the U.S.
While America always encouraged cultural, religious, and linguistic diversity, and
various immigrant groups have maintained their identities in special urban sections,
they were all united in accepting the basic American English culture and the values
built up by more than two centuries of applying our universal constitution. This
is now under attack and we may be moving from a multi-cultural, multi-religious,
open society to one that provides special linguistic, religious, and cultural conces-
sions to various groups. Such Balkanization of America may seriously impact on
the unity and purpose of the United States as envisioned by our founders. But it
also may affect the spirit of cooperation, freedom, tolerance, and understanding that
is so uniquely American.

ECONOMIC PROSPECTS AND CHALLENGES


America has all the opportunities and resources for a prosperous future. It is
the unchallenged economic leader of the world and dominates world trade. Its
currency is the staple of exchange and its markets dominate world markets. It is the
technological leader which sets technological standards in computing, information
technology, communications, pharmaceuticals, diagnostics, armaments, and more.
It has a highly productive workforce and ample domestic resources. Most impor-
tantly, it is the world financial center with a GNP which is nearly one third of the
world’s total product. Yet with all of these, America may face major economic
challenges in the next few decades. These will largely be brought by the demands
of a completely new economic world driven by radical changes introduced by new
technology, a world of electronic delivery of government, health care, educational,
financial, commercial, and other service information; a world in which personal
face-to-face and paper transactions will be largely replaced by electronic paperless
transactions.
AMERICAN SOCIAL AND ECONOMIC DEVELOPMENTS 127

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

CLAIMS TO WORLD LEADERSHIP

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

countries recognized their commercial value. So while these technologies rapidly


penetrated business as well as society, it was only those, which were organized as
effective businesses and which make full use of the new technologies succeeded.
Individuals or society were, as noted, interested in technology to improve upon
traditional ways of doing things and for more effective interpersonal communica-
tions or transactions. While at first B-to-B electronic commerce was perceived to
have a better chance of success than B-to-C electronic commerce, this soon changed
and a growing percentage of retail business is now done electronically.
The new technology not only affects how we are performing but more basically
what we are performing. In other words, unlike other periods in human development,
it is not only designed to improve productivity and basic communication processes
but questions the way we do things and communicate. As a result, it forces us to
reevaluate or eliminate many of our business, production, operational, and social
processes. Similarly, in services it not only tries to better their delivery but also
often offers radical simplification and efficient improvements in their competence
and delivery. It today affects all aspects of our economy and is now beginning
to influence the structure of government, business, institutions, and even family.
Much of this as a result of the reversal of insight which has long been associated
with experience and seniority, but is now more prevalent in people with technical
courage, curiosity, and entrepreneurship.
The potential effects of these developments on the future of America and the rest
of the world are profound. While in the past 100 years and particularly the past 50
years, America has been able to lead the technological revolution and introduce as
well as use new technology without any radical changes in its social, government,
institutional, and economic structure, this may not be possible in future. In fact we
may have to reinvent the structure of our society and institutions for this brave new
world. The problem is not so much how to achieve structural change per se, but
how to achieve such a change in a way that retains our values. This at a time when
America is becoming more culturally diverse, while fighting increased economic
disparity as well as external challenges and worldwide terrorism.

THE NEW AMERICA

New technology, after first invading productive processes in manufacturing and


agriculture during the Industrial Revolution, 200 years ago, and later services such
as transportation, communication, health care, and entertainment, is now penetrating
our personal lives. While this trend is driven by peoples’ desire for more conve-
nience, higher living standards, and greater security, we only gradually learn to
adjust to the implicit requirements for change in our personal lives imposed by the
new technologies. Ease of access may be linked to the need for instant decisions
or commitments as well as real time gratification. Consider for example electronic
ticketing by the Internet where a double click may commit a person to a large
amount of money and a schedule, the person had little time to consider. The same
applies even more to electronic stock market trading which again can be executed
CLAIMS TO WORLD LEADERSHIP 131

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’S BUSINESS AND FINANCIAL LEADERSHIP

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

recently followed by mutual fund scandals, as well as examples of major lack


of fiduciary responsibility by some of the country’s largest investment banks,
brokerages, insurance firms, and accounting firms. These developments not only
cost the public hundreds of billions of dollars, but also undermined both U.S. public
as well as international confidence in the U.S. system of checks and balances. This
particularly as it required state Attorney Generals, such as Spitzer of New York, to
intervene in what was traditionally a federal oversight and regulatory function.
In addition the continued misuse of investors’ funds to pay obscene remuneration
to executives without any reference to their or their company’s performance illumi-
nates the serious ills of the U.S. financial industry. This is extremely dangerous at
a time when the U.S. is not only becoming a largely service-oriented economy, but
also the financial center of the world. The increasing lack of confidence domesti-
cally in the U.S. financial system could easily proliferate worldwide and result in
large-scale withdrawal of foreign investments, which not only stem the huge U.S.
trade deficits, but also help finance U.S. budget deficits.
One question in the public’s minds is: should white collar criminals be punished
the same way as blue collar criminals? In other words, do we treat an executive,
analyst or broker who steals or misuses funds or damages shareholders and citizens
financially the same as say a thief or burglar stealing a similar amount or causing
the same degree of damage. In the past white collar crime was not punished nearly
as severely and white collar criminals often got off with a slap on the wrist. The
reasons were often that the corporate or white collar criminal had no prior conviction
and may never be given an opportunity to repeat the crime. Often the argument
also used was that he was a promising candidate for rehabilitation. But there are
serious questions if these arguments really hold water.
At the same time, losses or damages caused by white-collar crimes are usually
much wider and have greater impacts. Many fraud sentences in America however
great the damage caused to the public are adjudicated by plea bargaining, a most
controversial element of the U.S. justice system, by which defendants negotiate
a shorter jail or less severe financial sentence for their right to an open trial. The
justice system likes this approach as it saves money and time. Yet the approach
may result in miscarriage of justice where criminals lie and prosecutors use the plea
bargaining advantage to play suspects against each other. The result is often gross
injustice that permits major corporate or white-collar criminals to get off lightly.
The problem with the American legal system is that fraud is not a capital offense
and most corporate criminals can afford good legal representation. As a result,
white collar criminals usually get off with little punishment and the public suffers
the consequences, such as loss of capital, investment, pension benefits, and jobs.
Major listed public companies in some cases had to revise earnings and/or
revenues which were inflated to beef up share prices and show executives in
a positive light. In turn these executives were rewarded by their often personally
selected boards of directors and the remuneration committee with exorbitant salaries,
expense accounts, shares of the company, and other benefits. These scams have
become quite widespread in America and include many well-known companies
CLAIMS TO WORLD LEADERSHIP 135

such as RiteAid, a pharmacy chain, AHOLD, an international supermarket chain,


and many more which stated huge fictitious earnings. In Italy Parmalat, a huge dairy
and retail chain, collapsed completely as a result of such fraud. It is only in recent
years that white collar criminals started to be severely punished. For years, at least
the public was under the impression that such criminals spent just a few years in
country club like detention to reemerge and reengage in their fraudulent practices.
In America finally sentences now more often fit the severity of the crime. Executives
at Dynegy, for example, a Texas energy firm, received a 24-year jail sentence for
their part in inflating Dynegy’s cash flow by $300m in 2001. Similarly, former
executives of Enron, if convicted, may spend the rest of their lives in prison. The
2002 Sarbanes-Oxley Act increases significantly penalties for white collar fraud.
The problem was often the definition or perception of fraud, which is obviously
different from theft, yet the damage to society may be significantly greater.
Similarly, it was often difficult to measure the consequences or damages caused by
fraud. Fraudulent criminals sometimes receive little if any direct financial benefit
from their fraudulent action, though losses to others and the public may be very
large. In other countries such as Germany, England, and France, for example, the
maximum sentences for fraud vary from 6 to 10 years, as financial loss is not taken
into account in determining the severity of the punishment. Well-publicized fraud
cases in the U.S. have greatly undermined global trust in the U.S. financial system
and may ultimately affect American leadership in the world financial system.

AMERICA’S IDENTITY CRISIS

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.

FOSTERING FOOD ADEQUACY AND SUPPLY

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.

AMERICAN MORAL AND SPIRITUAL LEADERSHIP

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

withdrawn, changed or augmented. In fact, the U.S. economy depends to a large


extent on foreign investments which in turn are affected by the security, opportunity,
and return on investment offered.
With Japanese government bonds or similar securities offering near zero rates
of interest, U.S. federal bonds are very attractive to Japanese who are traditionally
great savers, this particularly when the dollar increases in value against the Yen.
The initial decline in the Euro and various European currencies had brought similar
inflows of investments from Europe to the U.S. Yet the inflow continued albeit at
a slower rate when the dollar declined against the major currencies in recent years.
The federal funds rate that indirectly affects U.S. and foreign bond rates therefore
influences fund flows that in turn affect the economies of the major countries.
The only exceptions are usually poor developing countries and countries which
are economically as well as politically unstable or at risk. These countries often
do not exercise responsible economic policies, do not permit free cross border
flow of funds, restrict investments and ownership, have limited personal freedoms,
and often maintain restrictive as well as deficient or ineffective banking systems.
Many of these countries are deeply indebted and may be unable or unwilling to
repay their debts. This introduces a new problem to global economic and fiscal
management. In fact, it divided the world into those countries which abide by and
work within the framework of accepted economic and financial norms and those who
do not.
There is now a third category of countries such as Russia and other emerging
capital market economies that are taking a rather hypocritical approach to fiscal
management and accept some accepted norms while ignoring others. This has
a profound effect on the global financial systems that are based on accepted
standards of behavior, regulation, and adjudication, without political considera-
tions. This makes it difficult for the world financial systems to assure equity and
fairness.

THE MAKING OF LEADERS

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.

AMERICAN CONTRADICTIONS AND HYPOCRISY

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.

SOVEREIGNTY AND HUMAN RIGHTS

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.

AMERICAN STRENGTHS AND WEAKNESSES

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

MANAGING AMERICAN LEADERSHIP

The right to leadership by individuals or nations must be earned to be effective.


Earning trust for leadership must be by standing for principles that represent
universally, morally, and ethically accepted standards of behavior. These include
fairness as well as effective methods for their application. Leaders must show their
commitment by example and have a sense of what they stand for. Leadership is all
about people and for people. The well being of people and progress of mankind
should be the ultimate goal of leadership. Globalization now offers opportunities
not hitherto available.
America emerged as a world leader after World War II and for many years
since shared world leadership with the Soviet Union. It is only after the demise
of the USSR that America assumed the role of undisputed economic and military
world leader. However this leadership may be challenged not only by increasingly
potent China which, while retaining its communist centrally controlled government,
emerged as an increasingly important economic power. It managed to combine
central government control with a largely free market economy, something the
Soviet Union failed to achieve. It has been able to grow its economy at double-digit
rates for more than a decade. As a result, it may, if this trend continues, challenge
American world economic leadership within 20–30 years. At the same time, trends
towards the formation of economic unions or associations are accelerating. The
European Union (EU), for example, is expanding to include much of Eastern
Europe. With a total population exceeding 600 million, the new EU may challenge
America’s economic leadership even sooner. Recent trends in Russia and various
developing countries show that centralization of economic and management power
delays modern economic growth and effective introduction of new technology. This
applies equally at the state as well as at the corporate or company level.
Centralization of power reduces both competition and incentives that in turn slow
technological innovation. Similarly, widely granted monopoly rights usually lead
to inefficiencies in operations, manufacturing, and services. These lessons, while
supported by experience and recent history, are not universally accepted even in
countries that pride themselves to be democratic free market economies. This largely
147
148 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.

IMPACT OF TECHNOLOGICAL CHANGE

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

Manufacturing, transportation, materials handling, agriculture, energy generation


and conversion, mining, and other productive sectors could all greatly benefit from
an infusion of high technology, but this will only be achieved effectively if these
areas are given the attention they deserve in engineering education. The U.S. is
far behind in many of these areas and this largely because of our single-minded
concentration on what we call high technology. However, efficient, environmentally
clean, and sustainable energy conversion, as one example of an area in which we
lag far behind other countries, can be greatly advanced by marriage with advanced
information, computing, and communications technology. We must resurrect our
capability in and concern with these more mundane areas of engineering to be
able to advance the productive sectors of our economy. Not only will this assure a
more balanced approach to engineering education but also a more effective supply
of competent engineers and researchers in areas of concern to our economic and
environmental well being.
At the same time America’s productivity continues to grow respectably and with
the highest proportion of adults in the workforce among industrialized countries, it
is able to maintain its economic leadership for now. Yet its economic power may be
in danger as a result of excessive dependence on foreign imports of both products
and capital. At the same time, America continues to export many, particularly low
skill, jobs.

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 WAR ON TERROR

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.

DEFICITS AND PUBLIC DEBT

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.

Table 18. Nations’ Public Debt (as a %


of GDB 2003)

Japan 15462
Italy 10667
Belgium 10200
France 6920
Germany 6390
USA 6243
Netherlands 5540
Sweden 5280
Britain 514

USA’s current national debt (12/31/03)


was $7.34 trillion.
Source: Economic Intelligence Unit,
Boston Globe, August 29, 2004.
152 CHAPTER 5

AMERICA’S LEADERSHIP IN INNOVATION


One of America’s strengths is its ability and willingness to innovate. Not only
are many American companies structured or organized to permit workers at all
levels to suggest or even introduce product or process innovations. However the
informality and openness of personal relationships in many American companies
and organizations not only encourage, but facilitate innovation by anyone. While
innovation in America thrives in science and technology and Americans are partic-
ularly adept at effectively putting advances into practice and use, Americans are
often social conservatives unwilling to change individual behavior even when
such change is desirable or even necessary to respond to a new technological
environment requirement. In other words, Americans are often found to be techno-
logical innovators and social or behavioral conservatives. This must change to
assure not only more effective use of new advances in science and technology but
also assure more success by America in leading mankind toward a better and more
advanced and satisfying future.

AMERICA’S HEALTH CARE LEADERSHIP


America spends over 16% of GDP for health care, nearly twice the percentage
of other developed nations; yet its life expectancy is lower. America also spends
more on medical pharmaceutical and diagnostic equipment research than the rest of
the world. America leads in medical procedure and diagnostic technology and has
developed some of the most advanced medical breakthroughs. However it is among
a few industrialized countries without universal health care. It provides some of the
most advanced medical technology; yet access to it is often hampered by arcane
processes and legal impediments. America has been slow in reacting to epidemics
and the spread of communicable diseases both at home and abroad and has over 30
million (12%) of its population without health care insurance.
Continued advance of HIV/AIDS infection in both developed and developing
countries is threatening not only world health but progress in development. It
not only imposes a tremendous human and economic cost on many countries but
also affects political progress, particularly in Africa. For some time America’s
reaction was defensive. It is only in recent years that more aggressive and effective
approaches were finally adopted.
America has been fighting a war on drugs for decades without success. The fight
was mainly aimed at the supply side, the producers, refiners, smugglers, importers,
and distributors, with very little effort expended on reducing demand or fighting
users. This is contrary to the much more successful strategy adopted by some other
countries that put equal emphasis on reducing demand and supply by punishing
both users and suppliers. There is an urgent need to radically reduce demand that
not only affects people’s health but also fosters criminal activity, imposes huge
economic costs for drugs, medical services, law enforcement, and lost productivity.
To lead, America will have to show more effective approaches in dealing both
with medical and drug problems. This not only to improve conditions at home but
MANAGING AMERICAN LEADERSHIP 153

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 RIGHT TO LEADERSHIP

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

Democracy as a system for selecting a government by universal voting proposed by


the Athenians about twenty five hundred years ago was resurrected in modern times
only in the last two centuries. Until then equality was rare and most countries were
ruled by kings, dictators, military despots or religious dignitaries. They assumed
their rule by hereditary power or by divine right that was not to be questioned. Even
when America became the first modern democracy, voting was largely restricted by
property ownership, color, and race. Most of Europe and Asia continued to be ruled
by monarchs until the end of World War I and much of the southern hemisphere of
South America and Africa gained independence from colonialism only in the 19th
and 20th centuries. Yet many of the former colonies did not immediately introduce
democracy or for that matter representative government but exchanged colonial rule
for dictatorial rule. Suffrage was slow and the right to vote, if at all permitted, was
often restricted.
Even today only 117 countries or about 62% of the independent states are
considered electoral democracies according to Freedom House, but even among
those many do not really have truly representative voting. In some there are restric-
tions on access, such as voting qualifications, age, sex, literacy, and other tests.
Similarly, there are often other deterrents applied to limit access to voting such
as number of voting places, distance to voting places, registration, mechanics of
voting, and more. It is disturbing that even in the most open democracies that
supposedly put few if any restrictions on voting, the percentage of eligible voters
who actually vote in national elections for the leader of the country or for members
of a parliament or congress is often quite small.
It is particularly disturbing that the average number of eligible voters voting in
federal elections in the U.S. over the period 1990–2002 was only 49% for President
and 47% for Congress. Similarly the U.S. has a shamefully dismal small number
of 14% of female representatives, though female eligible voters outnumber males.
By comparison, many newer democracies show a much larger voter participation
as well as larger female representation at both the national and local levels. While
it is generally agreed that a democratic system of government is the best system to
assure personal freedom, freedom of expression, movement, and individual rights,
MANAGING AMERICAN LEADERSHIP 155

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.

AMERICAN STRENGTHS AND WEAKNESSES

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

THE FUTURE OF WORLD LEADERSHIP

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.

CHALLENGING AMERICAN LEADERSHIP

American leadership is being challenged now not only because of unpopular


American strategic decisions such as the Iraq war and various trade and other
159
160 CHAPTER 6

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

with an ultimate objective of American dominance. All of this makes America


vulnerable and opens the question of its leadership. Suspicions of moves towards
imperialistic goals and global dominance by America are increasingly voiced not
just by historic and political opponents but also by traditional allies. A major reason
for these developments is that America not only ignored its allies but also the Great
New Powers, particularly in Asia in the war on terrorism and in Iraq.
Finally, there is the issue of American illusions of superiority as others see it.
America claims to have the best health care and educational systems, yet lags many
other countries in the overall quality and delivery of health care and educational
services. Our legal and law enforcement systems are complex and often skewed
to serve special interests, particularly in health care delivery and damage recovery.
American gun laws are completely out of line with those of most countries, and
the country has among the highest violent crime rates of any developed and even
developing countries.
American elections are among the most archaic in democratic nations with hanging
chads, voter disenfranchisement, and other questionable practices. This when the
simple use of the Social Security identification number, residence, and nationality
proof (birth or nationalization certificate) could provide an easily managed and
fool proof voter qualification. As the world leader America must do better and
provide an example that truly represents its principles in fact and not just in words.

GROWING ASIAN DOMINANCE

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

Considering China’s economic, trade, industrial and technological developments


during the last 20 years and particularly its phenomenal growth rate since 1991, it
is certain that it will reshape the international economic and trading environment,
a development that must be considered in planning for the future.
China, Japan, and India, as well as many Southeast Asian countries, are proud old
civilizations with long established customs, ethics, and legal systems. They are also
thrifty and save more than most Westerners. As a result, the biggest contribution
towards financing the U.S. debt or deficit are the Asians. The economic boom in
Asia is currently slowing down slightly in China (2004), yet Japan seems to have
reemerged from its economic stagnation and India is growing into a truly advancing
economy in both financial and technological terms.
In fact, Asia is overall gaining in science and technology, both in terms of
practitioners as well as in research and discoveries. India for example graduates
more engineers per year than all of Europe and the U.S. combined.
The economic growth of Asia, and particularly East Asia, is expected to continue
at higher rates than those achieved by Europe and America for at least another 30
years. As a result, we must expect China, which is the world’s 3rd or 4th largest
economy now, to graduate to become the 2nd largest by 2020 or before and overtake
the U.S. by 2030.
China’s GDP is today (2005) over 13.8% of world output at purchasing power
parity (PPP), second only to America in PPP terms. It is also the world’s 3rd largest
exporter. As noted before, it attracts more foreign direct investment than any other
nation, this not only to take advantage of low labor costs and highly motivated
labor but also of the huge potential domestic market. In fact, China has become the
dominant importer in East Asia and is responsible for much of the manufactured
goods export growth of Japan and other Asian countries as well as the large increase
in imports of oil, mineral, and other raw materials.
China’s economic reforms based on gradual changes in the interest rate and
slowing of lending or available credit is apparently working in reducing the rate of
economic growth in 2004 and thereby will assure a safe landing of its overheated
economy. China has achieved a faster rate of economic growth than any western
country ever did and can be expected to become the world’s biggest trader by 2015
and overtake America as the largest economy on the globe 10–15 years later. China’s
economic growth appears well managed and under control. It is rapidly creating
wealth while maintaining a relatively open economy that offers huge opportunities
for foreign direct investments and consumer markets. Foreign manufacturers are
clamoring to export to or produce in China to meet this mushrooming demand
that has exploded with the large increase in disposable income of huge numbers of
people living in the coastal areas of China.
But this is just the beginning because the interior of China with 2–3 times the
population of the coastal areas is only just starting to be involved in the economic
reemergence of China. China is now emphasizing not only the development of the
interior, particularly the Yangtze upriver region, but also of transport access to this
region that in the past was largely served by inadequate river transport that isolated
THE FUTURE OF WORLD LEADERSHIP 163

it from rapid or efficient connections to major export markets. A new highway


from the area west of Wuhan to Myanmar (Burma) and the potential of a new
Chinese-built port in Myanmar on the Bay of Bengal (Indian Ocean) would provide
China with an efficient back door to markets in Europe and the east coast of the US.
China has a huge reservoir of able, hardworking, underemployed labor that can
be put to work in the Chinese interior. While many in the West and particularly
in America criticize the investment by Western firms in China as outsourcing, it
must be remembered that in the longer run it is designed to create wealth in China
and a resulting potentially huge market for the very products these investments are
designed to manufacture. With 20% of the world’s population, wealth creation, and
growing consumer demand will establish a most important new market that will
not only absorb much of what the Chinese factories produce but also imports from
other countries.
The great fear that outsourcing jobs to countries like China and India is under-
mining the American economy and generating unemployment is really misplaced.
While it is true that many basic manufacturing and service jobs, including
programming, software development, telephone answering, telemarketing, order
processing, and others have moved overseas, there are corresponding benefits such
as lower costs and inflation and new market developments. In addition there is an
increased demand for new technology that will be largely generated by the huge
research organizations of the West. It is interesting to note that most technological
and scientific breakthroughs were and are generated in the West, a trend that will not
only continue but accelerate. At the same time we must recognize the West produces
many fewer engineers than China, Japan, and India combined, but does generate
many more post-graduate scientists and engineers. In other words, it generates a
large cadre of researchers and technology developers. In fact, the number of scien-
tists and engineers working in research and technology development in the West
and even America alone far outnumber those in the Asian countries and will for
some time to come.
Similarly the amount of money or even percentage of GDP spent on research
and development in America is larger than that spent in the rest of the world and
many times that spent in Asia. As a result, advances in science and technology will
probably continue to emanate mainly from the U.S. and the West in general. This
provides an opportunity for these countries to benefit from the introduction of new
technology and services that permit capture of the high paying jobs that are the
essential domain of high and new technology developments. There is therefore an
excellent opportunity for America to advance more of its workforce towards more
sophisticated, knowledge and skill demanding jobs that by their nature command
higher pay.
Things are certainly changing and although China was the world’s largest
economy for much of human history it lost its place as an economic, science,
and technological leader about 150 years ago, when anarchy, foreign invasion, and
infighting not only reduced its economic prowess but also resulted in economic
isolation. Voltaire is reputed to have noted that “China has great potential and
164 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.

Table 19. Major Country’s GDP Measured in PPP Terms in Trillions


of $ for 2003

GDP in PPP Per Capita GDP in PPP

USA 1105 37 800


China 608 4 900
Japan 354 27 570
India 294 2 700
Germany 212 27 350
France 168 26 350
UK 166 26 950
Italy 158 26 750
Brazil 150 8 020
Russia 148 9 000

Source: IMF and U.S. Bureau of Economic Analysis.


THE FUTURE OF WORLD LEADERSHIP 165

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.
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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.

ASIAN ROAD TO ECONOMIC SUCCESS

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

these opportunities that allowed port employment to be significantly reduced as


required by the new private operator. Similarly, the redundant, archaic, and often
run down port facilities and now abandoned workers’ quarters were razed and
the waterfront land sold or leased to developers for large-scale commercial real
estate development. The revenues obtained more than covered the capital needs
of the local government for its share in the redevelopment costs of the port, and
furthermore established important new real estate tax revenue streams. Port privati-
zation in China was usually a private/government partnership, with the government
providing the land and various civil improvements for a minority share ownership
of the modernized port or terminal. This approach has served China well by assuring
it of one of the most efficient and capable port sectors in the world.
China’s economic policy has been and is radically different from that used by
Japan and later South Korea, which shunned foreign investment in their development
and protected local firms. China by comparison invited foreign investments and
trade from the start of its economic opening to the world at large. In 2003 alone
over $54bn of foreign direct investments were made in China, a sum larger than
all foreign investments in Japan since World War II. Yet at the same time China,
unlike Japan and South Korea, maintained large-scale state ownership in essential
industrial sectors as well as in major banks and financial institutions.
China’s foreign trade which reached $851bn in 2003 was actually fairly balanced
with a major surplus in trade with the U.S., Hong Kong, the Netherlands, and some
other industrialized countries, and major trade deficits with Japan, South Korea,
Taiwan, Germany, Malaysia, as well as Russia and many resource-rich developing
countries. The first set is primarily countries that supply China with high-tech
components and equipment, while the others are largely resource suppliers to China.

China’s Foreign Trade (2003)

Rank Country Import from Export to Net

1 U.S. 339 926 1265


2 Japan 741 594 1335
3 Hong Kong 111 763 874
4 South Korea 431 201 632
5 Taiwan 494 90 584
6 Germany 243 174 417
7 Malaysia 104 62 201
8 Singapore 105 89 194
9 Russia 97 60 157
10 Netherlands 19 135 154
Total 2720 3093 5813
Other 2697
Grand total 8510

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

give it a tremendous bargaining advantage. Actually the trade weighed exchange


rate of the Chinese Yuan changed little between 1996 and 2004, this largely due to
the fact that the value added in China to Chinese exports, particularly to America,
is actually comparatively small and estimated at no more than 25%.
One problem is obviously that China with its increasingly dominant economy
has not been invited to become a member of the G7. Such membership would have
increased China’s interest in making world trade work towards a more smooth and
orderly operation of the world economy. As an outsider who is neither consulted
nor involved in G7 policy discussions, China obviously pursues its own economic
strategy with little consideration for its broader implications.
China is domestically trying to control the flow of money and investments.
While effective in regulating bank lending, private money flows are not controlled.
China is making new efforts to emerge from a labor-intensive economy as Chinese
companies continue to solve problems by simply throwing low-cost labor at it.
Efficiency and productivity are largely eluding them as emphasis is mainly on
making things cheaper, not better or by use of more advanced technology. By and
large, few Chinese companies invest in long-term technological developments.
By comparison, U.S. companies emphasize breakthrough innovation; Japanese,
advanced processes; Korea, marginal product and process improvements; and,
Chinese companies emphasize mainly costs in producing things. In many areas
such as consumer hardware, ships and others, China has now captured a significant
share of global output. For example, in shipbuilding, an industry in which China
was a net importer even when not active in international shipping as little as 10
years ago, as noted before, China has emerged as a major power and is expected
to produce as much as 25% of the world’s ship building output by 2010.

AMERICA’S MISTAKEN SELF-PERCEPTION

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

successfully into different environments. Democracy must be accepted as rights


and principles not as sets of pre-conceived methods and organizations. The West in
general and America in particular have often tried to supplant or even impose their
interpretation of democracy. This is probably the biggest mistake of recent years
and a major reason for continued global unrest, particularly in nations, regions or
among peoples who compare Western attempts at democratization with colonialism
of earlier times.
At the same time America is considered the big laboratory of democracy where
all kinds of electioneering approaches are first developed and tried. It is interesting
to note that the large increase in voter participation in the 2004 Presidential election
was largely due to the return to grass roots electioneering.

AMERICA’S ECONOMIC CHALLENGES


The American economy faces severe challenges with its huge foreign exchange
deficits and a miniscule domestic savings rate, which make it dangerously dependent
on foreign investment inflows, particularly to finance government borrowing needs.
Much of this investment now comes from East Asia. America’s economy is increas-
ingly dependent on foreign trade, which exceeded $2.26 trillion or 23% of its GDP
in 2004. By November 2004, U.S. imports of $1.3 trillion exceeded exports of
$745 billion by nearly $585 billion, a number expected to reach $625 billion for all
of 2004. America’s foreign trade is highly imbalanced with most trading partners
(January–November 2004).
The huge and increasing U.S. current account deficit largely imposed by the trade
deficits in the world’s largest economy, while practically all other major economies
experience current account surpluses, causes a huge increase in U.S. foreign debt.
This cannot continue indefinitely as ultimately the costs of servicing this mounting
debt will introduce huge added foreign transfers which will make U.S. economic
growth non-sustainable.

U.S. Imports U.S. Exports Trade Deficit

Canada $2351b $1717b $634b


Mexico $1432b $1016b $416b
U.K. $421b $329b $92b
Euro Zone $1909b $1156b $753b
Gulf States $308b $104b $204b
China $1792b $315b $1477b
Japan $1183b $499b $684b

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

IMPACT OF GLOBALIZATION AND OUTSOURCING


ON ECONOMIC LEADERSHIP
Globalization and outsourcing have made the world a truly global village. While
increasingly open borders, reduced tariffs, and lower IT and transport costs have
played an important role in outsourcing which is growing at more than twice
the rate of the global economy, outsourcing of both hard and soft wares is still
small. It reached a global value of about $1.4 trillion in 2003, which though a
large number was dwarfed by global expenditure for sales, general and adminis-
trative, as well as distribution costs of $19 trillion. While white-collar outsourcing
is simpler, only 8% of white-collar work performed in the G7 countries is
outsourced. As usable Internet bandwidths are expanded, more white-collar work
will probably be outsourced. In theory about 50% of all white-collar work could be
outsourced.
Hard or manufacturing outsourcing depends not only on differential labor costs
and technical competence but also on transport or logistics costs. Transport costs
have declined greatly in the last 20 years. Air freight has leveled off at about
60% of the costs of 1985, while rail has declined by more than 50% and barge
or inland water transport costs have declined even more. Much of this obviously
depends on developments in fuel costs, one factor that affects particularly airfreight
costs. Much more radical cost reductions have been experienced in telecom-
munication costs, which before long will be equally inexpensive worldwide, as
even high-priced telecom service countries move toward efficient mass markets.
In parallel, financial institutions have expanded their activities and are increas-
ingly investing in or leaning to outsourcing activities both on a large or mini
scale.
This trend allows many developing countries to become players in the outsourcing
or globalized world. While in countries such as China, government banks, foreign
companies, and foreign direct investment provided the capital for the build up
of manufacturing and other facilities, and in India foreign and domestic IT and
service companies such as banks, consultancies, and more provided the capital
for the establishment of outsourcing service facilities, other developing countries
such as Bangladesh with a more primitive infrastructure and social base had to
rely on alternative financing methods to provide employment opportunities through
outsourcing.
Micro-credit, a concept started by Grameen Bank of Bangladesh about 25 years
ago and which extends micro-loans largely to women to encourage micro,
often single person home business promotion, has proven a great development
success. Since its beginning, this concept has assisted millions of women in
Asia to become independent and prime supporters of their families. Inter-
nationally Mercy Corps is advancing the idea and now works with funding
agencies in many Asian countries from Mongolia and Kazakhstan to South
Asia to advance more business development. In many countries the success
of the approach at the micro-level has encouraged advancement towards larger
financing operations from micro to mini-loan facilities that permit borrowers to
186 CHAPTER 6

finance small businesses employing a few dozen. As a result, we now have


hundreds of new, often women managed and owned, businesses in manufacturing,
services, construction, and more. The lean repayment records of micro-loan credit
facilities has been excellent, a fact that permits continued extensions of easy
credit.
To remain an economic leader America must continuously reinvent itself. At the
same time, as one example, Americans have lost much of their ability to effectively
plan, design, and build large-scale or macro projects, an area in which they ruled
supreme for a long period of time. This is largely because they have lost their
nimbleness of identifying macro project opportunities, have become rather staid
and bureaucratic or traditional in their approach, and have lost much of their project
organizing skills.
Global demand for macro projects is growing rapidly as developing countries are
trying to bring their infrastructure to global standards; but this often demands very
responsive planning and implementation capabilities, characteristics U.S. firms,
largely used to American standards and approaches, seriously lack. As a result,
few macro projects in Asia, particularly in China, have been won by American
firms.
Globalization has affected America probably more than most other industrialized
countries, since it led the world in post-industrializing or in the move towards a
service economy. As a result, a larger percentage of jobs are probably outsourced
by American companies than by those of other industrialized countries. While,
according to a study by Cornell University and the University of Massachusetts,
mainly manufacturing jobs moved abroad with 202,000 in 2001 and 309,000 in
2004, non-manufacturing jobs, primarily tele-service and software development
jobs are rapidly catching up with 2000 only outsourced in 2001 growing to 97,000
in 2004. Outsourced service jobs primarily to India are expected to dominate U.S.
outsourced jobs by 2006. While outsourcing is usually assumed to cause a loss
of American jobs, multi-nationals who increase employment abroad also increase
supervisory or technical employment in the U.S. For example (according to the
Institute for International Economics), computer/mathematics jobs in the U.S. grew
from 2.78m in 2002 to over 3.08m in 2004, while architecture and engineering jobs
grew from 2.4m to 2.53m during the same period.
This suggests a need to plan and design more effective outsourcing by identifying
who does what best and in a most cost-effective manner. While shipping costs of
manufacturers have declined more slowly than the IT costs of providers of remote
services, savings in inventory holding costs by use of global shipping with massive
manufacturing outsourcing centers serving multiple markets connected by efficient
real IT systems make the approach very attractive.
Increasingly alternative strategies of large-scale automation versus outsourcing
are evaluated in light of potent technical changes on product design and demand as
well as on process developments and use. It is important more than ever to make
products more affordable by lowering costs, reducing delivery schedules, improving
use and usability, and designing their effective marketing
THE FUTURE OF WORLD LEADERSHIP 187

FACTORS DETERMINING LEADERSHIP

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’S LEADERSHIP ROLE

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.

THE ELECTRONIC CHALLENGES TO THE AMERICAN


SERVICE ECONOMY

Telemedicine, remote or Internet education, online shopping and ticket booking,


and now computerized legal research, conflict evaluation, and in future arbitration
or even adjudication are rapidly replacing humans in personal interface in services,
particularly in America. While these developments are largely driven by costs as
well as a desire to reduce the time required for resolution of issues, analysis or
decision making, they increasingly help to replace people in services. In America
where well over 70% of the working population is engaged in services, this may
have a huge effect on the economy. In fact, as increased automation and scale
in productive sectors such as manufacturing and agriculture displaced workers the
service sectors started to blossom, and absorbed much of the surplus labor, albeit
often in less demanding and less well paid jobs.
THE FUTURE OF WORLD LEADERSHIP 191

Now, with electronic and communication technology increasingly infiltrating


service industries, these jobs are in danger and there is little relief on the horizon.
There are really no other sectors in the economy that could absorb redundant service
sector employees. America is particularly vulnerable in this respect not only because
of the size of its service economy but also because of the high cost of its labor and
often lack of education and other skills that could be readily transferred.
These developments pose a huge challenge to America not just in economic but
also in social and political terms. As a country with huge current account and trade
deficits, large foreign debts, with a population that barely does any saving and
social support systems such as the Social Security, Medicare, and Medicaid all in
potential fiscal trouble, the country faces a very difficult future. This at a time when
many private pension systems are underfunded and America assumed huge foreign
and domestic obligations.

AMERICAN CREATIVITY AND ITS ROLE IN PERPETUATING


LEADERSHIP

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
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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.

THE NEW BRAIN DRAIN AND REACTION

At an age of continuing learning, knowledge and experience are accumulated or


built up throughout a person’s life. Not only as people’s knowledge enhanced by
the use of a changing technology in an ever changing environment, but people
continue to learn from their experience, their successes, and their failures. Much
of this is difficult to convey in a classroom environment, as much of it is multi-
functional and multi-dimensional systems knowledge that depends on the timing,
environment, and conditions prevailing when a decision had to be made, and the
resulting outcome. Such knowledge cannot readily be taught in a focused subject
classroom-type environment. This knowledge usually resides in older, experienced
professionals and managers who have gone through many of the complex situations
expected to be faced again in the future. Yet many employers and particularly the
government ignore that knowledge or wisdom and are trying to get rid of older
employees to cut costs, as these are usually more expensive than younger workers.
This strategy often backfires as old lessons have to be relearned or mistakes
are repeated. Most senior professionals and managers prefer not to retire or at
least stop working altogether, but prefer instead to phase out gradually and at
least remain involved part-time as advisors, trouble shooters, consultants or simply
sounding boards. Wise companies recognize the fallacy of this most serious brain
drain caused by radical shut out of older professionals and managers on reaching
a certain age. Similarly excluding older people from advancement in their career
path is often counterincentive not only by depriving a company of their experience
and knowledge, but also by undermining the confidence of the whole body of
employees in their advancement opportunities. Continuous learning has introduced
a completely new valuation of people and the increasing complexity of decision
requirements now demands not just specific and up-to-date knowledge but an ability
to integrate knowledge, experience, and understanding of situations as well as
interdependent complex systems in the making of effective, timely decisions that
lead to success.
At a time when learning is a life-long experience and most jobs require continuous
updating of knowledge, the traditional concepts of retirement make little sense.
While there are still many who rely on their early skill or knowledge acquisition,
most people continue learning; this particularly through the use of the Internet which
THE FUTURE OF WORLD LEADERSHIP 193

is no longer largely a communications tool but a boundless source of knowledge


and information. The Internet initially used primarily by technologically savvy
young people is increasingly becoming a universal source for knowledge acquisition
and training. As a result, older people are reentering the knowledge world, and
are increasingly participating in the latest developments. This combined with their
experience-tuned judgment capability increasingly makes older people effective
workers and managers. Combined with increased life expectation and improved
health will make it attractive to continue use of people who in the past would
have been retired or at least not hired. Low birth rates and unsustainable demands
on retirement or pension systems increasingly encourage continued employment
of older people, many of whom prefer an active professional life to one of often
contentless leisure.
A brain drain is also caused by the increasingly strict interpretations of so-
called U.S. security requirements and subsequent imposition of barriers to entry
of foreign nationals. This is affecting both the number of academically-qualified
foreign candidates seeking admission to U.S. research institutions and institutions
of higher learning, and the quality of those admitted. While there are no reliable
statistics on the number of qualified graduate students and researchers who were
either not admitted, given entry visas or chose to abort their plans to go to the U.S.
and went elsewhere instead, the numbers appear to be significant. Of equal, if not
more importance, is that as a consequence, the quality of foreign graduate students
and researchers at American institutions appears not only to have declined, but their
commitments seem to be less focused as well.
Greater numbers of highly-qualified candidates now appear to prefer committing
to institutions in other countries, which are not only more hospitable in their
admission strategies and procedures, but also are more open and generous in terms
of their research support. Stem cell research is a typical example where institutions
in foreign countries are now doing advanced research that often leapfrogs U.S.
work. Similarly, the level of research support in which the U.S. has dominated
for so long is becoming more equal in many areas of science and technology –
with accessibility and size of support often better in other countries, where
political correctness plays at most only a minor role in the awarding of research
funding.
In the past, foreign graduate students provided a significant base of highly-
qualified researchers, and often led important advances in science and technology.
Many of them chose to remain in this country after completion of their academic
research, providing important new blood to universities, research institutions, and
industry. However now, as a result of the new U.S. security requirements, more of
those admitted are sponsored by their respective government and their commitment
to the interests of our country is greatly diminished. Indeed, their sponsorship is
often based on explicit understandings or commitments for them to return to their
native countries and transfer U.S.-developed technology or research advances. It
is hard to understand why these foreign-government-sponsored candidates pose a
lesser security risk.
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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.

REPOSITIONING AMERICA IN THE PUBLIC EYE

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.

CAN EUROPE AGAIN BECOME A WORLD LEADER?

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,
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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 CHANGING IMAGE

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.
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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
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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

LEADING INTO THE FUTURE

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.
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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.
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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

concentrate on their own development and the advancement of their economies,


technological development, and political effectiveness. This approach permits them
to effectively manage and assure greater control of development risks. China in
particular has made a point of not getting involved in other countries’ affairs and
has kept a hands-off policy towards its neighbors. Even relations with India, with
which China had a long term border conflict, are good now and the two countries
are increasingly mutually supportive.
Both of these super nations are showing an understanding of the need for non-
interference and global harmony to advance economically and socially in all respects
and have shunned major involvements in conflicts. This gives them not only an
opportunity to concentrate on their own development but also to lead the world
at large.

INDIA’S EMERGING ECONOMY AND LEADERSHIP POTENTIAL

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
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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’S REBIRTH AND THRUST TOWARDS


GLOBAL ECONOMIC POWER

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

determined steps, and by developing long-term relationships with strategic partners


in these spheres. It assumes as pointed out by Brzezinski [Ref. 16] that Japan’s
influence will decline, and China will dominate East Asia both strategically as well
as economically before long. China is becoming a more global entity and is assuming
international approaches, systems, and positions. While some like Mearsheimer
[Ref. 17] feel that China’s neighbors will join with America in attempts to contain
China’s power, others think that China will not attempt or even find it in its interest
to push the U.S. out of Asia and become the dominant military and economic power
on the continent.
While this may be historically the right path for China, the reality of global-
ization and the self-interest of China in becoming an economic leader may result in
a different strategy. With the economic resources to lift its huge 1.3 billion strong
population out of poverty and make Asia the most populous continent on earth with
more than half the world’s population, China may aim at making Asia the center of
global social, economic, scientific, and technological development, and the world’s
leader. China does not need to push America out of Asia. Its economic infiltration
and ultimate take over of the continent will be effective in itself and negate the
need for military, strategic or even political domination. In turn American influence
will wane.
The only question is the role of India on the continent, its development and
affiliations. Will India try to compete with China, complement its Asia growth
strategy or join forces with America to oppose China’s expansion? As noted,
China’s economic expansion started in 1980. It has continued nearly unabated for
25 years now and though a slowdown in economic growth was projected and even
recommended to prevent over-heating of its economy, its growth continues nearly
unabated.
As pointed out by Wolf [Ref. 18], both Japan’s and Korea’s per capita GDP
actually grew faster between 1950 and 1973 and between 1962 and 1990, respec-
tively. This though may not be a reasonable comparison, considering both the
situation of the respective countries and their relative sizes. Even Taiwan outpaced
mainland China’s rate of economic development. Obviously all of these compar-
isons are not reasonable. China, a nation of 1.3 billion or about 20% of mankind,
a population more than twice as large as Europe’s started from not only a lower
economic base, but also a very complex political, ethnic, linguistic, and cultural base.
A mainly agrarian society using a largely failed communist economic structure,
China confronted not only economic, but also social and political problems. While
ethnically fairly homogeneous, it is really a very culturally diverse society. Its
main advantages are fairly high literacy and Confucian types of discipline and
work ethics. Chinese are usually entrepreneurial and willing to take risks. At the
same time, past political developments and the continued pervasive political system
prevent many of them to outer business opportunities at full speed.
Although China’s economic growth has been and is impressive, this more so
from a macro point of view than in terms of per capital GDP income. Its per capita
GDP grew from 5% of that of the U.S. in 1980 to 7% of that of the U.S. now
LEADING INTO THE FUTURE 213

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

of the world’s aluminum. In other words, it is an increasing user of raw materials,


out of proportion to the size of its economy or population. At the same time China,
as mentioned before, is now the second largest importer and user of petroleum.
As a result, it helps push up the prices of many raw materials. While China has
captured much of the manufactured goods export markets to the developed world,
often replacing poor developing countries, some of China’s neighbors partake in
that boom by exporting parts and components for assembly in China, and export to
the U.S. and Europe.
At the same time, China’s agricultural sector continues to thrive, with little if
any subsidy or other market distortion. It is actually quite noteworthy that China’s
agriculture was and is able to meet much of the food needs of its huge population
with little if any market distortion such as subsidies. It is only recently that China
has started to clean and open up its banking sector. The government spent nearly
$283b since 1998 just to clean up bad loans and other deficiencies to make the
industry more acceptable at home and abroad. With over $1.2 trillion in household
savings along, it is extremely attractive. In response, foreign banks have started to
come on board and invested over $14b in purchasing small minority shares (less
than 10%) of Chinese banks during the first 9 months of 2005.
There are many issues which are considered as destabilizing for China, such as
large and growing income differences, lack of effective support of farming and
traditional enterprises, as well as all the various infrastructure projects, particularly
the large ones, such as the “Three Gorges Dam” which caused major dislocation
of people as well as economic, social, and cultural activities. Yet it must also be
recognized that many of these provide much greater economic and social benefits
than the costs they impose. The Three Gorges Dam, for example, is expected to
not only replace 30 dirty coal-fired power plants and reduce the cost of power, but
also prevent the large-scale annual flooding of the low lands, improve irrigation,
and make the Yangtze River the central transport artery for 300 million Chinese
living along its banks, navigable by 10,000 dwt or larger vessels year round.
In fact, after completion of the dam, such large vessels should be able to navigate
all the way to Chongqing and further up river. Furthermore, the new river domain
will permit the diversion of 10–20% of the rivers’ tributary flows to the fresh water
starved north and along the Gobi Desert. It may even supply the Beijing area with
water. In other words, this mammoth project has multiple benefits, which will affect
the lives of hundreds of millions and not just the 1.2–2.0 million people negatively
affected through relocation, loss of habitat and/or traditional jobs. In other words,
this and other development projects introduce much greater benefits than costs, and
positively affect many more people than those who are penalized by them.
China’s most difficult problem is to develop its interior, an area that has long been
disjointed from the coastal region. Traditionally land transport such as road and
rail served south to north transport, while east-west communications were largely
provided by water transport using the three large river systems, the Yellow, Yangtze,
and Western rivers and their tributaries. This not only because interior populations
were largely concentrated around the river basins, but also because river transport
LEADING INTO THE FUTURE 215

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

biotechnology, pharmaceuticals, as well as large-scale industrial development in


steel making, refining, petrochemicals, automobile manufacturing, household goods,
and more from its traditional concentrations on agriculture, textiles, and small
manufacturing. While India has a population expected to exceed that of China by
2020, it lags behind China in many ways. It attracts currently only about one-tenth
the foreign direct investment of China, its manufacturing as a percentage of GDP
is only 15% versus 43% in China, and its GDP per capita is less than half that of
China ($590 versus $1280 in 2005). Its urban population is also much less than
that of China (29% versus 40% in 2005). As noted before, the main drag on India’s
development is the lack of effective existing infrastructure as well as government
investment in new infrastructure. Here again China is spending nearly 10 times
as much as India on infrastructure improvements ($2.5 billion/year versus $25.8
billion per year in 2005).
India has the advantage of a democratic political and transparent legal and
financial system, yet its bureaucracy is excessive and inefficient, its literacy rate
quite low and outlawed, yet widely practiced, class (or caste) discrimination
continues to disenfranchise a large section of the population. As a result, India’s
economic development has lagged and will continue to lag that of China for
the foreseeable future. The main challenge to American economic leadership will
therefore come from East Asia, initially from the block of East Asian nations and
later from China itself.
China will not only assert its economic power but also become a major economic
power broker. Its advances in the world energy, food, information technology,
manufacturing and service sectors as well as its great progress in the physical and
life sciences assures China an important role in the global economy. As a major
importer of fuels, minerals, and food grains, it has become an important player
in the commodity markets. In fact, it is expected to surpass the U.S. in terms
of total volumes in commodity trading. China’s energy companies are already
unsettling international energy markets as they corner oil and gas reserves. China
has learned the principles of international trade and finance well notwithstanding
the deficiencies in its domestic banking system.
It has made important inroads into important commodity and particularly fuel
or energy supply markets and used political tensions between major existing or
potential suppliers and the U.S. or the West in general to its advantage. It has
established major stakes in the Sudan and various other African as well as Central
Asian countries, some of which were not particularly popular in the U.S. and other
Western countries. By providing financial, combined with political, support, it has
gained important strategic footholds in these countries, which assures China of
reliable commodity supplies.
China usually combines such commercial relations with various support activ-
ities, such as providing poor developing countries, particularly in Africa, with
development assistance in infrastructure building, education, and other social
activities. As a result, it has gained wide political, diplomatic, and commercial
support.
218 CHAPTER 7

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

PROBLEMS IN MAINTAINING AMERICAN LEADERSHIP


There are many issues that threaten America’s claim to world leadership, most of
which are self-inflicted, and the result of lack of self control. They are also caused
by America’s narrow view of the world and its preoccupation with internal interests.
The Western lead towards globalization, which started with outsourcing of manufac-
turing and later of services, has now permitted many developing countries to emerge
economically and challenge America and its Western partners in some economic
sectors. Designed initially to reduce costs of manufacturing and services and thereby
assure lower prices and higher living standards in the West it actually benefited
many developing countries more by raising their income levels, employment, and
technology. At the same time, many of them were able to use their newly found
opportunities to improve social conditions and competitiveness. The West, and
America in particular, did not recognize the speed of emergence of these new
economic leaders.
America and the West, while benefiting economically from globalization, failed
to adequately address some of their inherent as well as other social and societal
problems such as income distribution, immigration, drug addiction, unemployment,
education, health care, and law enforcement. They also quite often got involved
or were drawn into political or military conflicts. Most Americans are traditionally
trained for middle level jobs, neither specialized nor unskilled. With jobs for
lower middle class becoming scarce, and with an inadequate number of highly
trained people, America is now loosing its technological edge. Similarly, military,
economic, political, and social commitments often stretch or even exhausted its
capabilities. As a result, many domestic improvements required to maintain and
advance economic competitiveness and living standards were compromised, as was
the ability to effectively respond to the growing economic challenges from East
and South Asia, among others.
Most of the problems faced by the West and particularly by America are of their
own making or the result of political conveniences; yet they impact on their ability
to lead the world. Leadership requires example, and many developments do not
represent effective examples. America now faces the need of having to resort to
a radical overhaul of its educational, health care, and legal system or face continued
loss of competitiveness and ultimately economic leadership. In some areas, such
as immigration, America, a country of immigrants build by immigrants, faces the
dilemma of being overrun by millions of illegal immigrants every year, most of
whom are untrained or otherwise unable to fill needs for the growing number
of technical jobs.
The problem is not only one of porous borders, as nearly 40% of illegal
immigrants actually entered America legally, but did not depart again as required
by their visas. At the same time, highly trained immigrants to the U.S. are subject
to strict quotas even though they contribute greatly to the economy and often
create jobs.
In Western Europe the trend was to replace a declining population by immigration,
mainly from Moslem countries. These immigrants usually had large families and
220 CHAPTER 7

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

This phenomenon permeates private, corporate and government decisions. Not


only do many individuals have inadequate resources to cater for their future needs,
but corporations and government often leave many future obligations unfunded.
These in combination with America’s huge foreign and domestic public debts
present very difficult strategic challenges to the U.S. economy.
As noted before, there is a growing problem of rapid decline in productive
activities in the American economy, particularly in manufacturing. The increasing
loss of a manufacturing base not only deprives America of high level employment
opportunities and thereby a thriving middle class, but also of support and incentives
for technological innovation. Manufacturing following agriculture has historically
provided the back bone of the American economy and the incentives for technology
development, and innovation.
While the growth of the American service sectors may be an appropriate economic
development, most of these service sectors provide for the needs of Americans, in
other words are purely domestic services. Among these are education, health care
and law enforcement. As noted, America has some of the world’s best hospitals
and medical facilities, but spends more than twice as much per capita or as a
percentage of its GDP (15.2% in 2005) for health care. Yet health care insurance
does not cover as many as 40 million Americans, and many others are only partially
covered.
Similarly, law enforcement consumes an inordinately large percentage of the
GDP. In 2005, over $1.6 trillion or about 15% of GDP were expended on it,
without any measurable improvements in public safety or crime prevention, this
in addition to the costs of homeland security which imposes large additional costs
without measurable improvements in security. In total, education, health care, law
enforcement, and homeland security, all domestic services, are expected to reach
costs in excess of half of the American GDP in 2006.
The problem is that these services in America, while providing for the well being
of its citizens, currently add little to the economic growth and competitiveness
of America in an increasing globalized world. They may also affect America’s
continued ability to lead the world economy as well as its ability to serve the
world as the premier technology developer and military power, as shown by the
tremendous budgetary strain imposed by the Iraq war and the recent natural disasters
such as Hurricane Katrina.
In fact, both of these pose the question if America is really able to effectively
deal with major foreign challenges and domestic disasters. America needs major
improvements in its educational system just to keep pace with the new foreign
competition in technology and science. Katrina was a great test for America.
It showed up utter chaos at both the federal and state levels in responding to
a mammoth disaster. A combination of federal negligence, incompetent planning,
and untimely provision of often inadequate aid was further exacerbated by blame
games, heavy handed bureaucracy, probable political as well as racial discrimi-
nation, and most importantly real incompetence by many of the people responsible
for emergency management.
LEADING INTO THE FUTURE 227

America has become highly politicized with increasing partisanship at all


levels of government. American government usually works better when its three
branches have different or independent political affiliations. When the executive
and legislative branches are fully beholden to one political view, they may
furthermore try to use opportunities to fill vacancies in the judiciary, the third
branch of the government with like-minded judges as well, wholly negating
the premise of the founders in devising a three branch government ruled by
the requirements of the country’s Constitution. This condition is being reached
now. It contributes greatly to the gradual breakdown of not only the indepen-
dence of the three branches of government but also true representation of
the people, among which the combination of minorities have always been a
majority.
The result is a more divisive decision making environment and a decline in
the true representation of the public’s or the people’s interests. America is more
divided today than at any time in recent history. This not only because of the
apparent quagmire in which it finds itself in the Iraq War today in 2005, but also
for lack of any real action plan to complete this mission and lead the world. This
and the dismal failure of the American government at all, but primarily the federal
level, to effectively deal with the Hurricane Katrina disaster in an effective and
timely manner results in the assignment of a failing grade to America in strategic
and action management. The Katrina episode showed a real lack of leadership,
inadequate communication and cooperation and blame game politics. One hundred
days after the disaster only 103 disaster loans to business and 1400 to home owners
out of hundreds of thousands of qualified applicants had been considered. There
were also serious allegations that race played a role in the lack of government
and particularly the Federal Emergency Management Administration response to
this calamity. Katrina really showed the major deficiencies in America’s ability
to cope with large-scale accidents, independent of the large and often stored or
pre-positioned resources.
Lack of organization, cooperation, and simply basic planning and management
skills as well as commitments appear to be major factors causing these deficiencies.
At the same time these experiences raise serious doubts of America’s credibility
as a global leader. Many Katrina victims waited and waited for help and shelter.
Thousands apparently died from lack of help and not the direct effects of the storm.
Bodies were still being found in houses that were simply bypassed, ignored or
otherwise not considered. Similarly many sick and elderly in hospitals and old age
homes were simply abandoned to die.
Other problems that affect the credibility of American leadership are driven by
things such as excessive executive pay in industry and finance which, while legal,
seriously undermines the concept of reward for performance or earned income.
Also the newly popular dismantling of corporate pension and health care systems or
obligations are serious indictments of American corporate leadership. These actions
are often facilitated by the use of Chapter 11 bankruptcy provisions and used as
management tools. They often fill the pockets of lawyers, vulture investors and
228 CHAPTER 7

executives. Chapter 11 bankruptcy laws were reformed on October 17, 2005 at


a huge cost to shareholders, workers, and customers.
Chief executive pay by the 1000 largest U.S. corporations averaged $5.7 million
per year in 2005 or over 150 times that of an average employee working for
them, this usually independent of performance. In fact executives have resisted any
linkage of pay, bonuses, and other benefits to performance. Bonuses, particularly
in the financial sector, have similarly become unreasonably large. These trends are
obviously again at the expense of shareholders, customers, and employees.
America spends more that twice as much per person on education, health care, and
law enforcement than any other country. With nearly 50% of GDP spent on these
services, we are in effect wasting nearly 25% or a quarter of our GDP by spending
so much more on these services than other advanced countries. While our elite
universities and schools or our pre-eminent hospitals may be better and some are
among the best in the world, the average quality of education, health care, as well as
public safety is probably well below that of other advanced industrialized countries.
Even more importantly, America’s education, health care, and legal systems are
less accessible to the average citizen than those in other advanced countries, where
government and/or central organizations provide coverage and accessibility to all.
America’s largely private system provides many opportunities for legal,
insurance, consulting, and other interests to intervene and add significant costs
without the addition of measurable or for that matter any benefits. In fact these inter-
ventions usually reduce accessibility and quality without improvements in quality
of service. Marketing has become a huge and essentially non-productive industry
in America. It is estimated to account for over 10% of GDP and includes not just
the advertising of products but increasingly also of services. These include educa-
tional, health care, and legal services, as well as marketing of all kinds of activities
people did not even know they could or should possibly want. There is a lot of
false advertising and misleading marketing, which often undermine public confi-
dence and interests. The media and particularly the Internet play an increasingly
important role in this.
All of these developments and resulting conditions show a trend towards
decadence in America somewhat reminiscent of the Roman Empire before its fall
from leadership. America is slowly but surely losing respect. While still admired
for its achievements in science, engineering, medicine and other intellectual activ-
ities as well as in entrepreneurship, it has lost much of the world’s confidence
as a global mediator and economic leader and is perceived by many as a dicta-
torial diplomat. Like Rome which soon after reaching the pinnacle of power and
respect became a morass of infighting cliques, self indulgence, mis-organization,
and social discord, America seems to be sliding into mismanagement and social
self-satisfaction without base.
As a result, America is gradually losing both the confidence and respect of many
people, including some of the most important leaders in the world, this also for
lack of or inefficient communication and consultation with others. Leaders must
suggest and discuss as well as consult with others affected by their proposals and
LEADING INTO THE FUTURE 229

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

America is recognized as preeminent in science and technology, as well as economic


and military power. The question though is if these factors qualify it to lead global
policy and development in the world. Global leadership not only requires a dominant
position in these important areas but a firm and moral base, creativity, credibility,
persuasiveness, and effective communicating ability. A world leader must foremost
want to organize people and nations to do the right thing, the moral thing, and the
things that advance human and the world’s interests for the long run. They should
not be driven by short-term or temporary interests, no matter how attractive or
rewarding, but keep the overall and long-term development impacts always in mind.
Throughout history leaders have emerged and vanished. Some achieved
leadership status by virtue of their personality and achievement, while others did
so by power, greed, shrewdness or popular support. It is interesting to note the
different ways rulers came to power throughout history all over the world. Those
who establish hereditary rights to rule often emerged from nowhere but were later
anointed by religious, power group or popular acclaim to their exalted leadership
position as emperors, kings or other aristocratic figures. Few actually exemplified
leadership characteristics and in fact many would later be deemed absolute failures
as leaders. The same applies to groups of people or nations claiming leadership.
Today widely available and open real time communications require leaders and
leading nations to respond effectively to issues as they occur to retain credibility.
They similarly must be open in their relations and information exchange. Infor-
mation should be inclusive and comprehensive and not be used to try to hide or
circumvent facts to attain public relations advantages. Leaders must be committed
to basic human rights of their own people, all people under their direct or indirect
control, as well as others. This includes freedom of expression, religion, and
movement without hindrance. Leaders in essence have a contract with their people
and leading nations with all other nations to guide, help and protect them.
In today’s environment we need more people oriented leadership with emphasis
on human rights and human development. It is unfortunate that people or social
development does not receive greater attention, both in many developed as well
as developing countries. Leaders often do not recognize that it is their people
who constitute the most valuable resource. Human development with emphasis on
education, health care, legal protection and safety, as well as freedom of expression,
business activity, movement, and enterprise are the only sure way of attaining
prosperity, economic growth, respect, and security.
To achieve this, leaders must be mature, well adjusted, and people oriented. They
must build on their people’s strength. Leaders must learn to understand their people
and their needs, as well as the needs of the world or mankind in general. They
must be good listeners and demand as well as accept criticism. Leaders should be
230 CHAPTER 7

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

TOWARDS A BETTER, FAIRER GLOBALIZED WORLD

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.

WHAT THE WORLD 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
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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.
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Such a World Emergency Management Agency or Organization (WEMO) should


not be a large bureaucracy or supranational all-powerful agency, but very much
like International Air Traffic Control or the World Health Organization (WHO),
a global resource management, coordination, and assignment body with powers to
both direct as well as mobilize resources. However, it must be provided with powers
which permit it to requisition and control required resources, including material,
equipment, and manpower, as well as the means for transport. The recruiting
and assignment of manpower under these circumstances to such an emergency
management agency would be the responsibility of such a World Emergency
Management Organization headed by an international council such as the UN
Security Council.
Our interconnected globalized world has put its major emphasis and priorities on
technological advances and uses. At the same time, social development has lagged,
and we suffer continued and actually growing conflicts among people, both within
countries or regions as well as between nations and cultures. Our technological and
scientific advances unfortunately were not paralleled by similar progress in inter
social, cultural, and religious relations. In fact today we face greater differences
and conflicts, particularly among the three Abramic monotheistic faiths than ever
before. It may well be that if we cannot resolve the differences between Muslim and
Judeo-Christian faiths and cultures now, the result may make the Crusades seem
like a cakewalk. It is incomprehensible that believers in faiths which are essentially
founded on the same basis, have the same heritage, and even customs would explode
into such a venomous discord and violent confrontation; this particularly as they
all share a common background and many traditions.
The common foundations of all monotheism are the belief in one, all powerful
and compassionate god. All preach peace and joy of humanity and discourage
conflict. Their moral demands are uniquely similar or mostly the same. The world
is definitely richer because of the multitude of religious thought and custom. This
diversity, often the result of differences in environment, culture, and living condi-
tions, had a positive impact on mankind and the world at large. The main competition
among religions should be in doing good, to explore and live visions of compassion
and not in trying to degrade other faiths, this particularly as there are no funda-
mental conflicts among these religions and all share not only their background,
customs, and vision, but also basic morals. Religion should be a personal choice
and not partisan. Most importantly it should be a lifetime commitment to peace.
It is interesting to note that most Moslems fight and are willing to give their
lives for their faith but not necessarily for their country. This is particularly true
in Arab countries, most of which share not just common ethnicity and language,
but also culture. Many of these countries are really political divisions or the result
of colonial boundaries without any unique or particular cultural, linguistic or even
ethnic characteristics usually associated with nationality. They mostly represent
fiefdoms which came into being over time without the typical trappings associated
with uniqueness of nationality elsewhere. The result is greater loyalty to the larger
religious affiliation than to the often artificial national boundaries. With such divided
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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
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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.
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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.

CAN AMERICA DELIVER?


The beginning of the 21st century has brought major challenges to America’s
global leadership, this not only because the world has changed and has truly
become a global techno-village with easy communication, travel, and lifestyle, but
TOWARDS A BETTER, FAIRER GLOBALIZED WORLD 243

also because greater closeness, facility of movement, large-scale immigration, and


other people transfer has brought many economic, social, cultural, and religious
differences to the surface.
America as the world’s most successful and determined melting pot, a country
truly built by and for immigrants from all over the world, has established a unique
Western-style multi-ethnic culture, while at the same time developing its own rather
controversial concepts of a world where American approaches and ideas dominate,
including its perception of democracy, people’s rights, and individual freedoms. At
the same time, America, as noted earlier in this book, has developed many cultural
attributes and habits which, while interesting, are not readily accepted by the rest
of the world as standards to be adopted or aimed for. This includes also America’s
type of leadership not just as the world’s largest economy but also as its policeman,
cultural guide, and moral preacher.
There are many who consider American cultural and moral leadership a myth
and its economic dominance largely artificial. While still the largest economy in
the world, America is also the world’s largest debtor who could suffer the rug
from being pulled out from under its feet making the country non-creditworthy.
American cultural dominance as another example is largely a myth as many of its
leaders or stars in film, theatre, music, and even literature are or were foreign born
or actual foreigners residing in its midst.
American cultural dominance, as another example, is largely a myth as many of
its leaders or stars in film, theatre, music, and even literature are or were foreign born
or actual foreigners residing in its midst. America is a true melting pot, one which
did not emerge from a mixture of resident people as many other nations but which
continues to melt, with immigrants remaining a larger percentage of its population
than in any other country. Its character and culture as a result is continuously
changing. Many believe, for example, that it will become increasingly Latin and
lose its more traditional Anglo-Saxon cultural and East European character mixed
with a large African continent. At the same time, globalization which grew as an
economic opportunity is increasingly being refocused in cultural as well as religious
and ethnic terms that are often opposed to the free-wheeling, open and sometimes
prejudicial assumptions that American leadership use.
While the world is economically more united than ever before and global
markets have brought people closer together, social, cultural, religious and
political differences have actually grown. America has assumed and maintained
a leadership role since World War II based on unchallenged superiority of its
economy, military strength, and technology. Its selfless actions after the last
World War were admired for their compassion and generosity, but it has since
lost much of this support largely because of its interventions first in Viet