The Post-American World: Release 2.0 (4 page)

The Three Forces: Politics,
Economics, and Technology

How did all this come to be? To answer that question, we have to go back a few decades, to the 1970s, and recall the way most countries ran their economies at the time. I remember the atmosphere vividly because I was growing up in India, a country that really didn’t think it was playing on the same field as the United States. In the minds of India’s policy and intellectual elites, there was a U.S.-led capitalist model on one end of the spectrum and a Soviet-led socialist model on the other. New Delhi was trying to carve a middle way between them. In this respect, India was not unusual. Brazil, Egypt, and Indonesia—and in fact, the majority of the world—were on this middle path. But it turned out to be a road to nowhere, and this was becoming apparent to many people in these countries by the late 1970s. As they stagnated, Japan and a few other East Asian economies that had charted a quasi-capitalist course succeeded conspicuously, and the lesson started to sink in.

But the earthquake that shook everything was the collapse of the Soviet Union in the late 1980s. With central planning totally discredited and one end of the political spectrum in ruins, the entire debate shifted. Suddenly, there was only one basic approach to organizing a country’s economy. This is why Alan Greenspan has described the fall of the Soviet Union as the seminal
economic
event of our time. Since then, despite all the unease about various liberalization and marketization plans, the general direction has not changed. As Margaret Thatcher famously put it in the years when she was reviving the British economy, “There is no alternative.”

The ideological shift in economics had been building over the 1970s and 1980s even before the fall of the Berlin Wall. Conventional economic wisdom, embodied in organizations such as the International Monetary Fund and the World Bank, had become far more critical of the quasi-socialist path of countries like India. Academic experts like Jeffrey Sachs traveled around the world advising governments to liberalize, liberalize, liberalize. Graduates of Western economics programs, such as Chile’s “Chicago Boys,” went home and implemented market-friendly policies. Some developing countries worried about becoming rapacious capitalists, and Sachs recalls explaining to them that they should debate long and hard whether they wanted to end up more like Sweden, France, or the United States. But, he would add, they didn’t have to worry about that decision for a while: most of them were still much closer to the Soviet Union.

The financial force that has powered the new era is the free movement of capital. This, too, is a relatively recent phenomenon. The post–World War II period was one of fixed exchange rates. Most Western countries, including France and Italy, had capital controls restricting the movement of currency in and out of their borders. The dollar was pegged to gold. But as global trade grew, fixed rates created frictions and inefficiencies and prevented capital from being put to its best use. Most Western countries removed controls during the 1970s and 1980s. The result: a vast and ever-growing supply of capital that could move freely from one place to the next. Today, when people think about globalization, they still think of it mostly in terms of the huge amount of cash—currency traders swap about $2 trillion a day—that sloshes around the globe, rewarding some countries and punishing others. It is globalization’s celestial mechanism for discipline. (That discipline didn’t extend to the money-shifters themselves. Those piles of money created their own problems, which we’ll get to in a moment.)

Along with freely floating money came another policy revolution: the spread of independent central banks and the taming of inflation. Hyperinflation is the worst economic malady that can befall a nation. It wipes out the value of money, savings, assets, and thus work. It is worse even than a deep recession. Hyperinflation robs you of what you have now (savings), whereas a recession robs you of what you might have had (higher standards of living if the economy had grown). That’s why hyperinflation has so often toppled governments and produced revolution. It was not the Great Depression that brought the Nazis to power in Germany but rather hyperinflation, which destroyed the middle class by making its savings worthless.

It is rare that one can look back at a war that was so decisively won. Starting with Paul Volcker in the United States during the early 1980s, central bankers waged war on inflation, wielding the blunt tools of monetary policy to keep the price of goods relatively stable. It’s hard to overstate the momentousness of this economic battle. Between 1854 and 1919 (the years immediately preceding the creation of the Federal Reserve, the institution responsible for keeping inflation in check), recessions struck once every four years and lasted nearly two full years when they came. In the two decades before 2008, the United States experienced eight years of uninterrupted growth between recessions, and the downturns, when they hit, lasted only eight months. This period of stability was a spoil of the decades-long assault on inflation.

The tactics honed in that war became one of America’s most successful exports. In the late 1980s, dozens of large, important countries were beset by hyperinflation. In Argentina it was at 3,500 percent, in Brazil 1,200 percent, and in Peru 2,500 percent. In the 1990s, one after the other of these developing countries moved soberly toward monetary and fiscal discipline. Some accepted the need to float their currencies; others linked their currencies to the euro or the dollar. By 2007, just twenty-three countries had an inflation rate higher than 10 percent, and only one—Zimbabwe—suffered from hyperinflation. (By 2009, even Zimbabwe had cured its bout with hyperinflation by giving up its own currency and relying on the South African rand and U.S. dollar for commerce.) This broad atmosphere of low inflation has been crucial to the political stability and good economic fortunes of the emerging nations.

Though the inevitable protesters at G-20 summits will say differently, none of this happened by coercion. Success stories like Japan and the “Asian tigers” (Hong Kong, Singapore, South Korea, and Taiwan) were persuasive examples of the benefits of free trade and smart economic governance. Governments from Vietnam to Colombia realized they couldn’t afford to miss out on the global race to prosperity. They adopted sound policies, lowering debt levels and eliminating distorting subsidies—not because Bob Rubin or a secretive cabal inside the World Trade Organization forced them to do so, but because they could see the benefits of moving in that direction (and the costs of not doing so). Those reforms encouraged foreign investment and created new jobs.

Along with these political and economic factors moving countries toward a new consensus came a series of technological innovations that pushed in the same direction. It is difficult today to remember life back in the dark days of the 1970s, when news was not conveyed instantly. But by the 1990s, events happening anywhere—East Berlin, Kuwait, Tiananmen Square—were transmitted in real time everywhere. We tend to think of news mainly as political. But prices are also a kind of news, and the ability to convey prices instantly and transparently across the globe has triggered another revolution of efficiency. Today, it is routine to compare prices for products in a few minutes on the Internet. Twenty years ago, there was a huge business in arbitrage—the exploitation of different prices in different places or during different times—because such instant price comparison was so difficult.

The expansion of communications meant that the world got more deeply connected and became “flat,” in Thomas Friedman’s famous formulation. Cheap phone calls and broadband made it possible for people to do jobs for one country in another country—marking the next stage in the ongoing story of capitalism. With the arrival of big ships in the fifteenth century, goods became mobile. With modern banking in the seventeenth century, capital became mobile. In the 1990s, labor became mobile. People could not necessarily go to where the jobs were, but jobs could go to where people were. And they went to programmers in India, telephone operators in the Philippines, and radiologists in Thailand. The cost of transporting goods and services has been falling for centuries. With the advent of broadband, it has dropped to zero for many services. Not all jobs can be outsourced—not by a long shot—but the effect of outsourcing can be felt everywhere.

In a sense, this is how trade has always worked—textile factories shifted from Great Britain to Japan in the early twentieth century, for example. But instant and constant communications means that this process has accelerated sharply. A clothing factory in Thailand can be managed almost as if it were in the United States. A Nebraskan sporting goods store can source from China, sell to Europe, and have its checkbooks balanced by accountants in Bangalore. Companies now use dozens of countries as parts of a chain that buys, manufactures, assembles, markets, and sells goods.

Since the 1980s, these three forces—politics, economics, and technology—have pushed in the same direction to produce a more open, connected, exacting international environment. But they have also given countries everywhere fresh opportunities to start moving up the ladder of growth and prosperity.

Consider the sea change in two representative (non-Asian) countries. Twenty years ago, Brazil and Turkey would have been considered typical “developing” countries, with sluggish growth, rampant inflation, spiraling debt, an anemic private sector, and a fragile political system. Today, both are well managed and boast historically low inflation, vigorous growth rates, falling debt levels, a thriving private sector, and increasingly stable democratic institutions. Brazil’s inflation rate is now, for the first time in history, in the same ballpark as that of the United States. Brazil and Turkey still have problems—what country doesn’t?—but they are serious nations on the rise.

More generally, the story of the last quarter century has primarily been one of extraordinary growth. The size of the global economy doubled every ten years or so, going from $31 trillion in 1999 to $62 trillion in 2010, and inflation stayed surprisingly and persistently low. Economic growth reached new regions. While Western families moved into bigger homes and bought laptops and cell phones, subsistence farmers in Asia and Latin America found new jobs in rapidly growing cities. Even in Africa, people were able to tap into a global market to sell their goods. Everywhere, prices fell while wealth in the form of stocks, bonds, and real estate soared.

The Problems of Plenty

For the last two decades, we have spent much time, energy, and attention worrying about crises and breakdown in the global economy and terrorism, nuclear blackmail, and war in geopolitics. This is natural—preparing for the worst can help avert it. And we have indeed had bad news—from wars in the Balkans and Africa, to terrorism around the world, to economic crises in East Asia, Russia, and—most dramatically—the United States. But focusing on the breakdowns has also left us unprepared for many of the largest problems we face:
which are the product not of failure but of success
. The fact that we have experienced decades of synchronous global growth is good news, but it has also raised a series of complex and potentially lethal dilemmas.

Consider oil prices. It’s only a dim memory now, but in 2008 the cost of a barrel climbed upward at a dizzying rate. After years of hovering in the $25–$50 range, oil hit nearly $150 in mid-2008, and a Goldman Sachs analyst predicted it would reach $200 the following year. The oil shock of the naughts was different from previous ones. In the past, prices rose because oil producers—OPEC—artificially restricted supply and thus forced up the cost of gasoline. By contrast, prices rose in 2008 because of
demand
from China, India, and other emerging markets, as well as the continuing, massive demand in the developed world. If prices are rising because economies are growing, it means that economies have the vigor and flexibility to handle increased costs by improving productivity (and, to a lesser extent, by passing them on to consumers). As a result, the price hikes of the naughts were far more easily digested than, say, those of the 1970s. Had we asked our fortune-teller in 2001 to assess the effect of a quadrupling in oil prices, he would have surely predicted a massive global recession.

It wasn’t just oil that became more expensive. Commodity prices reached a 200-year high in 2008. Agricultural produce grew so expensive that developing countries faced a political problem of how to respond to food inflation. UN Secretary-General Ban Ki-moon issued a plea in the
Washington Post
for “an effective and urgent response” to the emergency. Raw materials of all kinds became dear. The cost of construction exploded from New York to Dubai to Shanghai. Even the humble gas helium, which is used not merely in party balloons but also in MRI machines and microchip factories, was in short supply globally—and it’s the second-most-abundant element in the universe.

When the financial crisis struck later that year, prices quickly deflated. If the 2008 commodity boom had been a one-off event—a by-product of speculation, say—we might be able to leave it aside for the study of historians. But it wasn’t. Rather, it was the result of the long, inexorable rise of the billions who inhabit China, India, and other emerging powers. How can we be sure? When global growth returned in 2010, commodity prices resumed their upward march. Coffee, cocoa, and wheat prices all saw double-digit increases that year. The price of cotton more than doubled.