GLOBALIZATION, REGIONS AND THE NEW ECONOMY
Kenichi Ohmae
Transcript of a talk given in celebration of the establishment of the Center for Globalization and Policy Research, UCLA, Faculty Center, Sequoia Room,
Wednesday, January 17, 2001, at 12:00 Noon
I would like to share with you some of my recent thoughts about the globalization of the economy as well as the globalization of the political and social systems. When I wrote the books “Triad Power” and “The Borderless World”, I was observing the forces at work at that time. I was working with a number of Japanese multinationals, and the speed at which the resources of management, such as capital and technology, crisscrossing national borders, were moving was so fast that I could not distinguish a strategy for a company in a given country. We had to develop certain strategies almost entirely and simultaneously for the world, and at the same time, localize the strategy depending on very different consumer needs, location by location. So I identified four C’s: Company, Currency, Competition and Capital, crossing national borders. The speed was so fast you couldn’t have a very stable, static strategy for any given country. You couldn’t even build a strategy for Japan without recourse to its implications in the rest of Asia and also the world.
So the migration across national borders of critical management resources, particularly technology, information and capital are the fundamental reasons for globalization. Now this is a physical phenomenon. Therefore, whether you like it or not, it will continue. It’s irreversible. The invention of the Internet and permeation of information technology accelerates this. Now we have to think about the economy of the whole world as a total entity first, before we start thinking about its implications in a region or country.
If you look at the prosperous regions of the world today, you know these are the regions which take advantage either explicitly or implicitly of the migration of these management resources, particularly information and capital. When I say “prosperous regions of the world”, I am talking about Ireland, Finland, parts of Sweden, Singapore, Hong Kong and Shenzhen, parts of North America, which seem to be doing quite well. But at same time, these are not nations. For example, the U.S. economy has been doing well until recently, but if you look at regions like Colorado, Scottsdale and Austin, Texas, they are doing far better than the rest of the country. It is also true in China. While the Chinese economy is growing at about 7-8 percent per annum, certain regions of China are growing at over 20 percent per annum. Therefore, the national average doesn’t mean much.
If you go to Sweden, you will find the center of worldwide mobile technology, focussed on the Ericsson Research Park, and there are about 400 companies clustered around that area. That part of the Swedish economy is booming. But that is not true for the rest of the country. Gothenburg for example is facing considerable economic stress. It is not the country as a whole that constitutes the hotspot. It is not the entirety of Finland that is prosperous; but Helsinki, the home of the mobile phone company Nokia is. Nokia used to be a pulp and paper, rubber and copper product company, but now 25% of Finnish exports are made up by mobile phones and related products. Helsinki has now become one of the hotspot of the IT industry worldwide. These are the countries or the regions which are very good at getting capital to come in from the rest of the world, not necessarily using their own capital. Japan is the example of the polar opposite. It has not let the whole world economy work with it. It has the world’s largest savings: $13 trillion in savings in the private sector, and yet we haven’t been able to stimulate the economy, simply because we are too inward looking. We are exploiting our next generation, and this next generation is paying part of the price to stimulate the current economy. This means that the Japanese are still using Keynesian economic policy to do something about the stimulation of the economy.
If you look at the US, it is the best example of making use of globalization to stimulate the economy. It has been spending money over and beyond its means. It is borrowing money from the rest of the world (Latin America, Asia, Europe, Japan). By raising the interest rate, it has absorbed money from all over the world, stimulating its stock market and its economy. Therefore Greenspan’s magic is no magic. It is really a recipe for opening up the US for the rest of the world to come in. This is the bipolar opposite of what I just said about the Japanese approach – which is trying to use its own money and technology and information available domestically inside Japan, and which therefore has certain limits. The problem in the Bush administration is huge because everyone now understands Greenspan’s magic, and therefore when this magic is completely understood, somebody else will try to take this money away from the U.S.
American investors will be first to put their money into European pockets. The Euro is going to become a hard currency as of next year, and after a year’s transition, it’s going to be extremely effective as the second bucket to receive the super liquidity of the whole world. The American economy represents about 30% of global GNP. About 50% of savings around the world are in dollars, which means that about 20% of what America has minted is sitting in somebody else’s hands. It’s in the closets of Russian people, Yugoslavians, Argentinians, everyone is saving in dollars. Therefore, when this magic goes away, then this money might come back to the United States, and this could create a huge problem of inflation. And you have to understand what the Clinton administration was really doing, or what the trio of Ruben-Summers- Greenspan were doing, and that is to use the rest of the world to finance and help America to prosper. Now, that’s not the fault of the Americans, it is the fault of the rest of the world. The rest of the world is still living under the 19th century nation-state model. America has discovered the beauty of the borderless world, and has been importing people, capital, technology, and that’s sort of a wonderful thing.
The trouble is, that when this is discovered and people start reversing the trend, there is no way the American government can keep this money in the United States, a phenomenon which you have already seen in the migration of some portion of the capital back into Euros. I think this trend is going to accelerate over the next half-year or so. Now, when this happens, unlike the cold war between the Soviet Union and the United States, a currency cold war is going to appear, and this is a very difficult one because it involves fighting every second.
The Cold War was never fought because they built too much missile and nuclear power and created a stalemate. But the currency war is fought every second and therefore it’s very painful. For example, if somebody says it’s better to keep your money in Euros and put part of your money in Yen, Americans will be first to put their money into Euros. And, when American citizens do this, the American government has no way of stopping it – that’s the consequence of the free economy. When this happens, I think the volatility between the Euro and the dollar will be so much over the next several years that they will have to think about amalgamating the two currencies.
Therefore I predict over the next 5 to 10 years that there will be a very serious discussion between the Europeans and Americans as to the creation of a common currency, just as the Europeans have done in the case of the Euro. I call this currency tentatively the Doro or the Eullar. As you know, Argentina already wants to use American currency in the domestic market instead of its peso, because it’s very difficult keep to the peg of one peso equals one dollar. Of course, El Salvador has just migrated into dollar country as of January of this year. And last year, we had Ecuador.
There are four countries in Latin America that are already using the dollar as their domestic currency. I think Brazil and other small Latin American countries will also consider using the dollar as a common currency. The dollar therefore will become the de facto Euro for Latin Americans, and Euro will become the de facto currency throughout the East European and Russian economies. That leaves Japan and the rest of Asia in a very difficult situation because when some huge currency such as the Doro emerges, then smaller countries’ currencies could be arbitraged by the likes of George Soros, and when that happens, we in Asia will have to think about the creation of what I have tentatively called the “Asea,” which is the common currency putting Chinese yen, Japanese yen and Korean won all together as one basket currency. This “Asea” will also be arbitraged on a global base, and therefore we might have to think about forming finally the Doro and the Asea into one currency, -- and it’s up to you to name that global currency, maybe the “Esperanza,” or something like this.
But over the next decade, I think we will have to do this, otherwise the whole world economy will become unstable. You are already doing this in your portfolio formation regarding your retirement. People in many countries are diversifying their bets in currency terms into yen, euro and dollars. If you’re an Australian, you’re already putting half of your assets into American dollars. The Australian currency is getting weaker for this reason, but it doesn’t matter. The people don’t suffer because they are better hedged against this kind of fluctuation than their government. So what we’ve seen as the globalization of the economy is not only the dispersal of companies into many different regions, but the globalization of your personal assets, your lifestyle, etc; and as such, we have to think about currency, which is the instrument to exchange, one value into another. This is certainly a must over the next decade.
In terms of political systems, I think the Center for Globalization and Policy Research will have to think about what we mean by democracy – it is a fantastically large subject. But as we move into this type of global economy, and global living, the notion of democracy is at odds with what is already happening in the world. Of course, democracy requires elections. We have to have a candidate from the local village and we choose these village guys to represent that particular village, county, or state to go to Washington, or in the case of Japan - Tokyo. These guys are chosen by the very local people, but they do not have any idea about what the whole world is like.
And therefore, democracy as it is structured today tends to pick up very locally oriented people. Once they become the head of state for the US, Japan, etc., they have to deal mainly with national and international issues, not local issues. Therefore, choosing your representative for the center of the country is at odds with what is happening. For example, the American president influences the economy of Japan more than the Japanese Prime Minister. America has set the prime rate of Japan for the past ten years. Mr. Greenspan always gets very upset when Japan wants to raise its interest rate. Europeans are always encouraged to lower their interest rates compared to the U.S. for the obvious reasons. Therefore, not only because of the interdependence of trade but also because of the interdependence of capital, politicians have increasingly to worry about what others will do. In turn, we are often more influenced by foreign politicians and administrative representatives than the domestic people and that has a significant impact. Therefore, electing your local representatives and eventually for these representatives to become involved in world affairs, may be the wrong thing.
If you look at the American presidential election – this is a very good case in point. We in Japan were watching the primaries for 18 months. It’s very boring, because we don’t understand what’s going on. I don’t understand the relevance of New Hampshire in today’s world, but they start with New Hampshire and then go all over the place. The rest of the world has to wait in limbo for 18 months, and when this due date came, given the strange situation in Florida, they didn’t even deliver. Americans are in fact choosing the president for the whole world, and we don’t have a say in the American election system. America has 13% economic representation in Japan; and we have about 6 percent influence on the American economy from Japan. This economic interdependence says that we can’t be totally indifferent about who the American president shall be.
That’s why in this rethinking of the American political, and particularly presidential election system, I’d like to offer a few suggestions. My first reaction is to propose to do the primaries outside of the U.S., starting with Papua New Guinea. Then have each country come up with a candidate because if you resort to party politics between Republicans and Democrats, you will choose someone the party can support, and of course the very attractive persons will be eliminated in the primaries. That’s why I think the rest of world should do the primaries and pick two or three persons, then the Americans will do the real election with improved mechanical and computer-based systems and then choose the finalist. Americans will have the final say for their own president, but the rest of the world will develop the reference points. We have 189 countries in the world, so in 18 months, it will be like 10 primaries per month, and that will not be very boring for the rest of the world. Americans will also have to pay more attention to what the rest of the world really thinks about America. I have tons of proposals about the presidential election: looking at the state of Florida and the rest of the country and being a graduate of MIT, I have to come up with some solutions.
But fundamentally, I think the whole world needs to think about what we mean by elections. In Japan, for example, the voting rate is below 40%. That means that democracy is not working there because those who don’t come to vote represent 60% of the people. Because they are so disenchanted with the political system, they don’t come to vote and the incumbent has a vested interest of making the election dirty, uninteresting, so that more and more people won’t come. Therefore the organized parties and fringe groups will win, because at 40% voting rate, 21% is the majority. Therefore while we use this system of democracy, what we are choosing is something that nobody really wants. Many countries are going into this kind of situation. Japan isn’t alone in this. Therefore along with this fiasco of presidential elections, it is a very good time for the entire world to think about what we mean by the Democratic System, what we mean by Representation, Whose Representation? what interest to represent? and to come up with a completely new globally compatible system for the 21st century.
We have come a long way from the days when I used to work on a company by company basis. Strategy has to be built simultaneously for the world. We now have to think about the governing system for the whole world, including the charter of the United Nations. We have to pause at this moment, and over the next several years to come up with a system that will work and that will be in harmony with what we have been observing in the globalization of the economy. The globalization of the political and social system is a must as a next step.
I hope the new Center for Globalization and Policy Research will address these issues and will actively propose new ways to think about them, and will become a focal point for thinking about globalization. In this regard, UCLA is particularly well positioned on the West Coast of the United States. I would like to congratulate Allen Scott and his colleagues and encourage them to continue to pump out new ideas in this direction. Thank you very much.
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