Sunday, May 15, 2011

Can America Learn From Others?

In the March 3 issue of the Time magazine Fareed Zakaria analyzed America’s status in the world. To his own rhetorical question – ‘is America #1?’ he answered: “Yes, the U.S. remains the world's largest economy, and we have the largest military by far, the most dynamic technology companies and a highly entrepreneurial climate.” As to some other metrics, America ranks 12th among developed countries in college graduation, 79th in elementary-school enrollment, 23rd in infrastructure, 27th in life expectancy, 18th in diabetes and first in obesity. Zakaria writes, “There are some areas in which we are still clearly No. 1, but they're not ones we usually brag about. We have the most guns. We have the most crime among rich countries. And, of course, we have by far the largest amount of debt in the world.”

As to the reason behind this low ranking, Zakaria rightly concludes that other countries are catching up to America through efforts that were once the defining strategy for America’s ascendancy in our globe. These being: the interstate-highway system, massive funding for science and technology, a public-education system that was the envy of the world and generous immigration policies. Through her well-funded research universities and institutions – some of the best in our world, especially in science and engineering – America, even in the post-World War II era, was able not only to attract the best brains to study here but also to absorb and retain these foreign talents internally with lucrative jobs and opportunities that helped the country to lead in technological revolution. Not surprisingly, therefore, that there is not a single prestigious university and institution within the USA that does not have foreign sounding names in its esteemed faculty list. The same is true in the engineering, research and development divisions within the industrial sector.

Niall Ferguson, who now writes for the Newsweek magazine, mentions six basic elements, which he refers to as the ‘secret sauce’ of Western civilization. These are: competition, modern science, the rule of law and private property rights, modern medicine, the consumer society and the work ethic. In his book, Civilization: The West and the Rest, Ferguson writes, “For 500 years the West patented six killer applications that set it apart. The first to download them was Japan. Over the last century, one Asian country after another has downloaded these killer apps…” Obviously Ferguson, a neo-con promoter of empire-buildup and global hegemony, does not mention the other not-so-secret sauces which were responsible for creating this western success story – colonization, immigration, exploitation of labor, unfair trade & commerce rules, robbery of outside resources while crippling the indigenous economy of the exploited nations. I doubt these erstwhile colonial powers would have been this successful without the savage acts of slavery, colonial plunders and exploitations. Ferguson’s thesis also fails to explain why China, where the government at moment’s notice can disown anyone of its property rights, is succeeding, without downloading the so-called western killer applications.

And as every student of economics knows with material success consumerism sets in. What was once a delighter or ‘nice to have’ need becomes a performance need, and what was once the performance need later becomes a basic or ‘must have’ need. It is thus not difficult to see how this shifting tendency in meeting needs can translate into borrowing beyond one’s capacity. Gone are the days that these former colonial powers could afford to do the kind of things (e.g., invasion and colonization to steal wealth of other nations) that once ensured economic success and prosperity to their people. (But as the American invasion of Iraq has shown, the empire-builders have not abandoned their age-old savage means altogether. It backfired!) So, most of these countries are now debtor nations, who have spent money unwisely beyond their means.

The world we live in today is quite different than the world in which our grandparents and parents grew up, and in all likelihood would be different for our children. It has become a global village, thanks especially to the advances in technology, esp. in the communication front from the cell phones to the Internet to the Twitter and Facebook. There is fierce competition in the business sector where previous models for growth and customer satisfaction (and retention) are continuously being challenged by the newer realities of our time. And yet, to a customer the three most important criteria have remained the same. These are quality, cost and speed. People in general like things that are of good quality, delivered on time, and yet cheap or affordable. It is this latter criterion, which pushed many American and European companies to outsource their manufacturing operations in places like China and India. In many instances, even the entire service sector was outsourced.

As a result, while millions of jobs were lost inside America and Europe, tens of millions of jobs were added in cheaper labor markets of China and India. The paradox is: while an unemployed worker in these developed countries was upset with his/her loss of job, he/she did not like to invest in stocks or shares that did not guarantee handsome dividends. It is this mindset about maximizing the benefits to their investors, which forced the corporate directors sitting in the board to kill the geese that were laying golden eggs! And on the top of that while the corporations were losing, the CEOs and Directors bestowed unbelievable bonus payments unto themselves. A wrong combination!

The International Monetary Fund (IMF ) recently said in a report that gross domestic product (GDP) of China will overtake the U.S. in 2016 in a comparison based on purchasing power parity (PPP), i.e., the real economy. That figure exceeds the forecasts of U.S. GDP, which at that time would reach 18.8 trillion from the current 15.2 trillion. This prediction should not be too surprising given that with almost 4 times the population of the USA, it’s simply a question of time when China (and for that matter India one day) would catch up to the US economy. Over the years, her government has invested in human capital, and her workers have learned to copycat many inventions made in the West. The prolonged political stability - albeit an authoritarian one - and a prudent economic plan, which was able to woo foreign investors, provided the necessary glue required for a winning formula in China.

One of the thorniest economic issues facing the developed world is: how to maintain manufacturing competitiveness against low-cost emerging economies like China and India. In my opinion, Germany offers that road map for the U.S. and other European countries. Even in hard times of 2008 when the demand was low for many chemicals, at BASF, the world’s largest chemical company, instead of laying off cherished staff, management deployed idled workers to new assignments. And the nation prevented the sort of large-scale layoffs the U.S. endured during the recession with a short-term work program in which the government subsidized firms to keep workers. Major German companies also refused to outsource everything to the developing world.

While the American, Spanish, Irish, Greek and other Europeans were gorging on debt, building too many houses and giving themselves fat pay raises, Germans were busy fixing their economy. German companies poured money into R&D and cut expenses. Loosening up the tightly regulated labor market to make it easier for firms to hire and fire helped. Union cooperation meant Germany was the only major European economy that reduced labor costs for several years after 2005. And on the top of all these measures, Germany never forgot the value of superior quality and the precision engineering work. Her manufacturers know that customers will pay extra for the “Made in Germany” label whether it is for the Mercedes Benz or other utility tools or equipment that they buy.

Is America ready to adjust and repair? A crucial aspect of beginning to turn things around would be for the U.S. to make an honest accounting of where it stands and what it can learn from other countries. This kind of benchmarking is quite common in the business world. Can America learn form others, especially Germany that had fought two major wars, which ruined her economy? Can it spend more on science, technology, innovation and infrastructure, which will produce growth and jobs in the future? Can it avoid its faulty empire-building instincts which in recent years have bankrupted this country? Can it continue to attract, retain and reward meritocracy instead of the not-so-hidden agenda of chauvinist politicians and corporate leaders that discriminate and pull their own guys to upper echelons of power and authority?

Only an insane can choose to shut its eyes to the potholes on its path.

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