Don’t Give Up on Globalization

The global economy’s vulnerabilities are apparent: economic interdependence without international political influence, open markets without political stability or legal-regulatory infrastructure, economic transitions without social safety nets.

Uncertainties and crises in international markets affect American interests--the “Asian flu” that finally infected the U.S. stock market, Russia’s currency and leadership problems, Japan’s recession--but U.S. leaders are unable to intervene in other countries’ policies or ensure rapid building of infrastructure to support free markets. Russia, Hong Kong and Malaysia have reversed open market policies. Terrorism emanates from countries least connected to the global economy and most disdainful of Western values. While Europe heads toward monetary unity, North America faces a backlash against cooperation; NAFTA’s timing, just before the Mexican peso’s free fall, meant some U.S. border towns heard that sucking sound of jobs to Mexico.

Yet forces propelling economic globalization continue: border-defying information technologies; global mergers in media, telecommunications, accounting that facilitate further globalization; business strategies that increasingly rely on world products and standards.

Countries with maturing markets need the growth potential of emerging markets; about 30% of the U.S. economy’s growth since 1993 is international trade related. Developing countries need international investors and customers.

Most proposed remedies involve short-term macroeconomic fixes; America should certainly lead economic stabilization through international loans and aid packages. But the global economy consists of more than financial institutions and transactions; it involves social arrangements. To save it requires long-term commitments to institution-building, with the private sector as a partner.

Start with technology and the human talent behind it. Brainpower is to a global information economy as oil is to an industrial economy. Physical assets (property, plant and equipment) accounted for only 37.9% of the total market value of American firms in manufacturing and mining industries in 1991. “Soft” assets--brand names, customer relations, work force skills, proprietary technologies--are now key sources of a firm’s value.

Taiwan, with little foreign debt, is an exception to current Asian misfortunes because its strong domestic economy is linked to global technology. Decisions to invest in advanced work force skills, create science parks and encourage venture capital have made Taiwan a leader in semiconductors and material sciences. America’s system of higher education is a magnet for the world’s talent and can expand that role. Foreign students return to their home countries bringing cultural and social ties, not just technology.

World-class businesses are the foundation of strong economies. International investment should emphasize long-term value creation through innovation and advanced skills. Bubbles based on paper assets or real estate speculation invariably burst; stock markets ultimately reflect business strength. New long-term capital could replace short-term investments in emerging markets; U.S. and European companies can now buy Korean and Thai firms once off limits. International alliances spread know-how. Home Depot entered Chile in partnership with Falabella customers. Home Depot gets local insight and access to Falabella charge card holders, while Falabella gets knowledge of American logistics and information technology.

Once condemned as Third World exploiters, American multinationals can become a force for raising standards, just as Starbucks set labor standards for coffee plantations, or Levi Strauss sought to end child labor in Bangladesh, paying underage factory workers to go to school, not to work. Public-private partnerships with local government can address social problems. IBM’s “Reinventing Education” effort involves engineers and consultants on public education projects in Brazil, Ireland, Italy and Vietnam. American-style volunteerism can be a model. Electronic Data Systems involved some of India’s largest companies in its volunteer day.

Securing America’s international economic interests also requires putting the domestic house in order. Claims about the virtues of free markets are less credible when public education is in disarray, millions of children lack access to health insurance and many working families cannot earn a living wage. America must show the world that capitalism does not have to be associated with neglect of basic human needs.

The global economy is still a work in progress. The next challenges are institutional and societal, not just macro-economic. While the International Monetary Fund works on short-term fixes, policymakers should focus on institution-building; it’s slower than monetary infusions or shock therapy, but ultimately the foundation for prosperity, peace and democracy.