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Manufacturing is still critical to the economy United States. Clyde Prestowitz, says it's time to start realizing the positive spillovers that manufacturing creates... Read more  

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Stephen Olson at Chinese Development Institute Conference

 

 Clyde Prestowitz giving presentation to CDI...

 

Steve Olson teaching trade negotiations at the Mekong Institute...

 

Stephen Olson to speak at upcoming workshop organized by the International Institute for Trade and Development on 

"Economics of GMS Agricultural trade in goods and services towards the world market"

Chiangmai, Thailand Sep 8-12.

(09/02/05) Clyde Prestowitz interviewed on Vibewire

(09/02/05) Clyde Prestowitz interviewed on Vibewire
Interview: Clyde Prestowitz, author of Three Billion New Capitalists
Contributed by Ari Sharp

This past fortnight I've become strangely addicted to a thrilling new page-turner. Whilst others on the train are thumbing through the latest Harry Potter instalment or some Dan Brown pulp fiction, I've been reading an epic tale of international intrigue and subterfuge, drama and debt, East and West, all from the pen (or more likely Blackberry) of Clyde Prestowitz. It's an exciting read, but as for the outcome... well, you need to wait a while. Give it another couple of decades.

Clyde Prestowitz's latest book, Three Billion New Capitalists, comes on the back of several previous books which have contributed much to public debate both in popular and elite circles. He previously wrote Trading Places, about the trade relationship between Japan and the United States, and Rogue Nation, a book about American foreign policy.

When I am given a chance to meet Mr Prestowitz, or Clyde as he announces to me with a firm handshake, I can see instinctively why he has had the ear of so many important decision makers around the world. He exudes old fashioned American charm, with a twinkle in the eye and gives the impression that there's a highly perceptive mind at work behind those eyes. In another life you can imagine Prestowitz as being perhaps a salesman or a preacher, which in an odd way is what he's doing at the moment. Prestowitz can see an impending economic Armageddon (with a bit of poetic licence) and is doing his best to make the world change its ill ways.

Prestowitz has impeccable US conservative credentials. He describes his upbringing as being in "a conservative environment, a very religious environment, and very Republican," and his own family was a deeply Christian one.

"Then I went to Swathmore college, which is very liberal, and I went there on scholarship," Prestowitz says. "It was a huge clash of values, I was coming up from this very traditional, conservative, religious background and into this very left-wing background. People often ask me 'did I enjoy my university years?', I have to say I didn't really enjoy it, no, I was in intellectual combat, constantly. But I learned a lot."

Later Prestowitz went on to advice the Secretary of Commerce under Ronald Reagan, an American President whose economic philosophy was sharply at odds with the philosophy Prestowitz holds today.

The subtitle of his latest work is "The Great Shift of Wealth and Power to the East", and this gives a good indication of the message contained within. Prestowitz's Three Billion New Capitalists are the combined populations of India , China and the former Soviet states, all of which are now enjoying unprecedented levels of economic and social freedom.

Whilst standards of living in these nations are still generally poor, their wealth is growing at a remarkably rapid rate, with many having a Gross Doestic Product (GDP) growth rate well into double figures, compared to the 2 to 4 per cent common in most developed countries such as Australia and the US. Prestowitz is remarkably positive toward the economic and governmental strategies used by these places to grow their economy. He is far less thrilled, though, with the West's response.

Prestowitz is savage toward Western policy makers, who he believes have been on the wrong economic track for decades. In the US - and to a lesser extent Europe and Australia - the orthodoxy of laissez-faire capitalism has ruled supreme, with its dogma that the market is the best way to decide the allocation of resources, and crucially that government should take a hands-off approach.

The problem with this mentality, as Prestowitz sees it, is that it leaves no room for some overall guiding strategy to economic success, because it denies government decision makers access to the levers of the economy. There's no place for a strategy if you have no way to put it in place. In free-market economic circles, the very notion of an Industry Strategy has been routinely dismissed as an attempt by government to intervene where it's not welcome.

Contrast this strategy with the approach taken by the Asian economic tigers which have proven themselves to be the economic heroes of the second half of the twentieth century. Taiwan , Japan and South Korea are all highly developed economies, but their governments have taken a fundamentally different approach to the 'no market intervention' approach of the west. Instead, they have been actively supporting companies that wish to set up within their borders, generously funding research and development, encouraging collaboration and providing strong financial incentives for overseas companies to shift their research and their manufacturing. It's an approach that has worked remarkably well, and has given these countries a 'research and development eco-system' that Prestowitz so craves.

Now however, the threat to American economic dominance is not just from the hi-tech Asian economies, but also from the cheap labour economies which dominate the three billion in the title. In a verbal flourish, Prestowitz gets the nub of his case.

"We have a high standard of living, we pay ourselves high wages," Prestowitz says. "There are other people in the world who can do just what we do and they get paid a lot less. How do we justify paying ourselves what we pay ourselves? And the only way to justify it is to figure out either we do something that they can't do, or we do something a lot better. That is a challenge that we really haven't faced in the past and it demands fuller attention to education, to infrastructure, to the analysis of where is a sustainable advantage. What do we have to do to maintain that sustainable advantage?

"And this is a way of thinking that Americans are not accustomed to, and Aussies are not accustomed to, in fact we reject it because it smacks of government intervention, it smacks of planning, it smacks of lack of freedom. If you begin talking about government planning, or government coordination, or blah blah blah, well that's not very popular. However, if you go to an American audience and you don't call it industrial policy, you don't call it government planning, you call it 'National Security', you call it 'Defence', you can do anything, because 'we want to defend our freedom'." As is so often the case these days, it seems the problem is not with the product but with the marketing.

Prestowitz's affection for Asia is different from many of his colleagues on the conservative side of US politics. Early on he realised the importance of the world's most populous continent, and learnt Japanese at college in the 1960s in an era where World War Two sensitivities meant that few Americans were learning the language. He characterises the US relationship with China as the product of "(a) long sense of unrequited love of China in the US ," reflecting the fact that the Americans need the Chinese (to produce goods with their cheap labour) much more than the Chinese need the Americans.

Also shaping the relationship is the hangover from the Chinese civil war in the 1940s, when many Americans developed a particular affection for the anti-communist Nationalists (Kuomintang). "As a kid," says Prestowitz, "my church sponsored a missionary in China . The missionary we sponsored initially was in China , then wound up in Taiwan . He and his wife would come back and tell us what was happening in China , and of course they would tell us from the perspective of being very anti-Communist." Prestowitz believes this experience was not uncommon.

The future of China is also of great interest to Prestowitz. Whilst he sees its strong development continuing, he is sceptical about whether this will bring political reforms. "We in the West have made a bet," Prestowitz explains. "Our bet is that bringing China into the global economy, fostering market capitalism, globalisation, will inevitably lead to democratisation in China . If China keeps globalising, the Communist party is finished. That's our bet. Well we may be right, but the Communist Party has made a bet. Their bet is that globalisation will enable them to maintain power. Now, they may be wrong, but if I ask myself who knows China best...?" Prestowitz ends this tantalizing question of game theory with a knowing chuckle.

Of course what is holding back economic performance in the West is not just rivalry from new players - many of the barriers are problems of our own making. It is the nature of democracy that short term decision making is dominant, more so than under authoritarian rule, creating difficulties down the track.

On the looming demographic crisis facing the West, as the post-War baby boomers start retiring and there are fewer left in the workforce, Prestowitz is characteristically blunt. "Us old guys are going to tax you, thanks very much. All of us in these Western democracies have dug a big hole, we haven't saved in the US , we're running big budget deficits. In the US our leaders, our President runs around saying we're the envy of the world, our economy is great - I think the Prime Minister does the same thing here in Australia - and all the while, the younger generation is being burdened with a huge financial burden down the road.

"It'll be great for the old guys, but it's not great for the young guys. And there's no easy answer. If you're a young person today, the best advice I can give is to start saving now. But as a society, because we didn't save enough in the past... you can't replace that. We're going to wind with either higher taxation, or a lower level of service and care, but one way or the other you're going to pay for it."

It is telling that Prestowitz draws this conclusion. Though much of his book acts as a catalogue of ways that Western economic performance has gone off the rails, there is usually a ray of sunshine at the end; some remedy or correction which can avert the otherwise inevitable. On the problem of demographics, though, Prestowitz offers no escape route.

Another problem taking up the attention of policy makers is labour reform. Given Prestowitz's celebration of economic growth in China and India , largely a product of cheap labour, it's tempting lump him with John Howard and his fellow Liberals in their desire for industrial relations reform, which is largely recognised as code for forcing labour flexibility and slowing wage growth. Though not familiar with the specific circumstances of industrial relations in Australia , Prestowitz is more circumspect about the benefits of reform.

"I think labour flexibility is desirable," he says, "but I think that you need to make a destinction between flexible so you can race to the bottom, and being flexible in the context of other programs that enable you to race to the top. There's no way that we in the developed countries can hope to compete with China and India through lower wages. We can't impoverish ourselves enough to be competitive that way. The only way that we can compete is by being more productive. Being innovative, and staying ahead of the technology and being more productive is the only way we can compete. That will require both labour flexibility and lots of other things, like better infrastructure."

As the interview progresses, Prestowitz reveals small but interesting details about himself. He clearly keeps a busy schedule and possesses boundless quantities of energy. Last weekend he was playing golf in Honolulu; he spent a few days in Auckland , followed by a whirlwind four days along the east coast of Australia , whilst the next week would start with some meetings in Jakarta.

Rather than seeing a distinction between business and pleasure, I sensed that for Prestowitz business is pleasure. He enjoys engagement in public debate, and being a trader in the market of public ideas. Though in the past he has spent time offering advice that would go all the way to the Reagan cabinet table, it seems that he gets greater satisfaction - and perhaps has a greater effect? - through writing and speaking.

Unlike most people in their 60s, Prestowitz has an intuitive love of technology that would be more commonly expected of his grandkids. He tells me with disbelief about the lack of broadband internet in his Melbourne hotel room and his admiration of IT infrastucture in Asia . Despite having just a day in Australia , his mobile is buzzing. Prestowitz, though he might look like a man approaching retirement, seems very much in his prime.

To close the interview, I ask a final question that I know will excite a strong response. As with most who were once in a position of great influence and authority there is a subconscious desire to revisit the post and once again dispense advice. So I ask, if you did once more have the ear of the US President, what economic advice would you give them today?

"First most important thing is to create savings in the US economy. We ought to get rid of our agricultural subsidies, we ought to cut our military spending, we need to balance the budget. Either tax more or spend less or a combination of the two. Beyond that, maybe even more importantly, we need to change the incentives, right now all the incentives in our economy are to consume and to spend and to borrow - we subsidise borrowing - we tax savings, so we need to reverse those incentives so that we get some savings.

"We need to reduce the international role of the dollar. We would be better off if the dollar were not the world's money. The United States could be largely energy independent. If we did with nuclear energy what the Japanese and the French do; if we did with biomass and ethanol what the Brazilians do; if we did with conservation what the Japanese and the Europeans do, we wouldn't be importing very much oil. This should be as important to us as the War on Terror, because it's part of the War on Terror. The terrorists are not very scary unless they have oil money, and that's where the money comes from -- and so becoming energy independent, we would hope to dry up their source of funding." Now that sounds like a plan.

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