05/22/2005 3 Billion New Capitalists Reviewed in St. Petersburg Times
Capital Ideas
St Petersburg Times
Copyright © 2005 St. Petersburg Times. All rights reserved.
May 22, 2005
Section: PERSPECTIVE
Capital ideas

MARGO HAMMOND

While New York Times columnist Thomas Friedman has been the No. 1 cheerleader for globalization with his bestseller The World Is Flat: A Brief History of the Twenty-first Century, Clyde Prestowitz, a former commerce official in the Reagan administration, has become its Chicken Little.

Not that Prestowitz is against globalization. A more integrated world economy will have advantages for many, he admits. And not that he actually says, "The sky is falling." He prefers other images of impending doom - "Icebergs Ahead," "The Ponzi Scheme Economy," "The Comfortable Road to Ruin," "Vulnerable at the Bridge Table" - but we get the idea. The level playing field, a concept beloved by Western political leaders, is tilting toward the new giants of the global economy, leaving the United States strategically, politically and, above all, economically behind, warns the metaphor-loving Prestowitz in Three Billion New Capitalists: The Great Shift of Wealth and Power to the East.

"Although America has not yet caught on, its relative economic superiority and power are rapidly slipping away," says Prestowitz, who heads the Economic Strategy Institute in Washington. "Far from leading the world on a global march to freedom, the United States could find itself hard-pressed to maintain a reasonable standard of living and defend its vital interests. While America still has the best cards, it will have to hold on to them - and learn to play them a lot better."

And who are the 3-billion capitalists poised to compete with the United States?

They are the combined populations of China, India and the former Soviet Union, all of whom have decided to leave behind their socialist workers' paradises and head down the once-despised capitalist road, says Prestowitz. It's a move that was encouraged by America itself and its Cold War policies, which were designed to attract these newcomers. It was believed that by helping our allies get rich, America - which was directing globalization - would get richer, too.

It worked.

Japan is now the second-largest economy in the world. Singapore and South Korea became economic "tigers." The European Union grew from six to 25 countries and is now united by a single European currency for the first time since the Roman empire. Latin American countries, particularly Mexico and Brazil, have attracted substantial foreign investment.

In fact, it has worked too well, says Prestowitz. Now America no longer is the only dominant player in the globalization process. With the introduction of the Internet and delivery systems like FedEx and UPS connecting the world in 36 hours, the capitalist road has become a high-speed capitalist raceway on which everyone is a driver, he says. More and more countries like Brazil are looking to partner up not with the United States, but with China.

The problem? America still bases its trade policies on the outmoded principles outlined in the early 19th century by David Ricardo, argues Prestowitz. In a world where there was little intellectual property, where technology, labor and capital didn't move easily from one country to the other, and where gold was the international money, the theory of comparative advantage - in which each country does what it does best and trades for the rest - worked. But in the modern world - where everyone is looking for the next best thing, where the Internet has made borders superfluous and where American dollar IOUs are filling up foreign coffers - these rules frequently don't apply.

Like Friedman in The World Is Flat, Prestowitz describes how the world's services are moving to India and how manufacturing is being transferred to China. He charts the rise of the European Union and its ever-strengthening euro. He marvels that Brazil, long the "eternal country of the future," is finally on track to overtake Germany economically by 2035. But unlike Friedman, Prestowitz isn't cheering.

While these countries are strengthening their advantage, he says, America still is acting like it's the only player that matters. American households are in debt up to their eyeballs - and the money is going for personal consumption, not investments in infrastructure or other wealth-generating projects. Americans don't save and Asians don't buy, resulting in an out-of-control trade deficit. U.S. education - particularly in math and science - is well below par. And, to top it off, America, by insisting on "acting like the Lone Ranger and asserting absolute autonomy of decision and action," has squandered "the respect and liking in which we were held by the world for decades."

For now, of course, says Prestowitz, America still holds the trump card (there's that bridge metaphor again): the dollar. But even that may be in danger. While everyone accepts the dollar's hegemony for now, only slight shifts in political and economic power quickly could change all that. Countries that have large accumulated dollar reserves - Russia and especially China - could exercise inordinate power over America's destiny. "The lack of an alternative to the dollar is the only reason it hasn't taken a big fall already," writes Prestowitz. "But those alternatives are emerging." They include the euro and an Asian version, the acu. Bet it could never happen? Significantly, Prestowitz notes, both Warren Buffett and George Soros are hedging that bet and have invested in foreign currency.

Like many a Cassandra, Prestowitz is better at warning than prescribing. In a final chapter, he offers a number of ways America could get off its comfortable road to ruin. They range from the preposterous to the obvious to the hopelessly naive:

Lead a global effort to gradually reduce the role of the dollar, eventually creating a new international currency; declare energy independence - and mean it; bring the federal deficit under control and get the U.S. population back to an 8-10 percent savings rate; create better safety nets for American workers, including wage insurance; improve American education, including beefing up discipline in the classroom and raising teacher salaries; and work on the country's "structural competitiveness," including an upgrade of infrastructure, promotion of foreign investment and a response to the manipulation of exchange rates that has been distorting trade.

Prestowitz's most innovative suggestions deal with bilateral international initiatives. "The unusually fluid international alignments present a once-in-a-lifetime opportunity for the United States to use its still vast power to reset the global table in ways that will favor its interest for a long time to come," he writes. With Canada and Mexico now linked by NAFTA, he would create a political union along the lines of the EU, eventually inviting Japan and even India to join. He would encourage the EU to invite Turkey and Russia into its fold, guaranteeing Moscow's future democratic development and relieving the EU's dependency on Middle Eastern oil.

And finally, he would work with China - "eyes wide open . . . keeping U.S. interests clearly in mind" - proposing joint projects in research and development. "It is in America's interest for China to succeed. The most dangerous thing for the world of the future would be a failing China," says Prestowitz.

In other words, if you can't beat them, join them.