Chicken Little Goes Global

Apocalypse When?

Millennial dread, a feeling that things are going haywire and will surely collapse at the dawn of the next thousand years, is building all around us. On January 1, 2000, we are told, civilization as we know it crashes. Worldwide chaos ensues: a rippling wave of economic destruction. The computers we rely on in homes, offices, banks, stock markets and government suddenly go berserk for a seemingly prosaic reason: They can't read this new date with three zeroes. The technology that now manages our lives sets off global ruin because these wondrous machines think it's 1900, not 2000.

But the Y2K problem has a bright side. If all those records vanish, so may all our debts. It will be as if everyone with a credit card balance, a car loan or a mortgage gets techno-amnesty. Stay tuned.

Whether or not the Y2K glitch actually crashes the system, it is a perfect metaphor for our deepening anxieties about the global economy. Our love-hate relationship with technology resembles the fear-greed tension of financial markets, and economic events are just as bewildering as technology can often be. The accumulating wonder and dread of the approaching millennium is not in your imagination--the global system of commerce and finance really is going haywire. The ringgit and the baht, the won and rupiah and ruble have, more or less, gone poof. The "miracle economy" of South Korea collapsed abruptly in a heap of bad loans. Interest rates are near zero in Japan and nobody will borrow. That well-known master of the universe George Soros bet wrong on Russia and lost $2 billion.

Where are we headed? Who really knows? When the titans of industry and finance (as well as government experts) don't seem so sure, it's time to get frightened. What follows is an explanation of the economic fundamentals that are roiling markets, nations and our own lives. Whatever the crisis of the day, the underlying dynamics of globalization have created an era of adventurous instability. When you understand these dynamics, you can read the newspapers without getting dizzy.

Chips Rule

We are in the midst of an industrial revolution. Everything is changing, and every change seems to accelerate more change.

The upheaval of an industrial revolution always begins with human ingenuity and invention (e.g., a new machine, a new power source that replaces or augments human labor). As enterprise learns how to apply these new inventions to production, the status quo is upended--rendered obsolete--as are existing social and commercial arrangements. Something similar is under way now, a creative explosion that ruthlessly destroys the old (companies, jobs, social stability) as it creates the new (products, producers, wealth).

Our revolution began 40 years ago with the invention of the silicon chip (by two Americans working independently, Jack Kilby at Texas Instruments and Robert Noyce at Fairchild). It took two generations, but semiconductors--the operating mechanisms planted in car windows, telephones, nuclear rockets--are ubiquitous. They run assembly lines and financial spreadsheets. They make cell phones and the Internet possible, to say nothing of worldwide financial panic.

Semiconductor chips are the oil of this industrial revolution, but unlike oil, this power source is becoming steadily more powerful. Moore's Law (a rule of thumb first articulated in 1965 by Gordon Moore of Intel) holds that the computing capacity of the memory chip will quadruple every three years as new technological applications manage to store more data in a smaller space. Thirty years later, this fantastic pace of multiplying power is still being maintained. A decade from now a single chip will have the capacity to hold 6 million pages of text.

The point is this: Moore's Law rules our world, especially stock markets and currencies, major corporations and governments. As computing power keeps expanding, it leads to new and more dazzling inventions, sweeping aside whatever seemed new a few years before. The pace of change fuels the fierce global price-cost competition and produces perilous surprises even at the largest companies. This revolution probably won't subside to normal until Moore's Law exhausts the physical possibilities of the chip. Technologists disagree on how soon this will occur, but it probably won't be for another 15 or 20 years.

So where are we now? The debate between cheerleaders and critics is about whether the world is on the brink of a new golden age of prosperity or careening toward some sort of cataclysm. I am of the Chicken Little school myself, because I know how troubled and tragic the 20th century's road to progress was. The last industrial revolution spawned decades of social strife and bloody conflict, including two world wars, the Depression and the breakdown of the international trading system. We can avoid repeating that terrible history, but now I think the world is flirting with another disaster.

Hot Money

A century ago, American banks relied on gold reserves, and if they got into trouble, they had to ask Europe to lend them more gold. It took two weeks for the gold shipments to cross the Atlantic. Lots of banks failed while waiting for their boat to arrive. Modern telecommunications have changed all that and have created a radical figure--the truly global investor who can monitor markets everywhere around the world, in real time, and instantly move money anywhere in huge volumes. The result is the random frenzy of hot money, a daily torrent that sloshes in and out of 102 nations like riptides, searching for the highest return. In the past ten years the volume of cross-border financial transactions--stocks, bonds, currencies and exotic derivatives--has exploded. More than $1.2 trillion flows through currency markets every day. This rush of capital has become an unpredictable and dangerous force unto itself.

George Soros' Quantum Fund, for example, is both celebrated and feared-- and no wonder. A few years ago it was worth $10 billion and now--depending on the latest news from Russia--is close to $20 billion. Governments loathe Soros when he attacks their currencies or dumps their bonds. But he's not that big alongside the major international banks and brokerages in New York, Frankfurt, London and Hong Kong that play at the same game. Soros can be awesome because, when he stakes out a provocative position, giant financial institutions often "surf" on his play. If Soros shorts the pound or the franc or the lira, they jump aboard too. That grossly magnifies the force of his market position and makes it more likely he will prevail.

"George Soros calls the bluff of governments," explains Robert Johnson, a former Soros partner. "Their job is to pretend that they're in control, but he represents a force that blows away that illusion."

Indeed, in our industrial revolution, global finance of the Soros sort plays the role of Robespierre--a stern enforcer who punishes corporations and countries, even entire regions if they seem to stray from correct principles of maximizing returns. If major private bankers and brokers gang up, they can mobilize more combined firepower in currency markets than can the leading central banks, including the Federal Reserve. The UK spent $20 billion in September 1992 trying to reverse Soros' assault on the pound, and lost it all. Many Asians believe (though Soros denies it) that his firm launched the unraveling of Thailand's baht almost two years ago--a devaluation that spread country by country and became the global currency crisis.

Titans such as Soros follow their own esoteric strategies, but the broad ranks of investors (and bankers, for that matter) act more like a herd of cattle--easily spooked and stampeded. When the herd turns and runs, the trampled nations are left in the dust--their currencies smashed, their economies collapsed by the sudden withdrawal of credit. The consequence of unregulated global finance is neither efficiency nor stability but recurring crises.

Without capital controls, governments are defenseless against panics that surge through the global financial system--especially the poorer nations struggling to industrialize. An otherwise vibrant economy can be smashed in an instant, punishing millions of innocent bystanders for someone else's folly.

These episodes are occurring now with greater frequency and a deepening scale of destruction. Since spring 1997, when Thailand failed (followed by Malaysia and Indonesia), the negative current of reckless capital has roamed the globe, collecting more victims and finally jolting America's own smugness. In elite economic and financial circles, the same question is asked each time another currency tanks: Could this be the Big One?

The Global Jobs Auction

Is your job safe? Let me tell you what I saw during a visit to a Motorola plant outside Kuala Lumpur, and you make the call. The female Malaysian employees were all dressed in the chaste tradition of Islam--ankle-length dresses and head scarves--when they arrived for the afternoon shift. They nodded shyly when the American manager, a tall and cordial Texan, greeted them with a hearty "Good afternoon, ladies." Minutes later the women emerged from a changing room looking like moon walkers--enveloped in white jumpsuits, soft white boots on their feet and bonnets over their heads, their faces nearly covered by surgical masks.

The women went into a sealed, dust-free assembly room, where every day they manufacture the semiconductor chips that are the central artifact of the global revolution and that show up often in our lives. The workers typically migrated from the poverty of rural villages in search of wages.

The disparity between ancient and modern is breathtaking but quite routine in the global economy. During my travels around the world, I regularly saw people from remote locations turning out the most advanced goods. It's exhilarating to witness but also chilling, because the threat to high-wage workers in the U.S. is obvious.

The U.S. semiconductor industry started moving assembly plants to Malaysia (among other places that are offshore) two decades ago when Japan, thanks to advanced automation, cut production costs and intensified competition. Motorola, Intel and others decided to counter the threat with cheaper labor.

The Malaysian government was happy to become an export platform and struck deals that had long-term political and social implications. In addition to offering tax concessions, for example, it promised that Malaysian workers would not be allowed to organize unions or bargain collectively for better pay.

Eventually Japan's leading electronics companies joined Americans in offloading assembly work on Malaysia's industrial zones. The Japanese have a worrisome name for the process of dispersing manufacturing jobs to low-wage countries--kudoka, or "hollowing out." Now, more than half of Sony's employees work outside Japan.

When multinationals arrive with their factories, the effect is both liberating and exploitative. The process starts an underdeveloped country up the ladder of industrialization but also puts it on a desperate treadmill. The country must endeavor to be more alluring than poorer nations who bid for the jobs with even cheaper labor and little regard for environmental laws and working conditions.

Malaysia's electronics sector is mature two decades after it started, yet on average its workers still make between $130 and $150 a month. They are still prohibited from organizing labor unions (though unions have long existed in other sectors). When the Malaysian labor minister suggested a few years ago that this ban be lifted, some American companies threatened to leave. The government backed off.

The experience has underscored how global the job auction is. If Malaysian women can be taught to make U.S. semiconductor chips, then Alabamians can learn how to make a Mercedes. In 1993 the state of Alabama dumped lavish sums on Daimler-Benz to secure a new Mercedes factory with 1500 jobs for Tuscaloosa. The subsidies amounted to roughly $200,000 per job.

Daimler, in turn, warned its German autoworkers in Stuttgart to soften their demands--or perhaps lose their jobs to those low-wage workers in the American South. Another lesson about the dynamics of globalization became clear: Multinationals can extract money and other concessions from labor unions and local governments by agreeing not to move to China, Mexico, Hungary or Poland.

So is your job safe? The newspapers often carry seemingly reassuring advice from financial pundits. It's a plausible mantra: Get more education and improve your skills, and you'll be OK. But when you hear such advice I suggest you remember this: The dispersal that moves jobs from high-wage labor markets to cheaper ones began with traditional low-end, low-wage assembly work--shirts and shoes and toys. But the process has long since focused on sophisticated skills and advanced technologies. In India, for instance, a software engineer will work for $12,000 a year to accomplish a task that pays an American counterpart close to $70,000. (Plus, the bilingual Indian speaks English.) Bangalore is flourishing as a global center of cheap computer professionals. Australia has similar ambitions for its electronics engineers.

In Shanxi Province, China, I visited Xian Aircraft Corp., where 20,000 workers make everything from Ferris wheels to jet bombers for the People's Liberation Army (which effectively owns Xian Aircraft). The machinists at XAC also make tail sections for Boeing 737s (work normally done in Wichita, Kansas), as well as Volvo buses, components for Airbus planes and various products subcontracted for Mitsubishi and other Japanese multinationals.

The powerful lesson in globalization dynamics was that the arrangement wasn't just about cheap labor. Boeing also traded American jobs for guaranteed sales to China's booming aircraft market. The deal offended advocates of free trade and illuminated yet another globalization dynamic: Ad hoc, short-run deals with profit as the only consideration will overcome most opposition. American labor unions, for example, objected to the loss of jobs, but the Chinese machinists at XAC earn about $60 a month, compared with $4000 for a Boeing worker in the U.S. The work done in China passes FAA inspections. Someday, XAC managers tell you cheerfully, they intend to build Chinese 737s and sell them to the world. Boeing managers say the Chinese are getting closer to their goal every day.

The economic forces that closed so many U.S. factories in the Eighties are building up again. If and when the crippled Asian economies stage a recovery, they will get well by taking another big bite out of U.S. and European manufacturing. Their cheap exports will grab market shares and make the U.S. trade deficit explode again. That will close more factories in the U.S. and, at a minimum, wipe out as many as 1 million of our prime manufacturing jobs.

That's the good news. The bad news would be that nobody gets well in Asia, not for a long time. And the rest of us get sick too.

Scary Scenarios

Forget the "Asian contagion" metaphor. It's worse than that. The slow-motion crisis working its way around the world, randomly collapsing financial markets or otherwise healthy economies, has ensnared both rich and poor nations. Like it or not, we are all in this together.

What does the future hold? Some scenarios invoke 1929 and worldwide depression. Let's not be hasty but instead remember how the present crisis got started. Investment fled from Asian markets in mid-1997, when "hot money" collided with what businessmen call overcapacity. Overcapacity is easy to understand--there are simply too many factories chasing too few consumers. After 20 years of explosive investment and invention, the world can now produce a staggering volume of goods. What it lacks is enough people with the wherewithal to buy the stuff.

A vivid example of the problem is the car industry. Auto companies worldwide can now make 80 million cars and trucks a year. But the global market of consumers can't buy more than 58 million vehicles. This gap between potential production and consumption--22 million vehicles each year--is larger than the entire North American market.

This same dark cloud hangs over nearly every major industrial sector, from consumer electronics to pharmaceuticals, commercial aircraft, semiconductors and blue jeans. Who will lose market share and be forced to close down? Multinational managers hope it's the other guy. When a company exchanges a high-wage U.S. worker for a cheaper one in Mexico or Malaysia, the global system also loses a high-wage consumer.

This looks good for the company's bottom line, but when the trend of depressing wages persists generally over two decades, it "hollows out" the prosperity. Henry Ford witnessed this principle in 1913 and decided to pay his assembly workers $5 a day. When he was criticized, Ford explained it as sound business. An industrial system cannot endure, he warned, if its workers can't afford to buy the things they make.

Economists generally ignore overcapacity (and its victims), believing that markets are self-correcting and will eventually come into balance. If the cars aren't sold, reduce prices. If there's still too much productive capacity, close some of the older, less efficient factories. That's the normal routine in business. But perhaps the most important dynamic is the irrelevance these days of "normal routine in business." Perhaps the best way to understand the future is to realize that the orthodoxy itself--the rigid conception of market capitalism that has ruled for the past generation and put the protection of financial values (that is, money and wealth) over more complex and ambiguous human realities--is now crumbling. If my hunch is right, Milton Friedman's grand theory--that markets can rule societies more wisely than mere governments can--is in the first stages of crack-up. The theory did not predict what is currently happening (concluded on page 231)Chicken Little(continued from page 104) and cannot explain it coherently now. Tragedy can be averted, but there is no reliable consensus among government authorities about what to do.

A Brave New World

In the spring of 1993, a ferociously quick fire swept through a huge toy factory on the outskirts of Bangkok, killing more than 180 workers and injuring nearly 500 others. All but 14 of the victims were female, some as young as 13 years old. It was the worst industrial fire in the history of capitalism, yet it was reported on page 25 of The Washington Post. The Wall Street Journal carried a brief account a day later on page 11.

The story was treated dismissively, like a typhoon in Bangladesh or one more earthquake in Turkey. But those Thai workers were killed while they were making toys for American children--Muppets, Bart Simpson dolls and Play-Skool Water Pets. The labels included all the famous brand names, including Fisher-Price, Hasbro and Kenner. We Americans rarely hear about those cheap industrial workers, but their deaths pose a core question about values. Do we have any responsibility for the random inhumanities at the other end of the global system? We are connected to those distant others in myriad ways and benefit from far-flung transactions, as consumers and producers, shareholders and managers. But we have not yet accepted the moral obligations in these new social relationships.

In one form or another, the question of interconnectedness is pushing its way to the center of American politics. Financial turmoil, trade deficits and the pressures on U.S. jobs and wages--as well as questions about sweatshops and child labor--are likely to claim a much larger place in the presidential campaign of 2000. The consensus that for many years supported free trade and deregulation is badly eroded, though multinational finance and commerce still have enormous political influence. Some political voices may preach a neo-isolationist withdrawal. Others will argue for moderating reforms in the trading system--new rules to protect labor rights, the environment and standards of human decency that are in fact universal.

If Americans can see the choices clearly, the new millennium offers a great opportunity to lead the world on behalf of America's proclaimed values--economic fairness and progress, an honest regard for individual destinies, democracy and tolerance. Global finance and commerce have opened a vast new vista. It remains for citizens and societies to grasp the possibilities for social progress and to promote their values.

One Sunday afternoon in Indonesia, I met with a group of young workers in an industrial zone outside Djakarta, where they make Nike and other shoes. Those sweet-mannered kids were bewildered by their new circumstances as industrial workers, eager to understand how the world works and where they fit in. But they did not have to be told by me that they are being exploited. They know this from their working conditions and wages. They are struggling with old questions of industrial life--how to make a decent living from their work, how to organize in order to gain a measure of power, dignity and a voice in their own destiny. They need help.

As they talked about their lives, I reflected on a serious scandal in Washington that rarely gets reported. While professing a righteous commitment to free speech and freedom of assembly, our government makes cynical commercial alliances with regimes and industries that brutally repress those freedoms for their own citizens. This is changing slowly. As Americans learn the ugly realities on the other end (such as sweatshops and child labor), they are mobilizing against the amoral status quo.

Our economic self-interest seems to be converging with our sense of altruism. If we come to the aid of distant others who struggle for the right to speak for themselves, we are actually protecting our own hearth and home. The great dislocations and wage depression caused by global cost-price competition will not abate so long as firms are racing to the bottom, searching for the next source of cheap workers.

Henry Ford might understand. The only real solution to the global shortfall of consumer power is to boost wage incomes, redressing the inequalities of recent years. As a practical matter, that means bringing the bottom up as rapidly as possible. Securing basic labor rights and other civic freedoms as standard terms of the global trading system will give people the means to make that happen--even in such unlikely places as China. Those $60-a-month machinists in Xian who make Boeing 737 tail sections are capable workers, but they need the freedom to bargain for themselves and become capable consumers.

If nations can get the economics right, the most extraordinary--and radical--dimension of this revolution will be its potential for unifying different peoples. Technology leaps across ancient barriers and biases of race, religion and political history, as well as distance. Stereotypes are demolished when impoverished people in unpromising circumstances make advanced goods of modern life.

The promising future is already becoming visible in loopy ways, in the spread of new gadgets. Even very poor people get some of the good toys. At a street market in Malaysia, I bought a fistful of "Rolexes" for a few dollars each. "Genuine copy," the teenage peddler assured me. Down the street, a Malaysian girl robe behind her boyfriend on a Japanese motorcycle. She was wearing the traditional Muslim veil, but her T-shirt proclaimed in English: THE NIGHT IS STILL YOUNG--PARTY HARD.

Anything is possible.