Globalization effects: winners and losers of the 21st century
This article first appeared in Trading News, an Argentinian bilingual publication (Spanish-English) dedicated to the analysis of the present reality and the future prospects of transport, logistics and international trade in their different forms.
According to Lesther Thurow, Management and Economics teacher of the Massachussets Institute of Technology (MIT) states affirms that the present era is revolutionary. It will change businesses, governments, philosophy and religion.
Wealth depends on one only factor: capacity to educate men. Show me a well-educated country and I'll show you a group of people who will probably be successful in the 21st century. Show me an uneducated country and I assure failure. We are living revolutionary times. In the 20s we improved the industrial combustion engine, on the basis that an internal combustion engine had not been invented before. The answer was "it is not difficult". We all would have slow cars, steam cars, electric ones, we would use the train more frequently but modern life would be similar to our current lives. On the other hand it is impossible to imagine modern life without electricity. We would not be able to describe our lives.
That is why historians declare that electrification was a revolution, and the combustion engine was an important invention.
I will try to convince you that we are living revolutionary times, everything will change. Business, government, war, philosophy, religion.
A historian could announce that, in 50 years, with the third industrial revolution, 5000 years of commercial retail sale came to an end. In ancient Egypt, people went shopping to the store in the corner to buy their daily goods. That shop was like a modern one, with shelves full of goods and employees, they paid the salesman for the goods they would take home. Nothing changed in 5000 years, until now.
I could live in Buenos Aires for the rest of my life and would never have the necessity of going shopping to a store again.
I can buy a car or a house through the Internet, I do not need a store. The question is "Will e-commerce be a revolution of 10% or 90%? That is to say, in thirty years, are we going to buy 10 or 90% of products by this electronic means? Let's think it is 90%, what is the city going to be like with no stores? What kind of routes will we need? Besides, if this is a 10% revolution, it would be important but it will not change things completely. The problem is that we will get to know that in 20 years time. We will not know if it is a 10 or 90% revolution. Sociology always rules technology, though sociology changes.
A few months ago my car was stolen so I began to see new cars. I did what every American is used to doing in these days: I entered Internet and decided what kind of car I wanted. Then I came to a store like any American and once there I wondered "why did I come? Why didn't I buy it electronically?" I came to the conclusion that the answer was because when I was 7 years old I went to buy a car with my father for the first time. He told me "Lesther, you should not buy a car unless you slam its door, you kick the wheels and drive it for a while." In fact, I never learned much in this way. I drive so slowly when I am testing a car that it is not useful. Moreover, my children are used to downloading racing games from the Internet. They download a Ford simulator, they drive a Jaguar electronically, they crush and they learn more about that car than what I learned going to the store. I am sure they feel perfectly all right when they buy a car through e- commerce.
Of course, auto companies cannot wait to find out what will happen. It is almost impossible to lower the cost of a car by improving the company's performance. Even in the global supply chain you can see that every component is made in the country that gets the lowest cost. Maybe it can be improved a little bit, but not much. However, if a completely electronically supply chain can be obtained, the cost of a car can be reduced around $1000. With direct electronic sale, without the need of a middleman, $1000 more can be lowered; if inventories are avoided and if work to order is achieved, the final cost will go down $1,500 more. So it would be $3,500 less.
In this revolution, relationships between companies and governments will change. We are used to a world where governments end up paying companies. For example, Israel paid 600 million dollars to Intel for installing some plants in its country. Brazil is paying Ford so that it establishes its plant there.
Governments will have to change the way they behave. They are used to considering themselves as air traffic controllers and governing the flows of their economy. They cannot continue doing so in a global economy. Governments have to think as landing strip and building constructors. Once companies compete they cannot be controlled.
30 years ago governments did not meet to analyze this problem, cause in order to use a fiscal oasis you had to live in it. Now things have changed. Nowadays you can use a tax oasis in an electronic way, without living in it. An example of this can be observed in the financial center rankings of the world: 1st New York, 2nd Tokyo, 3rd London, 4th France, and 5th the Caiman Islands (fiscal oasis), in Latin America.
The fiscal issue will be very important in the new economy. If I do not want to pay to my government, I will find a way out so as not to do it.
Destroy to create
Let's suppose we are in USA in 1920. There are 100 auto companies. In 1950 there will be just three: Ford, General Motors and Chrysler. If you had bought those three in 1920, you would have had a very lucrative deal. But if you had purchased one of the others you would have lost money. In any kind of industry, 97 out of 100 lose money, but there is a possibility of becoming extremely rich if you choose the three big.
Let's suppose I am Moses and I am talking to God. We are in 1981 when computer revolution starts. And he tells me: "Lesther, in 1999, 140 million computers will be sold in the world, (exactly what is being sold)." What would you have done? Would you have run to buy Comodore, leader in 1981? But 13 years later it was out of the market. The winner was Microsoft that did not exist as a company in 1981.
At the beginning it is impossible to know who the winners will be. But there will be one. One characteristic of this revolution is that it occurs in almost all companies. Enterprises have two alternatives: they merge to become a global player, or they are a niche player, the best in the world to do any small thing. But there is no space for medium sized companies, they will be driven out of the market. For example in the auto industry, everybody thinks that in fifteen years there will be from six to eight companies in the whole world. We already know the name of four of them: Ford, General Motors, Volkswagen and Toyota. Which are the others? Nobody knows yet. That is the reason why Renault purchases Nissan, or Fiat is sold to General Motors. Fiat produces 2 million cars; nevertheless it is not big enough to compete in its industry.
The medium-sized bank will have to close down. In the 50s, 60s and 70s there was convergence. Poor countries tried to reach richer countries. In the 90s there is divergence. The difference between the richest country and the poorest one in the year 2000 will be larger than in 1990. For example the Americans were always richer than Canadians, but nowadays the gap is even larger than 10 years ago.
If the countries want to be one of the most successful ones, they want to have big firms and they do not want unbalanced salaries, first they have to focus on education, but that costs money.
Developed countries have a problem called China: 1,300 million well educated people. In Latin America, the best-educated nation is Castro's Cuba. Continental China has an education strategy, which means a big competitor, with a high education level and very low pay level. They can have secondary school graduates for $28 a month, working 30 days, twelve hours per day. That is competence. Of course, nobody wants to play the game so the only way to compete is by being better educated.
On the other hand, in Brazil, people between the age of 16 and 18 do not go to school. Many human beings in the world will not belong to the global economy. If they live in an uneducated and without infrastructure country, they will remain outside. Sub-Sahara Africa is making for that way. They will not be marginalized, but they will be ignored.
After education comes infrastructure. Does this nation have a system of telecommunications, transportation, electricity to give first level infrastructure to companies in the whole world? They have another place to go. There is no company in the world that needs the United States and there is no one that needs Argentina.
And are investments being made in research and development? In an industrial revolution there are important characteristics, the social ones. The first one is to be able to shut down the old company, which is very difficult in every country. They are "destructive creation" processes because in general, destruction comes before creation. For example, AT&T had a million employees in 1988 at the time of the antitrust trial. Three years later, successful enterprises had half a million, so 500,000 people had been dismissed. But that gave rise to new telecommunication companies that by now take on more than half a million persons. The total employment is above a million. That cannot be done in Germany. Deutche Telefone cannot be privatized and deregulated because half the workers would have to be fired, and new telecommunication companies cannot be opened. In the ╬90s, income-producing American companies fired from 600,000 to 800,000 people per year. Nine out of ten new firms will fail within five years. What happens with those who started working in those nine companies that closed? In the United States, everybody will say "he is a working and enterprising person, he has experience, let's hire him." In France, it is different. If I start a business and it goes bankrupt, they will put a label on my forehead saying "failure," and it will be even harder to work again. It is much more risky to start an enterprise in France than in the United States. In the USA there is a good phrase, "falling forward." I start working, nine out of ten close, I fall, but as I got such experience I will be employed for a better work. Still, the psychological failure is difficult.
It is not impossible that an old company becomes a leader, but it is not common.
Creativity, a key to success
Let's suppose that fifteen years ago I came to Argentina and said: in the year 2000 the most important manufacturer of cellular phones will come from Finland. You would have laughed. You would have asked "those citizens of the North Pole? That can't be true. However Nokia has the major market share.
One of the vital requirements is creativity. Some engineers had a meeting and concluded: "Finland is not very good at cultivating trees, we are far in the North. We chop down trees to obtain wood and paper but still we are not the best. Maybe we are good at communications," and so they got down to business. If Finland could do it, who couldn't? It is difficult but not impossible.
Globalization, good or bad?
Were the nineties a good or bad decade for the third world? If you were in China at that time (half the population of the third world) the nineties was the best decade, the Chinese grew between 8 and 10% a year. Though, the same period was a disaster for Sub-Sahara Africa. The per capita income decreased and a lot of human beings died of AIDS.
Globalization was positive or negative depending where you stand or where you look at. China took advantage of it because they learned they can create components to be assembled somewhere else.
The richness gap between Canada and the USA is becoming larger. In spite of being a rich country, Canada should wonder, why aren't we rich in this new world?
There is quite a rejection to globalization in France. It is interesting for when McDonalds wanted to establish there, nobody thought that someone would eat a hamburger in France. All the licenses in the world were granted to one person and at a bargain. But the French loved McDonalds and the problem was how to withdraw the license from such person.
How many people think that McDonalds makes the best hamburgers in the world? (Nobody) Hamburgers were not its forte, fast food is. French people wanted to have a fast lunch and take advantage of lunchtime. The globalization symbol in France is something that the French like to buy.
Another example: Last year, nine out of the ten most successful movies were American and one was Italian. As far as I know there is no law prohibiting French citizens from watching French movies. Americans are best at making movies for the French taste than the French themselves. It is what the French call a "dangerous invasion of the American culture," and the problem is they cannot stop it. It is not an American culture invasion but a group of French who want to participate in McDonalds' culture and in films.
Success does not depend on God
Some years ago cultivatable land was the means. But now we live in an era where everything has to do with the human aspect, no one could say that Nokia was in Finland, a cold and small country in the North. It did not have any natural advantage to sell telephones, it had a group of persons who made up their minds and said "let's try to create a competitive advantage to sell telephones." The same occurred in Sillicon Valley. One of the problems is that it is not easy to say what should or shouldn't be done. It is very easy to know why Pittsburgh produced steel, you can see the rivers, the raw material. But Sillicon Valley accounts for no explanation, it was made by the human being, not by God.
Finally, biotechnology will be the revolution of this era. Human beings with a very high I.Q. will be created soon, they will have the body of a model, the character of parents, the height of a basketball player.
A further example: Jews do not eat pork for considering it a dirty animal. Within twelve months, heart transplants will be performed from pigs to human beings. Last year there were twelve hearts available for 1000 patients waiting for a heart. There are people who think that pigs are dirty and so they do not eat them. How will they reject what saves their lives? This is a revolution, a change in religion.