In a widely publicized study carried out in the late 1950s and early 1960s, researchers asked citizens of more than a dozen countries around the world whether they were happy with their lives. While the answers indicated a wide range of attitudes within each country, the surprising result—which attracted much comment at the time, and for some years thereafter—was that, on average, the citizens of poor countries were no less satisfied than those of rich countries. Germany’s per capita income was four times Yugoslavia’s and fourteen times Nigeria’s, but Germans and Yugoslavians and Nigerians were all, on average, about equally happy.
A quarter-century later new researchers carried out a similar study. This time the results were dramatically different. Now the Swiss and Norwegians and Canadians were distinctly more satisfied than Germans and Belgians, and they were more satisfied than Italians and Spanish, who in turn were more satisfied than Greeks and Portuguese. The alignment with per capita income was not perfect (the Irish, for example, stood out by being much happier than their comparatively low income level alone would have suggested), but it was very close. Citizens of richer countries, on average, professed to be distinctly happier than those of poorer countries.
The most plausible explanation for this puzzling change is that while people in the pre-television era mostly compared themselves to their fellow countrymen, and felt either satisfied or frustrated depending on whether their own circumstances matched what they saw at close hand, once a new generation grew up watching TV it began to see things differently. Today almost everybody, almost everywhere, is familiar with at least the external appearance of middle-class living standards in the world’s advanced postindustrial democracies. And most people want to be part of whatever will give them access to that way of life.
Sharing the same economic space is often uncomfortable, and not just because people start comparing their own lot to what others have (or seem to have). Economic interdependence means having the opportunity to trade, but it also means facing the need to compete. Interdependence also poses the risk of catching other people’s economic diseases. Competition has winners but losers, too, and not everybody starts off on an equal footing. Often the reasons for that inequality are outside anyone’s control, but in other cases individuals or even entire countries can discard some of the practices and attitudes that slow them down economically. These choices can also be painful, however, since what looks like excess baggage from a competitive perspective is sometimes integral to people’s religion, or to the continuity of their cultural traditions, or to their sense of moral values.
It is useful, both intellectually and morally, to remember that not so long ago the United States was a newly developing nation, supplying easy-to-make goods to more advanced economies and competing, as many of today’s developing countries now do, on the basis of abundant resources and cheap labor. In the quarter-century before the American Civil War, for example, cheap cotton from the United States undercut parts of England’s textile industry, forcing down wages and helping to foster not only widespread urban misery, especially in the country’s northern industrial towns, but also labor unrest. (Even the popular literature of the day reflected this competition. One of the “Darkshire” mill owners in Elizabeth Gaskell’s 1854-1855 novel North and South laments, “Why, the Americans are getting their yarns so into the general market, that our only chance is producing them at a lower rate. If we can’t, we may shut up shop at once, and hands and masters go alike on tramp.” Sounds familiar, doesn’t it?)
Similarly, back then it was the United States that relied heavily on foreign capital to finance its industrialization and transcontinental expansion. Whenever European financial markets encountered some disruption—as occurred, for example, in 1873, when the speculation in Germany and Austria that followed France’s payment of its Franco-Prussian War indemnity collapsed, causing German investors to cut off lending to Jay Cooke’s Northern Pacific Railroad—the financing typically dried up and America’s economic advance temporarily halted. And if an economic downturn here forced overextended American borrowers to default on their debts, it was often European investors who sustained the major losses. Sometimes the overextended borrowers were US states, which had either issued debt abroad in their own names or guaranteed the debt of private borrowers. In the worst of these episodes, in the late 1830s, Florida and Mississippi formally repudiated their debts and seven other states stopped paying interest.*
Today, of course, Americans are on the other side. Now it is cheap labor throughout Asia and Latin America that undercuts the wages of US workers. It is now US lenders, including not only traditional bond market investors but also banks and mutual funds, that lose money when developing country debtors default on their obligations. And now it is economic activity in Korea and Malaysia and Brazil that suffers when investors in the United States and other developed countries become skittish about placing their capital at risk.
The international financial and economic disruptions of the past two years have once again put into sharp relief the negative features of sharing economic space. And as usually happens in such circumstances, participants in markets that are at the front line of these conflicts have begun to question whether there can be too much interdependence. The relative merits of fixed versus floating exchange rates, the absence of an international central bank or even a genuine international lender of last resort, the lack of international machinery for handling bankruptcies, the unevenness of financial disclosure standards, even the once-taboo subject of controls on the free flow of capital, are all—once again—at the center of debate. At a more basic level, many of the fundamental assumptions that have underpinned the discussion of the role of financial markets in economic interde- pendence, for the past decade and more, are also now coming under question.
Moreover, the events of the past two years have brought into the open important political issues that are partly a generic matter of sharing economic space but also partly a consequence of the specific alignment of world power as it currently stands. When the Soviet Union collapsed, everyone knew that for the foreseeable future the United States would be the lone military superpower. Many people also suspected that America’s commitment to internationalism would therefore begin to give ground to the country’s more traditional isolationism. But at the beginning of the 1990s few people anticipated that Europe would suffer a decade of chronic high unemployment, that Japan would allow the inevitable end of a stock market and real estate boom to turn into unending recession, and that the development of mature economies in China and Brazil would remain always just beyond the horizon—in short, that the United States would be the lone economic superpower too. The consequence has been US dominance to an extent, and in a form, that still comes as something of a surprise, and that presents both opportunities and challenges for America no less than for the countries that now stand, economically and financially, where America stood in an earlier era.
In The Lexus and the Olive Tree, the New York Times columnist Thomas Friedman views these developments from a perspective that emphasizes electronic technology. Mr. Friedman (no relation that I know of) is well aware that economic interdependence is nothing new. He notes, correctly, that the share of world economic production flowing through international trade is no greater today than on the eve of World War I, and that most of the world’s labor is less mobile today than it was then. But he argues persuasively that the advent of new electronic technology—especially the Internet—makes today’s interdependence qualitatively different. It is, in his view, primarily responsible for what he labels “globalization.”
Mr. Friedman sees the electronic revolution underlying the new globalization in two mutually reinforcing ways. First, there is, increasingly, more economic space to be shared. Tradition-ally, international trade meant trade in physical goods: raw materials like wheat and timber and coal and iron ore, finished products like steel and refined petroleum, and manufactured goods like guns and textiles and cars and computers. Even now, physical goods account for 71 percent of US exports and 84 percent of US imports.
But economic activity increasingly consists of providing services, not producing goods, and so world trade will keep up only if services become saleable across national borders. Thanks to electronic communications, more and more are. Mr. Friedman’s book is filled with examples of services being provided across national boundaries and even of services and related products being produced multinationally. In one of the more striking examples that he cites, IBM programmers in Beijing work on software and forward it daily by the Internet to other IBM programmers in Seattle, who, after adding refinements, send it on for more adjustments to Latvia, next to India, and finally back around to Beijing. Work on a specific programming task thus proceeds around the clock—just as it is now possible to buy or sell IBM stock at any hour of the day or night simply by executing the trade in Tokyo, or Singapore, or London, when the stock market in New York is closed.
An immediate implication of electronic technology, therefore, which is quite obvious from these examples, is that labor mobility is no longer as important as it once was. Chinese and Latvian and Indian programmers can work not just for but with IBM—in other words, not on a subcontract basis but as part of the same product team—without emigrating to the United States. As a result, while Mr. Friedman recognizes that labor is less mobile than it was a century ago, he has reason to play down this fact.
A further implication of the increasing dominance of services in economic activity is that limitations on natural resources need not constrain a country’s prosperity. What matters is the resources inside its people’s minds. Moreover, given enough time and the money to pay for teachers, a country can have whatever education system it chooses. As a result, one of Mr. Friedman’s most fundamental conclusions is that no country has to be poor. Prosperity is a matter of choice, he believes, so why not get on board?
The second principal way in which Mr. Friedman sees new electronic technology underlying today’s globalization is in its power to enhance the ability of investors everywhere to put their money at work anywhere, or withdraw it, whenever they choose. To be sure, international capital flows are not new either. But Mr. Friedman argues that with modern electronic communications, record-keeping, and trading capacities, the world financial market has now achieved both a critical magnitude and a critical degree of coherence among investors who may remain broadly dispersed physically but have become closely interlinked in ways that are more important. As a result, the “electronic herd” expresses its collective judgment on countries’ economies, on their politics, even on their cultures. Being in favor with the herd means receiving inflows of capital on a scale that was unthinkable in an earlier era of economic development. Being out of favor means facing capital outflows instead. Moreover, the herd can, and not infrequently does, change its mind very abruptly.
A useful exercise for Americans who nowadays decry the moral laxity of borrowers in Indonesia and Thailand is to read the acerbic sonnet "To the Pennsylvanians" by Wordsworth, who apparently lost money investing in that state's bonds on the London market. The poem ends, "All who revere the memory of Penn/Grieve for the land on whose wild woods his name/ Was fondly grafted with a virtuous aim,/ Renounced, abandoned by degenerate Men/For state-dishonour black as ever came/To upper air from Mammon's loathsome den."↩
A useful exercise for Americans who nowadays decry the moral laxity of borrowers in Indonesia and Thailand is to read the acerbic sonnet “To the Pennsylvanians” by Wordsworth, who apparently lost money investing in that state’s bonds on the London market. The poem ends, “All who revere the memory of Penn/Grieve for the land on whose wild woods his name/ Was fondly grafted with a virtuous aim,/ Renounced, abandoned by degenerate Men/For state-dishonour black as ever came/To upper air from Mammon’s loathsome den.”↩