One World Insight Blog | Douglas "Las" Wengell

An American Generation Deferred

There was a time, not long ago, when Americans were confident that the next generation would be wealthier, more skilled, better able, prettier, in a better position, happier than the prior one. That’s no longer true by almost every measure. My generation – Gen X – and those after will be the first in American history to witness a declining quality of living as measured by income, wealth and global competitiveness. And this before our engineers-turned-financial wizards single-handedly orchestrated the Great Recession and before Baby Boomers, who road the wing of postwar prosperity, begin their epic retirement, since they can’t afford to.

 

When I look at my life and those aspiring Americans around me – peers, friends, associates, fancy MBAs, interns, fellow travelers – there is a pattern suggesting a new reality. Few have worked at one job longer than a few years. Few have the time or resources to dig into other non-work aspects of their life – family, hobbies, travel. A huge number are freelancers of one sort or another, stitching together full-time work and taking it as it comes. Savings and retirement are worthy – but who can afford it? Legions of educated women have delayed family, whether because of a missing man or out of necessity (and what if things don’t work out?)  Many friends don’t think twice about receiving financial help from their family and more college graduates move home after graduation.

 

The future is too uncertain. It’s a generation deferred.

Testosterone Starved Americans

Every four years, the Pew Center and the Council on Foreign Relations conduct a survey called, simply, “America’s Place in the World,” which tracks the sentiment of the public and thought leaders. A new one was released this month and, while just a survey, the results tell a story of a nation short on testosterone.

 

· 53% say that China is a major threat and 44% of the public now think that China is the world’s leading economic power (never mind that the U.S. economy is three times as large.)

 

· For the first time in 40 years, about half of the general public agree that the U.S. should “mind its own business internationally and let other countries get along the best they can on their own” and only 10% think that America should make it a priority to promote democracy abroad, a far cry from September 2001’s 44 percent.

 

· Only 21% consider defending human rights a priority (down from 43%); and only 35% think America should strive to improve living standards in developing countries.

 

Viagra anyone? Or Prozac? Both of which are made in the U.S.A, if that’s any consolation.

Authoritarian vs. Democratic Capitalism – Say what?

The most striking thing about China to me, at a macro level, is how affective the central government has been in maintaining its power and embracing capitalism. Unlike in the West, the government is in fact highly competent.

The prevailing belief about democracy is that it’s inevitable. Autocracy would eventual give way to power-to-the-people, if only the guard’s grip on power waned. Russia was our Cold War enemy. And the line sold to American’s proved true. Russia imploded.  But China is different from Russia. It’s economy is capitalistic. It’s politics in the hands of the smartest people Beijing can recruit.

From building massive infrastructure projects ahead of schedule, to reconfiguring the nearby park overnight, I am awed at China’s ability to execute, knowing that it’s based on the very top-down approach vilified in the West.

America: Harder to Climb and Further to Fall

The future is catching up with the present. The American psyche is – or was – obsessed with consumption paid for by debt – in other words, live today at the cost of tomorrow.  It’s a me household and a me budget deficit. Production, savings and innovation are deferred for a nether future. We’ll pay for it after the party. Except what happens then and who takes the hit?

 

With a sordid history emblazed upon the memory of the older Chinese, the nation feels they can only move up. America has already achieved so much. It’s gotten rich and drunk with self-importance. It’s harder to climb and further to fall.

Ayn Rand’s Shanghai on the Hill

Howard Roark, the protagonist in Ayn Rand’s Fountainhead, is a budding young architect. His challenge is to embrace bold, ambitious, future-oriented design from the self-generated well of creativity and ignore convention. This formed the basis of Rand’s libertarianism and influenced a generation of leader’s like Alan Greenspan, who put his faith not in central planning the marketplace. OK, at least he admitted before Congress that his worldview was not entirely correct.

The shimmering architecture of Shanghai got me thinking about Ayn Rand and Alan Greenspan. These buildings are not some Disneyland, or Las Vegas theme park. They are the psychic fabric of Shanghai, in perception and ethos, as well as the requisite urban infrastructure.  They are Shanghai. Here’s a city with attitude, like Beijing and Hong Kong. How unlike modern American urban architecture which, with some notable exception, has all but abandoned innovation for utility, banality over buttresses, functionality over form, mediocrity over majesty. Erase for a moment everything you know about the world and compare Shanghai architecture to America’s aging infrastructure, or JFK airport to Beijing International, and ask yourself who is aspiring and who is asphyxiating.

There’s bravado behind tarring down the old and creating something new. You’ll love Shanghai or hate it. But it’s something. It’s progress. It fosters innovation and creates new companies and new jobs. I laugh to myself when I think how long the new World Trade Center design took, or how the reconstruction of the San Francisco Bay Bridge is going on a decade. That just wouldn’t happen here.

America won World War II and has dominated the second part of the twentieth century. Good for us. But that was then and this is now. The world is changing; India and China are hungry and Americans overweight. “Only the paranoid survive,” said the founder of Intel. So if America is a company, what’s our new creation, our new product, our new skyline, our new marketing campaign, our employee training program, our new buildings, bridges, roads, trains and planes, our 2020?

If you don’t know where you are going, the saying goes, any road will take you there.

China Superpower Conundrum

On one hand, China identifies itself as a poor, emerging nation. This line of thinking implies special assistance. On the other, China wants to be a self-sufficient global citizen and leader.

 

The Chinese have been along on a free ride so far. We have been the bad guy. America does the  heavy lifting in foreign policy and make the tough decisions—and protects shipping lanes.  China keep its currency undervalued and benefits from emerging market status. Eventually China needs to become a responsible, engaged stakeholder in the international system and help solve international problems.

The conundrum is historically China has been an insular nation. “We build walls to keep people out, not invade foreign lands,” was how a businessman put it to me on an overnight train.

 

But the only way China will become a leader is if it takes the lead economically. And that will require innovation. And that require an informed, creative, question-asking citizenry. Qian Xuesen, the man who is credited with developing China’s atomic bomb, nearing death, was reported to have told China’s prime minister that what China most needed was innovation. “We’re not producing any creative people. We are making only technicians.”

 

The government wants advanced education without encouraging people to think.

 

In today’s globalize world, can you become a great power if you don’t allow your people to think? The Party wants to create a modern society. But it doesn’t want to allow too strong a civil society of churches, unions, associations, and other social organization needed to build a modern nation. It does not want citizens using the Internet to access sensitive information, but it needs technology to become the modern country it wants to be. The government needs to promote knowledge in order to compete, but knowledge is dangerous. It needs empowered people in order to become strong, but it can’t let the people be too empowered.

“Bet Against the American Dream” – aka, The Middle Class Short

This American Life, a U.S. public radio weekly, concluded a recent radio show with a Broadway parody distilling today’s robber barren era to its essence. Have a listen and  laugh (or cry):

Bet Against the American Dream from Alexander Hotz on Vimeo.

The top of the economic food chain has in effect shorted the middle class, and won. The losers in those bets weren’t Goldman Sachs investors -- they were millions of hard working Americans who bought into the American Dream, only to find it had been replaced by what looks more like House-takes-all ponzy scheme.

With the urgency of the financial crisis passing, the grim results surface: the largest transfer of wealth ever witnessed. Those at the top are intact and richer, those in the middle a few notches lower.  The American middle has been shrinking for at least 30 years and real wages stagnant when adjusted for inflation. Thirty years ago, top executives at S&P 500 companies made an average of 30 times what their workers did –  now they make 300 times. Between 2000 and 2008, the poverty rate in the suburbs of the largest metro areas in the U.S. grew by 25 percent – making these suburbs home to the country's largest and fastest-growing segment of the poor.

The American Dream used to be about hark work, perseverance, education, but the system appears rigged. Even the likes of establishment thinking is admitting this. In a new paper by The Hamilton Project, an economic think tank founded by Treasure-Citibank titan Robert Rubin, it argues that “the American tradition of expanding opportunity from one generation to the next is at risk because we are failing to make the necessary investments in human, physical, and environmental capital.”

The need to reorganize our financial system goes beyond the updating financial regulations. It goes to the heart of who we are as a nation, and whether we are going to stop sliding toward a Third World paradigm of two classes: those at the bottom and those at the top. “At least in an actual casino, the damage is contained to gamblers,” wrote financial journalist Roger Lowenstein.

 

One World Global Air Traffic Video

The Iceland volcano halted flights across Europe and the Atlantic, a humble reminder that  our lives are still at the pleasure of nature. Whether it’s people, cargo or digital bits, our planet gets smaller by the day. Check out this stunning video of global air traffic patterns, and note the seemingly lost continent of Africa.

“We make nothing, we own everything” - The Rise of the Paper Entrepreneur

So said Gordon Gecko 25 years ago. Meanwhile, Geithner and Orszag recently testified to the Senate Appropriations Committee not long ago. There were echoes in the room:

“As great as the economy's immediate challenges are and have been, our country’s economic problems are also deeper and more long-standing.  For nearly a decade, typical American families had seen their incomes stagnate instead of rising steadily as they had for generations.  Much of the economic growth that we had experienced in the past decade was fueled by consumers and the Government running up large debts, aided by a financial system better at making short-term profits than managing long-term risks.  And as a country, we were failing to invest in education, new energy technologies, and basic research and development.”  http://www.ustreas.gov/press/releases/tg589.htm

Indeed, the financial sector that has been very entrepreneurial in the creation, sales and distribution of complex financial instruments in line with thirty years of “Washington Consensus” rhetoric and strong arming at the emerging markets – global monetization and open markets. There have been benefits and wealth creation. But on closer examination one must wonder where innovation ends and greed begins. Just take a look at corporate profits from the finance sector compared to all other parts of the American economy:

Treasure Secretary’s assessment of a “financial system better at making short-term profits than managing long-term risks” is unfortunately not a new insight.  

Every since the titans of Wall Street in the 1980s became rock stars, and the barriers between commercial and investment banking were lifted in the 1990s, and hoards of talented quants headed to banking rather than MIT and science careers, more than any other point in American history, the engine of American innovation has lionized the rise of what Robert Reich aptly calls “paper entrepreneurs,” intangible, financial products and services which are big on gimmicks and light on substance.

The most striking thing about former Labor Secretary Robert Reich’s prescient opinion piece below is that it was written in 1980 – yet its insights are just as relevant today thirty years on.

 

“The paper entrepreneurs are winning out over the product entrepreneurs.

Paper entrepreneurs — trained in law, finance, accountancy — manipulate complex systems of rules and numbers. They innovate by using the systems in novel ways: establishing joint ventures, consortiums, holding companies, mutual funds; finding companies to acquire, “white knights” to be acquired by, commodity futures to invest in, tax shelters to hide in; engaging in proxy fights, tender offers, antitrust suits, stock splits, spin-offs, divestitures; buying and selling notes, bonds, convertible debentures, sinking-fund debentures; obtaining government subsidies, loan guarantees, tax breaks, contracts, licenses, quotas, price supports, bailouts; going private, going public, going bankrupt.

Product entrepreneurs — engineers, inventors, production managers, marketers, owners of small businesses — produce goods and services people want. They innovate by creating better products at less cost.

Our economic system needs both. Paper entrepreneurs ensure that capital is allocated efficiently among product entrepreneurs. But paper entrepreneurs do not directly enlarge the economic pie. They only arrange and divide the slices. They provide nothing of tangible use. For an economy to maintain its health, entrepreneurial rewards should flow primarily to product, not paper.

Yet paper entrepreneurialism is on the rise. It dominates the leadership of our largest corporations. It guides government departments, legislatures, agencies, public utilities. It stimulates platoons of lawyers and financiers.

It preoccupies some of our best minds, attracts some of our most talented graduates, embodies some of our most creative and original thinking, spurs some of our most energetic wheeling and dealing. Paper entrepreneurialism also promises the best financial rewards, the highest social status.

The ratio of paper entrepreneurialism to product entrepreneurialism in our economy — measured by total earnings flowing to each, or by the among of news in business journals and newspapers typically devoted to each — is about 2 to 1.

Why? Our economic system has become so complex and interdependent that capital must be allocated according to symbols of productivity rather than according to productivity itself. These symbolic rules and numbers lend themselves to profitable manipulation far more readily than do the underlying processes of production.

It takes time and effort to improve product quality, exploit manufacturing efficiencies, develop distribution and sales networks. But through strategic use of accounting conventions, tax rules, stock and commodity exchanges, exchange rates, government largesse, and litigation, enormous profits are possible with relatively little effort.

When paper entrepreneurs look for solutions to America’s declining productivity and international competitiveness, they come up with paper remedies to stimulate large-scale capital investment: accelerated depreciation, tax credits, government subsidies, relaxation of antitrust laws. 

Product entrepreneurs focus on techniques for improving output: better quality controls, improved labor-management relations, more effective incentives for managers and employees, more aggressive marketing and sales.

If we are to increase the economic pie, we will need to redress the balance of entrepreneurial effort. Which strategies will stimulate more paper, and which more product?”

The United States Land of Opportunity? Think Again.

A 2010 report from the Organization for Economic Co-Operation and Development finds that social mobility between generations is dramatically lower in the U.S. than in many other developed countries.  The report finds the U.S. below Denmark, Australia, Norway, Finland, Canada, Sweden, Germany and Spain in terms of how freely citizens move up or down the social ladder. Only in Italy and Great Britain is the intensity of the relationship between individual and parental earnings greater.

The credible report is an ugly reality check for a nation that has historically seen itself as uniquely rewarding of talent; as a place free of the sorts of rigid social structures that led so many generations of immigrants to leave Old Europe.

Harvard Professor Elizabeth Warren argues that America’s middle class had been eroding for 30 years even before the massive blows caused by the financial crisis. And with unemployment currently at astronomical levels, if there are no jobs for young people leaving school, the result could be long-term underemployment and, effectively, a lost generation.

According to the report, the main cause of social immobility is educational opportunity. It turns out that America’s public school system, rather than lifting children up, appears to be holding them down.

Another big factor in social mobility is inequality, the report finds. The greater a nation’s inequality, the harder it is for its children to improve their lot. That confirms findings by other researchers. “The way I usually put this is that when the rungs of the ladder are far apart, it becomes more difficult to climb the ladder,” Brookings Institution says. ”Given that we have more inequality in the U.S. right now than at any time since the 1920s, we should be concerned that this may become a vicious cycle. Inequality in one generation may mean less opportunity for the next generation to get ahead and thus still more inequality in the future.”

Elected officials have a false sense of security that because we are the sole superpower that we must be number one in everything. The facts suggest otherwise. The U.S. is below average in public finance, education results, healthcare outcomes, the status of infrastructure, investments in basic research, to name a few. We need to stop looking in the rear view mirror, make tough choices and invest in our future.

The Emergence of the “Beijing Consensus”

From the formation of the United States, Americans have always been paranoid about falling behind. The rise of Japan in the 1980s was the last example. Now it’s China.

As recently as 2008, when China was still an emerging economy eager to put its best foot forward for Western consumers, it lifted censorship, at least temporarily, on several Web sites before the Beijing Olympics. At the same time, it responded to pleas from U.S. and European politicians to cooperate on several other fronts. When China was seeking to join the World Trade Organization a decade ago, it accepted compromises to U.S. and European demands. With China’s rising clout, the West has less leverage over Beijing. At climate talks in Copenhagen, however, China blocked a comprehensive deal and refused to go beyond its earlier promises. Western diplomats complain about the way Beijing is dragging its feet on sanctions on Iran’s nuclear program and is propping up unsavory regimes across the world in its hunt for the natural resources to power its growth.

These days, China is no longer emerging. It has emerged — sooner and more assertively than had been expected before the wrenching global financial crisis, which badly damaged all the established industrial powers, from the United States to Europe and Japan. Its currency, the renminbi, is frozen at an undervalued level, and Internet controls are stricter than ever — even as Google threatens to leave.

The severe recession has fast-forwarded history, catapulting an unprepared world into a period of uneasy cohabitation between the United States, the No. 1 economy, and its likely successor.

“China is the West’s greatest hope and greatest fear.”  “No one was quite ready for how fast China has emerged.” “Everyone is trying to understand what sort of China they will be dealing with.” Politicians, pundits and academics.

For the first time, economists are pointing to Chinese spending — not the U.S. consumer — as the key to a global recovery. China’s GDP could overtake that of the United States within a decade; a PriceWaterhouseCoopers report predicts by 2020; and Goldman Sachs predicts by 2027; others are speculating about when the renminbi might begin to challenge the dollar as the world’s reserve currency.

Meanwhile, as developing countries look for a recipe for faster growth and greater stability than that offered by the now-tattered “Washington Consensus” of open markets, floating currencies and free elections, there is talk about a “Beijing Consensus.”

When the United States was snapping at the heels of the British empire, the global ruler of the early 20th century, the situation caused plenty of heat, even though both countries spoke the same language, shared similar values and were liberal democracies. China, in contrast, is a Confucian- Communist-capitalist hybrid under the umbrella of a one-party state that has so far resisted giving greater political freedom to a growing middle class.

What is the Beijing consensus? Some see it as a form of economic management with greater government involvement that is on the rise across the world. Others interpret it to mean more strictly controlled capital markets, which have made a re-appearance even in previously open countries like Brazil. Policy makers in Malaysia and Dubai focus on replicating China’s special economic zones, which afford generous terms to foreign investors in manageable geographic areas. Some suggest that China’s lack of democracy is an advantage in making unpopular but necessary changes. “It is more challenging for democratic systems because ever day they come under public pressure and every short period they have to go back to the polls,” said Victor Chu, chairman of First Eastern Investment Group in Hong Kong, the largest direct investment firm in China. “China is lucky to have the ability to make long-term strategic decisions and then execute them clinically.”

Some say Chinese officials are using their country’s $2.4 trillion in foreign currency reserves as a bargaining chip, knowing that any hint of reducing those reserves would rattle currency markets. “As China is emerging on the global stage with unprecedented power and influence, it is not proving to be the global partner the United States and E.U. seek,” said Professor David Shambaugh of George Washington.

The world will be asking more and more of China. So far, it appears to be getting less and less in return.

Market Access to China Treacherous - Multinationals Including

McDonald’s plans to double its presence in the world’s fastest-developing economy over the next few years. For those who know how ubiquitous it already is, it’s a huge increase. McDonald’s has about 1,100 outlets and it opened its first outlet in Shenzhen in only 1990. It expects informal eating out to grow by 10% a year, because of China’s growing middle class. China accounts for about 23% of McDonald’s revenue from the Asia-Pacific, Middle East and Africa regions. More uncoupling of American multinations and the S&P 500 from America, or any nation.

Starbucks recently announced similar plans. Same for Boeing, Intel, GM and the list goes on. If you want to know where the action will be in the coming years, multinationals are not counting on the West.  

China is the biggest recipient of foreign direct investment in the world: 450 of the Fortune 500 companies have a business presences there, and many of those reeling at home are doing brisk business in China. G.M. is hurting everywhere but for China.

Despite WTO agreements, Beijing is not making it easy for the largest, most powerful Western corporations, no less medium-sized American firms or non-Chinese entrepreneurs, citing national security concerns, which it defines broadly. “As a socialist country, China must put its own interests first when opening up and keep a firm hold on the right to lead core industries,” said a minister. Beijing is instating a formal review process, similar to the Committee on Foreign Investment in the United States. But a similar panel in China would be part of a government that has much greater direct influence on businesses than in the US.

Meanwhile, China’s new Nasdaq-style ChiNext board, which aims to boost start-ups and small and medium-sized companies, is a huge step forward for the formation of its capital markets.If you want in, you must play by Beijing’s rules. Except for maybe Google, most are willing to comply despite domestic repression. Don’t expect Walmart to let on to its American customers.  

 

Quadrennial Defense Review: U.S. Defense Challenges

The Quadrennial Defense Review was recently released to Congress, and it details the challenges America faces in the twenty-first “One World” century. Among them: asymmetrical warfare with non-state actors using non-conventional, disruptive, radioactive, bioactive, improvised weapons; “cyber” warfare; nuclear non-state actors; climate change and wars fought over natural resources.

 Hear a fascinating World Affairs lecture by Kathleen Hicks, Deputy Under Secretary of Defense for Strategy, Plans & Forces, about its highlights:

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Watch live streaming video from worldaffairs2010 at livestream.com

Ten Years on, the Age of Genomics is one Step Closer to Reality

When the genome was first mapped in 2000, it was thought that we were on the verge of a revolution in medicine. Innovation of course doesn’t always work in a straight line – more like fits and starts, small success and failure. Progress has been made, however.

For the last ten years, researchers, companies and investors bet on the notion that mutations that caused common diseases would themselves be common, so they set out to identify the common mutations in the human population. This is what made headlines in 2000. That meant indexing just a few healthy people – it didn’t really matter, so long as they were human – and comparing a small sector of a person’s individual genome to it.  This was expensive and, more importantly, supposed that the mutations would be easy to find.

The premise was incorrect. The latest findings suggest that common diseases are caused by rare, not common, mutations, such is the genetic lottery of reproduction. (Apparently natural selection weeds out disease-causing mutations before they become common.) The belief now is that the entire genome of patients need to be analyzed to get a complete, integral view. But the problem has been cost. What first cost tens of millions per genome, so complex was the sequencing and so new the technology, has decreased to $25,000 per genome, and at scale could drop below $5,000. (The company behind the testing is Complete Genomics of Mountain View, California.)

The research is still elementary. For example, we most understand single-gene, cause-and-effect diseases. But this research is the gateway to the more common multigene diseases such as cancer.

Customized medicine is coming. It will involve the sequencing of a person’s genome at birth, so that preventive measures can be taken until genetic altering cures can be found; and eventually, medicine that is designed to work with the an individual’s DNA footprint. Stay tuned.  

India vs China – and Getting Big Things Done

India and China are comparable in their economic model and development but not so in the political sphere. Beijing is autocratic, New Delhi a large and messy democracy.

Both are rapidly developing the big things required of a first world nation – infrastructure, rules and laws governing commerce. In this regard, at this stage of development, top down China is winning against bottom up India. 

“I just feel disgusted and ashamed that we are incapable of doing even small things.” So said one voice among many in India who are frustrated by Delhi’s inability to roll-out infrastructure projects, which routinely get bogged down in massive bureaucracy. In October 2010, India is hosting the Commonwealth Games in the hope of demonstrating the country’s emergence as an economic powerhouse, much as Beijing used the Olympics as a coming-out party for China. At a spiraling cost of $2B, officials admit that it will be down to the wire to finish in time. Whether it was taxi drivers in Delhi or residents I spoke with, there’s a frustration that “the world’s largest” democracy can’t get anything done.

China, with its sprawling networks of new highways, airports and high-speed rail connections, makes for a daunting comparison. India has weaker government finances and  unruly democratic government that lacks China’s authoritarian discipline, for worse at the moment. Clearing land for roads or power plants in China is no problem, as the verdict comes from atop; not so in India, where land rights are contentious. India’s government relies on private sector companies whereas China’s infrastructure build-out is aided by government-backed companies.

“It is more challenging for democratic systems because every day they come under public pressure and every short period they have to go back to the polls,” said Victor Chu, chairman of First Eastern Investment Group in Hong Kong, the largest direct investment firm in China. “China is lucky to have the ability to make long-term strategic decisions and then execute them clinically.”

How bad is India’s roads, so key to its future? By one account, 70,000 km of India highways “aren’t worth driving on” (and this according to a top politician), and 40 percent of fruits and vegetables rot before reaching market because of delays from poor roads and rail lines.

Despite India’s robust Bombay Stock Exchange –  in which infrastructure companies have raised $6B+ in capital since the beginning of 2008 – things move at the speed of a cow.

What’s Driving American Innovation?

America enjoys a well educated work force, natural resources and political stability, but it is lagging behind in the production of twenty-first century human capital: high-tech and scientific talent that is the engine of innovation and the fuel nation defying corporations most desire.  

The globalization of skilled labor is upon us. Said the CEO of Intel: “I have the luxury of hiring the best engineers anywhere on earth. If I can’t get them out of M.I.T., I’ll get them out of Tsing Hua [Beijing’s M.I.T.]” A 2009 study by the Information Technology and Innovation Foundation “ranked the U.S. sixth among the top 40 industrialized nations in innovative competitiveness — not great, but not bad. Yet that same study also measured what they call ‘the rate of change in innovation capacity’ over the last decade —how much countries were doing to make themselves more innovative for the future. The study relied on 16 different metrics of human capital — I.T. infrastructure, economic performance and so on. On this scale, the U.S. ranked dead last out of the same 40 nations. ... When you take a hard look at the things that make any country competitive. ... we are slipping,” said the Intel CEO.

“Having run a company through a major transition, it’s a lot easier to change when you can than when you have to. The cost is less. You have more time. I am a little worried that by the time we wake up to the crisis we will be in the abyss.” This from the head of one of America’s most successful high-tech companies.

China’s Voracious Appetite for Natural Resources at Odds with West

America views Southwest Asia as a security threat. China sees it as an opportunity.  While America is stuck in an Afghanistan quagmire, China is cutting deals with Afghans to aid its economy. In this case, for copper. China’s $3.4 billion bid is the largest foreign investment in Afghanistan and, to be fair, the largest anyone would offer. But that’s hardly the whole story.

You might be surprised to learn that after the blood and treasure America has spent on Iraq, China is investing more in extracting Iraqi oil than American companies. It has reached long term agreements with US-nemesis Iran to buy natural gas. It is the dominant investor in Pakistan, where a Chinese-built port in Gwadar, on the Gulf of Oman, is expected to carry Middle Eastern oil and gas over the western Himalayas into China. And China is cutting deals with despots in Sudan.

In effect, American troops and tax dollars have helped make Afghanistan safe for Chinese investment. (Of course, had an American firm won the bid, the world would have accused war cynical war critics that we waged war to seize the country’s fast mineral assets.)

China views its splurges as national security: to control long-term access to natural resources to keep its industrial empire going and keep its people looking forward.

If China wants to be a global player, it will need to bare responsibility by supporting global stability, not riding on the heels of America’s largess.

The U.S. Debtor Nation

Within a mere twelve years, the largest line item in the United States federal budget will be interest payments. This is politically untenable. Divisions aside, it’s a reality that must be addressed.

 

A nation’s finances are similar to a household. It has assets and debt and must make investments to maintain its property. As a nation, our “home” is aging. We are not making the needed investments in fixing the roof and upgrading the plumbing.

 

There’s no shortage of formidable graphs illustrating unsustainable trends. This one is of household debt as a percentage of GDP.

Arriving back in the United States

Arriving back in the United States from Tokyo in March, I knew there would be some shock and adjustment ahead of me. Some say returning home is the hardest part. There is some truth to that.

Within the first few hours, after landing at SFO, I hopped onto an aging rail car with stained carpets and dirtied windows known as the Bay Area Rapid Transit system. Once the envy of the country, new and modern, compared to Singapore and Hong Kong and elsewhere, it felt outdated and stuffy. I thought of Thomas Friedman’s pithy summary that we have become “The United States of Deferred Maintenance,” whilst China is becoming “The People’s Republic of Deferred Gratification”. It saves, invests and builds; we spend, borrow and patch.

 Just visit LAX or JFK – cramped, dark, like an aging world fair local – and compare it to a modern Asian international airport. It was once the envy of the world; now it’s trying to hide its age with cosmetic fixes. In some ways, LAX is representative of America: living off prior investments and success, drawing down principle, and too short-sited or conceited to make investments in its future.

 When the train passed through Oakland, I paid witness to a racial incident between an African American young woman and a spiffy business man. Slurs were wielded. Many in the train car walked to another. The tension was palpable. Nearly eight months traveling in Asia, the only time I felt this kind of tension was in Lhasa, Tibet, among the locals and the Han Chinese. Racism exists everywhere, of course; what struck me was how palpable it was back in the States, despite all the political correctness, and here I was in the “progressive” region of Northern California.

 The first few times in the American supermarket was disconcerting. It is a super in every way. Rows upon rows of cereals (all with essentially the same ingredients, corn and corn sugar), frozen foods, potato chips and snack foods.  Not just one variety but tens of them, fully stocked, the store gigantic and, not unusual, mostly empty. You just don’t see this in Asia. What struck out was the consumption, the choices, the inefficiencies, the saturation of all things material.

 

Other impressions over the last few weeks: How expensive it is to live and eat in America; the diversity of our democracy; the isolated dens of individualism; the conspicuous wealth along side poverty; the comfort obliviousness living inside a superpower nation; the superficial television news and lack of global curiosity; the rise of  aggressive, hostile, reality denial politics who want to “take back” America, its racial undertones unmistakable.

 But then there are the upsides. The diversity, the open mindedness, the anything-is-possible ethos, the lack of government involvement; the freedom to live dreams independent of tradition and expectation; the world class research centers like Berkeley and Stanford; the judicial order and material wealth; the availability of most anything; the capitalist model, with its variety of goods at competitive prices.

 One World. Despite all our faults, America is a benchmark, Washington still the epicenter of global leadership. The fear of losing our greatness is, it turns out, as American as apple pie, a paranoid anxiety that goes back to our 1776 independence.

The Fragile Stability of SE Asia

A longstanding political crisis that has divided Thais into bitterly opposed camps became a national embarrassment and, with the deaths of protesters, tragedy . It’s also a testimony to the fragility of Southeast Asia, when you consider that socially stable, democratic, relatively prosperous Thailand is the kind of vacation destination deemed safe by the Secretary of State, and popular among Westerners. Of course, that’s not true at the moment.

The immediate crisis had been escalating since mid-March, when tens of thousands of members of the increasingly heterogeneous “United Front of Democracy against Dictatorship” began their takeover of the streets of Bangkok. The activists from all over Thailand carried their tents, sleeping-mats and food supplies into the area around the high-rent shopping-district of the Rajprasong intersection, which is Bangkok ground zero. The red-shirts' political representatives held intermittent talks with the government of Thailand's prime minister Abhisit Vejjajiva; but these broke down in the first days of April, and the protestors then vowed to stay in place until the parliament was dissolved and new elections announced. And they have.

The crackdown was launched three days after Abhisit declared a state of emergency, which provided the government with broad powers of arrest, censorship, and suspension of civil liberties. Among the first measures taken was the blocking or closure of independent media, including thirty-six websites; the popular bilingual news-site Prachatai was one of those affected. So much for democracy.

This prepared the ground for the more stringent actions on Bangkok's bloody Saturday night: the use of water-cannons, tear-gas, and live ammunition to force the red-shirts off the streets. Twenty-one people are reported to have been killed and over 800 injured. The government will do anything to avoid that from happening again.

Thailand now peers into the abyss. Thailand's crisis traces its deeper roots to the mid-2000s with the rise, fall and subsequent exile of Thaksin Shinawatra, the populist leader elected in 2001 and ousted in a military coup in 2006. The confrontation between red-shirted pro-Thaksin republicans with a political base in the rural poor versus yellow-shirted royalist conservatives backed by the urban middle and upper-classes - fails to convey the political heterogeneity that has been emerging under misleadingly unified banners. But there are other dynamics at play: the cross-class, cross-space, and formation of the red-shirted alliance in the streets of Bangkok, as well as those writing, posting, and otherwise supporting them elsewhere in Thailand and abroad.

The Thai word phrai has become an ubiquitous reference-point by red-shirt members of the UDD. Phrai can be rendered in English as “commoner”: it is a direct reference to the feudal era, which officially ended in 1932 with the transformation of Thailand from an absolute to constitutional monarchy. Thomas Fuller, the New York Times's Bangkok correspondent, criticized a popular red-shirt bumper-sticker which reads: “The blood of the phrai is worth nothing”. This may be “overblown rhetoric”, says Fuller. “There are many stories of upward mobility in Thailand and, despite the presence of tens of thousands of protesters, the anger has not translated into personal attacks on the wealthy. The main target of the protesters' ire seems to be the system: the perception that bureaucrats and the military serve the elite at the expense of the poor.”

 

It is class war, a byproduct of rapid development and unequal economic implications, exactly the situation Beijing fears. “The battle is between the army that supports the establishment, government and Bangkok's urban elite against the people from the provinces … It is a class war,” said a prominent University president.

The state’s use of violence to repress the red shirts has not succeeded; they remain in key locations throughout Bangkok, defying Abhisit Vejjajiva's demand that they evacuate the city's streets. The red shirts continue to call for the immediate resignation of the prime minister, the dissolution of parliament, and plans for new elections.

 

Thailand's crisis continues as the American State Department looks on with concern. If US-ally Thailand can’t be put in the “stable” category, who can?

Green Tech – Who Will Lead?

The “Great Game” of the 21st century will be energy and clean, fresh water. Beijing’s goal is to quadruple the economy but increase energy use by two-fold. To get even close will require innovation and technology. Who will lead? In China, green initiatives, innovation and investment comes from the top down, with little to no private or foreign investment. The firms behind green energy are state-owned energy enterprises. Beijing sees this correctly: as a national security issue. Their gains are impressive:

Wind Energy – China is #3. Manufactures include Sinovel Wind and Goldwind Science and Technology. Massive wind farms are going up in the remote West.

Solar – China is now the leading solar and solar water heater producer.  In  2001, China produced just 5 megawatts of solar cells; last year it produced 1,800 megawatts, a 300 time increase). Suntech are largest producer. It plans to build the world’s largest solar power plant in Inner Mongolia – deal between FirstSolar USA and Beijing. It will be the size of Manhattan and power 3 million homes!

And then there are simple sounding examples that Washington can’t seem to muster. For example, in 2008, China added a small tariff on grocery plastic bags and witnessed a 66 percent reduction. In 2005, it implemented an air conditioner temperature policy that thatr had similar affects.

There are downsides to this approach. Domestic part manufactures are known to knock off Western technology. There is huge overcapacity. Many environmental, health and safety standards and laws are not implemented or enforced. Business and individuals inevitably try to game the rules.

But still.

Thomas Freedman just opined on this subject, again:

"Being in China right now I am more convinced than ever that when historians look back at the end of the first decade of the 21st century, they will say that the most important thing to happen was not the Great Recession, but China’s Green Leap Forward. The Beijing leadership clearly understands that the E.T. — Energy Technology — revolution is both a necessity and an opportunity, and they do not intend to miss it."

America’s Economic Engine

I ponder the trajectory of emerging markets. The challenges are daunting. It’s a tough and uncertain road. What it is about America’s recipe that is the envy of the world?

 

· Innovation feeders in science and technology; best universities in the world

· risk capital = starting new companies.

· Meritocracy and diversity means anyone can become boss

· Religious zeal for competition and free markets, or mostly free

· Unparallel ability to turn academic theory into practical invention

· Higher education attracts global talent magnet

· Extraordinary dynamism and resilience to get back up and try again

· Regional, bottom up solutions

The Rise of the Rest

America has always assumed that the world would come to our banks, speak our language and list on our stock exchanges. Our threshold for understanding other cultures is low. We’re too often convinced we are “number one” George W. Bush’s conceit was its poster child, and cost us more in “brand equity” than we care to admit.

 

The old world was capital and labor. Today’s competitive advantage – and our biggest strength –  is realizing new ideas.  One economist is calling the twenty-first century the third industrial revolution. The first was the shift of labor from farms to factories; the second was the transition from manufacturing to services; the next is the emergence of a flat world, where national boundaries fall, brands go global and workers compete irrespective of geography.

 

We can no longer coast on the vapors of post-war 1950s hegemony. While we were partying, or trying to get rich the easy way, the world changed. Globalization is here.

America’s debilitating do-nothing political process

From two heavy weights –  Fareed Zakaria and Michael Porter –  apropos to what I am seeing, hearing and reading.

“The American political system has lost the ability for large-scale compromise, and it has lost the ability to accept some pain now for much gain later on…. It has developed a highly dysfunctional politics. An antiquated and overly rigid political system to begin with has been captured by money, special interests, a sensationist media, and ideological attack groups. The results is ceaseless, virulent debate about trivia-politics as theater- and very little substance, compromise, and action. A can-do country is now saddled with a do-nothing political process, designed for partisan battle rather than problem solving.” Fareed Zakaria

 

“America's political system, especially as it has evolved in recent times, almost guarantees an absence of strategic thinking at the federal level. Government leaders react to current events piecemeal, rather than developing a strategy that unfolds over years. Congress and the Executive Branch are organized around discrete policy areas, not around the overall goal of improving competitiveness. Neither candidate has put forward anything close to a strategy; rather, each has presented a set of disconnected policy proposals with political appeal. Both parties contribute to the problem by approaching the economy with long-held ideologies and policy positions, many of which no longer fit with today's reality.” -- Michael Porter.

“My fellow Americans: We are not who we think we are.”

So said Thomas Freedom in Hot, Flat and Crowded.

 “Our political system seems incapable of producing long-range answers to big problems or big opportunities. We have been consuming too much, saving too little, studying too laxly, and investing not nearly enough. And our political institutions are also the institutions we have to overcome.”

 I met a retired French business guy in Shanghai who was putting a thirty year endnote on his East Asia travels from the 1960s. He describes how, on his return to France, he and his spouse were greeted by their town’s mayor and encouraged to have children, buy a house and join the community. His employer was equally committed. I have heard other variations of this story from plenty of American baby boomers, too.

 

This is not to say that this is the way we should live. But it’s a nice option for those not skilled in “Brand Me” self-promotion and life-long skill development. It’s that in our rush to be free of 1950s conformity, in our quest to realize our potential, to put individualism ahead of all else, the world has changed. It’s time we look up and outward.

The Anxious American

Viewing the United States from Asia, it’s painfully clear that living in America can be dangerous to your health. Insecurity around jobs and America’s future is as high as ever. Citizens morphined by consumption rather than demanding systematic change. The threat of China and India and the “rise of the rest” immobilizes instead of emboldening  Washington. We are anxious that we may be losing our edge, but reform even after Obama is elusive.

There is no question that America’s dynamic economic boom-and-busts engine tears at the fabric of stability, family formation and long-term health. American have no credible social safety net.

Other than family and friends,  you’re on your own.

Traveler: Where are all the Americans?

Too many Americans think extended overseas travel is the exclusive realm of students, dropouts, or the rich.  I am not sure if this is why so few Americans leave its borders, or because we are always on the edge of financial anxiety. And this was well before the financial crisis of 2009.

Too few fail to appreciate the value of visiting other cultures and navigating the world. Travel need not be an escape from life. It can also be a form of education and development. And since we are so work-oriented, I would argue that it makes you a more attractive employee, too..

 

Consider some lessons: independence, flexibility, negotiation, planning, initiative, self-sufficiency and improvisation, to name a few.

 

The reality is that I meet long-term travelers all the time, many traveling for a year or more. They are young and old, singles and couples, men and women, packs and solo pilgrims. Most are traveling on a shoe-string, saved money back home, find odd jobs on the road, but they make it happen. They go for it. Germans, Japanese, Australian, Dutch, Chilean, British, Australians, Chinese.

 

But almost none are American! I am not sure what this says about American culture but I have a feeling it’s not good. So start saving and start planning!

In Contrast…A Once Humming American City

The news and television and books and interviews coalescence before my wonder-struck eyes – everything and everyone are related, borders nothing more than lines on a map.

Having just visited the Urban Planning Museum, I stumble upon this. Guess the city? Incubator of middle class prosperity, manufacturing power house, a technology and innovation leader, a net exporter, a source of national pride and jobs for hard working citizens. Today Berlin after the war. Read Bob Herbert timely piece on the loss of America’s quintessential middle-class symbol, Detroit, Michigan, U.S.A.

 

http://www.nytimes.com/2009/11/21/opinion/21herbert.html

America and China – A Relationship of Opposites

It is believed that when President Nixon first came to China, he saw an opportunity not a threat. Today might be different. China is our banker. China is our supplier. We are busy fighting wars on the other side of the world and our economic reform lectures aren’t getting the attention they once did. Our hand is weak, our options dwindling, our objectives not clear. We look weak in the eyes of Beijing. Obama’s visit was style over substance. Obama let the Chinese stage manage his visit.

Thomas Friedman hits home when he describes the China-America co-dependent relationship:

 “At its core, the China-America growth engine worked like this: We in America built more and more stores, to sell more and more stuff, made in more and more Chinese factories, powered by more and more coal, and all those sales produced more dollars, which China used to buy more and more U.S. Treasury Bills, which allowed the Federal Reserve to extend more and more easy credit to more and more banks, consumers, and businesses so that more and more Americans could purchase more and more homes, and all those sales drove home prices higher and higher, which made more and more Americans feel like they had more and more money to buy more and more stuff made in more and more Chinese factories powered by more and more coal, which earned China more and more dollars to buy more and more T-bills to be recirculated back to America to create more and more credit so more and more people could build more and more stores and buy more and more homes . . .”

Washington's Chinese Challenge

The challenge: To peacefully accommodate China’s legitimate rise, to deter it from aggression and global disruption. America’s worst fear would be a double-edge Cold War: the military we countered with the rise of the Soviet Union, and the economic fear of Japan (before it imploded). We need to sustain our economic and technological superiority because that is the cause of our power. And we need a public relations campaign; according to polls, the Chinese have an unfavorable opinion of Americans as selfish, greedy, lazy, and dishonest.

But with the American economy in the slumps, and stymied by two wars, and China plowing forward, and natural resources war-like concerns for both, the relationship is likely to become more tense, not less. 

The Dragon's Swagger