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Deleted ScenesDeleted Scene #8Chapter Four: The Core and GapSection: The Flow of Money, or Why We Won't Be Going to War With ChinaCommentary: This eighth "deleted scene" was cut by Mark Warren because he felt it just made the section go on and on without extending the argument enough. Plus, he really loved the idea of ending the section on the great line, "And that, my friends, is how you make a roomful of Cold Warriors cry." I include it here for the sake of completeness only. It's good but not great stuff. I like it because it captures a sequence of argument that I long used in the brief: we need to change the FDI Triad into an FDI Quad. Read it to find out what I mean by that. Also check out the NewRuleSets.Project FDI report to see how we generated the data behind this concept. Here are two slides that would have gone with this section:
Deleted Scene: The Deleted Back Half of the Section on FDI[TEXT BEGINS] But that logic is exactly what should drive our approach to China over the coming years, because, as goes China, so goes the rest of Developing Asia. Developing Asia (everyone besides Japan, Australia and New Zealand) is nothing less than half the global population. That is what is at stake here -- half the world. American foreign policy experts are always going on and on about a "Marshall Plan" to fix this or that problem in the world system, as if the U.S. federal budget is ever going to support a resource flow of that magnitude ever again (remember the bit about Grandpa voting?). But what most of these strategists seem to have missed is the private-sector Marshall Plan that's been going on for two decades and counting. Heck, I don't blame them, even Wall Street took until the end of the 1980s to even come up with a name for this process -- Emerging Markets. Who has funded this private-sector Marshall Plan? Well, I guess you could say you and I have, working through all those mutual funds in which we invested over the years, as our 401k's struggled to generate all those nest eggs. All that money needed to find the best possible long-term use, and thanks to the hidden hand of the market, a lot of that money found its way to Developing Asia over the past quarter-century. Put in that light, you could say that all those investments really fueled a big part of the historical expansion of globalization from its original Triad of America, Western Europe and Japan to an emerging Quad of North America, Europe (both old and new), Japan, and Developing Asia. The importance of this momentous but ongoing historical achievement cannot be overstated: the shift from Globalization II to Globalization III is a shift from a small minority of the world (basically one-tenth) enjoying globalization's benefits to roughly two-thirds of the planet joining the party. Globalization I was built on the Triad of the United States, what we now call the European Union, and Japan. Currently, that is 12 percent of the population controlling over two-thirds of the global GDP and four-fifths of FDI flows. But a Quad of NAFTA, the EU, Japan, and Developing Asia would expand the population pie quite a bit. Now we would be talking about two-thirds of the population, over four-fifths of the global GDP, and over 90 percent of all FDI flows. So tell me, if you are a George Kennan, or any one of the other "wise men" from that time long ago, and you were smart enough back in the late 1940s to target Europe and Japan for integration into a revived global economy, who would you target today? Would you target half the world's population in Developing Asia, where economies are growing rapidly and energy demands are skyrocketing? Or would you, at least on a security basis, work to keep such potential "peer competitors" at arm's length? Ah, but you -- or any anti-globalization protestor worth his salt -- might reply, "All that development in Asia is nothing more than the West exploiting cheap labor to assemble cheap goods. There's no real development there. They're not really catching up at all!" And you would be wrong. What has happening in these "emerging markets" over the past generation has been nothing less than spectacular. Standards of living have increased, absolute poverty has decreased, and inequality of income has -- in most instances -- actually lessened. The big exception on that last one is China. Thanks to Mao's insistence that everyone in China be equally poor in the 1960s, inequality there has risen quite a bit thanks to all the development that has happened since. Most importantly, the nature of these economies has changed fundamentally from a dependence on raw materials and processed commodities as major exports to manufacture goods as the overwhelming portion of exports. In 1980, manufactured goods accounted for only 25 percent of all exports from those two dozen "globalizers" identified by the World Bank as constituting the bulk of emerging markets. By 2000, that share stood at 80 percent.1 That, my friends, is serious integration of half the world's population, bringing them from the Gap to the Core. So when the experts want to scare you about the huge divide between the "haves" and the "have nots," just remember that the real dividing line is between the connected and disconnected. If we were still stuck in Globalization II, then the anti-globalization types would have a much better point. They would tell you that there is basically six people in the world (representing 6 billion): one old white guy with lots of money and no kids, and five women of color with lots of kids but no money -- Mr. Have and the Mrs. Have Nots. But we are not stuck in Globalization II, thanks in no small measure to foreign direct investment flows. Globalization III says, yes, there are six people in the world: four individuals of all shades that are globalizing their economies (the Core), and two individuals of color that are not (the Gap). The question remains, "How do we make globalization global?" It is not about taking from the Haves and giving to the Have Nots. It is about shrinking the Gap and connecting the disconnected. This is not a sit-at-home-and-wait-until-it's-just-right sort of strategy, this is a get-out-there-now-and-make-it-happen sort of strategy. How FDI facilitates rule set change in emerging markets shows this to be the case. More than a few development experts have argued over the years that a developing market needs to radically overhaul its legal and financial rule sets before FDI will flow in significant numbers. This is the sort of "harsh medicine" many advocated for former Soviet bloc states as they sought to reform across the nineties. But as historical research now shows, FDI does not sit back passively and wait for perfect investment situations to develop. According to a recent Carnegie Endowment for International Peace study, rather than being "passive spectators," foreign investors are "a dynamic force in the forefront of the push for change and an agent for such reform. This phenomenon has been largely misunderstood by the international development community and ignored in the prevailing literature."2 That bad conventional wisdom in the development community fuels a lot of the strategic pessimism in the military community. Because it is assumed that countries need to become near models of rule-set proficiency prior to attracting any flow of FDI, Pentagon strategists tend to write off too much of the world to chronic "have not" status. But more than that, they tend to miss all the dramatic rule set change that has occurred in a potential "near peer" like China, preferring to focus solely on the continuing rule of the communist party there, which -- by the way -- recently began accepting purely capitalist businessmen as members. Does the way the Pentagon views the world have any impact on how Wall Street invests? After all, this private-sector Marshall Plan I cite has proceeded despite all that -- at least until 9/11 -- Pentagon planning on future wars in Asia. Clearly, Wall Street pays no attention to these Cold Warrior wannabes. While not wanting to overstate the case, it is important to remember that investment "follows the flag" even more than trade. That Cold War triad of America, Western Europe and Japan? You will find the two strongest military alliances in the world inside that Triad, plus about half the world's cumulative stock of FDI cementing those ties. Military alliances are built around shared fates and shared visions of the future. There is the old saying that friends come and go, but enemies accumulate. Well, history shows that trade partners come and go, but FDI and military alliances accumulate. When trade relationships sour, both sides can move on, but when investment relationships are betrayed, then one side can get much damaged. If you don't believe me, then talk to a Turkish bond trader about what happened after Ankara decided to say no to Washington's request to launch part of the invasion of Iraq from its soil.3 Trade is a just a transaction, but investment is a bond, a relationship, a promise. Foreign direct investment is about who really belongs in the Core and who is too "culturally different" -- to use Valery Giscard d'Estaing's infamous description of Turkey.4 Perceptions matter greatly here. When China is constantly touted by Pentagon strategists as a future potential threat, they are saying it does not belong and will not belong -- no matter how much it develops. That is simply wrong, of course, and it reflects the same mindset that once claimed a post-Nazi Germany would never fit it, or a postwar Japan, or a post-communist Russia. This Darwinian pessimism is certainly not justified by China's economic development and significant political change over the past decade. Yet it is perplexing how little American investors take advantage of "rising" Asia. Developing Asia represents half the world's population, the fastest-growing part of the global economy, and accounts for one-quarter of global production. Yet, in the words of investment expert James Glassman, "Asia gets almost no respect from U.S. investors." Japan's lengthy slump, he notes, is a big part of the problem. So is the misperception created by most "international funds" that buy European stocks and little else.5 But I think the main reason why American investors do not put their money in Asia is because they do not yet see Asia sharing a common future with the United States, unlike the more familiar Europe. I think this perception is based in large part on the way our political leadership has consistently cast China as the next great military threat, when in reality most of what we fear is its economic competitiveness -- not to mention its cheap labor. Amazingly, even Russia seems to have a better reputation now as a non-peer competitor, largely because its economy tanked several years ago. But that would seem to indicate that we are keeping China in our military sights primarily because of its economic successes, which are due in large part because their leaders have sought to integrate the national economy with the global economy. Tell me how whacked that is. The continued integration of Developing Asia into the Functioning Core is the "baby" we cannot throw out with the "bath water" known as the global war on terrorism. For all the right reasons, America should see increasing commonality with China over the threats posed by disconnectedness and the forces that promote it. Those forces do not need to be terrorists per se, because an epidemic like SARS can just as easily teach China the dangers of not embracing sufficient rule set change to deal with all their growing connectivity to the outside world. As these shared lessons and shared experiences accumulate, America's strategic military planners need to synch up their own internal rule sets with the emerging global rule set that says China has no choice but to embrace the Core. The money must flow because the energy must flow, and the energy must flow because China must grow. As my mentor Phil Ginsberg might say, "It's as simple as that." [1] Data culled from Collier and Dollar, Globalization, Growth, and Poverty, chapter ? (must look up in copy at office) [2] John Hewko, Foreign Direct Investment: Does the Rule of Law Matter? Carnegie Endowment for International Peace, Rule of Law Series Working Paper Number 26 (April 2002), p. 5. [3] Landon Thomas Jr., "U.S. Disfavor Drains Turkish Economy," The New York Times, 25 March 2003. [4] Chris Morris, "The changing face of the EU," BBC News, 14 November 2002, posted online @ <http://news.bbc.co.uk/1/hi/world/europe/2471789.stm>. [5] James K. Glassman, "Asia Major-But Ignored," The Washington Post, 16 February 2003. [TEXT ENDS] |
Putnam, 2004 |
