- The Curtain Rises
- The World as a Stage
- A Speedy Global Tour
- What Is the Global Economy?
- Notes
This chapter is from the book
This chapter is from the book
This chapter is from the book
What Is the Global Economy?
What are the characteristics of this new global economy relished in places as diverse as Dalian, Dublin, and Helsinki? Terminology is always an inexact science. Every term is a linguistic sieve. So, before attempting to define it, let's just say at the outset what the global economy is not.
What can be said is that the global economy should be differentiated from the notion of the "new economy" that sprang up in the late 1990s. This trumpeted a brave new economic order based on the fantastic technological advances unleashed through the Internet. It was a model that mistakenly saw a parallel and unstoppable rise in productivity. The wheels fell off this conceptual wagon in April 2000 with the sudden decline in technology stocks.
Apart from its manifest intellectual weaknesses, this "new economy" has very little in common with what we will talk about. The global economy is based on a world in which borderlessness is no longer a dream or an option, but a reality. This has been helped by the cyber-revolution, but it is not the same phenomenon as the cyber-revolution itself. Multiples of stock values, as well as derivatives and financially engineered products, also matter far more in the global economy.
The global economy has its own dynamic and its own logic. It is no longer theory; it is reality. It is going to grow stronger rather than weaker. It will feed on its own strengths. It is irresistible, and it is destined to have an impact on everybody&8212;businessmen, politicians, and bureaucrats, but, most important, ordinary citizens. There is no use complaining about it or wishing it to go away. People will have to learn to live with it.
The emphasis here is on learning because success and even survival depend on acquiring novel outlooks and relationships with the rest of the world. This book hopefully goes someway toward pointing a route toward these new outlooks and relationships.
Some people and countries might be determined to fight against the reality of the global economy, using the old mind maps and the old paradigms. However, the cost in economic and especially human terms will be enormous. Progress is as inevitable as death and taxes.
Traditional nation-states and national governments face a great challenge. Some seem to want to approach this new world with one foot stuck stubbornly in the shore of the past for support while they gingerly test the water with the toes on the other.
Some are better placed to take advantage of the global economy's opportunities. History favored the United States by providing it with a truly federal form of government. As a result, states such as North and South Carolina, known as the Carolinas, can pursue an innovative economic agenda without risk of being stymied by central government. The battles between state and center have been fought over and resolved. The constituent states are each well placed to take advantage of the global economy. This does not mean that all 50 states do so. Some still seem to be wedded to a past based on Canute-like protection of "strategic" economic sectors.
Other federal states in the world do not allow their constituent members anything like real autonomy, and the central government maintains a tight rein on regional developments. Examples include India and Brazil, two of the BRICs (Brazil, Russia, India, and China), according to Morgan-Stanley's new jargon of promising new economies. In terms of the global economy, these nations are still asleep as a whole nation. Nevertheless, some of their regions have begun to take their places on the global stage. China adopts a somewhat schizophrenic policy; in theory, it follows a rigid, centralized political formula. In practice, unprecedented economic autonomy has been allowed to regions and cities, particularly since Zhu Rongji's reform of 1998.
But at the opposite extreme, there are states such as Japan, Russia, and Indonesia, which maintain centrality of decision making in theory and practice. No region succeeds because no region is permitted to succeed independently of the rest of the state. Their central governments are jealous of allowing any directional role to escape the center. They are swimming against a tide that could yet inundate them. Of the BRICs, only China has the governance structure to help its regions to work interactively with the global economy. Others have a long way to go before their central government really wakes up to the calls of the rest of the world.
The task of describing what this new world is may be difficult. If all the news stories and clippings about globalization are assembled, the integrated picture that emerges is distorted. Not all the components fit neatly together; it is a wild, abstract mosaic rather than a jigsaw.
But let us forget the scare stories and the merchants of bad news, and instead try and see what we can say positively and with certainty about the characteristics of the global economy: It has innate characteristics, which I list in no order of importance.
Borderless
First, as I have long argued, national borders are far less constrictive than they once were. Some of this has been thanks to technology, while some has been the result of international and bilateral agreements, especially in the area of trade. The world is an increasingly borderless place. Tariffs are evaporating as countries realize they need each other to survive economically.
It is not yet completely border free, as nation-states still have reasons to maintain controls on the movement of people and goods in the interest of security and public safety. But in terms of four key factors of business life, the world has already attained the position of being effectively without borders. These business factors I have labeled the four C's: communications, capital, corporations, and consumers.[6]
Effective communications always depend on the nonexistence of borders. It was one thing when communication was predominantly physical. If a person wanted to go from A to B or send something there, be it a letter or a product, the inert force of gravity often slowed the process down. Slowness of movement was further added to by border checkpoints, the need for visas, and passport control, not to mention custom and excise inspection. People viewed these as obstacles and deterrents. But technology spurred an improvement. Telephone lines allowed a person to speak with someone directly on the other side of the world, without having to go through a host of intermediate exchanges. Once such lines of telecommunication, existed they could be used for data transfer. Improvements also occurred in the production of cables using fiber-optic technology. A barrier to communications remained while the conduits of this communication still had to pass along wires, which, in turn, had to be laid across mountains or oceans. The latest technological advances do away with wires and their costly installation and maintenance. When data is carried by radio frequencies, it is absurd to believe that lines drawn on maps can have any impact on its movements.
Telecommunication benefited from a process of deregulation in the 1980s, and many former state monopolies were privatized, thereby increasing competition and lowering costs for consumers. Domestic markets that had formerly been imprisoned in the clutches of national communications monopolies were opened up. Many communications companies co-operated and entered into alliances; others merged so that the telecommunications world was changed from a patchwork of state monopolies into a far more dynamic and colorful kaleidoscope that did not respect national borders. Many telecom operators, including TeliaSonera, Vodafone, and Telefonica, have become truly global.
Yet it was the development of the Internet from the mid-1990s onward that has probably had the greatest impact on making the world of communications truly borderless. This is a technology that is widely available, accessible from personal computers anywhere. Traffic passes through it oblivious of borders.
The second C, capital, is also a beneficiary of a borderless world. This, too, has been aided by deregulation of financial markets. It has also been assisted by the position of the U.S. dollar as a monetary platform. Not only is it the major trading and settlement currency, but it is also the currency of choice for many savers throughout the world. In most developed countries, the aging population save money for their retirement. The trouble is that no OECD member country offers adequate returns for an investment at home. This is one of the biggest reasons why a massive cross-border migration of capital, both short and long term, has occurred.
Some corporations have successfully responded to the borderless economy by shedding the trappings of the nation-state that hindered their self-awareness. It was far too common in the past for a successful corporation to identify closely with a "home base," a company headquarters, or a corporate "home town, where it all began." Some of this might have been sentimental, but it was outdated if the corporation saw the world as its marketplace. Improvements in telecommunications mean that companies do not feel tied down to a corporate headquarters in a certain city. If circumstances demand it, they might even dispense with legal ties to their home bases by reregistering in another, more favorable location.
The last two decades have seen a remarkable decomposition of corporate functions, ranging from R&D and manufacturing to sales/marketing and financing. It is now common within an individual company for these functions to be located across national borders&8212;for example, R&D in Switzerland, engineering in India, manufacturing in China, financing in London, while the marketing function and HQ remain in the United States. More recently, indirect work has been outsourced: Witness the growth in call centers in India and elsewhere, and the outsourcing of logistics to specialists such as FedEx, DHL, and UPS.
It is in terms of the last C, consumers, that the borderless element of the global economy has made itself felt most keenly. Consumers have the ability to do what they have been urged to do many times: shop around. The Internet gives consumers the ability to compare products and prices and make a much more informed choice more easily. Platforms for paying by credit card then allow the purchase to be made, processed, and delivered. There might still be some who are emotionally tied to the ideal of the nation-state, who support demagogues seeking greater protection of domestic businesses and jobs, but when they are presented with a choice of two similar products, one (product A) available locally at a price considerably higher than product B, which originates elsewhere and still enjoys a price advantage when delivery charges are added on, only the most die-hard partisan of the nation-state will opt for the pricey product A. The reality is that it is almost impossible to buy a shirt that is genuinely "Made in America." Its fabric may come from Egypt, threads from Japan, and buttons from the Philippines. If only the sewing process takes place in the United States, how American does that make the finished shirt?
Invisible
Observers might be forgiven for not fully realizing the potency and prevalence of the global economy. It is largely invisible. It might be better said that it is not totally visible to the naked eye. This should not be taken as implying that it is secretive or reclusive. It is because the actions that it performs often take place not on the streets or the debating chambers of national parliaments, but on computer terminals. One of the mechanisms whose development has enabled speedy cash transfer is a piece of plastic: the credit card. It is the preferred means of carrying and spending money for hundreds of millions of consumers. Yet the money that credit-card holders spend is never seen. Sometimes, payment occurs so quickly that not even the most sophisticated camera with an incredibly high shutter speed could record it.
Some of the most important developments are earth-shaking in their potential, but their implications are not fully understood outside of a small circle of players. As a result, they are not headline news; they are lucky to feature in the news at all. As for the print media, they may be buried rather inconspicuously in the business pages.
Consider a few aspects of this invisible world. Transactions and settlements of money now take place mostly on and through computers. Some products are also purchased in the plaza known as B2B and B2C trade exchanges, or as C2C auctions. Most ATMs around the world spit out local currency if you use your home country cash/credit card with Plus or Cirrus membership. There is no way for the government to know how much cash you have withdrawn abroad or how much you have spent with a credit card to purchase goods and services across national borders.
Cyber-Connected
The global economy would not be possible, or even comprehensible, without cybertechnology allowing large amounts of data to be transferred incredibly quickly. It would not be possible without the corresponding drop in technology prices. The Internet is only the most public part of this. Today, the Internet protocol (IP) is capable of handling transmission of not only data, but also images, voice, music, and videos. Voice over IP (VoIP) is rapidly making inroads into the world of traditional telecom providers, but music and movies are also downloaded across national borders, as long as there is a line with IP routers. Everything and everyone connects.
Outsourcing, for example, rests on the capability to model new processes and instantly deliver critical software components, all within minutes of a conversation. The success of Indian software houses, such as Infosys, WiPro, HCL, Tata Information Services, and others, underscores the fact that 24x7 development is no longer a wish, but a reality.
Measured in Multiples
Money makes the world go around. And so the role of money in a global economy must be important. Money is no longer seen only as a unit of value in the short term. The late 1990s and the first years of the new century have witnessed a number of corporate takeovers and restructurings that would have been viewed as surreal two decades earlier: In these, a company that had only recently emerged and maybe was not actually profitable successfully acquired a much larger, longer-established, and seemingly solid part of the corporate landscape. None of this was possible without those who assess corporate value looking at a far bigger picture, not one based on the here and now alone and the currently quoted price on whatever share index they chose, but on what the situation was likely to be in 10 or 20 years, and on how this was reflected in price/earnings ratios.
Multiples are signs given to the management by the shareholders to shoot at the business opportunities on the horizon. If the management does nothing other than business as usual, the multiple will come down, reflecting the disappointment of the ammunition givers. Multiples are fictitious, in that they often do not reflect corporate value, but they express an expectation. This can become reality if a company is bought or a new investment is made to fully utilize the multiples.
So the global economy is borderless, invisible, cyberconnected, and measured in multiples. Many of these elements are self-nurturing: They feed off one another. They all involve taking a leap, if only an intellectual leap at first, into uncharted waters.
This global economy is in its infancy. Unfortunately, this description contains an analogy with human development, from the state of the infant, the child, and the uninformed. It might be better to say that the global economy is in the early stages of development, but there is nothing childlike or uninformed about it. It has not emerged like an extraterrestrial from on board a meteorite. It has entered the world through the actions and intellect of human beings. It has not been foisted onto the world by some small, nefarious network intent on world domination. It has developed collectively. And, as we will see, it promises to be beneficial to the world at large.
The excessive capital in developed countries is looking for opportunities to breed. If you understand the logic of the global economy, you can attract companies, customers, and capital to your region or company from the rest of the world. You do not have to be born rich or be born in a wealthy country to prosper. All four C's can and will come to you if you have the right recipe. Alternatively, if your logic and systems are out of sync with the global economy, the four C's will evaporate, and you will not have an opportunity to perform on the global stage.
To reap the benefits of the global economy, join me to better understand how the plot unfolds. Let us begin with the opening night.