The World Is Flat (45 page)

I fear, though, that things will have to get worse before they get better. As Judy Estrin said, it will probably take a crisis. I would simply add: The crisis is already here. It is just playing out in slow motion. The flattening of the world is moving ahead apace, and barring war or some catastrophic terrorist event, nothing is going to stop it. But what can happen is a decline in our standard of living, if more Americans are not empowered and educated to participate in a world where all the knowledge centers are being connected. We have within our society all the ingredients for American individuals to thrive in this world, but if we squander those ingredients, we will stagnate.

I repeat: This is not a test. This is a crisis, and as Paul Romer has so perceptively warned, “A crisis is a terrible thing to waste.”

It's not that we are becoming more Anglo-Saxon. It's that we are having an encounter with reality.

—Frank Schirrmacher, publisher of the German newspaper Frankfurter Allgemeine Zeitung, commenting to The New York Times about the need for German workers to retool and work longer hours

Seek knowledge even unto China.

—saying of the Prophet Muhammad

The more I worked on this book, the more I found myself asking people I met around the world where they were when they first discovered that the world was flat.

In the space of two weeks, I got two revealing answers, one from Mexico, one from Egypt. I was in Mexico City in the spring of 2004, and I put the question on the table during lunch with a few Mexican journalist colleagues. One of them said he realized that he was living in a new world when he started seeing reports appearing in the Mexican media and on the Internet that some statuettes of Mexico's patron saint, the Virgin of Guadalupe, were being imported into Mexico from China, probably via ports in California. When you are Mexico and your claim to fame is that you are a low-wage manufacturing country, and some of your people are importing statuettes of your own patron saint from China, because China can make them and ship them all the way across the Pacific more cheaply than you can produce them, you are living in a flat world.

You've also got a problem. Over at the Central Bank of Mexico, I asked its governor, Guillermo Ortiz, whether he was aware of this issue. He rolled his eyes and told me that for some time now he could feel the competitive playing field being leveled-and that Mexico was losing some of its natural geographic advantages with the U.S. market-by just staring at the numbers on his computer screen. “We started looking at the numbers in 2001 -it was the first year in two decades that [Mexico's] exports to the U.S. declined,” said Ortiz. “That was a real shock. We started reducing our gains in market share and then started losing them. We said that there is a real change here... And it was about China.”

China is such a powerhouse of low-cost manufacturing that even though the NAFTA accord has given Mexico a leg up with the United States, and even though Mexico is right next door to us, China in 2003 replaced Mexico as the number two exporter to the United States. (Canada remains number one.) Though Mexico still has a strong position in big-ticket exports that are costly to ship, such as cars, auto parts, and refrigerators, China is coming on strong and has already displaced Mexico in areas such as computer parts, electrical components, toys, textiles, sporting goods, and tennis shoes. But what's even worse for Mexico is that China is displacing some Mexican companies in Mexico, where Chinese-made clothing and toys are now showing up on store shelves everywhere. No wonder a Mexican journalist told me about the day he interviewed a Chinese central bank official, who told him something about China's relationship with America that really rattled him: “First we were afraid of the wolf, then we wanted to dance with the wolf, and now we want to be the wolf.”

A few days after returning from Mexico, I had breakfast in Washington with a friend from Egypt, Lamees El-Hadidy, a longtime business reporter in Cairo. Naturally I asked her where she was when she discovered the world was flat. She answered that it was a just few weeks earlier, during the Muslim holy month of Ramadan. She had done a story for CNBC Arabiya Television about the colorful lanterns called fawanis, each with a burning candle inside, that Egyptian schoolchildren traditionally carried around during Ramadan, a tradition dating back centuries to the Fatimid period in Egypt. Kids swing the lanterns and sing songs, and people give them candy or gifts, as in America on Halloween. For centuries, small, low-wage workshops in Cairo's older neighborhoods have manufactured these lanterns-until the last few years.

That was when plastic Chinese-made Ramadan lanterns, each with a battery-powered light instead of a candle, began flooding the market, crippling the traditional Egyptian workshops. Said Lamees, “They are invading our tradition -in an innovative way-and we are doing nothing about it... These lanterns come out of our tradition, our soul, but [the Chinese versions] are more creative and advanced than the Egyptian ones.” Lamees said that when she asked Egyptians, “Do you know where these are made?,” they would all answer no. Then they would turn the lamps over and see that they came from China.

Many mothers, like Lamees, though, appreciated the fact that the Chinese versions are safer than the traditional Egyptian ones, which are made with sharp metal edges and glass, and usually still use candles. The Chinese versions are made of plastic and feature flashing lights and have an embedded microchip that plays traditional Egyptian Ramadan tunes and even the theme song to the popular Ramadan TV cartoon series Bakkar. As Business Monthly, published by the American Chamber of Commerce in Egypt, reported in its December 2001 issue, Chinese importers “are pitted not only against each other, but also against the several-hundred-year-old Egyptian industry. But the Chinese models are destined to prevail, according to [a] famous importer, Taha Zayat. Imports have definitely cut down on sales of traditional fawanis,' he said. 'Of all fawanis on the market, I don't think that more than 5 percent are now made in Egypt.' People with ties to the Egyptian [fawanis] industry believe China has a clear advantage over Egypt. With its superior technology, they said, China can make mass quantities, which helps to keep prices relatively low. Egypt's traditional [fawanis] industry, by contrast, is characterized by a series of workshops specialized in different stages of the production process. Glassmakers, painters, welders and metal craftsmen all have their role to play. 'There will always be fawanis in Ramadan, but in the future I think Egyptian-made ones could become extinct/ Zayat said. 'There is no way they can ever compete with things made in China.'”

Think how crazy that statement is: Egypt has masses of low-wage workers, like China. It sits right next to Europe, on the Suez Canal. It could be and should be the Taiwan of the eastern Mediterranean, but instead it is throwing in the towel to atheistic China on the manufacture of one of Muslim Egypt's most cherished cultural artifacts. Ibrahim El Esway, one of the main importers from China of fawanis, gave The Business Monthly a tour of his warehouse in the Egyptian town of Muski: He had imported sixteen different models of Ramadan lanterns from China in 2004. “Amid the crowds at Muski, [El Esway] gestured to one of his employees, who promptly opened a dust-covered box and pulled out a plastic fawanis shaped like the head of Simba, from The Lion King. 'This is the first model we imported back in 1994,' he said. He switched it on. As the blue-colored lion's head lit up, the song 'It's a Small World' rang out.”

Introspection

The previous section of this book looked at how individuals, particularly Americans, should think about meeting the challenge posed by the flattening of the world. This chapter focuses on what sort of policies developing countries need to undertake in order to create the right environment for their companies and entrepreneurs to thrive in a flat world, although many of the things I am about to say apply to many developed countries as well.

When developing countries start thinking about the challenge of flatism, the first thing they need to do is engage in some brutally honest introspection. A country, its people and leaders alike, has to be honest with itself and look clearly at exactly where it stands in relation to other countries and in relation to the ten flatteners. It has to ask itself, “To what extent is my country advancing or being left behind by the flattening of the world, and to what extent is it adapting to and taking advantage of all the new platforms for collaboration and competition?” As that Chinese banking official boasted to my Mexican colleague, China is the wolf. Of all the ten flatteners, the entry of China into the world market is the most important for developing countries, and for many developed countries. China can do high-quality low-cost manufacturing better than any other country, and increasingly, it also can do high-quality higher-cost manufacturing. With China and the other nine flatteners coming on so strong, no country today can afford to be anything less than brutally honest with itself.

To that end, I believe that what the world needs today is a club that would be modeled after Alcoholics Anonymous (A.A.). It would be called Developing Countries Anonymous (D.C.A.). And just as at the first A.A. meeting you attend you have to stand up and say, “My name is Thomas Friedman and I'm an alcoholic,” so at Developing Countries Anonymous, countries would have to stand up at their first meeting and say, “My name is Syria and I'm underdeveloped.” Or “My name is Argentina and I'm underachieving. I have not lived up to my potential.”

Every country needs “the ability to make your own introspection,” since “no country develops without going through an X-ray of where you are and where your limits are,” said Luis de la Calle, one of Mexico's chief NAFTA negotiators. Countries that fall off the development wagon are a bit like drunks; to get back on they have to learn to see themselves as they really are. Development is a voluntary process. You need a positive decision to make the right steps, but it starts with introspection.

I Can Get It for You Wholesale

During the late 1970s, but particularly after the fall of the Berlin Wall, a lot of countries started to pursue development in a new way through a process that I call reform wholesale. The era of Globalization 2.0, when the world shrank from a size medium to a size small, was the era of reform wholesale, an era of broad macroeconomic reform. These wholesale reforms were initiated by a small handful of leaders in countries like China, Russia, Mexico, Brazil, and India. These small groups of reformers often relied on the leverage of authoritarian political systems to unleash the state-smothered market forces in their societies. They pushed their countries into more export-oriented, free-market strategies-based on privatization of state companies, deregulation of financial markets, currency adjustments, foreign direct investment, shrinking subsidies, lowering of protectionist tariff barriers, and introduction of more flexible labor laws-from the top down without ever really asking the people. Ernesto Zedillo, who served as president of Mexico from 1994 to 2000 and was finance minister before that, once remarked to me that all the decisions to open the Mexican economy were taken by three people. How many people do you suppose Deng Xiaoping consulted before he declared, “To get rich is glorious,” and opened the Chinese economy, or when he dismissed those who questioned China's move from communism to free markets by saying that what mattered was jobs and incomes, not ideology? Deng tossed over decades of Communist ideology with one sentence: “Black cat, white cat, all that matters is that it catches mice.” In 1991, when India's finance minister, Manmohan Singh, took the first tentative steps to open India's economy to more foreign trade, investment, and competition, it was a result not of some considered national debate and dialogue, but of the fact that India's economy at that moment was so sclerotic, so unappealing to foreign investors, that it had almost run out of foreign currency. When Mikhail Gorbachev started dabbling with perestroika, it was with his back up against the Kremlin wall and with few allies in the Soviet leadership. The same was true of Margaret Thatcher when she took on the striking coal miners' union in 1984 and forced reform wholesale onto the sagging British economy.

What all these leaders confronted was the irrefutable fact that more open and competitive markets are the only sustainable vehicle for growing a nation out of poverty, because they are the only guarantee that new ideas, technologies, and best practices are easily flowing into your country and that private enterprises, and even government, have the competitive incentive and flexibility to adopt those new ideas and turn them into jobs and products. This is why the nonglobalizing countries, those that refused to do any reform wholesale-North Korea, for instance- actually saw their per capita GDP growth shrink in the 1990s, while countries that moved from a more socialist model to a globalizing model saw their per capita GDP grow in the 1990s. As David Dollar and Art Kray conclude in their book Trade, Growth, and Poverty, economic growth and trade remain the best antipoverty program in the world.

The World Bank reported that in 1990 there were roughly 375 million people in China living in extreme poverty, on less than $ 1 per day. By 2001, there were 212 million Chinese living in extreme poverty, and by 2015, if current trends hold, there will be only 16 million living on less than $1 a day. In South Asia-primarily India, Pakistan, and Bangladesh-the numbers go from 462 million in 1990 living on less than $1 a day down to 431 million by 2001 and down to 216 million in 2015. In sub-Saharan Africa, by contrast, where globalization has been slow to take hold, there were 227 million people living on less than $1 a day in 1990, 313 million in 2001, and an expected 340 million by 2015.

The problem for any globalizing country lies in thinking you can stop with reform wholesale. In the 1990s, some countries thought that if you got your ten commandments of reform wholesale right-thou shall privatize state-owned industries, thou shall deregulate utilities, thou shall lower tariffs and encourage export industries, etc.-you had a successful development strategy. But as the world started to get smaller and flatter-enabling China to compete everywhere with everyone on a broad range of manufactured products, enabling India to export its brainpower everywhere, enabling corporations to outsource any task anywhere, and enabling individuals to compete globally as never before -reform wholesale was no longer sufficient to keep countries on a sustainable growth path.