Every few years a book comes along which perfectly expresses the moment's conventional wisdom-which says pretty much what everybody else in the chattering classes is saying, but does it in a way which manages to sound fresh and profound. Notable examples are Paul Kennedy's The Rise and Fall of the Great Powers (1988), with its theme of "imperial overstretch," of a US declining under the weight of its commitments; or Lester Thurow's Head to Head (1993), with its vision of a desperate commercial struggle among the advanced nations, and of a US unable to compete because of its na? faith in free markets. It is already clear that Thomas Friedman's The Lexus and the Olive Tree-which tells the story of the new global economy, and of a US triumphant because it is the nation best suited to capitalise on it-is the latest in the series. Will Friedman's vision date as quickly as those of his predecessors?
It is possible to summarise fairly quickly what Friedman has to say, because it is what you read in every issue of Business Week or The Economist. Information technology, he tells us, has made the world a small place, in which ideas and money move almost instantly across borders. This smaller world rewards countries and societies which meet its needs-namely, those with strong property rights, open minds and a flexible attitude-but it inflicts devastating punishment on those who fail to live up to global standards. Old-fashioned power politics is becoming obsolete because it conflicts with the imperatives of global capitalism. We are heading for a world which is basically democratic, because "you can't keep 'em down on the farm" once they have internet access, and basically peaceful, because George Soros will pull out his money if you rattle your sabre. This story is told via hundreds of anecdotes, most of them involving the author. But has Friedman got it right?
We might start with something that he almost certainly has wrong. If there is one single fact which transformed America's image of its place in the world, which made earlier vintage global visions look so foolish in retrospect, it is the contrast between America's unexpected prosperity and Japan's even more unexpected economic malaise. There is no careful discussion of what went wrong with Japan, but the clear implication of Friedman's various parables is that Japan is in trouble because it is hidebound and inefficient, and this makes it unfit for the global economy. Yet, as Friedman himself points out, Japan's export sector remains world-class. (He even names a symbol of Japanese manufacturing prowess, rather than some American speciality such as software or entertainment, in the book's title.) What has faltered in Japan is production for the domestic market-and while this production is, and always has been, inefficient, the immediate problem is not inadequate supply but inadequate demand. In a nutshell, the Japanese save too much. Although Friedman's only reference to Keynes is a disparaging one, in fact Japan is suffering the most classically Keynesian crisis since the 1930s. And the US, for its part, is not doing well because it is spectacularly successful in global markets. Except for the entertainment industry, American producers are still remarkably bad at exporting, and the US seems certain to mark the millennium with the biggest trade deficit ever measured. The US has been buoyed by an astonishing surge of consumer spending which, for reasons which have only a little to do with globalisation, has not led to a surge in inflation.
This is not a quibble. If the role-reversal between the US and Japan has more to do with old-fashioned macroeconomics than with the new logic of globalisation, maybe the rules of the game haven't changed as much as Friedman thinks-and maybe the US's winning streak is not forever. Did someone say "bubble economy"?
If Friedman misses the point about what went wrong in Japan, he is also on shaky ground when he comes to the world's other great recent reversal of fortune: the financial crisis in emerging markets. His bottom line is that, in the end, countries get treated as they deserve. If capital flight devastates your economy, it must have been fundamentally flawed to begin with. But this is a very dubious proposition. The sheer extent of global contagion has convinced many economists that nations can be subject to "self-fulfilling crises," in which a loss of confidence creates an economic and political collapse which validates investors' pessimism. Was Indonesia a disaster waiting to happen? Or was it an imperfect but reasonably well-managed economy which might well have grown out of its problems if its creditors had not stampeded for the exit? We all know that in the bad old days a run by depositors could break even a fundamentally sound bank. Why can't it happen to countries?
The point is that Friedman does not give the big question about globalisation a hearing: is it a force for instability on a scale which will swamp its gains? He thus prejudges the question of whether the globalising trend of the past 20 years will continue, or whether today's wide open world will, like the global economy of the early 20th century, be reined in by financial crises and political restrictions. I don't know the answer to this question, but neither does Friedman.
Maybe I have been in this business too long, and seen too many global visions come and go. In 1979 everyone knew that it was a Malthusian world, that the energy crisis was just the beginning of a global struggle for resources. In 1989 everyone knew that the big story was the struggle for the key manufacturing sectors, and that the winners would be those countries whose companies weren't subject to the short-term pressures of financial markets. And in 1999 everyone knows that it is a global knowledge economy, where only those countries which tear down their walls, and open themselves to the winds of electronic commerce, will succeed. I wonder what everyone will know in 2009?
l Reprinted from The Washington Monthly. Copyright The Washington Monthly company, 1611 Connecticut Avenue, NW, Washington, DC 20009. Tel (202) 462 0128.
The lexus and the olive tree
Thomas Friedman
HarperCollins 1999, £19.99
