Say It Ain't So...

I'm surprised it's taken this long to become realized. The New York Times published an article earlier this week indicating that several intelligence agencies have found that the American invasion and occupation of Iraq has helped spawn a new generation of Islamic radicalism and that the overall terrorist threat has grown since the Sept. 11 attacks.

Surprise. Surprise. A five-year old could have guessed that this was going to happen.

The article went on to say that the radical Islamic movement has expanded from a core of Qaeda operatives and affiliated groups to include a new class of “self-generating” cells inspired by Al Qaeda’s leadership but without any direct connection to Osama bin Laden or his top lieutenants.

What amazes me here is not only that this wasn't (and still isn't, by most) considered to be a risk when considering our foreign policy, but rather that our friends in the White House haven't used their impeccable media skills to sway the Islamic community as they do their own American constituents.

Come-on folks. This new form of war isn't going to be won by guns and brute force, but rather by media and education.

More on Globalization

Today, Ed Sim refers to a recent article in the Wall Street Journal and another article in The Economist that both discuss the impact of globalisation and emerging economies on our lives.

The Economist begins by stating:

Last year the combined output of emerging economies reached an important milestone: it accounted for more than half of total world GDP (measured at purchasing-power parity). This means that the rich countries no longer dominate the global economy. The developing countries also have a far greater influence on the performance of the rich economies than is generally realised. Emerging economies are driving global growth and having a big impact on developed countries' inflation, interest rates, wages and profits. As these newcomers become more integrated into the global economy and their incomes catch up with the rich countries, they will provide the biggest boost to the world economy since the industrial revolution.

I couldn't agree with this more. But, on the same token, emerging markets can also now bring down the world economy just as quickly. So, this boost is not coming without strings attached. These are countries that lack infrastructure, have been historically fraught with corruption, and are controlled by small groups of self-interested individuals & families. The Economist does point this out later in the article, but doesn't stress this risk enough in my opinion.

Financial wobbles this summer acted as a reminder that emerging economies are more volatile than rich-country ones; yet their long-run prospects look excellent, so long as they continue to move towards free and open markets, sound fiscal and monetary policies and better education. Because they start with much less capital per worker than developed economies, they have huge scope for boosting productivity by importing Western machinery and know-how. Catching up is easier than being a leader. When America and Britain were industrialising in the 19th century, they took 50 years to double their real incomes per head; today China is achieving the same feat in nine years.

Again, what China has gained in the past nine years could be lost within two if the capital markets lose faith in the economy & management over there. People, like the author of this essay, are quick to forget what happened in Argentina in 2002 or Russia in 1999, and countless other emerging economies in years past.

Michael Milken in the Wall Street Journal takes a different approach to the effects of globalisation:

As we start moving into our seventh decade, it's logical to ask what effect baby-boomer retirements will have on real estate and financial markets. The question is logical, but it puts the emphasis on the wrong side of the equation. The real future value of U.S. assets won't be determined by retirements, but by policy decisions on education, taxation, regulation, immigration, international investment and the environment. Baby boomer asset liquidation isn't really a financial market issue because (1) there's plenty of liquidity in the global economy; (2) as the rest of the world becomes wealthier, people outside the U.S. will own a greater percentage of global assets and they'll want to keep a share of their net worth in America; (3) liquidity will grow in both developed and developing nations as they adopt recent American financial innovations and market structures; (4) as baby boomers live longer and healthier, their new mantra will become "Who wants to retire?" and (5) most assets won't need to be sold.

It's always amazing to me just how much influence both the rest of the world & our governments' foreign policies have on our future. In this flattened global economic realm, the mass movements of dollars and information across borders has more of an impact than we really realize. As I mentioned in a past post, Bret Swanson has pointed out that the price of oil has more to do with our weak dollar than it does with our trade relations or oil producers.

I definitely agree that as these emerging markets accumulate wealth, and we manage to continue to innovate & live ahead of the curve, America stands to benefit greatly from the investment of those countries in to our economy. However, therein is the crux of the challenge we face in this newly globalised society; that financial inflow can come and go just as freely. Open capital markets are a great thing, and so is the open dissemination of information, but being ahead of the curve in a constantly-equalizing market is the only way to sustain value.

And, the only way we can do this well over the long-term is by leading the pack in education. Something which we are clearly not doing right now. In his blog post, Ed Sim uploaded this graph along with others and commented:

We have always thought of India and China as places to offshore low-level development work. Yes, alot of that has already been done but what is alarming is what may happen in the future as the comparative advantage that India and China have over us in terms of college graduates in science and math is overwhelming.

Not every one of those graduates according to the McKinsey Global Institute is up to par with the standards that we have in the U.S. (10% in China and 25% in India) but that is clearly changing.

In a world of pervasive communications, widespread information sharing, remote learning, and cheap transportation, it's becoming more and more clear (to me at least) that our only competitive advantages are our smarts & our creativity. Let's make sure we invest in these attributes so that we don't fall behind. Please.

The Effects of Globalization

Bruce Sterling brings up a subject that's dear to me, the effects of globalization, in last month's Wired Magazine. He starts by saying:

Cheap flights and ubiquitous worldwide communications are the stuff of globalization. Ready travel lets people oppressed at home taste the joys of free society, while the Net exposes them to the ideas and customs underpinning that social order. The effect is viral, spreading liberal values and economic growth to benighted dictatorships and hopeless pits of poverty.

But, then goes on to bring up some thoughts by Chris Parry, a Falklands vet, the former commander of HMS Fearless, and a current British intelligence officer.

During a recent briefing at the time-honored Royal United Service Institute – the oldest military think tank in the world, founded in 1831 by the Duke of Wellington – Parry imagined a future, circa 2030, in which the war on terror is still rolling along and the terrorists are winning. He describes a world so ripped up by nets and jets that sovereign nation-states like the UK are collapsing economically, politically, even physically. Then there are the people of that future, who hop from country to country and bear allegiance to none. “Globalization makes assimilation seem redundant and old-fashioned,” he noted, pointing out that, rather than dissolving into the melting pot of their host nations, immigrants are increasingly maintaining their own cultural identity. Jets and nets make this possible. “Groups of people are self-contained, going back and forth between their countries, exploiting sophisticated networks and using instant communication on phones and the Internet.” The result, Parry says, is “reverse colonization,” in which the developing world’s teeming masses conquer Western nations, as surely as the Goths sacked Rome.

With this thesis, these two innovations [nets and jets] might also be an imminent menace to Western civilization. I couldn't agree with Parry more. He may be a little dracronian, but his views, I believe, are directionally very relevant. Traditional states & international policies have to evolve to accomodate these changing times...

The Ford Memo

I was there in 1998, 1999, and part of 2000. And, I believe that Jac Nasser utterred a strategy & vision for Ford Motor Company that wasn't too far off from this (taken from Bill Ford's recent memo to shareholders):

"The business model that sustained us for decades is no longer sufficient to sustain profitability," the memo said. "We must change to a new business model that requires greater bottom-line contributions from cars and crossovers, continued leadership in pickups in North America, healthier profits from all other business units, growth in Asia, greater integration of our global operations and an evaluation of strategic alliances."

As I've posited in the past, the auto industry is fundamentally sound. There are a few aspects of the industry, here in the United States, that need addressing, but it's certainly very possible to make money in the business. Bill and his leadership team (as most of Detroit) are just mired in the past, and afraid of change.

I would love to see a private equity consortium buy Aston-Martin or Jaguar or Volvo. That would cause such an influx of capital & interest in the sector that it would likely see some quick changes (= results). A series of private equity firms would defintely address the following:

Regarding leadership, he [Bill Ford] wrote that he was now "even more determined to continue to develop leaders inside the company and to attract leaders from outside when we need additional skills to turnaround our business."