Book Review: How Countries Compete

For readers who are new to the topic, this book is a good, basic reference. For readers who have been tracking globalization since the fall of the Berlin Wall on 9 November 1989, it is far too naïve and elementary. Nonetheless, How Countries Compete should be read by America's President and each of its 100 Senators and 435 Representatives. Because America's government simply is not competing for global market share, while other governments are, with great skill and energy.

During a remarkable 20-day period, in 1–20 July 1944, at Bretton Woods, New Hampshire, America led the creation of a new world economy, even while the old one was still being destroyed by war. America's vision was based on open free markets and a ‘level playing field’. GATT, World Bank, IMF all were born at Bretton Woods. This vision was implemented and led the world to six decades of booming trade and unprecedented prosperity. In 1945, America's GDP was three-fourths of world GDP. Today it is about one-fourth—not because America is poorer, but because the world grew richer, owing to America's free-market vision.

Yet today, that prosperity is threatened, because the once-level playing field is now sharply tilted. Notwithstanding Thomas Friedman's book title, the world is not flat and is becoming less flat daily. In Asia, “three billion new capitalists” – the title of Clyde Prestowitz's excellent book on globalization – manage their currencies and stubbornly ensure those currencies (yuan, won, yen) are undervalued by buying massive amounts of dollars, while America and the developed countries pretend free markets prevail. The result: Huge US trade deficits that endanger the US economy and destabilize the dollar and the world economy as well. Countries may compete—but America is badly trailing and has been for years. This, despite IMD's World Competitiveness Yearbook that somehow perennially ranks America as the world's most competitive economy. America's businesses are competitive, precisely because they deploy mainly abroad rather than at home.

Professor Vietor is sanguine about the prospects of the world economy. This optimism pervades the book. He writes, for instance, “I’m more optimistic about Russia…than I’ve been at any time in my adult life. I’d invest there, with the hopes that it emerges as a strong capitalist democracy over the next couple of decades.” The fact is, ordinary Russians dislike democracy and attribute many of their troubles to it. Former President and now Prime Minister Putin seems intent on restoring Russia's Cold War clout. Without oil and gas revenue, there would be no Russian economy. I would avoid investing there.

I tend to believe Prestowitz, Ronald Reagan's trade negotiator, rather than Prof. Vietor. A world with 5% GDP growth, comprised of 7% growth in emerging markets and only 3% in developed economies, is not stable. A world in which emerging countries – mainly, Japan and China – hold $3 trillion in exchange reserves is not stable. A world where emerging economies have aggregate $600 billion in current account surpluses, mirroring $600 billion deficits in the rich economies, is not stable. A world where poor economies in Asia save 20–40% of their national income and then lend those savings to non-saving rich countries so their citizens can continue to binge is not stable. A world where labor's share of income is plunging, while capital's share is rising, is not stable. It can no longer be denied that capital and labor are again enemies, as Marx predicted. A world where capital and labor are bitter enemies is not stable.

Vietor's book strongly underestimates the dangers the world faces and underplays the urgency with which we must fix the problem. His closing sentence: “it is our responsibility to manage the globalization process – and to make our countries compete” strikes me as remarkably naïve for as worldly and experienced an author as Vietor. Asian countries have built powerful growth engines based on exporting to America and Europe, through cheap prices driven by cheap currencies. They show no inclination to change their ways. Nor do Americans show any sign of understanding they cannot sustain current negative savings rates to maintain comfortable lifestyles, nor maintain $500 billion annual defense spending (equal to aggregate total defense spending among all the other countries in the world). How can the globalization process be managed, when there are no longer any effective global institutions to do this? Will it take a massive global financial and economic crisis to create those institutions? Will they be created before a crash, rather than after?

Three years ago, a report by the National Intelligence Council, based on consultations with experts all over the world, outlined four possible future scenarios. One of them was close to Vietor's core view—“Pax Americana”, continued U.S. predominance. But three were utterly different ones—“Davos World”, with robust world growth led by non-Western nations, “New Caliphate”, in which radical religion-based politics challenge Western values; and “Cycle of Fear”, in which deadly terrorist attacks necessitate intrusive draconian security measures.

Here is what I perceive is the core issue, one that Vietor fails to address. In 2006, America's 500 largest companies, generating two-thirds of US GDP, did incredibly well, generating an enormous gusher of profits. Indeed, between 2000 and 2006, Fortune 500 companies’ profits rose by 80%, even though revenues grew by only 39%, while headcount (employment) barely rose, by only 3.6%. American companies are competing extremely well—by shifting production R&D and other business processes to low-cost sites abroad, mainly Asia. But America as a country is not competing well. Because in general American workers are not competing well at all. They are losing out. Factor price equalization means that if American workers have Korean productivity, they will ultimately have Korean wages. After America lost most of its manufacturing jobs, experts estimate some 30 millions white-collar professional jobs are now at risk, as services (tax preparation, call centers, accounting, even surgery) are outsourced to Asia. The Bush Administration seems to accept, and even encourage, this shift.

What can behavioral economics contribute to How Countries Compete? Faced with a growing social rift between labor and capital, both within countries and among countries, behavioral economics shows how social cohesion, fairness and equality, badly damaged by unfettered globalization, could (and must) be restored.

What will it take to share more equally the global dividends of world trade and growth, both within and among countries? And can this huge and growing canyon between rich and poor be bridged, before the whole system collapses? These are questions that go far beyond pure economics. Read How Countries Compete for basic background, history and facts about global competition. But don't expect any major revelations.

Shlomo Maital is the Academic Director of TIM-Technion Institute of Management, Israel's leading executive leadership development institute and a pioneer in action-learning methods.  He was summer Visiting Professor for 20 years in MIT Sloan School of Management's Management of Technology M.Sc. program, teaching over 1,000 R&D engineers from 40 countries.  He is the author co-author or editor of 8 books, including Innovation Management (Sage, 2007);  Executive Economics (The Free Press), translated into seven languages, and Managing New Product Development & Innovation.  He is co-editor of a new journal, International Journal of Technology &Innovation Management Education.  He was co-founder of SABE-Societyfor Advancement of Behavioral Economics.  He has published over 80 scholarly articles in refereed journals.    He has written guest editorials for Barron's, and writes regular columns for The Marker (Haaretz business daily) and Jerusalem Report (fortnightly).  He served as Director of the National & Economic Planning Authority, Economics Ministry, Government of Israel.    He has taught managers from 200 Israeli companies.  His research currently focuses on profit-driven innovation -- how to combine creativity and discipline to achieve marketplace success.