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Three billion new capitalists: the shift of wealth and power to the east

Westminster Matters

The Shift of Wealth and Power to the East

A Message from President Michael Bassis 

In his standing-room-only lecture on campus this fall, Clyde Prestowitz, the founder and President of the Economic Strategy Institute, transfixed his audience as he spoke about the radical economic, political, and ecological shifts now taking place across the world. The most obvious shift, he observed, is the “world is flat” phenomena, described recently by Thomas Friedman, where inexpensive and easy-to-use electronic communication networks are transforming global economic patterns.

But Prestowitz went on to identify a number of additional and potentially more severe changes that can threaten our economic future. The changes, or “ends,” he identifies range from the dollar’s fall from supremacy as a tool of trade (a complex scenario he manages to explain clearly) to shrinking supplies of oil and water to dramatic shifts in population patterns.

The hopeful part of Prestowitz’s message was his reassurance that dealing with these threats is well within our capabilities. But success will require that successive generations make smart choices about issues of global significance.

The implications of this message for colleges and universities are clear. Certainly one purpose of attending college is to get a good job after graduation. An even more valuable investment, however, is acquiring a college education that has been designed to prepare people for a rewarding and meaningful career, not just a job. Far beyond jobs and careers, however, a good education helps people make smart choices about important issues, and that includes helping them to understand and to care about the larger global forces that are rapidly reshaping our world.

Lectures like this help get our students thinking about the future and what they can do to shape it. Given the changes that Prestowitz describes, an education that teaches people how to work across disciplinary and cultural boundaries, one that promotes critical,
analytical, and integrative thinking is, perhaps, the most powerful prescription for preserving our planet and America’s role as a preeminent force for global stability. I can’t think of a more valuable investment.

Michael S. Bassis

President, Westminster College

Three Billion New Capitalists: The Shift of Wealth and Power to the East


Clyde Prestowitz

Founder and President of the Economic Strategy Institute

We are living at a moment of enormous change. I was in Japan two weeks ago, and I started thinking that, in many ways, Japan is a perfect metaphor for change. For 250 years, from 1600 to about 1850, nothing happened. The Samurai cut their hair the same way, they used the same swords, and then, BANG—Perry shows up in Tokyo Bay, everything is revolutionized, and Japan becomes a modern nation. Clyde Prestowitz

We are in one of those BANG moments where a lot of things are going to change. Let’s put that in perspective. For all of our lives, we just assumed that the United States was, and would be, the world’s biggest economy. We assumed that new technology would be developed here, that standards—cell phone standards, laptop standards—that allow us to use this equipment broadly would be set and determined in the US.

Now, I see a very new world. My friend Tom Friedman talks about the world being flat. I know what he means. The Internet has negated time and distance. Anything that can be done digitally, can be done anywhere in the world and delivered anywhere else in the world in two seconds. Even if you are making physical products that have to be physically delivered, FedEx can take anything anywhere in the world in a maximum of 36 hours. For all practical purposes, time and distance have gone away. In that sense, the world is flat. But while it may be flat, I believe it is also tilted. It is being tilted, I would argue, by what I call the Six Ends.

The first is the end of the dollar. If you look at the structure of the global economy today, it is very unbalanced. There is one net consumer in the global economy: the United States. All of the other major units—the EU, Canada, China, and Japan are net sellers. Americans are the greatest consumers in history, so great, in fact, that we don’t save a cent. Last year, Americans spent $500 billion more than we earned; we consumed about $700 billion more than we produced. This year, we are on track to have about a $900 billion trade deficit—about 7% of our GDP.

What makes this all work is the role of the dollar as the world’s money. When we buy oil from foreign producers, we give them dollars. We give them a piece of green paper with a president’s picture on it, and we get a barrel of oil. However, if you are Canadian or Japanese, Brazilian or French, you can’t do that. You’ve got to make something, sell it for dollars, and then use the dollars to get oil. Only the United States can buy in its own currency on international markets. Everybody else in the world has to keep their trade more or less in balance—they have to sell about as much as they buy. But not us. We just give out paper. As long as the rest of the world takes this paper and holds it, perfect. What could be better? We have a great party here.

But there is one little problem. The central banks of the world are sitting on all these dollars which are essentially claims against future American income. After a while, if you are a central bank, you start thinking “we have a trillion of these green presidential pictures, do we really want two trillion, three trillion?” Central banks know that, historically, when countries get heavily in debt, they inflate their currency, which means they reduce the value of the dollars you hold. If you are holding all these dollars, you begin thinking, “You know, maybe we shouldn’t hold so many of these.”
I have been interviewing the central bank directors around the world over the last six months. They are all as nervous as cats. No one wants to do anything stupid; the Chinese, the Japanese are not going to start selling dollars because that would trigger a collapse, a cascade, and they don’t want to do that. The problem is that the big guys aren’t the only ones in the game. If smaller countries start selling dollars, the big countries may have to sell too, because you don’t want to be the last guy out.
Think about this: if you are OPEC or China or Japan, and you are getting all these dollars and the dollar is constantly falling in value, why do you want dollars? Maybe you decide to price your products in Euros. Instead of a green presidential picture to get a barrel of oil, you have to give a Euro. However, for America to get a Euro, we have to earn it—we have to make something and sell it for Euros. Conse-
quently, I think in the not too distant future, the United States is looking at a global structure that will be much more like a normal country. Oil is going to be priced in a basket of currencies—probably still dollars to some extent—but also Euros and yens. That is what I mean by the end of the dollar.

The second is the end of oil. As you know, oil is not being discovered proportionately to the rate at which we are using it—not that we are going to run out of oil soon. However, the world is becoming dependent on the Persian Gulf, and the cost of extracting oil is rising, as is the price. The long era of the cheap, easy energy that fuels the disposable automotive-based economy is drawing to a close.

The third, and more serious, is the end of water. We can live without oil for a while, but you can’t live without water for very long. What we are seeing is a rapid deterioration of the quality, and a decline in the supply of water. The Gobi Desert is encroaching on Beijing at the rate of one kilometer a year. The Yellow River does not reach the ocean; the Rio Grande River does not reach Mexico; the Nile Delta is increasing in salinity because the Mediterranean is pushing up the Nile. All of the world’s glaciers are retreating. Peru is looking at a water crisis within the not too distant future because of the retreat of the Peruvian glaciers. The UN estimates that by 2025, 75 percent of the world’s population will be living in areas of water shortage.
I flew recently to Dubai over Turkey and much of the Middle East, and, as you look down, you see damns being built everywhere. We are looking at war in the Middle East that is now being driven by jihad and oil; it’s not too hard to imagine that soon it will be driven by water. We are coming into an era of water shortage more quickly than we think.

Fourth is the end of cool—global warming. In the not too distant future, we’re looking at a world in which Miami, Singapore, and much of New York is under water. At the current rate of carbon emissions and increases in global temperature, we can anticipate a rise in sea level over the next 50 years of somewhere between 10 and 20 feet. Such levels put much of the US Gulf Coast under water, along with many of our major cities. In fact, when someone asked me recently, “What country is the next superpower?” My answer, in this context, was “Canada.”

Why Canada? Picture this: The US Gulf Coast is under water, and the hurricanes make the surrounding area uninhabitable. The Sun Belt is too hot, and because of the cost of energy, the cost of air-conditioning is out of sight, so no one will want to live there. The agricultural bread basket is not an option either: no water, too hot, too dry. So, everybody moves to Canada. Because the North Pole is melting, the world’s shipping will cross the North Pole, therefore, Canada will control the shipping. Canada also has about as much oil as Saudi Arabia. Since Canada now has all the people, the technology will move with the people. Canada is the world’s next superpower. This may be a little bit of a stretch, but it gives you an idea of where we are going.

The fifth is the end of America. I don't mean that as draconian as it sounds, but what I think is important for Americans to understand is this (and understand that I say this as a person who was in the Reagan administration, as a person who always considered himself conservative): I have lived half of my life outside of the United States, and it is clear that the hard power of the United States is declining—the US army is being chewed up and the National Guard is virtually becoming inoperable as a result of our current expeditions. The reservoir of good will for the United States is drying up. We are digging a huge hole in our global relationships, and we are doing so at a moment when our accustomed economic power is going to be less automatic. At a moment when we are increasingly going to need friends in the world, we are increasingly having fewer friends and less good will than we have long had.

Sixth is the end of people. I’m half joking, but if you look at Japan, its population peaked last year; now, its population is shrinking. All of the European countries, with the possible exception of France and maybe the UK, are suffering population loss. Within 15 years, China will have a very rapid aging of its population and, eventually, a population decline; India continues to grow, but much of the world, and many of the world’s biggest economies, is going to be increasingly facing situations in which the number of people working is smaller and smaller relative to those who have to be supported.

I am often asked, “Is there any hope?” My answer is that yes, of course there is hope. Both the US and other countries like Japan and China have enormous resources, intellectual, human, and physical, and many of the problems that we face are relatively easy to address. Let’s take energy for example. The US is twice as energy-intensive as Japan. If we just imitated Japan’s energy conservation, we could dramatically reduce energy use and energy dependence in the US. If the US handled water in the same way that countries like Israel do, we would dramatically change the equation in water.

All of these problems also represent opportunities—particularly for young people. What I often say is this: think of this globalization game like a game of bridge. Ask yourself whose hand would you like to play? Would you prefer to play the Chinese hand, the American hand, the EU hand, or the Indian hand? My answer is always that, given the choice, I’d play the American hand. Americans have more high cards, more trumps, than anybody else. However, if you play bridge, you know that you can have really good cards and still lose (something that I manage to do frequently) if you play the cards badly.

Right now, we are playing the cards just about as badly as it is possible to play. But we can play better. We can be smarter. And people like you are, I hope, going to help us do just that.
Clyde Prestowitz has propelled the Economic Strategy Institute, which he heads, into an important role in the public policy process, influencing and often defining the terms of debate in the areas of international trade policy, economic competition, and the effects of globalization.

Mr. Prestowitz served as counselor to the Secretary of Commerce in the Reagan administration. There, he led many US trade and investment negotiations with Japan, China, Latin America, and Europe. He has served as vice chair of the President's Committee on Trade and Investment in the Pacific and sits on the Intel Policy Advisory Board and the US Export-Import Bank Advisory Board. His latest book, Three Billion New Capitalists: The Great Shift of Wealth and Power to the East, deals with the impact that three billion new consumers will have in India and China as well as the implications that such a shift in power will have for US businesses and consumers.

In addition to a BA with honors from Swarthmore College, and an MA in East-West Policies and Economics from the East-West Center of the University of Hawaii, Prestowitz has an MBA from the Wharton Graduate School of Business. He also studied at Keio University in Tokyo, and is fluent in Japanese, Dutch, German, and French.