Thirty Tomorrows

The Next Three Decades of Globalization, Demographics, and How We Will Live

Milton Ezrati

Thomas Dunne Books

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Growing Old Gracefully
 
The West and Japan are aging. Decades of declining birth rates have reduced the proportion of young people in these populations, creating increasingly severe shortfalls in the number of new entrants into their labor markets. At the same time, increasing life expectancies have swollen the ranks of their dependent retired populations, redoubling the burdens on these limited labor resources. The change by itself will impose severe growth constraints on these economies and even threaten existing living standards. In stark contrast, the emerging economies—India, Brazil, and China prominent among them—enjoy the benefits of large, youthful, and eager workforces, and will do so for years to come. These differences will set the economic and financial tone for the next 30 years at least.
It would be hard to overestimate the economic and financial ramifications of these demographic trends. The developed economies, to avoid economic setbacks, will come to rely more and more on the product of the emerging economies to support their outsized retired populations. The focus of economic and financial power will shift accordingly. To survive in such an environment—to have something to exchange for these imports—these developed economies will need to increase their emphasis on research, innovation, training, and education. The process will force huge industrial adjustments, change attitudes toward work and retirement, raise levels of immigration, and greatly accelerate the pace of globalization. To sustain such essential adjustments, the leaderships of these countries will need to disarm a dangerous, protectionist backlash that would block their access to emerging economies. China, India, and other emerging economies will have to make their own fundamental adjustments, too. While much can occur naturally without overarching direction, the entire effort, nonetheless, will demand purposeful leadership within each economy and globally.
CHANGING AMERICAS SELF-IMAGE
Though America finds itself under less intense demographic pressure than Japan or Europe, it will in many respects have the greatest trouble adjusting. Unlike Europe and Japan, America has always seen itself as a youthful society and has long claimed the virtues of youth: energy, optimism, physical strength, impulsiveness, perhaps even insouciance. It has left to other societies the virtues of age: prudence, patience, sensibility, composure, and care. But as America’s reality becomes less and less youthful, certainly compared with China, India, and other emerging economies, it will have to abandon these attitudes. Its prosperity, in fact, will depend on its ability to seize the advantages of age. Though in some ways the work of change has already begun, the adjustment will not proceed easily. Nor will it proceed easily in aging Japan and Europe, even though these countries have relied less on a cult of youth.
Until recently America’s identification with youth had a basis in reality. The nation was in fact young. Large families and huge waves of eager immigrants kept the average age of the nation’s population low.1 The physical structure of the economy was also young and ripe with development opportunities. From the eighteenth century to the middle of the twentieth, this young and growing workforce earned huge commercial dividends as it turned this New World’s vast tracts of wilderness into farmland and interconnected it with new roads, canals, railroads, and eventually air links. And, as the existence of this infrastructure facilitated industrial development around previously untouched natural resources, the economy significantly increased those returns.
Of course Europe during this time also enjoyed great economic leaps. Strides occurred especially in technology, transportation, communication, construction, and production. But there was a fundamental difference between Europe and America. Europe’s economies had already established themselves around older technologies. As they applied the new, they were not so much developing as redeveloping, modifying and refining, improving something that had already existed. Industry focused on efficiency, quality, sometimes variety. America, building new, oriented itself toward things more basic: size, volume, raw power. Its continental-sized national market reinforced the difference from a more economically Balkanized Europe.
Especially in the early stages of industrial development, these differences impelled Europe to lead in knowledge-based products. It invented mechanized spinning and the mechanized loom, the steam engine, the railroad, and the locomotive.2 America applied itself chiefly to the challenges of vast distances and mass production. The United States had its inventions, of course. It pioneered standardized parts and invented the cotton gin as well as the reaper.3 Not surprisingly, even America’s inventions aimed at volume. It was not until much later in the nineteenth century, when much of America’s de novo development was complete, that its inventors began to refocus innovative energies along lines that Europe had followed for years.
Still, these different emphases persisted right up through the Second World War and even into the second half of the twentieth century. Of course America, as it became ever more completely developed, could rely less and less on opening new areas and did begin to feel the Old World’s need to find its commercial returns in replacement, rebuilding, and refinement. But in the popular imagination, the old distinctions remain stark. America even laid its victory in the Second World War at the feet of its youthful, overwhelming force. The German Tiger tank, it was said, outclassed America’s Sherman tank, but the United States won the war anyway by producing its tank in overwhelming numbers. As one German tank commander noted, just one of his more sophisticated and better armored tanks could take out eight or nine of its American counterparts, but the Americans always sent 10 or more against him.4 In the air, too, against both Germany and Japan, the message of victory came in America’s ability to build more planes and throw more weight. Quality was claimed but was less obvious. Even America’s great wartime invention, the atomic bomb, spoke to overwhelming force and certainly not to refinement.
It was not until the Cold War that the relative reality, if not quite the imagery, began to change. America’s competition—economic, military, and diplomatic—had by then shifted east, to a still larger and less developed continental power. The Soviet Union was doing more de novo construction than America, certainly of industrial facilities, and tapping resources across a much wider range. The emphasis on mass production fit better there, and when the Soviet leader Nikita Khrushchev, in 1956, assured the world’s diplomats that Soviet Russia would “bury” the West, presumably in production, if not literally, it was believable.5 The difference showed vividly in the great competition of the time: space exploration. The Soviets emphasized force. Their bigger, more powerful rockets could lift more weight out of the atmosphere than the American rockets. The United States could meet the challenge only, it seemed, by taking a page out of old Europe’s book. Deploying greater refinement, America concentrated more on sophisticated electronics, more precise and careful guidance, and miniaturization to do more with less weight.6
Now demographics will draw America still further from its historically youthful image and all that that means. Ancient as the cultures of China and India are, these countries, not America, hold the great, unexploited continental reaches ripe for development. They can take American, European, and Japanese innovations and apply them to regions that, if not virgin territory, are nonetheless barely touched by modern development. They have youthful, eager populations with which to do it. China’s working-age population of 965 million is almost five times that of the United States. Though China’s median age of 35 years is only slightly lower than America’s 37, the gap will widen. India’s median age today is a youthful 26 years, and its working-age population of 744 million is more than three and a half times that of the United States. Brazil, to round out the picture, has a smaller working-age population than America but a much younger population, with a median age of only 29 years.7
In such circumstances, the United States can no longer use its old, youthful approach as a guide. Energy and opportunity combined with overwhelming volume and force will lie increasingly with the emerging economies. America must adapt, as it did in the Space Race with the Soviets, by meeting the challenge of China, India, and other emerging economies much as Europe once met America’s challenge. It must recognize that its advantages increasingly will come from refinement and innovation rather than through mass production—not in every case but generally. There is an urban myth from the 1920s that wonderfully captures the difference. As the story goes, right after the First World War American industrialists, though bigger, richer, and more powerful than their European rivals, chafed at their reputation for volume over refinement. A Connecticut copper mill challenged its British rival by sending over a length of tubing with the dare to produce something with a diameter as narrow and as consistent. When the response arrived in Connecticut, the Americans at first could find only their original tube. It took a while for them to realize that the British producers had threaded inside it their much finer piece of tubing.8
MAKING THE ADJUSTMENT
Today, in matters much more sophisticated than copper tubes, American producers must meet the challenge of the emerging economies, much as the British rival met its Connecticut competitor. Old attitudes and approaches will cease to work.
Even if people have a hard time accepting the change, the demographics will force it on them. As the dearth of youth in the developed countries creates a shortage of labor, certainly compared with their outsized retired populations, these economies will adjust, or the strain will cut into their living standards. Business no doubt will try to relieve the pressure by keeping existing workers on the job longer and turning to immigrant labor, but because such remedies can only go so far, producers will increasingly look overseas for relief. Business will find it in the emerging economies’ abundance of young, inexpensive, if not especially well-trained workers. By importing simpler products from them, those that require a lot of labor input, the developed economies can relieve much of the strain on their own limited workforces and, consequently, on their living standards. To have something with which to trade for these imports, production at home will need increasingly to leverage the superior training and production facilities in the developed world, emphasizing increasingly sophisticated, complex, and high-value products.
To its credit, American industry and commerce have already made great strides in this adjustment. Without any overall perspective or guidance, market signals and profit pressures have already begun the shift away from crude mass production, leaving those activities to the emerging economies, and toward more sophisticated and complex products. The United States, for instance, no longer produces inexpensive garments, plastic toys, even structural steel girders and concrete reinforcement bars. These mass-produced items come from South Korea, India, China, and elsewhere in the emerging or recently emerged world. In their place, America increasingly has emphasized technology, specialty products, and other, high-value items, as well as services. American producers have begun, as it were, to thread their own, finer tubing into that offered by China, India, et al.
Extending these adjustments, the economies of America, Europe, and Japan will increasingly have to act their age. Given the record of recent decades, there is every reason to believe that they can leave off other more muscular, obvious sorts of processes and make their money increasingly with products that require more concentration, training, and patience. This process, however, will take a change in attitude as well as action. Business will make the move under the tyranny of the bottom line. Matters in national capitals, and with the public generally, will be more problematic. Perhaps the aging baby boomer generation, less able to compete with the energy and raw power of youth, will at last come to value patience, diligence, and the products that rely on such mature virtues. Since baby boomers have always insisted that the larger society accommodate them, they just might shift the orientation of society overall, too. But the change will not come easily.
Of all the actors in this drama, the politicians in Washington and other capitals will surely have the most difficulty with the changes. They live in a world of power. Overwhelming force in output, money, and votes is what they understand and sometimes all they understand. Both Congress and the White House enjoy the idea of the United States as the biggest and most forceful in every way. They may like the idea of more refined products, but they apparently see no need to yield in the manufacture of girders, concrete reinforcement bars, and the like, no matter how compelling the economics. They will resist the change instinctively. Like their counterparts in Japan and Europe, U.S. politicians are also highly vulnerable to voters who complain about the very real pains of these adjustments, especially since those who have successfully adjusted, having no need of political assistance, will remain quiet and so effectively invisible to those in the various congresses, parliaments, and executive mansions.
However much the United States and other developed economies will struggle, the emerging economies should embrace the arrangements. Trade is their primary engine of growth. Without it, these economies would have difficulty employing their increasingly restive populations and would face severe social unrest. Though eventually their domestic consumer sectors will grow big enough to offer a market for their impressive production potentials, this will take decades. In the meantime these economies need access to the rich markets of Japan and the West. They also need trade to procure the complex goods and services essential for development and that, despite the impressive strides they have made to date, they still have trouble producing for themselves, and will for years, maybe decades, to come. They will also want the transnational investment flows on which they rely to secure the development funds that they need to build their industrial base and secure the essential management and financial expertise available only in the developed West and Japan.
CHANGE BEGETS CHANGE
But such seismic economic shifts will produce new ruptures of their own, not all of them pleasant and some dangerous. Certainly the shifting industrial emphasis, though essential to protect living standards generally, will create considerable pain and dislocation in particular sectors, industries, and geographic regions, in both the emerging and the developed economies. These hardships will generate an ever-growing resistance to globalization. They already have. It would be a mistake to underestimate the strength of such feeling. There are already ample signs of its influence in the highest reaches of government. The United States, for example, has threatened a tariff wall against Chinese products and China has promised retaliation. It would be an even bigger mistake to underestimate the extent of the danger in such trends. Protectionism, if it sometimes helps particular groups within an economy, has always hindered general economic growth and will do so especially when taking into account the future’s demographic imperatives. Economies, at least those that want to prosper, will need to disarm this sentiment and meet the needs of the new economic environment by dealing with the pain of transition.
Two areas in particular cry out for such remedial action. One involves employment and wages, the other finance. Whatever benefits increased trade has brought and will continue to bring, nations can no longer ignore the tendency for it to throw people out of long-held jobs and hold back wages at the middle and lower reaches of the income distributions, seemingly killing America’s middle-class dream and its equivalents in Japan and Europe. Nations must also wake up to the association between globalization and the horribly destructive boom-bust financial cycles of recent years, most notably the disastrous collapse in 2008–09. Unless the world’s economies can address these and other ills the backlash against globalization will deprive them of the welcome relief it can offer from demographic strains.
Given these needs and dangers, it is sad how most nations to date have such a patchy record relieving the strains of globalization and the social tensions created by them. The United States, true to its traditions, has left its financial markets to swing, almost unimpeded, up and down under the influence of global financial flows. It has left most workers displaced by globalization to find their own way back into new economic structures. The more controlled economic systems of Europe and Japan have fared no better. Their financial markets have fallen into a boom-bust pattern as well, while their extensive welfare policies have failed, even more thoroughly than America’s neglect, to reintegrate workers into new economic structures. On the contrary, Europe’s and Japan’s welfare schemes have simply warehoused workers and wasted their talents. These nations have also squandered public funds on subsidies to threatened industries or regions, fighting a losing battle at great expense. Rather than continue in these failed patterns, nations must find new and better ways to deal with the hardships imposed by globalization, in the financial sphere and among workers displaced by the process in one way or another.
On the financial side the direction is clear, if not especially easy. The ill effects of globalization have found definition in a number of painful and destructive cycles since the process gained momentum. The pattern first became clear in the Asian financial collapse of the mid-1990s, moved through the technology bubble that burst with the new century, and most recently contributed to the real estate collapse and attendant financial failures of 2008–09. Doubtless new regulation will play a role in the solution, especially if coordinated internationally. But since regulation alone never answers the need for financial stability, it is apparent that matters also call for a change in monetary management, to control the tendency for international financial flows alternately to glut markets with financial resources and then to starve them. It is fortunate in this regard that most central banks already have the tools necessary to insulate domestic financial markets from these effects. Control, however, will require new, more global policy perspectives and protocols at the Federal Reserve, the U.S. Treasury, and their equivalents abroad.
On the economic side, issues of employment, wages, and the destruction of the middle class are more subtle and obscure. To some extent the economic transformation itself, even as it displaces workers, also offers avenues for relief by creating new industries and new ways of doing things, and in the process creating powerful demands for workers with the necessary skills. Facilitating this adjustment will require a powerful focus on technological advancement and on an innovation-friendly environment to allow these economies to exploit new opportunities. For the sake of workers, the new industries, and social cohesion, success will demand a stronger commitment to training and education to prepare workers for their new work environment. Private-public partnerships will have a place in the effort, as will government tax and other funding incentives, but the adjustment will also require sensitivity on government’s part to when it needs to step back from the process.
Emerging economies, too, will have to change. At present they count almost exclusively on exports as an engine of growth, especially China. This economic development model will doubtlessly work for a considerable time to come, but, as with all things economic, it will pay diminishing returns. These economies must, then, develop with an eye to broadening their respective sources of growth beyond today’s exports, and anticipate that time when they will need to rely increasingly on their domestic consumer markets. Even at this relatively early stage these economies must allocate resources to foster growth in their domestic markets. Part of that effort must redistribute more of their growing wealth toward a larger portion of their respective populations. These nations must look to integrate all parts of their economies so that incomes can rise beyond those narrow parts of their population directly engaged in international trade.
A failure to make such accommodations will threaten countries’ respective expansions and their continued role in the world economic system. It would also threaten well beyond their borders, since the codependent nature of the world’s economic system makes it vulnerable to failure anywhere. Of course smaller emerging economies, such as relatively more developed Singapore and underdeveloped Vietnam, probably can proceed without too much concern for this anticipated change. Their longer-term economic niche probably lies in exporting, importing, and transshipping product, as Hong Kong has done for years and Singapore, too. But China, India, Brazil, Indonesia, and other larger emerging economies must keep this ultimate shift in mind as they develop. In this regard India’s and Brazil’s more organic, if slower, economic growth paths, with their ongoing attention to domestic development, show greater long-term promise than China’s heavily export-oriented dash for rapid growth.
The oil-producing economies face a particular peril, not because they can hold back a precious resource, which they sometimes do, but because of their seeming inability, despite their great wealth, to integrate their economies domestically and into the world trading system. Oil has cursed these nations, it seems, by alone generating enough income to tempt them away from such necessary, broad-based development. From Qatar to Russia to Venezuela, they neglect self-development and rely on the sale of a single resource, oil, to buy what others produce. They have, as a consequence, remained entirely dependent on the price of oil and upon other economies as a source of wealth and income. Saudi Arabia and the Gulf emirates may have an excuse. They have few economic options for broad-based development beyond oil. But Russia and Venezuela have no such excuses. They have many avenues for development, most of which, sadly, they have chosen to neglect. Having weakened their own economic prospects, they have weakened the world’s ability to adjust—if not fatally, then significantly.
THIRTY FUTURES
The world, then, faces two possible futures. One secures growth by adjusting successfully to globalization and to each nation’s comparative economic advantage. The other fails to make the adjustment and stagnates or worse. Each year will bring a raft of such choices, making the project one of a new tomorrow each year of the next three decades. Indeed, such choices will occur across so many dimensions, a more accurate characterization might look for thirty tomorrows a year for the next thirty years. Given the promise of one and the pain of the other, the choice, for those not blinded by narrow interests, seems obvious.
Success, however, will nonetheless require leadership. Many of these needed adjustments will grow naturally out of innumerable individual economic decisions guided by longer-term self-interest, something akin to Adam Smith’s “invisible hand.” The process, however natural it is, will still demand a source of vision and a constant, influential presence to retain a focus on the longer-term interests of business, individuals, and government. Both political and industrial leaders must head off the demagogic appeals of protectionism and instead foster a flexible and innovative economic environment, reintegrate those workers displaced in the process, and help nations enter into the global economic system as fully as possible.
In this regard the United States again becomes the indispensable nation. Japan is too weak, China and India too underdeveloped and partisan, and the European Union too conflicted internally to play such a role. America has had practice in this, too. If it has not always abided by its own ideals, it can nonetheless draw on the experience of the last 60-plus years during which it has, more than any other nation, encouraged broad-based global economic development, cultivated free trade and free financial flows, and worked, if sometimes sporadically, to persuade others to do likewise. America must keep this long-term focus, facilitate the entry of all nations into the world trading system, and set an example for the developed world by finding ways to adjust and help those of its own citizens displaced by the changing environment.

 
Copyright © 2014 by Milton Ezrati