http://web.archive.org/web/19970708140930/www.csis.org/nge/The United States and the New Global Economy
A CSIS Initiative to Position the United States
for the 21st Century Global Economic and Financial SystemMost analysts agree that the United States is now in the midst of one of the most significant, balanced, and prolonged economic expansions since the 1960s. The last four quarters have generated growth in excess of 4%, the last of which (1Q97) generated a remarkable 5.7% surge. Productivity growth has increased significantly. Unemployment is at its lowest levels in years. Inflation is negligible. The stock markets have been at historic highs both in terms of equity averages and market capitalization levels. And the national deficit--which only five years ago was characterized as a major problem in the global economy--has declined to less than one half of the deficit target the EU countries are now seeking to achieve in the lead-up to the single curre ncy. U.S. industries have taken the lead in many key sectors associated with the post-industrial knowledge economy and are well poised to compete internationally. Furthermore, there are no easily identifiable short-term imbalances that could interrupt the current seven-year expansion.
Despite the encouraging condition of the U.S. economy, however, there are longer-range issues that American leaders cannot afford to neglect. The United States is entering the new millennium facing an array of serious, structural economic and financial challenges. Large government deficits, a mounting stock of national debt, a tax system that favors disinvestment and dissavings, physical infrastructure deterioration, pressures on its human resource base (including underemployment and stagnant wages), l ooming financial dislocations brought about by an aging demographic bubble, and pronounced external economic imbalances are among the challenges that policymakers must confront in the years ahead. Three years ago, in testimony before the Senate Committee on Banking, Housing and Urban Affairs, Gerald Corrigan described these challenges as follows:
"
n the face of myopic trade policies, efforts to regulate and control capital flows, or continued large-scale government dissavings in the form of budget deficits at the national level such as in the United States, the period ahead could prove to be extraordinarily difficult.... In the fullness of time, the marketplace will treat harshly even the largest of nations that fail to conduct their economic and financial affairs in a sound and prudent fashion."
As significant as these problems could be to the U. S. economy in the future, what is most noteworthy about the current political debate on domestic reform is the near complete absence of serious discussion about the world economy and its relationship to U.S. economic performance at home. When issues of international economic policy do arise, there are signs--across the political spectrum--of growing economic nationalism and parochialism. The Cochairman of the CSIS International Research Council and fo rmer Chairman of the Council of Economic Advisers, Murray Weidenbaum, describes this as the paradox of the "simultaneous rise of the new spirit of isolationism amidst the increasing globalization of business and economic activity."
The fact remains, however, that to an increasing extent, the economic welfare of communities throughout the United States is contingent on events elsewhere in the world. Income and employment levels are no longer insulated from changes elsewhere in the global economy. With each passing day, every state, every district, and every community in the United States is increasingly affected by global interest rates, global capital flows, global trade trends, and shifts in the global labor market. Peter Druck er recently put it this way:
"Too many economists, politicians and segments of the public treat the external economy as something separate and safely ignored. The world economy has become too important for a country not to have a world-economy policy. Managed trade i s a delusion of grandeur. Outright protectionism can only do harm, but simply trying to thwart protectionism is not enough. What is needed is a deliberate and active--indeed, aggressive--policy.... For the United States and a number of other countries, it means abandoning ways of thinking that have dominated American economics perhaps since 1933, and certainly since 1945."
This is precisely the goal of the Center's project on "The United States and the New Global Economy." We look to develop a policy blueprint for the country to prosper in a rapidly changing world economic landscape. This blueprint, furthermore, will rep resent a mix of high-level public- and private-sector deliberation. In this way, CSIS seeks to establish a bridge between government and business on these key policy issues, and to narrow the gaps in perception that currently exist.
Project Description
This 18-month project has two main goals:
* The first is to "map" the new global economic topography over the next 10 years by identifying key new forces and their likely effects. The initiative will focus on five key forces driving the process of global economic and financial integration: finance, trade, labor, technology, and advanced emerging markets (AEMs).
Together, these forces provide the outlines for the New Global Economy the United States must address to ensure prosperity for future generations. They also engender major policy challenges for leaders in both business and policy.
* Second, the project will analyze the implications of the new global economic topography for the United States and generate concrete recommendations about how the United States can best position itself for the future. These recommendations will cove r the five forces examined in the first phase as well as other issues germane to the broader mandate of the project.
By analyzing the forces transforming the global economy and by making appropriate policy recommendations, CSIS hopes to elevate the quality of debate on the net effects of economic globalization, define explicit linkages between the U.S. domestic and int ernational economies, expand communication between the federal and state levels on the U.S. policy framework, and bridge the respective positions of the government and private-sector leaders.
The United States and the New Global Economy:
Steering Committee and International Advisory BoardChairman:
Robert Day, Chairman and CEO, Trust Company of the West
Steering Committee:
J. Carter Beese, Vice Chairman, Alex Brown International, Alex Brown & Sons Inc.
Reginald K. Brack, Jr., Chairman, Time Inc.
L. Paul Bremer, Managing Director, Kissinger Associates, Inc.
William Brock, Chairman, The Brock Group
Richard R. Burt, Chairman, International Equity Partners
William Clark, President, Japan Society
E. Gerald Corrigan, Managing Director, Executive Administration, Goldman Sachs
Robert C. Dinerstein, Senior Managing Director and General Counsel, UBS
Richard J. Elkus, Jr., Director, Voyan Technology
Geza Feketekuty, Director, Center for International Trade at the Monterey Institute of International Studies
John G. Heimann, Chairman, Global Financial Institutions, Merrill Lynch & Co., Inc.
Carla A. Hills, Chairman, Hills & Company
Henrietta Holsman Fore, Chairman & Chief Executive Officer, Holsman International
Thomas Friedman, Columnist, New York Times
Francis Fukuyama, George Mason University
Michael Galvin, President, Galvin Enterprises, Inc.
David D. Hale, Chief Economist, Kemper Mutual Funds
Gary C. Hufbauer, Reginald Jones Senior Fellow, Institute for International Economics
Walter Kansteiner III, Senior Associate, Forum for International Policy Rosabeth Moss Kanter, Professor, Harvard University
Julius Katz, President, Hills & Company
Francine Lamoriello, Senior Director, International Business Strategy, Baker, Donaldson, Bearman & Caldwell
Philip C. Lauinger, Jr., Chairman, Lauinger Publishing Company
Jack Lavery, Senior Vice President and Director of Corporate Business and Research Strategy, Merrill Lynch, Inc.
Diana MacArthur, CEO, Dynamac Corporation
Theodore H. Moran, Karl F. Landegger Professor of International Business Diplomacy, School of Foreign Service, Georgetown University
Michael H. Moskow, President, Federal Reserve Bank of Chicago
Alan Murray, Washington Bureau Chief and Senior Economics Reporter, The Wall Street Journal
Douglas T. Purvance, Booz-Allen & Hamilton, Inc.
John J. Roberts, Vice Chairman, American International Group
William D. Rogers, Partner, Arnold & Porter
Michael A. Samuels, President, Samuels International Associates, Inc.
Andy Sieg, Senior Vice President, Merrill Lynch
Roy C. Smith, Professor of Finance and International Business, Leonard N. Stern School of Business, New York University
Murray Weidenbaum, Chairman, Center for the Study of American Business, Washington University
Gary C. Wendt, Chairman and Chief Executive Officer, General Electric Capital Corporation
Marina v. N. Whitman, Distinguished Visiting Professor, University of Michigan
John N. Yochelson, President, Council on Competitiveness
International Advisory Committee:
Albert Bressand, Managing Director, Promethée
Maria Livanos Cattaui, Secretary General, International Chamber of Commerce
Kenneth S. Courtis, Strategist and Senior Economist, Deutsche Bank Capital Markets
Paul A. Dimitruk, Chairman, Pareto Partners
DeAnne Julius, Chief Economist, British Airways
Ian Martin, Chief Executive Officer, Unigate plc
William Rogers, Senior Partner, Arnold & Porter (London)
CSIS:
Erik R. Peterson, Senior Vice President and Director of Studies; William A. Schreyer Chair in Global Analysis; former Director of Research, Kissinger Associates, Inc.
Bradley Belt, Director, Capital Market Reform Project; Director, National Commission on Retirement Policy
William Garrison, Director, International Communication Studies Program
Ernest Preeg, William M. Scholl Chair in International Business
Peter Watson, Senior Adviser and Director, International Economics and Business Program; former Chairman, International Trade Commission
Sidney Weintraub, William E. Simon Chair in Political Economy
The Paradox of Simultaneous Globalization and Isolationism
Murray Weidenbaum on the challenges to American policymakers . . .[Murray Weidenbaum, former chairman of the Council of Economic Advisers, is chairman of the Washington University Center for the Study of American Business. The following is excerpted from his recent comments before the CSIS International Research Council, which he cochairs with Walter Laqueur.]
How does one reconcile virulent isolationism with an increasingly global economy?
A large part of the blame for our current predicament goes to the foreign policy establishment, which looks on the economy as an adjunct to defense policy. Using our economic strength and boycotts to convince countries to change their policies is hardly a central role for economic policy. The problem for the foreign policy establishment--because it fails to understand or pay much attention to the economic system--is that it does not have the slightest idea of how to deal with the isolationist sentiment in this country--which is such a barrier to sensible foreign policy.
We know, of course, that by every economic measure the flow of commerce and economic activity in the United States is increasingly transnational. International trade accounts for a rising share of the U.S. GDP. Growing arrays of American companies invest a majority of their assets overseas, and these companies obtain most of their sales and profits from those foreign sources. Indeed, the notion of cross-border business alliances has moved from the classroom to the boardroom. Global and massive movements of money and information occur faster than the eye can blink.
Most Americans regularly participate in the world economy, whether they know it or not, especially as consumers of goods and services produced around the world. In fact, if they did not participate to the degree in which they do, there would be no need for protectionism in the first place.
Yet, simultaneously, substantial segments of our society are focusing their thoughts primarily on internal matters. This isolationist, internally-oriented attitude is reinforced by the view that foreign influences are essentially harmful.
Surely, there is no shortage of domestic problems that bedevil our society--crime, budget deficits, and what is described as a growing gap between richer and poorer. These serious domestic challenges are compounded by the adverse effects of foreign competition on important segments of our population that are truly hurting--especially middle-aged workers with obsolescent skills and above-market pay. Let's face it, those workers don't share the general enthusiasm for the developments in the dynamic, entrepreneurial economies of Southeast Asia. You and I may look upon the achievements of the "Bamboo Network" of family-oriented Asian businesses as the modern equivalent of Horatio Alger. But many of our citizens see only unfair, low-cost competition on a field that is anything but level.
There is no simple and effective answer to the paradox of the simultaneous growth of globalization and isolationism. But one thing I'm sure of: More lectures on the merits of free and open trade will not suffice. They will serve only to irritate the losers in the dynamic marketplace. Nor will the standard supply-side response of tax cuts--whether or not accompanied by easier monetary policy--do the trick, especially at a time when concern about inflation is rising. But neither is a do-nothing strategy appropriate.
What we need is not a quick fix, but a positive and durable response. Specifically, we need to identify a set of strategic reforms to the structure of the American economy that will make this country a more attractive place for doing business and employing people. Such action will both reduce the protectionist sentiment at its core and enhance the U.S. global position.
Here are some key ingredients. First, we need not tax cuts but tax reform, as a way of raising our abysmally low levels of savings and investment. The basic way to do this is to shift the basis of taxation from income to consumption. And we can realize this goal while maintaining the progressive nature of the tax system, if we want to do so.Second, rather than preoccupying ourselves with total federal spending--and it should be closer to the level of available revenue--we need to shift the preponderance of government outlays away from consumption by entitlements to investment in training, education, and new technology.
Third, we need to eliminate the numerous and expensive federal subsidies that shield large portions of the economy from competition in the marketplace. These anti-economic expenditures often are simultaneously environmentally destructive. Ridding the budget of them would literally generate a "twofer."
Fourth, in the arcane area of governmental regulation, the traditional preoccupation with social benefits needs to be tempered by the offsetting economic costs. In particular, we need to focus on those regulatory requirements that cavalierly reduce the availability of jobs in the United States. If this discussion of regulation sounds trivial, just consider that monument to regulatory stupidity otherwise known as the Shoreham nuclear power plant on Long Island. A major portion of New York State is saddled, and for years will continue to be saddled, with very high-cost electricity that reduces the competitiveness of the industry in a key region of our country. This happened simply because the then-governor arbitrarily refused, at the tail end of the process, to let the company operate the plant even though it had met the multitude of requirements imposed by the intricate permit approval process. Since then, we have seen the exodus of manufacturing to lower-cost areas.
Regulatory, tax, and other structural reforms are needed to enhance the productivity and competitiveness of the U.S. economy. That's the positive response. Sadly, this is a subject that most foreign policy experts find too boring to command their attention. Nevertheless, we must persist in chipping away at these obstacles to economic progress.
A word of caution. The route I envision for the American economy will not be easy. Nor will it quickly yield dramatic results. But, in the most fundamental sense, these reforms will provide a constructive response to the isolationist sentiment that is now so strong. This is a response that is consistent with an increasingly global marketplace and, of greater importance, with the maintenance of a free society.
Finally, focusing economic policy on producing a stronger economy--rather than on using our economic strength to force other nations to change their policies--has a great advantage. It generates the resources for the substantial investments in defense and foreign policy initiatives needed to maintain America's position in an uncertain and dangerous world.
Regulating Global Electronic Commerce
The Administration's approach to growing cybercommerce. . ."Governments can have a profound effect on the growth of commerce on the Internet. By their actions, they can facilitate trade on the Internet or inhibit it. Knowing when to act and, at least as important, when not to act will be crucial to the development of electronic commerce." These words, drawn from a draft inter-agency document under development by the Administration to address electronic commerce, reflect a non-regulatory, market-oriented approach that Washington will promote with other governments as electronic commerce takes off in global commerce. The stakes are high. Electronic commerce, with an estimated sales volume of $200 million two years ago, is expected to reach several billion dollars of sales by the turn of the century. By virtue of its developed cyber-infrastructure and technological comparative advantage, the United States is well positioned to exploit the upside of this revolution--but only if a harmonized and transparent environment for global cybercommerce can be achieved. That will be no small task. The threat exists that governments will inhibit growth by creating new levels of regulation, adding new bureaucratic layers, and/or imposing new taxes and tariffs.
The Administration's strategy to create a predictable legal and regulatory framework for the development of electronic commerce is nearly complete. This "roadmap" for international discussions and agreements is based on the following principles:
* The private sector should take the lead in the electronic marketplace. Washington acknowledges that the rapid take-off of the Internet has been driven primarily by the private sector, and that the private sector must continue to lead for electronic commerce to flourish. The role of government, then, should be limited to creating a more predictable environment in terms of enforcement of contracts, liability, intellectual property protection, privacy, and security so that current uncertainties inhibiting higher levels of electronic commerce are reduced or even eliminated.
* Governments should avoid undue restrictions on electronic commerce. This is the flipside to constructive government involvement. The Administration's position highlights the downside of "problematic regulation [including] taxes and duties, restrictions on the type of information transmitted, control over standards development, and public utility forms of regulation on services offered." It also warns that "signs of these kinds of commerce-inhibiting actions are already appearing in many nations . . . [and that] preempting these harmful actions before they take root is a strong motivation for the [government's] strategy."
Specifically, the Administration will advocate that the WTO, the OECD, and other appropriate international organizations declare the Internet to be a duty-free area, and that only existing tax regimes should be applied to electronic commerce.
With respect to electronic payments systems and the security of cybercommerce, the government is advocating case-by-case supervision of the new systems that are coming on-line. It is working with G-10 Central Bank Governors, the Basle Committee on Banking Supervision, and the Financial Action Task Force to monitor the effect of EPS technologies on international commerce and banking.
Similarly, the U.S. government is supporting the development of a "uniform commercial code" for electronic commerce, similar to the Uniform Commercial Code adopted by the American states, and has endorsed a model law developed by the UN Commission on International Trade Law as a starting point.
In the area of intellectual property protection, the U.S. government is also seeking to establish clear and effective copyright, patent and trademark protection through international agreements to deter piracy and fraud.
The U.S. Patent and Trademark Office is leading the U.S. delegation at the World Intellectual Property Organization (WIPO) to formulate such agreements on copyrights through that organization. In the area of patents, the government will continue its annual conferences with Europe and Japan. It also looks to establish a working group of the WIPO permanent committee on industrial property information. On the issue of trademarks, it intends to seek domestic and international agreement on uniform standards that address trademark infringement and priority of rights for trademarks used in cyberspace.
* Where government involvement is needed, it should support a predictable, minimalist, consistent and simple environment. Specifically, Washington is advocating on the role of government in shielding consumers from fraudulent sales, protecting intellectual property, ensuring privacy, fostering competition, promoting disclosure, and creating "simple" means for the resolution of disputes.
On the matter of security, the Administration will seek to liberalize export controls for "commercial encryption products" while at the same time protecting legitimate law enforcement and national security interests.
* Governments should recognize the unique qualities of the Internet. The position paper suggests that governments across the world should recognize that "the Internet's unique structure poses significant logistical and technical challenges to current regulatory models, and should tailor their policies accordingly." It points to the decentralized nature and bottom-up governance of the Internet, and the need for industry self-regulation and close cooperation with the private sector.
* Electronic commerce should be facilitated on an international basis. Here the Administration will face its most difficult test. Enumerating the principles for "free trade" in cyberspace is one thing, but lining up countries with vastly different political, social, religious and other perspectives is quite another. The challenges in achieving consensus on the foregoing points will likely be significant even with our closest trading partners, as the constellation of "physical" trade issues--ranging from market access to technical standards to local content--has demonstrated over recent years.
Forging a globalized approach to electronic commerce along these lines will require an intense and sustained effort by this administration and, no doubt, future administrations.
[The specifics of the position paper are available at
http://www.nist.gov/eleccomm/glo_comm.htm]
The Challenge to Cities
Mayor Jerry E. Abramson of Louisville, Kentucky, on the global economy . . .Today, no city--no matter how small, no matter where it is located--and no state--no matter whether it is agricultural or industrial--can divorce itself from the impact of the global economy. Whether it is Nebraska wheat, Washington timber, West Virginia coal, Iowa corn, or Kentucky thoroughbreds, the market for those products is as much overseas as it is domestic. States and cities are actively seeking foreign investments, and actively playing a role in opening foreign markets for their local products. Competition among states and cities is fierce for these investments and markets.
The last two decades show why. In the 1970s, American cities began to lose manufacturing jobs as corporations went global and began to locate plants abroad. The early 1980s were the coup de grace. When I became mayor of Louisville in 1986, our city was reeling from the impact of the 1981-82 recession, when we lost 30,000 manufacturing jobs. My first priority was to restore jobs and a vibrant economy to our metropolitan area. We needed to become competitive, and quickly. We had to recognize the new reality of the global economy, seek investment, and expand markets abroad for our businesses.
To accomplish this, a strong, locally based, grass roots-oriented effort at commercial diplomacy was necessary. I launched my first trade mission to England, Germany, and Belgium within six months of my inauguration. Since that first trip, I have led trade and tourism missions almost every year of the 12 years of my administration, making sales presentations to foreign corporations and seeking to secure tourism contracts.
Mayors are working with governors to increase the attractiveness of their states and cities to foreign investment. They are also working closely with Washington-based agencies and diplomatic contacts to advance international economic development objectives. While the departments and agencies have been helpful, I must say that for cities, Congress has been missing in action. In the 1980s and 1990s, federal help for cities--from revenue sharing to funding for housing, infrastructure, and human needs--has been slashed. We are the orphan child of the new federalism.
As the partnership between Congress and local government frayed, mayors turned to local corporations for help. In response to intense international competition, U.S. companies became lean and mean, downsized their workforces, and modernized their manufacturing processes and technology. But they also found state and local governments willing to help. Cities and states, seeking to replace lost jobs, began offering incentives, tax breaks, and other government services to both attract new business and keep old ones.
Local government and business also realized that working together was a logical solution to problems they faced. For example, Louisville is the home of UPS's international air hub. Packages shipped from Europe and the Far East come to Louisville to be sorted. But we needed to expand our airport and add additional runways not only to handle the UPS traffic, but also to increase the ability of airlines to serve our city because air travel is the highway of the global economy. Our local businesses were willing to fund start-up costs for our city's $400 million airport expansion.
UPS makes our airport the sixth largest in the world for cargo, handling more than 2.7 billion pounds of air cargo annually. Because of UPS's hub, foreign and domestic companies have flocked to our industrial parks to build distribution centers. Our local, government-owned Riverport International Park offers the advantages of being both an enterprise zone and a foreign trade zone, offers significant breaks on duties and tariffs as well as tax breaks. Overall, the Louisville metropolitan region now has 90 foreign-owned companies, with an investment total estimated at more than $3 billion. In fact, we were so successful that in 1991 Louisville was named by World Trade magazine as one of the 10 best cities for international companies in the United States.
Cities and states have assisted the international outreach effort to secure foreign investment and to find markets abroad in a number of ways. For instance, Kentucky's World Trade Center, the state-led outreach effort, moved its headquarters to Louisville in 1995. The center provides educational programs, foreign trade seminars, and advice for businesses interested in foreign markets and foreign companies interested in local investment.
Our city's Office of Economic Development and our local Sister Cities organization are now heavily oriented to trade and economic development. Through our Sister Cities relationship with Perm, Russia, we set up the first locally based joint Russian-U.S. capital fund in October 1995 to help Perm purchase high-tech medical equipment from our area. Twenty MBA candidates from our local Bellarmine College went to Perm to help Russian entrepreneurs open businesses there, while under the USIA Business for Russia program 30 Russian students came to our community. As a result, several of our Louisville businesses are now doing business in Russia. Similar exchanges are going forward with our other Sister Cities: Quito, Ecuador; Tamale, Ghana; La Plata, Argentina; Mainz, Germany; and Montpellier, France.
Yet, even though cities and states have formed partnerships with the private sector to promote the global economy, I must return to an earlier theme. There is a serious disconnect between our efforts and what is happening in Congress. Underlying our needs to compete locally are two fundamental requirements: (1) an educated workforce that can perform the jobs being created by the information age and the global economy, and (2) improved infrastructure--whether old-fashioned roads and bridges or the infrastructure necessary to improve the information highway. The president, governors, and mayors understand the need to improve education--from research at our local universities to job training for our disadvantaged population. Yet Congress seems to have no concept of how to invest to ensure our global competitiveness. Mesmerized by the deficit, caught up in ideology and social issues, this Congress is letting the opportunity to prepare our nation for the next century pass by.
We need a national strategy to continue our advances. But with Congress absent for the most part as a partner in the planning process, our ability to develop and enact such a national strategy is hampered. Should we reduce federal spending? Yes. But any company that only reduces costs without investing in new technology, training, equipment, and products is on the road to nowhere. Likewise, we must have national investment in research, education and job training, and infrastructure to back up the efforts of our private sector and local governments.
[Excerpted from comments delivered recently to the CSIS Advisory Board.]