Global Trend

The Coming Global War for Economic Supremacy

As we’ve discussed, America must confront such issues as the fifth wave and the rise of global powers like China, with its mammoth population of cheap workers, its vast hoards of cash, and its urgent agenda for acquiring the resources to make it an economic superpower.

Clearly, if we are to remain the dominant technological and economic power in the world, we have to rethink the way we do business.

hat’s at stake is the very standard of living that we’ve fought for decades to achieve. Looking back, we’ve weathered each great challenge, coming out on top every time. But according to an article in Fortune magazine, no challenge we’ve faced has ever been as great as the one now looming ahead. And if we don’t get it right this time, we could enter a period of long, slow economic decline that could trigger a domestic or even global political crisis.

The big question, then, is: Can America still compete? We’ve always done it before, and we’ll do it again. But the game has changed. It’s a global economy without traditional borders. Somebody in India could literally have your job tomorrow.

Fortunately, the U.S. economy is strong. Productivity is at historic highs, and unemployment is low. Everything points in the right direction. Everything, except one thing: For the first time in 14 years, average compensation for the American worker fell last year, despite all those positive indicators forecasting that it should have risen. And prominent economists say that foreign workers are the reason ? and will be for years to come.

The problem is that the U.S. is trailing behind other countries in the number of highly skilled workers it is producing. China will award 3.3 million college degrees this year. Another 3.1 million will graduate in India. Meanwhile, the U.S. will award just 1.3 million.

In the process, China will create more than 600,000 engineering graduates, while India will add another 350,000. At home, we’ll hand engineering degrees to only 70,000 young people.

The combined populations of India and China are about seven times that of the U.S. But, they’re producing over 13 times as many engineers; that’s twice as many per capita.

Economic development throughout the world has been driven by science and technology. So, the key to maintaining our way of life lies largely in creating the next wave of scientific breakthroughs. And, it’s people schooled in science, math, and engineering who will be creating the technologies of the future.

According to Fortune, many of the world’s top economists conclude that this will lead to tremendous downward pressure on American wages and therefore, ultimately, to our standard of living. They argue that the only solid answer to the problem is education, because the best educated nation will produce the best science and technology.

In short, this means we need to revolutionize our schools. Fortunately, we’ve done it before. First, we did it in the transition from an agrarian society to an industrial one in the 19th and early 20th centuries when we created the high school as a universal standard of education for Americans. By 1940, we were the best-educated culture in the world. Then, after World War Two, in the face of the Soviet threat, we pushed the envelope again, investing federal dollars into creating more math, science, and engineering graduates than any other nation. This led to a revolution in industry that brought us everything from the integrated circuit to the laser.

It’s now time for a third revolution in education that will take us into the future with our technological lead ? and our way of life ? intact. This means that legislative reform is needed to create standards and accountability for our schools.

And, even as we’re building our intellectual capital at home, we have to remember that many of the great minds in the history of our technological dominance came from abroad. Think of Albert Einstein and Werner von Braun, to mention just two. In fact, it’s largely been America’s unique ability to attract global talent that has enabled us to dominate science and technology for the past century and a half.

But, today our immigration laws are keeping the best people out. The H1-B visas that would allow them in have recently been slashed from 195,000 to 65,000. That’s going to have to change.

Based on this analysis, we offer the following seven forecasts:

First, America will compete by exploiting its uniquely fertile entrepreneurial culture, which can’t be readily imitated elsewhere. Steve Jobs could not have invented the Apple computer in his garage if his garage had been in China. Bill Gates could not have created Microsoft there, either. Anyone can get a Ph.D., and anyone can pour money into research, but the truly creative leaps that are the stuff of technological revolutions arise from a culture of people who think for themselves and are rewarded for taking chances. For this reason alone, the threats to America’s advantage in innovation are not as severe as they first appear.

Second, even while our unique culture will afford us some protection, we won’t be able to rest on our laurels. We need to upgrade our skills and education to create the intellectual capital that will fuel future developments. With good leadership, we will revolutionize our schools once again, creating a culture that values education above instant gratification. New standards of accountability in our schools will enable us to create the most well-educated large population in history in the coming decades. That population will be competent to compete in ? and dominate ? the global marketplace.

Third, rising standards of living in other nations will not necessarily cause ours to decline. On the contrary, the theory of comparative advantage predicts that globalization will make everybody better off in the long run. After all, the rise of American technology didn’t cause a drop in the European standard of living. Looking ahead, China, India, and other developing nations will enjoy an improved way of life in accordance with their technological advancement, just as we have. In other words, the world will experience an overall improvement in standards of living and reach a higher level of equilibrium.

Fourth, for all its money, China will remain a backward nation in terms of market fundamentals for decades to come. In many ways, the threat of China as an economic competitor is certainly formidable. However, mainstream analysts typically overlook the fact that China’s communist legacy continues to thwart its economic potential. According to an article in the Financial Times, China’s backwardness stems from its style of government and the recent attempts to meld that with a more Western, capitalist strategy for self-improvement. This “Chinese compromise” doesn’t work, and has instead brought together the worst of both systems. While China has lots of cash, it allocates capital not according to rational risk analysis or market forces but by political fiat. In industry after industry, Chinese manufacturers are building up a crippling overcapacity that will only come back to haunt its economy and drain its resources. At the same time, China’s oppressive authoritarian government will keep its intelligent and well-educated people from being as creative as they need to be to compete. And, the stifling de facto state ownership of everyone and everything will keep entrepreneurs from developing to their full potential. Until the Chinese system truly changes, China can never actually become a fearsome competitor.

Fifth, in the coming decade, much of China’s economic power will be shown to be an illusion. Some people now see that nation as a place where cheap labor makes doing almost anything possible. But, if that’s the case, why aren’t Chinese companies making any money? And, why is its stock market at an eight-year low despite 9 percent+ GDP growth? The reason is that the real cost of doing business in China is extremely high; so high as to be prohibitive. Businesses there are being strangled by oppressive regulations, inept management, high operational costs, and a culture that simply doesn’t understand the value of return on investment. Even when an entrepreneur emerges there, China’s poor control of intellectual property typically means that his work will come to nothing. Since China’s insular state-run control structure seems incapable of overcoming these problems, China will never be on the technological cutting edge in a wide range of industries. Rather, it will remain an enormous, but essentially unsophisticated, exporter and processor of borrowed ideas.

Sixth, Chinese enterprises will make many stumbles in the coming decade before a few of them become world-class competitors. With the exception of a few Hong Kong companies, Chinese enterprises are neophytes when it comes to creating technological revolutions and to bringing them successfully to market. Even with the cleverest invention, the cheapest labor, or the most efficient processes, imitating large-scale entrepreneurial success is no easy matter. The Japanese, masters of the process, have demonstrated this with previous economic stumbles that brought their companies to their knees. Chinese enterprises and those of other developing nations that seem to pose such dire economic threats today have a very long way to go before being on an equal economic, technological, or business footing with the best companies in the United States or Europe. Look for some serious growing pains in those companies before it’s over. In the meantime, American entrepreneurs will do what they’ve always done: Retrench, retool, reeducate, and surge ahead.

Seventh, if America can continue to generate and hold onto the same number of foreign-born graduates in the sciences that it did in the 1990s, the U.S. will have plenty of technical expertise. American companies can select the best people from the global talent pool, particularly from India, China, and the countries of the former Soviet Union. At American colleges and universities, foreign students receive 40 percent of the advanced degrees in chemistry and biology, 50 percent in math and computer science, and 58 percent in engineering, according to figures from The National Science Foundation. As we noted in the October 2004 issue of Trends, there is reason to believe a shortage of scientists and engineers will not prove to be a serious long-term problem for the United States. That view is supported in an essay called “What Scientist Shortage?” in The Washington Post, by Daniel S. Greenberg, a guest scholar at the Brookings Institution. Greenberg contends, “The alarmists of scientific shortage have been warning for decades that a homeward exodus of foreign scientists will someday occur. But contrary to this expectation, the ‘stay’ rates of foreign doctoral students have actually increased, according to the National Science Foundation, which reports that 71 percent of foreign citizens who received their Ph.D.s in 1999 were still in the United States two years later ? up from 49 percent in 1987.” The uniquely fertile economy and academic setting in the United States will continue to attract the best and the brightest from around the world, and we’ll continue to be the beneficiaries as long as we don’t impede the natural flow of talent.

References List :
1. Fortune, July 20, 2005, “Can America Compete?” by Geoffrey Colvin. ⓒ Copyright 2005 by Time Warner, Inc. All rights reserved.2. Financial Times, April 29, 2005, “Chinas Corporate Cost Advantage Is a Myth,” by Joe Zhang. ⓒ Copyright 2005 by The Financial Times, Limited. All rights reserved.3. The Washington Post, May 19, 2004, “What Scientist Shortage?” by Daniel S. Greenberg. ⓒ Copyright 2004 by The Washington Post Company. All rights reserved.