United We Fall

Little,Brown

Pages: 380

Rs 599

In his continuing series of soundbite-sized diagnoses for the world’s problems,Thomas Friedman gets to America’s decline in That Used to be Us. It is Everyman’s politically correct list of issues and the authors,Friedman and Michael Mandelbaum,provide answers to the challenges through anecdotes and interviews. Some parts are funny, many parts repetitive. The best anecdote occurs early,and maybe unrelated to the major theme of the book,but the authors found it funny,and so did I. The quote for all seasons,and all books,originates with the manager of Liverpool’s football team: “Some people say that football is a matter of life and death. They are wrong. It’s much more important than that.”

The book is about the reasons for America’s decline,and how the past can be resurrected in the foreseeable future. The book suggests that there are four challenges to America. The Big Four are: how to adapt to globalisation,how to adjust to the information technology (IT) revolution,how to deal with large and soaring budget deficits,and how to cope with rising energy consumption and climate threats.

The important takeaway from the book is that globalisation has been responsible for America falling behind. Not an entirely original idea,but there it is. Its workers have been out-competed by,and its work outsourced to,workers in China,India and other members of the world-is-flat community. And what is the remedy,the policy? The US is weak in education,and it is time to wage war against the war on math and physics. Essentially,Americans got lazy,believed they had “a divine right to everything” and lost direction — and became weak because of a faulty education system.

There are problems both with the diagnosis and suggested solutions. First,the cause. Globalisation. The most consistent determinant of growth is catch-up. Stated simply,catch-up is a phenomenon whereby poorer countries grow faster than richer countries. Why? Because poorer countries can import technology free of cost — the developers of technology want to hire the cheap labour that poorer countries have. Globalisation means capitalism,and capitalism means profits. In the last 30 years of globalisation,technology has proceeded faster than at any time in history. That makes the post-1970s experience stand out among the great globalisation periods in human history.

So globalisation is not the cause for America’s decline. Stated differently,a large part of the decline in long-term US growth was/is inevitable. It has affected all nations and all the rich nations have had to make adjustments to this reality. There is an additional element,though,and an element that the authors get right. They start the book with this important sentence: “This is a book about America that begins in China.” But what makes China’s entry into globalisation so important for America and the rest of the world? Size,yes. But in terms of per capita income India was almost equal to China in the late 1970s,and the book does not begin in India. What makes the entry of China different for the entire world is its size coupled with the cheapest currency the world has ever seen. The fair value of the Chinese yuan is not 6.7 yuan but closer to 4 yuan. Just a few years ago it was 8.3 yuan. That makes the Chinese worker,after adjusting for productivity differences,cheaper than any worker in the world. And its size means that there aren’t too many jobs for anyone else. Looked at another way,China’s per capita GDP is three times India’s,the education level of its urban workforce is about two to three years higher than in India,and yet Chinese wages are lower than Indian wages in dollar terms.

Non-recognition of the scope of the Chinese advantage,and the world’s disadvantage,leads the authors into a wrongful attack on US education. For at least 30 years,we have been hearing the refrain: Johnny goes to school,but Johnny cannot read. Many foreigners have benefited enormously from the very same educational system. Indeed,the first preference for parents across the world is for an American education. And Americans remain,and most likely will remain,the true innovators in this rapidly changing world.

That is not to say that the US education system is not in need of repair. But it is to assert that among all the problems the US has,education is not high on the list. To identify the problem is to recognise the solution. And the solution is a new order of cooperation in this integrated world. In this new order,differences in the price of productivity-adjusted labour are critical to the wealth (and decline) of nations. The price of capital is the same across the world (except in ridiculously high-interest rate India!). This sameness further enhances the importance of getting right the price of labour. Just think how many million jobs there would be for blue- and white-collar Americans if there wasn’t dirt cheap labour in China for Walmart and IBM to hire. So maybe nothing went wrong with America.