BUILDING A COMPETITIVE ECONOMY FOR THE GLOBAL MARKETPLACE
Abraham M. George
This essay was delivered before several audiences in Bangalore, India, in January-February, 1995.
As an American of Indian origin, I hope my presentation today will have a perspective that you find interesting. Having spent over two decades in America, I am trained to see the business world as an American, but I want to assure you that I haven't forgotten my Indian heritage. My views on the subject of global competition have evolved from my consulting career working with multinational companies, my keen interest in political history, and undoubtedly from the opinions expressed in the writings of certain great minds, and in particular, Milton Friedman and George Will.
Let me start by asking ourselves the basic question: how does a nation compete and succeed in today's global market? Well, the answer appears rather simple: produce superior quality products at a relatively lower cost. Unfortunately, the solution just stated is a major challenge for any country. It may be within the reasonable reach of a country, such as India, to specialize in one industry, say textiles, and take advantage of the relatively lower labor and resource costs, and capture a certain segment of the global market for some time. But it is an other matter if India wants to be a successful industrial power like most of the Western European countries, Japan, Korea, or Singapore.
In order to understand what fundamental changes are needed for a country to succeed economically in today's world, we need to look beyond economics -- the political, social, and national characteristics of our nation and those we compete with. These are issues that America is currently struggling with, and I want to share some of those thoughts with you.
During the past decade, the production of many things -- cars, well-trained college graduates, low budget deficits, healthy balance of payments, livable cities, and the like -- have faltered. Schools are inadequate, scandalous numbers of children are in poverty (one in five), public choices produce spending wildly in excess of revenues, and private choices produce a destructive ratio of consumption to savings and investment. Many of its industrial partners produce superior quality products even in industries that have traditionally been American. In the midst of these many failures, Americans are delighted to find a few things that work -- weapons, the military generally -- when the nation consents to the use of force.
With the Allied operation against Iraq, America fought its sixth significant war since the battleship Maine blew up in Havana harbor in 1898 (by accident, it now appears). America was not attacked by Iraq, North Korea, or North Vietnam; these were optional wars in the name of freedom and containment. Today, the demise of communism has, in the minds of many Americans, invalidated the need for excessive military spending, but only to find that America is called upon for duty in unheard of places such as Somalia, Rwanda, Haiti, Sarajevo and others.
Nations are made in two ways: by the slow working of history or the galvanic force of ideas. Most nations are formed the former way, emerging slowly from the mist of the past. But a few nations, such as America, are formed and defined by the citizens' assent to a shared philosophy. The United States is a nation of immigrants whose social diversities are submerged beneath a shared dedication to a proposition. They consider that proposition as self-evident, that is, convincing to all reasonable minds. The immigrants who made America shed many nationalities and acquired a new one by the simple act of assenting to the proposition that all persons are created equal. American pluralism poses many problems, but never nationalistic problems.
Americans are driven by certain moralistic goals -- the pursuit of fairness, equality of opportunity, compassion for the poor, and the like. But these have become an unedifying frenzy, often loosing sight of the goals and the objectivity for the means of achieving them. Unlimited tolerance in the form of indiscriminate compassion is supposed to yield -- shall we say, a happy ending? It is an age in which children are taught not to discover the good but to manufacture values. The society in general, and the government in particular, have allowed social experimentation with our children.
Some things are pure pleasures, such as children and their cats and dogs and other preoccupations. Our children are the most important reasons why we care about politics and government. And they represent the claims of the private, the personal sphere of life, which public affairs are supposed to serve. America is yet to find a solution out of the mess it has created -- the dreadful reality of teenage crimes, pregnancy, drug use, and low achievement.
The perennial drama of democratic governance in America arises from the turbulent individualism of this economically capitalistic and politically and culturally pluralistic society. Individual rights do not lack advocates. What often is lacking is the will, or skill to balance them against the rights of the community. Such balancing is a test of democracy's maturity.
In one decade, 1965 to 1974, the government took on social programs in the name of society in general. The political left wants strong government to engineer social change. Great Society initiatives coincided with extreme disorders among the intended beneficiaries of the initiatives. A new class of American citizens were created -- the welfare class -- people who found it economically advantageous not to work, and their children grow up with no respect for themselves, their parents, and the remainder of society.
America is burdened with a widening social class it attempted to save out of poverty, only to find that the work ethic was broken. Since the early eighties, a majority of Americans have lost faith in the government's ability to do good. Government is a blunt instrument, not a precision tool -- a hammer, not a scalpel. It is good at big, broad strokes, such as waging a war, but clumsy at intervening in the organic processes of a complex society. Today, America is debating its options to its major social problems -- crime, high cost of medical care, welfare for the poor, clean air, and the like. Unlike the earlier years, the role of the government will be limited, and the private sector will have to meet the challenges.
The aim of modern politics, from Machiavelli on, has been to simplify politics by orienting it, away from ideals of excellence and nobility, to low but solid passions and goals. Politics thrives on selfishness -- a constant powerful force that is encouraged -- and perfected like science, comparable to Newtonian physics, through commercials, promises and rhetoric aimed at voter groups. American politics suffers from this modern evil, but the good news is that Americans are getting tired of it.
Despite all its problems, America is still a potent nation, vibrant with ideas and determination. America is strong not simply because of its economic power and military might, but mainly due to its national character. America is a society rooted in democracy, freedom, equality, openness, tolerance, commitment and justice. While it is far from perfect, the nation as a whole is constantly attempting to live up to these ideals. Americans understand that the true test of one's commitment to constitutional principles is the extent to which recognition is given to the rights of the least affluent, the least powerful, and the least welcome.
First Amendment rights do not vary with the affluence of individuals. Minorities are protected from the tyranny of the majority. American universities are incubators of future elites, many of whom are of Asian origins. In fact, Asian Americans lead all other ethnic groups, including WASP's, in educational attainments, and are increasingly recognized as the nation's model minority. America has come a long way in accepting diversity -- whether it be ethnic origin, race, sexual preference, or ways of living -- in fact to a point where it is now almost closed to the idea of reasoned discrimination between values.
America will remain strong because it is an open society, willing to critique itself, to self-examine, to challenge, and ultimately correct itself. Openness is an instrument virtue valued because it makes possible the quest, through reason, for knowledge that makes the objectively good possible. A strong and free press and an independent judiciary are the guardians of a nation's conscience.
Once a leading politician asked Justice Oliver Wendell Holmes," Sir, do justice in this matter," and Holmes replied, "That is not my job. It is my job to apply the law." Americans are willing to sacrifice many virtues, and rightly so, to protect its free society from those politicians, bureaucrats, and the powerful among us who assume a monopoly on wisdom in distinguishing good from bad for the rest of us.
I have spent too much time on discussing America. I would like to turn to Europe for a few minutes. As late as 1911, Belgium was the only country on the continent operating on Greenwich time. Belgium was nine minutes behind Paris, which by the way, was five minutes ahead of French railway time, which was 16 minutes behind Dutch time. In 1912, the first step forward European unity was taken when all European clocks were synchronized in appropriate time zones around Greenwich. Today, the EEC is attempting to bring together its economic diversity by way of free trade, uniformity of standards, protocols, laws, and even monitory union. European unity was never a noble vision, but after two world wars, nobility seemed less urgent than tranquility.
Was Napoleon poisoned? I certainly hope so. Some say now that he really didn't die of cancer. Like Hitler, who was not a German, Stalin, who was not a Russian, Napoleon was not French. The only good Napoleon did was inadvertent; he excited Beethoven to compose Eroica. These three men have done more damage to Europe, and to the world, than everyone else combined in recent history. Wars and revolutions are like boulders hurled into ponds. Ripples radiate for centuries. Unintended consequences often matter most. On August 17, 1962, one year and four days after the rudimentary Wall was put up in Berlin, in the dead of the night, Fechter, a young man of 18, was shot dead trying to scale it near Checkpoint Charlie. He died slowly, while the communist police refused to give assistance.
1989 was a year like we have never seen before. Only the Reformation is remotely comparable. The peoples of Germany began tearing down the Wall, brick by brick. The voices of Eastern Europe, speaking so plainly and simply of freedom and truth, sounded like the ultimate affirmation that human nature is unchangeable. Even in the presence of overwhelming indoctrination, the yearning for freedom and truth will rise out of man's heart.
In fact, communism saw the beginning of its demise not too long after Marx predicted that the workers of the world will unite. Well, prophecy is a predictable folly. For one practitioner, it was fatal. Girdana Cardana, a mathematician of distinction, also was famous throughout Europe as an astrologer during the 1500s. In the latter capacity, he constructed a horoscope predicting the date and time of his own death. When the fateful day arrived and found himself feeling fine, he couldn't bear to have his science proven wrong. So he killed himself. Well, in Berlin, 47 years before the Wall went up, Marx's prophecy met with its first major defeat. In August 1914, the German communist party, within hours after the outbreak of the war, voted to raise funds for the fatherland, and against the workers of its enemy.
Communism's core value, equality, is achieved only in deprivation. Once a party leader told his men, "After the revolution every one will have strawberries and cream." One worker shouted back, "But I don't like strawberries and cream." Then the party leader, "After the revolution you will like strawberries and cream."
Communism has buckled beneath the weight of aspirations that America, by its mere existence, arouses. Institutionally, socialism committed suicide, not just in the Eastern block, but in the West itself. In France, a socialist president embarked upon a predictable program of planning and redistribution, with disastrous results. In Spain, the socialist government wound up embracing the market economy. Even in Britain, the Labor party found the political wilderness conducive to rethinking. That is enough said about communism and socialism.
I want to say a few words about Germany, Italy and Britain. Chancellor Helmut Schmidt -- I even have trouble pronouncing his name -- was fond of sporting his fisherman's cap from his native Hamburg. Perhaps, it was his way of saying, " See how far we have come from our spiked helmets". For the past five decades, Germany's most important export has been reassurances. Assurances and reassurances aside, Germany is set to win in peace the European supremacy that has twice eluded it in war.
Germany is the foremost example of economic efficiency, educational excellence and all-round seriousness. Italy, on the other hand, was the sick man of Europe until recently. Just a mere decade after the last rites were being pronounced, it is now flourishing in a manner that makes it a model for the future. Today, Italy is the world's fifth largest industrial market economy. What do you now say about the old British saying, "Catholics sleep well, Protestants eat well".
Margaret Thatcher was probably one of the great leaders of modern times. Remember the Falkland war? Among her many achievements, if we may give her appropriate credit, was the transformation of Argentina from military rule to a democracy. The essence of Thatcherism is creation of an entrepreneurial, property owning democracy -- a far cry from the labor's doctrine of social ownership, collective corporate decision making, and centralized planning. Today, Britain is on the road to economic parity with the rest of Europe. Even monarchy is accepted for the right reason -- the pleasures of gossip and romantic intrigue.
What do we conclude from all these developments? The lesson of central planning is that risk-averse bureaucracies are unsatisfactory sources of economic dynamism. A society becomes enriched when individuals can aspire, businesses can be independent of control beyond legitimate laws, and when labor, religious, cultural and other mediating institutions voluntarily serve as buffers between the interests of the individual and the society in general. Something else grows as a result of this: there is a rapid diffusion of ideas, aspirations, information and possibilities. The nation becomes politically, economically and socially strong.
President Coolidge once said, "The business of America is business." That statement is true for every nation. Business, and not wars, creates prosperity, raising the standard of living. Businesses must compete freely without governmental interference -- unwanted controls. The government needs to ensure that there is fair competition -- in other words, no monopolistic practices. It also needs to enforce the quality of life by way of safeguards on pollution, worker safety, and the like. But it has no business in tampering with the working of the market.
Can you think of a better way than the price mechanism in determining supply and demand? The key insight of Adam Smith's Wealth of Nations is misleadingly simple: if the exchange between two parties is voluntary, it will not take place unless both parties believe that they will benefit from it. His flash of genius was his recognition that the prices that emerged from voluntary transactions between buyers ands sellers could coordinate the activities of millions of people, each seeking his own interest, in such a way as to make everyone better off. It was a startling idea then, and it remains one today. Superior products command superior prices. Efficient production by way of superior technology and processes lowers costs. Higher profits, net of taxes, create the incentive to produce more. Competition ensures that profits are commensurate with risks.
I do not want to leave you with the impression that I believe capitalism solves all problems. I am reminded of what President Kennedy once said so confidently, "A rising tide lifts all boats". Now we know better. We still do not know how to raise those who are stuck deep in mud. The world today is full of conflicts. Ethnic assertion, and the animosity surrounding it, is so prevalent in many countries, including India. Indeed, hatred has been called the "longest pleasure." Until the peoples of the nation rise above their differences, the economic fabric cannot be well knit.
So, what should we as a people, the collective body that really matters, do to achieve the economic strength to compete globally? To start with, we need less government, and not more. We need to create an environment where individuals can aspire and realize their goals. Equality of opportunity, as opposed to equality of condition, needs to be the social goal. Equal is not to be interpreted as identical.
The point is that there is a philosophical conflict between the ideal of "fair shares" and the ideal of "personal liberty." There is nothing fair about Marilyn Monroe having been born with beautiful legs, or whatever, or Muhammed Ali having been born with the skill that made him a great fighter. A society that puts equality of outcome ahead of freedom will end up with neither equality nor freedom. Freedom preserves the opportunity for today's disadvantaged to become tomorrow's privileged through hard work.
The nation must invest in all its children. They are the future human capital that fuels the economy. Children are like computers in that what goes in comes out. And each child gets only one floppy disk -- there is a critical early period in the development process of every infant. The merry-go-round goes around only once.
People need to have high confidence in the legal system. Laws must apply to all equally. The legal system must be independent and free of corruption. Similarly, the political system must have adequate checks and balances. Political institutions need to be open in order to serve the people. No one should be above the law.
Businesses must have the incentive to take risks, and the reward must be profits to keep. Inefficient production should not be subsidized. Remove import restrictions so that domestic businesses are forced to compete with foreign firms. Allow foreign investments and the free flow of capital. Let exchange rates float in world financial markets to their economic value against other currencies. Facilitate rapid and free flow of information so that markets operate efficiently. And most important of all, we need to build a society based on freedom, liberty, justice, and the pursuit of happiness. If we can accomplish all these, we would have built an economy that is enduring, an industrial base that is world class, to compete in today's global market.
I want to conclude with a comparison of post-independent India and the first thirty years after Meiji Restoration of 1867 in Japan. Both countries have ancient civilizations and sophisticated cultures. Japan had a feudal structure while India suffered from a rigid caste system. Both countries experienced major political changes that provided the opportunity to alter the social and economic arrangements. Almost all differences favored India: Japan was practically isolated internationally; India had a pool of Western trained technicians; India enjoyed superior natural resources.
Despite these set of circumstances, the outcome was vastly different. Japan dismantled its feudal system while India did not sufficiently follow through its commitment to eradicate the caste system. Japanese citizens are given the opportunity to work hard and profit from it. In the name of fairness and equality of outcome, India took the socialistic route, created the deadening arm of governmental control and centralized planning, while the citizens accepted one failure after another within a fatalistic philosophy. The recent economic events in India are certainly encouraging and in the right direction, but I am afraid that the political, legal and social foundations are so damaged already that they need drastic repair. The lessons of history move very slowly. Can you visualize making changes to India's constitution, political and legal system, and major adjustments to its social arrangements?
All this may sound like I am advocating a revolution in India. Frankly, I am. Not a violent revolution, but one that emphasizes the human element. It starts with education, skills and values. Since government continues to play a critical role to changes in the Indian society, we need to question the way government itself functions. The political system in India operates without public input; public simply reacts to political initiatives. The system projects an appearance of order -- chaos masqueraded as order.
In our form of democracy, the emotions of the masses are made rational by political manipulations to engineer consent. Policies are driven mostly by political considerations, and less so by idealistic positive goals. When ideas go unchallenged, they become powerful -- very mythological. They create conformity. They intimidate, and often become destructive. Hence, as a pre-condition to the nation's economic success, we need to cultivate a political system that promotes our collective identity -- "we the people of India" -- instead of Hindus, Muslims, Sikhs, etc.. It must embody a society rooted in tolerance, diversity, cooperation, common good, respect and encouragement. Ethical behavior on the part of government officials cannot be an unrealistic expectation of the governed.
As a people, we have restricted our field of vision. We rely too much on our government, and we are constrained by the government. We are living a national ideology that is invisible to us because we are inside of it. We need to recognize that political freedom does not necessarily bring economic choice. Unless we nurture the human spirit for innovation, hard work and risk-taking, we cannot build an economically efficient society. At the same time, we have to remain a compassionate people. The belief that the poor are with us forever leads to inaction and cynicism. When we truly invest in our human capital, we will begin to see miraculous results that few nations can match.
I would like to conclude by quoting the inscription on the University of Texas main building: "You shall know the truth, and truth shall make you free."