New Economy

The world has undergone monumental change in the twenty eight years since my birth. I was born in a world without personal computers, grew up playing with the emerging technologies of home arcade systems called Atari, then Coleco Vision, then Commodore, then Nintendo, and now the IBM- clone PC.

I grew up with the fear of an imminent nuclear war breaking out between my land and the Soviet Union. Now with the end of communism, the one third of humanity and the one quarter of the landmass of the world that used to be controlled by that system will be joining the capitalistic world.

Rapid changes in the world requires humans that can adapt quickly. Since most people need stability, change means hardship for most of humanity. We live in a world in which the rapidly growing human population is consuming, co-opting, or wasting a major portion of total biological productivity.

Up to one fourth of all the species of plants, animals, fungi, and microorganisms are likely to disappear forever over the next few decades. In addition, most scientists who have analyzed the problem have concluded that the Earth's temperature is already climbing steadily because of the' progressive increase in carbon dioxide, methane, nitrogen oxides, and CFCs in the atmosphere.

The concentration of ozone in the upper atmosphere has apparently fallen sufficiently to account for already at least a 20 percent increase in the incidence of skin cancer at middle latitudes, and the problem continues to worsen. Our topsoil is beng lost and our waters polluted at unprecedented rates.

For one out of three people in the developing world, the only water available to drink is unsafe and possibly deadly. Meanwhile, we are rapidly destroying what is left of our forests, and deserts are spreading in many regions.

Those of us who live in industrialized countries are the core of the problems facing the global ecosystem today. Industrialized peoples number less than one quarter of the world's people, and their activities alone are more than sufficient to create global instability.

For example, the United States, with 4.5 percent of the world's population, generates about 21 percent of the world's carbon dioxide. Similar relationships can be demonstrated in almost any area of resource consumption, indicating clearly that the industrialized countries of the world must act forcefully to reduce their levels of consumption if we are all going to be able to attain stability.

Shifts in technology, transportation, and communications are creating a world that refuses to slow down. In today's world, anything can be made anywhere on the face of the earth and sold everywhere else on the face of the earth. A substantial difference exists between global business firms with a worldview and national governments that focus on the welfare of "their" voters.

With these shifts, the world's population is growing, moving, and getting older. There are two types of populations emerging. There are those in poorer countries who are moving from their homelands to richer countries just when unskilled labor is not needed in the wealthy industrial world.

At the beginning of the Industrial Revolution, approximately in 1800, only 3 percent of the world's people were living in cities; fully 97 percent were rural, living on farms or in small towns. In the two centuries since then, population distribution has changed radically- toward the cities.

More people will live in Mexico City by the end of the 1990s than were living in all the cities of the world combined 200 years earlier. This is a staggering difference in the way people live. Almost half of the world population is in cities now, with a very high proportion of the people who are being added to the population also being city dwellers.

In the less developed world, this tends to lead to increasing exploitation of those who live in rural areas and produce the food, wood, and other commodities on which the city dwellers depend. Even in industrialized countries such as the United States, urbanization tends to make us collectively less able to understand and appreciate biological productivity, on which our common future depends. The great majority of all world population growth over the next few decades will take place in the cities, with all of the problems that implies.

The existence of international capital markets raises the possibility that industrialized countries with aging populations could, by investing in less developed countries, simultaneously increase their savings rates and decrease their investment rates without large movements in the return to capital. Less developed countries have lower capital-labor ratios, but faster growing labor forces, than the industrialized nations.

Thus, the less developed countries represent an attractive opportunity for investment. However, these countries also often have underdeveloped capital markets and are perceived by foreign investors as being quite risky. The industrialized countries of France, United Kingdom, Japan, and Germany will experience population aging due to a drop in fertility and rising life expectancy, and they face an aged dependency problem more severe than that of the United States.

While there are now 4 5 workers working in the U.S.to pay for every pension, by 2030 there will be only 1.7 workers in the U.S. available to be taxed to pay for every pension. In 2030, the ratio of people older than 64 to those between the ages of 15 and 64 will be about 30 percent in the U.S., 40 percent in France and the United Kingdom, and nearly 50 percent in Germany and Japan. France, Germany, and Japan also face financing problems in their social security programs that are much more severe than those of the U.S. system.

Population aging has two components: increased longevity, which extends the proportion of life spent in retirement and should boost desired pre-retirement savings rates, and decreased fertility, which reduces the growth rate of the labor force. The latter leads to reduced demand for new investment.

In a closed economy, saving must equal investment. and a combination of increased desired saving and decreased demand for investment would lead to a decrease in the rate of return.
If the sole objective of the increased saving were to restore Social Security to solvency, then investment abroad would be preferred, since by increasing wages, domestic investment would also increase Social Security's future benefit obligations.

Domestic investment would also decrease the returns on the Social Security trust fund and private pension funds. Developing countries also have aging populations and many are setting up partially pre-funded mandatory pension plans. This may result in increased global saving and a decreased rate of return.

Offsetting this are continued large movements of workers out of agriculture; these shifts increase the demand for capital investment and could increase the global rate of return.
To stimulate foreign investment, developing countries need to exhibit financial stability. Financial stability in the developed countries relies on the health of the banking system.

The banking system provides for a stable medium of exchange in the form of currency, provides the safekeeping of valuables for the communities the individual banks serve, provides for the gro\vth of commerce by lending for the purchase of assets, and other stabilizing services. A strong banking system will be necessary for less developed countries to have access to the world's capital markets, which will be needed to finance the huge nfrastructural investments needed to produce the high value-added items from the industries of the next century.

Before establishing their own banking system, the developing countries can have the benefit from learning of the developed nations' bank industry development. The primary function of any financial system is to facilitate the allocation and deployment of economic resources, both across borders and across time, in a uncertain environment. A financial
system provides ways of clearing and settling payments to facilitate the exchange of goods, services, and assets.

For example, banking in the United States started right after the Revolutionary War. The First Bank of the United States was a federally chartered bank, established to print money, purchase securities in companies, and lend money. It was also responsible for establishing lending rules that state banks would have to follow.

This federal bank was closed because of concern about the power that the bank held. With the demise of the federal banks, state banks quickly grew in power and size. Each bank was allowed to issue its own currency, which created an enormous fluctuation in the number of dollars actually in existence. This, in turn, influenced the value of each dollar.

As the banking industry progressed, a Federal Reserve was established to supervise the fluctuation of currency reserves for banks and to print currency. Also, a trading place known as the New York Stock Exchange was started to allow investors to buy shares of a company and/or buy loan notes known as bonds issued by companies or the government.

When the whole banking system ran into trouble in 1933, the government created the Federal Deposit Insurance Corporation to establish guarantees of the money deposited in banks. To supervise the trading of securities and to make sure that self- regulation functioned properly, the Securities and Exchange Commission was established by the 1934 Securities Act.

With a stable banking system established, less developed countries can make efforts to enter the global economy. Entering the global economy requires a development policy that fosters an industry infrastructure that is capable of creating productivity gains at an increasing rate for a country to create global competitive advantage. A country's economic development problems have to be understood in the context of an increasingly global economy.

One can trace the developmental gap of a country to its inability to benefit from global trade. As global trade is a complex adaptive system, complex interactions in the system can lead to skewed outcomes, where one country dominates the trade even when it has only marginal productivity edge over others.

When one considers the industries of the next century-information processing, finances, entertainment, communications, and leisure- one can expect the complexity of global trade to increase further. Since many industries of interest exhibit increasing returns, it is futile for a laggard to compete in them unless they also achieve increasing returns.

It is widely recognized that to develop and use technology effectively, the three major technology functions- Research, Development & Engineering (RD&E); marketing; and production must work together as an efficient system. It is just as widely recognized that few organizations have been able to mitigate the tensions among these functions that result from "cultural" differences.

Such differences include different time horizons, educational backgrounds, career patterns, recognition and reward systems, and perceptions of who the "customer" is. They are not necessarily amenable to simple solutions, such as forming multifunctional teams. It is much harder, for example, to transfer tecnnology between functions when these functions are decentralized across three countries.

There is little in the way of practical experience or theoretical understanding to draw upon. The expanding number of joint ventures, cross-licensing arrangements and stategic alliances has added still another level of complexity. All of this technology research has a tremendous downside for humanity.

The sophisticated devices imagined and manufactured- things such as televisions, computers, and automobiles- have come to define our world. One of humanity's challenges will be to use technology as a tool but not to let it define THE interaction with the world.

Humanity needs to connect to the natural world. People need to take opportunities to be in the wilderness, to listen to the wind, and to look at the exquisite variety of plants and rocks and insects with which they coexist.

For financial stability, less developed countries can rely on their own leadership to improve the lives of the masses. Leaders are challenged to enable and unite their people in a common purpose. To fulfill such things in a pressured, ever-chaging, fragmented world requires deep personal integrity, self-awareness, and sensitivity to other people. Leaders must be willing to take risks and experiment, articulate and model new ways of working, and celebrate and use diversity. They must help people feel loyal and plan for the future without the security of long-time government employment. Conflicts must be confronted and managed honestly and openly to reduce frustrations and solve problems. To lead in today's world is to be tenacious, open-minded, and savvy, and to help people be motivated and skilled.

Leadership is crucial for the long run survival and improvement of any society. As illustrated by both the inability of China to use its remarkable technological advances to generate the industrial revolution and the inability of the Dark Ages to get back to levels of productivity that had previously
existed, the best social systems do not automatically arise even though the necessary technology is present. The message of history is clear. Social institutions do not take care of themselves.

The Chinese invented all of the technologies necessary to have the industrial revolution hundreds of years before it occured in Europe. At least eight hundred years before they were to occur in Europe, China had invented blast furnaces and piston bellows for making steel; gunpowder and the cannon for military conquest; the compass and rudder for world exploration; paper, movable type, and the printing press for disseminating knowledge; suspension bridges; porcelain; the wheeled metal plow, the horse collar, a rotary threshing machine and a mechanical seeder for improving agricultural yields; a drill that enabled them to get energy from natural gas; and the decimal system, negative numbers, and the concept of zero to analyze what they were doing. In the fifteenth century, China would have been the candidate if historians had been asked to pick who was about to conquer and colonize the rest of the world militarily and to pull ahead of it economically by converting from an agricultural to an industrial base.

With the onset of the Dark Ages (476 to 1453), real per capita incomes fell dramatically from their imperial Roman peak. The technologies that allowed the Roman Empire to have much higher levels of productivity did not disappear. There were those in the Dark Ages who knew everything that
the Romans knew about technologies such as fertilization. What later Europeans lost was the organizational ability to produce and distribute fertilizer. Without fertilization, yields fell to the point that on land that had been the part of the breadbasket of the Roman Empire, for every one seed of grain planted, only three would be harvested. In the end, there was simply not enough calories to sustain vigorous activity and the quality of life had to decline.

Rome's downward spiral did not begin with an external shock. It began with a period of uncertainty. Further military expansion no longer made sense, since Rome was at its natural geographic limits- steppes, deserts, and dense empty forests surrounded the empire on all sides. With its communications, command, and control systems functioning at their technological limits, expansion no longer led to individual or collective wealth. Without conquest as a unifying social force, citizens of Rome were reluctant to pay taxes to support the large political apparatus and army that were necessary to maintain the empire. With public consumption rising and the willingness to pay taxes falling, investments that had been made were no longer made. Eventually an economic decline set in that fed upon itself.

As this century closes, not only do vastly increased human numbers and their activities have that power, but major unintended changes are occuring in the atmosphere, in the soils, in waters, among plants and animals, and in the relationships among all of these. The rate of change is outstripping the ability of scientific disciplines and our current capabilities to assess and advise. It is frustrating the attempts of political and economic institutions, which evolved in a different, more fragmented world, to adapt and cope.

The first two decades of the new millenium will be of fundamental importance to the pattern of growth of human populations, and thus to their impact on global ecology. During the 1990s alone, nearly a billion people were added to the world population, with approximately a billion more being added during each of the first two decades of the 21 st century. About 95 percent of the increase will occur in developing countries. From every point of view, these two decades are likely to be the most stresssful that the world has ever experienced.

With the addition of nearly 3 billion people to be added, in the relatively near future, to the 4.4 billion who now live in developing countries, we have in place the recipe for a global disaster of unprecedented dimensions. To maintain an adequate quality of life in the future, people in the industrialized nations will need to reevaluate themselves and their lives according to a different set of ideals.

Wealth and material possessions have come to mean success, at tremendous cost to the planet. Such ideas are deeply imbedded and extremely compelling, and will be difficult to change. It will require reinventing econmoic constructs, building the cost of environmental impact and damage into our accounting systems, causing market forces to work in favor of environmental protection. Business activities must involve developing cooperative partnerships with people all over the world and making the decisions based on long-term benefits to the environment.