The more we loosen government controls on trade, the more the invisible hand of the global market will guide the efficient flow of goods and services.
The idea that there should be no government intervention in the free market except to insure a level playing field assumes that the field can be level, which it cannot. There are irrational factors in the market which make it uneven, and addressing these requires a degree of political globalization.

One obvious recent irrational factor requiring a multinational political response was the SARS epidemic. In the future, a global government institution, such as the World Health Organization, may have to coordinate a global approach to health issues. Eventually, people will realize that individual countries cannot run their own health institutions; China’s delay in dealing with SARS, for example, significantly worsened the epidemic within its borders and raised the danger beyond them.

The epidemic should also be a reminder that completely unexpected events often have the largest economic effects. For example, globalization requires travel, and an epidemic prevents travel. Nike announced in the spring of 2003 it would have to move its production out of China if its managers and engineers could not travel there. Offshore supply-chain costs soar if executives are ordered to spend 10 days away from work, as happened to some Japanese executives after they visited a SARS-infested location.

When it comes to allocating resources, however, the private sector simply does a better job than the government.
There may be reasons to have less government intervention, but it does not inevitably follow that it will bring prosperity or efficiency.

New Zealand is a glaring example of a country that tried to do everything right and failed. In the 1980s New Zealand privatized all of its basic public services, even the post office, yet its growth has been the slowest in the developed world, at less than half the Organization for Economic Cooperation and Development average.

New Zealand’s downfall was that it did not identify a competitive advantage in the marketplace. By contrast, consider those alleged epitomes of free markets, Hong Kong and Singapore. Both established comparative advantage: Hong Kong had the geographic good fortune to be the gateway to China, while in Singapore the government built the best infrastructure in the region, perhaps in the world. The fact that Hong Kong and Singapore both have systems that allow private sector companies to grow unimpeded has led to a myth that these are places where market forces reign. In reality there is no other country in the world where the government is more involved in economic planning than Singapore; some people describe the economy as socialism done right. In Hong Kong, the government owns the land, and a large percentage of the population—at one point 80 percent—live in government housing.

One possible strategy for poor New Zealand might be to follow Taiwan’s example by joining a technological alliance. Taiwan’s government decided its industrial strategy would be to make things smaller and lighter, and it helped companies acquire and exploit certain technologies. Government investments helped new corporations such as Taiwan Semiconductor Manufacturing (the largest semiconductor foundry in the world) get started.

A free global market produces winners and losers but ultimately it narrows the economic gap that divides the world.
There are always going to be segments of the population whose incomes will go down in the global economy. Having fewer government controls on trade, however, does not mean we have to do away with social safety nets. Absent remedial action, there is no doubt that the knowledge-based economy is going to magnify the skill gaps that exist across countries and among individuals. Income inequalities will rise unless educational gaps shrink.

“Just to say I can move my jobs abroad does not necessarily mean I should.”

Inequality is not a disease of our economic system; it is one of the system’s basic characteristics, and it does not automatically disappear as countries grow richer. Deliberate measures have to be taken to reduce it, less for economic than for political and moral reasons; it is difficult to believe economic inequality can just keep growing without limits in democracies.

Education and training have to be the prime answers to rising inequality, and in the United States these skills have to be coupled with mechanisms for incorporating some of what Europe has been able to achieve in reducing wage differentials between services and manufacturing.

What globalization does demand is that education and other social programs to narrow this gap be funded not with payroll taxes or corporate income taxes but with a value added tax (VAT). Since VATs are applied to imports as well as local production, they do not raise the costs of local production relative to that of imports. They can be legally rebated on exports under the rules of international trade, so they do not raise the costs of exports relative to that of foreign-made products.

While VAT is regressive (in that as a proportion of their income middle-income consumers pay more than high-income consumers with higher savings rates), it is more progressive than a payroll tax, which is not applied to capital income at all, and often not to all earnings. By using VAT, the entire tax system becomes more progressive. Those countries that are first to replace corporate income taxes and payroll taxes with VATs are going to get an edge.

Cutting corporate taxes will create more employment and lead to a full economic recovery in the United States.
The reason countries need to cut corporate taxes has nothing to do with economic recovery; they need to do it to avoid seeing their companies domicile themselves in tax havens such as Bermuda. Any government that tries to exert the old controls simply finds corporations moving offshore and outside its jurisdiction. Because countries need corporations more than vice versa, the relative bargaining power is shifting in favor of the corporations.

There are only seven components to Gross Domestic Product (GDP)—seven sources of demand that can spur a vigorous American economic recovery—and only one of these is currently viable. Personal consumption is out because of the record levels of credit card debt relative to disposable income and low savings rates. Nor will business investment help because there is still excess capacity. Residential investment represents only 4 percent of GDP; in any case we cannot add a boom to a boom. Changes in inventories adjust to sales expectations rather than driving sales forward. A boost in net exports would require the rest of the world to be booming. State and local government spending are not viable when tax revenues are down. That leaves only one option: federal government spending.

We used to have a federal program of countercyclical revenue sharing with state and local governments to prevent recessions from feeding upon themselves, but it was not renewed in the 1990s. In a recession, we should be using debt to finance infrastructure projects, education, training and other programs that will create jobs.

If any country has benefited from globalization, it is China, which has an unfair advantage as an exporter and manufacturing center because the currency, the renminbi, is artificially undervalued.
China has, to be sure, been the biggest winner. Yet weak currency or not, the export-led growth model will ultimately be crushed by its own success. How can any one country, let alone all countries, increase exports by 15 percent to 20 percent a year when the world economy grows only at 3 percent to 4 percent a year? Complicating the equation is the strong likelihood of a plunge in the U.S. dollar, which will happen if our trade deficit continues to grow. China would end up with a lot of worthless factories that used to make products for the U.S. market. I tell people that China may be your least expensive place to manufacture a product, but you would be smart to put your factory on wheels.

China should embark on a strategy of internally generated growth. Between them, China and Hong Kong have some $500 billion in foreign exchange reserves, accumulating at almost 0 percent interest. They should be putting the money into long-term investments in infrastructure and agriculture, a move that would lower the growth rate but create jobs—and, to the benefit of the rest of the world, boost demand for imports.

The global economy has already weathered financial meltdowns, stock market crashes and a recession with no serious shocks or aftershocks, so it appears to be strong enough to withstand any crisis.
There are, nevertheless, some real risks to the global economy. One is deflation, such as we have seen in Japan. The second big risk is a falling U.S. dollar. The rest of the world has become dependent on the $450 billion worth of net demand that comes from the United States. Any sharp fall in the dollar would blow up the existing supply chains, because what were cheap places to manufacture components would become expensive.

This is an event that will happen if we keep running on a large trade deficit. True, American deficits are fundamentally different in nature from those of other countries because of our status as the powerhouse in the global economy. Conditions that would have long ago produced a crisis in any other country have not yet produced a crisis in America. But our trade deficit means that every year money has to be borrowed to pay for this deficit and to pay interest on past borrowings. Mathematically this cannot continue indefinitely.

We could minimize the risk of a hard landing by increasing national savings. The way to solve the problem of the deficit, however, is to insist that Europe and Japan adopt policies that will help them grow faster so that they can be bigger export markets for U.S. goods.

That brings up Japan’s crisis. What has happened there has been capitalism’s worst disease, deflation, which now threatens to spread to Europe and America. Unless the Japanese deal with their massive debt by embracing bankruptcy, nothing else will work. Companies on the edge of bankruptcy do not have the funds to invest in high-risk new activities; without a mechanism for restructuring their debt, they are essentially in limbo. Japanese laws currently allow bankruptcy, but there are cultural prohibitions against it.

The third big threat to the global economy would be an epidemic such as AIDS or SARS. If a disease got out of control, as SARS threatened to do last year, it would create serious problems in supply-chain manufacturing. AIDS is a potential crisis that could be kept under control with drugs. Yet we prevent the drugs from going where they are most needed because third world countries cannot afford them, nor do we allow them to make their own generic versions because of intellectual-property rights laws.

Knowledge is the most important resource in the global economy, so intellectual-property rights violations are a serious threat to competitiveness.
It is absolutely true that knowledge is the most important resource. One of the issues we should be examining is how to put into the public domain products of the knowledge-economy that are so important that everyone should have access, the prime example being AIDS drugs. We have to design a system that allows poor countries to copy some things to catch up, so that we can resolve the inherent tensions between having the incentives for new inventions versus the free use of new ideas. We could use the concept of eminent domain, whereby a third world country is allowed to buy first world patents, and if the two parties cannot agree on a price, a judge determines a fair price.

You have predicted that some 14 million college educated workers in the United States might see their jobs outsourced to India and other emerging markets.
Everyone in the English-speaking world is frightened about outsourcing of jobs, but it remains to be seen how it works. It is not affecting European countries [other than the United Kingdom] because these jobs are being exported to emerging markets where there is an educated English-speaking population, such as in India and China. If I were George Bush, I would be very worried about the junior financial analysts, radiologists, software engineers, architects and designers whose jobs are going abroad. There are Republican voters from among these ranks, and it is going to be an explosive political issue in the next few years.

Remember, just to say I can move my jobs abroad does not necessarily mean I should. An adverse exchange rate may make it disadvantageous. Also, the supply of skills abroad may not hold up. In 2002 India exported only $6 billion worth of software, while the global software market totaled $400 billion. It is not that significant a player in that market.

Even the bold sometimes fail.
If you are not bold in the global economy, you will fail. If you know the risks, it is easy to make a decision, but we do not know how technology and globalization will affect industries. We have to be willing to tolerate a lot of failures to find out what will work. Sooner or later every industry will face the types of upheaval that the music industry recently endured. To survive, the music industry leaders must find ways to use new technologies to lock up their product so people cannot get it without paying.

I recommend that every company establish a chief knowledge officer (CKO) position. This person would provide honest intelligence about technology and its interaction with economics and society, and how this will affect the company’s fortunes. Countries, too, have to learn how to play the new economic game, and a national CKO is where the future national economic edge may be found. Companies and countries need to examine these issues now if they want to keep their competitive advantages; catch-up is a much harder game to play.