“The Decline of America” Revisited

WASHINGTON – Remember Yale historian Paul Kennedy and his 1987 tome on “The Rise and Fall of the Great Powers”? At that time there was a lot of interest in this fairly comprehensive narrative focusing on how all major western powers, primarily because of the huge cost of maintaining their Empires, suffered progressive economic decline and eventual decay. Thus Spain –in Kennedy’s argument– thus Great Britain and thus – inevitably– the US. The book sparked a spirited debate about the future of the US as the leading power of the century. The combination of a sputtering economy, strong Japanese competition and raising security expenditures necessary to maintain the American Empire would lead to bankruptcy and thus to the inevitable –if sad—retreat from global ambitions. Kennedy’s work contributed to a new self-reflective atmosphere that gave rise, among other things, to efforts aimed at investigating the soundness of the main pillars that sustain the edifice of America’s might. Think tanks, the Congress, and the Federal Government launched studies, initiatives and task forces on “US Competitiveness” –or lack thereof. The newly formed bipartisan Concord Coalition started warning Americans as to the structural damage caused by runaway deficits due in large part to the unstoppable growth of spending on entitlement programs.

So, according to the conventional wisdom of the late 1980s, we were overstretched militarily because of the Cold War security commitments highlighted by the 300,000 troops permanently stationed in Europe, as our most visible contribution to NATO and by the questionable idea of spending billions of dollars on the Star Wars program, that is space based ballistic missile defenses. We had lost our edge in economic innovation. We were assaulted by the Japanese bulldozer from the East. This was the time, we should remember, in which the trade deficit was about Japan; while Japanese concerns had started a buying spree in America that, according to many, even serious, observers, had all the markings of a progressive take over of our economy. Meanwhile the “Europe 1992” agenda, the solemn commitment on the part of the then European Community to pull down residual internal barriers and create a brand new, vibrant market, seemed to foretell a new era of economic primacy for the Old Continent, engineered behind the walls of a “Fortress Europe” that –it was feared– would exclude Americans. Here at home, because of misguided fiscal policies and unhealthy personal spending habits, we –the Government and the individual citizens– were slowly but surely drowning in debt. That was the picture then. It was the widely shared notion that the economy was on the verge of collapse, especially after the mild recession of 1991 that propelled technocratic Bill Clinton and his panoply of new, original economic ideas (never really implemented, by the way) to the White House.

But, in the meantime, the unexpected happened –on many fronts. 1989 did not give us just the promise of German reunification. It was the first shock wave that signaled the collapse of the Soviet Empire and thus the end of the major threat to US security. The final demise of the biggest existential threat was the justification to significantly cut defense spending and international commitments in the 1990s. This dramatic change, combined with a resurgent faith in small government, especially after the republican revolution of 1994 masterminded by Newt Ginrich, meant that runaway federal spending could be contained.

At the same time, without the support of any particular blueprint devised in Washington, the information revolution was unfolding. Rather than creating a new economy, the massive adoption of IT by all businesses meant a massive leap forward in the competitiveness of the US economy. We had spectacular growth year after year, record low unemployment and high tax receipts that gave us for the first time in decades a federal budget surplus. At the same time, without the US lifting a finger, Japan, because of its internal social, rather than economic, contradictions, fizzled, while the predictions of the rise of a robust, innovative and economically powerful Europe proved to be quite wrong. And so, we had the roaring ‘90s: a prolonged period of American unchallenged economic primacy. The US was first in everything: innovation in high tech, creation of new employment, record productivity increases.

But it all seemed to have ended somewhat ignominiously with the beginning of the new millennium. We have had the dot.com bust, accompanied by the Enron, WorldCom, Adelphia and other well known corporate scandals which ushered the Wall Street contraction and the ensuing long bear market. The 9/11 attacks, occurring during this downward spiral certainly did not help.

And now, where are we now? There are disturbing signs that would indicate that Paul Kennedy and other were after all right in predicting decline. Only they were incorrect as to how close it was and what would cause it. The root cause is not “Imperial Overstretch”, but the erosion of US competitiveness due to lack of investments in both human capital and needed infrastructure, accompanied by the unstoppable growth of entitlement programs. Sure enough, at this time we also have a war. The prolonged Iraqi campaign has become stupendously expensive. But, regardless as to one’s own political opinion about the war, this commitment, in an as of itself, is economically affordable.

While a war and an increased Pentagon budget are a drain on public finances at the expense of productive investments, the real problems are in the same factors that were identified 20 years ago, at the time of the “competitiveness debate”, by most sensible analysts: a more and more expensive welfare state that cannot sustain itself financially, and the progressive erosion of the education advantage that made America the principal player in the knowledge economy. If we continue to follow the notion that large segments of the American society, mostly the elderly and the retirees, have an inherent right to subsidized benefits that represent an excessive drainage of national resources, the federal government, even assuming the ability to finance these obligations, will have nothing left for productive investments. The secondary public education system, in turn, provides mediocre graduates, while minorities, on balance, do a lot worse than the already low average. It is impossible to sustain this increasingly complex economy without a dramatic improvement in the quality of the labor force.

The fantastic explosion of the trade deficit is the manifestation of eroded competitiveness. The 40 billion dollar deficits that scared us about Japan in the 1980s are pocket change compared to the 220 plus billion that we have nowadays with China alone, (not to mention the increased cost of our energy habits: at 300 billion in 2006, higher than the cost of imports from China). 

Unfortunately, the argument on how to best rebalance our trade accounts has been successfully framed by a strange medley of simplistic romantics and demagogues who point the finger at the combined perils of free trade and outsourcing. By opening ourselves to foreign producers –so the refrain goes– we allow cheaper goods to come in. This means that US companies that have much higher costs go out of business or move overseas. Good American jobs go abroad because greedy corporations want to save money by having cheaper foreigners perform jobs previously held by higher paid Americans. The solutions advocated? Essentially close our borders, so that the jobs stay in and the foreign goods out. In this new era of global and irreversible interdependencies, the notion that this way we shall be able to regain, maintain and for ever keep our supposedly God given infinite prosperity is bizarre; but, nonetheless, it has strong emotional appeal.

However, if it is clearly futile to try and close our borders to keep cheap goods out or to prevent businesses from outsourcing, we still have a huge problem which is indeed caused by globalization. But not the globalization demonized by the protectionists. It is caused by the global spreading of the knowledge economy model developed first in America whose successful exploitation gave the US the edge for a number of years.

We have to come to terms with the fact that the genie of IT innovation has been out of the Silicon Valley bottle for a long, long time. We cannot restrict inventiveness and entrepreneurship –the key components of the American success story– to the American soil. The main ingredients of a knowledge based economy are transferable and so (despite copy cat failures and other clumsy attempts) they are transferred elsewhere today and more so in the intervening years.

True, the 1990s triumph of America’s reacquired competitiveness was due to a complex mix of factors that cannot all be easily reproduced. The lively, free wheeling, chaotic mixture of entrepreneurs, academics, venture capitalists and their interactions with established corporate entities that buy, absorb, invest in new ventures, as yet, has no equivalent elsewhere around the world, in terms of depth and scope.But some of its elements can be replicated. No doubt, by trial and error in time others will manage to produce adequately funded innovative clusters that will be able to quickly direct new discoveries to a hungry global marketplace.

The celebrated Bangalore example in India is illustrative. Leaving aside all other considerations, the Indians have managed to create and aggregate in productive clusters world class human capital (scientists, engineers, software programmers) and to harness it effectively in competitive IT enterprises. To keep things in perspective, we should remind ourselves that Bangalore is still mostly about outsourcing and not about innovation. Moreover, the whole Indian high tech phenomenon is only a small speck within a still primitive Indian economy which is constrained by inefficient administration and crumbling infrastructures. India has an enormous population that is still largely poor or very poor. So, the days of Indian supremacy are still in the distant future.

But Bangalore and other such examples around the world will multiply, as more and more people gain access to higher education, IT literacy and mundane computer and business skills that cannot be kept within the West and America. The very information revolution unleashed by the American genius becomes the vessel that greatly expedites the transfer of knowledge that will create new centers of excellence where none existed before. Furthermore, the Indian example proves that we do not need an economy that is overall highly developed to create islands of modernity that can compete on practically any level with counterparts in advanced economies. Indeed, centers of competitive high tech can be established even without the fertile ground of an already developed economy that has already successfully dealt with  macroeconomic issues.

These new enterprises, especially those established in business friendly developing countries where the cost of professional for many years to come will continue to be much lower than America’s, are bound to gain world market share, inevitably at our expense. If even a small fraction (as a percentage of the total population) of Indians and Chinese become good scientists, their absolute numbers will be sufficient to tip the balance. Our only hope to stay competitive is in continuing to invest in new technologies and new ideas so that superior innovative products and services will continue to be created in America.

But here we have a serious problem. Americans are so used to primacy that they do not believe that the ingredients that make this primacy possible need to be nurtured, refined and upgraded, especially now that we are confronted with new, capable competitors that have the added edge of a lower cost structure. (For instance, it has taken 20 years to the slow moving, no pun intended, automobile industry to have just recently what appears to be a collective awakening, with the active participation of the unions representing its thousands of workers. But it seems that only the specter of demise convinced the main players that dramatic cost cutting–be it salaries or health care benefits– is imperative in order to have a chance to compete. But, even if successfully implemented, these strategies are clearly not enough to get Detroit out of the woods. In the next few years we shall see whether the bitter cost cutting medicine will be accompanied by a new wave of creativity that is the real hope for recreating a competitive edge for this ailing sector). 

While discussions about the international economy abound, for the time being, we have not framed the debate in a way that will foster real progress. Unfortunately, to the extent that the general public has been brought into the conversation, it is fed gross distortions and oversimplifications pointing at the consequences of lost competitiveness, such as job losses. The conversation is mostly on allegedly bad trade policies and greedy corporations. If we could only change Washington’s direction on trade, all will be well. Indeed, the debate is mostly about identifying culprits and quick fixes. So, according to these critics, beyond the international trade policy incompetence (close to treasonous behavior), the enemies are the Asians, (yesterday Japan, today China) who do not play by the rules and the illegal immigrants who steal domestic jobs while depressing wages. This sort of populism may work with many constituencies in uncertain economic times; but it explains nothing about the causes of our ailments and its remedies would cure nothing.

The reality is that we have structural, systemic problems that need to be addressed now, so that we can begin to change course and hopefully improve our conditions for the long term. While the misbehavior of others is real (think of Chinese disregard for intellectual property rights and the ensuing flood of pirated software and counterfeit goods; think of the Mexican government actively encouraging the emigration to America of the country’s surplus labor), there are inherently domestic structural deficiences that slow down America and that have eroded its ability to compete. To name a few critical ones: a deteriorating education system, the unsustainable cost of the welfare state and the lack of a serious energy strategy.

Clearly the soft underbelly of America is a mediocre to bad education system right at the time when new, world class centers of higher learning are sprouting around the world. America for a long time nurtured domestic talent while, by design or by default, (think about the intellectual migration to America from Nazi occupied Europe), it was able to attract first class minds from around the world. After all, Albert Einstein, Enrico Fermi and Edward Teller were not Americans. But they were welcomed in America and the American intellectual and scientific environment was able to absorb this talent and greatly benefit from it. In more recent years there has been a significant influx of gifted Asians. But now the pull of America is not as compelling as it used to be in the light of the fact that good opportunities exist elsewhere.

At the same time, it is now apparent that the American public education system, the incubator that should nurture the future scientists, engineers and entrepreneurs is at best mediocre, deeply flawed in its worst components and certainly inadequate to create the world class work force that will have to compete on quality, as costs already work against us. The existence of several world class universities is not sufficient to guarantee that the broader US workforce will be able to compete with increasingly more sophisticated foreigners. A sub par worke force will make it difficult to compete, let alone strengthen, our positions in high value added strategic areas.

While it is hard to admit it, a huge chunk of the old manufacturing base of America is either gone or going. We lost a lot of steel, machine tools; we lost footwear, apparel; we have disturbing signs that we cannot keep up in automobiles. We have a battle unfolding in aerospace. Still, American success stories in valuable, technologically complex industries (think of GE, 3M, United Technologies, Boeing among many others) show that, despite higher labor cost, superior quality, when it can be reinforced by constant refinement, still counts.

By the same token, we still have an edge in services. But this is entirely dependent on the continuous waves of IT innovation. If we are no longer on the forefront of IT, because we can no longer compete with increasingly more competent but much cheaper Indians and Chinese, we have lost the competitiveness contest.

Much has been said about the increased welfare costs due to the demographic changes that America is experiencing, along with most other developed countries. The question is whether it is smart, in the long run, to have a central government whose main function is to distribute benefits at the cost of everything else. Even now, while immediate solvency is not an issue, the federal government devotes relatively smaller portions of its resources to productive investments, given the weight of the entitlement obligations. As we all know, in the future this is only going to get worse. It is understood that taking something away from people who believe that they have earned a partially subsidized old age is extremely hard. But there is an opportunity cost in spending most of our revenues on welfare and little on competitiveness enhancing investments. Unfortunately few people enumerate the thousand of research projects or new infrastructure that could be financed by the federal government, assuming a reduction in entitlement programs.

The energy picture is dismal. We have excessive consumption, little and declining production and increased dependence on imports that is financially burdensome, while it creates a serious strategic vulnerability. What we need is not just the tinkering provided by this or that pork laden energy bill; but a bold new energy strategy that would set realistic goals regarding alternatives to hydrocarbons, while actively discouraging consumption through revenue neutral gasoline taxes. In doing so, America would free itself from this straightjacket, while possibly becoming the world leader in all new technologies related to alternative energy.

But in all these areas: education, welfare reform and energy, while there is a debate and many have offered sensible solutions, we are far from having reached the deep understanding that is the prelude to decisive action. While many are worried, most believe that things are more or less fine and that we have enough slack to muddle through.

In hindsight, similar historic circumstances characterized by a passive attitude that in effects allows the sliding into decay (and here we go back to Paul Kennedy) are recognized as due to a state of mind of myopic denial and complacency of people who have lost their way. But usually this is the verdict of historians. And when they pronounce it, it is too late to change anything.

Modern Cost Effective Public Policy for America

By Paolo von Schirach

September 28, 2007

WASHINGTON – I was really hoping that former House Speaker Newt Gingrich would have entered the race for the Republican nomination and that he may have had a shot at the presidency. Apparently he decided otherwise. This was not an ideologically motivated, partisan wish for conservative leadership. This was and is about the hope that a credible public figure (Gingrich or someone with a similar approach) who has articulated and would push an agenda for the modernization of the state, for the introduction of viable technologies and cost effectiveness in public policy may bring fresh air in stale debates long on abstract ideological posturing and short on the need to drastically upgrade the effectiveness of the government’s tools. The tools (in terms of both institutions and technologies) are low quality and often obsolete. Without good tools we cannot implement anything meaningful.

Good government is about sound principles, of course. But, in the end, it is about the timely, cost effective, delivery of needed services. Whereas, amazingly, America is sorely deficient when it comes to modern tools necessary to plan and deliver basic public services. Whatever the reasons, two years after Katrina we still have not built adequate levees in New Orleans. We have collapsed bridges in Minnesota for lack of a system that would guarantee appropriate levels of care and repair of basic infrastructure. The Washington DC public school system not only fails to educate the children, but it does not even have the basic logistics to deliver badly needed pencils and books from a central warehouse to the classrooms.

In the country renowned for its innovative genius and technological advances –innovations that have led to a productivity revolution in all fields– the tools of public policy are horrendously outdated. Thus the ability to deliver high quality services is hampered. At the same time, because of consolidated, systemic inefficiencies, expectations of effectiveness on the part of the public have become surprisingly low. As people are used to public inefficiency, they have come to accept it as normal.

Here is a glaring example of inefficiency that could be easily remedied, assuming focus, will and better organization. Consider air traffic congestion and the reality of constant disruptions, more and more delays and mounting frustrations for the public that has emerged as a major national issue in recent months. President Bush, at a recent White House meeting aimed at addressing possible solutions, said, among other things, that, due to this mess, passengers are not treated fairly. This might suggest a focus on issues of improved customer relations for the airlines; such as providing timely information to customers about delays or compensating them adequately in case of severe travel disruptions.

While all this may help, this has little to do with the cause of the problem. The real issue is a stupendously obsolete air traffic control system incapable of coping with more and more flights. Why is it that we had to reach this unprecedented level of air gridlock to put forward a plan aimed at phasing in a new, more efficient space based system for air traffic control? And how long is it going to take to fully implement it? If the federal bureaucracy is expected to lead the phasing in of these new systems, it will be decades. Air traffic control management is a complex and delicate matter, but well within the technological know how of the United States of America.

And, equally important, why is it that we are unable to look at how to meet the needs of the traveling public in a broader context? The current problem is posited as: “More and more people are flying. How can we create a system that can accommodate these ever increasing volumes”? This is a good question. But it is incomplete, as we leave out of the equation other cost effective modalities of transportation that may be good in their own right, while they would help relieve at least some of the air congestion. In other words, flying is not the only good option.

Whatever the reasons, it is inconceivable that one of the most technologically advanced countries of the world has not managed to introduce high speed trains as a real cost effective alternative to air travel between relatively close large urban centers. For example, in this context of growing congestion in the air, especially in the North East, we have two airlines (Delta and US Air) that offer regular shuttle service between New York and Washington and between New York and Boston. The shuttle theoretically should be a convenient one hour flight. But we know that this is not so when we add the time to get to and from airports, security screenings and, most importantly these days, additional time wasted due to traffic congestion that delays departing and landing flights.

The existing, relatively fast, Acela trains between Washington and New York already cut down travel time to a level that is comparable to flight time plus airport transfers. Of course, significant investments would be necessary to build new tracks that would allow true high speed in the New York Washington corridor and increased passenger loads. But, even now, the case could be made that, as a matter of public policy, flights such as those between Washington and New York should be strongly discouraged, when good alternatives based on reasonably fast trains are available. It may not be much, but transferring the shuttle travelers to trains would help reduce congestion in the overcrowded air space of the New York area; while it would foster a more cost effective, more environmentally friendly, not to mention more pleasant, way to travel.

Further down the line, let us imagine a future in which most of the travel between the large urban centers of the North East, or along the coast of California, would take place via a network of high speed trains. This would significantly curtail congestion in the air, allowing airplanes to fulfill their true mission, that is, to take people to faraway places or to places that cannot be reached reasonably fast, in a cost effective way, through other means.

Of course, all this is complicated and quite expensive. Building new tracks in densely populated states would require significant up front capital investments; not to mention the legal complexities involved in the need to acquire the necessary tracts of land. But, however complicated, this is not an impossible idea and certainly not beyond the means of the world’s largest economy.

Yet, before even starting to think about efficient new modalities that could be made available to the traveling public, the current crop of policy-makers, faced with the task of confronting the probable resistance to change from organized lobbies, interest groups and bureaucratic inertia, have already given up, because leading on such  complex issues is just too hard.

This is why in this political season we would have needed someone like former Speaker Gingrich (no idea as to what his thinking may be on the specific issue of high speed trains) who seems to be willing to challenge the way we organize and deliver public services and rally the public behind the notion that, if we try, it is entirely possible to shake an outmoded, clumsy and inefficient way to conceive and conduct public policy.

Government “for the people”, beyond slogans and idealistic pronouncements aimed at stirring voters’ emotions at election time, in the end is quite simply about the delivery of high quality services and/or about creating a regulatory environment that induces the private sector to step in and do what is cost effective for the delivery of services useful for the society. The people of one of the most technologically advanced nations on earth are entitled to demand and get more value for their tax dollars.

America Addicted to Oil?

by Paolo von Schirach

June 7, 2007

WASHINGTON – President George Bush admonished America to shake its “addiction to oil”. Still, judging by the remedies that he proposes, it would appear that this amounts to a rather minor issue, something like being addicted to chocolate. “You know, too many calories, cut down a little”. Judging by what George Bush proposes, this is an issue, something to worry a bit about; but hardly a matter that requires drastic changes now –and certainly not an emergency.

In truth, we do not have an oil emergency, in the strict sense of the word. For the time being, we have high prices, largely due to increased global demand. However, in some measure, current high prices are also the result of decreased output not due to oil depletion but to political problems, that is non economic reasons. Economic sanctions against Iran and consequent under-investments in the oil sector and the continuing mess in Iraq are examples of how political turmoil causes cuts in production, thus contributing to higher prices.

And here we begin to see the nature of our problem. What are we going to do in case supply is not just diminished because of political turmoil here and there (this is our current predicament); but drastically cut due to a major crisis? Nobody really knows. Our addiction is serious. We produce only 30 to 35 per cent of the oil we consume. We have created a situation in which uncontrollable contingencies (political events or natural disasters) can instantly transform our dependence/addiction to oil into a real emergency.

(I am purposely sidestepping here any discussion about global warming concerns that should drive us to dramatically lower our carbon consumption, because of the dire environmental consequences of greenhouse gases. Global warming is a valid concern; but it is a much more complex issue, requiring multiple interventions and concerted international action at many levels over a number of years in order to produce results in terms reduced emissions. The focus here is exclusively on coming to recognize that our strategic vulnerability requires drastic measures to cut consumption now).

Even the superficially informed know that we import a lot of oil from unstable regions of the world. Yet, if anybody is seriously worried about this dependence, current gasoline consumption patterns do not show it. If the American public somehow believes that, in case of a serious emergency causing supply disruption, we should not be too concerned because the government has a plan for such contingencies, well, then they should be told the truth. We do not have a remedy. True, we have a strategic petroleum reserve and more crude oil is being added to it. But it is limited. In case of a major, prolonged disruption, we would be in serious trouble, as nothing at present and for quite some time can replace oil and oil products, gasoline first and foremost. But nobody seriously discusses the consequences of possible disruptions.

Widespread complacency may be due to the fact that, while people see that gasoline has gotten to be very expensive, it is not scarce. There is no rationing; while many may hope that, in a while, prices will go back to “normal”. Given these misperceptions, until there will be real disincentives regarding the use of gasoline, (the major component of our “oil problem”), people will treat our acknowledged “addiction” to oil just as we treat our food overindulgence. We cannot really price food out of the market in order to make millions of overweight Americans get serious about diet and food over consumption. But for our oil addiction, as painful and unpleasant as it may be, significantly higher price is the only way to both cut consumption and speed up the process leading us to new types of fuel. A substantial, revenue neutral, gasoline tax should be the main driver of any serious energy policy.

President Bush, pursuing his soft approach to get us out of this predicament, counts primarily on technology to do the trick and move us away from an oil based economy. But the incentive to invest massive resources to develop new technologies is in attractive returns. If current high prices are sustained, (60 to 65 dollars per barrel, gasoline above 3 dollars a gallon), then the alternative energy proposition becomes more appealing, as many of the alternatives currently being worked on become economically viable around these prices. The fact is that new ventures in this risky field need the reassurance that there will be large markets many years down the road. High fuel prices guaranteed by a gasoline tax would constitute such an incentive. At the same time, consistently higher prices will at least begin to curb the growth of domestic demand which translates in larger imports and increased strategic vulnerability in case of supply disruptions.

Whereas the administration, after having warned against the danger of our addiction to oil, is pursuing what turns out to be a very soft campaign to diminish it, through woefully insufficient policy measures. Increased fuel efficiencies for automobiles may yield some gasoline savings in a few years, if we are lucky. This is tinkering, just as subsidizing this or that renewable fuel is tinkering. Corn derived ethanol, very questionable in terms of cost effectiveness, is good business for many as it makes farmers and refiners rich; but it cannot radically transform the automotive fuel equation. Federal investments in new forms of energy, though real, are modest. They indicate that energy is an important issue; but not a national priority.

The one measure with a real chance to get America focused on devoting substantial resources to quickly finding  economically viable alternatives to oil is a real (a dollar, as a minimum, phased in progressively) additional tax on oil products, first and foremost gasoline. Of course, gasoline is already taxed at many levels in the United States. But, for the time being at least, existing taxes and historically very high prices have yet to force all players to seriously engage in finding a commercially viable alternative based on renewable sources (or on new ways to extract fuel from old, domestically abundant, sources like coal, assuming a successful solution to the additional emission problems). 

Many have already put forward this idea of a substantial gasoline tax. Such a tax would be revenue neutral, via tax relief in other areas. People would have the same overall tax burden. But very high prices at the pump would send a clear message: “Dependence on foreign imports of oil creates an intolerable degree of vulnerability for the US economy and for our national security. The Government wants to engage the whole country in devising and adopting alternatives as soon as possible. In the meantime, we have to cut back on consumption, hence imports”.

The public will be unhappy. Higher prices will cause unpleasant disruptions at multiple levels. But the gain down the road, once meaningful alternatives will have been adopted, will be in regaining greater control over our destiny, an immensely desirable goal.

But no political leader, from either party, dares to articulate this message. The assumption is that it would be politically suicidal to provoke the anger of the public by hitting Americans in the use of the automobile. Indeed, if the White House engages in half measures, in the early stages of this already vivacious presidential campaign there is no serious talk about a real gasoline tax increase; or, for that matter, about any other really drastic approach to oil dependence coming from anybody, regardless of party. This can be for two possible reasons: either political leaders believe that our dependence on imports does not really amount to a serious strategic vulnerability; or they maintain that the public, if told about the seriousness of our predicament, would just not believe it and would react angrily by shooting the messenger that would propose to mess with the sacrosanct right to gas guzzlers.

A gasoline tax would achieve two objectives: cut consumption by forcing consumers to save and provide a powerful incentive to develop commercially viable new fuels and/or propulsion systems. At the very least, higher gas prices will force people to buy cars that consume less and hopefully find a way to drive less.

In an op-ed piece written last year, Paolo Scaroni, the CEO of ENI, The Italian energy conglomerate, (“To Extend the Age of Oil, We Must Save Fuel Now”, The Financial Times, October 16, 2006) noted that, should Americans drive the same average size cars as the Europeans, (more compact vehicles, far fewer SUVs and light trucks in the mix) this alone would cut US oil demand by four million barrels a day, equivalent to the entire oil production of Iran, the world’s third largest oil exporter.

And this would be only a start. Europe’s fleet of cars is more fuel efficient relative to the US (13 km per litre in Europe, 7 km per litre in the US). But today there are vehicles that achieve an average of 20 km per litre. A hefty gasoline tax, by forcing consumers to shift to low consumption models, could drastically reduce consumption and thus dependence. Such cars are available; but the demand for low mileage models is still too high; largely because the gasoline price, as high as it is today, clearly is not high enough to cause a real shift to more fuel efficient vehicles. The public is obviously not sufficiently focused on the addiction and its ramifications. 

Because of a gasoline tax, the push to develop other fuels and/or propulsion systems hopefully will produce results more quickly. As new technologies will take over, the demand and thus the dependence on oil will lessen and eventually disappear. Meanwhile, as we discourage the excessive use of the private automobile, alternative transportation options, such as mass transit, should be adopted. There are proven, reliable and affordable alternative ways to get around and do what we need to do with reasonable ease, speed and comfort, other than via the individually operated vehicle. In urban environments, fewer private cars on the road and a seamless network of dedicated bus lanes could provide the same advantages of underground mass transit systems at a fraction of the cost. (Broader adoption of these alternatives will also help diminish air pollution, not to mention wasteful congestion that has reached apocalyptic levels in most large metropolitan areas).

Whereas, so far, we see only timid policies focusing on subsidies. A raft of subsidies to the low hanging fruit options, such as corn derived ethanol, may be popular with certain constituencies, but they do not constitute a robust policy aimed at introducing as quickly as we can affordable and environmentally sound alternatives to oil. Subsidies are bad energy policy.

While it is true that our hope to get out of the oil dependence rests on devising new technologies, we should not support anything in particular, simply because we have absolutely no idea which technologies may prove to be truly viable in the long run. The purpose of a gasoline tax is to create a floor that tells markets at what cost an alternative source becomes viable, i.e. profitable. This is what new enterprises need to elaborate their strategies and get to work, hoping to make money with the alternatives that they are working on. We just do not know which solution or combination of solutions will make most sense. Picking winners now through subsidies or other targeted incentives may lead us to back the wrong technologies. This is wasteful and patently unfair. It rewards political skills more than ability. Clever lobbying on the part of those who get the subsidies does not necessarily translate in good energy policies.  

On this, let us consider a little history about the notion of picking winners. In the 1990s, in a different context that involved a fresh look at macroeconomic policy approaches, America looked at and discussed “industrial policy” models, whereby elites made of government, enterprises, interest groups and labor unions would come together and decide where it would be smart to allocate scarce capital; so that we would eliminate wasteful investments and maximize returns for all: corporations, workers and society in general. We looked at this model of “national economic strategies” supposedly practiced by the (then) best world performers  –Japan and Germany. But nothing was done to transform policies in order to adopt their model. 

True, in 1992, then presidential candidate Bill Clinton openly flirted with this notion. In a campaign taking place in the midst of a modest downturn the need for a “national economic strategy” became a key policy component in Clinton’s speeches. (Remember the “It’s the economy, stupid” refrain?) However, in practice, as president, Clinton did little to implement industrial policies. By default at least, as a nation we concluded that top down decision about economic choices would lead to the squandering of resources. What applied then and applies today to economic policies in general, applies to finding alternatives to our energy sources.

Clearly there is a formal contradiction in being against subsidies but for dramatically higher taxes in order to discourage the use of a product. It is easy to object that, if it is appropriate to do away with market distorting subsidies, then we should not engage in other types of market manipulation through heavy taxation. 

In principle this is a valid objection. If market economics work, higher prices due to scarcity eventually should lead to new solutions priced by the market. However, the problem for the US, at the same time the largest consumer and importer, (but for other consumers as well), is that, along the way towards a market solution, energy flows may be drastically reduced for reasons that have nothing to do with the dynamics of demand and supply.

The scenario, (outlined a million times, but curiously not acted upon) is that major political events or natural catastrophes can suddenly and drastically reduce the availability of oil. Not enough oil (whatever the price) to keep the world economies going is a terrifying, rather extreme, yet quite possible scenario. As we Americans are by far the largest consumers in absolute as well as per capita terms, serious disruptions are likely to have devastating consequences internally, while restricting our ability to conduct an active foreign policy. Which is to say that oil is different from T-shirts or auto parts. 

Let us restate what we all know but seem not to take into account when we talk about our oil imports. All the major energy crises that we have experienced were not caused by market forces; rather by political and (very recently, with Katrina and Rita in 2005) natural events. The 1973 oil embargo was a political decision. The 1979 Iran Revolution caused a disruption in oil production and thus oil flows. More recently, hurricanes in the Gulf of Mexico region caused significant (albeit only temporary, in this case) disruption in the ability to receive, transport and refine oil, oil products and natural gas. These disruptions had nothing to do with market forces. (Of course there are similarities with other non economic phenomena that have an impact on markets. A freeze in Florida that destroys oranges will cause the price of orange juice to go up. But in the case of oil there is clearly a lot more at stake than some financial losses and inconvenience for the consumers. Orange juice is optional; until we find something else, oil is vital).  

Of course, we know that after the oil shocks, oil consumption was reduced due to new efficiencies created by the deployment of new technologies and prices shifted lower again. Likewise, in the aftermath of devastating hurricanes the infrastructure was eventually repaired. Yes, of course. We did all this.

But, please, note: reasonable success in dealing with the effects of past disruptions is no indication of the ability to get out of the next one. We have no guarantee that future shocks will be of a manageable size, something that would still allow us the opportunity to retrench and reorganize, as we have done in the past, albeit at a high cost.

Relatively speaking, our predicament is worse today. Due to the rapid depletion of domestic oil resources, our dependence has grown significantly during the past twenty years. What if the next oil shock is of a magnitude that we cannot cope with, so that our economy would be not just badly hurt but choked and devastated? Again, let us not forget that all we have is the strategic petroleum reserve and agreements about crisis management with other consumer countries. This is fine for a short crisis lasting no more than 120 days. For a long one we have nothing.

There is a long list of oil producing regions affected by political turmoil. The Middle East (where most of the known reserves are located) is of course the text book case, because of the bad mix of endemic conflicts and the appeal of radical politics. (Clearly, if all the Middle Eastern oil reserves would have ended up in peaceful Canada, the vulnerability issue would be a lot less pressing). Within the region, insurrectionists and terrorists of all stripes in Iraq have targeted oil facilities, terminals and pipelines since the very beginning of the occupation, thus limiting oil production. There have been terrorist (so far failed) attacks against Saudi oil facilities. Elsewhere around the world, we have the inextricable mess in the Niger Delta that has already caused a significant production cut in Nigeria. Hugo Chavez in Venezuela is an unpredictable populist determined to use oil for his political ends.

Existing political troubles (that is not due to market forces) have already caused significant production cuts. So far, these troubles are limited in scope. They have caused tighter supply and thus higher prices. Still, oil is flowing. However, bigger upheavals could make oil, irrespective of price, simply unavailable in the amounts necessary to run the economy.

In this context of tight supply, finding and bringing more oil to market as soon as possible is important, in as much as it recreates a minimum of slack in a very tight environment. But welcome as they are, new finds will buy us some time, nothing more. Unless we can envisage fantastically large new discoveries in peaceful parts of the world –something that would radically transform the oil supply geopolitical picture– marginal addition to supply is not a long term solution for the world in general and certainly not for the highly dependent US.

On a different level, it is important to observe that oblivion about the impact of oil dependence includes little discussion about the economic impact of the cost of all these imports. Perhaps it is easier to avoid dealing with vulnerability and the implications of major oil supply disruptions. After all this is a terrifying prospect, not a present crisis. But the issue of the colossal and growing cost of our national oil bill -and this is part of our day to day reality–  for mysterious reasons gets very little mention.

While Washington policy makers and commentators tell us daily that our trade deficit is the result of China’s wicked policies, we forget that the price of our imports of unchanged quantity of oil has quadrupled since 2002. Because of the price explosion of the last few years, in 2005 the cost of oil was almost as high as the trade deficit with China (175, and 200 billion respectively), while the price keeps going up, thus contributing more and more to a deteriorating trade imbalance. This is US money going abroad to pay for our gasoline bill. This is money that cannot be used for capital investments at home. (A gasoline tax would keep the oil bill high; but the proceeds would stay at home.)

Much has been said about the sustainability of a large and increasing trade deficit. But we hear almost nothing about the monetary cost of our “oil addiction”. Sure enough, our merchandise trade deficit is easily politicized, because of its more direct correlation to domestic job losses. Oil imports, whatever the price, do not displace US workers. But this does not mean that they have no economic impact. 

As abstract as the issue may appear, it is not impossible to explain to the general public that, by using scarce capital to pay for oil imports, this money is no longer available for productive investments, while the oil is burnt and we have to keep buying more from abroad just to keep things going. This forces us to give up other expenditures and investments.

So, there we have it: “addiction to oil” means a strategic vulnerability with potentially devastating effects which comes at a very high and increasing economic price. This should call for drastic action, starting with a substantial tax on gasoline. Whereas, for the time being, the few measures taken, such as subsidies for corn derived ethanol have amounted to an increase in the price of corn with ripple effects on a series of products and ultimately higher food stuff prices for the consumers, with negligible effects on our addiction to oil. This is the result of a largely ineffective band aid approach motivated by the fear of upsetting a nation unaware of the full implications of our addiction.  

Our oil dependence is a serious matter. Time has come to stop tinkering and half measures and get serious about it.

“At Ease with Globalization”?

by Paolo von Schirach

May 25, 2007

WASHINGTON – French President Nicolas Sarkozy in his first official visit to Manuel Barroso, president of the EU Commission in Brussels, reportedly talked, among other things, about the duty of the EU institutions to protect the citizens of Europe from the dangerous winds of globalization. He did not say protect forever. He said protect them until they are ready, until they have made the necessary adjustments in order to be able to transition to the new free for all environment. Why is it that after twenty years of globalization they are not yet “ready” it is not said.

Depending on how one looks at this approach, it is both right and wrong. Of course, in principle, it is better to have some training before entering the real competition. So this is good. But the competition started long ago. When will the citizens of Europe be ready? How long should this ‘training’ last? It would be wrong to assume an open ended period of protection.

On the domestic front, Sarkozy’s electoral message, the message that led him to a convincing political victory, is that France needs to get serious about work and that the French need to get busy. But, apparently, the president’s judgment is that the French -for the moment at least– are too frail to compete outside of Europe. Hence the need to have transitions. How would these transitions be shaped in order to make everybody stronger and more competitive we do not know exactly. The danger is, of course, that, as ‘we need more time’, temporary measures will somehow become permanent, without any marked improvement of the overall competitiveness

A message with a totally different tone came recently from the United Kingdom. Outgoing British Prime Minister Tony Blair, in his farewell speech to the constituents who elected him to Westminster, indicated that Britain, (in large part, of course, because of his enlightened policies), is not only ready for the challenge; but thriving in the new globalized economy and winning. ‘Look at our economy ‘said Blair–at ease with globalization. (emphasis added). London the world’s financial centre. Visit our great cities and compare them with 10 years ago. No country attracts overseas investment like we do”!

Needless to say, it is easy for Blair, just about to leave office, to give himself high marks, and proclaim Britain, because of the workings of his government, an internationally competitive society. But there is some truth to his words, at least in relation to how the society perceives itself, thus its chances of making it. The message is that the British “understand” global trends and that they have the tools that make them well equipped. Thus they are active participants and not fearful of competitors. They are ‘at ease’ with the whole process.

In the US we have a mixed bag. The country as a whole is doing reasonably well. Success in globalization is largely about being and staying ahead of the curve. America’s culture of innovation and risk taking enterprise, where ‘creative destruction’ is practiced daily, seems perfectly suited to doing well in a challenging world.

However, there is no unanimity that overall we are ‘at ease with globalization’. The strains of globalization are felt and many are so hurt, or are so afraid of being hurt that would like the whole thing to stop and go away. The arguments are familiar: cheap (Chinese today, Japanese yesterday) imports displace American workers. Factories close or relocate. Jobs are lost, communities are devastated, etc. Why do we allow this madness of a free trade that benefits only the competition? So, while Sarkozy demands a respite from the European institutions, many Americans demand dramatic policy shifts in Washington. Free trade, they claim, has become the instrument used by unscrupulous competitors to undo western economies and societies.

Let us leave aside here any attempt to settle the now worn diatribe on the pros and cons of globalization. In this instance, let’s focus on one observation: the emergence of Asia has brought about the net addition of hundreds of millions of relatively cheap workers to the global labor pool. It has been said before; but it is well worth repeating, as the critics arguments somehow seem to ignore that we are confronted with the new reality of hundreds of millions of new low cost workers, added to the global labor pool, with more coming. Unless we assume tighly sealed markets, this significant additional labor supply has to have a dampening effect on workers wages worldwide.

The West, Europe first and then North America, for a couple of centuries led industrialization and technological innovation. After World War II, Japan, previously the spoiler, joined the club as a full member. Then the Asian Tigers came along in the 1980s. These were significant changes that altered the global balance of economic power. But, with the exception of the fear engendered in some vociferous quarters by the perception in the 1980s that the Japanese were cunningly and ruthlessly pursuing a strategy of world economic dominance, (thus going back to their methods of WWII, albeit confined to the economic sphere) this was still, relatively speaking, incremental change, at least compared to what came after and is still unfolding.

As a consequence of both the spreading of technologies and the enactment of economic liberalization measures in Asia, the world economy is digesting and will digest for many more years to come the net addition of hundreds of millions of skilled or semi skilled workers, perfectly capable of performing at least a number of tasks at much lower cost. At least some of them will learn more complex tasks. This will allow for some sectors to move up the value chain. Hundreds of millions of new workers have transformed Asia into the world’s workshop. In services, English language proficiency, computer literacy and high speed, low cost, internet, make it possible to outsource more and more functions to where they cost significantly less.

This is a systemic shift in the global equation. We have moved and are continuing to move from relatively high cost operations in the west that employed millions, to low cost operations in Asia, with the net result of transferring functions and jobs over there. In the light of this systemic shift, amounting to hundreds of millions low cost Asians added to the global work force, even with increased global demand for goods and services, it is not possible for western workers to keep the same jobs at the same level of compensation enjoyed by them when they were not facing competition.

This is not a pleasant fact, as it carries many well known negative consequences: the rapid displacement of millions of western workers (with more dramatic impact in countries like the US where safety nets are minimal) and the lowering of standards of living for those (the lucky ones) who find new employment in jobs that quite often pay less then the factory union wages that they were accustomed to.

Looking at this devastation, many demand that this trend be stopped and, better yet, reversed, given its obvious catastrophic consequences for our standards of living. But stopping this trend in a world that is interconnected and interdependent to a degree unprecedented in history, is not possible, even leaving aside the question of how intelligent this solution would be.

Of course, we can and should protest about unorthodox and/or unlawful practices of our competitors. But no serious person can say that the economic rise of China, for instance, is only or mostly about dumping, currency manipulation, pirated goods, disregard for safety and labor standards, lack of reciprocity etc. etc. Of course we should do a lot more to create a level playing field and this should improve the chances of many economic actors currently hampered by restrictive practices.

Yet, the fact remains that the global labor pool has widened and this is not a function of added global demand. It would be foolish to assume that the relatively sudden entering of hundreds of millions of people in the global work force pool, in a world in which technologies have lowered the previous disadvantages of distance and other transaction costs, would have no effect on the established economic equilibrium: most importantly on the standards of living of developed countries’ workers who are now facing these low cost competitors. In this new environment, made possible by the spreading of the technological know how spearheaded in the west, others for the moment enjoy a relative advantage (low cost) that will not be negotiated away.

The critics call this shift of economic activities to low cost countries the race to the bottom. But how can it be otherwise? Capital looks for the highest remuneration. Wherever new opportunities to create competitive goods and services at a low cost will be found, money will go there. Of course there have been and there are excesses, (horrible working conditions, inhuman exploitation). But today they are not the norm. And when these bad practices do occur, they are more and more easily exposed by thousands of watchful NGOs and by the international media.

Overtime, cost differentials will shrink and the Chinese (and all the others) will have to compete on quality and not mainly on price. But this is not happening any time soon. There are one billion and three hundred million Chinese out there. Only a fraction of them are participating in this industrialization process that is proceeding at breakneck speed. May more will join the ranks before a rebalancing will occur. India is a very different case. But there are one billion plus Indians. Even leaving aside the crops of the elite technology and management schools, overtime the Indian system will generate an even more massive supply of capable workers and technically skilled individuals.

Westerners have to confront and digest this fact, without trying to exorcise it by attributing the success of others to their nefarious practices in alliance with wicked national traitors who are sending ‘our’ jobs overseas, thus lining their pockets; with cynical disregard for the plight of their former workers. This may make some people feel good about conducting a moral crusade. But, in the end, it will yield very little. This is not a passing phenomenon that can be blocked by rejecting free trade and erecting barriers against foreign goods. The economies of the world have reached a level of interconnection and interdependence that cannot be undone by a more muscular trade policy.

Everything else being equal, for instance, it is preposterous to believe that in a competitive environment, in the long term, we will be able to have a healthy auto industry when the American auto worker earns several times his Chinese counterpart. (We already see the devastating impact of US based Japanese factories. The success of Toyota is based on better products but also on non union wages for their US workers). In the end, either the unionized US auto worker will accept lower wages, (incidentally this is what airlines workers have done to recreate a modicum of cost competitiveness in a field populated by more and more domestic low cost carriers), or move on to other sectors where America is ahead and thus not facing low cost competitors for the same products.

So, people are displaced and more will be displaced. This is the area where “transitions” matter and can make a real difference. However, this is where the existing effort does not seem even remotely equal to the magnitude of the task. Displaced people need to be helped to get the skills so that they can find something else that can be meaningful and rewarding. The fact that many jobless people eventually find something that, however, does not pay as much as the former factory jobs, is difficult to digest. But, unfortunately, this is unavoidable, unless we can find a way to rapidly teach them truly valuable skills.

Of course, this state of affairs fuels class resentment. The well equipped western business and professional elites usually win in the new globalized economy. They have the resources to adapt, change, relocate, outsource. And the opportunity divide, if anything, with the passing of time, is getting deeper. With their money, the elites can pay for international education for their children. These children will have a gigantic head start on all the others in the competition for the plum jobs of the globalized economy. The MBA graduates from the top schools can vet tantalizing job offers ranging from finance in New York, London or Hong Kong; oil services in Texas or Dubai, high tech industries in California, Singapore or Finland.

At the opposite end of the spectrum, some American high school graduates cannot even read a bus timetable; not to mention the many, (mostly minorities) who, hampered by negative circumstances, do not even get to graduate. As a result of a woefully inadequate education system, most of the disadvantaged stay disadvantaged. They can compete only for the scraps, along with the other less educated from all over the world.

In this new era in which the value of education has increased, it is odd to hear fierce critics of globalization reminiscing about the good old days in which an uneducated individual could get a factory job with union wages that more or less guaranteed a lower middle class or even middle class standard of living. This is no longer, and this is bad, claim the critics. Leaving aside the notion that, according to this reasoning, being uneducated was somehow alright, almost a virtue, in as much as it did not economically penalize the uneducated, the truth is that that era is over. In order to have a chance to participate in the modern knowledge economy a good education and a variety of technical skills are mandatory.

The plight of displaced people is real enough. But instead of clamoring for the totally unrealistic goal of turning the clock back so that we can recreate those times in which lack of education did not entail such a major economic price, we should confront head on the real issue. If we cannot compete on price with the low cost Asians, we have to be able to compete on quality and rate of innovation.

And here education comes to the fore. All American politicians talk about it, lamenting its low quality and making speeches about the need to have more math and science, so that, just like the post Sputnik aftershock, we will get all the skilled people that we will need to stay competitive. All this is very true. But somehow, clamoring notwithstanding, not much is happening. Perhaps it is because we are approaching the issue from the wrong end: i.e. devise a system that will produce these many high quality graduates, etc. as if these were merely the human widgets needed to increase the performance of the economic mechanism.

Whereas, in order to be more successful in this endeavor, it would be good for the nation leaders to extol the intrinsic, as opposed to the commercial value of education. If higher education standards are pushed purely as defensive, reactive measures, then the efforts will not be very productive. Chances are that a mostly reactive education drive overtime will not be sustained.

A vibrant economy is a byproduct of vibrant people. And people are vibrant when they are passionate about what they are doing. (Ask any management guru and they will recite this mantra about ‘motivation’ and ‘passion’ over and over at the foundation of success in business). While it may very well be true that necessity is the mother of invention, the ideal environment is one in which people are driven by a genuine interest and curiosity for what they are doing and not primarily by the fear of losing.

Whereas what we hear from political leaders in America is that the primary reason why we have to improve proficiency is because now we have competitors. Which really means that, if we did not have competitors, then ignorance would be fine, because we would not pay a price for it. The message as crafted in this impoverished, merely utilitarian, fashion is that we attribute no intrinsic value to the pursuit of new knowledge. Knowledge (or lack thereof) is relevant only to the extent that objectively it is a competitiveness tool. Presumably, then, once we will have reached a level that seems to be safe for us to keep our coveted standards of living, then it will be alright to slacken the pace again.

This shallow approach devalues the proposition that, for a society to thrive, many of its citizens must be driven by a genuine, personal desire to expand their horizons. The western scientific and technological revolution did not start in the the 18th Century because of fear of competition, but because of a desire to acquire new knowledge and apply it in order to improve the quality of life. In the United States, free institutions were created because it was believed by the founders that liberty is the necessary precondition so that individuals, free of fear from arbitrary power, can be engaged in whatever lawful quest may appeal to them.

If we manage to instill this spirit of wonder and curiosity in our societies, then new knowledge, to be translated in commercially viable activities, will come about as a result of the combined efforts of millions. As a result, the fears of not being able to make it ‘at the foundation of all protectionist ideas and policies’ will wither away. Cognizant of our abilities and intellectual prowess, then, (if not all of us), at least many more shall all be, as Tony Blair put it, ‘at ease with globalization’.

How Pollution May Ruin Hong Kong

by Paolo von Schirach

January 18, 2007

WASHINGTON – It was reported last December in Hong Kong that members of the British, Canadian, Australian and Japanese chambers of commerce met political leader Donald Tsang to discuss pollution.  Their call follows a warning from the American Chamber of Commerce that fresh investment was being deterred by the thick smog that regularly clouds Hong Kong. “There is widespread concern that the deteriorating environment is adversely affecting the health of our community, our citizens, our children, our businesses and our enviable international status in an increasingly competitive global landscape,” the chambers said in a joint statement.

Pollution has become a hot political issue in Hong Kong as smog levels have risen to often dangerous levels. According to some measurements, poor air quality reduced visibility to less than one kilometer (about half a mile) on more than 50 days last year.

The government says the problem is mostly due to the industrialisation of southern China’s neighbouring Pearl River Delta region, while green groups also blame local coal-burning power stations and diesel-powered buses. AmCham chairman Steve Marcopoto has urged both the local and the neighbouring Guangdong provincial governments to step up efforts to combat the problem. Nearly 80 percent of the 140 top executives polled in a survey felt Hong Kong’s allure was falling, with four out of five knowing professionals who had considered leaving or have already left due to the air quality.

Karl Marx would probably have used the current Hong Kong predicament as an illustration of the ‘contradictions of capitalism’. The economic system that wanted to expand wealth, in the end becomes responsible for increased misery; thus causing its own demise. Marx focused on the inability to spread the riches deriving from the industrial processes introduced in large scale by the capitalists. I am talking about the different but real problem of increased air pollution in Hong Kong (indirectly at least generated by the Hong Kong capitalists) and the possible consequence of eventually shutting down this powerful center of economic prowess.

Several years ago, Great Britain was adamant in its negotiations with Beijing to bring about a post colonial future for Hong Kong that would preserve its special capitalistic status, even after reverting sovereignty back to the then rather communist mainland. During the negotiations, and for some time after Hong Kong had been handed over to the PRC in 1997, the concern was that communist China might have wanted to destroy this western style enclave for ideological reasons; or that it may feel ‘forced’ to do so  in order to avoid any possible capitalist contagion with the rest of China.

But the worst fears political proved to be exaggerated. Hong Kong is not totally free; but its capitalistic economy and special status has been preserved by its new communist masters.

However it would appear that should the demise of this vibrant center of enterprise come about after all, this inglorious outcome will be brought about at the hands of the capitalist leaders of the former British colony, rather than communist machinations.

It appears that the quality of life in Hong Kong is getting progressively worse because of the polluted air that blows into Hong Kong from the Pearl River delta region. Now, this is the region where a large number of manufacturing enterprises were established with Hong Kong capital in order to take advantage of low labor and other costs in mainland China. The Hong Kong capitalists created these industrial plants and own many of them. Focusing on the highest returns, they did not care to spend more money in order to make these productive facilities environmentally friendly, at a time in which the environment did not appear to be a pressing concern, (certainly not in modern Hong Kong).

As a result of this recklessness, we have now an environmental disaster in the region with the unforeseen additional negative consequence of the foul air produced in Guandong getting to Hong Kong, depending on the prevailing winds. Apparently, this air pollution problem, unchecked for many years, has grown progressively. Today, it represents probably the single most significant threat to the continued viability of this city as the unquestioned economic and financial capital of Asia. With all its stellar top competitiveness rankings and applauded economic freedoms, Hong Kong cannot avoid the pollution blowing from a vast industrial region that it created in order to preserve the price competitiveness that it could not possibly maintain because of higher labor costs in the territories.

To make matter worse, The Economist reported recently that food stuff imported into Hong Kong from the mainland appears to have unhealthy concentrations of pollutants and various toxic substances reputed to be carcinogens. So, Hong Kong’s proximity to a high concentration of pollution seems to cause damage at several levels.

Right now it appears that Hong Kong desperately needs the full cooperation of mainland authorities so that, jointly, (probably with massive capital infusions coming from Hong Kong itself) they can drastically reduce the growing deterioration of the environment in the whole region and thus the very ability to live a more normal life in the former colony. We do not hear much about the quality of life for the tens of thousands of workers who toil in the very factories whence the pollution originates. But they can hardly be better than in Hong Kong itself.

The seriousness of the problem for Hong Kong is illustrated by the fact that many international companies are relocating or at least are beginning to consider relocation in more salubrious locales. Many expatriate executives have already moved elsewhere their children, more vulnerable to respiratory afflictions. Should things get worse and should Hong Kong begin to lose at least some of the leading international companies that have made it their Asia headquarters, this may start a general exodus, as the attractiveness of the city rests in large part on the unusual concentration of economic power and talent.

So, unless drastic action is undertaken immediately to reverse the environmental deterioration, it would appear that the Hong Kong capitalists, after all, have been more shortsighted than the Beijing communist leadership.

Green is Business

WASHINGTON – “Green” is increasingly business — good business — around the globe. True, favorable regulatory and fiscal arrangements are still necessary to guarantee the viability of many businesses that produce and market environmentally friendly technologies. But subsidies are less crucial these days. Take wind mills for electric power generation in which Europe is the leader. The European Wind Energy Association indicates that since the 1980s the cost of producing wind power has gone down by 80 per cent. For more significant penetration around the world, the International Energy Agency calculates that costs will have to be cut by at least an additional 30 percent. Yet, European wind power industry leaders are confident that continued investment in R & D and economies of scale due to increased sales will accomplish this. Demand is growing. The sector is expanding.

BP Solar, the solar power generation unit of British Petroleum became profitable in 2004 with increased sales of 30 percent worldwide. So, the non oil offshoot of a major oil company is viable.

President Bush, speaking recently at the Virginia BioDiesel Refinery in Virginia, stated that, while biodiesel made with soy beans generated only 500,000 gallons of fuel in 1999 in the US, last year it accounted for 30 million gallons. Oak Ridge National Laboratory estimates that ethanol and biodiesel combined could provide up to one fifth of transportation fuel in the US within 25 years. Clearly a long way to go. Still, who would have thought 20 years ago of a US president stating that transforming soybeans into a cleaner transportation fuel is a real business?

Well, if we had any doubt left that the environment is now mainstream business, it vanished after Jeff Immelt, the CEO of General Electric, in the course of a carefully choreographed recent event in Washington, announced that the number two U.S. corporation in terms of market capitalization intends to focus on water and energy technologies as key components of its business strategy.

Under the banner of “ecomagination” GE will aggressively increase R & D funding and devote additional corporate resources to promote at least 17 proven technologies — from energy production to efficient engines to water filtration — that will improve the earth’s environment and thus the quality of life for millions of people. The technologies’ net effects will be measurable and the data gathered will be made public, thus creating standards that may help guide public policy. Among them: cleaner coal burning power plants whose costs will be brought down through increased efficiencies; more efficient engines for locomotives, airplanes and cars with lower emissions; desalination plants to increase water supply and filtration systems to make it safe. Immelt is sure that, by providing environmentally friendly solutions that address real needs, GE will make plenty of money. So, “ecoimagination” is not window dressing. This is core strategy.

Immelt’s reasoning is straightforward. The carbon based world economy is under severe stress. Oil at $ 50 a barrel is a reminder that we in the U.S. but also in the rest of the world depend on a source of energy that is increasingly more expensive, more scarce and potentially subject to supply disruptions; not to mention the pollution byproducts. Likewise, environmental concerns are no longer just niceties. They are at the center of the quality of life that we as human beings are going to enjoy.

If this is true in general, the argument for the adoption of state of the art new technologies is even stronger for poor countries. For the many and growing billions who live in the developing world there is a desperate need for new solutions. Indoor air pollution is a killer in rural areas and air pollution a menace in huge urban areas, while rampant disease due to unsafe water and non existing sanitation is only going to grow without the massive introduction of new technologies.

Tens of millions of Chinese (7 out of the 10 dirtiest large cities in the world in terms of air quality are in China) live daily with the consequences of extremely high air pollution in terms of diseases and lost productivity. And a study by the investment bank CLSA* indicates that China, already relying on coal for 68 percent of its primary energy consumption, will see air pollution increase 4 times 1990 levels by 2030. (Victor Mallet of The Financial Times writes that air pollution blowing from the heavily industrial Guangdong province has caused a severe deterioration in the quality of life and thus economic damage to environmentally conscious Hong Kong).

China is the world’s fastest growing economy. Immelt’s GE has already estimated that China and other large growing developing economies (India, Indonesia, Turkey) will provide in the years ahead 60 percent of the company’s growth. In launching the “ecoimagination” strategy, Immelt now connects the dots. He is clearly planning to make China a big buyer of these technologies. And why not? China is committed to growth; but not at the cost of self-destruction due to environmental ruin. If GE can provide solutions that do not sacrifice growth, they’ll buy them.

Of course, other major international players such as Siemens, ABB or Suez are already doing this in China and around the globe.

But GE’s announced strategy has similarities to IBM’s decision to enter the PC market. That move indicated to all around the world that PCs were a real business with long term prospects. As GE joins the environmental technology pack, by virtue of this powerful endorsement, the pack is bound to get bigger and bolder. The promise is that this new focus will fill real needs. In the developed world it will help cut energy costs, while improving the environment. In the developing world GE and its competitors can become key enablers for true, sustainable development.

Finally, if the environment proves to be big business, then it may provide the competitive edge that the US and the West in general need in order to maintain leadership positions in the world economy. In the 1980s, when we started hemorrhaging manufacturing in America, very few thought that Information and Communication Technologies could create high value products and services and significant new employment. Maybe environmental technologies and the myriad of services that are bound to sprout and develop around them will help unleash the next wave of American innovation.

*Air Pollution in Asia: www.clsau.com