By Paolo von Schirach
July 21, 2013
WASHINGTON – On April 6, media expert Marvin Kalb, and host of The Kalb Report, had a long conversation with Rupert Murdoch, Chairman and CEO of News Corporation. Murdoch is arguably one of the most powerful and influential media entrepreneurs in the world. When Kalb asking him which country will emerge as the dominant world power in the 21st Century, Murdoch said the USA.
Betting on America?
Now, this statement uttered by a pretty savvy media tycoon seems counter intuitive. Especially after The Big Crash of 2008, we have been flooded with endless commentaries and prognostications about America’s decline, while we all look with astonishment at the unstoppable rise of Asia, with China of course in the lead.
Well, not so fast.
Murdoch did not have a chance to elaborate on the reasons for his bullishness on the US. But here are mine.
Despite Washington’s failures, there is dynamism in the country
America is not doing well, we know that. Most notably the Washington policy-making machinery is essentially broken, at least for the time being. This sad policy paralysis makes it impossible to seriously address, let alone solve, America’s systemic problems, namely:
— entitlement reform
— tax reform
— serious health care reform
— public education
— new measures aimed at encouraging business creation while boosting competitiveness
This is very sad and worrisome. America is limping along with a paltry 2% growth, stubbornly high unemployment (7.6%) and a gigantic public debt, (close to $ 17 trillion). And yet, if Washington is frankly useless these days, this highly decentralized country is far from dead.
Many states are laboratories of public policy innovation, (look at Indiana, Utah or Kentucky), while their Governors are keen business planners and marketers, doing their best to create an environment that will attract new enterprises and (precious) fresh human capital.
Of course, lack of Federal Government support and broader policy guidance hurts; but it does not cause terminal damage. Thanks to state of the art technologies, a few super universities with their research centers that allowed the creation of several “innovation hubs” across the nation, America, or at least part of it, is still an exciting place where new things are happening. And all this is not by accident.
A pro-growth eco-system
The key advantage that America has over other countries is that over time we managed to create a reasonably well-balanced pro-enterprise eco-system supported by a pro-growth culture. This is an invaluable asset. And it is precisely this asset that allows America to rethink, re-engineer, discard, re-try and come up with state of the art innovation. Not all the time, and in fact now less than before. But still ahead of the rest of the world.
Europe: no enterprise
Compare America to Europe and you see the contrast. In Europe enterprise is feeble precisely because most countries lack a strong pro-growth culture. Entrepreneurs are timid and wait for business friendly public policies. Little is spent on R&D, and this under investment yields too little innovation which in turn creates only feeble growth.
Japan is a nursing home
Japan is now in the midst of a heroic effort pushed by super energetic Prime Minster Abe aimed at shaking up a dormant society. Still, “Abenomics” is still mostly a vision and a promise, rather than a reality. There are just too many vested interests in Japan that will resist the proposed radical changes that most likely will undermine their perpetual rent positions.
Besides, due to horrible demographic trends, (no babies), Japan has become a society of old people. Unless this trend is reversed, this is only going to get worse. Do not expect people above 70 to become entrepreneurs. On the contrary, you can count on this growing army of senior citizens to require more costly public services and more benefits. That means consistently high deficits and a larger public debt, (already more than double Japan’s GDP).
China did extremely well. Future uncertain
And what about China? China has had a fantastic 30 year ride. Its leadership did extremely well by exploiting to the maximum its inherent advantage: ultra cheap labor used to produce massive amounts of labor intensive goods for exports. At the same time China built brand new infrastructure at record speed, this way creating superb logistics that allow cost-effective, well-functioning supply chains.
But now the whole thing fizzled. The cheap labor advantage has been eroded by rising wages in China and by massive automation in the West. Indeed, if your Ohio based machine tools factory relies increasingly on robots, where is the value in moving the whole operation to China? Most of all, the erosion of the labor advantage will force China to compete on quality and innovation, rather than price alone. And it is not clear that it can do this. China does not have America’s pro-innovation eco-system. And it cannot improvise it. It does not have the culture, the values, the mind set to create its own “Silicon Valley-VC-research labs-academics/entrepreneurs” mix. It just doesn’t.
True innovation requires a bottom-up, decentralized eco-system with many independent players who in general agree upon easy to understand, transparent and enforceable rules of the game. China does not have such an eco-system. Even today, 30 years into its miracle, most experts do not trust official numbers and statistics.
Think about it: the second largest economy in the world that routinely cooks up economic figures. We are talking about the basics here. China may eventually get a modern business environment. But attaining this would be contingent on other, more complicated political reforms.
Forget the BRICS
As for the rest of the BRICS, not much there. Forget about hopelessly autocratic Russia, perennially messy India and almost equally messy Brazil. And let’s not even mention sorry-looking South Africa, a country run by unimaginative, often corrupt, ANC functionaries.
America has the ability to fix itself. Will it do it?
And so, by default if nothing else, we are back to America as the only reasonably dynamic society that historically has demonstrated to be capable of self-renewal. Now, past performance, as they say, is no guarantee of future achievements. The systemic shortcomings mentioned above will have to be addressed, at some point. But there is ground for hope that, despite the current political/policy paralysis in Washington, America will be able to fix itself.
As for the other major economies, I would not bet on their ability to self-correct, go to the next level and move forward.