On April 19th Dr. Fareed Zakaria, host of the Global Public Square (“GPS”) program on CNN and editor-at-large at Time magazine, shared with a diverse group of Puerto Ricans his views on various issues affecting the global economy and the larger geopolitical landscape.
For Dr. Zakaria the year 1979 was the critical inflection point in recent history. That year, Paul Volcker was appointed to be the chair of the U.S. Federal Reserve System and his mission was to “break the back of inflation.” It is perhaps difficult to remember today those days of double digit inflation, but Volcker, at the cost of inducing a very sharp recession, succeeded in taming inflation in the United States. The central bankers of the West soon followed suit. According to Dr. Zakaria, in 1979 there were 34 countries suffering from hyperinflation, in 2011 there are none.
The economic benefits of price stability are obvious, as it facilitates long-term investment and planning. The political benefits are also significant but perhaps not quite so obvious. Out of control price inflation is one of the great drivers of political instability as it destroys the value of what we already have, what has been saved and invested, perhaps for a generation or more. This sense of imminent loss generates significant uncertainty among middle class people all around the world. That uncertainty, in turn, quite frequently translates into open political conflict.
The deflationary bias of monetary policy between 1980 and 2000 was reinforced by the opening of China and India to world trade. According to Professor Richard Freeman, the opening of China, India, and the former Soviet bloc during the 1990s effectively doubled the global labor pool, from 1.46 billion workers to 2.93 billion. This “great doubling”, as Professor Freeman calls it, produced generous benefits for business enterprises, which benefited from lower labor costs, and for the people of China and India, where roughly 400 million have escaped from dire poverty over the past fifteen years.
The story for many American workers, however, is not as good. As Dr. Zakaria noted in his presentation, the U.S. economy is currently producing goods and services at pre-Great Recession levels, the only advanced economy to have recuperated so quickly, but with an additional 7 million people unemployed. Lowering unemployment in the U.S., without recurring to populist or isolationist policies, is one of the great challenges for U.S. policymakers.
These two trends have also converged with and reinforced the process of globalization, which had been independently gaining strength due to rapid technological change and the offshoring of jobs. According to Dr. Zakaria, advances in communications, falling transportation costs, the development of new information technologies, and the mechanization of many labor-intensive jobs, have altered the global division of labor by making some jobs obsolete, such as assembly line jobs now done by robots, or by allowing foreign workers to perform certain services electronically over long distances, such as the computer programming currently being done by young Indian computer scientists for U.S. companies.
Some prominent economists, among them Alan Blinder, former Vice Chairman of the Federal Reserve, believe offshoring will herald a new industrial revolution by radically altering the terms of comparative advantage among countries. Traditionally, economists used to classify goods and services as either tradable or non-tradable. Anything that could be put in a box and shipped (mostly manufactured goods) was considered tradable, while anything that could not be put in box (such as services or houses) was thought of as non-tradable.
However, recent changes in technology and lower transportation costs have altered this balance and the boundary between what is tradable and what is not is constantly shifting. For example, now it is possible for doctors in Singapore or accountants in India to perform services online for U.S.-based hospitals or accounting firms. The changes brought by offshoring will be disruptive for many wealthy economies, as jobs that were previously thought of as safe become increasingly subject to foreign competition. But offshoring is also likely to open up whole new fields for specialization and trade, and, thus, for generating new wealth. The only thing that is clear in this changing environment, according Dr. Blinder, is that nations and governments must face up to the massive, complex, and multifaceted challenges that offshoring will bring.
Dr. Zakaria is fairly confident that the U.S. stands to gain from all this change if “it plays its cards well”. Currently, the U.S. economy is growing at a modest rate of around 2%, its GDP is back to pre-2008 levels, and interest rates are at or near historic lows. The U.S. has also benefited from its political stability in the midst of turmoil in Middle-East and the political fallout of the European Union’s bailout of Greece and Ireland.
There are, however, some ominous clouds over the horizon. In addition to relatively high unemployment levels, the U.S. faces a massive federal budget deficit, a rapidly growing national debt, and the escalating costs of the Social Security, Medicare, and Medicaid entitlement programs. According to the Congressional Budget Office, these three programs, unless they are radically altered, will account for 60% of all federal expenditures by 2030—a situation that Dr. Zakaria rightly calls unsustainable. The medium to long-term viability of the U.S. economy depends, in large measure, on successfully addressing these thorny issues.
In addition to its domestic problems, the U.S. also has to face up to a very complicated international situation. The wars in Afghanistan and Iraq have not turned out to be the “cakewalk” that some U.S. officials predicted, while the situation in the broader Middle East is getting increasingly complicated with calls for regime change in Tunisia, Egypt, Yemen, Libya, Bahrain, and Syria. Furthermore, China, already the world’s second largest economy, is starting to throw its weight around the world, flexing its military muscle in the South China Sea and asserting its economic might in Africa, South America, and even some European countries. Accommodating the rise of China is likely to be the most difficult challenge for U.S. foreign policymakers in the short to medium-term.
Indeed, dealing with the rise of not only China, but also India, Brazil, and more broadly with what Dr. Zakaria calls the “rise of the rest”, presents a significant challenge for the United States. According to Dr. Zakaria, emerging countries have been the true beneficiaries of globalization as it has enabled them to “download the killer apps” for economic growth.
In his opinion, economic development can be seen as a three stage process in which a country moves from extreme poverty (stage 1) as soon as “government stops doing really stupid things”. Once a country reaches a GDP per capita of around $5,000, it is necessary to invest in both physical and human infrastructure to push on to the next level. Among the elements required to make this jump he mentioned a working legal system, adequate transportation and communication facilities, modern electricity and water networks, and an educated labor force.
The second big hurdle becomes evident when a country reaches GDP per capita between $12,000 and 15,000 (the second stage). To make the move from there to the advanced economy stage is very difficult. It requires quality education, an efficient financial system, investment in research and development, as well as the right incentives for taking risks and promoting innovation. According to Dr. Zakaria, many emerging countries have used the current globalization wave to move from the first to the second stage of development. It remains to be seen how many make it to next stage.
All of which leads us to Puerto Rico. According to Dr. Zakaria, Puerto Rico is stuck on stage two of this three-stage typology of economic development. According to his analysis, Puerto Rico’s primary problems are a lack of leadership and vision. The island government has become complacent with the current state of affairs, content to run a welfare state funded in large part by the U.S. federal government and with transferring wealth from one pocket to another without setting the conditions necessary for creating wealth locally.
In his view, Puerto Rico reminds him of Egypt, a country where the government became satisfied with distributing riches generated by accidents of nature (the Suez Canal, oil-rich neighbors) rather than produced by the efficient use of its resources. The result was a society with relatively high education and health levels, a bulky public system, and a growing number of healthy, educated, and unemployed young people, who, until recently, didn’t see much of a future there.
Luckily, Puerto Rico’s lack of natural resources means that the government needs to create wealth first in order to be able to generate tax revenues later. Puerto Rico, said Dr. Zakaria, should forget about obtaining parity in Medicare or other federal programs, or about obtaining a new federal tax break for U.S. corporations doing business in Puerto Rico. The focus should be on investing for the future, to generate employment and long-term growth, based on Puerto Rico’s comparative advantages.
Ironically, then, in a world that is becoming smaller every day due to changes in technology and advances in communications, Dr. Zakaria is telling us that the solutions to our problems are likely to be found here, in Puerto Rico. We should invest in what we have, that is, our people, which are our most important resource, and forget about importing silver bullet solutions from elsewhere.
Créditos: Dr. Fareed Zakaria’s Visit to Puerto Rico
Por: Sergio M. Marxuach | Director de Política Pública, Centro para la Nueva Economía