TOPICS > Economy

Clyde Prestowitz: “Three Billion New Capitalists”

August 15, 2005 at 12:00 AM EDT

TRANSCRIPT

PAUL SOLMAN: If you want to see where the world economy is heading, go east, young man and young woman, too. At least that’s the message of “Three Billion New Capitalists: The Great Shift of Wealth and Power to the East.” The author is Clyde Prestowitz, a veteran Asia watcher who began his career as a trade negotiator in the Reagan Administration. Prestowitz thinks all those factory workers in China and outsourcing jobs in India you keep seeing on the news are just the beginning of an economic tidal wave that Americans had better learn to live with, better learn to contend with. We sat down with Prestowitz recently to discuss the book.

PAUL SOLMAN: What’s the basic thesis of “Three Billion New Capitalists”?

CLYDE PRESTOWITZ: We’re in the middle of a two- part revolution. Three billion new people, billion and a half Chinese, billion Indians, half a billion people from former Soviet bloc, have suddenly come into the global economy all at one time. Within these three billion people is a population as big as the United States, bigger than anybody in Europe or Japan, who are every bit as skilled and can do anything that could be done in the U.S. or Japan or any of the developed countries for ten cents on the dollar.

PAUL SOLMAN: When you say “every bit as skilled,” you don’t mean as skilled as our top doctors, our top scientists –

CLYDE PRESTOWITZ: No, I do. I mean, as good as us or better. They’ve got their PhD’s from Harvard and MIT, they’ve worked at the Centers for Disease Control in Atlanta; they’ve been top professors at top U.S. universities. They’ve started companies in Silicon Valley with Silicon Valley venture capital. They are every bit as skilled and they can do this for 10 percent maybe 25 or 30 percent on the dollar.

PAUL SOLMAN: So why do they go back to their home countries?

CLYDE PRESTOWITZ: Because they got great opportunities. People who have that kind of a background in the U.S., going back to India today or going back to China today have just wonderful opportunities to start companies, to do things, to build things in their own country that are going to push those countries to be the winners of the 21st Century.

PAUL SOLMAN: So then in your view, the outsourcing we’ve been hearing so much about is just the tip of the iceberg?

CLYDE PRESTOWITZ: Just the beginning, yeah. And that’s the second revolution. Not only have you had three billion people come in, but the Internet and FedEx have canceled time and distance. So anything that you do on the Internet, it’s two seconds from any other place in the world; two seconds from Boston to Bangalore. And even if you’re working in atoms, even if you’re producing and actually have to deliver something, FedEx can deliver anything anywhere in the world in 36 hours. So effectively, all these people are right across the table.

PAUL SOLMAN: So what do we do? Are you just going to tell me we have to knuckle down, study harder, go to school longer, retrain our workforce?

CLYDE PRESTOWITZ: We have to do that. Our educational system is an embarrassment, and we definitely have to do that but that in and of itself is not enough. We need to have a new approach to international economics. And one of the things that needs to be addressed is something like the following: U.S. semiconductor manufacturers, despite the fact that the U.S. is the best place to make these kinds of products, are increasingly looking at putting plants elsewhere. In fact, two-thirds of the semiconductor plants being built today are being built in Asia. And you ask yourself, “Well, if the U.S. is the best place to make these things, why are they putting the plants in Asia?”

And the answer is because the economic development boards of Singapore and Malaysia and China and many of these countries are visiting regularly the executives of these companies and saying, you know, “What would it take to get you to my country? How about a tax holiday; how about a capital grant?” And you know you’re talking $3 billion investment, so if a government is willing to put up $1 billion or $2 billion, that’s a lot. So in effect, they bribe these plants to come there and this, of course, has nothing to do with market forces. It has nothing to do with Adam Smith and all the free trade theory that we talk about. And yet, the U.S., both Democrat and Republican administrations, has never responded to this.

PAUL SOLMAN: You know, this reminds me of what you were saying fifteen or twenty years ago. The United States had to come up with a national, competitive industrial policy or else– it was Japan back then– was going to eat our lunch. But the U.S. economy has been doing pretty well almost ever since.

CLYDE PRESTOWITZ: But the point is this: In response to the challenge that Japan posed in the ’80s, the United States Government actually did a lot of things. We established, for example, Sematech, a joint industry and U.S. Government-funded research and development organization to promote development of the U.S. semiconductor equipment industry.

We negotiated agreements with Japan which stopped Japanese dumping of chips in the U.S. market and which opened the Japanese market to substantially more foreign penetration than had taken place before. People forget that because the success of the U.S. in the ’90s is always attributed to the wonderful qualities of U.S. entrepreneurial capitalism, and certainly it had something to do with that, but it’s wrong to dismiss the impact of the response of U.S. government policies through the challenges posed by Japan in the ’80s.

And what we’re seeing now is kind of a rerun of the whole Japan story in the ’80s, except that the numbers are bigger, there are more players, and one of these players is a very different kind of player than Japan, a much tougher player than Japan: China.

PAUL SOLMAN: But economically, America is growing, isn’t it, faster than Europe, faster than Japan?

CLYDE PRESTOWITZ: Right. But this growth of ours is fueled by debt. The U.S. has swung from being the world’s biggest net creditor to being the world’s biggest net debtor to the tune of $3 trillion, growing at $700 billion a year. We’re now soaking up as a country, 80 percent of available global savings.

Well when you hit 100 percent, the music stops. Paul Volcker has said publicly 75 percent chance of a major financial crisis in the next five years. Warren Buffett has bet something like $20 billion of Berkshire Hathaway Funds investing in foreign currencies. George Soros has made a bet against the dollar. They’re all looking at these numbers and they’re saying, this doesn’t compute.

PAUL SOLMAN: But given the trends you’re citing, what real hope is there, even if we come up with a national economic strategy, work harder, study harder and so on?

CLYDE PRESTOWITZ: Let me give you hope, let me give you hope. They face huge challenges, too. We have — if you think of this as a game of bridge, and ask yourself whose hand would you like to play– China’s hand, India’s hand, U.S. hand — I’ll take the U.S. hand any day. We’ve got more trumps and aces than anybody else.

We’ve got stable institutions. We’ve got the best graduate schools. We have got the best infrastructure. We’ve got an entrepreneurial culture. We reduce risk in this society to encourage people to fail and try again. We have challenges on the pollution side and global warming, energy and so forth, but if you look at China and India, enormous challenges in pollution, trying to find clean water, just trying to find enough water in northern China and much of India, huge task. Energy, they’re just beginning to become big energy users.

They don’t have much at home. So they’re going to have to go out and become much more dependent on the Middle East, for example, than we are; AIDS, health issues. In China, aging — China in ten, fifteen years is going to age very rapidly and the population’s going to begin to shrink. The “one child” policy means that you got two parents and one child. How do the pension and healthcare issues get taken care of?

That’s an area where India actually has a great advantage. India’s demographics are good. Less — half the population is under the age of 25 in India, which is why I’m betting on India as the winner of the 21st Century. But they face enormous challenges. And the good thing is this: We want them to succeed. The worst thing in the world would be a failed China and India. That would be a threat to us as well as to them. So we want them to succeed and create a complementary economic relationship that lets them win and lets us win.

But the key here again is that we have to get our minds around the fact that we need to think about winning and we need to think about competing, and we need to think about having a strategy that enables us to do the things that are necessary to meet that challenge.

PAUL SOLMAN: Clyde Prestowitz, thanks very much.

CLYDE PRESTOWITZ: My pleasure.