The flat and the unflattened

image Friedman, T. L. (2005). The World Is Flat: A Brief History of the Twenty-first Century . New York, Farrar, Strauss Giroux. (link is updated to version 3.0)

I have long used chapters from Tom Friedman’s The Lexus and the Olive Tree in my classes to explain the impact of information technology and globalized capital markets on the world economy. Friedman’s ability to find entertaining and highly relevant examples, and his gift for creative labels (in that book he coined two: The electronic herd to denote the legions of day-traders and other small traders who represent the volatile private capital countries now must attract, rather than the much more stable large bank loans of yore; and the golden straight-jacket, how politicians are forced to refrain from cronyism, populism and personal enrichment in order to attract and maintain the good will of the electronic herd. In Lexus, Friedman showed how politicians are becoming CEOs of their countries, managing them to compete in a global economy that cares less about color and location than education and infrastructure. I was eagerly looking forward to his next book on globalization, and, to judge from the response, so has many others.

That being said, my feelings are mixed on this one. Don’t misunderstand me – everyone, from politicians to business leaders to students – should read this book, but perhaps less for the first 10 chapters, where Friedman describes how the world is going "flat" (that is, small and interconnected) than for the latter part of the book, starting with chapter 11, "The Unflat World", where he dives into the difficulties of globalization and the dangers of holding it up. While the first 10 chapters are interesting because Friedman writes extremely lively and documents relevant, if well known cases with clarity and wit, it is in the latter part of the book, where Friedman shows why he is the New York Times leading foreign affairs journalist and not their technology or business writer. In that part, the book starts to shine and really deserve the accolades heaped on it.

His key message is very similar to the closing passages of Landes’ The Wealth and Poverty of Nations , (indeed, the whole book can be taken as a popularization of Landes with more imminent examples, with a an seasoning of Theodore Dalrymple and Ernst Luttwak, but writen up more in the style of BusinessWeek than The Economist. If that is what it takes to get people to read about and understand globalization, I’m all for it.

That being said, the weakest chapter of the book is the one about business – aside from the brilliant example of Aramex, a Jordanian rapid delivery company, most of the advice there is trite to business researchers and, I suspect, not exactly news to the common reader. Friedman’s saving grace is that he can and does travel, has an incredibly knack not only for picking the relevant examples (most of the companies mentioned, such as UPS, eBay, Wal-Mart, are overused in many other contexts but appear fresh here) but for writing them up in a style that makes them interesting. The best example by far is Dell Computer, where he simply traces (or, rather, gets Dell to trace for him) in minute but fascinating detail how the computer he wrote most of the book on came to be – showing that if China and Taiwan cannot agree politically, they are pretty good at supplying parts and know-how to each other and to the world.

Friedman has a great gift for the poignant expression (On the need to not shut the world out for fear of terrorism: "Leave the cave-dwelling to Osama.") but sometimes veers over towards the saccarine (On the India-Pakistan sabre rattling in 2002 and how big companies lobbied to get India to stand down: "The [India-Pakistani 2000] cease-fire was brought to us not by General Powell but by General Electric. We bring good things to life.")

His suggestion that the United States embark on a "man on the moon" project aimed at making the country energy-independent in ten years is nothing short of brilliant – it addresses a serious problem, is doable, would further research towards a great goal, and help the American and the world economy no end. And it would lessen the world’s dependence on oil and thereby reduce the danger of future fallouts over access to energy. Go for it. It’s a no-brainer.

Friedman also answers his critics, cheerfully admitting that he is a technological determinist – "guilty as charged" – but not a historical one. And his analysis of how the anti-globalization movement – which he thinks is extremely important  – has been shanghaied by anti-Americanism and geriatric leftist ideology is both cooly rational but also heartfelt: Friedman is honest and world-wise enough to know that globalization, to be a beneficial evolution, needs a fact-based and rational opposition – focused on how we globalize rather than whether we are. Too many critics of globalization see it in terms of conspiracy theories – it is an evolution enabled by freedom of information, capital and to a certain extent people, and attempts to put the djinnie back in the bottle are not likely to be successful, to put it mildly. (Incidentally, Jared Diamond’s Collapse, which I am halfway through at the moment, provides a much better foundation for this opposition than Naomi Klein’s populistic but theoretically incoherent No Logo.) As Friedman says it: "What the world doesn’t need is the anti-globalization movement to go away. We just need it to grow up. […] You don’t help the world’s poor by dressing up in a turtle outfit and throwing a stone through a McDonald’s window. You help them by getting them the tools and instutions to help themselves. […] Just ask any Indian villager."

His best writing – and underlying anger – comes out when writing about the people for whom globalization is not as much a negative influence as a distant mirage. They constitute half the world’s population, they will get restless unless as soon as they see what they can get, and if that isn’t good enough reason to start thinking about how to use globalization beneficially rather than try to stop it from happening, I don’t know what is.

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Possible error: On page 268, Friedman refers to a study of "leading universities" creating 4000 companies with 1.1m jobs and $232b in revenues, refers to the "Task Force on the future of American Innovation" On page 244, however, the same figures are repeated, but instead of "leading universities" it is MIT, and the reference is to a study by BankBoston.

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Notes after the jump, taken as I read through the book, offered here, caveat emptor, typos and all:

How the world became flat

One: While I was sleeping
– Tom was sidetracked by 9/11 and writing about the middle East and al-Qaeda and didn’t see how everything has speeded up

Two: The ten forces that flattened the world
Flattener #1: 11/9/89 (the Berlin wall coming down, allowing people to think global, freeing up free trade, especially in India and China)
Flattener #2: 8/9/95 (Netscape going public, the rise of the web)
Flattener #3: Work flow software (interoperability standards – and how PayPal got to be eBay’s standard because the users wanted it, not eBay’s Billpoint. Essentially an explanation of network effects and the power of a customer community)
Flattener #4: Open-Sourcing (tells the story of the Apache web server and how it came to be. Eventually IBM signed up and was told to contribute their best engineers. Other examples are blogs, and the Wikipedia.)
Flattener #5: Outsourcing (Primarily India – enabled by cheap fiber (as a result of overinvesting), excellent technical education (no corruption in the Indian Institute of Technology) and strong demand driven first by Y2K and eCommerce, then demand for cheap engineers following the .com bust, eventually evolving to business process outsourcing)
Flattener #6: Offshoring: Essentially a description of China and offshoring of manufacturing – China has 160 cities with more than 1m inhabitants, for instance, and graduates 350K engineers annually. "90% of the output from US-owned offshore factories is sold to foreign consumers" p123.  WTO membership in 2001 has made a large difference. But it has created competition within China as well – and probably would not have passed had it been put to a popular vote.
Flattener #7: Supply-Chaining: Using Wal-Mart as an example of lean supply chains. Enormous numbers, effective supply chains, vendors dealing direcly with Bentonville, ramshackle headquarters. "but make no mistake about one thing: Wal-Mart also became number one because this little hick company from northwest Arkansas was smarter and faster about adopting new technology than any of its competitors. And it still is. When started in the 60s, it decided to bypass wholesalers and to go straight to producers, but had to build a centralized distribution center for that to get good prices. Once this was established, the focus was on 1) working with manufacturers to get them to lower costs, 2) optimizing the supply chain from the manufacturer, and 3) constantly improving own IT. Bought $260b worth of goods in 2004, 108 distribution centers, 3000 stores in USA, 1000 more abroad. HP sells 400K computers through Wal-Mart in one day at Christmastime. RetailLink hugely important, partnering with producers. Moving to RFID. Subchapter: TOO MUCH OF A GOOD THING: Wal-mart’s insularity has caused it to misread public opinion many times."Wal-Mart is the China of companies. It has so much leverage that it can grind down any supplier to the last halfpenny. And it is not at all hesitant about using its ability to play its foreign and domestic suppliers off against each other." (p.137). CEO insists it is better for Wal-Mart that things are produced in the States, but the problem is the suppliers themsevles, who do not want to have responsibility for production and employees (especially health care).
Flattener #8: Insourcing (example of Fedex and UPS. UPS has 271 aircraft, 11th largest fleet in world. Repairs computers for Toshiba in Louisville and does logistics for Papa John’s pizza. Friedman version of insourcing is when UPS engineers come in and design your logistics processes, then operate them. CEO Mike Eskew says the majority of customers are small companies who cannot build up a logistics chain themselves. Shows the connections between eBay sellers, UPS, PayPal, and eBay buyers. Also does credit risk, acting as trusted third party. Also works for large companies – UPS redesigned Ford’s distribution network.
Flattener #9: In-forming (example of search engines. Google as the ultimate flattener. Sergej Brin (p.155): "people underestimated the importance of finding information , as opposed to other things you would do online. If you are searching for like a health issue, , you really want to know: in some cases it is a life-and-death matter. We have people who search Google for heart-attack symptoms and then dial nine-one-one." Yahoo Groups another example. Flip side: privacy, your reputation will follow you no matter what.
Flattener #10: The steroids: Digital, Mobile, Personal and Virtual. (Friedman call these "steroids" because they amplify the other flatteners.). Standard examples: Moore’s law, growth in storage, Skype making voice calls free, wireless (exemplified by applications developed by NTT DoCoMo.)

Three: The triple convergence
Convergence I: Technical platform making it easy to store, process and transmit information – people flying Southwest Airlines now print out their own tickets (meaning that Tom, who got to the airport early, found the best seats taken already).
Convergence II: Organizational reconfiguring based on the technology – essentially, process organization.
Convergence III: More players – visa no longer needed.
Example from India, China and Russia: Dhruva, an Indian gaming software development company, doing everything from India. So you get Zippies – young upward mobile Indians. 3m books sold in China on how to prepare your child for Harvard. Boeing using Russian aerospace engineers to develop their next generation airplanes.

Great comment from Bill Gates: "As a result of China’s drive to succeed, Microsoft chairman Bill Gates argued to me, the ‘ovarian lottery’ has changed – as has the whole relationship between geography and talent. Thirty years ago, he said, if you had a choice between being born a genius on the outskirts of Bombay or Shanghai or being born and average person in Poughkeepsie, you would take Poughkeepsie, because your chances of thriving and living a decent life there, even with average talent, were much greater. But as the world has gone flat, Gates said, and so many people can now plug and play from anywhere, natural talent has started to trump geography. ‘Now’, he said, ‘I would rather be a genius born in China than an average guy born in Poughkeepsie.’

Smokescreen: The dot-com bust, 9/11, and Enron has obscured this development for many people, definitely for American politicians.Also, business leaders aren’t talking – "they don’t want to tell the kids."

Four: The great sorting out
"The most common disease of the flat world is going to be multiple identities disorder, which is why, if nothing else, political scientists are going to have a field day with the flat world. Political science may turn out to be the biggest growth industry of all in this new era." p.201.

Michael Sandel, political theoretician from Harvard: "What [Friedman] is arguing is that developments in information technology are enabling companies to squeeze out all the inefficiencies and friction from their markets and business operations. That is what your notion of ‘flattening’ really means. [….] Some obstacles to a frictionless global market are truly sources of waste and lost opportuniteis. But some of these inefficiencies are institutions, habits, cultures and traditions that people cherish precisely because they reflect nonmarket values like social cohesion, religious faith, and national pride. […] That is why why the debate about captialism has been, from the very beginning, about which frictions, barrriers, and boundaries are mere sources of waste and inefficiency, and which are sources of identity and belonging that we should try to protect."

Example: Indian consulting firm wins the contract to upgrade the unempl
oyment system for the state of Indiana. Would have saved $8m, was set up by pro-labor Democrats and politically torn up by free-trade Republicans. Sort that out. (p.207.) The left wants to protect workers but also help developing countries. The right wants to lower public spending and shrink government….

Multinationals becoming global also in their workforce. Lenovo bought IBMs PC division. Rolls-Royce’s British chairman asked to come with Gerhard Schroeder to Moscow to drum up business for German companies….

From command and control to collaborate and connect: General Powell doing his own research on Google faster than asking an aide, email with other foreign ministers, SMSing with Jack Straw.

Multiple identity disorder: Wal-Mart pressuring workers, customers and shareholders benefit. Deregulation speeded up drug approval process but may have created problems, such as Vioxx.

Death of the Salesman: Everything is price now, negotiations via email.

Political realignment – the leftist free-market liberals with the business conservatives, the conservative Christians with the labor unions.

America and the flat world
Five: America and the free trade: Is Ricardo still right?
– jobs are lost in bulk, and recreated one by one or five by ten – which never makes the papers
– wages will increase for knowledge workers in India and China, it will take time
– markets open up
– Paul Romer: Idea-based products can be sold to the whole world at once, manual labor can only be bought by one factory or farm or whatever
– there is no limit on the number of idea-generated jobs in the world (once Google is there, you need it)
– the Indians and Chinese are not racing us to the bottom, they are racing us to the top – and that is a good thing (p.233)

Six: The Untouchables (Defined as people whose job cannot be outsourced)
Message: You have to upgrade your skills. All the time.
To his girls: Not "finish your dinner because people in India are starving. It is "finish your homework because people in India and China are starving for your jobs."
Four kinds of untouchables:
– those who are special (such as Michael Jordan). Only one of them.
– those who are specialized, such as specialized lawyers, brain surgeons, and other work that cannot be automated.
– those who are anchored, such as barbers and waitresses, health personnel and plumbers – location-specific.
– those who are adaptable – and those are the ones that will survive, because the other categories will see parts of their work being outsourced
Important to march forward with innovation, be adaptable. America has many advantages: Innovation and education, capital flow, openness, intellectual capital protection, flexible labor laws, a large domestic market, and political stability. Study by BankBoston: MIT students have created 4000 companies, started at least 1.1 million jobs world wide and generated sales of $232b. US has a relatively clean capital market.
But America will have to work at it, because the others are catching up. Are we working at it? No.

Seven: The Quiet Crisis
The USA like a third-generation rich family, squandering it. And it is a quiet crisis. A "perfect storm" is brewing.
Dirty little secret #1: The numbers. Not enough youngsters are choosing science, many engineers and science teachers are retiring. Cut in spending on basic research.
Great quote from Tracy Koon, Intel’s director of corporate affairs: "Science and math are the universal language of technology. They drive technology and our standard of living. Unless our kids grow up knowing that universal language, they will not be able to compete. We are not in the business of manufacturing somehere else. This is a company that was founded here, but we have two raw materials – sand, which we have a ready supply of, and talent, which we don’t."

Eight: This is not a test
The crisis is a little bit like the shock of the Sputnik in the fifties, and the USA needs a moon program. However, this is not a war, and people don’t mobilize as readily.  USA is a little bit like IBM before Lou Gerstner. Bush should start his own moon program: Make America energy-independent in 10 years.
Other suggestions:
– portable benefits
– portable health care
– wage insurance (cushion for people between jobs)
– "if you want to live like a Republican, vote like a Democrat" (to stave off social unrest)
Corporate social activism: Set standards for environment and labor, because otherwise you get a backlash.
– should not at cannot take the place of government regulation

Developing countries and the flat world
Nine: The virgin of Guadelope
– the chapter title refers to how statues of Mexico’s national symbol are now being imported to Mexico from China
– discusses why China is overtaking Mexico as USAs biggest trade partner, puts it down to
— education: Where are all the crash programs in learning English
— attitude: there are islands of prosperity, such as Monterrey, but it doesn’t spread
— government: Signs that things are changing, but initial steps in globalization (privatization, changes in labor law) are hard to do in the face of politicians’ graft and rampant populism
– after globalization (which is "wholesale") comes "retail globalization" or "glocalization" – how easy is it to do business? This is much harder because it cannot be done from the top, much harder to bypass the entrenched bureaucracies
– culture matters a lot, especially culture of tolerance. Islam has a problem here (ref. Dalrymple) because no questoning or reinterpretation of the Koran is allowed
– how about democracy? p. 353: "It would be easy to conclude from just looking at Mexico and China that democracy may be a hindrance to reform retail. I think it is premature to conclude that. I think the real issue is leadership."
— democracries: Thatcher vs. German chancellors
— autocracies: China is focused and has a meritocracy, Zimbabwe has leaders "so illegitimate that they are afraid of inflicting any pain."
– From McKinsey report: "Rather than fixating on jobs lost to China, [Mexico and other latin-American countries] should remember a fact of economic life: no place can remain the world’s low-cost producer forever – even China will lose that title one day. Instead of trying to defend low-wage assembly jobs, Mexico and other middle-income counties should focus on creating jobs that add higher value. Only if more productive companies with higher-value-added activities replace less productive ones can middle income economies continue down the development path."
– self-confidence important: Luis Rubio`: "A lack of self-confidence leads a country to keep chewing on the past."

Companies and the flat world

Ten: How companies cope
(He says that he is not a business writer, and he is not. But the cases are fantastic.)
Rules for how to cope:
Rule #1: Don’t build walls.
– example: The experiences of a small photographer, where the photography business, all aspects of it except the ability to take really clever pictures, are being commoditized
Rule #2:  And the small shall act big.
– example: (great case) Aramex, Jordanian package company that was able to maintain a coalition of small companies and build their own software when their large partner Airborne was bought by FedEx.
Rule #3:
And the big shall act small.
– Starbucks offering customization (19000 versions of coffee), many of the innovations (such as soy milk) coming from customer requests
Rule #4: The best companies are the best collaborators, because the world is becoming so complex you can’t do it alone.
– example: Rolls Royce, doesn’t make cars, from national to international, partnering as core competence, demand for skills in managing virtual, international teams.
Rule #5: In a flat world, the best companies stay healthy by getting regular chest X-rays and then selling the results to their clients.
– IBM business consulting analyzing companies systemically, breaking them down into components
– HP selling its internal capacities, such as taking an outsourcing contract for an Indian bank
Rule #6: The best companies outsource to win, not to shrink.
– and so on….

Geopolitics and the flat world
Eleven: The unflat world
Friedman is a technological determinist – technology that enables use will be used. But he is not a historical determinist – he does not know what the long-term result will be.
Half the world is outside the benefits of globalization, this is because they are
– too sick:
— HIV/AIDS, malaria, TB and polio
— examples of the medical research the Gates Foundation is supporting, such as development of vaccines that do not need refrigeration
– too disempowered:
— people living in the twilight zone between unflat (abject powerty) and globalized. They can see it, but they can’t get there
— India is one example, for them the globalization cannot happen fast enough
— antiglobalization movement doesn’t help.
"Let’s pause for a moment here and trace how the antiglobalization movement lost touch with the true aspirations of the world’s poor. […] It was driven by five disparate forces. One was upper-midlde-class American liberal guilt at the incredible wealth and power that America had amassed in the wake of the fall of the Berlin Wall and the dot-com boom. At the peak of the stock market boom, lots of pampered American college kids, wearing their branded clothing, began to get interested in sweatshops as a way to expiate their guilt. The second force drving it was a rear-guard push by the Old Left – socialists, anarchists, and Trotskyites – in alliance with protectionist trade unions. […] They claimed to speak in the name of the Third World poor, but the bankrupt economic policies they advocated made them, in my view, the Coalition to Keep Poor People Poor. The third force was a more amorphous group. It was made up of many people who gave passive support […] because they [recognized] some kind of protest against the speed at which the old world was disappearing and becoming flat. The fourth force […] particularly strong in Europe and in the Islamic world, was anti-Americanism." 9/11 transformed America from economic power to visible military power, strenghtening this anti-Americanism. "Finally, the fifth force […] was a coalition of very serious, well-meaning, and constructive groups – from environmentalists to trade activitst to NGOs concerned with governance – who became part of the populist antiglobalization movement in the 1990s in  the hopes that they could catalyze a global discussion about how we globalize. I had a lot of respect for this latter group. But in the end they got drowned out by the whether-we-globalize crowd […]." The serious discussion about how to make globalization human disappeared, leaving a political vacuum. Best place to start: Rural India, which need better governance to build basic infrastructure so people can start to globalize.
"What the world doesn’t need is the anti-globalization movement to go away. We just need it to grow up." — "You don’t help the world’s poor by dressing up in a turtle outfit and throwing a stone through a McDonald’s window. You help them by getting them the tools and instutions to help themselves. […] Just ask any Indian villager."
— example of HP selling photo-printing equipment to villagers, who set up businesses making photos for ID, but also family photos
– too frustrated:
— Arab young men are frustrated because their religion tells them that they are superior, but others are living better. So they set out to destroy the others.
— their religion is Islamo-Leninism, seeing themselves as a vanguard
— quotes Dalrymple’s essay on his interactions with young Muslims in British prison
— Islam as utopian ideology, finding recruits in the many young Muslims who are living close to the flat world but not in it
— humiliation is the key – Arab countries have about same GDP as Spain, but not the productivity.
— this is why many Muslims secretly liked 9/11, because it gave rich and successful USA a bloody nose
— the movement disregards the scientific achievements, such as algebra, that came from Baghdad and Alexandria
"Unfortunately, there is huge resistance to such modernization from the authoritarian and religiously obscurantist forces within the Arab-Muslim world." The political leaders in the Arab world are illegitimate, so they have to either quell opposition or buy it off. That does not stop the frustration.
– too many Toyotas
— China (and India) is growing and needs oil, 1000 new cars in Beijing every day, need to find another Saudi Arabia by 2012.
— developing countries will not agree to reduce their consumption, they want the same evolution as Europe and America.
— China has only two parts of its foreign policy: Find oil, and no independence for Taiwan.
— the only thing America can do is to set an example by reducing their own energy consumption
"I would love to see a grand China-United States Manhattan Project, a crash program to jointly develop clean alternative energies, bringing together China’s best scientists and it spolitical ability to implement pilot proejcts, with America’s best brains, technology and money."

Twelve: The Dell theory of conflict prevention
– traces out the entire production process of his laptop
– no two countries that are part of the same global supply chain will go to war (note: this is offered a tad tounge-in-cheek, but still)
– has worked already: Large US corporations pressuring India to slow down its quarrel with Pakistan in 2002
– Jiang Zemin’s son is a partner in a wafer fabrication project in Shanghai with a Taiwanese company
"The [India-Pakistani 2000] cease-fire was brought to us not by General Powell but by General Electric."
Infosys vs. al-Qaeda: The freedom and inexpensive coordination that the Internet offers is available to and used by al-Qaeda as well.
Too personally insecure: al-Qaeda did not use nuclear weapons because it was beyond their capacity. Therefore, we must lock down the nuclear weapons.

Conclusion: Imagination

Thirteen: 11/9 vs. 9/11 (the downfall of the Berlin Wall vs. the fall of the World Trade Center)
– compare the startup of JetBlue to the startup of the al-Qaeda "airline"
– Americans cannot retreat from the world, need to stimulate hope and positive imagination (ref. to earlier: Where you have hope, you have a middle class.)
– "Leave the cave-dwelling to Osama."
– examples of such hope:
— eBay serving as a platform for entrepreneurs (boy with MS starts business on eBay): Not market, but a self-sustaining community
— India: Second largest Muslim population in the world, non-violent and tolerant. When Islam is embedded in democratic societies, it tends not to grow anger, but accept
ance – see India, Turkey. "While a Muslim woman sits on India’s Supreme Court, no Muslim woman is allowed even to drive a car in Saudi Arabia."
The curse of oil: "Nothing has contributed more to retarding the emergence of a democratic context in places like Venezuela, Nigeria, Saudi Arabia, and Iran than the curse of oil. As long as the monarchs and dictators who run these oil states can get rich by drilling their natural resources – as opposed drilling the natural talents and energy of their people – they can stay in office forever. [..] The rules don’t really have to pay attention to the people or explain how they are spending their money – because they have not raised that money through taxes." The most creativeness in the Arab-Muslim world today is in places that have no oil, such as Bahrain or Jordan. Iran spends its oil money on wasteful subsidies rather than building the future.
Trade increases exposure to the world, broadens imagination and increases tolerance and trust.
Need examples, such as Aramex: Successful Arab company, no oil involved.
Need to go from untouchables in the Indian sense, to untouchables in Friedman’s sense: Example of school in India proving that untouchables has as much potential as any other, given education.
"The two greatest dangers we Americans face are an excess of protectionism – excessive fears of another 9/11 that prompt us to wall ourselves in, in search of personal security – and excessive fears of competing in a world of 11/9 that prompt us to wall ourselves off, in search of economic security."

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