Fragility of Globalization

I am generally an optimist when it comes to business.  I see opportunities where others see challenges. In particular, I see enormous opportunity from the processes of globalization and I believe that we will all be better off as a result of these processes.  For this reason, I have been particularly distressed over the past couple of days to come across two respected analysts who are sounding the alarm bell, warning us not to take these processes for granted and, in fact, suggesting there is considerable risk that these processes may not only be stopped, but reversed.

One of these analysts is Peter Drucker, a deeply insightful man with considerable historical perspective.  He has a new article in the Spring 2005 issue of The National Interest entitled "Trading Places" (for some reason, on the cover of the print version of the quarterly, Drucker's article has the more ominous title of "Our Mercantilist Future").

In classic Drucker style, he paints on a broad canvas, discussing the evolution of the global economy, suggesting that

what is emerging is not one but four world economies: a world economy of information; of money; of multinationals (one no longer dominated by American enterprises); and a mercantilist world economy of goods, services and trade. These world economies overlap and interact with one another. But each is distinct with different members, a different scope, different values and different institutions.

(As an aside, I find it interesting that Drucker doesn't focus on a fifth global market - the talent market - that is having a profound impact on reshaping both the economic and political landscape of the world.) From my perspective, it's that fourth world economy that is most worrisome. In this context, he suggests that we are seeing the emergence of a new form of mercantilism, this time focused on regional blocs of nations rather than individual nation-states:

The world economy is thus fast coming to look far more like the mercantilism of Alexander Hamilton than like Adam Smith's free trade. It is fast becoming an "interzonal" rather than an "international" world economy.

Drucker argues that much of this new mercantilist rivalry is focused on containing the economic power of the United States:

But a new kind of mercantilist rivalry is emerging in this new economy--one in which the United States suffers from little-noticed disadvantages. For instance, the EU is seeking to export its regulations (and to impose its high regulatory costs on the United States) through international agreements, the reinterpretation of WTO rules, and the growing acceptance of EU standards in third markets. It is also promoting its new currency, the euro, as a rival and alternative to the dollar as the world's reserve currency--a step that, if it succeeded, would greatly reduce the U.S.government's ability to attract foreign funds to finance its deficit and thus maintain the Bush Doctrine. . . . The United States could therefore find itself with a smaller "home market" than rival blocs, but with the same high-cost regulations, in a world of intense mercantilist competition.

The other analyst weighing in on globalization is Niall Ferguson, the historian and prolific writer of such books as  The Cash Nexus, The House of Rothschild and Empire. He has a new article entitled "Sinking Globalization" (available only by purchase online) in the March/April 2005 issue of Foreign Affairs. 

Ferguson warns that we take globalization for granted but that history shows it can reverse very quickly. He focuses on the historical parallel with the era leading up to World War I:

The last age of globalization resembled the current one in numerous ways. It was characterized by relatively free trade, limited restrictions on migration, and hardly any regulation of capital flows. Inflation was low. A wave of technological innovation was revolutionizing the communications and energy sectors; the world first discovered the joys of the telephone, the radio, the internal combustion engine, and paved roads. The U.S. economy was the biggest in the world, and the development of its massive internal market had become the principal source of business innovation.

World War I wrecked all of this. Global markets were disrupted and disconnected, first by economic warfare, then by postwar protectionism.

China was opening up, raising all kinds of expectations in the West, and Russia was growing rapidly.

These two articles are timely warnings for those of us who take globalization for granted.  Make no mistake about it: globalization is a fragile process - there is nothing inevitable about it.  As it unfolds, it deeply threatens entrenched economic and political interests.  Those interests may spark a backlash and we may well find ourselves thrust back into a much more protectionist era.  I do worry that, here in the United States, we do not have enough corporate executives willing to publicly champion the more controversial aspects of globalization, including offshoring and immigration reform.  In the absence of this corporate voice, we are unlikely to find many political leaders willing to resist pressures to build more barriers.

Comments

[fCh]

Yeah John, I signaled the two articles too, and my key to understanding them is not that different.

Since Drucker's piece came out, we've seen the EU escalating to a new stage in its regulatory quest against MSFT. As well, GE has taken the lead, on these shores at least, and started its ECOMAGINATION drive--arguably, another 'concession' made to the European tastes. Now, for those folks in the US who do not feel that the current administration is responsible enough, the EU may well be part of a check&balance mechanism. Too bad the EU won't probably change its course even if/when we change ours in DC, so I think the second author you call our attention to might be on something big and frightening...

http://imotion.blogspot.com

[IJ]

"I do worry that, here in the United States, we do not have enough corporate executives willing to publicly champion the more controversial aspects of globalization, including offshoring and immigration reform. In the absence of this corporate voice, we are unlikely to find many political leaders willing to resist pressures to build more barriers."

The article by Peter Drucker suggests he thinks business doesn't have a convincing answer to the destabilising effects of globalisation:

"The most extreme protectionism, as already discussed, consists of rules with respect to agriculture and the protection of farm incomes. But similar protectionism is certain to develop for blue-collar workers in the manufacturing industry, and for the same reason: They are becoming an endangered species, the victims of productivity."

And the weekend's events indicate that the French haven't heard a convincing answer yet.

[Bill Miller]

Fourth Generation R&D –
John, say hello to JSB for me. Congrats on your new book. I agree capability development is one of the missing components in innovation. And you know capability development is a lot more than what universities and corporations define as education. My book, Fourth Generation R&D, published in 1998, provides the framework for value creation with a spiral business process for capability and architecture development. BTW, the 4G book defines capability as having 4 parts:
(1) people with knowledge ( dimensions: explicit and tacit, individual and group)(2) tools
(3) technology
(4) process(es) and practice(s)
The 4G book explains the knowledge management part of capability as individual and group learning based on groups/ communiites of practice. I used the book to teach innovation management at the Univ of Mich BSchool for several years. I consulted using the 4G priniciples for several years.
4G capability can be "stacked". Capability stacks help understand value chains and value nets, even ecologies. The big idea in 4G is that innovation comes from radical new capabilities such as Moore's Law and new architectures of that capability as dominant designs with 3 parts; product/process platforms, business models with partnerships, and industry structures/ value propositions. The new capability that I have redently created using the principles and practices of 4G is "immune system engineering". ISE is similar to what IBM calls autonomic computing. ISE can be demonstated - it's based on a new branch of math and science, somewhat like digital signal processing. ISE is being put into silicon. ISE will profoundly change INTEL's chips. ISE is a breakthrough that helps fix ONE of the 2 CORE PROBLEMS restraining nearly every industry dealing with complex systems from health care to transportation - lifecycle quality and costs. ISE uses the 4G Knowledge Channel, but is the biggest change in engineering practice in 50 years. Moore's Law was enabled by a paradigm shift, which was the IC. Manufacturing over the last 15 years was improved by a paradigm shift as lean manufacturing - the Toyota Production System. ISE will be bigger than lean manufacturing. But the point is that 4G created ISE. Innovation Management will be the discipline that creates the age after the Information Age. 4G says a Chief Innovation Officer (the NEW CIO) is required. GM is practicing 4G in the development of fuel cell vehicles. 4G says customers and other stakeholders have to experiment and experience the use of nedw things for innovation to progress effectively. 4G explains why traditional (3G) marketing fails to the uncover latent needs that exist on the EDGE(S) - but all BSchools only teach 3G. It's like BSchools, consultants and other experts are selling hunter-gathering practices (3G) when the need is farming (4G). The recent Council on Competitiveness report "Innovate America" failed to recommend that Innovation Management (with 4G capability and architecture development) is needed in the curriculum at universities, at corporate education organizations and in practice as THE discipline for the age of innovation. There are 4 main groups of belief on innovation - (1) economists (Innovate America and Wall Street, ...) - belief is innovation is a combination of random events that can't be managed effectively; there is no business process for innovation; globalization is just free market dynamics at work (2) scientists & technologists (ASTRA ...) - belief is NSF basic research IS innovation, and the process is linear (3) product development (PDMA, BSchools, stage-gate, VC's ,Front-End-of-Innovation: FEI at Stevens, Blue Oceans, Innovator's Dilemma and Christensen's Solution ...) - belief is that product development IS innovation and the process is linear\\, and the and (4) 4G innovation management as a discipline ( many of us including you and JSB, plus partly Stokes's Pasteur's Quadrant Model,partly Co-Creation's networked model based on the 4G Knowledge Channel Thomke's Experimentation, ...) - belief is that innovation is value creation based on capability and architecture with a spiral process, and innovation management as a new fusion discipline combining technology, knowledge management and new finance such as options. 4G maps intangibles including capability and architecture into a new finance. What kills innovation that creates organic business growth is mainly 2 things: (1) 3G stage-gate process (3G) and (2) 3G traditional investment thinking including DCF for resource allocation but also the VC portfolio of individual companies, not 4G architected platforms as new dominant design candidates - if WINTEL is a horizontal dominant design, then 3G VC investment portfolio strategy would have only created either MS or INTEl, not both.
Email me to find out the other CORE PROBLEM.
Cheers,
Bill