Midterm

The World's New Economic Landscape. By: Gunther, Marc, Fortune, 00158259, 7/26/2010, Vol. 162, Issue 2

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The World's New Economic Landscape 

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FORTUNE: GLOBAL 500

THIS YEAR'S COMPANIES KNOW HOW TO DO BUSINESS ANYTIME, ANYWHERE, WITH ANY CUSTOMER.

ON JULY 1, NESTLÉ, a company with no experience in retailing and even less in shipbuilding, launched a 90-foot-long barge on an 18-day journey up the Amazon River in Brazil. The barge-called Nestlé Até Você a Bordo, or Nestlé Takes You Onboard-is stocked with more than 300 Nestlé brands, including Leche Ideal (enhanced powdered milk), Maggi (soups and seasonings), and, of course, Nescafé (the world's leading instant coffee). Small, low-priced packages of each will be showcased in river ports that are home to 800,000 Brazilians who usually travel by boat, if at all. "We are going to pick up the customer where he is," Ivan Zurita, CEO of Nestlé Brasil, has said.

To get big and stay big in today's global economy, companies need to go the extra mile-whether by land or by sea. They especially need to do so in emerging markets that are growing faster than those of the U.S., Europe, and Japan. Most companies that made this year's Fortune Global 500, our annual ranking of the world's biggest companies by revenue, sell products or services not just in their home countries but globally.

For consumer products companies like Nestlé (No. 44, and the world's largest food company), crossing borders is tricky. They need to decide when to standardize their offerings and when to customize or localize their wares for what remains a remarkably diverse global marketplace. "Contrary to many predictions, the flattening of the world has not flattened unique cultural and national characteristics, or the idiosyncratic preferences of customers," says Martin Roll, a Singapore brand strategist.

Ideally companies would like to sell the same product everywhere to take advantage of economies of scale. But only a few have. Microsoft (No. 115) has sold 150 million copies of Windows 7 since last fall in more than 100 countries, with only minor tweaks. Code is code. Airplanes also travel well: Nearly 96% of the 157,100 employees at Boeing (No. 91) are based in the U.S., but more than 80% of the company's current order book of commercial airplanes will go to international customers. Ford (No. 23) and Apple (No. 197) design cars and iPhones on global platforms.

But even companies whose brands achieve ubiquity must adapt to emerging markets. Coke is Coke, so Coca-Cola (No. 245) sells it in 206 countries. But to transport the beverage to remote villages in East Africa, Coca-Cola relies on more than 13,000 small-scale distributors, some pushing carts. Coke's African sales topped $550 million last year. In India, Procter & Gamble (No. 66) and Unilever (No. 121) deploy sales forces of women who go door to door, marketing to their friends and neighbors.

Wal-Mart, too, is simultaneously growing and downsizing. With $408 billion in sales, Wal-Mart recaptured the top spot on this year's list, displacing Royal Dutch Shell. It did so largely because of growth outside the U.S.: Its international sales topped $100 billion for the first time in 2009, and more than 60% of Wal-Mart's new square footage this year will be built on foreign soil.

Wal-Mart operations in Mexico, the chain's third-biggest market behind the U.S. and Britain, are a good example of local customization. "We've got Supercenters, we've got Sam's Club, and we go all the way down to very small convenience stores, called Bodega Aurrera Express," says Mitch Slape, senior vice president for international business development. Wal-Mart is also expanding its global footprint very deliberately: It's in only 14 countries, after selling operations in South Korea and Germany a few years ago. "You have to think carefully about where to apply people, time, energy, and capital," says Slape. China and Brazil are seen as the company's next growth drivers.

To better understand unfamiliar markets, companies such as General Electric (No. 13) and Nokia (No. 120) have established research and development centers in China and India. The lone Finnish company on our list, Nokia, scored big a few years ago with a phone made for India that came with a built-in flashlight, alarm clock, and radio, all of which come in handy when the electricity goes down, as it often does. When the company learned that poor people often share one phone, it made handsets with multiple address books.

UNEXPECTEDLY, SOME IDEAS travel from global markets to the U.S. Two years ago Coca-Cola Russia created a version of a traditional Russian beverage known as Kvass, which is usually made out of stale rye bread and yeast. (Pushkin loved it, and some people insist that it's a real thirst kvencher.) Coke's Krushka & Bochka brand, which became a hit, has now found its way into Whole Foods Markets in the New York metropolitan area. The company hopes it will appeal not just to the sizable Russian immigrant population but also to other adventurous drinkers. (Coke, by the way, has more than 500 global brands, including Inca Kola, a lemon-flavored soft drink in Peru; Thumbs Up, India's top-selling cola; and a Chinese juice drink called Qoo.)

Unlike their counterparts in the U.S., Europe, Japan, and Korea, Chinese companies for the most part have not chosen to compete across the global landscape. Maybe that's because they don't have to, at least not yet. China's domestic economy is big enough and growing fast enough that the Chinese were able to place 46 companies on this year's Fortune Global 500, nine more than last year. The U.S. remains the leader, with 139 companies, followed by Japan (71), China, France (39), and Germany (37). India (8), Brazil (7), and Russia (6) lag far behind. They've got plenty of room to grow right at home-at least for now.

Business Economics

Vol. 46, No. 3 r National Association for Business Economics

World War II to 2011: Changes and Challenges in the Global Economy

ROBERT HORMATS and ARIEL M. RATNERn

This paper discusses six major changes and chal- lenges that have emerged since World War II that will shape the global economy for the indefinite future. These are the changing economic role of women, the emergence of the global economic and financial system, the re-emergence of state-supported enterprises, the impact of the Internet, the global diffusion of opportunity and innovation, and global- ization as an opportunity and a threat. How these challenges are addressed will have important con- sequences for business and for public policy. In addition to the prepared remarks, this paper also has a summary of the question-and-answer session that followed Dr. Hormats’ address.

Business Economics (2011) 46, 144–153. doi:10.1057/be.2011.18

Keywords: international economics, globalization, economic role of women, state-supported enterprises, economic impact of the Internet

1. The Emergence of Women

Today, I was at a celebration that Secretary Clinton and First Lady Michelle Obama held for the 100th anniversary of World Women’s Day. I mention this because it was very impressive to see women leaders from all over the world there, and all of them had interesting things to say. Prior to

this, I was talking to Secretary Clinton about World Women’s Day, and I told her that I was going to give a speech to NABE. We then discussed the emerging role of women in transforming economics—a point that I have also addressed in previous speeches. When I was at Goldman Sachs, the firm published a report that quoted the Chinese saying that women hold up half the world. It is certainly true that women make up at least half the world—and in some countries a lot more than that.

Think back on the American economy over the last hundred years and look at the major changes. A hundred years ago, the economic role of women was confined to very few areas. One of the most significant changes in American law and society that has enhanced opportunity and productivity over this century is the change in the economic status of women. There has been a growing and more significant role for women in the American economy, albeit that this development has not been perfect and still has a way to go. Much of the contribution of women remains unpaid or underpaid, despite its vital role in America’s success.

When you look at developing countries— particularly the Arab world, but many other parts of the world as well—one of the reasons some countries are not living up to their full potential— and this was described by a number of the women honorees at today’s anniversary celebration—is

This paper is based on an address delivered by Robert Hormats at the NABE Policy Conference, March 8, 2011.

nRobert Hormats was sworn in as Under Secretary of State for Economic, Energy and Agricultural Affairs on September 23, 2009. He was formerly vice chairman of Goldman Sachs (International), having joined Goldman Sachs in 1982. He served as Assistant Secretary of State for Economic and Business Affairs from 1981 to 1982, Ambassador and Deputy U.S. Trade Representative from 1979 to 1981, and Senior Deputy Assistant Secretary for Economic and Business Affairs at the Department of State from 1977 to 1979. He also served as a senior staff member for International Economic Affairs on the National Security Council from 1969 to 1977. He was a recipient of the French Legion of Honor in 1982 and the Arthur Fleming Award in 1974. Hormats has been a visiting lecturer at Princeton University and served on the Board of Visitors of the Fletcher School of Law and Diplomacy and the Dean’s Council of the John F. Kennedy School of Government at Harvard University. He is also a member of the Council on Foreign Relations. He earned a B.A. with a concentration in economics and political science from Tufts University. He earned an M.A. and a Ph.D. in International Economics from the Fletcher School of Law and Diplomacy. Ariel M. Ratner serves as speechwriter and advisor to the Under Secretary of State for Economic, Energy and Agricultural Affairs, Robert Hormats. A Political Appointee in the Obama Administration, Ratner previously served as Congressional Liaison in the Bureau of Near Eastern Affairs at the Department of State. Before joining the Obama Administration, Ratner had a career in both journalism and American politics and is a veteran of the Obama for America campaign. He earned a B.A. in History from Stanford University and a Master’s in Public Policy from the John F. Kennedy School of Government at Harvard University.

that they do not give women the chance to parti- cipate fully, or even at all, in their economy. As a result, they are depriving themselves of half of their human capital, of half of their economic potential. It is increasingly clear, when you look at economies around the world and determine how likely they are to achieve progress over the next 5, 10, 15 years, that if they do not allow women the opportunity to participate fully in their economies, those economies are going to underperform dramatically. For strong economic performance, it is necessary to give women the education, opportunity, and the rights they need, as well as other reforms.

One of many lessons from what is going on in North Africa and other parts of the Arab world is that liberation has to include liberation of women. It has to include women’s rights and women’s opportunities. If these countries are really going to be democracies and economies in which parti- cipation is meaningful, that participation has to include men and women, equally and fully.

As far as American foreign policy is concerned, ensuring equal opportunities and upward mobility for women is very important for Secretary Clinton. It is also very important for me, and I think it is going to be increasingly important for all econo- mies that want to grow in the future—in the Arab world in particular. Perhaps that will be one of the lessons from the people in Liberation Square in Egypt. They were not only men. Women were just as participatory, just as enthusiastic, and just as expectant that their rights will be provided to them as the men were. So, changes in opportunities for women are something we ought to keep a very close eye on because they will, to a large degree, determine the political and economic future of many countries.

2. The Emergence of the Global Economic and Financial System

The second topic that I want to touch on is the historic point at which we stand today in the global economy. When you look at the world right after World War II, there were no global financial institutions dedicated to economic growth and financial stability. One the many reasons for World War I and for World War II—particularly for World War II—is that there were no global effec- tive economic institutions. There was no equivalent to the International Monetary Fund for financial stabilization. There was no World Bank to help developing countries: many of today’s developing

countries were colonies at that point. And there was certainly no World Trade Organization (WTO) or General Agreement on Tariffs and Trade (GATT) or universal trading rules. If a country wanted to be protectionist, there was no interna- tional set of enforceable rules to constrain it from doing so. If a country wanted to do irresponsible things, it did them. The United States as well as others did such things in very destructive ways.

After World War II, however, there was an understanding by President Truman, Secretary Marshall, Secretary Acheson, and many others on the American side and people like Jean Monnet, Robert Schuman, and others on the European side that if we were going to pull the world back together, we would have to have effective global institutions. Together, they built the institutions of international economic and financial cooperation that we see today. These have served the world very well for over six decades—from the aftermath of World War II until the present time.

What we face now, however, is a very different kind of world compared with the world we faced in the 1940s and 1950s. The big difference is that today we have countries participating in the global economy that were not participants 30, 40, or 50 years ago. Also, we have a huge number of individuals in those countries that were not part of the global mass of international consumers or producers. They were behind the Iron Curtain or the Bamboo Curtain, living in very rigid, state- controlled economies, with little real economic opportunity.

Now, we face a different world. We face a world with a number of rapidly emerging econo- mies that are major players in global finance, trade, technology, and many other areas as well. So we need to find ways of ensuring that we find a place in this system that was developed and nurtured after World War II for these emerging economies to play a role. They benefited enormously from this system. Now, it is just as important that they assume greater responsibilities for that system.

An important characteristic of this post-WWII world compared with that before the war is that the economic and financial system became rules-based and market-oriented. Now one of our goals—one of our challenges—is to bring emerging economies into the global system in a constructive, participa- tory way where they not only gain benefits, which they have been achieving, but also assume respon- sibilities for making the system work well, which they have not been doing sufficiently.

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The changes that have occurred in emerging economies are not just in their economic power, but also in the way that they affect how the inter- national economic and financial system works. That is to say, if you were to look at the world 30 or 40 years ago, how did capital flows go? For the most part, capital flowed from industrialized to developing countries. Now, some developing and emerging economies, such as China and some other countries in East Asia and the Middle East, are major exporters of capital. And the United States is now a major importer of capital. So the nature of the financial system has changed.

We also see that the average debt leverage of a large, emerging economy today as a portion of GDP is roughly half that of the large industrial- ized countries. So these countries have not levered themselves up to the same degree as have the United States, Japan, and many countries in Europe.

3. The Re-emergence of State-Owned and State-Supported Enterprises

For a while after World War II, states played a major role in economic systems in most parts of the world. Then, the world went through a period of massive privatization, where the role of the state diminished. Now, we see the role of the state rising again, creating a 21st-century kind of challenge.

One of the things we are trying to better un- derstand is whether the world is moving toward a more state-oriented economic model—whether it is sustainable and what its implications are. By state- oriented, I mean state-owned enterprises, state- supported enterprises, or enterprises that enjoy favorable benefits from the state, such as pre- ferential banking ties or immunity from anti- monopoly laws. There are a whole range of things that the OECD has categorized as being state- supported measures. In addition, you also have companies that are owned by friends and relatives of government officials that benefit from crony capitalism.

Many state-owned enterprises are in the oil industry, and many are in various areas of high technology, as well as more general areas of manu- facturing, finance, and commerce. This type of situation exists in many parts of the world. Increas- ingly, private-sector enterprises are competing with state enterprises. In many cases, governments pro- vide an enormous amount of support for those enter- prises by using funds that they have accumulated as a result of foreign trade surpluses, by providing

special benefits with respect to regulatory latitude, or by giving special export subsidies or import protection for these companies. The prospect of the state continuing to play a substantial role in some countries is likely to persist for some time.

So, we must decide how we work with such countries to create a level playing field where state- owned enterprises do not distort trade or inter- national competition vis-a` -vis private enterprises that do not enjoy the kind of preferences or the kind of financial support, special legal support, or advantages that some of these state enterprises or state-supported enterprises enjoy? This is becoming a major challenge because this notion of state- directed capitalism or state capitalism has become quite appealing to certain countries, in part because it seems to work very well in China.

There are a number of negatives, however, for the countries that adopt this model. State- supported capitalism is not as advantageous as it seems. And I think one of the things we need to do is to explain to governments and individuals that this model has serious flaws. First of all, most emerging economies that favor model must recognize that they are competing with countries that have much deeper pockets, like China. That is an unenviable prospect for developing countries with fewer resources.

Second, to the extent that governments provide preferential flows of capital to certain privileged entities—entities that they own or that friends of the leaders own—that makes it harder for entrepreneurial start-up companies to get the resources, regulatory benefits, land, or other kinds of support that they need to thrive. This will hinder economic growth and job creation. This is yet another reason that this state-supported model, which again, looks attractive for the moment, may not be.

Among others, the French formerly had a dirigiste model. The Japanese, too, had a model where the state played a greater role. But these countries and others have come to realize that state control caused—and in some cases continues to cause—major distortions.

Thus, in protecting American interests and in helping other countries to develop their own potential, we face a long process of trying to work out a set of common rules that produce “competitive neutrality” so that government assistance to state- owned or state-supported enterprises does not distort competition vis-a` -vis companies that are not owned or assisted by the state.

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4. The Internet and the Free Flow of Information

Another 21st-century challenge that was never envisioned by the people who started the GATT, the World Bank, and the IMF is the Internet. Secretary Clinton [2011] has recently given an Internet freedom speech, And I am going to give a speech tonight on very much the same thing [Hormats 2011]. The role of the Internet is really quite dramatic, and if there is one thing we have learned—if we did not know it already—it is that the Internet is something that governments—how- ever they try—cannot control over the long term. And if they try to control it to limit access to one kind of information, they cause major distortions in other areas.

If you try to limit the Internet’s ability to transmit political ideas, you also—because it is one Internet; one entity, and one infrastructure—limit the ability of your own citizens to get access to market information, to get information about developments in the global economy, and to exchange ideas on research and development across borders. Therefore, the notion of Internet freedom and the liberty of people to communicate with one another, and to exchange ideas within their own countries and across borders, is one of the very interesting new challenges we face in the 21st century. Franklin Roosevelt during World War II famously talked about the “Four Freedoms.”1 We are now looking at yet one more freedom and that is the freedom to connect.

By “connect,” I mean to be able to exchange ideas, exchange information, and exchange views. Connecting presents opportunities for people not just to get new ideas about, and learn more about, what is going on in the world; for many people, it is absolutely critical to their jobs and their liveli- hoods. You can see this in developing countries where more and more people resourcefully use telephones, PDAs, and other devices to get in- formation on when to plant and harvest crops, weather forecasts, and markets.

How do we keep the Internet open and acces- sible for the flow of ideas, the flow of financial in- formation, and the flow of economic information? This is enormously challenging for most countries to figure out. For the United States, it is not a

1The “Four Freedoms” are freedom of speech and expression, freedom of every person to worship God in his own way, freedom from want, and freedom from fear [Roosevelt 1941].

major issue, because we have had the notion of freedom of press, freedom of communication, and freedom of exchange of ideas since our founding and long before. For many countries, such freedom is not in their DNA; and therefore moving in that direction has posed a major challenge.

5. The Diffusion of Opportunity and Innovation

We also need to look at one more great challenge that relates to this 21st century: the desire of more and more young people, who are connected to the rest of the world, to achieve economic and political opportunity—to be enfranchised, both economic- ally and politically. We are seeing this in the Middle East, and we are going to see it in other countries as well. This is a movement that has begun to grow and expand to a lot of countries.

Our goal in many countries has shifted to provide ways of supporting entrepreneurs, in- novators, small businesses, and other entities that create opportunities for people to get jobs. This is an important American goal because it is quite clear that people who do not see an opportunity for upward mobility have little hope in their lives. Their frustration becomes a cause of instability in many parts of the world. Therefore, in rethink- ing our approach to foreign assistance, one of the things we do in the State Department is energetically sponsor programs to support entrepreneurs around the world. Also, we try to connect entrepreneurs in the United States with those in other countries. Together, they create viral networks of communication.

The interesting point about this is that if you look at one of the areas that has been so important to the United States—which is innovation—more and more we are seeing that innovation is not done by any one company. It is done by a researcher at Johns Hopkins. Harvard, Caltech or Stanford working with his or her counterparts in Oxford, Moscow, Beijing, Singapore, Tel Aviv, or Bangalore. Increasingly, scholarly works and research on new drugs, new sources of energy, and new technologies are done in a much more active way by collaborative efforts across borders. These engage not just people in developed countries but people in developed and developing countries working together and in developing countries with one another. The result is that the whole innovative cycle in the world has shifted from Thomas Edison working in his lab to create an incandescent light bulb, or Henry Ford developing a car in his garage,

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to more and more people using the Internet in more and more countries around the world. It is really changing and accelerating the innovative process and utilizing the best talent from around the world.

6. Globalization as an Opportunity and as a Threat

Let me conclude on one issue that relates to American policy and how American policy needs to evolve in this very difficult and challenging environment. We now see a lot of people who see globalization as a threat—as something that has been disadvantageous to Americans: either a threat to their jobs or a threat to stability.

There are people who are concerned about new trade agreements and resist them because of the additional competition that expanded trade produces. There are people who are concerned about more immigration, when in fact one of the reasons the American economy has done so well is that we have enabled the best and the brightest to go to school here and to establish companies or work in entrepreneurial companies in Silicon Valley and many other parts of the United States.

The fact is that we can see globalization either as an opportunity or as a threat, and one of the great challenges for the world over the next several years is going to be how we harvest the benefits of globalization while mitigating the challenges and the disruptive elements that come from the increased competition that emerges from globalization. We are going to have to do both. We cannot deceive ourselves into thinking that globalization does not mean disadvantages or challenges for people who find it difficult to adjust to international competi- tion. Yet, for most companies and for most workers, the opportunity for future growth in jobs, incomes, and opportunity lies in tapping rapidly growing foreign markets, particularly in an environment where consumer demand in this country, for the time being, is going to be relatively modest. A U.S. recovery notwithstanding, the growth in consumer demand and demand for infrastructure around the world—particularly in most emerging economies— far exceeds what we now see and will see in the United States. So, we need to be very clear: in the 21st-century world, expanding trade is essential to increasing American jobs.

I see a real historic challenge for the United States today. One choice is that we can decide that we want to, in effect, retreat from the world economy or at least take only tentatively

internationalist positions. This implies imposing protectionist measures or refraining from partici- pating proactively in international trade agreements, thereby trying to shelter ourselves from the com petitive challenges of the global economy and sheltering ourselves from various people who want to come to the United States to create jobs, create companies, or go to school here.

The other choice is that we can regard inter- nationalization or globalization as an enormous opportunity: an opportunity for identifying and taking advantage of new markets and bright minds around the world—an opportunity for attracting investment from countries that have accumulated a lot of capital and are looking to diversifying their investments, just as we do with our own portfolios. Diversification is natural for countries that develop large amounts of reserves.

Do we want to try to maintain our openness to the best and the brightest from around the world, who want to go to school here, who want to come here to start companies, who want to come to work in American companies, as we have done in the past? Do we take advantage of these networks of international research that are increasing in terms of intensity and in terms of the quality of cross- border research? Or do we try to avoid this for fear that we are losing too many opportunities by partnering with other regions of the world?

These are the kinds of challenges that I think the United States faces today. This last challenge is international in the sense that it affects our ability to compete in the world, but it is domestic in terms of the kinds of policies that we need to pursue. What do we do when other countries do not play by the rules? One important issue here is piracy of intellectual property. Also, there are countries like China that have policies that force the transfer of technology or of innovation from American companies to domestic companies as a precondition for doing business there. There are a number of countries that give special preferences to their companies when it comes to government procurement.

All those things are compelling issues. And they are all issues where the United States has to take a tough position on behalf of its companies, par- ticularly protection of intellectual property because intellectual property is so critical to the future of American companies. So is ensuring a level playing field regarding state-supported enterprises.

Most of our companies do not thrive because they are low-wage companies. They thrive because

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they have innovative ideas and creative talent and come up with new ideas and communicate them. All these things are important reasons for us to take very strong positions in international negotiations to be sure that the rules are fair and that intellectual property is protected, as well as undertaking a wide range of other actions to defend our economic interests. This is being done by the State Department and other U.S. government agencies as well.

But no matter how well we do in protecting American interests, the key point from a competi- tiveness point of view is what we do at home: in terms of education; of developing new sources of clean energy so that we do not need to be as vulnerable to disruptions in other parts of the world, and in updating our antiquated infra- structure. While China, India, Brazil, and many other countries are building modern infrastructure, American infrastructure has, in many cases, dete- riorated or at best simply not kept up.

How do we maintain an R&D environment that enables us to develop new ideas and keep this culture of innovation going? The answer depends largely, of course, on the private sector; but it also depends, as we have seen in the past, on institutions like the Defense Advanced Research Projects Agency. Now the Department of Energy has its own Advanced Research Projects Agency playing a proactive role in supporting early-stage energy research and innovation.

So in the end, my worry—or at least my worry that I can do something about—is not so much that China and India and others are becoming more competitive. That was inevitable. These countries for decades in the 19th and 20th centuries had not undertaken major reforms. China started its reforms in 1979; India in the early 1990s. Those reforms were bound to produce dramatic results, given the talent these countries have. Along with South Korea, Singapore, Malaysia, and many others, these countries were bound to increase their competitive capabilities and technical skills and become more important financially and commer- cially. This was a change in the world economy that many predicted—although probably few could imagine how dramatically it would occur. The direction, if not the speed, was fairly evident.

The key point now is not to wring our hands over the fact that other countries are more com- petitive or in some cases are not playing by the rules that we think they should play by. We should of course focus on getting them to play by the rules,

take tough action if they do not, and work hard to convince them that playing by the rules is in their long-term interest. But no matter how successful we are in conducting our international economic policy in terms of protecting trade rights and in- ternational rights in other areas, we will not be able to provide the benefits for our children and our grandchildren and maintain a strong national economy unless we deal with the fundamental issues that the President talked about in the State of the Union speech: to make sure that what we are doing at home strengthens our economy—parti- cularly the environment for entrepreneurial, creative business—and enables business to grow, come up with new ideas, and hire new people. That depends on education, infrastructure, energy availability, and a sound long-term fiscal policy.

We have to focus a lot more on these things today: the president mentioned that we are in a Sputnik moment, but I would even go beyond that. Sputnik was sent up by the Soviet Union, now we are seeing Sputnik-like developments from all over the world. There are Sputniks from China, India, Singapore, South Korea, Finland, Malaysia, and many other countries. Such coun- tries are all doing very innovative things and developing new technologies and competitive products. We are seeing Sputniks go up every day, every week, and every month posing new compe- titive challenges for the United States.

The key for the United States today is to identify the kinds of things we need to do at home, with a sense of vision about our own future and how to make ourselves a more competitive economy. Most importantly, we must ensure that the companies that operate here, our workers, and the students who are expecting a better life when they get out of school all have the opportu- nities to thrive in this much more competitive world. We must focus on being a desirable location for doing business, for upward mobility, for research, and for education. That, to me, is the big challenge.

The Chinese plan. They have five-year plans. A number of other countries are thinking long term, too. We should not and will not engage in China-like planning. But we have to think about what we need to do now to make our companies, students, workers, and research labs more compe- titive in the global economy, not just today but over the next 5, 10, or 15 years. It is an enormous challenge. It requires vision; it requires leader- ship; it requires bipartisanship. And it requires a

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critical mass of national understanding that we are faced with a challenge that we have not faced before in our history. And we are going to have to meet it.

Questions and Answers (edited) Q: The U.S. economy came into this year with

considerable momentum, and Europe at the start of the year was also working on trying to resolve a sovereign debt crisis. Then suddenly in February, we had these sweeping geopolitical events—dis- ruptions that probably are on a scale that we have not seen since the fall of the Soviet Union. I wonder if you can give us your perspective on how long the uncertainty may continue about these events and what impact they are going to have on the United States and the global economy for the foreseeable future.

Dr. Hormats: I think that given the nature of the uncertainty, predicting when these events would end would be virtually impossible because we are now in a process where political change has accelerated at a very rapid rate. There has been regime change in some of these countries, but what the new regimes are going to look like remains to be seen.

The question of the impact on U.S. policy is interesting. There are a number of preliminary conclusions that one can come to, one of which concerns a point I mentioned. That is, we have gone through several energy events in the past 40 years, such as 1973 and 1974, when we had the initial oil embargo against the United States and the Netherlands. Similar disruptions and con- sequent energy price increases occurred in 1979 and then in the first Gulf War. The current unrest in North Africa and the Middle East is one more reminder that we are vulnerable to disruptions in oil supply—or extraordinary price disruptions that come from the concern about supply, even if the supply is really not disrupted very much. We have seen this in the current environment, where there are market concerns or concerns that people have that have tended to push the market up. Looking at this history over the past 40 years, we have really not taken as seriously as we must the need for a robust national energy policy that reduces our dependence on imported oil and hydrocarbons in general.

The second point is that—I think I touched on this earlier—our assistance to countries really needs to involve what one can call support for inclu- sive growth. That is, we must ensure that when we

provide assistance, or when we provide advice, or when the World Bank or other institutions do it, more and more people are included in the benefits of that assistance and advice and of economic growth. That is particularly true when it comes to younger people in many, if not most, of these countries.

Look at Egypt. It has the world’s second- largest percentage of college-educated young people who are unemployed. Number one is the Philippines. There are a lot of disenfranchised youth in such countries. One of the things we need to do is to focus our foreign-assistance programs on ways of helping these countries to enfranchise these people, to give them opportunities in the political as well as in the economic area. The broader point is that we have to recognize that when you get into these periods of major change, it is hard to know when they will end or what the final conclusion will look like.

There is this famous statement by Zhou Enlai, who some 30 years ago was asked what the implications of the French Revolution were. He said, “Well, it is too soon to tell.” And I think that is the answer I would give here: It is too soon to tell. It tends to be the case that when you have these revolutions or these major outflowings of public disenchantment with the current regimes, they can lead in a variety of directions. I’ll give you an example from the last 25 years. I had an opportunity to meet with Eduard Shevardnadze, who was the foreign minister under Mikhail Gorbachev when the Soviet Union dissolved into Russia and a number of independent republics. At the time, you had this outflowing of support of freedom throughout Eastern and Central Europe. I asked him about this, and he said that he did not anticipate that there would be this massive democratic movement. They assumed that there would be a lot of little Gorbachevs and that in most of the countries of Central and Eastern Europe the power of the state would still be in the hands of relatively few people. What happened was that you had almost all the leaders of Eastern Europe swept aside very quickly. This proves that even for someone who was pretty close to what was going on, it was impossible to predict. I asked Lech Walesa once, “Could you predict what was going to happen in Poland when you started Solidarity?” He answered that there was no way could he have predicted the outcome, and this is a guy who was very close to it.

Therefore, I just find it very difficult to make a prediction about what is going to happen. I do,

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however, think that from an American point of view, staying engaged and working with the forces of positive change is where we have to be—not so much that we will have enormous influence over them, but that what influence we do have will be constructive.

Q: My question is why the State Department and our intelligence services were caught off guard, without any contingency plans whatsoever over these events. And what is being done now to maybe not be that surprised when the next hot spot erupts?

Dr. Hormats: I am not in the intelligence part of the State Department, but I think there were people who understood that there had to be change in many of these countries. However, I do not think that very many who are experts in this area—either in the State Department or in academia—antici- pated that such far-reaching change would come so quickly or that it would come the way it did. Many academicians who were following the situa- tion understood that there was discontent in some of these countries and understood that there were pressures building up, but very few people really anticipated this.

What do we do now? It is really the same answer: stay in touch with the forces who are advocating constructive change and make sure that we have very active engagement. Our ambassadors who are in the region are meeting with various governmental and nongovernmental groups to stay in touch with developments, but there are no miracle answers. It is an ongoing set of engage- ments with people who are involved in these movements and who are involved in the desire for greater change and greater participation in the system. Our challenge is: How do we help them to get this in a constructive fashion?

Q: Thinking about the Doha trade talks, it seems to me that one of the main reasons those did not go further was that some of the emerging markets wanted the EU and the United States to give up some of their agricultural subsidies. I am wondering if you can envision the advanced economies in general, and especially the United States, giving up on some of these explicit and implicit farm subsidies in order to achieve growth in exports.

Dr. Hormats: We are in the negotiations now. They have been going on for quite some time. What we are prepared to give in that area depends in

part on what we are likely to get in a variety of other areas, so I do not think we are really at the point where we are putting new offers on the table. But let me make a few observations because I think you have asked a very important question: What happens to the Doha Round? Everyone knows if that you are going to get something, you have to make offers, and we have been having a series of negotiations on what our specific offers are and what we hope to get in return.

The bigger issue for the ability to conclude the negotiations relates at least tangentially to a point that I made earlier. That is, when these negotia- tions started, China, India, and Brazil were not major commercial powers. They were trading countries, but they did not have the kind of com- mercial power that they have today. What has happened is that many of these countries still, to a degree, see themselves—or at least project them- selves in their conversations with us—as emerging or developing economies, despite their new-found commercial and financial power; but they still have large numbers of low-income people. Therefore, economic development is one of their top priorities. This has made them very cautious, and in some cases unwilling, to move toward greater openness.

In the United States, being able to make progress on the trade negotiations—and particu- larly to get these things through the American Congress—is virtually impossible without having much more substantial offers of openness by the big three emerging economies—China, India, and Brazil. I would include Russia, too; but it is not in the WTO and therefore not part of the Doha Round. Our hope is that they join the WTO, be- cause we want them in a system of rules and obligations. With those countries that are in, we want to make sure that they open their markets to a far greater degree than they have been willing to do so far, because their markets are so important to American companies.

Our job in the State Department is to support American companies and American workers, and we cannot have the kind of export growth that the President wants, which is a doubling over five years to create or support two million jobs, until we have greater access to the markets of these large emerging economies. It is just arithmetic, and so far it is proving very difficult to get them to agree to much further opening.

Even beyond American exports—and of course, that is our major priority—if you are a small, developing country, it is important for you

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that the Chinese, the Brazilians, and the Indians further open their markets. For countries with smaller domestic markets, it is even more important than it is for the United States that they get access to these large, emerging, fast-growing economies. Therefore, we have been making the argument in the G20 and the G8 that large emer- ging economies have to open up further if there is to be a negotiation that is credible, that has any chance of getting through the American Congress, and that provides benefits to some of these smaller economies. Balancing these interests is the major hang-up in the negotiation at this point.

Q: In your prepared remarks, you discussed the increased role of state-supported enterprises in many countries. What is the U.S. response to this? Dr. Hormats: What we can encourage countries to do is to make sure that the provisions of state ownership and support do not distort international competition or distort international trade, In other words, we need rules that limit the degree to which, by virtue of being owned by the state or supported by the state, firms have competitive benefits or competitive advantages over companies that are not owned or supported by the state, such as those of the United States and many other parts of the world. This notion is called competitive neutrality, and it means you do not have exemption from antimonopoly rules; you do not have preferential access to capital; you do not have exemption from certain regulations. You do not have—for instance, if you are a bank or insurance company—government indemnity that enables you to borrow money more cheaply than a privately owned insurance company or bank. In many countries, that government support, or at least government backup, enables companies or financial institutions to get money more cheaply, which gives them a competitive advantage.

While we cannot tell countries whether they can have state participation in their economy or not, we prefer that they move toward a private-sector model. But if they choose state ownership or support, we want to make sure that there are rules and disciplines that avoid their firms being given a major competitive advantage due to state support—in financing, for example,

Also, we look at trade rules that deal with dumping, subsidies, and what we call “Special 301” violations of intellectual-property rules.2 These trade rules are hard to enforce when, for example, a company has been given free land by the govern-

ment or antitrust immunity, or when the bank that is owned by the government indirectly has been told to give a company money at 2 percent, when the market rate is 6 or 7 percent. You can, in some cases, go after some of these using traditional countervailing duty rules under the WTO. But in some cases, the problems are much more complex because many of these unfair arrangements are opaque.

How, for instance, do you judge what to do if you want to invest in a country when the host government says that you can only invest if you transfer a certain amount of technology to a do- mestic company or agree to a certain portion of procurement from a domestic company? That gives that domestic company an enormous competitive advantage and can, in many cases, be highly detrimental to the foreign investor. How do you measure that type of intervention? How do you quantify it? In many cases, it is opaque. In many cases, there is no paper trail: it is sort of subtly inferred from the negotiation that you have to do it. In other cases, it may not directly violate WTO rules that limit certain distortive practices. China, for instance, has not signed the Government Procurement Agreement of the WTO.

We are trying to figure out how to formulate new 21st-century rules. In the 20th century, there were very clear distinctions: tariff barriers and nontariff barriers. Now, there is a variety of crea- tive means of protection, which we would call mercantilism or an aspect of “industrial policy” or the French would call dirigisme. Developing inter- national rules, norms, and disciplines is much harder than it used to be because in many cases violations are opaque.

Another problem is that American companies are not going to go to the United States govern- ment and say: “Look what we are up against here.” After all, they want to do business in these coun- tries, and they are willing to shave off a little here and there in order to do it. So, we have some very complicated challenges before us to make sure there is a level playing field and that even if there is a growing role for the state in economies, there will be rules and obligations and disciplines to prevent state support from distorting global markets. This

2Section 301 of the Trade Act of 1974, as amended, requires that the United States Trade Representative must report annually on the actions of countries that deny adequate protection of U.S. property rights or deny access to markets that rely on such protection.

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is a very big challenge for American companies that do not have these advantages. We are going to be working on this in our bilateral talks with many of these countries in the Trans-Pacific Partnership that is being negotiated in the OECD and in the WTO.

REFERENCES

Clinton, Hillary Rodham. 2011. Internet Rights and Wrongs: Choices & Challenges in a Networked World,

Remarks at George Washington University, Washington, DC. February 15, http://www.state.gov/secretary/rm/ 2011/02/156619.htm.

Hormats, Robert D. 2011. Keynote Address, Center for Democracy and Technology Annual Dinner, March 8, http://usoecd.usmission.gov/hormats-cdt-remarks2 .html.

Roosevelt, Franklin D. 1941. The Four Freedoms, from The State of the Union, Address to Congress. Congressional Record, 87 Part I, http://www .wwnorton.com/college/history/ralph/workbook/ralprs36b .htm.