Speech before the Los Angeles World Affairs Council on May 18, 1999:
Thomas Friedman
First of all, I want to thank the World Affairs Council and all of you for coming out this evening and I really appreciate you hosting this event. Curtis, I really thank you. This is really a lovely evening and I’m glad to be here.
I’m going to speak this evening about my book, and basically the evolution of it, because that’s what’s on my mind. Then we can open it up for discussion afterwards on any issue that on your mind. I always begin my discussions of the book by talking about my job as the Foreign Affairs Columnist for The New York Times, which I started in 1995. I have the best job in the world. Somebody has to have it, I’ve got it and you don’t. It’s really that simple. I’m the Foreign Affairs Columnist for The New York Times and I get to be a tourist with an attitude. I get to travel wherever I want, whenever I want and have whatever attitudes I want and it’s a great job. I really can go wherever I want, whenever I want and have whatever attitudes I want. There’s only one downside with this job. I have to have attitudes twice a week. In fact, in my case, I have to have them every Tuesday and Friday. So the big question when I started this job in January of 1995 was: what attitudes?
Now, I’m the fifth Foreign Affairs Columnist in the history of The Times. The first was a woman, actually, Ann O’Hare McCormick, and Ann McCormick began in the 1930s. As her highly politically incorrect obit in The Times states she got her start accompanying her husband, who was an engineer from Dayton, Ohio, on buying trips to Europe. Then she started stringing for The Times and The Times liked her, and eventually they made her the first Foreign Affairs Columnist. Her column was called "In Europe" because, after all, foreign affairs were in Europe as far as America and The New York Times were concerned back then. Well, the super story, the kind of framework within which Ann McCormick wrote her column and shaped her attitude, was the crumbling of Versailles Europe and World War II. Her successors had the Cold War framework to shape their attitudes and it was very clear, the structure of international relations, a very clear international system.
I came along in January 1995 when the Cold War had ended, but it wasn’t immediately clear what was the international system that had replaced it and would be the framework for my attitudes. The Lexus and the Olive Tree is my answer to that question after the last almost five years of traveling the world. The simplest way I can reduce this book, or the argument of this book, is to say the following: For the last ten years, we have been speaking about the post-Cold War world. We have been describing the world for ten years by what it isn’t because we didn’t know what it is. Well, this book is a declaration that the statute of limitations on the cliche "the post-Cold War world" has expired. This book is an argument for what it is, and the argument is that globalization is this integration of markets, finance and technology that is shrinking the world from a size medium to a size small in a way that is allowing each of us as individuals to reach around the world farther, faster, deeper and cheaper than ever before. This thing called globalization is not a trend, it’s not an economic fad, it’s not a Nintendo game. It is nothing less and nothing more than the international system that has replaced the Cold War system. That is the core argument of this book. We are in a new international system.
Now, the Cold War system was characterized by one overarching characteristic: division. The world was a divided place, and all your threats and opportunities grew from who you were divided from. That system was symbolized by a single word--the "Wall," the Berlin Wall. The globalization system is also characterized by one overarching attribute--integration. In this system, all your threats and opportunities flow from who you’re connected to, and it is symbolized by a single word: the "Web." So, we’ve gone from a world of division and walls to a world of integration and Web. In the Cold War we reached for the hot line, which was a symbol that we were all divided--but at least two people were in charge--the United States and the Soviet Union. In globalization we reach for the Internet, which is the symbol that we’re all connected to, and nobody’s in charge. Oh, that’s what’s scary about this system. It’s just like the Internet. We’re all connected and nobody’s quite in charge. It’s Orwellian in its reach but with no Big Brother. Now, if the Cold War had been a sport, it would have been sumo wrestling, two big fat guys in a ring, lots of ritual grumping and stumping around, not a lot of contact, though, until the very end when one fat guy pushed the other fat guy out of the ring. If globalization were a sport it would be the hundred-meter dash, over and over and over, and if you lose by l/100th of a second it’s like you lost by a week. The only thing that victory assures is that you get to race again the next day. The Cold War system was about weight; the globalization system is about speed. The Cold War system was about E=MC ², the globalization system is about Morse’s law that the speed of microchips will double every 18 to 24 months. The ideal document in the Cold War was the treaty; the ideal document in globalization is the deal. The ideal defense mechanism in the Cold War was radar to detect the threat from the other side of the wall; the ideal defense mechanism in globalization is the x-ray machine to detect the threat from within. Two very different systems. The ideal economists for the Cold War were Marx and Keynes. They wanted to tame capitalism. The ideal economists for globalization are Schumpeter and Andy Grove, Schumpeter because he understood that capitalism was about creative destruction, the ability to shoot the wounded and quickly take their dead capital and reassign it to more efficient producers and Andy Grove who took the insight of Schumpeter for the title of his book about life in Silicon Valley, "Only the Paranoid Survive." Two very different systems.
Now, what really makes these two systems different and so much more difficult to analyze in the case of the globalization system is the way power is structured. The Cold War system was a system that could be explained almost entirely in terms of the balance between states. That is, people acted on the world through a state and the front page of the newspaper could be understood as states balancing states, clashing with states and aligning with states. The globalization system, instead of being built on just one balance between states, is built on three balances. The first balance is the traditional balance between states and states. That still matters every bit as much in this system as it did in the old system. NATO balancing Russia or Yugoslavia, Russia balancing China, Japan balancing Korea. It still matters. But now we have two new balances that can matter just as much at times. The first of those other two is the balance between states and what I call "supermarkets." The supermarkets are the 25 largest global stock and bond markets which, today have become autonomous independent actors. The United States can destroy you by dropping bombs, and supermarkets can destroy you by downgrading your bonds. Who ousted Suharto in Indonesia? It was not another state. It was the supermarket. So now we have states and states and states and supermarkets.
What is really unique about the globalization system, though, is that you now have states and what I call "super-empowered individuals." Now, you have super-empowered good people, because what happens when the walls get blown away and the world gets wired, individuals can now act on the world stage unmediated by a state. So you have super empowered-good people, as I said. Jody Williams won the Nobel Prize last year for organizing a global ban on land mines against the wishes of the five permanent members of the United Nations Security Council. How did she do it? Well, people asked h, and she had a very simple answer: e-mail. She built one e-mail coalition on top of another and was able to put together a coalition able to trump the wishes of the United States, Britain, France and China.
Remember the story CNN had out last year, the" tailwind" story, that American troops used poison gases in the Vietnam war? The story was put out by Time Warner/CNN, I believe the world’s biggest media conglomerate. They had a General advising them named Perry Smith. When that story came out he said "This is a bogus story, and if you run this story I’m going to quit." They said, "By-bye. We are Time-Warner/CNN. We don’t really care what some retired general has to say." Perry Smith went home and he got on his e-mail network and he mailed his five General friends from the Vietnam War, they e-mailed their five Colonel friends, the five Colonel friends e-mailed their five Major friends and right on down the line. Within a week, they had assembled a strong enough dossier to bring big, fat Time-Warner/CNN to their knees, begging for mercy. Five retired Generals with e-mail got super-empowered. So they were super empowered good guys; unfortunately, in this system you also have what I call "super-empowered angry men."
Osama bin Laden, the name responsible for blowing up the two U.S. embassies in Africa. He had his own global network, too. A kind of Jihad Online and he used that to take on the United State,s and the United States government fired sixteen cruise missiles at a person. We fired sixteen cruise missiles at Osama bin Laden. We said we were going after his camp but we also knew he was in, or was suspected to be in, his camp at the time. That was a superpower versus a super-empowered angry man.
Ramzi Yousef. Remember Ramzi Yousef? He was the guy who wanted to blow up, or tried to blow up, the two tallest buildings in America: the World Trade Center. I always wondered, "What did Ramzi Yousef want? Did he want a Palestinian state in Brooklyn? Did he want an Islamic republic in New Jersey? What did he want?" So for the book I went back, actually, to the court case. And it’s very interesting and very clear what he wanted. He wanted to blow up the two tallest buildings in America. Period. Paragraph. Full stop. Globalization as Americanization had gotten in his face and it had empowered him as an individual, super- empowered him, to do something about it. The only reason we actually captured him was because one of his associates actually went back to the Ryder Truck Agency and asked for the deposit on the truck the $400 deposit on the truck, claiming that it had been stolen, the truck they had used to blow up the World Trade Center. You blow up America in the morning on the basis of your antipathy for America and everything it stands for and then you use American contract law in the afternoon to get your deposit back.
We really broke the case because the FBI tracked Ramzi Yousef to an apartment in the Philippines. They broke in and they found all his plots on the C-drive of his Toshiba laptop. He was a super-empowered angry man, and what is scary about this world today is not that Ramzi Yousef can ever be a superpower, what is scary is how many people, how many people can be Ramzi Yousef. So now we have states and states, states and supermarkets, and states and super-empowered individuals, all interacting with one another on the front pages of our paper every day. It makes it an incredibly complex, and in my case, an incredibly rich system to write about.
Now if my girls were here, the next question they would ask would be, "Well, Daddy where did globalization come from?" And another way of asking that question is to ask, "What blew away all the walls?" The argument I make in the book is that what blew away the walls were three simultaneous things that I call "democratization," which were born in the Cold War system, gained strength in that system, and eventually converged at the end of the 1980s to create a whirlwind that blew away the wall.
The first democratization was the democratization of finance. You know, there was nothing more anti-democratic in this country than bank lending in the 1950s. You needed to have an in at the bank to start a business or whatever. Thanks first to the creation of the commercial paper market and then the home mortgage market and then the securitization of everything right up to Michael Milken’s junk bond market, right up to David Bowie, the rock star, last year issuing $55 million in David, the second thing to get democratized was technology through the alchemy of digitization, digitization being the way in which we take words, music and data and turn them into ones and zeros, transmit them over modems and they come out as perfect copies of that word, music and data on the other end--which produced the whole personal computer phenomenon that democratized technology. The third democratization is the democratization of information. Thanks to satellites, fiber optics and cell phones, we all now increasingly know how each other lives. The days when Pravda could run a front page picture of Americans waiting outside a deli in New York on a Saturday morning at 7:00 a.m. for the deli to open under the caption "Look, Bread Lines in America, too," those days are over. You wouldn’t try that today. Now, what basically happened was these three democratizations converged in the 1980s to create an incredible set of new efficiencies in the market place and a whole new place to do business called "cyber space." We are still just beginning to understand the full meaning and implication of these efficiencies. If your country or company absorbed these efficiencies and applied them to its way of life and business you thrived in the new era. If you didn’t, the Berlin Wall fell on you. The argument of this book is that the fall of the Berlin Wall was not a European event. It was a global event, and it is no accident that IBM, General Motors, the Soviet Union and East Germany all tanked at the same time because, basically, the Berlin Wall fell on all of them at the same time. Bloated, fat, sclerotic, overweight systems could not respond to the new efficiencies created by the convergence of these three democratizations, and had the Berlin Wall fall on [them].
When the walls fell, the key component of this new system created four key components. The first component is the collapse of the barriers to entry in everybody’s business, that’s what happens when the walls fall. When the barriers to entry fall into everyone’s business, what happens is the speed from which you moved from innovation to commoditization, the speed from which you moved from having a high value-added product or service that you can charge a lot of money for, to having that turn into a commodity that anyone can make or produce or sell. The differentiation is price, that moves from ten miles an hour to 110 miles an hour--and fasten your seat belts and put your seat back and tray tables into a fixed upright position because, with the Internet, that is going to very quickly move from 110 miles an hour to 210 miles an hour. You know how the Compaq computer got created? Back in 1986, Intel came out with something called the 386 chip, which is faster than the 286 chip. They came to their biggest customer, Big Blue IBM, and said, "We got a 386 chip. Run with it and make a new PC with it," and IBM said "We are IBM. We’re Big Blue. We’re big and fat and bloated and sclerotic, and we have barriers to entry all around us. Who’s going to compete with us? So we’re going to put that 386 on the shelf for a little bit because we just came out with a new computer called the AT." Remember, the IBM AT? It stood for Advanced Technology, and IBM had promised its customers that if they bought an AT they wouldn’t have to buy a new computer for 5 years. Hey, it was a world of walls and who was going to challenge them? Can anybody imagine a computer company that would promise you wouldn’t have to buy a new computer for five months? So a little start-up company down in Houston called Compaq, spelled their name funny, had a Q on the end. It said "We’ll take that 386 chip," and in the space of 24 months they were eating IBM’s lunch in the PC end of the computer business.
Now the best way I can explain this transformation to you is with a real story which I relate in the book. I was flying on an airplane about nine months ago and I picked up the airline magazine and there was an ad in there for the Sony Mavica camera. And I thought "Isn’t that neat? Sony makes cameras. I thought they made CDs and stereos and Walkmen." Well, actually this ad tells you everything you need to know about the new world. It had three pictures in it. The first picture was of the Sony Mavica camera and under it was the caption "This is your camera." Next to it is a 3-1/2 inch floppy disk. Under that it says "This is your film." Next to that is a computer with a baby picture on it. Under that it says "This is your post office." Now, what is that ad telling us? Well, it’s telling us that in a world where anything can be digitized if you’re a digitizing company like Sony, sure, in the past all you digitized was music, but what the heck? If anything can be digitized, why not digitize everybody’s baby pictures while we’re at it? So we are Sony and while we’re at it, I think we’ll be Kodak and, you know, while we’re digitizing why don’t we send those pictures as well and we’ll be FedEx. We are Sony, we are now Kodak, we are FedEx.
So I’m thinking to myself, "I wonder how Kodak feels about this?" I’m driving along in my car one day and I hear an ad for Kodak and they’re boasting about all their computer on-line services now. They’re talking like a computer company. So I go down to Houston to interview the folks at Compaq for the book and I say to them, "How do you feel about Kodak kind of talking like a computer company?" They say, "We’re not worried about Kodak. We, at Compaq, now do business solutions. We’re sort of a consulting company now." Ever see a Compaq ad? They hardly show pictures of the computers any more. It just says "Compaq, Better Answers." Oh, you do business solutions. So later I’m out playing golf with a friend of mine who works for PriceWaterhouse Coopers. I say to him "I thought you guys did business solutions. You worried about Compaq?" He says, "We’re not worried about Compaq, but we’re terrified of Goldman Sachs because they’re now doing tax derivatives." So he suggested I go home and read a book about it. I tell my wife "I’m going over to Borders to pick up a book." She says, "Don’t go to Borders go to borderless books--Amazon.com." So I go downstairs to my computer. I call up Amazon.com. What’s the first thing I see? They’re now selling CDS. I say, "Wasn’t that Sony’s business?" So I told this story to the book sellers of Farrar, Straus, Giroux, my publisher. A guy raised his hand. His name is Mark Gates and he says "Mr. Friedman, I’m the chief Farrar, Straus book seller in Chicago. I just came from a Brooks Bros. department store. I was in the men’s suit department. They were selling Michael Jordan’s new book there for 30% off on a stack of men’s suits. I went up to the head of the department. I said ‘How would you like it if I sold men’s suits in my book stores?’ He said, ‘Have you looked at your Con-Ed Electric bill lately? Con-Ed is offering the Jordan book for 40% off at Christmas and you can charge it to your electric bill.’"
When the barriers to entry fall, we are all in each other’s business and when that happens the speed from which you will move from innovation to commoditization will get turbocharged. We had a wonderful headline in The Times last week. A business page story about AT&T going in all directions at once from computers to cable to Internet. It’s a wonderful headline. It said: "Ma Everything." And it really captured what we’re talking about. I was at the Dublin School of Economic Forum this year and there was a press lunch with Bill Gates which I attended, and all the reporters there were asking him "Mr. Gates, Internet stocks are a bubble, [aren’t they]? They are bubbles, aren’t they? I mean all these Internet stocks. They’re really a bubble, they surely are bubbles?" He finally said, "Look, you bozos. Of course, they’re a bubble. Anyone who knows anything about the technology world knows that no one can project their earnings stream of ten years in this business. I don’t know if I’m going to be here in four years. But you’re missing the point because this bubble is attracting so much new capital to this industry that it is going to drive innovation faster and faster."
That afternoon I went to interview President Hosni Mubarak of Egypt and I was sitting around afterwards with some Egyptian business friends and one of them, the editor of the leading business daily in Cairo who has heard me speak on this before, said, "Mr. Tom, we understand that we’ve got to get on this globalization train, but could you slow it down?" In the morning, Bill Gates said, "This train is going to go faster and faster," and in the afternoon the man in Cairo wants to get on but he needs someone to slow it down for him? And I said ‘Man, I would love to slow it down for you, but there is nobody driving.’" And that’s what’s scary. If you can find the engineer I’ll talk to him.
So that’s the first thing that gets created in this system--the walls fall and the speed from which you move from innovation to commoditization gets turbo charged. Now we come back to the importance of Schumpeter’s view of capitalism because if, for cultural, political, historical, traditional, social reasons your society does not believe in shooting the wounded and transferring their dead capital, if you’re called Japan and you prefer to keep for traditional, historical, social reasons the wounded on life support systems and respirators for as long as you can, you will have a problem with this new system. It is not an accident that Japan has basically not grown and has had negative growth for the last two years since a certain wall fell in Berlin in 1989. That is surely no accident.
Now we come to the second element of this system. It’s a new political garment, which I call the "Golden Straitjacket." When your country joins and plugs in a full way into the globalization system, it is, I argue in the book, the equivalent of taking your country public. It is like turning your country into a public company and subjecting it to many of the same disciplines of a public company. In fact, I have a chapter in the book called "Buy Taiwan, Hold Italy, Sell France" which looks at countries as though they were companies and asks "who would you want to hold, who would you want to own and who would you want to short if countries were companies in this new system?" When you take your company public in this system you put on the Golden Straitjacket. Margaret Thatcher was the original seamstress of the Golden Straitjacket, later reenforced by Ronald Reagan. The Golden Straitjacket embodies all the neo-liberal economic rules of this system, rules about deficit to GNP ratios, privatization, deregulation, inflation, etc.; very strict rules when you plug into the system.
Two things happen when you put on the Golden Straitjacket. One is that the economy grows from more deregulation, privatization, investment, foreign competition, etc. Your economy grows and your politics shrink. Your economy grows and your political choices narrow to Pepsi or Coke, to mere nuances tolerated within this Golden Straitjacket. I mean, what was the difference between Bill Clinton and Bob Dole in the end? Dole wanted to add some padding to the shoulder and Clinton said, "Can’t we go in the middle a little bit?" But it was the debate about a Golden Straitjacket. Paddy Ashdown, the third party leader in Britain, the Liberal Party Leader, looked at John Majors and Tony Blair, this is where I came up with the idea. I was covering the Blair-Major election and Paddy Ashdown looked at the two of them as said, "Synchronized swimming. Synchronized swimming." Well, I see synchronized swimming all over the world today where countries have donned the Golden Straitjacket. Ask Mr. LaFontaine in Germany about synchronized swimming.
The third thing that gets graded in this new system is a new energy source and that energy source I call in the book the "Electronic Herd." The Electronic Herd is my name for all these global investors, from any of you at home with your e-trades to Charles Schwab website right up to City Bank, Chase Manhattan, Bank of America and the big multinationals of Ford, Intel and Microsoft. In a world where governments are increasingly having to run balanced budgets and shrink in size, the Electronic Herd has become the energy source that countries have to plug into in order to gain the resources to grow, not only countries but the fifty states of the United States. Now, the Electronic Herd is the new energy source in this system. What the system then becomes about politically, often, is how you plug into this new energy source which is like a high voltage wire, to get the best out of it without letting it burn you to a crisp when it surges. Occasionally it does, and that’s the fourth part of this system.
I like to compare, in the book, countries to computers and it is as though for the first time in the history of the world we all now have the same piece of hardware that I call free markets. We all have the same piece of hardware. Russia has free markets and China has free markets and Mexico has free markets and America has free markets. The question is who will get the operating system and the software to go with those free markets. So when you plug into the Herd you can get the most out of it without letting it basically burn you. Russia was like a piece of hardware, a computer plugged into the Electronic Herd. They said, "Hey, this looks easy. Where do I plug in? Right here?" With no operating system and no software in sight and when the Herd surged as it inevitably does, it melted down whatever tangled mess of wires that was the Russian economy. Thailand, Korea, Malaysia, Indonesia were plugged into this Herd but with a very slow operating system--what I call DOScapital l.0. Now DOScapital l.0 is great for getting your country from $500 per capita income to $5,000 but when the Herd moves from a 286 chip to a pentium 3 and you’re still running DOScapital l.0, better known as "Crony Capitalism," what happens to you is what happens if you run Windows 98 on your old 286 computer. A sign pops up that says you’ve misallocated all your resources, cannot move capital, please download new operating system and software. And that is what Thailand, Malaysia, Korea and Indonesia are involved in today. Operating system, in my lexicon, is economic rules of this system and software is the rule of law of oversized regulatory institutions and ultimately democratization. The drama today is basically how states are relating to this Herd. Oh, there was a Herd in the Cold War system but that system was so chopped up and divided [that] the Herd could never gather, grow, gain strength and really become the force that it has become today in a world without walls.
Let me just conclude by saying: is this system irreversible? Well, that’s question I ask in the book in the chapter called "If You’d Like to Speak to a Human Being, Press 1" and it’s about the threats to this system. Is it irreversible? My conclusion is that it’s in no way irreversible. It’s quite reversible and I list five reasons why I believe that to be the case. I won’t go through all five now, but I will share with you the first and most important is what I call "just too damn hard." It may be that this system is just too damn hard for too many people. What the first ten years of the globalization system has been about is what happens if it’s too hard for small states, states like Liberia, Algeria, Yugoslavia. Well, what happens is we tend to try to build an iron curtain around them and drive around them like a bad neighborhood. In the next decade of this system, the one we’ve just begun, the big question is what happens if it’s too hard for big states called Russia, China and Japan. I grew up in an age when the biggest threat to America were the military strength of Russia and China and the biggest economic challenge was the economic challenge of Japan. I believe my daughters for the next ten years will grow up in a world where the biggest threats to them are going to be the weakness of Russia and China and the weakness of Japan. The fundamental challenge of American foreign policy is going to be managing the weakness of these three countries, not their strengths. The Embassy incident in Beijing this past week was just one manifestation of it. Going on, while the Russian government is collapsing while we’re desperately seeking their help to get out of Yugoslavia. Managing their weakness, not their strength, is going to be the biggest challenge of American foreign policy. How it’ll come out? Beats me. That’s why I end that chapter with a cartoon from the New Yorker. It’s two Hell’s Angels on motorcycles and one says to the other, "Say, how was your day?" And the other says, "Well, advancing issues led declines." That’s about the most you can say about this system, and that is if we can keep advancing issues leading declines for more people and more countries on more days and more places, we will be doing God’s work and that is America’s mission.
Thank you.