Head to Head: The Economic Battle Among Japan, Europe, and America

350 Pages·2003·1.02 MB·English

by  Lester C. Thurow

HEAD HEAD
TO
THE ECONOMIC BATTLE
AMONG JAPAN, EUROPE, AND AMERICA
Lester C. Thurow
To those at Bretton Woods and elsewhere who in the aftermath of
World War II constructed the most productive economy the world
has ever seen. May this generation of world leaders be as successful.
CONTENTS
Introduction 1
Chapter 1 The Bear in the Woods 9
Chapter 2 A New Economic Game 25
Chapter 3 The House of Europe: Catalyst for Change 65
Chapter 4 Japan: The Challenge of Producer Economics 111
Chapter 5 The United States of America: The Great Wall Is
Down 151
Chapter 6 Getting Rich 201
Chapter 7 Festering Problems 217
Chapter 8 Who Owns the Twenty-first Century? 243
Chapter 9 An American Game Plan 257
Notes 299
Index 323
Acknowledgments
About the Author
Other Books by Lester C. Thurow
Cover
Copyright
About the Publisher

INTRODUCTION
Head to Head looks at the evolving economic chess game between Japan,
Europe, and America. In 1991, when I was writing this book, I came to the
conclusion that even though Japan had been the best performer in the 1980s,
the Europeans held the best position on the chessboard. If they played their
existing position skillfully, they could dominate the game and as a result
be the leading economic power in the twenty-first century.
Since this economic chess game never ends, a decade later it is worth
reexamining the players’ respective positions. Whose position has
strengthened and whose position has weakened?
Japan is the big loser. It should make any country both humble and
cautious. There is a set of circumstances that, if hit, can instantly turn the
biggest successes into the biggest failures. Japan came into the 1990s as the
world’s best economic performer in the 1960s, 1970s, and 1980s. In the
1980s, after it was already rich, it had averaged a 5 percent real growth
rate—far higher than America’s growth rate of just 2 percent.
But what no one knew, inside or outside Japan, was that Japan had an
unknown genetic weakness. It was incapable of cleaning up the damage
and rebuilding after a major financial crash.
I am sometimes asked what my biggest mistake has been as a professional
economist. There is an easy answer. As I was writing this book, the Japanese
stock market had already crashed and land values were plunging. I mention
the events but move on without much comment because I assumed that
Japan, like America in the savings and loan crisis that had just occurred,
would smoothly pick up the pieces and move on. I could not
1
2 / Lester C. Thurow
have been more wrong. The Japanese stock market and property crash was
not just a temporary downward perturbation. They could not pick up the
pieces, and Japan’s weaknesses led to a decade of little or no growth—what
the Japanese call the “lost decade.”
In 1990 Japan held a position of strength. Twelve of the world’s largest
fifteen financial institutions were Japanese (based on market capitalization)
and 6 of the top 10 industrial firms were Japanese. Currently, after a decade
of no growth, none of the top 15 banks are Japanese and only one (Toyota)
of the ten biggest industrial firms is Japanese. Among the world’s five
hundred most valuable firms, the number of Japanese firms fell from 149
to 50 while the number of America was rising from 151 to 238. Parity with
America in industrial strength was replaced by an almost four-to-one in-
feriority.
Technically, Japan understands what must be done. It must put a large
fraction of its families and its companies through bankruptcy to reduce the
debt burdens that stop growth from resuming. But its culture, tradition,
and laws won’t allow that to happen. “Change your culture” is an easy
recommendation, but how is one to do it? It only happens when societies
have a crisis and feel that fundamental aspects of their culture have to be
changed.
In some sense the Japanese have been too good at sharing pain. There is
a sense of crisis on the financial pages but there is no sense of crisis on the
streets in everyday life. Despite a decade of no growth, unemployment
hovers slightly above 5 percent—below the levels found in America or
Europe—and for the 95 percent who do work, wages are 10 percent above
those in the United States. Without an obvious crisis, everyone is willing
to talk about fundamental change but no one is willing to do anything to
bring it about. No one can be a leader if most aren’t willing to be followers.
As a result there is no light at the end of the tunnel as the Japanese start
their second decade of no economic growth. Talk about cleaning up the
bad debts abounds, but the necessary actions just don’t happen.
While Europe’s economic position did not collapse in the 1990s, it also
has a weaker position on the economic chessboard in the year 2003 than it
had in 1991. In 1991 per capita gross
Head to Head / 3
domestic product (GDP) (adjusted for differences in purchasing power)
was $1,000 below that of the United States in France, $2,000 lower in Ger-
many and Italy, and $5,000 lower in the United Kingdom. Ten years later,
in 2001, the per capita GDP gap had grown to $11,000 in the United King-
dom; $12,000 in Germany; $13,000 in France; and $16,000 in Italy. The rel-
ative gains of the 1970s and the 1980s were all lost and Western Europe’s
relative GDP per capita was back to where it was in the 1960s. Here the
“why” is just as obvious as it is in the case of the Japanese.
For everyone, the late 1980s and early 1990s was an era of pushing mature
technologies slowly forward. The big issue was: “Who could make D-Rams
or autos with the fewest defects?” But in the mid- and late-1990s it became
clear that the world was in the midst of what historians of the future will
call the third industrial revolution. Leaps forward and interactions between
six key technologies (micro-electronics, computers, telecommunications,
man-made materials, robotics, and biotechnology) were sending everyone’s
economy moving off in a different direction. Collectively, these technologies
and their interactions are producing a global knowledge-based economy
that is systematically replacing national industrial economies.
While Europeans were the leaders in both the first and the second indus-
trial revolutions, Europe is not fully participating in this third industrial
revolution. Nowhere is this non-participation more visible than in the area
of biotechnology.
Viewed from future biotechnology, it will come to be seen as the third
industrial revolution’s equivalent of steam in the first industrial revolution
or electricity in the second. If the twentieth century is viewed as the century
of physics, the twenty-first century will be viewed as the century of biology.
Humans have for the first time in their history gained the ability to change
their own genetic code. They can make themselves into something different.
They can control their own evolution. We have learned how to change
ourselves. It is not hard to imagine that this ability to change ourselves
genetically will come to be seen as the central inflection point in all of hu-
man history—maybe even more profound than the initial shift of humans
from hunter-gatherer societies to agricultural societies or the invention of
4 / Lester C. Thurow
writing and reading. It is the biggest disruption ever to hit humankind.
But because of their fears about genetically modified plants and animals,
Europeans are refusing to leap into this biological revolution. Technically
they have announced a moratorium on all further experiments until their
fears about super-weeds or monstrous animals can be alleviated. But that
is impossible. Scientists can never prove a negative—that something isn’t
dangerous—theoretically. One has to experiment, take a voyage of explor-
ation, to know whether things are dangerous. As a result, Europe has fallen
behind and continues to fall behind in the area that is going to be the key
technology of the twenty-first century—a technology that will redefine
computing, materials, medicine, and many other areas.
To put it simply, the fearful don’t win.
The other big European weakness is also easy to spot. In an industrial
revolution it is necessary to grow new big firms that can dominate the new
technologies. Europe has been unable to do so. In 2002, six of the world’s
most valuable twenty-five firms are American firms founded after 1960
that did not grow big by mergers. None are European, and one does not
get to a new European firm on this list until reaching the seventy-third
position and SAP—a European software firm.
The reasons for this failure differ from country to country across Europe.
Some (France) have trouble starting new firms; some (Italy) start lots of
new firms but their regulations and preferences for family-controlled firms
will not let them grow these start-ups into big firms; some (the United
Kingdom) don’t have enough engineering talent to staff new big firms. But
everywhere across Europe there is a failure to grow new big firms.
As a result of not having big new companies, Europe is falling behind
when it comes to private research and development (R&D) spending on
new technologies. If one looks at the firms that spend more than $1 billion
per year on R&D, 31 are American and 18 are European.
The American position on the economic chessboard has strengthened
partly due to the clumsy play of its competitors and partly due to its own
skillful moves.
America made the widespread predictions of its economic eclipse in the
1980s wrong by taking those predictions seriously.