Clyde Prestowitz Interview: Conversations with History; Institute of International Studies, UC Berkeley

The Changing Balance of International Economic Power: Conversation with Clyde Prestowitz, President of the Economic Strategy Institute, August 9, 2005, by Harry Kreisler

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The Changing Status of the U.S. Economy

Students used to come here from abroad to get educated and stay and work here, [but] now they're going back. We used to create centers of manufacturing and high technology with all the spin-offs that that entailed; that was here because we were the brain for this. Now that is moving abroad. So, again and again what we're seeing is we're losing the capacity here as part of our previous strategies to further development there. We're still on that track in a way, shooting ourselves in the foot. Is that a fair summary?

It's a good, quick summary -- it's a little bit maybe overly drawn. We shouldn't lose sight of the fact that we're still a very powerful economy, and we shouldn't lose sight of the fact that, sitting right here in Berkeley, we're still getting a lot of foreign students. In fact, in recent years many of the start-ups in Silicon Valley have been [created] by students who came here and stayed here, particularly Indians. So, it's not as if there's a rush out of the U.S. But it is happening, and it reflects positive developments, because India and China are now growing and they are in the global economy. They've learned how to develop, there's opportunity there.

In the past, the students would come here because there was no opportunity there and they would stay here because there was better opportunity than there was there. Well, now there's opportunity, and they're going back to take advantage of it. That's terrific. We want that. The most dangerous thing in the world would be the failure of China and India. That would be dangerous, so we want them to succeed. To the extent that they still come here and get skills and go back and can facilitate and foster that, it's fantastic.

But the other thing that is happening is that we are not maintaining the development of our own skills. We're not investing in the infrastructure. We are not providing adequate secondary education so that our students are moving on. If you look at the graduate courses at the leading U.S. technological institutions, the majority of the Ph.D. and Masters degree candidates are not Americans, they're from various foreign countries. [There's] nothing wrong with that; in fact, thank God they're there, because they help support those programs. But we need to be getting more Americans into those programs as well, and that's where we're falling apart.

The other thing that's happening is that as a continuing hangover from those days when I was out promoting Dutch exports to the U.S. market. We still have a structure which tends to make it more attractive to put production, and now even R&D and sophisticated services, abroad, rather than keeping them here. For example, the dollar is overvalued. In a way, we have outsourced the management of the dollar to Asia. We have a situation in which China has been pegging its currency to the dollar. It just recently revalued by about 2 percent, but essentially China is managing the value of its currency against the dollar.

Japan does the same thing. Japan does it in a different way. Japan intervenes in currency markets; whenever it feels the dollar is getting too weak, it buys dollars to strengthen the dollar. The other Asian countries do the same thing. So, the Asian central banks or finance ministries tend to manage the value of the dollar to keep the dollar strong. Well, that has great benefits for American consumers. It means that imports are cheap, it keeps inflation low, it tends to keep interest rates down in the U.S., so if you're a consumer, it feels good. But if you're a producer, if you're investing in new class of equipment or R&D, it's expensive, and so there's a tendency to move it abroad. But because of the linkages -- this word "linkage" is extremely important. Our economic theory tends to assume that all markets are commodity markets, like wheat or coffee or oil. Well, a lot of markets are. But if you're making semiconductors or you're making advanced telecommunications equipment, you've got to have a connection between the laboratory and the engineering division and the manufacturing. When those linkages are broken, then you tend to lose the ability to stay at the cutting edge of the technology. That's where we have a real problem.

I want to pursue [what you said] about the dollar, because I think many people in the general public don't understand. In your book you speak of the second wave of globalization -- the era in which you grew up and fulfilled your career -- as "borrow, spend, and consume." And that we were able to do that because in this international financial structure, when we didn't have the money to pay, we just printed dollars.

America has a privileged position which most people don't understand. You're right. Let's take oil, best example. Oil is priced globally in dollars. Everybody in the world buys oil with dollars. Now for the United States, since we own the dollar, we print dollars. So, if we need oil -- I'm simplifying, but essentially, if we need oil, the president calls up the secretary of the treasury and says, "Mr. Secretary, would you call the Government Printing Office and tell them to run off a few more dollars?" And then we send those dollars to the Mexicans, or the Venezuelans, or the Saudi Arabians, and we get oil. So essentially, we're giving them paper and they're giving us oil.

No other country can do that. If you're French, or Brazilian, or Japanese, or Chinese, you have to make something, you have to make a Lexus, or Camembert cheese, or orange juice, you've got to make something and sell it to the Americans to get dollars. And then you use those dollars to go get your oil. So everybody else in the world, in order to buy oil, they have to invest, they have to save, they have to make something and sell something. We, on the other hand, all we have to do is run the printing presses and send out dollars.

What that has meant is that there's no discipline on us. It means that we don't have to make anything, we don't have to invest, we don't have to save. We can run big government budget deficits. Other countries in the world cannot run the kind of deficits that we run, or if they do, they have to have enough savings to finance their own deficits. We don't have to do that. All we have to do is spend. As long as the rest of the world accepts dollars, everything is cool. And that's what we've been doing. We've built an economy based on high levels of consumption subsidized from all the way back in the late 1940s through the tax system, urging Americans to consume, and we've made it easy to borrow. So that's what we do, we borrow and consume, and the rest of the world then saves and invests and sells to us and finances our consumption, and that's how the global system works.

And importantly for a place like China or India, producing these products to sell in our market creates new jobs, and they have a large surplus of population to do that.

I want to emphasize one point very briefly which you've already touched on, that in this new global economy, new entrants like China and India have each defined a niche for themselves, and you talk about that. In China, as you mentioned, they have become the global manufacture par excellence, and India the software and service key player.

Right. Well, India represents a new twist. China is following a well-tried track. Japan developed this model of export-led growth based on manufacturing. The Japanese formula was that you suppress domestic consumption, you compel saving, the savings is channeled into mass production -- strategic industries like automobiles and machinery -- and you export like crazy while managing the currency to keep your currency relatively weak against the dollar. The Koreans looked at that and they said, "We can do that, too." And then the Taiwanese and others followed. So, in a way, China is the last tiger following this well-worn track.

India, on the other hand, is a new twist. Nobody thought about doing this in services, but it turns out that the Indians have a lot of highly skilled people, a lot of them educated right here. With the advent of the Internet, suddenly all of these skills could easily be transported to the U.S. without having to be there physically. This represented a whole new step and has brought to the services area the same competitive phenomena and dynamics that we've been watching in manufacturing for the last thirty or forty years.

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