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 Economic Future of the U.S.

Throughout your career you've been involved in the foreign service, in business, government advisor, and now running a think tank in Washington. It would be interesting to draw out of you the geopolitical implications, as you see it, of these new developments. One way to look at this is to compare the threat posed by the Soviet Union, the threat posed by Japan in two earlier periods, and compare that to the threat, as you see it, if it is a threat, posed by China and India. What are the differences in those three?

Frankly, if we talk about threat, the major threat is the threat we pose to ourselves. Let me explain that. The Soviet Union presented a clear, classic, traditional, geopolitical/military security threat. It was also an ideological threat, but it was something that, again, was in a classic traditional vein of international dealing. We responded to that with alliances, with a military buildup, by becoming superior to the Soviets in technology, and by building an alliance system that became also our trading and our economic partners, and as they became wealthier the whole free world system clearly demonstrated superiority to the Soviet system.

The trade frictions that broke out with Japan in the 1970s and the 1980s were certainly not a threat in that sense. Japan never had any ambitions, either ideologically or militarily. They were more a challenge to American technological and economic leadership, and they spotlighted, they highlighted weaknesses in the American economic structure and in American economic policies which gave rise to vigorous debate domestically about how we might have to change our system and vigorous debate internationally about how our system was interacting with the Japanese and with other systems.

The current relationship and current economic structure that's evolving, particularly with the rapid growth of India and China and the advent of the Internet and so forth, is a continuation of the challenge that Japan began to pose in the 1980s. I don't think of it as a threat, because the word "threat" is too strong.

Again, as I said earlier, we want the success of China and India. We have to hope for their success. But the key thing here is this. We have tended as Americans to take our economic success for granted. It's kind of a birthright as being Americans. We have attributed it to our own virtuosity and to the virtues of our system, our entrepreneurial, flexible, free market system, and there's a lot of truth to that. But we sometimes forget that we've also been very fortunate. We have a huge continental country with enormous resources, we had the first mass market in history, with a combination of hard work and skills but also good fortune, and that our policies are not necessarily always the best policies.

For example, we have very low savings rate in the United States. We have a relatively low investment rate. Our secondary educational system is not as good as it ought to be and not as good as that in some other leading countries. There inevitably are areas in the economy where you need to have cooperation between various levels of government and business. Ours is not always the best. And so, what's being highlighted here is some of those weaknesses in the U.S. economy. The real question is not so much what the Chinese or the Indians do but it's how we respond to correct our own weaknesses.

The second thing that's happening is that for a long time there's been a very unnatural imbalance in the global system in the sense that the United States has 5 percent of the world's population but we account for 30 percent of the world's production. Well, that's not natural and it can't last, and it shouldn't last. So, China -- let's remember that for most of its history, for the most of the world's history, China was the biggest economy. Back in 1400, when Henry the Navigator began sending his captains to see if they could get around Africa, the area that we now call China and India accounted for 75 percent of global GDP. Europe was primitive and there was no United States. Well, we're going back towards more of a balance. China is growing rapidly. It's again going to become the biggest economy. Eventually, India will become the biggest economy.

Now, when I say biggest economy that doesn't mean richest. That doesn't mean that they're going to be the richest economy on a per capita basis. The United States will remain in that position. But in terms of overall size of GDP, China will become the biggest economy in the next thirty or forty years, and by the end of the century, India will be the biggest. The United States or the NAFTA area will be the number three or maybe number four, because the E.U., the European Union, will also be a very, very large economy. There's nothing wrong with that, but it means that certain adjustments have to be made. It means that in global institutions like the World Trade Organization of the International Monetary Fund, the weight of the United States is going to be relatively less. Our ability to dictate what happens in those organizations is going to be relatively less. We're going to have to negotiate, we're going to have to have allies and supporters in these organizations rather than just coming in and saying our policy is. That's a whole new world for Americans. We're not used to that, and we need to think about how do we handle this.

I like to think of it as a game of bridge. The United States still has the best hand. We have more aces and more trumps than anybody else. But as you know if you play bridge, you could have a great hand but if you misplay the hand, you can still lose. We need to think carefully about how we play the hand.

What are the aces and what should leadership do to play the right hand?

Well, a big ace is that we have a system of transparency and a rule of law. Our institutions are stable and predictable and open. This reduces the risk of doing business in the United States. It makes the United States a business-friendly, economic investment-friendly environment. Here in the Bay Area and the Silicon Valley area we think of risk taking and we think of Americans as being a risk taking people, and we are a risk taking people. But one reason that we take risks is because actually we reduce the risk. Our system of stable institutions reduces the risk of making these investments.

A second element of our system, very, very important (and this is part of being an open society) is that you can fail and try again. I remember being surprised once when I was in a venture capital meeting where an entrepreneur was presenting his business plan, hoping for funding, and the venture capital team was asking him what he had done in the past. He was a little hesitant because he'd had a couple of failures, but he was honest and he mentioned that he'd had a couple of business failures. And the venture capitalist reaction was, "Fantastic! Great! Oh, man, now you know what not to do." It was like you couldn't get the money unless you had failed. Well, try that in Japan, try that in Germany. In those countries you get one shot, if you get one shot, but only one. So, that means that in the U.S. you can fail and try again. That's very important and we need to maintain that.

The other thing is that we do have superior institutions of higher learning, we do have the best elite universities in the world. Our secondary education system has real problems but our elite universities are the best. We have a fantastic infrastructure built up over the years, the Internet being a good example of our investment over the years in infrastructure. We still have leadership in many important areas of technology. Investment in biotech in the U.S. is greater than in the rest of the world combined. So, we have a lot of strengths. The problem is that -- let's take the Internet. DARPA's budget is being reduced. We're not reinvesting in these things that have given us such strength. Our elite universities are the elite universities, but as I said earlier, they're dependent now in their graduate programs on having foreign students fill those classrooms because our secondary schools and our secondary education is not feeding sufficient students into those programs. So, as I say, we've got good cards but we ain't playing them very well right now.

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