That Used to Be Us: How America Fell Behind in the World It Invented and How We Can

by Thomas L. Friedman

  Mike Splinter, the CEO of Applied Materials, echoes this point. “Outsourcing was ten years ago, where you’d say, ‘Let’s send some software generation overseas,’” he explained. “This is not outsourcing we’re doing today. This is just where I am going to get something done. Now you say, ‘Hey, half my Ph.D.’s in my R-and-D department would rather live in Singapore, Taiwan, or China because that is their hometown and they can go there and still work for my company.’ This is the next evolution. I have more options, many more options, to do more things than I had five or ten years ago.”

  From St. Louis to New Delhi

  But so, too, do the little guys in this world! Every year now it takes less money to start a more ambitious company with greater reach and higher aspirations. Consider two companies: one founded by Americans in St. Louis that operates virtually to make a medical device, and the other in a garage in South Delhi that provides banking services to India’s poor. Their stories tell you about the vast new opportunities every American entrepreneur has in this new world—and also the powerful new competitors those Americans will have in this world.

  You’ve heard the saying “As goes General Motors, so goes America.” Fortunately, that is no longer true. We wish the new GM well, but thanks to the hyper-connecting of the world our economic future is no longer tied to its fate. The days of the single factory providing 10,000 jobs for one town are fast disappearing. What we need are start-ups of every variety, size, and shape. That is why our motto is “As EndoStim goes, so goes America.”

  EndoStim is a St. Louis, Missouri, company that is developing a proprietary implantable medical device to treat acid reflux. We have no idea whether the product will make it to the marketplace, but we were fascinated by how EndoStim was formed and does business. It is the epitome of the new kind of start-up that can propel the American economy: new immigrants using old money to innovate in a flatter world. EndoStim was inspired by Cuban and Indian immigrants to America and funded by St. Louis venture capitalists. Its device is being manufactured in Uruguay, with the help of Israeli engineers and with constant feedback from doctors in India, the United States, Europe, and Chile. Oh, and the CEO is a South African, who was educated at the Sorbonne but lives in Missouri and California. His head office is an iPad. While rescuing General Motors will save some old jobs, only by spawning thousands of EndoStims—and we do mean thousands—will we generate the good new jobs we need to keep raising the country’s standard of living.

  EndoStim started up by accident. Dr. Raul Perez, an obstetrician and gynecologist, immigrated to America from Cuba in the 1960s and came to St. Louis, where he met Dan Burkhardt, a local investor. “Raul had a real nose for medical investing and what could be profitable in a clinical environment,” Burkhardt recalled. “So we started investing together.” In 1997, they created a medical venture fund, Oakwood Medical Investors. Perez had a problem with acid reflux and went for treatment to the Mayo Clinic in Arizona, where he was helped by an Indian American doctor, Virender K. Sharma. During his follow-ups, Dr. Sharma said the four words every venture capitalist wants to hear: “I have an idea”—to use a pacemaker-like device to control the muscle that would choke off acid reflux. Burkhardt, Perez, and Sharma were joined by Bevil Hogg (a South African and a founder of the Trek Bicycle Corporation), who became the CEO, to raise the initial funds to develop the technology. Two Israelis, Shai Policker, a medical engineer, and Dr. Edy Soffer, a prominent gastroenterologist, joined a Seattle-based engineering team (led by an Australian) to help with the design. A company in Uruguay specializing in pacemakers built the prototype.

  This is the latest in venture investing: a lean start-up whose principals are rarely in the same place at the same time and which takes advantage of all the tools of the connected world—teleconferencing, e-mail, the Internet, Facebook, Twitter, and faxes—to make use of the best expertise and low-cost, high-quality manufacturing. We’ve described cloud computing. This is cloud manufacturing.

  The early clinical trials for EndoStim were conducted in India and Chile and are now being expanded into Europe. “What they have in common,” said Hogg, “is superb surgeons with high levels of skill, enthusiasm for the project, an interest in research, and reasonable costs.” What’s in it for America? As long as the venture money, core innovation, and key management comes from this country—a lot. If EndoStim works out, its tiny headquarters in St. Louis will grow much larger. The United States is where the best jobs—top management, marketing, design—and the main shareholders will be, said Hogg. Where innovation occurs and capital is raised still matters.

  To go from EndoStim to Eko India Financial Services—humming away in a garage in South Delhi—is to go from the most virtual of startups to the most conventional, but it is still striking how much they have in common. Eko’s founders, Abhishek Sinha and his brother Abhinav, started with the simplest observation: Low-wage Indian migrant workers flocking to Delhi from poorer regions had no place to put their savings and no secure way to send money home to their families. India has relatively few bank branches for a country its size, so many migrants stuffed money in their mattresses or sent cash home through traditional hawala, hand-to-hand networks.

  This gave the brothers an idea. In most Indian neighborhoods and villages, there’s a mom-and-pop kiosk that sells drinks, cigarettes, candy, and a few groceries. Why not turn each one into a virtual bank? they asked themselves. To do so, they created a software program whereby a migrant worker in Delhi, using his cell phone and proof of identity, could open a bank account registered on his cell-phone text system. Mom-and-pop shopkeepers would act as the friendly neighborhood banker and do the same, so no new bricks and mortar were needed. Then the worker living in his shantytown around Delhi could give his kiosk owner 1,000 rupees (about $20) and the shopkeeper would record it on his phone and text the receipt of the deposit to the system’s mother bank, the State Bank of India. The worker’s wife back in Bihar could then just go to the mom-and-pop kiosk in her village, also tied in to the system, and make a withdrawal using her cell phone. The shopkeeper there would give her the 1,000 rupees sent by her husband. Each shopkeeper would earn a small fee from each transaction, as would the State Bank of India. Besides money transfers, workers could also use the system to bank their savings.

  Eighteen months after opening for business in 2008, this virtual bank had 180,000 users doing more than 7,000 transactions a day through 500 “branches”—those mom-and-pop kiosks—in Delhi, and 200 more in Bihar and Jharkhand, from where many maids and other internal migrants come. Eko gets a modest commission from the Bank of India for each transaction and was already showing a small profit in 2010. Abhishek, who was inspired by a similar program in Brazil, said the kiosk owners “are already trusted people in each community” and routinely extend credit to their poor customers. “So we said, ‘Why not leverage them?’ We are the agents of the bank, and these retailers are our subagents.”

  Why not, indeed? The cheapest Indian-made cell phone today has enough computing power to become a digital “mattress” and digital bank for the poor. The whole system is being run out of a little house and garage with a dozen employees, a bunch of laptops, and cheap Internet connectivity. Not surprisingly, the Sinha team began building its own core software with some free, open source code downloaded from the cloud. Realizing that they did not have the capital themselves to invest in large-scale hardware, they run their whole business on cloud-computing servers hosted at a data center in Noida, a suburb of Delhi.

  The core idea of the business, says Abhishek, is “to close the last mile—the gap where government services end and the consumer begins.” There is a huge business in closing that last mile for millions of poor Indians, who, without it, can’t get proper health care, education, or insurance. Eko, Abhishek added, “leveraged existing telecom networks and existing distribution networks” and with relatively little capital invested is now able to serve more than 700,000 low-income customers across eight Indian states. By early 2
011, Eko was processing more than 20,000 transactions daily, worth $2.5 million.

  It was telling that the small Eko team included graduates from India’s most prestigious institutes of technology, who were working in America but decided to return to Delhi to join this start-up. Jishnu Kinwar, who earned a master’s in computer science from Lamar University in Texas and an MBA from the University of Alabama, worked for ten years in the United States before he and his wife left their plum jobs to head back to Delhi, where Kinwar now works in the Eko garage. The chief operating officer, Matteo Chiampo, is an Italian technologist who left a good job in Boston to work in India because, as he put it, this is “where the excitement is.”

  The same forces empowering EndoStim and Eko are also empowering one- and two-person firms that can go global from anywhere. We can see this in the multibillion-dollar come-out-of-nowhere “apps” industry. Apple released the iPhone in June 2007 and the iPad in April 2010. A 2011 report produced by Forrester Research estimated that the revenue generated through the sales of smartphone and tablet applications will reach $38 billion annually by 2015. Think about that: An industry that did not exist in 2006 will be generating $38 billion in revenues within a decade, with a slew of new online stores—Google’s Android Market, Microsoft’s Marketplace, BlackBerry’s App World, and Hewlett-Packard’s Palm App Catalog. Apple’s iPhone, iPod Touch, and iPad alone already had generated some 350,000 apps when we wrote this book in the winter of 2011, and the company had paid more than $2 billion to developers of programs sold at its App Store. The potential for individuals today to globalize their talents, hobbies, and passions into applications with a worldwide market is without precedent in history and unbounded in potential.

  That’s the good news. The bad news, or, as we prefer to call it, “the challenging news,” is this: The emerging apps industry combines software, art, math, creativity, writing, gaming, education, composing, and marketing—everything that goes into different applications. In other words, it requires combining the skills of MIT, MTV, and Madison Avenue. These skills, in turn, require a lot more training and creativity than just writing software code.

  Within a few years, virtually everyone on the planet will have the tools and network connections to participate in the hyper-connected flat world. As that happens, all of these instruments of innovation and connectivity will become what electricity is for most of the world. “You will just presume they are there—they will actually just disappear into the background,” argues Joel Cawley, the vice president for strategy at IBM. And as that happens, two things will differentiate companies, countries, and individuals from one another, Cawley says. One is analytics. Once everyone is connected, your prosperity will depend on how well you or your company or country can “analyze and apply” all the data pouring through these networks to optimize your ability to provide better health care, education, e-commerce, innovation, customer service, and government services to everyone on the network. After all, the tools your company uses to perform all of this analysis will be sitting there in the cloud for every other company to use as well.

  Also, once all the technology is a given, Cawley predicts, “all the old-fashioned stuff will start to matter even more.” Then “the only advantage you can have is in the human stuff.” How good is your school system? How well have you trained your workers? What kind of creativity, inspiration, and imagination do they bring to this platform? How good is your rule of law and your national governance, and how smart are your regulatory, patent, and tax policies? “These,” said Cawley, “will be the real differentiators. The technology everyone will have.”

  Dov Seidman, the CEO of LRN, a company that helps other companies create sustainable business cultures, and the author of How: Why How We Do Anything Means Everything, summarizes the change from Flat World 1.0 to 2.0 this way: “We have gone from connected to interconnected to interdependent. All the links are getting so much tighter. So many more people can now connect, collaborate, and partner in much deeper ways. When the world is tied together this intimately, everyone’s values and behavior matter more than ever, because they impact so many more people than ever.”

  Creators and Servers

  And that brings us back to America.

  All these dramatic changes in the workplace, coming in rapid-fire succession, have left a lot of people feeling up in the air and asking, “Where do I fit in? How do I stay relevant in my job? And what kind of skills do I need to learn at school?” The short answer is that the workplace is undergoing a fundamental restructuring that every educator, parent, and worker needs to understand.

  The pressure on workers starts with the fact that the combination of the Great Recession and the hyper-flattening and hyper-connecting of the global marketplace is spurring every company to become more productive—to produce more goods and services for less money and with fewer workers. This explains why, despite the recession, U.S. productivity has gone up, corporate profits have gone up, and unemployment has gone up all at the same time. Companies are learning to do more with less, so more and more old jobs are never coming back and more and more new jobs are being done by machines and microchips.

  “There is a big tectonic change happening, driven by technology,” said Raghuram Rajan, a professor of finance at the University of Chicago’s Booth School of Business and the author of Fault Lines. Throughout the post–World War II period, until 1991, “it typically took on average eight months for jobs that were lost at the trough of a recession to come back to the old peak,” said Rajan. But with the introduction of all these new technologies and networks over the last two decades, that is no longer the case. With each recession and with each new hyper-flattening and hyper-connecting of the global marketplace, more and more jobs are being automated, digitized, or outsourced.

  “Look at the last three recessions,” said Rajan. “After 1991, it took twenty-three months for the jobs to come back to prerecession levels. After 2001, it took thirty-eight months. And after 2007, it is expected to take up to five years or more.” A key reason is that in the old cyclical recovery people got laid off and were rather quickly hired back into the workforce once demand rose again. The nature of the work did not change that radically from one recession to the next, so workers did not have to adjust that much. Today, said Rajan, under the pressure of globalization and the IT revolution, industries are becoming far more focused on productivity. And “once they have started letting people go, they have realized why not go whole hog and rethink entirely how we do things and where we do things?”

  Byron Auguste, a managing director at the McKinsey & Company consulting firm, who has worked on this subject, said a 2011 McKinsey study indicates that historically in a downturn, when there is a drop in demand, companies restructure. In past recessions, they would make up for lost business through a combination of laying off workers and accepting lower profits or even losses. So those companies would retain 60 to 70 percent of the workers in order to preserve their core base of employee expertise, while letting 30 to 40 percent go. Then, when the economy started to recover and demand rose again, they would hire back the workers that were laid off. With each recession over the last two decades, though, this pattern has been less and less pronounced. In the recession of 2008, said Auguste, citing McKinsey’s research, companies made up for roughly 98 percent of their lost revenue by laying off workers and then replacing their work with more automation and outsourcing. “When demand comes back,” said Auguste, “firms won’t hire back as many workers [as in the past], because they have now fundamentally restructured their operations to do their business with fewer people.”

  Did employers do this because they have gotten meaner over the last twenty years? No. They did it because the hyper-connecting of the world both enabled them to do it and required them to do it before their competitors did.

  Over the past decade this process eliminated a lot of American jobs, but the booming economy both disguised it and cushioned us from its effects, argues Rajan. How so? “B
y creating a huge housing bubble and a huge credit bubble to artificially sustain people’s standards of living,” he explained. “In effect, we created an industry—housing construction—to absorb all the unskilled labor” that would otherwise struggle to find jobs in a super-competitive marketplace. Once the housing and credit bubbles blew up, though, many workers found themselves literally up in the air. The bursting of the housing bubble wiped out a whole swath of low-skilled blue-collar jobs (many of the people who were building the houses) just when the intensification of globalization wiped out a whole swath of low- and mid-level white-collar jobs (many of the people who were buying the houses).

  There is no question that stimulating the economy with short-term measures meant to increase demand (tax cuts, low interest rates, and increased government spending) would help revive some of these jobs. We do have a serious demand problem. But we also have a new structural challenge in the labor market that can only be addressed by more education and more innovation.

  Here is a simple example of what is happening across the economy. For twenty years, Colorado ski resorts sold lift tickets that you clipped to your jacket for a lift operator to punch each morning when you took your first ride to the top of the mountain. These were relatively unskilled jobs that attracted mostly young people from around the world who came to America on temporary visas for the winter season. Their ID badges would often say what country they were from, and it was always fun for skiers to engage them: “Hey, you’re from Argentina. We were just there last year.” Then, with automation and digitization, the lift tickets were made with bar codes and the hole-punch tools were retired and replaced by handheld scanners, but the resorts still needed crews of unskilled workers to scan the tag on each skier’s jacket. In 2010, the Snowmass resort adopted a different system. Your lift ticket is now a credit-card-size piece of plastic with a microchip embedded in it. You slip the card into a jacket pocket. At the lift-line entrance, instead of stopping to get your ticket punched, you walk through a turnstile equipped with a sensor that automatically reads your card and, after picking up the signal, lets you pass through with a green light—an E-ZPass for skiers. There is no one from Argentina or Colorado checking your ticket with a welcoming smile. Instead of four lift employees, one at each gate, there is just one person, standing to the side, operating the whole system from a computer screen. One more highly skilled and no doubt better-paid employee and a computer have replaced four lesserskilled, lesser-paid employees.