A Future Perfect: The Challenge and Promise of Globalization

by John Micklethwait

  There are three reasons for this outbreak of apparent radicalism. The first is that the welfare state was designed for a world that no longer exists. When Bismarck invented the state pension, with a retirement age of sixty-five, the average life expectancy was forty-five. Now, in the OECD, it is seventy-six and rising, and yet the labor-force participation of men between sixty and sixty-four has declined from over 80 percent in most rich countries in 1960 to 50 percent in America and below 35 percent in Germany, Italy, and France. When most welfare states were created, a large proportion of the population was poor and uneducated. Now most people are relatively affluent, and most are educated enough to look after themselves and can make life’s major decisions for themselves rather than have them made for them by their rulers. The welfare state was designed for a world in which women stayed at home, families remained together, and unemployment carried a huge social stigma; in other words, a world we have lost.

  The second reason behind the shift is that most welfare states have failed to eliminate many of the problems they were established to tackle. R. H. Tawney’s prediction that under a welfare state it “would cease to be the rule for the rich to be rewarded, not only with riches, but with a preferential share of health and life, and for the penalty of the poor to be not merely poverty, but ignorance, sickness and premature death” has not been borne out. There are enormous inequalities in both health and educational performance between the rich and the poor. Indeed, it is arguable that the welfare state is actually worsening some of the problems that it was supposed to solve. In countries such as Germany, high social-security contributions are a severe tax on jobs.

  The third force behind the shift comes from the fear national governments have of being swamped by the swelling tide of inherited obligations. William Beveridge, the architect of Britain’s postwar welfare state, estimated no real increase over time in the cost of health and rehabilitation services because a healthier population would make fewer demands on services. In fact, spending rose astronomically and is continuing to rise. Populations in rich p. 89 countries are aging rapidly as the baby-boomer generation heads toward retirement and the birthrate declines. While today’s ratio of working taxpayers to nonworking pensioners in the developed world is 3:1, in thirty years, without reform, the ratio could fall to 1.5:1 or even lower, costing an extra 9 to 16 percent of GDP to finance benefits for the elderly.[8] To provide established entitlements, governments will have to make a grim choice: They will either have to raise tax rates dramatically—undermining economic competitiveness and threatening to unleash a generational war as the young refuse to impoverish themselves in order to indulge the aging children of Woodstock—or they will have to enlist the help of the private sector.

  By turning to the private sector, as most governments are now doing, they usually end up “denationalizing” the public sector in more than one sense. No sensible government wants to enlist the support of an incompetent private-sector operation to run the welfare state. Fairly soon, however, they discover that the most competent private-sector organizations are usually global ones. For instance, the British government originally turned over nursing homes to local family operators; now that industry, not unlike the funeral business that it supplies, is clustering into bigger, professional multinational companies. When governments outsource the administration of unemployment pay, it is now nearly always to big global firms such as Accenture and Electronic Data Services. It is no accident that Chile, which has led the way in introducing private retirement accounts, is also one of the places where foreign fund managers are most welcome. The headlong assault on Europe’s financial-services industry by large American firms is inspired by the idea that sooner or later most Europeans will rely on their state pension less and their own portable pension far more.

  Letting foreigners run boring computer systems that pay your unemployed is one thing. But globalization is now touching a much more sensitive part of the public sector: education. For many nationalists, schools and classrooms are the smithies where national identity is forged. Perhaps unsurprisingly, America—the country least wedded to the idea that education is part of the welfare state—has produced companies that are beginning to sell education around the world.

  Reading, Writing, and Enrichment

  Driving to the Sylvan Testing Center in Johannesburg provides a lesson in the perils of the new South Africa. The journey takes you past carefully tended rugby fields and elaborately fortified houses. An “all-hit” radio stap. 90tion advertises itself with the slogan “more police”; a poster demands “no mercy for criminals.” The only obvious reference to education is a newspaper billboard on a lamppost: PRINCIPAL SHOT IN HIJACK. It comes as something of a relief that at the testing center, you have to report to a uniformed guard with a truncheon and a military bearing.

  Sylvan Learning Systems is a Baltimore-based company founded by two university dropouts. Its most profitable business is the administration of computer-based versions of the standardized examinations that regulate admission to everything from universities to professional organizations. It also provides coaching for children with schoolwork problems and for those of any age who just want to steal a march on their contemporaries. In the United States, it is hard to enter the middle class without paying a toll to Sylvan; if the company gets its way, the same will become true in much of the rest of the world.

  In Africa, Sylvan has decided to concentrate on examining people rather than teaching them. Some fifteen thousand students there take Sylvan-administered exams, a number that is growing fast and would be much higher but for the strength of the dollar. The exams differ widely in difficulty—some are designed to test basic command of English, others to divine a grasp of sophisticated medical knowledge—but they are all multiple-choice. Sylvan does not create the examinations itself; its contribution to the proceedings—apart from the tight security—is a computerized system that makes administration and marking easy. The computer adjusts automatically to the candidates’ abilities so that strong candidates are given the hard questions that carry the highest marks.

  Once you get past the guard, the Johannesburg test center could be literally anywhere in the world. Sylvan centers are all built to a formula that is a far cry from the echoing examination halls that people of a certain age still remember from their childhoods. All the centers are divided into regulation-sized cubicles, each containing a Compaq computer. A regulation-sized window allows a supervisor to look in, as do regulation-sized mirrors and standard-issue video and audio equipment.

  The distinguishing quality of Sylvan, argues the test center’s boss, Lyn Van Haght, is that it always combines a global product with local roots. (A tall, blond Californian, Van Haght herself took this policy a little literally: She met her future husband three days after first arriving in South Africa.) Some African universities now require candidates to take Sylvan-administered tests for English proficiency, as does the Nigerian civil service. But Van Haght points out that most of Sylvan’s customers are trying to get p. 91 into an American university or a South African one that is running a joint course with an American one.

  American universities enjoy huge status in South Africa, to the extent that the newspapers are full of advertisements for fly-by-night American institutions (the University of Harvard in Beverly Hills and the like) offering “internationally certified degrees.” (Oxford and Cambridge are still highly regarded in South Africa, but otherwise British universities seem to have lost their former luster, despite the fact that many leading figures in the African National Congress were educated at the University of Sussex.) The most popular American degree by far is the M.B.A., which South Africans have long seen as a ticket to the top in their best companies. They thus naturally assume that the world’s most powerful business culture also provides the best business education. At the other end of the popularity scale are niche subjects that are simply not available on the African continent, such as equine dentistry.

  In South Africa about half
the university candidates are black and half are white; in the rest of Africa, most are black. Many of the white candidates disappear to the United States, never to return. But for the most part, the Sylvan Testing Center is being used to handle African issues rather than to provide an escape route for a disaffected minority. African governments and big South African companies (who are desperately trying to increase the number of blacks in senior management) both use the tests to select highfliers, many of whom are then sent on to American business schools. Similarly promising black athletes—including devotees of that very un-American game of rugby—regard an American sports scholarship as their best way into the middle class and thus pay particular attention to Sylvan tests.

  Schoolmasters of the Universe

  Sylvan is only one in a crowd of mainly American companies that are determined to turn education into a global business. Michael Milken, the former junk-bond king, is quietly putting together one of the world’s biggest education companies, Knowledge Universe. Kohlberg Kravis Roberts, a firm that strikes fear into managers the world over, also owns an education company, KinderCare. Various billionaires, including Warren Buffett and Paul Allen, have invested heavily in education, as have companies from a wide range of more conventional industries, including computers (IBM, Sun Microsystems), software (Microsoft, Oracle), telecommunications (MCI), entertainment (Sony), and publishing (The Washington Post).

  p. 92 There are at least two reasons why so many American companies are particularly attracted to this market. The first is the sheer size of the domestic market. The U.S. Department of Education estimates that the country spends $635 billion a year on education—more than on Social Security or defense—and predicts that spending per pupil will grow by 40 percent over the next decade. Private companies currently have no more than a seventh of the market, and that mostly in the training sector.[9]

  The second impetus comes from the fact that the American public sector has made such a hash of keeping pace with either public expectations or international standards. The United States spends a higher proportion of its GDP on education than most other countries do, but it achieves results that are nothing more than mediocre. More than 40 percent of American fourth graders cannot pass a basic reading test, and forty-two million adults are functionally illiterate. Part of the reason for this dismal performance is that as much as half the $6,500 spent each year on each child is eaten up by “noninstructional services.” While the public sector fumbles this basic job, demand for extra services is rising. As the income gap between high-school and university graduates grows, so does parents’ determination to get their children into college. And the latest research on intellectual development, which stresses the overwhelming importance of the first three years of life, is leading to a craze for “smart” kindergartens.

  Most of the private-sector activity in education so far has been focused on providing supplementary services to established schools. Some school boards that have contracted out peripheral services have been so impressed with the results that they are beginning to apply the principle to teaching itself. So companies such as Sylvan are venturing gingerly into what could be the biggest market of all: running public schools. The barrier between the public and private sectors is eroding. The country’s growing number of charter schools are often free to experiment with private management without losing their public funding. There is also a growing number of “educational management organizations”—modeled on health-maintenance organizations—that promise to reduce the administrative costs of running public schools while producing better results.

  In some ways, the arrival of the education companies signals a “back to the future” approach. One of their hallmarks is a Victorian enthusiasm for testing that Dickens’s Mr. Gradgrind might have appreciated. These companies have to prove that they are delivering results not just for their pupils but also for their shareholders. Sylvan offers free tuition in its classes if its students fail to meet specified targets and offers both students and teachers genp. 93erous prizes if they can improve their performances. Another hallmark is a focus on individual customers and on personal tuition in particular. The Apollo Group, a private university that specializes in educating working adults, has tried to update the function of the family governess: It goes to meet its pupils and locates its classrooms near major freeways, the better to serve busy commuters. The Edison Project insists that the homes of all its pupils above the third grade have computer links to the school.

  All these firms believe that they are selling a global product. Sylvan, which bought Europe’s largest training company in 1994, now has learning and testing centers in 105 countries. About a quarter of its revenues comes from outside the United States. Knowledge Universe is built on Milken’s idea that the global “intellectual capital” market is as ripe for revolution as the financial capital market was in the 1980s; further, he wants to create a gigantic education company that can provide its customers with cradle-to-grave service around the world. By 1999, he and his partners—his brother Lowell and Larry Ellison, boss of Oracle—had put together an education empire worth an estimated four billion dollars, stretching from an American educational-toy company to Britain’s largest training company.

  The Half Monty

  Even more than with sex and death, this is an uneven process. Education is a redoubt not only of public-sector trade unions but also of the professional middle classes. Witness such job-creating notions as that British teachers have to go back to school to be able to teach in America and vice versa. Unscrupulous politicians have accused potential reformers of local education systems—who, for instance, introduce experimental voucher schemes so parents can choose their own schools—of plotting to break the social contract, apparently motivated by a desire to preserve existing jobs.

  Such cronyism aside, there are also good reasons to be careful about introducing the profit motive into the education system. What happens if firms such as Sylvan and Knowledge Universe “cherrypick” the better students and the safer schools? When the privatization—and hence globalization—of the welfare state happens, there are usually important roles for government, as a regulator, to make sure that private companies do not abuse their positions, and as a provider of last resort, to make sure that there is still a safety net for people who do not have the resources to look after themselves.

  The global classroom, like the global pension and the global hospital, is even farther off than the global graveyard and the global peep show, but that p. 94 is the way that globalization works. Some industries are racing toward it; in others, the movement is glacial; and in many, there is an undertow, with parts of an industry localizing while the main market globalizes. There are plenty of other difficult businesses being affected. One is the law, where huge cross-border mergers between law firms became common only in the late 1990s. Another is gambling, where an industry that has always relied on its relationship with local regulators, such as the Nevada Gaming Commission or the Hong Kong Jockey Club, now finds itself in competition with Internet bookmakers and virtual casinos operating out of places such as Antigua.

  Indeed, the overall trend, even with the welfare state, is fairly clear. Who would have imagined that a British Labor government would sell off nearly all its unemployment offices to a consortium led by Goldman Sachs, with the result that some of the richest people on Wall Street now own the places where Full Monty types go to pick up their weekly benefits? And who would have believed that an American conglomerate in Johannesburg would help create the black middle class that the continent needs so desperately? Lyn Van Haght and Steven Hirsch might be somewhat unusual soul mates, but they are part of the same uneven but relentless process.

  Part Three – One World: The Business of Globalization

  6 – The Five Myths of Globalization

  p. 97 DRIVE INTO DOWNTOWN Los Angeles from the coast and you are confronted by a wall of shimmering skyscrapers, monuments to the city’s dream of itself as the Manhattan of the Pacific Rim.
Within this citadel of quartz, built mostly with Japanese money, bankers, oil executives, and lawyers toil for multinational companies. Drive a little further, however, and the first world dissolves. The buildings become dingy and dilapidated; whole blocks have been boarded up. A stretch of Fifth Street now hosts denizens of the lowest rungs of the underclass—amputees delivering drug-crazed lectures to the empty sidewalk, beggars begging from each other.

  H. G. Wells once predicted that mankind would mutate into two species, the effete Eloi and the subterranean Morlocks. Downtown Los Angeles would seem to be clinching evidence that the harsh economics of globalization have brought his vision into reality. Spend a little longer on Fifth Street, however, and you begin to realize that the situation is rather more complicated. The local warehouses, crumbling with disuse just a few years ago, are being renovated, the dingy tenements turned into makeshift shops and offices. The city is even having trouble regulating parking in an area that was once synonymous with desolation. Early in the morning, the local streets are jam-packed with trucks; on the weekend, they fill up with shoppers looking for bargains.

  For this, Los Angeles has to thank a cluster of roughly four hundred toy companies and wholesalers that collectively employs four thousand people and sells more than one billion dollars’ worth of toys, half of that outside the United States. The two or three biggest companies each employ almost five p. 98 hundred people, but most of the firms are one-warehouse operations run by ethnic Chinese, Mexicans, and Koreans. Many of the shops have mirrors hanging outside to deter evil spirits from entering; inside, next to the piles of toys, stand shrines to ancestral gods.