In essence, globalization has raised the cost of bad government. Mismanagement, pure and simple, has halved the per-capita income in Nigeria—a country where energy is plentiful but the local electricity utility, NEPA, is known as Never Expect Power Again. In 1998, Forbes magazine tried to calculate “the cost of Castro.” During his reign, the average GDP per capita in Cuba had fallen in real terms by about $500 to $1,300. If the generalissimo had merely managed to keep his country’s per-capita income at the same percentage of Florida’s as it was in 1959, it would have been $4,169; if he had made the same sort of progress as a moderately well run country like Mexico, it would have been closer to $10,000. The citizens of Cuba could pay Castro five billion dollars to go away—and make a profit fairly quickly.[5]
This suggests, however, that open markets generally strengthen rather than weaken the case for a fairly elaborate state, provided that it is reasonably efficient and honest. Globalization’s benefits are much harder to deliver when the state has all but collapsed (as in Liberia or Somalia) or degenerated into a branch of organized crime (as in pre-Putin Russia). Globalization has tended to wreak its worst havoc where state structures are weak. It is no accident that the cleanest and most efficient parts of Asia—such as Singapore, Taiwan, and Hong Kong—have coped best with open markets. As Nicholas Van Praag of the World Bank puts it: “Increasingly, we see that states need markets, but markets also need states. It’s not enough to say that markets can do it all. You need security, you need an education system that works.”[6] Remember Hobbes’s dictum that man needs Leviathan in order to save him from anarchy.
By the same token, many parts of the welfare state are not defensible only on moral grounds; they may well turn out to be competitive advantages, too. When thinking about where to build factories, multinational companies usually look beyond wages to things like skills, environment, and culture. By reducing crime, New York City has probably done more to tempt back multinationals than any number of tax breaks would have. European countries’ anxieties about bloated government tend to obscure the fact that universal p. 294 health care and good public education may yet stand them in good stead. Sweden has one of the most global economies in the world (far more reliant on trade than the United States), but it also has one of the largest welfare states.
The key, then, is not necessarily to make the state smaller but to make it more efficient. This is easier said than done, of course. The public sector has traditionally been immune to the productivity improvements that have swept through private business. A popular idea for closing the productivity gap is to force the public sector to learn management methods from the private sector—in effect, to send bureaucrats to business school. But the results of this have often been disappointing, largely because bureaucrats have usually just grafted their new skills onto their existing structures, rather than ask whether those structures should exist in the first place. It does not matter how many times you reengineer your department of agriculture if you should not have one.
The most important lesson to be learned from management theory is shamefully simple: Stop doing many things badly, and start doing a few things well. The state needs to focus its energies on one thing above all: the creation of human capital. Investing in human capital is the best way not only of making nations competitive but of helping the people who are currently not benefiting from globalization.
Regulation or Research?
Most third-way politicians maintain that they are trying to make their governments more selective. Tony Blair has declared that “the presumption should be that economic activity is best left to the private sector.” Bill Clinton repeatedly called for higher educational standards to prepare workers for global competition. Even European socialists can be heard echoing Thomas Paine’s warning that “the greedy hand of government . . . watches prosperity as its prey, and permits none to escape without a tribute.”
But the hand of government remains greedy nonetheless. One shudders to imagine what future commentators will make of the team of French civil servants that is trying to track down people who work too hard and thus break its thirty-five-hour workweek. Things have reached such a state in France that entrepreneurs have been fleeing to perfidious Albion, but Britain is hardly a model. The London School of Economics calculated that regulation under the last Tory government was costing taxpayers up to 1.5 billion pounds a year—not counting the much greater compliance costs for those p. 295 being regulated—and things have got much worse with Blair’s proliferating inspectorates.[7]
These national regulations, which the European Union has usually merely duplicated, form a set of nontariff barriers to foreign competition and also stifle entrepreneurs and job growth. Martin Wolf, a columnist for the Financial Times, likes to remind people that, over the past thirty years, real labor costs have risen by 70 percent in Europe, and employment has grown by around a tenth. By contrast, American labor costs have risen by about a quarter and jobs have grown by 70 percent. Thanks to rigidities in its labor market, the level of unemployment has risen in each successive business cycle in Europe. The ongoing pressure of having to raise ever more taxes to support pensioners and the unemployed will make Europe still less competitive and entrepreneurial. In America, nineteen of the twenty-five most valuable companies did not exist thirty years ago. In Europe, it is hard to think of one newcomer. In Sweden, all the large companies apart from TetraPak seem to be close to their hundredth birthdays.
America’s approach to regulation shines only when set beside Europe’s. The red tape involved in hiring a nanny legally in either California or New York has driven almost everyone who does not want to run for public office to the gray market. (The gray economy now amounts to around 15 percent of the GDP of the developed world.) The American tax code is an abomination, not just at the federal level (Citigroup’s 1998 return was thirty thousand pages long) but also at a local level. For instance, under the rules of New York State’s deranged sales-tax system, M&M’s are taxable, but mini-M&M’s are not. A single Twix candy bar is taxable; a box full of them is not. A hot knish is taxable, a frozen knish is not. Buy regular cotton balls, and you are taxed; buy sterile ones, and you are not. The result is not just unfair but, like all regulation, costly. Retailers waste ages trying to find which items to tax and which not.[8]
As in Europe, such taxation does not even achieve its aim of disciplining companies. By using the same complicated rules, more than half America’s 2.3 million corporations paid no tax at all between 1989 and 1995. Four out of every ten firms with more than $250 million in assets or $50 million in sales paid less than $100,000. Transfer-pricing abuses alone cost the government $2.8 billion a year; others put the figure ten times higher.[9] Indeed, you can argue that a good measure of a global company’s success is how easily it (legally) avoids the thicket of taxes. News Corporation’s tax rate rarely reaches 20 percent of its pretax profits.
The time and money that governments waste on regulation only seems p. 296 more harmful when set alongside the dwindling amounts going into basic research, a category that is declining in government budgets just about everywhere. Most people accept that basic science is one of those areas in which the market can fail. Companies concentrate on the development part of R and D, and they typically ignore wider benefits to society. Lester Thurow points out that American companies have typically derived a return of about 24 percent on their R and D spending. But the total “social” return, adding in all the benefits for society as a whole, averages about 66 percent.[10] That, argues Thurow, indicates that this is one area where public spending really can deliver returns. It is possible to debate Thurow’s figures (a lot depends on how the money is spent), but the fact is that most governments only claim to support basic research.
In one particular area—drug research—this failure is more than just inefficient. At the moment, there is a grotesque mismatch between the diseases that kill people and the diseases that drug companies are trying to cure. Billions are being spent on tryi
ng to find pills to fight rich-country ailments, such as heart disease, baldness, and impotence, while a mere eighty million dollars a year is spent on research into malaria, which kills 2.5 million people annually. No big firm, argues Jeffrey Sachs of Harvard, is prepared to invest in finding a vaccine for malaria (even though the genome of the malaria parasite has been mapped) because they do not think they will get a return: The poor cannot pay. Sachs suggests that rich-world governments should therefore create a market, perhaps by guaranteeing to pay ten dollars per dose for a vaccine for the twenty-five million children who are born each year in Africa; no money would be disbursed until a vaccine was produced.[11]
This also ties into a wider argument about the rich world’s obligation to the very poor. We have already pointed out that rich countries give shamefully little to poor ones and also criminally discriminate against the industries—notably agriculture—that offer the best chance of the poor world earning its keep. It is common in the soppier books on globalization to include several chapters on the need to forgive the debts of poor countries, currently $270 billion (about three quarters the size of one year’s worth of agriculture subsidies in OECD countries). Supporters of debt relief from Pope John Paul II to Bono are guilty of all sorts of woolly thinking, whether blaming international banks rather than incompetent governments or trying to construct an economic case when there is no clear one. But the moral case for debt forgiveness is already unanswerable: The amount is relatively small, there is no point in saddling the very poor with yet another handicap just to p. 297 punish their rulers, and it will remove a festering sore between the South and the North that might cost us all much more.
Cynics might argue that relieving debts or providing medicine for African children has little to do with sorting out Citigroup’s tax return. And we can already hear the screams of agrocrats at our daring to compare third-world debt with agricultural subsidies. But this is to miss the key point about resources. At the moment, governments devote too much effort to holding back the entrepreneurial forces that represent the good side of globalization and not enough concentrating on the areas where the public sector can really help. Until politicians reverse this, all the talk about reinventing government is nothing more than hot air.
Brains in the Balance
There are very few things New Yorkers can agree upon. One exception is that their city’s huge public school system has been an embarrassment. Its history has been shaped by repetitive political rows among the schools chancellor, the mayor, and the once-autonomous Board of Education, all of whom have assumed that they run the system. But even when they are working together, the system, which serves more than one million schoolchildren, has often been close to anarchy. At the ground level, there are thirty-two school districts, each of which has its own elected board—a hint of direct accountability sadly limited by the fact that turnout for its elections rarely reaches even 10 percent of the potential voters. Until recently, school principals had tenure after five years in the job, making it difficult to remove even the worst ones. Thanks to the bizarre concept of social promotion, now belatedly being phased out, several hundred thousand students who flunk their studies each year have been automatically promoted to the next grade. Oh, and the money to keep this system going comes from all three levels of government: federal, state, and local.
According to the mayor’s office, only about half of the ten billion dollars spent on education in New York actually reaches the classroom; the rest disappears into the bureaucracy. You might imagine that fixing such a mess would be at the top of the political agenda. Instead, for at least a generation, New York politicians have regarded education as a hornets’ nest. Democrats have been too frightened of the teachers’ unions to contemplate reform. The previous mayor, Rudy Giuliani, did not really get around to the subject until 1999, when he suddenly announced his enthusiasm for a series of reforms, including shifting responsibility for the schools to himself and introducing a p. 298 pilot voucher scheme. This might have been expected to win some support. In Chicago, for example, the schools have gotten visibly better since they were put under the firm control of the mayor. Voucher schemes in places such as Milwaukee have been reasonably successful. But Giuliani failed on both counts. Eventually, in 2002, Mike Bloomberg stitched up a deal with the teachers that gave him control over the infamous “Board of Ed,” but even this was technically only a temporary measure.
New York is perhaps an extreme example of an educational establishment with its head in the sand. But similar stories can be told just about everywhere. The reasons vary from country to country, but there is usually one overarching one: Education is still a surprisingly parochial affair, in which politicians routinely refuse to learn from each other. It is as if they have gotten as far as admitting that the education race is now more important than the arms race without going on to ask the next question: Who is winning? And why?
For the most part, the educational establishment treats the idea of comparing schools across borders as only slightly more ridiculous than comparing them within them. In the United States, national standards remain a mirage. As any recruiter can tell you, a mathematics qualification earned in Michigan can mean something completely different from one earned in California. In Britain, teachers are still complaining about comparing Solihull’s results with Southampton’s; the idea of comparing them with Seoul’s seems outlandish. This is a pity, because when you begin to make these comparisons some interesting results emerge.
The world’s three great educational systems—those of Europe, the United States, and Asia—all have conspicuous strengths and weaknesses. The United States boasts a system of higher education that is second to none. The elites of developing countries used to dream of sending their children to Oxford and Cambridge; now they choose Harvard and Stanford. Lower down in the educational system, however, the picture is a lot darker. The United States spends more per pupil than most other advanced countries do. But in a March 1997 international test of thirteen-year-olds in forty-one countries—significantly enough, one of the few global studies ever done—American children were twenty-eighth in mathematics, well below their peers in much poorer countries such as Hungary and South Korea.[12] America’s overall high-school dropout rate is at least 14 percent, compared with 9 percent in Germany and 6 percent in Japan, and the figures are much worse in poor neighborhoods. In many parts of New York, literacy and numeracy rates resemble those of a third-world country.
The reason has less to do with money than with structure. The Amerip. 299can school year is 180 days—sixty days fewer than in some other countries. Japanese children do five times as much homework a week as their American counterparts. Even when they are working, American children are seldom stretched. The lack of a core curriculum encourages a shopping-mall approach to education: Pile up the soft options and leave the hard stuff on the shelves. Ironically, the society most devoted to the ideal of equality of opportunity now has an educational system that is more corrupted by class than its rivals in Europe and Asia. At Beverly Hills High School—the school that gave the world Monica Lewinsky—the most urgent question is how to provide enough parking spaces for pupils’ cars; in South Central, a few miles away, the schools are factories of failure, where more than half the pupils drop out before graduation. Giving the poor such a dismal start in life was a risky enough policy in the days when there were plenty of blue-collar jobs to go around. But now that these jobs are being exported or mechanized out of existence, it guarantees the creation of a permanent and combustible underclass.
The European system is in many ways the mirror of America’s. Europe’s state high schools are generally much more rigorous; in particular, the German tripartite system remains the envy of the world, with grammar schools that stretch the academic elite and vocational schools that supply German industry with technically trained workers. Yet the Europeans let their pupils down after high school.
The French university system is an overcrowded shambles. The German app
renticeship system—which depends crucially on the participation of the trade unions—is fine for churning out machinists but hopeless when it comes to computer programmers. The German university system, which was the envy of nineteenth-century Europe, is degenerating into an expensive joke, with about sixty students for every professor, compared with fifteen in the United States. Undergraduates can dawdle for a decade: The average age at graduation is twenty-eight, justifying former chancellor Helmut Kohl’s famous complaint that Germany has the oldest graduates and the youngest retirees in the world.
Perhaps the most impressive continent in terms of education is Asia. To be sure, it lacks America’s wonderful universities and Germany’s magnificent grammar schools. It also lacks the West’s enthusiasm for innovation. But Asians tend to possess a relentless will to succeed. Classes across the continent may contain forty or more children, and schools may be crumbling slums that lack air-conditioning, but many Asians make up in enthusiasm what they lack in resources. In Japan, neatly uniformed children stride to school at 8:00 A.M. on Sunday morning. In South Korea, every other side p. 300 street houses a cramming school. In Hong Kong, a newspaper contains a letter from a pediatrician blaming an epidemic of spinal curvature on the fact that children carry such huge piles of books home with them.
Parents make big sacrifices to help their children succeed. Families pack their children off to cramming schools. (The best of these are so popular that there is a secondary industry in cramming people to get into cramming schools.) Mothers help their children with their homework. The latest fashion in Singapore is computer clubs for toddlers. All this effort has paid off in spades (not to mention grades). In the 1997 international test, the top four slots went to Asian sites: Singapore came first, followed by South Korea, Japan, and Hong Kong. All this investment in human capital should be enough to continue to power economic growth in Asia as the Asian crisis recedes into memory. It will also pose severe problems for both Europe and the United States.
A Future Perfect: The Challenge and Promise of Globalization Page 42
