A Future Perfect: The Challenge and Promise of Globalization

by John Micklethwait

  This is interesting because it raises the hope that the new rich, who are comparatively young, are only just getting around to giving away their money. Gates argues that anybody can give away money; the point is to give it away intelligently. At present, philanthropy occupies only around five hours of his time each week. All the same, he ranks medicine as his second biggest interest after information technology, and his relentlessly curious and competitive brain is plainly beginning to whir.

  The hope remains that Gates’s involvement with vaccines may have the same galvanizing effect on his peers as Rockefeller’s foundation of the University of Chicago in 1892 had on the robber barons. “I worked my way almost to a nervous breakdown in groping my way through the ever widening field of philanthropic behavior,” the oil man recalled later; but that struggle also forced him to rethink his giving in ways that others then copied. One result was that he appointed a man to look after all his philanthropic activities. His name, funnily enough, was Gates.

  16 – The Ant and the Silversword: Working and Investing in the Twenty-first Century

  p. 308 TO APPRECIATE the plight of the individual in the global economy, consider the tale of the ant and the silversword. The latter is a magnificent though rare plant that grows on slopes of volcanic craters in Hawaii. When people first saw a white fringe on the mountains, they imagined it was snow—and in some ways the silverswords seem only slightly more durable. The silverswords pollinate rarely—only once every fifty years in one case—and sometimes die afterward. They have survived so long because they live in a place that, in ecological terms, is among the least global in the world. With 2,500 miles of ocean to protect them from the mainland, the islands of Hawaii evolved in splendid isolation for roughly seventy million years. They were thus able to develop all sorts of peculiar, unhardy species—not just the silversword but also birds that could not fly and thistles without thorns.

  Ever since humans came to Hawaii roughly 1,500 years ago, this ecology has been under attack. Now that several million people come every year, every shoe, every shopping basket, and every shipping container is a potential carrier of “alien species” that eat, harass, or harm the locals. Hawaii’s twenty species of flightless bird are all extinct: They were unable to fly away from rats and other invaders. Perhaps a sixth of the islands’ native plant species are already gone, and another third are set to follow them. The islands have roughly one third of America’s endangered plants and even more of its endangered birds.

  One problem for the silverswords has been feral goats, which like gnawing the plant. But the silversword’s biggest problem is one of the tiniest creatures to get into Hawaii: the Argentine ant. The ant, which is famed for its p. 309 organizational abilities (it does not waste time in internecine struggles, as many other sorts of ant do), eats the larvae of the native yellow-faced bees and other insects that are the silversword’s main pollinators. In short, the ant destroys the silversword’s already fairly fragile reproductive system.

  The Law of Unintended Consequences

  It might seem a little insulting to compare one’s readers to a plant that has sex only once every fifty years. But the tale of the silversword and the ant is, first, an exaggerated warning of what happens when the outside world arrives and people fail to adapt; second, a reiteration of the idea that globalization is about not just financial logic and political ideas but physical happenstance; and third, and most important, an example of the importance of unintended consequences. Globalization can shape all sorts of people’s lives in all sorts of unpredictable ways. It is a process that may well bring you a wife, a father-in-law, an adopted child, a new job, a pink slip, better coffee, cheaper marijuana, a dishwasher, a working telephone, or even a fatal disease.

  Or it may not. Just as a plant as pathetically vulnerable as the silversword has managed to survive 1,500 years of human invasion, some of us will be able to continue in much the same way as we do at present—doing the same jobs, living in the same places, and the rest of it. Globalization will simply be a process that happens in the foothills of your particular volcano. Yet even if an Argentine ant does not manage to find you, it seems silly to plan your life on the assumption that it won’t come up the mountain.

  Trying to tell people how they should cope with globalization is awkward territory. As we shall see, it is easy to look at things like careers and exaggerate the degree to which they have actually changed; statistically, the evidence is at best patchy. And, even if they are changing, it is not clear how much of the blame (or credit) lies with globalization.

  The biggest difficulty of all, however, lies in the fact that individuals are exactly that: unique and various. The frustrating answer to people who ask how they should react to globalization is that it all depends on where they live and what they do. The sort of job insecurity that has become so frightening to a salaryman in Tokyo has long been normal for a construction worker in Dallas (and not that odd for a construction worker in Tokyo either). The effect of globalization on industries in America (where there is already plenty of competition) is inevitably muted compared with the way that it has shattered the “iron rice bowl” of lifetime employment in China (which relied on p. 310 keeping foreigners out). Indeed, in some cases, offering any kind of advice seems either condescending or inappropriate. Reginaldo Gobetti is a portfolio worker of sorts, though his portfolio is very small.

  Yet such warnings should not get in the way of one of the basic messages of this book: Globalization hands power to individuals. The idea that each of us is sovereign (or at least more of a monarch than most of us have been before) is something we applaud; indeed, it represents a triumph for the sort of liberal ideas that we celebrate in our conclusion. But it also presents choices that many of us have not really thought through and may not be altogether thrilled about having to make.

  Nowadays, if there is any certainty in our lives, it comes increasingly from within rather than from without: You have to manage yourself rather than waiting for other people to do the managing. But how do you manage yourself? And how do you chart a course that leads to reasonable prosperity rather than dumps you in some prefabricated shack in Nowheresville?

  This chapter will focus on the two things that keep you out of that prefabricated shack: your career and your investments. It will also confine its advice on those two things to people in the more advanced countries—in part because what is true of the rich world today will be true of the poorer world tomorrow. However much we try to plan our lives, we cannot be entirely sure that we will not be undermined by some human equivalent of the Argentine ant. But plan we must, and the things that we must plan most carefully, in an age of both individual sovereignty and growing uncertainty, are our investments and our careers.

  The Global Wallet

  Before anybody listens to a word that we say about investing, they should know that the first investment one of us made was in shares in Eurotunnel, while the other chose to spend the golden years of the 1980s writing an academic book that thanks, he still insists, to the myopia of Cambridge University Press, netted less than one thousand dollars. Financial gurus we are not. But there does seem to be a curious disconnection between the global way that most businesspeople think about their own industries and the still largely national way that most people think about investment. That does not mean that people should rush to invest a set proportion of their money overseas, but it increasingly implies two things: first, they should pick winners regardless of where they are based—at least when they deal with well-known large-cap stocks in developed countries; and, second, that they should look for trends that cross borders.

  p. 311 The heart of the problem is the fixation on country indexes. The typical investor still measures his or her shares against a local index; and if he or she considers globalization at all, it is by diversifying and buying foreign-country funds, which measure their performances against other national indexes. Fund-management companies work in a similar way, splitting their asset-allocation mode
ls by country. If a New York–based consumer-goods analyst decides that Unilever looks like a better bet than Procter & Gamble, the decision to switch still has to go through the bank’s country-allocation committee and may even have to be made through London or Amsterdam, even though you can buy Unilever American Depository Receipts in New York. The reason is that Unilever, despite being pretty similar to P&G, happens to be headquartered in London and Rotterdam. The only industry where a large number of investors treat the nationality of shares as irrelevant is oil.

  The first problem with this is that national stock-market indexes in developed countries are lousy guides to just about anything. In many countries, the stock market bears as much relation to the local economy as an international hotel does to its host city. Rio Tinto, for instance, is considered a rock-solid British share. Yet the world’s biggest mining company has no assets in the country other than its headquarters. Five of the FTSE 100 companies are South African; three are Asian; and more than half of the aggregate earnings of the one hundred companies come from outside the country.

  Any American investor who buys a British country fund in the hope of providing himself with diversification is thus buying a dud. But if the same investor eschews, say, Swiss stocks because the local economy looks as if it is a mess, he is probably making an equally big mistake. In 1998, Switzerland’s stock market soared while the rest of the country languished. Drug stocks were hot, and Roche and Novartis, two drug giants that make less than a tenth of their sales in Switzerland, drive the local index.

  You might argue that this is merely a statistical quirk. But as industries become more global, these quirks become much more costly, particularly if you happen to live outside the United States. Guy Monson, the chief investment officer at Bank Sarasin, a Swiss private bank, in the City of London, points out that one of the most dramatic explosions of wealth in history took place in computers and software in the 1990s.[1] Any European who restricted investments to domestic companies would have missed out, since the boom happened almost exclusively in the United States. Given the size of the American stock market and the current preeminence of its companies, investors there have been much better served. But there are still some industries—luxury goods, mobile telephones, and consumer electronics, for instance—where the better companies are probably in Europe or Japan.

  p. 312 A typical American investor puts about a seventh of his money abroad; in Britain, the proportion is about a third. In the past, there have been good reasons for investing most of your money at home. If you are investing to pay for your retirement, then you want to have your assets in the same economy as your liabilities (so if inflation pushes up the cost of keeping you in a nursing home, it pushes up the dividends from your shares, too). Next, there is the problem of currency risk: A New Yorker who invested in a good Italian company might have seen his money double in lire and then euros but barely budge in dollars. Above all, there is the problem of ignorance and trust: Why invest in a firm whose management you know too little about and whose accounting practices may be dodgy?

  All these arguments have become progressively weaker—at least if you invest in big companies from big countries. As they become more global, large companies the world over are getting a lot more familiar: For a Briton, GE is almost as well known as GEC once was. Also, shareholder rights and even accounting practices have become more uniform. Currencies still matter, but most studies show that, at least for long-term investors, the currency effects tend to cancel each other out in three to five years. The Euro not only knocks currency considerations out of a swath of investment decisions (the German can now invest in Italy with impunity) but also provides a heftier counterweight to the American dollar. As for inflation, the risks of a surge in prices destroying the purchasing power of your foreign nest egg have lessened as inflation and interest rates have tended to elide one another.

  Indeed, the correlation of stock-market returns in most countries has increased. Put a chart of Germany’s DAX over the S&P 500, and they look increasingly alike. The one big exception is Japan. But, as Monson points out, if you concentrate on what might be called Global Japan—exporters such as Toyota and Sony and software firms such as Softbank—you find a clear correlation with their counterparts in other markets.

  Once again, this does not mean that shareholders should immediately double the proportion of international shares in their portfolios; but it does mean that if, for instance, you think that DaimlerChrysler makes better cars than Ford, then you should put money in it. Of course you should take into account geography when deciding how good a particular firm is: A key source of Daimler’s competitiveness (or lack of it) is its Germanness. But the question of where it is listed looks increasingly secondary.

  There is nothing strange in thinking like this: Most of the world’s leading businesspeople have been running their businesses that way for decades. Microsoft is as American as apple pie, but it is run as a global software firm. The p. 313 move toward a more international view of company performance ought to be strongest in Europe. Fund managers within the Euro zone are already starting to measure themselves against regional indexes. For a French investor, sticking to the CAC-40 index will soon seem as bizarre as an inhabitant of Portland limiting himself to companies based in Oregon.

  A Heretical Idea about America and Europe

  The next thing to do after deciding to judge companies globally is to take advantage of the fact that most people have not caught up with you. As we have shown, globalization is a process rather than a fact: It pushes ideas and best practices around the world at different speeds. For instance, the consolidation in the American banking sector in the early 1990s generally lifted share prices as coldhearted managers trimmed branch systems and replaced people with machines. Exactly the same inefficiencies existed in the British banking sector, but it was valued at far lower multiples. In due course, the revolution arrived, and share prices of groups such as Lloyds TSB soared. In 1998 and 1999, the same pattern was repeated on the Continent.

  More generally, the diffusion of management ideas means that the chances of any one company or country remaining top dog for long are slim. In 1989, a Japanese member of parliament, Shintaro Ishihara, bragged, “There is no hope for the United States.” At the same time, assorted American academics lauded Japan’s tradition of industrial planning. The Harvard Business Review hailed the country’s “unsurpassed” financial regulators. And a rash of books implied that most of California would end up as a subsidiary of Matsushita. In the following decade, Japan’s share of the world’s stock market shrank from around 40 percent to around a tenth.

  At the beginning of the twenty-first century, much the same air of invincibility surrounded American companies. “Dot-com” books, adorned with pictures of hairy men in T-shirts, took the place of all those worthy tributes to kaizen. Flexibility, speed, inventiveness, ruthlessness were just a few of the virtues that were deemed innately American. In Fortune’s annual list of the world’s most admired companies, the top ten firms in 1999 all came from the United States; there were only three non-Americans—Sony, Toyota, and DaimlerChrysler—in the top twenty-five. The American stock market accounted for roughly twice as big a proportion of the world stock market as the United States’ underlying economy did of the world economy.

  Despite Enron and WorldCom, the success of American companies is surely built on much firmer foundations than that of the Japanese. Regardp. 314less of what you think about the new economy or accounting standards, American firms such as Wal-Mart and Oracle are still, by most measures of competitiveness, beating the bejesus out of their peers. America also has a substantial lead in most of the sunrise industries of the future. So a premium is certainly justified. But investors may still have underestimated the idea that non-American firms might recover some ground.

  Start with the presumption that in business, even more than politics, the only constant thing is change. One way that American firms caught up with their Japanese peers (assuming
that they were ever behind in the first place, which is another debate) was by copying them. All those books about total quality management and lean production had an effect. If you buy an American car, you no longer offer up a prayer as you drive it off the lot.

  Can the Europeans and Japanese catch up, too? Buoyed by fads such as reengineering, American firms spent much of the early 1990s slimming not just their number of blue-collar workers but their managerial ranks, too; and they have kept on slimming and outsourcing jobs to other places. By contrast, in Europe and Japan companies have, depending on your point of view, been kinder, lazier, browbeaten by their governments, or simply true to their stakeholders’ principles. Although sales growth in Europe has broadly kept pace with that in America, Continental profit margins are roughly half those in America. There are four times as many start-ups per capita in the United States than in Europe.[2]

  There are signs of change, however. In Europe, the hostile takeover of Telecom Italia by the far smaller Olivetti in 1999 might prove to have been a watershed. European giants such as Daimler and Fiat, which once considered themselves invulnerable, have begun to lop off “noncore” operations. Shareholder activism is on the rise in Europe; so is performance-related pay. And there is also the pressure from the single market and the single currency. Europe has twice as many carmakers as the United States, eight times as many rail-engine manufacturers, and ten times as many tractor and battery makers, to name just a few of the industries that are ripe for consolidation.

  Japan is several years farther behind. But takeovers are also on the rise in Tokyo. Witness the way that Cable & Wireless was able to wrest International Digital Communications from NTT in 1999. Meanwhile, fairly conservative groups such as Mitsubishi and NEC have announced restructuring drives. And as in Europe, there is a group of younger companies that are far less tradition bound.