The World is Flat

She had done a story for CNBC Arabiya Television about the colorful lanterns called fawanis, each with a burning candle inside, that Egyptian schoolchildren traditionally carried around during Ramadan, a tradition dating back centuries to the Fatimid period in Egypt. Kids swing the lanterns and sing songs, and people give them candy or gifts, as in America on Halloween. For centuries, small, low-wage workshops in Cairo's older neighborhoods have manufactured these lanterns-until the last few years.

That was when plastic Chinese-made Ramadan lanterns, each with a battery-powered light instead of a candle, began flooding the market, crippling the traditional Egyptian workshops. Said Lamees, “They are invading our tradition -in an innovative way-and we are doing nothing about it... These lanterns come out of our tradition, our soul, but [the Chinese versions] are more creative and advanced than the Egyptian ones.” Lamees said that when she asked Egyptians, “Do you know where these are made?,” they would all answer no. Then they would turn the lamps over and see that they came from China.

Many mothers, like Lamees, though, appreciated the fact that the Chinese versions are safer than the traditional Egyptian ones, which are made with sharp metal edges and glass, and usually still use candles. The Chinese versions are made of plastic and feature flashing lights and have an embedded microchip that plays traditional Egyptian Ramadan tunes and even the theme song to the popular Ramadan TV cartoon series Bakkar. As Business Monthly, published by the American Chamber of Commerce in Egypt, reported in its December 2001 issue, Chinese importers “are pitted not only against each other, but also against the several-hundred-year-old Egyptian industry. But the Chinese models are destined to prevail, according to [a] famous importer, Taha Zayat. Imports have definitely cut down on sales of traditional fawanis,' he said. 'Of all fawanis on the market, I don't think that more than 5 percent are now made in Egypt.' People with ties to the Egyptian [fawanis] industry believe China has a clear advantage over Egypt. With its superior technology, they said, China can make mass quantities, which helps to keep prices relatively low. Egypt's traditional [fawanis] industry, by contrast, is characterized by a series of workshops specialized in different stages of the production process. Glassmakers, painters, welders and metal craftsmen all have their role to play. 'There will always be fawanis in Ramadan, but in the future I think Egyptian-made ones could become extinct/ Zayat said. 'There is no way they can ever compete with things made in China.'”

Think how crazy that statement is: Egypt has masses of low-wage workers, like China. It sits right next to Europe, on the Suez Canal. It could be and should be the Taiwan of the eastern Mediterranean, but instead it is throwing in the towel to atheistic China on the manufacture of one of Muslim Egypt's most cherished cultural artifacts. Ibrahim El Esway, one of the main importers from China of fawanis, gave The Business Monthly a tour of his warehouse in the Egyptian town of Muski: He had imported sixteen different models of Ramadan lanterns from China in 2004. “Amid the crowds at Muski, [El Esway] gestured to one of his employees, who promptly opened a dust-covered box and pulled out a plastic fawanis shaped like the head of Simba, from The Lion King. 'This is the first model we imported back in 1994,' he said. He switched it on. As the blue-colored lion's head lit up, the song 'It's a Small World' rang out.”

Introspection

The previous section of this book looked at how individuals, particularly Americans, should think about meeting the challenge posed by the flattening of the world. This chapter focuses on what sort of policies developing countries need to undertake in order to create the right environment for their companies and entrepreneurs to thrive in a flat world, although many of the things I am about to say apply to many developed countries as well.

When developing countries start thinking about the challenge of flatism, the first thing they need to do is engage in some brutally honest introspection. A country, its people and leaders alike, has to be honest with itself and look clearly at exactly where it stands in relation to other countries and in relation to the ten flatteners. It has to ask itself, “To what extent is my country advancing or being left behind by the flattening of the world, and to what extent is it adapting to and taking advantage of all the new platforms for collaboration and competition?” As that Chinese banking official boasted to my Mexican colleague, China is the wolf. Of all the ten flatteners, the entry of China into the world market is the most important for developing countries, and for many developed countries. China can do high-quality low-cost manufacturing better than any other country, and increasingly, it also can do high-quality higher-cost manufacturing. With China and the other nine flatteners coming on so strong, no country today can afford to be anything less than brutally honest with itself.

To that end, I believe that what the world needs today is a club that would be modeled after Alcoholics Anonymous (A.A.). It would be called Developing Countries Anonymous (D.C.A.). And just as at the first A.A. meeting you attend you have to stand up and say, “My name is Thomas Friedman and I'm an alcoholic,” so at Developing Countries Anonymous, countries would have to stand up at their first meeting and say, “My name is Syria and I'm underdeveloped.” Or “My name is Argentina and I'm underachieving. I have not lived up to my potential.”

Every country needs “the ability to make your own introspection,” since “no country develops without going through an X-ray of where you are and where your limits are,” said Luis de la Calle, one of Mexico's chief NAFTA negotiators. Countries that fall off the development wagon are a bit like drunks; to get back on they have to learn to see themselves as they really are. Development is a voluntary process. You need a positive decision to make the right steps, but it starts with introspection.

I Can Get It for You Wholesale

During the late 1970s, but particularly after the fall of the Berlin Wall, a lot of countries started to pursue development in a new way through a process that I call reform wholesale. The era of Globalization 2.0, when the world shrank from a size medium to a size small, was the era of reform wholesale, an era of broad macroeconomic reform. These wholesale reforms were initiated by a small handful of leaders in countries like China, Russia, Mexico, Brazil, and India. These small groups of reformers often relied on the leverage of authoritarian political systems to unleash the state-smothered market forces in their societies. They pushed their countries into more export-oriented, free-market strategies-based on privatization of state companies, deregulation of financial markets, currency adjustments, foreign direct investment, shrinking subsidies, lowering of protectionist tariff barriers, and introduction of more flexible labor laws-from the top down without ever really asking the people. Ernesto Zedillo, who served as president of Mexico from 1994 to 2000 and was finance minister before that, once remarked to me that all the decisions to open the Mexican economy were taken by three people. How many people do you suppose Deng Xiaoping consulted before he declared, “To get rich is glorious,” and opened the Chinese economy, or when he dismissed those who questioned China's move from communism to free markets by saying that what mattered was jobs and incomes, not ideology? Deng tossed over decades of Communist ideology with one sentence: “Black cat, white cat, all that matters is that it catches mice.” In 1991, when India's finance minister, Manmohan Singh, took the first tentative steps to open India's economy to more foreign trade, investment, and competition, it was a result not of some considered national debate and dialogue, but of the fact that India's economy at that moment was so sclerotic, so unappealing to foreign investors, that it had almost run out of foreign currency. When Mikhail Gorbachev started dabbling with perestroika, it was with his back up against the Kremlin wall and with few allies in the Soviet leadership. The same was true of Margaret Thatcher when she took on the striking coal miners' union in 1984 and forced reform wholesale onto the sagging British economy.

What all these leaders confronted was the irrefutable fact that more open and competitive markets are the only sustainable vehicle for growing a nation out of poverty, because they are the only guarantee that new ideas, technologies, and best practices are easily flowing into your country and that private enterprises, and even government, have the competitive incentive and flexibility to adopt those new ideas and turn them into jobs and products. This is why the nonglobalizing countries, those that refused to do any reform wholesale-North Korea, for instance— actually saw their per capita GDP growth shrink in the 1990s, while countries that moved from a more socialist model to a globalizing model saw their per capita GDP grow in the 1990s. As David Dollar and Art Kray conclude in their book Trade, Growth, and Poverty, economic growth and trade remain the best antipoverty program in the world.

The World Bank reported that in 1990 there were roughly 375 million people in China living in extreme poverty, on less than $ 1 per day. By 2001, there were 212 million Chinese living in extreme poverty, and by 2015, if current trends hold, there will be only 16 million living on less than $1 a day. In South Asia-primarily India, Pakistan, and Bangladesh-the numbers go from 462 million in 1990 living on less than $1 a day down to 431 million by 2001 and down to 216 million in 2015. In sub-Saharan Africa, by contrast, where globalization has been slow to take hold, there were 227 million people living on less than $1 a day in 1990, 313 million in 2001, and an expected 340 million by 2015.

The problem for any globalizing country lies in thinking you can stop with reform wholesale. In the 1990s, some countries thought that if you got your ten commandments of reform wholesale right-thou shall privatize state-owned industries, thou shall deregulate utilities, thou shall lower tariffs and encourage export industries, etc.-you had a successful development strategy. But as the world started to get smaller and flatter-enabling China to compete everywhere with everyone on a broad range of manufactured products, enabling India to export its brainpower everywhere, enabling corporations to outsource any task anywhere, and enabling individuals to compete globally as never before -reform wholesale was no longer sufficient to keep countries on a sustainable growth path.

A deeper process of reform was required-a process I would call reform retail.

I Can Only Get It for You Retail

What if regions of the world were like the neighborhoods of a city? What would the world look like? I'd describe it like this: Western Europe would be an assisted-living facility, with an aging population lavishly attended to by Turkish nurses. The United States would be a gated community, with a metal detector at the front gate and a lot of people sitting in their front yards complaining about how lazy everyone else was, even though out back there was a small opening in the fence for Mexican labor and other energetic immigrants who helped to make the gated community function. Latin America would be the fun part of town, the club district, where the workday doesn't begin until ten p.m. and everyone sleeps until midmorning. It's definitely the place to hang out, but in between the clubs, you don't see a lot of new businesses opening up, except on the street where the Chileans live. The landlords in this neighborhood almost never reinvest their profits here, but keep them in a bank across town. The Arab street would be a dark alley where outsiders fear to tread, except for a few side streets called Dubai, Jordan, Bahrain, Qatar, and Morocco. The only new businesses are gas stations, whose owners, like the elites in the Latin neighborhood, rarely reinvest their funds in the neighborhood. Many people on the Arab street have their curtains closed, their shutters drawn, and signs on their front lawn that say, “No Trespassing. Beware of Dog.” India, China, and East Asia would be “the other side of the tracks.” Their neighborhood is a big teeming market, made up of small shops and one-room factories, interspersed with Stanley Kaplan SAT prep schools and engineering colleges. Nobody ever sleeps in this neighborhood, everyone lives in extended families, and everyone is working and saving to get to “the right side of the tracks.” On the Chinese streets, there's no rule of law, but the roads are all well paved; there are no potholes, and the streetlights all work. On the Indian streets, by contrast, no one ever repairs the streetlights, the roads are full of ruts, but the police are sticklers for the rules. You need a license to open a lemonade stand on the Indian streets. Luckily, the local cops can be bribed, and the successful entrepreneurs all have their own generators to run their factories and the latest cell phones to get around the fact that the local telephone poles are all down. Africa, sadly, is that part of town where the businesses are boarded up, life expectancy is declining, and the only new buildings are health-care clinics.

The point here is that every region of the world has its strengths and weaknesses, and all are in need of reform retail to some degree. What is reform retail? In the simplest terms, it is more than just opening your country to foreign trade and investment and making a few macroeco-nomic policy changes from the top. That is reform wholesale. Reform retail presumes you have already done reform wholesale. It involves looking at four key aspects of your society-infrastructure, regulatory institutions, education, and culture (the general way your country and leaders relate to the world)-and upgrading each one to remove as many friction points as possible. The idea of reform retail is to enable the greatest number of your people to have the best legal and institutional framework within which to innovate, start companies, and become attractive partners for those who want to collaborate with them from elsewhere in the world.

Many of the key elements of reform retail were best defined by the research done by the World Bank's International Finance Corporation (IFC) and its economic analysis team led by its chief economist, Michael Klein. What do we learn from their work? To begin with, you don't grow your country out of poverty by guaranteeing everyone a job. Egypt guarantees all college graduates a job each year, and it has been mired in poverty with a slow-growing economy for fifty years.

“If it were just a matter of the number of jobs, solutions would be easy,” note Klein and Bita Hadjimichael in their World Bank Study, The Private Sector in Development. “For example, state-owned enterprises could absorb all those in need of employment. The real issue is not just employment, but increasingly productive employment that allows living standards to rise.” State-owned enterprises and state-subsidized private firms usually have not delivered sustainable productivity growth, and neither have a lot of other approaches that people assume are elixirs of growth, they add. Just attracting more foreign investment into a country also doesn't automatically do it. And even massive investments in education won't guarantee it.

“Productivity growth and, hence, the way out of poverty, is not simply a matter of throwing resources at the problem,” say Klein and Hadjimichael. “More important, it is a matter of using resources well.” In other words, countries grow out of poverty not only when they manage their fiscal and monetary policies responsibly from above, i.e., reform wholesale. They grow out of poverty when they also create an environment below that makes it very easy for their people to start businesses, raise capital, and become entrepreneurs, and when they subject their people to at least some competition from beyond-because companies and countries with competitors always innovate more and faster.

The IFC drove home this point with a comprehensive study of more than 130 countries, called Doing Business in 2004. The IFC asked five basic questions about doing business in each of these countries, questions about how easy or difficult it is to 1) start a business in terms of local rules, regulations, and license fees, 2) hire and fire workers, 3) enforce a contract, 4) get credit, and 5) close a business that goes bankrupt or is failing. To translate it into my own lexicon, those countries that make all these things relatively simple and friction-free have undertaken reform retail, and those that have not are stalled in reform wholesale and are not likely to thrive in a flat world. The IFC's criteria were inspired by the brilliant and innovative work of Hernando de Soto, who has demonstrated in Peru and other developing nations that if you change the regulatory and business environment for the poor, and give them the tools to collaborate, they will do the rest.

Doing Business in 2004 tries to explain each of its points with a few colorful examples: “Teuku, an entreprenuer in Jakarta, wants to open a textile factory. He has customers lined up, imported machinery, and a promising business plan. Teuku's first encounter with the government is when registering his business. He gets the standard forms from the Ministry of Justice, and completes and notarizes them. Teuku proves that he is a local resident and does not have a criminal record. He obtains a tax number, applies for a business license, and deposits the minimum capital (three times national income per capita) in the bank. He then publishes the articles of association in the official gazette, pays a stamp fee, registers at the Ministry of Justice, and waits 90 days before filing for social security. One hundred sixty-eight days after he commences the process, Teuku can legally start operations. In the meantime, his customers have contracted with another business.

“In Panama, another entrepreneur, Ina, registers her construction company in only 19 days. Business is booming and Ina wants to hire someone for a two-year appointment. But the employment law only allows fixed-term appointments for specific tasks, and even then requires a maximum term of one year. At the same time, one of her current workers often leaves early, with no excuse, and makes costly mistakes. To replace him, Ina needs to notify and get approval from the union, and pay five months' severance pay. Ina rejects the more qualified applicant she would like to hire and keeps the underperforming worker on staff.

“Ali, a trader in the United Arab Emirates, can hire and fire with ease. But one of his customers refuses to pay for equipment delivered three months earlier. It takes 27 procedures and more than 550 days to resolve the payment dispute in court. Almost all procedures must be made in writing, and require extensive legal justification and the use of lawyers. After this experience, Ali decides to deal only with customers he knows well.

“Timnit, a young entrepreneur in Ethiopia, wants to expand her successful consulting business by taking a loan. But she has no proof of good credit history because there are no credit information registries. Although her business has substantial assets in accounts receivable, laws restrict her bank from using these as collateral. The bank knows it cannot recover the debt if Timnit defaults, because courts are inefficient and laws give creditors few powers. Credit is denied. The business stays small.

“Having registered, hired workers, enforced contracts, and obtained credit, Avik, a businessman in India, cannot make a profit and goes out of business. Faced with a 10-year-long process of going through bankruptcy, Avik absconds, leaving his workers, the bank, and the tax agency with nothing.”

If you want to know why two decades of macroeconomic reform wholesale at the top have not slowed the spread of poverty and produced enough new jobs in key countries of Latin America, Africa, the Arab world, and the former Soviet Empire, it is because there has been too little reform retail. According to the IFC report, if you want to create productive jobs (the kind that lead to rising standards of living), and if you want to stimulate the growth of new businesses (the kind that innovate, compete, and create wealth), you need a regulatory environment that makes it easy to start a business, easy to adjust a business to changing market circumstances and opportunities, and easy to close a business that goes bankrupt, so that the capital can be freed up for more productive uses.

“It takes two days to start a business in Australia, but 203 days in Haiti and 215 days in the Democratic Republic of Congo,” the IFC study found. “There are no monetary costs to start a new business in Denmark, but it costs more than five times income per capita in Cambodia and over thirteen times in Sierra Leone. Hong Kong, Singapore, Thailand and more than three dozen other economies require no minimum capital from start-ups. In contrast, in Syria the capital requirement is equivalent to fifty-six times income per capita... Businesses in the Czech Republic and Denmark can hire workers on part-time or fixed-term contracts for any job, without specifying maximum duration of the contract. In contrast, employment laws in El Salvador allow fixed-term contracts only for specific jobs, and set their duration to be at most one year... A simple commercial contract is enforced in seven days in Tunisia and thirty-nine days in the Netherlands, but takes almost 1,500 days in Guatemala. The cost of enforcement is less than 1 percent of the disputed amount in Austria, Canada and the United Kingdom, but more than 100 percent in Burkina Faso, the Dominican Republic, Indonesia... and the Philippines. Credit bureaus contain credit histories on almost every adult in New Zealand, Norway and the United States. But the credit registries in Cameroon, Ghana, Pakistan, Nigeria and Serbia and Montenegro have credit histories for less than 1 percent of adults. In the United Kingdom, laws on collateral and bankruptcy give creditors strong powers to recover their money if a debtor defaults. In Colombia, the Republic of Congo, Mexico, Oman and Tunisia, a creditor has no such rights. It takes less than six months to go through bankruptcy proceedings in Ireland and Japan, but more than ten years in Brazil and India. It costs less than 1 percent of the value of the estate to resolve insolvency in Finland, the Netherlands, Norway and Singapore-and nearly half the estate value in Chad, Panama, Macedonia, Venezuela, Serbia and Montenegro, and Sierra Leone.”

As the IFC report notes, excessive regulation also tends to hurt most the very people it is supposed to protect. The rich and the well connected just buy or hustle their way around onerous regulations. In countries that have very regulated labor markets where it is difficult to hire and fire people, women, especially, have a hard time finding employment.

“Good regulation does not mean zero regulation,” concludes the IFC study. “The optimal level of regulation is not none, but may be less than what is currently found in most countries, and especially poor ones.” It offers what I call a five-step checklist for reform retail. One, simplify and deregulate wherever possible in competitive markets, because competition for consumers and workers can be the best source of pressure for best practices, and overregulation just opens the door for corrupt bureaucrats to demand bribes. “There is no reason for Angola to have one of the most rigid employment laws if Portugal, whose laws Angola adapted, has already revised them twice to make the labor market more flexible,” says the IFC study. Two, focus on enhancing property rights. Under de Soto's initiative, the Peruvian government in the last decade has issued property titles to 1.2 million urban squatter households. “Secure property rights have enabled parents to leave their homes and find jobs instead of staying in to protect the property,” says the IFC study. “The main beneficiaries are their children, who can now go to school.” Three, expand the use of the Internet for regulation fulfillment. It makes it faster, more transparent, and far less open to bribery. Four, reduce court involvement in business matters. And last but certainly not least, advises the IFC study, “Make reform a continuous process... Countries that consistently perform well across the Doing Business indicators do so because of continuous reform.”

In addition to the IFC's criteria, reform retail obviously has to include expanding the opportunities for your population to get an education at all levels and investing in the logistical infrastructure-roads, ports, telecommunications, and airports-without which no reform retail can take off and collaboration with others is impossible. Many countries today still have telecommunications systems dominated by state monopolies that make it either too expensive or too slow to get highspeed Internet access and wireless access, and to make cheap longdistance and overseas phone calls. Without reform retail in your telecom sector, reform retail in the other five areas, while necessary, will not be sufficient. What is striking about the IFC's criteria is that a lot of people think they are relevant only for Peru and Argentina, but in fact some of the countries that score worst are places like Germany and Italy. (Indeed, the German government protested some of the findings.)

“When you and I were born,” said Luis de la Calle, “our competition [was] our next-door neighbors. Today our competition is a Japanese or a Frenchman or a Chinese. You know where you rank very quickly in a flat world... You are now competing with everyone else.” The best talent in a flat world will earn more, he added, “and if you don't measure up, someone will replace you-and it will not be the guy across the street.”

If you don't agree, just ask some of the major players. Craig Barrett, the chairman of Intel, said to me, “With very few exceptions, when you would think about where to site a manufacturing plant, you would think about the cost of labor, transportation, and availability of utilities-that sort of stuff. The discussion has been expanded today, and so it is no longer where you put your plant but now where do you put your engineering resources, your research and development-where are the most efficient intellectual and other resources relative to cost? You now have the freedom to make that choice... Today we can be anywhere. Anywhere could be part of my supply chain now-Brazil, Vietnam, the Czech Republic, Ukraine. Many of us are limiting our scope today to a couple of countries for a very simple reason: Some can combine the availability of talent and a market-that is, India, Russia, and China.” But for every country Intel considers going into, added Barrett, he asks himself the same question: “What inherent strength does [the] country bring to the party? India, Russia-crummy infrastructure, good educational level, you have a bunch of smart folks. China has a little bit of everything. China has good infrastructure, better than Russia or India. So if you go to Egypt, what unique capability [does that country have to offer]? Exceedingly low labor rates, but what is [the] infrastructure and education base? The Philippines or Malaysia have good literacy rates-you get to employ college grads in your manufacturing line. They did not have infrastructure, but they had a pool of educated people. You have got to have something to build on. When we go to India and are asked about opening plants, we say, 'You don't have infrastructure. Your electricity goes off four times a day.'”

Added John Chambers, the CEO of Cisco Systems, which uses a global supply chain to build the routers that run the Internet and is constantly being wooed to invest in one country or another, “The jobs are going to go where the best-educated workforce is with the most competitive infrastructure and environment for creativity and supportive government. It is inevitable. And by definition those people will have the best standard of living. This may or may not be the countries who led the Industrial Revolution.”

But while the stakes in reform retail today are higher than ever, and countries know it, one need only look around the world to notice that not every country can pull it off. Unlike reform wholesale, which could be done by a handful of people using administrative orders or just authoritarian dictates, reform retail requires a much wider base of public and parliamentary buy-in if it is going to overcome vested economic and political interests.

In Mexico, “we did the first stages of structural reform from the top down,” said Guillermo Ortiz. “The next stage is much more difficult. You have to work from the bottom up. You have to create the wider consensus to push the reforms in a democratic context.” And once that happens, noted Moises Nairn, a former Economy Minister of Venezuela and now editor of Foreign Policy magazine, you have a much larger number of actors participating, making the internal logic and technical consistency of the reform policies much more vulnerable to the impact of political compromises, contradictions, and institutional failures. “Bypassing or ignoring the entrenched and defensive public bureaucracy-a luxury frequently enjoyed by the government teams that launch initial reform measures-is more difficult in this stage,” Nairn said.

So why does one country get over this reform retail hump, with leaders able to mobilize the bureaucracy and the public behind these more painful, more exacting micro-reforms, and another country get tripped up?

Culture Matters: Glocalization

One answer is culture. To reduce a country's economic performance to culture alone is ridiculous, but to analyze a country's economic performance without reference to culture is equally ridiculous, although that is what many economists and political scientists want to do.