ERT: Many economists say that globalization is
really just a catch phrase for long-term trends in the world economy.
If this is true, then globalization doesn't mean that there really is
a new economy. What is your view on this?
C. Oman: The answer, in my view, is two-fold.
Globalization, as a general phenomenon, is not new. Since the 19th
century, or earlier, there has been a long-term global trend towards
liberalizing international trade and investment. There is plenty of
room to further liberalize policies on international flows of finance,
trade, foreign direct investment and, for that matter, people. All
this lends support to the argument that globalization is more a catch
phrase than a word that designates something truly new. Many
economists may simply fail to grasp the specific characteristics of
the current wave of globalization. It is equally important to
recognize that globalization occurs in waves. There are periods of
relatively fast or intense globalization, and periods when
globalization slackens and may even be reversed—each major
globalization wave has its own specific characteristics. The last 100
years alone have witnessed three major waves of globalization. One is
the decades-long period that began in the latter part of the 19th
century and continued until World War I. Another began after World War
II and lasted until the 1970s when productivity growth rates in
Europe, North America and Japan dropped very sharply. The current wave
started roughly in the late 1970s, or the early 1980s, and continues
today. Globalization can indeed be understood as something more than a
catch phrase. The key to understanding globalization today is not to
be found in the liberalization of policies on trade and capital flows
or in the speed of technological change. Both of these elements are
important to all waves of globalization. Rather, the key lies in the
nature of the business model that is driving competition in the
leading economies. To illustrate this, let's compare the business
model that drove globalization in the postwar period with the one
driving it today.
Globalization after World War II was driven and
shaped by the ongoing development and international spread of a US
business model known as "scientific management" or
"mass production." That model is characterized by three key
features. One is a tendency in the organization of production to
separate "thinking" and "doing" between management
and specialized engineers, on the one hand, and relatively unskilled
workers on the other. This organizational approach facilitates
managerial control, as well as the organization of large numbers of
people in a single factory who may not all speak the same language, or
know how to read and write. Another key feature is a tendency to
narrowly define production workers' job responsibilities and push job
specialization as far as possible in order to maximize potential
economies of scale. A third feature is a belief, promoted by the
engineer Frederick W. Taylor, that at any given time there is a single
best way of organizing work and production. This is why he called this
business model the "scientific management" approach to
organizing mass production.
Scientific management spread across the globe, and
in doing so drove globalization following World War II. This system
took root and spread in Western Europe thanks in no small measure to
the Marshall Plan. One of the plan's major (but often forgotten)
contributions to postwar reconstruction was to bring large numbers of
European managers and foremen to visit factories in the United States
and to send any American managers and foremen to share their knowledge
with their counterparts in Europe. Though given another name, the
"Stalinist management techniques" that spread behind the
Iron Curtain during this same period in the centrally planned
economies of Central and Eastern Europe were virtual caricatures of
scientific management.
Scientific management methods were also widely
introduced during this period by multinational enterprises as well as
by local firms in the so-called modern sector of many countries in
Latin America, Asia and Africa.
It must be emphasized that globalization during
this period and rapid international diffusion of scientific
management, contributed greatly to raising productivity levels and
standards of living around the world for more than 20 years. It also
contributed to a gradual buildup of bureaucratic rigidities in both
the private and public sectors, notably in the leading economies in
which scientific management was most widely used. Those rigidities
came home to roost in the form of a marked slowdown of long-term
productivity growth in the 1970s.
The sharp slowdown in productivity growth led many
corporate managers to relocate some of the more labor-intensive
segments of production for their home markets to developing countries
that have cheaper and more flexible labor pools.
The late 1970s and early 1980s in turn witnessed
the emergence of what one might call the new business model, whose
remarkable competitive strength is driving the current wave of
globalization. In many important respects this new approach turns the
precepts of scientific management on their head. In particular:
Production-related thinking and doing are
re-integrated in order to take advantage of production workers' human
intelligence and capabilities to problem-solve on the shop floor.
Teamwork is emphasized. While specialization and
economies of scale remain important, the new model is designed to take
advantage of the potential synergies generated in working groups of
10, 15, or 20 people, and specialization is no longer blindly pursued
to the detriment of teamwork. Rather than thinking there is one best
way of doing things at any given time, the new approach emphasizes the
importance of continuous innovation — not only in what is produced
by constantly adapting to changing demands, but in how it is produced
(i.e., how business and production are organized) using new technology
and new ways of organizing and motivating people.
What is remarkable is that firms operating on this
new model have achieved levels of capital and labor productivity
significantly greater than the levels attained by the scientific
management model. This productivity differential in turn exerts
tremendous pressure on all types of firms to adopt the new business
model.
In certain industries, this model is referred to as
the "just-in-time" system. Despite tremendous competitive
pressure to adopt this new business approach, there remains much
resistance to change. This resistance goes far to explain both the
growth and relatively high levels of unemployment in Europe and the
significant growth in the number of working poor in the US over the
last couple of decades. While globalization today is often blamed for
these problems, the real culprit is the difficulty many firms and
people have in making the transition to the new business model.
Groups resisting the change to the new business
model tend to be those operating according to the precepts of
scientific management. They include not only organized labor but also,
in many cases, middle and top management in hierarchical organizations
whose jobs open become redundant, or whose ways of addressing problems
become dysfunctional in the new business model. A notorious example is
that of General Motors (GM). The company's significant loss of market
share and difficult reorganization during the 1980s is a story of top
managers who proved unable for too long to see the world other than
through the lenses of scientific management, and they had to be
replaced.
ERT: What difference does globalization make for
companies? Is the basic business model changing?
C. Oman: My understanding of the new business
model refers to a broad variety of different types of businesses. On
the one hand, you have large companies such as Toyota that already in
the late 1950s found they could not replicate what Ford, GM and
Chrysler were doing in the US. Toyota gradually overcame certain
production obstacles by establishing flexible production methods that
led to the development, over many years, of what has come to be known
as the just-in-time system. That is only one subtype of the new
business model, however. For example, many small and medium-size
companies in parts of Italy and southern Germany developed into
industrial clusters operating on the new business model.
The US society, economy and many US businesses are
relatively flexible, however. Since the recession of the early 1990s,
US companies have adapted quickly and reorganized production based on
many new business model principles. It is not just new companies such
as the dot.coms that are operating according to the new business
model. Hallmarks of the old model, including GM, have had to move
towards the model as well. (GM began integrating features of the new
business model when it set up the Saturn production facility based on
the just-in-time system.) Above all, the new business model is a
philosophy of human organization based on conscious teamwork,
networking, motivating people and reducing waste, including the cost
of under using human capabilities and retaining inventory. There is no
inherent reason why old-style businesses cannot adopt the new model if
their top people understand its underlying principles. But nobody can
say it's easy.
ERT: What are the implications for the developing
countries of the shift in business models? Are the fears evident at
the WTO meeting in Seattle justifiable in the sense that developing
countries are likely to be left behind?
C. Oman: I happened to be in Seattle at the
time of the WTO Ministerial. In my view, the Seattle demonstrators
were mostly Americans expressing their lack of trust in their
government and, in many cases, in large American businesses. Some of
them protested on behalf of developing countries. While I don't
necessarily question their good faith, I certainly do not think that
they could actually speak for developing countries. Mexico, for
example, is a bona fide developing country that doesn't seem to share
many of the concerns expressed on the Seattle streets. Hence, I would
not assume that any significant number of demonstrators in Seattle
actually represent a cohesive Third World perspective. Nonetheless,
the way in which developing countries respond to the current forces
driving globalization will have a major effect on their living
standards, growth rates, quality of life, and development process in
the coming decades. In countries where institutions are not deeply
rooted, shifting to the new business model may meet less resistance
than in countries where those institutions are more developed.
Conversely, in countries where corporate and political governance
structures are very rigid (typically in conflict or tension-ridden
societies), adopting the new business model is likely to be difficult.
As a result, these countries may fall even further behind during this
wave of globalization than they did during the previous one
In short, whether or not developing countries will
benefit or lose from the new business model and its competitive
strength remains an open question. It depends largely on how the
governments of these countries respond. Two interesting questions are
whether countries such as China, Brazil, Indonesia, or India should
adopt the new business model, and what role should US companies play
if they are considering investing in those countries? I'm not
suggesting that the world is no longer interested in mass production
based on low-cost labor. Certainly many companies are still interested
in setting up such activities in China, India or Indonesia and
exporting from these countries. What I am saying is that the
1970s-style move to relocate "offshore to produce mainly for the
investor's home market is not the wave of the future. Increasingly,
companies invest to produce in developing countries with a long-term
view of serving the markets in the region in which the country hosting
the investment is located.
The wave of the future is flexible production and
flexible organizations. In that regard, many developing countries
should continue to improve the quality of their educational systems
and their physical infrastructure (notably telecommunications and
transportation), which will enable them to compete more effectively in
local and regional markets and, in the case of some industries, in
global markets. In my view, the increasing internationalization of
production is occurring within rather than between the major regions.
By major region I mean greater Europe, North America, or even the
Western Hemisphere, and Asia.
Notwithstanding the 1997 Asian financial crisis,
investment in Asia is surging, and most of it serves the greater Asian
market. The same is true for investment in Europe and the Western
Hemisphere. In other words, geography still counts. Physical proximity
between firms and their clients on the one hand, and between firms and
their suppliers (particularly when it comes to physical inputs), on
the other hand, can be an important competitive advantage that should
not be underestimated. This suggests that regional integration will
continue to accelerate.
Therefore, it is important that policymakers ensure
that regional integration schemes, such as the North American Free
Trade Agreement and the Free Trade Area of the Americas, and
microeconomic, company-level forces driving globalization are
compatible and mutually reinforcing.
ERT: How important is institution building to
countries that want to participate in the new economy, particularly
independent judicial systems, contract law and private property rights—especially
trademark and copyright protection?
C. Oman: The experience of countries that
sought to internationalize their economies in the 1980s and 1990s by
applying liberal trade and investment policies clearly demonstrates
that liberal policies are necessary but not sufficient. Strong,
credibly market-supporting institutions, including laws and property
rights, are needed in order for countries to benefit from economic
liberalization. What Russia provides is an extreme example of the fact
that markets cannot work well without the requisite institutions. Over
the past 20 years, many countries in Latin America and Asia have
liberated market forces significantly, and those that also developed
market-supporting institutions are faring much better than those that
did not. Regulatory institution ensure that regulations foster rather
than obstruct competitive market forces.
ERT: How important has the worldwide spread of
democracy been to the advent of the new economy?
C. Oman: The spread of democracy is extremely
important for economic development. I would link it any more closely
to the development of the new economy than to economic development as
a whole. Clearly the development of democracy and of the economy go
hand-in-hand. Beginning in the 1970s, repeated discussion has focused
on the deleterious effects of financial repression on economic
development, particularly in Latin American and other Third World
countries that adopted the import substitution model. The experience
of the 1980s shows that during financial repression by establishing
free, well-functioning financial markets coincides with the need to
end political repression and develop democratic institutions that
ensure political expression. The bottom line is that democratic
political institutions and well-functioning financial and capital
markets are mutually reinforcing.
— AsiaNet Feature Service
