Speech before the Los Angeles World Affairs Council on March 28

Speech before the Los Angeles World Affairs Council on March 21, 2002:

Daniel Yergin
Chairman, Cambridge Energy Research Associates

Commanding Heights: The Battle for the World Economy

Bob, thank you very much for those very gracious words. I appreciate them a great deal. It is an honor to be here this evening, at the World Affairs Council, ladies and gentlemen and I see many friends in the audience. I recognize what a distinguished organization and the service that this Council has provided to this community for over a half a century in terms of engaging it with the world and being a framework for bringing understanding and so I’m really very pleased to be part of this program.

I’m happy to be introduced by Bob whom I have know for a number of years and I can tell you in addition to being a tenacious businessman I have great respect for his leadership both within BP and the industry and as an actively-engaged, very thoughtful public citizen. We’ve been working with Bob and his colleagues because BP is a very sterling underwriter of this venture that we set out to do which is to try to make sense of, say the last hundred years of history, that we’ve called the Commanding Heights and I’ve reflected on BP’s involvement with it and I think that it really represents its commitment to improving public understanding of the global economy in all of its dimensions and also I think something that’s very important and feel very strongly about in terms of educating the younger generations to better understanding of it. Where are the high school students? We’re very happy to have you all here kind of as a representative of a generation that we hope will find this series and the extraordinary website something that will be helpful in your education. I also have to tell you kids something that it’s not so many years ago when I was in high school that I used to come to this very hotel to engage in speech contests at the Optimists and Lions Clubs who have, and perhaps still have, so I’m delighted that you all are here this evening.

A couple of other people that I just want to note. One is Greg Barker who is one of the two producers of the Commanding Heights. Greg is right over here. We’ve had quite an enterprise in taking ideas and concepts and thinking and turning them into visual images and stories and I think you’ll see, you’ll get some flavor of it. It’s really been an extraordinary challenge. We’ve learned a lot. The L.A. Times since has asked me to write an article about what it’s like to turn a book into a TV show and I think, I guess, what Greg will try to remember but it’s a great challenge and you’ll see some of it. It’s been a pleasure working with Greg and I want to also acknowledge _____________ who has been key to this project and Allen Palmer who is an extraordinary cameraman and I’ve never quite had the experience of driving with somebody through traffic in Mexico City with him actually hanging out the window to photograph things and it’s always to get that picture and the pictures are often very beautiful, so some of the team is here to show it this evening.

What we’re going to do just to kind of orient you to what’s happening. We did this book as Bob Malone described called the Commanding Heights and then based upon that experience of doing The Prize said you know enough time passes and you forget how hard things are and so we said, “We’ll do it again” and we set out on this venture to do the Commanding Heights, transforming it to a six-hour TV series and also into this incredible website that’s part of it. It’s been a challenge and I’ll talk a little bit more about that but to give you a sense in terms of scale this is six hours. If it were on commercial TV it would actually be eight hours because twenty minutes of every hour in commercial TV is commercials. So, we don’t think there’s going to be anything else that’s going to be on certainly public television or commercial television that will have this scale and what it really is is big history right up to the present day and I think working with Greg that was one of our challenges to treat the past and the present in his almost like kind of perspective. We went to five continents, twenty countries, I think, a total of 170 interviews. As I say, this will be the biggest project of its scale. It goes on the air April 3^rd, we finally came to a meeting of the minds about the last, you know those things that identify people at the bottom of the TV screens, even those have to their difference of opinion we finally came to agreement on the last one about five hours ago so I can finally say that we’re finished, we’re ready to go on the air, and what we’re going to show you this evening is just about fourteen minutes to give you a flavor. It will be first an overview of the series, then something very interesting, as you all know, we’re living through his age of globalization but this is actually the second age of globalization and we’re going to take you back to the first age of globalization, a century ago, and you’ll hear the names of ________________to dominating economists of the 20^th century who in a sense became the frame for the first of the three nights. Then we’ll look at what we call the global village which is how technologies tie things together and then we’ll turn to the question of poverty in the world and the test for globalization to the degree to which it is inclusive and as we are having dinner this evening here heads of state are meeting in Monterey, Mexico to discuss exactly this and I think this focus on global poverty is one of the consequences of September 11^th. After the film I’ll come back and share a few things that I learned from this extraordinary process that we’ve been through but first let us bring down the screen and roll some film.

FILM

This spring Dr. Daniel Yergin and Producer William _____, the team that created The Prize, comes a new series on how today’s global economy was born. This is the story o a battle between the power of governments and the power of the market place over which will control the commanding heights of the world’s economies.

The debate of whether you have an economy based on crises or state planning has been at the very heart of the economic battles of the last hundred years. “It is a struggle that has defined the 20^th century. The First World War was a catalyst -- people were disillusioned, people were bitter, they were looking for something better. Socialism, Communism, seemed to promise that better world. Through the prosperous years the stock market had become a national pass time.

And the lean years. Now here’s a complete and utter collapse. This great nation will endure the war and peace. At the end of World War II there was tremendous loss of faith in the market economy. During inflation we were having double digit unemployment and double digit inflation at the same time and it simply was not working.

And deregulation. We actually regulated the size of sandwiches. We will not go back to business as usual.

And privatization. The spirit of enterprise has been sat upon for years.

And the agony of reform. Gorbachev began too late and these reforms were too cautious.

This is the story of a new global economy. ______________ ecological world in which we live. It is possible to do in Bangkok what has been done in Silicon Valley.

Its promise and its perils. You’re going to hear a giant sucking sound of jobs being pulled out of this country.

From free trade. Millions of people a day are better off than they would have been without globalization.

To free fall. All of these people who have decided there was no risk anywhere literally panicked and decided that there’s got to be massive risk everywhere.

Then September 11^th. Up until September 11^th there was a sense that this movement towards globalization really was irreversible and since then there’s a recognition that things can go in another direction.

This extraordinary six hours series tells the story of combat among brilliant thinkers, about which economic systems would truly benefit mankind. The forces of the market are just there like the wind and the tides. If you want to try to ignore them, you ignore them at your peril. The story of epic political struggles to impose those ideas on the nations of the world, the great and the small, the rich and the impoverished. It was ultimately the collapse of everything else that had been tried that was the most important factor in this massive shift of thinking in the world.

The story of revolution and counter-revolution and ideas, and technology and in political power that has defined the wealth and fate of nations and will shape our lives in the 21^st century.

The next three challenges making this independent world of ours on balance far more positive than negative and the extent to which we succeed in doing that will determine whether the 21^st century is either marred by terrorism of all kinds or whether it becomes the most peaceful and prosperous and interesting kind of world ever known.

Commanding Heights, The Battle for the World Economy.

At the start of the 20^th century __________ and kings had witnessed the first age of globalization. Every day life is being transformed everywhere. Technologies, like the telegraph and the telephone, revolutionized communications. Steamships and railways made the world a smaller place. Tens of millions migrated without the need for passports. Kings described this global market in which trade flowed freely, “If an inhabitant of London could orbit by telephone while sipping his morning’s tea the various products of the ______ earth and reasonably expect their early delivery on his doorsteps relativism and imperialism eventually cut through the rivalries a little more than the amusements of his daily newspaper. What an extraordinary episode when the economic progress of man was that age which came to an end on August of 1914. I had summed it up more succinctly. I had not realized how ________ our civilization was. The murder of an Austrian archduke by a terrorist triggered a world war. It would be almost eighty years before there was once again a true global economy.

During the 1990s technology, too, leaped over national borders, spreading commerce and ideas. It’s hard to believe that at the beginning of the l990s e-mail was virtually unknown, most people didn’t have it and a decade later it was everywhere. It has become part of people’s life and so with communications network so powerful the price of telephone calls have plummeted. The number of telephone calls around the world skyrocketed and people are in contact and connected in a way that had never happened before.

In a decade, the number of international phone calls from the U.S. increased from 200 million to 5.2 million. This AT&T control center handles 300 million calls each day. Americans were often connected to the developing world without even knowing it. Consumers checking their credit card balances could be routed to call centers like this one in India where operators identified themselves with made up American names.

In a remote Indian village, farmers took their crops to market as they had for generations but an internet connection insured they were now paid the world price for their crops, a price set at the Chicago Mercantile Exchange, 8000 miles away.

This borderless world created a new kind of business. Entrepreneurs could now think like multinationals and see the entire world as a single market. Ariana ______ understood this revolution earlier than most. All of us believed in central planning. All of us believed in socialism because we’re all children of a different generation. Then I realized that if you want to _________ you go and do it by _________________. You have to create new wealth. With only $250 _______ helped found a computer software company. His headquarters in Bangalor became the second largest software company, only Microsoft was bigger. Ninety percent of the world’s software engineers are from India. You know I define globalization as using where it is most cost effective, selling where it is most profitable, sourcing capital from where it is ______ best without worrying about national boundaries.

People as well are becoming increasingly mobile. America relaxed its immigration laws, attracting a huge influx of high tech workers from across the developing world. Silicon Valley is the place, the happening place, so many people come to. It is the place of opportunity. It is a place to improve ourselves, to show or skills. In many ways Silicon Valley was the spiritual center of the new global village. The source not only of its technology but of its entrepreneurial ethos.

Global poverty soon became the galvanizing issue among globalization’s opponents. In the wake of Seattle, control of the protest movement began to shift from unions to a desperate network of grass roots sectors. We’re trying to move from the politics of protest to the politics of liberation. It’s not simply trying to create a kinder, gentler kind of capitalism. It’s not something about trying to hide social causes or negotiate the terms of our misery, trying to make our misery a little bit less miserable. It’s about changing the world. It’s about creating structure and institutions and frameworks and communities and neighborhoods that are based on our values, which are values of social justice, of mutual aid, of solidarity, of direct democracy. And we’re a long way from where we want to go but we have to start now.

One of the protestors’ next targets was the World Bank, an institution whose sole purpose was to reduce poverty in developing countries. When you see someone outside a barricade attacking you vehemently because of something called globalization you have to wonder what it is they’re getting at. It enrages when you have people who assume they have the moral high ground against a team of people here who are devoting their lives to addressing the very questions that these people claim to be addressing. But the protests had become impossible to ignore. Inside the World Bank and other institutions officials struggled to make sense of the growing debate. The protest movement is multifaceted and anger is multifaceted but there clearly is a sense of losing control in a __________ nation. The old structures and the old institutions are not working anymore and I think we’re at a stage where there is this extraordinary chaos in international organizations, in international rules of the game that we’re trying to define and we’re not there yet and I think like any chaotic situation when you’re in the middle of it you don’t see a way out but I think what we’re observing is a series of protests, a series of engagements as part of the process of coming to some new structure for managing a global economy.

Globalization did not cause global poverty but it did make us more aware of it and by creating a single global market it raised the question of how that market benefits the world’s poorest nations. We are seeing around the world a movement towards greater reliance on markets, greater confidence in markets and for that confidence to last it has to be seen that these markets are fair, that they are delivering the benefits widely to people who are benefiting from them and if they don’t have that kind of legitimacy then the confidence is not going to remain and the markets will be vulnerable to corruption and being replaced by other kinds of controls. So every day the market has to earn and prove ________ and that’s a big task, particularly in the developing world where the number one issue is the issue of poverty and that more than anything else is what these markets are judged by.

END OF FILM

Thank you very much and on behalf of Greg and Allan Bethany and all of us appreciate your response to it. This gives you a sense, of course, what you’ve just seen are pieces and in fact the whole six hours unfolds very much as a story, as a narrative, like reading some kind of favorite history book but it comes up into the very present day and I think that as you get a sense of it there are a lot of different voices in it that it is complex and it is changing and there isn’t a single answer and I think different people watch it and come to different views but what we are trying to do particularly in the last two hours that Greg focused on is to tell the story of this second age of globalization, a century after the first stage and the quest to find the new rules of the game for how this global economy will work. It’s almost like an analogy at the end of the 19^th century, the United States came together as a single national economy and we needed to get our rules in place for it which we did do over a period of thirty years or so and that’s where we are today with this global economy and we’re still very much in a world of nation states. So we try to provide a framework for thinking about this second year of globalization. It is striking that this word “globalization” which is a five syllable rather abstract word and yet it manages to excite so much passion and emotion and I thought about that and asked the question “why?” and part of the answer is because we are living through a time of a lot of change and some part of it is disconcerting and secondly I think it’s because people can look at that word and see their specific concerns and issues but we try to, as I say, to in a sense bring this word down to earth and what are we talking about and as we were working on this, of course, the world itself was changing. How rapidly things change. During the time we were working on this the new economy came and went. You remember the new economy? It’s not that long ago. People talked about first movers, they didn’t talk about market, they talked about space and they talked about cannibalizing your business before someone else does, you didn’t want customers you wanted eyeballs and the whole thing was said to be the first movers. Now, in retrospect, there some advantage in being the last mover. So it’s important to avoid the temptation to think that everything is new and I think in a way that people talked in the 1920s about a new economy that should have been a tipoff. And it is helpful to remember that there was this very remarkable first stage of globalization in which the United States was the leading emerging market of its day, technology was tying the world together and it all ended with a terrorist’s bullet in Sarajevo in June 1914 as we saw in the film and the First World War. Well, globalization gets discussed as a thing, it’s either lauded or attacked but as we see it it’s much more a process. It’s an interweaving of national economies through the growing flows of trade, investment and capital across historical borders. I was talking to some of the people from the Long Beach Port this evening and it’s so striking how the degree people don’t realize the degree to which we’re tied together with the global economy in so many different ways, but a port like that really represents not only facilitates it but represents and embodies it. But it’s also the flow of technology, of skills, of ideas and news information, entertainment and, of course, people. It’s very striking to see those Indian technologists working in the Silicon Valley. Now, you could say that this has all been going on for over 500 years since Guttenberg invented moveable type in the age of discovery or you could say it’s been going on since the end of the Second World War when people learned the lessons of the 1930s and began to open up world trade, but the perspective we have is that something really began with the fall of the Berlin Wall and the collapse of Communism because for the first time since 1914 we truly had a global economy and these changes have been driven by the changes in ideas about the role of markets towards greater openness, greater confidence in markets, certainly technologies are driving these changes, the tying together of markets through trade, through capital, etc,. and something I think does not get enough attention is what we call the global shareholder which is really more than anything else American, British and other pension funds which are in a sense seeking growth and demanding performance from companies around the world. You know, the measures are just incredible. It’s really remarkable that in the 1990s world trade doubled in one decade to almost eight trillion dollars, something like 30 percent of total world output. There’s that wonderful statistic that’s in the film about the number of phone calls from America in 1980 it was 200 million overseas calls, at the end of the 1990s 5.2 billion. Talk about being tied together.

Another aspect of the change in fact which does not in a sense get remarked upon enough is the growth of democracy. I remember going to the first summit of the Americas in Miami in 1994. It was extraordinary. There are 34 democratically elected presidents standing there on a platform from a hemisphere that was famous for dictatorships. That’s a part of this change.

As I say, though, we see the rise of anti-globalization and the concern about it and there are many issues that seem to make a lot of sense. For instance, debt relief for developing countries, but many other issues that you scratch your head and say, “What do they have to do with these down to earth processes of economies being tied together?” And the thing, as I said before, that people see what they want to see or see other issues. But I want to share with you for a couple of minutes the things that I learned from this process of spending a couple of years after really writing a book to then looking at it from this perspective. One is I’m so struck that so often people will attribute to globalization things that really are not the result of economies being tied together such as global poverty, such as these major environmental problems. If you want to see the worst environmental problems go to the former Communist countries where that is one of the legacies that they’ll be dealing with for decades.

The second thing I come away with and in a sense sometimes it’s almost unfashionable to see this but the degree to which these processes of globalization, particularly trade, are really engines for reducing poverty and the best arguments if you look at Asia, Korea and India in 1960 had about the same income per capita, both very poor countries. India kind of kept the walls up, Korea said, “We’re going to make a bet on the world economy,” and today the per capita income of Korea is twenty times that of India. It’s a very powerful demonstration. Another example, is Singapore which when it came into existence as an independent country thirty-five years ago was so dirt-poor people weren’t sure it was to be able to survive. Today, its per capita income is higher than Britain’s and it’s as high as Germany or France. What a remarkable change. And we see that process unfolding in China now, we see the creation of middle classes. So, the power of trade is a driving force for raising standards of living.

Another thing that really became clear to us is the dichotomy between what critics will say and what developing countries want and we see it when we see the section about Seattle in 1999 which anti-globalization burst upon the scene and in the streets there was one drama going on but in the conference halls was another drama going on. The developing countries were saying, “We want more trade. We want access to your markets, that’s the way we’re going to be able to deal with poverty.” About a year ago I heard the Finance Minister of South Africa, somebody from the AMC say, “We were elected by millions of poor people to raise their standards of living. Who are the people who tell us we can’t have trade and investment. How else are we going to do it?” And I think there is a strong new agenda, a developing world agenda, about opening up markets. I think sometimes people don’t have quite the right image. They think it’s developed countries here, developing countries there and they don’t see that the most dynamic countries are these new globalizers, countries like India and we saw a little bit of it and I’m convinced there wouldn’t be an internet without India and these are countries that are growing faster than many other countries and you come away with a sense of the role of government. Is the rules of the game, is creating institutions of law, contract, transparency that focus the legitimacy of markets, education, health, social services and one of the aspects of it is property rights and we have this remarkable man, Hernando DeSoto, we see him up there, Allen, you filmed it, talking to very poor people, high in the Andes about property rights and their capital, their skills and arguing that you can’t become part of a capitalist society unless you have property rights and that’s a very big problem and Greg filmed in Tanzania a coffee farmer who’s selling his coffee in the world market. He paid for his farm, but he doesn’t have title to it, he doesn’t have ownership for it and that lack of property rights is actually a very basic element. So, internationally it seems to us there is a very big agenda in terms of getting the rules right and nobody has a monopoly of wisdom on how to go about it and it extends from trade to something that was considered rather obscure but no longer is obscure which is accounting rules. In fact I noted that for the first time in American history, it’s never happened before in a Presidential State of the Union Address, that the president discussed accounting standards and that is one of these rules of the game questions and in front of the world community is the question of how do you make globalization work. How do you make it resilient, how do you make it beneficial and legitimate. There are a couple of questions that I want to raise about it. One is, of course, in the aftermath of September 11^th, one aspect of that aftermath is this new attention to global poverty which is striking. And of course the other is that security has been pushed to the fore and I’m sure that at World Affairs Council meetings you’ve talked a lot about this since September 11^th and probably even before, but history has shown that we had an exaggerated sense of confidence about security prior to September 11^th and government’s first job is to ensure the security of its citizens and in a sense we’ve gone to some degree of cultural openness to a culture of vigilance. We don’t know the future, but we do know that the benefits of a more integrated world economy work better during peace time, work better in a world with less war, less conflict and less fractured world and the positive tracks that we’re on but the risks are obviously much more evident and we do have the lesson of the first age of globalization to keep us focus on this.

I think the second thing I’d like to say is that we kind of take it for granted now Japan’s weakness. We talk about how a decade ago in 1991-92, if you remember Japan was going to be the No. 1 economy in the world and not only bought Rockefeller Center, it bought Universal Studios and it seemed to be going like that. And now it’s been for ten years in a slump. I just want to highlight that that is a big risk to the global economy – the difficulties of the Japanese economy.

The third thing I’d like to just mention is the question about the nature of this thing called “capitalism.” I remember once when I was going to get an interview at the Harvard Business School the guy who was interviewing me said, “Well, why do you want to come here?” and I said, “I’m very interested in capitalism and how it works” and he looked at me and said, “We never talk about capitalism here” which I thought was very interesting at the Harvard Business School, but I find myself thinking about the question, “Who calls the shots in modern capitalism?” and you might have different answers. Some will say companies, others will say governments. I’ve come to the conclusion that to a considerable degree it’s us – it’s our aggregated retirement savings, the 11.5 trillion dollars of pension savings in this country that is seeking higher performance and is seeking quarterly performance and a quarter is very short. It seems to me many managements have to spend three or four weeks every quarter preparing for quarterly results and then you turn around and the quarter is over and you have to start again and it creates a lot of pressure and through the whole system. It starts with our retirement, goes through the money managers and ends up on companies and people who work in the companies. It’s a characteristic of it. There’s a lot of vigor in our system. The United States in the 1980s created 18 billion jobs. In the 1990 it created another 18 million jobs, so it’s a very vital system but it does have this pressure. I asked George Schultz, former Secretary of State and Treasury, why people don’t like markets and some people say because they’re unjust or unfair and he had another answer. He said, “Because markets are relentless” and I think that is the case. Just to give you a story of that many of you know Calpers, the largest pension fund in the world of California employees, represents a million state employees and at one point a couple of years ago it went out ended up controlling 5 per cent of the French stock market. The French had privatized their companies to open the door and suddenly there’s this thing called Calpers and this was very upsetting to the French, so much so that President Chirac went on TV on Bastille Day to denounce Calpers. The French were so disturbed that they dispatched a television crew to Sacramento. Two things – first they wanted to find out where Sacramento is and then the second things is they wanted to know what’s Calpers? And so they go and they interview this lady who works there named Mary _____ who’s in charge of their international investments and she’s ready for them. She has her computer screen up, she has all of her data showing how Calpers makes its investment decisions, its discipline, what it’s looking for. But the television crew isn’t interested in that. What they’re interested in is that she’s eating lunch at her desk and all she’s eating for lunch is a salad and so she keeps talking and talking about what she’s doing and they just keep filming the salad because they say, “Is this the future that French men and French women are going to give up their three hour lunches and eat salads at their desks? Is this the future of capitalism?” Well, Mary sought to reassure them that she didn’t do this every day but probably the French television was not convinced, but there is a point in there about the kind of pressures of this system. It’s something that I think it part of the dynamic of it and around the world and part of the change. But events, as I say, don’t stand still. Over the last five years think how much has happened. The Asian financial crises, technological transformation, the new economy has come and gone, boom-bust recession, recovery, Alan Greenspan has told us, and of course global terrorism and September 11^th.

So, what’s going to be the future and of course the future will be tested by events and developments and by ideas about how we view, how the overall system is working. I think it seems the new rules of the game is very central for us and it’s one of our big takeaways from it. And I think so much really comes down to confidence. The kind of confidence that underpins the decentralized market-oriented system so it can work in our country and around the world. And I think the last six months has really been a demonstration of the centrality of confidence. You know you really only notice confidence, I think, when it’s not there and I think confidence which is the underpinning of our system is much more likely to endure if it is anchored, if it is tempered by realistic appraisal of risks and uncertainty, the benefits and also the limits of markets and their values and it involves resisting euphoria and exuberance and fashion. So the question, the profound question about the future, “will there be an increasingly, well integrated, well functioning global economy composed of nation states that is providing benefits to billions of people around the world” or will it be in some way fractured as new barriers go up in ways that we can imagine or not imagine as security concerns come much more to the floor. And it is a complex question to answer because at one and the same time we’re dealing with a world that is composed of nation states and a growing global market place. They exist together.

Well, how will we view it, how will they work? Well, as I say it will be events that will shape it but also our ideas about events and the answers will really be found in a cumulative judgment and experience that orient our beliefs and shape this balance of confidence and it’s that very confidence that does so much to drive ideas and to drive the wheels of history itself.

Thank you.