The Sputnik moment and the zero-sum game

February 1, 2011

The best line in U.S. President Barack Obama’s State of the Union address was his contention that “this is our generation’s Sputnik moment.”

It was smart because the essence of the idea is obviously true: Just as the Sputnik launching in 1957 terrified Americans with the prospect that they might lose their global scientific supremacy, the rise of the emerging markets, particularly China, has made them worry they could be losing their technological edge.

Mr. Obama’s evocation of NASA and the moon landing was an emotionally powerful reminder that Americans haven’t always viewed government investment – or even government spending – as an unequivocally bad thing.

Today’s Sputnik moment is playing out in an utterly transformed world economy whose defining characteristic is its interconnectedness. That makes winning a lot harder to define. The United States wanted the Soviet Union to lose – not just in space, but back on Earth. This time around, it isn’t quite that simple. In the age of globalization, America wants to win, and it wants everyone else to win, too – except when it doesn’t.

The President’s speech reflected that ambivalence. At times, he framed the country’s economic challenge as a Cold War-style, zero-sum game: “the competition for jobs is real,” “we need to out-innovate, out-educate, and out-build the rest of the world,” innovation must “produce jobs in America and not overseas.”

But another part of the address was about enmeshing the United States more deeply in the global economy and making it even more dependent on the prosperity of its sometime rivals. The President talked up trade – boasting about agreements with India and China, claiming credit for his hard-won free-trade deal with South Korea and pledging to pursue similar pacts with Panama and Colombia.

Business people (and teenagers) are used to this sort of complicated relationship with counterparts that are sometimes rivals and sometimes partners – they call them frenemies. Nowadays, countries live in a world of frenemies, too. T.K. Kurian, CEO of pioneering Indian outsourcing company Wipro IT, said in an interview that to succeed in the fast-growing emerging markets, Western companies needed to move some of their research and development there. That, he said, was the only way they could truly “understand what a frugal environment means.”

Lest the point be lost on Davos attendees, Azim Premji – chairman of Wipro Ltd. and Mr. Kurian’s boss – told a cautionary tale of the mistakes Western multinationals make when they approach emerging markets with the “mindset of an American sitting in Milwaukee or the mindset of an automobile design engineer sitting in Detroit.”

Ford, Mr. Premji said, wanted to create a cheaper car for the Indian market. To bring down costs, it produced a model with only two electric windows, rather than four. But those two were in the front of the car, next to the chauffeur. Anyone able to spend $15,000 on an automobile sits in the back seat, and those owners weren’t pleased to be downgraded to manual windows.

The good news, Mr. Premji and Mr. Kurian said, was that Western companies that master emerging market research and development often find they have come up with an inexpensive product they can sell to cost-conscious consumers back home. Except that may not be such good news to the American in Milwaukee or the engineer in Detroit who joins his blue-collar brethren in being displaced by workers abroad. Hence – frenemies.

The biggest example of how we are all frenemies was Mr. Obama’s push for export-led economic growth. From a national perspective, it makes a lot of sense: After all, it is a strategy that is paying off for China and Germany, two of the world’s most robust economies. The catch is that export-led growth won’t work if everyone tries it.

“Not everybody can have export-led growth,” said Lawrence H. Summers, the President’s former chief economic adviser, who went back to Harvard at the beginning of this year. “The thing economists know is that all the trade balances, if you add them up, have to sum to zero,” he said, because “there are no Martians to whom we can export.”

And that is why the political leaders here at Davos are frenemies. Each one wants his country and its national champions to win in the new global arms race of producing high-tech, high-value-added exports. But he also wants his neighbours to be rich enough to buy those goods – and nowadays everyone, even consumerist America, has decided that the only path to prosperity is to likewise pursue a strategy of export-led growth.

Balancing these global appetites is the world’s Sputnik moment, and it may make putting a man on the moon – or even Mars – look simple in comparison.

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Wow, here’s big chance for Reuters to advance global trade: Send Larry Summers a copy of David Ricardo’s Principles of Political Economy.

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