Musings On The Global Economy:

Pharaohs
Old and New

(originally published February 21, 2006)

Dear Maurizio,

I remember a few years ago or so, in 2003, we were speaking about the economy and, in particular, we said that, after the ITC technology boom of the 1990s, there is nowhere left to invest in the real sense of the term (and not in the speculative sense).

Obviously such a statement requires an explanation of the factual details that stand behind it.

Political conditions allowing, instantaneous global communications mean that big power groups – mainly national governments and multinational enterprises – can organize a truly global division of labor. Under these conditions, they can optimize the allocation of resources in the several sectors: for example, on the one hand, the industrial production of manufactures in regions where labor costs less (now Asia – led by China and India – compared to old centers of industrialization such as Europe, English-speaking America, and Japan) and, on the other hand, in the development, design, and planning of the application of the technologies that stand behind it in regions where managerial methods, university education and knowledge are at a higher level of quality, i.e. still, for now, in the same old centers of industrialization.

Meanwhile, these same old centers of industrialization – literally old also in the demographic sense – import persons of low education to work in the low-level service and construction sectors. More in detail, the United States imports not only low-cost goods from China, but also low-cost persons from Mexico and the rest of Latin America. Europe too, though to a lesser extent and with reluctance, imports low-cost persons from Africa, from western Asia, from central Europe, and in some cases (Spain and Italy) also from Latin America, all regions were the demography is “young, but lacks, however, the strong industrialization that in contrast is now the case in India and eastern Asia.

So far so good: investment in ITC technology means goods and services at lower cost and so, in the aggregate, higher productivity for all and a higher quality of life for all on a relatively global scale, at least in principle, including also, and perhaps in particular, “intellectual” workers in the countries of old industrialization. Perhaps the only true losers in this scenario are poorly educated workers employed in manufacturing based in the same old centers of industrialization, but there are also retraining programs and in any case many of these workers are close to retirement.

However, in this scenario there are several economic, political and social structure problems, which are also reflected in the financial scenario. In the following paragraphs I summarize only a few aspects of the most important problems on these four levels.

On the economic level, I focus on the supply and cost of energy, a sector which once again emerges as a central point in human affairs since, on the one hand, there is a need to fuel the growing number of new factories in countries such as China and, on the other hand, there is a need to transport all this merchandise to the centers of consumption over mountains and oceans. We can also add the need to heat the houses of the old pensioners in the old industrialized countries (not so old pensioners in some countries, especially in western Europe, led by Italy) and fuel their SUVs., etc.

Now the political problem arises: still the most efficient sources of energy (oil and natural gas) are found for the most part inside or around countries where major groups aspiring for power, with another ideology, – that certain other, already-established power groups label as “terrorists” – want to, no surprise, increase and officialize their power, and so to achieve this objective they make war where the stakes are the price of energy, to whom to sell it, and how to redistribute the income so generated.

Obviously I am referring to the Arab countries, and to those that extend from northeastern Africa to central Asia and even to Indonesia, and to the Islamists. Something similar is ongoing also in Latin America, though not at the level of a shooting war and with milder ideologies, specifically Venezuela (the world’s number five oil producer) and now in Bolivia (enormous quantities of natural gas have recently been discovered) of which more below. Struggles in African countries like Nigeria and Angola can also be viewed in this context.

Addressing now the social structure issue, I would like to point to one general phenomenon and one particular one that regards us even personally. The general point is that historically, speaking of big power groups, any change in territorial relations due to technological and/or economic and/or social and political changes also gives rise to the challenge of how to manage potential and real social changes that result within the territories of the respective big power groups.

As for the particular phenomenon, as mentioned above, investment in ITC technology means goods and services at lower cost and so, in the aggregate, higher productivity for all and a higher quality of life for all on a relatively global scale, at least in principle, including also, and perhaps in particular, “intellectual” workers in the countries of old industrialization.

It is not so simple in reality, however, neither is it simple to understand the reality, and perhaps even less so to describe it in an economy of words. However, I shall try, as God commands.

Obviously the societies of early (old) industrialization cannot bring forward their social models developed towards the end of the 1800s and during the 1900s, especially those after the second world war until the end of the cold war. At the same time, the established power groups – neither in the countries of early industrialization, nor in the emerging countries, nor in the so-called underdeveloped countries (I refer in particular to Latin America), nor the “traditional” countries (I refer mainly to the Arab countries) – do not want to lose control during this stage of transformation of the global economy.

One proven method of control throughout history for two thousand five-hundred years – and here I address the financial scenario – is social and financial indebtedness, together with its partner, inflation: in other words, control of the money supply, of the means of exchange, the unit of account, and the store of material value. (There is also the military method, still employed, among still other methods of control.)

In principle, lower-cost goods and services and higher productivity at the aggregate level should mean a stable price level or even a moderate deflation. In such a scenario, there could be a true higher quality of life for everyone on a relatively global scale, also including, and perhaps in particular, intellectual workers in the countries of early industrialization: imagine what social, political, and cultural changes could occur through a true liberation of creative intellect, tempered by a sensibility for maintaining what has conserved true moral and cultural value throughout the centuries.

But the will of the current big power groups is that there be no fundamental changes in the matrices of the current social political models, based on the cultural ideology of consumerist materialism – whether of the so-called capitalist, socialist, or communist variants – as a result of the mere global extension of the industrial economic model organized through a combination of free markets and state intervention. The only alternative offered by the current global political agenda would be radical Islamism, which in my opinion would mean, stated briefly, the reversal of the gains of the industrial revolution of these last two-hundred years.

Instead, assuming that the established power groups beat back the challenge posed by radical Islamism, the social structure will continue to transform toward one that combines the gains of the industrial revolution of these past two-hundred years on a global scale on the economic plane – as in parallel fashion, the gains of the agricultural revolution have spread since around ten thousand years ago – with a widening gap between wealth/income groups (relatively few hyper-rich and many relatively poor) and an increasingly small middle class (including intellectual workers), just so reminiscent of a "traditional" agricultural society.

And the key instruments in implementing this transformation are the control of the energy supply, and of other commodities, and then control of the money supply, indebtedness, and inflation, and so control of the manipulation of published inflation data, implying also the huge sphere of control of the mass media.

As a result, the working classes, intellectual and non-intellectual, will be fixed and/or flexible in their places, both physical as well as social economic, by the will of the leaders of the big power groups (rule by telecommand), under the dominion of a consumerist materialist ideology, at the global level.

The details, among others, of this implementation are, in the countries of early industrialization, in the costs of the pension, healthcare, and university systems, in the speculative bubbles in asset prices – ten years ago in equities, now in the residential real estate market –, in the spread through the banking system of consumer credit and household indebtedness, the manipulation especially of the inflation data, and, at the global level, of migration flows, especially towards the countries of early industrialization.

As a result, stated briefly, at a certain point there will be a greater balance in the production of manufactured goods and services among the several regions of the world (and so also in the balance of payments): the number of factories will one day grow again in Europe and the United States, but the workers will not necessarily be the descendents of the current and soon-to-be pensioners, and the associated social costs will be of lesser proportions than those of the models in effect for several generations now in the countries of early industrialization.

Summarizing, then, the opening reference, I see the investment and application of ITC technology on the global level and scale in the last fifteen or twenty years, and since the end of the cold war, as a second wave of the industrial revolution, whose social, political, and economic implications are still being played out (e.g. military conflicts, financial speculation, imbalances in the balance of payments among the several countries, government and private debt, attempts to manage real and imagined climate changes, among other phenomena that generate uncertainty).

However, for the foreseeable future, perhaps the next fifty to one-hundred years, in my view, we will have a social structure that combines the gains of the industrialization of the last two hundred years with several social aspects reminiscent of the social structure of "traditional" agricultural societies, based, however, on a dominant consumerist materialist ideology in the hands of the current big power groups, leaving the conservation of culture and moral values to the efforts of smaller groups and individuals that still have the time, the will, and the strength.

And this space there will be: the current big power groups are exactly that, big and powerful, however they are not totalitarian (e.g. nazism, communism, and radical Islamism), and a good part of the leaders of these groups also see that to leave free a part of this sphere of human life on earth is also to their own benefit.

In the following paragraphs I offer a few observations, in the framework of the scenario delineated above, on the social economic situation in the regions and in several of the countries where I have enjoyed the privilege – in part also thanks to investment in ITC technology in these last fifteen/twenty years – of living, working, and studying.

As is well known, in Europe there is a struggle going on for many years now among those social forces that want to conserve as much as possible the old social model noted above, on the one hand, and those that are in a position to gain from the globalization of the economy, on the other (at times, these forces overlap and are contradictory among themselves, as often is the case in politics).

The result so far in countries like Italy, with rigid social systems (including the political system, the bureaucracy, and the labor market in particular) is that the society is consuming the wealth generated in the past at a faster pace than it is generating new wealth, and young people find relatively little space to gainfully express their talents, i.e. in jobs that pay well and in the formation of new, successful businesses (instead of being suffocated by the bureaucracy before generating even a euro of profit), allowing them to facilitate the formation of new families. I see that the Italian companies which are prospering are precisely those that are involved in the globalized economy, even in the traditional sectors of the modern Italian economy, such as the fashion and clothing sector, but likewise companies involved in the construction of infrastructure in key sectors such as energy and transport, among others.

One possible solution for domestic Europe, as opposed to a more flexible society achieving an increase in productivity, maintaining at the same time, nonetheless, the same expectations for the standard of living, would be a return to the protectionism of the past, a fortress Europe, which, however, would still have to find a solution to its energy needs, perhaps integrating more with Russia, central Asia, and possibly also with countries like Iran, quoting the price of oil in euro.

As for the United States, it seems that there an almost total political consensus that globalization is the only path forward. So the most striking aspect is the ongoing change in the social structure. It seems to me that the key to avoiding serfdom at the individual/household level is to avoid indebtedness due to excess consumption (also with moral implications).

The speculation in the real estate market is no longer sustainable. As a long-term result of the overproduction of oversized houses in the last seven or so years, I see the subdivision of these constructions into multi-family housing and a change in the zoning laws, allowing in zones – that so far are otherwise strictly residential – small industrial and commercial operations – reminiscent of what I had seen in Portuguese villages only seven or eight years ago and what I see as still the dominant model in Latin America – in part to offset excessive transport costs (job commuting, in some cases nowadays up to two hours one way only) and the carrying costs of these constructions, consisting of mortgage debt, energy expenses (light, heating, air conditioning), local property taxes, insurance, physical maintenance, and other items, all expenses that have gone or are going almost literally through the roof in the United States, not to mention healthcare and university education expenses.

One way out for both the United States and Europe, apart from a fresh outbreak of both trade and migration protectionism, would be new investment and widespread application of a new form(s) of energy and transport. However, in the current political economic structure in which big oil dominates, I do not see such a change on the visible horizon.

As for Latin America, then, judging from what I see so far in only one country, Ecuador, I have learned the meaning of an "underdeveloped" country (we may by now discard the term “third world” and for different reasons): there is industrial development, but at a much slower pace compared to both the countries of early industrialization and the emerging countries, in the grips of a ruling class with a "traditional agricultural" mentality who at the same time maintains strong cultural and political, as well as economic and financial, ties with "old world" Europe and the United States.

However, in contrast, Latin America maintains in a much more widespread way several aspects of the old "traditional agricultural" culture that are really worth the effort to conserve, in my view, such as the family and the art of enjoying life regardless of material conditions. I observe this referring to a concept of relative wealth and poverty and with all due respect for those suffering absolute poverty. I repeat, there is industrial development in Latin America, though at a very slow pace, and above all there is hardly a lack of food and in many environments the climate is favorable to the sweet life for people who know how to do it, in their own way; what is lacking, however, stated briefly, are social institutions (political and economic) that would allow the great mass of persons to achieve a level of material life “enjoyed” by those in the countries of early industrialization.

However, in my opinion, such a level of material life is overvalued, not only nowadays in market terms, but above all in human terms, and the people in the countries of early industrialization continue to pay an excessively high price in terms of social rigidity (the lack of freedom?) to conserve the system, in part because of notions of nationalist propaganda, snobbism, and downright racism: a little personal multi-lingualism and real experience in situ go a long way in helping to value the way of life of others, while at the same time wishing them the sweeter fruits (and not the bitter ones) of the systems of the countries of early industrialization, while they conserve those fruits of their own traditions that have real value.

In this context, several current political trends in Latin America perhaps merit comment, even if, in my view, the underlying issue is the same as always: are the ruling classes, of whatever flavor in terms of political propaganda, sincere and do they have the skills to transform the income generated by few commodities into durable social institutions that are capable not only of giving a higher standard of living to an increasingly larger share of their respective populations through a redistribution of income, but also more opportunities to grow, to express their talents, in a more diversified and competitive economy in the global context? Or are we witnessing the usual populism whose economic strength is based on a boom in the price of a single commodity which sooner or later will go bust according to the international trend, ending with the defenestration of the demagogue of the day? Nowadays I am referring in particular to Hugo Chavez of Venezuela and even more recently to Evo Morales of Bolivia.

Certainly more regional integration would make each one of these countries more competitive at the global level, and perhaps Brazil is the leading example in this sense, being the only country capable of standing alone as a global economic power, not only because of its territorial size but also because of the quality of its industry and its skills in research and development. Other countries are attempting to combine regional integration with global trade openness: I am referring in particular to the free trade agreement among the central American countries (plus the Dominican Republic) and the United States, the negotiations for a similar agreement among the Andean countries – Colombia, Ecuador, and Peru – and the United States (the final executive signatures are expected this year, 2006), the free trade agreements with Chile, Mexico’s NAFTA, and, finally, there are similar agreements being negotiated among different Latin American countries/regions and the European Union, and even with some Pacific-rim countries, including China.

It is worth mentioning that, at least in the Ecuador that I see, among the ones who prosper the most are those involved in some way with the global economy, both through emigration and the remittances that they send back to the country of origin and through trade.

Therefore, even a combination of populist socialism and free market in an open economy regime would be good in principle. The question remains whether the Latin American ruling classes are willing and able to give their respective societies social institutions adequate to the current global scenario and to curb, at least, the corruption that so punishes those who are for the most part good people.

As for the east Asian countries and India, obviously I cannot make personal observations, limiting myself instead to a few general remarks. First, it seems to me that the gap in the level of material life between an Asian worker and a worker from a country of early industrialization is set to narrow significantly over time. In the meantime, these countries are improving both in military terms and in terms of home-grown technology (improvement also reflected in the sphere of autonomous university research).

This development strengthens the idea and the reality that the systems of the countries of early industrialization are by now, or in any case will be, overvalued and they will have to maintain their hegemony, if they can, through a combination of propaganda, further technological and managerial development, and perhaps some social reinvigoration. Otherwise their destiny may be to become second-rate players in a global system dominated by the Asians, more numerous by far, while the Chinese laugh at the war between the "West" and the Arabs to determine who will sell them the commodities, energy first of all, for the industrial development through which they would come to dominate everyone.

In this overall context, at the personal level of one who, in some way, is part of that “middle class” that is decreasing in number and in importance, at least in comparison to the society of the countries of early industrialization during the last hundred years or so, I would say that the risks and the opportunities – in terms of mere survival, in general economic terms, in terms of personal moral choices – are not much different than they were in similar social situations of the past. I am thinking in particular of the Roman Empire of the first Two Centuries in comparison with the Third Century, for example. At any rate, often in history there is a complaint about the disappearance of one sort of "middle class" or another. Apparently the destiny of humanity does not revolve around this point, and there are more important things, even at the individual level. At any rate, I always remember something that I read in connection with Egyptian history, a letter from a father written to a son, conserved in the sands of the desert, precisely at the dawn of written history, in which the father exhorts the son to become a scribe, i.e. to know how to read and write, to know languages, because such knowledge would give him the skills and the flexibility to survive in the world of big power groups, of the pharaohs, old and new.

Peace of soul to all,

Latin & Hellas ™

4-5 January 2006

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