A brief discourse on Thomas L. Friedman’s book “The World Is Flat – A Brief History of the Twenty First Century”.
I don’t know Mr. Friedman personally nor do I receive anything in return for mentioning his book. I saw Mr. Friedman when he spoke at our company in the fall of 2005. A few weeks later, I saw Mr. Friedman discussing this book on CNN. I have been tossing around similar ideas since 1995 when I realized the world was getting smaller or flatter through increased automation in numerous industries, local outsourcing, offshoring to India, ever increasing quality, increasing speed in computer hardware and software, etc., so I purchased and just completed reading this book. The book is about 450 pages but is easy to read and approachable for people outside of the technology industry. While I don’t agree with everything Mr. Friedman says, I did enjoy the book overall.
Below is an overview of several topics from “The World Is Flat” that interest me, namely:
1) There are some themes in Mr. Friedman’s book that are very similar to themes mentioned in Adam Smith’s “The Wealth of Nations”. I hope to provide the reader some comparisons.
2) What skills are necessary for the average U.S worker and skills required by those still in school in the U.S. to be successful in a flat world?
3) Flatteners that Mr. Friedman may have missed.
4) We cannot stop globalization or the flattening of the world, are there any possibilities for the average person to take advantage of these trends?
1) There are some themes in Mr. Friedman’s book that are very similar to some themes mentioned in “The Wealth of Nations” by Adam Smith.
- One theme in common between these 2 works is the virtuous cycle where the pie grows larger for those nations that trade with each other thus increasing product specialization and employment which in turn increases the size of the pie, etc.
Mr. Friedman states on pg 228 “as lower-end service and manufacturing jobs move out of Europe, America, and Japan to India, China and the former Soviet Empire, the global pie not only grows larger – because more people have more income to spend – it also grows more complex, as more new jobs, and specialties, are created.”
Adam Smith mentions:
“This great increase in the quantity of work, which, in consequence of the division of labour, the same number of people are capable of performing, is owing to three different circumstances; first, to the increase of dexterity in every particular workman; secondly, to the saving of the time which is commonly lost in passing from one species of work to another; and, lastly, to the invention of a great number of machines which facilitate and abridge labour, and enable one man to do the work of many.”
- Mr. Friedman states on page 233 that as The Indians and Chinese are racing us to the top, “They want a higher standard of living, not sweatshops; they want brand names, not junk…And the more they do that, the higher they climb, the more room is created at the top – because the more they have, the more they spend, the more diverse product markets become, and the more niches for specialization are created as well.”
Adam Smith mentions:
“It is the great multiplication of the productions of all the different arts, in consequence of the division of labour, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people. Every workman has a great quantity of his own work to dispose of beyond what he himself has occasion for; and every other workman being exactly in the same situation, he is enabled to exchange a great quantity of his own goods for a great quantity or, what comes to the same thing, for the price of a great quantity of theirs. He supplies them abundantly with what they have occasion for, and they accommodate him as amply with what he has occasion for, and a general plenty diffuses itself through all the different ranks of the society.”
- Lastly, another theme in common is that trade is a mechanism that helps to prevent nations from going to war, though it does not eliminate the possibility of war.
Mr. Friedman states on page 420 “the extent that countries tied their economies and futures to global integration and trade, it would act as a restraint on going to war with their neighbors.” Mr. Friedman then discusses his “Golden Arches Theory of Conflict Prevention” and the “Dell Theory of Conflict Prevention”, which I found rather amusing but probably true.
In comparison, Adam Smith mentions:
“…commerce and manufactures gradually introduced order and good government, and with them the liberty and security of individuals, among the inhabitants of the country, who had before lived almost in a continual state of war with their neighbours, and of servile dependency upon their superiors. This, though it has been the least observed, is by far the most important of all their effects.”
2) One topic that is described throughout Mr. Friedman’s book but is not presented in a consolidated manner are the skills he believes are necessary to be successful in a flat world. Some of those skills include:
On page 81 Mr. Friedman states: “The next six flatteners represent the new forms of collaboration which this new platform empowered… Each of these forms of collaboration was either made possible by the new platform or greatly enhanced by it. And as more and more of us learn how to collaborate in these different ways, we are flattening the world even more.”
Within this quote, of course it implies that collaboration is with people in other countries. Thus softer skills will be required to understand other cultures, soft skills such as their sense of time, perception of numbers, work styles and possibly some level of familiarity or mastery of the local language.
- Training in math, science and computer skills.
On page 118 Mr. Friedman states, “China’s long-term strategy is to outrace America and the E.U. countries to the top, and the Chinese are off to a good start. China’s leaders are much more focused than many of their Western counterparts on how to train their young people in the math, science and computer skills required for success in the flat world, how to build a physical and telecom infrastructure that will allow the Chinese to people to plug and play faster and easier than others”. The last point regarding “plug and play” ties back to the previous point above about collaboration.
- The ability to glean knowledge and patterns from numerous, disparate data points.
I only partially agree with Mr. Friedman regarding his “Flattener #9 In-Forming”. Internet search engines such as MSN Search, Google, Yahoo, etc. are nice; they allow anyone with a connection to the Internet the ability to find numerous pieces of data on almost any topic. It is wonderful, as Mr. Friedman states on page 159, that “superpower search…has no class boundaries or education boundaries”. However, Mr. Friedman could have gone deeper into this topic to discuss the difficulty with search engines that have persisted over the years and interject the skills the person performing the search would need to create higher level knowledge out of numerous pieces of data. The problems that persist with search engines are relevancy and limiting the sheer number of items returned from a query. Outside the context of a search engine, the individual must possess the ability to craft knowledge from disparate data points that possess various correlations. Thus, I personally believe, to be successful in the future, workers and students need to be able to think critically and personally filter an enormous amount of disparate information in order to assemble the knowledge he/she seeks, make a decision from that knowledge and move forward to complete the task at hand. On a personal note, I have worked with grade school students who get lost very easily with all of the choices that technology provides through search engines, so much so that they lose their way and never complete the assignment.
- The ability to learn quickly. Not just continuing education, but continual education with every possible emphasis placed on continual.
I wholeheartedly agree with Mr. Friedman’s observations in this area. On page 183 he states “Because once the world has been flattened and the new forms of collaboration made available to more and more people, the winners will be those who learn the habits, processes and skills most quickly…In the future globalization is going to be increasingly driven by the individuals who understand the flat world, adapt themselves quickly to it’s processes and technologies, and start to march forward.”
My little periscope into the world (my opinion only) tells me that some industries will probably go through different rates of change at different times. However, one thing is certain, the knowledge and skills a worker had yesterday may not add enough value tomorrow to ensure ongoing employment. In other words, the current knowledge and skills a worker in the U.S. has may not command the current pay rate when compared to other workers who are plugged-in around the world, thus that U.S. worker needs to seek continual education in almost any form in order to continually produce more value and move up the value chain. Mr. Friedman quotes a source named Rajesh on page 190 who says “Instead of complaining about outsourcing, said Rajesh, Americans and Western Europeans would “be better off thinking about how you can raise your bar and raise yourselves into doing something better””.
- The ability to learn how to learn.
I again agree with Mr. Friedman on this point, on page 239 he states “Being adaptable in a flat world, knowing how to “learn how to learn,” will be one of the most important assets any worker can have, because job churn will come faster, because innovation will happen faster.” I believe this is related to the previous point regarding continual education.
- Increased personal saving and conservative personal finances.
Mr. Friedman does touch upon topics that fall under the umbrella I consider “personal responsibility”; specifically he briefly mentions self-reliant workers, flexibility and mobility of U.S. workers, etc. The health insurance he mentions seems like it would only cover someone who is employed, he doesn’t mention what would happen to someone who is unemployed for an extended period of time due to offshoring or downsizing.
In my opinion, I consider personal savings a “skill” that many Americans have not mastered especially compared to their Asian counterparts. Numerous articles have been published that show American taking on too much debt, barely able to make minimum monthly payments on credit cards, obsession with jumbo home loans, etc. In an age of increased job insecurity, it seems prudent to reduce external globalization risks as much as possible by living as though we will have to take a 30% pay cut tomorrow and will have to go for several years hopefully working back to the previous pay rate. The “wage insurance” Mr. Friedman mentions probably will not be enacted anytime soon especially with our Social Security system experiencing current problems and projected future problems.
I again agree with Mr. Friedman that a skill a worker needs to be successful is imagination. On page 443 he states “in a flat world so many of the inputs and tools of collaboration are becoming commodities available to everyone… There is one thing, though, that has not and can never be commoditized – and that is imagination.”
I see the term versatilists as a convenient way of referring to most of the traits previously mentioned. On page 291 Mr. Friedman quotes a Gartner Inc. study that describes the versatilist as someone who applies “depth of skill to a progressively widening scope of situations and experiences, gaining new competencies, building relationships, and assuming new roles.” In addition managers “can no longer see people as specialty tools. And their people need to become less like specialty tools and more like Swiss Army knives.”
Irregardless of the skills mentioned above, I believe Mr. Friedman may have missed the opportunity to provide a more complete picture for workers in any country to find and keep meaningful employment. It appears that Mr. Friedman believes that if we do our
homework, learn quickly and are imaginative (all personal traits) then we will do well in a flat world. However, my skeptical nature tells me that there are systems, processes, government regulations, etc. that are outside the control of the average U.S. worker that will affect his/her ability to find and keep meaningful employment in the future. In other words, I do not believe the personal traits mentioned above are not enough. I don’t have any research in this area, but I would be interested in anyone providing well respected and free sources that describe how a persons ability to find and keep meaningful employment is affected by things outside his/her control. I believe that by melding the internal personal traits mentioned above with these yet to be defined external constraints, that the end result will provide a more complete picture for successful employment in a flat world.
3) Flatteners that Mr. Friedman may have missed.
I believe Mr. Friedman missed one flattener, namely very cheap external and local storage. External storage is storage located on the Internet or an organizational intranet. Local storage is located on a users personal machine like a hard-drive or versatile personal device such a portable USB storage device. I believe Mr. Friedman mentions that storage is a “steroid” but I see it more as a flattener. Come to think of it, he didn’t clearly define a “flattener” but merely presented several examples.
One example of free external storage is Google’s Gmail – http://mail.google.com/mail/help/about.html – when I last checked they offered 2.5 gigabytes of storage for free. An example of inexpensive local storage is portable USB devices that hold 512 megabytes of information for roughly $50.
The following is a quote from Bob Muglia, Microsoft’s Senior Vice President and head of Microsoft’s new Enterprise Storage Division, in a PressPass article he mentions “In just the past couple of years, we’ve seen the cost of enterprise-class storage drop dramatically from around 20 cents per megabyte to 3 to 5 cents per megabyte — it’s going to continue down that curve.” Later in that same article he mentions possible storage trends for the future: “The amount of available storage will be so dramatically higher than today that you almost won’t worry about it. Storage density is doubling every year. In five years, we’ll see portable computers with a terabyte of storage. If you go out 20 years, you’ll have multiple petabytes [a petabyte is equivalent to 1,000 terabytes] in your portable. To give you an idea of what that means, five or six petabytes is enough storage to run a high-quality video of your entire life.” http://www.microsoft.com/presspass/features/2002/apr02/04-03storageqa.mspx
I believe that cheap external and local storage is a flattener because it can be used by anyone with a PC or access to the Internet much like the other Flatteners Mr. Friedman mentions in his book. The playing field is indeed being leveled since low cost or free storage can be used by anyone irregardless of geographic location, race, income, etc. all that’s needed is a connection to the Internet. Without cheap storage, where would the vast amount of data be stored in order for knowledge workers to transform that data into higher value goods and/or services? This data includes tax returns, medical transcriptions and MRI’s just to name a few; these examples are used throughout Mr. Friedman’s book but there is no mention of where this data would be stored.
4) We cannot stop globalization or the “flattening” of the world, are there any possibilities for the average person to take advantage of these trends?
Note: I am NOT a qualified investment professional. You should seek the guidance of a qualified investment professional before making any investment decisions.
Some possibilities that I see for the average person to take advantage of these trends include:
A) Increasing the exposure of an investment portfolio to include developed or developing countries outside the U.S.
B) Investing in industrial commodities that are experiencing increasing demand due to globalization.
C) Consumers purchasing the same amount of goods and services, retaining and investing the savings rather than spending that savings on additional goods and services.
There could be many other ways to take advantage of globalization trends, but these three points represent my initial thoughts.
A) My little periscope into the world tells me that if trade between various nations is increasing, if the middle-class is growing larger in more nations, if more entrepreneurs overseas are starting new corporations every day, then in my opinion it seems better to increase the exposure of an investment portfolio to include more equities outside of the U.S. I am not suggesting that the U.S is a bad place to invest, but why are U.S. equities not given at least equal weight when allocating an investment portfolio among various developed countries?
There are many advantages to investing overseas. MSN Money recently published an interesting article by Timothy Middleton that summarizes my point, “11 places better to invest than the U.S. – One money manager says he can prove that countries with the most economic freedom are the best places to invest. You’ll need to look overseas; one ranking puts the U.S. at just 12th”. The article can be found at: http://moneycentral.msn.com/content/P125132.asp
Mr. Middleton’s article only looks at the past 5 years. The exceptional performance of countries outside of the U.S. as demonstrated in this article could be a short-term aberration given that the U.S. economy was in a mild recession during a portion of this time. The unanswered question is, what could cause the remarkable short-term trends in the “freedom portfolio” to fall behind U.S. equities?
The average investor has a few choices when investing overseas. An investor could invest in the developed European countries as well as Japan and Australia. Another option is to invest in countries that are part of the emerging markets such as India, China and many South American countries. The equities of countries that comprise emerging markets tend to be much more volatile than developed countries, so I probably would not give emerging markets equal weighting, but they should probably be considered. A good article that lists some of the pros and cons with investing in a typical emerging market such as India is “Fund pros find passage to India” http://moneycentral.msn.com/content/invest/mstar/P134931.asp
Another choice to invest outside of the U.S. is American Depository Receipts or ADR’s. ADR’s represent shares in foreign companies that are traded on U.S. stock exchanges. For example, you could buy shares of Nokia, Vodafone and Sony which trade on the New York Stock Exchange even though these companies are based outside of the U.S. Of course, buying individual ADR’s has the same risk as purchasing stock in individual U.S. companies, namely it would be difficult and expensive to broadly diversify an equity portfolio across various industries compared to buying a single index or mutual fund that contains hundreds of foreign companies in many industries.
On the other hand, there are a few reasons not to invest much outside of the U.S. One reason is that an investor receives some international exposure by simply buying the S&P 500 Index. Some U.S. based multi-national companies receive a large portion of their revenues from overseas markets, usually up to 50% or more. If overseas markets do well then there is a good chance the U.S. multi-national company should do well, or so the theory goes.
Another reason one might be tempted not to invest more overseas is due to the rising correlation between U.S. markets and international markets as measured by the S&P 500 and the Morgan Stanley EAFE index. The Morgan Stanley EAFE index is comprised of Europe, Australia and the Far East. An article published by the American Association of Individual Investors http://www.aaii.com/ titled “International Diversification: Are the Benefits Dwindling?” published in May 1999 and was written by Stephen E. Wilcox. In this article Mr. Wilcox states “In order for diversification to work, securities that make up a portfolio must have low correlations. But over time, the correlation between the S&P 500 and the dollar-based EAFE index have increased substantially”. This article explains some of the reasons for this rising correlation, namely governments have agreed to coordinate their fiscal, monetary and trade policies which gives some reason to believe that the correlation will continue to increase among developed countries. However, Mr. Wilcox indirectly points out that correlation and return are two different things. He concludes the article by saying “historical evidence indicates that the returns on non-U.S. securities often substantially exceed the returns of U.S. securities.”
Yet another reason that can prohibit the purchase of equities outside the U.S. is the additional risks involved, such as currency fluctuations and higher management fees. I will only briefly focus on management fees below for actively managed mutual funds since there are various articles from well respected sources that describe the potential affects of currency fluctuations and other risks involved with foreign investments. One source for this extra information is Vanguard: http://flagship5.vanguard.com/VGApp/hnw/VanguardViewsArticle?ArticleJSP=/freshness/News_and_Views/news_Research_international_09242004_ALL.jsp
Let us briefly look into management fees for domestic and foreign mutual funds. I did a very cursory study of some of the management fees involved with actively managed mutual funds that invest outside of the U.S. I compiled data from 800 Large, Mid and Small Cap Domestic U.S. Mutual Funds and 345 Large, Mid and Small Cap Foreign Mutual funds. Their average expenses are summarized below:
|Front Load %||Deferred Sales Charge %||Redemption Fee %||12b-1 Fee %||Expense Ratio %|
This brief study shows that actively managed foreign mutual funds are slightly more expensive than mutual funds that invest only in the U.S.
One way to decrease the management fees when investing overseas is to buy ETF’s or Exchange Traded Funds. These are passive investment vehicles that usually attempt to mirror a particular index. On one hand, management fees are less expensive, the ETF expense ratio averages about .60%, but because they are passive investments that may not perform as well as actively managed investments with portfolio manager(s). There are many types of ETF’s, such as AMEX iShares, Vanguard VIPERS, etc. and they seem to be very similar. Just one example of the costs involved with iShares International ETF’s is at: http://us.ishares.com/product_info/fund/index_filter/int_region.htm
In closing, I will restate that I am not in a position to recommend investments. I briefly explored this area mainly because it seemed like increasing equity investments outside of the U.S. is one way for the average person to take advantage of globalization trends.
B) Investing in industrial commodities that are experiencing increasing demand due to globalization.
I am not familiar with investing in commodities. I realized this might be a possible approach as a natural outcome of a simple supply-demand relationship. There is probably a strong correlation between countries such as China increasing their industrial output and their demand for commodities such as copper, aluminum and other metals.
MSN Money recently published an article on various ways to invest in commodities titled “Stocks for the 2006 commodities crunch”. The article can be found at: http://moneycentral.msn.com/content/P136804.asp
I am unsure how best to take advantage of the increased demand in industrial commodities, whether purchasing stock in the companies that mine these commodities, purchasing commodities futures, etc. This perspective seemed like one way for the average person to take advantage of globalization trends.
C) Consumers purchasing the same amount of good and services (or possibly less) and retaining and investing the savings rather than spending that savings on additional goods and services.
An article titled “Lean Consumption” published in the March 1, 2005 Harvard Business Review written by James P. Womack and Daniel T. Jones states “During the past 20 years, the real price of most consumer goods has fallen worldwide, the variety of goods and the range of sales channels offering them have continued to grow, and product quality has steadily improved.” The article can be found at:
Unplug your brain from the latest consumer device and think about it for a moment. The cheapest DVD players currently sell for $33 and they possess high quality! By comparison, the cheapest price for an average VHS player when they were popular was a few hundred dollars. There are many more consumer goods and services that demonstrate this trend. I believe it would be prudent to consume the same amount (or possibly less) of consumer goods and services and retain or invest the savings rather than using that savings to purchase even more “stuff”. Do we really need more than one TV, one DVD player, one PC and maybe one personal music device such as an M3 player?
On the other hand, the cost of other necessities seems to have increased which potentially dilutes any savings mentioned above. The cost of other necessities that I am referring to is of course the price of oil, health care, housing, etc. The other aspect that I am missing is the degree to which personal income has kept pace with other necessities not just the price of consumer electronics. I am not an economist and I could not give a memorable performance pretending to be one, therefore I cannot intelligently present these issues. However, I do see these issues affecting any savings gained from some areas of a consumers life being taken away by price increases in other areas.