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The Lexus and the Olive Tree

Author: Thomas L. Friedman

Publisher: New York: Farrar, Straus and Giroux, 1999

ISBN: Center of Bus

Summary:Friedman explains the foreign affairs beat, and his experiences. "To understand foreign affairs, Friedman says, one needs to understand economics; and to understand economics in the 90's, one needs to understand the changes that globalization is bringing."

Two major events happened in 1989. One was the fall of the Berlin Wall, and with it one of the great, misguided experiments in economics. The other was the publication of Thomas Friedman's book, From Beirut to Jerusalem, one of the single best books about the Arab-Israeli conflict. Then as now, Friedman was a columnist for the New York Times. Since 1994 he has had the foreign affairs beat, and his experiences there have led to The Lexus and the Olive Tree. To understand foreign affairs, Friedman says, one needs to understand economics; and to understand economics in the 90's, one needs to understand the changes that globalization is bringing.

It's hard for an American not to feel pretty smug, looking out at the rest of the world ten years after the death of communism. We've had the longest period of economic growth of the century, the lowest unemployment rates of a generation, and the greatest burst of innovation since the beginning of the industrial revolution. This is the country that has boats of would-be immigrants risking their lives to enter it. The state of Massachusetts alone has a bigger venture capital industry than all of Europe. And so forth. Friedman's enthusiasm starts about here, and goes to levels that ten years ago would have been unthinkable. What's remarkable about The Lexus and the Olive Tree is that he doesn't go off the deep end. This book is first-rate (if not, at 378 pages, pithy) explanation of why some societies are succeeding in the "new economy" and others aren't.

America, Friedman tells us, is the Michael Jordan of the world economy. Not just the best, but the best paid. Last summer, Fortune Magazine credited Jordan with creating more than $10 billion of value. Reasonably enough, Jordan has gotten to keep a large piece of all that value. But other parts of Jordan's world, the NBA for instance, also benefited. Jordan is an example of what economist Brian Arthur called "increasing returns economics," or, in simpler terms, winner-take-all. But even if Jordan's take-home pay is disproportionately large compared to other, almost-as-talented basketball players', the revenues of the NBA have also gone up. Michael Jordan was the tide that lifted all boats. And that's what has happened to America. By being better at its game-the game of competing in the world economy-the US has gotten disproportionate rewards.

The model for America's success, Friedman argues, is replicable throughout the world. That model requires, metaphorically, the right hardware and the right operating system. The choice of hardware platforms for an economy is pretty simple-free market, central planning, or a mixed economy. After 1989, no country, except maybe North Korea, wanted anything other than a free market. But (to push this metaphor a little harder), if you don't have the right OS, your computer is worthless. The OS that is needed to make an economy function consists of all those things that make up the rule of law. To name a few: property rights, contract law, banking and commercial laws, bankruptcy rules, international accounting standards, regulatory agencies, impartial judiciaries, and conflict of interest laws that apply to politicians and bureaucrats. What happens if a country has free-market hardware and no operating system? Albania. Malaysia. Russia. On a more positive note, the countries that bounced back most quickly from the 1998 Asian collapse, Singapore, Hong Kong, and Taiwan, were the countries that had the best operating systems.

But why do the losers get punished so quickly, and the winners bounce back so fast? Friedman answers this with images of the Electronic Herd, in the Global Supermarket. (Note from the bull in the china shop: block that metaphor.) The Global Supermarket is his shorthand of describing how linked all the world's financial markets are now, and how fast money can move in and out of a country. The Electronic Herd is the group that is moving all that money around. As the name implies, the herd may be slow to think, but it's quick to move, and it moves en masse. This herd-all the fund managers and currency traders trying to follow in George Soros's footsteps-are the enforcers of the new economy. If they don't like what they see in a country, their money moves out at the speed of light. So, if countries get with the program, the world financial markets are there to bankroll them. But if they wander off the path, their punishment will be swift and certain.

Segue to the Golden Straitjacket. That's Friedman's name for the preferred option that countries can choose. Plug into the world economy, open up the borders, and accept the loss of control that goes with free markets. Countries putting on the Golden Straitjacket remind me of Ulysses, lashing himself and his men to the masts of their ship, to deliver them from the temptation of the Sirens. What politicians need to be delivered from is the temptation to fiddle with the books, to give in to the forces of corruption or protectionism, and to inflate their way out of a bad situation. It's a version of good cop, bad cop. The Golden Straitjacket lets politicians blame the world financial markets, the Electronic Herd, for forcing them to make the tough decisions. What I find fascinating about this analysis is that it quite accurately describes the behavior of both markets and politicians.

More than once in the course of the book, Friedman has an insight that all by itself would justify the purchase price of the book. One is about the importance of the nation-state in the connected global economy. The common wisdom (and it's wrong) is that in the 21st Century, national borders will matter less than ever. Not so fast, says our author. In fact, borders-and quality of government-will matter more than ever. Capital, trade flows, and people will have more choice than ever about where to locate. And money in particular will flow to those countries with the best "operating systems," the most open and even-handed economies. In a world where people and capital have no choices, the only threats to a government are revolution and conquest. In the connected global economy, the threat of revolution gets outsourced to the Electronic Herd beyond the border. Capital can go anywhere it wants, and it's not going to head toward corrupt, lawless lands. Borders matter more, not less.

Another one of Friedman's insights is an explanation of why has been such a success. Amazon capitalized (in a very literal sense) on the democratization of three things. First is the democratization of computers-a computer for everyone. Second is the democratization of finance-a credit card for everyone. Third is the democratization of information-the internet for everyone. Take away any one of those three, and the business doesn't work. Be the first to capitalize on them, and create $20 billion of value.

Of course I have a few gripes about the book. Friedman makes us more than aware that he seems to know every important figure in the world. Of course he does-he's one of the New York Times's most prominent columnists. Another annoying thing is the "McDonalds Theory of War and Peace," which starts with the observation that no two countries that both have McDonalds have ever gone to war with each other. A middle class strong enough to support a McDonalds is presumably never going to support a war with an equally developed country. Although Friedman seems to believe this theory, he is big enough to point out that it is not that different from the sorts of things one heard before World War I. And then there's the neologisms. "Globalution," short for "global revolution. Or "glocalism," or "global localism." What do I say about this? Globalnuffalready.

The somewhat improbable title of the book is Friedman's way of capturing the two conflicting themes of the global economy. The Lexus automobile is Friedman's image for what is global, highly-engineered, and portable. The olive tree, on the other hand, is a metaphor for what is local, immobile, and enduring. More often than not, wars and feuds are fought over the olive trees of locality, while the battles of business are fought about being the lowest cost, most global producer. Tip O'Neill said that all politics is local. Friedman, in his own way, is saying that all economics is global.

Overall, what Friedman is telling us in The Lexus and the Olive Tree is that the world economic system is fundamentally different than it was ten years ago-and he's right. "In the Cold War, we reached for the hot line between the White House and the Kremlin-a symbol that we were all divided but at least someone, the two superpowers, was in charge. In the era of globalization, we reach for the Internet-a symbol that we are all connected but nobody is in charge."

Yes, we are all more connected than ever, and nobody is in charge. Welcome to the Globe 2000. But, it is easier than ever before to buy a good bottle of olive oil.

©  Center for Business Innovation, Cambridge MA.