Transcript of ‘Globalization 3.0 Has Shrunk the World to Size Tiny’

Nayan Chanda: We are pleased to welcome Thomas Friedman, the NYT columnist and author of “The Lexus and the Olive Tree,” back to Yale. Tom, you were here about a year ago - exactly February of last year - and we asked you what changes have you seen in globalization since the publication of “The Lexus and the Olive Tree” in 1999. And you said two things. One was that terrorism had thrown some sand in the gears but that globalization was continuing. And, secondly, you asked those people who said that globalization has stopped - you invited them to look at two countries, China and India. And you said these two countries have bet their future on a globalization strategy, on educating and empowering their people and designing infrastructure, trade, and governance policies to succeed in globalization. And recently you were back from India, one of those countries that you mentioned as being one of the leaders in globalization.

So what can you tell us about the changes that have come in globalization since our last interview?

Thomas Friedman: Well I guess the biggest change, Nayan, and I really learnt this in India - having spent the last two years on 9/11, post-9/11, pre-Iraq, Iraq, and post-Iraq - I really had lost the thread of the globalization story, and I found it in Bangalore, on my last trip to India. And here's what I discovered. I think we've seen in the world three great eras of globalization. The first I would call Globalization 1.0. And that was primarily, Nayan, the globalization of countries that began with Vasco da Gama and Christopher Columbus globalizing their countries and exploring the world on behalf of their countries. And that era, one could say, started in the 1400s and continued all the way - in its own way - right up to the invention of the steamship, the railroad and the telegraph, but ended with World War One. I call that Globalization 1.0. And it gradually shrank the world from a “Size Large” to a “Size Medium.” Then came Globalization 2.0. And that was really from World War Two right up until the year 2000, until Y2K. And it really intensified from 1980 until 2000.

Chanda: So what happened in 2000?

Friedman: Well basically it intensified in the fact that we had the internet, we had fiber optics. And that period - which is really what I catalogued in “The Lexus and the Olive Tree” - shrank the world, as I said in the book, from a “Size Medium” to a “Size Small.” Well, that's when I left it. That's when I went off and covered the world of 9/11. Well, while I was sleeping, Nayan, something really important happened. We witnessed Globalization 3.0. And Globalization 3.0 is the intensification of everything that was invented in Globalization 2.0 - the bandwidths, the fiber-optics, the PCs, and the software capabilities that connected them - but intensified all of them to such a degree that it became a difference in kind. And so if Globalizaiton 2.0 shrank the world from a “Size Medium” to a “Size Small,” and really was about - I would say - the globalization of companies, Globalization 3.0 shrank the world from a “Size Small” to a “Size Tiny.” Now we're talking about the globalization of individuals.

Chanda: Can you explain that?

Friedman: I think we've gone from the globalization of countries to the globalization of companies to the globalization of individuals. What do I mean by that? We're now at a point where you as an individual both must and can think about how you fit into the global supply chain. That is to say, I flew up here this morning on Southwest Airlines.

The bad news was that thanks to 9/11 there was a long line in the security area where you get your bag checked. But the good news was (I didn't avail myself of this but I could have) you can know check yourself in on Southwest airlines, not with the e-ticket machine at the airport - oh, Nayan, that's passé, that's, that is so 20th century, okay? You can now download your reservation at home and print it out yourself and just show up at the gate. You as an individual can do that. I'll give you another story. The Washington Post had a story the other day about a new website where 6-year-olds, 5-year-olds, can set up their own personal website! You as an individual, Nayan, also have to figure out in a world of outsourcing where do I as an individual fit in the global supply chain? And you'd better think about that! What skills do I have that aren't fungible? What are the unique skills that make me what I like to call an “untouchable”? In the age of globalization, in Globalization 3.0 when the world shrinks to “Size Tiny,” the untouchables are not the lowest class. They become the highest class! They're the people who can't be outsourced.

Chanda: If you can go back to India, the manifestation of this Globalization 3.0, where did you see this? Where in India?

Friedman: Where did I see this? Well I'll give you an example of a company - you've never heard of it, Nayan - Dhruva. Dhruva is a little game company in Bangalore. Their offices are in a quiet suburban street in Bangalore, founded by a guy named Rajesh Rao, a young man who is really into games. You know the gaming business today is bigger than Hollywood. The X-Boxes, all those things - it's bigger than Hollywood! More of those games are sold and downloaded off the internet than movies! So this is big business. Well, Rajesh, he wanted to get into this business. And he thought India had a lot of unique skills because there are a lot of sons and daughters of Indian Hindu temple artists, where drawing and painting have been elevated to a high art, who are very adept at transferring those skills to computer-assisted design to draw up characters. And he thought, “Woah! If I could use all this technology to connect these Indian artists - the sons and daughters of Hindu temple artists - to the game industry, I could be part of this game! So what did he do? It's very interesting. He started a company! They bought some PCs, got a fiber-optic Internet connection - the pipes and the PCs. And then they used the software that is now available - everything from Microsoft Netmeeting to email to Google - to offer their services to draw characters for American or European game companies.

So they used, basically, they downloaded from Google all this Wild West imagery. They used email, and all these new software for computer-aided design, and they developed a whole game which they marketed over the internet, which so attracted American companies that some of the biggest game companies in American now are outsourcing characters to little Dhruva on a backstreet in Bangalore. Oh, that's a world gone tiny.

Chanda: And in terms of supply-chain management, where does the individual fit in? They have to work through a company, I suppose.

Friedman: Well, you have to work through a company, sort of. There's another company in India we came across and it's run by a guy named Jerry Rau. It's called Emphasis, I believe. And I would like to say that Jerry Rau, he lives in Bangalore, I like to tell people that Jerry Rau, he want to do your taxes. Ah, you say, I already have someone to do my taxes. But Rau, has a vaguely Indian sound, how could he possibly do my taxes? Well, Jerry set up a company in the United States, it's really just an Internet portal. He works with American accounting firms. Back home in Bangalore, actually all across India, he has different accountants, CPAs, who are specialists in different states of the United States. Oh, some just do Delaware, some just do Florida, some just do Connecticut, basically, and they sit at home. And Jerry serves as a middleman between the American accounting company and his own network of Indian CPAs back in India, and he just farms out tax returns to these Indian CPAs. Most of them just sit home and do them. And this year, I believe I saw a figure, one-hundred thousand American tax returns are going to be done in India.

Nayan: Now, this is obviously helping American CPA companies, or even taxpayers who are perhaps paying less to get their taxes done. But there is this outcry over outsourcing of jobs to India, and people are seeing globalization as a threat to the United States now. What do you say to those people?

Friedman: Well, I say two things. One is that, first of all, I feel your pain. If I were an accountant, if I were a radiologist, if I were a call-center worker, or my kids were, I would be frustrated, I would be angry, I would be worried, because this world without walls has shrunk to a “Size Tiny,” and it seems to be taking my job with it. I think that we have to listen to those people and we have to think about what strategies, what public policy, we can design to cushion them. Whether it's wage insurance, whether it's health benefits, whether it's re-education and training, we have to have public policy that addresses their pain. You know, there's an old law in trade theory that says that people who are harmed by free trade know exactly who they are. People who are benefited by free trade have no idea. And, so people who are harmed, know who they are, and now these are increasingly white-collar workers who vote and write op-ed pieces for the New York Times. And so they will be mobilized, they will have a political impact, and we can see that today.

So, to me, first of all, we have to listen to what these people are telling us. At the same time, we should not be putting up walls, because what has kept our economy going forward all these years? It's our ability to innovate. It's our ability to come up with, in the middle of 9/11, companies like Google, companies like Yahoo, and EBay, and Amazon. Those are all the products of American innovation. They weren't invented in India, they weren't invented in Germany, they weren't invented in Beijing. They were invented in a culture, in a society that is incredibly flexible, that doesn't believe in walls, is hypercompetitive, but has a decent regulatory system, great capital markets, a venture capital system that rewards innovation, and a culture of try, fail, try, fail, try, fail, try, succeed, start EBay, become a billionaire. And I am confident, as long as we maintain those things, we'll then have the resources to cushion the people who are hurt by that innovative cycle.

But my friend David Rothkopf, acting congress secretary, has a nice saying that says that most jobs are not being outsourced to India or China, they are being outsourced to the past. Because, basically, well, think about what I told you about coming up on Southwest Airlines. There's someone who was working as a counter employee for Southwest Airlines who probably doesn't have their job now, because I can go to the internet, forget to an E-ticket machine, I can go on my own computer now and download my own boarding pass on to Southwest. So many more jobs are destroyed by Schumpeter [referring to economist Joseph Schumpeter's theory of creative destruction of companies brought by the march of capitalism] than are destroyed by India. They're destroyed by creative destruction and technological change. Thirty percent of Americans worked in agriculture in 1900. Where is that now? Somehow the economy has absorbed that, as long as you have an economy full of innovation. The other strategy has been tried; it's been tried in places like Germany. And look at all the problems they have, the chronic unemployment that they have, and the place is full of cushions, full of social welfare programs. But meanwhile, they have this chronic unemployment.

Chanda: There are two problems I see. One is the speed at which these changes taking place are overwhelming populations and the governments are much slower to act to do something about them. And the second question is that in order to be innovative, you have to have education, and the education budgets at least in the United States, in the states, are all shrinking. This is some kind of a long term problem.

Friedman: One of my great fears as we move from a “Size Small” to a “Size Tiny,” have we moved so fast that we have really reached the limit of human capacity to adjust, and government capacity to adjust. It's a question, I don't know. But the point you said about education, Nayan, is so right on. What I do know is that the smaller the world gets, the more untouchable you need to make yourself. And that means the more educated you need to be, the more you need to perfect skills that are not fungible, that are not easily replaceable by man or machine. Now, not all of us can be brain surgeons, and some of us are going to be radiologists, and there are going to be professional white collar jobs that are going to see a real cut in their standard of living - there's no question about it. I hope columnist isn't one of them. I'll have to take my medicine when it comes! But that is a fact, and we all have to think about where we fit in a global supply chain. We have gone from countries having to think globally, to companies having to think globally, to individuals having to think globally. And that's what happened while I was sleeping.

Chanda: I think that individuals don't think globally when they go to Wal-Mart and pick up a DVD made in China for $100. They don't think it has anything to do with globalization.

Friedman: They think it has to do with the mall.

Chanda: But, when it is a question of getting their paycheck, then they have to think globally.

Friedman: The real question, I think, the unknown question, look, jobs are outsourced, it's like they are an export. At the end of the day, supply will equal demand. If we outsource these opportunities to India or China, it will, in the long run, or not even in the long run, come back as demand for American products. That is certainly the history of trade. But here is the question that I have, and I don't know the answer to this. Will it come back in demand for a range of good jobs like we've had before? Or will it come back in the form of demand for the royalties of Barbara Streisand and Bill Gates? And the rest of us? Larry Summers said this to me, “The rest of us will end up cleaning their pools.” Will we see some kind of reconfiguration of what kind of work is created by this demand as the world flattens out in this way? I don't know - that's one of the unknowables.

Chanda: The other thing is the question of creating demand. The world, still, you have part of the world population living in misery, so those people are outside the market. So unless those people come to the market to create demand for goods, you are going to be flooding the current market with more supply, prices being depressed and people losing jobs.

Friedman: Which is why we have to be doing things in response to the outsourcing challenge. One of the things we have to do is to open India's markets more for the things we still do well, whether it's financial services, insurance, entertainment. Countries like India and China still have a lot of tariff barriers and non-tariff barriers, not to mention Japan, and we really need to be busting open those markets as well. We want to increase aggregate demand everywhere. Just as Indians don't want to be told by us, “Say, wait a minute. You want us to buy your Microsoft and your Coca-Cola, but you don't want to send us any of your jobs.” We don't want to be in the position of saying to India, “Hey, you guys want our jobs, but you don't want to buy our Microsoft and our Coca-Cola, or our E-Trade or our Merrill Lynch.” I think part of this, the result of what I call the “flattening of the world,” is that there is going to have to be an equalization of trade barriers, which is to say they're all going to have to come down because the politics is going to shift. The political pressures, as they come from white collar workers, both in India and China, is really going to force, I think, the trade barriers to come down.

Chanda: Now, what is interesting, though, is that the number of Indian students in the United States is now at a record high. And they are the same students that are learning things here and going back home to be then doing work for American companies who are outsourcing jobs.

Friedman: But I want them to stay. See, I have a real simple motto in life, Nayan - Our Indians will beat India's Indians any day. Our Chinese will beat China's Chinese any day. Our Japanese will beat Japan's Japanese any day. Our Europeans - you know there are 400,000 Europeans in Silicon Valley - tech workers. Why are they there and not in Europe? Because of the culture of innovation there. So as long we keep that, ours will beat theirs any day. But I want to have a system where we can cream off the intellectual first round draft choices from around the world, bring them here, and I want to keep them here. Because I think they are a wonderful enrichment for our stew.

Chanda: That requires changing the immigration policy, which is now very restrictive.

Friedman: Exactly.

Chanda: So, there are a lot of changes that are required by this new Globalization 3.0.

Friedman: Yes, absolutely.

Chanda: And people are still unaware as to what the requirements are.

Friedman: Absolutely. That's just the beginning of it, Nayan. The outsourcing thing is like the canary in the coal mine. And what is chirping is, “You're in a new world, you're in a new world.” That's what it is telling us.

Chanda: Great. Tom, thanks so much.

Friedman: My pleasure.