THE LEXUS AND THE OLIVE TREE
UNDERSTANDING GLOBALIZATION
THOMAS L. FRIEDMAN
FARRAR STRAUS GIROUX 1999
PART I
Opening Scene: The World Is Ten Years Old
• On the morning of December 8, 1997, the government of Thailand announced that it was closing 56 of the country’s 58 top finance houses. Almost overnight, these private banks had been bankrupted by the crash of the Thai currency, the baht, because they had borrowed heavily in dollars believing that the Thai government was committed to keeping the Thai baht at a fixed rate against the dollar.
• When the Thai currency plummeted by 30% the businesses that had borrowed dollars had to come up with 30% more to repay the loan. Many businesses couldn’t repay the finance houses, many finance houses couldn’t repay their foreign lenders and 20,000 white collar employees were out of work.
• Within a few months commodity prices fell, transmitting the Southeast Asian crisis to Russia. As Russia’s economy continued to slide, the Russians had to raise the interest rate on their ruble bonds from 20% to 50% to 70% to keep attracting foreigners
• The Asian-triggered slump in oil prices made it harder for the Russian government to pay the interest and principal on its T-bills. On August 17 the Russian economic house of cards came tumbling down, dealing the markets a double whammy: Russia both devalued and unilaterally defaulted in its government bonds, without giving any warning to its creditors or arranging any workout agreement.
• The hedge funds, banks and investment banks that were invested in Russia began piling up massive losses, and those that had borrowed money to magnify their bets in the Kremlin casino were threatened with bankruptcy.
• Just as crude oil prices were the transmission mechanism from Southeast Asia to Russia, the hedge funds were the transmission mechanism from Russia to all other emerging markets in the world, particularly Brazil.
• Brazil had to raise its interest rates as high as 40% to try to hold capital inside the country. Variations on this scenario were played out throughout the world’s emerging markets, as investors fled for safety.
• They cashed in their Brazilian, Korean, Egyptian, Israeli and Mexican bonds and stocks, and put the money either under their mattresses or into the safest U.S. bonds they could find.
• So the declines in Brazil and the other emerging markets became the transmission mechanism that triggered a herdlike stampede into U.S. Treasury bonds.
• This, in turn, sharply drove up the value of U.S. T-bonds, drove down the interest that the U.S. government had to offer on them to attract investors and increased the spread between U.S. T-bonds and other corporate and emerging market bonds.
• The steep drop in the yield on U.S. Treasury bonds was then the transmission mechanism which crippled more hedge funds and investment banks. In order to make money is such a fiercely competitive world, the hedge funds had to seek ever more exotic bets with ever larger pools of cash.
• Long-Term Capital Management put $120 billion at risk betting on the direction that bonds would take in the summer of 1998 and lost.
• In August 1998 shares in my friend’s new Internet bank opened at $14.50 a share, soared to $27 and fell to $8. It took nine months for the events on Asoke Street to affect my street and one week for events on the Brazilian Amazon to affect Amazon.com.
• On October 11, 1998, at the height of the global economic crisis, Merrill Lynch ran full-page ads with the title The World Is 10 Years Old, referring to the fall of the Berlin wall in 1989 and the new era of globalization.
• The Merrill Lynch ad would have been more correct to say this era of globalization is ten years old because from the mid-1800s to the late 1920s the world experienced a similar era of globalization.
• Great Britain, which was then the dominant global power, was a huge investor in emerging markets, and fat cats in England, Europe and America were often buffeted by financial crises, triggered by something that happened in Argentine railroad bonds, Latvian government bonds or German government bonds.
• In this first era of globalization and global finance capitalism was broken apart by the successive hammer blows of World War I, the Russian Revolution and the Great Depression, which combined to fracture the world both physically and ideologically.
• The roughly seventy-five-year period from the start of World War I to the end of the Cold war was just a long time-out between one era of globalization and another.
• What is new today is the degree and intensity with which the world is being tied together into a single globalized marketplace and the number of people and countries able to participate and be affected by it.
• Daily foreign exchange trading in 1900 was measured in millions of dollars; in 1992 it was $820 billion a day. By April 1998 it was up to $1.5 trillion a day and still rising.
• The previous era of globalization was built around falling transportation costs. Today’s era of globalization is built around falling communications costs.
• These new technologies mean that developing countries can become big-time producers and companies can locate production, research and marketing in different countries but still tie them together through computer and teleconferencing. Services such as medical advice can be traded globally.
• It is not only nation states and corporations that can reach farther, faster, cheaper and deeper than ever before, but individuals can also.
• This book is an effort to explain how this era of globalization became the dominant international system at the end of the 20th century – replacing the Cold War system – and to examine how it now shapes virtually everyone’s domestic politics and international relations.
• The first part of the book explains how to look at today’s globalization system and how the system works. The second part explains how nation states, communities, individuals, and the environment interact with this system.
• The third part explains the backlash against globalization. The fourth part explains the unique role the United States plays, and needs to keep playing, in stabilizing this new system.
PART ONE: SEEING THE SYSTEM
Chapter 1: Tourist with an Attitude
• The Cold war had its own structure of power: the balance between the United States and the U.S.S.R. The Cold War had its own rules: in foreign affairs, neither superpower would encroach on the other’s sphere of influence.
• Today’s era of globalization is not static, but a dynamic ongoing process: globalization involves the inexorable integration of markets, nations states and technologies to a degree never witnessed before – in a way that is enabling individuals, corporations and nation-states to reach around the world farther, faster, deeper and cheaper than ever before, and in a way that is also producing a powerful backlash from those brutalized or left behind by this new system.
• Globalization means the spread of free-market capitalism to virtually every country of the world with its own set of rules: opening, deregulating and privatizing your economy.
• The symbol of the Cold War system was a wall, which divided everyone. The symbol of globalization is a World Wide Web, which unites everyone. The defining measurement is speed of commerce, travel, communication and innovation.
• Innovation replaces tradition. Nothing matters so much as what will come next, and what will come next can only arrive if what is here and now gets overturned.
• While this makes the system a terrific place for innovation, it makes it a difficult place to live, since most people prefer some measure of security about the future lived in almost constant uncertainty.
• If globalization were a sport, it would be the 100-meter dash, over and over. And no matter how many times you win, you have to race again the next day. And if you lose by just one-hundredth of a second it can be can as if you lost by an hour.
• Globalization also has its own demographic pattern – a rapid acceleration of the movement of people from rural areas and agricultural lifestyles to urban areas and urban lifestyles more intimately linked with global fashion, food, markets and entertainment trends.
• Globalization has its own defining structure of power, built around three balances, which overlap and affect one another.
• The first is the traditional balance between nation-states, with the United States the sole and dominant superpower and all other nations subordinate to some degree.
• The second balance is between nation-states and global markets with millions of investors moving money around the world with a click of a mouse. The attitudes and actions of the Electronic Herd and the key global financial centers – the Supermarkets – can have a huge impact on nation-states, even triggering the downfall of governments.
• The third balance is between individuals and nation-states, giving more power to individuals to influence both markets and nation-states than at any time in history.
• Some of these Super-empowered individuals are quite angry, some of them quite wonderful – but all of them are now able to act directly on the world stage without the traditional mediation of governments, corporations or any other public or private institutions.
• Without the knowledge of the U.S. government, Long-Term Capital Management – a few guys in Greenwich, Connecticut – amassed more financial bets around the world than all the foreign reserves of China.
• Osama bin Laden, a Saudi millionaire with his own global network, declared war on the United States in the late 1990s, and the U.S. Air Force had to launch a cruise missile attack on him as though he were another nation-state. We fired cruise missiles at an individual!
• Jody Williams won the Nobel Peace prize in 1997 for her contribution to the international ban on landmines, in the face of opposition from the Big Five major powers. She said her secret weapon for organizing 1,000 different human rights and arms control groups on six continents was E-mail.
• You will never understand the globalization system, or the front page of the morning paper, unless you see it as a complex interaction between all three of these actors: states bumping up against states, states bumping up against Supermarkets, and Supermarkets and states bumping up against Super-empowered individuals.
Chapter 2: The Lexus and the Olive Tree
• I visited the Lexus luxury car factory outside Toyota City, producing 300 Lexus sedans each day, made by 66 human beings and 310 robots. After touring the factory I was speeding along at 180 miles an hour on the most modern train in the world reading a story about the people of Palestine and Israel fighting over who owned which olive tree.
• It struck me that the Lexus and the olive tree are symbols of the post-Cold War era: half the world seemed to be emerging from the Cold War intent on building a better Lexus, dedicated to modernizing, streamlining and privatising their economies in order to thrive in the system of globalization. And half of the world – sometimes half the same country, sometimes half the same person – was still caught up in the fight over who owns which olive tree.
• Olive trees represent everything that roots us, anchors us, identifies us and locates us in this world – whether it belongs to a family, a community, a tribe, a nation, a religion or, most of all, a place called home.
• Olive trees are what gives us the warmth of family, the joy of individuality, the intimacy of personal rituals, the depth of private relationships, as well as the confidence and security to reach out and encounter others.
• We fight so intensely at times over our olive trees because, at their best, they provide the feelings of self-esteem and belonging that are as essential for human survival as food in the belly.
• At worst, though, when taken to excess, an obsession with out olive trees leads us to forge identities, bonds and communities based on the exclusion of others, and at their very worst, when these obsessions really run amok, as with the Nazis in Germany or the Serbs in Yugoslavia, they lead to the extermination of others.
• Conflicts between Serbs and Muslims, Jews and Palestinians, Armenians and Azeris over who owns which olive tree are so venomous precisely because they are about who will be at home and anchored in a local world and who will not be.
• The Lexus represents an equally fundamental, age-old human drive – the drive for sustenance, improvement, prosperity and modernization – as it is played out in today’s globalization system.
• The Lexus represents all the burgeoning global markets, financial institutions and computer technologies with which we pursue higher living standards today. Everyone is either directly or indirectly affected by them.
• The Lexus versus the olive tree is just a modern version of a very old story – indeed one of the oldest stories in recorded history – the story of why Cain slew Abel.
• All the basic elements of human motivation are potentially there in one story: the need for sexual intimacy, the need for sustenance and the need for a sense of identity and community. This book is about the last two.
• The biggest threat today to your olive tree is likely to come from the Lexus – from all the anonymous, transnational, homogenizing, standardizing market forces and technologies that make up today’s globalizing economic system.
• There are some things about this system that can make the Lexus so overpowering it can overrun and overwhelm every olive tree in sight – and this can produce a real backlash.
• But there are other things about this system that empower even the smallest, weakest political community to use the new technologies and markets to preserve their olive trees, their culture and identity.
• The Lexus and the olive tree wrestling with each other in the new system of globalization was reflected in Norway’s 1994 referendum about whether or not to join the European Union. The referendum failed, because too many Norwegians felt joining the EU would mean uprooting too much of their own Norwegian identity and way of life, which, thanks to Norwegian North Sea oil (sold into a global economy), the Norwegians could still afford to preserve – without EU membership.
• Preserving olive tree impulses in today’s globalized system contains a hidden long-term price. Moody’s, the international credit-rating agency, downgraded India’s economy from “investment grade,” which meant it was safe for global investors, to “speculative grade,” which meant borrowing money from international markets would be at higher rates of interest.
• The challenge in this era of globalization – for countries and individuals – is to find a healthy balance between preserving a sense of identity and community and doing what it takes to survive within the globalized system.
• Any society that wants to thrive economically today must constantly be trying to build a better Lexus and driving it out into the world. But if that participation comes at the price of a country’s identity, if individuals feel their olive tree roots crushed, or washed out, by this global system, those olive tree roots will rebel. They will rise up and strangle the process.
• A country without a Lexus will never grow or go very far. A country without healthy olive trees will never be rooted or secure enough to open up fully to the world. But keeping them in balance is a constant struggle.