December 06, 2012
The Cooperative Advantage
How Innovation Rewrote the Rules of Foreign Policy
When the US Congress passed the Guano Islands Act of 1855, authorizing Americans to take over any island rich with bird droppings, it was out of fear that others would corner the supply of what was then a critical component of fertilizer. But in 1909, German chemist Fritz Haber invented a way to make synthetic fertilizer, reducing the need for guano and the strategic value of poop-covered real estate. The same story has played out across a broad swath of the global economy: technological innovation has reduced competition for limited natural resources, and the days in which great powers wage total war in pursuit of land and resources appear to have come to an end . Against contemporary fearmongering about Russia and China, international commerce and diplomacy have actually become less rivalrous. Far from a threat to our prosperity and future, “the rise of the rest,” especially the large nations of China, India, South Africa, and Brazil, will spur new technological developments which will redound to the benefit of all.
If you wish to conduct some latter-day colonial expansion on behalf of the US government, look no further than US Code 48, Chapter 8: “Whenever any citizen of the United States discovers a deposit of guano” — dried bat or bird droppings — “on any island, rock, or key, not within the lawful jurisdiction of any other government, and not occupied by the citizens of any other government, and takes peaceable possession thereof, and occupies the same, such island, rock, or key may, at the discretion of the President, be considered as appertaining to the United States.”1
In short: find an unoccupied rock in international waters on which a seagull has relieved herself and you can claim it for America.
The Guano Islands Act was enacted in 1856 at a time when guano was the world’s best fertilizer and source of saltpeter, a vital ingredient of gunpowder. Around 100 islands were claimed by the United States under the law, including Midway. And it wasn’t just the United States that scrambled for control of guano deposits: Peru, Spain, Bolivia, and Chile fought wars over them.2
That might have seemed reasonable at the time: everyone was desperate for the same source of nitrogen fertilizer. But in 1909, Fritz Haber developed a method of producing ammonia from nitrogen in the air, enabling chemists to manufacture fertilizer on an industrial scale. This new technology, the Haber process, provided the world with a less smelly and more widely replicable way to meet our nitrogen needs, slashing the strategic value of poop-covered real estate.
Nonetheless, the Guano Islands Act remains on the books, representing a way of thinking about international relations that is as anachronistic as it is enduring: the idea that countries must compete for a set amount of resources, land, or wealth. From this zero-sum viewpoint comes the idea that every new manufacturing job in Chongqing means one less in Chattanooga; that every new patent application in Beijing means one less in Boston; and that every increase in Indian GDP is a threat to the economy of the United States. It is a view of power and international relations based on a preindustrial understanding of the world, one in which national power and wellbeing are seen as emerging from a nation’s privileged access to resources that are limited (“rival,” in economic jargon). Think guano: if the United States mined droppings to use on American corn fields, there would be less left for Germany or Japan.
But this is no longer how economic strength works. Today, a wealthier, healthier, better educated, more democratic, and more peaceful developing world is fantastic news for Europe and America. Prosperity for what Fareed Zakaria calls “the rest” does not impoverish or imperil the West.3 Quite the opposite: the increasing success of emerging markets, in part the result of their adopting ideas and institutions pioneered by industrial economies, is binding the world’s countries together into ever closer relationships of mutual benefit.
It has been well over a century since the amount of territory a country controls has been a good measure of much of anything, in large part because more and more global output involves ‘weightless’ products rather than physical goods. In 1970, agriculture and industry accounted for about 46 percent of global output. Today, that figure is 30 percent, with the other 70 percent accounted for by services.4 As economies shift from agrarian to industrial to postindustrial production systems, the sectors that are most dependent upon rivalrous resources and competition –– agriculture, mining, and manufacturing –– constitute a proportionately smaller percentage of total economic output. This is why a country like South Korea, with a land area around one-tenth of 1 percent of the planetary total, can have an annual economic output that is larger than the whole planet’s was in 1820.5
Of course resources still matter –– indeed, we use more than ever –– but technological change and economic advance have not only made raw materials an increasingly minor part of final product value: they have also made it far more straightforward to extract those materials in the first place. Though the first decade of the 21st century saw commodity prices triple,6 this still left them at about one-half the level of inflation-adjusted commodity prices between 1845 and 1920. And this is despite the fact that extraction rates for many of these commodities have risen twentyfold or more since the 19th century.7
For oil, aluminum, copper, phosphate, and a wide range of other natural resources, new discoveries and extraction techniques have meant that global reserves keep on climbing even as we extract more from the ground each year. Between 2009 and 2012, for example, global proven reserves of crude oil climbed from 1.3 to 1.5 trillion barrels.8 The great danger we face regarding these resources — in particular fossil fuels — is not that we will run out, but that they will prove too abundant for our own good. Were we to extract and burn all of the coal, oil, and gas that we are technically able to access, the climatic consequences would be severe.
Meanwhile, at the country level, plentiful resources are commonly associated with slower development.9 But a recent World Bank synthesis study concluded that in fact, “greater natural resource wealth is associated with higher GDP per capita,” suggesting that the resource curse (the idea that sitting on fossil or mineral wealth is actually a barrier to development) is overblown.10 But the analysis also suggests that the economic benefits a country derives from its plentiful resources depend considerably on the quality of its institutions. Only governments that are effective at providing services and responding to citizen needs garner substantial nationwide benefit from their country’s natural wealth.
So while there is a relationship between national resource endowments and wealth, this relationship cannot predict accurately which nations will become wealthy and which ones will not. Economists William Easterly and Ross Levine, while both working at the World Bank, examined the source of national differences in wealth and economic growth. A full 90 percent of the observed difference, they concluded, was accounted for by ‘total factor productivity’ — technology, ideas, and institutions.11 This is fantastic news for developing countries. The critical thing about technology, ideas, and institutions is that, unlike stocks of land, resources, or population, they are fundamentally non-rival. America being a democracy with an independent central bank and a scientifically-advanced health system does not stop Brazil from having the same attributes. In fact, we all benefit from both Brazil and America sharing them.
Or take invention and international property rights. While patents may confer to inventors a large share of the financial benefits of their inventions, the fact remains that new technologies are a global public good: in most cases we all benefit from inventions, regardless of who invents them. Maurice Hilleman, working at Merck in Philadelphia in the 1960s, may have developed the measles, mumps, and rubella (MMR) vaccine, earning Merck a healthy return on its investment in research and development. But the bigger benefit has surely accrued to the millions of people the vaccine has saved. In 1980, around 2.6 million people died from measles; thanks to the wide availability of the MMR vaccine, that figure is down to 158,000 today.12
Or consider modern communications systems. For all of the billionaires created by advances in networked technologies, the billions of individuals worldwide with mobile phone subscriptions and Internet access have also garnered an immense consumer surplus. Like with vaccines, the biggest beneficiaries of the ICT revolution are not the manufacturers, but rather the users.13 To be sure, there is money to be made in making computers and communications equipment. In the middle of last decade, 21 percent of Malaysia’s GDP was officially accounted for by the production of information and communication technologies.14 But the massive increases in computing and communications capacity at stable or declining cost — the ‘total factor productivity’ gains associated with Gordon Moore’s observation that the number of transistors on a computer chip doubles every two years — have largely accrued to users, who have gained access to better and better technologies at the same or lower cost.
The $300 that used to buy a scientific calculator that handled cosine calculations now buys a computer that can stream videos, edit high-resolution photographs, and run regression analysis on million-point datasets — all at the same time. Malaysia may get some more jobs manufacturing laptops, but those benefits are dwarfed by the broad productivity benefits that cheaper and better ICT technologies confer upon national economies all over the world.15
Even better in terms of spreading the global benefits of technological innovation is the reality that invention is cumulative, so that a technology advance by a researcher in one country can support or stimulate further advances in another. Isaac Newton suggested he stood on the shoulders of giants to make his discoveries; today, there are a lot more shoulders to stand on, and a growing number of them come from the developing world. Take Rangaswamy Srinivasan, the Indian-born co-inventor of LASIK eye surgery, or Luis Miramontes, the Mexican co-inventor of oral contraceptives.
Thanks to technological change and inventions such as the container ship and the Internet, ever more of our production, invention, and discovery are planet-spanning, bringing us closer together in relations of mutual benefit. The US Department of Commerce estimates that nearly 10 million Americans are employed exporting goods.16 Total US exports climbed from $901 billion in 2005 to $1,546 billion in 2012,17 and while America still runs a considerable trade deficit with China, over the same period, exports to China nearly tripled.18 In 2009, General Motors sold more cars in China than it did in the United States, while Chinese tourists now outspend German and French visitors to America. The 235,000 Chinese students at US universities help ensure there is enough money to overcompensate their lavishly paid football coaches and administrators. Taken together, the countries of the developing world have become the destination for about three-fifths of US exports.19
Trade undoubtedly carries adjustment costs, and the United States in particular has done a terrible job retraining workers impacted by growing competition with manufactured imports. Between 1990 and 1997, the federal government spent just $1 retraining workers for every $200 it spent on retirement or disability payments to displaced workers who exited the labor force instead of looking for a new job.20
But were high imports an inevitable cause of unemployment, one would expect the United States, which has the second lowest ratio of imports to GDP of high-income OECD countries, to see low unemployment. In fact, it suffers the ninth highest unemployment ratio of those countries. Imports provide both lower cost and greater variety to US businesses and consumers. That’s why it is often self defeating to interrupt such imports in an effort to save jobs. Recent tariffs put on tire imports from China may have preserved some employment in the US domestic tire business, argues Gary Hufbauer at the Peterson Institute for International Economics,21 but it cost jobs in the rest of the economy by making tires more expensive and weakening demand for everything else. The net effect: an estimated 2,500 fewer Americans employed.
Today we see not only more trade, but also greater trade integration. It’s unlikely that any country today produces all of the parts and components necessary to make a computer, an aircraft, or a car — or that any country would even want to do so. Indeed, the value of a given country’s exports is often made up in large part of imports from elsewhere. Take China: processing exports make up more than half of the nation’s booming manufacturing trade, but the Chinese content of those exports is less than 20 percent, with the other 80 percent imported.22 According to the OECD, about 15 percent of the value of goods that the United States exports is made up of components, materials, and services that it first imported.23 And more than a quarter of what the United States exports ends up as inputs to recipient countries’ own exports. That suggests that around 40 percent of US exports are part of a global value chain. The same proportion is above one-half for German exports and around two-thirds for Taiwan, the Philippines, and Malaysia.
When the United States runs an overall trade deficit, what flows inward is finance. That keeps the cost of borrowing low and helps America spend its way out of recession, creating jobs and enabling further consumption. As with trade, two-way flows in investment are good for both parties. Over the last decade, US firms have made great returns in China, for example. The country was home to 3,701 KFC locations in 2011, and Starbucks will have 1,500 stores there by 2015. Operating margins on those Starbucks stores are an astonishing 35 percent.24
Increased bilateral financial flows point towards greater global financial integration in general. Today, global financial markets rise and fall in tandem. The monthly correlation in returns between Asian stock markets and the S&P 500 has risen from roughly zero in 1992 to 0.79 in 2010. For Latin American markets, the correlation with the S&P 500 increased from 0.15 in 1992 to 0.86 in 2010. Pension funds in London, Los Angeles, and Lagos are now all in the same boat.25
The economic rise of the developing world is one of the epochal storylines of our time. In 1980, developing countries accounted for 27 percent of global GDP; by 2012 that reached 43 percent. Some see the growth of the developing world — and China in particular — as an immense threat. Take Charles Krauthammer, who suggests in the Weekly Standard that the international arena “remains a Hobbesian state of nature”. If we renounce our power, he warns, “they will fill the vacuum,” doubtless with the usual Hobbesian consequences for America: a life nasty, brutish, and short.26 Krauthammer captures the popular mood: only nine percent of Americans think China’s growth will have a mostly positive impact on the United States.27
In reality, greater wealth in developing countries brings with it better ways to deal with global threats. A richer, healthier, more secure developing world has been critical in filling the International Monetary Fund’s coffers, helping it bail out the Eurozone and debt-ridden countries across the world. The vast majority of blue-helmeted troops on UN operations are from developing countries (the United States supplies just 0.03 percent of the 83,500 troops involved in UN peacekeeping operations).28
Even better, the declining importance of domestic physical resources and the strengthening economic ties between nations are conspiring to make peacekeeping operations less necessary than they used to be. Contrary to Krauthammer, the world is much less Hobbesian than it used to be. The number of wars of conquest has dropped to almost zero over the past few decades. The number of wars of all kinds — including civil conflict — climbed from five in 1961 to 24 in 1984, but dropped back to five again by 2008. From 1950 to 2007, an average of 148,000 people died each year on battlefields worldwide; from 2008 to 2012, the average was just 28,000.
The rise of the rest does of course create challenges. Thanks to their rapid economic growth, China and India have joined the United States as the world’s three largest emitters of greenhouse gasses. But once again, dealing with the challenge of climate change is not a zero-sum issue; it requires international collaboration to respond effectively and rapidly. The answer cannot be to demand that developing countries forsake a quality of life that the rich world takes for granted. A moral and practical approach to climate change demands engaging with developing countries to ensure they can grow their economies while following a lower-carbon trajectory than that which fueled the rich world’s historic growth.
All of this suggests that we need to develop a new view of the international economy as a positive-sum game (to borrow from Financial Times columnist Martin Wolf), one that acknowledges that advances in wealth, technology, or wellbeing in one part of the world are likely to enhance rather than hurt prospects for progress elsewhere.29 Seeing the planet today through the decayed eyes of Malthus and Machiavelli — and framing engagement with developing countries as zero-sum — simply does not make sense in a non-rival, globally integrated world.
In our positive-sum world, cosmopolitanism and compassion increasingly align with self-interest. This is a far nicer situation than one in which the two conflict, and it is surely a leading reason to hope that the world will keep on becoming a better place to live. It’s time to shift our thinking about Asia, Africa, and Latin America, emphasizing cooperation and mutual gain rather than competition and fear. Thinking of the developing world’s growth in the 21st century as primarily a threat makes about as much sense as trying to run a modern empire on bird poop.
Photo Credit: "The World's Constable" (1904) by Louis Dalrymple; Public Domain (left); iStockphoto (right)
1. "Guano districts; claim by United States," Title 48 U.S. Code, Sec. 1441. 2006 ed. Supp. III, 2009. Available: http://www.gpo.gov/; Accessed: 5/1/2014.
2. Dan O’Donnell, “The Pacific Guano Islands: The Stirring of American Empire in the Pacific Ocean,” Pacific Studies 16, no. 1 (1993), https://ojs.lib.byu.edu/spc/index.php/pacificstudies/article/download/9817/9466.
3. Fareed Zakaria, “The Future of American Power,” Foreign Affairs, May/June 2008, http://www.foreignaffairs.com/articles/63394/fareed-zakaria/the-future-of-american-power.
4. World Bank Databank, http://databank.worldbank.org/data/home.aspx.
5. World GDP: Angus Maddison, The World Economy: A Millennial Perspective (Paris, France, OECD, 2001) http://www.ggdc.net/maddison/other_books/appendix_B.pdf. South Korean GDP: World Bank Databank, http://databank.worldbank.org/data/home.aspx.
6. “Crowded Out,” The Economist, September 24, 2011, http://www.economist.com/node/21528986.
7. Clive Ponting, A New Green History of the World: The Environment and the Collapse of Great Civilizations (New York: Penguin Books, 2007), 322-326.
8. “International Energy Statistics,” US Energy Information Agency, http://www.eia.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=5&pid=57&aid=6.
9. Michael L. Ross, The Oil Curse: How Petroleum Wealth Shapes the Development of Nations (Princeton, NJ: Princeton UP, 2013).
10. Otaviano Canuto and Matheus Cavallari, “Natural Capital and the Resource Curse,” Economic Premise no. 83 (May 2012), http://siteresources.worldbank.org/EXTPREMNET/Resources/EP83.pdf.
11. William Easterly and Ross Levine, “What have we learned from a decade of empirical research on growth? It's Not Factor Accumulation: Stylized Facts and Growth Models,” World Bank Economic Review 15, no. 2 (2001), http://williameasterly.files.wordpress.com/2010/08/33_easterly_levine_itsnotfactoraccumulation_prp.pdf.
12. “Towards a World Without Measles and Rubella,” last updated January 21, 2013, UNICEF, http://www.unicef.org/immunization/index_measles.html.
13. Charles Kenny, Overselling the Web? Development And the Internet (Boulder, CO: Lynne Rienner Publishers, 2006), 57-60.
14. Christine Zhen-Wei Qiang, Alexander Pitt, et al, “Contribution of Information and Communication Technologies to Growth” (working paper, World Bank, Washington, DC, 2004), http://elibrary.worldbank.org/doi/pdf/10.1596/0-8213-5722-0.
15. Charles Kenny, “Ending Global Poverty Through Tax Breaks to Bill Gates,” (unpublished paper, Charles Kenny’s personal blog), http://charleskenny.blogs.com/weblog/files/ictindustsubs.pdf.
16. John Tschetter, Exports Support American Jobs (Washington, DC, International Trade Administration, US Department of Commerce, 2010), http://trade.gov/publications/pdfs/exports-support-american-jobs.pdf.
17. US International Trade Data, Foreign Trade, US Census, http://www.census.gov/foreign-trade/statistics/historical/.
18. US International Trade Data, Foreign Trade, US Census, http://www.census.gov/foreign-trade/statistics/historical/.
19. “Hey Big Spenders,” The Economist, November 9, 2011, http://www.economist.com/node/21537925.
20. David H. Autor, David Dorn, et al, “The China Syndrome: Local Labor Market Effects of Import Competition in the United States,” American Economic Review 103, no. 6 (2013), http://economics.mit.edu/files/6613.
21. Gary Clyde Hufbauer and Sean Lowry, “US Tire Tariffs: Saving Few Jobs at High Cost” (policy brief, Peterson Institute for International Economics, Washington, DC, April 2012), http://www.iie.com/publications/pb/pb12-9.pdf.
22. Richard Baldwin, “Trade and Industrialization After Globalization’s 2nd Unbundling: How Building and Joining a Supply Chain Are Different and Why It Matters” (working paper, National Bureau of Economic Research, Cambridge, MA, December 2011), http://siteresources.worldbank.org/INTRANETTRADE/Resources/Baldwin_NBER_Working_Paper_17716.pdf.
23. “Interconnected Economies: Benefitting from Global Value Chains” (synthesis report, OECD, Paris, France, 2013), http://www.oecd.org/sti/ind/interconnected-economies-GVCs-synthesis.pdf.
24. Staff, “Starbucks Heads for Smaller China Cities as Coffee Shops Triple,” Bloomberg, April 1, 2012, http://www.bloomberg.com/news/2012-04-01/starbucks-heads-for-smaller-china-cities-as-coffee-shops-triple.html.
25. Todd Moss and Ross Thuotte, “Nowhere Left to Hide” (working paper, Center for Global Development, Washington, DC, March 2013), http://www.cgdev.org/files/1427009_file_Moss_Thuotte_market_correlations_FINAL.pdf.
26. Charles Krauthammer, “Decline Is a Choice,” The Weekly Standard, October 19, 2005, http://www.weeklystandard.com/Content/Public/Articles/000/000/017/056lfnpr.asp?page=3.
27. Dina Smeltz, Foreign Policy in the New Millenium: Results of the 2012 Chicago Council Survey of American Public Opinion and US Foreign Policy (Chicago, Chicago Council on Global Affairs, 2012), http://www.thechicagocouncil.org/UserFiles/File/Task%20Force%20Reports/2012_CCS_Report.pdf.
28. “Monthly Summary of Contribution (Police, UN Military Experts on Mission and Troops)” last updated November 30, 2013, United Nations, http://www.un.org/en/peacekeeping/contributors/2013/nov13_1.pdf.
29. Martin Wolf, “The Dangers of Living in A Zero-Sum World Economy,” Financial Times, December 19, 2007, http://www.ft.com/intl/cms/s/0/0447f562-ad85-11dc-9386-0000779fd2ac.html#axzz2pYVj4eLq.
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Charles Kenny is a senior fellow at the Center for Global Development. He is the author of The Upside of Down: Why the Rise of the Rest is Great for the West (Basic Books, 2014).
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