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Friday, April 15, 2005

US Global Competitiveness: In Search of a Strategy

Worsening US budget and trade deficits along with the declining interest in U.S. equities by private investors have raised a lot of eyebrows recently. When some thought that a depreciated dollar would improve the competitiveness of U.S. exports, the trade balance continued to move into the negative.

The problem that concerns me is not so much the trade deficit itself but rather the increasing reliance of the US economy on foreign central banks (official capital inflows) to finance it. I believe the bigger problem that needs focused attention has to do with the current and future state of US global competitiveness. The U.S. lawmakers need to lend serious thought to this long-term and strategic issue and pass forward-looking legislation in the areas of innovation, job creation & training, education, and immigration.

Recently, the US Council on Competitiveness whose members include corporate chief executives, university presidents and labor leaders, released a bipartisan Report on the need for a coherent strategy to promote future US global competitiveness. This report presents an opportunity for further debate and can serve as a starting point for a comprehensive strategy that aims to secure a competitive US economy. The recommendations of this study known as the National Innovation Initiative are organized into three broad categories: Talent; Investment; Infrastructure.


..Talent..............

The human dimension of innovation, including knowledge creation, education, training and workforce support. Recommendations support a culture of collaboration, a symbiotic relationship between research and commercialization, and lifelong skill development.

Recommendations:

1. Build a National Innovation Education Strategy for a diverse, innovative and technically trained workforce

  • Establish tax-deductible private sector 'Invest in the Future' scholarships for American S&E undergraduates
  • Empower young American innovators by creating 5,000 new portable graduate fellowships funded by federal R&D agencies
  • Expand university-based professional science Masters and traineeships to all state university systems
  • Reform immigration to attract the best and brightest S&E students from around the world and provide work permits to foreign S&E graduates of US institutions.

2. Catalyze the next generation of American Innovators

  • Stimulate creative thinking and innovation skills through problem-based learning in K-12 community colleges and universities
  • Create innovation learning opportunities for students to bridge the gap between research and application
  • Establish innovation curricula for entrepreneurs and small business managers

3. Empower Workers to succeed in the global economy

  • Stimulate workforce flexibility and skills through lifelong learning opportunities
  • Accelerate portability of healthcare and pension benefits
  • Align federal and state skill needs more tightly to training resources
  • Expand assistance to those dislocated by technology and trade


..Investment.......

The financial dimension of innovation, including R&D investment; support for risk-taking and entrepreneurship; and encouragement of long-term innovation strategies. Recommendations seek to give innovators the resources and incentives to succeed.

Recommendations:

1. Revitalize frontier and multidisciplinary research

  • Stimulate high-risk research through 'Innovation Acceleration' grants that relocate 3 percent of agency R&D budgets
  • Restore DoD's historic commitment to basic research by directing 20 percent of the S&T budget to long-term research
  • Intensify support for physical sciences and engineering to achieve a robust national R&D portfolio
  • Enact a permanent, restructured R&E tax credit and extend the credit to research conducted in university-industry consortia

2. Energize the entrepreneurial economy

  • Build 10 innovation Hot Spots over the next 5 years to capitalize on regional assets and leverage public-private investments
  • Designate a lead agency and an inter-agency council to coordinate federal economic development policies and programs to accelerate innovation-based growth
  • Increase the availability of early-stage risk capital with tax incentives, expand angle networks, and state and private seed capital funds

3. Reinforce risk-taking and long-term investment

  • Align private-sector incentives and compensation structures to reward long-term value creation
  • Create safe-harbor provisions to promote voluntary disclosure of intangible assets
  • Reduce the cost of tort litigation from 2 percent to 1 percent of GDP
  • Convene a Financial Markets Intermediary Committee to evaluate the impact of new regulations on risk-taking


..Infrastructure..

The physical and policy structures that support innovators, including networks for information, transportation, healthcare and energy; intellectual property protection; business regulation; and structures for collaboration among innovation stakeholders.

Recommendations:

1. Create national consensus for innovation growth strategies

  • Enact a federal innovation strategy through the executive office of the President
  • Catalyze national and regional alliances to implement innovation policies and innovation-led growth
  • Develop new metrics to understand and manage innovation more effectively
  • Establish national innovation prizes to recognize excellence in innovation performance

2. Create a 21st century intellectual property regime

  • Build quality in all phases of the patent process
  • Leverage patent databases into innovation tools
  • Create best practices for collaborative standards setting

3. Strengthen America's manufacturing capacity

  • Create centers for production excellence including shared facilities and consortia
  • Foster development of industry-led standards for interoperable manufacturing and logistics
  • Create Innovation Extension Centers to enable SMEs to become first-tier manufacturing partners
  • Expand industry-led roadmaps for R&D priorities

4. Build 21st Century innovation infrastructures - the health care test bed

  • Expand electronic health reporting
  • Establish and promote standards for an integrated health data system
  • Establish pilot programs for international electronic exchanges on healthcare research and delivery
  • Expand use of performance-based purchasing agreements

24 Comments:

Blogger Irina Tsukerman said...

Thank you for posting this. That presents a special interest to me...

April 15, 2005

 
Blogger Irina Tsukerman said...

By the way, cool counter stat in Arabic!

April 15, 2005

 
Blogger Jawad said...

Thanks Irina. This is an important topic that US lawmakers should be all over instead of debating tabloid issues of no long-term significance. The problem is that we don't seem to get politicians to look beyond their term in office. They tend to focus on short-term issues and anger points (whatever the wind brings at the particular time) to sustain their position. They see it as too much of a risk to tackle strategic long-term issues like that of revising the institutional framework of US economic competitiveness.

One thing is sure. The world is rapidly changing. 25 years from now, there will be a new global order in place. US lawmakers better plan for that now.

April 16, 2005

 
Blogger Gothamimage said...

Hey Jawad- Irina directed me to this. I will have to read this carefully, there is much of interest on this blog. I think I will have to post about this dilemma, which is beyond partisan.

April 16, 2005

 
Blogger Gothamimage said...

When I have kids, I will want them to learn Chinese -the language of the future, as well as Greek, Hebrew, and Latin -

Look at the world a hundred years ago- People took the British Monarchy seriously when they called themselves "defenders of the faith." The Tzar was unassailable. China was totally humbled. The Sultan of Ottoman, was also Caliph.

If you said all that would wash away, you would have looked silly.

America has to prepare for new realities, otherwise we are gonna be in deep trouble.

April 16, 2005

 
Blogger Irina Tsukerman said...

In which case, you should also make them learn a few Eastern European languages, because that part of the world is going to give China a run for its (or at least our) money one day.

April 17, 2005

 
Blogger Jawad said...

WC: Welcome. I already started learning myself so there is no doubt that if I have children, they too would learn Chinese. :)

Irina: You are right to point out the power-jockeying taking place in Asia-Pacific right now. The China-Taiwan-Japan-South Korea power game is in full force:

* Anti-Japanese demonstrations in China.

* Japan adopting new position re Taiwan

* China passing a law that would clear way for them to attack Taiwan if latter declares independence

* Japan vying for a permanent Security Council seat as part of the new reform plan at UN

* South Korea protesting the UN reform plan (guess why? yep, because they don't want to see Japan gain a perm seat - China is also doing everything possible to block it)

...and much more going including the North Korea issue. In terms of trade, China has now surpassed Japan in terms of exports to US but Japan is China's biggest trading partner!!!

The world is slowly changing right in front of our eyes if only we took the time to notice.

April 18, 2005

 
Blogger Irina Tsukerman said...

Moreover, the smaller Asian countries (Laos, Vietnam, Myanmar, etc.) have been forming their own alliance to counterweigh the influence of China and Japan. And of course if you add India, and India-China relations into the picture, it only gets more complicated!

April 18, 2005

 
Blogger laurenbove said...

I'm all for building the US up to be more competitive in the global marketplace. I'm also completely with you in the strategies that are outlined. I have a couple of concerns, however.

You can train and educate all you like, but when that newly trained and skilled American - who incidentally was paid $120,000 a year in that special job - can now be undercut by outsourcing to another country for 5 or $6,000 a year(and the US gov't gives such companies tax breaks) what's the point?

If in business, it all comes down to the bottom line and the weight of the profit stays heftily at the top...it seems that in order to become competitive, we'll have to have an economic collapse and rebuild.

Maybe then we could actually manufacture something in this country that could compete price point to price point, with the inexpensively manufactured goods that are imported from elsewhere. (Not to mention the inexpensive services that legal and even nonlegal immigrants are willing to provide for the "togoodforthatjob" people.)

April 18, 2005

 
Blogger laurenbove said...

Thinking....(If the dollar keeps declining as it has during the past few years, those goods will become more and more expensive...maybe that's just the economic bust that we need in order to begin making comptitively priced goods in the US. Afterall, they say economics is not magic, just a repetitive cycle.)

April 18, 2005

 
Blogger Khalij-Khazar said...

In determing comprehensive policy, policy-makers utilize a variety of technical models such as the RCM, Incrementalist,etc.The problem is, creating policy which moves too far from the status-quo puts them at risk of a castrophic failure. The threat of immense failure discourages almost everyone (except for the Rumsfelds, Cheneys, Perles, etc.)And the scarcity of time doesnt allow them to study all possible options.
The U.S. economy seems to understand the implication of regionalization, and is doing well to promote its high-tec R&D centers such as Austin-Dallas, silicon valley, and i think its route 617 in the Boston area? Anyways, as the OECD advises, focusing on knowledge based capital and finding niche markets in the new global world will be the key to success in the future...it will also have interesting consequences on issues such as sovereignty, etc.

April 18, 2005

 
Blogger Irina Tsukerman said...

How do you think it will influence the issue of soverignty?

April 18, 2005

 
Blogger Jawad said...

Hi Lauren. A few scattered thoughts in response to your question.

The dollar is a free-floating currency unlike some of the Asian currencies including the Chinese Renminbi (RMB). The RMB is pegged (fixed) to the dollar. So, that in addition to very low labor costs offsets the effects of the declining dollar on Asian exports to the US. When you said: "If the dollar keeps declining as it has during the past few years, those goods will become more and more expensive" - you were right regarding European goods (Euro is a free floater). The same does not quite work for China because the Renminbi is pegged to $.

However, the Asian central Banks have been accumulating a large number of reserves since the Asian financial crisis. They now hold the largest DOLLAR reserves in the world. So, if the dollar were to completely crash, so will their reserves. So, they play this delicate game (Asian central banks intervene directly in the Foreign exchange market - the US does not) whereby they play the dollar just enough to benefit in terms of trade but keep their reserves in good shape. That's why when the Japanese and Koreans almost simultaneously announced that they intend "to diversify their reserves", some in the US got extremely concerned. Because that signals a lack of confidence in the dollar by those who hold most of it - so bad news. The next day, the Japanese PM came out and made another statement to "clarify" what was said before. He was not just doing that for the sake of diplomatic relations with the US but also as a move in the interest of the Japanese economy. See, the Asian economies are in deep with the dollar so they can’t all bail out at the same time, otherwise they all collapse. It’s the first out of the gate that benefits.

On the other hand, a declining dollar is definitely not in the interest of Europe. Because your logic applies in this situation. Falling dollar makes European goods more expensive, thus, less attractive to US consumers. So, I expect that if the dollar continues to bleed and reaches the neighborhood of 1.5 for 1 Euro, the European Central Bank, the US Fed and major Asian CBs will get together in a fancy hotel somewhere in New York and initiate a coordinated intervention in the Foreign Exchange (FX) Market to salvage the $.

Look, the world can not reverse globalization. That’s just a fact. In addition, if protectionist policies are adopted they will put a lot more people out of work. In trade there are losers and winners and its all about comparative advantage. The government’s job is to adopt strategies (medium and log-term) to create comparative advantage for its people in the global market. That’s what US lawmakers need to work on. What’s unfortunate is that the “anger point” used by the left for political gain is “outsourcing” and free trade, just like the right is using “religion” and “national security” as anger points for political gain. These politicians need to get real and start doing some work for the long-term sustainability of the US economy.

Sorry my answer is so long. It’s just that kind of topic…

April 19, 2005

 
Blogger Irina Tsukerman said...

This is really interesting; thanks for clarifying. I guess we're too used to thinking in terms that make the papers the most and not the ones that really matter!

April 19, 2005

 
Blogger Khalij-Khazar said...

Jawad, is it not in the interest of debt servicing that the U.S. dollar reduce in value?

& to clarify Irina, many of these regional commercial entities span beyond the influence of single tier governments, such as the singapore-malaysia-indonesia corridor. As well, these regional trade structures need a degree of autonomy to service their interests, which may often conflict with the policies of the hosting nation(s).

April 19, 2005

 
Blogger Irina Tsukerman said...

So do you think trade conquers all ; ), or will tyranny triumph?

April 19, 2005

 
Blogger Jawad said...

Hi Khalij. It depends on the foreign exchange regime of the debtor country (peg or float)and it also depends on the way the debt is structured.

Examples:

1. If you are a North African country whose currency is pegged to the Euro and whose debt servicing is denominated in $, chances are the dollar has depreciated in relation to your local currency, thus, it has gotten a bit cheaper for you to service your debt. But if you owe your debt in Euros, it may have just gotten more expensive to service your debt (depending on your currency peg).

2. If you are an Asian nation whose currency is pegged to the dollar and your debt is in $, then No significant change. But if you owe in Euros then you're debt has just gotten more expensive to service.

3. If you are a US bank owed money by foreign debtor, you don't really care because if you are owed $10 then that's what the debtor still has to pay you. If you are a US debtor who owes 10 Euros to a European bank, then the falling dollar costs you more to pay your debt in terms of local currency...and so on and so forth.

What is important to understand is that this is an interdependent and convoluted system. Some think that countries like China actively seek to crash the dollar and collapse the US economy. That's pure garbage. Because as I said, if the dollar crashes, China looses in terms of its reserves. If the US market shrinks or collapses, then that's less market for China to sell its products - thus it loses. See it's not that simple. There are some intertwined interests built into the international financial system due to globalization. That does not mean that there is no competition. To the contrary, there is plenty between US, Europe, and Asia-pacific. But this is not a zero-sum, winner-takes-all game.

April 19, 2005

 
Blogger Jawad said...

BTW, Khalij and Irina, if you have time you need to read this report by the world Bank (Global Economic Prospects 2005) regarding regional trade agreements. I think it presents a balanced argument.

http://siteresources.worldbank.org/INTGEP2005/Resources/gep2005.pdf

Also, just checked and the Chinese foreign reserves grew from around $180 billion in 2001 to over $650 Billion this year!!

April 19, 2005

 
Blogger Irina Tsukerman said...

Thanks for the recommendation! I'll be sure to read it. The growth in China's reserves is insane. Something definitely needs to be done to make us more competitive - and focusing only on stopping China would only be counterproductive at this point.

April 19, 2005

 
Blogger laurenbove said...

Hi Jawad: Thanks for your help in my understanding the asian central banks interest and connection to the US$. I had heard that on NPR a couple of days ago and then again that the dollar had "stablized" probably after the clarification you refer to.

I'd love to have a seat at the table when the save the dollar talks take place. =)

Regarding the angerpoint of "outsourcing:" It's not just propaganda. It's hits really close to home. My entire IT dept. is a casualty and has been replaced by a cheaper overseas group. Waaaaay cheaper.

My company is just one of the many I've found in looking for replacement work that's jumped on this IT overseas bandwagon. It's not as if the company takes all that saved money and hires new employees or gives raises or bonuses to employees, but I have noticed the CEO just bought a new BMW and summer home in Costa Blanca.

Grrrr.

April 19, 2005

 
Blogger Jawad said...

Hi Lauren. I am not saying that 'outsourcing' does not exist. In fact, what I am saying is that it is an inevitable consequence of globalization and free trade...and that some on the left are using it as an anger point for political gain without providing any realistic alternatives. If they were to adopt the protectionist policies they advocate, they would harm far more Americans than present. So, that's why the focus should be on enhancing US competitiveness (creating new demand for new products, thus new jobs, through innovation). Because the truth is: We can't have it both ways. We can't, as consumers, demand Wal-Mart prices all while seeking California wages.

I also think that in the short-term the US must put pressure on China to revalue its currency but not completely float it right away. Because that can cause a meltdown of the RMB. So, the Chinese need to revalue but only gradually move towards floating their currency.

I also agree with your description of the corporate motive. I think it was the Chairman of GM who once said: "We are in the business of making money. We just happen to be making cars"

April 20, 2005

 
Blogger laurenbove said...

Because the truth is: We can't have it both ways. We can't, as consumers, demand Wal-Mart prices all while seeking California wages.

Ooohh, but I want to have it both ways. I want to have my cake and eat it too. You caught me in my dichotomy. (How'd you know that I luh-huv Walmart?) I have thought about this deeply, became frustrated with the own inner argument that ensued with myself and then firmly decided to drop it and cease antagonizing myself.

(sigh)

I now understand what you were saying about the anger points. Thanks for clarification. You are one brilliant and lucid person.

Regarding that GM manager's mindset...it absolutely flourishes under the current fascist corporatism we have running things at the moment?

(oops, did I say that out loud?)

April 21, 2005

 
Blogger laurenbove said...

I'm wondering out loud but it seems like the economy and reserves are just this finite amount, dispersed in a bell curve like manner to which you can struggle all you like to break free from your current economic situation but you'll almost always wind up right where you left off just having taken a different route to get there.

April 21, 2005

 
Blogger Jawad said...

That's pretty much true for most people in the world :) unless, as is the case for some, you can manage to get yourself a nice VIP room overlooking the rollercoaster you described where most people are getting winded :)

April 21, 2005

 

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