Kentucky’s opportunities in a flattening world

Sunday, February 12, 2006

Finding ways to raise our region’s ‘valleys’

By David Jones Jr.

Special to The Courier-Journal

I have been working with, and sometimes in, China for more than 25 years. I first experienced the country as an English teacher, from 1980 to 1982, at a medical school in Changsha. In that city about the size of Louisville, the tallest building was a six-story hotel. I received two phone calls in two years, and my biggest monthly expense was for postage stamps — not because I was trying to be frugal, but because there was nothing else to buy.

If conditions were challenging for foreign teachers, they were terrible for ordinary Chinese. My students lived eight to a room in an unheated dormitory that smelled like its trench toilets. Students had no control over their post-graduation work prospects, since jobs were assigned by the Communist government. Despite all this, the students worked hard and stretched in every way possible to take advantage of the unexpected chance to learn English from a native speaker, in hopes that their world might someday open up.

I’ve stayed involved with China ever since, most recently in the course of regular business activities for my Louisville-based venture capital firm and on an advisory committee at Yale University. On my most recent visit, in January 2005, I was overwhelmed by progress and development. Ferociously competitive phone companies provide urban Chinese with wireless services far superior to those Americans enjoy. The cities I visited were replete with skyscrapers. Changsha now looks more like Chicago than like Louisville, and massive public investment is replacing and expanding the dilapidated universities of my memory with new campuses that, if not exactly gleaming, are highly functional. On campus visits, I continue to encounter students who remind me of my earlier medical students —intense, ambitious, eager to learn about the world —but with vastly more opportunities.

Tension amidst the joy

Something important is happening there. As a former teacher, I’m thrilled to see the hard work and learning of my students, and their children, bear fruit. But as an American, the tension between the China of my memory and the China of my modern experience has been making my stomach churn for several years. Put simply, I am concerned that we are not preparing ourselves for productive competition with China, India or the other rising economies. My unease has grown as we have concentrated our diplomacy, foreign aid and, quite literally, national blood and treasure on the Middle East. (Some of the tension may be even more personal, since my youngest brother is a Marine infantry officer preparing for his next deployment in Iraq.)

My gut tells me that the world is changing very, very fast; that the real action is not in the Middle East, but in the Far East and South Asia; and that the United States, by focusing on the countries that have so far been losers in globalization at the cost of ignoring the emerging winners, may have misplaced its priorities.
As a Kentuckian, I’m even more concerned, as low education levels, disastrous public health and myopic politics threaten my state’s ability even to stay on the competitive playing field.

How we got here

Thomas Friedman’s recent book, The World Is Flat: A Brief History of the 21st Century, helped me put my sense of unease in context. Friedman spent the years between the bursting of the tech bubble in 2000 and late 2004 writing almost exclusively about the Middle East and, like our national leadership, was almost wholly concerned with the War on Terror.

“While we were sleeping” in those years, he writes, the world changed fundamentally: It “became flat.” What he means is that changes in technology and politics knocked down barriers that previously kept people from working and competing together. This, in turn, radically increased the number of both customers and competitors we all face.

Two main factors are bringing global competition to most of our workplaces. The first is technology, particularly (a) the gigantic investment in fiber optic bandwidth, which made international communication affordable, and (b) the Internet and its related technologies, which allow people and computers to exchange information easily. These intertwined innovations have made it possible for smart people anywhere to work together to create value.

The second is political change, especially the fall of the Soviet Union in 1991 and the moves toward market capitalism by India and China. These changes brought billions of new players onto the global economic stage. Friedman quotes estimates that the “global economic world” has grown from about 2.5 billion people to about 5.5 billion, through the addition of the countries named above.

Even though only about half of these 3 billion new people are of working age, and perhaps 90 percent still lack the education and connectivity to play in the world economy, this still leaves 150 million new competitors —roughly the number of the entire U.S. workforce.

Is anyone immune?

These changes matter not only to the factory hands and call center workers, but also to doctors and lawyers and researchers and graphic artists and journalists — even to venture capitalists. We all know that “rote” work — manufacturing, standard call center and help-desk activities — has been moving to more productive parts of the world for decades. What’s astonishing is how many of our more “upstream” jobs are being affected as well.

Many people are aware that a high percentage of simple individual income tax form work is done by accountants in India who are much less expensive than U.S. accountants. What is less well-known is that in 2004, an estimated 40 percent of corporate and trust returns — that is, the more complicated tax returns — were also done in India.

Meanwhile, doctors in India and elsewhere are reviewing x-rays, CAT-scans, and PET-scans, and are providing both overnight coverage for understaffed U.S. hospitals and second opinions for U.S. patients. As India builds modern hospitals, and as comfort levels with the quality of its medical care grow, people are even starting to travel to India for hands-on procedures.

Technology allows much, and perhaps most, knowledge-based work to be disaggregated and moved. Ironically, Humana’s IT work has been easier to globalize, with great results in terms of access to talent and creativity, than what some consider the simpler, lower-end call center work with which the company has also experimented.

Companies are able to hire several smart researchers and modelers from China or India for the price of one U.S. employee — but wages are not the only issue. In many cases, time-zone differences enable overseas employees to work while U.S employees sleep, helping to make the business productive 24 hours a day. In other cases, overseas teams just do a better job. For example, Microsoft has three research centers in the world: Cambridge, England; Redmond, Wash.; and Beijing, China. According to Bill Gates, the most productive of these, “in terms of the quality of ideas that they are turning out,” is in Beijing. “It’s mind-blowing,” says Gates.

What can Kentucky learn?

Our new competitors come from countries with recent histories of disastrous government, failed ideological experiments, corruption — in fact, of doing almost everything wrong. And their citizens still face big challenges: political repression in China and ethnic strife in India, to name but two. But these countries have gotten one big thing right: education. And in Friedman’s flat world, it turns out that education is the ticket to the dance.

China has invested heavily in education, and it shows. In only one generation — from 1978 to today — China has increased the proportion of its college-age population in higher education from 1.4 percent to about 20 percent. The numbers of undergraduates and holders of doctoral degrees have both increased fivefold in the past 10 years. And, lest we complacently assume that this is about narrow vocationalism, The New York Times reports that “China wants to transform its top universities into the world’s best within a decade, and it is spending billions of dollars to woo big-name scholars” from around the world to this task — “Bucks for Brains” on steroids.

Not that the Chinese (or Indians or Vietnamese or others) are waiting for homegrown excellence — they’ve learned new languages and left home, sometimes for decades, to find it. I remember the focus and intensity of my students in China, so it doesn’t surprise me that 56 percent of the engineering degrees now granted by American universities go to non-U.S. citizens, or that in computer science and math the statistics are 46 percent and 42 percent, respectively. I am also not surprised — though I am concerned — that the U.S. Department of Labor predicts that by 2010, 90 percent of the world’s science and engineering degrees will be held in Asia.

Thriving in a ‘flat’ world

Neither the United States nor Kentucky needs to quail in the face of globalization. We have huge advantages, as a nation and in our state, that the new competitors lack: stable government, a tradition of innovation and constant immigration of ambitious, talented contributors. The flatter the world, the further our light should shine.

But to be competitive, we must get in shape.

Lots of people are wondering whether we can do it — or whether the U.S. has become “fat, dumb and happy” and is destined to decline. (Take a look at how the U.S. is portrayed in European cartoons these days — tall, skinny Uncle Sam now has a gut.) To quote Fareed Zakaria, the Indian-American editor of Newsweek, “The ultimate challenge for America — and for Americans — is whether we are prepared for this flat world. …[A]re we conducting ourselves in a way that will succeed in this new atmosphere? Or will it turn out that, having globalized the world, the United States had forgotten to globalize itself?”
This question is provoking consternation in Silicon Valley, Boston and other centers of U.S. brainpower. For Kentucky, the challenge of globalization is more brutally obvious, because the facts are not ambiguous. Our population is poorly educated and in bad health.

Education

The Prichard Committee for Academic Excellence reported last year that, of 100 9th graders who enter Kentucky’s high schools, only 68 will graduate and only 15 will graduate from college. As technology becomes more important, can the 32 percent of Kentucky kids who won’t finish high school prosper? Or the 85 percent who won’t complete college? Can the communities and businesses that succeed in global competition afford to pay the taxes that an uncompetitive state might extract (indeed, already does extract on its metro areas) to provide basic services to those left behind — or will our companies choose, or be compelled by distant owners, to move elsewhere? Will we have the vision and tenacity to educate, motivate and offer good jobs to our kids, or will the capable ones work for people, and in places, that prepare better for the new order?
In a flat world, opportunities to trade goods and services will abound. Job searches will not be limited to Greater Louisville or Kentucky, but will potentially lead anywhere. This is good news for people who have the education, the motivation and the tenacity to compete. But it could lead to disaster for places whose people are unprepared. Kentucky’s leaders must push for education policies — and its voters should demand outcomes — that give Kentucky’s citizens a shot at a prosperous future.

Public health

Kentucky also carries the handicap of an unhealthy citizenry into global competition. As The Courier-Journal recently reported, we’re near the top nationally in rates of tobacco use and obesity.

These epidemics impose costs on employers, fellow-workers, and taxpayers — all of whom can move elsewhere, or see their work taken over by healthier workers in other places. These epidemics are growing especially fast among our youth, with disastrous implications for the future.

These aren’t “American” diseases, but rather “diseases of affluence,” as shown by the fact that obesity is spreading more rapidly in China than anywhere. Nor do they reflect individual morality — “good thin people” vs. “bad fat people” — as sometimes comes across. Having moved in the last five years from borderline obesity myself , and still struggling every day to keep off the 35 pounds that I lost, I’m acquainted with both sides of this issue.

Neither kids nor adults have to be fat, and they don’t have to smoke. Aggressive public action can, among other things:

- restore physical education and healthy foods in the schools;

- raise taxes on tobacco so that it is unaffordable to young people and a more painful choice for all addicts;

- adapt school bus schedules so kids walk more; and

- authorize and adopt health benefit structures that pay for healthy behavior and outcomes.

Improving public health is not rocket science; it is a matter of political will and priorities. Today, however, it is scarcely part of our public debate, either nationally or even in our state, governed by a doctor.

Globalization is happening; Kentucky is too small to resist it, or even influence its development. We must prepare ourselves to succeed or face a future that could be grim. Singapore’s minister of education was recently quoted as saying, “From where I sit, it’s not a flat world. It’s one of peaks and valleys. The good news for America is that the peaks are getting higher. But the valleys are getting deeper, and many of them are also in the United States.”

Our fine city and beautiful state have too many of these “valleys” already; we must act now to get smart enough, and fit enough, to raise them up.

Caption: Beijing’s teeming skyline: ‘My gut tells me that the world is changing very, very fast; that the real action is not in the Middle East but in the Far East and South Asia. …’

David Jones Jr. of Louisville is chairman of Chrysalis Ventures LLC.

Workers in Bangalore, India, being trained in January to use specialized software to provide services to overseas clients.

Technology and politics knocked down barriers that previously kept people from working and competing together. This, in turn, radically increased the number of both customers and competitors we all face, writes New York Times columnist Thomas Friedman.