FOREIGN AFFAIRS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP90-00530R000300610004-3
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 24
• Document Creation Date: December 22, 2016
• Document Release Date: October 22, 2012
• Sequence Number: 4
• Content Type: MISC

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~~ v ~
FoRriGnT ~rl~ ~Zs
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AMERICA AND THE WORLD 1987/88
Coping With the Lippmann Gap Samuel P. Huntington
453
A European Perspective on the Reagan Years
Michael Howard
478
The Superpowers: Dance of the -Dinosaurs
Marshall D. Shulman 494
h World Economy and Technological Change
11. J
ich 516
W. Michael Blumenthal~zy
Soviet and Chinese Economic Reform
Marshall I. Goldman and Merle Goldman 551
Israel at 40: Looking Back, Looking Ahead
Yitzhak Shamir 574
Peace in Central America? ..........Linda Robinson 591
The 1988 Election: U.S. Foreign Policy at a Watershed
George McGovern 614
Comment and Correspondence ................... 630
Source Material .............................. 632
Chronology 1987 ............................. 638
Foreign Affairs is published five times annually
by the Council on Foreign Relations, Inc.
Vol. 66, No. 3 ?1988
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commercial
discoveries
I our high-
, the legiti-
?rtook ours
!f-righteous
gainst such
reality can
is avoided.
?e to accept
ind in our
Homy, and
.ride-and
e truth. .
l~ Michael Blumenthal
THE WORLD ECONOMY
AND TECHNOLOGICAL CHANGE
he years since the mid-1970s have been an unusual and
disquieting period. Even before the events of last October 19
there was a growing sense that something was not quite right
in America's economic life. The system appears no longer to
be working as it should.
On economic matters, we seem to be governing ourselves
less adequately than at any time since World War II; sometimes
we seem to be confronted by factors and forces that we cannot
- quite understand, let alone predict or correct. We find our-
selves more and more in an environment of unaccustomed
economic uncertainty and instability, both at home and abroad,
anc~ with no real consensus on what is happening, what is
causing it, or what should be done next.
In ttre postwar period we often confronted severe economic
challenges at home and abroad, and we met them-not always
perfectly, but certainly-quite adequately and, in fact, rather
well. Cur domestic economic policies enjoyed a broad degree
of support and met our needs. We created new international
institutions and, on balance, they did the job. The depth of
our problems was not an impediment to effective economic
management and positive progress.
Can there be any doubt that we are not presently tackling
the problems of the 1980s with equal understanding, imagi-
nation and success? Look first at our domestic scene:
-We are burdened with a federal budget deficit of unprec-
edented proportions, year in and year out, even in times
of relatively satisfactory employment and growth. There
is broad agreement that the risks are great, but not on
much else. The nation with the world's largest and most
sophisticated economy has so far been incapable of finding
a way out.
W. Michael Blumenthal is Chairman and Chief Executive Officer of the
Unisys Corporation, and served as Secretary of the Treasury from 1977 to
1979. This article is drawn from the Elihu Root Lectures delivered to the
Council on Foreign Relations in November-December 1987.
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530 FOREIGN AFFAIRS
-We are running huge deficits in trade and current ac-
counts which stubbornly fail to dissolve, even two years
after our .currency has been devalued relative to the
world's other principal currencies by more than 40 per-
cent. Most predictions as to the timing of any real improve-
ment have so far been wrong-much to the consternation
of the experts, who can no longer adequately explain
exactly what is going on, let alone predict when and by
how much the numbers will change.
-We are the richest nation on earth, yet we are now also
the world's largest debtor. At the current rate we will
soon owe more than all of the rest of the world's debtors
combined. There has long been agreement that this state
of affairs cannot last, yet it has-and no one can be sure
exactly what will happen next.
-We have an unstable currency and cannot quite decide
whether to support it or not. When we have tried, the
effort has generally failed or at best only brought tempo-
rary respite. We have worried, and rightly so, about the
possibility of a dollar "free-fall" and its longer-run political
as well as economic implications.
-We have experienced two serious energy crises, providing
clear evidence of our unhealthy dependence on inherently
unreliable external sources of energy and of the impor-
tance to economize and increase the efficiency of energy
use. Yet today we have largely abandoned even the pre-
tense of a national energy policy. In spite of recent histor-
ical experience, we cannot even agree whether one is
needed at all.
-We have the lowest savings rate of any developed country
in the world and do not understand why, though we
recognize the urgent need to save more and to reinvest to
improve our global competitiveness. But since we fail to
understand why we do not save more, we are unable to
agree on how to change our domestic policies to promote
our critical investment needs from within.
-In the midst of general prosperity and growth, amid a
national binge of borrowing and consumption, we tolerate
year after year grave pockets of poverty, distress and decay
in this land. The consequences of these structural imbal-
ances are egregious for our young, for our educational
system, for the fabric of our social life. We know all this,
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 rent ac-
~o years
to the
40 per-
nprove-
rnation
explain
sand by
~w also
e will
debtors
his state
~~e sure
'decide
hd, the-
:empo-
~ut the
~litical
widing
Irently
lmpor-
~nergy
Ile pre-
histor-
pne is
'~luntry
~h we
~,est to
pail to
'ale to
;mote
hid a
berate
decay
nbal-
~'ional
this,
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TECHNOLOGICAL CHANGE 531
but we cannot devise effective programs to combat these
national scourges, and the problem steadily worsens.
-Lastly, of course, we are now caught up in unprecedented
securities market uncertainties, with excessive, sometimes
violent, up and down swings which threaten the stability
of the system. And again, no one quite knows what needs
to be done.
I do not believe that all has gone awry, that no positive
economic decisions have been made. That clearly is not the
case. But the list of serious problems is long, we understand
them less well than we should, and seem less able to come to
grips with them than in earlier times. The result has been a
growing sense of concern and frustration at large amid a
stagnation of official thinking and positive action, and much
empty rhetoric, wishful thinking and general drift.
We are not alone. Japan, for example, is also faced with new
factors and forces which policymakers have yet to master. The
past mix of domestic demand management and export pro-
motion no longer makes sense. The yen is rising to historical
highs and competition from newly industrialized countries is
displacing Japanese jobs and "hollowing out" the industrial
base. Meanwhile, Japanese structural surpluses on trade and
current accounts have remained largely impervious to efforts
to create better balance. In some European countries unem-
ployment has risen to postwar highs, and the European Eco-
nomic Community faces a mounting crisis with agricultural
surpluses which threaten the fundamental structure of the
Community system.
At the same time, such serious world issues as the debt of
the Third World and rising protectionism linger, with few new
ideas and no decisive action in sight.
What is the cause of all this uncertainty and change? Why
the difficulty in understanding what is under way?
No single reason adequately explains what has occurred. But
I believe there is one circumstance which overshadows all else
and has set the current period apart: unprecedented, deep and
continual technological change. In the 1970s and 1980s ex-
traordinarily rapid technological change has thrust upon us
new and as yet unresolved problems of governance in the
national and international spheres.
There_appears-to-be a fundamental-lag-between fhe-cur-r-ent~-,
i
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532 FOREIGN AFFAIRS
rate-of-technological-chang d the rate of adjustment'`~to--~
these-change-s-among de_cis~on-mak~?s ~-Technolytihat.evol-ves---~
rn
uch
mor
e
idl
_
-
-
~r_ap
y-than~the=bady pa-litic-can--abs~r_b~creates~~
str--wins and-stresses-which=le~-d_to-dill_ocations;-in=stabilities-an
axal
f
,p
ysis.o
actions and-sometimes p vre erse_resp- onses~This is
what characterizes our situation toda
The
robl
i
f
y.
p
em
s
urther
complicated because the private sec-tor accepts tee-hnological~
ct~a-nge=more-ra
id
l
th
h
p
-y_
~
an_t
e_gover-r~~ment~
Today's situation differs in one fundamental aspect from
earlier periods of rapid technolo
ical cha
g
nge (e.g., during the
invention of the steam engine or the telephone). `7~he current
per-iod=of-re_v_ol~utionar_y-charge-=i -aecurr-i g-in=a=muchRmore--~
inter_dependen.t wo~-.ld_in which~pu-r-_el-y or~la~-gel-_y_r~a~ti~na7ae-l=-~
existing international institutions have~b
l
d
een
ren
ered obsolet
by technological change
and the ca
acit
f
,
p
y
or making interna-
tional reforms is even less developed than that for making
domestic reforms. In the absence of adequate institutions,
progress on adjusting to the new technology is reduced to a
slow crawl.
III
What is the new technology?
The range of significant recent technological changes is large
and diverse. But one development, I believe, lies at the heart
of many of the changed circumstances with which we must
come to terms. .
We need to understand, and master, the full implications of
the acceleratingadva~nces=in-microelectronics; which~beg~-~an~
with=the-rove Lion-of t~~nsistors-at Bell Laboratories-in 1'94-7
a~-wer ce ontinued-a-decade=later-by-the-dev ~laprnent=of~
,~i-n~tegrated-cir~uit~ the ability to group a large number of
transistors on a single silicon chip.
Through miniaturization it has been possible, on the average,
to double the number of transistors on one tiny chip each year
since-with dramatic implications for performance and, above
all, for cost. As a result one random-access memory chip can
today accommodate as many as one million bits, which is
125,000 separate characters of information, on a device no
bigger than a fingernail and at a tiny fraction of the earlier
cost. The scientists at Unisys assure me, based on work now in
progress in the laboratories, that we will soon be able to place
four times as many characters on that same small device.
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ment to
t evolves
~ creates
ities and
o. This is
further
-ological
ct from
ring the
current
~~h more
oral ef-
iermore,
~>bsolete
!nterna-
making
~tutions,
ed to a
'is large
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;e must
'ions of
(began
~i 1947
!ent of
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h year
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~'ip can
~ich is
ce no
earlier
;ow in
place
TECHNOLOGICAL CHANGE 533
The results have been spectacular. In=1-961---we=achieved-the-.
ability--to ~andle~as rr~any as 34,00 arithmetic operati~on~s-p~~--
seeor3d-in one-com-pater; only= 20-years later,==we--fear-ne to
handy-as many as-800 m~llori arithmetic operations per-second
yin=-a=sngh=computer:=By the end of this decade that number
will have been far surpassed.
Another extraordinary development of the 1960s, the mi-
croprocessor, is now affecting our lives in even more startling
and revolutionary ways. For this breakthrough now enables us
to combine not merely within one computer, but on a single
small chip, a vast array of complex features_and functions for
both memory and logic processes. A single standard- micro- - -
~processor -can handle--as -many as 2U- million- ndi-victual -and -
rvari~d-instructions-per-second. An-annual-r-ate-of=fin- cr-ease-of
~2~0-per-cent- -in---that cap~bi_1ity-is likely -for years-to- come:-This
revolution with regard to size, speed and complexity has equally
revolutionized cost, which has dropped by over 90 percent in
the last two decades and continues to decline steadily year after
year, albeit now at a decreasing rate.
The-~ffeet on-an~ever-i cr=easing rtinge-of human-endeavors-____~
-
-is-as profound as it is pervasive. -And what makes it particularly
powerful is that all this has occurred in conjunction with far-
reaching changes in other technologies as well. The most
important of these changes have been in jet aviation, space
satellites, biotechnology and, especially, the technology of new
materials, particularly ceramics and glass fibers.
~__ ~_ _.
The -impact- on commnnrcat-ion and- transportation- leas- ha --
specials-meaning.--Our capability to establish virtually instanta-
neous worldwide electronic links, combined with the technol-
ogy of television satellites and jet transportation, has revolu-
tionized how we live, where we go and what we do.
Technological breakthroughs invade every aspect of our
lives. Just four decades ago the world had just one computer,
the ErriAC, built at the University of Pennsylvania in 1946. It
weighed 30 tons, utilized 18,000 vacuum tubes, stood two
stories high and covered 15,000 square feet. It cost many
millions.
Ten years later, in 1956, there were but 600 computers in
the entire United States. Two decades ago there were 30,000.
In 1976 there were about half a million computers in use across
this land. Today there are several million, and we now estimate
that by the end of this century half of all the households in the
United States will have at least one free-standing computer.
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 534 FOREIGN AFFAIRS
Within less than three decades of the birth of the computer
age, the industry was producing, for a few hundred dollars, a
microcomputer that was 20 times faster than the ENIAC, ten
times more reliable, required 3,600 times less power and took
up 300,000 times less spacel Today, untold numbers of micro-
processors perform a myriad of complex tasks in factories,
offices and homes.
The results? In the seventeenth century it took Johannes
Kepler four years to calculate the orbit of Mars. Today a
microprocessor can do it in four seconds flat.
In factories, parts are conceived, designed and produced at
one-hundredth of their old cost and in a fraction of the time.
Robots with preprogrammed microchip brains do complex
routines requiring superhuman strength and handle the chores
that are particularly dangerous or dull. They can hear, see and
touch. In automobiles, a single throwaway microprocessor con-
trols ignition, fuel, suspension and brakes, and almost every-
thing else that makes the car go.
Inforrnatontihas=become the key~ta moder~i- econ6mi-c-activ=-~
Sty=a~basic-resou ce~asrimportant--today-,as-capital,_la-nd-and--~
1-abor-have=been n~t~p~st: Ireformation is not and cannot any
longer be geographically limited or confined. Tghe-new-=tech-,:-y
{nology_moves_ tt mstantaneou$ly across--national-boundaries,- -
anywhere- and- at -any=time: -We~ are, in fact, not far from the
point where the entire store of human knowledge is available
worldwide and where new developments and changes are com-
municated in split seconds to anyone, at any place on the globe.
The combining-af electronics-wit-h =6iotechnologg and--the-- >
~appl~ication of=engineering methods=to tfie study=of live-organ---_
eisrrms- _are- resulting-in-equally-stunning-new -possibiaities-for-- -~
mankind: in agriculture, we have raised productivity substan-
tially and have grown plant species in new environments; in
genetics, we are learning to reprogram and create new proteins
nonexistent in nature, and can now utilize these techniques to
unlock the genetic code with dramatic implications for world
population growth, medicine and health.
Medical science has leapt ahead. eA-r scanners provide com-
posite images with resolution beyond the capability of conven-
t~onal X-ray machines. Expert systems can suggest diagnoses
from a menu of thousands of symptoms and hundreds of
diseases.
The-=new technology--has=-fundamentally altered= what- we .
produce_and.how-w_ e do-it,=what-we trade;-how we eorrimurii=~
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Declassified and Approved For
 ~mputer
otlars, a
~~c, ten
nd took
f micro-
ictories,
jhannes
`oday a
~uced at
le time.
omplex
'chores
gee and
'or con-
~I every-
activ-
'pd and
',got any
'v tech-
~daries,
im the
'ailable
'e com-
globe.
~~ d the
~~rgan-
~es for
bstan-
hts; in
loteins
ues to
'Iworld
I~, com-
nven-
~~noses
~,ds of
~.
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TECHNOLOGICAL CHANGE 535
rcate and'how-quickly-anc~--widely-information-can--be-passed
along; who_tra_vels~r~di =by what-means; how-we=educate ou ~
chi~ldr-enf.and_care for---the=sick; how-we-compose-- sic-ands.
~wri_te~books. So little has remained the same that we can no
longer hope to govern our affairs as before. Because of the
microchip, mankind can now accumulate, store, manipulate,
access and utilize information, data and knowledge in vastly
more efficient ways and in volumes exponentially greater than
only a few short years ago. Ten billion bits of information can
be put on a single video disc no larger than a phonograph,
record. The entire contents of the Library of Congress can be
stored in a cabinet hardly bigger than amedium-sized medicine
chest.
A- simple little experience impressed upon me the scale of
these changes more deeply than anything else. Not long ago,
far from high-tech civilization in the interior of China's Anhui
province, a local farmer showed me his new television set on
which he was just then watching excerpts of the Asc evening
news, featuring Sam Donaldson, firing pointed questions at the
president as he boarded his weekend helicopter-but of course
getting not much more than a cheerful grin and a wave in
return, even in dubbed Chinese. The farmer thought it was
great and I have not forgotten it since. When I was growing
up in China, that illiterate peasant's horizon and knowledge
about the outside world was limited by the distance he could
walk or, if he had one, peddle his bicycle. I doubt that he would
have ever been to the provincial capital, Hefei, not all that
many kilometers away.
In sum, the world is not what it was only a few short years
ago.
World industry and commerce are being reshaped by tech-
nological change in many other ways, as are the national and
international problems to which new technologies give rise.
We are witnessing the development of entirely new materials,
and we can now endow old ones with changed and vastly
enhanced new properties to reduce cost, improve strength, add
flexibility and so forth.
Older materials like copper, tin, aluminum, even steel are
increasingly faced with new competition and the threat of
obsolescence, with potentially serious impact on the economies
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536 FOREIGN AFFAIRS
of countries such as Bolivia, Chile, Peru and others in Southeast
Asia and Africa.
Secondly, as noted previously, the impact of technology on
agriculture is probably as profound as it is in industry. Biotech-
nology and biogenetics are creating tremendous opportunities
for mankind but also present us with new challenges and
problems. Genetic engineering promises to revolutionize agri-
culture in the years to come. Genetically engineered seed and
the development of highly drought- and herbicide-resistant
species are likely to lead to rapid and continuing improvements
in productivity and total output, eventually making traditional
food importers largely self-sufficient and eliminating, or at
least sharply restricting, many markets for temperate-zone
agricultural goods. Further advances in productivity enhance-
ment, crop varieties and animal breeding techniques promise
to continue these shifts in the balance of world demand and
supply.
Technological change is also altering world trade. In fact,
for one who spent four long years in arduous negotiations to
lower tariff barriers and increase world trade, it is a sobering
thought that technological change appears to be having a far
greater impact on the nature and volume of international
commerce than all the trade negotiations since the 1948 estab-
lishment of the General Agreement on Tariffs and Trade
(GATT combined.
Service trade was not a problem in the Kennedy Round
twenty years ago. Today, it is the issue. I=n-an azluanced-countr-y---
cinch-a_s-the_L~_n~ite~l-States; 7-5-percent-of-the-wor-k=ford-is-now
---
~employed-in-the-service-sector_Overall,=and-t~aa=thirds of =that=
number- are-connected= in ane-way-or-ana[her-with infor-maton=
or wi[h=the-knowle~C ge=indusuy-itself: The estimate is that by
the year 2000 only 15 percent of all employment in the United
States will be devoted to the manufacture of goods.
Increasingly, =then; a country's-compar-atiive a vantage-lies in - T
`its ability to-utilize effec-lively-the-n we reformation-technology; __
in-the -speed _of=its =absorption-n-to the-producti-ve-pr_ocess-and
~__ _ T. __ _____~
iri-the relative e#~f ciency-=with-which =it is applied Less and less
it is the other factor endowments, the availability of raw ma-
terials or the cost of labor, that determines which country has
the advantage and which has the lowest total cost.
As the new technology becomes an important input of the
traditional production process, fundamental changes in the
cost structure occur. As recently as a decade ago, for example,
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southeast
~ology on
Biotech-
rtunities
ages and
size agri-
~seed and
resistant
wements
~d~tional
g, or at
'ate-zone
Inhance-
ipromise
'md and
Round
~:ountry
is now
of that
mation
:hat by
United
lies in
~ology,
>s, and
~d less
w ma-
'ry has
TECHNOLOGICAL CHANGE 537
many electronic assembly operations were being shifted out of
the United States, first to Japan and subsequently to Hong
Kong, South Korea or Taiwan.
Now a reverse move may be taking place. Labor cost differ-
entials between us and the Far East may, quite apart from
exchange rates, become less important in determining the
location of production or plant. For it is now high technology
applied to manufacturing, including robots and computer mod-
eling, that permits the introduction of "just in time" delivery
of inputs and high levels of automation and reduces or totally
offsets the advantages of low labor costs. At Unisys, we can
assemble computer terminals in the United States at a cost
roughly equivalent to the Far East, even though wage rates
differ substantially between our plant in Flemington, New
Jersey, and those in South Korea or Taiwan.
For a company like ours, the location of manufacturing and
- = service facilities for our worldwide operations can now be
determined more by market and customer considerations than
- -proximity to needed raw materials or areas with low labor
rates. Increasingly, we can ship products by jet and make
delivery from anywhere to any place on the globe in 48 hours
or less.
My own view is that not only the interrelationships but also
the volume of world trade will as a consequence continue to
grow. Some trade flows have obviously become obsolete, and
there is a debate whether these are now or soon will become
so large as to offset the new opportunities being opened up.
Intuitively, I do not believe that to be so, but it remains to be
seen.
This enhanced interdependence is changing trade in another
important way: the-national-origin-of -a-pr-oduct =is-becom-ing-~
more=and=more cliff cu_l~t -to-define: ~ As a smaller number of
large players are able to organize their operations on a world-
wide scale, their products cease to be truly American or Ger-
man or Japanese. Parts, components, subsystems, products and
services are intermingled and exchanged in ways that render
debates as to the final product's national origin not much to
the point.
In the financial marketplace it is clear that technology, the
ability to develop and gain access to vast data bases, to handle
complex computing with lightning speed, and to communicate
instantaneously, has had a profound impact in at least four
critically important ways. First, information is now universally
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 ,. -. ..~ _
,~.
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538 FOREIGN AFFAIRS
available, in real time, simultaneously, in every financial center
of the world. Second, technology has tied all the principal
countries and world financial and banking centers together
into one integrated network. Few countries or parts of the
world can any longer remain insulated from financial shocks
and changes, wherever they may occur. Third, technology. has
made possible the establishment of a new, comprehensive sys-
tem and highly efficient world market to match lenders and
borrowers, to pool resources and share risk on an international
scale, without regard to national boundaries. Finally, technol-
ogy has engendered a vast amount of innovation or new "prod-
ucts," mostly to hedge against changes in interest rates or
exchange rates.
Technology has made the system more efficient. But new
systemic and policy problems have also been raised, as the
recent unstable performance of the securities markets clearly
showed. The problem does not lie here. It lies rather-"in fhe = _