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Declassified and Approved For Release 2012/10/22 :CIA-RDP90-005308000300610004-3 Declassified and Approved For Release 2012/10/22 :CIA-RDP90-005308000300610004-3 Declassified and Approved For Release 2012/10/22 :CIA-RDP90-005308000300610004-3 ~~ v ~ FoRriGnT ~rl~ ~Zs W..,,:zw i 9 xv~ vv 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 Declassified and Approved For Release 2012/10/22 :CIA-RDP90-005308000300610004-3 Declassified and Approved For Release 2012/10/22 :CIA-RDP90-005308000300610004-3 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. Declassified and Approved For Release 2012/10/22 :CIA-RDP90-005308000300610004-3 Declassified and Approved For Release 2012/10/22 :CIA-RDP90-005308000300610004-3 530 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, Declassified and Approved For Release 2012/10/22 :CIA-RDP90-005308000300610004-3 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, Declassified and Approved For Release 2012/10/22 :CIA-RDP90-005308000300610004-3 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 Declassified and Approved For Release 2012/10/22 :CIA-RDP90-005308000300610004-3 Declassified and Approved For Release 2012/10/22 :CIA-RDP90-005308000300610004-3 532 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. Declassified and Approved For Release 2012/10/22 :CIA-RDP90-005308000300610004-3 Declassified and Approved For Release 2012/10/22 :CIA-RDP90-005308000300610004-3 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 ~'e heart ;e must 'ions of (began ~i 1947 !ent of ber of i ~ierage, h year above ~'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. Declassified and Approved For Release 2012/10/22 :CIA-RDP90-005308000300610004-3 534 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 . e do-it,=what-we trade;-how we eorrimurii=~ Declassified and Approved For Release 2012/10/22 :CIA-RDP90-005308000300610004-3 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 ~. Declassified and Approved For Release 2012/10/22 :CIA-RDP90-005308000300610004-3 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 Declassified and Approved For Release 2012/10/22 :CIA-R DP90-00530800030061 Declassified and Approved For Release 2012/10/22 :CIA-RDP90-005308000300610004-3 536 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, Declassified and Approved For Release 2012/10/22 :CIA-RDP90-005308000300610004-3 Declassified and Approved For Release 2012/10/22 :CIA-RDP90-005308000300610004-3 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 Declassified and Approved For Release 2012/10/22 :CIA-RDP90-005308000300610004-3 ,. -. ..~ _ ,~. Declassified and Approved For Release 2012/10/22 :CIA-RDP90-005308000300610004-3 538 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 = _