<sub>Clyde Prestowitz is President of the Economic Strategy Institute, he served as counselor to the Secretary of Commerce in the Reagan Administration, was a senior businessman in the United States, Europe, Japan, and throughout Asia and Latin America. He has served as vice chairman of the President's Committee on Trade and Investment in the Pacific and sits on the Intel Policy Advisory Board and the U.S. Export-Import Bank Advisory Board.

Mr. Prestowitz has a B.A. with honors from Swarthmore College; an M.A. in East-West Policies and Economics from the East-West Center of the University of Hawaii; and an M.B.A. from the Wharton Graduate School of Business.</sub>

_{There are major shifts in the world’s economies. China, which was 75% of world GDP in 1415, was only 5% in 1950. It is now about 13% and growing rapidly. India is also becoming a major economic player.}

_{Their growth has been based not only on cheap labor, but skilled labor. For example, India has high tech hospitals. They are selling "medical tourism"; it is a $1B industry. They are performing analyses of x-rays, MRIs, etc. on an outsourcing basis.}

_{The Internet, where anything that can be digitized, sends data anywhere instantly and distribution systems that deliver physical product overnight have revolutionized economic activity. Industries are not tied to specific geographic areas as they once were.}

_{The global economy is distorted in that the only net consumer at this time is the US. The US is spending more than is being earned; there are no savings. We are effectively borrowing from China and India, both of whom are holding large amounts of US Treasury bonds.}

_{If they decide to no longer hold these bonds the dollar could see a devaluation of 50-80%. Of course this would have an adverse effect on the holders of this debt so it’s not likely to happen quickly, but there may be a move to other currencies over time.}

_{China’s ultimate direction is still to be determined. There are two bets:}

_{Globalization makes the world rich and as China develops its market economy it becomes less centralized and information will flow freely and it will be more peaceful.}

_{Economic growth allows the central government to retain its power with restrictions in the use of the Internet and the flow of information. He noted the recent cases where Microsoft and Yahoo both acceded to government demand to provide information and restrict Internet capabilities.}

_Energy:

_{Energy fuels the growth of these emerging countries. China, India and Brazil are using increasing amounts of energy. The US has been the least energy efficient of all the developed countries. Iran has so far ignored European and US pressure on nuclear arms development because they are a large source of oil. There has been limited action taken to deal with energy shortages.}

_{In 50-75 years sea levels will rise 10-30 feet causing dislocations for half the world’s population. There has been little reaction to these oncoming changes}

_{The growth of China and India offer an opportunity for the US to develop cooperative relationships. China and India need US technology and management capabilities to address growth issues and the US needs to develop ways to deal with the increasing demands for energy.}

_{The US must establish control over the national debt.}

_{Q: What’s needed to move China toward a democratic society?}

_{A: An opportunity was missed when China was brought into the World Trade Organization to negotiate steps to move to a more democratic country}

_{Q: Is it possible that governments holding US Treasuries will blackmail the US by threatening to pull out?}

_{A: Don’t know. Smaller countries are hedging their reserves; buying different currencies. If anything major happens, however, you may get a stampede out of US dollars.}

_{Q: What if companies like Microsoft say no to China’s requests to limit the Internet?}

_{A: Don’t know, but corporate leaders have to think about how they are going to handle such requests.}

_{Q: How will smaller countries fare in this new world?}

_{A: Malaysia, Indonesia, etc. which are commodity producers should do OK. However, Central America, Latin America and Eastern Europe produce manufactured goods and cannot compete with China.}

_{Q: Is there a net gain to outsourcing?}

_{A: It’s mixed. There are benefits to the US, e.g., when MRIs are read in India; the costs are less and it can be done when the people in the US are sleeping. However, most countries have tax incentive programs to attract investment which distorts market forces. There are no WTO rules in this area.}

_{Q: What are the implications of the growth in China and India to Japan?}

_{A: Japan has an aging population which is a constraint on growth. They will get closer to the US to get protection from China.}

_{Q: What about corruption – do you see the standardization of accounting rules such as FASB (Financial Accounting Standards Board)?}

_{A: Corruption severely limits economic growth; however, it will be a while before we see such standards.}

World Affairs Council of the Mid-Hudson Valley, Inc.