The Lexus And The Olive Tree – Making Globalization Work

This is a review of  Thomas Friedman’s book which has tackled the globalization issue. You can find two excerpts from the book further below.

In the following, I will present some of the key issues approached by the writer, starting with the metaphor hidden in the book title itself.

The Central Idea

Pulitzer Prize winning journalist Thomas L. Friedman, writes in his book, “The Lexus and the Olive Tree”, about the phenomenon of globalization and how it has instituted an international system that has replaced the Cold War. It is a system that has united the fates of peoples all over the world from Brazilian Indians to Thai bankers to multinational company executives. Here, Friedman explains how the democratization of information, technology and finance has shrunk the world into an over connected community where billions of dollars are moved from one country to another with the click of a mouse. He offers not only an astonishingly all-encompassing perspective on this globalized, Fast World but also options for countries and companies who wish not only to survive in it but also to thrive in it. He also explains how in the globalized world a balance must be maintained between the Lexus (the aspiration towards material prosperity) and the olive tree (the ancient forces of culture, race, tradition and community).

Globalization is a spawn of a free market economy. Its defining measurement is speed.

Friedman thinks globalization is built around three balances, which overlap and affect one another. There is the traditional balance between nation-states, between nation states and global markets and between individuals and nation-states.

The Lexus and the Olive Tree

Friedman explains the title of his book in this chapter. He reflects that explaining world events involves studying what is as new as Internet websites and what is as old as olive trees in Jerusalem. He says that while in one part of the world the Japanese are building Lexus cars with the use of advanced robotics, in another part of the world, a whole gamut of issues hinged on who owned which olive trees in Jerusalem. While the Lexus represented modernization, the triumph of technology, the olive tree symbolized everything which identifies a people as unique.

The tree signifies the core of values that make a people feel that they are part of a country or a family. The olive tree tells them who they are. Friedman’s view is that to understand our world today we need to grasp the interplay between the very human desire for material betterment as symbolized by the luxury Lexus car and the need to cling to one’s individual and communal roots, as symbolized by the olive tree.

Information arbitrage. Democratization of Finance and Technology. The Electronic Herd

Friedman says the Electronic Herd consists of two basic groups, the “short-horn cattle” and the “long-horn cattle”. The short-horn cattle are those involved in the buying and selling of stocks, bonds and currencies around the world who can and do move their money around on a very short-term basis. The long-horn cattle are the big multinationals who are involved in foreign direct investment, building factories in different countries and long-term production contracts with overseas factories. The democratization of finance, technology and information opened up a whole field for the Electronic aHerd to play around. It has become in a sense, as US Treasury Secretary Larry Summers puts it, “the overwhelming source of capital for growth.”

Friedman contends that the Electronic Herd has become so powerful that it can influence political events and even topple governments.

Short-Horn Cattle
Friedman says that virtually anything can be made into a bond. In a detailed explanation, he says that any activity or product that can produce a cash flow that can be statistically predicted over a period of time ca be turned into a bond. This securitization of commodities has opened up credit markets all over the world. It has enabled poor countries to gain access to capital. But while short-horn cattle investors now have a huge array of bonds to choose from and invest in, they also need more and more information to see how these bonds perform. They also need much more money to invest. When the investment pays off, the profits are mind-boggling but then the losses can be cataclysmic as well. Global investing has become so popular through the Internet that ordinary people can be investors without ever calling a broker, investing their money in bonds in places they never heard of before. While this empowers the small investor it also makes it easy for the small investor to transfer money out. Friedman points out that it was local Mexican financiers, local Indonesian speculators and local Thai bankers who began the stampedes against their own currencies, stocks and bonds.

The Electronic Herd merely followed.
However, the explosion of information on markets does not necessarily lead to wiser investment. Instead, it can lead to impulsive speculation. Friedman reveals that in 1998 five million Americans had accounts with Internet discount brokerages and around a million of them were “day traders”,
amateurs who operated mostly from their homes using their computers to obtain the share-dealing services provided by on-line brokerages. NASDAQ market insiders say that it is the short-horn day traders who push the Internet stocks up and down on the slightest information. Most buyers do not even know what they are buying into. Friedman quotes Allan Greenspan who said that “The very same financial globalization which has induced such dramatic increases in private capital flows has also exhibited significantly improved capacities to transmit ill-advised investments.”

The Long-Horn Cattle
The long-horn cattle are the big multinational companies like Ford, Intel, Compaq, Enron and Toyota. In the era of globalization, they are forced to expand overseas by opening and building factories in cost-lowering countries where costs of production are cheapest. For them, this is one way to be a globally competitive market player. Through the Internet, for instance, Nike can design a shoe in Oregon; e-mail its latest design adjustments overnight to its factories all over Asia which will then start turning out the new track shoe the next day. These multinational companies are also not just building factories, they are building alliances with partners in many countries. They also provide the local factory with the very vital technology transfer.

The Electronic Herd can hold political leaders and governments hostage as well. Friedman points out that the Electronic Herd helped to trigger Suharto’s downfall in 1998 by so undercutting the Indonesian currency and markets that the Indonesian public and army lost all confidence in Suharto’s leadership. Friedman goes so far as to say that heads of state are reduced now to the position of governors who must continuously entice the Electronic Herd and Supermarkets to invest in their countries and do everything to make them stay there.

Friedman asks nine questions to determine a country’s economic power and potential, out of which we briefly disclose the following:

How Fast Is your Company?

Change and innovation are taking place at such a fast pace in the globalized world that the fast will eat up the slow. Products will be obsolete almost immediately.

Is Your Company Harvesting Its Knowledge?

Besides being wired, a company or country needs to amass knowledge effectively and use it effectively. They must also use this information to their advantage, as information becomes a marketable commodity.

How Much Does Your Country or Company Weigh?

Technological advances have made products lighter, easier to carry and more efficient.
With digitization and miniaturization, more information can be packed into smaller and smaller products.

Winners Take All

Globalization’s major downside is the widening of the gap between the haves and the have-nots. Economists Robert M. Frank and Philip J. Cook write in their book, The Winner-Take-All Society, that globalization, “has played an important role in the expansion of inequality.” In this global village the top players can earn enormous profits. Those who are only marginally skilled will
significantly earn far less, thereby exacerbating the inequality between them and the top earners.
Friedman points out that Forbes Magazine estimated Michael Jordan’s non-basketball income from endorsements at $ 47 million in 1997 and his salary that year was $ 31.3 million. And yet another player on the same team, Joe Kleine, whose skills are only slightly less than Jordan’s was paid a salary of only $ 272,250.

Friedman’s point is that globalization will dramatically heighten the differences between the rich and the poor in many countries. The distribution of wealth will not be equal. This will lead to a certain volatility in societies.

The Way Forward

Friedman sends the message that the US has the greatest responsibility in making sure that globalization is sustainable because it benefits the most from globalization.

Excerpt Number One

Excerpt Number Two