The Lexus and the Olive Tree

THE LEXUS AND THE OLIVE TREE

by

Thomas L. Friedman

Foreword to the Anchor Edition

Globalization is not a trend or a fad but is an international system which replaced the Cold War system and, like its predecessor has its own rules and logic that now influence the politics, geopolitics, economics and environment of virtually every country in the world.

I have carefully examined the controversial sub-theses. One of them is my Golden Arches theory - that no two countries that both have McDonald's have ever fought a war against each other since they each got their McDonald's (As of April, 1999) and have found it still valid.

OPENING SCENE:

The World Is Ten Years Old

On December 8, 1997 Thailand's government announced it was closing 56 of its 59 finance houses. Thai businesses had launched a huge building program with U.S. dollars, borrowed from their finance houses who loaned, thinking themselves safely backed by their government and a strong baht. When the government failed its support due to massive, global speculation that the economy was stretched too far, value of the baht crashed. And there were not enough cheapened bahts to pay for the borrowed dollars. These investment houses were the first dominoes to fall in the first global financial crisis in the new era of Globalization - the era that followed the Cold War.

Then within just a few months, the Southeast Asian recession, originating in Thailand, began to affect commodity prices around the world. Asia had previously consumed huge amounts of raw materials. When their engines began to sputter, the prices of many essential commodities began to fall.

These lowering prices seriously affected Russia, whose factories couldn't make much of value anyway; but, even so, there was little market for their few items worthy of sale. Hence unable to sell, they produced little income. The government of Russia was dependent on taxes from commodity exports and when these diminished, taxable income fell. Also it had lured foreign investors with bonds bearing ludicrous rates of interest and now she had to be paying that high interest with her falling revenues. In August, '98 Russia defaulted - giving no advance notice to its creditors.

At the same time, hedge funds and the huge unregulated pools of private capital that search the globe for the best investments - having racked up huge losses in their investments in Russia, suddenly had to raise cash to pay back their bankers - thus selling everything they could at distress prices.

Also Brazil saw all its stocks and bonds being sold by nervous investors and thus had to raise interest rates as high as 40% to try to hold capital in its country. Variations on this theme played throughout the world's emerging markets as investors in Korea, Egypt, Israel and Mexico saw their assets tumble in value. They cashed in, took their losses and moved what remaining funds they had into safe U.S. Treasury bonds. That steep drop crippled more hedge funds and investment banks. U.S.A. Today summed up the global market at the end of '98, "The trouble spread to one continent after another like a virus. U.S. markets reacted instantaneously....People in barbershops actually talked about the Thai baht."

It was not long though before the Amazon.coms began to soar again, pulling up the Internet stocks which pulled up the U.S. market which brought wealth to America, which encouraged Americans to spend more than they had, which helped Brazil, Thailand and other emerging markets out of their troubles by selling to America, which was now back into the market.

The rapidly moving cycle helps to show us the state of the world today. The slow, fixed, divided Cold War system that had dominated international affairs since '45 was replaced by a new, greased, inter-connected system we can descriptively call Globalization. If that was not clear when the Berlin Wall fell in '89, it was very clear October 11, 1998 at the height of the global crisis. That day Merrill Lynch ran full page ads everywhere, "The world is ten years old, born when the Wall fell down."

There have been other globalizations. In the mid-1800's until the late '20's, with transatlantic cable, steamships, telegraph, railways, telephone and migrations of peoples, there was a globalization which before World War 1 shrank the world from a size "large" to