21ST CENTURY CAPITALISM--THE TRIPLE REVOLUTION

Every once in a great while, the established order is overthrown. Within a span of decades, technological advances, organizational innovations, and new ways of thinking transform economies. From the 1760s to the 1830s, steam engines, textile mills, and the Enlightenment produced the Industrial Revolution. The years 1880 to 1930 were shaped by the spread of electric power, mass production, and democracy.

On the eve of the 21st century, the signs of monumental change are all around us. Chinese capitalists. Russian entrepreneurs. Nelson Mandela President of South Africa. Inflation at 7% in Argentina. Internet connections expanding by 15% a month. Fiber optics transmitting 40 billion bits of data per second. From government dictators to assembly-line workers, everyone seems aware that unfamiliar and unusually powerful forces are at work. Says Shimon Peres, Israel's Foreign Minister: ``We are not entering a new century. We are entering a new era.''

A great transformation in world history is creating a new economic, social, and political order. Communism's collapse and the embrace of freer markets by much of the developing world are driving huge increases in global commerce and international investment. The Information Revolution is forging strong links between nations, companies, and peoples. Improving education levels are creating a global middle class that shares ``similar concepts of citizenship, similar ideas about economic progress, and a similar picture of human rights,'' says John Meyer, professor of sociology at Stanford University. Almost 150 years following the publication of the Communist Manifesto, and more than half a century after the rise of totalitarianism, the bourgeoisie has won. PLUNGING POVERTY. Indeed, behind these simultaneous revolutions lies one powerful idea: openness. Governments everywhere are pursuing liberal economic policies. Multinational corporations are accelerating the exchange of innovations across open borders. Global investors are pressuring companies everywhere to open their books. Populations are demanding stronger political and civil rights.

Already, signs of a payoff are apparent. The growth rate for developing Asia averaged a heady 7.8% a year from 1985 to 1990, and by the end of the decade, one-tenth of everything produced in the world will hail from developing Asia, according to DRI/McGraw-Hill, the economic consulting firm. In China, the percentage of people living below the poverty line has plunged from 33% in 1970 to 10% in 1990. Latin America, stagnant for much of the 1970s and 1980s, has been expanding at a 3% pace since 1991. The traumatized economies of Eastern Europe appear ready to generate growth rates of 4% to 6% over the next several years. Even in sub-Saharan Africa, a region of the world experiencing severe economic problems, the global investment community has been taking a keen look at the new South Africa.

A growing number of governments in developing countries and emerging markets are struggling to get the fundamentals right: keep inflation low and fiscal policies prudent; maintain high savings and investment rates; improve the education level of the population; trade with the outside world and encourage foreign direct investment. In the 1990s, the 16 largest developing economies have all sharply reduced tariff, tax, and other barriers to foreign direct investment. And any country that runs the currency printing presses or walls out private foreign capital pays a steep price in economic welfare these days. ``Most developing nations have turned away from self-sufficiency and hostility to the outside world, and see it is in their interests to connect [to it] as rapidly as they can,'' says Paul Romer, economist at the University of California at Berkeley.

What's more, the usual yardsticks may underestimate prospects for global prosperity. In the decades following the Bolshevik Revolution of 1917 and colonialism's end in the 1950s and 1960s, economic-development efforts largely focused on central planning and government-led investment. And the best and brightest people from Brazil to the Soviet Union joined the government bureaucracy, the military, or other economically unproductive institutions. When P.T. Bauer, the late development economist, lectured at a dozen or so Indian universities and research centers in 1970, teachers and students alike believed that central planning was indispensable for raising living standards. The only question was whether the Soviet or the Chinese model was the superior approach for development.

Today, the balance of power has decisively shifted away from government planners and toward markets. When markets are large and laws allow people to build companies and keep their profits, more and more talented citizens become entrepreneurs and wealth-creators. One study, covering many of the world's economies, by economists Andrei Schliefer, Kevin Murphy, and Robert Vishny, estimated that if an extra 10% of university students went into engineering, the growth rate of an economy would rise by 0.5% a year. ``What were once called Third World countries are developing much faster than you would suppose if constrained by the traditional models of economic growth,'' says Donald N. McCloskey, economist at the University of Iowa.

And over long periods of time, small differences loom large. For example, from 1870 to 1990, real per capita gross domestic product in the U.S. rose by 1.75% a year, to the world's highest level--from $2,224 to $18,258. Had the American growth rate been only one percentage point less a year--0.75%--then real per capita GDP in 1990 would have been $5,519, or about that of Mexico and Hungary, according to Robert J. Barro, economist at Harvard University.

ETHNIC CONFLICT. On a global scale, freer trade will spur growth by providing entrepreneurs from major economies access to bigger markets. Trade also encourages the spread of new technologies and manufacturing techniques. General Electric Co. is sinking tens of millions of dollars into building factories and power plants in Mexico and India. Microsoft Corp. gets more than 50% of its revenue from international sales. Toyota Motor Corp. is powering its way into Southeast Asia as is Volkswagen into China.

To be sure, revolutions are tumultuous. From the vast lands of the former Soviet Union to the Amazon forest in Brazil, frontier capitalism is brutal and very often criminal. In many developing countries, sweatshops and slums are commonplace, a bleak, Dickensian world of worker misery and raw social and political tensions. Fast growth in China and elsewhere creates dismaying environmental destruction. Corruption and sclerotic bureaucracies are deeply entrenched. Ethnic conflicts are flaring.

Still, the impact of global integration on growth could be staggering. Over the past two centuries, as national boundaries have shrunk in importance, the pace of economic development has quickened. Britain needed nearly 60 years to double its output per person beginning in 1780. It took Japan 34 years starting in the 1880s and South Korea only 11 years after 1966. ``At the turn of the century, stellar growth meant 4% a year. Now, it means 10% plus,'' says Jeffrey D. Sachs, economist at Harvard University. Adds Henry S. Rowan, a professor at Stanford University's business school: ``A process is under way that promises within a generation to make most of the world's population rich or much richer than it is today.''

Take the three regions of the world where private enterprise is being unleashed: most of Asia, including India and China; Mexico and parts of Latin America; and several East European countries. These areas make up 50% of the world's population and about 20% of the GDP of the industrial nations. If these three regions achieve annual growth rates of 8% over the next 10 years--somewhat less than the sizzling performance of Asia's Four Tigers in the 1980s--then they would contribute almost as much to world growth as the industrial nations. Within several decades, a number of developing nations including Taiwan and Korea will join the club of wealthy nations. ``Because the emerging markets' growth rates are much higher than those in the developed world, we are definitely seeing convergence,'' says Giles Keating, economist at CS First Boston in London.

Another benefit of global interdependence is lower inflation rates. True, industrial commodity prices will go up, especially with the new demand from the emerging economies. But heated international competition will keep wage demands moderate and put a lid on the ability of domestic producers to hike prices, especially in the developed countries. Perhaps even more important, the policy actions of central bankers, the most powerful economic actors on the world stage, all share a similar anti-inflation ideology.

HOTBEDS OF TALENT. It's ironic, then, that at a time when prospects for global prosperity seem better than ever, gloom envelopes much of the industrial world. Japan's economic juggernaut is stalled. Unemployment is at 11% in Europe. Companies are still slashing payrolls in the relatively vibrant U.S. economy. At the same time, U.S., European, and Japanese multinationals have stepped up their investment spending in developing and former communist countries. It's no surprise that ``ordinary citizens in most advanced industrial countries are confused and scared by what is happening to them,'' says Richard Lipsey, economist at the Canadian Institute for Advanced Research.

And there's much more to come. From Eastern Europe to Asia to Latin America, many countries are eager to compete with bountiful low-wage labor. Heightened international competition, along with rapid technological change, largely accounts for the 22.5% plunge in real hourly wages for high school dropouts from 1973 to 1993 in the U.S. And in a sharp break with the past, German manufacturers are looking elsewhere when building new plants. After all, hourly wages of German manufacturing workers are 4.5 times higher than in Taiwan, 9 times greater than for Mexican workers, and 54 times the wages of Russian labor.

It isn't just cheap brawn, however. The competition is heating up for producing the kind of high-quality goods and sophisticated services in which the industrial nations have traditionally dominated. Cities such as Singapore, Penang in Malaysia, and Taipei in Taiwan are hotbeds of engineering talent. India has millions of computer-literate workers. Central Europe is peppered with brilliant scientists. And when Hewlett-Packard Co. opened a research and development center in Guadalajara three years ago, it signaled Mexico's coming of high-tech age.

In the industrial world, protests against the new competition are starting to get louder and take on a nasty edge. Keep immigrants out. Bar low-wage imports from China and Hungary. Preserve our native culture. Frets Andre Levy-Lang, chairman of the management board at Compagnie Financire de Paribas, the big French investment bank: ``The great temptation is going to be to say: `Let's close the borders, and let's live happily ever after by ourselves.'''

Yet if policymakers succumb, it could lead to political and economic devastation. That, at least, seems to be the lesson of history. The period from 1870 to 1913, like this one, was a time of vast international capital flows. In 1913, the share of foreign securities traded in London was 59% of all traded securities; and by 1914, the stock value of foreign direct investment had reached an estimated $14 billion, or one-third of world investment. Some 36 million people left Europe; two-thirds of them emigrated to the U.S. and an even larger number of Chinese and Indians went to Burma, Indonesia, and elsewhere. Trade soared, technological innovation flourished, and economic growth surged. Yet beggar-thy-neighbor protectionist policies ended up contributing to two global wars and the Great Depression.

Today, international economic interdependence is once again generating a lot of discord. Nations are engaged in bitter international negotiations over cross-border pollution, intellectual-property rights, and differing workplace standards. Worse are the savage wars in Kuwait, the Balkans, Angola, and other hot spots. Military buildups and the spread of nuclear weapons in Asia and elsewhere offer the potential of even larger conflagrations.

Still, there's no gainsaying the geopolitical progress in the Middle East and in relations between the U.S. and Russia. And global economic integration isn't a zero-sum game. Worldwide trade has expanded by more than 6% a year since 1950, more than 50% faster than the growth in world GDP. The growing numbers of working-class and middle-class citizens in the emerging capitalist nations are demanding better housing, roads, water, and phones, as well as more consumer goods. Rising demands will create bigger markets and new opportunities for profits for everyone including the industrial nations. ``The forces of integration are so much more powerful than at the end of the 19th century,'' says David Hale, economist at Kemper Financial Cos.

Thanks largely to the Information Revolution, companies headquartered in the industrial nations will still have a formidable edge in the global growth stakes. ``Information technologies are the most powerful forces ever generated to make things cost-effective,'' says John S. Mayo, president of AT&T Bell Laboratories. It is the industrial nations, especially the U.S., that are behind the Internet boom and that are building the vast fiber-optic networks and web of new services of the Information Superhighway. The industrial world is setting high standards for quality and manufacturing flexibility to produce low-cost goods, and its rich capital markets offer ample resources for financing new ventures or rejuvenating old ones.

WEALTHY ELITE. Of course, it's a market axiom that big returns come attached with greater risks--some fortunes will suffer spectacular declines even as others leap forward. It's a world where IBM can show a net income of $6.5 billion in 1984 and a loss of nearly $9 billion in 1993. And emerging-country stock markets are up an average of 20% in 1994 in dollar terms. But that spectacular return masks some huge setbacks, including a drop of 50% in the Turkish market, 48% in China, and more than 30% in Israel.

Such nerve-racking volatility is encouraging a lot of U.S., Japanese, and European multinationals to link up with foreign partners. It expands their presence in the world economy and hedges their investment risks at the same time. AT&T is forging broad alliances with a host of European telecommunications companies, and Mitsubishi has a cooperative relationship with Daimler Benz. Alliances are common in such knowledge-based and capital-intensive industries as information technologies and biotechnology. Says Paul A. Allaire, chief executive of Xerox Corp.: ``You will see people working more closely than ever before.''

There will be no shortage of consumers to buy products and services. Global capitalism is creating a wealthy international elite of cosmopolitan professionals comfortable working for companies headquartered in New York, Tokyo, or Buenos Aires. Millions more are joining the middle class in Asia, Latin America, and elsewhere. As in the U.S. or Japan, the middle class in the emerging capitalist nations is boosting its living standards by buying material goods. In Ho Chi Minh City, Vietnam, three Toyota dealerships are within a few miles of one another, and a Mercedes dealership is being built.

Consumers are demanding better services, too. Poorer countries will spend trillions of dollars on new roads, sewers, telephone systems, education, and health-care facilities in coming decades. Over the past 15 years, the share of households with access to clean water has increased by half, and power production and telephone lines per capita have doubled in developing nations. Still, 1 billion people lack clean water, electric power has yet to reach 2 billion people, and the demand for modern telecommunications networks far outstrips supply, according to the World Bank. To boost efficiency, many countries are privatizing their infrastructure. From 1988 to 1992, the value of developing-country privatizations in 25 countries totaled $61.6 billion. And infrastructure investment can propel giant leaps in economic activity.

Clearly, global integration comes with enormous benefits. At the same time, pessimists proclaiming the decline of the industrial world often argue that global convergence is closer at hand than is the case. Even if all went smoothly, the inequalities between rich and poor nations are so vast that it will take decades for them to disappear. Much of the wage gap between manufacturing workers in rich and poor nations reflects large skill dif- ferences and exchange rates. According to Harvard economist Richard B. Freeman, some 43% of Mexican manufacturing laborers have less than six years of schooling, vs. 3% of American manufacturing workers.

Nor do economies grow in a straight line. At capitalism's frontier, including many of the Soviet Union's successor states and China, vicious cycles of reform and regression are probable in coming decades. Environmental problems and population pressures will worsen in many developing nations. Policymakers worldwide also worry that rising social and economic pressures in a competitive global economy will spark ``culture wars.'' Hinduism vs. Islam. Confucian values vs. Western values. ``The fault lines between civilizations will be the battle lines of the future,'' wrote Harvard University professor Samuel P. Huntington in an influential 1993 Foreign Affairs article. SIMILAR LOGIC. Cultural differences between economies are deep-rooted. Modern Japanese capitalism has been extremely successful in building large organizations, while American capitalism does better creating whole new industries, says Peter Berger, director of the Institute for the Study of Economic Culture at Boston University. Chinese capitalism is very different from French dirigisme. Yet the remarkable aspect of capitalism is the ability of citizens from around the world to strike deals with one another. Japanese, American, French, Chinese, and Russian capitalists can compete, negotiate alliances, and trade securities with the same goals and similar logic, according to economist Robert Heilbroner.

Indeed, capitalism is triumphant because it is multicultural. Unlike communism, it is open-ended and adaptive, and in the 21st century a range of capitalisms will evolve.

Ever since the Industrial Revolution began, the reality has been how much material wealth has grown in the modern nations of the industrial world. Given time, the triumph of the liberal ideas of the bourgeoisie, from free trade to democracy, coupled with the spread of technological innovations, should improve living standards throughout the world--bringing most people an opportunity for a better, richer life.