Martha and Spencer Love School of Business

A Healthy Economy: True or False?

Remarks by L. M. Baker Jr.
Retired Chairman, Wachovia Corporation

Elon University ? Legend of Business
April 27, 2004

I find the great thing in this world is not so much where we stand, as in what direction we are moving?We must sail sometimes with the wind and sometimes against it, --but we must sail, and not drift, nor lie at anchor.

Oliver Wendell Holmes
The Autocrat of the Breakfast Table (1858)

In his book, ?The Year of Decision (1846),? the historian Bernard De Voto wrote about the exploration of the western frontier of America. He spoke of 19th century Americans, calling them ?unremarkable commoners of the young democracy, thrusting personal experience into national experience and achievement.?

He said, ?Sometimes there are exceedingly brief periods which determine a long future. A moment in time holds, in solution, ingredients which might combine in any of several or many ways, and then another moment precipitating out of the possible the determined thing.?

It is incredible to think of the adventures of our ancestors. But the world in which we live is abundant with triumph, tragedy and joy. This, too, is an age when personal striving will bear on national achievement.

In the next half century, it is estimated that the population of America will increase 47%. This alone should ensure 50 years of prosperity for our nation. Thus the long view for America is excellent, and the standard of living for our people should rise. This alone is sufficiently provocative, but, in addition, we are also witness to a dramatic new social order.

The world is profoundly changing, and the future of the new century hangs on the outcome. Strong forces are in place, shaking established foundations of political order, social structure, religious belief and economic practice. New voices have joined debate on the use of resources, the deployment of capital, and issues involving technology, labor and trade. Cultural, religious and ethnic differences are erupting onto the global stage.

America is in challenging transition. The instruments of change boost productivity and help sustain economic growth. The basic process of business is altered. This brings challenge, opportunity and uncertainty to our lives.

The nominal rate of growth of the U.S. economy is subdued and in recent years has not provided pricing buoyancy to help sustain revenue growth. In decades to come, our economy will perform well, but at a moderate pace. Business will be challenged to sustain revenue and earnings growth.

The cost of raw materials and commodities has moderated, reflecting global supply and new processing and extractive techniques defined by technology. Labor costs are reduced by layoffs in the industrial world and by abundant workers in emerging nations. New capabilities arising from technology have made manufacturing efficient and effective, but also requiring fewer people. Strong capital investment has created excess capacity. Our people are now discerning consumers with opportunities to buy on favorable terms through multiple channels. With the exception of commodity imbalances, there will not be strong pricing power underpinning the global economy.

The global economy is defined by capital, ideas and energy, not by artificial, geographic or political boundaries. New uses of information have altered traditional alignment. New alliances have formed. The advancement of communication technology has helped open new markets to trade, investment and future growth.

Across the globe, millions of people seek to resolve their own destiny, striving to achieve a better life. In years to come, the effects of global economic growth will be beneficial, but in the short-term, many nations are under severe competitive pressure. In industrial countries, jobs are permanently lost to low-wage competitors while emerging countries struggle to attract and employ capital.

The most significant factor at work is the diffusion of information across society. Useful and inexpensive information is available to everyone, and it is instantly transmitted around the globe.

Information makes technology a trump card for innovators and destroys artificial and inefficient structures at all levels of society.

These are significant factors that are stimulating change: slower nominal growth, low inflation, globalization and the evolution of technology. These factors are causing upheaval in process, procedure and business practice. Old constraints are evaporating, standard operating procedures being rethought.

America has experienced a mild recession and is now in recovery of duration yet unknown. The slowdown and its soft landing were in response to a sharp run up in the price of oil, interest rate hikes and a stunning collapse in capital spending. A similar environment was present across the global economy with the addition of contractive burdens in many countries still laboring under debt restructuring. At the forefront of concern is weakness in investment and global demand and uncertainty regarding employment and the financial health of consumers. The economy might be described as improving, but vulnerable.

The global family, a collection of nation states, is disassembled and lining up in new alliances. There is upheaval and, at its heart, is freedom. Across the world, people are thinking for themselves and, in self-determination, building lives in which the sweat of their brow is measured in food for the table and in a decent place for their children to sleep. The world today is a global construct linked by complex new relationships transcending traditional political boundaries.

The fabric of the global construct is stitched by startling advances in communications and technology. In 30 years, the world has filled with copiers. Every organization on earth is linked by telephone and fiber optic cable.

People who never thought they needed portable phones now can?t imagine living without them. In 1996, there were 28 million cellular phones, mostly in America. Now there are hundreds of millions often used for primary communication. Many citizens have fax machines in their homes. If you have a fax machine or e-mail and I am on similar terms, we have formed a network. We can communicate. Soon we will exchange greetings, do a little business, topple a despicable dictator.

Information travels at the speed of light. An economic virus at a distant point on the globe raises employment issues in a village in China. A riot in Indonesia is of interest to the American business community. The ability to do business with its burgeoning population means food for our babies. The arithmetic of such connectivity is stunning. One-half of the world?s population lives in China, India and Indonesia, and in each of these countries the spirit of the entrepreneur is alive. The people of these nations are in touch in ways we did not think possible a short time ago.

In history, major changes in product, process and technology have evolved over time. Commercial air flight, automated manufacturing, and the development of television and computers took decades from origination to maturity. Now it is the explosion of technology and diffusion of information that stimulates productivity and is creating such dramatic change.

For decades, computers and communication systems processed information that was controlled by large entities: government, universities or corporations. Now information runs like wildfire across the globe. Cheap data and technology are available to everyone. For almost every purpose, there is access to vast storehouses of information for large and small organizations and for individuals. Most of it is free.

A key to success in this environment will be the ability to collect and process information into useful knowledge at a faster pace than competitors. To accomplish this critical goal, organizations will continue to streamline and flatten to get decision-makers closer to knowledge workers and to customers. The brightest people will be hired to gain competitive advantage.

The world of material, equipment and ?things? is slipping away. It is replaced by the world of knowledge. In such provocative times, the greatest gift of leadership is the ability to see the future clearly. Insightful vision coupled with strategic intuition, decisiveness and compassion will, in the years ahead, constitute ingredients of the recipe for high performance and success.

In the wake of the great disaster of Sept. 11, America experienced an economic slowdown of moderate depth and duration. Under the circumstances, the sustainability and recovery of the economy has been remarkable to behold. But if economic confidence is more fragile than is apparent, the outcome could be serious, resulting in a longer self-perpetuating period of deflation and profit destruction.

The key to sustained recovery is a resumption of confidence, employment and demand. Assuming progress and success in hobbling the terrorist threat and the achievement of some level of responsive ?public policy,? America could regain its confidence, inspire investment and achieve sustained levels of sound economic growth.

Continued attacks on the United States and its friends will erode confidence and could forestall recovery and growth. If this happens, the country could revert to a more severe defense footing and undergo significant change in the composition of gross domestic product and the means to achieve it.

In recent decades, our economies have actually benefited from the benign attributes of deflation. Individuals have had lower costs and more goods, services and value for fewer dollars. Businesses have had good profits. Governments have enjoyed surpluses.

Now we are in a more mature phase of the cycle as revenue and tax receipts for business and government falter and profits shrink. In the contraction of big government and continued restructuring of corporations, jobs are lost, incentive pay curtailed and hiring reduced. There are cutbacks in training, travel, investment and support for products and services. In a prolonged contraction broadened by entrenched consumer apathy, corporations may need to permanently lay off workers. This, we wish to avoid.

In the years ahead, the nation?s economy will expand based on population growth, high productivity and minor price inflation. The combination of these is expected to create nominal growth in the range of five to six percent over time.

I believe the years ahead will be good ones. It is possible to envision a substantial period of economic growth stretching well into the new century. The forces driving expansion are in place and they bode well for global prosperity over time.

Progress, however, will be challenging and often slow. There will be disruption, disappointment, stress and strain. Significant events will happen that we cannot anticipate.

Exciting scientific discoveries, ideological leveling and changing views of future events continue to move at accelerating speed, reshaping our sense of reality. We are no longer safe relying on the concrete and predictable. Ignorance raises the specter of survival. Too many of us have grown too comfortable with the illusion of certainty.

On Dec. 31, 2000, the population of the world included two billion teenagers. It is important to understand the influence of these young people on the global family.

They are charter citizens of the new world, and they share a common experience not limited to distinct culture or geographic boundary. The influence of ?new world children,? combined with the dramatic tide of economic growth, can be beneficial for the world economy. Their entry as players on life?s stage will help sustain worldwide growth over time. For the first time in history, they have more in common with their classmates of the world than with their grandparents.

Armed with idealism and the energy of youth, these young citizens will help resolve the transition of nation states to a true global community. Their impact on culture and lifestyle will soar beyond the limits of current imagination. They are intelligent and educated. They are highly skilled in the use of technology and new age communication. Many are conservative and ambitious, embracing high personal values and principles. They are hard working and impatient.

These young people also join with a diverse society of older citizens who demand participation in decisions affecting their families and future. This is a coalition seeking economic opportunity and personal liberty. Thus, to a greater degree than often appreciated, political, economic and social change in our world is in the offing.

And so, I am optimistic about our future. I am also not totally naïve. For many people, the miserable state of the world is still with us. Wrong decisions are made. The right people do not always get a fair chance. Many lack education and the opportunity to pull ahead. Many do not live in freedom. For them, this lofty vision of the world is a dream to be enjoyed by someone else, a special province of the rich.

At the beginning of the 20th century, 50 acknowledged states constituted the global community. That number is now approaching 200, often created from ethnic conflicts arising from the collapse of previous governments. The fragmentation and reordering of national identities will continue. Some, as we now know, will involve upheaval and heartbreaking violence.

Our challenge is to embrace and understand the rich and diverse array of economic and cultural relations now enabled by technology and facilitating the interconnectedness of people around the world. The electronic environment removes cultural restraints that once allowed many peoples to live in harmony, even if uneasily. This is a revolution of a new breed, giving rise to new methods of conducting affairs including broad social movement, armed response to regional conflict and the mushrooming of global interdependency. The relationship of nations has changed, creating significant shifts in the distribution of power. The ultimate shape of the new world will not be known for sometime.

The 21st century is deploying with new and emerging balances of power. It is incumbent on America to be helpful and to offer strong and trusted leadership in this tumultuous time.

In the midst of such change, the needs of our people are significant:

We must take steps to protect the vibrancy of the global economy. Continued growth in world gross national product is necessary to meet fundamental human needs. Across the globe, our brothers and sisters cry out for the chance to feed, clothe and provide decent homes for their children.

We must resolve the issue of terrorism. For years into the future we will witness changes in identity, national boundaries, races and cultures. Ethnicity will continue to exert itself in uprising, rebellion and civil disturbance. But increasingly, those advocating violent and disruptive leadership must understand that this behavior will cause their exclusion from the benefit of world progress.

There is no dispute today on the need to provide for the defense of our citizens. Freedom from fear is an assumed right of Americans and one of the few directly expressed constitutional functions of national government. At the same time, we must exercise extreme vigilance to protect individual liberty and personal freedom. No loss of life or property is an excuse for the curtailment of personal liberty.

Finally, we must open our hearts and minds to the needs of the new world. For America to play a major role in the global world of tomorrow, we must regain confidence in our economic systems and ourselves. It is confidence well earned through the years. Prosperous nations must come together and strive to cleanse the disaffection that hangs over the global community. We must unite against the forces of poverty, ignorance and despair. We must seek understanding on economic progress, literacy, citizen health and higher standards of living. We must embrace anew the protection of human rights.

In America, we are blessed to live with ample and abundant resources. In the days ahead we will be asked, as we always have, to give up some of that wealth for the good of our friends at home and around the world.

In the 21st century, the architects of history will be those who reach out to the world?s citizens to help find a better life. The result will be a reduction in oppressive government and barbarian behavior. The task of civilized people in this era is of epoch and gallant proportion.

I believe the golden age of America is before us. The attacks on America of Sept. 11 do nothing to alter this view. Global terrorism must be swept aside. The forces of darkness and evil must be vanquished. The children of the world must be nurtured and saved. The hope of the poor must be restored. The cause of personal liberty must be triumphant. Our people must live together in peace.