The World, According to Daniel Yergin

Wall Street's slide as the economy improves, says the Pulitzer Prize-winning author, proves you only notice confidence when it's not there

The timing was grim, but it couldn't have been better. Six months after September 11, and against the backdrop of the most intense global turmoil in several decades, the Public Broadcasting System unveiled its first miniseries about the global economy in 22 years. It was based on the book Commanding Heights, by Daniel Yergin, who was chief commentator and executive producer for the PBS series.

In 1992, Yergin won a Pulitzer Prize for The Prize, a look at global oil markets. Today, he's chairman of Cambridge Energy Research Associates, an analytical firm. Recently, he spoke with Beth Belton, news editor at BusinessWeek Online, about the crisis of confidence in the U.S. and the global economic outlook, among other topics. Edited excerpts from the conversation follow:

Q: Clearly, there's a loss of confidence in CEOs and in the market. How will that affect the pace of globalization going forward?


Markets rest on confidence and legitimacy. You only notice confidence when it's not there. We're not at that point yet, but there is a sense of disillusionment. What's really been going on? Is the system being gamed? Those are the kinds of questions being asked.

In fact, though, we do have quite a legal process. A lot of people are going to be in court for a long time over these [accounting scandals]. But the irrational exuberance has been pretty much drained out of the system, and the fact that the economy is coming back, that helps the bedrock. There isn't the ebullient belief [anymore] that markets are the be-all or the end-all. So it's a process of readjustment, and we're in that now.

Q: What are you worried about regarding the loss of investor confidence?


We need to fix the problems and to restore confidence, but they don't necessarily have the same time frame. If markets continue to fall, it puts many people into vulnerable situations in terms of financial exposure. And [then there's] the question of how long so much can rest on the housing boom. That's the market to be concerned about. Real estate is the last refuge right now. For many people, it's where their net worth is.

So it is a dangerous, treacherous time in which pessimism and fear are the dominant emotions. There's no question the stock market way overshot on the upside, and now the question is how much it will overshoot on the downside, and whether it will create a precarious financial situation.

Q: Isn't that how markets work, overshooting before equilibrium is found?


Yes, it has to do with psychology, which was way overoptimistic, so how pessimistic will it get now? And political fratricide over these issues is a vehicle for expressing the anger and bitterness people feel...but it isn't necessarily the way to go about fixing the problems in a sound way, and to restore confidence in leadership.

Q: Is Congress finger-pointing rather than restoring confidence?


Yes, this is all happening in the shadow of elections, which are just over three months away. In political season, it's much harder to really do the sound things, to really fix things in the right way on accounting, and not in the ways that respond to the passions of the moment.

Q: Did President Bush's [July 9 Wall Street] speech on the subject go far enough?


The general response has been critical, but it was a tough speech, heavy on the enforcement side. The agenda of what needs to be done is pretty clear. And we're also starting to hear talk about [a designated] somebody on the board of directors at a company playing the role of lead director.

That sounds like a pretty ambiguous position, but it does point to some degree to the British model, in which you have a nonexecutive chairman who represents the shareholders. There are more checks and balances, and you don't have the all-powerful CEO. It would be a big change for Corporate America to move in that direction, but at least for the next few years, the role of the CEO as the all-powerful merchant prince is over.

Q: How damaging is this to the global status of the U.S.?


This is pretty damaging, because the U.S. model really seemed to be working and it was being adapted [worldwide]. In the late '90s, people said our most important export was generally accepted accounting principle standards. No one would say that today.

We used to lecture the Russians on corporate governance, we would tell the Asian countries to put an end to crony capitalism, and we told the European companies to increase shareholder value. Look at what has happened to Deutsche Telekom and Vivendi. I remember a few years ago somebody on Wall Street saying with awe about a prominent Continental European chief executive, that if you shut your eyes and forgot about the accent, he sounded just like an American CEO. Today, people in Europe don't want to sound like an American CEO.

Q: Can the U.S. economy withstand this crisis?


There are a lot of indications that it was a mild recession and that recovery is [out] there, but right now it just isn't computing. That would be one of the things that would start to turn things around, when things start looking better. But there is also this feeling of malaise.

It isn't just this huge bust, particularly in telecommunications. There are the questions about compliant accounting. It's about living in a post-September 11 world. Even though people don't think about it day to day, we are at war.

There are a lot of concerns about what kind of disruptions are down the road. And other things are looming out there: What's unfolding in [markets in] Latin America, which isn't getting a lot of attention? Obviously, the weakening of the dollar is triggering some major shifts in the economy. It's all focused on this incredible drama of greed and wrongdoing and fallen heroes. But that's only part of what's affecting psychology, not to mention we've still got a lot of overcapacity, so there's no haste to add capacity.

Q: What is the state of the globalization revolution post-September 11?


A new era began in the early 1990s with the end of the Cold War, the collapse of the Berlin Wall, the end of the Persian Gulf crisis. It's quite remarkable that world trade doubled in the 1990s, to almost $8 trillion. The degree to which global trade now represents about 25% of world GDP shows that we're really tied together.

But the pendulum has swung the other way. The borderless world has borders again, obviously. The just-in-time world just became less just-in-time. And companies are still going through the process of reevaluating how their business processes, their organizations, how you move goods from one country to another, and of course a big aspect of this is the movement of people.

There are 200,000 Indian technologists working around Silicon Valley, the Bay Area. Well, people are not going to be flowing [into the U.S.] so easily [anymore]. The pendulum has swung back. So we're at a point of reflection, reconsideration, and things are somewhat slower.

Q: But it's a pause, right?


It's a pause, although people have always said globalization is irreversible. It's not irreversible. There are very powerful forces: Technology continues to tie things together, markets continue to get integrated, Doha [the meeting of World Trade Organization in Qatar] in the shadows of September 11 was actually very important in terms of developing a world trade agenda. But right now there's not the ebullience, and there's uncertainty about the economy.

Q: Is globalization just another word for Americanization?


It's overstated to say that globalization is Americanization. I mean, three out of the five major Hollywood film studios are owned by non-U.S. companies. The two top security firms in the U.S. are Danish and Swedish. There are many more non-U.S. multinationals now. Many Americans still don't realize [the hard] feelings [that] exist in other parts of the world. After September 11, the question you saw asked so often in the media was, "Why do they hate us?"

Q: What is the relationship between education and globalization?


Singapore is an interesting case study. Thirty-five or 40 years ago, it was so dirt poor, people didn't think it would make it as a country. Today, its per capita income is higher than Britain's, and Britain had a 200-year head start. As [Singapore Senior Minister] Lee Kuan Yew says, Singapore decided it had to be relevant to the world economy. Critical to that was education, and if you ask where a country should invest to be able to get the benefits of trade in the global economy, it's clearly in education.

Q: Do you see a grand struggle between Islam and the West, and how would that affect globalization?


Obviously, there's a huge urgency about the question. A lot of the Islamic countries have very high birth rates, which means they have large populations of young men who may or may not have jobs, lots of resentments, and there's always been that question about political expression. So it's a front-and-center issue.

It's the kind of thing that could really set back globalization. I'd like to think it is avoidable with education and economic development, but the risks are not theoretical. They're obvious to everyone.

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