Chapter Five
Governance
Governance is the last of the four forces for a reason: it is the tool humans use to manage shifts in the first three. As change bubbles up from below—in resources, technology, and demographics—the role of governance is to sensibly and proactively respond in ways that will ensure the long-term stability of a society.
Resources, technology, and demographics are assets: things that have or can produce value and that can be owned or traded. In social groups, people pool their assets and work collaboratively to accomplish more than they can individually. A successful collaboration requires a common vision for the group and rules that ensure cooperation toward that end.
This kind of collective action needs to be organized according to clear rules, roles, and responsibilities, with methods for leadership selection and succession. The body of people who have the authority to make and enforce rules is what we call government. This group's function is to establish and maintain rule-making procedures and then to make and enforce the rules for the group.
Government takes many different forms in societies, examples of which include tribal elders, monarchs, communes, dictators, parliaments, theocracies, and democracies. Governments are formed at a more local level, too, such as a board of trustees for a corporation or university, a Parent-Teacher Association, and your neighborhood Little League program. Any organization that has a decision-making body, with methods for leadership selection and succession, has a government.
The focus of this chapter, however, is governance, not government. We're interested in governance as one of the four forces—as a universal practice—so I'll begin with a broad definition: governance is the mechanism humans use for making plans, achieving goals, and managing change.
There are two sets of tools in governance: the rule of law and the rule of markets. The two rule sets are used together to make sure that the group's labor, materials, and time will provide a better life for its members today and tomorrow. The rule of law creates formal protections for people and assets. These protections set explicit expectations and procedures for nearly everything we do, be it how we marry, conduct business, acquire land rights, hire workers, or drive on the road.
Whereas laws tell us how to organize and distribute our assets, the rule of markets determines the value of those assets. The rule of markets is all about exchanges. If I give a doctor a side of beef, does it entitle me to one or two office visits with him? I've invested time, land, and money in raising the cow and learning the skills of butchery; the doctor has invested time and money in his education. He's too busy to raise livestock, but has six children to feed. I have a pasture full of cows, but can't figure out why my daughter is ill. We each bring something to the exchange that the other party values, so it is deemed a fair transaction.
Governance of markets helps formalize these kinds of transactions by setting valuation standards for such assets as production, trade, knowledge, investment, and debt. Each of these exchanges is based on how desirable something is, how much time and material were required to produce it, and whether the item is abundant or scarce. Consider what happens to the value of that side of beef when it's turned to ground hamburger, then served as double cheeseburgers at a McDonald's restaurant for a buck or two each. But if the side of beef comes from a Waygu cow raised in Kobe, Japan, is presented with black truffles and foie gras as the FleurBurger 5000, and found only on a single haute cuisine menu created by James Beard Best Chef winner Hubert Keller, you'll be coughing up $5,000 for the food “experience.” Such is the rule of markets: supply and demand, quality and quantity, desirability and utility.
These are general examples of how the rule of law and the rule of markets function in society. Yet governance isn't only something that is conducted “out there,” concocted by an elite group of politicians and policy wonks. Rather, if you think of governance as rules made and enforced for the purposes of organizing our world, you'll recognize how pervasive it is in every part of our lives.
One of the most common examples of governance is the “rules of the house” code of conduct we grew up with and that we've set for our own families. We also find governance in play in the “rules of the road” we follow for safe driving or the “rules of grammar and punctuation” that uphold the standard for written communications. The rules not only make group action more efficient but also serve as a guide to reward. Kids understand, for instance, that if the rules of the house include making their bed every morning, complying with them ensures that they'll earn their weekly allowance. Drivers know that if they have a record of safe driving, they'll pay less for insurance. And aspiring writers know that if they want a job in journalism, they'd better understand how to use a comma and wield a semicolon.
Rules imply that someone has given your goals a lot of consideration and determined what you need to do—and not do—to reach them. Kids may not care whether their beds are made, but, to their parents, instituting these rules serves the larger goals of creating an orderly home and raising children to become responsible adults.
Governance requires a clear view of the future, for we can make rules only for goals we understand. Which is why, when we feel overwhelmed by change, we find it hard to make decisions. Rather than act, we engage in heated debates about whether the changes we face are real, and what the causes and implications of change might be. When this occurs in the public sphere, the debate surfaces as a cultural or political “issue,” such as the highly charged arguments made over stem cell research, immigration, climate change, and intellectual property law in the age of the Internet. As uncomfortable and maddening as these debates can be, they are how change is processed and integrated within a society.
Which is to say, because governance is the tool for adapting to change, it is also the bottleneck. Not until we can reconcile our values and beliefs with the new capacities in resources, technology, and demographics are we able to integrate those capacities into our lives. Understanding the source and direction of change, by using the Four Forces Model, goes a long way to helping us see how we need to organize—to govern—ourselves for the future.
Governance is the last of the four forces for a second reason: its thoughtful application is the grand objective of any futurist. Governance provides the architecture of a better life—a better society, a better business, a better family—and gives us the power to create a future that is aligned with a larger purpose. In short, governance is our tool for accepting, integrating, and leading change.
If you've never felt your heart go pitter-pat during discussions of economic policy, well, you just haven't lived.
Or maybe you haven't heard Clyde Prestowitz, an adviser to national governments and multinational corporations, explain the effects of globalization on the economy. Clyde's had a seat at the table with some mighty big players, and can attest to how difficult it is for people, at all levels of society, to plan for the future. Those of us who were lucky enough to hear him speak at the PUSH conferences in 2006 and 2007 learned quite a bit about the role of governance in making strong societies with robust economies.
The most common barrier to smart, long-term strategies, according to Clyde, is ideology. Even in the halls of power, where we expect leaders to exercise sober, clear-eyed judgment, we can see that they're no more immune to their brains' preference for certainty than the rest of us. In fact, when considering weighty issues, such as the economic future of a country or business, people tend to cling even more tightly to beliefs about the way the world should be, as if the future can be shaped by will alone. Too often, the obstacle to clear-eyed, rational decisions, says Clyde, is some sort of “-ism”—communism, liberalism, socialism, relativism, neoconservatism, nationalism, fundamentalism, and, in America, exceptionalism, a belief that our future is assured by something in our cultural DNA.
This idea about America stems from the fact that the country had an exceptional beginning: an intentional construction of government, designed to support the vision of America as a land of opportunity. In other words, America would be a land of entrepreneurs, where anyone's idea could be brought to market, and his or her right to ownership of the idea and any profit it produced would be protected. Such an aspiration places innovation right at the center of the economic engine.
And it places an ebullient “Yes, you can!” spirit at the center of the culture. Americans are prepared to meet any challenge with a lot of elbow grease and imagination and, so equipped, are confident that they can turn any problem into an opportunity. American exceptionalism holds that a can-do attitude and the freedom to pursue ideas and to profit from successes give a competitive advantage so great that, well, American ingenuity simply has no competition.
The global economy may be a little wobbly, but “We'll be fine,” goes the thinking. “America always comes out on top because, when it comes to innovation, it's what we're born to do.”
But Clyde cautions that this thinking leads people to ignore important economic indicators that don't confirm their outlook. To underscore his point, Clyde presents this simple fact: China exports $46 billion in computer equipment to the United States, whereas the number-one export from the United States to China is $7.6 billion in waste paper and scrap metal.
True, there's a lot of cutting-edge innovation, developed in U.S. companies, that's delivered back to American consumers in shipping containers full of iPads, laptops, printers, and fun electronic gadgets. And sure, U.S. companies like Apple, Intel, and Amazon are among the most successful businesses in the world, but that trade statistic raises a critical question regarding the design of the U.S. economy: Is this arrangement sustainable?
It's a mistake to believe that entrepreneurism, innovation, and creativity are cultural properties that favor one economy over another. Instead, Clyde says, they are behaviors that are fostered by policies designed to reward them, and we do ourselves and our economy a disservice when we assume they are God-given gifts, rather than capacities that, if supported, can flourish anywhere.
“The apparently effortless technological supremacy Americans assume as a birthright had nothing to do with market forces and everything to do with targeted policy decisions.” If Clyde's perspective were to be translated into a slogan, it might very well be “It's a policy decision, stupid.” At its core, governance is really about good planning, navigating change, and creating our future, by design.
In 2007, after delivering his speech, Clyde went directly from the PUSH stage to the airport. He had just received a request from the Israeli government to attend a meeting in Tel Aviv. The country faced some daunting challenges, specifically a deadly combination of a rising dependency ratio and an underemployed labor force. The Israelis were working on a long-term plan to address these concerns and grow their economy, and had asked Clyde and his colleagues at the Economic Strategy Institute, a nonpartisan public policy research organization in Washington, DC, to help them chart the course. They named the project Israel 2020: A Strategic Vision for Economic Development.
A tiny little country, no larger than the state of New Jersey, Israel has the twenty-fourth-largest economy in the world, much of it driven by its energetic high-tech sector, which is second only to California's Silicon Valley. Like its American counterpart, “Silicon Wadi,”1 as the community is known, is brimming with home-grown start-ups and venture capital congregated in high-tech clusters and research parks. It is an innovation hot spot that is so advanced, most global technology companies (including the likes of Microsoft, Google, Intel, Philips, Cisco, Oracle, and IBM) have established R&D labs in Israel.
One of the most outstanding features of Silicon Wadi is the density of highly educated, highly skilled scientists and engineers who work there. In fact, the Israeli population has the highest percentage of engineers of any other country in the world. Now that's a demographic asset!
Yet despite its stellar reputation for innovation, investment, and growth, Israel's high-tech sector employs a very small proportion of the population. In fact, says economist Dan Ben-David, the executive director of the Taub Center for Social Policy Studies in Israel, “A very large share of the country's working age population does not participate in the labor force.”2 Only 56 percent of working-age adults in Israel are employed. Scariest of all, that number is shrinking.
From the discussion in Chapter Four, we know that this number translates to a high dependency ratio, meaning that the economy is strained by having more people to support than it has contributing to it. Correcting this trend requires a deeper understanding of why so many working-age adults are unemployed in Israel.
The easy answer to the question is that most Israelis simply don't have the education to participate in more skilled jobs that pay more. But the reasons accounting for this situation are somewhat more complex, and they reflect difficult social issues Israel must confront in order to prevent a slide into an unsustainably high dependency ratio.
The majority of unemployed people in Israel are concentrated in two communities: the ultra-Orthodox (also known as Haredi) and Israeli Arabs.
When Israel was formed as a state in 1948, the ultra-Orthodox community was granted exemption from military service so that the men could devote their lives to religious studies. The ultra-Orthodox have a separate education system that produces fine religious scholars, but does very little to prepare its students for participation in a modern economy. Many men continue their studies into their forties, but do not learn practical subjects such as math and science beyond a grade-school level.
If the ultra-Orthodox community had remained as small as it was when the government first agreed to support it, the effect on Israel's economy would be negligible. But projections are that within the next ten years, this group will account for 20 percent of the Israeli population. With 65 percent of ultra-Orthodox men and most women unemployed, the financial burden on the country could be catastrophic.
The community of Israeli Arabs has rates of unemployment and fertility similar to those of the ultra-Orthodox, yet the Arab community already accounts for 20 percent of the Israeli population. These numbers do not bode well for Israel's labor force: together, the Arabs and ultra-Orthodox currently make up 50 percent of school-age children. That's 50 percent of the next generation that is likely to be underskilled and underemployed. Add that to the naturally dependent groups of the old and young, and you can see that Israel is facing a crippling dependency ratio.
There are both structural and cultural barriers to employment for these two communities that Israel will have to address in its long-term economic strategy. Among them are such factors as a lack of standardized criteria in the Israeli education system that apply to all schools, in all communities. The transportation infrastructure connecting some of the more isolated groups to active business zones is poor. Too few businesses operate within their communities, and women often lack cultural support and preparation for entering the job market. Of course, there's another, glaring factor that hampers Israel's economic prospects, and that is its state of chronic conflict with its neighbors, particularly Palestine. Not only are much of the country's precious resources—cash and people—diverted for security needs, but Israel also misses out on valuable trade opportunities and efficient trade corridors into the rest of the region.
The other threat to Israel's economic stability comes from its high-tech industry, the country's pride and glory. Most of the activity in Silicon Wadi follows the same path: innovations developed there are packaged into well-funded start-ups; once they're mature, they're sold to high-bidding foreign companies. All that good intellectual property is lost, and, worse, the opportunity to grow businesses at home is forfeited. It is only through the cultivation of businesses at home—beyond the start-up phase—that jobs which don't require a PhD can increase. Businesses that stay and grow create career paths, and they create the need for ancillary services that grow with them, giving a substantial boost to other industries, such as construction, livery, hospitality, office work, day care, dry cleaners, restaurants, and more.
The Israeli government wanted to see how other countries had successfully met challenges comparable to their own, and asked Clyde to conduct a benchmarking study of similarly sized countries and then make policy recommendations based on his findings. Countries chosen for the study were Singapore, Taiwan, Ireland, Sweden, Finland, and Estonia.
Although this was not an exhaustive survey, each of the countries selected reflects aspects of the Israeli conundrum in some manner; like Israel, some are young countries, some have multiethnic populations, others face security threats, and several have come through periods of high unemployment. Clyde and his team were on the lookout for policies that had successfully confronted these conditions. More important, they were watching for patterns and principles of success across the whole group that could be applied to Israel as well.
Remember, the function of governance is to ensure that people are safe and prosperous for the long term. To that end, rules, services, and institutions are created to make sure that the good life stays available for everyone in the group. The sum of all those parts is the economy.
But for policy strategists such as Clyde to see what's working in an economy, what's not, and how to make improvements, they've got to evaluate each of the components in the system. Ideally, these components reinforce one another, in a continuous cycle of renewal.
The eight factors Clyde used to evaluate each of the countries in his benchmarking study were
- Education
- Infrastructure
- Innovation
- Business environment
- Labor
- Institutions
- Society
- Macroeconomics
Strategies among the countries were compared. The shaping influence of each country's history, geography, ethnicity, and culture were all taken into account, as were its particular form of government and economic system.
After sifting through all the data and cataloging each country's challenges and successes, Clyde took a big step back. He was looking for commonalities: Did successful strategies demonstrate the same principles and practices?
Clyde's been working in the economic strategy and policy arena at high levels for decades, so it's not often that he has a completely new insight that shifts his thinking. The Israel 2020 assignment was one of those exceptions.
After reviewing the different policy strategies exercised by each country in the benchmarking study, Clyde came to his profound realization: form doesn't matter. Neither the form of government (autocracy, democracy, theocracy, communist or socialist state, tribal council, or monarchy) nor its economic system (market, mixed, or barter economy) are determining factors for any country's economic performance. Instead, he found that the most important predictor of economic health was the degree to which the country's citizens feel as though they're all on the same team.
Countries with a relatively homogenous ethnic population come by this team spirit naturally, as is the case for three of the countries in the study, Taiwan, Sweden, and Finland. Looking like one another, speaking the same language, and sharing the same culture and history in the same geographical area contribute to a collective spirit that predisposes people to work toward a common goal and to sacrifice when necessary, even when their individual interests compete.
But the countries in the study with more diverse populations had been intentional about finding ways to encourage and reward participation from all communities, as Iqbal had accomplished with Grameenphone. People who had previously been marginalized by location, ethnicity, class, religion, or other barriers suddenly had far more productive power and, therefore, roles to play in the larger economy. In the Grameenphone example, a private business introduced an instrument for participation and was able to level the playing field in a way that the Bangladeshi government had failed to do.
The social cohesion that drives economies can be forged by government, business, or a combination of both. Both socialist and capitalist economies succeed at this. What matters most is that they aim to unite people in a common purpose and vision and that they align their policies with that goal.
One of the best examples is Singapore, a country with an extremely diverse population: 75 percent Chinese, 15 percent Malay, and 10 percent Indian, united by the vision put forward by Singapore's leader, Lee Kuan Yew. Yew wanted to promote Singapore as a first-world oasis in a third-world region. He reasoned that if Singapore could establish first-world standards in public and personal security, health, education, telecommunications, transportation, and services, it would become a base camp for entrepreneurs, engineers, managers, and other professionals doing business in the region.
Achieving this goal requires a population that is well educated, has high-tech skills, and speaks English. Education, then, was to be a pivotal part of Singapore's strategy for achieving economic competitiveness; ensuring that these standards were met by all Singaporeans would mean that they'd be sharing in a common purpose, a common language, and an economy that provided opportunity for all.
The social cohesion that Clyde had identified as being so critical to economic success was engineered in a very intentional manner in Singapore. Education was the foundation of the strategy, but housing and immigration programs were also instrumental in promoting social harmony within a diverse society. Clyde's study found the following to be some of the most impressive features of these programs:
The ultimate function of leadership is to inspire people to work cooperatively toward a common vision. As you may know from your own experience managing a team, family, project, or even just a meeting, this is no easy feat. For people to invest themselves in a coordinated effort, they have to know that what's good for the group is relevant to their personal values and aspirations. The greater the diversity in the group, the broader the range of values and aspirations to accommodate. This is the hurdle every leader must clear.
Integrating common good and personal gain is the particular goal of governance, and it's something that Singapore has done spectacularly well. It is all the more impressive considering its diverse population and its short history as a sovereign state. Until 1959, when Singapore began self-government with Lee Kuan Yew as its prime minister, the small island country had been occupied by one power or another since 1613. By the time it gained autonomy, Singapore was in bad shape: the country lacked public housing and had high unemployment, poor sanitation, and racial tensions so high that riots were a common occurrence. By 2011, just fifty years later, Singapore was ranked first in global competitiveness on the World Economic Forum's World Competiveness Report,3 a confirmation that the goal of becoming a first-world oasis in a third-world region had been achieved.
Singapore earned its place at the top of the international rankings because it planned to be there. This point is the crux of Clyde's insight, a principle he saw at play in each of the examples of success from the benchmarking study. Together, the stories reinforced his realization that there is no single prescribed path to success, that good governance isn't a function of one form of government or another, but of careful planning and cooperation. In other words, what really matters is leadership—directing a clear vision, good planning, and a common sense of purpose within the group.
These lessons were built into Clyde's final report for Israel and were detailed in specific policy recommendations to address each of the eight factors of success he'd benchmarked in his study: education, infrastructure, innovation, business environment, labor, institutions, society, and macroeconomics. Israel's challenges are significant, Clyde allowed, but they are nothing that some creative, nonideological problem solving, guided by a clear vision, can't overcome.
Clyde's wisdom applies to governance in all parts of our lives, from families to large nation-states. Vision matters. Leadership matters. Cultivating a sense of “team” matters. What matters, Clyde concluded, is good planning.
