The Remaking of the Industrial World
No. 4 2011 October/December
Vladislav Inozemtsev

PhD in Economics; he is Head of the Department of World Economy at the Faculty of Public Administration, Lomonosov Moscow State University, and Director of the Center for Post-Industrial Studies.

Exploring the Contours of a New Global Order

The departure of the Soviet Union from the historical arena 20 years ago was a great political event, full of deep meaning. First of all, it was naturally interpreted as a victory of democracy over authoritarianism and of the liberal order over the communist utopia. There were many statements about the superiority of pragmatism over ideology, and that the time of ideologized societies was over. In geopolitical and military terms, the event was perceived as the success of NATO and the defeat of the Warsaw Pact, while economically it was viewed as the bankruptcy of the planned economy model. Yet there was one more factor, which was ignored by many.


The economic problems that had brought about the collapse of the Soviet Union became especially noticeable in the second half of the 1980s, but at that time the Soviet Union was not the only major nation to encounter difficulties. Japan, the third largest economy in the world after the United States and the Soviet Union, was going through hard times, too. Its achievements shortly before the “era of change” had alarmed the U.S. as much as the Soviet achievements of the 1960s did. However, Japan went into an economic tailspin almost simultaneously with the Soviet economy. As a result, the two potential rivals that the U.S. had to reckon with in the mid-1980s disappeared from the horizon by the end of the 1990s.

The reader may ask: What is the relation between the political bankruptcy of the authoritarian Eurasian empire and temporary economic difficulties faced by the highly efficient Far Eastern power? The relation is obvious: two countries that opted for the maximum development of the industrial type of economy failed to cross the threshold of the 1990s. Two entirely different economic systems – a planned and a market economy, a fully closed one and one oriented towards the maximum expansion into foreign markets, a highly militarized economy and a totally demilitarized one – stumbled almost simultaneously. For the next 20 years, they were the main losers in the global economic system: their aggregate share in world GDP dwindled from 19.6 to 8.8 percent, that is, more than by half.

An explanation to this phenomenon was given almost immediately, although it did not receive as much public response as the political factors of the Soviet Union’s collapse did. In a small book with a conspicuous title, Paul Pilzer, the youngest Citibank vice-president in history and a New York University professor, told the readers that the Western world had found a source of unlimited wealth: in the “post-industrial” era the most successful societies, while creating technologies and knowledge, do not spend but multiply their own human capital, and while selling them, they sell not the final product but rather its copies, which does not reduce the public wealth. Therefore, the wealth in knowledge societies is unlimited, as opposed to the industrial production which depends on the availability of raw materials and the supply of human and material resources.

A few years later, one of Japan’s most prominent economists, Taichi Sakaiya, agreed that Japan had not created economic, social or value structures of a post-industrial society and that it had stopped at “the ultimate phase of industrialism,” which in the end brought about its historical defeat. While Russian economists were busy addressing their own problems, already in the first half of the 1990s globalization analysts worldwide came to think that the Western world owed its dominant position, above all, to its historic breakthrough in information and communication technologies.

These views received a spectacular confirmation pretty soon. The very first conflict between the post-industrial and traditional worlds – the 1991 Gulf War – demonstrated the indisputable superiority of the United States and its allies. With casualties of 379 killed, they routed a mighty army, killing at least 30,000 and wounding over 75,000 Iraqi soldiers.

Despite the rapid economic growth in Asia, the U.S. share in global GDP began to increase in the mid-1990s – for the first time since World War II. Financial markets in America and Europe showed a rapid rise, while industrial economies grew ever more unstable. The “Asian” financial crisis, which began in 1997, hit actually all emerging economies, whereas GDP grew in the United States by 4.5 percent on average in 1997-1998, and by 2.8 percent in the European Union. In 1998, the U.S. federal budget was in surplus for the first time since 1969. Oil prices, which stood at $42-44 in the early 1980s, hit a record low of $11.8 in the late 1990s. Gold prices fell from $850 to $255 per troy ounce; cotton prices fell from $114 to $32 per ton; and prices of non-ferrous metals decreased by an average of 2.3-2.6 times. Simultaneously, the Nasdaq-100 Index increased by 6.1 times in 1995-1999. Within just two months, from mid-October to mid-December 1999, the increase in the market capitalization of the Amazon.com electronic commerce company alone exceeded the aggregate value of the 183 billion cubic meters of natural gas exported by Russia in 1999. The total capitalization of high-tech U.S. companies in the spring of 2000 exceeded China’s GDP by 6.7 times.

The economic dominance of the post-industrial world over the rest of mankind seemed much more impressive than the military and political superiority of the Western bloc over the rapidly disintegrating alliance of socialist countries ten years before. The author of this article in those years fully shared the triumphalist hopes of supporters of a post-industrial transformation, although he feared that the success of the Western world might provoke an insurmountable inequality, which would become a dangerous source of global political instability.

However, ten years later it became clear that this dominance proved transient. In 1999, China’s GDP in market prices was below U.S. GDP 21 times; however, in 2010 it was only 2.5 times lower. Similarly, Russia’s budget revenue in 1999 barely reached 1.3 percent of the U.S. figure, whereas in 2010 it exceeded 15 percent. The world’s top ten exporters today include only five Western countries, as against nine a decade ago. Foreign exchange reserves of the five largest non-Western countries reached $5.8 trillion in the summer of 2011, while the budget deficits of the U.S. and the EU countries exceeded $2.5 trillion. The trends of the 2000s were the result of not political plans but economic processes.

At the first phase of this cycle, one might think (and actually did) that the turnaround was brought about by purely market factors. The Western world in the late 1990s provided invaluable help to developing industrial countries by not hindering the depreciation of their currencies and issuing large loans to countries that had found themselves in a difficult situation. The increase in imports by the U.S. alone from Southeast Asia from 1997 to 2002 stood at $35-40 billion annually, and the exchange rate of the U.S. dollar to the yen, the won or the rupiah in 1998-1999 was almost twice as high as today.

The resumption of growth brought about an upward trend in commodity markets, and by 2002 energy prices recovered from their record low of the late 1990s – but they only returned to their previous levels, rather than soared high. Later, it seemed for some time that their growth was provoked by the war in Iraq and that it would be as short-lived as it was in 1990. However, starting in 2006-2007, it became clear to most world economy analysts that it was a long-term trend – and soon there appeared many books which, in contrast to researches of the early 1990s, began to preach a “return of history”, speak about the end of yet another democratic wave, and prepare the Western public opinion for a new stage in the confrontation between liberal and authoritarian regimes.


In the mid-1990s futurologists bravely talked about the coming of a new world and about absolute dominance of a post-industrial civilization and knowledge-based economy. In my opinion, several theories that were widespread in those years proved to be erroneous.

First, proponents of “information society,” who reasonably believed that information is a very important resource and that there is a virtually unlimited demand for it, proceeded from the premise that this demand would maintain relatively high prices for technological innovations and information know-how. But this never happened. In contrast, for example, to the price of an average car, which in the United States rose between 1995 and 2010 from $17,900 to $29,200, or the price of an overnight stay in a four-star hotel, which increased from $129 to $224 on average, the average price of a laptop fell over the same period from $1,900 to $780, and the per-minute fee for using a mobile phone decreased from ¢47 to ¢6.2. Technologies and high-tech products became increasingly cheaper, and although technology companies manage to maintain their high capitalization, sales still are not very impressive.

The United States, the most technologically advanced economy in the world, exports technologies to the tune of $95 billion a year, which does not exceed 0.65 percent of its GDP. Apple, the most valuable company in the world at $370 billion, sells products to the tune of only $108 billion. More and more Internet services are becoming free, just as services provided by many information companies. Indeed, “technologies” can be consumed on an infinitely large scale – information romanticists were right here – but one does not need to pay much for them (or pay at all), and this was their mistake. Moreover: the logic of reducing prices in a situation of fantastic competition requires moving hardware production out of developed countries. Accordingly, it is not companies creating new technologies that increasingly benefit from technological progress but those that make products based on them. In 2010, high-tech products based on American and European inventions accounted for 39 percent of China’s exports, estimated at $1.6 trillion. As a result, depreciating technologies are now concentrated in developed countries, while the value added, in developing ones. In fact, this is the main factor that was not foreseen by “information society” theorists.

Second, the premise that informatization of the economy would sharply reduce demand for resources and their prices proved utterly wrong. This conclusion was based on the practices of the 1980s-early 1990s, when a large-scale wave of material saving did reduce the demand for resources. Today, Germany has 55 percent more cars than it did in 1990, but they all consume 42 percent less gasoline than twenty years ago. Oil consumption between 2000-2010 decreased by 11.3 percent in Germany, by 12.1 percent in France, by 16.3 percent in Denmark, and by almost 22 percent in Italy, although the size of these economies increased over the decade by almost a third on average.

These examples can be continued. This trend is a prerequisite for reducing commodity prices, but at the same time it brings down the cost of raw materials and energy against GDP. Whereas in 1974 this figure in the U.S. was about 14.5 percent, in 2007 in the EU it stood at 4.3 percent. So, Western economies over the last quarter of the 20th century became relatively immune to fluctuations in commodity prices, and when the growth in demand for raw materials in the early 2000s pushed prices up, no one tried to counteract this development, in contrast to the 1970s. Moreover, the improved quality of life in post-industrial countries brought to life new sectors of the “green” economy, which greatly benefited from growing commodity prices, as their developments were found more and more relevant and necessary. As a result, whereas in 2000 aggregate exports of oil and gas earned $193 billion for Saudi Arabia, Russia, Nigeria, Qatar and Venezuela, in 2010 they brought them no less than $635 billion – although physically (in Btu) the exports increased by only 14.4 percent. By the end of 2011, oil and gas exports may even reach $830 billion. So, it is not only industrial but even commodity-dependent economies that have essentially strengthened their positions vis-И-vis post-industrial ones.

Third, post-industrial societies, feeling infinitely powerful, focused on the service sector, which took an excessive dimension while its products proved highly overrated. In a globalizing world, services and goods, whose provision could not be globalized, began to be sold at exorbitant prices. Accordingly, housing prices, utility and transportation rates, and hotel and restaurant fees rose, as well. Factors that made this development possible included a steady decline in prices for imported consumer goods and information products, which ensured growing living standards. This resulted in financial incontinence based on confidence that the value of assets located in rich and prosperous countries would keep growing. The average price of a house in the U.S. more than doubled from 1995 to 2008. Loans grew increasingly popular, and financial institutions took ever more risks. As a result, mortgage lending in the United States over the past 20 years increased by 3.6 times, and consumer lending, by 3.1 times.

The U.S. economy and – to a lesser extent – other post-industrial economies turned not so much into information as financial economies. Financial transactions, wholesale and retail trade, and real estate transactions in 2007 produced 44.3 percent of U.S. GDP. The developed world was turning not so much into a supplier of technologies and goods to developing countries as a supplier of symbolic values and financial services. From 1999 to 2007, the trade deficit between the U.S. and the rest of the world reached $5.34 trillion, with the entire increase in deficit due to a growing imbalance in trade with China, newly industrialized Asian countries and oil exporters. These dollar-denominated funds largely returned to the United States through the sale by the U.S. government, banks and private companies of their debt instruments. The “unlimited” wealth was coupled with a possibility of unlimited borrowing – on any terms. Therefore, those authors who put the blame for the financial imbalances that brought about the recent crisis equally on both developed and developing countries are absolutely right.

To sum up, I should say that in the 1990s the post-industrial world created not unlimited wealth but conditions for its creation. It developed technologies that radically expanded economic horizons; however, instead of using them, it preferred to transfer them to other countries and confine itself to the role of service economy and financial center. It is this de-industrialization, which sagacious researchers objected to back in the 1980s, that changed the global economic configuration.

If high-tech industrial production had remained localized in developed countries, there would have been no explosive growth of Asian and other newly industrialized countries. Without it, there would have been no overconsumption of energy resources and raw materials, because developed economies exceed by far China or Brazil in terms of material effectiveness. Between 2000 and 2010 oil consumption in China increased by 204 million tons – almost a third of all oil consumption in the EU. The result was sad: the post-industrial world used only a tiny part of what it created. According to the World Bank, in countries that spend not less than 2.5 percent of their GDP on R&D, labor productivity over the past 15 years grew by 1.3 to 2 percent per year on average, whereas in China, the largest importer of technologies, it grew by 8.2 percent.

The transfer of technologies to less developed countries, as well as their unauthorized copying, has hit U.S. innovative companies which over the last 10 years have kept their profits at a mere 2.2 percent of their surplus value created by the use of their inventions, according to Yale University professor William Nordhaus. In a globalized world dominated by free and unrestrained competition, the production of technologies is becoming a kind of production of public goods. This is a noble and lofty task, but it is not always justified economically.


The tendencies that emerged in the late 1980s–early 1990s in economy did not become stable; rather, there emerged counter-tendencies, which eventually proved to be more significant. As a result, there formed a basically new global configuration, which can be viewed as coexistence and competition of “three worlds.”

At one pole of this new order, there are post-industrial nations which are ahead of others, primarily the United States and the UK: they are characterized by a very low share of the manufacturing sector in GDP (10 to 13 percent), a swollen financial sector, chronic budget deficits, and a persistent negative balance of foreign trade. At the same time, these countries have an immense intellectual potential and extensive capabilities for further development.

Apart from the U.S. and Britain, one can include in this category some European countries that are not quite well-off, namely Ireland, Spain, Italy and Greece. Of course, this grouping is rather arbitrary, but these countries are united by their indifference to industrial policy and irresponsible attitude to their own finance. This “de-industrialized” world, which has an ideal infrastructure of global finance, accounts for about $20 trillion of global GDP, estimated at $76 trillion, for almost half of registered intellectual property, and 216 of 500 largest corporations included in the latest FT-500 ranking, estimated by market players at 9,8 to 10 trillion U.S. dollars. Today, this part of the world feels uncomfortable due to the lack of self-trust and the need to look for new footholds in the changing global architecture. However, this discomfort is partly counterbalanced by the sense of civilizational and historical unity and closeness of social and economic systems. These are countries of the Western world that show to the rest of the world the future that awaits it if the de-industrialization tendency persists.

The second pole comprises various kinds of countries which emerged from obscurity due to a “tidal wave” of growing commodity prices. These include Russia, Saudi Arabia, Iran, Kazakhstan, Venezuela, Nigeria, Angola, Turkmenistan, several Latin American countries supplying raw materials, and some others. All of them have a very high share of the primary sector in the economy (over 75 percent of exports and at least 50 percent of budget revenues). Also, they are characterized by domination of the bureaucracy over other social groups, by an authoritarian style of government, utter dependence on foreign technologies and investment, and by a growth of budget spending in direct proportion to commodity revenues. This part of the world accounts for about $5 trillion of aggregate GDP and, at the same time, for an insignificant part of commercialized intellectual property and a small number of large corporations – only 19 out of the top 500, valued at 800 to 900 billion U.S. dollars (for fairness’ sake, it must be noted that many large companies in these countries belong to the state, and therefore both these figures should increased by 2 to 2.5 times). As a rule, there are no large international financial centers in this part of the world, and local currencies are pegged to the dollar or the euro or are not freely convertible. The elites of these countries think of themselves as minions of fortune and propagate highly irrational consumption models. Political cooperation between these countries is entirely decorative and cannot bring about strong strategic alliances.

And finally, in the heart of the new world, there are old industrial countries “risen from the ashes” (Germany and Japan) and new centers of industrialism (South Korea, China, Brazil, Taiwan, Malaysia, Thailand, Mexico, Poland and some other Eastern European and other countries). Although this group of countries does not seem homogeneous, they are united by a high share of manufacturing industries in GDP (23 to 45 percent), a stable positive balance of trade in manufactured goods, developed domestic markets, and their relatively steady development in line with strategic concepts defining their future.

Today, this group dominates the world with an aggregate gross product of $26 trillion and relatively high growth rates. Countries of this group particularly benefit from the current technological revolution. All of them (even Japan after 20 years of “correction”) are characterized by a reasonable level of capitalization of domestic markets (these countries are home to 139 of the largest public companies, valued by investors at $5.5 to 5.7 trillion). Their currencies are dominant in their regions and may serve as the basis for a new global financial system in the future. At the same time, the history, political systems and forms of social life in these countries are so different from each other that the industrial center of the world cannot be viewed as something intrinsically integral.



The industrial nations of the 21st century are relatively disunited, yet they make a very interesting picture of the new “regionalization.” In contrast to the 20th century, there is no single economic center in the world; at the same time, there is no reason to expect that potential leaders may soon start struggling for this status.

Now, one can confidently speak of three industrial “monsters,” each having a strong regional projection. In the first place, they include China, which is surrounded by smaller countries that are gradually being involved in commercial and industrial chains created by Beijing. China’s dominance in that part of the world is obvious: the GDP of its neighbors (South Korea, Taiwan, Malaysia, Thailand, Singapore, the three Indochinese countries, Indonesia and the Philippines), calculated at purchasing power parity, is about 52 percent of China’s GDP.

During the next few decades, China will have plenty to do in this “co-prosperity sphere”: it will be a field for applying political efforts (the final integration of Hong Kong and Cross-Strait relations) and economic ones (the strengthening of China’s influence in Indonesia and Vietnam, the creation of a transport infrastructure and development of mineral resources in Myanmar, and financial consolidation in Southeast Asia in general). At the same time, there are two strong potential rivals in the neighborhood of China’s zone of influence, namely Japan and India, which will ultimately determine the boundaries of this zone. China’s global aspirations, if any, will in the next few decades restrain the United States which has been building a serious “containment alliance” with the aforementioned major neighbors of China.

In Europe, we see a much more interesting process, which gives a better understanding of what is happening in this part of the world. In the 1990s and the first half of the 2000s, the European Union, whose origins date back to the days of the Franco-German reconciliation, extended its boundaries eastwards, began accession negotiations with Turkey, and announced the Eastern Partnership program. All these initiatives can be taken differently, but one cannot fail to see the rapid formation of a new industrial zone in the east of the EU, to which (and not to China) some industrial facilities are being transferred from the basic EU countries. Against this background, the current financial turmoil is viewed as a crisis which hit, above all, countries that had allowed de-industrialization (Ireland and Greece), or hoped to continue living on credit (Greece again and Italy), or put up with a chronic trade deficit (Spain).

This crisis will definitely bring these countries to their senses and return them to the more balanced German model, characterized by a strong industrial sector. In this case, we see a much less pronounced “quantitative” domination of “leading” countries over those “led”: if we include Germany, France and the Netherlands in the first group and Italy, Spain, Poland, Greece, the Czech Republic, Slovakia, Hungary, Bulgaria, Romania and the Baltic States countries, as well as Ukraine and Belarus which potentially gravitate towards the EU, in the second, then the two groups will be almost equal in terms of GDP. However, there is no doubting the success of the European project, as the lessons taught by the crisis will be learned, and the attractiveness of European institutions and the European model will be a decisive factor.

I would like to remind the Russian readers, who are traditionally skeptical about the European project, that today’s Europe is one of the most strongest industrial centers of the world, which produces 1.5 to 3 times more industrial products – ranging from automobiles and industrial equipment to metals, chemicals and pharmaceuticals – than the United States. The success of the Europeans in the current conditions would mean the success of a more balanced development model combining innovations and industrial development. The area where this experiment is being conducted has clear boundaries: Russia in the east and the Arab World in the south and southeast.

In the southern Western Hemisphere, the situation is obvious, too. In that part of the world, there is a natural leader of its own: this is Brazil, which accounts for 50.5 percent of the GDP of South America and 52.7 percent of its population. Over the last 30 years, Brazil has been demonstrating impressive progress: it has become the third-ranking country in the world in the production of passenger aircraft and the sixth-ranking country in the production of cars (most of which are flexible-fuel vehicles). Over the last 20 years, it has increased proven oil reserves by 4.5 times and organized on the basis of its own technologies the drilling of the deepest offshore wells in the world. In 2002, Brazil held the world’s first electronic voting. The share of Brazil’s spending on R&D has exceeded 1.5 percent of GDP.

Today, Brazilian-made manufactured goods dominate in shops in almost every Latin American country. It must be noted, though, that Brazil has always been aloof on the continent and that its Portuguese language and culture, not to mention its dominating size, cause mixed attitudes from its neighbors. Yet, the logic of economic development must overcome: Argentina, which could be viewed as a potential rival, has been declining for the larger part of the last 100 years; Venezuela is bogged down in socialist experiments and has been showing a decline in per capita GDP for the last 30 years; China is far away; while the attitude towards the United States in Latin America has always been more than cautious. For its part, Brazil is even more limited in its potential expansion than China or major European countries. Therefore, it would be safe to say that in the “neo-industrial” world of the 21st century none of the “new industrial poles” will clash with another.

Each of these poles, however, will implement an economic strategy of its own. In China, for example, it will most likely be based on the mass production of relatively standardized and cheap products for both the domestic market, which still needs to be saturated, and for the markets of the U.S., the EU, Russia, Japan and countries in the Middle East. The industrial growth policy will help China regain the status of the world’s top-ranking economy, which it lost in the 1960s, as would befit the world’s most populous nation. At the same time, China will hardly start producing, let alone exporting, significant new technologies during the next few decades.

In Europe, the industrial strategy will focus on the production of very high value-added products, status consumption goods, high-tech equipment, and energy and resource-saving goods. As with China, such goods can be sold around the world. At the same time, the production of a wide range of more “primitive” manufactured goods will continue, which are in demand in Europe and neighboring countries. The Brazilian variant will be the least “globalized” and the most “frontal” one: it will develop most diverse sectors, including the manufacturing and extractive industries and agriculture.


Proceeding from the above logic, the United States and Russia, the recent Cold War antagonists, will find themselves in a particularly difficult situation in the coming decades.

The United States is the leader of the post-industrial revolution, which has brought it immense opportunities – and big problems. On the one hand, America has enormous power over the world and a huge technological potential; on the other hand, its power can no longer be projected the way it was done before, and technologies enrich its competitors even faster than they do the Americans. Having leaped into the post-industrial future, America has found itself too dependent on the import of large amounts of relatively cheap goods and on the eternal inflow of credit facilities or money creation.

At present, the living standards in the United States are much higher than a country producing such goods of such quality could expect. Mass production, which has been the key to success for the Americans since Henry Ford’s days, now works against them: mass-produced branded goods must be cheaper to sell well, while mass-produced information products are easily copied through copyright infringement. In the first case, the Americans are beaten by competitors, and in the second, they are unable to establish rules of the game that would be advantageous to themselves. It looks like there is no going back into an advanced industrial society for the United States: the conditions in which its economy functions allow the U.S. to try to compete with Europe for its niche; but it can hardly hope to win.

Russia is a country that became de-industrialized according to an entirely different scenario. Whereas the U.S. has objectively outgrown its modern industry oriented to meet high consumer demands, Russia has not even risen to this level. Objectively, Russia is as dependent on inflows of funds from abroad as the United States is. The difference is, the world lends money to the U.S. or simply accepts the U.S. dollars as legal tender, whereas Russia has (for the time being) to dig up money from the ground. In addition, unlike the U.S., Russia depends on inflows of technologies and high-tech products, because it does not produce even a tenth of the range of goods that its neighbor China, for example, has learned to produce over the last 15 years. And whereas it is very difficult for the Americans to “turn around” and, in a way, to return to their industrial past, we, the Russians, are unable even to reach our industrial future.

Both cases require harsh political decisions, which the former parties to the great confrontation of the 20th century are unable to make. One party tells stories to itself that the new century will be as “American” as the previous one was. The other party, it seems, has come to believe that hard times are over and that the whole world now depends on its resources, infinite and required by all. Instead of rethinking the mistakes made and exploring opportunities that may open up if both countries join their competitive advantages and industrial strategies, the political elites of both Russia and the United States have fallen into a stupor. One cannot bring itself to believe the difficulties it has encountered, whereas the other cannot believe its luck. Both, however, will have to wake up sometime.

* * *

History has proven that linear predictions are rarely correct. Illusory hopes that new technological possibilities will help create unlimited wealth have never come true. No invention can ensure a life of ease for decades. Of course, the world has changed – but, as the developments of recent years have shown, not to an extent that the established economic patterns should be discarded as worthless. The 21st-century world is a renewed yet still industrial world. There is nothing more important for the governments and intellectual elites of every country now than to understand their place in the new world and make this place as worthy as possible.