Authors: North America could become next great emerging market
U.S. needs to pass comprehensive immigration reform, they say
Editor’s Note: David H. Petraeus, a retired four-star general and former director of the CIA, is chairman of KKR Global Institute. Paras D. Bhayani is a Boston-based management consultant. They are co-authors of a new report from Harvard Kennedy School’s Belfer Center for Science and International Affairs. KKR has investments in some of the sectors discussed in the report. The authors wrote this report in their private capacities, and all opinions expressed are theirs alone. Funding for the report was provided by the Belfer Center.
Fracking. 3D printing. Personalized medicine. Big data.
Each is a compelling technological trend. And taken together, advances in energy production, manufacturing, life sciences and IT amount to four interlocking revolutions that could make North America the next great emerging market – as long as policymakers in this country don’t impede their potential.
The impact of these four revolutions is already evident in the enviable economic position enjoyed by Canada, Mexico and United States compared with the rest of the world.
Japan – despite some promising signs under “Abenomics” – and most of the Eurozone could epitomize the “new mediocre” of which IMF Managing Director Christine Lagarde has warned.
China is slowing because of a combination of the exhaustion of investment-led development, rising labor costs and soaring debt, among other issues.
India, perhaps on the threshold of the “Modi Moment,” has yet to develop convincing momentum, and Brazil is sliding into recession.
To be sure, the comparative strength of the North American economies is partly explained by natural strengths: macroeconomic stability; a sound banking system; favorable business climates; strong cultures of innovation and entrepreneurial spirit; deep and agile capital markets; small firms that can create and capitalize on technological advances; and, of course, their deep integration with one another. But the growing dynamism of the three economies is credited increasingly to the technological transformations.
In a virtuous cycle, innovations in one sector are generating important advances in others.
For example, the rise of big data and cloud computing, combined with American leadership in manufacturing and the life sciences, has yielded what some have called the “Industrial Internet” and the “Health Care Internet.” Meanwhile, the drilling advances that have expanded reserves and lowered prices for oil and gas are not only improving energy independence, but they are enabling a resurgence of manufacturing, where advanced robotics and 3D printing are raising engineering quality and lowering costs.
Although these revolutions may be synergistic, they are not self-sustaining. And they are currently pushing against so-called policy headwinds from Washington. The conventional political “fix” is to talk about the problem, boost a subsidy or two, carve out some new tax loopholes and hope for the best. But there’s too much at stake for such policy gimmicks.
Making good on the promise of these four revolutions could mean ushering in the kind of broadly shared prosperity America hasn’t seen in generations. Congress and the White House can capitalize on these opportunities if they embrace a long-term view of critical investments. Among the priorities:
1) Reform public education to ensure the United States continues to develop the best human capital by encouraging state policymakers to adopt rigorous educational standards, particularly for math, science and reading.
2) Pass comprehensive immigration reform to dramatically expand the quantity of H1B visas, particularly for foreign technical graduates of American universities; implement a point system in which those with advanced degrees and the ability to contribute to the economy are given a higher score and a faster path to entry; and create a path to permanent residency and citizenship for low-skilled workers.
3) Invest intelligently to improve America’s deteriorating physical infrastructure. Create a National Infrastructure Bank to promote more-rigorous project selection and increase the motor-fuels tax and index it to inflation to rejuvenate and sustain the highway trust fund.
4) Tackle the two largest drivers of spending – Social Security and Medicare – and replace the blunt cuts in the “sequester” with targeted cuts to carefully chosen defense and nondefense programs to reduce the long-term debt-to-GDP ratio from 74% to 72% by 2024.
5) Pursue comprehensive reform of the U.S. tax code, with a particular emphasis on the corporate tax code. Reduce the code’s complexity by stripping out deductions and loopholes and using the savings to lower the overall rate from 35% to 26%.
6) Increase funding for defense and nondefense scientific research across the range of relevant agencies, including Defense Advanced Research Projects Agency, the National Institutes of Health, the National Science Foundation and the Department of Energy’s Office of Science. Make the research and development tax credit permanent to support continued corporate investment in applied research.
7) Encourage the continued development of domestic and North American energy sources and the integration of the North American energy market. Approve the Keystone XL pipeline to carry oil extracted from Canadian tar sands to refineries and other production facilities in the United States and lift the ban on American exports of oil.
Consensus in Congress is vanishingly small in most years and approaches zero during a presidential election cycle, so these reforms are unlikely to be taken up quickly.
Still, many of the ideas presented here have attracted significant bipartisan support in the recent past. If framed as an agenda for prosperity – a key to unleashing North America’s tech-fuelled potential – they may finally gain traction.