“Developing World Catches a Fresh IT Wave” looks like the title for some completely disposable fluff piece, possibly in a trade publication or even an investment brochure, featuring interviews with a Sri Lankan computer geek and an Indonesian businesswoman addicted to her I-Phone, but economist Andy Xie’s latest essay works its way to high speculative adventure on current events and future history.
Xie begins with fairly commonplace observations on the “third wave” of Information Technology – “cloud computing, optical fiber lines and mobile devices” – seen as supplanting the personal computer-based second wave and mainframe-based first wave. His expanded analysis is very much worth reading in full, but one of the more interesting passages compares IT first to other macro-level forces, and second to other theoretically way-of-life-altering technologies:
Alongside IT, globalization and aging are shaping the global economy. The first two forces enlarge the pie but change the way incomes are distributed among people, industries and countries. Aging makes the pie smaller. Eventually the pie may be bigger as the new IT revolution changes economies, even though the process will be quite painful.
Yet of all technologies, IT remains the most powerful force influencing the global economy. Green energy survives on government subsidies. We will not see a day when it will be more than a niche phenomenon. Biotech is constrained by a long gestation period for product development. The IT revolution, on the other hand, races forward at lightning speed.
Much of the rest of the essay describes the economic functions that 3rd Wave IT replaces, suggesting a massive process of “Schumpeterian creative destruction” that will be on balance positive for the developing world, but frightening and de-stabilizing in the developed world.
This problem for the latter “world,” us, centers on in what progressive economist Mike Hudson calls the FIRE sector – Finance, Insurance, Real Estate. In short, 3rd Wave IT makes much of what those who profit from and are employed in FIRE do, and how and where they do it, superfluous. As a result, the developed world’s highly developed financial and other service sectors put them increasingly at a competitive disadvantage with a developing world that has never burned its capital on FIRE, at least to anything approaching the same extent. Not-yet-developed economies therefore can take advantage of the kind of leapfrogging that saw cell-phones and satellite dishes spreading in countries that had never invested in land-line and VHF-UHF infrastructures.
Xie pauses to put the 2008 financial crisis and the ongoing economic slump in this context, making a nice observation as to how the FIRE sector, whose debilitating effects on the economy were dramatically exposed in 2008, escaped being overthrown:
As financial services industry loses value-added to customers and the real economy, it is increasingly dependent on gaming the system and profiting from customer ignorance. This makes the industry and financial market more volatile and bubble-prone. In the last financial crisis, the financial sector survived by holding the real economy hostage.
Bringing us to the present:
Unless policymakers understand that the financial industry isn’t necessary for the real economy anymore, and that it should scale down dramatically, the sector will remain a gigantic parasite on top of the real economy.
Yet, as the prior observation demonstrates, removing this parasite is something that was too painful to contemplate for us two years ago, and FIRE remains immensely wealthy and therefore immensely influential, and immensely able to protect itself. The hostage situation appears to have re-settled into trans-epochal, transnational Stockholm Syndrome.
The last section of the essay draws the economic outlines for a major transition phase in world history. Reviewing the competitive disadvantages and related structural unemployment problems afflicting the developed world, an inevitable by-product of FIRE dependency, Xie closes on a speculative note:
The global economy has bifurcated into the weak developed world and the booming developing world. The contrast is partly due to liquidity from the former to the latter. When the current liquidity bubble bursts, the developing world may suffer a growth slowdown. But its cost advantages will sustain it with stronger growth performance.
The third wave of the IT revolution could amplify this outperformance. And if the world remains at peace, a convergence between what are now two worlds may occur this century.
“And if the world remains at peace…”: I’ve been reading Andy Xie for a couple of years now. I believe that the above represents the first time he has mentioned matters of war and peace in any context, even obliquely. As for the underlying analysis, not only do I think he is right, I think that everybody knows that he is right: An impetus toward “convergence” is irresistible. Unfortunately, what everybody does with that knowledge may not be the same, or predictable… or good for children and other living things, as the saying goes.
Achieved convergence, at higher levels of technological and cultural development, might even be subjectively more satisfying for many or most of the citizens of the already-developed world, even if in raw measures of consumption of resources they would be objectively “poorer.” If Xie’s analysis is accurate, then the question of the century would become whether and to what degree this next major economic, political, and cultural transition can take place unlike every other one known to history – that is, “at peace.”
). Go to our 
Well therein lies the 60,000 dollar question, what will we replace the FIRE economy with, more manufacturing would be the ideal, but there
are a series of obstacles to doing that.