LOS ANGELES — Fighting global terrorism will take more than military might or determined diplomacy. To win, the United States must radically change its approach to those countries from which terrorists spring, according to two scholars writing in the latest issue of The Milken Institute Review.
The key, they say, is not simply to alleviate suffering in these nations — which the authors call the "New Second World" — but to nurture the institutions that will allow them to make the leap to development.
"If we are to win the war on terrorism, we must recognize that it is not the poverty of the third world, but our shared failure to manage third world countries′ transition out of poverty, that is endangering our nation as well as theirs," write the Keenan Institute′s Jennifer Bremer and John D. Kasarda in their article, "The Origins of Terror."
Helping countries like Iran and Saudi Arabia, which are in the early phase of the transition, or Turkey and China, which are in more advanced stages, get through the difficult period of reform will help buffer youth discontent — the fuel of terrorism.
"Implanting democracy and market-led development, especially in countries in the early phase of the New Second World, is the only way to attack the origins of terrorism," the authors say.
Also in this issue of the Review, Marco Iansiti of the Harvard Business School and Roy Levien of National Economic Research Associates offer a striking alternative to the traditional analysis of markets used by trustbusters — an alternative that accounts for the ecosystem-like complexity of interaction in so-called "network" industries.
"Business 'ecosystems′ don′t even remotely fit the boundaries of product or service markets, and thus, the influence of firms with aggressive business strategies should not be judged solely by their competitive impact on conventionally defined industries," they write. "Wal-Mart, with its remarkable integrated vendor-supply system, may eat rival retailers for breakfast, lunch and dinner. But the potential damage to competition in retailing associated with greater industrial concentration should be weighed against the potential productivity gains for the consumers and suppliers that share in the benefits of Wal-Mart′s innovations."
Other highlights from the new Review:
o Marcus Noland of the Institute for International Economics brings us up to date on the new technology of scamming — in particular, on the adoption of the West African "419" e-mail scams that have pulled in anywhere from $2 billion to $5 billion a year.
o Sheldon Danziger of the University of Michigan looks at welfare reform six years after its passage, just as Congress is debating its reauthorization. "If gains from welfare reform are to be sustained during a recession," he writes, "additional funds will be needed to complete the task of turning a cash-based safety net into a work-oriented safety net."
o Michael Milken, Chairman of the Milken Institute, offers a timely lesson in matching corporate capital structure to business risk. "Most people approach corporate finance the way scientists deal with problems in the physical world: plug in the right formula and you′ll come up with the solution," he writes. "But as any scientist will tell you, at the very highest levels even the most technical pursuit becomes an art. In the same way that artists select from an infinite palette of colors, financiers choose from a broad palette of financial technologies and securities to build the correct capital structure for a business."
o Ross DeVol, Director of Regional and Demographic Studies at the Milken Institute, offers a primer of his own on the factors that make a regional economy vibrant and prosperous. "A region′s economic performance is largely determined by how effectively it uses it comparative advantages — everything from the presence of world-class universities to recreational opportunities to affordable housing — to create and expand knowledge assets and convert them into economic value," he writes.
This issue′s book excerpt comes from Does Education Matter, by University of London Professor Alison Wolf, who forces us to defend some very basic assumptions about education and economic growth. The excerpt is followed by a rebuttal from David Card, an economist from the University of California, Berkeley.
The Milken Institute Review is distributed to some 10,000 corporate and financial executives, policy makers, academics and journalists throughout the world. Its editor is Peter Passell, former economics columnist for The New York Times.