In 2016, Antoine van Agtmael and Fred Bakker published “The Smartest Places on Earth.” Van Agtmael, a personal friend and a donor to Fair Observer, asked me to review the book. Unfortunately, day-to-day writing, editorial and administrative tasks in a crazy year ensured that this fell off the wagon.
This summer, I picked up the book again and read it cover to cover. It makes a compelling argument: “The next emerging market may, in fact, be the West.” The old industrial cities of the US and Europe still have formidable assets in the form of smart people, physical infrastructure, cultural openness and bonds of trust.
In recent years, the most industrialized region in the Northeast and Midwest states of the US has come to be called the Rust Belt. Once known for steel, automobile and other heavy industry, the area turned to rust as industry moved to the American South, Mexico or Asia. The two Dutch authors, van Agtmael and Bakker, call any declining region in Europe or the US a rustbelt. They argue that many of these rustbelt regions are quietly coming back.
In these regions, smart people are coming together to create a new economy based on interdisciplinary collaboration, international talent and cutting-edge technologies. The US and even Europe have regained competitive advantage from Asia because smart now trumps cheap in the global economy. And emerging markets neither have the culture nor the infrastructure to compete.
In their book, van Agtmael and Bakker explain how rustbelt regions around Akron in Ohio, Albany in upstate New York and Batesville in Mississippi were “becoming the unlikely hotspots of global innovation.” Dominant Democrats took the same view. At the 2016 Democratic National Convention, Michelle Obama bellowed, “[T]his right now is the greatest country on earth.”
In the same year, Donald Trump was playing a mesmerizing tune about American decline and promising to “make America great again.” Enough Americans believed this Pied Piper’s story of decline and elected him to the White House.
A simple question arises: Which of the two narratives rings more true? Is America on the bounce or is it down in the dumps?
Is the West Still the Best?
Over the years, van Agtmael has been a canny investor. In 1981, when working for the International Finance Corporation (IFC), a full 10 years before the fall of the Soviet Union, this Dutchman coined the term “emerging markets” to convince fund managers to invest in what was then still referred to as the Third World. In 2007, he went on to publish “The Emerging Markets Century” about a new breed of world-class companies taking over the world. Nine years later, he revised his view.
Van Agtmael and Bakker begin the book by referring to comments by David Ku, a chief financial officer of a chip manufacturer in Taiwan. Ku tells authors of the competition from Qualcomm in the US. The Asian business leader remarks that the American company’s R&D is so advanced that it can easily squeeze Ku’s company. Van Agtmael and Bakker argue that Ku has a point.
For much of the last few decades, Asia has focused on low-cost production. Now, cost arbitrage is not as much of an advantage because labor costs are no longer a key determinant in production. American and even European companies are coming up with complex new products using new production methods such as automation, robotics and 3D printing. Apple and Google are a sign of things to come.
What is different is that innovation is no longer confined to Silicon Valley and Cambridge, Massachusetts. It has now spread to former rustbelt locations all over the United States. Akron is in corn-growing Ohio, Albany in upstate New York and Batesville in sleepy Mississippi. These rustbelt locations are now turning into brainbelts, a bit like Cinderella after meeting her fairy godmother.
Visionary thinkers and connectors are playing the role of the fairy godmother by bringing together local universities, regional government initiatives, big companies and startups to create new products. To do so, inventors and innovators integrate sensors and chips. They use new materials and new production methods. They come up with new combinations of hardware and software. Van Agtmael and Bakker estimate that the US has 35 brainbelts and 20 of them are in the rustbelt.
Europe is emulating the US and also making a comeback. In 2011, Eindhoven was named “the smartest region in the world,” beating the likes of Silicon Valley and Cambridge in Massachusetts as well as Cambridge in the UK. Dresden in Germany, Lund-Malmö in Sweden and Oulu in Finland are among the other “awakening beauties,” creating new technologies, products and a new form of global economy. If one is to believe van Agtmael and Bakker, the West is still the best.
How Do You Create a Brainbelt?
In a long conversation, van Agtmael mentioned to me that no one could go to the moon alone, but a team of talented people could do it together. They had a clear goal, though not a clear road. The moonshot in the 1960s unleashed a wave of technology, knowledge and energy, giving a huge tailwind to the US economy. However, the US turned lazy over time and headwinds appeared from Asia. Today, Asian headwinds are dying down and technology tailwinds are pushing not only the US but also Europe forward. These tailwinds are coming from brainbelts, which according to the two Dutchmen have the following components.
First, any brainbelt must have a collaborative ecosystem with research universities at the core. Startups, local governments, bigger companies, teaching hospitals, community colleges and similar institutions often form part of the ecosystem. Second, it must focus on one or just a few technologies or activities. Third, a connecter, who brings vision, relationships and energy, almost invariably helps create, establish and sustain an ecosystem that makes a region a brainbelt.
Fourth, a brainbelt must have appealing work and living environments, such as good housing, decent schools, attractive restaurants and interesting cafes. Fifth, it must have capital for investment and pleasant physical places to work out of. Finally, and most importantly, a brainbelt must have a culture of trust with freedom of thinking. By accepting failure as part and parcel of innovation, this culture stimulates new ideas and new ways of doing things. It markedly differs from the hierarchical, regimented thinking in Asia or Latin America where failure is never and option. In fact, more than anything, this culture forms the West’s greatest competitive advantage.
Three Key Technologies
As per van Agtmael and Bakker, brainbelts are deriving their power from three key technologies. The first is robotics. As the writers say, “automation obliterates the labor cost advantage.” They give the example of Baxter, a robot that costs $22,000 and has a work capacity of 6,500 hours. This means that Baxter gets “paid” just $3.38 an hour. The robot is also more productive and reliable than most human beings.
There is something more going on. When you combine artificial intelligence, sensors and big data computing with cheap computing power, you get smart robots. They can keep learning instead of just doing repetitive tasks endlessly. Smart robotics is the new race to the moon and the US is in pole position.
If one is to believe in the thesis of the two Dutchmen, a new economy is around the corner. We neither understand it nor can measure it yet. New materials, new technologies and new products will change the way we live.
The second technology that powers brainbelts is additive manufacturing, of which 3D printing is a prime example. Research labs, startups, operating rooms, workshops and even schools now use this method. Gone are the days of molding, machining, laser cutting and welding. Today, a 3D printer melts polymer using a laser and deposits layer after layer to construct three-dimensional shapes in a single solid piece, eliminating joints or weak spots. It also eliminates waste.
It turns out that 3D printing is not the only method of additive manufacturing. There is an innovative new production process named digital light synthesis that uses ultraviolet light to cure, i.e., solidify, liquid polymer into a layer. Many layers of solidified polymer make a desired shape that is then baked in an oven. While van Agtmael and Bakker focus on 3D manufacturing, it turns out that digital light synthesis is 100 times faster than 3D printing and the baking element knits together layers more effectively, making stronger products with smoother surfaces.
Then, there is the cutting-edge of bioprinting. In North Carolina, researchers have already printed ears, bones and muscles. They have implanted them successfully into animals. This technology requires a combination of a bewildering array of technologies from many fields. Software, hardware, new materials and biology come together to create a heady cocktail.
Additive manufacturing threatens old methods such as injection molding, which worked brilliantly for the last 150 years. This manufacturing method is ideal for mass production of thousands or even millions of identical things. Designed for economies of scale and undifferentiated demand, it is risky in a world where consumer demand is far more fickle and variable. Making molds and setting up production lines is slow. So, if consumer taste changes, companies are often left with unrecoverable sunk costs. Additive manufacturing requires less investment, cuts out waste and enables quicker production of new designs.
General Electric Co., Honeywell International Inc. and United Technologies Corp. have invested billions in 3D printers to make jet engines. Adidas is using digital light synthesis to make soles for its shoes. In the words of van Agtmael and Bakker, additive manufacturing “holds tremendous potential for unleashing creativity and imagination” for new products that we can’t even imagine today.
The third technology driving brainbelts is the Internet of Things. Chips and sensors make this possible. Computing power has become cheaper and the storage capacity of sensors has increased. American companies such as Intel, Cisco and IBM launched the Industrial Internet Consortium (IIC) in March 2014. Everything is increasingly interconnected and, in production processes, every parameter is constantly recorded, tracked and optimized.
The Magic of the Human Element
Van Agtmael and Bakker do not paint Aldous Huxley’s brave new world or George Orwell’s 1984. They argue that the human element is the most critical one for any brainbelt. They extol connectors who create communities. The Dutchmen credit Luis Proenza, the former president of the University of Ohio, for resuscitating Northeast Ohio after the tire industry went offshore. Thanks to Proenza’s efforts, the region is now the polymer capital of the world. Its 1,000 startups employ more people now than the four big tire companies in the past. Its 10,000 manufacturing companies employ 3.9 million people with the university acting as the engine of the brainbelt’s economic growth.
The writers credit Alain Kaloyeros for the renaissance of Albany. This former Christian militiaman from Lebanon with a PhD in experimental condensed matter physics has made a rustbelt in upstate New York the Mecca of nanotechnology. It involved bringing together government, academia and industry. Kaloyeros had to convince competitors to collaborate and engage in a “brainsharing process” to increase effectiveness.
George Simpson, the first director of and the acknowledged brain behind North Carolina’s Research Triangle Park, ran “a bluff game in the beginning” with nothing more than a brochure in hand to create a now renowned center of innovation in the third-poorest state of the nation. Today, Simpson’s successor, Bob Geolas, has pushed forward the new model where academia, business and government work together. He sees a “highly collaborative, authentic, unique and inspiring” culture as the only way to be “fresh and attractive to the smartest young creative minds.”
Gitta Haupold, the founder of Silicon Saxony, is the driving force behind Dresden’s renaissance. It is now a leading center of chip-making and is turning the clock back to its glory days of the 1930s. Mentors such as Betina Vossberg and Roland Scholz are appearing to change the risk-averse culture in Germany where failure is still a stigma. In a country where the Mittelstand, small, family-owned companies with annual turnover from about $500 million to $5 billion, still rule the roost, Dresden’s mentors are transforming culture and bringing in capital despite stiff competition from Berlin.
Eindhoven’s return to the global stage was led by three Dutch musketeers: Gerard Kleisterlee, Amandus Lundqvist and Alexander Sakkers. Kleisterlee, the then-CEO of Philips, made open innovation the mantra at his company. Lundqvist, the former head of IBM Netherlands and the ex-chairman of Feyenoord football club, became the chair of the Technical University of Eindhoven and deepened university-industry collaboration. Sakkers was elected mayor of Eindhoven and brought together different local institutions to polish the “rough diamond” in town, the High Tech Campus.
These three musketeers have proved prescient. They bet on open innovation and won big. Brainsharing has become a way of life in Eindhoven and more than 19,000 researchers from all over the world have flocked to the smartest place on earth to do their work. The combination of a local base and global talent has proved to be a winning model for a merchant people who pioneered the first joint-stock company and the first stock exchange.
Van Agtmael and Bakker credit Nils Hörjel for making Lund and Malmö rebound from economic downturn. Hörjel focused on the computer and electronics industry as well as the disciplines of chemistry and biotechnology to replace old industries like shipbuilding. Like other connecters, he brought together academia, business and government to create an innovative Scandinavian brainbelt.
A Smart New Economy
If one is to believe in the thesis of the two Dutchmen, a new economy is around the corner. We neither understand it nor can measure it yet. New materials, new technologies and new products will change the way we live. Their multiplier effect might well be exponential.
Van Agtmael and Bakker are not the only people who believe in such a transformation. Klaus Schwab, the founder of the World Economic Forum, wrote about the “fourth industrial revolution” in January 2016. This revolution is “characterized by a fusion of technologies that is blurring the lines between the physical, digital, and biological spheres.” Schwab argues that “emerging technology breakthroughs in fields such as artificial intelligence, robotics, the Internet of Things, autonomous vehicles, 3-D printing, nanotechnology, biotechnology, materials science, energy storage, and quantum computing” will transform entire systems of production, management and governance.
While Schwab acknowledges the threat of inequality as “the greatest societal concern,” the Dutchmen are relentlessly optimistic in their thesis. They head out for the broad sunlit uplands and do not see dark clouds on the horizon. They celebrate the breaking down of silos and increasing innovation. They find hope in new antimicrobial fibers that filter out ultraviolet light, resist chemicals and keep us cool. They sing paeans not only to rustbelts, but also to established strongholds such as Minneapolis, Portland and Zurich.
Van Agtmael and Bakker see a smarter world around the corner. They envision homes, buildings, planes, cars and machines becoming more energy efficient. As demand drops, supply from renewables will increase. The cost of producing solar, wind or any other renewable energy will keep going down. New battery technologies will make it easier to store electricity and a decentralized grid could evolve. Homes and businesses could then generate electricity for their own use and also to supply the grid.
The Dutchmen foresee a revolution in the automobile industry. Only 1% of gasoline is required to transport the weight of the driver. The rest of it powers the nearly 2,000-kg car. Additionally, the car sits idle most of the time. Self-driving, electric, smart cars might be the win-win answer against climate change, accidental deaths, high stress and social fragmentation.
Van Agtmael and Bakker also envision a revolution in farming. By 2050, the world population will be 9 billion. Feeding them will require new agricultural methods and technologies. The innovative Netherlands with 0.5% of the area of the US and 7.5% of the world’s food experts might play a big role in feeding the world. Plants generating electricity, jam-packing microbiomes into the human gut, and using hydroponic production technologies to grow crops in a mineral-rich solution are some potential solutions.
Apparently, hydroponic methods allow 20 to 25 harvests a year and consume 85% less energy than traditional methods. This makes them ideal for a heating planet that is running out of water. Better eating and milking methods, combined with sophisticated milk refining, will ensure that “our limited natural resources will meet our ever-growing demand.”
A New Mercantilism and the Story of Renewal
Like their countrymen, van Agtmael and Bakker are pragmatists. Unlike Milton Friedman, they do not deliver fire and brimstone sermons against state intervention. They see a smart economy emerging thanks to intelligent mercantilism à la Jean-Baptiste Colbert. The Dutchmen point to the likes of Kurt Biedenkopf, the premier of Saxony, as a model for other politicians. In former East Germany, this statesman invested in fundamental research and created world-class institutions to restore his region to former glory. Thanks to his big bets, Saxony has emerged as a leader in chip production and life sciences.
Van Agtmael and Bakker also salute the Finns for transitioning from mobile phones to connected health in Oulu. Instead of trusting in the invisible hand of the market alone, the authors posit that “the entrepreneur needs government assistance, marketing partners, and, very important, money.” They give the example of Seppo Kopsala to prove their point. Optomed, a medical technology company that specializes in retinal imaging devices and solutions, created a device to detect eye diseases. It took both European and American investment along with an Indian customer for the company to take off. Importantly, Optomed manufactures in Europe.
Van Agtmael and Bakker make a telling point. Asia can manufacture rubber gloves, thermometers and syringes, but it cannot yet make pacemakers, prostheses, implants and surgical robots. In the life sciences industry, the US has 39% market share, Europe 28% and Japan 10%. Emerging markets are left with low hanging fruit. This success in the West is possible thanks to a combination of public investment in research and private investment in entrepreneurship. Luckily for the US and Europe, Asia is yet to figure out how to brew this magic potion.
In the fifth chapter, van Agtmael and Bakker predict growing local production and slowing global trade. Even before President Trump unleashed headwinds of protectionism and trade wars, trade was slowing down. As the two Dutchmen predicted, food, clothing, shoes and other products will once again be made closer to home. This might be good news for the West in general and the US in particular, but export-oriented Asian economies will suffer.
There is more good news for the US. Deborah and James Fallows have completed a 100,000-mile journey in a single-engine prop airplane to small towns and cities across the country. They have chronicled a story of reinvention in the American heartland. The couple report that “positive and practical developments” are taking place at the local and regional level. Trevor Cohen and Gregory Schwartz tell a similar story of renewal in their upcoming book. They found that Americans in family farms and small towns are rolling up their sleeves to save the environment, create a circular economy and rebuild their country.
Some Dark Clouds
Van Agtmael and Bakker champion the internet economy. They take the view that consumer surplus of free services such as Google Maps and Google Search does not show up in statistics. However, they fail to factor in the internet’s negative externalities like distracted employees or negligent students who amuse themselves to death. The truth is that the jury is still out if the internet is increasing or decreasing productivity.
To be fair, van Agtmael and Bakker acknowledge the $1.2 trillion student debt crisis in the US and propose better vocational programs in community colleges as well as Germany-style work-study model with industry internships. Yet this is unlikely to take off in the toxic, polarized politics of today. In fact, the $75 billion the US spends on fundamental research might decrease. As of now, this amount exceeds the European Union’s $40 billion and Japan’s $18 billion greatly. Throw in an added $82 billion for applied research along with its gargantuan pools of venture capital and the US economy seems like an unstoppable juggernaut.
The fact that foreigners still flock to American universities, companies and towns is a testimony to the continued dynamism of the country. It has institutions such as the Defense Advanced Research Projects Agency and the National Institute of Health that are the envy of the world. Yet even the cutting-edge military and health care research that leads to major spinoffs has its limitations. Immigrants like Elon Musk or Sundar Pichai might achieve the great American dream, but far too many debt-ridden families live the terrible American nightmare of surviving paycheck to paycheck.
There is another little problem with the smart new economy that van Agtmael and Bakker celebrate. The internet has benefited many but also harmed others. It has also damaged democracy as well as eviscerated a free, fair and independent press. For instance, the ratio of public relations professionals to journalists has gone up from less than two to one in 1998 to nearly six and a half to one in 2018. The US now has one of the best democracies money can buy and, in part, that is thanks to the internet.
The biggest criticism of the two Dutchmen’s book is that their optimism is not tempered by a fairly obvious fact: Even the new smart economy will have winners and losers. Despite my Oxford and Wharton education, I would struggle to find a job in a high-tech brainbelt unless I decided to cook meals, teach yoga or give massages. In contrast, the brilliant scientific minds, technology entrepreneurs and investors would be right at home.
Much like myself, the inner-city African-American, the poor Hispanic immigrant and the white, working-class Midwesterner are unlikely to find a place in the sun in this new smart economy. As Schwab fears, the already terrible inequality could increase further. This could tear the social fabric and give demagogues the keys to power. Globally, the ascendance of the West could herald a new form of imperialism and colonization, reminiscent of the Dutch and the British East India Companies. Van Agtmael and Bakker paint glorious new possibilities for humanity, but they forget to mention that the fourth industrial revolution could also cause riots, rebellions and even revolutions.
The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.