A Big Mac, fries - and lasting peace. Is globalisation a damaging form of "cowboy capitalism" or a progressive movement that is leading us towards an embryonic world government?

The Lexus and the Olive Tree

Thomas Friedman <em>HarperCollins, 394pp, £19.99</em>

In The Lexus and the Olive Tree, Thomas Friedman relates a story about Martin Indyk, the US ambassador to Israel. Indyk recently presided over a ceremony marking the opening of the first McDonald's in Jerusalem. A young boy with a McDonald's hat approached him, requested his autograph and asked how it felt to be an ambassador from McDonald's opening restaurants all over the world. When informed that Indyk was not the McDonald's but the American ambassador, the boy looked crestfallen and withdrew his request for the autograph.

This anecdote encapsulates many of the themes of Friedman's excellent new book on globalisation. In the new world order that has emerged since the fall of the Berlin Wall, economics has become at least as important as politics.Countries are now evaluated by what Friedman, a foreign affairs correspondent of the New York Times, calls the "electronic herd" of faceless global investors acting as if they were companies; and companies themselves play the role of cultural ambassadors, remaking the world in a distinctly American image.

What Friedman does not mention is that Martin Indyk was the first Jewish assistant secretary of state to head the State Department's notoriously Arabist Bureau of Near Eastern Affairs, and at the time of his nomination by the Clinton administration he was not even an American citizen. (He was an Australian national who had to be hurriedly naturalised.) Still, he presided over a remarkably successful period of US-Middle East diplomacy that included the negotiation of the Oslo accords between Israel and the Palestinians. In the new global order being promoted by the US, ethnicity, nationality and religion count for much less than competence and bottom-line results.

Hence the title of Friedman's book: the Lexus represents the efficiency, transnationality and technological sophistication of the new global economy; the olive tree represents tradition, rootedness and local identities that persist and at times rise up in rage at the homogenising demands of the "electronic herd". They coexist in the present world and they react against each other in the new polarisation that has replaced the east-west divide of the cold war.

Samuel Huntingdon, in The Clash of Civilisations, sneered at what he called the "Davos culture", that is, the world of the Lexus being promoted by the elite businessmen, politicians, academics and media types who attend the annual Davos World Economic Forum. Friedman argues persuasively that the Davos culture, while promoted by elites, is in fact profoundly democratising and represents a vision of society that countless poor around the world, voting with their feet, try to realise.

The democratisation is threefold: of technology, of finance and of information. The microchip, which does not reward scale, is easily spread to all corners of the earth, and even the remotest village has access to information about the larger world outside it. The growth of mutual funds and the securitisation of emerging-market finance mean that the "electronic herd" is no longer controlled by elite bankers and Wall Street brokers but indirectly by you and me and everyone else who has a pension fund. And information is no longer controlled by rigid hierarchies; everyone can communicate cheaply and potentially has access to knowledge about how their neighbour is doing. The cold war world was one of high walls created by centralised state hierarchies, built not just around countries but around companies, markets and cultures. These walls have now come down.

They have been replaced by what Friedman calls the "golden straitjacket": that is, the set of rules regarding economic policy that is enforced by the "electronic herd" on any country that hopes to participate in the global economy and presided over by financial institutions such as the International Monetary Fund. If a country busts its budget by spending too lavishly on social programmes, the bond market exacts an immediate punishment: higher interest rates. But this discipline forces countries to adopt sensible economic policies that set the stage for growth and overcome entrenched interest groups that have become comfortable doing business behind protectionist walls.

The "golden straitjacket" operates on a political level, as well as through a process Friedman labels "globalution" - revolution via the global economy. Human rights activists and ordinary people struggling for democracy now have powerful allies in such unlikely sources as multinational corporations and their accounting firms, which, like pro-democracy activists, demand openness, transparency, uncorrupt government and rule-based accountability from those with whom they deal. There is a growing network of norms and rules that enmesh authoritarian regimes: critics of the Suharto regime in Indonesia before its fall could not openly criticise the government for corruption but could quote the World Trade Organisation when it made similar charges.

With greater wealth comes more education, information and ultimately more democracy. And with more democracy comes greater peace between nations. The two great correlations that social scientists have debated at great length - the correspondence between level of development and democracy, and that between democracy and peace - are summarised by Friedman in his dictum, noted during his extensive travels, that no two countries with a McDonald's have ever gone to war. That is, any country open enough to global trade and investment to permit the building of a McDonald's, and with a large enough middle class to make it a profitable operation, is likely to be preoccupied with promoting economic growth, rather than fighting wars over olive trees.

But there are many downsides to the global economy. The one area not subject to democratisation is labour markets; here, the advance of the microchip has produced increasing rewards for skill, education and cognitive ability. Low-skill workers in developed countries have lost out either to similarly skilled workers in developing countries or to smart machines. The results are increasing gaps between rich and poor in the US and persistently high levels of unemployment in Europe.

The "electronic herd", moreover, behaves exactly like a herd, stampeding into certain emerging markets during bouts of optimism (as in the great investment boom of the early 1990s) and then stampeding out again when economies turn down or exchange-rate pegs fail to hold. There have already been five major financial crises in this decade, beginning with sterling in 1992, the Mexican peso in 1994, the crises in Thailand, Korea, Indonesia and other parts of Asia in 1997, the Russian default in 1998 and the Brazilian crisis of earlier this year. The ability of short-term capital to move in and out of emerging markets at the click of a mouse has exaggerated the swings both upward and downward and inflicted misery on hapless workers in places such as Jakarta, who, having only recently aspired to middle-class status, have landed back in poverty.

Finally, there are the inter-related problems of culture and democracy. Globalisation may be multinational but it wears a distinctly American designer label. To many people globalisation means the replacement of their traditional foods and architecture by the golden arches or a Taco Bell. Many Europeans see globalisation as an assault on the welfare state in the name of what they regard as an American-style "cowboy capitalism". There is a strong perception that the ability of these societies to control their own culture or institutions has eroded sharply, with effective power having passed on to faceless and unaccountable individuals at the IMF or a foreign financial institution.

These problems have led to a backlash against globalisation from those who can't play the globalisation game well or those who don't want to play it in the first place. The forms of backlash are many, from Zyuganov's Russian Communist Party to the Taliban. The mixture may one day become deadly, as some group of angry young men uses the technological means provided by globalisation to strike back at its very centres of power - men such as Ramzi Youssef, who attempted to blow up the World Trade Center.

Friedman does not, however, want to write an end-of-globalisation story, because he feels its effects are too powerful. The question for him is how best to preserve the beneficial aspects of globalisation through the appropriate public policies while trying to limit its destabilising and often harsh consequences. The search for a solution to that problem leads him to be what he calls an "integrationist social-safety-netter", that is, someone committed to continuing integration into the global economy, but with enough government intervention to ease the pain for those wounded by the system. That leads to a number of fairly conventional policy recommendations that in the end create something less than a global safety net: worker retraining, rather than income redistribution; no fundamental changes in the global financial architecture; and continued funding of the IMF and other international institutions. In the end, it seems to me that some bolder action is legitimate and possible. There is no reason, for example, for the WTO not to take seriously the demands of trade unions to include labour standards in their agenda, not just as a covert barrier to trade but as a global standard to be negotiated and enforced. It has been a long time since anyone has thought seriously about creating new global governance institutions, and now, in the wake of the emerging-markets turmoil of the late 1990s, may be the time to do so. It is also clear that Washington and the IMF made key policy mistakes in the early 1990s, chiefly by promoting liberalisation in the absence of adequate governance institutions. Evidently things will have to go slower in the future.

The Lexus and the Olive Tree is particularly satisfying for me because it confirms, vividly and in rich detail, the truth that we have indeed reached the end of history: the ambassador for McDonald's is more highly regarded than the ambassador from the US. Earlier in the decade, Tom Friedman used to ring me, saying, "You know, you're essentially right about the victory of democracy and markets around the world." He would then cite specific examples from his own observations as a journalist. He has collected all of these insights into a single, powerful volume that comes as close as anything we now have to a definition of the real character of the new world order.

Francis Fukuyama, Hirst Professor of Public Policy at George Mason University, Virginia, is author of "The Great Disruption" (Profile Books, £20)In The Lexus and the Olive Tree, Thomas Friedman relates a story about Martin Indyk, the US ambassador to Israel. Indyk recently presided over a ceremony marking the opening of the first McDonald's in Jerusalem. A young boy with a McDonald's hat approached him, requested his autograph and asked how it felt to be an ambassador from McDonald's opening restaurants all over the world. When informed that Indyk was not the McDonald's but the American ambassador, the boy looked crestfallen and withdrew his request for the autograph.

This anecdote encapsulates many of the themes of Friedman's excellent new book on globalisation. In the new world order that has emerged since the fall of the Berlin Wall, economics has become at least as important as politics.Countries are now evaluated by what Friedman, a foreign affairs correspondent of the New York Times, calls the "electronic herd" of faceless global investors acting as if they were companies; and companies themselves play the role of cultural ambassadors, remaking the world in a distinctly American image.

What Friedman does not mention is that Martin Indyk was the first Jewish assistant secretary of state to head the State Department's notoriously Arabist Bureau of Near Eastern Affairs, and at the time of his nomination by the Clinton administration he was not even an American citizen. (He was an Australian national who had to be hurriedly naturalised.) Still, he presided over a remarkably successful period of US-Middle East diplomacy that included the negotiation of the Oslo accords between Israel and the Palestinians. In the new global order being promoted by the US, ethnicity, nationality and religion count for much less than competence and bottom-line results.

Hence the title of Friedman's book: the Lexus represents the efficiency, transnationality and technological sophistication of the new global economy; the olive tree represents tradition, rootedness and local identities that persist and at times rise up in rage at the homogenising demands of the "electronic herd". They coexist in the present world and they react against each other in the new polarisation that has replaced the east-west divide of the cold war.

Samuel Huntingdon, in The Clash of Civilisations, sneered at what he called the "Davos culture", that is, the world of the Lexus being promoted by the elite businessmen, politicians, academics and media types who attend the annual Davos World Economic Forum. Friedman argues persuasively that the Davos culture, while promoted by elites, is in fact profoundly democratising and represents a vision of society that countless poor around the world, voting with their feet, try to realise.

The democratisation is threefold: of technology, of finance and of information. The microchip, which does not reward scale, is easily spread to all corners of the earth, and even the remotest village has access to information about the larger world outside it. The growth of mutual funds and the securitisation of emerging-market finance mean that the "electronic herd" is no longer controlled by elite bankers and Wall Street brokers but indirectly by you and me and everyone else who has a pension fund. And information is no longer controlled by rigid hierarchies; everyone can communicate cheaply and potentially has access to knowledge about how their neighbour is doing. The cold war world was one of high walls created by centralised state hierarchies, built not just around countries but around companies, markets and cultures. These walls have now come down.

They have been replaced by what Friedman calls the "golden straitjacket": that is, the set of rules regarding economic policy that is enforced by the "electronic herd" on any country that hopes to participate in the global economy and presided over by financial institutions such as the International Monetary Fund. If a country busts its budget by spending too lavishly on social programmes, the bond market exacts an immediate punishment: higher interest rates. But this discipline forces countries to adopt sensible economic policies that set the stage for growth and overcome entrenched interest groups that have become comfortable doing business behind protectionist walls.

The "golden straitjacket" operates on a political level, as well as through a process Friedman labels "globalution" - revolution via the global economy. Human rights activists and ordinary people struggling for democracy now have powerful allies in such unlikely sources as multinational corporations and their accounting firms, which, like pro-democracy activists, demand openness, transparency, uncorrupt government and rule-based accountability from those with whom they deal. There is a growing network of norms and rules that enmesh authoritarian regimes: critics of the Suharto regime in Indonesia before its fall could not openly criticise the government for corruption but could quote the World Trade Organisation when it made similar charges.

With greater wealth comes more education, information and ultimately more democracy. And with more democracy comes greater peace between nations. The two great correlations that social scientists have debated at great length - the correspondence between level of development and democracy, and that between democracy and peace - are summarised by Friedman in his dictum, noted during his extensive travels, that no two countries with a McDonald's have ever gone to war. That is, any country open enough to global trade and investment to permit the building of a McDonald's, and with a large enough middle class to make it a profitable operation, is likely to be preoccupied with promoting economic growth, rather than fighting wars over olive trees.

But there are many downsides to the global economy. The one area not subject to democratisation is labour markets; here, the advance of the microchip has produced increasing rewards for skill, education and cognitive ability. Low-skill workers in developed countries have lost out either to similarly skilled workers in developing countries or to smart machines. The results are increasing gaps between rich and poor in the US and persistently high levels of unemployment in Europe.

The "electronic herd", moreover, behaves exactly like a herd, stampeding into certain emerging markets during bouts of optimism (as in the great investment boom of the early 1990s) and then stampeding out again when economies turn down or exchange-rate pegs fail to hold. There have already been five major financial crises in this decade, beginning with sterling in 1992, the Mexican peso in 1994, the crises in Thailand, Korea, Indonesia and other parts of Asia in 1997, the Russian default in 1998 and the Brazilian crisis of earlier this year. The ability of short-term capital to move in and out of emerging markets at the click of a mouse has exaggerated the swings both upward and downward and inflicted misery on hapless workers in places such as Jakarta, who, having only recently aspired to middle-class status, have landed back in poverty.

Finally, there are the inter-related problems of culture and democracy. Globalisation may be multinational but it wears a distinctly American designer label. To many people globalisation means the replacement of their traditional foods and architecture by the golden arches or a Taco Bell. Many Europeans see globalisation as an assault on the welfare state in the name of what they regard as an American-style "cowboy capitalism". There is a strong perception that the ability of these societies to control their own culture or institutions has eroded sharply, with effective power having passed on to faceless and unaccountable individuals at the IMF or a foreign financial institution.

These problems have led to a backlash against globalisation from those who can't play the globalisation game well or those who don't want to play it in the first place. The forms of backlash are many, from Zyuganov's Russian Communist Party to the Taliban. The mixture may one day become deadly, as some group of angry young men uses the technological means provided by globalisation to strike back at its very centres of power - men such as Ramzi Youssef, who attempted to blow up the World Trade Center.

Friedman does not, however, want to write an end-of-globalisation story, because he feels its effects are too powerful. The question for him is how best to preserve the beneficial aspects of globalisation through the appropriate public policies while trying to limit its destabilising and often harsh consequences. The search for a solution to that problem leads him to be what he calls an "integrationist social-safety-netter", that is, someone committed to continuing integration into the global economy, but with enough government intervention to ease the pain for those wounded by the system. That leads to a number of fairly conventional policy recommendations that in the end create something less than a global safety net: worker retraining, rather than income redistribution; no fundamental changes in the global financial architecture; and continued funding of the IMF and other international institutions. In the end, it seems to me that some bolder action is legitimate and possible. There is no reason, for example, for the WTO not to take seriously the demands of trade unions to include labour standards in their agenda, not just as a covert barrier to trade but as a global standard to be negotiated and enforced. It has been a long time since anyone has thought seriously about creating new global governance institutions, and now, in the wake of the emerging-markets turmoil of the late 1990s, may be the time to do so. It is also clear that Washington and the IMF made key policy mistakes in the early 1990s, chiefly by promoting liberalisation in the absence of adequate governance institutions. Evidently things will have to go slower in the future.

The Lexus and the Olive Tree is particularly satisfying for me because it confirms, vividly and in rich detail, the truth that we have indeed reached the end of history: the ambassador for McDonald's is more highly regarded than the ambassador from the US. Earlier in the decade, Tom Friedman used to ring me, saying, "You know, you're essentially right about the victory of democracy and markets around the world." He would then cite specific examples from his own observations as a journalist. He has collected all of these insights into a single, powerful volume that comes as close as anything we now have to a definition of the real character of the new world order.

Francis Fukuyama, Hirst Professor of Public Policy at George Mason University, Virginia, is author of "The Great Disruption" (Profile Books, £20)