By Christopher M. Wright

Name: Lester Thurow Title: Lemelson Professor of Management and Economics at MIT Born: May 7, l938 in Livingston, Mont. Experience: Professor Thurow has taught at MIT since 1968. He was dean of MIT's Sloan School of Management from 1987 to 1993. His previous books include the bestsellers "The Zero Sum Society," "Head to Head," "Building Wealth," and "The Future of Capitalism." His writings have also appeared in Newsweek, The New York Times, and the Wall Street Journal. A Rhodes Scholar, he is on the board of the globally active companies Analog Devices, Inc. and E*Trade. He was a Democratic appointee to the U.S. Trade Deficit Review Commission in 1999. A frequent keynote speaker, Professor Thurow customizes presentations regarding competitive threats and strategies for specific audiences.

Few economists think bigger picture than Lester Thurow, the Lemelson professor of management and economics at MIT. Thurow is a prominent economist, futurist and change agent. His latest book, "Fortune Favors the Bold," argues that globalization can bring prosperity if shaped properly. Real Estate Portfolio recently asked Thurow to share his thoughts on the burgeoning global financial markets and how the real estate industry fits into this new economy.

Portfolio: You wrote in 1987 that communications and computer technologies have created a world capital market for the first time in human history. How is the world a different place now that capital can move so quickly from one country or region to another in search of the highest return?
Thurow: If you're a poor, attractive country like China, you have no problem getting capital. It used to be that firms in the U.S. thought they could simply add more capital per worker to offset the higher wages they had to pay to U.S. workers. But now China has the same access to capital and technology as the U.S. So it's now possible for Chinese workers to have the same productivity.

The important thing about capital is that it brings technology with it, especially when the capital flows as FDI [foreign direct investment] where investors participate in running the operation. China gets three-fourths of the FDI in the Third World. Firms there are able to compete with companies in the U.S., Europe and Japan. I've made three trips outside the U.S. recently and the only topic of conversation is how things are moving to China. The wage differential is real. You can get a good, smart high school graduate outside of Shanghai for 28 cents an hour.

Portfolio: IBM announced it was adding 6,000 jobs earlier this year, but most of them were in India. Does globalization mean that we will all end up making 28 cents an hour?
Thurow: There's a little bit of truth to that. In a perfectly functioning global economy, you get what economists call "factor price equalization"—theoretically, the same wage should be paid relative to education all over the world. Living in a rich or poor country doesn't affect individual wages. I'm not saying that globalization will push U.S. wages down to the levels in India or China, but it is placing downward pressure on U.S. wages, no question.

Portfolio: Your book warns that a rapidly falling U.S. dollar as a result of a growing trade deficit is one of the most significant potential threats to the global financial system. Are you more or less concerned about it now than when your book was published in October 2003?
Thurow: A fall is more likely now than in October 2003. People look at a move in the Euro from 85 cents up to $1.27 and say the dollar is falling. But they forget that the Euro started at $1.17. A move from $1.17 to $1.27 is less than 10 percent. So by those numbers, you could not say that the dollar is definitely falling.

Portfolio: What would a run on the U.S. dollar look like?
Thurow: The problem is that the world has never seen a slow fall. The first person to move their assets away from dollars wins and the last loses. Capitalists don't sit around waiting. At some point, they panic and all head to the door—there's a herd mentality in capitalism. The collapse of the dot.coms only took six weeks. A soft landing is impossible unless you believe capitalists are stupid.

But economists are horrible on timing these things. Economists and G-7 countries have been warning the U.S. about its growing trade deficit and the danger of a falling dollar for 20 years. The assets we have make the timing uncertain. Mexico borrowed from big banks and there was a crisis when the loans could not be repaid. But the U.S. doesn't borrow in the same way. We sell assets—Chrysler to Mercedes, Rockefeller Center to the Japanese—to pay for the trade deficit.

There's now a $2 trillion differential between foreign assets in the U.S. and U.S. assets in foreign countries. We have $30 trillion in assets left, but we make new stuff all the time. So I can't tell you when the dollar will fall, but I can tell you that it will probably be a hard landing when it does happen. No country can run a trade deficit forever.

Portfolio: Your book also says that deflation in the U.S. is another potential danger that the global financial system faces. Why would deflation in America be such a threat to the global system and are you still concerned about domestic deflation even though most other observers seem to have stopped worrying?
Thurow: Deflation in Japan has spread to other countries like Hong Kong and Singapore. Inflation in Germany is supposedly zero, but if you look where the government doesn't control prices, the rate is negative. In the U.S., the GDP deflator rose 1.7 percent in 2003, but 1.5 percent was health care which has its own dynamic. The U.S. is pretty close to zero inflation otherwise. Central banks and economists consider 2 percent to be the optimal rate of inflation.

We have convinced ourselves that deflation is less of a threat now, but there's no evidence of that. You can see deflation in the real estate industry. Property values are falling in many parts of the world. In Boston, where I live, office buildings have fallen in value—that's deflation.

In my neighborhood, parking garage spaces that used to sell for $60,000 now go for $45,000. How widespread all of this is, I don't know, but when deflation hits, it tends to hit real estate harder than other industries.

Portfolio: In your book, you state that globalization is inevitable but do not address the real estate industry directly. What are the implications of globalization for the real estate industry and REITs in particular?
Thurow: Real estate takes a lot of local knowledge. Globalization first showed up in the capital markets and then in durable goods manufacturing. There is some cross-border investment in real estate now, but it will be relatively slow in developing.

Portfolio: You often advise corporate leaders. What should REIT executives do in an era of globalization?
Thurow: I talk in my book about appointing a chief knowledge officer. This is someone who keeps on top of technological and economic trends and advises the company where demand is going to expand or contract.

If music is increasingly being sold online, you want to know that your record store tenants are more likely to close up shop. Technology also affects how you construct buildings in terms of what kind of communications technology a building should have. If white-collar outsourcing really catches on, there might be less demand for office space in the U.S. but higher demand in India. Which industries are growing, maturing or declining?

Real estate companies should have a chief knowledge officer to keep track of all this. The CEO is too busy to do it.

Portfolio: Your book describes a general cycle of optimism, overinvestment and recession that has certainly been at work in the real estate industry throughout much of its history. How does a firm in an industry prone to this cycle deal with it?
Thurow: You don't have any choice but to ride the wave. You can't predict the ups and downs. You say you won't make the same mistakes again, but you always do. You have to make that marginal investment or your market share will go down if the recession doesn't arrive when you expect it.

In agriculture, the corn-hog cycle has been discussed for 200 years, but individual farmers still have to deal with it. Capitalism has good and bad characteristics. One bad thing is that it's unstable—it goes in cycles and there's nothing you can do about it. Unless, of course, you adopt a completely different system, like socialism, which has no boom-bust cycles but lots of other problems.

Portfolio: You have written a very optimistic book. You believe it is possible to build a new and lasting prosperity for much of the world through globalization. What is the source of your optimism?
Thurow: Part of it is the analysis in the book and part of it is what's already happened. The biggest beneficiary of globalization has been mainland China. The rest of the world should have a big smile on its face. China is growing because of capital and technology from abroad and access to world markets. That's one-fifth of humanity.

Sub-Saharan Africa, on the other hand, is a different story. It's not that globalization is crushing that region: the opposite is true. Sub-Saharan Africa remains poor because it is electing not to participate in globalization. If we do nothing, globalization will probably end up being a net benefit. If people can make some relatively minor changes—handling bankruptcies the way the U.S. did in the savings and loan crisis instead of the way Japan does now, for example—then the positive aspects of globalization can be made much bigger and the negative aspects much smaller. But one thing is for sure, if you stay out, you will get poor. Globalization is the route to success, as China shows.