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Monday, January 17, 2011

How the West Lost-by Dambisa Moyo: reviewed by Paul Collier

By the end of this century, most of the world will be developed: the era of western exceptionalism will be over. How the West Was Lost is a dyspeptic account of what this might imply.

The rosy scenario that most economists would suggest (if they dared to tackle such a large issue) would be that the convergence of the emerging market economies on the west is mutually beneficial: we can all prosper together. Dambisa Moyo, author of the bestselling Dead Aid, is having none of this. She argues that the west has become mired in complacency: each of the drivers of growth – capital accumulation, skill accumulation, and technical innovation – have stalled, and there is no political will to salvage the situation. The market for capital has failed in its core task of finding investment opportunities that offer good returns at acceptable risk.

Moyo is a former employee of Goldman Sachs, and her diagnosis of the recent disasters in financial markets is succinct and sophisticated: "Debt claimants failed in their fiduciary duty to police the equity holders because they were hedged by public policy." Not only did the prospect of bailouts generate moral hazard, but the generous subsidies for home ownership diverted investment into housing, squeezing more productive alternative uses such as infrastructure and innovation.

Above all, in the west, both households and governments got into debt to finance consumption at levels that will prove unsustainable: in contrast, China, both people and government, has been saving at rates without historical precedent. As to skills, Moyo sees complacency in government in the face of declining schooling standards relative to those in the emerging societies.

Among parents she sees folly as they collude in their children's fantasies of becoming sporting or entertainment celebrities rather than getting down to the hard grind of learning how to be productive: in east Asia children spend many more hours doing schoolwork than they do in the west. In the face of these daunting challenges, she sees public policy in the west hamstrung by an obsession with individual rights and a reluctance to face reality. In a telling example from 2009, she contrasts the decisive Chinese response to an outbreak of pneumonic plague with the spineless British response to swine flu. The Chinese government instantly sealed off the affected city and placed it in quarantine, an action almost inconceivable in the west. In contrast, the British government feared a popular backlash and doled out anti-flu drugs, despite the scientific evidence that not only were they unnecessary, but that profligate distribution would help the virus to mutate.

Moyo sees all this ending in tears. The west will lose out in the scramble for finite resources, and so as "the rest" rise "the west" will decline, not just relatively but absolutely.

China has evolved an economic model in which the government guides development, accumulating capital, investing in state-of-the-art productive infrastructure, encouraging science, and buying up global resources. This may not be efficient, in the sense of maximising living standards at any particular moment, but it is effective in driving them relentlessly upwards.

The other emerging economies see that this is successful. They have no love for the west, and so will follow China both as a model and as a political leader. Meanwhile, the west, and in particular the US, is stuck with an excessive faith in market mechanisms, combined with a political system that will push it increasingly into the most dysfunctional aspects of social welfare: dependency of the poor on government handouts, financed by public debt.

Her proposed solution for the US is as radical as is her diagnosis: trade protectionism and debt default. She argues that were America to retreat into autarky and default it would fare much better than the devastation it would impose on China as an exporter and creditor. Moyo is not, I think, seriously advocating these policies; rather, her point is that as a credible threat they would improve American bargaining power vis-a-vis China.

What are we to make of the Moyo thesis? Inevitably, in a short book of such a sweeping nature, there are many hostages to critics. I will let these pass. I do not share Moyo's pessimism, but I applaud her brave alarum against our economic and social complacency: her core concerns are sufficiently close to painful truths to warrant our attention.

She is right that the rise of "the rest" will widen inequalities within the west: it has already. To respond effectively, governments need to reskill our population, combining carrots and sticks so as to get everyone into productive work. She is also right that the psychological shock as the west realises that it is no longer top dog could lead to demoralisation. Britain pioneered western disillusion: famously, having lost an empire, we floundered for two decades struggling to "find a role".

Americans are in for an analogous shock as other economies become dominant, and as other societies offer higher living standards: if you want to see the future visit Singapore, not New York. The divisive and dysfunctional politics of America may become increasingly reminiscent of Britain in the 1970s. To respond effectively may well require a vision that is both tougher and simpler than the principles of market efficiency that have guided economic policy in recent decades: investment needs to be prioritised over consumption.

The difference in vision is well illustrated by infrastructure. The consensus among western economists is that infrastructure offers only low returns and so substantial investment is not worthwhile. American and British infrastructure policies over recent decades have reflected this consensus. Yet a distinguished minority argues that the conventional approach to the measuring of benefits misses all the strategic gains. In contrast to the lousy infrastructure of the US and Britain, China is building high-speed railways. As a result of our investment parsimony and Chinese investment profligacy, the current generation of westerners can consume at a level far above that of the Chinese. But will our grandchildren congratulate us on being so smart?

Paul Collier is the author of The Plundered Planet: How to Reconcile Prosperity with Nature (Penguin)
Sent from my BlackBerry® smartphone from Zain Kenya

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