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Why the West is flailing

China and India are set to eclipse the western powers, and the fault lies in our own political and economic expediency, argues economist Dambisa Moyo.

Dambisa Moyo gave the foreign aid community fits with her first book, Dead Aid, which argued that the billions of dollars in development money wealthy countries send to developing African nations fail to reduce poverty or increase economic growth. In her new book, How the West Was Lost, she expands that critique, treating the housing bubble at the root of the recent financial crisis as just one instance of what’s been 50 years of misguided policy by the West, particularly the United States. As a result, the underlying promise of globalization — rising incomes for all — has failed to materialize, and the West finds itself in decline, being rapidly overtaken by the more agile and focused economies of China and India.

While she doesn’t say that all is lost, the Oxford-educated economist who worked at Goldman Sachs does believe the U.S. will have to fight back very hard if it is to stay on top. That will require making difficult decisions, and thinking about the long term, in a democratic environment that rewards easy choices and short-term thinking. She spoke with features editor Andrew Potter.

Canadian Business: At the start of your book, you say that the decline of the West is the story of the misallocation of resources that drive growth capital, labour and technology. At first, it sounds like you’re talking about a fairly recent problem of poor financial regulation and incentives, especially with respect to housing. But as the book goes on, you seem to be arguing that the problem is with the whole system of democratic capitalism that has built the western welfare state. Is that what you think is the root of the crisis?

Dambiso Moyo: Yes and no. I’m absolutely a supporter of democratic processes. But the democratic process with very short election cycles means an environment where policy-makers are driven to put in bad policies in the short term. You end up with not enough time to deal with the structural, long-term issues.

It’s not that the financial crisis per se is the end of the West, but rather that it is the most recent step down in what has been a catalogue of errors. If you had a longer democratic cycle — like in Brazil, where a term lasts seven years — it would be easier for the government to identify problems and put in place more structural solutions without having to face the electorate. I give the example of China because everyone is focused on it, but I am absolutely not saying get rid of democracy and move to communism. Rather, there are lots of things a government can do without having to change the political system from democratic to non-democratic. One example is Brazil; another is to implement more rewards — creating incentives for people to actually do the right thing.

Take an extreme example: we know obesity is a big issue, but we don’t want to infringe on individual rights, so maybe a government rewards people for losing weight. Or in education, you reward children for studying math or science instead of social sciences. Incentives have been eroded. And that doesn’t require becoming autocratic — just the current democratic cycle has to be de-politicized. Obama tried to do that by setting up the National Commission on Fiscal Responsibility and Reform, a bipartisan group to focus on health-care, information, infrastructure. But you have to strip the politics out of it.

CB: You move back and forth between worries about the relative decline of the West and concern that we are headed for an absolute decline in our living standards. I get the sense you think that a relative decline, with China and India catching up, is in itself a bad thing.

DM: Ultimately, the world is a better place if we can float more boats. Having India, China, Brazil, South Africa all growing is good news for humanity. But when you look at the way the world is right now, based on capital, labour and productivity, China and India are going to keep growing faster than the U.S. and Europe. What we don’t know — and this is why it’s so crucial for the West to get it right — is whether [those emerging economies] will start to approach the per capita incomes of the U.S. and Europe. And the reason we don’t know that is because there are binding constraints on the availability of water, energy, arable land and minerals around the world.

The way we are going to get around these constraints is to find innovative solutions. We’re going to have nine billion people on the planet in 40 years, many of them in China and India, who are going to demand higher incomes and living standards. In order to cater to those people, the West needs to be absolutely focused on innovative solutions. I believe the U.S. and Europe could find solutions to the constraints around energy if they put their minds to it. Unfortunately, that is not what policy minds in the United States are rewarded for.

If we don’t do anything, it is a zero-sum game. And that is precisely why the Chinese have played this game brilliantly. They’ve largely hedged themselves. They are the largest trading partner of Brazil and Chile and the Australians. And they have made friends around the world in resource states, almost in anticipation of a situation where there are no innovative gains to satisfy the demands of nine billion people.

CB: The story of the decline of the U.S. has been told before — the big threat 20 years ago was Japan. While you concede that China has some internal threats, how confident are you that the Chinese are going to solve their problems and continue to challenge the West?

DM: Well, the jury is still out. But if you are asking if the Chinese are focused on their issues, the answer is yes. And that is something we are not. We have to stop looking at China and think instead of what we are doing with our own policies. Think of it this way: people talk about China converging on our standards, but it is as much that as it is the West declining to Chinese standards. And that decline has to do with allowing infrastructure to deteriorate, while education — so critical to competitiveness and innovation — is wasting away. If the West would just focus on its own problems, it wouldn’t have to worry about China.

Of course, China has some serious structural problems — a billion people who have now seen the good life, 300 million living like westerners. China has to figure out where they’re going to get their resources. They’re trying to educate their populace, urbanize, build infrastructure. It’s possible that China could blow up. But I’m pretty sanguine that China has already seen the problems and is dealing with them.

CB: Is this only about what countries can do, or can individual corporations do something, at the strategic level, to meet these challenges?

DM: It boils down to policies, and part of the policy element is incentives. The success of the West largely stems from governments providing the correct incentives to drive innovation, infrastructure and other feats we accomplished over the past 500 years. But over the past 50 years, there has been a predilection to implement policies that actually erode the essence of western society. How do they do that? They create policies that discourage people from doing the things that westerners need.

So, if you ask, “What is China doing right?” it’s that they copied the West in building up a society of incentives. As to what CEOs should do, they need to help governments understand that the policy environment, the conditions under which we — households, businesses, individuals — decide what our actions will be, needs to incentivize people to do the right thing.

CB: At the end of the book, you run through a number of scenarios that lay out how things may play out: the status quo, China faltering, America fighting back, America going ultra-protectionist. If you’re an investor, where are you putting your money? Which scenario are you betting on?

DM: You know what? I do believe in America. If I had to do a value trade, America versus Europe, I’d bet on America. That is why I wrote this book. For me, there are only two possible reasons why policy-makers have not jumped up and said, “We’re prioritizing health care, or education, these big issues.” One is that people really don’t care about the future. They look at their lives and they think, “I’m only here for a short time. My kids? Too bad, you’re going to have to sort things out for yourselves.” But are we as humans connected intergenerationally? Do we care about the planet we are leaving our kids? I think we do.

The other problem is that policy-makers have assumed people don’t care about these issues. They therefore have not tried to explain the reality of the world. Is it because they think we’re stupid? I hope governments don’t think that. But they have chosen not to educate the population on what it should be doing. How do I know that? Because within six months of the financial crisis being tamed — and we weren’t even out of it yet — I was getting e-mails asking me if I wanted to borrow more money.

Governments have lost out on a great opportunity to shift people’s mindsets — to say, “Your kids are uneducated, your infrastructure is dilapidated, so let’s focus on these issues.” I believe there will come a point when people will read my book or other material and say, “Oh my god! I didn’t realize that 23% of school leavers can’t add 50 plus 2 in their heads. That’s pathetic.” If that happens, then I think America could fight back. If the others are right in believing that people understand the situation fine and they simply don’t care about their children, well, then the Chinese will have the lead. But I’m optimistic that it’s not too late for the West.