Jul 29th 2013

The West’s unfounded defeatism

I read an article recently that made me wonder once again whether the negative outlook on the future of the West, often expressed in the United States and Europe, is justified.

In America, people seem to believe that the country’s best days are over. Washington is considered to be broke beyond repair. Europe, of course, is in everybody’s mind old, uncompetitive and deeply in debt. The economic activity in the world is increasingly moving to the East. China will be the world’s biggest economy, if it is not already. China’s example is followed by India, and other emerging countries. This century will be the century of Asia. This makes one wonder if democracy is after all a good way of running a country. Can efficient bureaucrats manage a country better -- as seems to be the case in China?

The demise of the Rest

The article mentioned above was written by Ruchir Sharma, the head of Emerging Markets and Global Macro at Morgan Stanley. The article appeared in the November/ December 2012 issue of Foreign Affairs.

Sharma writes that the per capita income gap between the advanced and the developing economies, in fact, steadily widened from 1950 until 2000! The past decade was exceptional. There was a lot of easy money around, which lifted every country and gave the wrong impression that the rest, i.e. countries other than the Western countries and Japan, would be catching up with the West. Sharma claims the next decade will bring us back to normal and concludes:

“Although some nations will break away from poverty the new economic order will probably look more like the old one than most observers predict…..The rest may continue to rise, but they will rise more slowly and unevenly than many experts are anticipating. And precious few will ever reach the income levels of the developed world.”    

There is, of course, one very big exception i.e. China, but Sharma is not optimistic about it either:

“In the next decade to come, the United States, Europe, and Japan are likely to grow slowly. Their sluggishness, however, will look less worrisome compared with the even bigger story in the global economy, which will be the three to four percent slowdown in China…and possibly even deeper slowdown in store.”

According to Sharma, China is running out of surplus labor, while over 50 percent already live in cities, and because of the one child policy, China’s economy is maturing, making growth more difficult.

Sharma’s views are certainly not shared by the public in the West. Sharma himself writes that over 50 percent of Americans think that the Chinese economy is already bigger than that of the U.S., even though the U.S. economy is still more than twice the size of the Chinese economy and seven times higher in terms of income per capita.

Sharma:

“In due time, the sense of many Americans today that Asian juggernauts are swiftly overtaking the U.S. economy will be remembered as the country’s periodic bouts of paranoia…”

China and why nations succeed or fail

The authors of the book “Why Nations Fail”, Daron Acemoglu and James Robinson, arrive at similar conclusions about China, but from a different perspective. In their article “Will China rule the world?” posted on Facts & Arts on March 23, 2012 they start with the following:   

“….[It] is hardly the first time observers have been swept up in the growth potential of a communist state….. Nobel Prize winner Paul Samuelson's introductory economics textbook predicted in its 1961 edition that the Soviet national income would overtake that of the United States by 1997. In the 1980 edition there was little change in the analysis, though the overtaking was delayed to 2012.”

In their research Acemoglu and Robinson have come to the conclusion that it is a nation’s institutions that determine its success, not culture, religion, geography, weather or anything else. An example is South and North Korea. They are otherwise the same, but with very different institutions. One of them has become rich the other is utterly poor. The same applied to West and East Germany.

About China Acemoglu and Robinson write in the above mentioned article: 

“Our research on national economies throughout world history shows that long-term economic growth, while indeed based on technological innovation, only sustains itself in the presence of democratic political institutions that provide people with incentives to innovate. China may continue to grow in the near term, but the limited rights it affords its citizens places major restrictions on the country's longer-term possibilities for prosperity.”

“There will be limits on how much innovation such a system can generate, even if China keeps growing this decade. For all its changes, China still has what we term "extractive" political institutions, those that direct resources away from the people and toward the state and a small number of its elites. History is littered with states that have had some democratic or "inclusive" features, but remained essentially extractive: from ancient Rome to early-modern Venice to many authoritarian nations within the last century, these states have ultimately failed to deliver sustained growth.”

“By their nature, extractive states are against the kind of innovation that leads to widespread prosperity: this kind of change threatens the hold on political and economic power that elites in such states fight to maintain. And fight they will…”

The development of a mature economy requires that new replace the old. As for instance, the development of IT has led to the partial destruction of print media, and accordingly paper manufacturing industry, a process called ‘creative destruction’ a concept first coined by the Austrian economist Joseph Schumpeter. According to Acemoglu and Robinson, a democracy allows this process, but the elite of a centrally managed country does not. For instance, still in the 80’s the dominant companies in the U.S. were the car manufacturers General Motors, Ford and Chrysler. Today completely new companies have taken their place, such as Microsoft, Apple and Google. The democratic America not only allows the redistribution of economic power for the benefit of the economy as a whole, but in fact it has no institutions that could stop the process. China has. The party conference of the Chinese communist party is said to be the biggest gathering of billionaires in the world. They have the interest and the means to stop creative destruction if needed to protect their assets.

If this is true then the countries that have a tradition of democratic governess have a better ability to renew themselves in the changing world. Most counties are not democracies and it is difficult to implement democracy if there is no tradition for it.

China has no democratic tradition and has no intention of implementing it. Its state philosophy, Confucianism, is a philosophy for good governance by the elite bureaucracy. After Mao’s horrific rule that killed tens of millions of Chinese and kept the country poor, China adapted Western type of market economy, first in a small scale, then more fully. The results of the policy have been very good indeed, but it would not have been possible had not the rich U.S. allowed the imports of Chinese goods, a policy that much harmed the American manufacturing industry and its workers, but has probably helped the U.S. economy to develop yet onto another level of sophistication. Now China must find the growth from within itself. Whether it can adapt to a new situation remains to be seen.

Europe

Democracy, of course, is originally a European concept, more specifically Greece. In modern times democracy was developed in England at a time of the industrial revolution. Nascent democracy together with property rights were a prerequisite for the industrial revolution to emerge, according to Acemoglu and Robinson. It led to England to become a world power. The democratic principles were adapted by most European countries. After the Second World War democracy in Europe was secured by the U.S., even forced upon to then Western Germany. After the dissolution of Soviet Union, its European satellite states adopted democracy and joined the European Union consisting of democratically run states. The borders after the Second World War were effectively redrawn without a shot and even without a peace agreement. Democracy had won.

Today Europe is rich. Within Europe the countries with the most decentralized economic institutions, like Switzerland and Germany, seem to be fairing best. The countries experiencing economic difficulties at the very moment were, in fact, dictatorships fairly recently, namely Portugal, Spain, Greece, even Italy. The very Paris-centred France, although democratic, is increasingly having difficulties.

Europe produces some of the finest products in the world, like world’s largest airliner the Airbus 380, the world’s finest cars, finest fashion ware, it has the worlds most international banking and insurance hub in London, it has the world’s finest tourist attractions. Europe’s has traditions, yes, but its production facilities are far from being out of date.

Even the euro zone debt crisis is a misnomer. During its existence the balance of payments of the zone as a whole has been more or less zero during its existence, i.e. the euro zone has not indebted itself at all. The euro-zone states that have a debt problem are mostly in debt to their own citizens or to other Europeans, especially to German and French banks, as is Luigi Zingales writes in his article “German Banks on Top” posted on Facts & Arts on July 17, 2013. Instead of using the term “Debt problem” one could equally well say that Europe has a “Receivables problem”.

Japan

After the Second World War the United States forced democracy and market economy upon Japan. By the 1970’s Japan was a miracle economy. It was thought, at least in the West, to be heading to a level larger than the U.S. economy. It did not, but today Japan is, however, one of the richest countries in the world. It has been able to transform its economy from a low-cost producer of relatively simple products to a producer of most sophisticated products that are sold throughout the world. It is a democracy with well-established human rights.

Japan is now able to provide its citizens a frame for a good life that would have been completely unimaginable in the past. This does not only refer to the material living standards, but also to the security and rights of the individual such as equality in front of the law, right for education, right for medical care, property rights, right to participate equally with all others in the process of choosing a government, freedom of speech, freedom of movement etc. - all originally basically Western values based on the individual rather than a group of individuals such as a family or a clan.

The Japanese economy has, however, been stagnant for more than a decade expressed in terms of the growth of the GNP. The GNP might tough be a wrong measurement. The Japanese population is ageing and decreasing. The Japanese are doing quite well when measured in terms of growth of income per capita.

The Japanese government has very high debts, circa 2.5 times more than its yearly GNP. However that debt is to the Japanese themselves. Japan has had for many decades a surplus in its balance of payments, in other words it has accumulated receivables from the rest of the world.  

Russia

It is not easy for a country to install democracy if the country has no tradition for it.

Still in the early 1980’s the leaders of the Soviet Union believed it would take over the Western Europe in not too distance future. It did not happen either. Instead the next generation of Soviet leaders was forced to throw in the towel. They knew that their economy was no match to the Western democracies.  Soviet Union ceased to exist; its main successor state, Russia, adapted, or at first seemed to intend to adapt, a Western type of market economy and democracy. Its economy started to grow, though much enhanced by the fact that oil price went from $ 20 per barrel to higher than $ 100 due to demand in West and gradually from China. Its democracy has become increasingly managed from the Kremlin, ownership of the privatized production apparatus has been concentrated to a few individuals with close ties to the Kremlin, and its legal system is not independent from the Kremlin. It is, as if Russia is falling back to a system that is reminiscent to the rule of the communists and the tsars.

Russian economy has largely remained as a supplier of raw materials to more sophisticated economies. Its growth has stagnated in spite of the fact that the price of oil has remained high. The more the power in the country is concentrated to the elite in or around the Kremlin the more stagnant Russian’s economy is likely to be.

Islam and democracy

There are of course also countries that have no intention to implementing democracy. A large group of them are countries where the dominant religion is Islam. 

Tony Blair, the former prime minister of the U.K. writes in an article posted on June 11, 2013 Facts & Arts:    

“There is not a problem with Islam. For those of us who have studied it, there is no doubt about its true and peaceful nature. There is not a problem with Muslims in general…” 

 “But there is a problem within Islam, and we have to put it on the table and be honest about it. There are, of course, Christian extremists and Jewish, Buddhist, and Hindu ones. But I am afraid that the problematic strain within Islam is not the province of a few extremists. It has at its heart a view of religion – and of the relationship between religion and politics – that is not compatible with pluralistic, liberal, open-minded societies. At the extreme end of the spectrum are terrorists, but the worldview goes deeper and wider than it is comfortable for us to admit.”

If so these countries are likely to remain poor. There are, of course, some very rich countries that have Islam as a state religion. Say for instance Dubai that has become rich due to its oil and gas reserves. But it is the West that has primarily made oil valuable. The modern Dubai has been largely built under Western management with Asian labor. How sustainable is such an economy?  The West even might, in due course, make oil redundant with new innovations.

Israel

Israel is a democracy. Its economy has developed magnificently, even taking into account the financial help it has received from the U.S. It is called a start-up nation. But this applies only for the Jews. Ben Gurion once said that Israel can consist of greater Israel, be Jewish and democratic, but not all three at the same time. Today approximately half of the people who live in Israel proper, West Bank and in Gaza are Palestinians, who are outside of the democratic process and remain poor. This might be an unsolvable problem. Settlement movement might have gone too far to allow a two state solution. The demographic trends are on the side of the Palestinian population.

Summary

The negative outlook that exists both in the U.S. and in Europe seems for me to be unfounded. We seem to be too aware of our own problems, not realizing that others have theirs. Few of us have the ability to eye our present with a longer time perspective both in regards to the past as well as to the future.

Should the U.S. and Europe be able to agree upon a free trade pact the West would most probably continue to set the standards for the rest of the world for a long time to come. This is probably the main reason why the negotiations are held, even though they are marketed mainly as a tool to enhance growth in the U.S. and in Europe.

Related articles on Facts & Arts:

First evidence supports Sharma’s prediction. Nouriel Roubini writes in his article “Trouble in Emerging-Market Paradise” posted on Facts & Arts on July 23, 2013:

“Brazil’s GDP grew by only 1% last year, and may not grow by more than 2% this year, with its potential growth barely above 3%. Russia’s economy may grow by barely 2% this year, with potential growth also at around 3%, despite oil prices being around $100 a barrel. India had a couple of years of strong growth recently (11.2% in 2010 and 7.7% in 2011) but slowed to 4% in 2012. China’s economy grew by 10% per year for the last three decades, but slowed to 7.8% last year and risks a hard landing.”

Acemoglu and Robinson write about “The problem with U.S. Inequality” posted on Facts & Arts on March 23, 2012. Quote:

“Almost a quarter of total U.S. national income now accrues to the richest 1 percent of the population…..….the real reason to worry about this picture is not the unfairness of it all. Any discussion of inequality should distinguish economic inequality from inequality of opportunity and from political inequality.  …….The problem is that economic inequality often comes bundled with inequality of opportunity and political inequality.

Prosperity depends on innovation, and we waste our innovative potential if we do not provide a level playing field for all: we don't know where the next Microsoft, Google, or Facebook will come from, and if the person who will make this happen goes to a failing school and cannot get into a good university, the chances that it will become a reality are much diminished. There is a lot to worry about here.”







Browse articles by author

More Current Affairs

Jan 21st 2022
EXTRACTS: "The fear is that Moscow is backing itself into a diplomatic corner where the use of force is its only way to remain credible." ----- "The Ukrainian population has also been mobilizing in support of the troops since the seizure of Crimea and the war in Donbas. And according to a poll taken in December 2021 by the Kyiv International Institute of Sociology, 58% of Ukrainian men and almost 13% of women declared that they are ready to take up arms. A further 17% and 25% more said they would resist through other means. In what would be a classic case of asymmetrical warfare, resistance from Ukraine’s population could therefore prove a serious thorn in Moscow’s side."
Jan 12th 2022
EXTRACTS: "While at the time of writing, the outcome of Djokovic’s visa troubles was uncertain, the double standard of rules raises a much bigger question about the philosophy of law: can the application of a rule be so unfair that we have no valid reason to follow it?" ------ "......a rule that doesn’t treat like cases alike can’t be a law at all. This is because a key requirement of a legal system is that it needs to be stable, which means that people need to know what the law is and when it applies. If a rule doesn’t treat everyone equally, then it does the opposite and increases doubt and uncertainty about what the law even is. And if enough rules exist that create uncertainty about what the law is and when it applies, the system will collapse. A rule that undermines a legal system in this way can’t really be law at all, and legal officials shouldn’t create or uphold them."
Jan 9th 2022
EXTRACT: "Novak Djokovic, the world’s top-ranking tennis player, has just been granted a medical exemption to take part in the Australian Open. Djokovic, who has won the event nine times (one more victory would give him a record-breaking 21 major titles), refused to show proof of vaccination, which is required to enter Australia. “I will not reveal my status whether I have been vaccinated or not,” he told Blic, a Serbian daily, calling it “a private matter and an inappropriate inquiry.” The family of Dale Weeks, who died last month at the age of 78, would disagree. Weeks was a patient at a small hospital in rural Iowa, being treated for sepsis. The hospital sought to transfer him to a larger hospital where he could have surgery, but a surge in COVID-19 patients, almost all of them unvaccinated, meant that there were no spare beds. It took 15 days for Weeks to obtain a transfer, and by then, it was too late."
Jan 9th 2022
EXTRACT: "The protests that erupted across Kazakhstan on January 2 quickly turned into riots in all of the country’s major cities. What do the protesters want, and what will be the outcome of the country’s most severe civil unrest since independence in 1991? "
Jan 7th 2022
EXTRACT: ".....one wonders how Chinese President Xi Jinping views Russia’s intervention in Kazakhstan, which shares a nearly 1,800-kilometer (1,120-mile) border with China, especially in light of Putin’s earlier comments diminishing the history of Kazakhstan’s independent statehood. (He has shown similar contempt for the independence of Belarus, the Baltic states, and Ukraine.)"
Jan 7th 2022
EXTRACT: "The problem with history as propaganda is not that it makes people feel good or bad, but that it creates perpetual enemies – and thus the perpetual risk of wars."
Jan 5th 2022
EXTRACT: ".....a scenario in which Trump (or one of his allies) is designated president by the House of Representatives after the 2024 election probably belongs in the realm of political-thriller fiction.  Now consider the unlikely event that Trump were nominated and won a clear Electoral College or popular-vote majority in 2024. Rather than establish the white-nationalist dictatorship of progressive nightmares, an elderly second-term Trump would most likely be an even more ineffectual figurehead in a party dominated by conventional Republicans than he was in his first four years. If Italian democracy could survive three terms of Silvio Berlusconi as prime minister, American democracy can survive two terms of Trump. None of this is to suggest that American democracy is not under threat. Populist demagogues like Trump are symptoms of a disease in the body politic. The real threat to American democracy is the disconnect between what the bipartisan US political establishment promises and what it delivers. This problem predates Trump by decades and helps to explain his rise. "
Jan 4th 2022
EXTRACT: "This month, the world’s major central banks shifted gears and announced plans to tighten monetary policy. But there was one notable exception: the European Central Bank, which says it does not intend to raise interest rates in 2022, even though it is well aware of today’s inflation risks." ----- "Does this mean that the ECB is “soft on inflation,” occupying a dovish outlier position among the world’s major central banks? Is Germany’s bestselling tabloid, Bild, justified in bestowing on ECB President Christine Lagarde the mocking sobriquet “Madame Inflation”? No and no.
Dec 21st 2021
EXTRACTS: "By the grim metric of fatalities in the first 10 years of a dictator’s rule, Kim Jong Un has yet to match the records set by his grandfather, Kim Il Sung, or father, Kim Jong Il – the two tyrants who reigned by terror in North Korea before him. For now, the number of people Kim Jong Un has personally ordered killed – such as his uncle in 2013 and half-brother in 2017 – is likely to number in the hundreds." ---- "Concrete numbers of how many have died from starvation and malnourishment-related conditions such as diarrhea and pneumonia under Kim are difficult to come by. But as a scholar of Korean history, I believe the young dictator – who turns 38 next January – has the capacity to surpass even the ghastly death tolls of his two familial predecessors."
Dec 19th 2021
EXTRACTS: "But have enough Conservative backbenchers reached the conclusion that Johnson should be removed as party leader? There is a historical precedent which throws light on the present situation. This was when Margaret Thatcher was sacked as leader of her party – and consequently lost her job as prime minister – in 1990. She had a loyal following in the party and had won three elections in a row, but even that couldn’t save her when polling showed that the Conservatives were heading for a serious defeat under her leadership. ---- "That said, if Thatcher’s experience is anything to go by, at present the Conservatives are not going to sack Johnson. It took 18 months of seriously deteriorating polling for a revolt over Thatcher’s leadership to finally succeed – and she almost survived the leadership challenge. The present hope among Conservative backbenchers will be that the party can recover next year."
Dec 11th 2021
EXTRACT: "Although Johnson has a well-deserved reputation for maintaining an arm’s-length relationship with the truth, many voters seem to have priced this in to how they perceive him. Moreover, Conservative Party insiders, and those who previously worked with Johnson in journalism (his career before politics), have always known that he was unlikely to follow any rules that did not suit him. This rather large personal failing was apparent even in his boyhood, as a remarkably prescient school report by his Eton College housemaster noted. “I think,” Johnson’s teacher wrote, “he honestly believes that it is churlish of us not to regard him as an exception, one who should be free of the network of obligation which binds everyone else.” "
Dec 8th 2021
EXTRACT: "This puts US Democrats in a difficult position. What is a political party to do when the other main party has been taken over by self-appointed holy warriors? To treat them as a loyal opposition worthy of engagement in a spirit of compromise and respect becomes almost impossible. Democrats like Hillary Clinton, Barrack Obama, and Joe Biden have sometimes been criticized by their own supporters for not fighting dirty and giving Republican fanatics a dose of their own foul medicine.  That would be a mistake. All legal means should be used to stop extremists from wrecking democratic institutions, but those institutions won’t survive if all parties turn politics into a matter of life and death. In a quasi-religious war, the far right will almost certainly win; they have more fanatics and, in the US, many more guns."
Dec 4th 2021
EXTRACT: "In contrast to the index for consumer goods, which measures only the prices of final products, industrial producer prices capture all intermediate stages of production. They therefore have a certain prognostic significance for consumer prices, even though the final products won’t show such extreme spikes. ----- These new inflation figures are so extreme that the ECB’s position looks like willful denial. Germany is currently experiencing the strongest inflation in a lifetime. And the situation is not much better in other European countries. In September, France reported an 11.6% annual increase in industrial producer prices, and that figure stood at 15.6% in Italy, 18.1% in Finland, 21.4% in the Netherlands, and 23.6% in Spain."
Nov 30th 2021
EXTRACT: "So it could well be that, despite the faster spread of the infection, its ultimate health, social and economic impact proves negligible. We simply do not know at this point. But detecting more uncertainty than before, financial markets have reacted with panic. For example, the S&P500 tumbled 2.3% on Friday November 26 only to rise 1.1% on Monday November 29. Most markets gave up between 2% and 4%, which is a pretty substantial one-day fall."
Nov 28th 2021
EXTRACT: "Momentous changes are casting a long shadow on China. The country’s political system will soon undergo a profound reform, pending final approval (a quasi-formality) at next year’s congress of the Communist Party of China (CPC). President Xi Jinping, the Party chairman and the “navigator” of the country, has decided on a new course, abandoning the principle of collective leadership. Xi is leading China away from the path taken by Deng Xiaoping after the terror of the Cultural Revolution, and back toward a system of absolute rule by one person without term limits, as under Mao Zedong."
Nov 25th 2021
EXTRACTS: "”The biggest disappointment in Glasgow was the last-minute watering down of the proposed (and widely supported) agreement to “phase out” the use of coal in energy production. With India providing political cover for China in vetoing this language, the final conference proposal was to “phase down” coal”. ---- “China accounts for more than half of the world’s coal consumption, and has the largest amount of coal-fired generating capacity under construction. Pressed about why his country would not do more in Glasgow to help save the planet, China’s chief negotiator pointed to the commitments in the Communist Party of China’s current Five-Year Plan. So, our future now depends on the CPC’s program. The tragedy for the world is that the Party cannot be phased down, much less phased out, despite the fact that it is a huge threat to the future of all of us.” ------ “To save the planet, robust democratic leadership must be phased up – not phased down, let alone phased out. Rather than merely keeping our fingers crossed and hoping for the best, we should start by calling out the appalling behavior of dictatorships such as China and Russia.”
Nov 22nd 2021
EXTRACT: "The transitory inflation debate in the United States is over. The upsurge in US inflation has turned into something far worse than the Federal Reserve expected. Perpetually optimistic financial markets are taking this largely in stride. The Fed is widely presumed to have both the wisdom and the firepower to keep underlying inflation in check. That remains to be seen."
Nov 14th 2021
EXTRACT: "S&P projects that companies are planning to install 44 gigawatts of new solar in 2022. The year 2020, despite the onset of the pandemic, saw a record-breaking 19 gigawatts of new solar capacity installed in the U.S. So given the bids out there already, it appears that in 2022 solar installers will more than double their best year ever so far. The U.S. currently has 100 gigawatts of solar electricity-generating capacity, so in just one year we are poised to add nearly 50% of our current total. A gigawatt of power can provide electricity to about 750,000 homes. So the 44 new gigawatts we’ll put in next year have a nameplate capacity that would under ideal conditions allow them to power 33 million homes." ----- "Not only is there a lot of good news on the green energy front but there is good news in the bad news for fossil fuels. S&P finds that coal plants are being retired way before the utilities had expected. Some 29 gigawatts of coal retirements are expected from 2020 through 2025. "
Nov 3rd 2021
EXTRACT: "Zemmour’s way of thinking stems from a tradition going back to the French Revolution of 1789. Catholic conservatives and right-wing intellectuals, who hated the secular republic that emerged from the revolution, have long fulminated against liberals, cosmopolitans, immigrants, and other enemies of their idea of a society based on ethnic purity, obedience to the church, and family values. They were almost invariably anti-Semitic. When Jewish army Captain Alfred Dreyfus was falsely accused of betraying his country in the notorious scandal of the 1890s, they were on the side of Dreyfus’s accusers. ---- Germany’s invasion of France in 1940 gave reactionaries of this kind the chance to form a French puppet-government in Vichy. Zemmour has had kind things to say about the Vichy regime. He also has expressed some doubt about the innocence of Dreyfus. ---- None of these views would be surprising if they came from a far-right agitator like Jean-Marie Le Pen. But Zemmour is the son of Sephardic Jewish immigrants from Algeria who lived among the Muslim Berbers."
Oct 27th 2021
EXTRACT: "performed strongly in last month’s parliamentary and regional elections. Officially, Communist Party candidates took 18.9% of the popular vote for the State Duma (parliament), compared to nearly 49.8% for the Kremlin’s United Russia party. But the Communists refused to recognize the results, insisting that the vote was rigged. And, indeed, some experts estimate that they should have gotten around 30% of the vote, with United Russia taking about 35%."