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

Jul 19th 2023
EXTRACTS: "Little wonder then that Crimea has been heavily militarised since Russia’s illegal annexation of the peninsula in March 2014 – or that Russian troops there have increasingly been threatened by different anti-Putin partisan groups. These include both Russian volunteers and indigenous Crimean Tatars who have become more active since the start of the Ukrainian counteroffensive."
Jul 19th 2023
EXTRACT: "Prigozhin’s fighters would not have been able to travel almost a thousand kilometers (621 miles) within Russian territory in less than a day without help from members of Putin’s inner circle or the military. Rumors are swirling that the billionaire brothers Yuri and Mikhail Kovalchuk may have played a role. The Kovalchuks, close associates of Putin, reportedly share Prigozhin’s belief that Russia has not been forceful enough in the war or in its broader confrontation with the West. Another possible collaborator is General Sergei Surovikin. Like Prigozhin, Surovikin has reportedly advocated a far more brutal war effort than Defense Minister Sergei Shoigu seems willing to conduct. Since the mutiny, he has not been seen in public, and is said to be “resting.” "
Jul 19th 2023
EXTRACTS:" While Western experts continue to view Russia as a modern state, they overlook the fact that Putin’s cronies, who represent the mingling of the security services – particularly the FSB, the successor to the Soviet-era KGB – and organized crime, control most state functions as their private domains." .... "The existence of multiple private armies will make these power games more destabilizing. As a commentator on RIA Novosti, Russia’s official news agency, put it after documenting the private armies of several oil companies: “[W]e are on the verge of a major increase in corporate and other paramilitary structures, as well as major changes in the very approach to the use of military force.” Against this backdrop, the Russian army has become another gang vying for power and property. But as the Kremlin’s grip on power slips, Russia’s generals will likely organize a putsch against Putin and his KGB/FSB cronies – the army’s historical rival."
Jul 16th 2023
EXTRACTS: "The fuel inside nuclear reactors needs continuous, active cooling for many months after a reactor shutdown" ..... "The world saw in dramatic fashion in Fukushima, Japan, in 2011 what can happen when continuous, active cooling of nuclear reactors is disrupted. More than 70% of the total radioactivity at the Fukushima power plant was in the spent fuel ponds" .... "In his classic 1981 book Nuclear Radiation in Warfare, Nobel Peace Prize-winning physicist Joseph Rotblat documented how 'in a pressurised water reactor, the meltdown of the core could occur within less than one minute after the loss of coolant'. The radioactivity released from damaged spent fuel ponds could be even greater than from a meltdown at the reactor itself, he wrote. His study makes clear that a military attack on a reactor or spent fuel pond could release more radioactivity – and longer-lasting radioactivity – than even a large (megaton range) nuclear weapon."
Jul 6th 2023
EXTRACT: "The closer we get to the endgame, the greater the risk that the Kremlin will resort to some irrational act like ordering the use of a nuclear weapon. Prigozhin’s revolt offers a preview of the chaos that awaits. Almost anything is conceivable now, from the disintegration of the Russian Federation to the rise of another ultra-nationalist regime with neo-czarist dreams of imperial restoration. Like Putin’s Russia, this one would remain locked in the past, far removed from any prospect of social, political, or economic modernization. It would pose a permanent threat to Europe’s eastern flank, and to global stability more broadly. We will have to arm ourselves against it, and our grandchildren and great-grandchildren will most likely have to do the same."
Jun 27th 2023
EXTRACT: "So, who might seize the throne? Two obvious possibilities are Nikolai Patrushev, the secretary of Russia’s Security Council, and his son Dmitry, the minister of agriculture. Another is Prime Minister Mikhail Mishustin, who deliberately appeared on television hard at work during the crisis, while Putin reportedly flew to safety in Valdai, far from the Kremlin. Then there is Dyumin, as well as Moscow’s Mayor Sergei Sobyanin, who controls his own powerful armed force."
Jun 25th 2023
EXTRACT: "......because Prigozhin and his men enjoy the supportof many Russians. For them, Prigozhin is a hero, not a traitor, because he is one of the only public figures who dares to speak the truth about the Kremlin’s incompetent management of the war. And they also see in him a fatherly commander standing up for the soldiers whose lives are being thrown away needlessly by Putin’s clumsy, corrupt generals. People who think this way may well make up a very large part of Russian society. Whether Prigozhin ultimately is imprisoned, executed, or victorious, he will remain an icon for them."
Jun 25th 2023
EXTRACT: "While it might be tempting to conclude that the gut microbes identified as being associated with signs of preclinical Alzheimer’s are also contributing to developing the disease, the study does not provide any evidence of a cause-and-effect relationship. However, if a connection can be established, it opens up an exciting possibility that future treatments for Alzheimer’s might target the microbes in our gut."
Jun 18th 2023
EXTRACT: "When it comes to sustainability, however, US fiscal policy receives a low score. Amid the short-term fluctuations, it is often easy to lose sight of the long-term trajectory. Public debt, as a share of GDP, peaked at the end of World War II and then gradually declined until the Reagan tax cuts of the 1980s, which led to record deficits. Since then, the debt-to-GDP ratio has steadily risen, almost reaching its 1946 record in 2020. Only during the period 1996-2000, under President Bill Clinton, did this trend temporarily reverse."
Jun 14th 2023
EXTRACT: "It is by no means clear that the latest banking crisis has run its course. There are concerns about the so-called shadow banking system, largely unregulated financial institutions that now make up half of all global financial assets. For example, in the US many people invest in money market funds, which pay higher interest than banks, but provide no deposit insurance."
Jun 9th 2023
EXTRACT: "Given the scale of the ECB’s bond holdings, however, its approach to quantitative tightening (QT) seems downright homeopathic. At the current rate, bringing the asset-purchase program to zero will take roughly 15 years (and this does not even account for the fact that the ECB continues to reinvest all maturing assets purchased under the Pandemic Emergency Purchase Program). "
Jun 9th 2023
EXTRACT: "Hardly a week goes by without various pioneers in artificial intelligence issuing dire warnings about the technology that they introduced to the world." ---- " I have my doubts. Since the start of my professional life in the 1980s (and of course for much longer), technological progress has repeatedly been held up as a major threat to jobs in key industries such as automobile manufacturing. Yet...."
May 31st 2023
EXTRACT: "In discussions about the implications of artificial intelligence (AI), someone almost always evokes the ancient Greek myth of Pandora’s box. In the modern fairytale version of the story, Pandora is depicted as a tragically curious young woman who opens a sealed urn and inadvertently releases eternal misery on humankind. Like the genie that has escaped the bottle, the horse that has fled the barn, and the train that has left the station, the myth has become a cliché. And yet the actual story of Pandora is far more apropos to debates about AI and machine learning than many realize. What it shows is that it is better to listen to “Prometheans” who are concerned about humanity’s future than “Epimetheans” who are easily dazzled by the prospect of short-term gains. One of the oldest Greek myths, the story of Pandora was first recorded more than 2,500 years ago, in the time of Homer. In the original telling, Pandora was not some innocent girl who succumbed to the temptation to open a forbidden jar. Rather, as the poet Hesiod tells us, Pandora was “made, not born.” Having been commissioned by all-powerful Zeus and designed to his cruel specifications by Hephaestus, the god of invention, Pandora was a lifelike android created to look like a bewitching maiden. Her purpose was to entrap mortals as a manifestation of kalos kakon: “evil hidden in beauty.”
May 31st 2023
EXTRACT: "Specifically, many believe that the arrival of artificial general intelligence (AGI) – an AI that can teach itself to perform any cognitive task that humans can do – will pose an existential threat to humanity. A carelessly designed AGI (or one governed by unknown “black box” processes) could carry out its tasks in ways that compromise fundamental elements of our humanity. After that, what it means to be human could come to be mediated by AGI."
May 29th 2023
EXTRACT: "In his 2018 book Destined For War, political scientist Graham Allison observes that the US and China are headed toward what he called the “Thucydides’ Trap,” a reference to the ancient Greek historian’s account of Sparta’s efforts to suppress the rise of Athens, which ultimately culminated in the Peloponnesian War. A better analogy, however, is the message sent by the Athenians to the inhabitants of the besieged island of Melos before executing the men and enslaving the women and children: “The strong do what they can and the weak suffer what they must." ---- Allowing China and other authoritarian countries to shape the rules would result in a world order based solely on this “realist” principle. It is a nightmare scenario that the G7 countries and other liberal democracies must strive to prevent. ---- China’s assertions about the decline of the West reveal an underlying anxiety. After all, if liberal democracy is failing, why do Chinese officials consistently express their fear of it? The fact that leaders of the Communist Party of China have instructed rank-and-file members to engage in an “intense struggle” against liberal-democratic values indicates that they view open societies as an existential threat."
May 28th 2023
EXTRACTS: "Cyberspace Administration of China (CAC) decreed that generative AI content must “embody core socialist values and must not contain any content that subverts state power, advocates the overthrow of the socialist system, incites splitting the country or undermines national unity.' ” .... "This implies that the harder the CAC tries to control ChatGPT content, the smaller the resulting output of chatbot-generated Chinese intelligence will be – yet another constraint on the AI intellectual revolution in China. Unsurprisingly, the early returns on China’s generative-AI efforts have been disappointing."
May 20th 2023
EXTRACTS: "Cognitive dissonance occurs when one’s beliefs and actions conflict with each other." .... "This conflict might constrain people from acquiring new information that will increase the existing dissonance" .... "if someone commits wholeheartedly to Trump, they may well experience dissonance as they watch the news from that Manhattan courthouse. But they don’t necessarily stop supporting him. Instead, they might seek yet more information about the “deep state” and how it is persecuting Trump, or preach more about his positive attributes and the witch hunt against him." .... " If so, we can expect to see more conspiracy theories and more proselytising from the hardcore supporters going into 2024 and beyond. Donald Trump may not be finished just yet."
May 11th 2023
EXTRACT: "....the US possesses advantages in developing large language models (LLMs). It benefits from close business-university collaboration, lubricated by a deep-pocketed venture-capital industry. It is no coincidence that ChatGPT came out of the US, and out of Greater Silicon Valley in particular." .... "Developing countries would seem to be at a significant disadvantage in this AI arms race and are at risk of losing their competitive advantage: abundant low-cost labor. Yet AI also holds out the promise of benefits for these countries." .... " however, economic development depends on human development – that is, on the accumulation of human capital. Where developing countries lack the resources, financial and otherwise, to increase significantly their spending on traditional modes of education, AI holds out hope for providing what is missing."
May 2nd 2023
EXTRACT: "The past decade has not been kind to neoliberalism. With 40 years of deregulation, financialization, and globalization having failed to deliver prosperity for anyone but the rich, the United States and other Western liberal democracies have seemingly moved on from the neoliberal experiment and re-embraced industrial policy. But the economic paradigm that underpinned Thatcherism, Reaganomics, and the Washington Consensus is alive and well in at least one place: the pages of the Economist."
Apr 25th 2023
EXTRACT: "Yet there is an important twist for the US: a chronic shortfall of domestic saving casts the economic consequences of conflict with China in a very different light. In 2022, net US saving – the depreciation-adjusted saving of households, businesses, and the government sector – fell to just 1.6% of national income, far below the longer-term 5.8% average from 1960 to 2020. Lacking in saving and wanting to invest and grow, the US takes full advantage of the dollar’s “exorbitant privilege” as the world’s dominant reserve currency and freely imports surplus saving from abroad, running a massive current-account and multilateral trade deficit to attract foreign capital."