How the West Was Lost, Fifty Years of Economic Folly – And the Stark Choices Ahead; Dambisa Moyo
“once an idea is out it can be used and improved upon by anyone, anywhere, an idea has a marginal cost of zero”
This quote is referring to the spinoffs from the magnificent technology that enabled the Apollo moon landing in July 1969. I was a vagabond watching it on a storefront TV in Athens, Greece, along with a small crowd who didn’t own their own sets, or had to be in downtown Athens on that day, away from the comfort of their own home. We were all looking for free.
Technology, labour and capital all combined to make America the winner of the Space Race and the Cold War, and the Superpower of the planet. Then came the Financial Crisis of 2008. Dambisa Moyo contends that it is not just the quantity of capital, of labour and of technology that matters, but also the quality. By ‘quality’ she means the manner in which capital is allocated, the aptitude of the workforce and the nature of the technology.
Beginning with capital, Moyo points out how the cash-strapped West is losing out in the international bidding war for commodities. The 50 year-long policy to enable the chase for the American Dream by extending credit against an ever-weakening collateral has left America at the cliff-edge of collapse. Too much capital was drawn into the housing market (by risk-loving banks backed by government guarantees) where it becomes ‘non-productive’ capital, ‘non-cash-generating’, and ‘low-yielding’. The combination of easy debt (like mortgages) and the mistaken belief that home equity would always rise led to the housing bubble and collapse of 2008. Moyo says “in a sentence, debt claiments failed in their fiduciary duty to police the equity holders because they were hedged by public policy”.
The second misallocation is Labour. Expensive future-debt in the form of pension (I enjoy mine) is one problem. Bad labour-pricing that rewards the wrong groups (sportsmen, CEO’s, and financial services managers) whose societal benefits are low, versus those whose work benefits society more broadly (doctors, nurses, teachers) is another. The global migration of labour is also an issue where quantity and quality are considered from their economic impact.
The key demographic factor in the West is the looming retirement of the baby-boomers. The UN forcasts that by 2050 one in three persons in the rich countries of the West will be a pensioner. The median age for all countries in 2050 will rise from today’s 29 years to 38 years. Contrast this with the expectation that the emerging economies (BRIC, for example) will add 2 billion people to the middle class. The quantity question is in the numbers.
The quality question is illustrated by Moyo through a discussion about engineering degrees. “According to a 2009 Forbes article, the US prefers lawyers over engineers by 41:1”. The economic trajectory of agriculture to manufacturing, to service sector predominance in maturing economies may explain some of this preference, but the service sector economy is also in jeopardy (witness the call-centre outsourcing described by Tom Friedman in his Flat Earth book). But its not just this aspect of technology that has shifted labour, its also R&D. The education systems in India and China favour a ‘meritocratic’ style where streaming students is practiced, in contrast to the egalitarian practice of broadening access is favoured in the West.
I have some disagreement about this latter point and the validity of the evidence. Firstly, the top place in the TIMMS and PISA testing regimes has consistently gone to Finland, a Western country, with Canada close to the top as well. Secondly, the recent high rankings of ‘city states’ like Shanghai and Singapore, are not the same as saying all of China or Malaysia is excelling in the same way or that the system is better. Thirdly, the US scores can be disaggregated to show that some schools and districts are indeed failing but others are excelling, depending on socio-economic status and racial makeup (which is a problem of another kind).
Besides capital and labour inputs, a third factor contributes to the growth of economies. This is the ‘total factor productivity’ (TFP). Think of this as all possible contributing factors combined such as geographical factors (terrain and weather), rule of law, property rights, human rights, freedom of expression and technological growth and efficiency. The West’s superior ‘know-how’ has been eroding in a number of ways in this input area. One example of this is the R&D in the pharmacological industry. Drugs developed in the US and Europe privately, soon show up abroad as generics. Another example is the auto industry, where the big three (GM, Ford and Chrysler) failed to keep up to the technological innovations of such manufacturers as Nissan, Toyota, Honda and Hundai.
Big global problems become economic challenges as well. Healthcare and education, energy and food security, all require marshalling innovation in new ways. The new world order must now acknowledge other players at the table such as Brazil, Russia, India, China (BRIC) Turkey and South Africa. These players come with a different view of how to organize their economies. Instead of allowing the market to decide how to behave unfettered by regulation and government direction, these countries accept governments with larger roles in directing the economy. 75% of global oil reserves, for example, are controlled by state-owned companies from emerging markets.
Moyo, the economist, explains how a country’s wealth comes about:
Y = C + I + G + (X – M)
Y is a country’s GDP (its income); C is individual consumption; I is total investment in the country (private and public); G is the net position of government (revenues less expenses); (X – M) is exports less imports.