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How to lose the West

17 January 2011 By Hugo Dixon

Dambisa Moyo doesn’t shirk controversy; arguably the Zambian-born economist seeks it out. In her first book, Dead Aid, she argued that aid was not the solution to Africa’s problems. It was actually part of the problem as it encouraged corruption and dependency. Her new book, How the West was Lost, is also likely to create waves. The scene she sets – of a surging China and other rapidly developing economies eventually eclipsing the power of the United States and Europe – is not in itself unusual. But some of her diagnosis of how we got there and what the West needs to do to fight back is misconceived.

The most controversial elements argue that free trade has damaged the West’s position, that Beijing’s one-party rule may be a good way of boosting economic growth, and that the West may need to fight fire with fire, potentially resorting to protectionism to shut out Chinese goods if Beijing doesn’t stop manipulating its currency. She even raises the option of America defaulting on its debts to damage Chinese commercial interests.

To be fair, Moyo doesn’t give such policy options her full backing. She claims to be a democrat and a believer in free trade. But her thinking on these topics is still muddled.

Moyo’s starting point is to think of the world in terms of winners and losers. From the perspective of power, that’s reasonable enough. If China gets more powerful, America will be weaker. But in economics, there doesn’t have to be a zero-sum game. The world as a whole can get richer – indeed, that has been the big story of the post-war period. First Japan, then South Korea, China and now India are benefiting hugely from free trade.

Moyo points out that the poorer, least-well educated members of Western societies have not been doing so well. As cheap goods have flooded the global market, their competitive position has been eroded. In the United States, they have only been able to maintain living standards by loading themselves up to the gills with subprime mortgages.

But a poor person from Florida is still vastly richer than a malnourished child in India. From the perspective of a man on Mars, the world isn’t developing too badly. The West doesn’t possess any God-given right to lord it over the Rest, Moyo’s term for the others.

This doesn’t mean, though, that the West has to throw up its hands and accept that it is going to be dominated by the Rest. The first thing to note is that the Rest have got a long way to go. Although China’s and India’s weight of numbers means they will eventually surpass America in sheer economic scale, on a per capita basis neither is within shooting distance.

The Rest also have significant hurdles to jump if they are to maintain their growth rates. While one-party rule may have helped Beijing drive forward the economy over the past 30 years – when it was in a catch-up mode – it will be less suited to fostering the innovation that is required when an economy is already developed. Its people will increasingly demand political goods such as freedom of speech. China will also have to address its extreme inequality or risk social tension. Meanwhile, India needs to root out the corruption that gnaws away at the legitimacy of its government and its economic potential.

Just as the Rest have their challenges, the West has its opportunities. Moyo argues persuasively that the size and quality of its workforce need to be increased. The answer is to delay retirement (so we don’t have a growing army of couch potatoes supported by a shrinking group of workers) and to improve education. She also advocates increased savings and investment in the West so that our capital stock doesn’t deteriorate.

These policies will make the West richer without impoverishing the Rest. But Moyo’s other ideas – trade wars or a default by America – would amount to cutting off our nose to spite our face.

 

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