Looking to the east for a solution to western problems

Tue, Feb 15, 2011, 00:00

As China becomes the world’s second-largest economy, Zambian economist and author Dambisa Moyo says there is much Ireland can learn from the east about rebuilding our country, writes DENIS STAUNTON

YESTERDAY’S REPORT that China has finally overtaken Japan to become the world’s second largest economy created a small flurry among western diplomats and economists who have watched China’s rapid emergence from poverty with a mixture of envy, fascination and alarm. On current trends, China could replace the United States as the global economic leader within a decade.

Beijing already has the world’s deepest reserves of foreign currency, which bring China political as well as economic clout with western powers, notably the US.

An undemanding friend to despotic regimes in Asia, Africa and Latin America, China’s diplomatic influence has expanded alongside its economic power and its military capacity is growing fast.

China’s rise has produced numerous books in recent years, from Martin Jacques’ breathlessly admiring When China Rules the Worldto a flood of scary American polemics with titles like The Coming Conflict with Chinaand Showdown: Why China Wants War with the United States.

At first glance, Dambisa Moyo’s How the West was Lostis a combination of the two genres, praising the economic, political and cultural choices that have contributed to China’s rise and warning that the West is digging its own economic grave.

A Zambian economist who has worked for the World Bank and at Goldman Sachs, Moyo became a controversial figure two years ago with her first book, Dead Aid, which argued that foreign aid was impeding Africa’s economic development and should be phased out.

“The thing that binds my two books is unintended consequences, the idea of good intentions with bad outcomes,” she says.

“Everybody’s talking about convergence being about China converging to the West when actually it’s just as much about the West coming downwards to meet China.”

Moyo argues that western countries have squandered much of their advantage over emerging economies such as China, India and Brazil by mishandling the three key elements of the economy – capital, labour and technology. Instead of investing in public infrastructure, which helps to boost future economic growth, westerners have embraced the cult of home-ownership, shovelling most of their wealth into houses and fuelling property bubbles such as those that wreaked havoc in the US and Ireland.

The self-centred, undisciplined children of the prosperous West are no match for their studious counterparts in China, who not only spend many more hours on their homework but strive to become engineers or doctors rather than dreaming of being sports stars or celebrities, Moyo says. Above all, short-term political considerations prevent western leaders from making the tough choices necessary to maintain competitiveness while China runs its economy without having to bother about democratic sensitivities.

“I’m pro-democracy, let’s put that on the record,” Moyo insists.

“The fundamental tension I describe is the tension between tactical short-term policymaking versus longer term structural policymaking. Of course, part of that is the tension between individual rights versus broader societal rights.”

For centuries, western societies prospered by creating an environment of incentives that encouraged innovators to tackle some of the world’s most difficult problems. Moyo argues that in recent years, western countries have pursued policies that actually discourage innovation and self-reliance.

“I believe that we should solve this problem within the context of a democratic society. You do not need to become a China in order to solve a problem with incentives and therefore encourage people, induce people to do what I would argue is the right thing for broader society,” she says.

“The way in which incentives might manifest themselves in terms of policy in western society is maybe we need to start incentivising people to do maths and science because we know that maths and science are important for economies that are not based on agriculture or manufacturing but are very heavily focused on innovation and research and development. So what can we do as a society to incentivise people to get back into those areas that we know could be of a lot of benefit?”

Although Moyo refers throughout her book to “the West”, the conditions she describes are predominantly those of the English-speaking countries, notably Britain and the US. Despite China’s apparent advantages, German exports are booming and policy-makers in Berlin are confident that the coming years will see an extended period of uninterrupted economic growth. Like many other continental Europeans, Germans are not preoccupied with home-ownership, usually preferring to rent than to take on a huge debt.

Among Moyo’s most controversial assertions is that the US should consider defaulting on its debts to China and restoring trade barriers while Americans work towards greater competitiveness.

As an African, she knows from bitter experience that despite globalisation, protectionism never went away and many African farmers are still shut out of markets in Europe and the US.

“On a global basis, things have improved. We have seen a narrowing of income inequality,” Moyo says, “but obviously, when you look at what has happened to westerners, they have now been left with more debt because their real wages have been flat and the way they have been rewarded from any economic gain has been through a rise in debt access.”

If the US is big and self-sufficient enough to survive the fallout from defaulting on its debt, Moyo cautions Ireland against risking a similar move. Instead of grumbling about our misfortunes or dwelling on the size of the debt we have taken on, we should focus on finding new ways to grow the economy. After all, Moyo suggests, you can shrink a big debt to GDP ratio in two ways – by reducing the debt or by growing the economy.

“I think there are a whole host of things that Ireland can do. I would caution people against the temptation to turn inward and become more insular. It’s important to look at the longer term and not to get obsessed by the short term. And I know it can be a great temptation, particularly at difficult times,” she says.

“When I was growing up in Africa, it was during the structural adjustment programmes, which were brutal. They were reducing the civil service, they were privatising a lot of state-owned enterprises and it was very, very difficult. But the government, to their credit in retrospect, really did a good job of managing people’s expectations and helping us to understand that the trade-off was between our current generation versus generations of the future. I would argue that Ireland needs to stay the course.”

Instead of blaming the banks for lending us too much money, Moyo says we should admit that nobody forced us to take on debt and that we spent the money on all the wrong things – like extra holidays and more houses. As the world’s population grows and competition for resources becomes more intense, it’s time to break the habit of excessive consumption and work towards a more sustainable economic model.

Despite her stark warning about the dangers of western self-indulgence and short-sightedness, Moyo believes the West still has a chance to remain ahead of the rest, but only if we stop fretting about China’s strengths and focus instead on our own challenges.

“It’s kind of like being at the top of the Premier League in soccer,” she says. “If you’re number one, don’t worry about the people snapping at your heels. Focus on your own weaknesses. Otherwise, if you stop focusing on your own weaknesses and start focusing on what China or the number two guy, Chelsea or whatever, is doing, you end up getting relegated and the guy who’s been snapping at your heels actually does take the prime position but that’s not because they did anything right, it’s more because you’re doing something wrong.”


How the West was Lost – Fifty Years of Economic Folly and the Stark Choices Aheadby Dambisa Moyo is published by Allen Lane at £14.99.