Has the West really lost? Or will Western ideas continue to dominate the world economy, even as China, India and the other emerging economies pick up the baton of growth? There can be no question that economic might has shifted away from North America and Europe, principally to Asia, and it is beyond dispute that the shift has speeded up as a result of the recent downturn. But China, India and the other fast-growing nations only started to achieve rapid growth once they adopted market reforms and have sustained it by applying Western-developed technologies. So in that sense it could be argued that the West has in one sense actually won.
Or so it seemed three or four years ago. The recession in the developed world has undermined this proposition: that Western ideas have dominated, even if Western economies have slowed. The scale of the recession revealed that the West had made huge errors in the three principal aspects of economic policy. There was fiscal failure, for nearly all developed economies have run up massive debts that will hobble future growth. There was monetary failure, in that most nations allowed an asset bubble to build, which when popped has undermined their banking systems. And there was regulatory failure, evident in the implosion of many Western banks. It is hardly surprising that Western economic management is not much admired, as anyone who has travelled to China, India and elsewhere since the downturn will be well aware.
The sad saga of the recession gives legs to Dambisa Moyo's provocatively-entitled book, for it goes to the heart of the great economic issue of our times: how swiftly will power shift over this century? Her proposition is stark and her background, being brought up in Zambia and educated at Harvard and Oxford, gives a valuable global perspective. "The collapse," she writes, "was the culmination of policy errors and mistakes that had been gathering momentum over the last fifty years... what happened in 2008 marked yet another step in a fundamental transition from one economic power to another; from the West to the Rising Rest."
These flawed policies include excessive borrowing both by governments and individuals, over-consumption and under-investment – and particularly the wrong sort of investment, in housing and financial services rather than in manufacturing and infrastructure. The very things that let to Western dominance, including emphasis on hard work and sound education, have been abandoned. You might sum it up by saying that the West has become self-indulgent and complacent – and arrogantly ignorant of its loss of influence. The West is in denial and needs to mend its ways.
This theme will have become pretty familiar to anyone who follows what is happening to the world economy and its rebalancing away from the Group of Seven developed nations towards the four largest emerging economies: in the Goldman Sachs' acronym, the BRICs (Brazil, Russia, India and China). Earlier this year China passed Japan to become the second largest economy and seems set to pass the US within 20 years. India is projected to become the third largest economy in a similar period. Given the population of these two Asian giants, this is a transition that appears inevitable, but one that will equally inevitably be hard to manage.
So what is to be done? Here Moyo's clear and confident voice becomes a little less sharp. She sketches four scenarios. The first is a continuation of present trends. Things will "trundle along", so that by the end of this century the US and the large European countries will become second-tier economies: "the losers over the long term are the West and the winners are the Rest." The second scenario is that China will falter; that it will be difficult for it to continue growing at its present rate. Even so, she argues, China will eventually win; it is just that the shift of power will take a bit longer. Unless, that is, America fights back: scenario three. It needs to invest in its education system, in more productive technology, cut its debts and so on. It will be a long haul and Moyo is clearly dubious as to whether the US has the mettle to do so.
The final scenario is for the US to take the "nuclear option" by defaulting on its debts. Much of these are to China and she argues that this should be seen as a serious option for the US. The result might be for the world to slide into three economic blocs, one led by North America, another by Europe, and a third in Asia. She hints that the US might emerge quite well from such an outcome. It is seductive, but surely must be wrong. It may yet happen - but if the West's biggest country were indeed to default, then the West would truly have lost the great economic game.
Hamish McRae's book 'What Works' is published by HarperPressReuse content