How the West Was Lost : Fifty Years of Economic Folly--and the Stark Choices Ahead
Amid the hype of China's rise to global power, the most important story of our generation is being pushed aside: how America's rapidly growing population of the unskilled, unemployed, and disaffected threatens the nation's wealth and stature.
In How the West Was Lost, the New York Times bestselling author and economist Dambisa Moyo sheds light on how a host of shortsighted policy decisions have left the economic seesaw poised to tip away from America and toward the emerging world. Faced with this impending calamity, the United States can choose either to remain open to the international economy or to close itself off, adopting protectionist policies that will give the country time and space to redress these pervasive structural problems.
Incisive and illuminating, How the West Was Lost not only exposes the policy myopia of the West that has led it onto a path of economic decline but also reveals the crucial--and radical--policy actions that must be taken to stem this tide.
There are no customer reviews available at this time. Would you like to write a review?
Farrar, Straus and Giroux
February 15, 2011
Number of Print Pages*
Adobe DRM EPUB
* Number of eBook pages may differ. Click here for more information.
Excerpt from How the West Was Lost by Dambisa Moyo
The Way It Was
Once Upon a Time in the West
Once upon a time, the West had it all: the money, the political nous, the military might; it knew where it wanted to go, and had the muscle to get there. Be it Portugal, Spain, the Netherlands or England, this held true for 500 years. However, the story of the West's dominance in the second half of the twentieth century is the story of America.1
Whether it was the US troops pouring on to the shores of Normandy with the Allied forces or the Enola Gay dropping the bomb on Hiroshima, by the end of the Second World War the baton of global power (economic, political or military) passed from Great Britain to the United States. While it took almost fifty years for the Cold War to play itself out, for the most part the US firmly maintained its paramount position for the next five decades and into the twenty-first century.
Of course, in the prelude to the Second World War, the United States had suffered the consequences of the 1929 Great Depression (by 1933 the value of stocks on the New York Stock Exchange was less than 20 per cent of what it had been at its peak in 1929, and US unemployment soared to around 25 per cent) and the trauma and casualties of the First World War. Although it did not end the economic crisis of the 1930s, President Franklin Roosevelt's New Deal was an attempt to reconstruct American capitalism, and give the not so invisible hand of the government a new and more dynamic role. At its core America would remain a supporter of free enterprise, but the plan was for government to play a key role in orchestrating, supervising and directing the faltering economy, leading, not following, private enterprise and administering large-scale endeavours. All this would prepare America for and enable it to capitalize on the war that would break the back of Western Europe.2
Thus, despite any remaining weaknesses, with the advent of the Second World War America was in a unique position to direct the industrial, military and manufacturing sectors to its best economic advantage. In this sense, the Second World War was not seen simply as a political and military necessity, but as an economic opportunity to which it was ready to respond.
For example, in 1941, President Roosevelt signed into law the Lend-Lease Act which would sell, exchange, lease or lend to America's allies any military equipment deemed necessary. From 1941 to 1945, under this programme, materiel worth US$50bn (equivalent to US$700bn at 2007 prices) - battleships, machine guns, torpedo boats, submarines and even army boots - were shipped across the waters to its beleaguered allies. Europe took on a heavy burden of future debt repayments to the US through the Lend-Lease programme (Britain made the final payment of its Lend-Lease loan of US$83.83m on the last day of 2006 - fifty years later), and America peaked economically after the war, in the 1950s, as a result. Because of Lend-Lease (the Marshall Plan was, of course, a wholly different proposition) the US had become the best-in-class manufacturer.3
America's actions were a marriage of political imperative and economic savvy. The manufacture of goods to be shipped abroad was not just a political act to help the Allies; it also helped boost the US economy. Indeed, the results of this 'great American intervention' were staggering on almost every level. Thanks to the global need for US production, America's sluggish economy was transformed into a manufacturing powerhouse.
By the end of 1944, US unemployment had shrunk to just 1.2 per cent of the civilian labour force - a record low in its economic history which has never been bettered (at the worst point of the Depression more than 15 million Americans - one quarter of the nation's workforce - were unemployed). The US GNP grew from US$88.6bn in 1939 to US$135bn in 1944 - an 8.8 per cent compounded annual increase in half a decade. All this meant that everything was geared to manufacturing - and scientific and technological changes intensified. By the end of the war, the rest of the world was broke: Japan destitute, Europe bankrupt and United Kingdom penniless, leaving the United States as unquestionably the economic force.4
In its crudest form, the only thing that America lost in the Second World War was men. And even then, their losses compared to those of other warring countries were small. Out of the more than 72 million people who lost their lives in the war, the United States lost 416,800 - 0.32 per cent of its population. But, politically, militarily and economically America won hands down. The war was, in the most perverse sense, a resounding success.
America came out of the Second World War hugely rich. As the economic historian Alan Milward notes: 'the United States emerged in 1945 in an incomparably stronger position economically than in 1941 ... By 1945 the foundations of the United States' economic domination over the next quarter of a century had been secured ... [This] may have been the most influential consequence of the Second World War for the post-war world.'
By the middle of the 1950s America was financing the rebuilding of post-war Europe and beyond, while at the same time establishing itself as the foremost exporter of cultural norms and technological know-how. It was going to be America's century, and indeed it was.
Not only had the USA avoided direct collateral damage on its own soil (saving the outlay of potentially billions of dollars to rebuild its own infrastructure), the very fact that America could win the war, bankroll its allies during the war and institute the Marshall Plan (aid to Europe worth US$100bn in today's terms, which was around 5 per cent of the 1948 US GDP) demonstrates just how enormously wealthy the country had become.
Christopher Tassava wrote: 'economically strengthened by wartime industrial expansion ... possessed of an economy that was larger and richer than any other in the world, American leaders determined to make the United States the centre of the post-war world economy.' The Cold War would continue for the next fifty years, but it was this strategy that ultimately prevailed. Barely scathed, fantastically rich, no country could come close to the United States. The world was hers.
Rising America infused all aspects of society. Such was its strength, its confidence, its energy, that it permeated and infiltrated every sphere of Western-influenced human activity. The ensuing decades, the 1950s and 1960s, seemed to bear this theme out. Politically this was the era of social conscience and the civil rights movement, culturally there was a revolution in music, literature and art, and American innovation dominated in science and technology, putting a man on the moon and further developing the atomic bomb.
The success of the Manhattan Project and advances in the nuclear arms race heralded an age when America's scientific and technological mastery seemed unassailable in the West. United States exports increased from US$9,993m in 1950 to US$19,626m in 1960. This expansion in exports in just one decade was supported by the increase in US gross fixed capital formation, which grew from US$58bn in 1950 to US$104bn in 1960.
The three decades from the 1950s saw America wield its influence in every quarter. From the great industrial complexes such as General Motors, Ford Motor Company, Mobil Oil, International Business Machines, United Fruit Company and Dow Chemicals, to the Hollywood film industry and the music business exemplified by Motown, all came to symbolize the power of Americana, at home and abroad. It did not just stop at business.
Through the Peace Corps, established in 1961, America stamped its moral authority as it exported its values via its youth to everywhere Americans believed was not like them; with a remit to 'promote world peace and friendship through a Peace Corps, which shall make available to interested countries and areas men and women of the United States qualified for service abroad and willing to serve, under conditions of hardship if necessary, to help the peoples of such countries and areas in meeting their needs for trained manpower'. And, of course, American values were not just exported through the Peace Corps. Militarily, the US invaded Korea, and Vietnam to this day remains the great blot on America's conscience. The fact that America was growing bolder, and wielded unparalleled power outside its borders, was unquestionable.
All in all, this was the era that belonged to what the American journalist Tom Brokaw calls the 'Greatest Generation': the generation of Americans who fought in the Second World War and returned to build America into the greatest country in the world. For the next five decades they appeared to have succeeded - America was the epitome of wealth, power and cultural dominance, its tentacles reaching to every part of the globe. The rest of the West was firmly held in America's orbit - how could you not be in its grip, mesmerized by its power and brilliance? It was the sun around which other countries all revolved.
Good times, bad times, America was undeterred. From the oil spikes of the 1970s, the debt burdens and the Wall Street crash of the 1980s, and even the fall of communism in the 1990s, which would spawn its fiercest economic competitors, America seemed unassailable. Through its military might, its industrial capability, helped by free-market capitalism, and its cultural monopoly, America had planned it that way - Made in America was the logo of the times.
But fast-forward to today. See how much has changed. Western states are facing untold financial calamity, their populations ageing with few resources to sustain them, much of the necessary political reform remaining politically unpopular, and their economic supremacy susceptible to challenges from around the globe in a way never envisaged before. And while there have been setbacks before, such as America's savings and loans crisis of the 1980s and 1990s, the recent financial crisis and the policies the USA continues to pursue are proof positive that America is fast losing the hold it once had over the rest of the world. It has become a region of financial weakness and economic vulnerability in this, the first decade of the twenty-first century, to such an extent that, like bad blood, it has infected the rest of the Western body politic, making the story of economic decline necessarily one of the West versus a number of emerging upstarts. However, among the countries of the West, there remain good reasons to bet on the US being economically stronger than European countries in years to come.
But what exactly, in economic terms, drives growth?
THE PILLARS OF GROWTH
Much ado has been made of the seemingly inevitable economic decline of the industrialized West - the United States, in particular - and the 'rise of the rest', led by China. While most of this debate has tended to centre on historical patterns of imperialism and strategic and military considerations, canonical models of economic growth also offer a framework that highlights just how the West continues to misallocate the key ingredients necessary for long-term sustainable economic success and growth, to its detriment.
The evolution of growth theory has been a fascinating one, and one that cannot adequately be expounded in the short space that this book allows. An earlier incarnation in the economics literature began with the Harrod - Domar idea, which identified growth as solely a function of one input - capital.
In 1956, Robert Solow, an American professor at the Massachusetts Institute of Technology, built on this one-input model by demonstrating that labour too played a crucial and determinate role in delivering growth. For 'his contributions to the theory of economic growth', Solow was awarded the Nobel Prize for Economics in 1987, and for a time the Solow model, which saw growth as determined by capital and labour, remained the backbone of the macroeconomic growth literature for many years.
However, it must have come as something of a surprise that when these seemingly logical explanations for growth were subjected to empirical scrutiny, they accounted for only 40 per cent of a country's economic prosperity. There was a missing component; and a large one at that. This hitherto unidentified factor - the 60 per cent - has come to be known as total factor productivity, a catch-all phrase which encompasses technological development as well as anything not captured by the capital and labour inputs, such as culture and institutions. Thus canonical economic models point to three essential ingredients which determine economic growth: capital, labour, and total factor productivity. 5 These are the pistons which drive the cylinders of economic growth. Finely tuned and working in unison, they motor an engine of near limitless power.
Perhaps nothing illustrates the might, the sheer potency, of these three components coming together better than the American moon landing in July 1969. The gauntlet thrown down by President Kennedy in 1961, to land a man on the moon by the end of the decade, could not have been more ambitious. Goaded by the seemingly more adept Russian space programme, which was first with an object - Sputnik-1(1957) - first with a living creature - Laika the dog (1957) - and, of course, first with a man - Yuri Gagarin (1961) - Kennedy captured the spirit of the times in his famous words: 'We choose to go to the moon in this decade and do the other things not because they are easy, but because they are hard.'
The history of the Apollo programme, its personalities, its spirit of adventure, remains one of the most celebrated moments in American (and world) history, and rightly so.6 But it is also the supreme example of the confluence of capital, labour and technology, each at the height of its powers and all of them working as one. America had the capital, it had the labour, and, ultimately, it had the technology. The facts and figures speak volumes.
In terms of capital, the costs of the Apollo project were astronomical. The annual budget of the National Aeronautics and Space Administration (NASA) increased from US$500m in 1960 to a high point of US$5.2bn in 1965 - representing 5.3 per cent of that year's federal budget (5 per cent of today's US budget would be around US$125bn). As a reference point, the Vietnamese war is thought to have cost around US$111bn (US$686bn in 2008 dollars). All told, the final cost of the Apollo project was between US$20bn and US$25bn in 1969 dollars (or approximately US$135bn in 2005 dollars).
Cash was only one component of the Apollo challenge. To realize its goal America had to draw upon the two other essentials: labour and technology. Luckily for America, it could.
To this end, a huge army of personnel were enlisted. By 1966, NASA's civil service list had grown to 36,000 people from the 10,000 the agency employed in 1960. NASA's space programme would also require that the agency call upon thousands upon thousands of outside technicians and scientists. From 1960 to 1965 individuals working on the programme increased by a factor of 10, from 36,000 to an astonishing 376,000. The more critical point here was not that NASA needed to find such a vast amount of talent, but rather that it could. And where the talent did not exist, NASA created it. Private industries, research institutions and universities provided the majority of these personnel. It was this labour force that would invent and build the technology which would catapult America to the forefront of the space race and put Neil Armstrong and Buzz Aldrin on the moon - an accomplishment often cited to this day as the greatest technological achievement in history.
The technological feats of the Apollo programme were truly awe-inspiring. While marvelling at the wonder, the approximately one fifth of the world's population that watched the live transmission of the first Apollo moon landing would have struggled to appreciate the phenomenal behind-the-scenes technological brilliance that had made this possible.
The idea of a lunar landing had been through ten years of trials, prototypes and numerous setbacks in order to make it a reality. From the huge Saturn rockets that had the power to lift a US destroyer into space, to the lunar module that landed two 150-pound men on the moon, and to each of the hundreds of thousands of components and parts that had to be researched, designed, built and tested, the apparatus of the Apollo was breathtaking in its vastness and complexity.
It did not stop there: the programme spurred advances in many areas of technology peripheral to rocketry and manned spaceflight, including avionics, telecommunications and computing, as well as in the fields of engineering, statistical methods, and civil, mechanical and electrical engineering. This is the power of ideas. Beyond the immediate machine or contraption the spill-over effects are the real gains of technology. And because once an idea is out it can be used and improved upon by anyone, anywhere, an idea has a marginal cost of zero.
Even if it had wished to, no country other than America had the capability - the capital, the labour, the technology - to plan, to develop and to execute the moon landing. Russia was not so far behind in space investment, hence the emergence of the Space Race, but over time it became clear that it would not be able to compete.
The absence of any one of these elements would have meant that America couldn't have achieved its lunar ambitions. The point is, with these three factors in place the implausible becomes possible; economies, and therefore countries, become forces to be reckoned with. Yet if they are misused, misallocated, a country's economic decline is not just on the cards but accelerated.
What is clear, and what this book will demonstrate, is that deliberate (American) public policies are making things worse, exacerbating this economic step down by weakening these three components. America's economic growth is not only less than it would otherwise have been, but its overall economic decline is undoubtedly faster and more acute than it would be with better policymaking.
What follows is an exposition of how these three factors are individually and collectively contributing to the decline of the West. Further, two aspects are fundamental: their respective quantity and quality. To hammer home the point, it is not only the quantity of capital, the quantity of labour, the quantity of technology that is of concern; what has equal bearing in determining economic success or failure is their quality. That is to say, the manner in which the capital is allocated, the aptitude of the workforce and the nature of the technology.
From the early days of the growth debate, capital has always been regarded as the prime mover in defining a country's failure or success. So it seems right and proper that the book should first turn its attention to this all-important subject.