LOSING CONTROL (2 page)

Do additional enabling resources still exist?
Can the world easily accommodate continued rapid economic growth without bumping into a new economic constraint?
Is the replication of existing technologies across more and more nations sufficient to allow continued economic advance at a pace that people have come to expect?
Can Western labour markets easily withstand the competitive onslaught coming from the rapidly improving labour markets in the emerging world?

At the very least, the West needs to consider its relative position in the world economic and political order.
In the 1950s, 1960s and 1970s, the West
was
the world economy, with only Japan and South Korea threatening the old economic order.
Other countries were, in economic terms, also-rans.
By the 2050s and 2060s, I argue, the West will be a shadow of its former economic self, both in terms of its falling share of the global economic pie and its rapidly diminishing share of the world’s ever-increasing population.
How and why this process will happen, and its likely consequences – both good and bad – are the key themes of this book.

In the following pages, I outline some of the many ways in which the developed world is in danger of losing control over its economic destiny.
Part One, ‘Scarcity and History’, tries to place our understanding
of globalization today in the context of basic economic principles and our economic past.
I underline the importance of China’s emergence as a growing economic superpower in the late 1970s, a development of epic importance.
As China begins to throw its weight around, the West will no longer be able to take its economic progress for granted.
Too often, I believe, policymakers lose sight of one of the key issues in economics, namely the idea that resources are ultimately
scarce
.
They have done so because, for many years, the West has not had to face competition from others for the world’s scarce resources.
It does now.

Part Two, ‘Broken Economic Barometers’, deals with our understanding of what makes economies tick.
Are standard theories of comparative advantage – which have been the mainstay of free-trade arguments over the years – still useful in explaining the trade patterns emerging today?
Is the growing instability of financial markets a response to the heightened importance of the emerging nations?
Why have financial market returns been so low since the 1990s despite the rapid growth of the emerging nations?
Are we seeing a modern-day version of the Californian gold rush, with the vast majority of investors seeing their dreams of rising wealth continuously dashed?
Part Two ends with a critique of Western monetary policy.
Has the pursuit of inflation-targeting become a source of instability in a world where the prices of goods, services and capital are now increasingly being determined by developments in the emerging nations?

Part Three, ‘The Return of Political Economy’, examines some of the big questions confronting Western nations in the years ahead.
Why is income inequality so high, particularly in the US and the UK?
Why have the benefits of globalization accrued largely to the already very rich (and, thus, very lucky)?
If globalization represents a triumph for market forces, why are we seeing the rise of state capitalism, a topic that crops up time and again in this book?
Do we really live in a global market economy when so much economic
activity is influenced by governments, either directly via high levels of public spending or indirectly through government influence on energy supplies or bond prices?

If past economic success owed much to mass migrations of people both within countries and across borders, what should we make of heightened border controls and the growth of anti-immigration politics?
How will Western countries deal with the economic hole created by population ageing?
Will they be forced to rethink their current resistance to large-scale immigration?

Part Four, ‘Great Power Games’, draws together the various strands of my thesis.
Like Spain in the sixteenth century, the US is in danger of becoming a busted flush.
Yes, it has the most powerful military machine in the world, but so did Spain five hundred years ago.
Frankly, the US has become too dependent on the willingness of other nations to hold its dollars, in the same way that Spain depended on others to hold its silver.
The more the US has borrowed from the rest of the world, the more economically powerful the rest of the world has become.
In time, it’s quite possible that China’s renminbi will replace the dollar as the world’s reserve currency.

More broadly, I examine the options open to the world’s policymakers.
Reforming the international monetary system is of great importance.
In my view, the peculiarities of the euro – a currency which can and does attract new members – offer a blueprint for future monetary reform.
If membership of a single currency can gradually increase, it surely creates the opportunity to build a world where the proliferation of nation states need not get in the way of enhanced monetary stability.
Could something similar happen for the dollar or for currencies in Asia, leading to the creation of regional, rather than national, central banks?

I have written this final section with a heavy heart.
The pressures on the West stemming from globalization may, ultimately, be politically too difficult to absorb.
I already sense a shift away from
multilateral to bilateral economic arrangements, whatever the G20 pretends to offer.
These bilateral deals are not just those which will define the ongoing relationship between the US and China but also those which will carve up the rest of the world.
Think, for example, of China’s growing bilateral arrangements with selected African states.
More worryingly, protectionist pressures are growing.
Should they become strong enough, the West could quite easily turn its back on globalization, a knee-jerk reaction to its waning influence in world economic affairs.
That would be a tragedy, not least because globalization has been instrumental in lifting so many people out of poverty.
Unfortunately, history shows that our ability to avoid the tragic outcome has often been lacking.

History, politics and geography matter.
Too often, economists end up lost in a mathematical world of esoteric equations which cannot provide answers to the really big questions affecting society.
At the British Academy in the summer of 2009, the great and the good of the UK economics profession met to discuss the drafting of a letter to Her Majesty the Queen intended to explain why economists had failed to spot the credit crunch.
The letter subsequently delivered to Buckingham Palace ended as follows:

A simpler conclusion might have been to say that many bright people had failed to learn the lessons of history, politics and geography.
Part One uses these lessons to explain why the West has, until now, enjoyed its time in the economic sun and why, in the years ahead, the sun will be shining on the other side of the world.

For Margaret Goodson, my inspirational teacher at school, economics was about the allocation of scarce resources.
The costs of using resources in one particular way were the opportunities foregone.
These were ‘opportunity costs’.
Having more of one thing meant having to forego something else.
Economics was, therefore, about the choices to be made in a world of scarcity.

Scarcity and choice dominate our lives in all sorts of different ways.
I chose to go to university to study economics, thereby forfeiting any hopes of becoming a professional musician.
By choosing one subject, I let go of another: both time and money were scarce.
Western governments choose to cultivate bio-fuels to allow us access to cheaper energy.
By doing so, the opportunity to grow sufficient crops to feed the starving and the destitute may be foregone.

At its worst, scarcity promotes armed conflict.
In Africa and elsewhere, low incomes per head and a sense of hopelessness about the economic future lead all too frequently to war and war, in turn,
lowers incomes per head.
People choose (or are forced) to fight, rather than feed, each other.

In the West, where we’ve experienced steadily rising living standards for many years, we have often forgotten about the ultimate economic constraint of scarcity.
Technologies will overcome temporary shortages.
People and governments ignore budgetary constraints, hoping instead for continued access to credit.
Governments boast about the pace of economic growth.
We have come to expect – even to deserve – higher living standards, based on our faith in the success of technology and free markets.
Those countries that do not deliver are labelled failures.

With the rise of the emerging nations, this kind of complacent thinking will have to change.
Western living standards will not progress in the future as they have done in the past.
Western economies are being pushed to one side by much more dynamic nations elsewhere in the world.
Yet our leaders constantly promise more economic growth, seemingly unaware of the growing constraints being imposed on the West as a result of the economic success of nations elsewhere in the world.

There are many good examples of the hubris associated with Western economic progress.
In his January 2007 State of the Union Address, President George W.
Bush boasted of his past achievements:

Two years later, unemployment had soared, the budget deficit had exploded and the US had suffered its deepest recession since the 1930s.

Gordon Brown was similarly guilty.
As Britain’s Chancellor of the Exchequer, he said in his 2006 pre-Budget Report speech to the House of Commons:

Suitably tub-thumping stuff, perhaps, but on the back of a housing collapse and banking implosion the UK was soon to join the US in what became a deep and protracted recession for the Western world as a whole.

Why were political leaders so confident?
Why did policymakers believe they had found the holy grail of economic success?
In part, I think, they had forgotten about the ultimate constraints of scarcity.
They certainly chose to ignore the growing claims on the world’s scarce resources being made by the increasingly dynamic emerging nations.
They had, thus, forgotten about Mrs Goodson’s fundamental economic choices.

The rise – or more accurately, the economic re-emergence – of countries like China and India is profoundly changing the behaviour of the world economy and, within it, the West’s relative economic power.
To understand the growing influence of the emerging world,
let me offer two trivial examples.
The first concerns competition over scarce resources.
The second is about opportunity.

The tennis Championships at Wimbledon offer scarce resources.
In the Ladies’ Singles Championship, for example, there is only one trophy; so there can be only one winner.
Before the First World War, when Wimbledon was very much an English affair (Wimbledon is, after all, the home of the All England Lawn Tennis and Croquet Club), the ladies’ champion was almost always English.
Indeed, the only interloper was May Sutton, an American, who won the trophy in 1905 and 1907.

During the interwar period, English dominance faded dramatically.
The French and the Americans, in the shape of Suzanne Lenglen and Helen Wills Moody, dominated.
Since the end of the Second World War, American supremacy has been maintained, but champions have also come from Germany, Brazil, the Czech Republic, Switzerland, Spain and Australia (two came from England, although one of them, Virginia Wade, spent the formative years of her life in South Africa).

Have English tennis players got worse over the years?
Was something put in the nation’s tea to undermine racquet skills?
Not at all.
England’s players have, instead, become victims of globalization.
Globalization – in its broadest terms, political and economic openness – has allowed players from an increasing number of countries to take part in the Wimbledon championships.
The ladies’ singles quarter-finals in 2008, for example, included two Americans, two Russians, a Czech, a Pole and, for the first time ever, two women from Asia, one from Thailand and one from China.
For an Englishwoman, becoming Wimbledon champion today is considerably more difficult than it was a hundred years ago.
Compare the current situation, for example, with the first ladies’ event held in 1884, when Maud Watson emerged triumphant from a field of just thirteen competitors.

Apart from the occasional interruption for a world war, the summer Olympic Games have taken place every fourth year since the inaugural modern Games were held in Athens in 1896.
Before the Second World War, the Olympics were a European and American affair, sometimes characterized more by their chaotic organization and quirky winners than by their sporting prowess.
The St Louis Games held in 1904 are a case in point.
According to the International Olympic Committee, ‘The [St Louis] Olympic competitions, spread out over four and a half months, were lost in the chaos of a World’s Fair.
Of the 94 events generally considered to have been part of the Olympic program, only 42 included athletes who were not from the United States.’
The highlight for that year was an American gymnast, George Eyser, ‘who won six medals even though his left leg was made of wood’.
³

Before the First World War, few nations joined in, partly because there were more empires, and hence fewer nations, than there are today.
The Athens Olympics in 1896 included athletes representing just fourteen countries.
Even during the interwar years, country representation wasn’t very high, peaking at forty-nine for Hitler’s Berlin Olympics in 1936 when Jesse Owens, an African-American, made a fool of the Nazi leader.
⁴

After the Second World War, the Olympics changed rapidly.
The number of participating countries increased dramatically.
At the Beijing Olympics in 2008, for example, athletes from 204 countries took part.
For the purposes of this book, though, the more interesting development has been the shift in Olympic geography.
No longer do Europe and the US enjoy a monopoly over the location of the Games.

The initial experiment – very much a case of playing safe – took place in Melbourne in 1956, with the first-ever southern hemisphere
games.
Since then, the Olympic movement has become far more adventurous.
Of the sixteen summer games held since the Second World War, six have been held in Europe, two in the US and one in Canada.
Five have been held in the Asia-Pacific area, one in Moscow and one in Mexico City.
The likelihood of US or European cities becoming host nations has slowly declined.
Admittedly, London is hosting the 2012 Olympics, but, despite the best efforts of President and Michelle Obama, the 2016 Olympics were awarded not to Chicago but, instead, to Rio de Janeiro, making Brazil the first South American country to host the games.
⁵
Meanwhile, even with the demise of America’s Cold War rivals, the US medal count is not what it once was.
The US Olympic team achieved an impressive gold medal haul of forty-four in the 1996 Atlanta Games, but this number dropped to thirty-six in the three subsequent competitions.
China, meanwhile, has seen its gold medal tally rise from sixteen in 1996 to a massive fifty-one in Beijing in 2008.
⁶

Both my examples demonstrate that for many years Westerners enjoyed the best sporting opportunities and the biggest sporting rewards.
As, however, the world has opened up, becoming increasingly connected in the process, more and more nations and their people have striven for a piece of the sporting action.
Western sportsmen and women and the Olympic Committees that support them have lost out, at least from the perspective of the number of medals and trophies won.

Wimbledon and the Olympics are simple metaphors for economic developments on the grandest of scales.
As the emerging nations have become increasingly successful, extending their grip on the world’s resources, so the Western world is discovering that its own claims on these resources are slowly diminishing.

In the second half of the twentieth century, the Western nations absolutely dominated the global economy.
They had the tools to do so – the best technologies, the most effective forms of government
and the most educated workforces.
As we shall see in Chapter 2, history was squarely on the West’s side.
Meanwhile, the vast majority of the world’s population was unable to make credible economic claims, which reflected both technological and (often self-imposed) political barriers alongside an absence of effective market mech-anisms.
That is all beginning to change.
As existing technologies are replicated across more and more parts of the world, so the number of people hoping to enjoy ‘Western’ lifestyles is rising dramatically.

As a result, the demand for ultimately scarce resources – most obviously food and fuel – is growing rapidly.
At the same time, the competitive environment is changing.
Fragmented local labour markets are increasingly being joined together, reducing the relative bargaining power of many Western workers.
The ability to negotiate pay increases and decent pensions is fading, constrained by the competitive onslaught from newly enfranchised workers elsewhere in the world.

Our belief in ever-rising living standards hinges on the idea that the West will continue to reap significant economic benefits from technological progress.
As we shall see, however, this idea is unsound.
Japan is one of the most technologically advanced countries in the world yet its economy has stagnated over the last twenty years.
Technologies certainly help to raise living standards, but the story doesn’t end there.
Technologies also change the competitive nature of markets, to the advantage of some but to the disadvantage of others.
And they allow more people to gain access to scarce resources.
Rising incomes in the emerging world are increasingly affecting prices of goods, services, labour and capital in the Western world, forcing people to adjust to new, and often challenging, economic realities.

The rise of the emerging nations is, thus, of fundamental importance.
The emerging nations’ success undermines our understanding of what makes economies tick.
The study of economics has, regrettably, become an increasingly technical discipline, ill-equipped to
deal with the extraordinary upheavals now taking place in the world economy.
In particular, economists have too often forgotten that economics is rooted in politics.
The great economists of the past – Adam Smith, David Ricardo, John Stuart Mill and Karl Marx, to name but a few – understood that scarcity was linked to choice and choice, in turn, was linked to politics.
The economics that mattered to these great thinkers and which still matters to the man and woman on the street is not just about the most efficient allocation of resources but also about the distribution of those resources: who ends up better off, who ends up worse off, who wins and who loses.
We are, at long last, witnessing the return of what used to be called ‘political economy’.