LOSING CONTROL (4 page)

Technologies have enabled more and more people to join the international economic order.
Where governments allow, migrants increasingly head to countries that offer better economic prospects.
Capital heads towards countries where labour is cheaper.
People are better connected and better informed.
For example, a one-minute mobile phone call from India to the UK cost around IR100 per minute in 1995.
Thirteen years later, the same phone call cost just IR9 per minute.
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Put simply, an increasing number of people have access to economic opportunity.
These opportunities create incentives.
Indians, Chinese, Russians and others can go to college knowing full well that their opportunities upon graduation will be much better than before.
Multinationals increasingly hire all over the world.
They’re no longer restricted to Harvard, Yale, Oxford or Cambridge.
And, even if multinationals only focused on the West’s best educational establishments, they’d happily find that the best universities, in turn, cast their nets further and further afield to grab the world’s brightest young people.
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Meanwhile, entrepreneurs can come from all over the world.
There’s no reason why, for example, software development should reside only in Silicon Valley.
Nowadays, India has its own technology industry.

The economic effects of this ‘opening up’ are extraordinary.
Since the 1980s, for example, Chinese incomes have risen at a faster rate than those in Europe for the first time in six centuries, thanks to Deng Xiaoping’s willingness to encourage China to engage with the rest of the world.
China’s share of global output has consequently soared (from a low of 5 per cent in 1950 to 15 per cent by the beginning of the twenty-first century).
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So has its share of world trade.
Chairman Mao famously boasted in the 1950s about China’s Great Leap Forward.
As it turned out, he was forty or fifty years too early.

Similar stories can be found all over what is now called the emerging world.
India’s growth rate has accelerated in recent decades, helped along by the so-called green revolution of the 1960s and 1970s, during which crop yields rose dramatically.
The collapse of the Soviet Union led India’s leaders to realign their interests with the West.
Trade barriers have been slowly reduced and trade has flourished as a result.
Meanwhile, for former members of the Soviet Empire, openness is, in some cases, resulting in a mini-version of China’s experience.
1917 marked the start of the ‘short-century’ economic and political mistake in Russia, and, through its repressive influence, Russia’s western and southern neighbours.
Taken together, the emerging nations are now at least as big economically as the US and they’re growing around three times faster.

Admittedly, despite their gains, many in the emerging nations are still very poor.
For example, the median income per capita for China’s rural workers in 2008 stood at RMB4, 700 or, in 2008 dollars, $691.
Yet, for urban workers, life is getting better; income per capita for Chinese urbanites in 2008 was RMB15,000 or $2,205.
Within this urban group, there are now millions of people earning annual incomes in the $5,000–10,000 range.
At these levels, citizens begin to place increasing demands on the world’s scarce resources.
They want cars, holidays, central heating, air-conditioning and all the paraphernalia of modern life.
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They aspire to Western diets.
Meat, poultry and dairy are favoured, while the simple bowl of rice is treated with disdain.
Feeding people via animals, though, is highly inefficient: to feed the animals that then are used to feed humans requires many more crops compared with feeding humans from the fields directly.

China’s increased command over the world’s resources can be seen in all sorts of different ways.
Since the beginning of the twenty-first century, it has been the single biggest contributor to increased global energy demand.
China is now the most important marginal consumer of aluminium and copper.
The proliferation of Starbucks
in Beijing and Shanghai demonstrates the Chinese middle classes’ desire to have Western diets (ostensibly, Starbucks sells coffee, but, given that its most popular products are lattes, cappuccinos and frappucinos, its sales are effectively dominated by milk).
Meanwhile, China represents Ferrari’s fastest-growing market in the world.

China is not the first Asian country to gain a foothold on the ladder of economic progress.
From the 1950s through to the 1980s, Japan’s economy grew at a faster rate than that of either the US or the major European countries.
South Korea followed Japan’s example later.
Sixty years ago, after the Korean War, South Korea was impoverished, with the majority of people living off subsistence agriculture.
Now Seoul is the home of well-known multinationals such as Samsung and LG.

Yet while the Japanese and Korean experiences are of considerable interest, in global terms China and India are in a different league.
Japan has a population of 120 million.
South Korea’s population is around 80 million.
These numbers are dwarfed by China and India.
At the last count, China had a population of 1.3 billion while India’s population amounted to 1.1 billion.
India’s population will soon exceed China’s, reflecting a relatively high Indian birth rate, falling infant mortality and, for China, the restrictions imposed by the one-child policy.
Whatever the relativities, however, the aggregate populations of China and India are enormous in global terms.
Taken together, China and India account for well over one-third of the world’s population, currently estimated to be 6.6 billion.
Even if only a fraction of Chinese and Indians have the opportunity to make effective claims on the world’s resources, the balance of economic power will probably shift dramatically.
No productivity miracle is likely to be big enough to cope with this demographic pressure.

China is the first economy of size still to have remarkably low per-capita incomes by global standards.
In the past, there has been a strong correlation between overall output and output per head.
For
example, the US is the world’s biggest economy and, of the major industrial nations, has one of the highest levels of income per capita.
Conversely, the majority of poor countries are poor both in per-capita terms and also in total.
China is unique.
Following thirty years of rapid economic growth it is still poor in relation to the industrialized world, but already it has become a huge global player in resource markets.
Imagine, then, that China keeps growing at its current rate.
In thirty years’ time China would be roughly the same size in economic terms as the US.
Its per-capita incomes would still be much lower, but its citizens would, collectively, be placing huge demands on the world’s resources.
Simple calculations suggest that, by the middle of the twenty-first century, China would be trying to consume the equivalent of all today’s global oil output.

That, of course, will not happen.
Oil prices will rise, energy efficiency will increase and, if we’re lucky, new, cleaner sources of energy will be harnessed.
Nevertheless.
China’s success places a burden on the world as a whole.
Across a huge range of resources, competition is hotting up (as, indeed, is the climate).
As China makes new friends in Africa and Central Asia and the US deals with old enemies in the Middle East, the economic and political map is being redrawn to reflect the increasing claims on ultimately scarce resources by the Chinese and others.
Countries have gone to war over far more trivial matters.

No amount of free trade, comparative advantage or capital-market openness will change this new economic reality.
Globalization creates a new kind of economic growth.
I call it growth through technology replication rather than technology improvement.
Let me explain why.

In the 1950s, the jet airline industry was in its infancy.
The first commercial jet airliner was the British Comet.
Shortly afterwards,
Boeing developed the 707, which became the workhorse for many commercial fleets in the years to come.
These airliners were inefficient.
Piston planes offered better fuel economy.
Moreover, Comets suffered from metal fatigue and had an alarming habit of falling out of the sky.
Nevertheless, jet planes were clearly the way ahead: in time, they delivered greater fuel efficiency, could fly longer distances and, for their passengers, offered reduced noise and more comfort.

The arrival of the Airbus A380, the world’s biggest commercial passenger aircraft yet, enables us to assess progress so far.
According to industry sources, the giant Airbus is three to four times more efficient than the Comet 4.
The resources used per passenger mile are less than 30 per cent of those used in the Comet.
This vast improvement in productivity is, of course, good news both for the passengers and the environment.
The calculation, however, reflects only technology improvement.
In a world of scarce resources, what matters is not so much the improvement in technology but on how many occasions that technology is replicated.

Before the arrival of Deng Xiaoping and the collapse of the Berlin Wall, technology replication was limited.
Too many countries were shut off from new technologies and, even where they had access, they channelled those technologies into military, rather than civilian, ventures.
No longer is this the case.
More and more countries are using technology replication to improve the lives of their citizens.
It may be that the Airbus A380 is much more fuel-efficient than the Comet, but, with a sevenfold rise in passenger numbers over the last forty years, greater efficiency is still consistent with higher resource utilization.
In other words, the numbers of people making claims on resources has risen faster than the technological efficiency with which those resources are utilized.
Put another way, even though the flight cost per passenger has gone down, the number of passengers now flying has risen dramatically.
This shift in demand necessarily
puts pressure on scarce resources, most obviously the metals and plastics used in the manufacture of aircraft components and the fuel needed to keep aeroplanes in the air.

Technology replication is a direct result of globalization.
More people can aspire to the lifestyles enjoyed by rich Westerners.
More people have the ability to meet their aspirations.
As they strive to do so, competition over access to raw materials and technologies will only increase.
In this environment, can we really be confident that globalization has the potential to make everybody winners?

My thesis is simple.
For the Western world, the emerging economies increasingly threaten the cosy expectations of ever-rising living standards which characterized the second half of the twentieth century.
Through the destruction of political and technological barriers and through technology replication, more and more countries will be trying to lay claim to only limited global resources.
Economic claims from a wide variety of hitherto poor nations are becoming ever more credible.
Understanding how the West is vulnerable as a result of these mounting claims is the theme of this book.
Our hallowed assumptions about the world economy are fast breaking down.
The world economy is undergoing a major transformation.
The Western powers are, in so many different ways, losing control.

There are, of course, many ways in which the Western powers are vulnerable.
This book, though, is not about military strength, nor is it about new political alliances, even though I touch upon both issues.
It is, instead, about the economic mechanisms that will allow the emerging markets to claim more, and the developed world to consume less, of the world’s resources.

Before turning to the future, however, I want to turn to the past.
Chapter 2 looks at the reasons behind the West’s economic progress over the last few hundred years.
Market forces, technological gains and productivity surges have all been important.
They are not, however, the full story.
Western economic success has also depended
on conquests, land grabs, slavery, state capitalism and, more generally, a willingness to rig markets for the benefit of a privileged minority.
The West’s ability to rig markets to keep its citizens happy is now under serious pressure, a direct result of the success of the emerging nations.

The Western world’s economic development over the last five hundred years was not the result of productivity gains or market forces alone.
Western nations became wealthier because they were increasingly able to rig the global economy to suit their own aims, using a combination of economic, political and military power.
Specifically, they were able to engage in what economists call ‘rent-seeking behaviour’.
In very simple terms, those who successfully seek rents are paid above the free market price.
Most of us are rent seekers.
We like to be paid more even if there has been no rise in demand for our services or increase in our efforts.
For the successful rent seeker, the Malthusian constraint can be removed even while others are still suffering.

David Ricardo (1772–1823) related economic rent to only one factor of production, namely land.
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It can, however, be used for any factor of production where there is, for a while, limited supply.
Economic rent can be defined as the payment made to a factor of production – land, labour or capital – over and above the minimum
required to keep the factor of production in its current use (the minimum payment is known as the transfer earnings of the factor of production in question).
Those who earn rents thus receive a higher income than they require to remain engaged in a particular line of economic activity.
For some, bankers’ bonuses fall into this category.
Others might worry more about the earnings of top soccer, baseball and film stars.

Obvious ways to increase rental payments include the development of economies of scale, the creation of barriers to entry which keep competitors out, becoming a Hollywood superstar, friendly government regulation (otherwise known as protectionism), military action, bribery, racism in its many forms and slavery.
Apart from Hollywood, these examples suggest that nation states have strong incentives to collude with commercial interests.
Rent-seeking is not confined to the private sector alone.
In modern-day parlance, we might call linkages between governments and commercial interests ‘state capitalism’.
Western governments have used the methods of state capitalism for hundreds of years in their bid to shape the world around them.

Indeed, rent-seeking behaviour was, over the centuries, closely linked to colonization.
The discovery and exploitation of lands and peoples offered an abundance of raw materials and cheap labour designed to furnish Western economic tastes.
So long as the local population could be bribed, destroyed or enslaved, the Malthusian constraint, at least for the West, could be removed (Incas, Aztecs, Native Americans, Aborigines and Black Africans doubtless didn’t feel the same).
Productivity may have been increasing, but so too were supplies of the raw materials and cheap labour necessary to feed Europe’s expansion.
I’ll call them ‘enabling’ resources.

Before the Industrial Revolution, which raised productivity and, hence, output per worker, slaves were the enabling resources.
As the revolution took hold, two additional resources became crucial.
The
first was land.
The New World offered land in abundance, particularly given the willingness of the settlers to take it away from the indigenous population.
The second was coal.

These ‘enabling’ resources allowed countries to exploit new technologies to the full.
Slavery became less important, not just because of a sudden moment of ethical illumination but also because, economically, the coal-powered steam engine was much more efficient than a group of slaves, no matter how numerous they were or how hard they were made to work.
Meanwhile, no longer did people have to make difficult choices over cultivating land for either food or fuel.
Land could now be used exclusively for food because fuel was to be found underneath: nations could have both guns and butter.
The available land, and the fuel that could be found below its surface, increased dramatically as the eighteenth and nineteenth centuries progressed.

Not surprisingly, as the West became economically more powerful, the interests of government and commerce became increasingly inter-related.
The idea that market forces alone led to the West’s success is nonsense.
Take, for example, the development of the British East India Company (founded in 1600).
As its ventures in India became more complex, so it built up a large private army to protect its interests (matching the earlier behaviour of the Dutch East India Company).
It wasn’t long before a commercial operation turned into political ambition, thereby providing an early example of today’s state capitalism, a theme I explore in greater detail in Chapter 7.
The mercenaries of the private army became regular soldiers, and India was absorbed into the British Empire.

The Opium Wars of the nineteenth century provide a similar example.
Again, the East India Company was involved, increasingly exporting opium to a lucrative Chinese market.
Again, the British government supported Britain’s commercial interests.
The rising demand in Britain for Chinese luxuries such as porcelain and silk
had to be paid for somehow.
As a consequence, the UK became the world’s biggest drug dealer.
It could do so because, despite two huge uprisings, the Chinese didn’t possess the military means to end Britain’s interests in a trade that was, to say the least, morally dubious.

Meanwhile, others just didn’t have the means or desire to stake a claim on the world’s resources.
Europe’s economic progress from the fifteenth century onwards (and its eventual spread into North America, Australia and New Zealand) was not matched elsewhere.
The Renaissance, the Reformation and the later Age of Enlightenment were all crucial staging posts in European development, signalling the growing dominance of science, the reduced power of the church and the emergence of a new political philosophy consistent with the rights of man (and his property).
All this, in turn, allowed the creation of increasingly complex markets for goods, services and, crucially, capital.

Market complexity still didn’t indicate market freedom.
It wasn’t until 1789, well after the establishment of stock markets,
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that William Wilberforce spoke in favour of the abolition of slavery.
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US citizens fought each other in the Civil War of 1861–5 partly over the issue of slavery.
Meanwhile, many nineteenth-century US industries were built up not in the face of fierce competition from Europe but, instead, behind protectionist barriers.
The infant industry arguments so beloved of Japan, South Korea and China in the second half of the twentieth century were utilized heavily by the Americans 150 years ago and by British wool-makers even earlier.
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Other countries and empires fell behind, even when they were not being repressed by avaricious Europeans.
Islam made extraordinary advances, both military and scientific, from its earliest days through
to the 1400s, but thereafter became increasingly introspective and, in relation to Christian Europe, increasingly repressive.
Having finally been forced out of Spain in 1492, with defeat at Grenada, Muslim leaders chose to focus on problems closer to home in response to growing strains between the Sunnis of the Ottoman Empire and the Shiites in Persia.
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Economically and politically, Islam suffered a double blow.
In the same year that the Moors were expelled from Spain Columbus discovered the Americas.
Eight years later, Vasco da Gama rounded the South African Cape and sailed to India.
These discoveries mattered for three reasons: (i) Europeans were fast developing ocean-going sailing skills which left Islamic nations at a nautical disadvantage; (ii) now that Europeans could sail to India and elsewhere in the Indian Ocean, they were no longer dependent on the Middle East for supplies of exotic spices and silks, thereby reducing the incomes – and, thus, the rents – of Arab middlemen (Venice, which had been the European hub for the land-based spice trade, also went into relative decline at this time); (iii) as opportunities in the Americas expanded, so Europeans were able to cultivate crops that hitherto had been supplied via Islamic lands.
Chief among these were coffee and sugar.

The Islamic leaders of the Ottoman Empire did not emulate the separation of sacred from secular taking place in Christian Europe (the Prophet Mohammed was, after all, not just a spiritual leader but also a political and military hero, thereby inextricably linking the spiritual, political, legal and material worlds).
Scientific progress, itself dependent on open debate, became more of a challenge, limiting the opportunities for technical progress.

Meanwhile, after a brief flirtation with various European nations in the Indian Ocean, the leaders of the Ming Dynasty in China became increasingly worried about the influx of new, and possibly corrupting, influences on the Chinese Empire.
In the early 1430s, Chinese leaders chose to destroy their entire ocean-going fleet.
As a
symbolic act, it was, economically, one of the most costly moments in human history.
At the time, Chinese ships were bigger and better than their European counterparts.
Chinese sailors navigated using the magnetic compass as a matter of routine.
And, in Admiral Zheng He, a seven-foot tall Muslim Mongolian eunuch, China had the greatest sailor of the day, whose exploits included visits to thirty-seven countries over twenty-eight years with a fleet of around 300 ships and 28,000 sailors (it’s now thought that Zheng found the Americas before Columbus).
Through closing itself off to the rest of the world, China was starved of the ideas and innovations that contributed so much to the productivity gains seen in Europe over the last five hundred years.
Openness matters.

Angus Maddison, the renowned economic historian, has constructed some estimates of per-capita incomes in China and Europe going back over two millennia.
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Of course, these are no more than the vaguest of guesses, but they’re based on some simple – and not very controversial – observations.
Until 1400, both Europe and China were subject to Malthusian constraints.
Europe lost out in relation to China in both the fourth century (when the Roman Empire collapsed in the West) and the seventh century (when the Arabs captured Spain and large parts of western Asia, which destroyed European trade in the Mediterranean).
China made progress during the Sung dynasty (960–1279), largely through advances in rice production, but population growth placed a lid on per-capita incomes: for most people, the Malthusian curse was an everyday reality.
From the 1500s onwards, however, Europe began to move ahead.
Removed from the shackles of agricultural subsistence, Europe started to benefit from technical advances: better ships, printing presses and, in time, steam power and railways.
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China, closed off from the rest of the world, did nothing.
In 1000, Chinese per-capita incomes were slightly higher than those in Europe.
By 1820 they were only half European levels (although the huge size of China’s
population meant that its economy was still roughly the same size as all the Western economies added together).

According to Maddison’s data, the gap grew progressively wider until the 1950s.
The Great Leap Forward of that decade and the Cultural Revolution that followed in the late 1960s did little to help the situation: Chinese per-capita incomes stabilized at around 8 per cent of European levels.
The best that can be said about Mao Zedong’s reign is that China’s relative economic decline came to a halt: but, with Chinese per-capita incomes now averaging just 8 per cent of those in Western Europe, Chairman Mao managed only to confirm China’s huge loss of global economic status.

In simple terms, then, the history of economic development over at least the last four or five hundred years has been a story of Western progress while other nations stagnated.
By the beginning of the twentieth century, the world economy was completely dominated by the Western powers, who directly produced more than 50 per cent of the world’s GDP, a result of their rapid economic growth over many previous decades.
By the mid-twentieth century, other nations just didn’t seem to matter: their shares of world income were tiny and their incomes per capita were minute.
Across East Asia, for example, incomes per capita were less than one-tenth of those of the United States.

While the progress of Western economies was, thus, hugely impressive compared with the competition, their progress did not depend purely on technology gains and the benefits of free markets, important though these sometimes were.
There were three other vital ingredients.
First, economies of scale made it more difficult for other countries to enter certain industries.
Second, virgin lands with abundant raw materials and labour were discovered and exploited.
Third,
populations in other parts of the world were unable to stake meaningful economic claims.
They were disconnected from the world’s productivity engines through the suppression of ideas, innovations and linkages with other nations, or by the violence meted out to them by the Western powers.
Throughout its period of rapid economic development, then, the West was able to benefit from rent-seeking behaviour in all its forms.