The best books on The Decline of the West

What are you saying with this title? Is it, as you argue in your own book, that the West will decline, especially vis a vis China, unless we get our act together?

My book choices reflect a very simple theme – that we are at a global inflexion point. If nothing else changes, we are witnessing the decline of Western supremacy and the Eastern, or more generally emerging economy, ascendancy.

Let’s start with Niall Ferguson’s Civilization. I’ve read a lot of reviews focusing on the “six killer apps” that helped the West get to where it is. I take it that there’s more to it than that?

What I found interesting and what I like about this book is the fact that Niall takes a very broad look at the East-West theme. When people are looking at this issue of East versus West, or West versus the Rest, they tend to focus either on politics (which is very important and we’ll talk about that when we discuss Richard McGregor’s book on the Chinese Communist Party) or on economics. But there has not been anything that I have read that has been more all-encompassing: looking at religion, looking at East versus West not just as US versus China, but also bringing in other elements like Islam, cultural aspects, historical context, work ethic, Calvinism. So that’s what really drew me to this book. If I were to be critical of an economist’s perspective, it’s that we tend to have a very narrow lens. What Niall has done is added additional pillars to the discourse by bringing in the historical context, covering religion, technological advance, and many other things that are relevant but would fall outside the purview of an economist or a political scientist.

Is his view that the West is in trouble?

That’s a running theme in Niall’s recent work. But I think it’s more about what’s happening in the Rest, and China in particular. The central question he seeks to address is why, over the past several centuries, the West succeeded and mastered economic success whereas other regions have faltered, stalled and even declined. You have to remember it’s not the first time places like China and India have been the largest economies in the world. This was the case in the 1820s. What he’s trying to get at – and what is interesting not just in Niall’s work but across all the books I have chosen – is: Why should it be different for China this time? What mistakes did they make last time? How is it that Western countries actually surpassed China and India to become the biggest economies? Also, what happened to Japan? About 20 years ago everyone was talking about Japan taking over as the lead global economic powerhouse. Why is that we think China can do better than Japan did? Niall is posing tough questions about China’s rise, in the context of historical evidence.

Let’s go on to the Ian Bremmer book, The End of the Free Market. Does he think state authoritarianism will enable China or some of these Arab countries with large sovereign wealth funds to control the world economy?

Let me tell you my understanding of Ian Bremmer’s view, both from hearing him speak and from reading his book. Bremmer looks at the East-West theme largely through a political lens. One of his quips encapsulates his fundamental view: “In the Rest the state controls the corporations whereas in the West the corporations control the state.” My reading of his work is that in the West, the influence of the corporations has led to an erosion of political culture: they’ve infiltrated the political discourse. On some level, Ian is quite enamoured of China’s state capitalism, of the role of the Sovereign Wealth Funds, of the implications of the state controlling the corporations.

“We are at a global inflexion point. If nothing else changes, we are witnessing the decline of Western supremacy.”

I would say it’s pretty clear that governments like China are not obsessed with profit maximisation per se, they’re obsessed with volume maximisation. In that sense they have a bigger utility function – one with a longer term horizon (instead of a myopic view). It’s not just “we’ve got to make profits”. It’s about China, the grand society. I found this type of perspective very interesting. However, I think Ian would argue that there are still very big economic risks to the success of the emerging world that could cause things to unravel.

What do you mean?

To give you a specific example, I think Ian would say (and many economists would agree) that one of the key reasons that China has done extremely well is because her wages have been very low. A confluence of factors – low wages, a large population and state-controlled capitalism – have worked well for China. At very minimum, these three factors have made it possible for China to perform phenomenally. The problem is that we’re now seeing wages rising. And even though you have state capitalism, there is still a risk that the whole thing falls apart. In an environment where wages are rising fast, you end up not only with inflationary pressure but widening income inequalities, and this can be very problematic for the state capitalism model. I think Ian, like most of us, would say that China is not out of the woods.

Do you sympathise with his idea that state authoritarianism has advantages?

Yes, I’ve written about that. But when you say advantages, it depends what you’re talking about. If you’re asking me if democracy is a prerequisite for economic development, clearly it’s not. China is not democratic, nor is Singapore, nor was Chile in the manner in which we define democratic process. There are numerous countries around the world that have achieved long-term, sustained economic growth and lifted millions of people out of poverty without living in a classical democracy. So that’s not up for debate. The question is, as a long-term strategy is it possible for countries to have sustained economic growth with a large role for the state? Also, what happens when you have a large, critical middle class who demand greater political franchise? We don’t know what the answer to that is. I would say that the larger the middle class becomes in China, the more demands they will make for democracy, and the political transition will always be tricky. However, I don’t think we’re quite there yet.

Next is Richard McGregor’s book on the Chinese Communist Party. Why is this on your list? Are you saying there is an advantage to having a centralised body looking out for the good of a country, without having to be too concerned about the short-term popularity of its policies?

That is, in essence, the argument in my own book. Let me couch it this way. I think there are three specific roles for government. The first role of government is to provide public goods. In economics, those are goods we all benefit from, but no one bears the sole cost of underwriting them. Infrastructure, national security and education are classic examples of public goods. A very simple example of a public good is a street lamp. We all benefit because it lights up the street at night, but I didn’t pay for it myself and nor did you. The government pays for it by pooling [tax] money to pay for these public goods. Whether you’re left-leaning or right-leaning (ie for a large or small government role respectively) I think everyone agrees there is some role for government in providing public goods. Of course there is the age-old debate about what should qualify as a public good. For example, in the US many people don’t view healthcare as a public good, yet in much of the rest of the world people assume it is.

Role number two for government is to provide a regulatory environment. One that is not so onerous that it kills off innovation, but at the same time an effective regulatory infrastructure that ensures that illegal activity doesn’t occur and steps in if the markets fail. As we know the markets failed in the financial crisis. There was systemic risk, and the government had to step in. And the third role of government is to provide a policy framework, that incentivises people to be entrepreneurs and build businesses but broadly incentivises good behaviour.

This is why I think Richard’s book is particularly interesting. It’s a sneak peak into the way the Communist Party works. Clearly the Chinese government has succeeded in providing a policy environment that incentivises people to do things – to work hard, to make money – without it necessarily being democratic. Like it or not, they have a rule of law, they have some transparency – certainly enough that foreigners are happy to invest there. It’s not a model of democracy or transparency as we know it in the West, but it’s clearly a good enough system that people feel they want to invest their money there.

Also, in the financial crisis China was able to push through a massive fiscal stimulus, while the US was crippled by disagreements between left and right.

Absolutely. And if you ask me if having elections so often actually hampers the ability of policymakers in the US, and across democratic countries, to implement more long term, strategic policies that are important to avert long-term decline, then my answer is yes. That doesn’t necessarily mean you should throw out democracy. In fact, there are different things you can do within a democratic society that can get around this problem of hyper-politicisation. For example, you could have longer political terms. You don’t have to have elections every two years, you could have them every six years as Mexico does. Such a system just might give policymakers a little more wiggle room to focus on the more structural or longer term issues, such as (in the case of the US) education reform, energy and infrastructure build-outs which tend to fall by the wayside in short-term politics.

I think if people recognise that there is sub-optimal policymaking going on because government policymakers are inherently myopic and very rationally focus on short-term issues, then they will start considering ways of working within a democratic system to extend the policy framework. China is an extreme example of how, without the shackles of multiparty elections every two years, a government can implement very beneficial long-term policies.

Let’s go on to This Time Is Different, which covers the history of financial folly. China has no advantage here – its stock and property markets suffer from bubbles as much, if not more, than anyone’s.

If you travel around the US, the UK and Europe, people say “China this, China that…” and I find myself constantly having to remind people: China is still a very poor country! On a per capita income basis, they’re still number 99 in the world. Their financial markets are not developed at all. At the moment, there are all sorts of risks that we are seeing – the property markets in China are just one example. The property bubble we saw in Japan was a killer, as we all know. It’s affected the country economically for the last few decades. All of that is still a possibility in China, because they’re not functioning at a developed market level and are working super-hard to avert structural decline or stalling that we have seen in Japan.

I think the more interesting story in This Time Is Different is what happens in the aftermath of bubbles, which links to what we were talking about before. In the case of the US, it’s still very reliant on tried and tested formulas to try to sort out economic busts – ie let’s just reflate this bubble by using relatively loose monetary policy and fiscal policy (think low interest rates, tax breaks, government spending increases, quantitative easing). In a similar vein, the Chinese moved very quickly, with strong political will, to finance and build massive infrastructure projects and construct massive cities. They have a lot of flexibility in what they can do in the aftermath of a financial crisis and how they can execute it, because they’ve got the political will and the political ability.

Is the book a lot about that – how you deal with bubbles?

Yes, but it also details what happens in their aftermath. It talks about the fact that countries almost always have these bailouts and end up with massive debts. And it points out that if you have 90% debt-to-GDP ratios, you invariably end up in a marked slow-growth period for several years. So, according to Reinhart and Rogoff’s book, we can expect that the US and western Europe are now in a long-term type of decline.

Tell me more.

I think the key point I would argue is that the US in particular – and many countries in Europe as well – have not yet understood the fact that they now have structural unemployment. They are no longer dealing with cyclical unemployment. In the past, when the US had a recession, or Britain had a recession, they would do exactly what the US is doing now. They would reflate the economy and things would ostensibly be fine. Why this is not working this time, and why I don’t think it will work longer-term, is because you’ve got competition. In the past you had no competition. America made all the computers, it made all the T-shirts. This time is different because there’s global competition. The fact that America is not producing computers does not mean the world can’t buy computers, because the Chinese are producing them.

The way you deal with structural unemployment is quite different from the way you deal with cyclical unemployment. Dealing with structural unemployment means the US has to be much more aggressive than I would argue policymakers have been. You have to have the wiggle room, the flexibility, to be able to implement long-term structural policies. You have to have everyone on board. Which China has but the US doesn’t, because of the demands of democracy. If we were in China, I think they would know how to deal with structural unemployment much more aggressively than policymakers do in the West, who are hamstrung by short-term politics as discussed earlier.

Can you tell me a bit more about Reinhart and Rogoff’s book specifically?

It’s the only book I have seen that provides, with great detail and over 800 years, clearly defined, analytical, data-driven evidence of what the impact of a post-financial crisis period is and hence what we can anticipate. In all my reading during my PhD, in all my reading in general, I’ve never seen anything that comes close in terms of being comprehensive. It’s a tour de force.

Do they have a solution?

One thing they point out is that a lot of countries have defaulted. They talk about Germany, for example, and about a lot of other countries. I think that’s quite interesting, because I’ve talked about how a US default is not off the table. A lot of people get their hackles up when I say that, but reading this book you realise many countries have got out of post-financial crisis aftermath periods by defaulting. Reinhart and Rogoff are not saying America should default, but there are many countries that have defaulted.

Your last pick is Evgeny Morozov’s The Net Delusion, about the dark side of internet freedom.

Well the Morozov book is more about some of the issues that are still very deeply embedded in the emerging world. It’s not about the decline of the West, it’s about how social media tools are being used in the emerging world. I’m surprised at how some people have been quite dismissive of Morozov’s essential and fundamental point. I think it’s a brilliant insight, from a very young author from Belarus who lives in the West. Some people tend to dismiss his ideas because we live in a world where people believe what they want to believe. It’s like the aid world – everyone wants to believe that giving money to Africa helps. Everybody wants to believe that social media have been the reason why Iran, Egypt and other places have had uprisings. The author speaks convincingly as someone from one of the emerging economies. To paraphrase him, he is saying “I’m from one of these countries. Here is how social media tools actually impact a country and its political landscape and infrastructure. It doesn’t always work like you think it does, and its effects are not universally positive.”

And there’s no reason that the Chinese Communist Party, for example, can’t exploit social media to its own advantage. It’s just a medium, in the end.

Exactly. And every government does it. The Washington Post ran a story about six months ago about how the US government bought every single copy of a book that was being published by a former US marine. The book had some details that may be construed as government secrets. Few picked up on the story, but clearly the US government intervened and censored in a way that you might not expect in a Western society. We can point at China, but it’s something governments do all over the world, albeit to varying degrees.