Careful with that ‘Decline of the West’ Riff – We’ve Heard It Before

The conventional wisdom on the financial crisis is that it symbolizes or accelerates a transfer of power from West to East, from the US and EU to China and India. I think this is wildly overrated.

1. We have heard this before – and not just in the 20th century, but the West has proven extremely (frustratingly, if you’re from somewhere else) tenacious in leading the world pack since its breakout in the 16th century. Here are a just a few examples. Long before bin Laden, Islam was supposed to replace errant western Christianity, but failed at Vienna in 1683. Politically, Islam has never properly recovered. In the 19th C, the Chinese thought the western marauders a troublesome nuisance who would eventually recognize the superiority of the Middle Kingdom. It took 50 years of humiliation for that fantasy to finally fade. At the same time, pan-Orthodox/pan-Slavic Russians like Dostoyevsky and Alexander II thought the West would sink under its own corruption and decadence; instead that happened to the Romanovs. 1917 ignited the communist revolutionary wave (‘we will bury you’) that was supposed end capitalism and imperialism. After 75 years of unparalleled effort and bloodletting, it failed practically and morally. 1929 too supposedly revealed the inanity and shallowness of gilded age capitalism which macho fascist vitalism would sweep away. Despite exhaustion and disillusionment from WWI, western democratic capitalism hung on again, emerging stronger than ever, arguably, in 1945. By the 1960s, the new non-western future was supposedly in decolonization. The huge populations of the third world would modernize and turn the global system upside down. Instead they fell into Huntington’s decay and begged for debt relief. In the 1970s, the US failure in Vietnam and stagflation supposedly made the world multipolar, helped the Soviets to parity, and sparked a New International Economic Order. Reagan ended that sham. In the 1980s, came the declinism of Paul Kennedy and Walter LaFeber, this time based on massive US trade and budget deficits. The wholly unanticipated Clinton-dotcom boom put that fiction to rest too. And 9/11 of course was to spark an umma-wide uprising to humiliate the US as jihad had humbled the USSR in Afghanistan. Inside it pulled the US even more deeply into the Middle East.

2. China and India have huge hurdles before they even approach US/western power. They have massive internal structural problems – corruption, stifling bureaucracy, poor courts, bad information (propaganda and lack of disclosure), mediocre education systems for generating human capital, irregular treatment of foreigners and FDI. Development-at-all-costs too has resulted in enormous environmental liabilities that are now affecting lifespans. Do superpowers really have to spray-paint their grass green before an Olympics? They also lack the cultural software of entrepeneurialism and individualism that encourage the ‘animal spirits’ to take chances (worse in Confucian China than more liberal India). And finally, China is not democratic yet, which means a wrenching and usually expensive transition still has to come (think SK in the 80s, plus Indonesia in the late 90s, plus the end of the USSR all rolled into one). This will include restive provinces that will inevitably try to take advantage of the transition to push for autonomy. India of course is already, thankfully, liberal democratic, but it has found embracing wealth-generating capitalism extraordinarily difficult. There is no national consensus for it; all those tech companies that fixed Y2K have to keep redundant energy generators on-site in case there is a power failure. Finally both are still extraordinarily poor by OECD standards (to which neither belong). Between them both they account for half the world’s poorest people (most of the rest are in Africa). Don’t let Thomas Friedman’s stories about a zillion IT engineers in Bangalore or individual Chinese cities just focused on the production of cardigans or baseballs mask the reality that India and China together have something like 800 million people living in subsistence agriculture. Both economies are wildly unbalanced with relatively weak currencies, semi-dysfunctional politics, terrible corruption, and huge unresolved social resentment and poverty. That is not the future, at least not yet.

3. I think the best analysis of the geopolitical fallout of the crisis is here. Walter Russell Mead argues that actually the crisis will encourage states only tepidly committed to capitalism to once again turn toward statist, populist alternatives (think Chavez). Predatory elites will use the crisis as cover to resist liberalization. This will only continue the economic stagnation and political confusion of the Middle East, Russia/central Asia, Latin America, and Africa. The question is whether the Asian rimland states will go this way too. (I don’t think they will.)

So geopolitically, it is better to think of the crisis as a deck-clearing exercise, a shake-out of weak players and also-rans that will reinforce the leaders rather than damage them relatively. The leaders will slide, but the weakest will slide even more. As an analogy, think of how the dotcom bust killed off lots of wannabes on the internet. Only the strong survived that bloodbath. And my guess is that will be the real effect here. The crisis will reinforce the value of those very qualities that have catapulted the West to the top – market pricing, clean courts and banks, transparency, a free press (to spotlight failure), democracy (to insure the peaceful aggregation of conflicting interests and citizen grievance), etc, etc.