Is the West Still on Top of the Hill

    Is the West still on the top of the hill?

An essay by

     Dr. Michael Sakbani

Ten years ago, America had Steve Jobs, Bob Hope and Johnny Cash. Now it has no Jobs, no Hope and no Cash. Or so the parable goes.

Only, it’s not a joke. The line is pretty close to reality in the US and we need not mention old and aging Europe. Let us first recall that the economic dominance of the West has been there only for last 300 years. According to Angus Maddison’s OECD study, India and China had nearly 50 percent of global GDP as late as the end of the eighteenth century. Hence India and China are not emerging or rising powers. They are retrieving to an extent their past positions.

Western decline can be monitored from various indicators. The US dollar is having a rollercoaster ride at present and if it were not for the flimsiness of the Euro and lack of alternatives, it would have been long discarded as the world key currency. In 1990, the share of the G-7 in world GDP (on a purchasing power parity basis) was 51 percent and that of emerging markets 36 percent. But in 2011, the G7 share is less than 40 percent. Both Europe and the US are growing in real terms at less than one-fourth of China and India and less than half of the average of middle income developing countries. The crisis today is an American crisis exported to Europe, in which the US is incapable of dealing effectively with it and Europe has neither the vigor nor the willingness to devise the measures necessary for the task.

The US economy is essentially dependent on borrowing in dollars foreign savings to finance its public expenditure. The US economy is dependent on imported talents and on the rent from its rich natural resources to generate growth. It still has great universities and innovative entrepreneurs and some world-class institutions. But the US has taken leave of its senses. Its society is becoming divided between those who think in rural terms and want no government in their lives and those who depend on government in everything. According to a recent report in The Wall Street Journal (10 October 2011), nearly half of US households receive government benefits like food stamps, subsidized housing, cash welfare or  Medicare or Medicaid and social security (which is not fully funded).

 As a result, Washington has no decision- making ability these days. Instead of investing in new technologies, it continues to spend 27 percent of its budget on the military and wars and their consequences. By the time the debt is serviced, only 61 percent of the budget is left. Expenditure on infrastructure in real terms is back to the levels of the per Eisenhower's administration and expenditure on research, education in urban places, is relatively at the bottom of the industrial countries. Half the roads and one-third of the bridges need infrastructure investments. The US now produces half of the engineers it needs and its great universities accord one-quarter of their graduate degrees to foreign-born graduates.

In Europe, the twenty-seven members of the EU have fourteen trillion Euros in public debt, which is close to their combined GDP. Some of them, Greece, has debt GDP ratio in excess of 165 %. The Eurozone has members like Greece and Portugal that should not have been admitted and aspirants like Bulgaria and Rumania, which are essentially underdeveloped. Its third and fourth-largest economies, Italy and Spain, are mismanaged, have low productivity growth, double-digit unemployment, a debt they cannot pay and have recently been running negative growth.

If one considers the so-called “emerging economies”, one finds that at no point of time in the last 20 years has a foreign investment – direct and portfolio – exceeded 10 percent of domestic investment in India, Japan and S. Korea. China has had higher figures, but a large part of investments are financed by savings from overseas Chinese. Moreover, its undemocratic government has proven clever in its economic and policy choices and extremely able in implementation.

The crisis faced by the West is primarily because it does not save enough to finance its investments. In the US on the one extreme, national savings average less than 6 percent of the GDP and in the household sector, they have been negative several times in the last 15 years. In Europe, nonself dependent social traditions have become the political norm. Europe has nationalized families over the last 60 years: old age, ill health, single motherhood – everything is the responsibility of the state. The benefits disbursed under this social contract exceed the European ability to pay. To pay for living high on the hog, the west borrows to spend. This is its way to not allow a real transfer of resources to the Asian and other developing nations which must result in a decline in the standards of living. However, the West resists allowing that to take place and borrows to pay. Before the onset of the Arab Spring, the West could have counted on Arab and Chinese savings to pay the bill. But, after the seminal changes in the Arab World, this source might soon dry up.  

Demography has also been adverse. Social security goes for a toss since people are living longer and not many from below contribute to their pensions through taxes. So the nationalization of families becomes   burden on the state. And European societies do not accept immigrants to solve this problem and loath cultural differences.

The Western model of Big Government and Big Business has twin dangers for average citizens. This model is unjust and inefficient. It is capitalist in distributing the benefits and socialist in bearing the burdens. The Wall Street demonstrators are bringing starkly this fact before our eyes.