The Merryn Somerset Webb interview: What democracies can learn from China
The election cycle is too short-termist to deal with our long-term economic problems, says Dambisa Moyo
I first interviewed Dambisa Moyo around two years ago. She was giving a TED talk (which has now had more than 1.7 million views) and had so little time that in order to talk to her properly I had to drive out to the airport with her. It was worth it. So I was thrilled when I asked her if she would talk to us again that she not only agreed to sit down for a proper chat but to have it videoed too. You can see the video here, but we wasted no time with small talk (well, not while the cameras were on anyway). We kicked off with what's wrong with the global economy.
Moyo's second book is called How The West Was Lost: Fifty Years Of Economic Folly And The Stark Choices Ahead. Her point here is that three main factors drive structural growth labour (quantity and quality), capital and, of course, productivity. And we have failed to deal with the "substantive and long-term" problems with all three over the last 50 years. Look at labour 90% of the world's population lives in the emerging markets and 70% of that group are under the age of 25. But in the developed markets we have a very "negative demographic story of ageing and the larger pressures on the public purse".
But while globalisation has been great for the movement of capital and for trade, it hasn't done much for the movement of labour. Instead of letting the young who can drive economic growth move to developed markets, we have created "significant issues around immigration that ultimately, I think, have put pressure, and will continue to put pressure, on the long-term prospects of economic growth". We have also totally failed to invest in education. We know "that people are under-skilled" and we know that people are "underemployed in the United States and many of the developed economies". A report from McKinsey recently argued that "underinvestment in education in the United States is tantamount to a permanent recession" and one you can't turn around in a hurry. "This is intergenerational", says Moyo, and it has obvious implications for productivity, something we "tend to really undervalue", despite the fact that "it explains 60% of why one country grows and another one doesn't".
The trouble with democracy
So what can we do about all this now? The fundamental problem is that "we have a political system in place, particularly in the developed markets, that does not match the structural problems that the world is facing". The big issues are "around education, infrastructure and investment, and the cost of health care long-term problems".
There is also the matter of technology, which could put downward pressure on growth as well. Technology could have "unabashedly positive" implications for things such as the delivery of education and health care and for market efficiency. "You could be sitting in a rural village in India; you get a text saying, if you take your cow to City A you get $50; you take it to City B you get $70. That's market information that people didn't have access to a decade ago" and it is "incredibly positive". That said, "it could be incredibly disruptive for the models of economics that we've become used to", says Moyo. "A recent paper suggested that 47% of jobs in the US will be disrupted over the next 20 years." Technology can be positive for us all, but on the jobs front, "if we don't come up with alternatives it can be detrimental".
The problem? Our political system isn't set up to deal with all this. We have a system in place, "largely liberal democracy, that has cyclicality that's much more short term and myopic, and therefore doesn't address some of the problems that we're addressing right now". Moyo is not, she hastens to add, suggesting for a second that politicians are not "smart" just that they are "incredibly rational". The winners in their world are the ones who focus on short-term issues rather than the intractable intergenerational problems that are really holding back productivity (which has been falling globally since 2003) and growth.
I wonder what we can do about that without undermining our (already fragile) democracies. "I think that there are lessons to be learned from other places, for example, the emerging markets", where some countries, such as Mexico and Brazil, have longer terms. Being in power for, say, eight to nine years "takes a lot of pressure off". There are obvious downside risks here: you can easily elect the wrong person, for example, "but I do think that there's something to be said about matching or marrying the public policy problems that we are facing" with the way we organise government. We all "love liberal democracy", but right now it just isn't doing what we need it to.
The Chinese model
I wonder how she would deal with a nine-year term. What would she do to deal with the consequences of our 50-year folly? Look to China, she says, where we "actually have the counterfactual alive and well in our time". China and the US look very different. One "has deprioritised democracy and used state capitalism as its engine for growth". The other has "liberal democracy as its ideological frame for politics, and believes in free markets". But it is China that has "the compelling story". There hasn't been the decline in real (after-inflation) wages seen in the US, and there has been double-digit GDP growth. There's been huge infrastructure growth and "we've seen them move hundreds of millions of people out of poverty in a very short period of time".
Of course, China is not without its challenges. "Am I worried about the housing sector, non-performing loans? Yes. I mean, I think we don't really know what that number is and therefore it causes a lack of clarity. Am I worried about pollution in the environment? Absolutely. Slow growth? Yes. You need to grow by at least 7% per year in order to double per-capita incomes in one generation. Is there a risk of a middle-income trap? Absolutely." But Moyo is optimistic about changes made to overcome those challenges. She spent some time with Chinese President Xi Jinping a year ago, and found "the way he expressed concern for the currency of the global economy was untainted by political strictures". He could see that trickle-down economics (the idea that if you keep taxes low, wealth will cascade from rich to poor) hasn't worked. And he could also see that the "tax-and-spend redistribution model" isn't working.
But unlike Western politicians, who seem to have to stick to one or the other to win votes, he can look for a better way. "His view was less hung up by ideology and more nuanced in pretty much every key area of economic growth." China's political elite are well aware of the issues in their economy and "I think what we discount is their ability to actually solve some of these problems". How does that make her feel about investing in the Chinese stockmarket? Long term just fine. She'd bet on the Chinese finding "innovative approaches to solving problems" over assuming the problems are intractable.
Europe will rumble on
We move on to the other topic of the week, Europe. The relationship between Greece and the rest of Europe is, she reckons, just moving into a new equilibrium. It has "all the hallmarks of the aid system". You have a donor and you have a recipient. The latter promises to address its structural problems. It doesn't. But the donor just keeps giving. If the giving involves loans, the donor will, in the end, lend the recipient the money needed to pay back the original loans.
This is what has been happening and one way or another will probably continue to happen. The eurozone doesn't hang together as an "economic or a financial construct", but the "bigger utility function is making sure that there's a common region and common environment therefore the economics is only secondary I think that case is still compelling." Then there is the geopolitical argument "if Greece goes away, does this become a sort of a gateway for Isis and terrorist actors I think that that is an aspect that perhaps the market, again, has tended to discount".
I ask how all this makes her view markets. She agrees with us that most global markets are "fully priced". That can hardly be considered a surprise, given the "loose monetary policy environment we've been in" (she doesn't expect a rise in American interest rates until after December). But, still, look at the metrics and a crash of some kind seems inevitable. So when does it correct? Moyo answers that in the most honest way possible (we like this). If she knew that kind of thing, she says, she'd "be in Tahiti, not here". She also points out that today's markets are pretty manipulated. The authorities know that "the stockmarket is not just about returns it's also about signalling".
So a sell-off would have nasty knock-on effects for the consumer and the rest of the economy effects that the central banks can no longer offset by cutting interest rates, given how low they are already. That would be just "too costly".
So Moyo expects policymakers to do all they can to avoid it? "Absolutely, which I think is print, print, print." We haven't said goodbye to quantitative easing yet.
Who is Dambisa Moyo?
Dambisa Moyo is an economist known for her critical views on the impact of development assistance to Africa, contrasting it with the more business-orientated approach of countries such as China. After working at the World Bank and then Goldman Sachs, her book, Dead Aid: Why Aid Is Not Working And How There Is Another Way For Africa, became an international bestseller, winning acclaim and criticism in equal measure. She has since followed it up with two other books.
In How The West Was Lost: Fifty Years Of Economic Folly, she argues that the inability of Western countries to make difficult economic and social decisions will lead to their decline unless they make radical changes. Winner Take All: China's Race For Resources And What It Means For The World claims that Chinese demand for commodities will push up prices, lowering living standards around the world. Moyo also serves on the boards of several companies, most notably Barclays.