How the west was lost – Dambisa Moyo – Book Review By Given Chansa

By Given Chansa

Dambisa first came to the world scene as the author of a her first book, “DEAD AID” in which she argues that a 50 year long financial model for Africa based on aid has failed to deliver sustainable  and broad-based development to lift millions of Africans out of poverty.

It was a radical shift from the status quo not only because it brought into question the celebrity dominated promotion of starving and dying children in Africa aimed at garnering financial donation from the rich West but because it also went as far as suggesting that AID to Africa has now become part of the problem in so far as it empowers the corrupt governments in Africa and distorts the natural allegiances and relationships between the elected and the electorate.

The question for me clearly was whether, having enjoyed the success of DEAD AID, Dambisa would be able to find it in her to write another book that had equal if not more depth, one that would be as compelling, original and ground breaking. Or was she just going to write “another” book hoping to ride on the success of her previous work?

Having read both her books, “DEAD AID” and “HOW THE WEST WAS LOST”, it is my considered view that her latest book represents her best work yet. The two books clearly address two different themes although there are plenty of synergies in their practical applicability for African policy makers.

Firstly anyone going to write a book entitled “HOW THE WEST WAS LOST”, assuming the title has anything to do with the content, has to either be nuts or possess the technical know how, Intellectual depth and a mountain of the body of evidence to placate oneself from being publicly hang from the gallows of London’s Tower Hill.

Well her book was published to the public in the UK on Friday 14th January 2011 and unless I have missed the news, it would seem that Dambisa has in fact managed the latter.

In HOW THE WEST WAS LOST, Dambisa has proved herself as an author who has come of age and one that ought to be taken seriously.

The book charts the economic and geopolitical dominance of the West for the last 500 years. She shows how over years, the baton of economic, political and military dominance has exchanged hands across a number of European nations and empires culminating into the exchange from Great Britain to the United States by the end of the Second World War.

Dambisa tells of how the Lend-Lease Act signed into Law by President Franklin Roosevelt in 1941 would become the catalyst that would see America emerge from the war politically, militarily and economically the strongest nation on earth. She says, “The war was, in the most perverse sense, a resounding success” for America. Dambisa aptly describes America’s actions as a marriage of political imperative and economic savvy.

Dambisa goes on from there to outline the fundamental pillars of economic growth. She would later build on that to show how canonical economic models of growth could be used to highlight how the West has and continues to misallocate the key ingredients necessary for long-term sustainable economic success.

She writes of canonical economic models as pointing to three essential ingredients which determine economic growth: CAPITAL, LABOUR and TOTAL FACTOR PRODUCTICTIVITY.

The better part of half of the book is then dedicated to discussing, and with remarkable clarity and a wealth of statistical evidence, these three ingredients and how they show the haemorrhaging economic dominance of the West.

On Capital, Dambisa writes of how the story of the West’s rise and fall has been primarily a tale of how it viewed, stored and wasted its capital. In this regard Dambisa compares the West to the behaviour of a profligate son who goes about squandering the family wealth garnered over the centuries.

From there, the book gets quite technical as Dambisa lays into the body of evidence demonstrating the West’s misallocation of Capital.

Under the heading “DEBT IS CHEAPER THAN EQUITY” Dambisa outlines the competing interests of the key players in the capitalization or the net value of an enterprise.  It is at this point that you begin to see Dambisa get into her strides and come alive.  Using the simple equation, EV = EQ + ED, for computing the enterprise value (EV) – measure of a company’s worth – EQ being the expected value of the equity and ED being the expected value of debt, Dambisa introduces the reader to the “Equity Claimant” and the “Debt Claimant”, being the two key players in the capital equation.

Sensing that this might throw off those uninitiated into the world of finance, Dambisa quickly throws in a quick introductory lesson into the world of financial Options – derivatives financial instruments.

She would use this knowledge to show that the Debt Claimant is naturally risk averse where as the Equity Claimant is risk seeking, he loves risk; he loves

volatility and high levels of leverage around an investment.

This again would form the basis for her demonstration that the biggest failure in the West’s long-term financial and economic policies has its roots in the inability and failure of the Debt Claimant to fulfil their core fiduciary duty of managing the freewheeling and risk-loving exploits of the equity holders.

To demonstrate this, Dambisa outlines how the well intended US government policies of home ownership for everyone led to misallocation of capital through over-investment into the housing market and how the government guarantees of these home loans through Fannie Mae and Freddie Mac led to the break down in the natural relationship between the Debt Claimant and the Equity Claimant culminating into excessive leverages by banks and home owners alike and which finally came to a head bringing the entire world financial institutions and systems to their knees in the period between 2007 and 2010.

Moving on to Labour, Dambisa demonstrates three ways in which the West is misallocating its labour to its detriment.

She argues that the introduction of pension plans in the period following the Second World War has inadvertently led to a widespread mispricing of labour contracts giving the impression that the cost of labour is cheaper than it actually is. In effect, she argues, the real cost of these mispriced pension costs is yet to be paid.

She points out that the broad societal shift to favour the service sector over the productive industry is another way in which the West has been misallocating its labour. She argues that this societal shift has created a society in which exorbitant salaries and rewards are stacked in favour of those whose societal benefits seem relatively narrow such as sportsmen, showbiz entertainers, etc., instead of those with broader societal gains like, engineers, doctors, nurses, etc.

She further writes that the West is also misallocating its labour by adopting ever more stringent and restrictive laws governing the global migration of labour.

She builds on the evidence of how the West is losing the battle on Labour by demonstrating that there are significant short falls in the West’s labour both in quantity and quality. She says of China and India, “With their inherently overwhelming numbers, China and India were always going to give the West a run for its money…”

On the quality of labour Dambisa points to the aging population of the West and the productivity loss that would go along with such demographic shifts.

In my view, if there ever was anything in this book that shows and demonstrates Dambisa’s confidence, intellectual depth and intimate understanding of World economics, it is the case she makes in regard to the Quality of Labour through Labour Lost by the decline of industries that once fuelled the West’s rise to economic dominance and the Labour Lost by sending wrong labour price signals.

In the first instance she shows a wealth of statics that show the decline in the number of Western university students graduating with engineering and science degrees and how this coupled with declining investments in research and development means that the West is losing the quality of labour to remain competitive in the face of the growing number of the said graduates and investment in R&D across the emerging markets particularly China and India.

Here she writes, “Nevertheless, in the West engineering has become passé. Whereas in the 1950s and 1960s America’s best and brightest largely ended up getting their hands dirty producing goods, and working away at the coalface of invention, by the 1990s the top tenth of the talent rushed into the service industry – banking and consulting the preferred options. Graduates used to be doers (as engineers and diplomats in the 1950s and 1960s State department and oil companies); then they became corporate managers at oil companies and technology companies such as IBM, in the 1970s and 1980s; then they became talkers, as investment bankers and management consultants, and finally as speculators as hedge fund and private-equity managers in the 1990s and 2000s to today.”

For me, the crowning glory, for her, in this entire book is the case she makes for the misallocation of labour through the sending of wrong price signals that characterises the West’s celebrity culture. Making a case, and a rather strong case if I might add, where she compares the promotion of yob-culture and the associated “talentless-celebrities” to the way the drug world’s pay scheme works and proposing a case that the proponents of the yob-culture should be taxed in much the same way that industry with high-level of industrial pollution are is as insane as it is genius. What next? Poometer? Pay as you poo? Excellent!!

Dambisa then continues building on the evidence for the misallocation of labour, by pointing out that the increasing visa restrictions in the US are putting America at a severe competitive disadvantage.

She writes of this, “Putting aside the fact that America’s success was built on the wealth of its immigration, this strategy of turning in on itself, particularly in the light of its worsening education and academic record, is as blind as it is foolhardy.”

After Capital and Labour, comes TFP being the third ingredients in the canonical economic models of growth. Dambisa describes TFP as the catch-all phrase that describes contributing factors over which there may not always be direct control – e.g. geographical factors. TFP, she adds, includes things like the rule of law, property rights, human rights, freedom of expression as well as technological growth and efficiency.

She then shows a host of data showing how for much of the eighteenth, nineteenth and twentieth century, it has been the West that has led much of the human innovations and advancement in science and technology; from James Watt who invented the first reliable steam engine in 1775, through Alexander Graham Bell who invented the telephone in 1876, Bill Gates the founder of Microsoft to Sergey Brin, the brain behind Google.

From that foundation, she moves to show how this technological superiority, once monopolized by the West, is quickly being breached as the emerging countries continue to make huge technological and scientific advancements.

She supports this view with a host of statics showing that in almost all fields of science and technology, the emerging countries are quickly catching up with the West.

Of the many technological and scientific advancements Dambisa lists, one area stood out for me. This regards China’s ability to modify the weather, I think the technical know how, the organisation, precision and mobilization of equipment and facilities to pull off this feat is quite commendable.

Whether it’s a case of industrial espionage, transfer of technology through setting up of factories in emerging countries or the declining investment in Research & Development, Dambisa argues that the West’s Superior know-how is quickly being lost.

The book then moves on to discussing the fundamental shift in the economic dominance from the West to the East sighting the financial crisis of 2008 as the first tangible indication that the new transference of economic power has already begun.

Crucially Dambisa equates this transfer of economic power from America to China to the exchange from Great Britain to the United States by the end of the Second World War, saying this new transference of power portends to have even greater ramifications than the last.

Laying the foundation for the display of the new emerging world economic power, Dambisa argues that as far as China’s economic transformation goes, we have not seen anything yet adding that China is undergoing an economic revolution.

She points out that Economic forecasts already predict that America will cede its top spot as the world’s largest economy to China by 2027 adding that, “The continued erosion of the quantity and quality of its capital, its labour and its monopoly in technology has set the American economy on a path of long-term, structural and fundamental destruction.”

Building on that Dambisa lays into the West’s attitude and policies of exclusion over the last fifty years which she argues have fomented a culture of “us” against “them” demonstrating this by showing that most of the major international agencies and organisations are dominated by the developed West with virtually no representation from the emerging world.

She argues that having Canada has a member of the G8 and not China or India is not only preposterous but also shows the West’s unwillingness to face up to the new economic realities.

She goes on to argue that the result of this is that the emerging countries have now started forming their own clubs where they can trade together and plot together to the detriment of the industrialized West.

With that she lays out a body of evidence showing a range of bilateral and multi-lateral technological and economical agreements and deals by various emerging countries across China, Russia, South America, the Middle East and Africa.

She points out that the West have been put in a position of subservience by  making them debtor nations hooked to their lenders, the Rest of the world who have quietly been building up their cash piles while the West went onto the spending spree.

She cite China in particular has now lending the United States 23.4 percent of its total borrowing.

She writes on this, “By feeding the West’s seemingly insatiable appetite for debt, the Chinese have masterfully manufactured the West’s goods and provided them with the very cash (in the form of loans) with which to buy them; they have locked the West into a stranglehold of debt and dependence from which it will be very difficult to escape.”

Onward and forwards Dambisa sets out to build a case for adoption of a different variety of Capitalism from the laissez-faire, the purest form of Capitalism adopted by the US. She discusses the second type of Capitalism, the model favoured by much of continental Europe as one characterized by state provision of a range of public goods and services and higher taxes.

The third form of Capitalism being the one adopted by China where the government has a firm hand in pretty much everything. This form of Capitalism she points out is based on the consensus that an economic model couched in capitalistic thinking, laced with a hefty dollop of government intervention was the way to go.

Listing a series of economic woes from the hyper-inflation of the Weimar Republic, the 1929 Wall Street Crash and the Great Depression that followed

and the most recent financial crisis of 2008, she demonstrates how unfettered capitalism has been fraught with booms and busts dating back to the Dutch tulip mania 300 years ago.

She argues that all these evidences make a strong case for a government-led capitalistic approach and for not allowing the free market to run roughshod.

On this she writes, “… the Chinese premier, Wen Jiabao, underscored the view that a system based on ‘excessive expansion of financial institutions in blind pursuit of profit’ and an ‘unsustainable model of development, characterized by prolonged low savings and high consumption’ was not the way to go.”

She then moves to highlight that while America’s infrastructure is failing apart with little concerted investment; China is rolling out its infrastructure at the rate never seen in any nation since the nineteenth century.

Here again Dambisa throws a whole body of statics to support her argument not least showing that for four years between 2006 and 2010 China spent US$200bn on its railways alone and that estimates suggest that by 2020, 50 percent of the world’s high-speed trains will be operating in China at speeds of over 150 mph across 11, 250 miles of track.

Adding to that she points out that the World’s fastest super speed trains capable of speeds of up to 270mph is in China’s financial capital Shanghai; this she says was built in just four years.

In a relentless barrage of evidence and statics, Dambisa continues to show how in so many ways China and the Rest are wining the battle.

To do this Dambisa uses yet another simple but fundamental equation;

Y = C + I + G + (X-M), used to calculate a country’s GDP.

Thus whether its in Consumption (C), Investment (I), net government revenues (G), or the trade balance represented by exports (X) – imports (M), China and the Rest have over the years been doing the right things while the West have gotten it catastrophically wrong. On this she adds, “Thrifty Chinese have taken savings to excess, while profligate Americans have spent their way into debt.”

The book concludes with warnings that if the West does not change its mindset; stop regarding the up-and-comers as simply gatecrashers, overhaul its tax system to encourage savings rather than ravenous consumption and specifically address the essential ingredients for growth of Capital, Labour and Technology, it will have no chance of firmly getting back into the race.

She writes, “The odds are, however, that the United States will be a bona fide socialist state by the latter part of this century. Indeed, if nothing else changes it from its current path, it is almost certain that America will move from a fully fledged capitalist society of entrepreneurs to a socialist nation in just a few decades. The trouble is, it won’t be just any socialist welfare state …..the US is on a path to creating the worst and most venal form of welfare state (poorly developed and designed) – one born of desperation from many years of flawed economic policies and a society that rapaciously feeds on itself.”

A BOLD AND CONFIDENT BOOK FROM A WRITER WHO HAS FOUND HER MOJO.

About Given Chansa

Given Chansa, 35 years old, was born in Mufulira, Zambia during the time his father worked in the mines. The family moved to Kalulushi where he went to primary school and completed his secondary school at Kalulushi Secondary School. After obtaining his A-Levels from Mpelembe Secondary School, Given went on to study Engineering at Imperial College Of Science, Technology & Medicine in London in the United Kingdom. It was while studying at Imperial that he met his wife, Patricia Chansa, who was studying Dentistry at Birmingham Dental School. The couple now lives in Milton Keynes, have two lovely children a boy & a girl. Given works in the Investment Banking Industry in London specializing in developing risk management and trading systems across a range of asset classes. He is a member of Chartered Institute for Securities & Investment Certification - Derivatives Level III, a Microsoft Certified Professional Developer – Enterprise (MCPD – EAD), MCTS, MCP. Given has worked as a consultant for a number of leading International Investment Banks including BNP Paribas Investment Banking, West LB AG Investment Bank, Goldman Sachs, Santander Global Banking & Markets and Barclays Capital.